H+H International A/S

CSE:HH

Earnings Call Transcript

[Bjarne Pedersen, Vice President of Business Development & IR]

Hello, and welcome to the conference call on H+H Interim Report for the first quarter of 2018. With me is CEO, Michael Andersen, and CFO, Ian Perkins. My name is Bjarne Pedersen for Investor Relations. Our home page has a presentation available. We will now go through the presentation. There is a page number in the upper-right corner, and we'll refer to this.For your information, this call, including subsequent questions, is being recorded for playback on our website.On Slide 2, there is a disclaimer on the forward-looking statements. There's an agenda. We'll go through highlights of financial performance, outlook, and the long-term financial targets, segments, market development, the intended share [capital] increase, and then we will take questions and answers at the end.The numbers in the quarter [was] impacted by both our acquisition of HDKS and the planned standstill of the Borough Green factory in the U.K., and we will try to guide you through the impact on the numbers. Further, we need to stress, as we do every year, that Q1 and Q2 is connected due to facing issues from weather and the number of sales days around Easter, depending on whether that is in March or in April.We will now go to Slide 3 and the highlights. We had an organic growth of 5% in the quarter. We had extreme weather conditions in the markets in the Western European segment [indiscernible] in March. On the EBITDA before special items, we had DKK40 million in the first quarter versus DKK37 million last year, and we [need] to take in account that there was an adverse impact from the planned standstill of the Borough Green factor, so we had no absorption of our production overheads.On the acquisitions, we made the closing of the HDKS transaction end of February, so there is one month of figures included in the Q1 report. We have had closing of Grupa Silikaty after the ending date of this period, so there is no impact or any numbers in the Q [indiscernible] impact from this transaction.And then finally, on the capital structure, we got approval from the Annual General Assembly to issue new shares with net proceeds of around DKK500 million. We expect to execute this in near future, assuming unchanged market conditions.Moving on to the next slide, Slide 4 around the acquisition of HDKS, on the right-hand side we have a map where the blue spots, they show the location of the factories, so we have a cluster in the Northeast and in Southwest, and then one factory in Switzerland. HDKS is the second largest producer of calcium silicate units in Germany, and, as mentioned, seven factories in Germany, and then one in Switzerland, where it's also operating. HDKS had revenue in 2017 of DKK500 million, and EBITDA was around DKK100 million. In the German CSU market, it has a market share of around [14%], and the company has around 200 employees.On the next slide, Number 5, we have similar information on the acquisition in Poland, Grupa Silikaty. If we start looking at the right, we have the map, and again, the light blue spots are on the factories we have acquired, and the light green ones are the ones we already have. You see another, much more overlapping, geographical footprint in the Polish transaction. Grupa Silikaty is the second largest producer of calcium silicate and operates seven factories in Poland. Latest public number [indiscernible] 2016, estimated revenue of around DKK160 million, and EBITDA of DKK11 million. And the market share in the Polish CSU market is around 30%, and it has 300 employees.On Slide 6, we have details on the financial performance for the first quarter. Revenue, 15% up, everything included. If we focus only on organic revenue is 5% up, and the two things affecting the differences, the development in currencies, nothing significant this quarter, and then it is the acquisition of HDKS for one month.On the gross margin, it says 22% this quarter versus 23% last year. We have made a [star annotation] because there are a number of elements we need to take into account. First of all, we expensed [some] special items on the gross margin level due to sales of imported products into the U.K. If we adjust for this, gross margin would have been 24% this quarter, and that is the same level as it would have been last year in the same quarter, adjusted for the special items. And if we, on top of this, adjust for the overhead recovery, or the lack of it due to the standstill of the Borough Green factory, the gross margin would have been 26% in this quarter, so 2% up on same quarter last year.EBITDA before special items is at DKK40 million versus DKK37 million last year. The EBIT margin before special items, 3% versus 5% last year. And besides the effect from what we have already mentioned until now, we also need to take into account that, when we did the acquisition of HDKS, we bought, for example, the order book. We bought trademark. And both of these has to be depreciated over quite a short time period. And as the EBIT in absolute number is low in the first quarter, this additional depreciations has an impact on the EBIT margin. So if we adjust for this, EBIT margin would have been higher than last year, as well.'Return on invested capital, 12% this year, 14% last year for the reasons we have already mentioned, and the additional investment into HDKS. The investments and the free cash flow [is here presented] excluding acquisitions and divestments. We have not had any. Investments are at DKK29 million versus DKK23 million last year, so DKK6 million up, and to plan, predominantly the Borough Green factory. And the free cash flow, minus DKK99 million in this quarter versus DKK94 million last year, but it's normal seasonal buildup of stocks as the main reason for that.On the net interest-bearing debt, we are at DKK1.3 billion, and again, it's the cash payment for the acquisition of HDKS that is the predominant reason for that. Equity stands at DKK370 million at the end of the first quarter.Moving on to the next slide, Slide 7, is the outlook for 2018. We reiterate the original outlook, the growth of around 5% on the top line, EBITDA in the region of DKK350 million to DKK370 million, then we have a number of special items. All of that is for things we have touched upon, either the Borough Green factory or integration and transaction costs for our two acquisitions.On the investments, we have stated DKK150 million, and we need to bear in mind that around DKK35 million is due to a special situation where we have a similar deduction on the purchase price from HDKS. So of that, investments this year is guided to be [DKK115] million.On the following slide, Slide 8, we have restated our long-term financial targets. It's an EBIT margin before special items of minimum 11%. It is a return on invested capital of minimum 12%, and a financial [gearing] of 1% to 2%, which will naturally depend on getting the share [count] to increase in place. And on the right-hand side you can see the historical performance versus the [indiscernible] that has been set forth [on these initiatives].On Slide 9, other selected items. We have the special items. DKK7 million of that is related to sale of imported products in the U.K., and DKK9 million is related to acquisition and integration costs. The PPA on HDKS, which is -- PPA stands for Preliminary Purchase Price Allocation, and that is where we divide the DKK800 million to the different asset classifications. And it's worth noticing we have recognized DKK133 million as goodwill. As a consequence of that deferred tax also increases, and the other classifications has gone into other intangible assets, fixed asset, net working capital, et cetera.On the solvency, the solvency ratio at 15% end of March 2018, and that's, of course, diluted from acquisitions until the anticipated share capital increase has taken place. And on pensions, we had actuarial gains in the comprehensive income statement of [DKK15] million, but looking at the balance sheet, the pension obligation is the same at 31 December 2017, and that is because we have [bought] some pension obligation as a part of the HDKS transaction.Moving on to Slide 10, Western European segment, where we'll dive a bit into the market development, looking at the figures and [indiscernible] in the upper-left corner, revenue in total, 7% up, but looking at organic growth, we are 6% down on last year. EBITDA is also down the last year, but for reasons already set out, and also stated in the text below. Investments are at DKK28 million, which is higher than last year. And again, it's the Borough Green factory who is driving this. The [indiscernible] [loss] organic growth in the quarter is due to the lower sales volume, and that is related to the extreme weather conditions we've experienced in March in the countries in this segment. Prices, they are higher than same-period last year in all the markets in this segment. EBITDA was adversely impact by the planned standstill of the Borough Green factory. Ramp-up of the factory is running to schedule here throughout the second quarter, and we expect maximum output from the factory to be achieved by the end of the second quarter.On to next slide, Slide 11 and the Eastern European segment. Revenue, both actual and organic, is significantly up on last year due to Poland. EBITDA follows as a consequence of the increase in revenue, and the investments are very low, only DKK1 million in the quarter. There's strong growth in the Polish market, and both price and volume development is favorable to last year. Sales volume, they are limited by production output. That is also why investments are low, because we let the factories run as much as possible, so we don't have time for standstill to do various upgrades, et cetera, the most needed maintenance.[indiscernible] market, we expect additional capacity to come in, as already mentioned last year, so there is nothing new. But we have confirmation that these things are running to schedule from what they communicate.Looking at Russia, we had negative organic growth due to price pressure. There is a [indiscernible] market outlook for Russia. To compensate for that, we have successfully delivered products to the U.K., so we utilize the capacity in Russia as much as possible on the plant we have around St. Petersburg.On Slide 12, we reiterate the intention of a pre-empted [indiscernible] to increase with a net proceed of around DKK500 million. We would use the money to reduce the increased interest-bearing debt following the acquisition of HDKS. We will use it for strengthening of the balance sheet, and should the right opportunities occur this year, next year, we will have funds available to participate in further market [restructure].On the M&A activities, we have some potential acquisition targets identified. We have kind of high-level dialogues with some of these targets. Having flexibility on financing is a strong sign to the sell side. I think we also need to stress that the ability to complete such acquisition, and the timing will depend on both the market development and a number of other things that we are not fully in control of.And a bit more flavor to the opportunities, on Slide 13. On the right-hand side, we have a map showing various opportunities in various regions, and we focus quite much on Germany because we see that as an over-capacity in the German aircrete market. We have also showed that we are able to make successful restructuring with the [Grupa Silikaty] transaction in mind in Poland. We are now harvesting the synergies from that, and we pursue similar opportunities in Germany. We have a target list. It includes companies suffering from over-capacity. It includes family-owned businesses that have succession issues, and businesses that are subsidiaries in groups where wall-building materials not is a part of the core business.And we are also in a situation where we will have limited impact from the antitrust regulation in Germany, and that is why we call this a unique situation, because most of the other potential buyers for some of these businesses will have significantly more restraint due to antitrust regulation.With that, we are done with the slides we've prepared, so we are on to the Q&A session. And for that, I would ask for the lines to be opened.

[Operator]

[Operator Instructions]

[Bjarne Pedersen, Vice President of Business Development & IR]

State your name and where you're calling from, and we will try to elaborate on your questions. Anyone eager to go first?

[Kristian Tornøe Johansen, Senior Analyst]

Kristian Tornoe Johansen from Danske Bank. Just have a few questions. In terms of Borough Green, can you update us on the process? So obviously you expect this to be up and running fully by the end of Q2. Where are you as of today? Are you at full capacity? Are you still on the ramp-up?

[Michael Troensegaard Andersen]

In the assumption for our budget this year, we were expecting to have a ramp-up during the second quarter, starting from zero in 1 April and ending up at full capacity output at the end of June. We did start up actually a few days prior to 1 April, and we do see encouraging output from the plant. We are continue [indiscernible] the volume right now, but bear in mind that it becomes harder and harder when it is optimization towards the end of the period where you get from a good utilization to really optimize all the [steerings], but we feel that we are [fully] in control, and we feel that we are on schedule. But we are not at full output yet.

[Kristian Tornøe Johansen, Senior Analyst]

Just on Poland, obviously you have -- I think most people are amazed by the organic growth you delivered here in the first quarter. How far are you on capacity utilization, and when will you sort of hit maximum capacity if this trend continues?

[Michael Troensegaard Andersen]

From an overall point of view, I think that the majority of the upsides, going forward, will come from price. Of course, we continue to optimize on our processes, and we manage to squeeze out more volume, but we do not have significant over-capacity in Poland. And what we are doing right now is that we are selling what we produce. We [indiscernible] within the perspective of more than one year. Of course, we have investment [growth programs] in place where we can further [optionalize] the output from the [plants] to get more volume, but we are not going to be able to make any step changes on the volume as it is right now. We do not plan for it, either. We'd rather utilize our position and our -- because we have a big capacity and a big share of the total capacity available [to well-optimize] on our price.If you look at the prices in Poland, they are still quite well below prices in other of our [markets], still believe that there is chance for price increase in Poland, going forward.

[Kristian Tornøe Johansen, Senior Analyst]

And then, just to confirm, obviously you closed down some capacity not long ago. That's fully closed down? None of that can be restarted again?

[Michael Troensegaard Andersen]

Not at all. All the plants have been decommissioned, and yes, as you may recall, because we sold a lot of [indiscernible], but that was actually predominantly [indiscernible] that we sold as [indiscernible] back in 2015, '16.

[Kristian Tornøe Johansen, Senior Analyst]

My last question, obviously you now get the exposure into calcium silicate. I know it's fairly limited what we see in Q1, but at this stage, obviously you have a bit more details. Can you just elaborate a bit on the market dynamics you're seeing in Germany and Poland on calcium silicate?

[Michael Troensegaard Andersen]

Yes. If you take Germany -- if you look at the market and we see where is this predominantly used, it's predominantly used in the high-rise segment. The high-rise segment has shown -- and also we look at [indiscernible] -- are showing higher growth rates than the low-rise segment, which is because of this new [indiscernible] that is ongoing all the time. So that's one thing to bear in mind. I think another thing to bear in mind is that the order horizon for calcium silicate is much longer than it is for aircrete, so we find ourselves in the fortunate situation when we guide that we have a little bit more reach in our outlook than we would have in the traditional aircrete business, where products are basically [poured] off from stock, and we have an expectation in the market for very few days of delivery time. In the calcium silicate market, at least in Germany, the order [reach] is much longer. And therefore, I think that when you hear us -- when we get more in control of the business, you'll hear us talk about [further the guidance talk], that should know that that is founded in a longer-reaching order portfolio. And I think that is a good dynamic, in a way, right?

[Bjarne Pedersen, Vice President of Business Development & IR]

Question from other participants in this call? If there are no further questions, we will allow to conclude the call. Thank you all for dialing in, wish you a nice day, and good-bye.