H+H International A/S

CSE:HH

Earnings Call Transcript

[Operator]

Welcome to H+H International Q1 2025 Financial Results Presentation. Today's call is being recorded. [Operator Instructions]

I will now turn the call over to speakers. Please begin.

[Niclas Kristensen, executive]

Yes. Thank you, and good morning, and welcome to H+H conference call for the first quarter of '25. My name is Niclas and I'm the Head of Investor Relations and Treasury. Joining me this morning is our CEO, Jorg Brinkmann; and our CFO, Bjarne Pedersen. Yesterday evening, interim financial report and supporting documents, including the presentation for this call was published and uploaded to our Investor Relations website.

During today's call, management will present the Q1 financial report, after which there will be a Q&A session. This call is scheduled to last a maximum of 1 hour. Please note that this conference call is also being recorded and will be made available on our Investor Relations website after the call.

Before handing the call over to Jorg, I would like to direct your attention to disclaimer on Page #2. Please be advised that this call will be -- will include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially. For more information about these risk factors, please see the 2024 annual report.

With that, over to you, Jorg, with an update on our performance highlights in Q1.

[Jorg Brinkmann, executive]

Yes. Thank you, Niclas, and good morning, everyone. Thanks for dialing in into our Q1 earnings call this morning. So if you go to the next page, you can see our financial results for the first quarter. I don't want to get into all the details here. But overall, one statement, all KPIs actually have developed in the right way. So when I look really where the company was a year ago, when you compare the quarter-on-quarter performance. I'd really say we have nicely improved the business actually and are in a very more stable position than we were a year ago, actually, which is encouraging to see.

However, when you look into the different markets, we still see some challenges in some markets, our market is taking different dynamics. And I want to comment a little bit about it actually. So the first thing that actually, that is a very encouraging thing to see is that the U.K. market is improving. So we see more new build activity in the market happening, leading to higher sales volume in U.K., which is really nice, and also the midterm trend looks positive. So a positive market development in U.K. mainly driven by the new government activity here.

However, what we are dealing with at the moment is ramping up capacity. And that is also what you can see in the gross margin, and Bjarne will talk a bit this about a little bit later. But certainly, this ramp-up and making sure there's enough volume to fulfill the demand is causing some inefficiencies still in the network in the U.K. And that is one of the key priorities we are working on with the team in the U.K. But overall, it's going in the right direction.

Second market, certainly is Germany. I'd say this is still a very challenging market for us. You've heard there's a new government in place, and I'm going to comment on this a little later. But we have to confess for now that building activity is still super low. We are not seeing any impact in the market and that is certainly giving us challenges. Volumes are still low and as is the efficiency of the business. We've done a lot over the last 2 years, but still, we are not seeing the full potential of the German business yet.

Poland. Also here, the market has cooled down a little bit after the 2% program, but it's all in a very stable level actually. So we are fairly happy and also optimistic with the results that we're seeing from Poland, despite Q1 came in quarter-on-quarter comparison, lower from organic growth than last year.

Overall, what we are driving is and we've rechanged the spirit in the company from restructuring and streamlining, which we've done for 2 years to focus on profitable growth. So that is really what we are driving, mainly focusing on the efficiency in the plant network and making sure there's enough capacity when the demand is going up again.

With that, let's have a little closer look into our market on Page 4. So you can see here the 3 core markets. And I think the slide is telling the story in a really nice way. Actually, it's a building permit that we are tracking here. And starting off with U.K., what you can see is that literally mid last year, the building registrations really took some momentum, and we are seeing a fairly nice growth here in the U.K. is mainly coming from what the new government is driving.

One of the political commitment was to increase housebuilding in the U.K. It's basically sitting in the planning system at the moment, and that is driving a new build and a lot of activities from our house build of customers. So as I said, yes, some nice outlook, 11% organic growth in the first quarter. So yes, going in the right direction.

Poland. What you can see here is the 2% program, you can really see that effect started mid-'23 really driving the building permits, the peak we were experiencing actually last year Q1, that was the highest volume, and that is also why the quarter-on-quarter comparison only leads to an organic growth of minus 4% here. But overall, the fundamentals in Poland remains strong. There's building activity out there, fairly stable business, delivering nice results. So a good contributor to the group results also in the first quarter 2025.

Then Germany and here you can really see a completely different view. You see when you just look at the blue line here and the growth rates, you just see only in January, we were at a 0% growth, i.e., it is not declining further, but we are not seeing the same momentum like we're seeing in Poland or the U.K., when the market really started picking up again. So we still haven't seen that.

As you're all aware of, there's 2 government in place. There's a new building minister in place. There was a governmental speech. Housing is on the agenda. The government is investing the right topics here, but still it's too early to see what kind of initiatives they will come up with to really stimulate the market so that we see similar momentum like we are seeing now in the U.K. and that we were seeing earlier in Poland.

However, CWE delivered an organic growth of 3% and that is because out of the network in Germany, we are also delivering the other countries where we see also positive signs. So Scandinavia going in the right direction, nice growth here. Czech Republic, Netherlands, Switzerland, all these markets developing in the right way. It is really Germany that we are waiting for to take the right direction here, and making sure that the long-term demand for housing is finally addressed.

So it is all about volumes. However, we've done a lot in the last 2 years. And if you go to next page, Page 5. And I don't want to comment again on all the stuff we have done over the last 2 years. My key point is we have streamlined the business. We've taken a lot of costs as you have followed. For us, it's very important that we're now making sure we are shifting the agenda towards profitable growth. So it is going back and closer to our customers, identifying those cost opportunities, and there is a lot of trends in the industry. We're talking lack of skilled labor. We're talking affordable housing, and that is where we have the right products for and that is what we really want to drive.

Together with our home initiative, and making sure that the efficiency of the client network is increasing quarter-on-quarter. And that is literally the agenda for me and the team, and that is what we are driving for. And yes, the rest, we need to see and observe when Germany starts to improve. But until we are waiting for that, this is what we are focusing on.

And with that, let me turn over my speech to Bjarne, who will get a little closer look through the financial figures.

[Peter Jnsen, executive]

Thanks, Jorg and good morning to everybody on the call. On the next slide, we have more or less, I think, the statement in the header saying that higher prices offset the lower volumes. That is the nutshell of the first quarter. On the left-hand side, as a chart shown, we are having a negative volume development of 2%. As indicated, in particularly Poland, they had some tough comparison numbers. If we adjust for that and let's say, normalize the first quarter of last year for Poland, we would more be at a 2% to 3% volume growth. And similar on the pricing side, we also see a minor growth where we are passing on the inflationary costs.

The volume growth that we are seeing is coming from the U.K., as Jorg alluded to Germany still difficult and going backwards in volume compared to Q1 last year, but the adjacent markets are supporting the German factory network.

On the right-hand side, you have the revenue breakdown and that is all in line with the pattern that you're seeing on the volumes. All markets are slightly improving their prices. So we can defend our margins in Africa.

Organic growth was 3%. And again, mentioned that Poland had tough comparisons, we will catch up on that during the year to get into our guidance range of 5% to 10%.

On the next slide, there is a chart showing the development in gross margin. And on the German side with a continuous decline in volume, we are seeing more and more factories running at very low volumes. That also means low factory utilization and with a less efficient absorption of our indirect production cost, we -- that is one of the, let's say, heat tractors on our gross margin. And then, of course, we have the situation in the U.K. where we are, let's say, investing some of our indirect production costs in some future volume out of the factories which will be particularly visible in the second half of this year.

When we are comparing to the first quarter last year, gross margin was at 17%. So the progress from that is predominantly come from gas that was an excessive gas cost in Q1 last year, and there were also something on the stock build destocking that we had last year and then the underlying improvements we have done since then.

On the next slide, we have the cash flow. And Niclas, do you want to give a few remarks on that?

[Niclas Kristensen, executive]

Yes. Thanks, Bjarne. Cash flow from operating activities before financial items and tax amounted to negative DKK 43 million in Q1 2025 compared to a negative DKK 42 million in Q1 2024. The improvement in earnings in the first quarter compared to last year was offset by a negative development in working capital. Three factors are impacting cash flow this quarter. First, we had unusually strong net working capital position as per December 31 last year. And second, there has been payouts in Q1 related to special items accrued for in 2024. This will also be the case in Q2. Lastly, the third factor is payment to the old gas contracts that were settled in Q1 '24, which is also affecting cash flow during the quarter and will continue to do so in the coming quarters.

On the debt side, per 31st of March, net interest-bearing debt total DKK 765 million, corresponding to an increase of DKK 33 million since the beginning of the year. On the next slide, a review of our financial guidance for 2025. First of all, there are no changes to our outlook, and that means we expect organic growth of 5% to 10%. And EBIT before special items will be in the range of DKK 120 million to DKK 180 million.

Volume growth will predominantly come from the U.K. low market activity in Germany will continue. In other words, we cannot see a market recovery in the short term. Pricing will largely reflect cost inflation. On the housekeeping side, we assume CapEx of around DKK 200 million, and this will be in line with our depreciation for the year.

With that, I will now hand it over to Jorg, who will finish this presentation with a few final remarks. Please turn to Page 10.

[Jorg Brinkmann, executive]

Thank you, Niclas. So before opening the call for questions, really key summary. I'd say Poland was the first market that we covered in '23. It's nice to see that despite it cooled down a little, it's holding a nice level actually, and we have still good momentum from Poland, and is strongly contributing to the group resides. So that is nice to see, and we are positive about the underlying fundamentals in Poland.

U.K., good to see that the market is recovering. Good to see that the government took initiative here, and this is now turning into more activity. So that is certainly positive. And also, as I said, the midterm outlook is positive. The key change for us is to make sure the production network is following the higher demand we are seeing. It is basically the ramp-up of the closed line in Colinton where we are focusing on and then also making sure we're building a strong position because we have to make sure that the supply chain is on in an efficient way. So that is one of the key focuses for us. But overall, developing in the right way, we need to follow here and then the U.K. market is also in a really good position from our point of view.

Germany, that is the big question mark, positive science, new government in place. So there is an opportunity that also this market will experience some stimulus and then also hopefully show a recovery like our other 2 markets. Until then, we are really focusing on making sure we balance price and volume in the market and operate in the market in the best way we can.

Overall, we are driving, as I said, towards profitable growth dealing with our customers, making sure the plant network is developing in the right direction and really executing our strategy. So that is the menu.

And with that, let me open the call up for questions.

[Operator]

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

[Peter Grave, analyst]

First one on the gross margin performance, down 360 basis points in the quarter from Q4 last year. This means that you are seeing sort of DKK 44 million more direct cost basically on the same amount of volumes. So you alluded to 2 guys in the presentation with more blue color work in the U.K., but I guess that's that is not the whole explanation for this sort of more cost in the quarter. So maybe you could expand a bit on the dynamic impacting the gross margin here in the quarter.

[Bjarne Pedersen, executive]

Thanks for the question. Overall, we had this price growth that is part of our organic growth and with a negative volume growth, we can more or less calculate where that is. And overall, a big part of that price increase we're seeing that is passed on of the input cost increases we are seeing. So that is, let's say, one of the main drivers for the increase in the absolute cost number.

Then you're right, we have built back some shifts. And in particular in the U.K., we have some extra cost in order to get, let's say, the underlying machine into the right state as soon as possible, and a consequence of the things we're doing in the U.K. is also that we are distributing our products in a suboptimal pattern because we want to maintain a higher service level to our customers as possible, which effectively means that we are running shorter production batch in order to have all the varieties ready for delivery, and we sometimes have to drive from another plant and the preferred supply plant and that is also adding to the cost base. So those are the main drivers.

[Peter Grave, analyst]

That's very helpful. Then second question on the building activity in Germany, still on super low levels here. But I just want to try to get your -- just a sense of your expectations for the development going forward, as you say, your positive signals, new government signs of willingness to spend more money and maybe also on house building, we hope. What are you thinking in terms of starting to ramp up the capacity here in Germany? And I mean, also in light of your learnings from the U.K. ramp-up?

[Jorg Brinkmann, executive]

Yes. So -- good question. So the first thing is -- I mean, it's super early days, but to just give you 2 reference points. So the first thing is, we had EUR 500 billion fund in infrastructure. That's the first thing that has changed from the former government. There is funding and there's money available, and that wasn't the case in the old government. So that is certainly what has changed.

Second is when you listen into the new government, actually, we hear them talking about we need to bring building costs down. We have to do more social housing whereas the old government was talking a lot about the green transformation about the housing sector actually. So also, that means the agenda and the focus has changed. For me, both are encouraging signs. I mean now we need to see how they transmit that into, let's say, a real program into a real stimulus. So that is the government side.

On our side capacity, the point is that in Germany to get -- so to fill more demand where we get this out of the plants that we are operating today. So there's no plant that we have most bold in Germany that we need to reactivate short term, actually. So there's 2 plants that are most bold, but we don't need them to -- or for the first stimulus and for the first recovery actually, not needed. We can do that out of the existing network. And that is why it's a different different approach actually plus Germany, we have significantly higher stock levels than the U.K.

So that means when we see the momentum, there is stock. There is the existing plant. So there's enough time actually to then make sure that the demand is that the supply is following the demand. So it's a really different situation in. Let's get the stimulus and what I'm telling you is we are well prepared to supply higher demand.

[Peter Grave, analyst]

Okay. So 2 follow-ups. So how much more volume can you squeeze out of the existing network in Germany? And how long does it take to open and ramp up a mothball factory in Germany?

[Jorg Brinkmann, executive]

Yes. So I mean the point is when I can give you a little bit of -- the plant that we are running 1 shift, 2 shifts, so that gives a little bit of indication of how much capacity you set there. So it's a lot of volume we talk actually. So we need really, really big recovery rate before we are we're going to look into opening up most plants actually. So there's -- we can do that using additional shift and just ramping that up. So there's huge volume potential in the existing plants that we are offering today.

[Operator]

The next question is from Anders Preetzmann from Danske Bank.

[Anders Preetzmann, analyst]

I have a couple as well. If we can move back to the gross margin development for the coming quarters here in 2025. It's my understanding, of course, that do you expect this to increase over the coming quarters, peaking sometime in H2. But can you maybe give some additional comments on how much perhaps in percentage points that you expect the gross margin to increase in the coming quarters?

[Bjarne Pedersen, executive]

Anders, thanks for the question. You're right, in line with our communication when we too had [indiscernible] increase during the year, with where we are and what we know right now, we are talking more keen are moving a little bit side way. But we also think that when you get the running in the right order, which we think we do into the second half, we feel fairly optimistic that our gross margin for the full year will be higher than what we showed in the first quarter, but we need a little bit more time because we figured probably because the games, in particular in the U.K., will be about coming out of the year with the right composition. But when we get the factors going, it can recover quite time because we see some opportunities there. But we don't see the Q2 improvement we had original.

[Anders Preetzmann, analyst]

Okay. No, that's fair. And I suppose also the pickup in activity can't see longer than just 1 or 2 quarters, of course. Then perhaps a question on the guidance. I was wondering if you can share your assumption for Poland. Do you assume flat revenue growth in Poland or to reach the midpoint of guidance, for instance, or where we are there? .

[Bjarne Pedersen, executive]

We expect that the Poland market overall will be in line with the volumes we saw the last year, and we expect minor price increases. So it is like Poland has been, let's say, improving significantly over the last couple of years, where we see the more cash flowing for the full year where we were particularly in the first quarter on the volume side, then we're behind. And again, playing the balance around the price and volume we want to make sure we maintain the price quality and then we are less buoyant on the volume the enterprise in that market.

[Anders Preetzmann, analyst]

That's perfectly understandable. Can you maybe share your capacity utilization in Poland in percentages maybe?

[Bjarne Pedersen, executive]

It's always a little bit what you compare against. But let's say, most of the factories are running at a good utilization. So if you are -- if you're looking for how much is your capacity we would be able to pick up there, it's not a lot so kind of a step change in Poland that we run a little bit behind because some of the home efforts they are ongoing and both this year and also into '26. A big part of our home investments will go into Poland to support both automization and to give some extra capacity.

[Anders Preetzmann, analyst]

All right. That was perfectly clear. Maybe just a final question from my side. I mean I'm delighted to see that you don't book any special items here for Q1. But do you have any expectations for booking of special items for the remainder of '25?

[Bjarne Pedersen, executive]

No, we don't.

[Operator]

[Operator Instructions] It does not look like we have any further questions. So I will hand it back to the speakers. Please begin. .

[Niclas Kristensen, executive]

Yes. Thank you for listening into our earnings call this morning. I wish you a good rest of week. Good success and then looking forward to seeing some of you later throughout the day and in the next couple of days. Thank you.