Welcome to the Dürr Conference Call. Ralf Dieter, CEO, and Mr. Jochen Weyrauch, member of the board of Dürr AG, will present the background of the acquisition of MEGTEC and Universal for the Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG.
Yeah, thank you very much, Mrs. Falcone, and good afternoon, ladies and gentlemen, or good morning. I'm here with my colleague, Dr. Jochen Weyrauch, and also our CFO, Carlo Crosetto, is with me here today. We are happy to share with you the reasoning of our latest acquisition, which was signed last night or this morning German time, and we would like to give you an understanding of why we undertook this acquisition. I will just come with an overview, and then Jochen Weyrauch will give you more insights because Jochen is responsible for the CTS division as well as for the Paint and Final Assembly Systems division and also for merger and acquisitions, and I think it's a good opportunity for himself to understand this rationale.
First of all, we are very happy and pleased that we could sign this agreement last night, and, because the combination of MEGTEC and Universal and the Dürr Clean Technology Systems division, we have a combined company which will be among the leading providers for industrial purification systems, acoustic systems, and emission technologies. So we are strengthening our so far relatively small CTS division. MEGTEC and Universal itself, they are strong players in industries like oil and gas, wood products, printing and coating, and metals and mining. And the Dürr's focus so far in this area is more on the chemical, pharmaceutical, and automotive industry. So it's a very good combination from those end markets from our point of view.
Also from a regional fit, MEGTEC and Universal, they are strong in the U.S., and Dürr Clean Technology Systems is strong in Europe and also in Asia, which means China, India, and other countries from there. The increased scale will allow the combined company to have more production costs, which we have to basically leverage over time, and we have synergies like sourcing and economies of scale, and also synergies, and Jochen will come to that also on the sales side to increase the volume of the business. Also, there's an increased service potential because MEGTEC and Universal have a strong service organization, and we see a sales potential in those industries like wood and chemicals in the combined operations.
Just for information, the MEGTEC and Universal company in 2018 will have forecasted sales of about EUR 200 million and then 5% EBIT margin, and the enterprise value is EUR 110 million . So that's kind of a brief introduction from my side, and I would like now to hand over to Jochen to give you more insights and we move to page four.
Yep. Thank you. Good morning, good afternoon also from my side, Jochen Weyrauch. On slide number four, I just wanted to give you a brief overview where CTS stands today before the acquisition of MEGTEC/Universal. The business in total last year was about EUR 185 million , which is split or not really split because the energy efficiency business is less than EUR 5 million , what you can see on the right.
The focus is really on the environmental technology, which was the lion's share, obviously, of our turnover last year, and this is the business we want to strengthen. That business, in many cases, happens as a turnkey business where we take responsibility for the overall plan that we deliver. To some extent, also product business where we supply components into bigger plants. The business today comprises two main areas. One is absorption, which is thermal oxidation. The other part is the absorption, which is catalytic systems. You see some numbers below in terms of amounts of volume flow. And if we now look at page number five, you get an overview on the MEGTEC/Universal business. You see on the left side the MEGTEC business, on the right side the Universal business.
Just to have an overview, and I'm now talking dollars for a moment, the business in total of MEGTEC and Universal last year was about $220 million, of which about 2/3 is the MEGTEC business. And you see here a number of the products or applications that MEGTEC has in its portfolio, like solvent recovery systems where in very expensive chemical processes it's worth to recover solvents. That is a business MEGTEC has. We don't have that application. The next application that you see, heat recovery systems, and this is why we boxed it yellow, that's a business that we also have today, so there's overlap. That further, MEGTEC also has wet electrostatic precipitators, which you find in many processes, like also the mining industry, a business that we don't have today.
Then next business is what we call RTOs, which is regenerative thermal oxidizers, which in fact today is the lion's share or the biggest single application of both CTS and MEGTEC. We also do like MEGTEC the wet scrubbers, and then you have a few other products like distillators as well as the interesting application of battery coating lines and also dryers, which are current applications Dürr does not have in its portfolio. There is a second part of the business coming, if you will, as a package with a deal that is Universal. And Universal is a company that deals with noise reduction in a number of ways, either on the intake side of, for example, a gas turbine or a power plant as such, or even for pipelines, but as well also exhaust systems. That's the main part of the business.
A very big issue more and more in terms of noise reduction is, if you will, for example, for pipelines, you need a lot of compressor stations, which in many cases are not far away from areas where you find homes, and this is why when you have compressors, you need silencers to reduce the noise. So this gives you a little bit of a feeling. So we're talking about two businesses that have pretty much the same size overall. Now, if we look at page number six, you see again, and this is now figures again in euros, the business of MEGTEC/Universal in the last two years, actual, and now a projection for 2018 as well. As Ralf already mentioned, we assume the business to do about EUR 200 million in turnover for the whole year with a big margin of 5%.
The business, very much driven locally from the United States or North America, had a relatively weak year last year. This is why we believe we have bought the business at the very right moment in order to participate with the market coming back, but as well with the measures that we will implement. You see some comments that especially in 2017, we saw weak markets in metals and mining, but also in housing. Now, this is what we've already seen as reported, that 2018 is recovering. We see recovering demand, and we already see that in the order book of the business. If we now look at page number seven and talk a little bit more about the strategic rationale of this acquisition, Ralf has pointed some of the points. I want to stress them a little further. First of all, the improved scale.
Even though the CTS business with Dürr and MEGTEC, you can say compared to the total size of Dürr, is still not the largest business, but in our industries, both companies are significant, and now with the combination, we really have an improved scale that will help us to boost competitiveness. Especially MEGTEC with their leadership in a number of the applications, like their wet electrostatic precipitators in mining or RTOs in chemicals and pharma, will really offer us a lot of potential to leverage the business. Very interesting, especially with MEGTEC, is their strong service organization, especially in North America. They have around 130 employees just focusing on service. This is something where we also believe from a Dürr perspective, we can learn because they are extremely well set up, and we will leverage that know-how with our organization. As I already mentioned, we have a complementary product portfolio.
There's some overlap, which helps us to generate economies of scale on the one hand, but on the other hand, with their new applications, like especially the wet and dry electrostatic precipitators and the particle filtration or dust control, meaning dusting, we have a few more applications in our portfolio that really help us to round up our offering and improve our position with customers. We also see a very promising synergy potential in sales. Ralf was already mentioning the interesting combination of complementary industries and complementary regions where MEGTEC and Universal are extremely strong or very strong in North America, Dürr traditionally being strong in Europe and Asia. Really helps us to combine our forces on one hand, but on the other hand, we also see some bottom line synergies, especially in terms of procurement.
Last but not least, MEGTEC was one, and we've been looking at the market, obviously, one of very few sizable but also addressable targets in order to move our environmental business forward. If we now look at page eight on the combined business, what you can see obviously in 2017 is our standalone CTS business with the EUR 186 million in turnover, and for 2018, EUR 300 million that you can read are under the assumption that we would consolidate six months of the anticipated annual turnover of EUR 200 million from MEGTEC and Universal. Then you see the plan going forward, whereas we've reported we believe that we can grow the business to around a little bit south of EUR 500 million by the year 2021. You also see the expected ranges for EBIT, where we say we believe we can reach 6%-7% by 2021.
And we also have, as you can see, significant purchase price allocation, which we show here separately, and Ralf will talk about that later more. And we also have some, and we've probably been, I can admit that, a bit conservative with the extraordinary effects of EUR 3 million this year and EUR 5 million next year because we are strong believers of well-integrating businesses, which, as you can imagine, creates expenses, especially on the infrastructure/IT side. So that is what I wanted to give a bit more in depth around the acquisition and would now hand back to Ralf for the summary.
Yeah, thanks, Jochen. I think we will get some questions later. So the combined company, as a summary, I think most has been said, but the combined company will be a leading business in that purification technology.
As Jochen mentioned, our ambition is that we bring that business up to 2021 to about EUR 500 million with the EBIT margin potential between 6% and 7%. Why did we buy that business? Because I think it has a strong growth driver with the strict emissions standards in emerging markets. That's why we see all this business booming in China and in most of the countries. And also the service business we find at MEGTEC, we can leverage also in our installed base better, so we will have an increase in the service. That's, as you know, the higher margin business. We have some complementary technologies which also have a good regional fit. We have some new end markets which give us a new opportunity like mining or housing, timber, glass industry where we see potential for that business.
From a customer point of view, I think it's a very unique offering that we have a complete technology portfolio and the service capability, which is quite unique, and I think the customer will value that. As Jochen said, we see synergy potentials in sales and cost. We have to work more on that after closing, but from our point of view today, there are potentials to get out of this. That's an overview about the, we call it Orion project of the acquisition of MEGTEC and Universal. The presentation you have in front of you, we have an appendix which I would like to address some points here for also our further reporting. Page number 11 shows here Carlo, Jochen, and I discussed about the now quite significantly increased effect of PPA effects we have in our profit and loss.
Therefore, if you look at 2018, now we expect a PPA effect in total out of MEGTEC, Universal, HOMAG, but also others we have shown so far, which are from the former Agramkow acquisition and the iTAC acquisition. So it's heading up to EUR 21 million this year and next year about EUR 22 million. Therefore, from second quarter onwards, we will show the EBIT before and after PPA effects just to have a better view on the operational capability of our organization. You see also the projection of the PPA effect going forward, which increased, but still even in the year 2021, it's a EUR 15 million effect which in our opinion is worthwhile to show extra. On page 12, we have an outlook. We would not call it revised. It's an outlook which is matching now this acquisition, and it's only changed for this acquisition.
Nothing else is in here, only the changes needed out of the organic or MEGTEC/Universal acquisition. For example, order intake before we forecasted EUR 3.6 billion-EUR 3.9 billion, now EUR 3.7 billion-EUR 4 billion. Sales revenue equally. The EBIT margin before was forecasted between 7.0% and 7.5%, now to be due to these effects we just showed before, it will be 6.7%-7.2%. Before extraordinary effects between 7.4% and 7.8%. Yeah. Then the net finance expense will be slightly lower. The coming after tax will also here for information. I think another important point is our net financial status and our liquidity. The forecast so far was not for sure not containing the organic acquisition, but also we did a share buyback from the HOMAG, from the family, from the family and the pool. So we spent about EUR 35 million for buying further shares of HOMAG as we have announced.
So in total, HOMAG shares plus organic changing that financial status from today's so far forecast to EUR 40 million-EUR 280 million, now to EUR 90 million-EUR 130 million. And the liquidity should be not between EUR 690 million and EUR 750 million, but more between EUR 540 million and EUR 580 million. That's here just also for your information. And I think that's mainly the information we would like to give to you. And now Carlo, Jochen, and I are happy to receive your questions. And yeah, then I hand back to Mrs. Falcone.
Thank you. Then we will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero two to come to your question. If you are using speaker equipment today, please use the handset before making your selection. One moment, please, for the first question. We've received the first question. It comes from Sven Weier, UBS. Please go ahead. Your lines are open.
Yeah. Good afternoon, gentlemen. A couple of questions from my side. Maybe we can take them one by one. The first question I just have is on the transaction security because if I see it correctly, the seller has been bid for two weeks ago, and the bid was for including those two activities. So I was just wondering if there's still a chance that the deal could break or just simply how secure the transaction is.
That's a good point.
Yeah. Yeah. As we announced, the transaction depends, first of all, on antitrust approval and a few other regulatory issues, especially the CFIUS approval, which we actually are very confident, but there is, I cannot give you a guarantee, but we're obviously optimistic and we're working towards those approvals, and we will have to see. We don't see particular risk in not obtaining approvals, and consequently, I would say this is within the normal magnitude of deal security or transaction security.
I think the good thing here is that we are in the CFIUS organization. We are known already as a buyer because we recently had the TDI acquisition. They screened us already, so this went through without any problems, but as Jochen said, always uncertain.
Less about the regulatory aspect, but more about the situation that there is a takeover bid out there. I think that it is including, so there's no risk from that end that the buyer seems to want the business including those activities.
Look, I cannot speak for B& W. The only thing I can say is the board has approved the transaction, and we're just talking a number of hours ago, so I assume that they support the transaction. Otherwise, we wouldn't have done it, and we have a signed deal.
Okay. The second question is with regards to your CTS business and the two different activities you have. I mean, are both activities core for you, both the environmental and the energy efficiency? Because I think the environmental bit has probably performed a bit better than the other one. Is that fair?
Yes, that is fair. It's two, if you will, we have two businesses in one division. One is energy efficiency, one is environmental technology. And environmental technology is what we're talking about. That's a core part of our business, and this is why we are strengthening it. The energy efficiency business comprises of two small businesses today. One is Organic Rankine Cycle. The other one is the microturbine. And those are both businesses that are still very small, and we are looking at those businesses.
And then I was just wondering, the last question is, I don't know how far your due diligence already went, if you had a chance to look at the backlog of the company, if there were any kind of legacy issues or were those more contained to the other acquired businesses.
Yeah. What you might be referring to is what B&W was reporting about some of their projects. Those projects that have been reported are definitely not within the scope of MEGTEC and Universal, number one. And number two, based on the fact that Wilcox is a public company, we had certain insights and certain information was not available. And within the due diligence, we felt quite confident with the business.
Yeah. And we did this due diligence with all the experts possible too. So we've made a lot of effort to really find every corner. And I think the most important point is that this MEGTEC/Universal has nothing to do with the accidents B&W was reporting.
Yeah. Okay. Very good. Thank you.
Thank you. The next question is from Alexander Hauenstein of the DZ Bank. Please go ahead. The line is now open.
Hello, gentlemen. Alexander, DZ Bank. A few questions from my side. First of all, could you quantify a bit the synergies here or at least give us a bit of color here how to think of it and how it went into your purchase price? The next question was, I mean, is the top management of MEGTEC and Universal committed to stay on board? And the third question is, was it a company you were looking at since a while or was it a very short-term opportunistic deal?
And the last question, a bit more looking forward, I mean, doubling sales and even more EBIT is certainly nice, no doubt. But I'd like to know whether you could imagine even going for another target post this deal in clean tech in order to further increase scale here, or is this ruled out for the time being for this decision? Thank you.
To answer your second question, the answer is yes. Management is committed and we'll stay on board. They liked it. They were also there, let's say, their buyer of choice. The last one, I think we will, we have now made a big step, is this acquisition. Before we do another one, there will be some time. But yes, for the moment, Jochen, the other two.
The first one you were asking was the synergies. Let me put it that way. We've looked at the acquisition and justified even ideally without synergies. We will make our minds further regarding the synergies. There will be, but we have not calculated them in a big magnitude, and we've not used them to justify the acquisition.
Don't put in your model to 600 million.
You were asking about whether we looked at MEGTEC for a longer time. I can assure you we've been looking at the whole market, and MEGTEC was top of our list. And for us, it was quite a lucky situation that B& W basically, and you can read that in the press, needed to sell the business as part of their restructuring activity of their own balance sheet.
It was before your time because MEGTEC was already on the market two and a half years ago, and it was sold to B& W for far above what we paid. And in that case, we thought it's too expensive for what it is. And I think now we have found what we can see out of the reasoning. I think it's a lucky opportunity, and we took it.
Yeah. Okay. Thank you. Sounds good. Great.
Thank you. The next question is from Philippe Lorrain of Berenberg. Please go ahead. Your line is now open.
Yes. Good afternoon, gentlemen. Philippe Lorrain from Berenberg. Just to bounce back on the last question first, I wanted to clarify here if your guidance for the margin for 2021 for CTS of 6%-7% is actually including these synergies you were talking about. That's the first one.
Yeah. That's yes.
And then a quick question as well with regard to the franchise business. What's the approach here between turnkey business versus product business? And could you share the importance of the service business in terms of share of revenue?
Differentiation between turnkey and product or component business, to be honest, is not easy because it's a gray area. But if you put, say, maybe 2/3 versus 1/3, that rationale should work. On the service side of the business, service including spare parts for both businesses today is roughly one-quarter of the revenues.
Okay. Great. And on the service side, I mean, in terms of profitability, is that in line with what you do already on the deal side? Or is there a gap there?
No. No, no, no, no. Definitely not. The MEGTEC business, in terms of its margins in general, is healthy.
Okay. Great. And to bounce back again on these guidance that you put for 2021, this 6%-7% margin, is that reflecting basically the full margin potentially in the segment, which is mostly, I do understand, then kind of a project business? Or is there more potential beyond the kind of target to actually further extend the margin towards the normal group level of 6%-9%?
The businesses are different businesses. If you compare what we have within the Dürr Group, and I'm sure you are aware, we have businesses that are more towards the machine-building business. Here, we're talking more planned business. So we should really also differentiate between the target margins. Let me probably just say that we are very confident about the 6%-7%.
And if we find potential, then we will take it for sure. But I think your question was about the overall group margin. That hasn't changed for 2020, between 8% and 10%.
Okay. So to compare then going forward, the margins of CTS probably with the one that you want to achieve at B&W.
Yeah. If you want to compare that, that is maybe adequate.
Okay. And then the last question is, is there any synergy potential between these acquired entities and also HOMAG? Because you were mentioning that on the turnkey side, MEGTEC is the.
The answer is no. Sorry to interrupt you, but.
Totally different.
More on the wood production than HOMAG is later when the wood pieces are ready.
Thank you.
Thank you. The next question is from Mr. [Schaller] of HSBC. Please go ahead. Your line is now open.
Has been answered already?
Mr. [Schaller], you can ask your question now, maybe.
Yes. Good afternoon. Can you hear me now?
Yes.
Yeah.
I have a question concerning the regional split. You mentioned that the new activities are quite strongly focused on the U.S., while you are strong in Europe and in Asia. Is it really so easy then to swap also the technologies across borders, or is the U.S. not as often especially cased, and therefore it might not be so easy to raise sales synergies by transforming the products from MEGTEC and Universal to other markets here? How do you see this?
Yeah. The answer is yes and no, but it is more no in terms of it's not so difficult because it more depends on your customer base and who is where in terms of if BASF builds a facility in the U.S. or in China or in Europe, it's the same standard, and you might see the same thing if Reliance builds a plant somewhere or whomever. So now this also to a large extent is quite an international business meanwhile.
I think some of the industries, Jochen, like oil industry, they are following American standards. That's the line you made for example. Yeah. So yes and no.
Okay, and just to make sure, this growth potential you are applying for the next years, is this then mainly coming from the new activities, or do you assume that your existing activities might also then get a certain boost from this?
It's a combination. For coming combined activities is on a full-year basis more than EUR 400 million. And we simply believe in three years, with especially the demand that we see in Asia, especially China, we really believe that combined we can achieve the amount. We've not, in a scientific way, split so many millions coming from here and there. We simply see the potential and the project.
Okay. Thank you.
Thank you. The next question is from Jack O'Brien of Goldman Sachs. Please go ahead. Your line is now open.
Hi. Good afternoon, gentlemen. It's Jack O'Brien here from Goldman Sachs. My first question just relates to your confidence in the recovery in 2018. I suppose this business looks like an interesting acquisition on the presumption that it does recover. So just interested to understand a little more about your confidence in that recovery and the order intake you've seen through this year. And perhaps a little more color on what happened in 2017 because obviously your Clean Technology Systems business also saw order intake down and had some margin issues, and this business seems the same. That's my first question.
Okay. Thanks for the question. First of all, yes, we see definitely now for a number of months on the order intake/order book recovery of the target business. And yes, especially looking when we look at our CTS business, you've seen overall that we've been a little bit weak also in the order intake last year. And if you look at it on a regional basis, you would see that a big part of that also came from North America. So it was very much market-driven with all the uncertainty in the market at that point. And like we see it recovering with MEGTEC/Universal, we've also seen improvements with our business. So I would say it makes sense what we see.
Yeah. Okay. And what sort of visibility does the order book of MEGTEC and Universal offer the business from a revenue perspective?
Put it in very simple terms, the order book in this business is typically around four to six months.
Okay. Thank you very much. My follow-up question is just on the competition or the competitive environment you see for these acquired businesses. Are there any sort of names you can mention here that you may have heard of?
I mean, the competition is more or less the same one we had before. The only difference that we have maybe now more potential of leveraging our size. And we don't want to name now all the competitors, but we can give one which is, yeah, o ne is Eisenmann, for example. There's always, yeah, our friends from around the corner.
And then you find a big number of local competitors, especially in Asia.
Okay. So it's quite fragmented.
Yeah. Fragmented, yeah.
And then perhaps just my final question. Appreciate this is a call about the acquisition, so I don't want to hijack it. But any comments you can just make on the trading of the rest of the business through the recent months?
It's all Dürr Group. This is not the purpose of this call today. We are doing fine.
All right. Thanks for your time.
Thank you. We have the next question. It comes from Daniel Schwarz, MainFirst. Please go ahead. Your line is now open.
Good afternoon. Thank you very much for taking my questions. The first one would be on your overall aspirations with regards to M&A. You frequently mentioned that you're looking for a third pillar. I'm wondering how the HOMAG share buyback and recent acquisition, how is that impacting your overall picture? Are you still pursuing a third pillar, or is this off the boards now for the moment?
That was yes. The acquisition was not big enough to basically consume all our firepower.
Okay. I'm not really sure I understood the answer you gave on the question whether you would be on further acquisitions within CTS. Was that a no?
It was a no for now because this is a significant even though you could say Dürr is about EUR 4 billion, and this is a EUR 200 million acquisition. So this business, it is a struggling business. And we want to make our homework right, and we want to well integrate the business. So talking about further acquisitions for CTS in a significant way at the moment, the answer is no.
Okay. If we could move to slide number five, if you could help us a little bit understand with regards to the absolute growth of your MV size for the coming years, where does this originate from? Is it mainly the regenerative thermal oxidizers, or is there any other area you would highlight in terms of growth potential?
There is not one single big example. We will further build on our traditional RTO and waste heat recovery business, but especially also the wet and dry electrostatic precipitators. We see a potential to introduce this more in the markets where traditionally we have a stronger sales organization compared to MEGTEC.
But we even have interesting elements in there. Just to give one example, those battery coating lines where we are selling coating lines to coat anode and cathode foils. It's a big business becoming quite interesting with the actual trends that we see. So it's a variety. There is not one single piece. In terms of absolute growth, potentially still in the RTOs and heat recovery systems because this is where we traditionally do most of the business. But also the smaller business, especially wet electrostatic precipitators, which today are a significant share also of the MEGTEC sales, we believe that we can roll out more globally.
If you look at the weak margins in 2017, was it also driven across the board, or have there been areas which were particularly loss-making?
Especially if you look at the whole performance of CTS. Oh, the question was regarding MEGTEC or our? Oh, the target. Sorry. Now it's been mainly an issue that was also very much volume-driven at MEGTEC, not so much the individual margins being of course, also the gross margins have suffered a little bit, but it was mainly an issue of volume and absorption.
Was the volume you move size this year flat over 2017 while the EBIT is coming up? Is this on restructuring, or how is this working out?
They've been reducing overhead.
One last question, if I may. If you look at the charts again, is there any of the business that you assume will require restructuring down the road, similarly like we've seen in energy efficiency at CTS?
No.
No.
Not now.
All right. Thank you very much for answering my questions.
For sure.
Thank you. If there are no further questions at the moment, I would hand back to you.
Yeah. It's Dieter speaking again. Thank you very much, first of all, for joining us on short notice today. And again, thank you very much for your questions regarding our latest acquisition. I think that's all that we can offer today. And now we are looking to work to integrate this business. Thank you very much for joining us today, and speak to you soon for our second quarter call in August. Okay. Two days. Have a good time. Thank you. Bye-bye.
Bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.