H+H International A/S

CSE:HH

Earnings Call Transcript

[Operator]

At this time, I would like to welcome everyone to this H+H Q3 2024 Financial Results. Today's call is being recorded. [Operator Instructions]

I'll now turn the call over to your speakers. You may now begin.

[Niclas Kristensen, executive]

Good morning, and welcome to H+H conference call covering the third quarter of 2024. My name is Niclas. I am the Head of Investor Relations and Treasury. Joining me on today's call is our CEO, Jorg Brinkmann; and our CFO, Bjarne Pedersen. Yesterday evening, the Q3 report and related documents, including the presentation for this call, was put on our Investor Relations website. During today's call, management will present the 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, please pay 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 risk and uncertainties as many factors could 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 Jorg.

[Jorg Brinkmann, executive]

Thank you, Niclas, and good morning, everyone, from Copenhagen. So please go to Page 3 to see a couple of highlights from our Q3 execution. So overall, four key takeaways from the last quarter. Number one, and let me start with an operational topic here, and that is certainly the gross margin of 24%, which we have delivered, which is a significant improvement to what we were seeing in the first half. It came in as expected, and it really shows now the underlying performance of the business after we have restructured the whole organization and have won a lot of programs and initiatives, and I will come back to that a little bit later. But certainly, for us, it's motivating and a pleasure to see how the underlying gross margin is now coming out. So strong from that angle actually.

Second, also the Q3 certainly marks a special event here. Through the crisis, actually, Q3 was the first quarter after 7 quarters with the strongest EBIT delivery and an improvement after having reported a lot of quarters where business and volumes were going down and the EBIT suffered. So that is also very promising to see that the EBIT is in the range of DKK 50 million and certainly a significant improvement to what we were seeing over the last 7 quarters.

Then talking a little bit about markets here. It's also nice to see that there is a volume growth of 5%, mainly coming from Poland and the U.K. So we are seeing some improvement of building activities, and I'll talk about the markets a little later. But certainly, when we're looking into these markets, it is encouraging to see. And as a consequence of that, we are driving efficiency of network, ramping up shifts and making sure we have enough volume to meet the demand we are seeing. As one measure that we've announced last quarter, we've decided to reopen the mothballed plant in Pollington and also that we have successfully executed. So the plant is up and running again, and will now be gradually filled with volume.

And then finally, number four, also that is, from my point of view, yes, really success. So we started selling the mothball plant in Warsaw. Interesting location because it's in the city of Warsaw area actually. And so we were able to sell that and then close the sale actually in October, and have cashed in, and Bjarne comes to the financials, but an equivalent of DKK 190 million. So very attractive and certainly helping the gearing to further improve in connection with better EBITDA. So we see a clear way to get the gearing down to a level of 3 where it belongs actually. So from different angles, a really good quarter.

Now let me provide an update on the situation of our key markets on Page 4. Starting off with the United Kingdom. So when you look into U.K., two drivers are important for our business, number one is the building registrations and the second is the mortgage applications. We see actually both indicators improving month-on-month, which is promising. Furthermore, there's a new government in place. And one of the big promises in the election was that they will address the new build market. What we're already seeing is that they are working on getting new land approved to build, and that is certainly encouraging. For sure, there's more things to become. But as a first step, I think this is going in the right direction.

In this environment, we saw a revenue growth of 4% in the last quarter, which is certainly positive. And then as I said, the Pollington 1 plant is up and running now. For sure, we started only with one shift, and then we are gradually ramping it up in balance with demand that we're going to see coming through.

From U.K. to Poland, which is certainly the most promising market, you can see a reported revenue growth of 29% here quarter-on-quarter, which is definitely encouraging. It is driven by the 2% safe credit program. But despite that, also the underlying level of demand for mortgage demand is actually increasing in a better shape. So that is certainly driving new build activity in the country. We were reporting about a successor program for the 2% program. It's called Kredyt na Star or Loan for Start. Still, this program is under construction, let me call it like that. So it's going through the political decision system and has not been launched yet, but the market is expecting something to come in 2025. That will certainly also be a good stimulus for the market going forward.

As I said, with that future and higher demand we are seeing also in Poland, we are driving efficiency of the network and also ramping up shifts in various plants so that we are always having capacity ahead of demand, which is needed so that we really can take profit of the market uptick here. One thing we are working on, as we've announced that we sold the Warsaw plant. We are certainly working on the solution to supply the Warsaw market. So we're going to still operate this year next year, 2025, from that location, but in parallel, are working on building up a new terminal close to Warsaw.

It's an important market for us. So the decision that we've closed that factory and sold the land doesn't mean here we're retreating from the market, but we're going to hold a strong presence here and building up a new terminal that will guarantee efficient and really good service and customer experience for the market going forward, so that is under execution already. So U.K. and Poland, very promising and encouraging markets.

Let's go to CWE, respectively, Germany. Opposite to the other markets, we are reporting a negative revenue development of 9% in CWE, mainly coming from Germany. Other than U.K. and Poland, unfortunately, we are seeing building permits further dropping in Germany, and that is heavily impacting building activity in the market. What is the root cause for that? Mainly two things. Number one is, we are faced with really high construction costs. A lot of regulation. New regulation is driving the cost for building and making it unaffordable for many people to build at the moment. So that is certainly something that needs to be addressed. And then the second is, and you read that from newspapers, I guess, Germany is in recession, and that is leading to high uncertainty in the market and amongst consumers, and that is certainly impacting the whole new build market.

In this connection, you may have heard that the current government actually fall apart. There will be new election in February 2025, and it will be interesting to see over the next couple of weeks how the different parties will address the housing shortage, which is actually increasing day by day in their programs. And so we'll be very closely monitoring that and see how a new government will address that problem in the market. Despite volume, there's one thing that is encouraging. We're seeing positive price development in the market, which is good. We started to increase prices as of 1st of September that is coming through and definitely is needed in a market environment that we are operating in. And then we also continue working on the cost side. We've done already a lot, but there's more to come. and that is particularly focusing on the SG&A part. And I'm going to talk about that on Page 5, which is an overview of our different improvement programs that we are running.

So please turn to Page 5. So what you can see here is really the overview of our 3 major improvement programs. With the beginning of crisis, we've started to adjust our factory network. We've all talked about that. This has delivered DKK 150 million that we've already delivered and really puts us into a different position and certainly also is driving the gross margin you can currently see. In parallel to that, we've also looked into SG&A cost, another DKK 100 million, mainly coming through this year, but certainly helping to put us on a different level in SG&A.

And then what we are currently working on is Project One, which is specifically for Germany. You know that in Germany, we were acquiring a couple of companies in the years 2018 and 2022, and we have not fully utilized the synergies of building one organization in Germany yet. So that is currently in execution and underway so that we are really summarizing all operations in Germany under one umbrella, and that is what Project One is about. What it will deliver is hopefully, a better customer experience, better service, a simpler company actually, and then also additionally DKK 50 million of cost savings in SG&A mainly, which we will then see coming through in 2025.

With that, let me turn over the call to Bjarne, who will update you on the financials.

[Bjarne Pedersen, executive]

Thank you, Jorg, and hello to everyone on the call. Please allow me to take you through the financials, and we start on Slide #6 with that, where we're looking at the top line. On the left-hand side, you see the volume development quarter-by-quarter and a positive development compared to same quarter last year of 5%, and that's despite the decline in activity that we have seen in Germany. The positive volume development that is driving the organic growth, which is further supported by slightly higher prices compared to same period last year.

We see incremental price increases both in Germany and in Poland. Pricing in the U.K., they are set on the annual contracts. And as previously mentioned, they are lower in '24 than they were in '23. Offsetting these positive effects in the organic growth calculation is both country mix as we are selling more in Poland, which has a lower sales price per cubic meter than in the other markets. And then we are helped a bit by the FX rates that has been higher in this period for the sterling and the Polish zloty. So that gets us in at an organic growth of 2%, but then uplift to 4% on the top line.

On Page #7, we have an overview of the gross margin development. As already mentioned by Jorg, back on track, so to speak, is DKK 174 million in the period. That gets us in 24%. It was 20% in the same period last year. But more importantly, I think we've seen the more depressed quarters in between where we were recognizing the impact of the gas contracts and then, of course, the destocking we also talked about. But now with the restructuring with price increases and then these effects from the interim quarters out, we are back at the 24% level. Further, there will be scale effects from better plant utilization, which will lead to better absorption of cost when the markets they are recovering.

On Page #8, we have an overview of our special items, which -- besides the gas contract, which we settled back in Q1, we have our restructuring program related to Project One, where we recognized DKK 80 million in the quarter, and we expect to spend around DKK 40 million in the last quarter of the year in order to complete the program. Then also in Q4, we will recognize the gain from the sale of land in Warsaw. We expect that to be in the region of DKK 160 million, and we will then post that as special items. So no impact on the guidance from that transaction. But fortunately, a positive impact on the debt and gearing situation in the next quarter.

That is on the next slide, which is #9. On the left-hand side, you see a bridge of the third quarter where we have the profit from the operations. We have a positive cash contribution from the working capital, offset by CapEx and in the other category of interest and tax, fairly in line with expectations and getting us in at a NIBD coincidentally exactly where we started the year. On the right-hand side, you see that our gearing is coming down. End of Q3, it is at 4.4x. And then with the sale of the land in Warsaw, we expect it to get it down to around 3x EBITDA towards the end of the year.

And then we have Page #10, where there is an update to our guidance, our financial outlook for '24. We keep the top line outlook for around 0% growth unchanged. And then we adjust our EBIT before special items to DKK 50 million to DKK 80 million, where we, in the previous guidance had DKK 50 million to DKK 100 million. So with that, I will hand over the word to Jorg again to round off the presentation part.

[Jorg Brinkmann, executive]

Thanks, Bjarne. So before we open up for questions, we'll look at the summary of where we are. Number one, the gross margin is displaying the underlying performance of all the work we've put into the company and all the adjustments, we can see now way better, and that is promising. Then it is the first quarter throughout the crisis that is showing a 7% EBIT margin again and it's the best quarter after 7 quarters in a row, and that is certainly encouraging.

Poland and U.K., it's not that they are back to historic volumes, but they are going in the right direction. And it's good to see market recovery here, and it's also nice to ramp up capacity here and there again. So that is certainly markets that show some early promising signs. And then last but not least, the sale of the Warsaw factory is putting us in a completely different position when it comes to financial gearing, which is good to see that gearing comes down in this quarter, but then also going forward. And with that, let me open up for questions.

[Operator]

[Operator Instructions]

Our first question comes from Sebastian Grave from Nordea.

[Peter Grave, analyst]

First of all, congrats on the solid margin performance in the quarter. Now my first question is on the gross margin. So will you be able to sort of quantify the negative impact you saw from Borough Green and destocking in the quarter, just to get a better impression of the actual underlying performance here.

[Bjarne Pedersen, executive]

Yes. Sebastian, I'm happy to take that question. There are a minor impact of the Borough Green incident because there's -- it was both a top line and then a cost issue. And then on top of that, you had minor destocking this quarter. So in total, that actually bridges our 24% up to the 25% that we are striving to meet even in these market circumstances.

[Peter Grave, analyst]

Okay. That is very clear. Then you show on Slide 5 that you expect another DKK 50 million cost savings in 2025 from SG&A mainly. So just -- I mean, how should we think of these cost savings? Is it -- I mean, we take the 2024 base and then minus DKK 50 million plus some inflation? Or I mean, could you maybe expand a bit on these savings here?

[Bjarne Pedersen, executive]

Yes, happy to do so. It also goes like with the other savings, we do represent the numbers that we are taking out. And then you add back something for inflation. And also, we are, of course, still developing the organization, getting some additional competencies in and so on. But we expect that on top of, let's say, what we see as a total 2024 cost, that will be in the region of DKK 50 million that we do take out in 2025.

[Peter Grave, analyst]

Okay. Sounds great. And then yes, my last question for now, at least, on the SG&A base for the quarter, you have -- in the other income line, you have a net income of DKK 9 million. Maybe you could expand a bit on this.

[Bjarne Pedersen, executive]

Yes. That is just as you heard about the Warsaw transaction and a lot of things been going on there. We have had a smaller case that is in the U.K. related to the factory that was closed down back in 2008. We have been sitting on a long-term lease contract, and we could not get out of that. So in the last 15 years, we have had a tenant in due to the turmoil on the financial markets, that was -- that came up some issues with that. Then we have had various negotiations, both with the tenant and the lease holder.

And you also saw in the previous quarter that we had a little bit higher SG&A that was because there were some uncertainties -- or sorry, other higher operating -- other operating items because there were some uncertainties, and we have now concluded those negotiations, and this is the final reversal of some of the accruals we've had. So let's say, a lot of back and forth on this, but it's under the radar. It's a small number in the big picture and we'll find it out to you.

[Operator]

The next question comes from the line of Kristian Johansen from SEB.

[Kristian Tornøe Johansen, analyst]

Just on SG&A cost as well, if we look at the run rate, it's been fairly stable between sort of DKK 81 million and DKK 85 million for the past 5 quarters. I mean, given what you just said, Bjarne, that there are some savings coming in and then there are some inflation, which moves the other way, should we expect this run rate sort of continue at this level going forward?

[Bjarne Pedersen, executive]

For this year, which essentially is Q4, yes, there are limited changes in Q4 on this number. But then as outlined from the Project One, there will be a -- we call it a step change into next year on that.

[Kristian Tornøe Johansen, analyst]

So we should see a lower run rate into 2025 due to the Project One savings?

[Bjarne Pedersen, executive]

Yes.

[Kristian Tornøe Johansen, analyst]

Understood. And then speaking of Project One, so at least I've noticed from when we spoke in August that you expected DKK 60 million in total restructuring costs for the year. You're now saying DKK 80 million. Why has this increased by DKK 20 million?

[Jorg Brinkmann, executive]

When you look at -- it has to do really with market. So when you see the situation in Germany and that building permits coming down further, it is actually showing us -- showing the need to really further adjust. And so that is where that adjustment comes from.

[Kristian Tornøe Johansen, analyst]

All right. And then my last question here. If you take your guidance to reach the DKK 80 billion -- million in EBIT before special items, you need your EBIT for Q4 to be essentially on par with what you booked here for Q3. So typically, you are seeing lower revenue and volumes in Q4 seasonally. So what is the assumption behind the upper end of your guidance? I mean how -- I mean, what needs to happen to make such a strong fourth quarter?

[Bjarne Pedersen, executive]

I think to put it simple, there are 2 assumptions around it. First of all, we need, let's say, a long season, so no early stop on building sites towards the end of the year. And then our production, which is, for example, on the G1, we opened factory in the U.K., we are ramping that up. And then if we can run it, let's say, over Christmas and so on, we will get some stock build towards the end of the year and then a good absorption of our indirect production cost.

[Kristian Tornøe Johansen, analyst]

Okay. That makes sense. And then no assumed sort of operating income like the DKK 9 million we saw in Q3 assumed for Q4?

[Bjarne Pedersen, executive]

That's correct. There is -- in the other operating income, there is the cost of the mothballed factories and minor stuff, and that is a cost of, let's say, a run rate of DKK 2 million to DKK 3 million.

[Operator]

As no one else has lined up for questions in this call, I'll now hand it back to the speakers for any closing remarks.

[Jorg Brinkmann, executive]

Thanks for your interest in the company this morning. Have a great day, and I'll see some of you later in the day. Thank you. Bye.