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

Welcome to H+H International Q4 and Full Year Report for 2023. [Operator Instructions] This call is being recorded. And I will now hand it over to your speakers. Please begin.

Good afternoon, and welcome to H+H conference call and presentation of the annual report for 2023. Joining me on today's call is our CEO, Jorg Brinkmann, our CFO, Peter Klovgaard-Jorgensen, as well as our newly appointed CFO, Bjarne Pedersen. Yesterday evening, the annual board and supporting documents were copied and uploaded to our Investor Relations website. The presentation for this call followed this morning. 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 this call. Before handing the call over to Jorg and Peter, I would like to direct your attention to the disclaimer on Page 2. During this call, the Executive Board might share forward-looking statements regarding various aspects of our business and company that go beyond historical facts. These statements are built on current expectations and assumptions. Hence, they are exposed to certain risks and uncertainties. Numerous factors could lead to substantial differences in these actual results. For more details about the risk factors, please see the annual report for 2023 and with that, I would like to turn the call over to you, Jorg.

Thank you, Niclas, and hello to everyone participating in this call. Before I share with you the summary of our performance in '23, I would like to welcome Bjarne Pedersen as our new CFO of the company. So Bjarne has worked for H+H for more than 15 years now. He comes in or he came in with auditing and banking background, which is actually good for being a CFO and then has hold a lot of financial positions in our company, having worked in IT, Corporate Finance, Investor Relations and then lately as the Chief Strategy Officer. I've worked with him since I joined the company. We have a cost for a really good relationship, and I'm really looking forward to see the company together with him. And yes, drive the next chapter for H+H together. I'm also excited to have an internal candidate for such an important role who can now take over seamlessly from Peter. And with that, Bjarne, maybe a few sentences to our investors community.

Yes. Thanks, [indiscernible], and hello, everyone. I'm really pleased to joining on this call and to get back on the Investor Relations track. I have seen a couple of familiar names on the participant list. So nice to reach out to you again and also a number of new names that I'm looking forward to get to know and service you together with the rest of the team going forward. So looking forward to the collaboration. And with that, I think we are go back to Jorg.

Thanks, Bjarne. So with that, let me go over a few highlights from the year and provide an update on our core markets and our strategic priorities before Peter then we will additionally -- add additional color on the financial performance for the year and also our financial expectations for 2024. Please turn to Page 4. After 14 years of growing market in the residential newbuild sector, the economy experienced massive downturn in 2023. The fast change of interest rates put future homeowners for really huge challenges. As families usually need external financing to buy a new home building became unaffordable for many. Same applies for residential investors. As a consequence, the number of mortgage contracts being issued as well as building permits dropped between 30% to 40% across all our markets. Same applies to our sales volumes, which decreased by 34% and impacted our business significantly in 2023. Despite a challenging market environment, I am pleased to report that we were able to implement double-digit price increases which were needed to cover inflation. We have also successfully delivered on our business improvement program and have taken DKK 150 million fixed cost out already in 2023 with another DKK 100 million carryover effect to come in 2024. This was mainly achieved by closing plants and a reduction in SG&A costs. In total, we delivered an EBITDA of DKK 244 million, corresponding to a margin of 9%. Certainly, our financial leverage is increasing and reached a level of 3.6x EBITDA. However, this is still well within our covenants and based on a fairly stable net debt position. Cash management for sure, remains a key focus for us. While our financial performance is influenced by the general downturn in the market, I'm really pleased that we achieved positive traction on our sustainability targets. The year 2023 marked a significant achievement in our CO2 emissions efforts with an 11% reduction in intensity on a per cubic meter basis. Regardless of market conditions, we continue to execute on our energy optimization strategy. Beyond that, the closure of less-efficient plants supported our CO2 reductions. A fine example for me of how financial and environmental targets go hand in hand. Also from a safety perspective, 2023 marked a new benchmark with lowest LTIF number ever achieved. Now let me provide an update on the situation in our key markets on Page 5. Let's start with Germany. The number of building permits issued in Germany decreased by 25% year-on-year with an even lower number of job sites starting to build. Next to the general interest rate development, this is also driven by huge confusion about future building regulations. Also, there are no effective support programs available to activate the market. As a reaction to the market, we have decided to close 5 of our plants in Germany throughout the year. Three CSU plants located in Demmin, Kronau and Niederrimsingen were permanently closed, and volumes were redirected to other more efficient plants. Additionally, we have temporarily closed 2 of our AAC plants, one plant in Wittenborn, where we were operating 2 plants next to each other and concentrated volumes to our more modern plants plus a second plant in Feuchtwangen in South Germany. Even though we have currently paused production, we are still using the plant as a logistics hub to service our customers and to build up our market position in this very strategic market for us going forward. Also, we have started to cut back SG&A costs in CWE with DKK 30 million savings already realized. Compared to U.K. and Poland, CWE is still operating on a higher cost base, which is a result from the numerous acquisitions we have done over the last years. We are now in the process of finally integrating our business into one organization and standardize our business processes. As we are not expecting the market to recover quickly, price discipline is really key for us going into the new year. In this context, it is good to see price lift increases being having been announced towards the end of 2023. However, as always, the execution will be critical. And with that, let's move on to United Kingdom. The U.K. housing sector faced considerable challenges in 2023. Mortgage rates continue to raise for the first 3 quarters of 2023. This, combined with high inflation impacted negatively the customer confidence and, in turn, had a significant impact on the demand for new build. This led to a significant drop in new home registrations which decreased by 44% compared to previous year. Despite those challenges, we have success in reentering the foundation market and also winning new customers. We were also able to maintain our prices throughout 2023. However, for 2024, the sector is experiencing price pressure, which we are carefully managing in combination with lower input costs and efficiency gains from our operations. In Q4, in Poland one plant has been temporarily closed as production capacity at our other plants, combined with our inventories is sufficient in the current market environment. This allows us to run the other 2 plants at continued high efficiency levels with [ 24/5 ], respectively, 24/7 operating models. While current market demand has led us to adjust capacity in the short term, we are investing additional capacity in the medium to long term, which I will come back later to. And finally, Poland. Since 2022, the Polish Central Bank has significantly raised interest rates in response to double-digit inflation impacting the financing of new building projects throughout the year. This situation led to a substantial decrease in building activity. We have also reacted to this and decided to permanently close our AAC plant in Warsaw and our CSU plant in Pisz in North Poland, following our general strategy to concentrate volumes in higher efficient plants and so maintaining high efficiency of the total network. Additionally, the CSU plant in [ Ludwina ] was temporarily shutdown. Amongst our markets, Poland is the country where we start seeing some positive momentum. In July 2023, the Polish government announced a 2% mortgage loan program for first-time buyers. The simplicity is actually the strength of the program and led to a significant increase in mortgage contracts and permits in the second half of the year, which finally led to better volumes already. If you compare those programs to other programs, especially in Germany, it is really -- the simplicity is really what is driving it. And when you look into province in Germany, they are so complicated and it is not really a stimulus for the residential market. So it actually could serve as a really good example for other markets to really activate new build in markets. The fourth one was at the end, such a success that the budget is already consumed. However, the new government talks about a new version of the program to further stimulate the new build market. Now please turn to Page 6 for a review of our strategic initiatives during the year. Here, you can see our Form 2 journey in 2023. As a reaction to a 34% volume decline, we have launched and executed a group-wide business improvement program. In total, we have closed 9 of our originally 32 plants which allows us to operate on similar efficiency levels like before. Saying goodbye to almost 500 people was not easy for our teams. However, an important element to adjust our fixed cost base. In total, we've already realized DKK 100 million fixed cost savings in production plus DKK 50 million savings in SG&A in 2023. The run rate effect, however, is DKK 250 million, which will fully be realized throughout 2024. We supported those adjustments with special items restructuring costs of DKK 133 million and thus delivered an attractive payback of those initiatives. Now please turn to Page 7 for our strategic focus areas for 2024. When I look into 2024, we do not expect huge improvements of our markets. As long as interest rates will not go down and/or governments launch effective support programs to activate the new build markets, building activity will not change significantly. In this free environment, 4 things are critical for our business. Number one, focus on price discipline in our markets. Number two, further improve our plant network efficiency. We have a very clear road map on how and where to reinstall future capacity, which will be coming from uptime, debottlenecking and continuous improvement. Number three, generating further SG&A cost savings by bringing CWE on a similar level to Poland and U.K. And finally, carefully managing our cash, which also includes significant decrease of our stock levels and very tight CapEx management in 2024. If you turn to Page 8, there's an example of how we will build capacity back in. And as the market is in a downturn phase at the moment, it is also important not to lose sight for when the markets will pick up again. And here, you can see a very nice example of how we will rebuild capacity. At the moment, as we speak, we are investing into our plant in Borough Green, which is close to London. And at every plant, there is bottlenecks in these operations. And we've identified the bottlenecks sitting at the back end of the plant in our packaging line. And as a consequence, we are investing into a second packaging line, which will increase the output of that plant by 20%, without adding fixed costs through the operations. This initiative will lead to the fact that this plant will be our most efficient plant in the network going forward plus delivering a total 10% more volume for the U.K. market. And with that, let me hand over the call to Peter, who will guide you through our financial performance.

Thank you, Jorg, and good afternoon. I will take you through the financials, starting with the revenue for Q4 2023 on Page 9. As previously mentioned, very low building activity has resulted in decreased volumes across our markets. This was also the case for Q4, where total revenue decreased by 26% to DKK 601 million compared to a relatively strong Q4 in 2022. In the Central Western Europe region, revenue amounted to DKK 257 million compared to DKK 369 million in Q4 last year. The decline was driven by negative organic growth of 31% as a result of lower sales volumes, partly offset by higher sales prices. In the U.K., revenue was DKK 169 million compared to DKK 235 million last year, which was a strong quarter. Hence, organic growth was negative 31% driven by lower volumes, partly offset by higher sales prices implemented in early 2022. For Poland revenue amounted to DKK 175 million for the quarter compared to DKK 206 million last year. Organic growth in Poland was negative 18% still driven by lower volumes, however, with a softening compared to previous calls. Now please turn to Page 10 for a few comments on our margins for Q4. The earnings for the quarter are influenced by the significant decline in sales volumes across our operations. We have been focused on restructuring to realize cost savings in the fixed production costs and though we do see the impact of these in the profit and loss statement, they are offset by low sales for the quarter and increased energy costs from unfavorable gas contracts. Together, these factors are negatively impacting our margins. Gross profit for the fourth quarter amounted to DKK 94 million. This corresponds to a gross margin of 16% compared to 25% last year. Adjusted for unfavorable gas contracts, gross margin would have been 19%. EBITDA before special items was DKK 32 million compared to DKK 111 million last year, representing an EBIT margin of 5%. This includes savings in SG&A of around DKK 30 million. Adjusted for unfavorable gas contracts, EBITDA margin would have been 9%. And finally, EBIT before special items amounted to negative DKK 15 million compared to DKK 58 million last year. This corresponds to an EBIT margin of negative 2% versus 7% last year. Now please turn to Page 11 for a review of our full year earnings. The drivers influencing the earnings for the quarter are also influencing the full year margins. First, the major decline in sales volumes across our operations which significantly impacted the earnings. Second, we have made considerable adjustments to our cost sales in order to align production and admin costs to the lower level of sales. And third, also, the unfavorable gas contracts have led to increased energy costs in the second half of 2022. Gross profit for the full year was DKK 564 million compared to DKK 1 billion last year. This corresponds to a gross margin of 21% compared to 28% in 2020. The decrease in gross profit is driven by fixed production costs spread over lower volumes and increased energy costs, which included a negative impact of DKK 55 million in second half of the year from unfavorable gas hedges. Gross profit is positively impacted by significant restructurings which led to around DKK 100 million savings in fixed production costs all recognized in 2023. Also double-digit price increases in the beginning of '23, and ongoing procurement efforts contributed to positive impacts from pass-through though we saw some price pressure in the second half of '23 in Germany and Poland. EBITDA before special items for the year decreased by 63% to DKK 244 million compared to DKK 657 million in 2022, corresponding to EBITDA margins of 9% and 18%, respectively. EBITDA is helped by SG&A restructurings leading to around DKK 50 million savings recognized in 2023. Adjusted for the unfavorable gas hedges, EBITDA before special items would be DKK 299 million, corresponding to a margin of 11%. And finally, EBIT before special items was DKK 57 million in 2023 compared to DKK 455 million in 2022. This is the result of the significant adjustments made to the organization during the year. Adjusted for the unfavorable gas edges EBIT before special items would be DKK 112 million, corresponding to a margin of 4%. Next, please turn to Page 12 for an update on special items and the cash impact in 2022. The cost savings initiatives mentioned previously included restructuring of the total costs and SG&A expenses primarily in the CWE region. Further, driven by further centralization of administrative functions. In total, DKK 133 million in restructuring costs related to the cost savings program have been recognized as special items. These restructuring costs led to in-year savings of DKK 150 million and will also have a carryover effect of DKK 100 million savings, mainly in the fixed production costs. In addition, and as a result of the closure of plants and impairment loss of DKK 101 million was recognized for production equipment for the year. As previously mentioned, gas contracts entered in summer 2022 negatively impacts our earnings. There are 2 elements in this. Firstly, gas used in production impacts our production costs in the cost that we showed. For 2023, there was DKK 55 million recognized in expenses related to the contracts mainly impacting the second half of the year. Secondly, due to the lower-than-expected volumes unused gas was sold back to the market. This resulted in a loss classified as special items amounting to DKK 51 million as the fixed gas prices of the gas being sold off exceeds current market cost. In addition, financial income of DKK 2 million has also been recognized related to fair value adjustments of the gas forward contracts. The total loss of unused gas for '23 was DKK 53 million. Next, please turn to Page 13 for an update on our debt position. At the end of '23, net interest-bearing debt totaled DKK 887 million, corresponding to an increase of DKK 43 million in Q4 and an increase of DKK 394 million since the beginning of the year. In Q4, we reduced inventory by DKK 31 million and achieved a stable cash flow from operations. The increase in net interest-bearing cash since the beginning of the year was primarily driven by stock build and inflationary impact on working capital. Through tight cash management, we have lowered CapEx by approximately DKK 100 million compared to 2022 and stabilized the working capital. The company's financial dealing was 3.6x net interest-bearing debt to EBITDA. The increase for the quarter is mainly driven by the reduced earnings on a trailing 12-month basis. For the same reason, we anticipate that net interest-bearing debt to EBITDA ratio will continue to increase in the beginning of '24 despite a stable net debt. The net interest-bearing debt to credit institutions totaled DKK 768 million end of 2023. We reiterate that we have adequate headroom to our loan covenants in 2023 and will continue so in '24 based on current outlook and keeping in mind that the unfavorable gas hedges were known at the time of entering the loan. Next, please turn to Page 14 for an update on our gas contracts. We have looked into alternatives to increase transparency of our financial reporting and have decided to unwind the hedges as of 31st of March 2024. The unwinding will have following impact. The remaining day one loss covering the remaining period until Q1 2026 will be recognized as a one-off loss of around DKK 95 million classified as special items in Q1 2024. The unfavorable hedges are still expected to impact cost of goods sold in first half of 2024 by approximately DKK 45 million until the higher energy costs are unwound from the inventory. In addition, lower volumes are expected to lead to the sale of unused hedged gas in the market in the first quarter, resulting in a loss classified as special items amounting to around DKK 15 million. And maybe most important, the unwinding does not affect the cash flow timing of the hedges as the installments will continue to follow the original payment then. Finally, on 5th of March 2024, a new hedging agreement was entered to cover a proportion of the expected gas volumes in the relevant markets for the remainder of 2024. The new hedges were secured at the same forward rates as the unwinding hedges. For our financial guidance for '24, please turn to Page 15. We had issued following guidance for 2024. Organic growth for the year to be in the range of negative 5% to positive 5% and EBIT before special items is expected to be in the range of DKK 50 million to DKK 150 million. The financial outlook for 2024 is based on the assumption that sales building activity will be in line with the 2023 levels, but sales price discipline is maintained within our key markets. And finally, that exchange rates, primarily British town, the euro and the Polish zloty remained at end-February levels. The guidance is based on the current market conditions and includes DKK 100 million carryover savings from restructuring executed in 2023. Also, further SG&A savings are expected in the CWE region during 2024 through restructuring which could lead to special items expenses of around DKK 40 million. Payback will be less than one year. We do expect some significant phasing within 2024 where Q1 is likely to show a negative EBIT before special items, driven by sales seasonality and negative impacts from gas costs and inventory reductions. Earnings will gradually pick up in line with seasonality and as the high gas cost unwinds from the inventory towards the end of Q2. This concludes my prepared remarks, and I will now turn the call back to Jorg for closing statements.

Yes. Thank you, Peter. So before we open up for questions, let me conclude with a few remarks on Page 16. So 5 takeaways. Number one, the decline in the market we've experienced that was significant. And the 34% loss in volume is impacting our business in a really tough way. Second, despite a challenging market, I think it's really remarkable that we were able to place double-digit price increases and found a way to really pass through inflation. Number three, I think we were very strict in executing our business program, having closed 9 plants of our 32 plants and have found DKK 250 million of run rate savings in fixed costs, which was needed to adjust the company to the new demand situation. Number four, it is important that we are not giving up on long-term strategy and ESG is an important part of it. And so I think it's a good outcome actually that we had a record year for both the CO2 emissions and then also the safety performance of our company despite a challenging year from the markets. And then looking into 2024, we do not expect a lot from the markets and the quick recovery. However, we will concentrate on the things we can influence, which is, number one, further drive efficiency of our operations. And then number two, deliver further SG&A costs and then most important, very carefully managing our cash positions throughout the next quarters. And with that, we are now ready to take your questions.

[Operator Instructions] The first question is from the line of Sebastian Grave from Nordea.

Hi Peter and Niclas, and also hi to you Bjarne, congrats on the new position. I'm looking forward to the collaboration going forward. Now going back to the unwinding exercise here that you explained very nice, Peter. Let me try to set the stage here. Thus for P&L impact from these unfavorable hedges has been twofold. Part of the impact related to sourcing and hence, impact your COGS and the other part related to sale of unused gas and hence, sits in a special item line. Now to unwind these contracts, you recognize a one-off loss of DKK 95 million in Q1. On top of that, you will see additional DKK 15 million in one-off in Q1, plus you will see DKK 45 million impact on COGS in H1 2024. Now does that mean all else being equal, that after Q1, meaning from Q2 and onwards, you will have no more special items in the P&L relating to the hedges and after H1, meaning from Q3 and onwards, the COGS space will be based on normalized gas sourcing prices. I know that was a long run-up, but that will be my first question.

You are absolutely spot on Sebastian. So welcome done and that is also our expectation.

Okay. That's great to hear. Now Peter, as I recall, you said in the Q3 conference call that based on, I mean, very strict assumptions back then, you expected a full year COGS impact of DKK 50 million over 2024 relating to these hedges. And now it's DKK 45 million in H1. Is this a reflection of falling nat gas prices? Or what is the dynamic here? What should we read into it?

You are absolutely right. So you can say the hedges are fixed -- with fixed volume and fixed price. So when we talk about deviations and impacts as the DKK 50 million that we guided, weekly or around -- was compared to the market price at that time. Since then, the market price for gas has come down, which also means that the net difference to the current market prices is bigger. And that is why we now see a 45 number estimated for the first half. Of course, that number can still slightly change because the market prices here during is March can, of course, still change on the...

Okay. That makes perfectly good sense. And then just my last one, and I will go back in the queue. I guess there's others who have questions as well. You expect to achieve additional DKK 100 million year-on-year cost savings in 2024 from these initiatives launched in 2023. Now obviously, hedges disturbs the picture. So is it fair to assume that these savings are achieved on an underlying basis, meaning that the 2024 cost base ex hedging impact is going to be DKK 100 million lower compared to the 2023 base ex hedging impact? Is that how to read it?

Just to be specific, so the cost savings, we're talking about the DKK 100 million is a carryover effect, but it's on the fixed production costs. So that means what it takes to basically run the plant in terms of people and general running the plant. It doesn't include the actual input costs, if you will. So of course, there is -- there can be some other differences through the input cost, raw materials, et cetera, then and just outlined here. So you should see it as a DKK 100 million cost saving in the fixed costs as regard impacts from gas, et cetera, et cetera.

The next question is from the line of Kristian Johansen from SEB.

Yes. Also a couple of questions from me. The DKK 95 million, you would recognize relating to the unwinding of gases, why would you book that as a special item? Have you not unrolled these hedges, it would not have been a special item cost.

So unwinding these hedges basically crystallize the original day one loss that was recognized as of April 2023. So when these hedges became effective, there was a difference between the hedge prices and the market price at that time called the day one loss. That day one loss is essentially being expensed over the period, all the way until Q1 2026, had we done nothing. Because we now unwind theses such as -- that the remaining day one loss which was DKK 126 million as of end of 2023 and now DKK 95 million as of end of Q1 2024 will basically crystallize as a one-off loss. And for that, we take that as a special items. And that means also that the day one losses basically fully expensed off in the P&L. And it's our belief that this will create a better transparency going forward in reading and understanding that the true underlying performance of the business going forward.

Okay. And in regards to the cash impact, should we don't think of this DKK 95 million being recognized as cash sort of up until Q1 2026?

No. So the day one loss is a little bit detached from the financial obligations. So as of end of December, there was DKK 138 million as a payment obligation, if you will, for those hedges. So that payment obligation will still exist and continue to follow the original payment plan for the gas so every month as we consume gas, we will also be paying off the original hedge. So as such, it's a little bit detached from the day one loss. So effectively it means that we clear out the day one loss through the P&L, and then we'll have a remaining obligation sitting in our payables which we will then pay over the period until Q1 '26. .

And then you state you have made a new hedging agreement, maybe just to elaborate how much of your expected gas consumption for 2024 is then hedge now and then if you have anything into 2025?

So what we've done in line with our new hedging policy, which was instated last year. We, across our markets is continuously evaluating which hedges we should enter with certain caps of how much to cover. So across our markets as it stands right now, we have between plus/minus 60% hedged across our business for the remainder of '24, but no hedges has been entered into for '25.

Okay. That makes sense. And then my last question, in Q4, you have other operating income or net other operating income of DKK 20 million which seems to relate to a sale of equipment or land. Can you just elaborate exactly what that relates to?

Yes. So as part of our cash management focus, we've also had a focus on seeing if we could sell off some of the idle assets following the closures of our plants. So as a result of that, we have sold off 2 land pieces and some equipment in fourth quarter, which then contributed positively both cash wise, but also as part of the income in the profit & loss statement.

And why is that game not recognized as a specialized in the...

So this is a balance, and I think you can, of course, debate whether how you feel about the usage of special items. We believe that IFRS are quite clear that it's for extraordinary reasons, including restructuring and no sort of activities that constitute a special items. If you go back into previous years, we've also have certain land sales, et cetera, of similar sizes or smaller classified as other operating income. I think the most important for us honestly is creating transparency. And we have full disclosure on what is the other operating income. And then people like yourselves can, of course, make your judgment how you see the performance of the group.

[Operator Instructions] It does not seem like we have any more questions from the conference call. So I will hand it back to the speakers.

All right. Yes. Thanks for dialing in this morning. We're looking forward to see the one or the other during the next days. And with that, Peter, that was your last official call for the company. So thanks for having work together. Thanks for all your contribution. And I wish you all the best for your future career. But you will be around for a couple of days and ensuring a hand over, and we also see the one or the other. And with that, have a great day. Thank you.