M&A Announcement

Jul 12, 2021

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the Amplifon Special Call on the Acquisition of Bay Audio. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Ms. Francesca Rambaudi, Investor Relations Director of Amplifon. Please go ahead, madam. Thank you, Sherry. Good morning to everyone and welcome to our special conference call on the announcement of the acquisition of Bay Audio. During the next hour or so, CEO, will provide comments on the transaction. After the presentation, we will be happy to take your questions. First, few logistical comments. Earlier this morning, we issued a press release on the transaction. And the presentation, which our CEO will refer to now, is also posted on our website. Second, you should note that some of the statements made during this call may be considered forward looking statements. Please refer to the disclaimer on Slide two. With that, I'm now pleased to turn the call over to Eric Ovita. Thank you, Francesca. Good morning to everyone, and thank you for attending this special call with such short notice. Exactly three years after the acquisition of GAAIS, today, we are extremely excited to share with you another major acquisition, which represents a key milestone in Amplifon growth story. The acquisition of BeiAudio, in fact, represents a truly unique opportunity for us, thanks to the perfect fit with our growth model and M and A strategy, will allow us to build another company stronghold in Australia, One of our core markets. And finally, we create tremendous new opportunities to drive growth and create a significant shareholder value while delivering strong benefits to both Amplifon customers and employees. The deal values BA Audio at circa €340,000,000 on a debt and cash free basis and will be fully financed by available cash. Finally, in terms of timing, the transaction is currently expected to be completed by the end of this year and is obviously subject to the receipt of the required antitrust clearance and Australian foreign investment approval. So let's now move to the next slide, Slide number four, to talk more in detail about the rationale and what really this transaction means for Amplicon. As said, Bai Audio represents a unique strategic fit with our growth model and M and A strategy to consolidate and complement our position in the core Australian market. I'm confident that this acquisition will allow us to build a presence in Australia, very similar to the one that we have built over time in other core markets like New Zealand, Spain, Italy, etcetera. The pay audio innovative retail model based on stores located in high traffic, premier and youth performing malls, its highly valued and recognized brand, represents the ideal addition to our existing businesses of both Amplifon and Atum brands. All in all, we expect these acquisitions to drive significant value creation for all the stakeholders. So let's now move to the Slide four to talk a bit more in detail about BeiAudio, founded in 02/2007 by Peter and Anja Hudson, is today a leading private independent hearing care retailer in Australia, One of our core markets. Australia, in fact, is the tenth largest worldwide retail market with a high growth potential. I have already mentioned about BAE's innovative retail model, which today counts on over 100 points of sales across the East Coast. And on this regard, another very important thing to highlight is that this model allows Bay to attract a much younger customer base compared to the average of the industry. Also, Bey leverages on its highly valued and recognized brands and similar to Amplifono, on a thorough customer centric strategy and high quality service to customers, thanks to its qualified professional workforce made of about 500 people. Moving now to the Slide number five, our final slide of this presentation. So similar to Amplifon, MeiAudio represents a fantastic growth of story of growth. In the last five years, their revenue compounded annual growth rate has been above 20% despite the impact of the pandemic in 2020 and 2021. In the last financial year, P and A posted revenues slightly above AUD 100,000,000, with a strong quarter. Even more significantly, for this financial year, free from the pandemic, are expected to grow by more than 30%. With clearly younger network, almost twothree of the point of sales, in fact, are less than five years old. The younger customer base and the potential expansion to other Australian territories will also support and accelerate this growth trajectory. Finally, with regards to the synergies, by 2023, we expect to achieve €5,000,000 of annual synergies at EBITDA level. These synergies will come in general from larger scale effect on the fixed cost base, but also from marketing with a significant increase in effectiveness and efficiency of the combined marketing activities and finally, from purchasing efficiencies, both in terms of indirect and direct spend. I will conclude by saying that I'm extremely excited about this acquisition. It will create tremendous new opportunities to drive growth and create significant value to shareholders and will also create significant new opportunities for all employees and customers alike. With that, I now turn over to Francesca again for the Q and A session. Thanks, Erico. Before I turn the call to the operator, please kindly limit your question to maximum two initially in order to give everybody the opportunity to ask a question. Now I turn the call over to Sherry in order to open the Q and A session. Thank you, madam. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. The first question is from Domenico Gilotti of Equita. Please go ahead, sir. Good morning. Can you hear me well? Good morning. Yes. Okay. My first question is related to the synergies and the positioning. So in terms of positioning, if I'm not wrong, revenues that are generated per store are quite high. So if you can share with us the average selling price of the product compared to Amprys in Australia. And just to understand if this is targeting particularly the private market, so not the social market as was the case for NFC. And second, if you can repeat or elaborate a little bit more on the synergies, where do you see the synergies coming from? Okay. Thank you, Domenico, for the questions. So with regards to the first part of the question, yes, well, F2 also is it's a very innovative business model. Bay today is as an average selling price, which is higher than what we have been able to achieve with our Amplifon brands. This is also in part due to the fact that they have quite a significant share in the private market that, as you know, has been always a part of our strategy, actually, to grow our share in the private market. We estimate that Bay has a share in the private market in the region of about 40%, which is higher than, for example, Amplifon, which is in the region of 30%, thirty five %. So this higher average selling price of base due to definitely a mix of channels, so more private, And also, it's due to the fact that they are able actually, they were able to position themselves in the upper part of the market, also targeting a younger customer base. With regards to the second part of the question, and therefore, with regards to the synergies, of course, we expect to have some positive benefit on the overall fixed cost base, thanks to the fact that, of course, we will be able to leverage on a larger scale. But also, we think that we can definitely put together and share a lot of other initiatives, in particular, in terms of marketing, in terms of CRM, etcetera, etcetera. Finally, as usual, one bucket of synergies will come from procurement, in particular, from efficiencies, both in the indirect spend and in the direct spend. The next question is from Veronika Dubajova of Goldman Sachs. Please go ahead, madam. Hi. Good morning and thank you for taking my questions. I have two please. One, just kind of curious Enrico, how does this acquisition play into your appetite for further M and A both in the region? And then any thoughts on whether you would have capacity even outside of Australia to consummate another larger transaction at this stage or is that off the table for a little while? And then my second question is a technical one. I don't know if Gabriela is on the line or maybe Francesca can tackle that. But just curious on the cost of financing and any implications for the tax rate and depreciation, just from a technical perspective. Thank guys. Thank you. Thank you, Veronika. So I will answer the first part of the question, and I will also leave the rest to Gabriela that is here with us. In terms of if this acquisition changes our strategy on M and A in the future and our appetite to pursue other acquisitions in the future, I would say absolutely not. Also because even after, of course, this acquisition in terms of leverage, we will be definitely in a very safe position. And on this regard, I would like to maybe hand over to Gabrielle to give you some numbers. Yes, yes, absolutely. In terms of leverage at the end of the year, so when the acquisition is going to be completed, we will stay in a very safe position. As you know, I mean, our cost is at 2,860,000,000.00 and we plan to be below full. So, issue. And of course, I mean, this also keeps in place our appetite for I mean further M and A bolt on or maybe even higher target. In terms of cost of financing, a big deal. We had some cash available that we raised last year during the COVID. As you know, our financial headroom was in the range of €800,000,000 So even after this acquisition, we still have a very significant financial headroom in the range of €150,000,000 In terms of tax, Australia is I mean working with a tax rate of around 30%, so very much aligned with our group tax rate. So no major issues on this. In terms of M and A, of course, we will need to perform the purchase price allocation before I mean releasing some numbers of course. But I mean in terms of fixed assets or the depreciation today available not a big chart. Okay. Excellent. Thank you guys. And if I can just squeeze in a quick follow-up. Guess geographically when you think about larger scale M and A obviously Australia is a great market. What other markets are kind of top of mind for you when you're thinking about M and A, especially on the larger end side? And then I'll jump back into the queue. Yes. Well, for sure, I think that we have mentioned many times countries like, for sure, we will continue to grow in France, Germany, U. S. Definitely is one of our main markets as well. Also, you have seen our recent second JV in China, again, another small JV, but another important step for us in order to build the presence in this country. So also, will be definitely in our target as a market. The next question is a follow-up from Mr. Domenico Bellotti of Equita. Please go ahead, sir. I have a few other questions. The first is related, if you have any fiscal benefit. If I'm not wrong, in your past acquisition in Australia, you were able to have, let's say, fiscal recognition of your goodwill. I would like to understand this is the case. And second, if you are seeing integration costs. And third is follow-up on the, let's say, below EBITDA level. First of all, I'm trying to understand if there is a significant or higher than usual impact from leases being located in high traffic shopping malls. So if you can help us in understanding if there is something different compared to Amplifon, let's say, in terms of, say, percentage incidence of D and A and leases. Yes. Okay. Regarding the fiscal benefit, this is something allowed if you make the acquisition from Italy. Of course, sort of step up of what you buy. So by paying something in the range of 16%, you can have the full benefit of 27%. So last year for Atune, we did. I think, I mean, we will do also something this year. With this acquisition in terms of amount it's still I mean to be defined of course. We will see also at the end of the year other for M and A and the target leverage because of course you have to pay in advance in order to have the benefit in the future five years. In terms of leasing today, amount is around 7% to 8% in terms of ratio of rents to sale. Of course, there can be some scale benefit while revenues will be growing. But that's the average leasing we pay, which is not in the end very different compared to some other reality. At the group level, we have around 6% around €100,000,000 divided by our $1800000000.01900000000.0 euros revenues. I don't recall if you have another Integration cost? Integration cost not really meaningful. Of course, it's a network very complementary to the network that we have. We did an in-depth analysis about potential overlapping on of different shops, but there are not any overlap. Maybe we can have some retention costs in order to keep the I mean the key managers because I mean they have a specific advertiser. But at the end it's going to be something very, very limited. So no restructuring at all. Okay. And just to be clear, on top of the 7%, eight % of leases then we should add a small contribution from say depreciation of tangible assets? Small depreciation sorry from tangible assets? I mean to get the full D and A impact. Of course, I mean as soon as we will be close we have 12, but we will start much earlier to make the purchase price allocation. So according to the particular price allocation that we will do, we will have some sort of depreciation coming from PPA. Very difficult to tell you a number right now should be Now I suppose referring excluding the PPA that we will see later on. So excluding PPA, I should add to the leases also Yes. Yes. There is some asset because of course I mean we need some capitalization on the shops when restructuring but it's not a particularly high number no. Much, The average 5%, six % depreciation charge that we have at the foot level of course. Okay. Very clear. Thank you. The next question is from Nikolas Storr of Kepler. Please go ahead sir. Yes. Good morning. Thanks for taking my question. I just wanted to understand better in what this new company you have to acquire is different from the former NHC in the way it operates its business? And maybe a quick follow-up. You previously mentioned 30%, thirty five % share for Amplifon in Australian private market. I didn't get the number for the audio. Yes. With regards to this second part of the question, yes, Amplifon has a share of private on the total business in the range of 30%, thirty five % more towards the 30%, whilst BA Audio has a share of private market, which is above 40%. There is a quite four-zero. Four-zero, four-zero. So there is quite a significant difference, and this is also, in part, the reason why they have higher average selling price than Amplifon. With regards to the first part of the question, why Bay Audio is different from Amplifon and why it is a very good complement to our model of presence in Australia. The audio stores are located in very high traffic and very high end shopping malls in Australia. So their marketing lead main lead generation mean is spontaneous traffic. So people are shopping around the shopping malls and then entering their stores to get a free hearing check and so on. So they do not use a lot consumer marketing. They are more towards spontaneous traffic being their store located in high end shopping malls. That is also the reason why there is a very, very limited overlap between our network and their network. Actually, is no overlap and that we do not envisage any closure at all. So I mean, they are not, for instance, more advanced or, I don't know, having a defined strategy on online or Well, they have their store format is quite innovative. Innovative. It makes use of digital technologies in a quite extensive way also in order to perform hearing checks, in order to perform the first screenings, etcetera, etcetera. So also, it is quite a technological advance in terms of model. And this is also the reason why they are able also to attract a younger customer base. We estimate that their customer base is, on average, more than five years younger than our customer base. Thank you. Thank you. The next question is from Ayesha Noor of Morgan Stanley. Please go ahead. Great. Thank you for taking my questions. I have two please. The first is what was the owners' motivation to sell given that the business was growing above market and is very profitable? Question number two, it looks from the website that Bay Audio supplies hearing aids for Starkey and Demont. Is it fair to assume these are the largest suppliers for the business? Yes. So with regards to the second part of the question, yes, the two major suppliers of Bay are demands and start date. With regards to motivation of the entrepreneur, of course, I can't give you an answer. This is more a question for them. But what I can tell you is that, definitely, there was a process in place. It has been a competitive process and eventually we won the bid. Great. Thank you. The next question is from Eugenio Verniano of Mediobanca. Please go ahead. Hi. Good morning. Thanks for taking my question. Two quick ones. First is on the pace of revenue growth from Beiulio which seems very strong. Can you provide ballpark split in terms of what is the key which are the key drivers of this growth? Is it new offerings? Is it like for like? Is it have they done any acquisition in the recent past? Yes, for the past five years and for the 30% you expect for this year. And the second is you mentioned before that you don't expect to have any store closures due to limited overlap or if any very few. Do you expect any antitrust issue? Is there any area where you're getting market share combined, which may be a bit high for antitrust authorities? Yes. So with regards to the first part of the question, Adaira, very high growth rate was a combination, a combination of organic growth, same store growth and also new openings, no acquisitions. With regards to the split between organic growth and the new openings, of course, we can't provide the details, but what I can tell you is that their organic growth was above market average. With regards to antitrust, at this stage, of course, we do not envisage any significant impact from antitrust. But of course, as you know very well, we needed to follow all the processes. Of course. Thank you. Thank you. Ms. Rambaudi, gentlemen, there are no questions registered at this time. Okay. So thank you everybody for taking part to this last minute call. This concludes today's call. So thank you again for your interest and attendance and we kindly ask you Sherry to disconnect. Thanks. Thank you. Thank you everyone. Bye. Bye. Bye. Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephone.