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

Good morning, ladies and gentlemen, and welcome to the conference call regarding the third quarter and 9-month results 2021-2022 of HORNBACH Group. [Operator Instructions] Let me now turn the floor over to your host, Antje Kelbert.

Thank you, and good morning. For those of you who have not attended our call on Monday, my name is Antje Kelbert and since 1st of December, I am heading the Communications and Investor Relations Department. After our pre-results disclosure on the 7th of December, we have today published the full set of figures for the first 9 months and the third quarter 2021-'22. Our CFO, Karin Dohm, will be our presenter today and also take your questions. Together with us on the call is my Investor Relations colleague, Anne Spies. Let us right away dive into the highlights of the past quarter, and I hand over to our CFO, Karin Dohm.

Thank you very much, Antje, and a very warm welcome from my side as well to this Q3 event. I'm very much looking forward to run you through some of those key figures of last quarter as well as of the 9 months that we just finished and then, obviously, very happy to take your questions afterwards. So let me start. We had a very good third quarter. We saw strong sales, still coming in way above the pre-COVID levels. There is a slight element of inflation. But as I said, we see higher levels of demand for home improvement on an ongoing basis. Earnings are down from last year, but well ahead of pre-COVID levels as well. And we have a sustainably higher earnings position that reflected also -- or that was reflected in the credit ratings, which was upgraded to BB+ at the October 13. We raised our full year guidance on December 7 to reflect those better-than-expected developments in Q3 against the strong previous year. Let me caution, of course, that we are still not yet in a full COVID-clean situation. I come later to those details, where we currently have some closures or limitations to our store activity. But first, a little bit about our organic expansion. We continued that in the third quarter as we did in the previous quarters of this fiscal year. We opened 2 new stores, 1 in the Netherlands and 1 in Switzerland. We also extended one of our existing Dutch stores with a new format called HORNBACH Vloeren, which is focusing specifically on floors, tiles and anything that you -- and clients might think about when home improving their specific home situation. With that all in account, we have now 167 stores as of November 30. We also could build, as we did in the previous quarters, on a very effective management of the COVID pandemic. And we also managed to keep, despite the challenging situations that we have around logistics, logistical chains and, of course, the general availability of goods, we managed to be well stocked and to ramp up our capacities also looking into the specific requirements of the Christmas season and, of course, in preparation also of the next spring. Looking a bit into the specific figures. You see here robust sales growth in all 3 quarters. And once again, as I said earlier, significantly higher level than pre-COVID. To make sure we have a little bit of that comparison, we included here not only last year but also the year before. We have, as we said, a little bit of inflation that drives partially our sales growth. But in general, the cocooning, the homing trends and the general quest to home improve, whether it's in a DIY fashion or whether customers reach out to merchants and chandlers is still in high demand and still higher than pre-COVID on a robust level. Like-for-like sales same here. We had a growth on top of a very strong prior year, specifically when you compare those figures across the various countries. We have, of course, as I mentioned earlier, still a couple of limitations to our activity. I would like to point out specifically the Netherlands. They had, especially at the beginning of the year, so when we look into 9-month figures, they had limitation with regard to store openings and the possibility for customers to enter the stores. We also, as you know, have their new restrictions in the Netherlands, which will now affect our fourth quarter. So that is something to take into account. We have, in the third quarter, specifically, a couple of closures in Austria and Slovakia for 3 and 2 weeks, respectively, but that had no major effect on the figures you see here for Q3. Coming a bit into the details of the e-commerce activities. Once again here, good dynamics. We're very happy with the development. On a rolling 12-month basis, we see e-commerce share of total sales reaching slightly above 20%. The growth slowed down in the course of the year, which we expected as higher growth in Q1 was driven in part by lockdowns in a number of geographies. However, it remains robust at 10% in Q3. Click & Collect more than doubled in the course of the year, while direct delivery grew by 16%. Specifically on -- in Germany, and I'll also talk about other regions in a minute. Specifically, in Germany, we managed to outperform the sector and in a continued manner. You see the comparisons between the competitors and on our performance when it comes to sales, like-for-like growth in the DIY sector in Germany. And as said, we have been outperforming that sector for years, but that positive gap has significantly widened in the last 2 years, partly driven as we are convinced, by our successful ICR strategy, combined with a very good management on the merchandising side and our logistical network. As mentioned, a little bit of view also beyond, when we look into market shares. As said, really happy with the performance in Germany. You see here a really impressive gain in market share, now being beyond 15% but also in other countries, looking, for example, into Netherlands, looking into Switzerland and others. We really are happy with the fact that we managed to gain further market shares not only this year, you know that we had, had that positive development also in previous years, but it's a good continuation, so we're really happy with that. Bottom line, when we look into the adjusted EBIT, we're well ahead of pre-COVID levels again, with an increase in adjusted EBIT of 63.7% versus the 9 months of 2019-2020, and currently an EBIT margin of 8.4%. So far in this quarter and in this fiscal year as well, we didn't have any nonoperating earning items. When we look below that surface into the various segments, we see largely the same picture for HORNBACH Baumarkt. Adjusted EBITDA and profitability well ahead pre-COVID levels, although slightly down on last year's record level. However, a significant increase in adjusted EBIT for HORNBACH Baustoff Union versus last year due to strong sales and positive gross margin effect. Looking on to the cost side, we maintained improved cost structures versus the pre-COVID levels. You see here the long-term comparison and a normalization in some cost items, as we talked about already in previous quarters, was deliberately achieved because we wanted to make sure we, for example, boost up our marketing activities, which were slowed down in the previous fiscal year and also spend on projects and other components thinking here also on, of course, ongoing IT spend, which we consider crucial to make sure that we keep our performance and with that, our market shares and activity levels. Gross margin, of course, we have the same situation as all our competitors and many other companies. Currently, we see higher purchasing prices. We could largely cover them by selling prices, but there is, of course, an element of, as we mentioned earlier, of inflation as well. So we see that also coming through. When we look on to the cash side and the funds from operation, we're above previous year and well above, of course, the year before that, the year 2019 and 2020. We have had fluctuations in working capital resulting from a COVID-related exceptionally high order volume in the previous year and accelerated payments to suppliers in the current year to avoid negative interest. CapEx increased due to the accelerated expansion, and you will see that as well, of course, in the next year. As said, during the course of this year, we did not only open new stores this year, we also plan to have a similar amount, around 5, in the next year. So you will see similar CapEx movements also in the next fiscal year. Cash flow from financing activities also includes incoming payments of EUR 50 million from taking up financial loans and a similar amount outgoing for the redemption of loans. So the usual movements, nothing specific in comparison to any other year on that side. As said at the beginning, we confirmed our guidance and increased the outlook for the ongoing year. We, of course, have a couple of unknowns in this fourth quarter, which we just started when you think about corona and the ongoing public discussion, it might be that we see the one or the other limitation in the next 2.5 months. But nevertheless, we are confirming those figures. We are comfortable with those ranges. And the last, so to say, organic growth piece that we will see this year, talking about this fiscal year, is the opening of the fifth store. As you know, we are replacing in Paderborn one of our existing stores that will happen at the beginning of February as planned currently. So to sum it all up, let me just come back to why we think that key investment highlights are unchanged and even reconfirmed by the current development. We're obviously benefiting from those broader consumer trends, which, we said earlier, we see not only as a single event, but as an ongoing trade regarding cocooning, homing, the working from home and, of course, the effects of demographic changes in our countries and the carbon dioxide footprint considerations, which will also trigger a couple of improvement in anybody's homes. We definitely think that our interconnected retail offering is one of our key differentiator, which is supported by our merchandising and logistics teamwork. And ultimately, we have a strong operational track record generating consistent organic growth in combination with leading productivity, specifically in Germany, when you measure us by sales per square foot. So we have put on to the slides, which is the last one. And as well, we'll put that on our Internet the financial activities between now and our trading statement on March 22. I'm very happy, of course, now to take your questions. Thank you.

[Operator Instructions] We do have a question from Thomas Maul.

Thomas Maul, DZ Bank. I got 2, please. First one, with regard to price increases and inflation. Are there actually certain product groups that are particularly affected by higher purchase prices? Or -- yes, just the other way around, which parts of the product range are affected less than average? And yes, the second question, how high was the share of private labels recently? And then in which countries are these products produced?

So with regard to the pricing structure, we have seen, as you know, throughout the year, a substantial increase in anything that was related to wood. And that, to my knowledge, has relaxed a little bit over the course of the last weeks and months due to the fact that, as said, the whole chain has adjusted. As you know, sawmill capacities in the U.S. were beefed up and that all switched back into availabilities of, so to say, sliced wood and all the components that are needed. So that relaxed a little bit. In general, beyond that, it's literally across the whole range of products and of anything that we have in stock or offer. In addition, we are in some goods, of course, also affected like the car industry, if you think so, when you think about the chips. But yes, it's a general range as that [indiscernible] slightly relaxed. And your other question was around the white label or private labels. It's roughly, on average, 25%. It differs a little bit from country to country. But yes, that's the general average range.

[Operator Instructions] And it's from Ludovic Allègre. I hope I pronounced it correctly.

Yes. Can you hear me?

Yes.

Yes? Okay. Perfect. Yes, I just have 2 questions. The first one is, do you think that the current inflation situation and notably the rise in energy prices can distort the current demand for DIY project? So it is my first question. And the second one is more on the following years. Do you expect a normalization in terms of adjusted EBIT margin in the following years after the 2 last exceptional years? And is there a potential for an adjusted EBIT margin to expand beyond 6% as internationals becomes a larger part of your business in the following years?

Yes. Thanks for your questions. Let me start with the first one. Energy prices, general pricing levels, inflation. Of course, I think as everybody has their impressions from the public discussions also with regard to not only the current energy discussion, also the ones on ECB and where and how they might start tapering or things like that. I think, of course, it might be that clients or customers postpone certain projects because they might have a cautious look into their piggy [ purchase ] and then, as said, postpone the one or the other thing. But in general, as said, a lot of those things that our customers are doing in that project area is not necessarily affected from our perception currently. It might lead to, as said, some movements, so things then potentially are not done this winter than they are done next spring, but they are not evaporating. So we think more -- if those things are happening, if there is a certain distortion, it's more over the time-line and not necessarily with regard to whether something is done at all or whether the money flows into some other investment channels from a customer's perspective. Of course, let me remind you that we are still, as said, in a not COVID-free situation. So this whole aspect of what's the new normal, and that is probably kind of leeway also to your other question. The aspect of what's the new normal? And how does that then crystallize in our figures, including EBIT margin, is not really [indiscernible] currently for us. You're correct, the range of our -- of the portion of sales and EBIT that we generate outside of Germany in comparison to Germany is growing and the shop openings that we have in mind currently for the next year are also happening outside of Germany in a vast degree. So the percentage is the growing slowly, but continuously growing as far as activities outside of Germany are concerned.

[Operator Instructions] And there is another question from Mark Josefson.

Yes. I wanted to push you still a bit further on the guidance. I mean, I do, of course, accept the background to the wide range that we have. But if I just look at the sales guidance there we have the bottom end of the range, I think it would imply a negative 6%-or-so development in the final quarter, whereas the top end would enroll 22%-or-so growth. And I see that as a very wide range. If we look at November for the last month of the quarter we're talking about and the first 3 weeks or so of December, has the sales development across the group being closer to the minus 6% or closer to the plus 22%, just to give me a feel for how it's been so far?

Yes. Thanks for the question. And I appreciate as you voiced it yourself, trying to push us a little bit further. Two thoughts there. Number one, as you know and as everybody knows, we've heard several times over the last 2 years, political statements of the one or the other kind, which included sentences like, this will not happen or this will happen, and then we all learned a little bit later that something else was happening. So please allow us to stay very cautious with regard to what degree of closure we might face between now and end of February. Whilst, of course, being relatively confident, let's put it that way, that the majority of limitations stay as they are currently, which means people need to show that they are vaccinated or have overcomed COVID infection when they want to enter the store. Obviously, we're excellently prepared to ensure any click and collect and direct delivery activity wherever and in what shape and form our customers ask for. And as said earlier, this is exactly also what is happening now in the Netherlands, where we are more or less in a déjà vu situation as we were at the beginning of this fiscal year. So yes, we are very confident with those ranges. Yes, you are right, it would imply -- if we go to the lower end, it would imply that we have a quarter, a fourth quarter, which is relatively close to last year's fourth quarter, which we do currently not expect, but as said, with all those disclaimers I've voiced, I really, [ I am ] extremely hesitant to narrow a range, which we just gave out more or less 2 weeks ago. So allow me to stay as vague as I just was.

Okay. Okay. I can accept that. I had to redial in because my questions were not being registered. And as I came back in, you were commenting on additional costs or rather the impact on margins. I didn't hear the question. But I just wondered if you are able to quantify for us the sort of additional store costs that, if I just take Germany, for example, and look only at the DIY side rather than the merchant's business, we typically have to [indiscernible] as we go in the store, and that often means additional employees. I wonder, if you can quantify in any way the additional cost that the group has had to absorb with the new regulations across the different countries?

You mean such as additional security and things like that?

Exactly that or additional hygiene measures, generally. That's right.

I don't have the exact figures now in my hands. In the previous fiscal year, all in, if I remember that correctly, that was a smaller double-digit million amount. So very happy to -- I would expect something similar, but very happy for a full year that is very happy to give you a more exact figure.

Then we do have another question, and it comes from [indiscernible].

[Indiscernible]. Two questions for me, please. You already said that you expect sort of same CapEx level next year and this year because of the expected 5 store openings. Can you take us a bit further into the future, would you expect sort of the CapEx level over the next few years? It will be the same? Will it be a step up? And related to that question for the store openings. Can you tell us a bit more about the focus of the geographical areas, the countries, where you, well, want to open more stores or even into new country? And thus also more a [ question ] for the next couple of years.

Yes. Thank you very much. So with regard to CapEx, yes, definitely, next fiscal year, I would expect similar regions. And high probability also then for the following year. As of today, so obviously, we are currently going through the preparation of our planning figures for the next year and the following 5 years. So once we're through with that, very happy to look a bit further and give also more details on the outer years with regard to potential CapEx. Geographically, we're talking here -- once again, we're talking next year specifically all about Netherlands. We're talking Slovakia. We're talking Romania. We are also talking about a little bit Germany. So as that mixture with more new stores outside of Germany than within Germany, that is partially very straightforward and transparent question of good opportunities. And obviously, Germany is, as you know, is a dense market there. It's more about gaining market share via performance and not so much via opening new stores. With regard to your question to new countries or other countries. No, we have nothing concrete specific there in our draws. We are obviously and continuously checking the market and looking into opportunities wherever they might come our way. But currently, no, there is nothing specific in our draw as yet.

So right now, there are -- sorry, I just wanted to say there are no further questions, but there came another one and it's from Mark Josefson, again.

We had during the conference you talked about HORNBACH Vloeren in the Holland, which sounds a little bit like Bodenhaus to me, albeit it sounds like that might be attached to an existing unit. Can you give us any feedback on the early start of HORNBACH [ Bodenhaus ] here in Germany?

Of course. Just to recollect, 2 stores, 1 in Berlin, 1 in Cologne in the city themselves, so opened at the beginning of this fiscal year. Obviously, unfortunately, in the heat of closure status, so to say, they have been nicely developing over the summer when there was a possibility to bring forward the whole activity scheme to both professional customers as well as DIY customers. We think we need to make sure we allow both sufficient time to really demonstrate what potential is there and how well can the potential be captured. So, so far, as said, first year is not yet over. We're still in observation mode. So the development is from a dynamic positive, but of course, it's very early stages.

Okay. And did I understand correctly that the experiment in the Netherlands with HORNBACH Vloeren, that's attached to an existing unit?

Exactly. It is literally physically, so to say, it's 1 area and you have 2 buildings, which are very close to one another. And it's -- the one is an already existing classical HORNBACH store, if you want to say so. And then we have opened this specifically concept which focuses similar to the Bodenhaus only on anything and everything that is related to floors.

Then we don't have any further questions.

Okay. Then we can conclude today's call. Thank you very much for your interest, your questions and your time this morning. Whenever you have remaining and further questions, please do not hesitate to contact the Investor Relations department. So -- and now it's on us to wish you a happy holiday season and a healthy new year. Goodbye, and thank you.