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

Welcome to the H+H International A/S Q3 2025 Financial Results Call. [Operator Instructions] This call is being recorded. I'll now hand over to the speakers. Please begin.

Thank you, and good morning, and welcome to our conference call covering the third quarter of 2025. My name is Niclas. I'm the Head of Investor Relations and Treasury. Joining me today are, as always, our CEO, Jorg Brinkmann; and our CFO, Bjarne Pedersen. Yesterday evening, we published the Q3 report and related materials, including the presentation for this call on our Investor Relations website. Please note that this call is being recorded and will be made available on our Investor Relations website after the meeting. 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 from those expressed or implied. For more information about these risk factors, please see the 2024 annual report. And with that, I would like to hand it over to Jorg with an update on our performance in Q3.

Yes. Thank you, Niclas, and good morning to everyone. Thanks for taking your time and dialing into our earnings call for the third quarter. So please turn to Page 3. And as always, I'd like to share with you a couple of the financial highlights and then the key takeaways. So if you look at numbers, Q3 performance is in line with what we've expected. You know seasonality in our business. The third quarter is usually a stronger one. So we're seeing a 2% organic growth, 24% gross margin and then also EBIT margin of 7% and also positive cash flow. So all these numbers we've expected. When you look into the business, you know that we are reorganizing Germany. We've announced that in July. So we are moving or I have to say, moved into a profit center structure following a regional approach. This is well on track, and we're also seeing cost savings coming through. I'm going to elaborate a little more on that during the call. However, the market is still flat in Germany. So there's no impact from the market, but our restructuring is underway. And then also Poland delivered another strong quarter with really exciting results, I have to say. What happened after we've closed the third quarter, and this leads me to the situation we're in, we were seeing actually a quite significant drop in volumes in the U.K. So until September, a very stable development driven by more activity in the housebuilding market in the U.K. But then the first housebuilders were reporting lower sales rates of houses, and we could see that in the October volumes, and that is impacting our outlook for the fourth quarter and that also led to the situation where we had to correct the outlook for the year. And I'll come to that a little later. Overall, we need to really summarize that market environment is still challenging. It's still volatile. So what we are doing is here making sure that we stay agile, that we are able to react to different situations that we are seeing and driving really the performance of our plants because that is what we can influence. We can't impact the markets, but we certainly can impact stuff we are doing on and the things we have in control. And this is performance in our plants. And for sure, it's also to manage our fixed costs carefully. And this is -- it has been the program for the company, and it will continue to be the program for the company. With that, let's have a quick look into the different markets and the dynamics on Page 4. So what you can see here is development of building permits. And let me start with the U.K. as this is the most critical market at the moment for us. And you can see that registrations actually have developed nicely. So we are seeing a 13% year-to-date compared to last year increase. However, as I said, October was kind of a hard stop actually. So housebuilders were purchasing less volumes, managing their own stock. And this, as I said, based on the lower sales rate they were experiencing. Question is, where is that coming from? And the key point is really for that development, and it always has been, is uncertainty on future homeowner sites. And what's currently going on is that the government in the U.K. has postponed their budget for 2025. So instead of announcing this October, is now announced to be shared on the 26th of November. There's a lot of speculation in the market about taxation rises. And this is really leading to high uncertainty in the market. We can hear that from our customers, but also from other sources. So there's high uncertainty at the moment, and that is holding future housebuilders back. We really need to see what is happening in the 26th November budget, and that will then also determine the future outlook. However, the current lower activity, we expect this to continue at least until the end of the fourth quarter. And that is, as I said, what we are currently dealing with. We're also preparing for shift adjustments. For sure, we always are after managing the demand and the supply side. So we are looking into this, how do we do this in a smart way and always what's guiding us to make sure we are reacting to things we are seeing in the market, but not giving up on the long-term fundamentals and the long-term opportunities. And this is strategies we are currently working on. From the U.K. to Poland, and I think also in this call, we've discussed that actually that we are seeing a decline in building permits. We're talking 15% less permits in the year-to-date, so compared to last year. And this is mainly coming from multifamily houses. So there's developers having also a fairly high stock of apartments they want to sell, and they are also holding back a little here and adjusting their own stock base. So we can see that. However, the pipeline on projects is still fairly strong. So there's a backlog of projects that were permitted and that are currently still executed. So that is why we are also delivering a strong Q3, and we remain also positive for the rest of the year for the Polish market. What's good is actually that just a couple of days ago, the Central Bank has further decreased the reference rate. I mean it's an important indicator. It's impacting the mortgage cost for people. And that is the third cut within 6 months actually, going in the right direction, quite positive stimulus for the Polish market. Well, then comes Germany. So when you look into the graph here, you can see there's a 7% growth in permits after really a long time of decline. So you can say well, it's a first sign in the right direction. What also is happening is that the government has launched a support program, which the old government has stopped. So I think this is also a good sign. It still needs to be approved, but likelihood that this will start in December is high. We need to see and wait a little in how much that will bring. It is an EUR 800 million program. So not super big, but I think every sign that goes into that direction is certainly valued as a positive sign in the right direction. As I said, we need to see how this is impacting the market. So far, it is very flat and also a high competitive environment we are operating in. So for markets, a little deeper insight into Germany. And with that, please turn to Page 5. So this is about the update of our reorganization in Germany. It is well on track. So we were sharing with you that we are transitioning into a profit center approach. So we really want to establish regional businesses that are close to the market. What I can tell you is that structure is in place. So we've shifted from this nationwide more functional organization into that regional profit center structure, making sure all people are in place and then adjusting the processes of the company accordingly. So this is in place. What we're currently doing is, and I think I shared that is really strategy is selling around the chimney. You know that our products don't travel unlimited. So it's really about making sure we are strong partners for our customers within the region, and that is currently undergoing. So we are looking into product programs. It's really products that we want to offer and that we can also make in the region and that also fit the region. We're looking into and evaluating different customer relations. So there's a lot of stuff going on. A lot of stuff is under review, always a clear target to establish profitable businesses also in low-volume scenarios. This is what we are executing. Bjarne will talk about financials a little later. We've spent the biggest amount of our special items already, and we are currently seeing savings of DKK 40 million to DKK 50 million run rate, but Bjarne has the numbers a little later for you. And then also, we've announced that we are executing a strategic review. We have started those discussions. We are believing that the market needs further consolidation. I think this is without doubt. And yes, we are in dialogue with partners, testing different options. But you can imagine these processes takes time. There are things -- moving parts in the market. And so yes, this will allow a little bit more time, but there is dialogues going on to see how we can create further value in the German market. So with that, let me hand over to Bjarne, who will share the financials on Page 6 with you.

Thanks for that, Jorg, and good morning, everyone. Thank you for joining our call. As mentioned on Slide 6, you see a couple of charts. If we start on the left-hand side, that is the quarterly volume development, and we have a 2% volume growth this quarter over the same quarter last year. And when you see the curves, you see, let's say, the normal seasonality you would expect out of our business. The volume growth is then broken down on the right-hand side, so in the most right-hand bar, you can see the split per region. And you can see that the growth is coming from Poland and from the U.K. and then partly offset by a volume decline in CWE, which is driven by Germany. Overall, the prices, they are on par with last year. But when you dig further into it, you see that we have this organic growth of 2%, so nothing coming from prices, but prices are slightly up in Poland. Then number-wise, they're flat in the U.K., but that is due to customer and product mix. So there's no changes in the pricing in the U.K. despite the changed market situation. And then we'll have a lower price in CWE, again, driven by Germany, just in line with the assumptions we have for our financial outlook. Overall, it leads to a revenue for the quarter of DKK 738 million. Then on the next slide, which is #7, we have a little bit on the margins. Gross profit came in at DKK 179 million, that is equivalent to a gross margin of 24%, which is in line with the third quarter last year. There are some changes in some of the underlying drivers. As Jorg mentioned, Poland is performing strong. We have a better factory utilization in the U.K. this year than we had the same quarter last year. And those 2 things, they are offsetting the negative impact we have from Germany. We also see the first financial benefits from our restructuring costs. It's not specifically visible here, but it is in the numbers, and that is as there are lower indirect production costs the simplification of the supply chain setup in Germany. And if we move to the next slide, we have more details on the restructuring, as Jorg already alluded to. We have in this quarter posted special items, which is all cash related to be paid out here in the third, fourth quarter or first quarter of next year. DKK 43 million we put into the restructuring program so far. For the full year, we expect to spend between DKK 50 million and DKK 70 million, but we have some kind of buffer in there because referencing to Jorg's comment, there are ongoing initiatives, and we will have to see how they play out. The anticipated savings, they will be between DKK 15 million and DKK 20 million this year. So that would be in the indirect production cost and in SG&A. In the third quarter, some is in the production cost, and you will see more in the fourth quarter where it will be more visible on the SG&A as well. And then into next year, there will be a top-up to the numbers Jorg mentioned. So compared to this year's cost base, it will be additional DKK 25 million to DKK 30 million as a payback on the investment into the special items. So in summary, we expect to spend less than we have originally announced and the savings expectations, they are adjusted accordingly, but the ratio remains the same. And then as a reminder from the half year report, we also have some benefits from the impairments we posted in the second quarter. It goes under the depreciations. So we have a benefit of DKK 15 million this year, and then we have another DKK 15 million to come next year. With that, I will hand over to Niclas to look at the cash flow.

Thank you, Bjarne. Please turn to Page 9. If we take a look at cash flow from operating activities before financial items and tax, this came in at DKK 115 million in Q3 compared to DKK 170 million in the same period last year. The cash flow in Q3 were mainly driven by a positive operating results and seasonal development in working capital. As a reminder, Q3 last year was impacted by significant destocking, which weighted on cash generation at that time. Noncash adjustments primarily reflect changes in provisions, mainly related to the ongoing restructuring efforts in Germany. Beyond that, cash flow were limited to interest and tax payments as well as DKK 26 million in CapEx. Consequently, we ended the quarter with net interest-bearing debt of DKK 779 million, corresponding to a net debt-to-EBITDA ratio of 2.5x. Now please move to Page 10 for our financial outlook. As announced on October 23 in company announcement number 587, we have revised our expectations for organic growth to around 0% compared to the previous guidance of around 4%. We also adjusted EBIT before special items to a range of DKK 85 million to DKK 115 million, down from the previous range of DKK 100 million to DKK 150 million. With that, I would like to hand it back to Jorg, who will finish the presentation with a few final remarks. Please turn to Page 11.

Now let me conclude with what has been said. So financials for the Q3 came in as expected. That is good. The U.K. is certainly -- the sudden development came quickly. We've reflected that. And I think it's important to take away that we are reacting to it and preparing for it. Poland, strong underlying fundamentals, attractive results, happy to have this being part of our business. And then Germany, still weak market, but the reorganization is progressing well. And then with all we do, there is challenges around us everywhere. We are proactively managing them. And then in all we do, we always are not losing sight for future opportunities. So I think that is important. So we're taking decisions that are relevant for now, but also keep opportunities open for market pickups and stronger demands that we will see. And with that, let me open the call up for questions.

[Operator Instructions] And our first question will be from the line of Anders Preetzmann from Danske Bank.

I have a few, and I'll start with a question on the U.K. market. So you mentioned a hard stop in orders from the U.K. homebuilders here in October. I was wondering if you are able to quantify this in any way? What does a hard stop mean?

Yes, Anders, so we've built that into the organic growth guidance, but certainly, it's a significant double-digit drop actually.

Okay. That's very clear. And what -- say, if this were to continue into 2026, what would that mean for the profitability of the U.K. business?