Ladies and gentlemen, welcome to the H+H Interim Financial Report for H1 for 2022. For the first part of this call, all participants are in a listen-only mode. Afterwards, there'll be a question and answer session. To ask a question, please press five star on your telephone keypad. Today, I'm pleased to present CEO Michael T. Andersen, CFO Peter Klovgaard-Jørgensen, and Head of Investor Relations, Andreas Holkjær. Please go ahead with your meeting.
Good morning, and welcome to H+H's conference call for the second quarter and for the first six months of 2022. My name is Andreas Holkjær, Head of Investor Relations at H+H. Joining me on this morning's call is our CEO, Michael T. Andersen, and our CFO, Peter Klovgaard-Jørgensen. Yesterday, the interim financial report was published and uploaded to our investor relations website, and this morning the presentation for this call was also uploaded to our website. During this 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 over the call to Michael and Peter, I would like to direct your attention to the disclaimer on page two.
During this call, management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. For further information about the risk factors, please see the annual report for 2021. With that, I will now turn the call over to Michael.
Thank you, Andreas, and good morning to everyone participating in this call. Today, I will briefly go over a few highlights from the second quarter before providing an update on our key markets. Peter will then provide additional color on the financial performance for the quarter and the six-month period, as well as on our financial expectations for the full year 2022. First, please turn to page three. The strong performance from the first quarter continued into the second quarter of the year, fueled by continued high activity and customer demand. In combination with continued implementation of significant sales price increases, these effects drove a solid organic growth of 13% in Q2 2022. Our markets remain characterized by a growing inflationary pressure, and we continue our efforts to defend earnings margins through sales price increases.
In Q2, we were slightly ahead of the input cost curve with a gross margin of 32%. We do, however, anticipate a continued cost pressure in the second half of this year. Our EBIT margin was 18% in the quarter, compared to 15% in the prior year. Return on invested capital remained high at 26%, compared to 21% in 2021. The solid earnings in the quarter drove free cash flow generation of DKK 165 million compared to DKK 172 million in the prior year. Finally, financial gearing was 0.5x net debt to EBITDA at the end of the period, compared to 0.3 for the same period in 2021, and 0.7 at the end of the first quarter.
Next, I will go over our core markets, starting with the central Western Europe region on page four. Demand remains high, fueled by continued shortages of housing space, especially in the larger cities, from a growing number of smaller households. The country faces growing inflation rates in large part due to rising natural gas prices driven by uncertainties around future supply. This has hampered visibility for the remainder of the year, as consumers likely reevaluate investment decisions based on the relatively higher cost of living and general economic uncertainties. The number of building permits issued has already declined by 11% year-on-year, and the rising inflation has driven an increasing trend of postponements of construction starts. Regarding the continued supply of natural gas, we continue to assume there will be sufficient gas supplies available for the second half of the year.
However, we have taken precautionary measures to ensure continuous availability of energy to safeguard production in the exceptional event of limited availability of natural gas. Currently, most of the factories in the central Western Europe region have the capability to use oil as an alternative energy source if necessary. Potential uncertainties therefore relate to a limited share of H+H production volume in the region. However, it is important to state that while we can safeguard our own production in the extraordinary event of natural gas shortages, major uncertainties still relate to the supply chains and the continuous availability of raw materials. The upgrade of the Wittenborn factory continues as planned, partially supported by the Volkwarden and the Dormagen factories. Further, the ramp up of the Volkwarden factory and the integration of the Dormagen factory into the wider German factory network continue in line with plans.
Moving to the Nordics, the latest macro-economic analysis points to a relatively more negative outlook for the construction industry due to the high inflation and a shortage of labor and materials. However, demand for our products remains high, and we expect this trend to continue for the remainder of the year. In Switzerland, the general demand output remains unchanged, and sales in the Benelux countries are good, but capped by our production output. While the underlying demand in the two regions remains solid, uncertainties from the current geopolitical events continue to weigh on the expected economic growth for 2022. Turning now to the UK market on page five. The general construction industry is still expected to continue growing, albeit at a slower rate than previously expected. The downward revision comes as a result of growing inflation arising from both local and global issues.
In the private housing segments, demand remains strong and resilient, but in combination with the growing inflation, rising interest rates are expected to adversely impact consumer confidence in the country. Nevertheless, housing sales rates remain high, and housebuilders continue to report strong forward sales for the remainder of the year. The general expectation is that the UK housing market will continue to provide favorable market conditions in the short term, but increased levels of uncertainty fueled by the anticipation of tougher conditions ahead. Before turning the call over to Peter, please turn to page six for an update on the Polish market. Demand remained solid in the second quarter and supported the continued implementation of significant sales price increases to counter the growing inflation on raw materials.
The number of building permits issued over the January to June period remains at a high level, and housing completions are continuing along an upward trend. However, due to growing inflation and rising interest rates, Polish purchasing power is now significantly lower, which will likely influence investment decisions in the country. Construction starts have already decreased by approximately 17% compared to the corresponding period in 2021. It remains unclear to which extent the great number of refugees from Ukraine will impact the Polish housing markets, but the situation will likely drive further construction activity due to the already significant shortage of housing space in the country. The expansion of the AAC factory in Wajda with an additional CSU production line continues in line with plan. H+H currently expects that the factory will commence production by September 2022.
To summarize, the high activity levels seen in the beginning of the year continued into the second quarter and generally exceeded our production capacity. However, growing inflation, geopolitical instabilities, and continued interest rate increases continue to weigh on visibility for the second half of the year. A continuation of such trends may adversely impact future customer demand. H+H's diversified geographical footprint and strong factory network provide a resilient market position. For the second half of the year, H+H expects continued positive market development with a gradual stabilization of demand levels. These expectations are based on the assumptions of continued availability of relevant energy sources and raw materials, and neither escalation of the war in Ukraine, nor recessionary developments in any of our current markets. This concludes my remarks, and I will now turn the call to Peter for review of our financial performance.
Thank you, Michael, and welcome to this morning's call from me as well. Please allow me to take you through the financials for the second quarter and the six-month period, starting with the quarterly revenue on page seven. Total revenue for Q2 2022 increased by 20% to DKK 1 billion, compared to DKK 836 million in Q2 2021. Organic growth for the quarter was 13%, mainly driven by the continued implementation of significant sales price increases, but partly offset by lower sales volumes. Revenue in Central Western Europe increased by 9% to DKK 440 million, compared to DKK 403 million in Q2 2021.
Organic growth in the region was negative 4% for the quarter as a result of lower sales volume for aircrete as a result of the ongoing factory upgrade, and to a lesser extent for CSU, partly offset by higher sales prices for both product categories. The lower sales volumes in the aircrete segment was partly driven by the upgrade of the Wittenborn factory, which has been ongoing for most of the quarter. It is a special situation that acquired factories supports existing businesses. The negative 4% organic growth represents the growth from our existing factories and does not include the acquired production capacity. If we included the sales that the acquired factories have contributed to existing sites, then CWE organic growth would be slightly positive. Also in isolation, DOMAPOR factory had 15% organic growth in Q2 compared to last year.
In the UK, revenue increased by 13% to DKK 281 million, compared to DKK 248 million in Q2 2021. Organic growth in the UK was 11%, driven by higher sales prices, but partly offset by lower sales volumes as a result of lower stock. Revenue in Poland increased by 51% to DKK 279 million compared to DKK 185 million in Q2 2021. Organic growth was 54% for the quarter, driven by significantly higher sales prices and slightly higher sales volumes in both product segments.
On page eight, you will see a summary of our revenue for the first six months of 2022. Total revenue for the first half of 2022 increased by 27% to approximately DKK 1.9 billion, compared to approximately DKK 1.5 billion in the comparative period of 2021. Organic growth for the period was 20%, mainly as a result of higher sales prices. Revenue in Central Western Europe increased by 20% to DKK 836 million, compared to DKK 695 million in 2021, with organic growth of 7%, again, negatively impacted by lower volumes due to the upgrade. In the UK, revenue increased by 17% to DKK 520 million, compared to DKK 444 million in 2021, with organic growth of 14%.
Finally, revenue in Poland increased by 53% to DKK 580 million, compared to DKK 339 million in 2021, with organic growth of 56%. Moving on to a review of our quarterly earnings on page nine. Firstly, production costs remains impacted by increasing prices on raw materials as well as higher transport costs in the UK. Moreover, as Michael mentioned, H+H has during the second quarter of 2022 continued the planned upgrades and maintenance of the German factories in Volkmann and Wittenborn respectively, resulting in relatively low production output in the period. Moreover, higher sales prices and our ability to stay ahead of the input cost curve positively impacted gross profit for the period, which grew by 27% compared to Q2 2021.
Our gross margin improved by 2 percentage points to 32% compared to the 30% in Q2 2021. EBITDA before special items increased by 32% to DKK 227 million, compared to DKK 172 million in Q2 2021. This corresponded to EBITDA margins of 23% and 21% respectively. Finally, EBIT before special items increased by 42% to DKK 177 million, compared to DKK 125 million in Q2 2021, corresponding to an EBIT margin of 18% compared to 15% last year. On page 10, you will see our earnings for the first six months of the year.
Gross profit increased by 28% to DKK 564 million, compared to DKK 439 million in 2021, corresponding to a gross margin of 30%, which is unchanged from 2021. EBITDA before special items increased by 37% to DKK 386 million, compared to DKK 281 million in 2021, corresponding to an EBITDA margin of 21% and 19% respectively. Finally, EBIT before special items increased by 52% to DKK 287 million, compared to DKK 189 million in 2021, corresponding to EBIT margins before special items of 15% and 13% respectively. On page 11, you will see the development on our free cash flow for the second quarter of 2022.
After special items of DKK 9 million, which consisted of additional transport costs related to the ongoing factory upgrade in Germany, we've reported EBITDA of DKK 280 million. Cash flow from operations was DKK 207 million, driven by strong earnings and changes in working capital. Capital expenditures amounted to DKK 42 million, resulting in free cash flow for the second quarter of DKK 165 million. Next, please turn to page 12 for a review of our net debt in the second quarter. At the end of the quarter, interest-bearing debt included leasing totaled DKK 343 million, corresponding to a decrease of DKK 109 million since the end of the first quarter. This was primarily driven by a strong cash flow from operations and partly offset by the purchase of treasury shares in connection with the ongoing share buyback program.
Financial gearing remained low and stood at 0.5x net interest-bearing debt to EBITDA before special items at the end of the quarter. This level remains comfortably below our long-term financial target of 1-2x EBITDA before special items. Now please turn to page 13 for a brief update on the ongoing share buyback program announced earlier this year. As of 30th of June, a total of 403,000 shares, corresponding to approximately 2.3% of the current share capital, have been bought back under the program for a total purchase price of DKK 66 million. As a reminder, the total value of the share buyback program is up to DKK 150 million, and it is expected that the program will be carried out over a 12-month period.
Now, before handing the call back to Michael for closing remarks, please turn to page 14 for an update on our full year 2022 financial expectations. Based on our performance in the first six months and our expectations to general market developments for the remainder of the year, we maintain our full-year financial expectations. Organic growth is therefore still expected to be in the range of 15%-20%. Further, EBIT before special items is still expected to be in the range of DKK 440 million-DKK 520 million.
The financial expectations are based on the assumption that foreign exchange rates, primarily the euro, the British pound, and the Polish zloty will remain at mid-August 2022 levels. Further, we assume that the cost of energy and raw materials are to remain at current levels. This concludes my prepared remarks, and I will now turn the call back to Michael for closing statements.
Thank you, Peter. Please turn to page 15. To summarize, this was an exceptionally strong quarter for H+H, fueled by continued high activity and customer demand. I'm pleased with the solid performance across the business in the first half of 2022, which demonstrates our continued ability to renegotiate sales price increases with customers to offset the continued inflationary pressure. While the current macroeconomic landscape is clearly causing uncertainties and is expected to weigh on future construction activity, we maintain our financial expectations for the full year of 2022. Our focus remains on delivering a strong operational performance and continuing to service customers across our footprint. With that, we are now ready to take questions. Operator, please go ahead.
Thank you. If you have a question for the speakers, please press five star on your telephone keypad. To withdraw your question, please press five star again. We'll have a brief pause while questions are being registered. The first question will be from the line of Sebastian from Nordea. Please go ahead. Your line will now be unmuted.
Hi, Michael, Peter, and Andreas. Sebastian here from Nordea. Thank you for taking my questions. First on your guidance, I mean, on the back of a solid report yesterday, the EBIT for the first six months amounted to almost DKK 300 million, and still you reiterate your full year guidance, which appears to, I mean, imply margin headwinds in the second half of the year. Could you maybe please put some more color to this? In addition to that, trying to understand your sensitivity to the increasing energy prices, how would further increase in cost of energy impact your gross margin going forward? Thank you.
Thank you, Sebastian. You're right that we come on the back of a very strong first six months and maintain our guidance. With that puts our earnings somewhere around the same earnings for half year since all back in 2020 and 2019. Overall, when you look at it, we have been benefiting from being probably ahead of the price curve, meaning that we've been very fast at implementing sales price increases, faster than the input cost increases, and in particular in the dynamic market of Poland.
That means that, as we are then seeing the input costs also impacting us during the quarter but also going forward, it will be more difficult. There will be a somewhat delay in getting the sales price implemented as well. That is essentially what we foresee. We have implemented price increases during the first half and also into the beginning of the second half of the year, and we have in our current forecast not assumed significant additional price increases. Of course, we do stay alert to potentially implement it if needed.
That means that essentially, when we've been ahead of the sales of the price curve in the first half, then we do see a somewhat catching up effect in the second half. Typically, we will announce the price increases in the beginning of the year and therefore we do see this slightly different curves. In terms of the range, we are seeing towards the lower end of the range, we are seeing a potential market softening in Poland and in the CWE region. That is something that we, to a certain extent, have built into our guidance range.
We have also built in a further inflationary pressure to a certain extent into the low case. Finally, the German government recently installed a gas surcharge effective the first of October this year, and the exact impacts of that is still uncertain. Of course, we know our own impact on the energy costs, but it's still uncertain whether the suppliers will break contracts or want to renegotiate input costs. Therefore, we are a little bit hesitant on that side, and we've not built in the current forecast to specifically raise our sales prices as a consequence of this, as this is still being evaluated.
On the highest end of the range, we do see a potential market upside in Germany and Poland from volumes and potentially price. We also built in some potential cost avoidance in the markets as a response to some of this input pressure, and also specifically lower transport costs in the UK, where we are having extra costs in trying to fulfill market demand. That is overall the guidance range that we put forward and the explanations to that. In terms of specifically our sensitivity to input costs. We have pretty much secured our pricing for the input costs.
Our key raw materials in terms of cement and lime, we have pretty much negotiated pricing on for the remainder of the year. Again, we have seen before that we've seen contract renegotiation and, depending on what will happen on the energy situation, we cannot rule out that that will happen again. Of course, we will need to assess the situation. As such, we have locked in our prices on the raw materials. Similarly on the energy side, we have also locked in our gas pricing, and we have acquired coal in Poland to secure us for remainder of the year. As such, the sensitivities, you could say, are limited. But of course, there is a risk of contract renegotiation.
Okay. Thank you. Very clear. I have another one if I may. Given you're starting to see emerging signs of a slowdown in several of your core markets, how do you assess your overall ability to sort of continue to pass on price increases to your customers? Maybe a follow-up to that, how do you assess the overall competitive landscape now compared to back before the financial crisis? Thank you.
If we start with the last first, on the competitive situation, I would say of course, it's a much different landscape than the last financial crisis. If you dare refer back to the 2008-2009 times.
Yeah.
H+H in particular had been a market consolidator. If you look at the components of the competitive landscapes, in particular in Poland but also in Germany, it is a much different picture in which we have gone from several competitors sharing the market to now having a few competitors sharing the majority of the market. If you look at the German market, between us and Sella, we now have roughly 80% of the market overall. And similarly in Poland, we have between 20%-25% of the total market. We have one large competitor within each product segment as well. It is a much different market composition than back then.
Of course, that also means that the impact on the competition on pricing is also much different. In terms of our ability to pass on price increases, I would say that we have proven that we can do this, and we have done that, and that clearly is also coming through on the revenue line. It is something that we have been able to do. We know our products are critical for the housing building process, and it's something where also security of delivery until now has been more important than necessarily the price, and we've been able to benefit from that. Whether it is continuing and whether we can continue to pass on is uncertain.
Also because of the fact that it's of course, again, depending on the competition situation. I can only say that so far we have been successful in doing it.
Okay. Thank you. Very clear. That was it for me. Thank you.
As a reminder, please press five star on your telephone keypad to ask a question. We'll have a brief pause while the questions are being registered. The next question will be from the line of Martin Brenøe from Nordea. Please go ahead. Your line will be unmuted.
Hi. Thank you very much for taking my question. We are double teaming on this one. Just a brief follow-up to Sebastian's question and your response on it. I mean, I understand that you are preparing for increase in input costs. It's only the sensible thing to do. Are you actually seeing further price increases in the latest months? Because when I sort of tried to track it seems that it's been flattish and even slightly down when I look at it on a sequential basis. That would be very helpful if you could give some color on that. Thank you.
In general, on our input cost, we have seen an increasing curve across our raw materials. As we have now locked in pricing, then we also fairly well know how the picture looks for the rest of the year. If I compare the second half average to the first half average, then it is an increase. In terms of specifically energy, which is also a key component of our raw material input cost and price composition, then during the course of July, we have seen increases in the natural gas prices. In general, that is still something that impacts the overall cost drivers.
Similarly, on coal, we've seen more of a stabilization during July. We have used that to also lock in and purchase coal for the remainder of the year. In that sense, we are trying to take benefit of a stabilization. That's overall where we are.
Okay. If I understand you correctly, you still have price increases in the second half of the year, which the guidance is still implying. But you also expect to see the cost increases to be higher than the price increases that you benefit from on a sequential basis, so versus the first half of the year.
As explained in the assumptions, we essentially assume that the raw materials will stay at the current level pricing. The reason for that is that we have secured pricing now for the remainder of the year. The average of that fixed pricing for the second half is higher than the average of the first half.
You also increase your prices, correct?
They have been-
More in second half than the first half of the year. I'm just trying to cancel out, you know. The underlying assumption must be that the input costs in total is going to be higher than your price increases effectively in the second half versus the first half. Is that correct?
That is correct.
Okay.
The reason behind it is that we, in Poland, have been very fast at introducing price increases and already we managed to do a large part of this already in Q4 last year. We basically started the year on a very high sales price level, and been able to then further increase that in the second half. It is probably, as you see right now, potentially reaching a ceiling of the kind. Still to be challenged, nonetheless. Whereas in the other regions, we've been implementing either first of January or during the later part of the first half, thereby taking full effect in the second half.
Makes sense. Thank you so much for making it clear. It's very clear now. Thank you.
As there are no further questions at this moment in time, I will now hand it back to the speakers.
Okay. I will conclude by, of course, thanking everybody for listening in. Also, since this is going to be my last presentation of a quarterly report, I will also say thank you for all the cooperation over the years. I wish you all a good day.