Welcome to H+H International A/S H1 2025 Financial Results. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question and answer session. To ask a question, please press five star on your telephone keypad. I'll now hand it over to speakers. Please begin.
Good morning and welcome to H+H International A/S's Conference Call covering the first half of 2025. My name is Niclas. I'm the Head of Investor Relations and Treasury. Joining me this morning is our CEO, Jörg Brinkmann, and our CFO, Bjarne Pedersen. Yesterday evening, the half-year report and related documents, including the presentation for this call, were put on our Investor Relations website. During today's call, management will present the H1 financial report, after which there will be a Q&A session. The call is scheduled to last a maximum of one hour. Please note that this conference call is being recorded and will be made available on our website after the call. Before handing the call over to Bjarne, I would like to direct your attention to the disclaimer on page number two.
Please be advised that this call will include forward-looking statements, which are subject to risk 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, Jörg, with an update on our performance highlights in Q2.
Thanks, Niclas, for the intro, and good morning, everyone. Thank you for dialing in. Over to page three to share some highlight events of the Q2 execution within our group. The first thing we need to talk about is certainly the German market. In Germany, we are still faced with very low volume and very low building activity. I come to that and I leverage on that a little more throughout the call. I'd say this is the most challenge we have, actually. In combination with that, it is a low-volume environment, which we expected, actually, but it is really a very tough competitive environment. Resulting from that, prices are under pressure, and this is impacting margins.
What we've seen throughout Q2 execution is that this is not only impacting the earnings from the German market, but also impacting the group, and that at the end led to a change in the outlook for the year, unfortunately, also for the group. When you look at that situation, for sure, you can pitch here and say we are a cyclical company and you can just wait. If you have a business that is cash bleeding, and that was the situation in Germany, we thought it is the right move to react. That is why we've decided to reorganize the operations in Germany. What we basically did, and you're going to see a little bit more details later, is changing from a model that had national coverage. I mean, that was the plan to a regional structure.
I come to that back a little later, why we believe that is the right setup for the time being, and also how that will improve the operations in Germany. This can be seen as a first step. What we also have initiated and communicated is the strategic review of the business. What is important for us is that we are really building businesses that have the chance to develop profitably. That is why we're also looking into strategic options we're having in the German market to establish businesses that are able to operate on a profitable level long term, even in lower volume scenarios. This is what we are currently executing. That is Germany, and it is really interesting to see that all other markets where we're operating, despite Germany, are progressing. Markets are developing nicely, earnings coming through.
This situation in Poland, volume is growing, very strong EBIT returns from Poland. We are very happy with what's going on in Poland. Very strong, strong business and very strong contribution to the group. Also in the U.K., we are seeing good demand coming through. We ramped up the network. Since a couple of weeks ago, our plants are back to 24/7, and now we are driving output of the network to really meet that demand in the U.K. Overall, very positive market conditions and also good returns coming from the U.K. A little more specific look into the market activities on page four. As you know, we are monitoring building registrations in the U.K. and permits in Poland and Germany. It's a really good indicator for what's going on in the market. If you look into the U.K., there is good drive for more registrations.
You can see that really since the middle of 2024, this is coming through. We have positive sentiments from the house builders. We are living strong partnerships with these companies. A fairly positive business environment. Just a couple of days ago, the Bank of England has cut further the interest rates down to now 4%. It's the lowest number we have seen in the last two years, actually. Quite encouraging. It's a nice combination, I'd say, where government is really committed to new build. The interest rates are also going in the right direction. I'd say it's a good environment for new build. Market outlook is positive in the U.K. Over to Poland. There is one watch-out area we certainly need to see here, and that is when you look at the permits. Actually, in the last couple of months, we see a small decline.
A key question is how is that impacting our business? It is basically larger developers slowing down their activities. They do that on the basis of a solid backlog from the permits from last year. From what we can see now, actually, we see there is a pipeline that looks solid. We are monitoring that. Overall, strong development and again, also strong industry performance and really attractive margins coming from the Polish business. You can see we delivered a 5% organic growth. It's the only region where we really can see some nice contribution of a strong last year already. Over to Germany, if you follow that blue line here, which is literally the three months rolling of permits, you can say it's improving, but it is just back to a 0%. The message here is it's not further falling, which is good.
We haven't seen this triggering event that we were seeing in the U.K. and Poland. If you really look and study the graphs carefully, you can see these triggering events in the other markets. That has really changed the business environment. We don't see that in Germany yet. The building permits are on a historically low level, unfortunately. There's new government in place. We've also talked about the DKK 500 billion special fund that the government wants to invest over the next 10 years. So far, we haven't seen specific instruments, actually. That is also why we are certainly for this year not very, very, very positive about the market. The question will be, how is that developing into next year? So far, there's no signs for recovery where we can see this triggering event.
Turning to page five gives you a little bit more of insight on how the businesses are developing. What you really can see here is the separate effect of Germany and then all the other regions. You can see that the development really took a completely different track. The German market is down to 50% of the activity that we had in 2022 before the crisis, whereas you can see that all other regions, so this is the other regions we are operating in, they are back on an 85% execution of the volumes of 2022. That tells you a lot, actually. That means there's a 35% gap in volume in the group. That is certainly the key issue we are faced with here. You know that we were doing a lot of restructuring already in Germany. I mean, we closed plants in the first wave.
With that move here, the 50% and also an outlook that is not great, that is what led us to the decision to further adjust and especially making sure we are not further burning cash. We are establishing a way to transform also the German business into a profitable business. A number that is, from my point of view, remarkable is when you exclude the impact of the German operation. Our EBIT would be a double-digit number and fairly close to the long-term financial targets, which means without Germany, we are operating on a 10%- 12% EBIT margin, showing how healthy the business is in the UK, Poland, but also in Denmark and Netherlands, which we are supplying from Germany. We have good growth rates and also attractive margin levels, actually. It's really the German problem that we need to address.
That leads me to page six, where I want to elaborate a little bit more on what we are doing in Germany. Yeah. What you really can see here is that we, instead of operating everywhere in Germany and delivering nationwide, have decided to change the business model and in the future run six different profit centers in Germany, which you can see here on the map. The idea is to, I call it, sell around the chimney. It is really to establish strong local businesses close to the customers, making sure that the market and the factory are perfectly matched to each other and allowing actually to generate attractive businesses with customers that are close to the plants and with products that fit to the markets instead of running nationwide supply chains, which actually was, in the current market environment, we believe, not the right setup.
We are changing that. There will be these six profit centers, local leaders, and then we are going to drive these six profit centers. I think what also was mentioned here is that from the one in the very north, so the plant north of Hamburg, our plant in Wittenborn, that is also supplying Denmark. As I've said, Denmark is developing very nicely, good growth rates, good market environment here. This is part of the northern cluster, if you want. Also, the Benelux, which we are supplying from the factory in the western German part, is also part of that cluster to really make sure that the volume follows the profitable way, actually. This is how we have set up the new organization in Germany. There will for sure be a back office for administration tasks.
I think it's also a question we got here because we invested a lot of effort and also money in, let's say, integrating the business in Germany and standardizing it. We talked about the one project. You heard about home before. All this is still valid and still there. We are not giving up on that. There will be functions ensuring that we are living high standards in all those six profit centers that we are operating. We just believe, number one, we are getting closer to the markets and we are in a better position to improve profitability on a regional base. Plus, second, we are going to cut costs. Bjarne will elaborate on that and we will operate on a lower cost base, actually. These two things we believe are the right recipe to establish a more healthy business in Germany.
With that, handing over to Bjarne to share financial numbers with you.
Yes, thank you, Jörg, and good morning to everybody on the call. On the next slide, there is a top line view both in regards to volume and revenue. If we start on the left-hand side, we can see that volumes there are slightly down. As mentioned, Poland is running to expectations. A tick on that. In the U.K., we last year did destocking in the second quarter. We have not had stocks this year, and as we are ramping up production, we had a lower volume this year. In Germany, it is more the underlying market situation as Jörg has already addressed. All that pans out on the revenue line, as you can see to the right.
It is really about finding the right price-volume equation in Germany, where we have higher prices in the second quarter this year compared to the second quarter last year, but the price is down compared to Q1 this year. That is where the numbers really start to look into the root cause of the situation in Germany. With the move, it is about getting into the right point in the matrix between volume and price and doing that on a regional basis should set us up for a better position. On the next slide, we can see also how that plays into the margins. If we compare to last year, you see a nice improvement. We need to bear in mind that destocking and then also normalization of input costs is driving our margins up and then somewhat offset by this price development in Germany.
Compared to last quarter, it is flat. We are, of course, working on the situation, getting more output out of the U.K. and a better setup in Germany should also improve the margins. On the next slide, we have the cash flow. Niclas, would you like to elaborate on that?
Yes, thanks, Bjarne. If we look at cash flow from operating activities before financial items and tax, it came in at - DKK 19 million in Q2 2025 compared to DKK 80 million last year. As expected, we saw a modest stock load in Q2 along with scheduled payouts of creditors towards the end of the quarter. Beyond that, cash outflows were limited to interest and tax and about DKK 25 million in CapEx. As a result, we closed the quarter with net interest-bearing debt at DKK 837 million and financial gearing at 2.6x net interest-bearing debt to EBITDA. On the next page is an overview of the financial impact from the German restructuring plan. In Q3 and Q4, we will book special items of around DKK 80 million-DKK 1 00 million for the restructuring program. This is all cash-based and will be paid out during 2025 and 2026.
The benefit starts already this year, about DKK 20 million in 2025 and up to DKK 40 million on top of that in 2026. On impairments, we expect an additional EBIT benefit of around DKK 15 million this year, plus another DKK 15 million next year. On impairments, we have closed permanently Wittenborn 1 in the north and another plant in the south, which were previously multiple factories. Both had high book values, expecting reopening, but we're now writing them down. We're also revaluing other closed factories and taking further write-downs where needed. Second, customer relations, these are intangibles from past acquisitions. With the business still loss-making, we're writing those down as well. Finally, goodwill under IFRS rules, other impairments trigger a goodwill test using more conservative growth and margin assumptions, reflecting no near-term recovery in Germany. As mentioned before, we're writing off DKK 250 million.
These actions reset the asset base to more realistic market conditions and put us on track for sustained EBIT improvements from this year onward. Over to you again, Bjarne, for our financial outlook.
Thanks for that, Niclas. Just rounding off with the adjustments we did a couple of weeks ago, we reduced expectations for organic growth to around 4%. It was the previous 5%-1 0%. On the EBIT before special items, we are in the range of 100- 150, where we previously had 120-1 80. That was both the retrospective and also the forward-looking things on the financials. With that, back to Jörg for finishing off the presentation.
Yeah, thanks, guys, for the financial update. Let me conclude on page 12. This is really the key takeaway. Basically, it's three things that are worth mentioning. Number one, it is really the, I really must say, the really challenging and bad situation in Germany that is forcing us here to act and then impacting earnings. The second is our key focus is really on Germany, changing the operations as described from national to regional and operating on a lower cost base, and then doing that strategic review. Germany is the key focus area because, as you really have seen from the numbers, it is the market we need to change. Finally, and that is actually a motivating point from my point of view, is really strong performance in Poland. Really nice to see the results coming through. Also the U.K. with some really good outlook.
The ramp-up making progress and seeing all factories now firing through. That is certainly a market that is going in the right direction. Finally, for sure, without the German effect, a group EBIT of 10%- 12%, that is a motivation for us to also work on the German case to make sure the overall group is performing on an attractive level. With that, let me open the call for questions.
If you do wish to ask a question, please press five star on your telephone keypad. To withdraw your question, you may do so by pressing five star again. We will have a brief pause while questions are being registered. The first question is from the line of Anders Preetzmann from Danske Bank. Please go ahead. Your line will now be unmuted.
Thank you and good morning, Jörg, Bjarne, and Niclas. Thank you for taking my questions. I have a few on the assumptions that you've applied for the impairment test on the goodwill. You mentioned it briefly here on the call, but in the report, it says that you go from assuming a 9.3% revenue CAGR from 2025 to 2029 to now just 2.8% CAGR, which I think at first glance seems at the lower end of what one could expect. Can you please share some more insights regarding your assumptions on this? Does it have to do with you taking out capacity of the CWE market, or is it purely driven by you expecting no rebound for the time being in Germany, essentially meaning that German new builds should just stay flat for the next five years, or how do you see it?
Thanks for the question. It is, let's say, set in a level where we are, as communicated, we don't see any triggers in the short to mid-term. We are not building up a lot of expectations that this is going to come back fast. Of course, there are uncertainties around it. In particular, if you look out five years in such a model, it has quite some lever how much you take out to the right-hand side of such a model. We have taken an approach where we say we don't want to get into a problem where this is something we are adjusting on a half-year basis or anything like that. With the data we have, there are data supporting we are on a fairly flat-ish level. There will be a little bit as normal inflation and so on.
Only time can tell whether this is spot on or we are being too conservative. We are comfortable with this outlook being the right one to apply in order to have a prudent valuation of our goodwill. We also have some headroom as we are announcing the strategic review with a lot of options. It could also mean that there would be some volume loss coming from that.
Okay, thank you. Also, on the gross margin assumptions, you just alluded to it a little bit, Bjarne, but what drives the lower gross margin expansion in particular? Is it just the lower growth rates, or is there anything else? Is it the pricing pressure? Is there anything else driving that?
Yes, it's a bit of both because, as we say, we have not put in, let's say, the aggressive price expectations as we don't see this dynamic where we get a price momentum, which is where this business really takes off. Also, with lower volumes, you don't get the same capacity utilization in the factories and consequently also lower leverage on your fixed cost and lower gross margin.
Thank you very much. If we assume that you for the next five years achieve the 2.8% revenue CAGR and everything else remains equal in Germany, would you be able to generate positive EBIT returns at such growth rates?
Yes, we would. I can confirm that.
Okay, that is very clear. Maybe just a follow-up on the German restructuring plan. Can you please remind us of your, if you have one, a timeline for changing the setup from national to regional and also perhaps a timeline of when we will hear more regarding the strategic review in particular?
Yeah, the timeline is, it is communicated now. The organization is informed. By end of year, the change lasts until end of year, actually, and then beginning of new year, we're going to operate in the new setup. For sure, we drive execution as fast as possible because clarity for everyone is one of our key principles here.
Okay, so end of year. That is very clear. Thank you. A final question from me then. I mean, Jörg, you alluded to that you're very satisfied with the EBIT for the Polish entity and also saw good returns in the UK, leading to your business, excluding Germany, reaching or almost reaching the EBIT margin targets that you have between 10% and 12%. If we assume in one year that the UK will be fully up and running and Poland continues, and we continue to exclude the German business, of course, would you be able to exceed your EBIT margin targets under such scenarios?
It could be for all. It's too early to speculate into 2026, but no, it will be a gradual improvement we'll see over, as you alluded to, a strategic period, which is also the basis for not having changed anything on our long-term targets.
I think the most important is when you connect this question with the 85% of volume we are only seeing in the other markets, right? I think this is the key message here. It is we are delivering double-digit EBIT margin despite these markets are only operating off 85%. That means with further growth, we naturally should see an improvement, actually. It is the historic long-term financial target in connection with an 85% volume setup only, which shows actually that we were able to adjust the organizations so that they can operate on really profitable levels, actually. It will be with further growth, actually. For sure, market margins will improve. Same is valid for Germany.
Okay, thank you very much. That was all from me. See you later. Bye.
Let me just remind you, if you do wish to ask a question, please press five star on your telephone keypad. It does not seem like we have any further questions from the conference call, so I'll hand it back to you guys for any closing remarks.
Thank you. Thanks for dialing in and your continuous interest in the company. I see a couple of you later during the day, and have a great Wednesday. Bjarne.