Ahlers : 08.07.2020Half-year Report 2019/20

AHLERS AG

Herford Half-year Report 2019/20

AHLERS AG

HALF-YEAR REPORT 2019/20

(December 1, 2019 to May 31, 2020)

BUSINESS PERFORMANCE IN THE FIRST SIX MONTHS OF FISCAL 2019/20

H1 2019/20

• - Revenues down by 33 percent to EUR 70.7 million due to adverse effects of coronavirus pandemic

• - Business performance in Q2 2019/20 nevertheless slightly better than expected at the beginning of the lockdown

• - Consolidated earnings in H1 down by EUR 7.7 million to EUR -9.4 million even though operating expenses are reduced significantly (EUR -10.4 million or -19.7 percent)

• - Financial position remains stable as reflected in reduced net working capital (-6.9 percent), lower net financial debt (-8.6 percent) and solid equity ratio (52.4 percent)*

• - Drop in revenues in full fiscal year 2019/20 expected to be above the half-year rate at around -25 percent to a maximum of -33 percent.

• * all figures before adoption of IFRS 16 - Leases

1. BUSINESS AND GENERAL CONDITIONS

In January 2020, most economic institutes assumed that economic growth in the eurozone would slow down somewhat in the current year. Due to the global coronavirus pandemic and the containment measures adopted as a result, forecasts had to be downgraded sharply (all forecasts Commerzbank Research June 2020). While a GDP (gross domestic product) growth rate of 0.9 percent had been assumed for the eurozone countries for 2020 in January, GDP is now expected to decline by 7 percent. Among the four major eurozone countries, Italy and Spain are expected to record the strongest decline in economic output, by 9 percent each, but a recession of 7.5 percent and 5.5 percent, respectively, is also forecast for France and Germany. Although economic activity is believed to have bottomed out in April, a quick return to pre-crisis levels is not expected. On the one hand, global demand for goods from the eurozone is being curbed by the continued measures to combat the spread of the coronavirus in other parts of the world. On the other hand, it should take some time to rebuild the interrupted supply chains.

While short-time work should cushion the rise in unemployment, many jobs are expected to be lost because of COVID-19. The jobless rate in the eurozone is expected to climb from 7.6 percent to close to 8.8 percent in 2020. Uncer-tainties about economy activity and the labour market situation are having an adverse impact on consumer sentiment. The GfK consumer climate for Germany has fallen in May to the second lowest value ever measured (GfK Consumer Climate June 2020). The situation in the rest of Europe is likely to be similar. On the other hand, support is being provided by the accommo-dative monetary policy pursued by the European Central Bank and the measures aimed at stimulating private consumption.

Due to the coronavirus pandemic, clothing retailers throughout Europe were ordered to close their stores in mid-March. This dramatically intensified the previous trend of slightly declining sales in Germany's physical fashion stores. German retail stores were allowed to reopen completely in mid-May. This also applies to many other European countries, except to Russia, where the closures lasted longer. The sales figures for the weeks following the reopening are still mixed. Compared to the two extremely difficult previous months, however, there are signs of a recovery. In May, both sales revenues and footfall picked up from week to week. But accumulated sales revenues are still a double-digit percentage below the previous year. Recent surveys, however, indicate that a growing normalisation of the purchasing behaviour can be expected (Textilwirtschaft 23_2020 and 26_2020). As the measures were taken throughout Europe, the situation is likely to be the same in all relevant European markets. At the beginning of the lockdown period, e-commerce contributed little to sales, as consumers concentrated on buying other things, such as hygiene products. It recovered already during the lockdown, however, and has grown ever since.

2. EARNINGS, FINANCIAL AND NET WORTH POSITION

Preliminary remarks on accounting pursuant to IFRS 16

As communicated in the 2018/19 Annual Report (p. 73 and 94 et seq.), major portions of the former lease expenses will be reduced while depreciation and financing costs will increase accordingly as a result of the first-time adoption of IFRS 16 (Leases). As a result, EBITDA increased by EUR 2.4 million in the first six months of the current fiscal year. At the EBT level, the adoption of the standard has virtually no effect on profit/loss, as depreciation/amortisation and financing costs will increase by about EUR 2.5 million. The obligation to capitalise the discounted future lease payments extended the balance sheet by EUR 11.1 million in the first half of 2019/20. On the assets side, fixed assets increased by this amount due to the rights of use in the leased property. On the liabilities side, non-current and current financial liabilities from future lease payments rose by EUR 7.0 million and EUR 4.2 million, respectively, while equity declined by EUR 0.1 million. To ensure comparability, reference is made below to the accounting treatment before IFRS 16 at the relevant points.

Q2 2019/20: 58 percent drop in revenues due to retail store closures

Between March and May 2020, clothing stores across Europe had to be closed. In the second quarter of 2019/20 of Ahlers' fiscal year (March - May 2020), this sent revenues falling by EUR 26.8 million or 58 percent to EUR 19.5 million (Q2 2018/19: EUR 46.3 million).* However, revenues were thus at the upper end of expectations at the beginning of the lockdown, as the face masks launched at short notice were sold successfully and more summer merchandise than expected was delivered to customers in the second half of May.

Revenues for the first six months of 2019/20 also fell by 33 percent or EUR 34.6 million to EUR 70.7 million (previous year: EUR 105.3 million), due to the Europe-wide lockdown to contain the COVID-19 pandemic. This affected all regions of Europe in a similar way. In the first half of fiscal 2019/20, Germany and the rest of Western Europe were roughly on a par, with declines by 30 percent each. In Eastern Europe, where merchandise is usually shipped later in the season, revenues even dropped by 45 percent.

* all figures in this chapter before adoption of IFRS 16 - Leases

Positive trend for e-commerce

The company's own online shops recorded increasing revenues again in April and May 2020, thus dampening the overall downward trend. Marketplace sales also picked up again in the course of May. Declining by 37 percent, like-for-like revenues of the Group's entire own retail activities were slightly below the general business trend. Own retail revenues thus accounted for 13.8 percent of total revenues, down from 15.0 percent in the previous year.

EARNINGS POSITION

Consolidated earnings decline due to coronavirus in spite of noticeably reduced operating expenses

In the first half of 2019/20, the gross profit margin declined by a moderate 0.9 percentage points from 48.7 percent to 47.8 percent due to higher write-downs on seasonal goods.* Gross profit therefore dropped by EUR 17.5 million from EUR 51.3 million to EUR 33.8 million (-34 percent), primarily due to the much lower revenues. As a result of the earnings and efficiency increasing measures and the cost-cutting measures introduced at short notice, operating expenses, which com-prise personnel expenses, the balance of operating expenses and income as well as write-downs, declined by a noticeable EUR 10.3 million or 19.5 percent to EUR 42.4 million. Personnel expenses declined by EUR 4.8 million or 19.6 percent to EUR 19.7 million because of the introduction of short-time work and changes in central departments. The balance of operating expenses and income declined even more strongly by EUR 5.4 million or 20.9 percent to EUR 20.4 million. This was mainly due to savings in store rents, agent commissions and travel expenses as well as noticeably lower freight and order picking costs. The reduction in marketing expenses and temporary staff also made a noticeable contribution to the reduced costs. While extraordinary income and expenses had offset each other in the same period of the previous year, the exchange rate effects of weaker zloty and rouble exchange rates, in particular, led to one-time effects of EUR -0.4 million in the first half of fiscal 2019/20. At EUR -0.5 million, the financial result was down by EUR -0.2 million on the previous year due to higher interest rates and the capitalised and now written-off expenses under the syndicated loan agreement. Earnings before income taxes declined by EUR -7.8 million to EUR -9.5 million in the first half of 2019/20. As of the reporting date, a small amount of deferred tax assets was recognised for losses incurred by foreign subsidiaries, as the losses are expected to be offset before the end of the current fiscal year. As before, no deferred taxes were formed on domestic results. This means that larger profits may be achieved tax-free in the future. Consolidated net income dropped by EUR -7.6 million to EUR -9.3 million (previous year: EUR -1.7 million).

* all figures in this chapter before adoption of IFRS 16 - Leases

EARNINGS POSITION H1 2019/20

incl. IFRS 16	before IFRS 16	before IFRS 16
EUR million	H1 2019/20	H1 2019/20	H1 2018/19	Change in %
Sales	70.7	70.7	105.3	-32.9
Gross profit	33.8	33.8	51.3	-34.1
in % of sales	47.8	47.8	48.7
Personnel expenses*	-19.7	-19.7	-24.5	19.6
Balance of other expenses/income*	-18.0	-20.4	-25.8	20.9
EBITDA*	-3.9	-6.3	1.0	n.a.
Depreciation and amortisation*	-4.6	-2.3	-2.4	4.2
EBIT*	-8.5	-8.6	-1.4	<-100.0
One-time effects	-0.4	-0.4	0.0
Financial result	-0.7	-0.5	-0.3	-66.7
Pre-tax profit	-9.6	-9.5	-1.7	<-100.0
Income taxes	0.2	0.2	0.0
Consolidated net income	-9.4	-9.3	-1.7	<-100.0
* before one-time effects