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

Welcome to the H+H International A/S 2021 Annual Report. [Operator Instructions] Today, I am pleased to present CEO, Michael Andersen; CFO, Peter Jørgensen; and Investor Relations Manager, Andreas Holkiaer. Speakers, please begin.

Good morning, and welcome to H+H's conference call and presentation of the annual report for 2021. My name is Andreas Holkiaer, Head of Investor Relations and Treasury. Joining me on this morning's call is our CEO, Michael T. Andersen; and our CFO, Peter Klovgaard-Jørgensen. Yesterday evening, the annual report and supporting documents, including the presentation for this call, were published and uploaded to our Investor Relations website. During today's call, management will present the annual financial report. After which, there will be a Q&A session. Please note that this conference call is being recorded and will be made available on our Investor Relations website after the call. Before handing over the call to Michael and Peter, I would like to direct your attention to the disclaimer on Page 2. And assuming that you have all read that, I will hand the call over to Michael.

Thank you, Andreas, and good morning to everyone participating in this call. Today, I will go over a few highlights from the year before moving on to an update on our sustainability efforts and our strategic progress. Peter will then provide an update for our core markets as well as additional color on the financial performance for the year and our financial expectations for 2022. But first, please turn to Page 3. 2021 turned out to be a remarkable year for H+H, our employees, customers and partners across all our markets. The annual report released yesterday evening showed the strongest ever financial results in the history of H+H, with strong organic growth and solid earnings margins. It was also a year in which we made important strides on our continued growth journey with 2 additional acquisitions in Germany. Finally, we also reached an important milestone on our sustainability journey by committing to an ambitious 1.5-degree science-based emissions reductions target. These fantastic results are, to a large extent, the result of the continued dedication of all H+H employees. And I would like to extend my sincere gratitude to everyone in the organization. Now please allow me to go over a few highlights from the year. Organic growth amounted to 13% compared to negative 6% in 2020, driven by a swift recovery of the European construction markets due to high activity and strong demand across all markets. EBIT was DKK 408 million compared to DKK 332 million in 2020, corresponding to a strong EBIT margin of 14%. And the profit for the year amounted to DKK 321 million. Our free cash flow of DKK 265 million, excluding acquisitions and divestments, illustrates a continued strong cash flow, which can be used to fund our continued growth strategy. And finally, financing gearing remained low at 0.6x EBITDA, comfortably below our long-term financial target of 1x to 2x EBITDA. Next, I will provide an update on our efforts within sustainability on Page 4. With the release of H+H's first separate sustainability report in 2020, we committed to achieving net 0 emissions from our products and operations by 2050. We also promised to develop emissions reduction road maps and have these submitted for verification under the science-based target initiative. Today, I'm proud to present that H+H has, as the first producer of AAC and CSU products, committed to an ambitious 1.5-degree emission reduction target. As part of this process, we further commit to 2 midterm targets, which will take us a long way on our path towards reaching carbon neutrality by 2050. Towards 2030, it is our ambitions to reduce our Scope 1 and 2 emissions by 46% and our Scope 3 emissions by 22%. We are confident that this commitment will not only make an important contribution in the fight against climate change, but also adds significant and sustainable long-term value to our business and to our shareholders. Turning now to an update on our strategic journey on Page 5. Since 2014, it has been a key strategic ambition for H+H to take part in the consolidation of the European white-stone market, with a primary focus on Germany and Poland. Through strong strategic execution, we have consolidated our position in our chosen markets. And we have laid a solid foundation for continued growth and long-term value creation for our shareholders. During 2021, we made meaningful strides on our continued growth journey with the acquisition of one aircrete factory in Feuchtwangen in Germany as well as the acquisition of 52.5% of the shares in DOMAPOR. The recent acquisitions provide us with a critical mass and a unique geographical presence across the country, with the ability to efficiently supply the entire German white-stone market. This important milestone serves a testament to our targeted M&A strategy and ongoing investments into further upgrades, aimed at increased production efficiencies. Growth through acquisitions will remain on our strategic agenda, and we maintain a pipeline of potential acquisition targets. To meet the drivers of future growth, we will also invest in the optimization of our production platform. Through targeted investments, we will upgrade and expand our existing factory network, with a clear aim of harvesting efficiency gains to drive further organic growth, while at the same time reducing our overall environmental footprint. The expansion of our product offering with other wall-building materials may potentially also offer relevant growth opportunities. Certain wall building materials have similar sales channels and therefore offer potential synergies. Our markets remain characterized by the longer-term effects of a structural undersupply of housing. Further, we are seeing ever-increasing expectations of more sustainable and climate-friendly buildings throughout the building life cycle, from the use of raw materials, production and supply chain, to the energy efficiency of both new and existing buildings, as well as safe and healthy indoor environments. H+H is strongly positioned to take advantage of these longer-term trends, and we will be investing in further advancing that position over the coming years. We also see interesting opportunities of using our technologies in other product categories and new product segments within the construction industry. This includes the continued development of products suited for energy renovation as well as products targeting efficiency improvements for our customers. Innovation will therefore be a key factor in our pursuit of these opportunities. We will strive to remain a key partner to our customers and work on the lifetime performance of our products. And we will explore options for expanding the commercial range. This concludes my prepared remarks. And I will now turn the call over to Peter for an update on our core markets and a review of our financial performance.

Thank you, Michael, and welcome from me as well. I will start by providing an update of the situation in our key markets, starting with the Central Western Europe region on Page 6. In Germany, macroeconomic indicators point to favorable conditions for the housing market in 2022, but there is an underlying risk of potential interest rate increases. The German government remains supportive and recently increased the targeted number of annual dwellings to 400,000. However, the considerable shortage of skilled labor remains a key challenge. In the early months of 2022, activities have been high, with strong demand in H+H factories running at full capacity to service customers. Our efforts to consolidate the German white-stone market have paved the way for significant sales price increases. Generally, customers are accepting these price increases, and they are being phased in over the coming months. Integration of newly acquired factories is well underway, with a factory in [indiscernible] already running at full capacity. The factory in Feuchtwangen continues to ramp up capacity, and we expect it to reach the targeted run rate capacity by mid-2022. In the Nordic countries, demand is strong and macroeconomic indicators point to continued high activity in 2022. However, we remain watchful of the shorter-term challenges from a general shortage of raw materials and transport. In the Benelux countries, the number of building permits issued has been steadily increasing over the recent years, underpinning the positive demand outlook. Finally, the Swiss economy is also recovering following the downturn caused by the pandemic, albeit at slightly lower rates than previously as supply bottlenecks and COVID-19 restrictions are putting a strain on economic growth. Next, please turn to Page 7 for an update on the U.K. market. Also here, macroeconomic indicators point to favorable conditions for the housing market in 2022, but there is an underlying risk of potential interest rate increases. The British government remains committed to solving the country's housing pricing -- prices and recently reiterated its target of delivering 300,000 dwellings annually. The country faces several challenges related to its workforce, which is forcing the construction industry to modernize. We see great potential in the British MMC initiative and have products providing improved efficiency at the construction sites. Customer interest in these solutions is strong, and we will continue our efforts to market these products to the British market. Generally, our British factories are running at near full capacity to service our customers and the very high demand. As previously communicated, we are converting our U.K. factories to use sand instead of PFA, which is becoming increasingly difficult to source. These upgrades will not impact production capacity. We are continuously working on optimizing our factories to increase efficiency and production output. Further, with the solid long-term prospects for the British housing markets, we see opportunities to further expand our British production capacity, but maintain our view that firm commitment from the government and from our customers are needed before major investment decisions are taken. Sales price increases have been successfully negotiated with customers, and these are now being implemented. Before dialing into the financials, please turn to Page 8 for an update on the Polish market. Following the very strong fourth quarter, macroeconomic indicators point to continued favorable conditions for the Polish housing market in 2022. The strong demand seen in the fourth quarter has continued into 2022, supported by the relatively mild winter weather. Further, pricing has continued its positive trajectory and starts 2022 at a higher level. Our factories are running at near full capacity to service our customers and high demand. It is expected that one competitor will open an additional CSU production line during 2022. But given the high market activity and the strong demand, it is expected that the additional capacity can be absorbed. The expansion of our AAC factory in Reda with an additional CSU production line is well underway and production start-up from the factory is expected for Q3 2022. Next, please allow me to take you through the financials for Q4 2021 and the full year 2021, starting with the revenue for Q4 on Page 9. Total revenue for the quarter increased by 14% to DKK 731 million, with organic growth of 11%. In the Central Western Europe region, revenue amounted to DKK 349 million compared to DKK 297 million in Q4 2020. Organic growth for the region was 13% as a result of both higher sales volumes and higher sales prices in both product segments. In the U.K., revenue was DKK 193 million compared to DKK 188 million in Q4 2020. Organic growth was negative 4% as a result of lower sales volumes compared to an extraordinary Q4 last year were partly offset by higher sales prices. For Poland, revenue amounted to DKK 189 million for the quarter compared to DKK 157 million in Q4 2020. Organic growth in Poland was 24%, driven by both higher sales volumes and higher sales prices in both product segments. Now please turn to Page 10 for a few commit -- comments on the full year 2021 revenue. Total revenue for the year increased by 14% to DKK 3 billion, with an organic growth of 13%. Organic growth was mainly a result of the recovery of the U.K. market and the year-on-year higher volumes following the national lockdown in 2020. Revenue in the U.K. amounted to DKK 884 million compared to DKK 639 million in 2020. Organic growth was positive 34%, mainly due to higher sales volume, and to a lesser extent, due to higher sales prices. Excluding the U.K., organic growth was 6% in 2021. Revenue in Central Western Europe amounted to DKK 1.4 billion compared to DKK 1.3 billion in 2020. Organic growth was 6%, mainly driven by higher sales prices in both product categories, but partly offset by lower sales volumes. This was primarily a result of the harsh winter weather seen in the beginning of the year as well as capacity being constrained by upgrades performed during 2021. Revenue in Poland was 337 -- DKK 737 million compared to DKK 716 million in 2020, driven by both higher volumes and higher sales prices. Organic growth was 6%, mainly driven by higher sales prices for aircrete and higher volumes for CSU, partly offset by lower CSU sales prices. Now please turn to Page 11 for a breakdown of our full year cost items. Our cost base remains highly resilient, with approximately 75% of cost of goods sold being fully scalable to production. Nearly half of the costs relate to direct production cost, which comprise raw materials, energy and other direct production costs. During 2021, we have seen increase in cost for transport and energy as well as for raw materials, which were primarily a result of higher cost for emission allowances on cement-based products. We have, to a large extent, been able to mitigate these cost increases through strong procurement efforts and solid hedging policies. As these trends are likely to continue, a key focus in 2021 has been to further strengthen the procurement processes and harvest efficiency gains in the production process from our ongoing continuous improvement program. Further, the acquisitions completed in 2021 will help mitigate higher transport costs arising from having to ship products from suboptimal locations, as seen during 2021. Moving now to Page 12 for a review of our quarterly earnings. As previously mentioned, H+H faced an increasing inflationary pressure and higher transport cost, which is adversely impacting earnings margins. This effect is primarily driven by 3 main factors. Firstly, we have seen increases in the prices of certain raw materials, mainly cement, limestone, pallets and plastics foil. Second, we have experienced higher transport costs in the U.K. and Germany caused by the continued high demand pressure, leading to shipments from suboptimal locations. And finally, during the course of 2021, H+H has been conducting certain plant upgrades and maintenance of 2 of our factories in Germany, resulting in relatively lower production output from the factories in the period. These upgrades have also resulted in increased transport costs as H+H has had to ship products from other production facilities and often over longer distances. Together, these effects are adversely impacting our margins. Gross profit for the fourth quarter amounted to DKK 216 million, representing an increase of 10% relative to Q4 2020. This corresponds to a gross margin of 30% compared to 31% in Q4 2020. The relatively lower gross margin year-on-year is mainly due to the higher production costs, and to a lesser extent, higher transport costs. EBITDA before special items increased by 11% to DKK 139 million compared to DKK 125 million in Q4 2020, representing an EBIT margin -- EBITDA margin of 19%, which is on par with 2020. Finally, EBIT before special items amounted to DKK 94 million compared to DKK 74 million in Q4 2020. This corresponds to an EBIT margin of 13% versus 12% in Q4 2020. Now please turn to Page 13 for a review of our full year earnings. Gross profit for the full year 2021 increased by 8% to DKK 905 million compared to DKK 836 million in 2020. This corresponds to a gross margin of 30% compared to 31% in 2020. The relatively lower gross margin year-on-year is mainly due to higher transport costs, and to a lesser extent, higher production costs. EBITDA before special items increased by 13% to DKK 591 million compared to DKK 521 million in 2020, representing an EBITDA margin of 20%, which is on par with 2020. And finally, EBIT before special items increased by 23% to DKK 408 million compared to DKK 332 million in 2020, representing the highest-ever EBIT for H+H. This corresponds to an EBIT margin of 14% versus 13% in 2020. While inflation and higher transport costs are clearly impacting our earnings margins, we remain confident that these are short-term effects. We will therefore continue to implement a firm pricing discipline, which includes flexible pricing agreements with links to the increasing cost pressure. And we maintain our ambition to defend a gross margin of at least 30%. On Page 14, you will see the bridge from EBITDA to free cash flow in 2021. After special items of DKK 24 million, which mainly related to the acquisitions completed in 2021 and comprised integration costs and transaction and restructuring costs, we reported EBITDA of DKK 567 million. We further reported special items of DKK 7 million related to a write-down of assets in connection with the coming upgrade of the Wittenborn factory. Cash flow from operating activities amounted to DKK 454 million, mainly driven by positive working capital developments, but offset by net financial items and taxes paid for the year. Capital expenditures amount to DKK 189 million, resulting in free -- in a strong free cash flow before M&A activities of DKK 265 million, highlighting our continued ability to generate strong cash flows and fund our continued growth journey. Our strong free cash flow generation has also allowed us to perform a share buyback program during 2021, and it supports the Board's decision to initiate an additional program later this year. On Page 15, you will see the development in our net debt for the year. At the end of 2021, net debt totaled DKK 350 million, of which DKK 106 million related to lease liabilities. This compares to a total net debt of DKK 230 million at the end of 2020. The increase since the beginning of the year is mainly a result of the acquisitions completed in Germany during the year as well as the purchase of treasury shares in connection with the recently concluded share buyback program. Financial gearing increased from 0.4x EBITDA at the beginning of the year to 0.6x EBITDA at the end of 2021, but remains comfortably below our long-term target of 1 to 2x EBITDA. Next, please turn to Page 16 for a brief comment on the decision to initiate a share buyback program of up to DKK 150 million. The decision by the Board of Directors to initiate the share buyback program is supported by the continued strong earnings and free cash flow generation, which has resulted in a financial gearing comfortably below our long-term target. While acquisitive growth remains a key strategic focus for H+H, the Board of Directors continue to prudently balance further investments in growth while returning value to our shareholders. Given the headroom to the long-term target for financial gearing and the sound cash position, there is an opportunity to return capital to the company's shareholders while still maintaining the ambition to pursue attractive opportunities on the company's ongoing strategic growth journey. The share buyback program is carried out with the objective of adjusting the capital structure of H+H. It is expected that the shares bought back will be proposed/canceled at the Annual General Meeting in 2023. Next, please turn to Page 17 for a walk-through of our financial expectations for the full year 2022. We expect organic growth for the year to be in the range of 10% to 15% compared to 13% for the full year 2021. Further, EBIT before special items is expected to be in the range of DKK 420 million to DKK 500 million compared to DKK 408 million for the full year 2021. The financial outlook for 2022 is based on the assumption that exchange rates, primarily the British pound, the euro and the Polish zloty, remain at mid-February 2022 levels. Further, we assume that the inflation rates related to the cost of energy and raw material stabilized at mid-February 2022 levels. Further -- sorry, now before handing the call back to Michael for closing remarks, please turn to Page 18 for some comments on the upgrade of our long-term financial targets. Over the recent years, we have consistently outperformed our long-term financial targets. Supported by the underlying market trends of a continued structural undersupply of housing, demographic growth, urbanization and governmental support in increasing housing output, we are confident in the prospect for continued growth. We are therefore raising our ambitions and will increase our long-term target for EBIT margin from 11% to 12% and our target for return on invested capital from 14% to 16%. As a reminder, the long-term financial targets reflect the ambition to maintain minimum average levels across a full business cycle. This concludes my prepared remarks. I will now turn the call back to Michael for closing statements.

Thank you, Peter. Before opening for questions, please allow me to conclude with a few final remarks on Page 19. 2021 turned out to be the strongest ever financial year for H+H, with a fantastic results driven by high market activity and strong customer demand. Further, with the successful implementation of double-digits sales price increases, we expect to grow our business even further in 2022, as illustrated by the financial outlook presented by Peter. However, we do remain watchful of the short-term impacts of the continued inflationary pressure. Looking ahead into 2022, we will further strengthen our platform through targeted upgrades and the implementation of the newly acquired factories in Germany as we work towards reaching our German market share targets by 2023. We continue to take responsibility in the fight against climate change. In early 2022, we committed to an ambitious 1.5-degree science-based emission reduction target, with the midterm targets that will take us a long way along our path towards reaching carbon neutrality by 2050. We are confident that this commitment will not only make an important contribution in the fight against climate change, but also adds significant and sustainable long-term value to both our business and to our shareholders. We will continue to harvest synergies from the recent year's acquisitions in Poland to build further resilience. And we will continue to optimize our U.K. footprint, which may include a potential expansion of production capacity to maintain our market-leading position in the country. We are confident that our continued growth strategy will deliver long-term shareholder value. And underpinned by our strong cash flow generation, we have the means necessary to invest in the drivers of future growth. This concludes my prepared remarks. And we are now ready to take questions. Operator, please go ahead.

[Operator Instructions] So far, we have one question from the phones. That's the line of Kristian Johansen of SEB.

A couple of questions from my side. In your commentary around your 3 core regions, you touched upon pricing for all of them. And you sounded actually fairly positive in passing price increases on. If we then turn to your guidance and sort of look at what you are assuming on gross margin, my conclusion at least is that you must be assuming your gross margin in '22 to come down versus '21 in the magnitude of, say, 1 to 3 percentage points. So can you talk a bit about this balance between the increasing input cost and level of price increases you are assuming for 2022?

Kristian, thank you for your question. You are right that, of course, there is a clear link between our input prices -- the input pricing and our sales pricing. What we have seen in 2021 is actually thanks to a quite strong hedging profile, we've been able to maintain most of our input costs. But we are, of course, aware that there are increases in 2022. So the guidance for 2022 includes sort of a catch-up effect for 2021 on the input cost, plus the inflation rates that we saw in the mid-February time frame. With that in mind, we are aware that we do need to push new price increases to our customers. And we -- as you also rightly say, we have done that, and we're also quite positive around being able to achieve that. But traditionally, there is a phasing in of sales price increases, whereas the input costs come more quickly. And as a result, we are seeing 2022 as a sort of a phasing year in terms of [indiscernible] to the demand compared to the relatively steep input price increases. And as a result of that, you are right that we are seeing a phasing during the year.

An increasing gross margin during 2022, would that be fair to assume?

That would be our base assumption.

Understood. And then maybe just on special items. Can you in any way guide us or help us to just roughly indicate what you expect in terms of special item cost for 2022?

So at this point, special items, we are -- as we also communicated earlier in the year, the upgrade of the German Wittenborn factory is expected to cause certain increased transport costs as we are getting goods in either from Feuchtwangen in the south or from elsewhere. And therefore, we are projecting an increased transport cost. We saw a similar case in the U.K. during the Borough Green Upgrade in 2018. And it's basically the same story. The level that we are expecting at this point is a low double-digit number.

Understand. And the phasing will be primarily Q2 then?

As it is right now, the planning is for the upgrade to occur during Q3, maybe with a slight overlap into Q3. And therefore, yes, it will be during that time frame.

Great. Then you now more clearly state that you would consider to add more capacity in the U.K. Can you elaborate a bit on what options you are potentially looking at? And also, if you decide to go for a greenfield factory in the U.K., what's roughly the CapEx of a greenfield factory?

So you are right that we have for some time been stating that we are ready to also look at added capacity in the U.K. market. The government have some time been highlighting the target of 300,000 dwellings. But we still lack more firm plans on how to get there and what that will consist of. Alongside of that, we are, of course, in a close dialogue with our key customers in terms of what demand they are seeing, and that together will form the basis of potential aspect. In terms of options, then there are different options. Obviously, one is that we -- one option is to expand existing factories and add a capacity to that. Another option would be to potentially look at more greenfield.

And the rough estimate of the cost of a greenfield factory?

It's -- I think it's no surprise, as we go down that path, it would be a significant investment that we have to make. I was just going to stress that, that decision has not been made yet. And if we make it like this, it is going to be at a duration of at least 3, if not 4 years to complete it because there is so much preparation to be done. But it's also true that if you are looking at an investment that site, that the total investment could exceed GBP 40 million, but again, over a longer time period and also initiated not in the near future in terms of those cash flows.

Understand. And then just my last question is in terms our considerations around the impact of the war on Ukraine. So obviously, you don't have a Russian business anymore, which at least right now makes it slightly more simple, but obviously, with the big exposure to Poland, what thoughts have you done at this stage?

I think, first of all, it is top of mind for many of us, what is occurring there right now, and we have our deepest sympathy for what is happening. With that in mind, as you say, we did divest our Russian business back in 2019, and thereby considerably derisked the position of the company and focused on our more core markets, which we've done successfully. In terms of consideration, specifically on our current markets, you could say that if you look at the short-term impact, then within our guidance, you assume that the markets will continue to function as normal and that there will be no such short-term impacts on the market activities. Similarly, on the input cost and the -- first of all, it's the potential shortage of supply that is top of mind first. But then, of course, secondarily, also the pricing. So we are, of course, assuming that supply chain is still operational and still working and that we can still get our products in. As such, we do not see within 2022 that we are in a need of buying specific raw materials in the impacted area right now. But we are, of course, aware that there could be a potential impact on the cost. I would say right now, there are many movements on the -- particularly on the energy prices, which, of course, we observe within the guidance presented here. We assume that they will -- the inflation rates will stabilize again at the mid-February levels.

Okay. Can you remind us, on the Polish market, i.e. do you know what level of imports from Ukraine and Belarus we have seen in the market?

I think that we haven't seen -- it has been very limited what has been coming in from Ukraine, even though we have seen some evidence of products coming for Ukraine, but not to a level where it would have any impact. We believe that the Belarus could have on AAC had an impact of, I think, that is up to 5% of total volume. And of course, one would assume that, that will start and making probably a small also, say, stabilizer for us if demand should start to drop.

Maybe just additionally on that in 2019, where the pricing was very high, we have seen an increased activity from Belarus. During 2020, it seems to sort of drop down a little bit again. So it is a little bit moving.

[Operator Instructions] Okay. There seems to be no further questions from the phone lines at this time. So I'll hand the floor back to our speakers.

Thank you very much. I want to thank you, everybody, for listening in, and looking forward to present again in the month of May when we come up with the Q1 announcement. Take care, everyone.