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Good morning, ladies and gentlemen, and welcome to the conference call of Hornbach Group regarding the third quarter results 2018/2019. [Operator Instructions] Let me now turn the floor over to Axel Müller.
Yes. Thank you very much. Yes, wish you all welcome everybody. My name is Axel Müller. I'm in charge of Investor Relations for the Hornbach Group. I'm sitting together with Roland Pelka, the CFO of Hornbach Holding AG & Co. KGaA and as well my colleague Anne Spies is with us to complete the team. It's a good tradition that we release our numbers only a few days before Christmas. And we have a special situation this year because we're on the back of the profit warning. And I'm sure we will have intense discussion after the short introduction of Roland and I would like to hand over in the first step to Roland, please.
Thank you, Axel. Good morning to everybody. This morning we published our financial report as of November 30, 2018. On December 10, we've already published an important announcement to inform the capital market about the unexpectedly weak earnings performance in the third quarter and the resulting adjustment to our earnings forecast. Before we begin the discussion, I would like to start by offering you a brief overview of the most important facts. At the end of September 2018, we opened a new Hornbach store in Boras, which is now our seventh store in Sweden. With weighted sales average of 8,500 square meters, this store is significantly smaller than the other 6 Swedish stores. This was the third new store opening in this current financial year and followed on from the Hornbach DIY stores opened in Switzerland and Netherlands in the first quarter already. We closed 1 small Hornbach compact store in Germany. As a result, we now operate a total of 158 DIY stores in 9 European countries with total sales area of 1.8 million square meters. These are supplemented by 30 builders' merchants outlets operated by Hornbach Baustoff Union at 28 locations in Germany and 2 locations close to the border in France. The Hornbach Group sales grew to EUR 1.085 billion in the third quarter, up to 7.7% on the previous year period. Like-for-like sales at the Hornbach stores i.e. excluding stores newly opened in the past 12 months, but including online sales develop as follows; group wise like-for-like sales in constant currencies rose by 6.2% in the third quarter, following growth of 2.3% in the first quarter and 3.4% in second quarter. Cumulative 9 months like-for-like sales are now 3.8%, ahead of the previous year. Particularly, pleasing was the development in sales of Germany, where the stores increased their like-for-like sales, net of currency items by 8.2% in the third quarter. On a cumulative basis for the first 9 months, the International Hornbach stores can now report like-for-like sales growth in constant currencies of 6.3%. This pleasing third quarter performance was driven by sales growth in nearly all countries. The only expectation -- only exception for Switzerland was third quarter sales in constant currencies stagnated compared with the previous year. Third quarter sales at Hornbach stores in Germany also posted pleasing growth of 4.4%. On a cumulative basis for the first 9 months, like-for-like sales in Germany are now 1.6%, ahead of the previous year. Despite this pleasing sales performance, third quarter operating earnings, adjusted from 1 operating components at the Hornbach Group came to EUR 19.7 million and fell significantly short of the previous year figure. On an unadjusted basis, the Hornbach Group reported operating earnings of EUR 20.9 million, as against EUR 29.2 million in the previous year. This substantial reduction was mainly due to unsatisfactory earnings performance in Germany and Austria. Operating earnings at the Hornbach stores in other countries rose by almost 10% compared with the previous year. The weak earnings performance in Germany and Austria were the main reason for the 67% fall in adjusted operating earnings at the Hornbach Baumarkt subgroup to just under EUR 4 million in the third quarter. On an unadjusted basis, third quarter EBIT came to EUR 5 million as against EUR 12.2 million in the previous year. The gross margin at the Hornbach Baumarkt subgroup 36.4% in the previous year to 35.8% in the third quarter of the current financial year. Over the same period, store expansions grew slightly less rapidly than sales rising by 7.1% to EUR 300.7 million or 29.9% of sales. Overhead costs, including digitalization costs, grew significantly faster than sales, rising by 50.1% to EUR 57.2 million in third quarter. Given stable earnings at the Hornbach Immobilien subgroup and only a slight reduction in operating earnings at Hornbach Baustoff Union, the overall Hornbach Holding Group showed a less substantial reduction in earnings at the third quarter of the current financial year. On a cumulative basis for the first 9 months, the overall Hornbach Holding Group generated EBIT of EUR 181.7 million compared with EUR 205 million in the previous year. That of course points to a reduction of 11.4%. The Hornbach Baumarkt subgroup reported cumulative 9 months unadjusted operating earnings of EUR 135.2 million as against EUR 153.7 million in the previous year. The Hornbach Group invested a total of EUR 158 million in the 9 months period, mostly advanced buildings and operating equipment. The Hornbach Baumarkt subgroup invested a total of EUR 149 million. The consolidated balance sheet of Hornbach Holding as of November 30, 2018, showed shareholders' equity of EUR 1.557 billion shareholders' equity at the Hornbach Baumarkt subgroup amounted to EUR 1.122 billion. As a percentage of total assets, shareholders' equity corresponded to around 55% of the Hornbach Group and to 52% at the Hornbach Baumarkt subgroup. Cash and equivalents amounted to around EUR 229 million at the Hornbach Group and EUR 162 million at the Hornbach Baumarkt subgroup. Net debt accrued level rose by EUR 14 million to EUR 474 million. So what do we now expect? Our extension program for the current financial year is now complete. No further new store openings are scheduled for the first quarter.In the coming 2019/'20 financial year, we expect to open up to 4 Hornbach stores, in this case in Sweden, the Netherlands, Slovakia and Romania. Given the unsatisfactory earnings performance in the third quarter and that above all in Germany and Austria, we have been obliged to revise our full-year earnings targets for 2018/2019, both for the overall Hornbach Holding Group and for the Hornbach Baumarkt subgroup. We now expect to generate adjusted operating earnings that fall more than 10% short of the previous year figure, those at the overall Hornbach Group and the Hornbach Baumarkt subgroup. Our full year sales growth target remains unchanged. Here we still expect to generate sales growth in the medium single-digit percentage rate. The reduction in earnings also expect -- also expected for the financial year as a whole is due above all to a lower gross margin and to disproportionate growth in stores and overhead cost including digitalization cost. That brings me to the end of my comments. Together with Axel Miller, I would be glad now to answer your questions. Many thanks for listening.
[Operator Instructions] And the first questioner is Juergen Elfers from Commerzbank.
As usual, I would like to ask you whether you could please be so kind as to shed some light on the like-for-like developments on the country by country basis, both for Q3 as well as for the accumulated 9 months period?
Okay. 9 months development in the countries in the third quarter accumulative was as follows: First of all, in Germany, we achieved, as I already said, growth of 4.4% in the third quarter and 1.6% in the 9 months period. In Austria, we achieved the sales growth of 3.0% in the third quarter, and 0.2% on accumulative basis. In the Netherlands, we achieved a sales growth of 12.2% in the third quarter and 12.4% in the first 9 months. In Switzerland, in constant currencies, we had stagnating growth in the third quarter of 0.4% and on accumulated basis, 0.7% growth in Switzerland. In Sweden, we achieved a sales growth of 11.6% in the third quarter and 7.1% in the first 9 months on -- in constant currencies. In Czech Republic, we achieved a sales growth of 11.5% in the third quarter and 8.5% on a cumulative basis and in constant currencies. In Slovakia, we had a sales growth of 14.7% in the third quarter and 11.4% in the first 9 months. In Luxembourg, we achieved a sales growth of 7.3% in the third quarter and 4.8% in the first 9 months. In Romania, last but not least, we achieved a sales growth of 11.5% in the third quarter and 9.9% in the first 9 months, again, in constant currencies.
Mr. Pelka, thank you very much for this detailed shedding of light into the outstanding success of your international operations. In many of those countries in the third quarter, sales momentum remained in double-digit or end at double-digit territory. Would it be fair to assume that there were some special effects there? Or could it be the case that such momentum would be brought forward into the fourth quarter as well? And that implies that it may well be that you are -- your mid-single-digit full-year sales guidance may be slightly in excess of 5% if you are able to sort of stick to this dynamics of the international markets. Is that correct?
Yes. As of today, there are no signs that this dynamic will go down. So that's the situation today. So we have a very positive trend in all countries outside of Germany. Now including Austria and Germany has now is also positive at the moment, but Germany and Austria will remain the most -- the countries with the highest competition.
In fact, I was going to ask you also if I may, on the underlying EBIT, you refer to poor performances in Germany and Austria. And maybe you could shed some light on the specific competitive situations in these 2 markets? And what your reading is for the shorter to medium-term going forward in these markets?
The competitive situation in both countries is unchanged. So as far as the stationary business is concerned, okay, in online, sales there's also no change. We have the online competition as we had in the past. Amazon is a big player in the online segment, but no change in the overall competitive situation. So there's -- nothing has changed so far.
Okay. Then let's maybe have a look at the online sales momentum. Can you provide us with some figures on how online sales progress in the third quarter as well as for the first 9 months?
Axel, do we have numbers as ...
So we didn't disclose specific numbers on that. But in the -- for the third quarter, we accelerated the momentum of the online sales for the group. I think we had just over 20% after -- in the second half of the fiscal year. And we had a plus of around 30% in interconnected retail sales or online sales in the third quarter. So the overall trend as well in the online business is accelerating as well in the stationary business. And that may be also the trigger for the over proportionate growth outside Germany because the growth rate and the growth momentum in online sales is higher than in Germany.
Okay. Just to clarify, you said for H1, the momentum was just over 20% and in Q3, you are talking about more than 30%. Is that correct?
For the third quarter as I said, yes, that's correct. For the first half, I have to ...
For the first half, 22%.
Okay. First half 22%, and now we have more than -- we exceed 30% growth rate.
Okay. Yes. So then just one final, if I may? Mr. Pelka, you spoke about your plans for establishing 4 new stores in Sweden, in the Netherlands, Slovakia and Romania. And I was just wondering can you share with us your impressions after the first few months of the Boras store? Is the smaller store size becoming a blueprint for your expansion plans? Or is it only applicable to probably the new store in Sweden?
The Boras store is a smaller store and it's a store for a smaller catchment area, what we have in Boras and we'll open a similar store, a very similar store next year in Kristianstad, which is also catchment area, very comparable to the Boras catchment area. This store type was approximately 8,500 square meters weighted sales space, including drive-through facility, is a store type for smaller catchment area. It's working well now in Sweden. We're very happy with the development. We're -- with development in Boras and due to the store type, which progress in Sweden, it could also work in other countries for smaller catchment areas.
But for now, the new stores in the Netherlands Slovakia and Romania are not planned to be trimmed to such store size levels.
The stores in store openings which we planned in the Netherlands, in Slovakia and Romania are type -- so-called type 6 stores, so which is our biggest, largest store format. Are there any further questions?
Yes, there are. And next up is Thilo Kleibauer from Warburg Research.
I have 2 questions. Firstly, in your report you mentioned that the planned buyback of 2 stores in the Netherlands will not become effective. So what is the reason behind this? Why -- so will you continue with some rental contract? And why can't you make usage of the option to buy these stores? And secondly, you have issued promissory notes, I think also to refinance this real estate transaction. Can you give us maybe a rough indication about the interest rates for these midterm financings?
First to your first question, the buy -- the planned buyback of 2 stores in Netherlands, yes, we are very interested to buy back these 2 stores. The stores are owned by AXA or let's say, a real estate portfolio managed by AXA or the AXA Group, it's an insurance company. And they decided not to sell. So we were interested to buy, but they surprisingly decided not to sell. And so we have to accept this decision. As far as the promissory mode is concerned, which we issued in the third quarter in the amount of EUR 95 million, we have 2 portions, 5 years and 7 years. And the interest rate is 1.5%, effective interest rate for the 7 years portion and it is slightly below 1.2% for the 5 years portion.
Yes. Okay, and then for the 2 stores in the Netherlands, have you prolonged the rental contract? Or so have you secured the stores for your operating business? Or could there come up a problem if you're not the owner of the store?
No. We are still owner. We have no problems to rent these stores. And these -- but all stores in Netherlands are working very well. So we prolongate the rental agreement.
At the moment, there are no further questions. [Operator Instructions] And the next question comes from Christian Bruns, Pareto Securities.
I have an additional question on your weak performance in Germany and Austria. And as you are really value destroying in your operations here in your home turf, but what could you do to help yourself coming out of this situation? There must be a couple of stores which are losing a lot of money. And I would like to know if there are further restructuring measures planned? And the second question is on -- also on the planned buyback in the Netherlands. Just could you give us an idea of what multiple you were prepared to pay in terms of annual rent for this location?
So as far as your second question is concerned, I can't give you indication about rental agreement in Netherlands. So we are in a current rental agreement which is -- and so I don't have the details on my desk now.
Okay. And the next part of my question is that you calculate your hidden reserves in real estate by using 13 -- a multiple of 13 and deducting H ...
That's correct. Yes, that's correct.
And I guess that the current prices are much higher. And I would guess that you're -- we are also willing to pay a higher multiple on these 2 stores, real estate?
Yes. What we did, we didn't buyback these 2 stores.
I know, I know. But I just wanted to know at what level you consider it attractive to buy such a store?
We -- you mean in terms of the multiplier of ...
The multiplier on your annual rent?
In the past, we disclosed that the average ratio -- sorry, the average multiplier of 13 should reflect a fair bandwidth between, let's say new stores, actual stores and also order sales on the other side. And when we have the situation where we entered into the prolongation and we have a long, long distance to go for the contract that should translate to more attractive multiplier, but that's more a virtual discussion because we don't get to the ready detail store by store. Do you have any additional information on that, Roland?
No. We have long-term rental agreements for these 2 stores. And market rent, which is [indiscernible] further remarks on this subject. And coming to Germany and Austria, it is clear that we have to do something in both countries. It is unacceptable, the situation in Germany and in Austria. We have -- it's not -- it's a cost problem and we have to -- we already focused this. We have to focus and we will focus this problem. And our target is clearly to improve the profit situation, profitability, especially in these 2 countries, but -- and this is -- it's very clear.
Does it include the same amount of stores? Just to use your personal in the stores? Or I think that you have to close down some stores, which are ...
No, we have no store closure plans. We think that we can improve the business on the -- based on the existing store network except for maybe 1 or 2 stores, smaller stores, which are -- but no, we have no substantial plans for store closing program in Germany and Austria. We have a good market position in both countries, but we have a cost problem. And we have in some case, a problem with the or let's say a problem that detects that the gross margin is suffering as a result of higher purchasing costs, which can be passed on to sales prices, but this could change.
We then come to the next question. It's a question from Juergen Elfers from Commerzbank.
The other questions that have occurred, it's regard new questions as is always the case. Mr. Pelka, I would just come back to Thilo Kleibauer's question of the funding of the EUR 95 million that were initially planned to buyback the 4 stores, 2 in Berlin and 2 in the Netherlands. Also EUR 95 million, I believe you now have as the Netherlands' deal is not going to materialize, you now have like EUR 50 million of funding that is not dedicated to a special deal or transaction from now on. So what are you going to do with the excess cash? That's the first question.
First of all, we need to -- as I said, we plan to open another store in the Netherlands. And we have more stores in the pipeline in the Netherlands. We are extremely successful in the Netherlands. So this promissory note has been issued in the Netherlands. So we can -- we will use the funds to finance our further expansion in the Netherlands. And as far as the promissory note is concerned, I come back to the question of Mr. Kleibauer who asked the interest rate now has -- now in front of me, I said 1.5% for 7 years, which is EUR 43 million fee for 7 years. And the interest coupon of 1.5% and for the 5 years portion, which is EUR 52 million, we pay 1.13% to make this thing clear.
Okay, okay. So effectively, the second leg of the promissory note is for the Netherlands. Is that the 7-year promissory note?
Yes. We have EUR 43 million, 7 years and EUR 52 million, 5 years ...
Okay. And did you pay EUR 45 million for the first 2 stores in Berlin and Potsdam, hence you have like ...
For the first 2 stores in Potsdam and Vogelsdorf close to the Berlin, we paid EUR 45 million, EUR 45 million.
EUR 45 million. So that is a residual of EUR 50 million net and therefore, that was planned to be invested into the 2 Dutch stores. Is that correct?
That's correct.
Yes, so then the 5-year promissory note that has a volume of EUR 52 million, perfectly fits into this transaction. Is that also correct?
That's correct.
Okay, okay, right. Good. Then, 2 more questions if I may on Austria yet again. Is Austria actually loss-making?
No. Austria is not loss-making. It's profitable. No, Germany is loss-making, that's true, but Austria not.
I was of the opinion that profitability in Austria was pretty robust until actually and including 2014/'15. And the weakness, the margin weakness started to pour in from 2015/'16. Do you support this view? And then if so, has that got to do with having pushed Baumarkt over the cliff? And that the Baumarkt's portfolio has been acquired by other players, namely OBI and Boras. Is that the reason for the poor profitability?
No. The poor profitability in Austria, let's not say the poor profitability, but the lower profitability compared to the years before, that has nothing to do with the specific competitive situation in Austria. So we have a good market position. And we have some homemade problems, from my point of view, which we have to solve and we will solve these things. We have cost issue. And I'm very -- I'm optimistic about the further development in Austria.
Okay. I would've thought you've embarked into a rental contract, which didn't perform according to expectations. Is that the prime problem that you have?
Do you mean the rental contracts in the store in Innsbruck?
Yes, that's correct.
It was a former Baumarkt store. And this store is we are not so happy with the performance of this store, that's correct. But this has also to do -- this has to do with a Boras opening in Innsbruck last year, but we think that we can solve this problem as well.
Okay, okay. Super. Then...
What happened also, I think one thing I should mention in Austria, our most successful store in the near -- in Pölten, which is very close to Vienna, this is our -- was in the past, our most successful store. And we did the store remodeling this year, big stores are called store conversion. And this store conversion has -- hasn't been processed so as what it should be processed. And as a result, we have to change this now, and but this store will come back on the track very soon. And so this is what I said, we had some homemade problems.
Okay. Then one final if I may. You said you are unhappy with the cost situation in Germany. You have to bring down costs. Can you give us some examples of how you plan to trim operational expenses?
First of all, we have to look on our overhead costs. And it's not acceptable that the overhead cost grow every year, over proportionate to the safe development, that's not acceptable. And now we address this problem. And it's not so much the store expenses. It's more -- we have to look at the overhead costs, including digitalization costs.
And we are not looking into really closing down stores, I hear. Is that correct?
For one or two, of course, but this is not very substantial.
And these one or two stores are smaller stores or could they be also some of those that you have cost from ...
To make the thing clear, it's not one or two, it's maybe, it's one. And it's a small store.
Are there any further questions around?
Yes, there are questions coming from Kim Ashton from [indiscernible].
Just on thinking about the comments you make about the gross margin coming down and write down, were you thinking particularly of some inventory write-downs in particular stores with local play? Or are you finding the customer preference for the online business is different? Or were there any sorts of factors within that, that were affecting the numbers?
This is Roland Pelka, speaking again. First of all, the gross margin -- the slowdown of the gross margin or the retail gross margins has mainly to do with -- and that's the main reason it's related to increasing procurement costs, especially in building material and woods and lumber. And this -- these costs have -- couldn't be passed on to the sales price so far as a result of the competitive environment. And that has nothing to do with extraordinary inventory write-offs in the stores or whatever. The main -- and I think as the gross margin, at least, is a result of the competitive environment, and what I see is that these cost pressures are now not -- is not only the case with Hornbach, all our competitors has the same or have similar problems. And also in the building -- in the business -- merchant business, they're faced with higher procurement costs. And they are much faster to pass this on to the selling prices. But this gross margin development is not related to any write-offs of inventory.
Is there anybody who ...
At the moment -- I am sorry. At the moment, there are no further questions.
Then we would like to give you the opportunity and some seconds to reflect whether there's something we can do right now for you.
[Operator Instructions]
If there is no further question at this time?
No. No further questions at this time.
We would like to thank you to be in the call and to share those information with us. Yes, of course, what we should do in any case is to wish you a very, very Merry Christmas and happy New Year, full of health and blackened success. Take care. And according to our new financial calendar, the next news flow will be for the trading statement in March. The date is, hold on, the March of -- 21st of March, next year. And we would like to keep in touch with you. Merry Christmas, again, and bye-bye.
Bye-bye.