H+H International A/S

CSE:HH

Earnings Call Transcript

[Operator]

Hi, everyone, and welcome to this H+H International Q1 Report for 2024. [Operator Instructions] This call is being recorded.I'll now turn the call over to your speakers. Please begin.

[Niclas Kristensen, executive]

Good afternoon, and welcome to H+H conference call for the first quarter of 2024. My name is Niclas Bo Kristensen, Head of Investor Relations and Treasury. Joining me today is our CEO, Jorg Brinkmann; and our CFO, Bjarne Pedersen. This morning, the interim financial report and supporting documents, including the presentation for this call is published and updated to 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 handing 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, as many factors could significantly change the outcomes. For more information about these risks, please see the 2023 Annual Report.And with that, I will now turn the call over to you, Jorg.

[Jorg Brinkmann, executive]

Yes. Thank you, Niclas, and good morning to everyone participating in this call. So please turn to Page 3. So I want to give you an overview of the highlights of quarter 1, 2024. And in a nutshell, quarter 1 is a quarter that is very much in line with our expectations.And let me share with you a couple of key takeaways that you can see from our financials here. Number one, we have seen early signs of market improvement in the U.K. and also in Poland, resulting in 13% higher sales volumes, which is a positive sign from our perspective.One more internal view. We are observing that our business improvement program that we were executing throughout 2023 is delivering to our expectations, so that we were operating on 30% lower fixed costs if you compare quarter 1 this year to quarter 1 last year.Then number three, our gross margin, it was lower than last year, but also gross margin came in as we expected because there's 2 major effects that are impacting gross margin in quarter 1. First effect coming from significant planned stock decreases and then the second effect coming from still higher gas costs, which will unwind after the settlement from the inventories throughout the year.And then finally, a quick comment on our financial gearing. For sure, a number of [ 5.1 ] is high. However, it is no surprise for us, but the number is the number that we've expected. And then even more important, the numbers fit also well within our banking agreement and our covenants.Now let me provide an update on the situation in our key markets on Page 4. Starting off with U.K. In the U.K., we were delivering an organic growth of 20%, 22%, and we were seeing early positive signs from higher consumer confidence and then also mortgage applications, which is an important key performance indicator in the market for us is improving with more than 60,000 approvals in February, which was the highest number since February 2022. Also, registrations are still below last year, but gradually improving month-on-month, which is showing that the market is actually lightening up. That is driving our volumes.Talking about prices in the market, we need to see here that prices in 2024 are lower than 2023. We were holding a high price level throughout 2023, simply because of the nature of the business in the U.K. where we were working with annual contracts with large customers. In the beginning of this year, we adjusted our pricing to current market conditions.So from the U.K. to Poland, Poland is certainly the most exciting of our 3 markets with an organic growth of 31%. We have reported earlier that the Polish government last year has launched a 2% loan program, and we could really nicely see how this boosted the application for new mortgages and then also the new build activities and finally, our volumes in the Polish market. Also building permits are up 33% year-to-date March versus last year. And this all leads to a positive environment in the market in the first quarter.The 2% program was so successful that the budget has already been consumed. It is good to see that the government is working on a successor program, which I expect to be launched in the second half of 2024.Next to volume, talking also about prices in Poland. Prices are stable in the first quarter if you compare prices to quarter 4, 2023. However, if you compare prices to quarter 1 last year, you will see that prices are lower, and we were lowering prices throughout last year, but backed on lower input costs, as well, so that this didn't impact our contribution margins.From Poland to Germany, here we see a completely opposite picture to U.K. and Poland with less new build activity than last year in Germany. Also, the building permits are down 25% year-to-date February, which is very much in line with what we're observing in the market in general.And in total, I'd say it's still a challenging new build residential market, mainly driven by a mix of 3 components. Number one, still interest rates are high. Number two, construction costs are comparably high, mainly driven by new regulations that the government placed. And then, now three, there is a lack of really efficient government support programs like we were seeing the one in Poland. And that mix leads to a challenging environment for new build and puts people, who want to build into a waiting position to wait for better conditions to then start their building projects and their journey to build a house.Also talking about prices in Germany. If you compare the price development in the beginning of this year through the end of last year, so quarter 1 this year to quarter 4 last year, we see a slight positive price development, which is good. However, also here, when you compare quarter 1 last year and then quarter 1 this year, you would see lower prices. So also in Germany, prices came down gradually on the back of lower input costs throughout 2023.And with that, let me move the view a little bit from markets into the internal perspective of the company on Page 5. We were talking throughout last year about our business improvement program. And what you can see here is actually how the efforts are turning out in the first quarter. So if you compare the first quarter last year to first quarter this year, you see that from originally 32 plants, this quarter, we were only operating 23 plants. There's 4 plants that are still mothballed. And it's our intention to keep that plant mothballed, as long as possible and then use the volumes that we still have in the current operating plants. This will drive efficiencies and help improving gross margin going forward.When it comes to cost, you see that we're operating with 400 people less. That also means there is [ DKK 50 million ] less fixed cost in operations, very much in line with what we were communicating earlier and the savings we want to generate are materializing in Q1, which is a good sign.Then also the stock decrease is a strategic priority for us. End of last year, quarter 1, we were sitting on a stock of 3.7 months, which is way too high for a company of ours. We've brought that down significantly in Q1 and are now sitting on a stock level of 2.2 months reach still too high. So there will be further stock decreases throughout the year. But the biggest chunk of our initiatives have already been executed in the first quarter, which is a good move.On a more qualitative note, you see that we are also working strategically in a different way. I'd say we're coming from running more individual plants and optimizing plant by plant. I'd say today, we are looking more on the network of plants and especially now when we are reinstalling capacity to support future growth, we are really following the margins, establishing shifts back in our high profitable plants, redirecting volumes to these plants, and that will lead to a more efficient plant network going forward.Specific outcomes, we've completed the [indiscernible] in Borough Green, which gives us 20% more capacity in that plant. We are utilizing the high efficient plants and then also expand customer offerings, which means better service for our customers. We are able to add new products to some of our plants and then really focus on quality and availability of our products for our customers.Next to this, another strategic property for us is to transform our business in CWE, which you can see on Page 6. The title for this initiative is Project ONE, which is actually describing that we really want to change into one operating company in Germany. You know that over the last years, the German business has been brought together through a couple of acquisitions, so that gives us the national coverage and national footprint. However, there is still some work to do on finally integrating these into one network of plants, which we've done last year and now is really towards one acting company in Germany.And that is where we are having 3 strategic objectives with that project. Number one, we want to serve with one face to the customer, so that there's only one H+H company that customers are really dealing with. So that is one strategic priority for us. Second is we are working on a simplified and streamlined product portfolio. You can imagine after acquisitions, that is a big task, and there's some potential for us to optimize that. And then finally, also to align and integrate our business processes, which is certainly a need after having done a lot of acquisitions in the last past years.What this will deliver is certainly a true partner in wall building, offering great customer experience; number two, better plant utilization and higher uptime resulting in higher efficiency; and then certainly, it would also help to bring SG&A costs down, so that they are also in line with our SG&A cost performance in the U.K. and Poland. It's a problem that we will run throughout all 2024 and then the full impact, we're going to see that throughout '25 and '26.And with that update, I will now hand over the call to our new -- not new CFO, Bjarne, to guide us through some financials.

[Bjarne Pedersen, executive]

Thank you, Jorg, and hello to everyone on the call. Please allow me to take you through some of the KPIs of the financial side in order to elaborate a bit.So if you go to Page 7, we have the overview of the organic growth and some details to that because as we stated, it is impacted by country mix. If you start on the slide -- sorry, on the chart on the left-hand side of the slide, we see they have this 13% volume increase Jorg talked about. It is coming from the U.K. and in particular, from Poland.What we need to bear in mind is that Poland has the lowest selling price in Danish kroner when we compare across the markets. So we have gotten a lot of, let's say, cubic meters in that doesn't generate that much revenue. So that means when you look on the right-hand side and [ state ], we have a negative 4% organic growth, the country mix has a significant impact. It is 7%, and that then also means that the lower price accounts for 9% when we compare to the first quarter of '23.Taking into account that there was this decline in Poland and CWE during last year when inflation and energy costs came down, that had found a natural balance. So when we look at Q4 into Q1, we see that CWE have increased prices and Poland have remained stable. And then as Jorg explained, the U.K. is not a one-off, where the price adjustment is done once [ each year ]. Then so with that understanding of the pricing that saying on a quarter-to-quarter basis, we are declining. But looking at Q4 into Q1, we are in a more stable phase.It makes sense to look at the next page, which is elaborating on the gross margin. Jorg mentioned 2 major impacts that was gas and [indiscernible] stock adjustments. And if we do the comparison of this quarter, where we came in at DKK 109 million compared to previous quarter, Q4, 2023, we see the margin is 1% up. So more or less on par. So again, that supports the stability of our business. So despite the change in prices, it goes hand-in-hand with lower costs.Then if you compare it to the first quarter of last year, you would say, well, that is quite a difference from the 24% to the 17%, and that's where the gas and the stock adjustments come into play. In the comments, you can see that there is around DKK 20 million of adverse impact on the gross margin from the gas contracts. They were not in the Q1 last year, and it accounts for approximately 3% improvement in gross margin.And at the same time, in Q1 last year, we had a stock build or say significant stock build, where we Q1 this year had a stock decrease. And the difference in those 2 also accounts to around 3%. So then we are more or less on par again supporting lower prices is not something that is deteriorating the margins if we adjust for these 2 circumstances.If we go to Page 9, we have an overview of our special items. The main part is coming from the gas settlement. The gas settlement we announced in the annual report. The settlement itself was DKK 93 million in line with what was announced. And then there was sale of unused gas out of those contracts, and that accounted for DKK 17 million. So a total of DKK 110 million.In addition to that, we have some restructuring costs related to some of the project Jorg was also touching upon it relates to CWE, where we see it as investments in preparing the company for the future setup. The amount was DKK 19 million in the first quarter, and we expect a similar amount for the remaining part of the year to come.If we go to Slide #10, there's an overview of our debt situation. And from the left-hand side, we see that it's building up. Q1, normally a low cash period despite reducing the stocks with DKK 92 million in the first quarter, we saw a negative impact from the operating activities. We had the investments, including lease contracts and then some FX and interest that [ Jorg had announced ] with a net interest-bearing debt of DKK 1 billion.That has an impact over to the financial gearing. But more, we need to stress that the increase in the financial gearing is due to the lower EBITDA, as a consequence of the gas contracts. And that's also, why we again reiterate all this is known to our banks, and that is why we can operate with a -- in comparison to many others, high debt gearing. We are comfortable about it. We anticipate that it will decline in the second half of the year. And in the longer perspective under stable market condition, organic measures will bring the gearing back into our long-term strategic target range.If we go to Page #11, we reiterate the outlook for 2024, which is an organic growth between minus 5% and plus 5% and it's an EBIT before special items in the range of DKK 50 million to DKK 150 million.With that, I will give the word back to Jorg to finish this presentation. Thank you.

[Jorg Brinkmann, executive]

Yes. Thank you, Bjarne. So key takeaways for me on the next page. So number one, it's encouraging to see early market signs of market improvement in U.K. and Poland coming in with 13% higher sales volumes. Second, the business improvement program is delivering on target and allows us to operate on 30% lower fixed costs when you compare the quarters. Gross margin, also this expected and as Bjarne really laid out very much in line with what we wanted to see is especially effects for the first quarter comes from destocking and then there's still higher gas costs, which will unwind and improve throughout the year.Then number four, financial gearing. It is under control. It [ fits ] in the covenants, and then also we expect this to improve. And then finally, and that is actually an important one. We are preparing for future growth by enhancing operational efficiencies in our plants and also dedicated investments like the one we did in Borough Green to debottleneck further plants and then finally transform our business in CWE into one company.And with that, let me open up the call for questions.

[Operator]

[Operator Instructions] The first question will be from the line of Sebastian Grave from Nordea.

[Peter Grave, analyst]

Hi, Jorg and Bjarne, thank you for taking my questions. First one on pricing. So in Germany, you are passing through price increases from start 2024 despite minus 30% organic growth year-on-year in the quarter, which I guess indicate volume declines of a similar magnitude or even more. Now with the stalling recovery in Germany, how do you view the risk picture in terms of discipline fading in that market in particular? That will be my first question.

[Jorg Brinkmann, executive]

Well, overall, we have had these price increases in the beginning of the year. And we observed the market, and the trade-off is always between volume and price. If there is a discipline among the competitor base, we are confident around this current price level. We been difficult to get further price increase in Germany during the year. But it's not, let's say, out of reach to stay at this level. But of course, there is an overcapacity. We are aware of that, and that's also impacting the way we operate in the marketplace.

[Bjarne Pedersen, executive]

I think that Sebastian on a general note, what you've seen from -- basically from all markets, and that is the fundamental strategy, right? So the one is the really the adjusting fixed cost basis to the volumes that we are selling, right? That is the one thing we've done that. And then the second is, it is we are also protecting the contribution margins, right? And that means it has to be in line with input costs, and that is also what will guide us going forward. It's what we've done in 2023. It's also what we're going to do in 2024 and that is the result you'll see. But that is the clear strategy for us, as a company to really protect our margins and earnings, especially in a market. And that is when you see the 3 markets in Germany, it's a different situation, where market is still going backwards. That is really key for the business success in Germany.

[Peter Grave, analyst]

Okay. I appreciate the details here. And I appreciate also that I mean, it's always a trade-off between volumes and pricing. But what are you preferring at this point? I mean so -- or maybe another way to ask it. So in Germany, are you seeing a stable market share position? Or are you willing to give up market shares in order to protect pricing at this point?

[Jorg Brinkmann, executive]

Price quality over volume.

[Bjarne Pedersen, executive]

So that means losing some market share would be acceptable.

[Peter Grave, analyst]

Yes. Got it. Perfect. Next question is on the gross margin. So small improvement quarter-on-quarter, also on an underlying basis, i.e., when I adjust for the gas hedges. Now looking ahead, and I mean, looking from your guidance, I think it's pretty clear that you expect a significant improvement in gross margin throughout the year, also on an underlying basis. How comfortable are you that you are going to see these improvements? Or maybe could you expand a bit on sort of the drivers, which you're going to improve your gross margins throughout the year?

[Bjarne Pedersen, executive]

Yes. When you have the 2 things to adjust for the destocking and the gas, it always gets you up to, let's say, a territory around 24%. It will predominantly sit in the second half. Q2 will also have both some destocking and some gas in it. And then, we have other measures from our procurement program, there will be benefits and also the network of factories and getting more production volume throughout -- in particular, the second half of the year will drive the gross margin up.

[Peter Grave, analyst]

Sorry, yes, just go ahead.

[Jorg Brinkmann, executive]

On the longer run, I mean, this upgrade we've done in Borough Green, for instance, right, that we are leveraging fixed cost of this plant by this strategy. And that will certainly also help to bring the fixed cost percentage down and also drive margin, right? So these kind of things, the redirection of volumes to these high efficient plants will certainly also help this year, but then also going forward.

[Peter Grave, analyst]

Okay. And then just going back to you Bjarne here. So if I got you correct, you're saying that adjusting for not only gas hedges, but also the destocking effect in Q1, you would had a 24% gross margin instead of 17%.

[Bjarne Pedersen, executive]

In that range, yes.

[Jorg Brinkmann, executive]

You can always [ discuss everyone ]. Yes, just last year, we had the overproduction here when I added to this year, where we had the underproduction, so to speak, or the inefficiency setting. But we see a way back and in particular, into the second half, obtaining some gross margin that also supports the overall guidance.

[Peter Grave, analyst]

Okay. Got it. And then just last question on the sort of balance sheet and cash management here. So [ you're ] negative free cash flow for the quarter. I guess, I would expect something else given the inventory release. What should we think of sort of your cash generation over the coming quarters?

[Bjarne Pedersen, executive]

In general, Q1 is always a low one improving into the second quarter, but it's normally Q3 and Q4 that are our strongest cash generating quarters. And we don't see this year being different from the historical patterns.

[Operator]

[Operator Instructions] The next question will be from the line of Kristian Johansen from SEB.

[Kristian Tornøe Johansen, analyst]

Yes. Thank you. I will pick up where we just asked on the balance sheet. So I think you said, Bjarne, that you expect the net debt to EBITDA to start declining from the second half of the year. So should we expect that it will increase further from the [ 5.1 ] in Q2?And secondly, in terms of the absolute net debt, when do you expect that to peak?

[Bjarne Pedersen, executive]

When you look at the gearing, what we need to take into account is when we look at it quarter-by-quarter, we have 3 quarters of last -- sorry, 2 quarters of last year with high gas to Netherlands, and you will get the gas cost in the first and second quarter of this year as well. So in the second quarter, we will be replacing a quarter without gas costs last year with a quarter with these excess gas costs. So yes, the gearing is likely to go up again in the next quarter.And the -- on the net -- net interest-bearing debt, that will be around the mid of this year, it will start to slow down again. So a little bit earlier. But on the gearing, it's actually the EBIT that is driving it, not the absolute debt.

[Kristian Tornøe Johansen, analyst]

Okay. So you expect positive free cash flow in the second half year.

[Bjarne Pedersen, executive]

Yes.

[Kristian Tornøe Johansen, analyst]

Okay. Then on the restructuring cost, you have special items of DKK 17 million -- DKK 19 million in Q1 related to restructuring costs. How much more special item costs related to restructuring will come in the coming quarters?

[Bjarne Pedersen, executive]

We expect this was around half of what we will see throughout the full year. So that is a...

[Kristian Tornøe Johansen, analyst]

So another roughly DKK 20 million for the coming quarters.

[Bjarne Pedersen, executive]

Yes. [indiscernible] on project-by-project basis. It would also support savings on fixed cost in the years to come.

[Kristian Tornøe Johansen, analyst]

Okay. And as things look now, should there be any similar cost in '25? Or do you expect this program to be completed by this year?

[Jorg Brinkmann, executive]

Yes. It's our aspiration to have everything completed by end of this year.

[Kristian Tornøe Johansen, analyst]

Okay. All right. And then just my last question on Poland and demand and specifically this impact of the [indiscernible] program. So I mean, you indicate that the program has boosted demand and I sense it in your sales and revenue. Considering the program has ended or been fulfilled, how long do you expect this boost to last [ until ]?

[Jorg Brinkmann, executive]

I mean, there is certainly -- there's certainly a ramp-up effect, right? So the program has been launched last year in July. When we could see the market contracts being on the applications rising then volumes come, right? So you're certainly seeing 6 months to 12 months or so rolling actually. And so that is why it will certainly hold. But the point you're making is what it shows is really the -- when the conditions are right for people to build, you can see that we're always talking about the underlying demand, right? And that is exactly what you can see here when the conditions are right, when this underlying demand is materializing very good actually and that is -- you can see that from the organic growth, right?So we are positive that this where the first launch of the program that will hold for some time. And then also that the second program will also help to further improve the situation in Poland. Overall, it's a positive climate at the moment. But certainly, the details of the second program that is [ important now ].

[Kristian Tornøe Johansen, analyst]

Understand. I guess, what I'm asked is, is the risk that you can have a gap in between these programs? Because I mean, with the first program being completed and second program in the making, I mean, the people, who missed out on the first one will likely sit and wait for the next one. So what's the risk of a slowdown or at least a temporary slowdown.

[Jorg Brinkmann, executive]

No. I mean, this is, as always, right, this is -- we're talking politics here, right? And then, there's also new government launching that second program, right? So we've election in between. So for sure, there is uncertainty around that how will that continue absolutely as always. But in total, is better what I'm saying the [ moves ] in the industry at the moment is because of that is actually it's really improved actually and also what you can see in the U.K. So if the confidence is there and people feel that is the right moment to build now, then people are taking these decisions and starting to invest again because demand is still -- the underlying demand is high. And that is also situation in Poland.

[Operator]

The next question will be from the line of Peter Sehested from ABG.

[Peter Sehested, analyst]

I had only one question, and I think it was partly answered in your previous answer here and that actually pertains to your guidance. And my question would have been, why you keep relatively wide guidance range if that was sort of related to, one, the risk just talked about in Poland and also potentially the outlook for Germany because given that you are very well into sort of the peak season, your visibility should be okay. So in addition to Poland, what are sort of the other risk or factors limiting the visibility in order for you not to sort of narrow your guidance range at this point. [ I'm going to not ] say narrowing not towards one and -- or the other, but just around the current midpoint?

[Bjarne Pedersen, executive]

It again comes back to this -- the skewing of the year into the 2 halves, we know we are in the low season now. So despite we are well into the year, our -- let's say, our expectation is that the majority of the earnings will be in the second half of the year. And then, we also have the price situation, which has been addressed. It is stable for now. There's nothing we're actually worried about. But we do know that if there's something spiraling, we need a fairly wide range in order to be able to stay within if something goes in an unexpected direction.

[Operator]

As no one else is lined up for questions, I will hand it back to the speakers for any closing remarks.

[Niclas Kristensen, executive]

Hi, guys, thanks for dialing in and the interest in our company. Looking forward to see you within the next couple of days in the one or the other meeting. And with that, have a good afternoon. Bye-bye.