HORNBACH Holding AG & Co. KGaA (HBH) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the conference call regarding simplification and aligning Capital Markets listing of Hornbach Group. [Operator Instructions] Let me now turn the floor over to your host, Antje Kelbert. Please go ahead.

Ladies and gentlemen, welcome to our investor and analyst call, and we appreciate your attendance today. My name is Antje Kelbert, and I recently joined Hornbach on 1st of December to head the Communications and Investor Relations Department. I am pleased to say that with me on the call are our CEO, Albrecht Hornbach; and our CFO, Karin Dohm; and my IR colleague, Anne Spies. Today, we will be presenting our plan to simplify Hornbach's capital market structure through the delisting of Hornbach Baumarkt. Please be aware of this disclaimer. I will now hand over to our CEO, Albrecht Hornbach; and our CFO, Kevin Dohm, who will take you through today's presentation.

Thank you. Albrecht Hornbach speaking now. Welcome, ladies and gentlemen, and thank you for joining us. This is an important step for Hornbach, and we are pleased to announce the simplification plans today. Before we go into the detail, we would like to set the context and background for this announcement and briefly remind you of the key company components of our investment case. So you should see some slides. Hornbach has a proud history and is one of Europe's leading home improvement retailers with a store footprint spanning 9 countries and 168 outlets. We are the market leader in multichannel home improvement retail in Germany. As a result of our successful strategy and strong operational performance, we have been able to deliver organic growth ahead of the German home improvement market. Founded in 1977, we are the only [indiscernible] player with a history stretching back 6 generations. Hornbach Group's current capital market positioning comprises of 2 listed entities: Hornbach Holding and Hornbach Baumarkt. Hornbach Holding was listed in 1987 followed by Hornbach Baumarkt in 1993 to help facilitate international development of the group. A key contributor to our success is our focus on the customer proposition and our interconnected retail strategy. We are focused on project customers, and this includes both studio sales enthusiasts and [ great ] people. We believe through our everyday low-price policy, generous opening hours, broad and diversified range of products and rapid handling of in-store orders, we can build loyalty and retain customers over long term. We are able to address our customers and give expert advice across all channels, including in-store, online and via our apps. Through services, including Click & Collect, home delivery and drive-in stores, we enable our customers to shop how they want, when they want and seamlessly across all channels.

Let me highlight a couple of those items that I think are key for the strong investment case. We have not only a strong investment case so far, but also a proven track record. Our industry history has been Hornbach adapt to many different opportunities and challenges. The pandemic has accelerated longer-term consumer trends such as cocooning and homing and also, of course, working from home, which is leading to an increased focus on home improvement projects across our markets. Hornbach as a group is extremely well positioned to benefit from customers' increased focus on their homes. We also have a track record of achieving high customer satisfaction ratings and delivering operational excellence in interconnected retail. The group has continuously demonstrated an ability to deliver growth with an average like-for-like sales increase in excess of 4% over a 10-year period and a leading store productivity, especially in the German DIY sector. Our successful organic growth strategy is also built upon physical expansion underpinned by our own real estate portfolio, a further differentiator for Hornbach. We believe our business offers a compelling and unique equity story for investors, delivering growth, attractive shareholder returns and benefiting from the commitment, experience and support of the Hornbach family as a key anchor shareholder. Our shareholders are at the core of our business with a targeted dividend policy in place to ensure shareholders' returns. As we've referred to earlier, the current capital market structure of the group consists of 2 listed entities: The Holding and the Baumarkt AG, with the later entering the public market in 1993 and the facilitating, at that time, the international expansion of the group. We later made the transition to form a KGaA structure at holding level in 2015, and that simplification announced today is the next consequent step from our point of view in that journey. This dual-listed structure, which served us well for many years, is no longer appropriate in the current capital market and has been under review for some time. As we look forward now, it is the right time to address this legacy structure, which no longer benefits either set of shareholders nor the company itself.

The announcement today reflects careful consideration of the best solution we resolved -- to resolve the issues created by our dual-listed legacy structure. As we look to the future, we want to simplify the capital structure of the business to create one group with one listing, and I will now hand over to Karin Dohm once more who will take you through our plans in more detail.

Thank you. As Albrecht Hornbach just outlined, we definitely feel that the group has outgrown its listed legacy structure and do not see any advantages any further in that structure. Instead, we think it acts as a constraint on the shares liquidity. It adds unnecessary complexity, and it is ultimately contributing factor to a structural valuation discount. We therefore view this simplification as an opportunity for the group that will create one clear structure and story for our shareholders. The streamlined structure will enable us to drive continued operational excellence and further growth across the group. Moreover, as the equity story for both entities is highly aligned and there is no financial or operational benefit in maintaining 2 listings, we feel the next logical step for the company is to simplify and streamline our capital market position. Furthermore, we believe the envisaged transaction addresses not only the operational requirements but also both shareholder groups' respective interests and is therefore a win-win from all perspectives. Such simplification offers a variety of benefits for the group, with the goal of unlocking value whilst also facilitating attractive opportunity for Baumarkt shareholders to monetize their investment. Hornbach Group remains committed to the capital markets with the listing of Baumarkt Holding unaffected by the proposed simplification and should instead be strengthened as it becomes the focal point for investors. The simplification will be implemented by way of a delisting offer by Hornbach Holding to all Hornbach Baumarkt shareholders. This offer allows Hornbach Baumarkt shareholders to tender their shares and receive cash consideration and return. We see the core benefits of these steps as delivering reduced complexity, creating a cleaner capital market positioning and enhanced operational flexibility, which will also free up management time. In addition, we believe this simplification will better enable us to continue to implement our successful strategy and strengthen our position as one of the leading home improvement stocks in Europe. We also expect that in time, it will enable us to attract new investors. One clear equity story with one listed entity will increase the focus on our attractive story, strengthen our capital market profile, and in turn, we expect it will drive liquidity and potentially support the valuation of Hornbach Holding. We evaluated a range of solutions with independent advisers to achieve such simplification. The delisting offer provided the fairest and simplest solution and has been carefully considered and calibrated to balance the interests of both set of shareholders. Hornbach Holding offers Hornbach Baumarkt shareholders an attractive offer price of EUR 47.5, representing a premium of 13.18 -- 13.8% to Friday's closing price and a premium of 29.4% compared to the last 6-month volume-weighted average price. Furthermore, the offer price is also above the all-time high of Baumarkt Holding. The Hornbach Holding shareholders, we believe, the premium paid at a price worth paying to secure the simplification and benefits of one group, one listed for the future. The analysis undertaken to arrive at this decision considered is a wide range of metrics. This is unique situation created by our history and legacy structure, and no perfect benchmark comparison exists. But in the detailed advice and analysis we have undertaken, we believe we have taken into account all the relevant factors to achieve the right balance and advantage for both sets of shareholders. We also have to consider the share price performance has been driven in part by growth and excellent operational performance and as well as demand due to the COVID pandemic although, of course, there are uncertainties ahead, specifically in the foreseeable future. Compensation to Hornbach Baumarkt shareholders will be 100% cash and will allow full flexibility to reinvest in Hornbach Holding. We hope many of the Baumarkt shareholders remain shareholders by investing their proceeds on to the holding company. I also want to emphasize in terms of the condition that the offer is not subject to any closing condition, and there is no minimum acceptance threshold. Hornbach Baumarkt shareholders that wish to accept the offer will have approximately 5 weeks to tender their shares following the approval of the offer document by BaFin and the opening of the offer period. Each shareholder will be contacted by their custodian bank with tender instructions, which we expect to happen more or less by the middle of January. We expect the offer process and delisting to be concluded by the end of February or early March and that the trading of Hornbach Baumarkt on the regulated FSE Exchange will cease around that time.

We believe that the simplification will deliver an enhanced proposition for Hornbach Group, which also ensuring the core pillars of our investment case remain unchanged. One clearly defined equity story and one choice for investors, we believe will drive liquidity and visibility in the market for Hornbach Holding shares by reducing competition for capital. We believe this transparent and competitive listing structure will better position Hornbach to deliver its next phase of growth and we hope will unlock further valuation potential. We remain committed to delivering returns to shareholders, and we'll continue to provide an attractive and reliable dividend. At the Hornbach level, distribution per share shall stay at least in line with the level of the previous year, and we are continuing to target a 30% payout ratio. In addition, the Hornbach family will retain its position as a committed anchor shareholder, ensuring long-term value creation by promoting entrepreneurial and strategic flexibility.

We have secured a short-term bridge financing to facilitate the transaction. This will allow the maximization of transaction certainty with the highest flexibility to determine the optimal long-term financing structure. The short-term credit facility will be replaced by a long-term alternative, options of which comprise the whole range of common financing instruments. As I'm sure you will understand, the management team at Hornbach continuously assesses the most favorable capital structure with the goal of ensuring continued financial strength across the group. Our core financing objectives remain, of course, unchanged. The group is committed to maintain or even improve its BB+ rating with goals of enhancing Hornbach's capital market profile and cost efficiency. To conclude this section, we thought it would be helpful to briefly outline the time line for the proposed offer. Following our announcement today, we expect the offer document to be published subject to BaFin approval during the second half of January, at which point the offer period will formally commence. At this point, shareholders of Hornbach Baumarkt will have the opportunity to tender their shares at the offer price of EUR 47.5 per share. Shareholders will be able to tender their shares at any point during the 5-week offer period. Following publication of the offer document, the Management Board and Supervisory Board of Hornbach Baumarkt will publish a recent opinion on the proposed offer, and the delisting application is expected to be filed in early February. Subsequently, final tender results are expected to be available towards the end of February. Hornbach Baumarkt's final day of trading on a regular exchange is expected to be at the end of February or early March, and this will mark the conclusion of the delisting offer. We hope that Hornbach Baumarkt's shareholders share our view that this offer is very attractive, fair and provides a unique opportunity to realize attractive returns from our investments. We also wanted to give you a short update on the third quarter. As you might have seen also during our preliminary figures, which we published as part of the Ad-hoc roughly 2 weeks ago. Nevertheless, just a few lines on that one as well. We have continued to see strong demand for home improvement products in the third quarter, and earnings remain well ahead of the pre-COVID 2019-2020 levels. We've raised our guidance, and we now expect to deliver between 2% and 7% growth in net sales as well as an adjusted EBIT of between EUR 330 million and EUR 380 million. We also would like to highlight that there remain, of course, significant uncertainties in the assessment of the group's business performance for the remainder of the financial year due to the ongoing unpredictability of the COVID-19 pandemic throughout all regions in which we are active. The full set of Q3 2021-2022 results will be released later this week on the 22nd, so on Wednesday. And as usual, we will be hosting a call for analysts and investors on that morning.

In summary, the announcement today is a logical solution to simplify our business into one group with one listing. We see this as a clear commitment to the capital markets and have structured this offer to benefit both sets of shareholders. It allows Hornbach Baumarkt shareholders to crystallize value at an attractive price. And we very much hope that you'll reinvest in Hornbach Holding shares. Furthermore, it allows Hornbach Holding to deliver its strategy with reduced complexity. This proposal is expected to unlock value for all shareholders as it improves our operational flexibility and enhances the liquidity and focus on the Hornbach Holding shares. With our listing structure is changing, we believe the core elements of our investment case remains the same, notably offering sustainable organic growth and attractive customer proposition, an emphasis on operational excellence, a reliable dividend and a committed family shareholder. Thank you for listening, and we look forward to taking any questions you may have.

[Operator Instructions] We have no questions at the moment. [Operator Instructions]

So I think we have the first question here on the line.

Yes. We have Thilo Kleibauer.

Thank you for the information provided so far and quite a historic news for the Hornbach Group. I have one question. You said -- or you only talked about delisting, and the delisting itself is not automatically a change in the structure or simplification. So do you intend to implement a profit and loss transfer agreement or to go into a domination agreement with the Hornbach Baumarkt subgroup? Or do you want to change the legal form of the Baumarkt AG to get a more simplified structure? Maybe you can comment a little bit on this.

Albrecht Hornbach speaking. Nothing else about the normal delisting is planned at the moment and in the next time, so I have to say no.

But you want to -- in perspective, to concentrate the funding more to the holding level, if I understand your presentation correctly?

Sure. Sure, sure.

And currently, the cash generation is at the Hornbach Baumarkt subgroup, and the funding is with the bond and with other measures are more at the Baumarkt level. So how do you want to change the structure or to shift the funding to the holding without other steps to simplify the structure further?

We think the delisting alone is already an important change to the structure, especially for the view of external investors in the financial area because, like a lot of colleagues of you told us, the Baumarkt on the stock exchange has a very poor liquidity, and this is not very advantageous to the valuation of the whole group. And this is one of the main advantages which follows directly this delisting that we have only one listed share on the stock exchange. And we think this additional focus on the Hornbach Holding share will be very helpful in the future.

The next question comes from Mark Josefson.

I would tend to agree that the simplification should be eventually supportive in terms of value creating for the group. I have a question similar to Thilo with respect to the domination agreement, but I have a supplementary question as well. First of all, can you quantify any exceptional costs that will arise from the offer or the tender process? And then as a follow-on, can you quantify any direct savings that you would identify in the years ahead from this process?

I think it's quite -- Karin speaking, yes. Thanks for the question. I think from our perspective, that's quite straightforward. If 100% of the potential shareholders take our offer, we would be at EUR 356 million, just calculating price per share that we offer. Cost savings are not the driver here for our decision. We definitely think it serves the overarching focus within the group and as a capital market-orientated company to have 1 share instead of 2 because ultimately, there are not 2 underlying totally different business models, which you might find in some other groups on the market and at the stock exchange. So we think it's just a logical step after the ones that we alluded to earlier in our common presentation to make now this one and go into 1 share and have that as a focus and not 2 as we have currently.

The next question comes from [indiscernible].

Congratulations to the step. I think this makes really sense for the group. There's one thing -- when looking at the transaction from a Holding shareholder perspective, I would say from the very beginning that looks extremely attractive. Having said that, from the Baumarkt perspective, I'm not so sure until now. So just against the background, looking at the earnings perspective going forward with like EPS of more than like EUR 5, which would give you a PE below 10%. I think historic levels are always like PE ratios of 12, 13, 14 and like also the strong underperformance of the Baumarkt share compared to the Holding, like almost 40% this year. Against this background, I would be very interested to know how you got to this number, to this EUR 47.5 per share for Hornbach Baumarkt. Maybe you can shed some light on that.

Sure. And thanks for the question because we're really convinced that the price that we offer here is an attractive price for the shareholders of Baumarkt AG. We, of course -- as I alluded to earlier, we had a range of perspectives that our advisers and all parties involved took into consideration, whether you think about DCF considerations, whether you think about multiples, whether you think about other components. And we think that what we offer now is really attractive because if you consider that this translates into an implied premium of 13.8% over the last unaffected closing price also nearly 30% over the 6-month VWAP, we really think it's good offer. It's a very good offer, and therefore, makes sense for Baumarkt shareholders to take it up.

Okay. Good. I guess there will be a lot about the valuation in the offer document in the end. Is that correct? Would you -- there's something included there or...

Of course. Yes, of course.

So at the moment, we have no further questions. [Operator Instructions] And we have another question from Thomas Maul.

Just on Q3, could you provide us a quick update on the supply chain situation, gross margin impact. Yes, that would be great.

In principle, as we said earlier, we were happy to give just some rough outline. Otherwise, I would like to defer this to Wednesday, when we come out with a full set of figures to make sure we then have a thorough discussion and happy to take any question than today that was really meant to focus on the delisting offer, if that's acceptable from your side.

Okay. That's fine.

Thank you. In principle, as we said earlier, we were happy to give you some rough outline...

Do we have some more questions on the line?

Full set of figures...

Yes. I think [indiscernible] you have the tone on in the webcast as well. Your question goes now, please go ahead.

[indiscernible]. Just a follow-up question about the valuation. With the PE below 10% and [indiscernible] to date, I'm more interested in the timing of the decision, why to do it now and you could have done it earlier. So perhaps there are a bit more details about the timing why you're doing it now?

Sure. And thanks for the question. I think one, of course, specialty independent of whether you think about Holding or Baumarkt AG is that we have a fiscal year which is slightly off the calendar year as our fiscal year starts on March 1 and ends on February 28. So we obviously have had now the third quarter ending just at the end of November. And coming through the summer and now going into autumn, we started to consider various options and just have now the point in time where we had the relevant meetings of our governing body. And therefore, it is just now the time. And obviously, we thought it wouldn't be good nor beneficial to push it out further into the year-end -- into our fiscal year-end. And therefore, this is why we thought better now even if this -- and of course, we see this point that we are all jointly shortly before the holiday break, but we thought that's now the cleanest and clearest approach to make sure we get this out to you and everybody else as properly as possible.

Okay. If I may, another question also about -- it's an unconditional offer. I think also, if I understand the German rules correctly that it doesn't really matter how many people are willing to take the offer, which might influence a delisting. The delisting will happen anyway, if I'm correct.

That's correct.

Yes. That's absolutely correct.

Okay. So at the moment, we have no further questions. [Operator Instructions] So at the moment, there are no further questions. So let me hand back over to Antje Kelbert for some closing remarks.

Yes. Thank you very much. So this concludes today's presentation and thank you for taking the time to join us today. And we will have a further touch point opportunity later this week on the 22nd, as Karin already indicated, to get a glance on the full set of Q3 numbers. Thank you and goodbye.