Hornbach Holding AG & Co KGaA

XETRA:HBH

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the conference call regarding the 2019 Q3 results of Hornbach Group. [Operator Instructions] Let me now turn the floor over to your host, Axel Müller.

[Axel Müller, Head of Group Communications]

Yes, many thanks. Good morning to everybody. We wish you a warm welcome to our conference call on the third quarter and 9-month results. We released a fine set of figures this morning, confirming the early publication of last week. And I think the headline is we are back on track. And what this will mean, that's why I hand over to Roland Pelka, the CFO of the company.

[Roland Pelka, Member of the Board of Management]

Thank you, Axel. Good morning, ladies and gentlemen. As Axel already explained, we released an ad hoc announcement on December 10, 2019, to inform the market of our very pleasing earnings performance in the third quarter of the current financial year. To account for the strong performance, we raised the earnings forecast.Before we start discussing developments, however, I would like to begin by offering you a very brief overview of the most, most important facts. 2 further Hornbach stores were newly opened in the third quarter of the current financial year. This involves stores in Sweden and in Slovakia. The total number of Hornbach DIY stores and garden centers now amount to 159. These are located in 9 European countries and have total sales areas of 1.9 million square meters. They are supplemented by 33 builders' merchant outlets operated by Hornbach Baustoff Union, mainly in Southwestern Germany and close to the border in France. The Hornbach Group sales grew to EUR 1,139 million in the third quarter, up 5.0% on the previous year's period. Like-for-like sales developed as follows: Group-wise like-for-like sales in constant currency -- currencies rose by 4.6% in the third quarter, following growth of 7.8% in the first quarter and 8.8% in the second quarter. Cumulative 9 months like-for-like sales are now 7.1% ahead of the previous year. This very pleasing overall sales performance was driven both by the stores in Germany and by the stores in international regions. While sales in Germany rose by 3.3% in the third quarter, sales outside Germany showed currency-adjusted growth of 5.9% over the same period.On a cumulative basis for the first 9 months, the Hornbach stores in Germany can now report like-for-like sales growth of 6.2%. The very pleasing sales growth, both in the third quarter and cumulatively for the current financial year-to-date resulted from sales growth in all regions.Net of currency items like-for-like sales outside Germany showed overall growth of 8.1% in the first 9 months of the current financial year. Together with improved cost ratios, this very pleasing sales performance also led to substantial operating earnings growth. Operating earnings before interest and taxes, EBIT, at the overall Hornbach Holding AG Group thus increased by EUR 20.4 million to EUR 41.3 million in the third quarter and by almost EUR 559 million to EUR 240.6 million on a cumulative basis. Operating earnings were also positively affected by amended accounting requirements due to IFRS 16. This factor benefited operating earnings at the overall Hornbach Holding Group by EUR 9.5 million cumulatively and by EUR 3.2 million in the third quarter on the report. The very pleasing overall earnings performance was driven by improved operating earnings across all regions with only Hornbach Baustoff Union reporting a slightly lower level of EBIT compared with the previous years.Operating earnings at the Hornbach Baumarkt subgroup grew by EUR 23.9 million to just under EUR 29 million in the third quarter and by EUR 64.6 million to almost EUR 200 million on a cumulative basis for the first 9-month period. Here, the amended lease accounting requirements benefited earnings by EUR 16.2 million in the 9-month period and by EUR 5.4 million in the third quarter.While cumulative gross profit as a percentage of sales fell slightly short of the previous year, store preopening and administration expenses rose significantly less rapidly than sales. The Hornbach Group invested a total of EUR 104 million in the 9-month period, mostly in land, buildings as well as in plant and operating equipment. The Hornbach Baumarkt subgroup invested a total of EUR 74 million. The consolidated balance sheet of Hornbach Holding as of November 30, 2019, showed shareholders' equity of EUR 1,631 million. The Hornbach Baumarkt subgroup has shareholders' equity of EUR 1,164 million. The amended lease accounting requirements led to a sharp rise in total assets. As a percentage of total assets, shareholders' equity is reported at 40.4% and 30.4% for the Hornbach Baumarkt subgroup.We refinanced EUR 250 million bond due to mature in February 2020 by issuing a new bond in October already. As a result, cash and cash equivalents as of November 30 amounted to around EUR 464 million at the Hornbach Group and EUR 406 million at the Hornbach Baumarkt subgroup. In addition, we hold short-term financial assets in the amount of more than EUR 250 million -- EUR 240 million. We will repay the old bond on schedule in February 2020.So what do we now expect? The expansion program for the current financial year will be completed with the opening of a further location in the Netherlands, most likely in February 2020. Given the very strong earnings performance, both in the third quarter and cumulatively for the 9-month period, we have raised our earnings forecast for the 2019/2020 financial year, and that's both for the overall Hornbach Holding Group and the -- for the Hornbach Baumarkt subgroup.For the overall Hornbach Holding Group, we now expect adjusted operating earnings, EBIT, to show a year-on-year growth in a low to medium double-digit percentage range. For the Hornbach Baumarkt subgroup, we expect adjusted EBIT to grow in the medium to upper double-digit percentage range. The full year sales target still involves generating growth in a medium-to-above single-digit percentage range.That brings me to the end of my comments. And together with Axel, I would be glad to answer any questions you may have. Many thanks for listening.

[Operator]

[Operator Instructions] The first question is from Thomas Maul of DZ Bank.

[Thomas Maul, Analyst]

Thomas Maul, DZ Bank. I have 2. The first one, you just mentioned that you opened a store in Kristianstad, Sweden. Maybe you can elaborate a bit about the current competitive situation in Sweden? And how many markets you would like to operate in Sweden in the longer term?And the second question, I would be interested to know what the average shopping basket value is that people buy in the webshop and what the average shopping basket value is in the bricks-and-mortar market? So how much do people spend per purchase on average?

[Roland Pelka, Member of the Board of Management]

Okay. Good morning, Mr. Maul. This is Roland Pelka speaking. So we opened a store in Kristianstad. The store, which we opened in Kristianstad, Sweden, is a store which is a medium-sized store. We opened -- have already opened a similar store in Borås. I think it was last year. And this is a store which has approximately 5,000 square meters typical home improvement selling space. And in addition, a so-called price-through facility and the weighted average selling area is approximately 8,000 square meters. This is a store type for smaller -- let's say, smaller to medium-sized cities in Sweden. As you know, with our large store formats, the so-called type 6 formats, which has more than 13,000, 14,000 square meters weighted average selling space, so we have no chance to expand further in between because we are already present in the big catchment areas in Stockholm, Malmö and Helsingborg and so on, that we need a smaller store type. And this is a store type which is working quite good. So we have positive experience with the first store in Borås and now opened the next store in Kristianstad, and we have further expansion plans in Sweden with this smaller store type. And so we are pretty optimistic about further development in Sweden. The sales development is very good now in Sweden, and we are on a good way.Your second question is regarding the average shopping basket, the comparison between the webshop and the stores. So in average, the shopping basket in the webshop is approximately 4x higher than in our stores. It depends region by region, but approximately, on average, 4x higher the shopping basket in the webshop compared to the average in our stores.

[Operator]

The next question is from Thilo Kleibauer of Warburg Research.

[Thilo Kleibauer, Research Analyst]

I have 2 or 3 questions. The first one, you mentioned in your report that you bought an existing store in Chemnitz. Should we expect further buybacks in the coming years? Do you have options from formal sale and leaseback contracts to buy existing stores in the near future?And my second question would be regarding Hornbach Baustoff Union. You mentioned there, a margin decline and higher operating costs, so what is your assumption for the full year EBIT at Hornbach Baustoff Union? And what should we expect here for margin development in the coming years?

[Roland Pelka, Member of the Board of Management]

Okay. Good morning, Mr. Kleibauer. This is Roland Pelka speaking. Yes, we bought back a store in Chemnitz. This buying back was done by the Hornbach Immobilien AG, the property company, which is a sister company, as you know for the Hornbach AG. So this is a store, which works very good. And it's an excellent location, and so it makes -- made sense for us to -- instead of entering into a new long-term lease contracts, buying back the stores. So in most rental contracts, we have the option to buy back on all rental contracts we have. Normally, the options to buy back the store is after the majority of the rental agreement, and so we -- this is a decision, which is done on an individual basis. So we look at the specific situation, and if it makes sense for us to buy back the store, then we will do it. So we have no concrete buyback plan now, but it could happen also in the future.And your second question is regarding the EBIT development in the Hornbach Baustoff Union Group. So we have a lower EBIT this year, it's not a big issue, although it's a little bit lower compared to the previous year. And this has to do with, first of all, a lower gross margin in -- with the -- in the very competitive environment. And so the target for Hornbach Baustoff Union is always to minimum maintain and better increase market share in the specific regions so there was a price aggressiveness.And secondly, the Hornbach Baustoff Union took over 3 additional locations in the Baden-Württemberg area, Stuttgart, Göppingen and -- near Göppingen and Ulm. And these new locations -- we are not so happy with the development in these new locations, but we are working to fix the problems. And so we are pretty optimistic to get it done in the next year and -- but at the end of the current financial year, the EBIT margin and the absolute EBIT of Hornbach Baustoff Union will be lower compared to previous year. This has -- but it has no negative -- significant negative impact on the overall earnings performance of the group.

[Thilo Kleibauer, Research Analyst]

Okay. Maybe 1 additional question on the development now in the current Q4. We have seen in last year's Q4, a significant cost increase due to the preparation of the important Q1 business and an increase in number of people and increase also in your stock level with a significant increase in installed base cost. So what is your view on this year's Q4 with respect to the preparation of the next seasonal business in Q1? Maybe you can give us a little bit insight here?

[Roland Pelka, Member of the Board of Management]

Okay. So -- this is Roland Pelka speaking again. You are absolutely right. Last year, we increased the stock levels significantly to be better prepared for the spring season, and we made good experience with the higher stocks because this was one of the reasons that we had an excellent start in the current financial year that -- with excellent sales in the first couple of months. And so we think it is necessary to have higher stock levels at the end of the year to be prepared for the then coming spring season. But on the other side, and the year before, we did some mistakes as of -- and so -- and this year, we want to be better prepared and have increased stock levels, but in a better way, in a more efficient way than we have done last year.So we think we learned from our mistakes, and we will do it better this year. And -- but the most important target is to be good prepared -- well prepared for the very important spring season. And the higher costs last year, I think -- okay, we are -- the fourth quarter is always a loss-making quarter, has to do with weather and winter time, and so on. But with our forecast, we are very -- we are a little bit conservative, and we think that we have -- and we now we implemented a much better cost management. We see the first success in the -- we have already seen first success in the first 9 months. And so we think we will have a better situation on the cost side this year compared to the previous year.On the other side, as I said, due to the not foreseeable weather developments, it is always difficult to give a precise forecast for the last quarter of our financial year.

[Operator]

[Operator Instructions] The next question is from Mark Josefson from Pareto Securities.

[Mark Josefson, Analyst]

I'd just like to come back to your answer to the previous question with respect to the control of the cost. If we look at particular administration, that was actually down EUR 2 million in Q3 compared to last year. Is this a timing issue as well? Because I saw that in Q2, there was quite a big increase for admin? And can you give us a sort of run rate for admin expenses for the full year of 12-month period?

[Roland Pelka, Member of the Board of Management]

Okay. Good morning, Mr. Josefson. This is Roland Pelka speaking again. You -- as I said, we are working hard on the cost side, and our target is that we -- that our -- the development of administration expenses is always -- the growing of -- the growth of administration expenses is always much lower than the growth of sales. So we want to see a clear cost decretion on the -- at the -- for the administration expenses this year and the forthcoming years.

[Mark Josefson, Analyst]

Okay, okay. And can I just ask a question with respect to store opening expenses? I know they're spread for a period, but is it the case that the preopening costs for the Dutch store that you mentioned that will fall into the fourth quarter, so there will be some preopening expenses in Q4 of this year?

[Roland Pelka, Member of the Board of Management]

Yes, that's true. We have preopening costs for the Dutch store and some of the costs that already exist. They are booked in the quarters before. But we would also see the opening costs now in the fourth quarter for the Dutch store, and we will have also preopening costs for a store in Romania, which we'll open probably in April 2020 because this store is already under construction, and we have to hire the store people, train them and educate them, and so we will have also store opening costs for store openings in the forthcoming years.

[Mark Josefson, Analyst]

And in terms of the year in total, next year or the year 2020, what is the plan in terms of new DIY units?

[Roland Pelka, Member of the Board of Management]

The plan for new stores or?

[Mark Josefson, Analyst]

New stores.

[Roland Pelka, Member of the Board of Management]

Okay. As I already said, 1 store is already under construction in Romania, and then we will have -- we will see probably 2 store -- new store openings in Germany, but this is a new store type with a new name and with a new concept. And as of today, it's too early to explain this in a further way, but it is a new concept on a smaller, let's say, mid-sized selling area, a 6,000-square-meter store and with a new concept.And in addition, we will have some enlargements of existing stores next year, but the total number of store openings next year will be probably not higher than 3.

[Mark Josefson, Analyst]

Okay. And you spoke about addressing issues at Baustoff Union, does that mean that the one that you acquired last year could be closed again? Or is it a case of just playing with the mix at those units?

[Roland Pelka, Member of the Board of Management]

Okay. This -- I think we will -- this is not a big issue, yes? We acquired a smaller building merchant business with 3 outlets. And this was a so-called assets deal that means we have bought the properties in Stuttgart, and we entered into lease agreements -- into existing lease agreements in -- at Ulm and in Göppingen, and we took over the store people or the employees. And now we have some -- unfortunately, some of the key employees, key salespeople left the company, and this is one of the reasons that we have some problems there, but we are pretty optimistic to fix these problems. It's not -- from my point of view, it's not a big issue. We will see a further opening of a new builders merchant business now at -- until the end of the current financial year, but it's a very small location in [indiscernible]. And probably one more -- or 1 or 2 more openings in the forthcoming year in the...

[Mark Josefson, Analyst]

The opening new business is the idea to expand the region a little bit?

[Roland Pelka, Member of the Board of Management]

Yes. We already expanded those regions. We expanded the region because we -- typically or traditionally, Hornbach Baustoff Union is a company which operates locations -- builders' merchant outlets in the Southwest of Germany, especially here in Palatinate region and in [ Saarland ], and now we expanded further to the east from our point of view to Baden-Württemberg, which makes sense. And we have already expanded a little bit more into Heiden.

[Operator]

The next question is from Juergen Elfers of Commerzbank.

[Juergen Elfers, Equity Analyst of Retail]

Yes. First of all, congrats for the upgraded earnings guidance, happy to hear that. As usually the case, I would like to start with the like-for-like question on Q3 and 9 months for the international markets, please?

[Roland Pelka, Member of the Board of Management]

Yes, good morning, Dr. Elfers. This is Roland Pelka speaking again. Of course, we expected your first question. And so looking on the different regions, sales development in the regions were as follows, especially, the international regions, so in the different countries. First of all, in Austria, we had a positive like-for-like sales in the third -- we had a slightly negative like-for-like sales in the third quarter with 1.3% in Austria, but positive on a cumulative basis in Austria for the first 9 months with 2.6% plus.In the Netherlands, we had excellent sales development, a plus of 13.7% in the third quarter, and on a cumulative basis for the first 9 months, we achieved sales growth on a like-for-like sales basis in the Netherlands of 12.4%.In Switzerland, we had, in the second -- in the third quarter, plus 0.7% or so more or less on a -- of course, this is in constant currencies, plus 0.7% in the third quarter and plus 1.8% in Switzerland in the first 9 months.In Sweden, as I already said, we have very pleasing sales development in Sweden. In the third quarter, we achieved a plus of 6.1%, and on a cumulative basis for the first 9 months, we achieved a sales growth of 12.5% in Sweden.In the Czech Republic, we achieved a plus of 4.9% in the third quarter and 9.4% for the first 9 months.In Slovakia, we had positive like-for-likes of 5.7% in the third quarter and plus 10.3% in the first 9 months.In Luxembourg, we had positive like-for-likes of 6.9% in the third quarter and 6.3% in the first 9 months.And last, but not least, in Romania, we achieved a plus of 10.6% in the third quarter and had a sales growth of 13.2% in the first 9 months.

[Juergen Elfers, Equity Analyst of Retail]

Okay. Well, thank you very much for having updated us on all your markets. Can I just ask one other question on the like-for-like development? When you look at the international arena of your operations, can you please provide the like-for-like sales number including FX effect?

[Roland Pelka, Member of the Board of Management]

Including FX?

[Juergen Elfers, Equity Analyst of Retail]

Yes.

[Roland Pelka, Member of the Board of Management]

I hand over to Axel. Axel will have those numbers.

[Axel Müller, Head of Group Communications]

Yes. First of all, for the overall group, we already released the figures, it was 4.7% in total.

[Juergen Elfers, Equity Analyst of Retail]

Yes. I was specifically asking for the international operations of Hornbach Baumarkt AG.

[Axel Müller, Head of Group Communications]

Okay. International...

[Roland Pelka, Member of the Board of Management]

In the non-euro areas.

[Axel Müller, Head of Group Communications]

It was -- so in the -- in Switzerland, we had...

[Juergen Elfers, Equity Analyst of Retail]

I just wanted to have the aggregated number.

[Axel Müller, Head of Group Communications]

Okay. Aggregated is 6.1% in the third quarter and 8.4% in the first 9 months.

[Juergen Elfers, Equity Analyst of Retail]

Okay. Great. Well, as we had already had a number of issues discussed on the strategy, I hope you don't mind if I just ask 2 or 3 number-crunching issues in the first place. You restated the square footage by 2,000 square meters, both for the prior year period as well as for this year's period. Can you share with us the reasoning behind it?

[Roland Pelka, Member of the Board of Management]

Axel?

[Axel Müller, Head of Group Communications]

So the -- yes, it's -- we have some enlargements in some stores or changes in the sales area when we have an additional drive in area over there in some parts of our stores...

[Juergen Elfers, Equity Analyst of Retail]

But how come this would have affected the prior year's number?

[Axel Müller, Head of Group Communications]

This has to do with -- the prior number is due to a change in stores already opened in the past and we -- to be honest, I can't -- I have to check that because usually we don't go backwards with the last year's numbers. That's why I'm not quite sure whether we mixed it up a little bit in our publication. But anyway, the change between the temporary and temporary reporting now is due to enlargements and closing 1 store and opening new stores. So...

[Juergen Elfers, Equity Analyst of Retail]

Okay. Well, I'm just referring to this also because in the October 2019 bond roadshow handout, you had a square footage, assumingly as per the end of September, which was also 2,000 square meters lower than the one now appearing in the report.

[Roland Pelka, Member of the Board of Management]

Yes, this was another...

[Juergen Elfers, Equity Analyst of Retail]

This was a little bit of concern here for me. Okay. Anyway, then let's just have a quick look on pension provisions. If you don't mind me focusing on that one? In the first quarter -- I'm now looking at Hornbach Baumarkt. In the first quarter, we had an increase by more than EUR 6 million on the basis of EUR 14 million in total, so -- it went -- at year-end. It went from EUR 14 million to EUR 20 million in the first quarter, and the second quarter, it has risen by another EUR 9 million to EUR 29 million and has now come down again. I was of the opinion that I did understand the rise in the pension provisions due to the decline in interest rates, but I'm currently unsure to understand how come this provision position is coming down?

[Roland Pelka, Member of the Board of Management]

Dr. Elfers, this is the questions, which we -- which you can't answer over the phone now because...

[Juergen Elfers, Equity Analyst of Retail]

Okay.

[Roland Pelka, Member of the Board of Management]

This would need further investigation.

[Juergen Elfers, Equity Analyst of Retail]

Okay. Good. Then maybe 1 question on the recently issued corporate bond with a coupon of 3.25%. We have seen a cash out of EUR 220 million temporarily on -- in the cash flow statement. So can you sort of update us how actually -- whether you need to be -- need to pay penalty charges at financial institutions? Or how come this cash paid out for investment in connection with short-term finance planning, how this actually impacts on the financial results line?

[Roland Pelka, Member of the Board of Management]

Yes. First of all, what you see in the cash flow statement, this is an investment in financial assets -- short-term financial assets in order to avoid negative interest rates on bank deposits. So we invested cash in deposits with longer than 3 months period, but all these deposits will be due in end of the financial -- will come back in the -- at the -- in February now. And then in February, we will pay back the old bond. And then the -- our financial -- the position of financial assets I think will come down again. But unfortunately -- so with the current liquidity position, plus the financial assets of more than EUR 240 million now, we have financial assets now of -- in the group of much more than, what is it now, EUR 640 million, something like that. And this -- and with this high number of cash and liquidity, we couldn't avoid further negative interest. So at the moment, the average negative interest rate on financial assets is approximately 0.3%.

[Juergen Elfers, Equity Analyst of Retail]

Okay, that's helpful. Then 1 strategic question also apart from these number-crunching exercises, if I may? There was an article earlier today in -- on the news [indiscernible]. And the writer says, "There has to be the time for significant changes in how the DIY industry must tackle the market," and Albrecht Hornbach was quoted saying that, "We can't move into the inner city area because our stores require a specific size." We cannot move with our stores into the city centers. Is the new concept that you are now trying in Germany designed to fill that gap?

[Roland Pelka, Member of the Board of Management]

To be honest, at the moment, we have no concept for high street stores or inner city stores.

[Juergen Elfers, Equity Analyst of Retail]

But I heard you say that you have 2 further stores planned in Germany, new store, new type, new name, new concept, mid-size square footage?

[Roland Pelka, Member of the Board of Management]

It's a new concept, but with lower store size, but not a store concept for the high streets in the cities. This is -- we will open the 2 stores next year in Cologne and Berlin, but always in areas which could be reached by car. And so it's in support of the part of the cities, but not in the inner part -- but not in the inner cities. So we have 6,000 square meters weighted selling space, though it's impossible to open a 6,000 -- or it wouldn't make sense to open a 6,000-square-meter store on the [indiscernible] in Frankfurt.

[Juergen Elfers, Equity Analyst of Retail]

But the underlying idea is to move closer to where the customers live?

[Roland Pelka, Member of the Board of Management]

The underlying idea of this new store concept is, yes, it's a store concept, especially for metropolitan areas and to move a little bit closer to -- yes, that's correct.

[Operator]

There are currently no further questions in the queue.

[Axel Müller, Head of Group Communications]

Okay. So I would give you a last occasion and are there any questions arising?Okay. This is obviously not the case, so it's -- I would like to thank you to participate in our call. We wish you a merry Christmas and a happy New Year and good success in your projects and our projects, of course. Take care, and many thanks for listening. Next news flow will be in March with our trading statement. And yes, we keep you up-to-date. So many thanks for listening again. Bye-bye..