Global economy continues to boom
The global economy maintained its substantial growth in 2006, although there were some shifts in the relative weightings of the industrial nations and a temporary slowdown in growth rates in the first half of the year as a result of the sharp rise in the oil price. While the US economy lost momentum, partly as a result of the correction in the real estate market and the resultant decline in construction activity in the summer, there was a further consolidation in the economic upturn in the euro area. Since the final quarter of the past year, the global economy has witnessed one of its most dynamic periods since the fifties. This is largely due to ongoing high growth rates in emerging economies and to the decline in energy prices since August 2006, which had a tangibly positive impact on consumers' purchasing power and relieved the strain on companies' costs. Moreover, economic developments in the USA and Europe have benefited not least from the unusually mild weather conditions in the winter of 2006/2007, which had a particularly favorable impact on construction activity. Private household demand has also been stimulated by the upturn in global employment levels and the substantial rise in share prices on the international stock markets.

EU economy on the ascent
In the light of the global upturn, the European economy grew more rapidly in 2006 than at any time since 2000. According to the EU Commission, gross domestic product (GDP) in the euro area rose by 2.7 % in real terms (previous year: 1.4 %) and even by 2.9 % in the European Union as a whole (previous year: 1.7 %). The construction industry, which benefited both from ongoing pleasing levels of demand and from mild weather conditions, made a tangible contribution to the economic upturn in this respect. General economic indicators, such as industrial production, capacity utilization rates in the manufacturing industry, investment activity, the development of prices, and the decline in unemployment, provide a pleasing picture for the past year. Not only that, company and consumer confidence barometers indicate that the European economy is set to maintain its growth course in the current year as well.

Robust growth rates were also reported by the countries outside Germany in which HORNBACH is represented with its DIY megastores and garden centers. According to Eurostat forecasts, the Netherlands, Austria and Switzerland achieved growth of between 2.7 % and 3.1 % in 2006. Economic growth in Luxembourg and Sweden, as well as in Slovakia and the Czech Republic, even ranged between 4.0 % and 6.7 %.

Upturn in 2006 also driven by Germany
Germany increasingly found itself in the role of the economic motor of the euro area in the course of 2006. According to the Federal Statistics Office, there was a further substantial rise in gross domestic product in real terms at the end of the year. Due to seasonal and calendar-related factors, fourthquarter GDP was 0.9 % higher than in the third quarter, thus exceeding the equivalent figure for the previous year by 3.7 % following adjustment for calendar-related factors. For 2006 as a whole, the overall economy grew by 2.7 % in real terms (previous year: 0.9 %). Following adjustment for calendar-related factors – there were two working days fewer in 2006 than in 2005 – GDP rose by 2.9 % (previous year: 1.1 %). This represents the strongest economic upturn since the boom year in 2000.

The substantial growth in the economy was reflected in a marked increase in employment and a sharp decline in unemployment. The German rate of unemployment improved to 10.1 % in February 2007, compared with 12.2 % in the previous year. The unemployment rate fell from 10.2 % to 8.4 % in western Germany and from 19.5 % to 16.9 % in the eastern part of the country.

The German export sector, which witnessed a further major boost in the fourth quarter, once again contributed significantly to the economic upturn. At 12.5 % (previous year: 6.9 %), exports grew more strongly in real terms than imports, which rose by 11.1 % (previous year: 6.5 %). Of even greater significance, however, was the fact that the economic upturn in 2006 was largely driven by the domestic economy. In contrast to the two previous years, the domestic economy made a greater contribution to GDP growth (plus 1.5 percentage points) than the export sector (plus 1.1 percentage points). This growth was mainly driven by investment in plant and equipment, which rose by 5.6 % in real terms as a result of the pleasing climate in the commercial economy. This represents the highest level of growth since German reunification. Companies invested considerably more in equipment than in the previous year (plus 7.3 %). The construction industry witnessed an outright comeback – the 4.2 % rise in construction investment was the best figure since 1994. This development received additional impetus from the favorable weather conditions in the final quarter of 2006. The processing of orders on hand prior to the sales tax increase from 16 % to 19 % as of January 1, 2007 can also be expected to have played a role in this respect.

Public sector spending rose by 1.8 % in real terms (previous year: 0.6 %). Consumer expenditure, long the Achilles heel of the German economy, witnessed a slight recovery (plus 0.8 % in real terms, as against 0.1 % in the previous year). The trend towards ever more subdued levels of consumer confidence seems to have been halted. With growth of 2.1 % in nominal terms, consumer expenditure rose more rapidly than disposable income (plus 1.8 %). There was a corresponding decline in the savings rate for the first time in six years, albeit only marginally from 10.6 % to 10.5 %. It is also apparent, however, that increases in taxes and social security contributions have eroded employees' purchasing power. Although the gross earnings of employees rose overall by 1.5 % in 2006, only 0.3 % of this increase filtered through to their net income following the rise in the social security and tax burden. Moreover, if the fact that consumer prices rose by an annual average of 1.7 % is also taken into account (previous year: 2.0 %), then it is apparent that employees have suffered a further reduction in their purchasing power. The increasing disparity between the income from paid employment (plus 1.4 %) and companies' and asset income (plus 7.3 %) has also had a dampening effect on consumer expenditure.

Mixed developments in the retail sector
This can be seen as representing one of the reasons why the retail sector failed to benefit from the overall economic upturn in the year of the soccer world cup, continuing as it did to fall short of the development in consumer expenditure. Based on figures released by the Federal Statistics Office, sales in the traditional retail sector (excluding automobile retail and gas stations) rose by 0.8 % in nominal terms (2005/2006: 1.5 %). Following adjustment for inflation, however, the growth in retail sales was no more than 0.3 % (2005/2006: 1.1 %). Notably divergent developments were seen within the retail sector in 2006. While food retail sales suffered a year-on-year decline of 1.7 % in real terms, non-food retail sales finished the year with growth of 1.5 %. Individual retail segments benefited from the soccer world cup, while others profited from the pending sales tax increase. More specifically, the winners included clothing, footwear and leather goods retailers, as well as retail involving furnishings, household appliances (entertainment electronics!) and construction materials.

Following ten years of declining sales, specialist construction material retailers witnessed an outright boom in 2006. According to the Federal Association of German Construction Material Retailers (BDB), the impact of purchases being brought forward, the processing of building applications submitted prior to the abolition of the owner-occupied housing subsidy, and mild weather conditions led sales to rise by 11.2 % to almost € 14.5 billion. The great demand for heat insulation materials even resulted in supply shortages lasting several months in some cases.

It was long unclear what effect the increase in sales tax would have on consumer confidence. In the final weeks of 2006, the consumer confidence reported in the results of the monthly surveys undertaken by the Company for Consumer Research (GfK) reached its provisional high. The sharp rise in expectations as to economic developments indicated that the upturn had gained in breadth and that the optimism was increasingly having a positive impact on German consumers. The marked improvement in employment figures clearly helped to boost consumers' confidence in the continued stability of economic developments. In the final weeks of 2006, the propensity to spend on the part of private households reached its peak. However, the closer the deadline approached for the increase in taxes and duties on January 1, 2007, the more subdued consumers' expectations became as to their future income. The forecast decline in consumer confidence then actually materialized at the beginning of the year. According to figures released by the Federal Statistics Office, German retail sales were 1.1 % down on the previous year in nominal terms in January 2007 and 1.6 % lower in real terms. However, researchers at the GfK assumed that the drastic downturn in consumers' propensity to spend, which according to official statistics was in any case not reflected in January sales in the non-food segment “Furnishings, Household Appliances, Building Needs”, only represented a temporary factor. This assumption is backed up by rising hopes on the part of consumers that their incomes will grow once again in the wake of the optimistic economic climate. The insecurity seen among consumers can also be expected to decrease over time, given that the sales tax increase has not led to any measurable price shock. Prices showed moderate increases of 1.6 % in January and February 2007 compared with the equivalent months in the previous year. The rate of price increases is thus more or less at the same level as the annual average for 2006 (1.7 %).

DIY retail benefits only in part from the boom in construction materials
The retail segment involving products relating to construction, home improvement, and gardening performed considerably better in some cases in 2006 than did the overall retail sector in Germany. According to the Federal Association of German Home Improvement, DIY and Specialist Garden Stores (BHB), sales at DIY stores with sales areas of at least 1,000 m² per outlet increased by 1.2 % to € 17.88 billion (2005/2006: € 17.67 billion). At € 4.13 billion, the sales at DIY stores with sales areas of less than 1,000 m² were more or less at the same level as in the previous year (€ 4.12 billion). The market volume of all DIY and garden stores in Germany relevant for the measurement of market share – i.e. DIY retail in the more narrowly defined sense – showed a slight increase from € 21.79 billion in the previous year to € 22.01 billion in 2006 (plus 1.0 %). The segment of other distribution channels, which includes organized builders' merchants or wood retail, benefited far more clearly from the boom in demand for construction materials. Sales in this segment grew by 11.2 % to € 17.0 billion. The DIY market volume based on the broader definition therefore rose by 5.1 % from € 37.1 billion to € 39.0 billion.

The DIY store and garden center sector had a difficult year. Its sales performance can be summarized as follows – catastrophic start, satisfactory half-time, and a substantial final spurt. According to the DIY Panel reports compiled by the BHB sector association in cooperation with the Society for Consumer Research (GfK), like-for-like sales, i.e. excluding sales at newly opened stores, witnessed a miserable start to the year due to the unusually long, and in some parts of Germany extreme, winter period. Following four months of substantially negative figures, the sector did not achieve its first like-for-like growth until May 2006, after which sales returned to negative territory as expected during the soccer world cup in June. The long-awaited sales growth then arrived in the second half of the year. DIY retail benefited from the pleasing economic outlook, an improvement in consumer confidence, and from mild weather conditions in December 2006. The BHB sector association reported like-for-like sales growth of almost 7 % in this month alone. Sales growth of more than 20 % in the product groups of construction materials/construction chemicals, tiles and garden hardware just a few weeks before the increase in sales tax gives the BHB reason to believe that many DIY enthusiasts brought forward their larger-scale renovation or conversion projects or decided to buy their new lawn-mower at the old price. Having said this, not even the very pleasing performance in December was sufficient to prevent the sector's like-forlike sales concluding the year down 1.6 %.

According to the DIY Panel, sales exceeded the previous year's figures in most product divisions. The largest product group in terms of sales, construction materials, and construction chemicals grew by 5.7 % in absolute terms. Sanitary and heating, the second-largest generator of sales in the sector, grew by 2.8 %. Electronic goods, garden hardware, and garden furniture and decoration reported sales growth figures of between 1.9 % and 4.5 %. Considerably lower demand was seen for wood/plastics (minus 4.5 %) and wallpaper/flooring/interior decoration (minus 2.6 %).

The growth in sales areas also continued in 2006. Based on figures released by the BHB, the sales areas of all DIY and garden stores with sales areas of more than 1,000 m² increased from 15.76 million m² to 15.92 billion m² (plus 1.0 %), notably as a result of numerous store extensions. According to the BHB, average sales areas in this category rose from 5,466 m² to 5,652 m². As in the previous year, there was a slight increase in the surface productivity of German DIY and garden stores, given that sales growth was slightly higher than the increase in sales areas.

Consolidated sales rise by 7.1 %

HORNBACH-Baumarkt-AG increased its consolidated sales (net) by 7.1 % from € 2,234 million to € 2,392 million in the past financial year (March 1, 2006 to February 28, 2007). Around 64 % of sales (2005/2006: 65 %) were generated by the DIY megastores with garden centers in Germany. The net sales of these stores rose by 5.8 % to € 1,530 million (2005/2006: € 1,446 million). In the past financial year we therefore continued to grow more rapidly than the DIY and garden center sector in Germany (plus 1.0 %). The international stores reported even more dynamic growth, increasing their net sales by 9.4 % from € 788 million to € 862 million. The share of consolidated sales generated by the international stores showed a slight increase from 35 % in the previous year to 36 %.   Considerable improvements were achieved in key store productivity figures. Weighted average sales per store, for example, rose from € 18.7 million in the previous year to € 19.9 million. As in the previous year already, the average net sales per square meter of sales area, which increased from € 1,753 to € 1,833, meant that HORNBACH once again achieved the best figure of any of the top ten German DIY operators.

Energy-saving projects in great demand
Consolidated sales are attributable to the five product divisions of hardware/electrical, paint/wallpaper/flooring, construction materials/wood/prefabricated construction components, sanitary/tiles, and garden products. As in the previous year, the largest share of sales was generated by the product ranges in the construction materials, wood, and prefabricated construction components division. This was even more the case in 2006. Our concept, which is based on large-scale construction and renovation projects, enabled us to benefit more strongly from the marked economic recovery, and in particular from the great demand for construction materials, than did our competitors in the DIY sector.

Products involved in shell construction and larger-scale conversion and extension projects, such as roof extensions or bathroom renovations, were in particularly great demand, as was heating and air conditioning equipment. Customers granted a warm reception to project solutions relating to the replacement of central-heating boilers and thermal insulation, as well as to the extensive advisory services provided on the subject of energy saving. The hardware/electrical and sanitary/tiles merchandise areas also reported disproportionate growth compared with the rate of growth in consolidated sales. Overall, the sales performance showed increasingly dynamic developments in the second half of the financial year. This is particularly apparent in the development of the Group's like-for- like sales.

4.0 % growth in like-for-like sales
Thanks to a very pleasing jump in sales in Germany in the second half of the year, like-for-like sales rose by 4.0 % across the Group (2005/2006: plus 0.5 %). The performance of like-for-like sales was initially affected by an unusually long winter period, which had a particularly marked affect on our gardening business in the months of March and April 2006. The month of May then witnessed the expected boost in sales, enabling HORNBACH to regain valuable ground. The business performance gained further momentum in the course of the second quarter. The downturn in sales during the 2006 soccer world cup (June) turned out lower than expected. Up to the end of the financial year, like-for-like sales were then considerably higher than the equivalent figures for the previous year in every subsequent month. This is not only due to the ongoing high levels of growth achieved by our international DIY megastores with garden centers. The German stores raced to catch up, thus also contributing to the very pleasing level of overall sales growth.

Germany witnessed a disappointing start to the financial year, with a downturn of 1.3 % in the first quarter (March to May 2006). This was principally due to unfavorable weather conditions, a factor from which the overall sector suffered in March and April 2006, as well as to the ongoing tough price competition among German competitors. In this difficult climate, HORNBACH nevertheless succeeded in outperforming the German DIY sector in terms of its like-for-like sales in every month of the year under report. The company's year-on-year sales performance was an average of 2.7 percentage points higher than the sector average reported by the BHB sector association.

The closer the end of the year approached, and with it the increase in sales tax, the larger the company's head start over the competition became. With an increase of 5.2 % in the third quarter and even more substantial sales growth of 6.5 % in the fourth quarter (December to February), we achieved some of our best results in the past ten years. In November and December 2006 alone, we outperformed the DIY store sector by 6.0 and 7.7 percentage points respectively.

This proves two things. Firstly, thanks to its project orientation and its specialist and service competence in construction-related product ranges (e.g. construction materials, sanitary installation), HORNBACH is able to benefit disproportionately from the increased demand for construction materials. As a result, HORNBACH clearly profited more significantly from the impact of purchases being brought forward for tax reasons than did most of its competitors. Secondly, our decision to adopt a clear and reliable position in terms of our pricing policies half a year before the sales tax increase already turned out to be the right one. This involved not adjusting prices in the run-up to the tax hike, but simply including the unadulterated increased tax rate of 19 percent in our price calculations from January 1, 2007 onwards. This maximum degree of transparency, reliability, and honesty in our pricing policies was rewarded by customers and also resulted in a pleasing development in like-for-like sales in January and February 2007 as well, thus enabling us to extend our lead over the sector. We concluded the 2006/2007 financial year with overall growth of 2.3 % in Germany (2005/2006: minus 1.1 %).

Further substantial growth momentum was provided by the international business, where we once again significantly exceeded the high level of sales reported for the previous year. The like-for-like growth of 11.7 % reported in the final quarter represents the second-best quarterly figure since the beginning of our expansion into other European countries. At the same time, this also underlines the fact that the growth of the Group in the second half of the year was chiefly due to the strength of HORNBACH's concept, and not so much to the one-off impact of the tax increase, which cannot have influenced customer behavior outside Germany.

Market share in Germany rises to 8.1 %
The sales growth enabled us to further extend our market position as one of the leading DIY store operators in Europe in 2006/2007 in spite of no new stores being opened. In our core German market, we considerably expanded our market share compared with one year earlier. As a percentage of the total sales of all German DIY stores and garden centers (€ 22.01 billion in 2006 according to the BHB), our market share rose from 7.7 % in 2005 to 8.1 % in 2006.

The expansion into other European countries has from year to year lent further weight to the position of our HORNBACH DIY megastores with garden centers operating in the respective country markets. In all countries apart from Sweden, where the store network still has to achieve a critical mass, we are at least among the four leading companies operating DIY megastores with garden centers.

120 HORNBACH locations in eight countries
As a result of delayed building permits, no new stores were opened at the HORNBACH-Baumarkt-AG Group during the 2006/2007 financial year. Four locations were closed in the course of the year. These closures related on the one hand to the former Lafiora garden centers in Ludwigshafen and Germersheim (May 2006), which could no longer be operated profitably. On the other hand, the store in Darmstadt was closed in August 2006 and a standalone garden center in the Dutch town of Nieuwerkerk was closed in January 2007. New HORNBACH megastores of the latest generation, including drive-in construction materials facilities, are expected to be built at both of these locations in the current and/or coming financial year.

Including the four closures, we were operating a total of 120 retail outlets across the Group as of ebruary 28, 2007 (February 28, 2006: 124). The sales areas of our 89 stores in Germany (2005/2006: 92) amounted to around 920,000 m². The average store size in Germany amounts to more than 10,300 m² (2005/2006: 10,114 m²). Outside Germany, we operate a total of 31 DIY megastores with garden centers (2005/2006: 32) with total sales areas of around 388,000 m² and an average sales area of 12,505 m² (2005: 12,157 m²). The stores are located in Austria (11), the Netherlands (7), Luxembourg (1), the Czech Republic (5), Switzerland (3), Sweden (2), and Slovakia (2). With total sales areas of around 1,308,000 m² at the Group (2005/2006: 1,319,000 m²), the average sales area per store now amounts to almost 11,000 m² (2005/2006: around 10,600 m²). This thus underlines our unique position among European DIY store operators in the megastore segment involving sales areas of more than 10,000 m².

As expected, the HORNBACH-Baumarkt-AG Group achieved disproportionate earnings growth compared with the development of sales during the year under report, with earnings rising to record levels. Operating earnings (EBIT) grew by 36.9 % to € 96.1 million (2005/2006: € 70.2m). The EBIT margin improved from 3.1 % to 4.0 %

The main reasons for the marked year-on-year improvement in the company's earnings performance were the substantial like-for-like sales growth during the second half of the year, a slight increase in the gross margin, improved cost ratios at the stores and in the administration, as well as a lower level of pre-opening expenses and an improvement in net financial expenses.

The gross profit at the HORNBACH-Baumarkt-AG Group rose as a percentage of net sales (gross margin) from 35.7 % to 36.0 %. This is mainly due to a further optimization in the alignment of retail prices to market prices, which were slightly higher during the past financial year than in the previous year. Over and above this, changes in the product mix and adjusted supplier pricing terms also contributed to the improvement in margins.

Pre-opening, selling and store, general and administration expenses
As a result of the delays in the company's expansion, pre-opening expenses dropped from € 10.9 million to € 4.5 million in the past year. As a percentage of net sales, the pre-opening expense ratio therefore fell from 0.5 % to 0.2 %. This item includes those expenses incurred prior to the opening of a new HORNBACH DIY megastore with a garden center. These mainly involve personnel expenses.

Selling and store expenses declined as a percentage of sales at the Group in the 2006/2007 financial year. These expenses amounted to € 692.8 million (2005/2006: € 660.1 million) and were equivalent to 29.0 % of net sales (2005/2006: 29.5 %). The relative decline in selling and store expenses is primarily due to productivity enhancements on like-for-like surfaces, as well as to the pause in the company's expansion. This led store personnel and operating expenses to rise less rapidly than sales. Advertising expenses also grew more slowly than sales. These factors were offset by the marginally disproportionate increase in rental charges as a side effect of the sale and lease back strategy, whose impact on the selling and store expenses ratio was nevertheless compensated for by a lower level of depreciation and amortization.

At € 93.2 million, the Group's general and administration expenses were more or less at the same level as in the previous year (2005/2006: € 92.3 million). The administration expenses ratio therefore decreased (as a percentage of net sales) from 4.1 % to 3.9 %. It should be noted in this respect that administration expenses were negatively affected in the 2005/2006 financial year by the conversion of the former merchandise system to SAP.

The personnel expenses included under selling and store, general and administration and pre-opening expenses (including miscellaneous personnel expenses) rose by 4.8 % from € 371.2 million to € 388.9 million, thus declining as a proportion of sales. At € 64.3 million, the depreciation of noncurrent assets was 3.2 % lower than in the previous year (€ 66.5 million). This figure includes extraordinary depreciation of € 5.6 million (previous year: € 5.5 million) undertaken on real estate not used for operating purposes and on one DIY megastore with a garden center under construction as a result of a decline in their fair values or recoverable amounts. This item has been reported under other income and expenses.

Other income and expenses
The other income and expenses reported in the income statement principally relate to income from advertising allowances, income from the disposal of assets, income from insurance payments in connection with flood damage at the Swiss store in Littau (previous year), income from the release of provisions, income from exchange rate differences, and miscellaneous income. This is mainly offset by expenses relating to the damages caused by the flooding of the Littau store (previous year), expenses for the statement of provisions for disadvantageous contracts, extraordinary depreciation and amortization, and expenses relating to exchange rate differences.

Other income and expenses fell by 25.4 % to € 26.1 million in 2006/2007 (2005/2006: € 35.0 million), mainly as a result of lower disposal profits on the sale of two retail properties (2005/2006: four). The existing stores in Potsdam and Essen were sold to real estate companies during the year under report and rented back on a long-term basis. The sale and lease back transactions generated disposal profits amounting to € 9.6 million (2005/2006: € 15.1 million).

Significant earnings growth
All key earnings figures showed stronger growth than sales in the past financial year. The earnings before interest, taxes, depreciation, and amortization (EBITDA) of the HORNBACH-Baumarkt-AG Group rose by 17.4 % to € 160.4 million (2005/2006: € 136.7 million). The EBITDA margin thus improved (as a percentage of net sales) from 6.1 % to 6.7 % in the 2006/2007 financial year. Operating earnings (EBIT) increased by 36.9 % to € 96.1 million (2005/2006: € 70.2 million). The EBIT margin thus rose substantially from 3.1 % to 4.0 %. Mainly as a result of a marked increase in interest income, net financial expenses improved from minus € 26.6 million to minus € 23.2 million. Consolidated earnings before taxes jumped from € 43.6 million to € 72.9 million. The return on sales before taxes rose from 1.9 % to 3.1 %.

The consolidated net income of the HORNBACH-Baumarkt-AG Group is reported at € 60.7 million, compared with € 24.9 million in the previous year (plus 143.1 %). The considerably sharper increase in net income compared with consolidated earnings is due to the markedly lower tax charge compared with the previous year. The tax rate fell from 42.7 % to 16.7 %. This considerable reduction in the tax burden is chiefly due to the fact that the corporate income tax credit of € 9.3 million previously dependent on dividend distributions was recognized during the year under report as a result of legislative amendments as of December 31, 2006.

The return on sales after taxes has thus more than doubled from 1.1 % to 2.5 %. Including the 305,800 new shares which arose in the 2006/2007 financial year in connection with the company's 1997 and 1999 share option plans, the Group's basic earnings per share calculated in accordance with IFRS rose from € 1.64 to € 3.95.

Increased earnings contributions from international business
Thanks to the considerable year-on-year improvement in like-for-like sales, the segment reporting shows an increase in absolute terms in the earnings contributions generated in Germany. At the same time, the even greater profitability of the international business led to an increase in the share of the earnings performance of the overall Group attributable to its international activities.

The EBITDA in Germany rose from € 74.8 million to € 83.9 million. This is equivalent to a 52 % share of the EBITDA of the Group (2005/2006: 55 %). The EBIT contribution from Germany improved from € 28.3 million to € 38.1 million. The domestic share of operating earnings thus amounted to 40 % (2005/2006: 41 %). The HORNBACH International subgroup, at which all of the Group's activities outside Germany are pooled, generated a further considerable increase in earnings contributions in comparison with the previous year. With EBITDA of € 76.5 million (2005/2006: € 61.0 million), the international business accounted for around 48 % (2005/2006: 44 %) of the EBITDA of the HORNBACH-Baumarkt-AG Group. The operating earnings (EBIT) of the international business rose from € 41.0 million to € 58.0 million, equivalent to an increase in the international share from 58 % to 60 %. If these figures are compared with the respective share of sales (2006/2007: 36 %), the significance of the HORNBACH stores in other European countries for the Group's earnings performance becomes apparent. At the same time, this also reflects the success of the Group's international expansion strategy. HORNBACH has succeeded in rolling out its large-scale retail format as an “export hit” in a wide variety of country markets and has gradually acquired market share. Although the competitive climate is similarly challenging to that in Germany, our HORNBACH DIY megastores with garden centers in Austria achieved like-for-like sales growth and improved their EBIT margin in the 2006/2007 financial year. There were no changes in the location network during the 2006/2007 financial year. The conversion of two stores to prototypes with combined construction materials drive-in facilities (Type 6) led the sales areas of the eleven Austrian HORNBACH stores to rise by 8,000 m2 to 139,000 m2. The HORNBACH DIY megastores with garden centers in the Netherlands maintained their success story in the 2006/2007 financial year, increasing their income mainly as a result of high rates of like-for-like sales growth. No new stores were opened during the 2006/2007 financial year. Our store in Nieuwerkerk was closed at the end of January 2007 to make space for the construction of a new HORNBACH DIY megastore with a garden center of the latest generation, which is expected to take place in 2008/2009. At the reporting date, the HORNBACH store network in the Netherlands thus consisted of seven (2005/2006: eight) stores with sales areas of around 75,000 m2.

One reliable player in our store network is the DIY megastore with a garden center in Bertrange in the Duchy of Luxembourg. This store, whose weighted sales area of more than 12,000 m² makes it the largest DIY store in the country, once again reported increased surface productivity and profitability at a high level in the past year.

Some of the most dynamic developments in sales and earnings were reported by the HORNBACH stores in the Czech Republic (5) and Slovakia (2). The above-average performance of these economies compared with the overall EU provided a superb climate for meeting the ongoing high level of demand for construction materials at our megastores. We have significantly increased customer totals and gained additional market share. We continue to operate seven locations with sales areas of 94,000 m² in these two countries, which are managed in operational terms as a single region.

The unique position of the unmistakable HORNBACH concept is also reflected in the pleasing sales and earnings performance reported in Switzerland, where we achieved a further substantial increase in our acceptance levels among home improvement customers. With three locations and sales areas of 35,100 m², HORNBACH has successfully established itself here as the leading player in the DIY megastore and garden center segment.

Sweden is the only country on HORNBACH's expansion map where we have not yet reached breakeven on an operational level. Thanks to double-digit like-for-like sales growth in the past year, the negative operating result has declined by more than 60 %. The trend at the two locations (Gothenburg and Malmö) is promising. Given the growth opportunities in the Scandinavian market, we are pressing ahead with the expansion of the store network, which currently consists of sales areas of around 29,000 m².

Preparations continued at full speed during the year under report for our market entry in Rumania, which is scheduled to take place in Bucharest in mid-2007. These efforts focused on developing procurement and retail structures, as well as on securing attractive locations for our future expansion in this upcoming EU accession country, which with 22 million inhabitants is one of the most populous nations in Eastern Europe.

Proposed dividend
The Board of Management and Supervisory Board of HORNBACH-Baumarkt-AG will, as in the previous year, be proposing the payment of a dividend of € 0.87 per ordinary share for approval by the Annual General Meeting on July 12, 2007. We are maintaining the longstanding continuity of our dividend policy partly in order to make a major contribution towards financing our further growth and partly to enable us to invest in sustainable improvements in our credit rating by reducing our debts.

Principles and objectives of the Group’s financial management
Financing measures are undertaken by the central Group Treasury department at HORNBACH-Baumarkt-AG. Such measures also include granting assistance to subsidiaries in the form of guarantees and letters of comfort. The central organization of financial management activities enables the HORNBACH Group to maintain a uniform presence on the financial market and to provide centralized liquidity management for the overall Group.

The information required for efficient liquidity management is provided by rolling group financial planning encompassing all relevant companies, which is updated on a monthly basis and has a budgeting horizon of 12 months. This tool also provides short-term financial forecasting which is updated on a daily basis.

On the basis of the information available, the financing requirements of individual units within the Group are initially settled using surplus liquidity from other group companies by means of a cash pooling system. Such liquidity bears interest at market rates on the basis of internal group loan agreements.

External financing requirements are covered by taking up loans from banks and on the capital market. Furthermore, DIY store properties are sold to investors upon completion, with their subsequent utilization being secured by rental agreements (sale and lease back). Efforts are made in this respect to meet the criteria set out in IAS 17 concerning classification as “Operating Leases”.

Financial debt
At the reporting date on February 28, 2007, the net financial debt of the Group amounted to € 295.2 million (2005/2006: € 443.1 million) and was structured as follows:

Permanent improvement in capital resources
The inflow of funds from the bond of € 250 million issued in November 2004 with a term of ten years and an interest coupon of 6.125 % was used to repay the short-term financing facilities of the Group in full and to provide additional liquidity for the further growth of the company.

The Group had no short-term financing facilities at the reporting date on February 28, 2007. The short-term financial debt (up to 1 year) amounting to € 30.5 million consists of interest provisions (€ 7.9 million), liabilities in connection with derivative financial instruments (€ 1.3 million), and the short-term portion of long-term financing facilities (€ 21.3 million).

At the end of the 2006/2007 financial year, non-current assets amounting to € 643.0 million (2005/2006: € 629.1 million) were countered by non-current liabilities amounting to € 531.4 million (2005/2006: € 476.7 million).

In the second quarter of the 2006/2007 financial year, HORNBACH-Baumarkt-AG took up an unsecured borrowers’ note loan amounting to € 80 million, mainly for the purpose of redeeming various mortgage loans payable upon final maturity. The borrowers' note loan charges variable interest based on the 6-month EURIBOR and is to be repaid at the end of the term of five years. A forward swap with congruent terms was already concluded in the 2005/2006 financial year in order to secure the interest level. The swap enables the interest payable every half year to be secured for the entire term at a level of 3.128 % plus a bank margin.

The financing of the Group has been further positively affected by structural changes in the committed credit lines. Various bilateral credit lines have been pooled into a syndicated credit line of € 200.0 million, which has a term of 5 years and can be extended on two occasions, in each case by a further year. The covenants to be complied with, such as EBITDA to interest expenses, are basically equivalent to the obligations governing the bond issued in 2004.

At the reporting date on February 28, 2007, the HORNBACH-Baumarkt-AG Group had free credit lines, including the syndicated credit line referred to above, of € 315.6 million at customary market conditions (2005/2006: € 216.8 million). In order to provide the maximum possible degree of flexibility, all major group companies have credit lines denominated in their local currencies, in most cases from local banks.

Cash and cash equivalents amounted to € 192.9 million at the reporting date (2005/2006: € 72.4 million).

The interest cover, dynamic debt/equity ratio, equity ratio, and company liquidity (cash and cash equivalents, plus unutilized committed credit lines) are monitored on a monthly basis within the framework of the company's internal risk management. Further key figures are calculated on a quarterly basis. Countermeasures are initiated at an early stage in the event of the values falling short of specific target levels.

No securities in the form of assets have been provided to secure the credit lines or the bond.

Land charges amounting to € 216.7 million had been provided as security for existing mortgage loans as of the reporting date (2005/2006: € 344.8 million).

Since the issue of the bond, the external financing facilities of the HORNBACH-Baumarkt-AG Group have exclusively taken the form of unsecured loans and the sale of real estate (sale and lease back). In accordance with the company's internal risk principles, derivative financial instruments are held solely for hedging purposes. The nominal values and valuations of existing derivative financial instruments have been depicted in the notes to the financial statements (Notes on the Consolidated Balance Sheet (35) Financial Instruments).

Investments totaling € 87.7 million
The HORNBACH-Baumarkt-AG Group invested a total of € 87.7 million during the 2006/2007 financial year (2005/2006: € 141.2 million), primarily in land, buildings, and plant and office equipment for existing and new DIY megastores with garden centers. The funds of € 87.7 million for the cash-effective investments (2005/2006: € 144.3 million) were acquired in full from the cash flow from operating activities (€ 197.1 million).

The substantial decline in investments is principally due to the fact that no new DIY megastores with garden centers were opened in the past financial year as a result of delays in the granting of building permits.

Of the investment total, around 58 % related to new real estate, including prepayments made and assets under construction. Around 41 % of total investments were channeled into replacing and extending plant and office equipment, as well as into intangible assets (mainly IT software).

The most significant investment projects related to the DIY megastore with a garden center in Munich- Freiham, which was under construction in the 2006/2007 financial year, and to the acquisition of land for the further expansion of the company.

Two stores were sold to real estate companies during the period under report and rented back on a longterm basis (sale and lease back). Furthermore, the funds from the sale (and lease back) of the store in Berlin-Vogelsdorf agreed in the previous year were received during the year under report. As in the past, the sale and lease back transactions served to release funds to finance the company's further growth.The utilization rights have been secured on a long-term basis. Rental extension and purchase options have also been agreed in most cases.

Cash flow statement

As a result of the positive performance of the operating business, the inflow of funds from operating activities rose from € 16.4 million in the previous year to € 197.1 million in the 2006/2007 financial year. In addition to the year-on-year increase in annual net income by € 35.7 million, this development is chiefly due to the considerable reduction in the financing of net working capital (changes in inventories, accounts receivables and other assets plus changes in accounts payable). Whereas funds amounting to around € 70 million were required for the increase in inventories in the previous year, the reduction of inventories in the 2006/2007 financial year enabled liquid funds of around € 50 million to be released.

The outflow of funds for investment activities was reduced from € 48.2 million to € 47.6 million. In this respect, investments, which dropped by € 56.6 million to € 87.7 million, were countered by the roceeds from the disposal of non-current assets, which also witnessed a reduction, falling to € 40.1 million (2005/2006: € 96.1 million).

The repayment of existing financial loans meant that the outflow of funds for financing activities amounted to € 29.1 million in the 2006/2007 financial year, compared with an outflow of funds for financing activities of € 39.3 million in the previous year. Financial debt was reduced from € 515.5 million in the previous year to € 488.1 million.

The rise in cash and cash equivalents and simultaneous reduction in financial debt is due to the improvement in the operating business and the lower level of investment.

Rating
Since 2004, the creditworthiness of the HORNBACH-Baumarkt-AG Group has been assessed by the
leading international rating agencies Moody's Investors Service and Standard & Poor's as follows:

Both ratings include stable outlooks and were confirmed without any changes in December 2006
(Standard & Poor's) and November 2006 (Moody's).

Equity ratio rises to 35.4 %
The total assets of the Group rose by € 44.6 million, or by 3.5 %, compared with the previous year to reach € 1,330.6 million. The rise in total assets reflects the further expansion of the HORNBACH-Baumarkt-AG Group, which is mainly apparent in the increase in non-current assets.

Following the exercising of subscription rights in connection with the 1999 share option plan during the 2006/2007 financial year, a total of 273,300 new non-par ordinary shares in the company were issued by means of a conditional capital increase. Furthermore, the conversion of convertible bonds in connection with the 1997 share option plan resulted in the subscription of 32,500 new non-par ordinary shares in the company. The issuing of these new shares led the company's share capital to increase by € 917,400 to its current total of € 46,518,360, which is divided into 15,506,120 (2005/2006: 15,200,320) ordinary shares.

The equity of the Group as stated in the balance sheet at the end of the financial year amounted to € 470.8 million (2005/2006: € 415.3 million). At 35.4 %, the equity ratio has thus increased on the previous year's figure (32.3 %).

Non-current and current assets
Non-current assets amounted to € 643.1 million at the reporting date (2005/2006: € 629.1 million) and thus accounted for around 48 % of total assets (2005/2006: 49 %). Property, plant and equipment, and investment property increased by € 4.0 million (0.7 %) from € 585.1 million to € 589.1 million. In this respect, the additions to assets of € 81.1 million were countered by depreciation amounting to € 59.1 million. The disposals of assets amounting to € 14.5 million primarily relate to a DIY store property disposed of within the framework of a sale and lease back transaction during the financial year under report. Moreover, the application of IFRS 5 required properties of € 3.4 million held for sale to be reclassified as current assets. In the previous year, these properties had been reported under property, plant and equipment. Long-term income tax receivables involve a claim to payment of a corporate income tax credit with a present value of € 9.3 million arising as a result of legislative amendments (SEStEG).

Current assets rose by 4.7 % from € 656.8 million to € 687.5 million, and thus accounted for around 52 % of total assets (2005/2006: 51 %). Cash and cash equivalents rose from € 72.4 million in the previous year to € 193.0 million, while corresponding reductions were achieved in inventories, receivables, and other assets. Inventories fell in this respect by 10.1 % (€ 50.1 million) from € 496.1 million to € 446.0 million. In addition to the impact of the closure of three garden centers and one DIY megastore with a garden center, the reduction in inventories as of the reporting date was mainly attributable to the targeted improvements achieved in inventory turnover rates. Receivables and other assets (including receivables relating to taxes on income) fell by € 28.9 million from € 73.8 million to € 44.9 million. This is chiefly due to a reduction in tax receivables (€ 3.8 million), to receivables settled during the year under report in connection with insurance payments for the flood damage at our store in Littau (Switzerland) (€ 4.6 million), and a lower level of receivables in connection with sale and lease back transactions (€ 22.0 million). The non-current assets held for sale reported pursuant to IFRS 5 fell from € 14.5 million to € 3.6 million, mainly as a result of the disposal of a DIY megastore with a garden center within the framework of a sale and lease back transaction and of a further development property.

Non-current and current liabilities
Liabilities, including provisions, amounted to € 859.8 million at the reporting date on February 28, 2007, compared with € 870.6 million in the previous year. Non-current liabilities increased from € 476.7 million to € 531.4 million. The increase in non-current liabilities by € 54.6 million is primarily due to taking up an unsecured borrowers' note loan amounting to € 80 million. Other noncurrent liabilities rose from € 11.3 million to € 18.4 million, mainly as a result of the increase in liabilities for part-time early retirement agreements. The non-current liabilities include deferred tax liabilities amounting to € 55.3 million (2005/2006: € 52.4 million). The repayment of mortgage loans payable upon final maturity facilitated a substantial reduction in current liabilities. This led short-term financial debt to fall by 71.2 % from € 106.0 million to € 30.5 million as of February 28, 2007.

Accounts payable and other liabilities rose by a total of € 3.0 million to € 232.0 million as of the reporting date (2005/2006: € 229.0 million).

Financing instruments not reported in balance sheet and rental obligations
In addition to the DIY megastores with garden centers owned by the HORNBACH-Baumarkt-AG Group and the DIY megastores with garden centers used on the basis of financial leasing agreements, there are 39 stores and one logistics center which are let from the associate company HORNBACH Immobilien AG or its subsidiaries, as well as 53 DIY megastores with garden centers which are let from third parties. Moreover, there are also a small number of additional leasehold, leasing, and rental agreements for pieces of land.

The obligations under rental, hiring, leasehold, and leasing contracts relate exclusively to rental agreements for which the companies of the HORNBACH-Baumarkt-AG Group do not constitute the economic owners of the assets thereby leased pursuant to IFRS accounting standards (Operating Lease). The rental agreements principally relate to DIY megastores in Germany and other countries. The terms of the rental agreements amount to between 15 and 20 years, with subsequent rental extension options. The respective agreements include rent adjustment clauses.

At February 28, 2007, the obligations under rental, hiring, leasehold, and leasing contracts amounted to € 1,246.3 million (2005/2006: € 1,192.1 million). This increase is chiefly due to the rental agreements newly concluded with third parties for two DIY megastores with garden centers and for two builders' merchant centers. Moreover, one rental agreement with HORNBACH Immobilien AG was amended to account for extensions and a series of rental extension options were taken up during the 2006/2007 financial year.

Overall assessment of the earnings, financial and net asset situation
The HORNBACH-Baumarkt-AG Group performed well in very difficult market conditions in the 2006/2007 financial year and strengthened its market position. The company achieved a marked improvement in its earnings in spite of the tough price competition in Germany and the extreme weather conditions in some areas at the beginning of the financial year. We generated considerably more rapid sales growth than the sector as a whole, thus further extending our market position in Germany. Pleasing developments were reported by our international activities, which further expanded their share of sales and earnings. The expansion outside Germany has thus broadened the foundation for further growth and made the performance of the overall Group more independent of the difficult competitive situation in Germany. The equity ratio increased to 35.4 %. The capital structure and liquidity have improved. In view of the broad spectrum of financing sources available to the Group, we have a high degree of security and flexibility for financing our further growth. Overall, the economic situation of the Group is satisfactory.

New jobs created even without new store openings – Training quota of 8.8 % in Germany
At the reporting date on February 28, 2007, there were 11,577 individuals (2005/2006: 11,419) in active fixed employment at HORNBACH-Baumarkt-AG or at one of its subsidiaries. This is equivalent to an increase of 158, or 1.4 %, on the end of the previous financial year in February 2006. The number of employees in Germany rose from 7,579 to 7,766 (plus 187). At 3,811, the number of employees in other countries was almost at the same level as in the previous year (3,840). The growth in the total workforce was lower than in the previous year as a result of the store openings postponed to the current 2007/2008 financial year. As an annual average and converted into full-time equivalents, the overall HORNBACH-Baumarkt-AG Group had 10,091 employees (2005/2006: 10,046).

An average of 677 young people (2005/2006: 631) were provided with a training position in one of 13 different vocations in the year under report. The largest share of these were the 384 trainees aiming to qualify as retail sales personnel (2005/2006: 361). The training quota amounted to 8.8 % in Germany (2005/2006: 8.0 %). This underlines our social responsibility and our efforts to offer qualified training positions to as many young people as possible. Since 2002, almost 2,000 trainees have gained a foothold in the world of work at HORNBACH, benefiting from the career opportunities on offer at an international retail group.

Qualification plays a key role
Employees from the stores and administration departments participated in numerous training measures. 255 women and men took part in the management training program preparing them for promotion to subdivisional managers, assistant store managers or store managers. Since the past financial year, the programs enabling employees to be trained as store managers have been introduced across Europe.

As part of our specialist training, more than 3,400 employees received training from our suppliers in various merchandise divisions with the assistance of tailored programs in the 2006/2007 financial year. It should be noted in this respect that HORNBACH is the first company in the German DIY sector to certify its suppliers, i.e. only those suppliers who have taken part in our Train-the-Trainer measures are allowed to train our employees. Thanks to the close links with procurement departments and trend experts, it was possible to familiarize the sales personnel at the stores with the latest trends and product novelties at an early stage. HORNBACH has for the first time compiled a training calendar for every store in Germany, thus enabling each employee to compare all of the contents and objectives of the training measures with his or her respective level of knowledge and to take part in the relevant training measures if necessary. The rollout of specialist training programs to our foreign stores was launched at the end of the financial year.

The activities offered by the Training/Multimedia department enabled a further total of 2,180 employees in Germany and abroad to take part in 268 sessions training them for their daily work. We focus in this respect on blended learning concepts (combination of seminars and e-learning). The expenses involved in compiling the e-learning modules for these concepts were further optimized by using new tools. Not only that, the qualification of in-house trainers helps to develop and extend the level of expertise and competence among the workforce. 128 district trainers ensured that ongoing training measures with upto-date contents were on offer at the stores..

Further enhancement of the HORNBACH format
HORNBACH has longstanding experience built up over several decades in the operation of large-scale DIY stores with garden centers. This is also reflected in the average store size, which has most recently risen to almost 11,000 m² (2005/2006: 10,600 m²). This figure has not been matched by any other competitor among the leading DIY store operators in Europe. At the same time, we have a very homogeneous store network, with more than 80 % of our sales areas as of the reporting date relating to stores which are larger than 10,000 m².

The construction measures undertaken during the year under report focused on extending older stores into outlets of the latest generation with combined drive-in facilities (Type 6). During the 2006/2007 financial year, the store in Berlin-Bohnsdorf and the two Austrian locations in Bad Fischau and Gerasdorf in Greater Vienna were converted into Type 6 stores while maintaining ongoing operations.

The average size of these stores thus increased from around 11,600 m² to 15,000 m². The number of Type 6 stores had therefore risen from twelve to 15 by the end of the financial year. The drive-in concept is intended to enable customers to load cumbersome and heavy goods, such as construction materials, conveniently and directly into their vehicles, to combine this with purchases in the DIY store, and to pay for all of these goods at one checkout. HORNBACH has thus underlined its traditional competence in the retail of construction materials. Thanks to the stocking of the quantities also required for very large projects, numerous service measures, attractive opening hours, and easy accessibility, this concept is increasingly attracting professional customers as well.

Moreover, we are also working continuously on gradually bringing older stores in line with the latest standards and on enhancing operating processes to enable customers' wishes to be met even more closely. These measures include signs, shelving measures, adjustments to the layout of the stores, and the further enhancement of the product range. When transferring proven concepts to old and new sales areas (best practice approach), we are able to benefit from the homogeneity of our national and international store network.

Once again Number 1 in consumers’ favor
The guiding principle underlying the ongoing enhancement of the HORNBACH concept is the focus on the needs of our project customers. The key criteria for our customers include the easy accessibility of the stores, the stocking of large quantities of articles, the attractive presentation of merchandise, the highest levels of competence in the composition of the product ranges and in the provision of specialist advice, and not least a reliable price strategy. As proven by a series of consumer surveys and sector studies, HORNBACH once again further sharpened its profile as the preferred DIY store for projectoriented customers in the past year, thus successfully differentiating itself from its competitors.

For the second time since 2005, there is no other large DIY chain with which German home improvement customers are as satisfied as they are with HORNBACH. This is the finding of the “Kundenmonitor Deutschland 2006” survey undertaken by the Munich-based company Servicebarometer AG. More than 6,000 DIY customers were surveyed within this, the most important consumer survey in the German retail sector. With an average grade of 2.33 for overall satisfaction (2005/2006: 2.35), HORNBACH has further extended its head start over the competition. HORNBACH received the best marks for the individual criteria of product range selection and variety, product quality, service offerings, and value for money. Equally important for us is the fact that customers awarded HORNBACH top position in the comparison of prices, product range, and service offerings with those offered by the competition. This means that the renowned study has also confirmed our price leadership.

This is not only the case in Germany. HORNBACH has been voted the best DIY store in the Netherlands for the second consecutive year. This was the finding of the “Best Store Chain in the Netherlands” consumer survey undertaken by the specialist magazine Elsevier Retail. With almost four hundred thousand consumers taking part, this represents the largest study of its kind in the Dutch retail sector. Our company was clearly ahead of its DIY competitors in our neighboring country, especially in terms of its product range and prices. In Switzerland, the authors of a study undertaken by the College of Technology and Business in Chur came to the conclusion that in a comparison of prices undertaken at DIY stores within Switzerland, HORNBACH was once again by far the least expensive.

Cases where customers are not satisfied with their shopping experience at HORNBACH are handled by our complaints management system. This provides us with important indications as to the strengths and weaknesses of operations at our stores and thus acts as a management instrument for optimizing customer satisfaction levels. Each problem is solved in cooperation with the HORNBACH stores in a maximum of one to two days. In the case of product complaints, the procurement department and the supplier are also informed. Complaints are evaluated on a monthly basis. The trend is positive – 854 cases were processed in 2006, equivalent to a further decline of around 7 % on the previous year.

HORNBACH awarded the 2006 German Retail Prize
In October 2006, our group of companies was awarded the “Management Achievement of the Year 2006” German Retail Prize by the Association of German Retailers (HDE). In the reasons for its decision, the jury commented that HORNBACH had consistently relied on quality and customer satisfaction. This was evidenced by a superb image among consumers and great brand strength. “In the management of the company, long-term objectives always have priority over short-term success,” continued the commentary. The company's creative communications not only ensured that customers were constantly reminded of the products on offer, but also helped to improve the image of the DIY sector as a whole. The members of the jury highlighted the fact that HORNBACH had not taken part in the battle for ever greater discounts, but had rather relied on transparency in its pricing policies. Finally, “this has resulted in above-average growth, both in absolute terms and on a like-for-like basis, superb surface productivity, and a pleasing earnings performance in a stagnating overall market.“

Pricing policy based on transparency and reliability
The pressure on prices lost none of its intensity in the past financial year. In this competitive climate, we were uncompromising in our adherence to our credible permanent low price strategy, which enabled us to differentiate ourselves from the discount campaigns undertaken by competitors. We see this as providing the best foundation for achieving sustainable, above-average growth and high earnings power in the long term. Within the debate surrounding hidden price increases in the German retail sector in the run-up to the increase in sales tax, we communicated at an early stage that HORNBACH would factor the higher sales tax rate of 19 % into its retail prices after the beginning of the new year in 2007. Our aim is to retain customers at HORNBACH on a permanent basis by providing the highest possible degree of transparency, reliability, and honesty in our pricing policies.

Logistics successfully working with new warehouse management system
One key success factor in the operation of DIY megastores with garden centers across Europe is our sophisticated merchandise management system in conjunction with our homogeneous store network. HORNBACH has created a competitive advantage for itself in the form of its logistics concept, which has achieved recognition in the international retail sector. Its logistics system combines direct supplies to stores, indirect deliveries via central warehouses, and cross docking.

The third logistics center of the HORNBACH Group, which commenced operations in Vilshofen near Passau in Lower Bavaria in October 2005, successfully passed the test in its first year of operations, even managing to exceed service expectations. This has enabled the level of service to be enhanced for the HORNBACH stores in South-Eastern Germany, Austria, the Czech Republic, and Slovakia, as well as facilitating a reduction in transport costs.

At the end of the year, Essingen was the first logistics center to be converted to the new SAP warehouse management system specially adapted to HORNBACH. The conversion ran smoothly, without any interruption to the supply of the stores. Productivity enhancements were already apparent after just a few weeks. The conversion of the other logistics centers will be completed in the first half of the 2007/2008 financial year.

With its logistics centers, HORNBACH is also making a sustainable contribution towards protecting the environment. The pooling of supplier deliveries enables thousands of truck journeys to be avoided. Moreover, the railroads are used for transportation, for example of imported goods from Hamburg to Regensburg. Only then are the containers transferred by truck to the logistics center near Passau.

Further optimization of merchandise system
The IT division focused during the 2006/2007 financial year on optimizing and consolidating the integrated merchandise system. In particular, the user surface of the software at the stores was revised in order to better align store sales and order processes to customer requirements. The rollout of this new solution will be continued in the 2007/2008 financial year. At the same time, merchandising processes across the Group are to be accelerated by extending the functionalities within an integrated solution.

A further focus involved the conversion to the increased sales tax rate of 19 % as of January 1, 2007. Many millions of labels had to be printed and applied to products at the German stores within a very brief period. By working with our IT systems, our stores were able to handle this volume in a short time. Within the framework of our expansion, the entry into the Rumanian market had to be prepared in the IT systems in time for March 1, 2007, with the systems being adapted to legal requirements in that country. This already provides evidence of the advantage of our integrated system landscape, which was available to the Rumanian administration employees at short notice.

Advertising generates high awareness levels
In the past financial year, HORNBACH continued to set standards in terms of its TV and print advertising campaigns, once again winning an abundance of international advertising prizes (e.g. New York Advertising Festival, EPICA Awards, Mobius Awards, ADC Deutschland, “Golden Dog” Austria). The aim was and remains that of arousing consumers' passion for home improvement and of motivating people to tackle large-scale projects in their homes, flats and gardens. The message is that there is no better feeling than looking back with pride on an accomplished project and being able to say, “I did it myself!” Two examples of this message are provided by the campaigns “Do it yourself” and “You've got what it takes”.

The autumn campaign “Ron Hammer” set a benchmark in terms of the handling of new media, particularly by making use of Web 2.0 and the possibilities it offers. The skilful linking of a viral video distributed on the internet about a fictitious motorbike stuntman aiming to jump over a HORNBACH DIY megastore with a traditional TV advertising campaign attracted great attention – first on the internet, then in the press, and finally across the whole advertising industry. On October 31, 2007, the current affairs program “Akte 06” included a ten-minute contribution on the “advert which everybody is talking about in Germany”. These campaigns were supplemented with clear, informative advertising booklets intended to provide our customers with optimal support when implementing their projects. Alongside the products, the advertising booklets therefore always provide information on working steps, tips and tricks, and relevant services. Booklets such as “Wohnwelten” (living worlds) illustrate decorative possibilities in various styles which can easily be implemented with HORNBACH.

Permanent low prices and the resultant reliability for project customers represent an important aspect of HORNBACH's strategy. The communication of this price strategy forms a major component of the company's advertising and is repeatedly highlighted in a targeted manner in adverts in the print media, as well as in television and radio adverts. The advertising brochures are also made available together with a large quantity of additional information at the company's homepage (www.hornbach.com).

Corporate social responsibility
Over and above its actual business activities, the HORNBACH Group is committed to responsible, socially-oriented entrepreneurship. One example of this commitment is the HORNBACH Foundation “People in Need”, which supported 33 individuals and six organizations with donations totaling more than € 100,000 in 2006. HORNBACH set up this foundation in 2002 when the flood catastrophe along the Danube and the Elbe, as well as their tributaries, placed many people in a situation of very severe existential difficulty. The foundation's endowment of one million euros was contributed not only by the company and its employees, but also by the Hornbach families and by business partners. This provided some alleviation for the flood damage, in some cases massive, suffered by 32 colleagues in Germany, Austria, and the Czech Republic.

The waters receded and the damages were remedied, but the Foundation continued its activities. Since then, the Foundation has provided financial assistance to alleviate 108 cases of social hardship. These generally involved the individual fates of HORNBACH employees, as well as of people from outside who approached the company for assistance. The inquiries came not only from Germany, but also from the Netherlands, Austria, Switzerland, and the Czech Republic. Fatalities, accidents, severe disabilities, and disease had brought these individuals into situations of extreme need.

Furthermore, the Foundation has also supported welfare projects, including some in distant countries, which involved projects such as allaying people's need in India by supplying a water preparation plant or helping to remedy the homelessness of street children in Brazil. Further aid projects were supported in Russia, Belarus, South Africa, Senegal, Sierra Leone, Nicaragua, as well as in Sri Lanka following the tsunami catastrophe. Since its establishment, the HORNBACH Foundation has provided assistance to 123 individuals and organizations and donated more than € 500,000 for this purpose. However, the company's social commitment is not restricted to the work of the Foundation, but also includes projects to promote children and young people. These are supplemented on a sporadic basis by projects involving the preservation of historic monuments. Moreover, the company is also a member of the association called “Show your true colors! Campaign for a tolerant Germany”. This organization, which acts under the patronage of the former Federal Chancellor, Gerhard Schröder, is committed to encouraging people to take a stand against xenophobia, racism, anti-Semitism and all forms of right-wing violence.

There were changes in the composition of the Board of Management of HORNBACH-Baumarkt-AG during the 2006/2007 financial year. Susanne Jäger, longstanding Group Procurement Director at the Decoration product division (paint/wallpaper/flooring), was appointed by the Supervisory Board to be a member of the Board of Management with effect from December 1, 2006. She has taken over the “Operating Procurement” division. Her area of responsibility includes the management of regional merchandising and store development. The company's Board of Management has since consisted of five members. The change in personnel was accompanied by a partial reorganization of management board divisions. Steffen Hornbach (Chairman of the Board of Management) is now responsible for the IT, logistics, communications, and company development divisions. Manfred Valder retains responsibility for strategic group procurement and has taken over responsibility from Steffen Hornbach for the operating management of the stores. The responsibilities of the Financial Director, Roland Pelka, and the Marketing and Human Resources Director, Jürgen Schröcker, have remained basically unchanged.

There have been no events between the conclusion of the 2006/2007 financial year and the printing of this annual report which are of significance for the assessment of the net asset, financial or earnings position of HORNBACH-Baumarkt-AG or of the HORNBACH-Baumarkt-AG Group.

A report has been compiled for the 2006/2007 financial year pursuant to Section 312 of the German Stock Corporation Act (AktG) in respect of relationships to associated companies. With regard to those transactions requiring report, the report states: “Our company has received adequate counterperformance for all legal transactions executed with associated companies in accordance with the circumstances known to us at the time at which the legal transactions were executed and has not been disadvantaged by such transactions. No measures requiring report arose during the financial year.“

The compensation report presents the basic features and structure of the compensation of the Board of Management and the Supervisory Board. It forms a constituent component of the group management report and, with the exception of the disclosure of individual compensation, is based on the requirements of the German Corporate Governance Code.

Compensation of the Board of Management
The level and structure of the compensation of the Board of Management are based on the size of the company, its economic and financial situation, and the performance of the company within its competitive environment. Moreover, the overall compensation and the individual components of such compensation should stand in an appropriate relationship to the responsibilities of the respective member of the Board of Management, his or her personal performance, and the performance of the Board of Management as a whole.

The compensation of the Board of Management consists of fixed and variable components. The compensation system of the Board of Management comprises an agreed fixed annual salary, which is paid in equal monthly installments. Furthermore, the members of the Board of Management receive an annual bonus which is paid upon the consolidated financial statements being approved by the Supervisory Board. The size of the annual bonus is based on the level of consolidated net income.

As components of a long-term incentive nature, the members of the Board of Management were allocated share options in four tranches (2000-2003) within the framework of the 1999 share option plan. The share option program is based on the achievement of ambitious target prices for the share of HORNBACH-Baumarkt-AG. In the 2006/2007 financial year, all tranches had exceeded their respective exercise hurdles. Details of the share option plan have been provided under Note 35 of the notes to the consolidated financial statements.

The total compensation paid to the Board of Management of HORNBACH-Baumarkt-AG for the performance of its duties for the Group during the 2006/2007 financial year amounted to € 2,525k (2005/2006: € 2,151k). Of this total, € 875k (2005/2006: € 1,103k) constituted fixed compensation and € 1,650k (2005/2006: € 1,048k) involved performance-related components. As of the reporting date on February 28, 2007, the members of the Board of Management held a combined total of 21,790 shares in HORNBACH-Baumarkt-AG (2005/2006: 19,940). Given the size and market position of the company, we believe that the total compensation of the Board of Management is appropriate. At the 2006 Annual General Meeting, shareholders voted with a three-quarters majority to forego the disclosure of the compensation of members of the Board of Management on an individual basis up to and including the 2010/2011 financial year (opting-out clause).

The employment contracts of members of the Board of Management do not include severance packages.

Compensation of the Supervisory Board
The compensation of the Supervisory Board is governed by Section 15 of the Articles of Association of HORNBACH-Baumarkt-AG. In line with the Articles of Association, the compensation of the members of the Supervisory Board consists of a fixed component and a variable component based on the dividend. In addition to the reimbursement of his or her expenses, each member of the Supervisory Board receives annual fixed compensation of € 6,000 payable upon the conclusion of the Annual General Meeting and a performance-related component depending on the resolution adopted by the Annual General Meeting in respect of the appropriation of profits and thus on the dividend distribution.

The Chairman receives twice and the Deputy Chairman 1.5 times the fixed and performance-related compensation. Members of the Supervisory Board who also sit on the Audit Committee receive an additional sum of € 3,000. Members of the Supervisory Board who sit on another committee or on several other committees of the Supervisory Board receive an additional sum of € 1,500 per committee. Members of the Supervisory Board acting as the chairman of a Supervisory Board committee receive twice the respective committee remuneration. Members of the Supervisory Board who are only members of the Supervisory Board for part of the financial year receive proportionately lower compensation.

The compensation of the Supervisory Board for the 2006/2007 financial year amounted to € 188k (2005/2006: € 172k). Of this total, € 119k (2005/2006: € 103k) constituted fixed compensation and € 69k (2005/2006: € 69k) involved performance-related components. The members of the Supervisory Board held a total of 19,030 (2005/2006: 32,265) shares in HORNBACH-Baumarkt-AG at the reporting date.

The compensation of the individual members of the Supervisory Board can be derived from the Articles of Association and from the disclosures made in the notes to the consolidated financial statements and has therefore not been reported separately.

Risk management at the HORNBACH Group
The Board of Management of HORNBACH-Baumarkt-AG is committed to risk-conscious corporate management which accords top priority at all times to safeguarding the continued existence of the overall company and its subsidiaries. The risk management implemented by the Board of Management is intended to achieve ongoing enhancements in the early identification of risks with the aim of managing such risks proactively, as well as achieving a continuous optimization in the company's opportunity/risk profile.

Principles underlying risk policy
The generation of economic profit necessarily involves the taking of risks. Nonetheless, no action or decision may entail any threat to the continued existence of the company or of any of its operations. As a matter of principle, the Group does not enter into any risks which relate neither to its core processes nor to its supportive processes. Core processes involve the development and implementation of the respective business models, the procurement of merchandise and services, location decisions, the safeguarding of liquidity, and the development of specialist and management personnel. Any earnings risks entered into have to be justified by an appropriate level of expected return. The relevant key figures in this respect are based on the return on the capital committed. Risks which cannot be avoided have to be insured against, to the extent that this is economically expedient. Residual risks have to be controlled by means of a range of risk management instruments.

Organization and process
Responsibility for risk management lies with the overall Board of Management, which is supported by the Director of Risk Management.

The risk managers at the Group's operations in Germany and other countries are responsible for taking suitable measures to manage the risks in their area of responsibility. The risk managers are supported by a risk controller in the identification and evaluation of risks and in the determination of appropriate measures to manage such risks.

Risks are evaluated in terms of their implications and their probability of occurrence. In cases where they cannot be quantified, they are assessed in terms of their qualitative implications. The target figures used at the Group (including EBIT) serve as basis for reference in this respect.

The risks are updated on a quarterly basis and reported to the Board of Management. The Supervisory Board and the Audit Committee discuss the current risk situation on a half-yearly basis. In addition to this scheduled reporting, ad-hoc reporting structures are also in place for risks arising unexpectedly and have been implemented in the risk management process.

Financial risks
Financial risks comprise foreign exchange risks, interest rate risks, liquidity risks, and credit risks..

Foreign exchange risks
The increasingly international business activities of the HORNBACH Group result in rising foreign currency requirements both for the handling of international procurement and for the financing of objects of investment in foreign currencies. Any change in the exchange rate between the euro and the procurement currencies (chiefly the US dollar) could have a direct negative impact on earnings. Open foreign currency positions which could have a significant influence on the annual earnings of the Group are therefore largely secured by hedging transactions (forward contracts). Risks relating to foreign currency loans are hedged via the earnings of country companies operating in the same currency (natural hedging).

Interest rate risks
Interest rate exchange agreements (interest swaps) and interest limitation agreements (interest caps) have been concluded in order to safeguard the interest rate on existing liabilities. The interest swaps enable floating interest rates on loans to be exchanged for fixed interest rates, thus securing the interest payments on loans which could have a significant influence on the annual earnings of the Group.

Liquidity risks
The acquisition of land, investments in DIY megastores with garden centers and the procurement of large quantities of merchandise require liquidity to be permanently available. The financing of the company's further expansion is secured by the inflow of funds from the operating cash flow and sale and lease back transactions, as well as by bilateral bank loans, a syndicated credit line amounting to € 200 million and not least by the issuing of a bond amounting to € 250 million by HORNBACH-Baumarkt-AG in the 2004/2005 financial year. The information required for efficient liquidity management is provided by rolling group financial planning with a twelve-month budgeting horizon, which is updated on a monthly basis, as well as by a daily financial forecast. At present, no liquidity risks are discernible.

Credit risks
The company limits the risk of any financial loss resulting from the default of a contractual partner by working exclusively with partners of first-class creditworthiness and by selecting banks which belong tothe collective deposit security fund. The company's retail format (cash and carry) means that the risk of receivables default in the operative divisions is already considerable reduced.

Further detailed information concerning financial risks has been provided under Note 34 in the notes to the consolidated financial statements.

External risks
Macroeconomic and sector-specific risks
The dependency of HORNBACH DIY megastores with garden centers on general macroeconomic developments and levels of disposable household income may become apparent in the form of unwillingness on the part of customers to make purchases in periods of low economic growth. In general, the markets of relevance to HORNBACH are subject to differing economic developments. A significant dependence on economic developments in Germany can nevertheless be discerned.

The further expansion into other European countries is intended to achieve an ongoing diversification of risk. Furthermore, the company generates a considerable share of its sales with seasonal articles, whose turnover is notably affected by external factors, such as weather conditions.

Natural hazards
The climate change observed around the world also directly affects HORNBACH locations in Germany and other European countries. In addition to natural catastrophes (e.g. flooding), the HORNBACH Group is also exposed to risks resulting from fire and explosions. The principal natural hazards and any potential interruption to operations resulting from such risks are covered by group-wide insurance policies.

Operating risks
Location and sales risks
Investments in unsuitable locations could have a significant negative impact on the earnings power of the Group. In the interests of minimizing such risks, investments in new locations are therefore made on the basis of detailed market research analysis, with investment decisions being taken on the basis of dynamic investment calculations and sensitivity analyses. The risk of unsatisfactory sales performance as a result of additional factors, such as customer behavior and the local competitive situation, can nevertheless not be entirely excluded. Ongoing investments have to be made in locations and in enhancing customer service levels in order to maintain the company's competitiveness, especially in countries with low market growth and intense competition.

Procurement risks
An efficient early warning system has been developed to avoid the loss of major suppliers. The overall Group has a total of three central warehouses in order to reduce the risk of any interruption to the logistics chain and to optimize the supply of merchandise. In its procurement of merchandise, HORNBACH is subject, among other risks, to that of increasing purchasing prices for articles involving a high share of crude oil, copper or steel as a result of volatile prices on the international commodities markets.

Legal risks
Legislative and regulatory risks
As a result of its business activities in various countries, the HORNBACH Group is subject to various national legislative frameworks and regulations. Legislative amendments may therefore result in a higher level of compliance costs. In addition to risks such as those relating to damages claims due to infringements of patents or industrial property rights or of damages resulting from environmental or product liability, the future earnings situation of the Group may also be negatively affected in particular by any tightening up of national construction laws or by regulations governing the acquisition of land.

Risks relating to legal disputes
In the course of their business operations, the companies of the HORNBACH-Baumarkt-AG Group are
inevitably confronted with judicial and extrajudicial claims on the part of third parties. At present,
HORNBACH is not involved in any current or foreseeable court or arbitration proceedings which could
have any significant impact on the economic situation of the Group.

Management and organizational risks
IT risks
The management of the HORNBACH Group is heavily dependent on high-performance information technology (IT). The ongoing maintenance and optimization of the IT systems is undertaken by highly qualified internal and external experts. The company avoids any unauthorized data access, as well as the misuse or loss of data, by using appropriate up-to-date virus software, firewalls, adequate access and authorization concepts and by maintaining backup systems. Appropriate emergency plans are in place for unexpected breakdowns in IT systems.

Personnel risks
The deployment of highly motivated and qualified employees represents one of the foundations for HORNBACH's success. This pillar of the corporate culture is therefore of great significance for the overall Group. The maintenance of employee satisfaction levels is evaluated by employee surveys undertaken by external service providers on a regular basis. Employee qualification levels are improved on an ongoing basis by means of appropriate training and development measures. In its retention of highly qualified specialist and management personnel, however, HORNBACH is dependent on a variety of external factors, such as overall developments on the labor markets or in the sector.

Overall assessment of the risk situation
There were no risks to the continued existence of the HORNBACH-Baumarkt-AG Group in the 2006/2007 financial year. From a current perspective, there are also no discernible risks which could threaten the continued existence of the company in future or which could encroach on its earnings, financial or net asset situation to any notable extent.

The European DIY sector will continue to provide HORNBACH with attractive growth opportunities in future. Significant momentum is provided in this respect by the economic framework in Europe, sector trends, changes in consumer behavior, and the further development of the company's strategy.

Macroeconomic opportunities
Based on estimates compiled by economists, the global economy will continue to show a high level of growth. At just under 5 %, however, the rate of growth will slow down slightly in the current year and in 2008. Reports of a crisis in the US mortgage market led to uncertainty in early 2007, unsettling international stock markets and providing at least an indication of a potential slowdown in economic growth in America. The direction and strength of future global growth also continue to depend on the development of the oil price, which remains volatile. Although commodity prices were down on 2006 levels at the beginning of the year, the structural shortage continues to apply. The global imbalances reflected in the current account balances of various regions continue to harbor risks for the global economy. On the other hand, shifts in exchange rates or an end to the excesses seen on the US real estate market can be taken as signs that these imbalances are being reduced in a controlled manner. Moreover, in spite of the favorable global environment, the possibility of sudden risks arising, such as a collapse in the dollar exchange rate, drastic hikes in short-term interest rates or a recession in the USA, cannot be excluded. It would then remain to be seen whether the high-growth emerging markets in Asia and the now more robust economy of the European Union would be able to absorb such factors without any further consequences.

The European economy seems to be well on course towards maintaining the pace of growth seen in 2006 in 2007 as well. Based on the interim forecast published by the European Commission (February 2007), the gross domestic product of the EU as a whole is set to grow by 2.7 % in 2007 and that of the euro area by 2.4 %. This represents an increase of 0.3 percentage points compared with the autumn forecast. According to the ZEW (Centre for European Economic Research), the median value of two-year forecasts issued by German bank economists and research institutes for economic growth in the euro area amounts to 2.1 % in each case. The upturn is largely being driven by domestic demand, i.e. by consumer expenditure and capital expenditure. According to the European Commission, favorable expectations as to inflation and positive developments on the labor markets will boost disposable income and thus support consumer expenditure.

With regard to the Federal Republic of Germany, the EU Commission most recently expected to see economic growth of 1.8 % in the current year. The Commission has thus raised its growth forecast for Germany substantially since November 2006, now that it is apparent that the impact of the sales tax increase is less severe than had been feared. According to the Annual Economic Report issued by the Federal Government, the buoyant development of the economy is having a sustainable positive effect on the labor market. Unemployment is expected to decline by almost half a million in 2007, which could then lead to an unemployment rate of 9.6 % (2005/2006: 10.8 %). The ongoing rise in employment levels has a crucial role to play in achieving a gradual and permanent increase in consumer demand. A major wage round is due to take place in the first half of 2007. Given the pleasing economic situation, this will have to involve enabling employees to participate to a suitable extent in the success of their companies, while at the same time safeguarding employment-friendly wage policies to provide the upturn with a longer-term perspective.

Sector-specific opportunities
The retail business with DIY and home improvement products in the core market of Germany has the opportunity in 2007 of benefiting from the ongoing economic upturn and the positive trend seen in the construction industry. Moreover, there are increasing signs that the negative impact of the sales tax hike on consumer expenditure is probably only of a temporary nature and that this will be more than offset by a renewed increase in consumers' propensity to spend in the course of the year. The tangible recovery on the labor market will boost consumer confidence and foster consumers' motivation to renovate, refurbish or extend their own houses and flats. The BHB sector association has forecast marginal sales growth of 1 % to 2 % for this year.

In spite of the favorable overall economic climate, there will be no letting up in the consolidation pressure within the DIY store and garden center sector. In view of the ongoing presence of excess capacity in the German market, which even company mergers or the closure of individual locations which are no longer profitable will only be able to change in the longer term, the competition in terms of price and quality is expected to remain intense. This situation requires companies to be competitively structured both in terms of their business operations and of their conceptual frameworks. Thanks to our unique large-scale retail format and our structural advantages, which are reflected in particular in the fact that we have the highest level of surface productivity among the top ten DIY players in Germany, we also see the German market as harboring potential for further growth. This belief is backed up by several factors.

	The question of overcapacity in the densely occupied German market has to be viewed from a variety of angles. Much depends on competitive conditions in the respective catchment areas. On a local and regional level within Germany, there are still conurbations with below-average coverage with DIY stores with garden centers. We aim to step up our expansion in these regions in future.
	DIY and home improvement stores have still not fully exhausted their customer potential in Germany. This distribution channel covers considerably less than half of the estimated DIY market volume in Germany. The majority of DIY products are purchased in specialist retail stores, at builders' merchant outlets or via other distribution channels. By comparison, in the UK and France, the second and third-largest European markets after Germany, more than half of the demand for DIY products is covered by DIY stores. This indicates that there is potential for DIY stores if they succeed in gaining market share from competing sales formats by means of appropriate customer focus and concepts. We believe that we are well positioned in this respect with our attractive large-scale concept.
	Home improvement and the pleasure gained by consumers from designing their own living space mean that DIY remains very popular as a leisure activity. Numerous home improvement programs on television motivate consumers to improve their homes, flats, and gardens themselves and also to implement larger-scale renovation projects. HORNBACH has a very clear focus on the project customer target group and thus has above-average growth opportunities compared with its competitors.
	Germany still has one of the lowest rates of home ownership in Europe. This is an indication of there being potential to catch up, which could support construction activity, as well as generating higher demand in the DIY sector.
	Construction work on existing buildings (modernization and renovation market) can be expected to be even more significant for medium and long-term demand at DIY stores and garden centers. More than 80 % of flats were built more than 20 years ago. Only one in ten rented apartments was built later than 1990. More than 75 % of rented apartments are more than 30 years old and in many cases fail to meet current standards in terms of living space, comfort, facilities, and energy efficiency. Given that the value of the property will decline unless renovation measures are undertaken, the need for construction services and products can be expected to increase. The renovation sector stands to benefit from two factors in the coming years:   On the one hand, experts estimate that around € 145 billion is bequeathed between generations in Germany every year. Half of all inheritances also involve property. The transfer of such property to the new generation in many cases also triggers a decision to undertake renovation work or refurbishment.   On the other hand, rising energy costs and climate protection mean that energy efficiency is becoming an increasingly important topic, a process which is being accompanied by corresponding legislation. In line with the Energy Saving Ordinance, the Federal Government intends to require house owners to present an “Energy Pass” concerning energy consumption levels at their property from January 1, 2008, thus implementing a corresponding EU Directive. This needs-based energy pass will be obligatory for buildings with up to four apartments built before 1978. The pass provides tenants and buyers of apartments and houses with information on the condition of the building, oil or gas consumption levels, heat insulation, and incentives for renovation. Individuals hoping to obtain support from public sector subsidy programs in future will be required to present their needsbased energy passes.   The modernization market will play a more important role for the DIY store and garden sector in future than at present. With the competence of its range of products and services, HORNBACH has already prepared for this growth market at an early stage.

We continue to see above-average growth opportunities outside Germany. This is due on the one hand to the greater dynamism of economic developments in the foreign countries in which HORNBACH operates. Especially in Eastern Europe, the increase in income in real terms, the ongoing boom in housing construction, and consumers' enthusiasm for home improvement measures provide the construction industry and the DIY stores with garden centers with a promising basis for increasing their sales and earnings. On the other hand, the intensity of competition and number of competitors in the DIY megastore with garden center segment are considerably lower in many countries than is the case in Germany or Austria. Thanks to their attractive product ranges and price structures, players operating DIY megastores with garden centers have succeeded in recent years in expanding their market share at the expense of small and medium-sized domestic retailers.

The success of our business performance in Europe justifies our further international expansion and, by diversifying risks, will make us more independent of the difficult market conditions in Germany.

Strategic opportunities
Our aim is to continually expand HORNBACH's position in the European DIY market by means of organic growth. Our sales and profitability are to be sustainably increased by expanding our internationally successful retail format. This involves focusing on the further strategic enhancement of our concept and the expansion of our store network at locations with above-average growth potential in Germany and abroad. Account will also be taken of the opportunities resulting from the changes in the underlying economic and sector conditions referred to above.

	The company's strategy is focused on the concept of projects. HORNBACH is increasingly able to differentiate itself from its competitors with this approach, which is reflected in its product range, service, and pricing policies. This unmistakable differentiation is necessary for the active promotion of the consolidation process, especially in Germany. Our solid financial resources, our public corporate rating, and the flexibility available to us in refinancing the business on the capital market will enable us to invest considerable sums in differentiating HORNBACH's format in future as well.
	One unshakable component of our strategy is that of a reliable permanent low price policy. We believe that we are better able to retain customers at HORNBACH in the long term by offering them and guaranteeing the best market price on a permanent basis. In particular, our main target group of project customers, who often undertake large-scale renovation work, needs to be able to budget in the long term. This is hardly possible with temporary discount campaigns.