GROUP MANAGEMENT REPORT

Risk Report

Risk management at the HORNBACH Group
The Board of Management of HORNBACH HOLDING 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 proactively managing such risks, as well as continuously optimizing 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 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 support processes. Core processes involve developing and implementing the respective business models, procuring merchandise and services, location decisions, safeguarding liquidity and developing specialist and management personnel. Any earnings risks entered into have to be justified by an appropriate level of expected return. The relevant key figures 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. Risk managers are supported by a central risk controller when identifying and evaluating risks and determining 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
In general, HORNBACH is exposed to foreign exchange risks on account of its activities in countries with currencies other than the euro. Specifically, these involve Swiss francs, Czech crowns, Swedish crowns, and Romanian lei. Any depreciation in a foreign currency against the euro leads to a reduction in consolidated earnings. Furthermore, the increasingly international business activities of the HORNBACH Group result in rising foreign currency requirements both for handling international procurement and for 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 with a significant influence on the annual earnings of the Group are therefore largely secured by hedging transactions (forward exchange contracts). Risks relating to foreign currency loans are hedged via the operating cash flow of country companies operating in the same currency (natural hedging).

Interest rate risks
Interest rate exchange agreements (interest swaps) have been concluded to secure the interest rates 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 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 leaseback transactions, as well as by bilateral bank loans, a syndicated credit line amounting to € 200 million and not least by the issue by HORNBACH-Baumarkt-AG of a bond amounting to € 250 million in the 2004/2005 financial year. HORNBACH is countering the risk of no longer being able to obtain longer-term financing for new locations from banks or via sale and leaseback transactions due to the financial market crisis by temporarily cutting back its investments and by drawing on short-term financing based on existing credit lines. The HORNBACH Group committed itself to comply with specific key financial figures in the context of the bond issue and the agreement of a syndicated credit line. Any failure to do so may possibly result in the immediate repayment of the bond or the termination of the credit line. These key financial figures are monitored on an ongoing basis. 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 in connection with financial investments and derivative financial instruments by working exclusively with partners of good creditworthiness and by selecting banks covered by collective deposit security arrangements. Moreover, bank deposits have been distributed among several financial institutions in order to counter the increase in the risk of bank deposit default in the context of the financial market crisis. The company’s retail format (cash and carry) means that the risk of receivables defaults in its operating divisions is already considerably reduced. Default risks in the builders’ merchant business are managed using active debtor management procedures governing the application of creditworthiness-based limits for customer loans.

Further detailed information concerning financial risks can be found under Note 33 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 could become apparent in the form of unwillingness on the part of customers to make purchases in periods of low economic growth. In particular, the global economic crisis emerging on account of the financial market crisis has created new risks in terms of stagnating or declining DIY sales in the European countries in which HORNBACH operates. Irrespective of this, a major dependency on economic developments in Germany has been identified. The further expansion into other European countries is intended to achieve an ongoing diversification of risk. Furthermore, the company generates a substantial share of its sales with seasonal articles, whose turnover is significantly 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 arising as a result 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. To minimize such risks, investments in new locations are therefore prepared 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 due to additional factors, such as customer behavior and the local competitive situation, can nevertheless not be excluded entirely. 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 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. Due to the current decline in commodity prices, this risk has substantially declined, but is still latently present in terms of the future. Moreover, should the procurement cooperation in place with Kingfisher be terminated as a result of a sale of the shareholding held by Kingfisher, then an overall deterioration is to be expected in the procurement terms for certain goods previously purchased in cooperation with Kingfisher.

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 lead to higher compliance costs. Alongside 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 regulations governing the acquisition of land.

Risks relating to legal disputes
In the course of their business operations, the companies of the HORNBACH HOLDING AG Group are inevitably confronted with legal claims on the part of third parties, both in court and out of court. 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 organization 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. Unauthorized data access, and the misuse or loss of data are averted 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. Ongoing employee satisfaction levels are evaluated in regular employee surveys carried out by external service providers, while employee qualification levels are continually improved 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 HOLDING AG Group in the 2008/2009 financial year. Taking due account of what we believe to be the most probable implications of the financial crisis, no risks have currently been identified which could threaten the continued existence of the company or sustainably impair its earnings, financial or net asset position.