H+H International A/S

CSE:HH

Earnings Call Transcript

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

Good morning and welcome to the conference call on H+H interim results for the first quarter of 2019. With me is CEO Michael Andersen; CFO, Ian Perkins; and my name is Bjarne Pedersen from Investor Relations. On our homepage, there's a presentation available. We will now go through the presentation. There's a page number in the bottom right corner, and we will refer to this as we go through the presentation. For your information, the call, including subsequent questions are being recorded for playback on our website.On Slide #2, there is an agenda. There we talk facts about H+H and a forward -- a disclaimer on the forward-looking statements.Move to Slide #3 and the financial highlights. Revenue in the first quarter of 2019 was DKK 666 million, it's an increase of 53%, of which 22% is organic growth and the rest predominantly coming from the acquisitions of HDKS in Germany and Switzerland, and Grupa Silikaty in Poland, the rest is an FX exchange.On the gross margin level, we report 27% for the quarter. Last quarter the reported number was 22%, but to give you some flavor for that, last year should have been adjusted due to the standstill of the Borough Green factory in special items, so it would have been 26%. So 1% up this quarter over the same quarter last year.EBITDA is at DKK 97 million both before and after special items, and again significantly higher than last year. Same picture for EBIT. And we then go to the EBIT margin as a consequence of that 8% in the first quarter against 3% last year. And the return on invested capital 13% against 12% last year. Investments we are at DKK 11 million against DKK 29 million last year. The free cash flow is [indiscernible] DKK 23 million and it was [indiscernible] DKK 99 million last year, and it's predominantly due to the normal seasonality adjustments. There is a negative liquid cash movement predominantly from the Western European segment. But the difference this year is that the stock has developed value set, actually it's declined a bit where we normally build offset in the first quarter.On net interest-bearing debt, we are at DKK 659 million, significantly down than the last year. That is due to share counts increase, and of course also the improved earnings we are enjoying and same reasons for the equity now standing at DKK 1.046 billion.On Slide #4, we have the update of the outlook for 2019. It includes the impact from the closed year of 51% ownership of [indiscernible] that will be fully consolidated into our accounts. Revenue growth before acquisitions and measured in local currencies is expected to be around the 7% mark, that is unchanged. EBITDA before special items will be in the range of DKK 460 million to DKK 510 million, previously it was DKK 445 million to DKK 495 million.EBIT before special items, now DKK 280 million to DKK 330 million, and previously DKK 270 million to DKK 320 million. Investments are unchanged, around DKK 160 million, and that includes the CSU line that we established in the northern part of Poland.This was a number of the assumptions. We had the -- Brexit will not lead to a significant decrease in demand. We will expect continuous economic growth. We had our excellence programs, one, and expect them to deliver [ strength ] and then we expect that interim raw material costs, they will rise at higher rates than inflation. And there's also different set of assumptions in our financial report in the full year.On to Slide #5, more on Brexit, where the header says kicking the can down the road because that is how we see it from our perspective. We have just inserted a number of dates here to outline when we could expect something to happen. Now sooner potentially we have the European Parliament election and the U.K. is expected to participate. If they have occasion to feel not, they are automatically out with no deal. Then in the middle of June, the European Council have a meeting where they review the Brexit process. Then in September, both the Labour Party and the Conservative Party in the U.K. have their party conferences. And then at the end of October, the current exit date, and again, if no deals are done until then, the current structure is that the U.K. will leave the EU without a deal. But the proof is in the pudding.On to Slide #6, and on the Western European segment. On the table in the top we have the numbers. Revenues up to DKK 464 million, that is 50% more than same period last year. Organic growth was at 27%. EBITDA before special items is DKK 66 million and it was DKK 34 million last year when we measured before special items. EBIT is at DKK 34 million, and this again, also up on last year. Investments starting low at DKK 5 million, and we had DKK 28 million last year and that was predominantly related to the [ BG ] upgrade.Organic growth in the quarter is driven by higher sales and it is volume-related and it is in the U.K., and then of course we have had this favorable weather situation throughout the first quarter against the very harsh winter in March last year. Prices, they are higher than the same period last year in all markets. And the EBITDA improvement comes from both the acquired and the existing aircrete business.As also mentioned, the net working capital stock has been reduced in the first quarter and that is predominantly related to the U.K. And also as we say in [indiscernible] increasing cost pressure is expected to carry on and accelerate through the year. And there is some downgrades of macroeconomic in some of the regions and we will not expect that to have a direct impact on the demand in our markets for the short term.On to Slide #7, and the Eastern European segment. Revenue is at around DKK 200 million, and the picture is the same, significantly over last year 12% organic growth, predominantly coming from pricing in the Eastern European segment. EBITDA before special items of DKK 49 million. No special items, so again, it can be up on last year. And the same picture, EBIT at DKK 40 million. Investment at DKK 6 million.And as explained, recently the Eastern European segment is predominantly driven by Poland. Organic growth as mentioned price-related and that is because we cannot get more costs out of our taxes and we are fairly low on the stocks. EBITDA improvements, also here a combination of the acquired and the existing business. And as Poland is the major part of the segment, we can only confirm that the output continued to remain strong, but as we also reported earlier, we mentioned it is the same rate. And then we had also announced that there could be a potential sale of Russia and that is in line with what we had announced in our annual report.On the next slide, Slide #8, a few statements on our situation in Russia. It is a very normal time. In 2009, a normal rating in 2009 and we had a strong organization over there that is doing a good job. We will see if we can change the current situation, we also are fairly restricted on the cash we're willing to inject into Russia for the time being. That of course leads to the opportunities being carried into the Q1 and do something actively with us as we participate in restructuring except for the selling.We see that in order to get back to satisfactory levels, we require a significant improvement in the markets, and that will probably have to come also from the geopolitical situation and for the time being, as mentioned we are in dialogue with potential buyers, and we will update you when we either have a conditional SPA or the negotiations are terminated.On to Slide #9, we have the new brand frame saying "Partners in wall building." We used [indiscernible] in order to launch that on the corporate level of customers known as [ following wall ]. We want to build and our first apartment approach we've been using for many years, what you see visually is just a small change, but behind that there's much more than that. We've conducted 700 customer interviews with existing potential customers to identify the main challenges and how we can support and overcome these challenges. And the main sense is short as flavor, it's utilization, increasing material cost and sustainability issues.From a corporate perspective, we have had on Slide #10 also expressed what that could mean because with the new brand claim, we are also open for expanding into other product areas than just aircrete and calcium silicate. For the time being, we focus only on restructuring within our existing product ranges and in Central Europe that is top on the agenda in that regard.And that takes us on to Slide #11, where we hopefully are able to prove that we are delivering on the strategy. We have the calcium silicate plant in northern part of Poland, Reda, which is close to Gdansk, where we do a investment of around DKK 30 million, and we expect to have a production line up and running mid of 2020. And then we have closed the acquisition of the Dresden CSU factory, it's an ownership of 51%. We've paid around DKK 67 million and we are already working on the integration process. And the financial impact from this is of course also included in our guidance.That takes on to the Q&A session of this call. We will un-mute the all.

[Operator]

[Operator Instructions]

[Kristian Tornøe Johansen, Senior Analyst]

This is Kristian Johansen from Danske Bank. Just a few questions from my side. Can you elaborate a bit on the development in the acquired CSU businesses? So obviously they are not part of the organic growth yet, but at least especially on the Polish CSU business, the revenue percentage in Q1 just seems extremely strong. So any color on the development here on an underlying basis will be appreciated.

[Unknown Executive]

Obviously we are quite satisfied with development for the Polish acquisition from last year in the -- in calcium silicate. And we have both managed to get more volume up and now we see a favorable price development continuing that it does appear that our approach to the market has proved to be much more focused on getting prices up than our previous [indiscernible]. Therefore we see development of the other revenue.

[Kristian Tornøe Johansen, Senior Analyst]

And in terms of -- because obviously these businesses will figure as organic growth, especially in second half of this year, so are you running these businesses at full utilization now as well? Or -- and then how was that in second half of last year, i.e., is there any volume growth to be expected from the CSU business in the second half?

[Unknown Executive]

As I said, the only offside you can see remains through our authorization process you get more out whereas it looks like now they are [indiscernible].

[Kristian Tornøe Johansen, Senior Analyst]

Okay. And are you -- I mean is there no further imitative left to increase capacity? And how far are you along that?

[Unknown Executive]

We are investing in productions improvement, actually we've set a series of investment that also has some site durations which remains. Therefore we will just say that we are working at that to invest, now we're going to get it all -- our improvements going except for the Reda plant, which is going to be adding new capacity next year is still going to be on a marginal basis.

[Kristian Tornøe Johansen, Senior Analyst]

All right. Fair enough. That's quite clear. Then on the cash flow and the balance sheet, you have DKK 100 million increase in receivables compared to Q4. Can you just elaborate a bit on what's driving this?

[Unknown Executive]

Yes. I mean it's an increase from the end of the year that you're talking about. And because we've had strong sales during the first quarter and particularly in March, predominantly increases in debtors, and it's just volume-driven. And we have very good sales performance in March compared to December, debtors are going to be higher and that's driven the increase.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. So there's no changed payment terms or anything like that in this?

[Unknown Executive]

No. You shouldn't expect to see any change in payment terms or the normal change in working capital numbers in this, no.

[Kristian Tornøe Johansen, Senior Analyst]

All right. Then my last question is just on cost inflation. And then if you can provide an update in the development of your -- according to costs here and how it balance with the price increases you have there, you have in place?

[Unknown Executive]

The cost increases, as we've indicated I think before, are quite higher than normal. We've got particularly energy price increases in the eastern segment quite high. And then have an impact and to -- have not so much had an impact in the first quarter, but will maybe going forward. So we're recently seeing price increases and that will have an impact in the last part of the year, also in the first part. I think if you want to put a number to it, it's about 5% year-over-year, looking at around 6% inflation. And it's driven by CO2 emissions; it's driven by transport and network cost; it's driven by energy cost in [indiscernible] Poland; we also see pressure from -- because of the CO2 emission cost, we see pressure from cement and lime suppliers.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. But you still expect to be able to raise prices to at least that level, your own price?

[Unknown Executive]

Yes, if we look at it from the perspective of what we get out of volume, we take the total and we still believe that we'd be able to maintain our margin, if that's what you're asking. And we see it coming out of the first quarter. We are also like-for-like better than last year. But there is a delay on some of the cost [ SMEs ] which means that [indiscernible] we do not expect to beat our equity ratio on a like-for-like basis all told.

[Kristian Tornøe Johansen, Senior Analyst]

All right. But we shouldn't expect sort of a gross margin dilution in Eastern Europe towards the end of the year?

[Unknown Executive]

No, that's not our expectation.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. That's quite clear.

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

Thanks a lot Kristian. Other questions [indiscernible]? If that's not the case, we will conclude this call. It doesn't seem so. So thank you all for dialing in. We wish you a continuous nice day. Thank you and bye-bye.