© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the H+H International A/S 2021 Annual Reports. For the first part of this call, all participants will be in listen-only mode. And afterwards, there'll be a question-and-answer session.
Today, I am pleased to present CEO Michael Andersen; CFO Peter Jørgensen; and Investor Relations Manager, Andreas Holkjær. 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 Holkjær, 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 two 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 emission 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, financial gearing remained low at 0.6 times EBITDA, comfortably below our long-term financial target of one to 1 to 2 times 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 zero emissions on our products and operations by 2050. We also promised to develop emissions reduction roadmaps and have these submitted for verification under the Science Based Target initiative (sic) [Science Based Targets initiative]. Today, I'm proud to present that H+H, 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 two mid-term targets which would 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 add 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 [ph] our existing (04:53) – 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 as testament to our targeted M&A strategy and ongoing investments into further upgrades aimed at increased production efficiencies.
Growth through acquisitions 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 the 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's life cycle from the use of raw materials production and supply chain, through the energy efficiency of both new and existing buildings, and as well as safe and healthy indoor environments. H+H is strongly positioned to take advantage of these longer-term trends and we'll 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. Innovations 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 their commercial range.
This concludes my prepared remarks, and I'll 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 and 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 the factory in [indiscernible] (08:43) 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 UK 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 crisis 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 UK 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 diving into the financials, please turn to page 8 for an update on the Polish market. Following a 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 the 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 UK, 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, but 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 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 UK market and the year-on-year higher volumes following the national lockdown in 2020. Revenue in the UK 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 UK, 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 constrained by upgrades performed during 2021. Revenue in Poland was 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 by 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 costs, which comprise raw materials, energy and other direct production costs. During 2021, we've seen increase in costs for transport and energy as well as for raw materials which were primarily a result of higher costs 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 shift 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 costs which is adversely impacting earnings margins. This effect is primarily driven by three main factors. Firstly, we have seen increases in the prices of certain raw materials, mainly cement, limestone, pallets and plastic foil. Second, we have experienced higher transport costs in the UK 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 two of our factories in Germany, resulting in relatively lower production output from the factories in the period. These upgrades have also resulted in the 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 of 2020. This corresponds to a gross margin of 30% compared to 31% in Q4 of 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 EBITDA margin of 19% which is on par with 2020. And finally, EBIT before special items amounted to DKK 94 million compared to DKK 74 million in Q4 of 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 comprise 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 [ph] the Wittenborn (20:56) 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 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 0.4 times EBITDA at the beginning of the year to 0.6 times EBITDA at the end of 2021, but remains comfortably below our long-term target of 1 to 2 times 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 this 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 cancelled 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.
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 prospects 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 our ambition to maintain minimum average levels across a full business cycle.
This concludes my prepared remarks, and 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 the 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 mid-term targets that would 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 add a 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 UK footprint which may include a potential expansion of the 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.
Thank you. [Operator Instructions] So far, we have one question from the phone set. So, the line of Kristian Johansen of SEB, please go ahead. Your line is open.
Yes. Thank you. A couple of questions from my side. In your commentary around your three 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 2022 to come down versus 2021 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?
Hi, Kristian. Thank you for your question. You are right that, of course, there is a clear link between our input prices – input pricing and our sale 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 guide for 2022 includes sort of a catch-up effect for 2021 on the input costs, plus the inflation rates that we saw in the mid-February timeframe.
With that in mind, we are aware that we do need to push through 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 those 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] (30:21) 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.
And increase in gross margin during 2022, would that be fair to assume?
That would be our base assumption.
I understand. And then, maybe just on the special items, can you, in any way, guide us or help us just roughly indicate what you expect in terms of special item costs in 2022?
So, a good point. Special items, we are – as we also communicated early in the year, the upgrade of the German Wittenborn factory is expected to cost certain increased transport costs as we are getting goods in either from Feuchtwangen in the south or from elsewhere. And therefore, we are projecting a increased transport cost. We saw a similar case in the UK during the Burough 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 [ph] Q2 (32:15), maybe with a slight overlap into Q3. And therefore, yes, it will be during that timeframe.
Great. Then, you now more clearly state that you would consider to add more capacity in the UK. 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 UK, what's roughly the CapEx of a greenfield factory there?
So, you are right that we have for some time been stating that we are ready to also look at added capacity in the UK market. The government have, for 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 [ph] potential ask (33:33).
In terms of options, then they have different options. Obviously, one is that the – one option is to expand the existing factories and add a capacity to that, another option would be to potentially look at more greenfields.
And the rough estimate of a cost of greenfield factory?
I think, it's no surprise that, if 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. [ph] And if we make it sooner, I think that there is (34:14) going to be a duration of at least three, if not four 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 of that size, that the total investment could easily exceed £40 million. But again, over a longer time period and also initiated not in the near future in terms of those cash flows.
Understand. Thank you. And then just my last question is in terms on your considerations around the impact of the war in 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 also, 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 de-risked 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 we look at the short-term impact, then within our guidance we do 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 costs 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 chains are 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 [ph] cost/price (00:36:43). I would say right now, there are many movements particularly on the energy prices which, of course, we observe within the guidance presented here. We assume that the inflation rates would stabilize again at the mid-February levels.
Okay. Can you remind us on the Polish market, do you know what level of imports from Ukraine or 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, though we have seen some evidence of both coming from 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 the total volume. And of course, one would assume that that that will stop and then, probably the – a small also, let's say, stabilizer for us if demands should start to drop.
And maybe just additionally on that in 2019, where the pricing was very high, we have seen an increased activity from Belarus. During 2020, it seemed to sort of drop down a little bit again. So, it is a little bit moving.
Got it. Understand. Thank you so much. That was all for me. Understand.
Thank you. [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.
Again, 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.