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

Welcome to H+H International 2024 H1 Conference Call. [Operator Instructions] This call is being recorded. And I will now hand it over to your speakers. Please begin.

Thank you, and good morning, and welcome to H+H Conference Call covering the first half of 2024. My name is Niclas. I am the Head of Investor Relations and Treasury. Joining me today, as always, our CEO, Jorg Brinkmann; and our CFO, Bjarne Pedersen. Yesterday evening, the half year report and related documents, including the presentation for this call, was put on our Investor Relations website. During today's call, management will present the interim 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 I hand the call over to Jorg and Bjarne, I would like to direct your attention to the disclaimer on Page 2. During this call, the Executive Board may share future plans and expectations for our business that go beyond historical facts. These forward-looking statements rely on current assumptions and therefore, come with some risks and uncertainties, and as many factors could significantly change the outcomes. For more information about these risks, please see the 2023 annual report. And with that, I'll now turn the call over to Jorg.

Thank you, Niclas, and good morning, everyone. Thank you for dialing in. Please turn to Page 3 for the key highlights in the second quarter. And I'm happy to share with you our first half outcomes and where we are in relation to the current conditions. So let me start with a couple of highlights. In total, 4 things I really want to call out here. Number one, starting off with markets, and I'm going to lead you to U.K. and Poland first. And when you look into the results, we are happy to report that U.K. and Poland continued the positive trend from Q1 also into Q2, with both countries delivering double-digit revenue growth, which is really encouraging for us to see. As a consequence of that, in both countries, actually, we are already in the process of reinstalling capacity. That works in a different way. In Poland, it's more about increasing shifts and output. And in U.K., we have taken the decision to ramp up our mothballed plant in Pollington again. So that was one decision we have taken last year to take that plant out of the network. We needed to adjust the capacity. But now with the positive signs and environment we see, we believe it's the right time to bring Pollington 1 back into operations, which is encouraging to see. So yes, 2 encouraging markets. Opposite in Germany, unfortunately. The new build market in Germany is first going down, and that leads us to a situation where we can't see the effects of our business improvement program or the cost savings we have executed yet. So we're going to talk about that a little bit later. But certainly, this focus area for us, how to operate in Germany, and it's a market that is trending in the other direction than the other 2. And then finally, I think also a positive outcome also in Poland, we have closed plants. One of these plants we have closed is the plant in Warsaw, actually at an attractive location. And so we were able to enter into a conditional agreement to sell this plant and we're going to talk about this a little bit in more detail. But certainly, this will -- it's still conditional. But if this is materializing, it will certainly improve liquidity and then also we now have a nice impact on our financial gearing and get us closer to our long-term financial targets. So this is the highlights. When you look at the numbers, certainly, the positive development in U.K., Poland, you can see that in our sales volumes, which are growing compared to last year, that is encouraging. When you look into earnings, they are still impacted by the situation in Germany and also the fixed cost leverage this is causing. Bjarne will talk about that a little later. And then there's 2 special effects still in the first half and also in Q2, which is still unfavorable gas hedges, and then we've reduced our stock significantly, which had an impact on earnings. But as I said, Bjarne is certainly the better speaker to get you a little bit closer to what we are seeing here. And then finally, gearing is high. However, it is within our covenants, which is important. And then as I said, given the better outlook into the second half and then also the likely sale of the Warsaw land will certainly improve gearing also going forward. And with that, let's get a little bit closer to our key markets on Page 4. Yes. Starting off with the U.K. As I said, encouraging signs from U.K. As a company, we are always looking into 2 major indicators to really get a view on where these markets are going to. One is building permits or in U.K., it is building registrations. And then the other KPI for us is to follow the mortgage applications, so literally what private homebuilders are asking for to finance their new build programs. Both indicators go in the right direction. Since January, we've seen month-on-month increase, which is really encouraging. And then you followed that there was an election in the U.K. The new government -- the labor government actually put new builds really in the center of their campaign with a clear target to build 1.5 million homes over the next 5 years, still is a target. But it's definitely a very strong statement, and next weeks and months will show how this will materialize and what the programs will be behind it. And with this environment, we are pleased to see revenue growth of 11% compared to Q2 last year. And then as I said, and I just come from Pollington. So I was there Monday, Tuesday with the team. And so we were following the ramp-up of the plant. So we are expecting to bring the plant back into operations in the fourth quarter of this year so that we are ready to serve the market also from Pollington one plant into 2025. From U.K., moving over to Poland. Also in Portland, as I said, very positive development. Revenue growth in Q2, 36%, really remarkable. And certainly, and we were talking about that in these calls here certainly was boosted by the 2% loan program, a very simple, very effective program. I wish more governments in Europe would look into that and take this as an example. Certainly, it was the triggering event to boost new build across the country. The thing is that this program has been exhausted. It was so successful, actually, so that is the, let say, the funding is exhausted. However, when we look at the underlying mortgage applications, we also see a better trending compared to where it was last year. And then also the -- certainly the -- there's an order book actually that will also hold into Q3, Q4. And the Polish government is working on a successor program of that 2% program will not be exactly the same. So it is still a work in progress. The current expectation is that this will be something for 2025. We are following and observing it. Certainly, those support programs have really an impact on new build activity, thus our business in those markets. And then in Poland next to volume. I'm also pleased to see that we were able to gradually increase prices, which is going in the right direction. And certainly, after some correction in 2023, also a nice positive impact from Poland. And as I said, we are ramping up shifts in Poland following the efficiency of plants. So really throughout the whole crisis, that is what we have done, making sure we're keeping the shifts in the most efficient plant, and that is what we're going to continue doing. So that supply needs demand. Germany, as I said, very positive outlook in Poland and U.K. Unfortunately, Germany is going in the wrong direction, and that is leading us to a revenue loss actually in CWE of 25% in the second quarter. So really significant. The indicators in Germany are actually proving that. So we are seeing roughly 30% less building permits compared to last year. So there's not a lot of activity going on. And when we look into what is the reasons actually for that, actually, we are seeing -- the first reason is interest rates are still on a high level despite the ECB correction. Actually, there's nothing moving on the mortgage rate, which is having an impact. Second, construction costs are fairly high from really high regulation, especially towards energy efficiency of buildings, that is the second driver. And then there's no effective government support programs in place, a lot of complicated programs, hard to understand for people. And that is certainly -- this mixture actually is leading to a, let's say, holding position. The demand is high to build. But obviously, it's a more clever strategy for people at the moment to pause and wait and that is impacting our business especially in Germany. And despite a challenging market, there are 2 things we are really focusing on. The first is that we are making sure to further increase sales prices. In the first half, we've seen early positive signs, but we need to go further steps and that is announced further price increases effective 1st of September this year, as I said, is needed to cover inflation and then also the cost to entertain that network of clients. And then also on the cost side, we have delivered significant cost savings over the last 1.5 years. However, as I said, with the lower activity, it's hard to see them coming through in the P&L. And however, we are looking to further streamlining the organization and making sure we are further adjusting cost. So that's really the focus, price quality and then the further cost optimization. And with that, let me talk a little bit about the business improvement program on Page 5. So what you can see here is really from the start of the beginning of the crisis, January '23 to now, so 1.5 years being in that mode actually. So this is what we have done. So when we started off, 32 plants, we're operating almost full stream. So we've adjusted that. Today, it's 23 operating plants, 4 of them are mothballed. One of them, we're going to get back it is the point one. So from next year on, there will be 24 being in operations, and that's significant adjustments of our plant network, certainly helping increasing the overall efficiency in the network. Then second point is really the stock and here you can see the effect compared to last year. So last year, we were really significantly increasing stock. At end of Q1, we had a stock which was 3.5 months, which is way too much for our company. So we brought that back to 1.5 months overall, which is in line with our target. So that is normally what we're having. So that exercise is done. And it was our major focus for the first half of this year and I'm happy that we brought them back to normal levels. And third, we've adjusted fixed cost of the company with lower activity that was sort of an important exercise. So you can see in Q1 last year, we were still operating on DKK 250 million of fixed cost in our operations. As we speak, we're looking to more DKK 200 million number. So it's a DKK 50 million savings on quarter, DKK 200 million on an annualized actually. So a significant adjustment of our fixed cost base, which was an important exercise. Yes, that came along with definitely letting people go. It was hard, but without alternatives. So today, it's 1,300 people for us. And then a little bit more qualitative here, but we've also used and changed the way we're operating. So last year, Q1 was a lot of individual plans were -- and now we're looking into it more like a network of plants, really making sure we're managing overall capacity and then the supply of the market.following the margins and making sure, we're keeping the margins of network instead of optimizing individual plants. Also throughout the year, we've upgraded the plant in Borough Green. I mean, we've done things. This plant is our biggest plant now. And yes, that we operate on 20% higher capacity also going into the next year, which is positive. And so yes, there's a lot of stuff happening in the network. And [indiscernible], let's say, crisis to also improve the way we operate. And that is that. I will now turn over call to Bjarne, who will update you on our financials and a little bit more color on what I explored here.

Thanks for that, Jorg, and good morning to everyone on the call. I will take you through the financials, and we can start with the volumes and the revenue on Page 6. Before going into the details, you will hear me repeat a number of the messages from previous quarter because there's a lot of the underlying structures that are the same. If we start looking at the volume and top line development, it is based on also what Jorg explained, driven by Poland and the U.K. Also compared to last year, there is a country mix effect that becomes in particular, visible when we look at the organic growth. So despite an 8% volume increase, we know that prices have been straightly behind last year, in line with plan. And then on top of that, we have this strong country mix where we are setting more volume in Poland, which is the lowest priced market in our network and then with let's say, in some of the other markets with higher prices. So that is what is driving the organic growth into negative territory. Then if we move on to Page 7. We have our gross margins, and just like in the first quarter, they are again impacted by gas and by de-stocking. The gross profit is at DKK 132 million in this quarter versus DKK 178 million last year, and gross margin is 18% versus 24%. But there are these two effects we need to take into account. During 2024, we had de-stocked around DKK 200 million. And with that comes that we have the indirect production costs that were sitting in stock at the beginning of the year together with depreciations also sitting in stock flowing into the P&L this year and significantly reducing our gross profit as we still have the fixed cost sitting in our P&L this year. With this let's say, normalization of stock levels like Jorg referred to around 1.5 months on average. Then we're in a position now where our destocking project has come to an end. So for the second half of the year, the balance between sales volume and production volume are more or less in line. So there won't be this impact in the gross margin for the coming quarters. Additionally, we have in the first half had impact from the unfavorable gas hedges from the past. That has also impacted gross margin. And again, we have sold out the remaining inventories that has been produced these excess costs. So going forward, there will not be an impact in the P&L from the gas cost. We still have a cash flow impact from it, but we'll leave that for later. So the overall message is that despite the headline number for the gross market is low. We understand the difference between now and last year, and we are also content that going forward, we will be within the range that we have been operating in the past. If we move to the next slide, which is Slide #8. We have an overview of our restructuring cost and special items. We had DKK 13 million restructuring costs in this quarter. It is supporting the optimization of our CWE region. As Jorg explained, we will have to do further as the market has deteriorated more than anticipated. So in addition to what we already have announced, we expect to use additional restructuring costs in CWE for the remaining part of the year, and that will be treated as special items. Then we have the gas settlement also as special items that is all settled in the first quarter of this year, but impacting the total for the year. That will, to a large extent, be offset by the expected sale of the land in Poland. The transaction as such will be treated as a special item. In Danish krone, the sales price is around DKK 190 million, and we expect a net gain from the transaction in the region of DKK 140 million to DKK 150 million, and it's all settled in cash. So it will impact our full year guidance, that it will have a positive impact on our debt situation. And more on the debt situation on the next slide, which is Slide #9. On the left hand side, we have a bridge from, when we entered the quarter with a little bit more than DKK 1 billion in debt, we have a positive EBITA in the quarter and we have a positive net working capital impact. Then we have payment of provisions, which is predominantly related to the gas contracts, but also some pension payments, and then some CapEx and some interest payments. So we are still around DKK 1 billion in debt that's trending in the right direction. If we look at the financial gearing, that has increased from last quarter, but all inline with plan and the reason for that is that we in the in second quarter of last year had a stock build and we did not have any gas cost in the P&L. So when we are running 12 months basis made our EBITDA, it is worse on this last 12 months than it was in the previous quarter. But as mentioned, with the expected improvement on our gross profit in the quarters to come, it will improve our debt situation. Everything is in line with our bank covenants. And then we expect the financial gearing to be boosted with the cash proceeds from the -- likely sale of land in Warsaw. With that, we move on to Page 10, that is on our outlook for the year. We have updated that and narrowed. Our original guidance on organic growth was minus 5% to 5%. We've narrowed that and say now it is around 0%. And on before special items, our original guidance was from DKK 50 million to DKK 150 million and will now that to DKK 50 to DKK 100 million. That is driven by the situation in Germany, but the market is performing to a less extent than expected. And then the financial impact from the closure of the Borough Green plant during July this year. And as mentioned before, the sale of land in Warsaw will be a specialized item, so it won't impact our guidance. With that I will hand over to Jorg to do his final remarks before we do Q&A.

Yes. Thanks, Bjarne, for elaborating on the financials. And yes, let's turn to Page 11 for key takeaways. So again, encouraging signs from U.K., Poland, with double-digit growth in both countries. So that is certainly encouraging, going in the right direction, and also supported by the, let's say, political environment to really help developing the new build market, which is needed actually. So that is good to see. And the second really encouraging piece is that we are back in the process to reinstall capacity. I think it's the right thing to do to reopen Pollington one. So we do a careful decision here, but all the indicators and signs are proving that this is the right thing to do. So it's exciting to see to bring that plant back into operations after having closed so many plants actually over the past 6 quarters. And then, yes, definitely Germany, it is a challenge. The market is not recovering. New build activity is on a really low level. And yes, despite we've done really a lot of cost savings and business improvements. We are not seeing the effects yet. And also, we are in the process to execute further of those measures to really cope with the situation. But then as Bjarne has said, certainly that likely land sale in Warsaw, I think that is a positive outcome and we will improve the cash and then the gearing with the substantial value of DKK 119 million that is definitely meaningful for our business. Yes. And with that, let me open the call up for questions.

[Operator Instructions] And first off, we have Sebastian Gray from [indiscernible].

I have a few, and I'll just take them one by one. First question is on the gross margin here. So reported gross margin was around 18%. It was 17% in Q1. And last quarter, Bjarne, you stated that the underlying margin performance was 7 percentage points better than the reported, i.e., when you adjust for both the destocking and the gas hedges. So could you may be update on what's the underlying margin performance in Q2, i.e., adjusting for both destocking and gas hedges. That will be my first question.

Thanks, Sebastian. As I mentioned initially in my part, it is a little bit of a repetition because the underlying impact is on the same level. If you roughly do the math, you will see this destocking of the DKK 200 million, that's for the first half. We know, roughly speaking, that around 1/3 of our costs or indirect production costs, as I say, they are sitting there with a double impact. So roughly speaking, that has a value of around DKK 60 million. And then we know for the first half, the gas has been in the region of DKK 30-something million. So when you adjust for that, you get into this 24%, 25% range as the, let's say, clean gross margin impact if we adjust for these events.

Okay. That's very clear. And you also stated that you're aiming to operate at a gross margin range as you have done in the past. And I mean in the past, you've operated at a gross margin of up to 30%. So with that should we think of your gross margin trajectory towards 30% margin? Or should we think more of it as a H2 2022 margin i.e., around the 24%, 25% or what should we think of it going forward.

If we take it, it will be longer time to speak. The 25% to 30% is definitely our aspiration to be within over the cycle where the 30% is where we really had the tailwind also from the pricing where we have the underlying momentum in the market, where in a situation like this, where not all markets are performing, and in particularly in Germany, we see this need for further price increases. There, let's say, the 25% is, let's say, our aspirational baseline gross margin, and then we need to develop it step-by-step by that as the markets improve.

Okay. Okay, that's fair. But I mean, on gross margin in the little longer term here. So 30% just say is as such, it's around peak cycle, but I guess, with considering the restructuring efforts that you have done here over the past year, it shouldn't be sort of the base case be higher than the historical base case given the restructuring efforts?

That's of course, our aspiration, but it also depends on the cyclicality and the way the market moves, because there are these times in the cycle. We'll get this pricing moments and because simply it's a shortage. And then there should be some quarters where we are above that, let's say, to smoothen it and simplify the story around the corridor, it would be the 25% to 30%, but definitely, there should be some of the peak quarters that are above the 30%.

Okay. Got it. My next question is on the SG&A base. So this [indiscernible] was up from last quarter despite be the restructuring efforts. So, can you expand on this? What is the dynamics here? And what should we think of sort of the SG&A base going forward in absolute terms?

There are some one-off effects through the quarters, there's always some phasing depending on when there are some certain marketing activities and so on. But because we've taken out, it is in this run rate region, you need to see it going forward. And also there will be some further restructuring as we have announced, but it is more, let's say, to make sure that the costs are under control. The real benefit to drive the overall performance of the business will come above the gross margin in line.

Okay. Then on the capacity adjustments. Now you're turning up the capacity here in Poland, you increased shifts and you stated that in U.K., you are reopening the Pollington factory. So can you expand a bit more on the decision here to reopen this factory. Does it mean that you're currently running at more or less 24/7 in your existing factories? Or what should we think of the current capacity utilization given the fact that you're choosing to put in sort of what seems to be significant more capacity?

The strategy throughout the whole crisis was to keep our really high efficient plants up and running right? So throughout the whole situation, our plant in Borough Green, so the one close to London was always operating 24/7. And so the Pollington 2, we have 2 plants there. Yes, we speak is also running 24/7. So that leads us to a situation where we are in a situation where we need to reopen that Pollington 1 plant, right? The real advantage we have is, it is 2 plants, but on the same site. So that means we can manage shifting resources from one to the other. So we still have the knowledge also on the ground, so which is, it makes it a little easier actually to ramp it up, right? And then also to balance out these shifts. So that literally from the location Pollington 1, we need exactly the supply we need to meet the demand. So that is the situation there.

What's the cost of ramping up a factory like Pollington?

The total cash effect out will initially be close to GBP 1 million. Some of it is also restarting equipment and so on. So some of it will be capitalized. So for the net impact for the year, we do expect to be around 0 as a P&L effect, because we'll start selling out the products we produce in the fourth quarter.

And so that comment, that should mean that you are currently sort of undersupplying the market from the existing points. And given that you are able to sell out more incremental for the new. Is that the right way to look at it?

Yes. And it has to impact it, let's say, our sale is depending on production running schedule. And secondly, it also means that we are driving products a bit further. So the distribution pattern are not optimal before we get that factory up and running.

Okay. And then just last question -- sorry, sorry, just go ahead.

It's also important to understand is that the destocking, right, also happened in the U.K. So we were serving the market this year in the first half by destocking our yards. And so going to next year, actually, we will be starting from a significantly lower stock base, right? So that is why you need to put that into the equation here.

Yes, I got it. And then last question on sort of your update. You narrow your guidance towards the lower end. Maybe you could expand a bit on sort of your assumptions behind the current guidance and then the sort of your visibility on the H2 and -- so how comfortable do you feel about achieving this updated guidance range?

Yes. As I mentioned, there are 2 things driving it. We had the Borough Green event over the summer where we simply lost a little bit more than a week's production and exactly we had already having destocked it had financial consequences. And then, of course, with the market situation in Germany, where we are taking a more cautious approach. We have announced these price increases from 1st of September. There's, of course, always the day-to-day battle in the sales channel to get it through, but we have a firm aspiration on doing that. The Polish market, we continue to see being strong. So we are confident that they will contribute with [indiscernible]. And as I mentioned for the U.K., it is about making sure production runs to scheduled and then we have a visibility among the house builders that makes us confident that we can meet the guidance.

[Operator Instructions] As there are no further questions, I'll hand it back to you for any closing remarks.

Yes. Thanks, everyone, for dialing in. And yes, looking forward to see you soon. Bye-bye.