H+H International A/S (HH.CO) Earnings Call Transcript & Summary

All right. Good morning. I think it's 9:00 a.m., so let's start. First of all, thanks for joining in on such a short notice. As you all know, last night we sent out an announcement, and this call is for Bjarne and Jorg to elaborate a little bit on that announcement. The call is scheduled to last 1 hour. Jorg and Bjarne will have a couple of slides, and then we do Q&A after, as a regular conference call.    So, without taking too much time, Jorg, I think we should get going.

Yes. Good morning, everyone. So there's an update we want to give you, and that is especially coming from Germany. And -- so, the market is not in good condition, impacting our results. And -- so I'll talk about the new outlook, but then also more important, actually, what we're going to do about it.    If you can flip the slide, so, just to the very first -- next one. Right. So yes, this is the -- this is in a nutshell the key takeaways of the situation in the company. And so the first really issue is there is a market issue in Germany. And so the assumption, actually, when we went into the year, we didn't expected a growth from Germany, but we expected a certain price volume equation, if you want.    And what we can see now operating after the first half is that this is not coming through. So we started into the year increasing prices that were needed to pass on inflation, but that led to effect where we lost share. And this situation, we cannot -- is not sustainable actually. So we are -- to really keep competitive situation up, we're operating on a different price level than we wanted. So price increase is not coming soon, and that is certainly impacting margins in the company.    And what is the reason for it? The market is still at very, very low volumes. We'll come to that a little later, so I've got some insights for you. So you really can see how different Germany is operating to all the other regions where we are in. And plus, when you read a little bit the news coming out in Germany and the statistics, we just got the information that building starts in Germany, they were historically low. It is actually -- the situation is actually worse than what we were seeing last year, and that is impacting not only the German results, but it has such a big impact on group so that we are changing the outlook.    That's the situation where we are in. is that important? Two options. I mean you can just say we sit and wait, and wait for a better market. And I think everyone knows that Germany needs to build and something needs to happen. The point is, as we are sitting here, we don't see the stimulus coming. Also looking a little bit into next year, even though there's some slight growth actually, that will not justify a position where we keep the organization as is. And that is why we've looked into that what can we do. And we've decided to reorganize the operations in Germany.    Over the last years we've built a national-wide coverage. So the strategy was really to operate everywhere in Germany, build big supply chains all over the country. This we will pause and therefore, change to a regional business setup. And I'll come to that a little bit later how that looks and then also the advantages what it gives.    What this includes is restructuring costs in the second half plus an impairment of assets. So we are definitely cleaning up our German operations to improve the results and especially also making sure there's no further cash drain from that business because at the moment, as we speak, it's cash negative.   And then the third one, also important, this only gets us to a new baseline. And from here, we're going to look into different strategic options we have. Out of a regional perspective, we will look into what is that what we can do to ensure long-term profitable growth from the market that is then also helping to improve the EBIT and the results for the group. So that is actually the steps. You have the situation. You know what we are doing. And then also you know it's just the first step. On top of that, there will be a strategic review of the business, we believe it's needed.    So on next slide, Bjarne has the preliminary Q2 numbers for you.

Good morning, everyone. Just to provide you a little bit of background also to understand where we are and how we see the things. We have the Q2 report in the pipeline to be presented in a couple of weeks.    If we take a look at some of the main KPIs, we have a flat organic growth. We had a guidance range of 5% to 10%, and we have also said that it will be mainly backloaded. What we see in the regions is that in Germany we had a decline in volumes, and that is because we've been trying to increase prices. But it's very [indiscernible]. We have not been able to see a general price increase in the market as such, so we have lost volume.    In U.K., you also noticed that we are a little bit lower on the revenue than last year, but that is due to the big destocking we did last year, where this year is ramping up production volume. So going into the second half, we're confident around the perspective for the U.K. And also the Polish market has delivered well.    On the earnings metrics from gross margin and down to EBIT, you see improvements both for the quarter and for the first half year. And all of that is related to the extraordinary high input costs we had last year. They are on a normalized basis this year and the main driver for this improvement.    And finally, just to confirm the overall situation of the group, the financial gearing was at 2.6x the EBITDA. So it is a ratio we, of course, had intended to bring down with the adjustments we announced yesterday that we are probably more plateauing on this level, but it's not anything that is critical to the group.    With this, I think we can go back and look more into the actions and the background for the situation.

Yes. So here, a little bit of insight actually when you separate situation in Germany, and what we've done here is the 2022 volumes actually, this is indexed at 100%. And what you then can see that all countries literally in '23 went into that issue –- that crisis. So losses of volumes of around 30-ish percent.    Then '24, another setback actually across our markets. So really 2 years we were going into that markets came down. And then -- but you see the magnitude is different, right? And then what happened in 2025, we see recovery of all other regions. This is the green line here. So when you look at all other regions, we are looking into something at 80% recovery of where we were 2022.     So if you want in these markets, we are still operating with 20% lower volumes than we historically had, yes, but it's a completely different trajectory than the German business. German business went further down in 2025, as I discussed. We are down now to 50% of the historic volume. So what you really can see here is -- and it's the only market where we're operating that is taking that direction. So we -- it's half of the business that is left and instead of having a stable development is further going down. And that is the situation.    You can argue and say, well, there are so many improvement efforts going in, and that is true. I mean, just to recall here, in '23, '24, we have taken almost DKK 200 million of cost savings out only in Germany. So massive restructuring, massive change of the organization going in, but all this is not supporting and not helping in a market with such low volumes and even worse, the price level that we're currently seeing is impacting margin. And that is why we think doing further adjustments is the right way.    What you then also can see is actually, we did that exercise here. If you just separate the German business out of group, the rest of group had a double-digit EBIT margin, very close to our long-term financial targets of 12%, including a full headquarter that we are entertaining here in Copenhagen. So from my point of view, it really shows how strong group is in all countries we operate. Germany is our problem. This is a loss-making business, and we believe we cannot just sit here and wait for a better market, but we have to adjust to something else to make it sustainable and then take fresh action from here. That's the situation.    Going next. So this is what we do. Here, you see the German map. So literally from that, as I said, nationwide coverage being everywhere, having a sales team for the whole market. We'rewe're going to reorganize into 6 profit centers. So you can see them here. There is 3 profit centers in the east of the country, Berlin is [indiscernible] one in the south of east, then we have one in the north. Then we have the 11 close to Hamburg, which is also delivering to Denmark. We have one in the rest of the country also delivering to Benelux and then there's one in the south, mainly CSU in the Frankfurt area. So that is the regional profit centers.    What does that mean? We're going to build 6 strong regional units. So with own leadership in the region, sales will be reorganized into the regions. Customer service will be reorganized into the regions. And then on top of that there will be a central back office for service functions. So different setup.    Why do we believe it's right? And what we really want to accomplish here is, I call it sell around the chimney. So instead of entertaining all these supply chains across the country, it's really about making sure we're using the capacity that we've built in the region and doing business with customers in the area very close to the customer and really developing these regional markets. That is the strategy behind it. We believe this will lead to better margins in the regions, plus it will allow us to operate on a lower cost base, i.e., giving us better competitive edge to really perform stronger in the region. That is what we are up for here.    And there were, for sure, questions and it's only fair. What happened with all the stuff we were doing? We were talking about a new ERP system for the whole country. We are driving home and the capacity. All this is still there. It is the same platform we are operating. So we will not change the way we operate, i.e., it's still the same platform from when it comes to ERP and processes, very lean processes. Actually it's very successful project and is running very well.    And to be very clear here, it is only because we have that one platform, we can now reorganize into a profit center structure, ensuring that even though we are executing more local, we're still keeping certain standards across those profit centers. So that will continue helping to -- for performance.    Same for home. So the way we run our plants will not change. That is all there. We know the capacity upside. So all this will be continued executing, but in a different setup.    And then the last point here is, and that leads a little bit into my comment about a strategic review. We also believe that this regional setup, this is an opportunity to further consolidate the market in Germany. It is a flexible structure. And I think from here we can explore various options actually to really build something that is profitable, or prepared for profitable growth long-term. So that is why we believe it is the right move to go into this regional setup.    So next, and this is for Bjarne to give you a little bit what that brings, but also costs financially.

Yes. And as always, it's a game of 2 halves. In such a restructuring programs, we put money in, in order to get the restructuring done. That will have an impact on our reporting in Q3 and Q4, where you see there will be reported special items in the region of DKK 80 million to DKK 100 million, and that is all cash based, will be paid out during '25 and into 2026. That should bring us the benefit already this year of around DKK 20 million and then into '26, around DKK 40 million on top of that, as the plan is right now.    Then, looking at, let's say, the EBIT result, there will be additional benefits from the impairments we are doing. So there will be around DKK 15 million this year, and additional DKK 15 million coming in next year. And this takes us to the impairment topic. We split that into 2. We have looked at the assets, fixed assets and intangible assets. As a consequence of this new setup, we have decided to permanently close Wittenborn 1 and the factory in south called Feuchtwangen. They were sitting with some rather high book values in the anticipation that they would be reopened and the value in use would be higher than the book value. We have decided to impair that.    We still also have factories we've shut down during the last couple of years back to the curve we have presented. We have, of course, had efforts in order to sell that. We have taken another look at the values they booked at. So from a prudent point of view, we have written them further down and we'll, of course, continue to see how we can realize cash out of those assets.    And then finally, before we come to goodwill, that has also been what we call customer relations, which are part of the purchase price from some of the previous acquisitions. But with a loss-making business, it is difficult to defend from a layman perspective. So we have also decided to take a big impairment on those intangible assets.    Then on the goodwill, the IFRS rules are that when we do impairments of other assets, it's also an indication that there is impairment on the goodwill. We have tested it with some new and also more conservative assumptions as we do not see this market recovery in Germany that the previous goodwill valuation has been based on. Based on the new assumptions, which are lower growth, but also lower margins, we do a write-off of DKK 250 million on the goodwill.    And on the more technical matters like the [ bank ] and other issues, it will all be fully disclosed in the Q2 report. But the main message is [ methodology ] unchanged. It is the underlying business where we see that we don't have the same recovery profile as we have assumed in the past.    So with that, back to Jorg for some closing remarks.

Thanks to you. We are -- happy to do so. Happy to take this one. We are adjusting our full year outlook. Organic growth was 5% to 10%. We come in just at 1 year and the half year. So we will adjust it down to around 4%, and it is driven by price deterioration in the German market.    The EBIT is adjusting accordingly, a number of moving items. We came from DKK 120 million to DKK 180 million. We take the price effect from Germany out of that, and then we add in the benefits from the restructuring efforts for the cash one and the non-cash ones. On the assumptions, overall, it is only the German market situation that is changing. On minor changes, we are taking our CapEx a little bit down and then the special items as we discussed on the previous slide.

So, yes, I think I'm ready for Q&A and a lot more people are in this call than expected. Try to throw your hand up and I'll try to pick you out.

There's a question here.

There's one. There's a question from Sebastian.

I have a few questions. I'll just go through them one at the time here. So firstly, I'd like to ask a bit more about the timing and not least the sort of the direction of this reorganization. So needless to say, as you point out, the German market still remains very difficult. However, it's been so for a long time. And now with what seems to be a more pragmatic government, which also has taken steps to improve housebuilding as well as, I mean, prospects of more government spending in general, then why is it now the time to permanently reorganize and permanently close plants?    And then an extension of that, moving back towards a more sort of regionalized setup, you've had a few comments, Jorg, but maybe you could elaborate a bit more. It appears to be contradicting the direction from your one process initiatives. And I was just wondering what sort of -- what was sort of wrong with your initial analysis about centralizing the German setup. That will be my first questions.

Fair enough. So first, why now? I think what really has changed is -- so for this year, our assumption was flat market. But I'd say everyone in Germany I talked to expected something to happen from the new government, see stimulus. There were people saying second half will start improving.    If you look at the sentiment in the market now from the new government, there's no specific initiative of how the situation will be changed, even though they're in office for a couple of months now. I'd say everyone has corrected their outlook, a positive outlook for '25. People speculate about '26, but this what -- when you really see how the different regions are developing, even though with a small growth in Germany next year, the -- it's not justifying actually the -- this setup actually. And that is the situation where we believe it's right now the right timing.    And with that, we are not guiding on '26 here. But the point is we are not very optimistic about a super good '26 actually. But it needs that market recovery so that the whole market [ believes ] that the competitive situation changes, that also allows for price increases again. And it's -- the -- as I said, the other option was to just sit here, wait and accept the loss-making actually. That is another option that we believe it's the wrong option.    And now I come to why the regional setup, I believe is right. But what is first important is for me, we are not giving up on anything we did with the one project. So all these profit centers will operate in that ERP system, will allow us -- also -- it's also about how to steer and lead such a structure. You need financial KPIs, all that. So it's super important that we have that platform. That hasn't changed actually. So it was right to integrate it, to put it all on one platform, to standardize it, having same processes. So that was right no matter how we operate.    The major adjustments we do is -- and that is -- it's major -- mainly a commercial adjustment we do. And it really starts in sales where we actually have salespeople everywhere, we have sales regions everywhere, and then we have a supply chain actually directing the volumes into the regions. This is the major change because here we're going to a regional setup.   So actually, we have the plant in the middle of the market and the idea is we really sell around the plant. And that also means we will give up a couple of regions where we are selling today. But if this is loss-making, there is no sense actually to do that. And so we are really cutting and adjusting to that regional setup. But then at the same time, also being stronger in the region. So that is what we do, but it's not affecting the way we operate. So all the one and the home and all this is still there and is a platform on how we operate.    But it's more the view of having this nationwide going forward thing, because the assumption here was like why are you selling everywhere in the country, is because the assumption was, okay, we're going to open further plants. We're going to invest in capacity here, there. And this is actually cost and we concentrate on what we have in the strong regions. So that's literally the move.[indiscernible] That came with a pause in strategy.

I think next question is from Anders Preetzmann.

I also have a few. Maybe going back to -- I mean, Jorg, you mentioned the difference between the new guidance and the guidance that you reiterated in connection with the Q1 results 2 months ago, is that the price volume equation in Germany which has developed negatively. Can you share what your expectations around this is for the remainder of the year? Do you expect the price pressure to increase in the coming months? Or is the expectation more of a flat development?

From the top line, we still expect that we will be able to gain some of the volume back because we are more flexible on price. So this is the fine balance. But for the time being, when we don't get the volume, then we also get higher unit production cost. And that is what we are trying to balance by saying we allow some flexibility on price, which is why we take the organic growth down, but it is the best way to defend the current levels.

Okay. So maybe then on the guided range on EBIT, since you mentioned it,  Bjarne, I mean, there's a bit of a broad range implied here for H2. Are you able to put some color on what would need to happen for you to end at the lower end and at the top end?

Yes. I would say that is also a little bit based on the other regions where you can say on the high end we -- it's particularly U.K. If they can overperform on their production, that would give us extra volume. We are confident that can be [ sold ]. So that will be the main driver to get to the top end. And if you're looking towards the low end, it will be some market implications from Poland. Right now, we are confident around Poland despite we're seeing declining building permits. For this year, we think the impact is limited, but that would be, let's say -- additional, let's say, a negative impact that would take us to the low end.

Okay. Thank you very much. Going from this national to now, again, a regional setup in Germany, I assume it won't necessarily improve the price competition that you're seeing. I know that your unit cost will likely go down. But if the pattern here in Germany continues into 2026, should we still expect Germany -- if you implement your plans correctly, that Germany next year will also be loss-making?

It depends a bit on what level you look at. First threshold is to make sure that they are cash flow neutral. We know there will be some payout of the special items into '26. If we take that out, we want them to be cash neutral.    Then secondly, you can start to build from, let's say, a positive EBITDA and then potentially also a positive EBIT. But the main driver as we see it right now would more be that we operate on a lower cost base, not that we expect, let's say, that prices will increase overnight just because we changed the approach.

That's exactly the point here. It's -- at the end, it's about making sure we are delivering strong margins on a plant level. Distribution is a big element of our cost structure, right, because the products don't travel well. So it's really about making sure we build very strong customer relationships around the chimney, making sure we are operating at the lowest cost possible, and that gives us then the competitive edge and then also we have improved margins. So that is actually the strategy.    And then what Bjarne is saying, for sure, no further cash bleeding from the region. And then the next level is to make sure there's positive EBITDA development. And then from there also positive EBIT contribution because you have seen from my comment here, it is a big deal when you see that the rest of group, including a full equipped headquarter, is delivering more than 10% EBIT, right? And then the Germany is tracking that down. So everyone can do his own calculation what that number is, and it's a big number.    And this is our clear target and commitment. This is not sustainable, and that is why we are really taking -- we're taking a hard cut here, but with a clear target to make sure that Germany is contributing and not stopping the group from performing.

All right. Thank you very much. Just a final question before I jump back in the queue then. I mean, you mentioned it yourself, but then, I mean, the impairment of DKK 600 million, it seems to me that this is quite a large part of your German entity that you have now written down. I mean, can you maybe share a bit how much of your book value of the German entity that you take out of the books now with this impairment?

Yes. I think if you use it as kind of a gauge, the CWE region represents more than 40% of our revenue, I think at least in the '24 numbers. And as it's acquired assets, or actually older assets in Poland and Germany, the asset base is proportionately higher than just their revenue share. So yes, it is a significant cut, but as I also mentioned, we have had 2, let's say, fairly large factories that has been mothballed. In the current environment, expected sales proceeds cannot be -- are not super attractive. Accounting-wise we need to impair to either net proceeds or value in use. And as we're not using any more, it has to be the sales price. So they are, let's say, the big drivers on that.    But it's also reflecting that we are a loss-making business in Germany and with the priorities on how to recover, it is not something that we expect to just be around the corner. So we have, let's say, taken a stance to say, we need to do this. And hopefully, we've done it in a way, so we don't need further adjustments.

I think Sebastian, do you have another question?

Yes. So I just wanted to revert to the restructuring savings and I try to sort of figure out how they impact the P&L. So you say H2 '25 savings of approximately DKK 20 million, is this solely SG&A? Or is it a mix of SG&A and the indirect production cost?    And also adding to that, I mean, these restructuring savings, are these gross amount savings? Or are these sort of a net amount? Because in my [ years ], it sounds like you are also having to get new people out to sort of pursue this more regionalized strategy. So are these, you can say, gross and net proceeds?