Hornbach Holding AG & Co KGaA

XETRA:HBH

Earnings Call Analysis

HORNBACH's Resilient Performance Amid Challenges

Amid a turbulent economic landscape, HORNBACH Holdings maintains a resilient second-quarter performance in 2023. The company saw sales and earnings recovery with a focus on customer frequency and stabilized adjusted EBIDTA, especially in the garden sector. Earnings before interest and taxes (EBIT) reached margins of 6.4%, despite a decline in the German market. The company's international sales growth continues with aggressive cost management, achieving more than a 6% reduction in store operating costs. In line with its geographic diversification strategy, international markets now account for 51.6% of overall business. On the e-commerce front, sales hold steady at 13.2% of total net sales. HORNBACH also invests in sustainability projects, including new photovoltaic systems, and expands its sustainable product lines. These efforts are reflected in a solid adjusted free cash flow of EUR 260 million and a robust balance sheet with significant real estate assets valued at EUR 1.8 billion. The company's operational focus, cost-effective strategies, and diversified growth, alongside a commitment to sustainability, contribute to its position as a reliable partner to its customers and investors.

HORNBACH Holding's Resilience Amidst Economic Headwinds

Investors would be drawn to the story of HORNBACH Holding's second quarter and first half-year performance for 2023-2024, which spotlights resilience in challenging economic times. Between March and August 2023, the company managed a recovery in sales and earnings, demonstrating strength with increased customer frequency in stores leading to robust sales. Management successfully balanced cost while investing for future growth, even in the face of a tougher macroeconomic environment, particularly in Germany and the Euro zone.

Investing in Growth and Sustainability

The company is committed to growth and sustainability, a narrative affirmed by strategic investments like the new logistics center in Essingen and store expansion in the Netherlands. Their online offering has also been enhanced through platform improvements, and they've embarked on environmentally friendly initiatives, including the installation of photovoltaic systems and offering bio-certified products.

International Markets Bolster Sales Amid Domestic Challenges

HORNBACH Baumarkt's subgroup, including online retail, saw flat net sales, with negative growth in Germany being offset by a positive performance internationally. This has slightly increased the international business share to 51.6%. Despite a smaller average ticket size, sales in categories like renovations and outdoor living remained buoyant, as shown by an increase in like label sales by 1% during the second quarter.

Cost Structure and Margin Adjustments Signal Prudent Management

Despite a compressed gross margin due to inflationary pressures, HORNBACH Holding reported a stable margin development during the second quarter, with anticipated continued stabilization. Operational expenses witnessed a conscious management of headcount and investments in technology. Consequently, an effective reduction in operating costs by over 6% was achieved, signifying proactive cost management strategies.

Inventory Management and Cash Flow in Focus

In the first half-year, inventory was reduced by 14% compared to February's end, boosting inventory productivity and reflecting positively in a solidified adjusted cash flow of roughly EUR 260 million. This financial prudence was accompanied by capital expenditures of EUR 91.7 million, mostly on land and real estate to support organic growth. The company's balance sheet decreased by 5.3% to EUR 4.5 billion due to successful inventory reduction and lower short-term liabilities. The equity ratio remained stable at 44%, with significant real estate holdings which provide financial resilience.

Preparation for the Future Amid Economic Uncertainty

HORNBACH's narrative concludes on a forward-looking note, emphasizing continuous improvement in gross margin while upholding a competitive pricing philosophy. Despite the current economic unpredictability, management remains confident in their approach to navigate these challenges by leveraging operational efficiency, investment in interconnected retail offerings, and sustaining market leadership through targeted investments and sustainability initiatives.

Earnings Call Transcript 2024-Q2

[Antje Kelbert, executive]

Good morning, and welcome to our update call for the second quarter and first half year 2023, '24 for HORNBACH Holdings. My name is Antje Kelbert, Head of Investor Relations. Today at 7:00 a.m., we published our financial results comprising the period from the first of March until the end of August 2023.

Welcome also to our CFO, Karin Dohm, who will present today and will answer your questions. Please note, the entire conference call, including the Q&A session will be recorded and made available with the transcript on the company's website afterwards. Please also take note of the disclaimer which is valid for the entire presentation and the Q&A session. And now I hand over to you, Karin, to walk us through the set of numbers.

[Karin Dohm, executive]

Good morning, everybody, and a very warm welcome from my side as well. Let me start with some highlights. In Q2, we saw a recovery in both sales and earnings with strong customer frequency in our stores, leading to good sales. Our adjusted EBIT stabilized in Q2, including some catch-up effects in the garden area. As you recall from Q1, we had a challenging spring season, which was impacted by unfavorable weather conditions.

Inventory reductions had a positive effect on our working capital. This resulted in an adjusted free cash flow above previous year's period, excluding the repayments from the reverse factoring program at the beginning of the fiscal year. We also demonstrated our resilience by continuing to increase market shares in several of our key markets. Whilst our home market Germany remains a significant proportion of our business, we are seeing the benefits of our geographic diversification strategy.

Reflecting the weaker macroeconomic outlook, specifically in Germany and the Euro zone, we have updated our guidance. Management is focused on striking a balance between closely managing costs whilst continuing to invest to improve operating performance and deliver long-term growth. Throughout the first half, we've taken a number of steps to improve our business and keep pushing those through.

The management team has track record in successfully navigating short-term challenges and our long history shows us that HORNBACH has been able to emerge stronger than its competition in relatively tougher times by building on our market position. Leveraging our geographic diversification and leading interconnected retail offering, we are well positioned for when markets recover.

We see the underlying long-term trends in our industry unchanged. Structural trends such as energy efficiency, demographic development and an overall aging housing stock will continue to drive DIY spend on home improvement. We believe these drivers continue to underpin the attractions of our investment case. Let me highlight a couple of our key investment areas, including ESG-focused themes, delivering growth and further improving our logistics footprint.

We have opened our new logistics center in Essingen based next to our headquarters, which began operations in June. It includes the regional warehouse stock inventory for our stores as well as a cross-docking facility for long and bulky goods. Furthermore, we continued our successful expansion in the Netherlands with the opening of our 18th store in Nijmegen.

At the beginning of the financial year, we completed the back-end migration of our online shops for the [indiscernible] platform, which has improved performance and speed for our online offering by adding much more agility and flexibility to a modular platform architecture. We have successfully continued to roll out process automation tools and standardization of back-office tasks.

For example, we invested in a new software for 3D store planning, which makes our updates more efficient. Rolling out our strategy to reduce our CO2 footprint and switch to renewable energy. We've installed 20 photovoltaic systems on the roof of stores and logistic centers. We now operate systems running with an output of in total more than 12,000 KWP.

Further rollout is going ahead in the next year. We also continue to expand our sustainable product offering with the rollout of Bio certification for our private label plants and seeds, which is now implemented in 8 of our 9 countries. With regard to our supply chain emissions, which are the most important part of our footprint. We have joined forces with other leading international home improvement retailers in the Scope 3 task force of the Global Home Improvement Network.

The goal is to develop a consistent methodology for measuring and reporting emissions. Together with other DIY and gardening stores, we are introducing an industry-wide solution for reusable plant [ tree trays ] which are a big contributor to plastic waste in our stores. Let's double-click on our sales development. We are encouraged by the resilience of our sales in the first half with group net sales close to the previous year's record level.

Net sales of subgroup HORNBACH Baumarkt, including the online retail were almost flat. A challenging picture in Germany of minus 2.4% was balanced by a positive contribution from our international markets with an increase of 1.8%. As a consequence, on a Baumarkt level, the share of the international business further increased to 51.6% from 50.5%.

In general, we've seen a slightly reduced average ticket size but strength in smaller tickets, while there was some softness in big tickets and discretionary purchases. Keep in mind that Q2 last year was also affected by some panic purchases which did not take place this summer, for example, electric heaters. Since the beginning of this year, we are seeing good demand in articles within our renovation assortments, hardware and tools.

More recently, specifically with sunny and warm weather continuing into autumn, we've also seen a strong demand in the outdoor living category. Sales of private label brands have also picked up in recent months. We're especially excited about broadening our offering of private label innovations, in particular for professional customers, for example, in our [indiscernible] product lines.

Our private label ranges are specifically designed to offer value for money products to our customers. We will continue to lean into product innovations that simplify the project, saving our customers' time and money. Let's drill down to a country-by-country sales development.

We saw a positive sequential trend in like-for-like sales across all our markets in the second quarter compared to the first quarter. In total, HORNBACH Baumarkt increased like-for-like sales by 1% in Q2, the flattish home market development in Germany but a 1.6% growth in the rest of Europe. We continue to see very strong numbers from the Netherlands with an increase of 7.5% in Q2 following an outstanding performance in Q1.

Luxembourg, Slovakia and Switzerland also recorded positive like-for-like growth in Q2. Overall, this performance has also driven our market share development, which you see on the next page. Despite the uncertain economic backdrop, persistent inflation and softening consumer confidence, we are pleased to deliver market share gains in a number of our geographies.

In our home market, Germany, we've seen slight increase from 14.7% to 14.8% in the period January to July 2023. We also continue to see a strong development in our market position, especially in the Netherlands and Czech. Switzerland has also contributed positively to our market share gains.

When we look on to the e-commerce share of HORNBACH Baumarkt, you see that net sales stood at 13.2% in the first half of 2023, 2024, stabilizing at the level we saw by the end of Q1. Our overall level of e-commerce sales still remains well above pre-pandemic levels, and we're excited about customer engagement across our interconnected platforms in all regions. Customer accounts have increased significantly in the first half of the year by 11% to EUR 3.9 million as at the end of August.

This conference, the increasing attractiveness of our digital office offering, which we are continuously enhancing with new features and services. More than half of e-commerce sales continue to be fulfilled through our stores either through Click & Collect or our store delivery centers. This underpins the strength of our interconnected retail approach, leveraging the value of our dense big store network serving as a point of sale as well as storage and fulfillment facility.

Moving on to our cost structure. Our gross margin was down by 36 basis points compared to last year, reflecting ongoing inflationary challenges. However, Q2 gross margin development indicates the stabilization in recent months. Going forward, we expect the stabilization trend to continue during the second half of the year.

Our operating expense performance reflects for a large part, higher wages, including inflation support payments, investing into our people and teams. At the same time, we steer our headcount very consciously to optimize both in our stores and specifically, of course, in the back offices. Keep in mind that the ratios were also affected specifically in Q1 by the deleverage from the -- our top line results. We successfully reduced our store operating costs, which we managed down by more than 6%. This includes savings from lower energy as well as reduced energy prices.

Just to note, selling and store expenses were also affected in H2 by nonoperating effects from impairment. General and administration expenses have also increased due to higher wages as well as specifically from investments into technology and IT. We also kicked off our S/4HANA project in H2, which we are expecting to run for the next 2 to 3 years. As a result, we see an EBIT development, as highlighted here, with an adjusted EBIT, which has stabilized in Q2 with minus 13% compared to Q1.

For the first half of the year, the reduction summed up to 20% and our EBIT margin came in at 6.4%. Let me summarize. We are focused on improving the gross margin in the second half of the year whilst maintaining our competitive pricing in line with our everyday low price strategy. We expect positive effects to result from decreasing purchasing costs for a range of products from the very high levels we saw during the pandemic and the beginning of the Russia-Ukraine war namely '21 and '22. We continue to stay in constructive dialogue with our suppliers to ensure that decreasing input costs on their side are also well reflected in our purchasing prices.

As said earlier, implementation of energy reduction measures are bearing fruit. We're benefiting from both decreasing energy cost based on falling prices as well as lower consumption. We will balance any cost reduction measures carefully whilst not compromising our long-term development and opportunities of future growth. We are and we will also continue to invest in technology and our interconnected retail offering.

We are very pleased with the outcome of our inventory development and inventory productivity. Inventories have already been reduced by 14% compared to the end of February. Beyond seasonal reductions, which were subdued in Q1, we brought down inventory levels by 6% in comparison to the same period last year. We will continue to optimize our differentiated ordering management to ensure high availability both on stock and on shelves with focus on our professional and project customers with respect to fast-turning project goods.

This also includes the usual up-ramping of stock towards the end of this fiscal year where we will focus on balancing the productive buildup of inventory for the next spring season while maintaining a high level of product availability. The successful inventory reductions obviously also are reflected in our cash flow.

The development reflects the previous mentioned key items. Firstly, strong operating cash flow from continuously improving throughout H2. Second, successful stock reduction supporting specifically the change in working capital. And thirdly, our reverse factoring program influencing specifically the first quarter, as you know, where we were keen to make sure that we transform the outflow of money for payments for goods from the Q4 of the previous year to the first quarter of this year.

All in, we have therefore an adjusted cash flow of roughly EUR 260 million in H1. CapEx spend was at EUR 91.7 million in H1, of which 54% were spent on land and real estate maintained mainly for new store, which is consistent with our organic growth strategy. When we take a look into the balance sheet and compare that to February 28 of this year, you see that we had, as planned, a decrease by roughly 5.3% to EUR 4.5 billion.

This was mainly driven by the successful reduction in inventories on the asset side as well as short-term liabilities. Equity ratio is extremely stable, slightly built compared to last period with 44% and has further strengthened to a very comfortable level. Let me remind you that our balance sheet contains significant value in the form of owned land and real estate, which amounts to [ EUR 1.8 billion ] as of August 31, 2023.

The real estate is conservatively accounted for at amortized cost. While we are not a real estate company, those assets are a significant financial reserve that not every retail company can rely on. This further underpins our robust financial position and contributes to our conviction in the resilience of our business. Especially when you look back in the industry, the DIY industry in general and specifically also HORNBACH has reemerged stronger from periods of economic downturn.

At HORNBACH, we can also show a track record of delivering strong performance during these times by outperforming GDP general retail and the DIY industry in Germany, resulting in continuous market share gains and growth for us. Through the combination of the highest DIY sales density in Germany, compelling customer proposition and our attractive ICR offering, we have been able to adapt and tackle external challenges in the past and will so in the future.

Last but not least, successfully establishing new sales channels and geographic diversification have contributed significantly to the stability of our business. Summarizing that before we move to Q&A, let me highlight once again, improving operating efficiency is a key priority for us and management is closely focused on cost and inventory optimization against both we have already delivered now in H1.

In parallel, we will maintain our price leadership for our customers and remain a reliable partner for them with a strong focus as before on our professional customers and the depth and breadth of our store SKUs. We will continue to make targeted investments to improve operational efficiency and maintain our strong market position. In line with our commitment to sustainability, we will continue to broaden our offering of sustainable products. Lastly, we have a robust balance sheet, which enables reliable dividend payment.

Overall, we are confident that we will continue to successfully navigate the current unique and uncertain environment operate with agility and respond to evolving customer dynamics. With that, let me conclude, and I hand back to Antje.

[Antje Kelbert, executive]

Thank you, Karin. So we will now take your questions and start the Q&A session. And for this, I hand over to our operator. Please go ahead.

[Operator]

[Operator Instructions] And we have the first question from Thomas Maul with DZ Bank.

[Thomas Maul, analyst]

Thomas Maul from DZ Bank. I've got 3. Number one, can you please elaborate a bit on current trading in September and your expectation for the second half, #2, could you please shed some light on the impairment losses recognized in Q2? What happened here? And which is [ rather ] affected?

And the last one, you just highlighted that you recorded good growth in your private label segment. Can you please remind us how high the private label share is and where it will go and how that impacts your gross margin?

[Karin Dohm, executive]

Yes. Thanks a lot. Just quickly. First one, September current trading. I think partly a continuation of what we saw in August, namely -- we see really strong demand in outdoor living, also driven obviously by the favorable mild weather across all of our regions. We still have good frequency, and we see a continuation in what we had before the slightly slower demand on big tickets and the strength in smaller tickets.

So I would claim in the broader sense, a continuation of what we had towards the end of the second quarter. You asked for the private label ratio. So we're roughly at 23%, 24% more or less. We're always, as you know, aiming to have this moving higher. So that is definitely one of our strategies.

As we think with -- it's not only obviously a part where we have especially good margins, but it's also a part where we can really offer a broad range, specifically targeting professional customers and people who have larger projects. So our aim is towards ideally toward -- in the direction of 30%. Nevertheless, you always have a strong demand for brand products as well, which is totally fine for us. And so that's just the target [indiscernible] I would claim.

[Thomas Maul, analyst]

Okay. And ...

[Karin Dohm, executive]

Yes. Sorry, you had a third question.

[Thomas Maul, analyst]

Yes, it was on the impairment losses recognized in Q2.

[Karin Dohm, executive]

The impairment losses. So the impairments are driven by a mixture. We had #1, a little bit of once again ECB interest rate raises and a couple of also our neighboring central banks as far as they are not in euro land, as you know. And on the other hand, the slight decrease of the year's expectation on the top line is triggering a little bit. That is when you look into the underlying stores that is particularly, it's across a number of stores, so more smaller impairment but a larger number of stores.

But if there is any majority, I would claim it's in Sweden because you know Sweden has macroeconomic challenges currently where customers are a bit more hesitant to spend in light of the fact that they have the vast majority, they have their private home financing on floating interest rates, that means they are way more affected by the rising interest rates than consumers in our other countries.

[Operator]

[Operator Instructions] And the next question is from the line of Thilo Kleibauer with Warburg Research.

[Thilo Kleibauer, analyst]

Two questions. So one is on Austria. Austria seems to be a little bit the weak spot in you lost market share there and significant like-for-like decline. So anything specific in this market in terms of competition or some problems on your side? Maybe you have some more insight.

And second question is on potential new locations or the potential to acquire additional real estate facilities in the current environment. Do you get more offers for potential land for new locations? Or maybe do you get attractive offer to buy back stores, which are not in your own property in the current real estate environment.

[Karin Dohm, executive]

Yes. Thanks for your question, Thilo. Number one, on Austria, absolutely. That is a bit of a weak spot. The underlying challenge there for our colleagues is we are -- they are specifically strong really in the project and let's say, slightly more larger project-related business. And that is the part that has shrank. And it has shrank stronger in comparison to [ critical ] retail customer footfall and spending.

And I think that is the reason that we there see currently that we are giving a slightly smaller share of the market that we would like to see. Colleagues are obviously focused on that. And for us, that is more a temporary topic than an ongoing or a permanent topic. Nevertheless, definitely a focus area. With regard to new location, yes, we partially get real estate offered, which -- where we are in a long-term rental or leasing agreement.

In those instances where that happened so far, the expectations from the selling side were nevertheless in an area where I don't see that as an attractive opportunity for HORNBACH. We, as a team, didn't see that. On the other hand, yes, we're specifically also exploring opportunities where we can step into other locations.

And I might have said that in one of our last calls already, I definitely expect that there is more flexibility on some counterparts and market participants sites in the next months or maybe I would see a 12, 18 months where we will definitely have more -- just more things happening, so to say, and more movement in the market given the interest rate environment, given other people's refinancing costs and other aspects where I would expect people to be more flexible, so to say, also on the sell side. So we're continuously monitoring that.

We're in a number of talks where we examine things and then we just see where it makes a lot of sense to build further either our network or just [ densen ] it in some countries where we already are. Maybe I can highlight there. Our average interest rate currently is -- it has slightly increased, but it's still below 3%.

And I think that's a very comfortable situation in which we are there. And I think that is also especially comfortable in comparison to some others.

[Thilo Kleibauer, analyst]

Yes. Okay. But do you plan to issue a new financial things like loans or promising notes in the short-term? Or what we have sufficient cash?

[Karin Dohm, executive]

We have sufficient cash. We have nothing where we see the necessity to take up additional liquidity for the operations as they are. So there's nothing planned currently no -- sorry, just half a sentence, our bond is just a reminder, is running until '26. So that's also not recent.

[Operator]

The next question is from the line of Lars Hettche with HC Capital Advisors.

[Unknown Analyst]

Have a few. So starting with the guidance. I was a little bit puzzled when looking at your guidance at the beginning of the year, you had a range of about like 10%, so minus 5% to 15% here regarding EBIT development. And now after half year that has risen now to a range of 50% from minus 10% to minus 25%. Normally, you would think of that within the year that race becomes narrower and narrower.

So with you, it's the opposite. So what is really the reason behind that? So as really the environment becomes so much more uncertain so compared to like 3 months ago. And don't you have any kind of, let's say, cost-cutting countermeasures to go against that development and then bring it more in direction where you want to have it here.

And so this is the first question.

Then I've got a question regarding your targets in the future. When looking at the share price and looking like these price book measures, and I think we are rather now coming down to kind of all-time lows here. It seems like investors are really, really confused with the future prospects of the company. And you've shown a slide how good the company development in the past. But somehow, I think investors don't really buy that.

So isn't it possible to give some, like some targets for the future, where you want to go, where like gross margins should go again. So that -- I don't know, that investors become a little bit more confident again compared to what they are now. And then last thing is when looking at these -- the guidance cuts you've made about 2 weeks ago, isn't it possible to like, I don't know, maybe make a conference call the next day to explain a little bit what happened here?

So I had the feeling that a lot of people were really confused and then it takes like 2 weeks to explain that. And this is a kind of a vacuum for -- inflation vacuum and people are really confused and I think this is also something that brings down the share price a little bit and maybe that would help to really react directly actively afterwards.

[Karin Dohm, executive]

Yes. Thanks, Lars, for your questions. So let me start with the guidance. As we said 2 weeks ago when we came out, obviously, and you saw that also with some of our peers now I'm thinking here about Kingfisher, for example, and others. There is definitely a development in this time of the year over the last months. And especially when you look into the outlook on the macroeconomic side, when you see interest [ rate ] developments, you see GDP outlook is getting adjusted, whether you think about central banks or some think tanks and others and you see customer sentiment in general and purchase power development.

So those things have all not developed positively, but negatively, and the outlook is definitely more challenging than it was at the beginning of this year, specifically in the first month of this calendar year. So I think that is not very exotic, but unfortunately, a situation where many of us are in, and that was the main driver of our guidance adjustment.

So we've reacted to this shifting macroeconomic backdrop and reduced likelihood of further recovery of those aspects, which we missed in Q1 due at that time, mainly to the weather. And then to your second question with regard to targets on the long-term side, HORNBACH has per history and tradition, as you all know, has always given guidance on sales and on EBITs for the following year, but hasn't given long-term targets.

I think we're currently as any company, of course, as we move towards calendar year and fiscal year, we will, of course, go through the next cycle of planning, and we will certainly see whether there is something where we can add value to our investors by providing a more longer-term perspective. Nevertheless, I said the current habit of this company has been in the short-term providing measures. So I think that hasn't changed.

But as I said, we will talk about that in our next internal planning cycles definitely. And the third one, which was about the sequencing. I think as you usually have, you have, of course, around the half year figures where we also have some legal requirements and internal governance with certain bodies and other components, finalization of figures and making sure that the auditors who do a limited review also have their goal.

That is just a couple of things that drove those differences between first clarity on sales and EBIT, where we came out due to legal requirements, whilst as said, certain procedures that then follow to make sure that our governance is in good shape and that we have the full figures going out now and in a moment where those steps have taken place that just drove those timing.

[Operator]

[Operator Instructions] And the next question is from the line of Miro Zuzak with James Invest.

[Miro Zuzak, analyst]

I will ask 2. The first 9 is regarding the gross profit margin. The last time we spoke, you were a bit, let's say, positive on the gross profit margin. Now we see a decline year-over-year. And the question is, is this related to the impairments that you have taken? So were they booked in the gross profit margin in Q2? Or is this a clean margin that we see now?

[Karin Dohm, executive]

Yes. Thanks for your question. The impairments are not part of the gross margin. The gross margin is purely indicating or a result of, obviously, the sales and the costs related directly to the goods not to stores or personnel in the stores. That is all in the store expenses. With regard to the development, as highlighted earlier, we have seen a stabilization of our gross margin in the second quarter. So throughout those 6 months that we have passed now of this fiscal year, the direction of travel has been into the right direction.

So that is why we are confident that this will be now a good basis for further stabilization. We have seen a decrease, especially on the supply side. So anything that we buy comes in at lower prices. We've seen reductions in logistics and other costs attached to the goods to make sure we have them in our hand.

Some commodities have significantly come down. I'm thinking here about lumber. If you look into those prices, I think we're currently at USD 500 per 1,000 feet. And I think we were 2 years ago, it was 3x that high, so USD 1,500 at the same time, so summer '21 more or less. So I think there are a couple of items that give you a good indication especially also our proactive -- on the supply side to make sure that suppliers pass on their own price reductions to us. And I think all this, as said, gives us a very good confidence that we have here a stabilization, which we can work upon and that will gradually flow also more and more through our gross margin.

[Miro Zuzak, analyst]

And just a follow-up on the -- sorry, if I may, I think you said or even you wrote at some point in time that you expect a slight increase of the gross margin in the current year compared to the last year. Correct me if I'm wrong, if you haven't said that, just my notes. But would that still be valid? Do you still expect an increase now looking at the full year, which is ongoing at the moment. I know it's just half way through, right? But I hear you positive about the gross margin development. Do you still expect an increase in the current year?

[Karin Dohm, executive]

Yes, absolutely. As I said with a further stabilization and we see the potential for a sequential improvement until year-end -- fiscal year-end.

[Miro Zuzak, analyst]

Okay. Then the next one would be regarding the leasing payments. And maybe remember, that was also a question I had in the last call, where it was related to -- it was related to interest rates, the answer was no. Now I see an increase from EUR 24 million in Q1 to EUR 30 million in Q2. And I think you didn't really change the portfolio. Can you please explain whether -- firstly, what has happened here?

And secondly, whether this is now the level we should expect going forward to EUR 30 million per quarter? Or are there other moving parts which I'm not aware of?

[Karin Dohm, executive]

On our leasing payments with regard to you mean whether they are linked to inflation or -- sorry...

[Miro Zuzak, analyst]

Yes. I noticed now an increase to EUR 30 million in the second quarter, in the cash flow statement compared to the EUR 24 million in the first quarter. At least to my knowledge, this is not depending on interest rates. That's what you told me in the -- when we spoke last time. But -- and I also asked the question in the last call -- in the last quarterly call. So now I still -- I was a bit surprised to see now an increase of EUR 6 million, which is like 20% or 25% from EUR 24 million to EUR 30 million.

[Karin Dohm, executive]

Sorry, I'm not sure I'm following where -- on which figure exactly you're looking, but happy to follow up on that. We can follow up.

[Miro Zuzak, analyst]

Yes. Okay. Then it would be great to get some insight there. And the next one would be regarding current trading. I know I mean you gave the profit [ warning ] like 2 weeks ago, but still, have you seen any better development now in September? What are the first signs that you see here?

[Karin Dohm, executive]

Yes. I think we answered that question already earlier, but happy to repeat. We definitely saw good development, specifically in certain product areas such as [ garden ] equipment, anything that is happening outdoor, very strong demand there in September.

This is partially as I said offset by the developments we saw already earlier. People are focusing more on smaller baskets and refraining a little bit from bigger projects. So that is, I would claim up to a certain degree, relatively normal picture, favorably affected by the good weather currently or the mild autumn, if you want to say so, across all our geographies.

And a little bit there is an offsetting effect last September, we had some of those panic purchases again, with regard to energy supply, batteries, electrical heaters on things, we're looking way more negative for the winter and the potential supply of warming energy. So that is not happening this September. But otherwise, as described earlier.

[Operator]

The next question is from of Ludovic Allègre from Kepler Cheuvreux.

[Ludovic Allègre, analyst]

Just 2 questions. The first one is on the gross margin. So just to be sure of what you just said. So you expect the gross margin to increase this year, meaning it would be higher than the 33.4% of last year. So you expect an inflection point in H2 this year. Just to confirm that, that's the first question.

And the second one is the wages and particularly in Germany, how much wage increase can we expect this year? Can you remind me if you finish the negotiation with the trade union yet or not?

And my last question is on the inflation bonus. Will this be deducted from the future wage increase, or is it something that you will -- that will add up to the wage increase in Germany this year?

[Karin Dohm, executive]

Yes. Thanks for your questions. And let me start with the second one with regard to the wages. So there is not yet an agreement with the trade unions that is still outstanding, and we currently have no indication when that should or could come through. We have now a proposal from the Retail Employer Association in Germany to pay to the -- to everybody who is subject to this payment from 5.3%.

And that means that -- excuse me, 4.3%. And that means that the agreement would be an offer where every retailer can participate, but that doesn't mean there is already an agreement with regard to those payments and we will see how those come out. We have -- as we said before, we have reflected anything that we want by what we foresee in our plans and our -- so to say, forecast to make sure that we include that in any guidance. So that is something where we just need to see whether things will differ and how they play out over time.

But we currently feel confident that the various options are in the one or the other shape and form reflected in our planned figures. What we do not know, of course, is any specific extra payments in '24 or the following years. There is an expectation that whenever this agreement comes, it lasts for probably 18 months. And yes, as you said, right, as we said, we have paid in Germany this inflation bonus.

We also see that as in -- as I said, as an investment into our people and our teams. And of course, we are currently also expecting that, that is done in a part set off from that.

With regard to your questions to gross margin, so as I said, we have a number of components that have a positive impact on the gross margin, as I mentioned, especially so to say, on the incoming side. Nevertheless, there could also be -- which we are currently not foreseeing, but just to put here a little disclaimer, of course, there could be potential downside on the sales price side, depending a little bit also on competitors' behavior. But in general, as I said, and I can -- that's so to say, definitely the case, we're seeing throughout the progressing time stabilization. We currently absolutely aim for a slight increase towards our fiscal year-end with as said once again the given uncertainties around the next months to come.

[Operator]

There are no further questions at this time, and I hand back to Antje Kelbert.

[Antje Kelbert, executive]

Yes. Thank you very much for all your questions and your time this morning. We also would like to invite you to meet us during the upcoming capital market events. You see that also on our slide, where we'll attend certain conferences over the coming weeks and months.

Yes. And whenever you have some follow-up questions or some discussions, any topic, I'm happy to get in touch with you, just give us a call or drop us some lines. And so just, once again, thank you for all of your interest this morning. Have a nice day and hope to see you soon. Thank you very much. Goodbye.