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Good morning, and welcome to the conference call for H+H Interim Financial Report for Q3 2020. My name is Peter Klovgaard-Jørgensen, and I am the CFO of H+H. With me is CEO, Michael Andersen. We will take you through the presentation, which is also available on our website. The webcast is recorded and will also be available after the call on our website. On Slide 2, we have the agenda for today's call, a short summary about H+H, and I ask you to pay attention to the disclaimer on the forward-looking statements.Now Michael will give highlights to the quarter and a more detailed walk-through of the quarterly market developments.
Thank you, Peter. Moving to Slide 3, I will quickly address key highlights from the third quarter of 2020 as well as at current market outlook. We will go into details on the following slides. Q3 2020 was again a mixed quarter. We saw a quicker than expected recovery in the U.K., where, in particular, August and September were strong. Central Western Europe had a good and stable performance in the quarter, whereas the expected softening of Poland did impact our performance. Due to the quicker recovery of the U.K., we updated our financial outlook on 29th of October. On Slide 4, I will provide an overview of the key markets, inclusive COVID-19 impacts. First, the U.K. market. After 3 months closure of the construction industry, mostly building construction sites were open beginning of July, and productivity levels increased as distancing rules softened. August and September showed strong recovery in activity levels being above last year's level. End of June, H+H started production again to facilitate the increasing demand. And early August, all 3 U.K. factories were running.The U.K. is still affected by lockdowns. The construction and building activities so far are not impacted. In the German market, we have seen that lockdowns have not impacted building sites or distribution centers, and the market situation has not changed in the recent quarter. Higher order -- or high order backlog in the construction companies support midterm demand. Also on the Polish market, lockdowns have not impacted building sites or distribution centers. Expected softening of the market is showing fueled by COVID-19 and expected to continue in Q4. Competition in the CSU market has increased. I'll now pass over to Peter.
Thank you, Michael. I will go through the key figures for the period on Slide 5. Revenue for the quarter totaled DKK 712 million. Organic growth was negative by 7%, driven by impacts from the U.K. lockdown in the beginning of the quarter. Excluding the U.K. market, organic growth was also negative 7% as Poland has negative growth as expected, driven by an exceptional year in 2019, the increased competition in the CSU market and the expected softening of the market. Despite the negative growth for the quarter, we reached a reasonable EBIT of DKK 116 million, equaling a margin of 16%, up from 10% in Q2, but not quite at the 2019 level of 18%. Free cash flow totaled positive DKK 136 million, in line with last year, showing good working capital and CapEx management. Year-to-date, our revenue amounted to DKK 2 billion, corresponding to a negative growth of 9% compared to 2019. Investments were kept at a low level, totaling DKK 65 million at the end of September. ROIC amounted to 18%, close to last year's level. Financial gearing was 0.5x EBITDA before special items, demonstrating a comfortable level below our long-term target of 1 to 2x EBITDA.Moving to Slide 6, we take a closer look at the revenue for the period. As mentioned, revenue was impacted by the U.K. market with a total of negative 6%. This was mainly related to July as August and September were slightly above last year. Germany had organic growth of 3%, driven by higher prices and stable volumes. Poland had organic growth of negative 21% against an extraordinary high activity level in 2019, where organic growth was 20%. Both pricing and volumes were lower than the exceptional quarter last year. Other markets grew 4% adjusted for Russia, which we divested in Q4 2019. The Nordics, Benelux and Switzerland contributed to the organic growth in mainly pricing but also volume. On Slide 7, I will go further into details on the gross margin. Despite pressure on the top line, we maintained a gross margin of 34% for the quarter, 4 percentage point higher than Q2 and reaching the 2019 level for the quarter. The quarter was negatively affected by lower volumes in the U.K. and in Poland, offset by efficiency improvements as well as higher prices. Year-to-date gross margin ended at 32%, above 31% last year. This was overall mainly due to efficiency improvements, higher prices and government grants. On Slide 8, we would like to focus our margin -- we would like to describe our margin resilience in a bit more detail. As we have seen, our gross margin has not been severely impacted by lower volumes. This proves that our cost structure is becoming more resilient to volumes drops. Overall, 56% of our costs within gross profit is direct production costs being fully adjustable. On top of this, distribution is also fully flexible. Wages and salary comprise around 17% of the cost base, including overtime. And as some of the production overhead is also flexible, it means that around 80% of the cost base is fully variable. We do continue to work with the cost base to see how we can minimize overtime usage, optimize production and continuing to invest in productivity improvements. Moving to Slide 9. We go into development of the EBIT margin. Despite the market challenges, we gained 6 percentage point from last quarter, reaching 16%, however, still 2 percentage points below last year. Key drivers for the margin level in the quarter was mainly the lower volumes. The extraordinary high level in Q3 '19 was impacted overall by higher prices and a strong quarter for the divested business in Russia. Year-to-date EBITDA ratio is in line with last year, but EBIT ratio slightly behind by 1 percentage point. Strong operational excellence continues to contribute across all markets, including continuous improvements, purchasing initiatives and synergies from the acquired companies. As we move to Slide 10, we see a net interest-bearing debt and a financial gearing at continued low levels. The net interest-bearing debt decreased DKK 134 million since end of 2019 totaling DKK 273 million. Looking at the first 3 quarters of 2020, the net interest-bearing debt development was mainly driven by operating cash flow, partly offset by the payment of the acquired German aircrete factory in January as well as the last -- the third payment for Grupa Silicaty in Poland, totaling DKK 74 million.The CapEx level, excluding IFRS 16 impact, amounted to DKK 65 million, which was related to maintenance and essential upgrade products. By end of September, financial gearing was 0.5x EBITDA as we have held back CapEx as part of our resurgence program. Compared to Q3 last year, we see a decrease of DKK 198 million, primarily driven by strong operational cash flow, partly offset by CapEx. With a credit facility of DKK 1.1 billion, we currently have unused committed bank facility of DKK 0.9 billion at 30th of September, which corresponds to an increase of DKK 0.1 billion in the quarter. On Slide 11, we have gathered the key -- the financial key figures for the quarter and year-to-date. A few items to highlight is that year-to-date we've seen a pressure on the top line impact from COVID-19. Despite this, we have increased gross margin and the EBIT kept at a decent level of 13%. Investments were kept at a low level, totaling DKK 65 million. And for the year, we expect CapEx in the range of DKK 120 million to DKK 130 million, but I will get back to that when we get to the outlook. Total equity increased by DKK 219 million compared to Q3 '19. And, as per 30th of September 2020, equity amounted to DKK 1.477 million, equaling a solvency ratio of 47%. Free cash flow amounted to DKK 136 million and was predominantly impacted by strong operating cash in the period. With that, I will continue to the market outlook for rest of 2020. Moving to Slide 12. As mentioned, we see a recovery in the U.K., but volumes are still uncertain. We still expect a softening in Poland compared to last year and a stable to declining market in Germany. In our outlook, we do expect that any resurgence of COVID-19 is not expected to have nationwide impact on our markets. More specifically, in the U.K. market, we have listed the drivers, which have supported the recovery of the market. Regarding governmental stimulis, it was announced in the beginning of July that the threshold for stamp duty is temporarily increased from GBP 125,000 to GBP 500,000. This will continue until the end of March 2021.This could have a rather large impact as it covers 9 out of 10 house sales in the U.K., which will now be exempt from stamp duty. Further, the requirement of housing should be finalized by the end of year in order to utilize the Help to Buy program, but have been extended till the end of February 2021. Additionally, we've seen improved productivity levels at the construction sites, delivering sales volumes above last year in August and September. However, a continuation at last year's levels in Q4 was uncertain. In the long term, we still believe that fundamentals remain attractive. This leads us to the financial outlook for 2020 on Slide 13. We have previously presented our view on the current market situation. Based on the performance in Q3 and the current market situation, we upgraded our financial outlook on 29th of October. Revenue growth before acquisitions and measured in local currencies are expected to be in the range of negative 12% to negative 8%. EBIT before special items is expected to be in the range of DKK 290 million to DKK 320 million. Investments, excluding acquisitions, divestments and IFRS 16 effect, are expected to be in the range of DKK 120 million to DKK 130 million. Looking at the realized figures year-to-date 2020, we see an overall -- we overall expect negative organic growth in Q4, driven by a softening in Poland and uncertainty in the U.K. This finalizes our presentation for Q3 2020. And we'll now go to Q&A. Operator, will you begin?
[Operator Instructions] Our first question comes from the line of Laurits Kjaergaard from ABG.
Michael and Peter, a few questions from me, if I may. The first one is what you left off, Peter, looking at the organic growth. Obviously, you mentioned negative 9% organic growth in the first 9 months, and this is including the essential shutdown of the U.K. in Q2, which you realized. And what we hear for Boris Johnson, and he's saying all construction sites should remain open. Now you're guiding -- you're taking the bottom of your guidance, and we're halfway through November. What are we missing here for Q4? Are you really conservative here? Or is there something that could go potentially wrong here in Q4?
I think as highlighted in the beginning, there still is a large amount of uncertainty on the market. So in the U.K., we saw a very strong recovery in August and September being slightly above last year's levels. But we must also admit that there is some certainty here. We know that productivity levels are not fully back to normal levels. And there is an uncertainty of how long -- even though the Help to Buy has been extended, then for how low we are still supplying products into those finalizations under that program. And that causes some uncertainty. And a new Help to Buy program has been agreed and has been for a while that will start after the current Help to Buy program. But the practicalities around the new program is not yet in order. So therefore, that does have an impact right now on new houses sold. And that also leaves us with uncertainty around Q4.
If I may add just one thing that we tend to forget because we have so many years now with very warm weather towards the end of the year. I just want to caution you that we also need to be able to absorb any significant deterioration in the weather towards the end of the year where we have seen maybe not in the last 3, 4 years, but before that, a cold sale coming in over Europe in December has a significant impact on volumes as well or could have a significant impact on volumes as well.
Okay. That's very clear. Maybe looking a little bit ahead on the gross margin, which has obviously been quite strong through the corona situation. You mentioned that obviously, the higher input costs have been filtered out by lower transportation prices and also efficiency and improvements in the company. I'm not sort of asking you to guide for next year, but could you just talk about maybe the gross margin dynamics for next year? Have you done all the efficiency for this year kind of beforehand? Or is there anything more to gain next year? And what are we -- what can we expect in terms of input costs for H+H for next year? Could you give some -- a little bit of highlights or considerations that you're having at the moment?
I think if we start with the latter on the input costs, I cannot guide into next year, but at least, I can say that if you look throughout 2019, we were quite efficient in our procurement initiatives in making postponements of improved cost increases. And thereby, when we enter 2020, we entered this year by assuming that we will get a catch-up effect of this. As we then look in the year and the way that it has progressed, then COVID-19 has had an impact in many different ways, but also in the dialogue with the suppliers. Also meaning that we have been able to mitigate some of those increases that we originally expected.Of course, we do continue to see a pressure in particular on CO2 quotes that continue to come. And therefore, again, I'm sort of repeating myself a little bit from last year, but it is hard to believe that we, year-over-year, can continue to postpone unless we make other big changes in the organization. So therefore, we -- nonetheless, we must expect continued increases in the coming years. I think the question mark is maybe around transportation and distribution, where we have seen some impacts on the oil, which, of course, is also benefiting us. And I guess there's a little bit of uncertainty on that in the coming years. So on the input cost, I would say that we have had a couple of good years. And I think it's a matter of time before this starts to catch up.If you then look at the other side of the equation, which is -- which are the sales prices, then, obviously, through the consolidation that we've done in Poland and in Germany, we have been able to -- in the last couple of years to get really strong pricing through and price increases through. And we have also been successful in driving a price strategy of buying for the price, even though it may cost the volume. And this proves to be good on the bottom line, also in nominal numbers that there is a very strong impact on the EBIT numbers from this. But of course, we say the Polish market is in a softening condition right now. There's increased competition. And that means that the levels of price increases that we historically got and that we also got in '19, we have not seen to the same level in 2020. And I don't see a reason why that should go back to 2019 basis as such. In Germany, we also continue to pressure for price developments we've had successful there. But I think it all depending on how the markets will deliver next year before we can say more clearly around that.
So looking at your long-term EBIT margins, which so far reiterated, I mean those were announced in '18 where you realized adjusted around these 9%, 10% and you have long-term margins of 11%. Now you're around 12%, 13% even for this year. Shall we say that we can expect some sort of normalization back to the business? Or is there hope for you to perhaps like increase your long-term expectations for H+H, simply realizing that you're at a different stage now than you were back then?
I think when you look at the long-term targets for EBIT, us being a cyclical business, it is more like, let's say, announcing a floor than it is a target. And as it is right now, we are above that flow because markets are good. But when we talk about long-term return and the EBIT margin, it's more like a floor. And I think that if we get, say, over the next 3, 4, 5 years a significant volume drop due to less market activity, I think, promising an 11% margin is ambitious. We stick to it. We have also proven this year that we can. But that is how we want to view the EBIT as statement as to how we're going to manage over a full cycle.
Right. And especially this year has been quite turbulent, but still, you have achieved quite good margins. So it seems that H+H is simply at different stage than it has been previously. That was more my thought process. Maybe just one other question on sort of the long-term perspectives here. You mentioned you have a quite strong debt capital structure at the moment. You have a little bit of, let's say, resources to buy some more factories and businesses. Could you just give an update on sort of the M&A strategy? And is there anything that's been postponed due to COVID-19 that we perhaps can expect an acceleration of, let's say, M&A activity next year?
I think when we look at the equity story that we put forward, we are sitting to the market that we see ourselves as a growth case. And if you look at where should that growth come from having -- even also this year if we disregard the U.K. lockdown, a pretty strong market, I think it's clear that, that our top line growth has to come from M&A. And that's why we also need to have a good reserve to be able to use in that respect. We have worked this year on the focus areas that we have talked about also earlier on, which is continued consolidation and then reducing our job in Germany. We do have a pipeline that we work on. We have also -- there was an opening of travelers mix in the second, into the third quarter, which actually meant that we could continue our efforts.What we have seen unfortunately over the past, say, month or so is that it has been very difficult to interact. The targets we are looking at are -- these are not professional sellers. So it means that they're not used to work in the virtual space, and it's very much depending on our ability to build trust and that comes through personal meetings. And therefore, there is -- we have had some difficulties in moving forward. But we have not, say, changed our view on our likelihood of success. So when we -- let's say that when we are out of the COVID, at least what we can say is that we will open up for higher activity level on our side. And that should at least increase the likelihood of success.
Michael and Peter, congrats on a solid result once more.
Thank you.
And the next question comes from the line of Kristian Johansen from Danske Bank.
First question is on your Q4 indications or guidance, you can call that. So this quarter, I learned that when you say softening, it goes all the way down to minus 21%. So I'm just curious, when you say Germany should be stable to a slight decline in Q4, well, I mean, what's the range we are talking about? Because obviously, where I want to go is obviously that you've had a decent positive growth in Germany during 2020. So it seems that you are pointing towards a more negative view on Germany for Q4?
I believe that just on your first comment around our Polish organic growth of negative 21% that does needs to be seen also on the back of a strong 2019, which was exceptional. The development in Poland for us is not really a surprise. And it has been part of our growth forecast and expectations all along. In terms of Germany, what we're seeing there is that there is, obviously, a battle for price, nonetheless. And as we have been consolidating the market and have taken a very proactive price strategy, it also means that at sometimes we also lose volume on that.And we have seen that in some cases. And we also expect, nonetheless, that in Q4, it will be a stable, but a potential decline into next year. Again -- sorry, not next year, but for Q4. And I think also just to compare again to last year, during last year, in Q4, we had some upsides in some of our customer rebate structures, et cetera, which had a positive impact last year, which cannot be repeated again. So there is a little bit of a phasing as well between the course. And therefore, there can be some one-off impact in Q4 in Germany based on that.
Okay. But you had negative 8% organic growth in Germany Q4 last year.
Yes, which did include some upsides from [ lease on all structures ].
Fair enough. Fair enough. Then just on this change in EBIT guidance. So obviously, you -- on organic growth, you're saying you expect now to be in the higher end of what you indicated before, i.e., the minus 12% to minus 8% now. But yet, you are expecting to have an earnings, which could be higher than what you were expecting previously? Can you just elaborate on the drivers of what is the positive earnings surprises to you in this regard?
Some of it is the mix between sales price and volume that we have actually been able to maintain pricing and then losing volume a little bit, as I also pointed out in the numbers. But the net effect on EBIT is quite positive on that. And then we must also say, in all honesty, that our resurgence plans have been effective. And when you initiate that in a situation like this, where there is that amount of uncertainty, then, nonetheless, you do have a little bit of buffer in your -- in the effectiveness of your resurgence plans. And looking in the first 3 months -- sorry, 9 months, we have been effective in that and coming out both of in Q2 with a EBIT margin of 10%. We see actually quite strong with the impact that there's been from COVID-19.And then turning that up to 16% in Q3 with a very low July activity, which is normally a very strong period for us, is a testament of our flexibility in cost base and also our ability to adjust our fixed cost base. So the fact that we get to an EBITDA margin in line with last year for the quarter, we see as very, very strong. Then on the EBIT, and then we can't quite follow it because of the lower volumes and the unchanged depreciation. So there's a longer lead time on that, obviously. But otherwise, we must say that we have been effective in mitigating the impacts from COVID-19.
But also, if I understand your question correct, you're talking about both guidance and also what is that is the major change since our last guidance. I guess that's the questions. And I think that we need to also mention that, that almost the only thing that is surprising us compared to the guidance you came out with in August is the performance in the U.K. And that goes also on to the rest of the year, where we see much higher volumes than what we expected back in August.
Okay. That's quite clear. And then just my last question is, is there still a scenario where you would be able to close an acquisition before the year-end? Or is that becoming too tight?
I will not rule anything out, Kristian, but I would say it's becoming a little bit more difficult when you cannot meet with the sellers and complete activities. But I'm not ruling anything out at that current stage. But I'm less optimistic than I was a quarter ago.
And as there are no further questions, we can conclude this call. So thank you all for attending. You may now disconnect your lines.
Thank you. Thank you, all. Have a nice day.