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

Welcome to H+H International A/S H1 2025 Financial Results. [Operator Instructions] I will now hand it over to your speakers. Please begin.

Good morning, and welcome to H+H International conference call covering the first half of 2025. My name is Niclas, I'm the Head of Investor Relations and Treasury. Joining me this morning is our CEO, Jorg Brinkmann; and our CFO, Bjarne Pedersen. Yesterday evening, the half year report and related documents, including the presentation for this call was put on our Investor Relations website. During today's call, management will present the H1 financial report, after which there will be a Q&A session. The call is scheduled to last a maximum of 1 hour. Please note that this conference call is being recorded and will be made available on our website after the call. Before handing the call over to Jorg, I would like to direct your attention to the disclaimer on Page #2. Please be advised that this call will include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially. For more information about these risk factors, please see the 2024 annual report. And with that, over to you, Jorg, with an update on our performance highlights in Q2.

Thanks, Niclas, for the intro, and good morning, everyone. Thank you for dialing in. So over to Page 3 to share some highlight events of the Q2 execution within our group. First thing we need to talk about is certainly the German market. In Germany, we are still faced with very low volume and very low building activity, and I'll come to that in a little bit -- on that a little more throughout the call. I said it's the most challenging half actually. And in combination with that, it is the low volume environment, which we expected actually, but it is really a very tough competitive environment. And resulting from that, prices are under pressure. This is impacting margins. And what we've seen throughout Q2 execution is that this is not only impacting the earnings from the German market, but also impacting the group and that at the end led to a change in the outlook for the year, unfortunately, also for group. When you look at that situation, for sure, you can sit here and say we are a cyclical company, and you can just wait, but if you have a business that is cash bleeding and that was the situation in Germany, we thought it is the right move to react, and so that is why we've decided to reorganize the operations in Germany. And what we basically did, and you're going to see a little bit more details later, is changing from a model that had national coverage, I mean that was the plan, to a regional structure. And I come to that back a little later why we believe that is the right setup for the time being and also how that will improve the operations in Germany. This can be seen as a first step. What we also have initiated and communicated is a strategic review of the business. What is important for us is that we are really building businesses that have the chance to develop profitably. And so that is why we're also looking into strategic options we're having in the German market to establish businesses that are able to operate on a profitable level long term, even in lower volume scenarios. And this is what we are currently executing. That is Germany. And it is really interesting to see that all other markets where we're operating, despite Germany, are progressing. Markets are developing nicely, earnings coming through. So this situation in Poland, volume is growing, very strong EBIT returns from Poland. We are very happy with what's going on in Poland, very strong business and a very strong contribution to the group. And then also in the U.K., we are seeing good demand coming through. We ramped up the network. So since a couple of weeks ago, our plants are back to 24/7. And now, we are driving output of the network to really meet that demand in the U.K. But overall, very positive market conditions and also good returns coming from the U.K. A little more specific look into the market activities on Page 4. So as you know, we are monitoring building registrations in the U.K. and permits in Poland and Germany. It's a really good indicator for what's going on in the market. If you look into the U.K., there is good drive for more registrations. So you can see that really since middle of 2024, this is coming through. We have positive sentiment from the housebuilders. We are living strong partnerships with these companies. So a fairly positive business environment. And then, just a couple of days ago, the Bank of England has cut further the interest rates down to now 4%. It's the lowest number we have seen in the last 2 years, actually, so quite encouraging. So it's a nice combination, I'd say, where government is really committed to new build. The interest rates are also going in the right direction. It's a good environment for new build. And so market outlook is positive in the U.K. Over to Poland. And there's one watchout area we certainly need to see here, and that is when you look at the permits, actually, in the last couple of months, we see a small decline. So key question is how is that impacting our business. It is basically larger developers slowing down their activities, but they do that on a basis of a solid backlog from the permits from last year. So from what we can see now, actually, we see there is a pipeline that looks solid, and we are monitoring that. But overall, strong development, and again, also strong industry performance and really attractive margins coming from the Polish business. And you can see we delivered a 5% organic growth. It's the only region where we really can see some nice contribution of a strong last year already. Then, over to Germany, if you follow that blue line here, which is literally the 3 months rolling of permits, you can say, well, it's improving, but it is just back to a 0%. So the message here is not further falling, which is good, but we haven't seen this triggering event that we were seeing in the U.K. and Poland. If you really look and study the graphs carefully, you can see these triggering events in the other markets that has really changed the business environment. We don't see that in Germany yet, and the building permits are on a historically low level, unfortunately. You know there's new government in place. We've also talked about the EUR 500 billion special fund that the government wants to invest over the next 10 years. But so far, we haven't seen specific instruments actually. And so that is also why we are certainly for this year are not very positive about the market. And then the question will be, how is that developing into next year? So far, there's no signs for recovery where we can see this triggering event. Turning to Page 5, gives you a little bit more insight on how the businesses are developing. So what you really can see here is the separate effect of Germany and then all the other regions. And you can see that the development really took a completely different track. So the German market is down to 50% of the activity that we had in 2022 before the crisis, whereas you can see that all other regions, so this is the other regions we are operating in, they are back on an 85% execution of the volumes of 2022, and that tells you a lot, actually. So that means there's a 35% gap in volume in the group, and that is certainly the key issue we are faced with here. You know that we were doing a lot of restructuring already in Germany. I mean, we closed plants in the first wave, but with that move here, the 50% and also an outlook that is not great, that is what led us to the decision to further adjust and especially making sure we are not further burning cash and we are establishing a way to transform also the German business into a profitable business. The number that is, from my point of view, remarkable is when you exclude the impact of the German operations, our EBIT would be a double-digit number and fairly close to the long-term financial targets, which means without Germany, we are operating on a 10% to 12% EBIT margin, showing how healthy the business is in the U.K., Poland, but also in Denmark and Netherlands, which we are supplying from Germany. We have good growth rates and also attractive margin levels, actually. It's really the German problem that we need to address. And that leads me to Page 6, where we want to elaborate a little bit more on what we are doing in Germany, yes. So what you really can see here is that we -- instead of operating everywhere in Germany and delivering nationwide, we've decided to change the business model and in the future run 6 different profit centers in Germany, which you can see here on the map. The idea is to, I call it, sell around the chimney. So it is really to establish strong local businesses close to the customers, making sure that the market and the factory is perfectly matched to each other and allowing actually to generate attractive businesses with customers that are close to the plants and that with products that fit to the market instead of running nationwide supply chains, which actually was in the current market environment, we believe is not the right setup. So we are changing that. There will be these 6 profit centers, local leaders, and then, we're going to drive these fixed profit centers. I think what is also worth mentioning here that from the one in the very north, so the plant north of Hamburg, our plant in Wittenborn, that is also where we're supplying Denmark. As I said, Denmark is developing very nicely, good growth rates, good market environment here. So this is part of the northern cluster, if you want. And then also the Benelux, which we are supplying from the factory in the Western German part, is also part of that cluster to really make sure that the volume follows the profitable way actually. So this is how we have set up the new organization in Germany. We will for sure be a back office for administration tasks. And then, I think it's also a question we got here because we invested a lot of effort and also money in, let's say, integrating the business in Germany and standardizing it. We talked about the 1 project you heard about home before, all this is still valid and still there. So we are not giving up on that. So there will be functions ensuring that we are living high standards in all those 6 profit centers that we are operating. But we just believe, number one, we are getting closer to the markets and we are in a better position to improve profitability on a regional base. Plus, second, we're going to cut cost, Bjarne will elaborate on that, and we will operate on a lower cost base actually. And these 2 things, we believe, is a right recipe to establish a more healthy business in Germany. And with that, handing over to Bjarne to share financial numbers with you.

Yes. Thank you, Jorg, and good morning to everybody on the call. On the next slide, there is a topline view, both in regards to volume and revenue. If we start on the left-hand side, we can see that the volumes there are slightly down. As mentioned, Poland running to expectations, so a tick on that. In the U.K., we last year did destocking in the second quarter. We have not had stocks this year. And as we are ramping up production, we had a lower volume this year. And in Germany, it's more the underlying market situation, as Jorg has already addressed. All that pans out on the revenue line, as you can see to the right. So it's really about finding the right price volume equation in Germany, where we have higher prices in the second quarter this year compared to the second quarter last year, but the price is down compared to Q1 this year. And that's, let's say, where the numbers really start to look into the root cause of the situation in Germany. And with the move, it's about getting into the right point in the matrix between volume and price and doing that on a regional basis, should set us up for a better position. On the next slide, we can see also how that plays into the margins. If we compare to last year, you see a nice improvement. We need to bear in mind the destocking and then also, let's say, normalization of input costs is driving our margins up and then somewhat offset by this price development in Germany. So compared to last quarter, it is flat. And we are, of course, working on the situation getting more output out of the U.K., and better setup in Germany should also improve the margins. So on the next slide, we have the cash flow, and Niclas would you like to elaborate on that?

Yes. Thanks, Bjarne. If we look at cash flow from operating activities before financial items and tax that came in at negative DKK 19 million in Q2 '25 compared to DKK 80 million last year. As expected, we saw a modest stock build in Q2 and along with scheduled payouts creditors towards the end of the quarter. Beyond that, cash outflows were limited to interest and tax and about DKK 25 million in CapEx. As a result, we closed the quarter with a net interest-bearing debt at DKK 837 million and financial gearing at 2.6x net interest-bearing debt to EBITDA. On the next page is an overview of the financial impact from the German restructuring. In Q3 and Q4, we will book special items of around DKK 80 million to DKK 100 million for the restructuring program. This is all cash based and will be paid out during '25 and '26. The benefit starts already this year, about DKK 20 million in '25 and up to DKK 40 million on top of that in 2026. On impairments, we expect an additional EBIT benefit of around DKK 15 million this year, plus another DKK 15 million next year. On impairments, we have permanent -- we have closed permanently Wittenborn 1 in the North and Feuchtwangen in the South, which were previously mothballed factories. Both had high book values expecting reopening, but we're now writing them down. We also revalued other closed factories and taking further write-downs where needed. Second, customer relations. These are intangibles from past acquisitions with the business still loss-making, we're writing those down as well. And finally, goodwill, under IFRS rules, other impairments trigger a goodwill test using more conservative growth and margin assumptions, reflecting no near-term recovery in Germany, as mentioned before. We're writing off DKK 250 million. These actions reset the asset base to more realistic market conditions and put us on track for sustained EBIT improvements from this year onward. And then over to you again, Bjarne, for our financial outlook.

Yes. Just thanks for that, Niclas. And just rounding off with the adjustments we did a couple of weeks ago, we reduced expectations for organic growth to around 4%. It was previously 5% to 10%. And on the EBIT, before special items, we are in the range of DKK 100 million to DKK 150 million, where we previously had DKK 120 million to DKK 180 million. So that was both the retrospective and then also the forward-looking things on the financials. So with that, back to Jorg for finishing off the presentation.

Yes. Thanks, guys, for the financial update. Yes. Let me conclude on Page 12 with really the key takeaway. Basically, there's 3 things that are worth mentioning. Number one, it is really the -- I really must say the really challenging and bad situation in Germany that is forcing us here to act and then impacting earnings. The second is our key focus is really on Germany, changing the operations as described from national to regional, and operating on a lower cost base and then doing that strategic review. So Germany is a key focus area because as you really have seen from the numbers, it is the market we need to change. And then finally, and that is actually a motivating point from my point of view, is really strong performance in Poland. Really nice to see the results coming through. And then also the U.K. with some really good outlook, the ramp-up making progress and seeing all factories now firing, too. So that is certainly a market that is going in the right direction. And then finally, for sure, without the German effect, a group EBIT of 10% to 12%, that is a motivation for us to also work on the German case to make sure the overall group is performing on an attractive level. And with that, let me open the call for questions.

[Operator Instructions] The first question is from the line of Anders Preetzmann from Danske Bank.

I have a few on the assumptions that you've applied for the impairment test on the goodwill. You mentioned it briefly here on the call, but in the report, it says that you go from assuming a 9.3% revenue CAGR from 2025 to 29% to now just 2.8% CAGR, which I think at first glance seems at the low end of what one could expect. So can you please share some more insights regarding your assumptions on this? Does it have to do with you taking out capacity of the CWE market? Or is it purely driven by you expecting no rebound for the time being in Germany, essentially meaning that German new builds should just stay flat for the next 5 years? Or how do you see it?

Thanks for the question. It is, let's say, set in a level where we are -- as communicated, we don't see any triggers in the short to midterm. So we are not building up a lot of expectations that this is going to come back fast. Of course, there are uncertainties around it and also in particular, if you look out 5 years in such a model, it has quite some lever how much to take out in -- to the right-hand side of such a model. We have taken approach where we say we don't want to get into a problem where this is something we are adjusting on a half year basis or anything like that. But with the data we have, there are data supporting we are on a fairly flattish level. Of course, there will be a little bit normal inflation and so on, but only time can tell whether this is spot on or we are being too conservative. But we are comfortable with this outlook being the right one to apply in order to have a proven valuation of our goodwill. And then we also have some headroom, as we are announcing the strategic review with a lot of options, it could also mean that there would be some volume loss coming from that.

Okay. And then also on the gross margin assumptions, I mean you just alluded to it a little bit, Bjarne, but what drives the lower gross margin expansion in particular? Is it just the lower growth rates? Or is there anything else? Is there pricing pressure? Is there anything else driving that?