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Edited Transcript of HH.CO earnings conference call or presentation 14-Aug-19 2:30pm GMT

Half Year 2019 H+H International A/S Earnings Call

Copenhagen Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of H+H International A/S earnings conference call or presentation Wednesday, August 14, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bjarne Pedersen

H+H International A/S - VP of Business Development & IR and Chief Strategy Officer

* Michael Troensegaard Andersen

H+H International A/S - CEO & Member of Executive Board

* Peter Klovgaard Jørgensen

H+H International A/S - CFO & Member of the Executive Board

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Conference Call Participants

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* Kristian Tornøe Johansen

Danske Bank Markets Equity Research - Senior Analyst

* Laurits Louis Kjaergaard

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

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Presentation

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [1]

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Good afternoon, and welcome to the conference call on H+ H interim report for the first half of 2019. My name is Bjarne Pedersen. With me is CEO, Michael Andersen and our new CFO since 1st of June, Peter Jørgensen.

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [2]

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Yes. Hello, everybody. I'm very happy to have joined H+ H in a very interesting time. So looking forward to meeting all of you over the coming period and happy to be on board.

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [3]

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We will take you through the presentation that is available on our homepage. For your information, this call including subsequent questions is recorded for playback on our website.

In the presentation on Slide #2, there is an agenda, showing facts about H+ H and a disclaimer on the forward-looking statements. We will go to Slide #3 and the financial highlights.

We had organic growth of 7% in the quarter and 13% year-to-date. Gross margin is at 31% in the quarter and 29% year-to-date as the impact from acquisitions are fully upgrade and other things are materializing.

It gives EBITDA of DKK 156 million in the quarter and DKK 253 million year-to-date. And as our CEO mentioned, it is greater finance in the history of H+ H.

EBIT margin is at 15% and 12%, respectively and ROIC at 16%.

Year-to-date, investments are at DKK 27 million. Cash flow is positive, more than DKK 100 million when we can adjust it for IFRS 16, will come back to that.

All of that takes net interest-bearing debt around DKK 600 million mark and that's equivalent to a gearing of 1.2x EBITDA. The equity comes in around DKK 1.2 billion.

At Slide #4, we have our updated outlook as of 8th of August. So the outlook now is organic growth of around 8%, it was previously around 7%.

EBITDA is expected to be DKK 510 million to DKK 550 million and it was previously DKK 460 million to DKK 510 million, so an increase of DKK 50 million in the lower end and DKK 40 million in the upper end.

The same increase on EBIT. So it's now DKK 330 million to DKK 370 million. And on the investments we have adjusted that a bit down from DKK 160 million, so we now guide DKK 140 million on that.

On Slide #5, it's the Western European segment, we had 1% organic growth in the quarter, following the strong first quarter. Year-to-date is at 11% organic growth. EBITDA as well as EBIT is higher than last year, both for the quarter and year-to-date.

Organic growth in the quarter is predominantly driven by higher sales prices. Also, volume growth in the U.K. due to the additional capacity that's available now and that's partly offset by volume decline in Germany.

Prices are higher in the same period last year in all markets.

The EBITDA improvements are predominantly from the U.K. due to the specific circumstances in the first half last year where we didn't have overhead recovery of the factory in Borough Green.

We did the acquisition in the first -- sorry, in the second quarter of the joint venture stake in Baustoffwerke Dresden. We announced it in our Q1 report but it was -- it happened in the second quarter, also contributed a bit on top line and on earnings.

And from the year onset, we had expected a significant cost pressure, some of it has materialized but we have also been able to offset some of it. We had optimized supply mix and usage.

And on the market information side, for Germany, the -- a flat development in the number of building permits in the first half of this year and that was after a decline both in '17 and '18. We also see in reports that the construction companies have such report on a strong order backlog. But as probably everybody has noticed there should be also adverse indicators for the German macroeconomic situation.

On to Slide 6. We have information around the U.K. As everybody also has noted, we have the Brexit looming. First of all, a bit about our position where we have reduced our exposure to the U.K. over the last years. If you go back to 2017, 43% of -- group revenue for the full year was 43%, in 2018 it was 32% and expected to be in the same level this year.

With Brexit happening, we have already seen an impact on the foreign exchange rates. So we reiterate our sensitivity analysis from the annual report, an increase in Sterling of 5% would have an adverse profit impact and there's profit after tax of DKK 4 million and also an impact on equity of DKK 19 million of records.

Of market intelligence we saw registrations in the second quarter coming in at the highest numbers for the last 12 years, strong second quarter and it's also the strongest quarter since the fourth quarter of 2007. So something in the pipeline and as we also mentioned in our report, house builders in general reporting strong order backlogs.

On to the Eastern European segment that is on Slide #7. There was organic growth of 21% in the quarter and year-to-date, we are 18%. There was also a significant increase in both EBITDA and EBIT and it goes both for the quarter and year-to-date.

The organic growth is predominantly driven by price increases in Poland and also volume increases in Russia. The sales volume in the segment is capped by production output and we see continuous positive impact from the acquisitions we did in Poland last year.

The market outlook in Poland remains strong although building permits was down in the first half of 2019. And as for the Western European segment, the cost pressure we anticipated has been there but we've been able to offset some of it and again, same reasons, supply mix and usage. So good operational performance and good efforts in procurement.

And for the volume growth in Russia, we need to bear in mind that we are -- the circumstances that our main competitor in the area has its factory under modernization and is selling out of the stock and that is, of course, limited also due to the fact that initially they have been delayed on the initial time plan.

On to Slide #8, that is also regarding Russia and the potential sale. There is nothing new to add in regards to the negotiations. As to our prior announcement, there are still ongoing negotiations, there are still more interested parties. The only thing we've added in this report is that the potential sale can be contained in the upgraded guidance we did. So we do not expect this to be a reason for significant special items.

On Slide #9, we have more on cash flow and the debt. The adjusted cash flow numbers show a positive impact from operating income. So the adverse development, net debt is predominantly from the IFRS 16 adjustment on leasing and then from the impact of the acquisitions that is quarter 1 after privatization and installment of one the Polish acquisitions we did last year.

Also we reiterate our statement around capital structure, and it is our ambition to use the cash flow to develop the business and that will be both organic and also from acquisitions. And in case we deem there are surplus funds, we will do that various distribution of this.

On to Slide #10. We have a few examples on some of the actions we have done in the acquired businesses. These examples are from the acquired calcium silicate business in Poland last year, each of them are minor investments and represent a fine payback.

The picture to the left that is on control of autoclaving process. It gives higher production capacity due to better reliability and it also reduces the energy consumption.

The picture in the middle is of a new dosing system that makes the dosing more precise and gives lower raw materials consumption. And on the right-hand side, the picture of a new truck scale, which gives better control of the raw materials delivered.

With that, we are on to Slide #11 and that is the Q&A part of the session. So we will unmute the audience and then have the opportunity to ask questions to the management.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [2]

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This is Kristian Johansen from Danske Bank. A couple questions for me. First of all, in terms of Germany. So in Q1, you reported this strong organic growth, which I sense was driven by the U.K. and now you say you saw declining volumes in Germany in Q2. So can you just give a bit of color on how the growth in Germany look for the first half of this year?

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [3]

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The growth in Germany was negative but we had positive impact from price and adverse impact from volume. The market in Germany has been flattish, may be declining, especially in the second quarter. The first quarter was very strong and into second quarter it was more sluggish. As we had, as we have also announced earlier on, a strong focus on the price increases and we've managed to get the price increases also in order to offset the cost inflation. But a market decline, potentially also a smaller loss of market shares has been in the price for that.

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [4]

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But an improvement of the profit in Germany.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [5]

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Yes, that was my follow-up. So you do manage to increase your earnings, I guess?

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [6]

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Yes.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [7]

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Good. Then sticking on Germany and the acquisition you did in Dresden, now that you've been owning here for a few months, can you sort of update us on the performance and the possibility of the efficiency improvements going forward?

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [8]

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We can say that the Dresden acquisition had been living let's say, a period like extra charge because it's certainly a little (inaudible) weeks ago. Therefore, we will say that the effort on -- the focus on sales in previous ownership has not been where we were. So we didn't -- we think that the performance of the Dresden business that it take over time was not exactly what we expected. And we are refocusing our effort on sales and believe that we will create options to expected level during the year.

When we talk about the synergies, the synergy is more reflecting on -- with longer-term synergies in terms of cost savings on management and then also we will use the plant to get a bit of stuff of our capacity utilization across the Eastern part of Germany. So synergies are not -- they're not as instant as in the Polish case.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [9]

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Okay. That's clear. Then maybe just sticking on synergies. If -- I mean you gave us these few examples from the Polish business, how much more is there? I mean do you still have sort of even a list of smaller thing you can do which all adds help or how far along the journey are you?

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [10]

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I think that we are still in the beginning of that journey. What we have done is we have been focusing on the low-hanging fruits. We are implementing a number of investments, relatively small in size but with fairly high payback. We are early in the onset, we haven't been in control of the company for that long and if we do get, the majority of the impact -- improvement impacts on the acquisition so far has been on the sales side but we do see synergies. And I believe that the major synergy we've seen so far is that when you get more output out of the plants from some of those investments and we still see a good portion of investments that we do over the next 1, 2 years to further help us improve our business -- operational results.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [11]

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Okay. Then another question on Poland. So you managed to get very healthy price increases through -- in the first half of the year. You previously highlighted some uncertainty in terms of competitor capacity coming on stream. Can you just elaborate a bit on your thinking and your assumption of prices in Poland for the second half of the year?

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [12]

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I will say for us whichever was going to happen to the price in the second half is a little bit wait and see. We do expect that there will be some price pressure when this competitor comes online. But in the first half and a deadly start production slowly towards the end of the first half and also was out of demand, we didn't see the price pressure taking effect at that point in time. But we do expect that there will be some price pressure in the second half.

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [13]

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And that is related to the calcium silicate business. On the upgrade side, there is a little bit of capacity coming in but not materially impacted the countrywide perspective.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [14]

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Okay. That's good. And then in terms of the U.K., if you maybe just can remind us in terms of the year-on-year impact from Borough Green in the second half because obviously you've gotten a decent boost in the first half?

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [15]

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Yes, on the operations side, there shouldn't be year-on-year. It's all allocated in the first half where we had to stand still, but for the second half, be aware if we did come into second half with some stock levels from the imported goods where we were aiming to reduce stock throughout the second half and that seems very tight this year. So don't expect the same impact.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [16]

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All right. And then my last question is just for an update on your pursuit of acquisitions. I mean I see nothing has been announced but do you remain optimistic that you can close something this year?

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [17]

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If you compare with what we said in the first quarter, there's no change. We're still progressing on those activities and believe that we will succeed.

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [18]

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Next question?

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [19]

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This is Laurits Kjaergaard here from ABG. Peter. I hope you've been welcomed well to H+ H. If we could start on where my predecessor just left off, with M&A activities. As I remember, you've been speaking about Russia that you hope to have a close before summer and when I read your comments, now it seems that the process has been delayed. Is that understood correctly?

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [20]

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I wouldn't call it a process delay. It's ongoing negotiations and that just takes time. With a bit of luck, we could have had something close but it didn't turn out that way. And we are in Russia. So there are also a number of different formalities that are -- but we remain confident that there could be an opportunity.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [21]

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So when you say that that's basically been delayed, is that more -- I'm just trying to get a feel of it, is it more of a bureaucratic reasons that you -- with a bit of luck that it could have been closed? Or is it more strategic reasons and pricewise that this might be the reason?

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [22]

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It's more bureaucratic reasons.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [23]

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Okay. That's very clear. Going onto also these synergies that we were discussing before in the call. On Slide 10, you mentioned these 3 initiatives, which I understand has more to do with raw materials and now you also have sort of a very strong gross margin of about 30% for the quarter. Is 30% or above the new normal? And many of these initiatives, are they mostly regarding boosting your gross margins going forward?

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [24]

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Some of it has definitely run rate impact. Some of mix changes we have done simply because we have been able to see some things, we hadn't tried early on. As you know, the gross margin fluctuates over the years. We had the 2 small quarters, where typically happens maintenance that it's not unlikely to -- that you will see the second and the third quarter in that range.

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [25]

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I would also like to add. When we look at we can see they come up with an upgrade on the half year and we do talk about better than expected performance in operations and we also do mention that we have been quite good on procurement and the way we have obtained procurement results is also from shifting of suppliers and so forth. And that, of course, is not something we can all continue every time we shift suppliers. So what we may have done is we got a very good step change downwards in Poland through these activities but then now we have softer to normal input cost pressure, which comes especially from increased energy consumption. And then when we look at the things that we are doing in terms of being better at -- the raw material utilization being better at the control it's maybe going to help us to maintain higher margins going forward. It is not as this business would enable us to just continue getting higher and higher margins. We are not in function with those, and then there seems to be positive kind of a glass ceiling. We are focusing very much in these investors to get more out and also to improve our operational results. And therefore, better utilization of all the things.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [26]

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That's very clear. Another point if we go on the second quarter results here, that EBITDA was helped by the gross margin that was just discussed but also the sales and distribution costs where you also talked about transportation costs in Germany. Do you have some insights on this position going forward in regards to both the distribution side but also on any marketing that you may be performing, for example, the health and wall building branding that you were trying to launch. Just a few insights on this position would be very helpful?

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [27]

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Yes, first of all, just to clarify the transport cost is in the production cost. In general, we have seen increase in transportation costs that often when we sell it is also bundled into a delivered price. So to a large extent we've been able to offset that. I think some of the pressure in the transport has been taken off in Germany where we, let's say, 1 year ago had much more concerns because of the combination of shortage of drivers and increasing energy price at that point in time coming in. So we see and that's probably also due to the macroeconomic circumstances that it has tapered off a bit. And then another thing also as you specifically mentioned Germany is that the big part of the sales is also where typically the builders merchants, they pick up the goods themself. It is not our preferred way of reaching the market but that is the market normally in Germany for a significant part of sales and we have to accept that.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [28]

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That's very clear. One last question for me just on the organic growth now guiding 8%. You previously mentioned that we would expect some negative organic growth in the second half of 2019. With this new guidance upgrade, is this shifted more to Q4? So we could expect a better organic growth also in Q3. Is that part of the assumption in the guidance upgrade?

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Michael Troensegaard Andersen, H+H International A/S - CEO & Member of Executive Board [29]

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Yes. And the big picture, I would say is spot on because most of the price increases they are, let's say, have a run rate effect maybe with the exception of coal and depending on this capacity coming in and then we see the volume constraints where we, especially in Q4 depleted some stocks last year, which we cannot do again this year.

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [30]

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Other questions? That doesn't seem to be the case. In that case, we want to thank you for dialing in, and we wish you a continuous nice afternoon. Thank you and goodbye.