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

Welcome to the H+H International A/S financial report for the full year of 2019. [Operator Instructions] Speakers, please begin your meeting.

Good morning to everyone and welcome to the conference call for H+H Annual Report 2019. My name is Peter Klovgaard Jorgensen, and I'm the CFO of H+H. With me is CEO, Michael Andersen; and our Investor Relations Manager, Cristina Rønde Hefting. We will take you through the presentation, which is also available on our website. And the website (sic) [ webcast ] is recorded and will be available after the call on our website. On Slide 2, there is the agenda for today's call, a short summary about H+H. And I ask you to pay attention to the disclaimer on the forward-looking statements. As we go to Slide #3 and the highlights for the year 2019. Overall, we are very pleased with the strong performance for 2019 and the record high EBITDA of DKK 539 million, which is an improvement of 31% over last year. EBITDA margin reached 19%, an improvement of 3 percentage points based -- compared to last year, cementing a very strong operational performance throughout 2019. The revenue was DKK 2.8 billion, which is a 13% growth compared to 2018. This was driven by the acquisitions made in '18 and '19 and organic growth for the year of 6%. EBITDA and EBIT ended at the high end of our latest guidance, significantly above 2018, leading to an impressive ROIC for the year of 20%. CapEx ended at DKK 159 million, of which DKK 33 million was noncash IFRS 16 related. Net debt ended at DKK 407 million, equaling a financial gearing of 0.8x EBITDA. With those highlights, we will move to Slide #4, where we have the revenue allocation for the year. With the divestment of Russia, we will no longer report on Eastern and Western segments, but instead start to report revenue split on countries and product lines. The U.K. continues to be our biggest market, representing 31% of our revenue, closely followed by Poland with 27% and Germany with 25%. Other markets consisting of Nordic, Benelux, Switzerland and Czech Republic comprised 14% of revenue, and the divested entity in Russia represented 3% of our revenue. So we maintain a fairly equal revenue split across our core markets and strong market positions in each market as #1 or #2. In terms of product lines, aircrete is still the main product line for us with 71% of revenue, whereas CSU represents 29%. We have also disclosed gross profit split between the 2 product lines, and this is nearly the same split as revenue. On Slide 5, we have highlighted our strategic advancements during 2019. We have completed 2 acquisitions in Germany near Dresden. They provide us access to the aircrete and calcium silicate markets in the eastern part of Germany, with good access to Berlin and Czech Republic. Acquisition price for the 51% of both entities was DKK 120 million, and it was paid in cash. Also, we succeeded in the divestment of our Russian entity. Enterprise value was DKK 96 million, resulting in a net gain of DKK 1 million reported in special items. In connection with the divestment, there was a recycling of historical foreign exchange translations from equity reserves, resulting in a noncash, non-equity impact in financial expenses. This represents DKK 121 million, whereas the net proceeds of DKK 117 million is paid in cash. On Slide 6, we take a closer look at the revenue for the year and for the quarter. As mentioned, overall revenue growth for the year is 13%. All markets contributed to the growth and all markets benefited from increasing prices, and in addition, U.K. utilized some increased capacity following the Borough Green upgrade. For Q4, we experienced a stable development in the aircrete markets but saw a slowdown in the German high-rise market. Q4 '19 was also negatively impacted by the divestment of Russia, resulting in only a 1 month of revenue in the quarter. Finally, Q4 in 2018 was positively impacted by destocking in the U.K. Moving on to Slide #7, we take a closer look at earnings for the year and for the quarter. The year ended at a record high EBITDA of DKK 139 million and DKK 366 million in EBIT, which are both significant increases over last year. As previously mentioned, we have been positively impacted by good price developments and product mix, return on investments and operational excellence and favorable input costs driven by procurement efforts. For the quarter, we ended DKK 17 million above 2018, which is mainly driven by the impairment of fixed assets in Russia in 2018. Set that aside, Germany and Poland were negatively impacted in 2019 by lower volumes, partly offset by increased pricing. And U.K. is positively impacted by product mix, offset by stock movements in 2018. On Slide 8, we see a strong net debt reduction of DKK 188 million despite the inclusion of IFRS 16. The reduction is mainly driven by the strong operational cash flow of DKK 369 million, partly offset by DKK 126 million cash CapEx and DKK 124 million in total impact from IFRS 16. The positive impact from divestments is nearly offset by the cash flow related to acquisitions. By end of year, financial gearing was 0.8x EBITDA. Finally, it's worth mentioning that we, in beginning of 2020, have utilized an extension option to extend the finance agreement by 1 year, with maturities now in 2023. On Page 9, we have gathered the financial key figures for the fourth quarter and full year. A few items to highlight is the impressive gross margin of 31% for the quarter and full year, driving the strong EBITDA and EBIT performance. We will continue to drive towards maintaining such high gross margin, but 2019 is seen as extraordinary. Special items of DKK 8 million relates solely to the net gain on divestment of Russia and to acquisition-related costs. In 2018, special items related to acquisition costs and transportation costs related to Borough Green upgrade. Profit before tax is negatively impacted by the one-off noncash recycling of FX reserves related to Russia, which has no impact on equity. Profit after tax is impacted by a tax expense of DKK 55 million, of which DKK 70 million is current tax for the year. Total equity increased by DKK 371 million to DKK 1.371 billion as per 31st of December '19. This equals a solvency rate of 50%. Moving on to Slide 10. We would like to pay attention to ESG. Doing business in a sustainable way is an integral part of our activities. Our products are eco-friendly and provide comfortable, safe and healthy buildings with excellent indoor climate, thermal insulation, fire resistance and good acoustic skills. Health and safety have continuously been a focus area for us, and sustainability is increasingly on our agenda. Therefore, we have for some time disclosed ESG-related statistics, and as a consequence of our increasing ambitions, we have decided to put forth specific targets for ESG. We feel it's the right to do for our shareholders and stakeholders. We will initially set 4 targets: frequency of accidents, where improvement target is a rolling 50% reduction from 6 in 2019 to 3 in 2024; energy consumption per cubic meter, where reduction target is a 7% reduction by 2024; water consumption per cubic meter, where reduction target is 5% by 2024; and sickness absence, where reduction target is 9 days -- is -- reduction target is to 9 days by 2024. We believe these targets are relevant and ambitious, yet realistic. And to ensure success, we will be allocating DKK 50 million over the coming 3 years towards ESG-related investments. On Slide 11, we would like to comment on the market outlook for 2020. In general, we do see continued high activity levels across all markets for first half of 2020. However, for second half of 2020, despite continued demographic undersupply, we must realize that visibility is low. Specifically for the U.K., we expect a flat to modest growth as activity levels continue to be high. There are positive signs following Brexit election, and we see continued high activity from volume house builders, and there are indications of pickup in the builders merchant markets. For Germany, we expect a flat market with a high activity level, but the labor constraints are causing increasing order portfolios and continued undersupply. In Poland, we expect continued growth, but increasing competition from new CSU capacity and AAC parallel imports. On Slide 12, we have listed our expected investments, including the previously mentioned CSU factory in Reda in Poland. Also, we expect to do upgrade investments in the acquired CSU plants in Poland and to initiate conversion from PFA to sand in the U.K. Finally, we expect to invest in our AAC factories in Germany, mainly for maintenance and introduction of new products. Overall, we expect higher CapEx than previous years, leading to a slight increase in depreciations. In addition, we expect to continue our strategic acquisitions, in particular, around the restructuring of the German market, but also to pursue further growth in the European market and the adjacent markets. This leads us to the financial outlook for 2020 on Slide 13. Revenue growth before acquisitions and measured in local currencies is expected to be in the range of minus 2% to plus 2%. EBIT before special items is expected to be between DKK 300 million and DKK 360 million. Investments, excluding acquisitions, divestments and IFRS 16 effect, are expected to be between DKK 140 million and DKK 180 million, including investments for establishing a CSU production line near Gdansk, Poland and Reda. The expectations and basis for the outlook for 2020 are driven by following assumptions: the outbreak of the coronavirus will not have severe impact on construction activity levels or our supply chains, Brexit will not lead to a significant decrease in demand, continuous stable economic growth in H+H geographical footprint, the excellence programs continue to deliver improvements, and finally, energy and raw material costs expected to rise at levels exceeding inflation. Finally, on Slide 14, we would like to confirm the previous long-term financial targets: being an EBIT margin of 11%, ROIC of 12% and financial gearing between 1 and 2x EBITDA. We will also reiterate that we expect to use free cash flow to develop the existing business and to execute on the pipeline of strategic growth initiatives. Should such pipeline not exist at some point in the future, we will look into making shareholder distribution through dividends and share buybacks, but this is not the case for the time being. With that, I would like to open up for Q&A. Operator, will you begin?

[Operator Instructions] We have a question from Laurits Kjaergaard from ABG.

A few questions from my side. I think I'll take them one by one. The first one is in regards to your detailed segment information, which I see you've sort of changed a little bit here. Now not talking about revenue in the different areas and also on the product group, along with gross margins on the product group. Is this something we will be seeing on the quarters? And is there any way that you also deliver this information historically? That's my first question.

Yes. So following the divestment of Russia, we had only one country left in the Eastern region. And as a result of that, we decided to close down the historical segment reporting. So going forward, we will disclose revenue split by country and by product line and also maintain the gross profit per product line.

Okay. Your administration costs in Q4 of around DKK 50 million implicit seems a little bit high relatively to historic patterns. Is there any one-off here? Or what should we -- or is this sort of a new level for 2020?

I think, overall, expected continued levels will be in the same area as for 2019. So there are a few one-off items in the Q4.

And what are they?

These are mainly related to the administrative cost in our subsidiaries, and in part, in the head office.

Okay. Are we talking DKK 5 million or is it less than that?

Would be in that range.

In that range, okay. And then my last question, discussing sort of gross margin here and the category management system that you successfully implemented in 2019. In 2020, you discussed that, obviously, the gross margin of 30% was strong in Q4 and you expect this to continue. Can you also achieve 30% in 2020? Is that implicit in the EBIT guidance that you're giving?

For '19 -- 2019, we had a 31% gross profit. And what we all say is that, that is on the high side of what we can expect going forward. And overall, we know that we have had favorable negotiations and the input costs in 2019, and we would expect some headwind on that. So therefore, you can say the low point of our guidance also includes a setback in the gross profit.

Okay. In the high point, is that maintaining the gross margin that you realized in 2019?

Yes. It would be in that range, yes.

[Operator Instructions] Our next question comes from the line of Kristian Johansen from Danske Bank.

Yes. I would like to pick up on the topic we just discussed. So on cost inflation, can you just quantify how much -- on a group level, what's your cost inflation in 2019? And what is it you expect for 2020?

We have not, as such, provided guidance on our cost inflation overall. So therefore, I would not like to do that as such. What we are hinting is that, for 2020, we expect input cost increases that exceeds the normal inflation rates.

Okay. And one on your sales prices, what is the assumption here? Because, obviously, you did get a nice positive effect from increasing prices in '19 as well, I assume. Are you expecting prices to continue up but at a lower level? Or how should we read your guidance in net terms?

Yes. So overall, across our markets, of course, we are very focused on our sales prices. In the U.K., we see more slow developments. But of course, in 2019, we have been driving price increases, in particular in Germany and Poland. We do expect to get continued flowing of that as we have the carryover effect. But we must also see that, in Germany and in Poland, we do not expect the same price increase levels as we have done in 2019. The German market is -- there is a higher degree of uncertainty in general when we look in particular towards the second half of the year. And in Poland, we have increased competition in the CSU and in AAC, so we also expect that to have some impact on our growth projections, of course. But nonetheless, we will continue striving for improved pricing, but with a spread in the outlook.

Okay. And in terms of capacity increases, you mentioned that you have a competitor who increased capacity in Poland on CSU, and you have your own Reda expansion as well. Are there any other capacity increases in your key markets for 2020 we should be aware of?

Overall, as such, the capacity is, besides these, fairly flat. As we also mentioned, 2019, we had a slight capacity increase in the Borough Green factory. But we don't expect any further capacity increases in the U.K. Similarly, in Germany, there are no new factories being built.

There has been -- this is Michael speaking here. There has been 2 minor, minor increases of capacity in Germany, one in the aircrete was a very small increase that can easily be absorbed by the market, and then also a small increase over in the northwestern part of Germany on CSU, in an area where we are not selling.

Okay. And then, Michael, now that we [ heavy ] on last year, you did promise us you would close an acquisition, and you managed to in one of the last days of the year. How many acquisitions do you strive for in 2020?

I don't want to give any targets on that because that was hunting me all the year that I even off record almost told you this, and I said that it was 1 to 2 and we did actually close 2 last year, Kristian. I just want to remind you that. It was not only one. But we have a pipeline, and I think that is important. And there is still ways to go when we talk especially about Germany because the tipping point for us is that we believe that we have to get to a market share which is in the area around 20%, giving, say, the 2 largest players in the German market, AAC, a market share above 80%, and we think that is a bit of a tipping point. It's not a case where you can either depend on success on everything you do. And it's also difficult to predict which of those activities will actually succeed because it's still family-owned businesses. But we are making progress and we do believe that we will succeed eventually. I don't want to give you a timing on it this time, Kristian, but we are quite determined on the strategy, and we can also see that it works.

All right. Fair enough. And then, I mean, on your Slide 12, on the M&A activity, you highlight Germany as you just described here, but you're also talking about new markets and product lines. Just want to get a sense of how progressed that is. I mean would it be possible to you to close negotiation already this year in a new market? Is that what we should think about? Or is this more a reflection of your longer-term strategic thoughts?

I think that would be a stretch, but I will not rule anything out. But what I will say is that, that when we put it in the slide, it's because we are working on this in parallel. And we cannot wait, you can say, forever on this particular situation in Germany with a EUR 500. So we are working in parallel also with expanding according to the overall strategy. And for us, it's a scale game that we are running and H+H is still a fairly small player in the market. What we can see in '19 is that we have had these scale advantages, both in terms of pricing, but also in terms of sourcing, which makes us very confident that we need to continue on that journey.

Okay. And then my last question is on the coronavirus. What have you seen so far? And what risk do you see?

We have not seen any disruption in any of our markets from the coronavirus in terms of our business. Of course, we are taking all the same precautions that everybody else. It means that we are very limited in our own traveling. And we are, of course, implementing the same measures that everybody else in terms of helping limit contamination. We find ourselves in a situation that our processes are not calling for us traveling very, very extensively or intensively by air. It's only a few people in our organization who do that. The business where we have is, you can say, quite evenly dispersed around -- across our footprint with many plants. It means that we are not depending on one plant and being vulnerable for that being closed down suddenly. If you look at the application of our products, it's mostly used in the outdoor environment. People are not in confined spaces when they work with it. So we find ourselves in -- of course, in a totally different situation than many other businesses. Having said that, it's also in the outlook. We have not, in our outlook, looked at a situation where we would get disruption in our supply chain or where we would get close down of building sites. That's not in our outlook. But I would say that when we talk about lack of visibility in the second half, that lack of visibility is, of course, related to the macro economy. And we think that one of the impacts on macro economy could be this situation, obviously. So when we look into it, we are more thinking about our ability to absorb inside our guidance a slowdown, potential slowdown in the second half.

Okay. Sure. And just in terms of your sales process, how much is that driven by your sales force needing to take physical meetings with customers? I.e., obviously, if -- I mean if customers are limiting the amount of physical meetings, could that potentially hurt your sales?

I would say not in the short term. We have 2 different types of sales. We have the pull sale and the push sales, and the push sales is what I think an area which could very much move to, based on already established relations, where we take orders either electronically via EDI or phone or other, also old-fashioned methods. So if, for instance, we are forced to limit that power, we could easily do so. Then on the projects, when we're out selling projects, we have to remember that the sales per project is fairly high. So it means we don't have a lot of people traveling around in the landscape talking to customers when we talk about our pull sales. And of course, if we end up in a situation where we are not going to be able to take meetings, if that was the case, it will also be easy for us to build on already established relations and also to talk to the customers, say, electronically.

There are no further questions registered at this time. So I hand back to the speakers for any closing remarks.

With that, thank you very much, and have a great day.