Good afternoon, ladies and gentlemen. Thank you for standing by. My name is Francie, your Chorus Call operator. Welcome, and thank you for joining the conference call of Schaeffler AG's acquisition of Ewellix Group. Throughout today's presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Press the star key followed by zero for operator assistance. I would now like to turn the conference over to Renata. Please go ahead.
Thank you very much, Francie. Dear investors, dear analysts, welcome to this short notice conference call with Mr. Klaus Rosenfeld, CEO of the Schaeffler Group, Dr. Stefan Spindler, CEO of the Industrial Division, and Mr. Claus Bauer, CFO of the Schaeffler Group, and of course, also us at the IR team. The purpose of this short call is to illustrate to you the acquisition, which was communicated with an ad hoc yesterday, and the presentation press release has been sent to you and uploaded this morning on our IR web page. Mr. Rosenfeld will introduce the deal and hand over to Dr. Spindler, who will illustrate to you the acquisition and its rationale. Within this short call, there will be the possibility to ask questions, and the conversation will be conducted after the disclaimer. Without further ado, I hand over to Mr. Rosenfeld. Klaus, the floor is yours.
Thank you very much, Renata. Ladies and gentlemen, thanks for joining the call. As Renata said, we are thankful that you joined to share the news on our latest acquisition to the Industrial Division. We signed an agreement, as you read from the ad hoc statement, with Triton on Sunday to acquire Ewellix. If you look at the first page of our little deck, page number two, you see that Ewellix is a global manufacturer of actuation and linear motion systems with more than 50 years of experience in that sector, 1,200 employees, six manufacturing and customizing sites in Europe, U.S., and Asia, headquartered in Sweden. Stefan will explain the products and the strategic fit to you in all detail.
I skip the middle section here and go to profitability and revenues. The company made in 2021 approximately EUR 260 million in revenues and expected to make EUR 250 million in the year 2022. We said here on this page, profitability at par with existing industrial business of Schaeffler. What does that mean? We are referring to our EBIT margin as a point of reference. The statement here means that they are more or less in line with what we produce. You know the numbers from the first quarter. You will see the numbers on the second quarter in a few days. You also know what our multi-year plan is, so you can use that as a benchmark.
If you you know look for the EBITDA number, that is probably the more, the better way to calculate whether this purchase price is acceptable or not, then we're talking something in the high teens area EBITDA margin 2022. We agreed a purchase price of EUR 582 million. This excludes EUR 120 million approximate Ewellix net debt that we will assume as part of the transaction. Closing is expected end of the year 2022. If you model this, I would suggest to look at the full year 2023 going forward. We think the price is in a competitive environment where such an asset is definitely scarce, is a fair and equal market price.
It was generated through a pretty tough auction that we won. If you just do your math, you will find that this is in line with comparative deals, and also with what is paid for businesses of this quality. We'll finance the transaction 100% from existing internal and external debt sources. No capital increase needed, fully in line with our midterm target of net leverage that we shared with you, 1.25-1.75. In terms of transaction structure and integration, this is a share deal. That means we are acquiring 100% of the existing shares, Ewellix from Triton, and therefore Ewellix Group will become a 100% subsidiary of Schaeffler AG. Let me summarize here before I hand over to Stefan.
As we told you in several calls, we have reached a level of profitability in the Industrial Division, where Stefan's business has clearly earned the right to grow, not only internally but also externally. This is an excellent growth opportunity for Schaeffler. From my point of view as Group CEO, I'm very much in favor of the acquisition because it broadens and strengthens our Industrial Division. It also gives us, from the overall portfolio, more diversification. That's what we always said, M&A in the Industrial has priority, and therefore this is what we promised. We delivered. It will help us to make Schaeffler even stronger, even in this volatile environment. With that, ladies and gentlemen, I would hand over to Stefan for more details.
Yes, thank you very much, and hello to everybody in the call. I would like to show you just a couple of slides to explain in more detail who Ewellix is and why this company is so attractive. You see here one of the leading players in electromechanical automation active in secular growth sectors. If we wanna start with the sectors, machines, medical, and you can immediately figure out that those are sectors which have a sustainable growth path ahead of them. We could also choose other sectors like automated factory assembly or also food and beverage. In all these sectors, there is a trend towards electrification. Electrification is not only happening when we're talking about electric drives for cars.
There is also a lot of electrification happening in the industry. Why? Because with electromechanics you can fulfill certain automation tasks if you have the electricity available, and you can do that also in a very efficient manner. Therefore the sectors are attractive. That's one area. The second one is also the electromechanical automation, as I said, serving sustainability requirements and also serving automation requirements. I'll come to you know what do these electromechanical components do and why do we need their function in all these machines on the next page. Let me start with just explaining here a couple of these bullet points. Ewellix is a global player.
Obviously, the strongest region is Europe, but also a very good setup in both America and Asia. The portfolio is a sophisticated product portfolio technically, and we have convinced ourselves that there is a strong team behind that has invested a lot into R&D and also into application technology. You see some of the products listed, and I'll show you examples on the next page.
What has happened since Triton has taken over Ewellix, the former SKF [Linear] , in 2018, the company has invested a lot into consolidating smaller sites in high-cost countries into lower cost footprint sites and basically done a very good job in cost improvement and also invested in the global sales network. The team consists of 1,200 people roughly worldwide. A very good innovation track record, very strong customer orientation and something where we are saying, you know, this team has done an excellent job over the last years. We wanna use the momentum and basically let them execute on their plan, which is very aggressive and positive.
Coming to the next page, and this is now the story, you know, where are we today in industry and why does this company fit very well to us? You know, we are showing the markets in the Industrial Division in these four market clusters. Renewables, very good things happening there, also in general machinery and materials. When we look on the right-hand side, transportation and mobility and also industrial automation, that's where you see the check mark, and that means those are the sectors where Ewellix is becoming mainly relevant. I wanna start with the bottom. You see again the two examples from the medical and from the robotics area.
You see also in the middle here, Schaeffler Industrial portfolio already includes, and then you see bearings, track rollers, up to precision gears. That means, you know, we are in the majority of these sectors, we are present with our existing portfolio, and now we have an additional portfolio, which we can offer to the market. You see with the different color dots, you know, where do we talk about actuators, columns or also rail guides. Basically, in order to move a piece of machinery upwards, downwards, from A to B, you need linear motion.
Basically, this consists of a mechanical drive driven by an e-motor and the e-motor and the mechanical drive connected by a gearbox, and then also adding sensors. By that you can figure out that, you know, it's not just a simple component which you take from a catalog and sell it. It's a highly engineered component. The component will look different when you go into a medical application than if you go into a forklift application. The thing that Ewellix has managed very well is to have a modular program which, you know, has certain core elements which are always kept the same in order to get scalability.
On the other hand, to manage the application engineering and find the best fit for these applications. When you look upwards on the scissor lifts, you know, everybody knows these are platforms which you move up and down. They're very often used in enclosed buildings. The more things are happening in closed buildings, the more people wanna get away, for example, from hydraulics and apply electromechanics. That's a typical application which is growing. Also forklifts, smaller ones used also in enclosed areas and definitely a real trend towards electromechanics.
The story is that the combination of our existing portfolio together with this portfolio, you know, gives us a really stronger exposure to the markets and to the customers, which we are showing here as an example. Basically summarizing that, you know, those are the items which I try to illustrate. It's a market attractiveness. It's the fact that the portfolio is complementary. When we look at the synergy potential and, you know, I basically said it on the footprint optimization side, Ewellix has done a very good job, and they have found a very good setup.
They are now basically prepared for further growth, with their footprint and with their investments that they have made on the production side. We believe that by, you know, combining the sales efforts and also by, you know, finding the right cross-selling approaches between our portfolio and the Ewellix portfolio, that will give us even a further acceleration of the business plan that Ewellix has. Certainly by combined purchasing and also using the combined distribution network, there is good synergies possible. Klaus, I think you have said it will be accretive already in 2023.
The closing is expected for the end of the year, so 2023 is the first year where we will then see really the effects of the combined effort. With this, I hand back to you, Klaus.
Yeah. Once again, thank you very much, Stefan. I think we are at the end of the deck, ladies and gentlemen, and we would go without further ado into your questions.
Ladies and gentlemen, at this time we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from Akshay Katkar from JPMorgan. Please go ahead, sir.
Thank you. Good afternoon. Akshay Katkar from JPMorgan. Three questions from my side, please. The first one on financials. Can you please talk about the profitability track record of this asset before the pandemic and also in 2021? Just trying to see what was the track record over the last five years please, just an overall summary. The second question is on the long-term margin potential. In 2018, one of your competitors, Timken, bought a very similar Italian asset making 30% EBITDA margins. Should we think about similar levels on a long-term perspective? And the third question is on the balance sheet. Could you please talk about the balance sheet structure and a leverage ratio that you're comfortable with going into next year, where we could see multiple economic uncertainties? And do you think there is room for more M&A in the current capital structure?
Thank you.
Akshay, let me maybe take the last one. Claus, if you want to comment there, please, jump in. You all know that we have a multi-year plan target also leverage EUR 1.25-EUR 1.75. You know, knowing that we will close the deal not in June but end of the year, and looking at this, you can easily calculate this for yourself. We're talking about something like 0.4x on top of what we have at the moment, or what we're projecting for end of the year.
If you take our targets for free cash flow, if you assume that the cash flow generation is a little bit this year more geared towards the end, I think we can from today's point of view assume that it's somewhere well in the middle of this EUR 1.25-EUR 1.75 range. We think with the balance sheet strengths and also with the liquidity position we have that is an acceptable leverage even in this volatile environment. We know that that has taken away some of the firepower. Then when you ask about more M&A, we have always said we wanna be disciplined.
We wanna look for targets. That's the primary first aspect that fits strategically that fit into our growth strategies and that are affordable. This is definitely the case for this. I can tell you now first digest what we have here and properly integrate it into Schaeffler Group without changing its course. It's good. Profitability grows and then we see what is next. We feel good with that acquisition. That's a major step. I would say let us first digest this and stay the course on being disciplined with M&A and also with leverage. Claus, I'm not sure whether you wanna add something there. Otherwise we hand over to Stefan.
Yeah, I think, Klaus, you phrased it perfectly. I think financial discipline, that's really the key word, and we would apply that. We applied it in this process and also in future. I mean, that we are living in a time of uncertainty, I think, that is clear, that is also clear to us. That is why discipline is so much more important. But we will do things that we think make sense from a risk reward structure.
Maybe to add, actually, you remember we were participating in Dodge, also an auction process. At that time, no one knew what the world would look like a year later. Today, with hindsight, I have to say I rather buy this asset than something that is much bigger and would put us in a much more difficult position when it comes to leverage. You never get it right, but here we feel comfortable that this is well digestible with the strengths and also the leadership of Klaus as our CFO.
I think, Klaus, that's also a good example of financial discipline. I mean, in the Dodge procedures, once our walk away price that we thought was financially sound and reasonable was hit, we didn't continue the process. I think that's exactly what we apply. Of course, financial headroom and firepower is dependent on also how we think about the future. Rest assured that is in our evaluation of any opportunity that also will come up in future.
Maybe Stefan, would you take the two other questions?
Yes. On the profitability of Ewellix has been going through a similar transformation as we have done it in Schaeffler Industrial. Coming from a single-digit EBIT margin, done a lot of you know, cost saving and footprint optimization efforts. Now, after this optimization, they are in a good two-digit EBIT range, a similar range as we are in Schaeffler Industrial. The company has invested into structural things, but now also into growth, like we have done it also. As you know, from our expectations, we wanna be in the range above 12% EBIT. Ewellix will definitely support the journey of our profitability story.
Thank you. Just one clarification in terms of the long-term potential. Is the asset very similar to Rollon, which was bought by Timken, or is there something else that we should think about when we think about the long-term potential?
You know, if you compare on the linear side, I think you need to be a little bit careful comparing one target with the other. It very much depends on what products you're looking at. You're finding linear players which have a rather low profitability, and you're finding linear players which have a rather high profitability, but they are then in either a super price competitive area or they're in a super highly engineered area. What we have with Ewellix is a price competitiveness plus a highly engineered product. It's a much broader application range and product range compared to other targets. You cannot compare these linear targets one to one.
It's not just that's one linear company and that's the other linear company. You need to look at the content behind in order to compare them.
Understood. Thank you so much.
The next question is from Richard Carlson from Credit Suisse. Please go ahead, sir.
Good afternoon, guys. Thank you very much for hosting this call. I just wanna ask again, I guess you brought up Dodge, obviously something you guys famously walked away from, and now you feel really good about it. How has the overall market acceptance for some of these deals gone? Are you seeing this as maybe less aggressive than you saw Dodge? Or how, in general, just how has the market shifted?
Well, Richard, thanks for the question. I can say, you know, from the auction process that we went through here, you'd never have full transparency in the auction process, but we went through a full due diligence. This was not a preemptive situation. It was, it turned out into be something that was very competitive, full detailed due diligence. You know, more than a handful buyers in this, and in particular the strategic buyers as well. We were told by our counterparties it was very close and, again, as Claus said, we had a walkaway price also here, but that we didn't hit. We came out of the winter, you know, with heavy lifting over the weekend.
I would say the market is still looking at decent assets. This is a good asset. As Stefan said, for us in particular, because there is significant synergy potential, in particular on the top line, that we will raise.
I cannot emphasize again enough how the growth in the sectors that we are looking at is attractive. Therefore, you know, that tells me that the market has not gone upside down on this. If interest in the assets come to market out of private equity portfolios, I think there will be interest in particular from industrial strategic buyers.
Got it. Thanks for that. Then, you know, it sounds like this is a very strong performing business. Will you guys keep it as its own separate brand? Could you even move some, you know, some of your Schaeffler products that are complementary into that and to grow that brand?
Yes. I think we said this also in the press release. It would be wrong to now integrate this into and roll out the Schaeffler name on it. We'll integrate it over time. Ewellix is a proven name in the market. We will probably endorse it so that people understand it's part of the Schaeffler Group. We will keep it also integration-wise separate. It has a very strong management team. People that have gone through private equity exercises know this, so we will leave them as much autonomy as it makes sense.
Got it. Thank you, guys, and congrats on the deal.
Thanks.
The next question is from Sanjay Bhagwani from Citi. Please go ahead.
Hello. Thank you very much for taking my question also. I have three questions. My first one is, could you maybe provide some more color on the funding? So what portion is gonna come from the debt, and what would be the cost of that you are anticipating? My second question is on the synergies. If you could provide some more color on, like, what sort of synergies are you expecting from the top line versus from the cost synergies? Probably a kind of split from the revenue synergies versus cost synergies. My final question is on the industrial rationale for the deal. Thank you for providing the slides, which were quite helpful.
Additionally, could you maybe provide some color on, like, any insights, like why this asset is a substantially better fit for Schaeffler than for SKF, which was owning this? That would be very helpful. Thank you.
I think, Claus, you should take this one, and then maybe, Stefan, you can take the two or three ones.
Sure. From a financing standpoint, I think we are prepared to fully finance debt with external debt, that was what we investigated in the market. As Klaus already alluded to in the beginning, we will also still accumulate a significant portion of free cash by the end of the year when this is about to close. Therefore, it will be a mix between our own cash and debt financing, which we think is possible at the reasonable rates that are now in the debt market.
It will not be, at least not in the first step, a capital market financing because they are, as you are well aware, the margins right now might be not attractive. I think we will have the opportunity to finance that with debt at a reasonable cost.
Okay. I can take the other questions. You know, why is this a good target for Schaeffler? Our principle is pioneering motion. You know, we on a group level and certainly also on an industry level, it's all about motion. When you do motion and when you do kinematics and when you need to basically drive something or move something, you always talk about rotative and linear motion. So the combination to have both is a strength, especially nowadays, when we talk a lot about, as I explained, the trends towards electromechanical motion. So that's more the, let's say, the market and the technical aspect.
If you look at it from a number point of view, the linear market, which we're looking at here, is a EUR 6 billion-EUR 7 billion market. We would like to be part of that market and have a strong portfolio and growing with it. It's also a well-growing market. You know, the market forecasts, if you take external sources, is a higher single-digit growth, a pure market, not taking into account any market outperformance. It's a growing market, it's a good market size, and it's good to have it as a supplier of motion technologies combined with rotative portfolio. That's our strategy.
In terms of the synergies, it as Klaus also has said, you know, we wanna maintain the momentum of the company, and we want to make sure that Ewellix and the team is basically delivering on a strong growth plan, and basically make sure that all the products and the customer projects which they have in the pipeline that they deliver. In addition, step-by-step, we will see, you know, what can we do together and where we can combine our efforts. We're sure that on the sales side, due to the strong
Sales and customer service networks from both companies. We can do cross-selling synergies. That means increasing the top line further. Certainly also by combining purchasing efforts, we will be able to get benefits.
Thank you. Thank you, gentlemen. This is very helpful. Just, I probably didn't get it properly. The first point, this will be fully financed through debt. Is that right?
Yes. We, as I said at the beginning.
Yeah.
There's no need for any type of capital increase. We have the funds lined up from existing cash and/or credit lines to pay for this. It's paid in cash. You know, it's a very simple transaction structure. We're buying shares, we pay in cash, and we take the cash from our existing funds.
Thank you.
You're welcome.
The next question is from Michael Punzet from DZ Bank. Please go ahead, sir.
Yes. Michael, good afternoon. I have only one question. Can you give us any indication for the purchase price allocation you expect in 2023 and the years to come?
Claus, will you do that?
Yeah. I mean, it's very early in the process. What we did in our financial models is that we took the statistical average of comparable transactions and based our purchase price allocation based on that. We don't expect a huge deviation from that approach, based on what we learned in the due diligence.
Okay, thanks.
The last question is from Eduardo from HSBC. Please go ahead.
Hi, good afternoon. Thanks for taking my two questions. First, looking at the long-term profitability targets that you have in the context of the inflation of cost and revenue, could you confirm or comment about industrial EBIT profitability being 2x or 3x multiple compared to automotive OE in the midterm? Then second question, more strategically, in my estimates, industrial should be a bit below 40% of the total group operating income. I was curious if you can envisage a scenario where you bring the weight of industrial to the group to more than 50% in the future. Thank you.
Two very good questions. Eduardo, we've just gone through our strategic dialogue and this is a new world to some extent. We need to rethink a little bit the environment we are working in. At the moment, I have nothing new to say than what we outlined in our midterm targets. Here, I think we are definitely on track and on target to achieve our midterm up to 40% for industrial. Would that mean that auto comes to 7%? Again, let's leave at the moment the midterm targets as they are, and then you will see the numbers and know what we promised.
We will definitely, I think that's what every company is doing, review this, as part of our planning exercise, that is, starting after the summer break, to then see how we position the company. Could I imagine, in terms of profitability that we go in further with industrial? You know, we wanna do what is good for the company. We have always said that this is an automotive and industrial supplier. We have always said that we like the industrial business. You see here, this long-term trend towards electrification is not only relevant for auto, it's also relevant for industrial. Stefan is with Intelligent Move closing, here, one of the gaps. You know, we have always said this is not just auto plus industrial.
This is an integrated group, and there are synergies that can be generated by keeping similar business under one roof. That's a long-term view, and I hope you all see that this step here is just a proof point and another milestone on this way. Yes, Schaeffler is more than just a simple automotive supplier, as you all know. We think there's value if we continue in looking for strengthening our core competencies and going into growth markets of the future. Maybe that explains it without answering the 50%. Would I love to have higher profitability with a higher share? For sure. I'm not going to commit to the 50% in this call.
Thank you.
You're welcome.
Ladies and gentlemen, in the interest of time, we have to stop the Q&A session. I hand back to Renata Casaro. Please go ahead, ma'am.
Yeah, Francie, thank you very much. Please, let's check one more time if in our pipeline there is a lingering call. Sometimes there is a little one. Could you please check again if there is one more call? If not, we can close the call here, and I would hand over to Mr. Rosenfeld. Francie, is there anybody else?
There's one more, then I will.
Okay.
Yes.
Let's have this call. Let's have this question taken. Thank you.
You're welcome. From Christian Aust from Bernstein Autonomous. Please go ahead, sir.
Yeah, good afternoon. Sorry to keep everyone waiting then. Just a quick one on the you mentioned the leverage increased pro forma round about 0.4 times and a fully debt-financed deal. Did you check that with the rating agencies, particularly thinking Moody's here and the pending update on the rating?
Well, Claus can answer this, but we'll talk to the rating agency this afternoon.
Okay.
As you know, in such a deal that is closed on a Sunday, signed on a Sunday morning where you often don't talk to your, there's no chance to pre-agree this. But our view is, the rating agencies will probably don't see that as a big issue, given where we're coming from and given the solid position. Claus, maybe you wanna add something.
No, I think nothing to add there, Klaus. I think our expectation is clearly that it will not have an impact on the rating.
Yeah. They will also wait for the half year result. Again, we have not been on watch or anything. We have been stable with what we had, and therefore, let's see what they come out with when they have digested this.
Okay. Thank you.
You're welcome.
Now that was the last question. Back to you, Renata.
Well, I think that, thank you very much, Francie. I think we are done, and also it's very efficient. I would thank all the participants who jumped in on such short notice in our call and remind you that we will have our Q2 call on the 4th of August, as planned. Thank you very much, and we remain at your disposition. The IR team. Have a nice afternoon.
Good. Thank you very much. Bye-bye. All the best.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.