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

My name is Rasmus Køjborg and on behalf of Hans Christian Andersen Capital, I would like to welcome you all to today's event. We will focus on the German business of H+H International. With me today to tell us more about the operations in Germany, I have the pleasure of welcoming Managing Director of Central Western Europe, that's Paul Schipper. Welcome Paul. And also welcome to you, Michael, CEO of H+H International. And before I hand over to you, I would also give a warm welcome to all those of you participating in today's events and those of you who've signed up. As usual you can ask questions in the Czech in the lower right and we'll take those questions after the presentation. And of course, we record the presentation here and upload it later on our YouTube channel for you to watch again. But with that, I will leave it to you, Michael and Paul. Please go ahead.

Thank you very much Rasmus and I'll just introduce Paul by starting off with a short introduction of H+H. So Rasmus, if you will show the first slide, here's an overview of -- we call it H+H at a glance, where you can see the 2020 financial highlights. We see that the company had a revenue around DKK 2.6 billion in 2020 and an EBIT around DKK 332 million. We are currently running 31 factories in the Northern Central Europe. It's a company that has grown mainly through acquisitions, starting with only a handful of factories back in the late '90s and now reaching 31 factories, of which we have only -- that whole increase of which we've only built 2 of the factories ourselves. So it is a company that has grown through M&A and has been restructuring markets. And if we look at the 3 regions we're in today, we have a very strong position in United Kingdom, #1 position with more than 40% market share. And in Poland, we have also a very strong #2 position, market share around 20% to 25% in both the product groups that we are marketing. We are marketing aircrete as the majority of our sales that we also have since 2018 been active in the CSU, calcium silicate unit business by entering into these markets in Poland and Germany. The consolidation started with heavy M&A started back in Poland in 2015. And we have been building the acquisition up until today and we started a bit later in Germany, where we started making the first acquisition in 2018. And Paul will now start talking a bit about that. The only thing I would say is that we are still in the process of optimizing our footprint in Germany, but we have acquired and are in the process of implementing factories, which when it's fully implemented, will have tripled our sales in Germany since 2017. And it is a market -- it's the biggest building material market in Europe, this market where we have big expectations. But I'll leave it to you, Paul, to explain a little bit more about the Germany and also about the German market. So I give it to you now, Paul.

Thank you very much, Michael and Rasmus, and thank you all who are listening into this -- to this call. And let me indeed proceed with the next slide, which you can see now, as Michael said, there has been quite a history and a growth journey, thanks to merge and acquisitions. And here, you see the development of our presence in Germany from 2017 to 2018 to 2022, where in green, you see the aircrete factories. In blue, you see the calcium silicate factories, and in red, you see sales and administration offices, with the main office for the CWE region to which Germany belongs in Dusseldorf. And on the left side, I just made a recap of the steps that have been taken. And as Michael already announced, it started in Germany with a big acquisition in 2018 of the Heidelberg calcium silicate business, which meant 8 calcium silicate plants, of which 1 in Swiss and then followed by a joint venture in calcium silicate. In 2019, in Dresden, where we achieved 51% of the shares follows quickly after by another joint venture in Laussnitz in an aircrete plant, also having 51% of the shares. And these plants are close together, roughly 20 minutes driving from each other. And last year has also been quite dynamic, I would say. We acquired the Feuchtwangen assets. And the Feuchtwangen plant is located in the south of Bavaria. I get back to that in the slides further on. And we have just acquired the majority share control of combined CSU plant called DOMAPOR in the Northeast of Germany in Hohen Wangelin, close to [ Vostok ]. So just to give you a flavor of what has happened in Germany over the last periods and as you see, we have transformed from a small player to a real player having national coverage in the whole country. If I just allude a bit on what is our business, here you see in principle the 3 main products for wall building. It's aircrete blocks AAC in the abbreviation. It's ceramic blocks also called clay and calcium silicate blocks abbreviation CSU. And we, as H+H Germany, are active in both aircrete and in calcium silicate. And both product types have their own properties. Aircrete is very good for thermal insulation because it supports -- it really isolates really well buildings. If you look at calcium silicate, it's a more dense product and it has a high density and compressive strength and also as we found that it is fairly good in regards to acoustic insulation. So we as H+H are both active in AAC on the left side and on CSU on the right side. If I then go on to the importance of AAC and calcium silicate for the German wall-building industry, that is the next slide I would like to show you. You see that the share of AAC and CSU in the German market has increased from 20% in 2010 to 33% in 2020. So the share of both product offerings has really increased, which is good news. You see also on the right side. Aircrete specifically has grown from 15% to 18% and CSU from 13% to 15%. So that means we are in a good place with our products because the importance is increasing in the market. If I then go on to some more details on the markets in AAC and CSU. In Germany, there are currently 29 operating plants in AAC and a bit more, 77 is CSU. In our current footprint, after having completed the DOMAPOR acquisition or the majority share means that we will have 6 AAC plants, 9 CSU production lines. And that means that we will be #2 in AAC and having 20% market share after the ramp-up of Feuchtwangen and our upgrades and we will be #3 in CSU, having 30% market share. Looking at the other players Xella is #1 in AAC and also in CSU. And then we have, especially in CSU, Unika BMO, the combination having 16 CSU plants. We have Porit who owns 4 AAC plants. And in the South of Germany, there's Zapf with 5 CSU plants. So this underlines again, what was shown in the previous slide that we really have reinforced our position in the German markets, thanks to the acquisitions. If I then go on to the next slide, it shows a bit of the market dynamics in Germany. And I think that's good to elaborate a bit on that. If you look at the GDP development in Germany, it's quite positive for the next -- for 2022. Depending on who you talk to, the growth is foreseen between 3.7% and 4.8%, meaning that the country will probably come out of the corona situation by the end of 2022, which is positive. Another message is that the unemployment is really low in Germany. That's 5.1% in December of last year, 2021, which is low, that is even lower than it was 1 year before, where it was 5.9% in December. So that means people have a job. People have money. Of course, the downside is -- there's a shortage of labor in general in Germany. We see that in all sectors. Another important factor is that the interest rates are low or even negative, which means that there is an appetite for investments also in property. An important, I would say, characteristic of the market is that there is a shortage of housing. That is caused by mainly 2 factors. One is that there's an influx of mainly young people to the big cities, which means that there's high demand for smaller dwellings and smaller households. And the other major factor is the immigration, which, of course, also leads to a higher demand for housing. And it's important to have a look at the graph in the middle. Here you see the permissions that have been issued per year for new buildings. Important to mention, this is not dwellings because a building can have more dwellings, but this is based on buildings. And here, we see that in 2021, there was something like 152,000 permits being issued, which is an increase compared to the year before, as you see in the graph. And there was a peak in March. And you might wonder what is this peak. That was the ends of a specific Kinderbaugeld (sic) [ Baukindergeld ] subsidy, in which people got money depending on how many children they have in their family, when they will build a new house. And therefore, there was a rush of permits by the end of March. But in general, we've seen in recent years that the number of permits is increasing. And that means with 152,000 building permits, you would hope that 152,000 buildings would be built and completed, but that's not the case. There's a backlog in the number of buildings being completed. So last year, 137,000 buildings were completed. That's roughly 10% less than the number of permits being issued. And at least the fact that there is a backlog in completion, which is a bit more clearly shown in the right-hand diagram. In the bars you see again, the number of permits issued. And in the line, you see that the backlog is increasing in a number of permits that are not being completed. The estimate is roughly that the backlog is 2 years in permits, not being converted into completed buildings. So that's also a good, I would say, aspect of the German building market. There is quite, I would say, large amount of permits that still have to be completed, which is good for us. If I then go on to the next slide, if you're with me, I mentioned the 2 recent acquisitions that we have completed. And one is the acquisition in the Southern part of Germany for Feuchtwangen, which elaborated on the left side. And this is a very important acquisition to us strategically because we are already present in the North with 2 plants and we already have the plant in East in Hamm and with a joint venture in Laussnitz in 2020. We also increased our presence in the East. And now with this acquisition itself, we are all around the place. We have full coverage of Germany, which is really good for us. It also gives us the opportunity as the sole provider in the South to have a combined offering of CSU and AAC, which is really a strong asset to us. And last but not least, with this factory in the South, in Feuchtwangen, we cannot only supply Germany, but we have possibilities to go into the Czech markets and also to supply the Benelux to some extent. So all in all, a very good strategic acquisition for the group. And we are now in the middle of the process of integrating and ramping up this plant and bringing it to our quality and recipe standards. Then the DOMAPOR acquisition, where we have acquired the majority of the shares, as briefly mentioned. And we have 52.5% of the shares. We are now in the closing. And this factory has 2 production lines, one for CSU and one for AAC. And together with Feuchtwangen and with DOMAPOR, we will achieve the market shares that I mentioned in one of the first slides. And this is really a strong addition to our factory network. Talking about the factory network, I have my last slide, which I would like to show to you. Here, you see our current network, and I would like to focus specifically on AAC. As also mentioned in the press release, we are in the phase of upgrading our major plants in Wittenborn in the North. We have big upgrades and maintenance in which we will increase the automation of the plant. We will reduce the energy reduction and the scrap levels. That's part of a large investment plan that we have. It's good to mention that H+H is really investing massively in its plants and keeping them up to standards. But it means that this plant will be shut down for a couple of weeks. And it was very good that we have the other plants in our network. So we will be able to utilize the capacity of DOMAPOR close by. And we will be able to use the capacity of Feuchtwangen to support both Hamm, Laussnitz and [indiscernible]. And also because Feuchtwangen is very close to Laussnitz they can act as some kind of backup for each other. So these upgrades are really important to us for the future. They're strategic, and they will add to long-term value to us. And we can do these things because we have this expanded network at the moment which we really see as an asset to our company. I hope I've given you the bird's eye view of the company in Germany, what we're doing, why we are acquiring other businesses and how our set up is, and I look forward to answer your questions. Thank you.

Thank you very much for the presentation, Paul. And yes, as you said, we are ready to take on some questions. And I can see there's a few during the presentations here. We could start with this one on the market share of seller. If we go a little bit back to this slide, we get a feeling of the 60% market share on AAC [indiscernible]. Someone is asking here if it gives you any difficulties with the competitor of this kind of size?

Well, there's always competition, which is good, but we do not see it as a real problem or issue. We have high-quality products. We have a full offering. And what we see as a strength of ourself is that we are in a certain way, culturally still, I would say, [foreign language] it's a saying in Germany. That means you're really close to medium-sized companies. That means we have a very strong network of salespeople who are close to our customers, and we are successful in selling our products there.

If I may add, Paul, I think when we started out on this journey some years ago, the AAC market in Germany was very fragmented. And therefore, there were many competitors bidding for the same customers. If you look at the consolidation that we have now achieved, you take only H+H instead put that together. That is now 80% of the market. And if we include the third largest, we are 91% of the market. And that is, in general, a much better situation when we talk about operating in the market and being profitable than having a multitude of smaller competitors competing for the same customers.

Absolutely. And I might also ask one of the other questions, answer that. There was someone asking here. Do you see room for further consolidation? And I guess in the AAC, it's hard to see that you could any more consolidated than this.

Yes. We still -- I mean you still see that a lot of, I would say, family-owned businesses in Germany that's all specific for the market structure. We always keep our eyes open for other possibilities. At the moment, we're, of course, very busy integrating the 2 acquisitions we've done. But we always are monitoring other options as we've done before. So I don't think we're really at the end. But at the moment, we are very happy with the 2 acquisitions we've done.

From my perspective, just a comment on it is that we actually set up to get to a level of 20% market share in Germany, and we have reached that right now in a market that is fairly consolidated. But it doesn't mean that we will not be, as Paul is mentioning, willing to do more. And we're always on the look for more, but we do not have a strategic necessity. It will be more an effort to optimize our footprint and make it more profitable. But the strategic intent is fulfilled, especially on AAC, where we are still in the situation on CSU, where we could further participate where we can see others is a fairly large market share.

And also looking at this slide, looking at sort of the total production -- number of production plants in Germany is 29% for the AAC and almost triple that on the CSU. Just to get an understanding of the market and the production, why is that? Could you put a few words on that, Paul, perhaps?

If you look at the CSU products, they're much heavier than the AAC products. So it means transportation is much more costly. That means that limits your radius of operation. Therefore, the network is much more scattered than it's in AAC to a larger dimension.

Very good. And talking about the transportation costs, I guess that has been one of the struggles also for '21 for most companies. And I guess you also experienced the inflation here. And also one is asking on the rising energy prices. And I guess also your input for the production has also risen. Have you been able to pass on those extra costs on the prices? Yes.

So far, yes, and we have to do it because as you correctly say, we see a lot of input costs increasing. It's energy, it's transportation, it is new. And we must pass that on to our customers. We'll be doing that.

Very good. And maybe jumping on to this slide you had on the market dynamics. There was also a question here. And maybe we should -- maybe just to outline the question sort of like when there was the German federal election in the autumn of 2021, the SPD later formed the government and also with its leader, Olaf Scholz, [indiscernible]. I think they went to the election on something on affordable housing. Maybe a few words on that and also give us an update on whether that was just part of the election? Or is it something that will actually materialize here in '22?

Good question. What you see is that, in general, I mean, the construction industry cannot cope with the demand. The aim of previous governments has always been to complete 350,000 dwellings per year. Last year it was 310,000. For this year, 320,000 is anticipated. And the new government wants to complete 400,000 dwellings per year during its legislation. And I think that's quite ambitious. It's 30% more, but of course, it's good. And they want to focus on -- especially on standardization and more modular construction. That's one of the elements that's been highlighted to reduce the costs. I think that, that fits in also with a lot of our products. We have multi elements in AAC with [indiscernible] blocks in CSU. Those are the larger formats and that means it makes more efficient for builders to construct a house. That's on one side. On the other side, it's also necessary to make it more efficient because there's a shortage of labor in the construction market, specifically. So with products that's been 1 grid, you can install 1 square meter in a house. And that's the development we're also in. We have product for that. But having said that, I think there is -- the plans of the government are not yet detailed. It's more, I would say, a very clear outspoken ambition which we fully support, of course.

Very good. And I think in the article at least I've seen, I think, they mentioned a number around 400,000 housing units compared to there was 137,000 that was delivered last year. Was that correct?

137,000 is the number of buildings, which if you convert -- it was 310,000 dwellings last year. And the prognosis for this year is that will be 320,000 so far, still away from the 400,000 that is set by the government.

Very good. And maybe jumping on a little bit to the last slide you had here, sort of on the upgrade of the plant in Wittenborn. Could you give us a little bit on the cost part of this and what kind of upgrades it will be? And is there any risk, of course, to this in doing these upgrades, anything that we should look out for here in the coming months?

These are big projects. And that's really welcoming that the group is investing so much in Germany because that's really our aim, as I said before, to keep it to the highest standards both on safety, energy consumption, but also in automation. We need to automate in our plants also to cope with the lack of skilled labor. So these are large investments for which the group is committed. Other risks, yes, always, I would say, complicated, but we have good teams around it. We have experience. We have done upgrades in the past. So I'm quite sure that we will mention that.

Good. And would you perhaps also have excess supply on this that you can see some of the factories are quite close to the borders of some of the surrounding countries of Germany. Is that the case?

Well, it's a good question. If you look at the Wittenborn plants in the North also very important to the Nordics. So they supply Denmark and Sweden, especially the factory in Hamm in the East is supplying the Benelux. So these plants are important also in the whole region, Central Western Europe and not only for Germany. Talking about capacity, with these upgrades, we also want to increase our capacity, reduce overtime. And if you look at the Feuchtwangen plant there, specifically, we see potential to produce more to support.

And looking at this overview of the factories, it comes just to my eye that DOMAPOR is sort of the only one with a combined AAC and CCU production. Just to get of understanding for what is the reason for that? All the other factories being solidly on 1 product, no synergies?

To be honest, I don't know the real reason behind it And I mean [indiscernible] plants. There are some synergies in operating 2 product lines together. For instance, your boiler house, you can have 1 boiler house for 2 plants. But in general, if you look at our plants, we have specifically in AAC such a large, I would say, capacity that we have capacities of -- economies of scale because our AAC plants normally are bigger than we have in capacity than in DOMAPOR. So we take our plants just from there.

If I may of course, if you look at the full span of our footprint, there's only 1 factory in our footprint that is going to be similar because we are investing in establishing a production line in Poland at our most Northern AAC plant up close to the Gdansk. And then as Paul is saying, there are synergies in a sense that you can have the same energy source. And there are also some similarities on the processes, which means that there are commonalities in raw materials, you use sand for both products. You can use the same sand source. You can also use at least the same lime supplier even though you use different qualities. And the process optimization, you can also get some synergies here because there are quite a lot of commonalities in the way we produce the products. But for historical reasons, it has not been common to integrate the 2 different production lines. And I think it's more historically based in terms of coming there. And right now, it's only us and Xella that are, as you say, so integrated in having both product lines. For most of the other competitors, they are either aircrete block or calcium silicate.

And there was a follow-up question here from the audience on being the hub for neighboring countries, establishing production and expanding into these countries. But perhaps we can go back to the slide where it might be a little bit small, but we can actually see that you have some kind of footprint, not the same size as Germany, but of course, into Austria. I believe it in Czech Republic and the Benelux. Is that correct?

Yes. We do not sell in Austria, but it is into the Czech Republic where we sell. And then that is an option for us to expand further into that market through some of the capacities we have both in Poland and in Germany. And we're already doing so for Benelux. And we have for years not had any production in the Nordic countries. Everything has been supplied from the South, most of it from Germany.

Very good. I think we're running out of time. So I think we're about to conclude. And with this overview, it's a good opportunity. So thank you very much, Paul, for an interesting introduction to the German markets.

Thank you.

And also thank you for your support here, Michael. It's been very interesting. And with that, I'll just conclude for today. I wish you all a happy day. Thank you very much.

Thank you very much. Have a nice day.