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

A very warm welcome to our Q2 and half year update call for the HORNBACH Group. My name is Antie Kelbert, Head of Investor Relations. As usual, we published our financial results at 7:00 a.m. this morning. The reporting period comprises the first 6 months of our fiscal year 2026-'27 from 1st of March to the end of August 2026. Together with me is our CFO, Dr. Joanna Kowalska. She will guide us through our latest financial results, and we will also take your questions later on. Please note that this conference call, including the Q&A session, will be recorded and made available along with the transcript on our company website. Kindly also take note of the disclaimer which applies to the entire presentation as well as the Q&A session. After the presentation, we will take your questions. The technicalities will be explained by our moderator at the beginning of the Q&A session. With that, I'm pleased to pass the floor to Joanna, who will now take us through the main developments in Q2 and the first of half fiscal year. Over to you, Joanna.

Thank you, Antje. Good morning, and welcome. It's my pleasure to present you our half year results this morning. As usual, I would like to start with a brief outline of the macroeconomic and retail environment we faced during our first half year. Consumer sentiment in Europe continues to remain subdued, while geopolitical tension affect purchasing prices and logistic costs. However, we delivered strong quarterly results against this challenging backdrop. Following a good Q1, the positive trend continued over the summer season, resulting in a satisfying Q2 and first half year. The outlines of our results were already disclosed in a preliminary basis at the beginning of September, which we confirmed with today's numbers. In a nutshell, group net sales in Q2 grew by 7.3%. With these results, we were able to once again outperform the European DIY industry. Our bottom line also benefited from that development and adjusted EBIT in Q2 came in 12.8% higher than last year. For me personally, it is particularly important that we maintain a clear focus in these challenging times. This means remaining committed to our expansion strategy to invest in our existing store network and to keep our costs very much in focus. Our results demonstrate that the strength of our product-focused business model, our diversified European footprint and the commitment of our entire organization. Let us now have a deeper look at today's results from operating and strategic highlights to financials and outlook. It has been a busy quarter for us. An overview of our latest operational and strategic highlights. First, our customer feedback remains very positive. In the latest customer survey published in September, HORNBACH again ranked #1 in overall customer satisfaction in Germany and Austria. We also achieved strong results across key categories such as assortment, brands, product quality, service and digital channels. This underlines that our product focus model continues to resonate very well with our customers. Our efforts to keep our stores and assortment attracted is paying off. Second, we are continuously following our expansion strategy and are building on a very strong foundation. We operate a highly productive store network with many well-established locations. We continue to invest in these proven assets and regions to enhance our established network of stores contributes to our cash flow. Another one is our new store in Graz-Liebenau. We just opened in September. This store broadens our footprint in Austria a long established HORNBACH region. And third, we continue this expansion journey by proactively seeking new opportunities to strengthen our network. And as just mentioned, one of these rather attractive opportunities has recently become available to us in the German market. As we all know, Hellweg will leave the market and more than 100 of their stores in Germany have been affected. Out of this portfolio, at least 35 stores will be taken over by German DNY retailers. As shown on the map, we will take over 6 of these locations in key German regions. All stores are leased properties. These 6 locations are planned to be added to our portfolio as of December 2026. As a side mark, the transaction remains subject to review by the German Federal Cartel Office. As of today, we are aiming to reopen the stores in spring 2027 under the HORNBACH brand. And of course, as a consequence, we will see some limited additional CapEx for store equipment and vehicle fleet. For sure, also preopening costs in Q4 will be higher by a mid-single-digit million Euro in order to prepare for the reopenings in spring. In addition, we also had to stock these stores with our assortment. Preopening costs also include employee-related expenses for the 6 stores prior to opening. For 2 stores, we'll take over employees as of December, and the employees for the other 4 stores will be hired ahead of the planned openings. This opportunity enabled us to further densify our network, improve our regional footprint in Germany and support additional market share gains. But most importantly, it will help us to serve even more customers and products. Overall, this transaction aligns perfectly with our well-established and proven expansion strategy. We remain focused, disciplined and committed to investing where we see long-term value. And this leads us to strong financial achievements in the last reporting period. HORNBACH Group net sales in Q2 reached EUR 1.8 billion, as said, a strong increase of 7.3% versus prior year. For the first half, net sales amounted to EUR 3.8 billion, driven by strong terminal and even better international sales growth at HORNBACH Baumarkt AG, including newly opened stores in Austria, Romania and Slovakia. As you can see, like-for-like sales, so excluding new stores, grew by 5.4% in Q2 and 4% in the first 6 months. HORNBACH Baumarkt once again outperformed the DNY sector. The DNY sector in Germany saw significantly weaker figures from March to August compared to our result. Based on data of the Industry Association BHB, which underline our outperformance every month since beginning of our fiscal year. But also in Europe, we at least matched or outpaced the overall sector performance. Gross profit increased by more than 6% in the second quarter. For the first half year, gross profit grew by 5% to EUR 1.3 billion in 6 months, resulting in a gross margin of 34.6%. Adjusted EBIT came in very strong in Q2, increasing by 12.8%. For 6 months, adjusted EBIT amounted to EUR 286 million, a plus year-on-year of 4.9%. Despite higher CapEx, our free cash flow improved compared to prior year's level. And now we take a deeper dive into our 6 months financial in more detail, starting with our top line sales performance. As mentioned, group sales increased by 6%. Looking at sales of HORNBACH Baumarkt AG, we saw an increase of 5.9% to EUR 3.6 billion. We are, again, benefiting significantly from our diversified European footprint. Sales in our other European market grew by 7.7% and now account for 54% of Baumarkt sales, as you can see on the right side. However, we also saw growth in Germany picking up, increasing by a plus of 3.8% in the first half year. Our group business resilience results from a well-balanced geographical mix. We remain committed to this diversified strategic direction and will continue to push ahead with our expansion plans. As you can see also, Baustoff Union performed well and contributed to our growth, increasing in sales by 8.6%. This was driven by an improved building sector development and one new location. Let us now take a look at market share development. Once again, we were able to further expand our market shares in all HORNBACH countries for which data is available. Let us take a look at Snap. The left side shows our top 3 regions with the strongest performance. In Czechia, we are #1, and we're able to further increase our market share to above 40%. In the Netherlands, the positive development continue as well as customers value our project-focused offering. We also continue to improve our position in Switzerland. The right side of the map shows that we also achieved gains in highly competitive markets such as Germany and Austria. Our ambition is to continue this growth there by strengthening and expanding our presence across Europe. This is not only about expansion but also very much about driving profitable growth in our existing retail space. As you can see, sales on a like-for-like basis, so excluding newly opened stores, increased by 4%. This was primarily driven by robust consumer demand and increased footfall of 3.5%. But also the average basket size increased during the first half year. Other Europe remains the driving force with an increase of 4.8%. However, compared to last year, German like-for-like sales picked up notably by 3.2%. This means that we once again outperformed the German DIY market, which developed negatively from March to May compared to our Q1 performance. In the summer months, from June to August, the DIY industry in Germany saw weaker growth rates than HORNBACH back. Our top three performance in the last reporting period were the Netherlands, Slovakia and Czechia. The Netherlands continued the latest track record achieving a strong development of nearly plus 10%. Also Slovakia recorded strong growth. In the current fiscal year, customer sentiment improved higher purchase power. Czechia grew by 4.6%, driven by higher footfall as well as increase in average ticket size. In Romania, current inflation consent and low economic growth are weighing on customer spending in general. However, we are confident that the situation will stabilize in the short term. Overall, like-for-like sales growth trends across Europe remained balanced. This supports our confidence to translate current stress into further growth. The negative calendar effect we experienced in Q1 was fully offset in Q2, resulting in a comparable number of business days in the first half year. Sales performance was also positively supported by e-commerce. With a plus of EUR 39 million, e-commerce sales grew by 8.6% in the first half. Direct delivery accounting for the largest share of our online business growing by 4%. Click & Collect recorded a strong increase of 19% and continuation of the positive development we saw in Q1. Click & Collect remains an important channel for our customers with increasing relevance. Our strong e-commerce sales are an indicator for customer trust and loyalty for our online offerings. As a result, the e-commerce share of HORNBACH Baumarkt sales rose to 13.5% in the last 6 months. And compared to the prepandemic times, we now have doubled our e-commerce sales. Let us now look into the profits for the period. Gross profit rose by 5% or EUR 63 million, benefiting from strong sales growth. Gross margin remained under pressure due to increased logistic costs and rising purchase prices linked to the current geopolitical tensions and oil price hikes. This led to a gross margin below the prior year at 34.6%. We are closely monitoring this development and working to mitigate their impact. On the right side, you can see that total costs rose by EUR 48 million or 4.9%. Our strong gross profit development was able to fully offset the increased cost base. Where did the additional costs come from? The main driver was selling and store costs. This is a consequence of expanding our store network and associated personnel costs. In addition, we were confronted with higher operating costs in our store. However, as you can see, the cost ratio improved to 22.6% of sales. General and admin costs also experienced an increase. As expected, the main driver was higher personnel expenses. And in addition, the development reflects higher costs for IT infrastructure and transformation projects, including S/4HANA. Therefore, G&A cost ratio increased versus prior year. And since personnel costs are a key component of all cost items, let me briefly provide some further details. Total personnel costs across all cost lines amounted to EUR 609 million, up by 4.9%. This increase was mainly driven by a larger workforce following new store openings as well as salary increases. With that, we can now turn our attention to adjusted EBIT. Adjusted EBIT increased by EUR 15.4 million or 4.9%. The graph on the left side underlines the strong contribution of our second quarter. On the right side, you can see adjusted EBIT split by geography. Other euro contributed 64% to adjusted EBIT and the share of Germany was 36%. Let us now turn to the cash flow statement. Looking at our organic expansion. Operating cash flow plays an important role in financing this growth strategy. The increase in operating cash flow to EUR 352 million were mainly driven by a change in working capital. came from stronger seasonal reduction of inventories and overall improved working capital measures. Headwind came from the repayment of the reverse factoring program. Funds from operations likely increased year-on-year. CapEx amounted to EUR 121 million, EUR 13 million above prior year. This is in line with our strategy of organic expansion. On the right side, you can see the CapEx split. Around 53% of investment related to land and real estate preliminary tied to new store development. 34% of investments were located to store equipment for new and existing locations, and 14% of CapEx mainly went to software to drive digitization. Here, I would like to once again mention the migration to SAP 4HANA, which remains a top priority for us. The elevated cash flow from financing activities includes new promissory note loan. And among others, this was used to refinanced the bond of HORNBACH Baumarkt, which was redeemed early at the end of July. Free cash flow after CapEx and dividend payments amounted to EUR 195 million. The balance sheet total is up by nearly EUR 5 billion. This results from liquid funds and reflects cash from successful working capital management and new loans. The equity ratio increased to 45.8%, and net financial debt was reduced by 13% to EUR 1.2 billion. This was mainly due to higher liquid funds. And this brings us to our guidance for the current financial year. We had a very successful first half year 2026/'27 driven by robust customer demand in a challenging macroeconomic environment, both sales and earnings developed positively compared to the prior year. At the same time, many uncertainties remain. Ongoing geopolitical tensions are likely to continue affecting among others, consumer sentiment, sourcing and logistic costs. In addition, increased inflation puts pressure on sales and margins for the near-term future. Given this backdrop, we remain prudent in our forecast and confirm the guidance issued in May. For the HORNBACH Holding Group, we currently expect net sales to be at or slightly before -- above the level of the prior year. Adjusted EBIT is expected to be roughly at the previous year's level, and we will continue to invest in organic expansion across our entire network, including capturing attractive opportunities such as the one resulting from Hellweg insolvency. Therefore, we expect higher investments in the coming financial year. CapEx is likely to be significantly above the prior year level. For sure, this will put some pressure on our free cash flow compared to last year. Nevertheless, our operating cash flow remains solid. And as long as this holds investing in the future growth opportunities justifies a somewhat lower free cash flow in the current fiscal year. All in all, we are very pleased with the results in the first half year. The second half of the year is now underway, and we are well prepared. We have seen a good start to the autumn season so far, while continuing to support our customers in successfully realizing their projects. At the same time, we are maintaining our strategic expansion focused to further strengthen our business. Preparation for opening of the 6 new stores taken over from Hellweg are progressing at full speed. With the planned openings in spring, we have set ourselves ambitious goals. In parallel, we remain focused on our expansion across Europe, including Serbia. Let me conclude. There's always a job to be done.

Thank you, Joanna, for walking us through the key developments and sharing your perspective. We will now move on to our -- to the question-and-answer session. [Operator Instructions] I will now hand over to our moderator, who will explain how the Q&A session will work. Moderator, please go ahead.

[Operator Instructions] And we have the first risen hands from Thomas Maul from DZ Bank.

So again, this is Thomas Maul from DZ speaking. I have two. The first one, just a follow-up on Hellweg. You mentioned limited additional CapEx. Does that mean that all the Hellweg locations will be leased? Or can we expect you to acquire some locations as well? And the second question is, yes, in the first quarter, you reported an average basket size increase of 2.4%. And now for the first half, the increase was only 1.9%. So this implies a decline in the second quarter. Maybe you can elaborate a bit on the drivers of that decline.

Thomas, thank you for your question. I'll start with the first one. Hellweg, as I said, we take -- we will take over 6 locations, starting with December. And all of these 6 are lease locations. So we do not buy the buildings or lend. This is -- the CapEx will only arise from an additional remodeling and equipment, yes. So this is the only small part which we have to tackle with in the next quarter. And the second question was about the average basket size increase. The basket size is -- the average basket size is always a mix of the countries but also a different assortment. So in the first quarter, we have products, which we signed and in other categories, which another margins. And now in the Q2, there will then be unchanged, yes. So this is a mix of regional different basket size and also product mix. Thank you very much, Thomas, for your questions and happy to answer this.

And we have the next question in line from Christian Bruns.

Can you hear me?

Yes.

My questions are that you are going to have some additional preopening costs, of course, in Q4. If you now speed up your integration and the preopening of preopening costs for the Hellweg stores. And on the other side, you had a very good H1, and you report a good start into Q3. So that means I think it might be the preopening costs that let you stick to your conservative guidance, is this the right assumption?

Thank you, Christian, for the question. the preopening costs are indeed one of the part when -- why we stay at our previous guidance. But the most important one is the geopolitical tensions. So we see higher transportation costs, longer transit times and sometimes occasional capacity constraints, which means for us, there are a lot of tension on the margin. and especially the logistic costs. And this is why we are very prudent, in respect of the -- of our guidance. But of course, Hellweg, it's also a huge amount, which we have to cover in the next month. So both, yes, preopening costs, but also the pressure on margin.

Yes. May I add a second question. I saw that in H1, of course, interest expenses have gone up somewhat. I think this -- the reason is that you had to -- the redemption of the bond. And so there you have very high liquidity and double finance, if I say that so might be that will we see an improvement there in the second half of the year, so lower interest -- net interest expense?