M&A Announcement

Mar 18, 2020

Harvea information on the acquisition of the majority of the EOS sauna technique. My name is Tapio Paio Harvea. I'm the CEO of Hario. And next to me, we have Ari Vesterinen, our CFO. Hello. Hello. I will briefly go through the transaction overview. We'll also introduce and inform what is EOS all about, and then we'll go through the strategic reasoning of the deal. And then Harri will have a deep dive on the financials. And I think very happy that Harrivesk becoming stronger today. And even though we have a bit of abnormal times and people are talking about the coronavirus, we are also taking this very seriously. But if we have a bit of a longer horizon, we know that sauna is a winning concept and we have all the trends backing us up. Now we have the opportunity to close the deal on the EOS. And I will now take you through that deal. First of all, we have signed an agreement to buy the majority of the EOS group. And I think we've been maybe a bit joking about it, but I think Harvia is the Volkswagen of the sauna industry. We have the premium models, the Tow Drag, but we also have the Polos and the Golfs of the Sona industry. We have a couple of the Audi models in our portfolio, but we've been lacking the premium models of the Audi, and we've been lacking the Porsche. And then we didn't have any of the professional trucks. Now we also have the MAN trucks and the scanners of the sauna world. So that's completing a watering on the sauna heater and equipment business. We acquired the company for SEK 19 700,000. The total valuation is SEK 25,500,000, and I think that's a good price on the sauna industry. Then we have on top of that, we are financing a deal with an interest bearing debt with on our own cash pool, and we are expecting about 2,200,000 synergies on the deal. They are coming through gradually, maybe not as fast as on our latest almost Seversound acquisition. This is really taking time as we've been highlighting over here. But they are expected to be on the magnitude of SEK 2,200,000 on that respect. We also have some one off costs, and they are amounting with SEK 1,400,000 in that respect. They are coming through this year and the year after going forward. For sure, the deal is subject to all of the customary closing conditions, most likely closing between end of March and beginning of or actually end of April in that respect. I think we'll not go deep in our mission and vision, I think we intend to be the one stop shop for the sauna and spine industry, for the professional marketplace as well as for the residential marketplace. And in that respect, EOS is completing extremely well our offering. And also in our strategic journey, we have these 3 paths we are following. 1 is increasing the average purchase. And I think when we go through the portfolio and offering of EOS, that is, in a way, bang on in that respect, clearly increasing the average purchase both for the residential market as well as on the professional marketplace. Then the geographical expansion, I think when we go through the strong markets of EOS, we see that Harvia Group is gaining good foothold in the most penetrating sauna markets. And on top of that, we have a lot of opportunities for taking AOS into markets where they have not been for the time being. And then on the area of improving productivity, at least we realized that we have a lot of innovations in the portfolio where we feel that we can improve the commercial capability and viability of the offering EOS has. And together, we are clearly stronger in that respect. I think by accident, Hydrovia is becoming 70 years old company this year, towards the end of the year. EOS has been in the business also for 75 years. This EOS production will find when you go to a premium spa, premium fitness club or you have a what I call a premium luxury home or second home, there people use mainly the EOS equipment for heating up the sauna, generating steam for the combi sauna or steam room as well as for the infrared saunas. They also have a very nice spa equipment offering, also cooling and snowflakes and ice flakes, especially for the Russian market. And for the CES markets, they tend to be a project supplier with a turnkey bid projects on that respect. The customer base is extremely loyal, and I think it's a household name. And even though we are joking a bit about the Porsche of the sauna industry, I think it very well describes the position of EOS on the sauna and spa world. EOS also has a very good geographical distribution, and the split is completing our offering quite nicely. It's mainly on the German speaking area, Central Europe, but that's also where the Sona population is high. And on top of that, EOS is really the brand of the premium and professional image in the Russian and CIS market in that respect. During 2019, EOS has slightly above SEK 70,000,000 net sales and a very solid profitability and adjusted EBITDA, SEK 3.2 and on the EBIT, EUR 2,800,000 in that respect. Altogether, EOS employs 150 people, most of the people in Germany, in the main office and the main factory in Deirdorf, close to Frankfurt, roughly 1 hour and 10 minutes northwest from Frankfurt, as you can see maybe on the map. Of the 150 people, roughly 20 plus are working on the Russian CEIS. And EOS operates with 3 brands, and I will take you through on the offering of the 3 brands they have. First off, starting with the E. O. As such, it's really the household name on the premium and professional quality heaters, steam generators and componentry. Actually, on my right hand side, we have EOS, Zeus, and I think Celos tells a lot about the capability and capacity of the heaters. This one on my right hand side is 36 kilowatt, but on the portfolio of EOS, they go up to 72 kilowatts on the electric heaters and whereas Harivya was limited to 30 6 kilowatts, so basically double the capacity we have. And this type of heaters are extremely popular and having a high demand on the larger spas, professional spas. And some of you may know the Aufgus sauna type, which is actually growing very fast. So these are the Aufgus heaters for the saunas. Then the next one on the right hand side, that's the Mythos. Mythos is more of a professional fitness club, small family hotels and premium family saunas where they use these type of things. Then when we go further on the right, they have very nice own design and own development and own manufacturing on the electronic components. This is Emotouch, which is 4 color touchscreen control unit. And then we have 2 auxiliary steam generators, which you can basically attach to a combi sauna just to improve the quality of the steam and make the steam and experience more moisture and more softening in that respect. Really advanced on the electronic component redesign of that, and that's something what Harve has been missing in the past. On the other hand, we've been having and we will have very good partners in the work of electronics, and we continue long term partnership with our existing partners. Also on the illumination part, EOS has made a very good inroads into the illuminating the sauna, spa and steam. And then infrared, they have a state of the art offering on that one. Unlike Harvia, they've also been very good on the mobile application and the remote control of the saunas and spas, and they have their own systems for apps and iPhones and all of that. And in terms of accessories, when they operate with the more demanding professional spas, there is a versatile offering of very nice functional features, accessories, which will complement Hadoopie offering on that respect as well. Cusatpec, that's a state of the art gas burning heater company. It's a company within the company and technology on its own, and it's the only CE approved gas heater provider for the professional marketplace, mainly used in the Aufgas saunas and the premium spas. On top of the functional steam, one part of the benefits of the gas burning heaters is economy. On the places where you have gas available, usually the payback for the capital employed is very good after 2 years. And these are rather expensive, this price of a small car or up to a premium car, but then the payback is 2 to 3 years' time, you are back on your own. And then actually, you also do good for the environment when using the gas burning heaters. Spatronics, it's also a factory within the factory. So that's within the EOS premises, state of the art advanced own design, development and manufacturing of the electronic components for the sauna's power industry. And that's extremely good value add for Harterbeer going forward. Once again, on the rationale of the deal. I think you Harrivia has been operating on the residential market, clearly the market leader on the residential area, on the heaters. We've been making inroads to the professional part up to the 36 kilowatts, but this is speeding up to our journey into the professional marketplace. And on top of that, we become on a one go household name and appreciated partner for the professional spas in that respect. Then I think when the average purchase goes up with the Harivya, we've been demonstrating that we have a proven success on that one. The EOS product taken a price point, they are roughly 30% to 100% more expensive on the premium residential line. And then on the professional marketplace, they are really the name on the business, and that's why they can also command a very, very healthy price point. But having said that, they are extremely functional and are good value for money for the professional use even though they have a higher price tagging in that respect. Geographical split will soon go through the split of the markets, but I think you will realize that we will have a very good presence on the Central European marketplace. And it's actually a very healthy split, onethree in Germany, onethree in the rest of the Europe and then Russia and export markets on top of that. And when EOS is currently basically not available in the U. S. Marketplace, we have an opportunity to take them over there. I think it's good to remember, it's not going to happen overnight. U. S. Market needs to be having the UL approvals. It's usually 6 to 24 month project to get those, but we know how to get those, and we've been doing that in the past. And then on the Asian market, where the luxury sauna is going forward, that's also where EOS is currently not strong and dominating. Russia, where we have a very solid position, we are market leaders in the electric heaters. EOS is the market leader in the professional spas and the luxury saunas on that marketplace and very nicely complements our offering on the Russian marketplace. And with their project team work, who's been very successful in the Turkey beach, I think there are learnings we can do. We can take that in the baby steps to other markets as well. On the revenue stream, adjusted EBITDA and EBIT, Harry will take you through in more detail on that. But I think as a summary on this one, hydrovia becomes stronger in the heater and component market. And we continue our journey of becoming a one stop shop for the professional and residential marketplace. This takes our market share up from the 11% to 14%. Still a lot to do, but I think we now become clearly the strongest player on the heater and sounder market in that respect. And especially on the premium and professional is the extra and incremental for Harribia. Now I will pass the word to Ari, and Ari will take you through the financials in more detail. Please, Adi. Yes. Thank you. Yes. You may remember that Harvia has quite a strong cash position and also strong profitability and cash flow and so is also EOS. But since this is a long term investment, we will finance it with a long term debt. And now the preliminary purchase price is €19,700,000 but it will be specified after the closing period, the exact number. So the additional long term debt, what Harvya will get is the SEK 20,000,000. We will certainly use also some of our internal funds for the integration costs and so forth. Since we are buying the majority of the company, there is still, let's say, the opportunity or option to buy the rest of the company. And because of that, the valuation of that minority will be also booked on our balance sheet as a long term debt. And as a result, our net debt based under the year end 2019 figures would increase approximately from €28,000,000 to approximately €49,000,000 and net debt. And the long term liabilities from 80 sorry, from €38,000,000 to €61,000,000 And after the acquisition, the equity ratio will be still on the very healthy level of 47% based on the end of 2019 figures. The time lapse between signing and closing is actually quite short. We don't need any approvals from the competition authorities and so forth. So we are expecting that the closing and the transfer of the shares will happen even can happen even end of March, but at least during April. That's the case. And since there is there are 2 structures, the German unit and then the Russian unit, German unit may close a bit faster than the Russian unit, but this is all already signed and agreed the next steps. So are there any questions, comments we would like to answer together? Maybe before the questions and comments, I think we are very happy to have the EOS team on board of the Harivya Group and family And especially happy we are that Mr. Rainer Kunz will join the management team of Harvia, and he will continue running the EOS. And at the same time, his colleague Vasily Sosenko will continue running Russia EOS operation in Moscow and the CIS countries. Now I think it's time for questions or comments. And there's a chat available as well as the phone option on that. So please And on the chat, so far, there are no questions. And over the phone, do we entertain any further questions or comments? We have a question from the line of Maria Wicks from of Danske Bank. Go ahead. Your line is now open. Maria Roesch. Perfect. Can you hear me, gentlemen? Now we can hear you. Yes. Hello. Okay, perfect. Congratulations for the acquisition. I think did we have this call in English or Finnish? English, I guess. Please. Yes. It's a bit of hassle here in the home office. But yes, so I think it's I mean and it seems that the market is liking the acquisition as well. And personally visited a hotel in Berlin a month back, and they had an EOS heater. So it's definitely in a good spot. But can you a little bit talk about the given that the company has 75 years history that I mean, why are they interested in selling now? And then the second question that can you also a little bit I probably missed the fact that I mean the Reinhard Kunz becomes the shareholder in Harvia. So how does that share transfer work? Okay. I think on the appendices, we have the history of the company. So Mr. Kunst and Mr. Meijs have been running the company for some time. And I think now for the family reasons, Mr. Meijs wanted to step down and Mr. Kunz was looking for an option how to take it forward. We've been knowing the company for some time. We've also been knowing Mr. Kunst for some time, and I think he basically believes in the philosophy that together we are stronger. And I think they had also several other options, but I'm very happy that they selected HEYRIZIYA to be in the same deal with them. And then what was your other question? Shareholding. Shareholding. I think after the closing, Mr. Kunz will buy with a certain amount of his own money Harvia shares, And I think we have not disclosed that amount in detail. But it will be a decent substantial amount. And it's also very important for us that he will join the management team, and we have more international flair there from Central Europe than what we had until now. So that supports also our international growth and opportunities to leverage the synergies for the international business with EOS together. And is he planning to buy the shares on the market? Or is there some agreement in place that some of the current holders will sell shares to Mr. Poons? I think that's something we don't disclose. Major share subscription is not planned. So it will not dilute the amount of Harvia shares. All right. And then if I may continue one more, which is it's probably difficult to quantify. But of course, like the questions that I have received so far from the investor community is that the I think that you were planning this deal quite long time ago, and you said you had a good contact. But now, I mean, we have all these restrictions in place, I mean, for traveling, people staying at home and especially that this EOs is more placed on the spot than hotels. And I think some of the investments may be put on hold in this situation. So how do you currently see the corona situation affecting you guys? I think in general, Haraway has been sailing under rather favorable winds, and we escaped the China issue very fast. We came back to business 2.5 years days delayed after the Chinese New Year and only had a minor issue with some of the packing materials and some of the componentry. But thanks to the excellent team in China, we've been actually doing all of the needed output and being matching the demand on that. So very happy. And in our order books until, I think, end of last week, no impact at all. Now we realize that, okay, there is something happening and some of our customers have been closing their stores in Central Europe. Same applies for Norway, Denmark for a number of weeks. On the other hand, everyone knows that sauna and spa business is not going to go away. People will be enjoying time. And in the Scandinavian marketplace, we also realized that there was a bit of incremental activity for people working from the remote office, staying at home or going to the summer cottage a bit earlier for the remote work. There is action on the do it yourself market on that respect, which is increasing demand for some of our components. At the moment, I cannot answer in very detail regarding the EOS status and situation, but we discussed this with Mr. Kunz. And there is a feeling that for sure, some of the spas and hotels who may have a difficult economical position, they need to save every penny. That's happening. On the other hand, the ones who have a healthy situation, this is a time to renovate the hotel, not only the saunas, but the receptionist, the meeting rooms and all of that. So I think people who have funds, they will use the time very efficiently. For the other ones, it will be a bit of a hiccup, but it's going to be a short term hiccup in that respect. I'm afraid I cannot give you any more detailed answer on this. When the final decision for this acquisition was made, we made, CTOs very thorough analysis of the situation. We played different kind of scenarios through for 3, 6 or 12 months what will happen on the market. And this decision was discussed very carefully many times, and we think that this is really a long term investment, and this current market situation is just a temporary situation. And I think there is no analogy which will tell how future will go. But based on what the last time happened on the financial crisis, Harvev was very resilient as all of the other Sona companies in that respect. So we have some anticipation. And all of the scenarios we run, they were proving out to be good, solid or excellent. So I think in that respect, we were brave enough to make the deal. Then there's a question on the chat. It's about the organization culture and how does Harvie and EOS fit. And I think in general, they are sauna and spa people. The basic cultural fit is very good. But then you may understand that like the car people, the car guys, the ones who drive a Volkswagen, they think it's best on Earth. And the ones who drive a Porsche, they think it's even better. So I think there will be always a bit of a healthy competition internally, but I think that's good for the business. Any other questions, Maria or anyone else on the line? And we have another question from Maria Just a little bit further on the deal. You said the market share will go up, I mean, from 11% to 14%. And I have a hard time seeing that the competition authorities would basically have any saying to this one. But is there some of these considerations in any of the markets that you would see that you would be 2 dominating players? Or this is you see it more of a complementary acquisition that would also be a competitive authority view? We run a very tedious and delicate legal diligence, and this was on the topic and tested in that respect that we don't see any issue on this. And then my final question that you guys have had some of the difficulties in the Russian market, at least, to find growth. So can you a little bit elaborate on how has it been for EOS and I mean, their segment where they operate and how they have seen the Russian market performing for them in the last, I mean, 2 to 3 years? I think we tend to play in very different fields. We were interviewing our own Russian team and guys on the EOS and how visible and how good they are in the Russian marketplace. And the answer was a bit of a surprising. They said, we don't see them at all. I was, oh, come on, you need to see them somewhere. But they play on a super luxury and super premium league, and they have very different clientele than a typical Harvia customer is in Russia. So in that respect, it's complementing very well. And I think on that type of a client deal, the buying power is there. And if and when we can share the EOS Russian catalog, I can tell that that's one of the most impressive catalogs I've seen on the sauna and spa industry. So it's really state of the art and a very, very good addition. And I think in the dynamics on the Russian market where we play with 3 individual distributors, this will put bit of a new dynamics in place, and I think it may also potentially improve some of the working disciplines and ways of working in the marketplace, when people realize that, okay, Harbin has also other opportunities. And I think this is, in a way, in that respect, a welcomed incremental tool to develop our distribution in Russia. The Russian deals are really very often turnkey projects for premium customers and premium spas. So especially in Russia, EOS is a company with complete offering and luxurious complete offering. It's almost to the premium and super premium league in that respect. I hope I answered Mariela's question in that respect. Yes, I think you did. And then if there is nobody else on the line, then maybe my final question is that I think you talked about it quite a lot that it has been somewhat difficult to get into these like the old distribution relationships in Germany? And now when you have had various talks with Mr. Kunst, is this something that he sees that, I mean, now he can actually bring the Harvia and Sensiotech brands in the existing distribution network that leverage from there. So is that is he also seeing these sales synergies that you could have post the deal? I think he fully supports that. On the other hand, I think we intend to keep the brands rather independent. And I think EOS has their own clientele and Harvev has its own clientele. So in that respect, there will be, on the first go, not too much synergies. On the other hand, now we can operate outside of the core EOS markets on the professional and premium range where we now have the household name where there's no pressure whether it's good enough for the demand or strong enough or professional enough for that demand. So those are open. And I think together, we can open quite many new doors. But they are maybe not potentially in Germany. They can be, but they can be I think it's more outside of Germany than in the German speaking area. Thank you. Our next question comes from the line of Micha Karpenhan of Handelsbanken. Please go ahead. Your line is open. Hi, this is Mikael from Handelsbanken. Can you hear me? Yes. Yes, we can hear you. Yes, good. So Harvey has been growing organically in recent years quite well, while at the same time, E. Sales have been quite flattish. What's the reason for that? Have you been focusing more on improving profitability? Or what's the reason for that such a sluggish development in Brazil, yes? That's maybe a question I don't have a very solid answer, but they've been very focused on their own segment and category. And I think on that segment and category, they've been focusing on the super professional, super premium, whereas I think when going forward, we can offer them new markets and maybe a bit more flexibility on where you can go and how you can go. But on the other hand, we want to really honor the current partnerships they have built, and we'll keep that on the top priority. So we'll not do anything which would harm the reputation or the excellent distribution structure they've been able to develop. But I think we can help them in order to grow in that respect in the existing markets. And on top of that, there are clearly markets where we can help them to grow. And I think that's in the plans. EOS has also been continuously improving its performance and profitability. And it's, in this respect, very similar to Harvia. We like that. And it's good, a perfect fit in that respect also. Now we have on the chat a couple of questions. Let me just try to read through. The first one comes from Petri Kayani from Inderes. And it's could you elaborate a bit more on the gross margin differences? And do we have any plans of moving manufacturing from EOS factories to hardware factories in the near future? I may have the latter one, Adi, you take the first one on the gross margin. In the manufacturing platform, currently, we have no major plans to move any of the production. On the other hand, Haraway has some capabilities to supply some of the componentry maybe for EOS, which they're currently outsourcing. So those synergies we are for sure testing. And at the same token, on the sourcing synergies, we see opportunities on that respect. But no immediate transformation of place of manufacturing for the heaters and componentries in place. Yes. Since EOS is serving really the premium market and premium customers. It has slightly more costs in the field of sales and support and technical support. But on the other hand, the gross margin, even if they are healthy in Harvira, they are even healthier in EOS. So the gross margins after direct costs, they are good. Then the next one is also from Patrik, Iann Indeles. What part of EOS sales is product sales and how much is project sales. And I think most of the net sales out of the German unit is product sales, almost to 99%, whereas the Russia unit, which is roughly on the ballpark figure, €4,000,000 in net sales, of that €1,000,000,000 is product sales, rest is project sales. And that's including all also componentry, which is not made by EOS. It's made by partners, for example, on the cooling equipment, snowflakes and ice machines, plus all of the sauna componentry in that respect. Then there is a Petrik Kayani, you have an option to buy the rest of the shares of EOS in the future. How does the valuation of the deal being constructed for the rest of the 20% for example, 5 years from now? Adi, you may open that. Well, we haven't disclosed it in our stock announcement, but it's based on the financial success and certain put and call rules, which will probably be disclosed later. But I think basically, it guarantees that we will have a very smooth and solid ride, and there is motivation for Let me see if there are any other questions on the chat. Not really. And how does it look on the teleconference? If not, what is the Telephone park. Sorry, go ahead. Still one coming or okay. So thank you for your time and attention, and I wish you a very good day. Thank you.