Harvia information on the acquisition of the majority of the EOS Saunatechnik. My name is Tapio Pajuharju. I'm the CEO of Harvia, and next to me, we have Ari Vesterinen, our CFO.
Hello.
I will briefly go through the transaction overview. We'll also introduce and inform what is EOS all about. We'll go through the strategic reasoning of the deal. Ari will have a deep dive on the financials. I think very happy that Harvia is becoming stronger today. Even though we have a bit of abnormal times and people are talking about the coronavirus, we are also taking this very seriously. 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. We had the opportunity to close the deal on the EOS. 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 Touareg, but we also have the Polos and the Golfs of the sauna industry. We have 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 Scania of the sauna world. That's completing our offering on the sauna heater and equipment business. We acquired the company for EUR 19.7 million. The total valuation is EUR 25.5 million, and I think that's a good price on the sauna industry.
We have, on top of that, we are financing a deal with an interest-bearing debt on our own cash pool, and we are expecting about EUR 2.2 million synergies on the deal. They are coming through gradually, maybe not as fast as on our latest Almost Heaven Saunas acquisition. This is really taking time, as we've been highlighting over here, but they are expected to be on the magnitude of EUR 2.2 million on that respect. We also have some one-off costs, and they are amounting to EUR 1.4 million 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, but I think we intend to be the one-stop shop for the sauna and spa industry, for the professional marketplace, as well as for the residential marketplace, and in that respect, EOS is completing extremely well our offering. Also in our strategic journey, we have these three paths we are following. One 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 of the professional marketplace. 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 lot of opportunities for taking EOS into markets where they've not been for the time being. On the area of improving productivity, at least we realize that we have 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, Harvia is becoming 70 years old company this year, towards the end of the year. EOS has been in the business also for 75 years.
These EOS products you will find when you go to a premium spa, a 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 Russia market and for the CIS 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 sauna 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 EUR 17 million net sales and a very solid profitability, an adjusted EBITDA of EUR 3.2 million and on the EBIT, EUR 2.8 million in that respect. Altogether, EOS employs 150 people, most of the people in Germany in the main office and the main factory in Driedorf, close to Frankfurt, roughly one hour and 10 minutes northwest from Frankfurt, as you can see maybe on the map.
Of the 150 people, roughly 20+ are working on the Russian CIS. EOS operates with three brands, and I will take you through on the offering of the three brands they have. First off, starting with the EOS 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 Zeus tells a lot about the capability and capacity of the heaters. This one on my right-hand side is 36 kilowatts, but on the portfolio of EOS, they go up to 72 kilowatts on the electric heaters and whereas Harvia was limited to 36 kilowatts, so basically double the capacity we have.
These type of heaters are extremely popular and having a high demand on the larger spas, professional spas, and some of you may know the Aufguss sauna type, which is actually growing very fast. These are the Aufguss heaters for the saunas. The next one on the right-hand side, that's the Mythos. Mythos is more of a professional fitness club, small family hotel, some premium family saunas where they use these type of things. 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 four-color touchscreen control unit. We have two auxiliary steam generators, which you can basically attach to a combi sauna just to improve the quality of the steam and make the steam an experience more moisture and more soften in that respect.
Really advanced on the electronic component redesign of that, and that's something what Harvia has been missing in the past. On the other hand, 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. Infrared, they have a state-of-the-art offering on that one. Like Harvia, they also been very good on the mobile application and the remote control of the saunas and spas, and they have their own system for apps and iPhones and all of that. 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 Harvia offering on that respect as well.
Kusatek, that's a state-of-the-art gas-burning heater company. It's a company within a company and technology on its own, and it's the only CE-approved gas heater provider for the professional marketplace, mainly used in the Aufguss 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 two years. These are rather expensive. These are price of a small car or up to a premium car, but then the payback is two to three years' time, you are back on your own, and then actually you also do good for the environment when using the gas-burning heaters.
Spatronic is also a factory within a factory, that's within the EOS premises, state-of-the-art advanced own design, development, and manufacturing of the electronic components for the sauna and spa industry, that's extremely good value add for Harvia going forward. Once again, on the rationale of the deal, I think Harvia has been operating on the residential market, clearly the market leader on the residence area, on the heaters. We've been making inroads to the professional part up to the 36 kW, this is speeding up to our journey into the professional marketplace. On top of that, we become on a one-go a household name, an appreciated partner for the professional spas in that respect.
I think when the average purchase goes up with the Harvia, and we've been demonstrating that we have a proven success on that one, the EOS product taking a price point, they are roughly 30%-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 healthy price point. Having said that, they are extremely functional and a 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 on the markets. 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.
One-third in Germany, one-third in the rest of the Europe, and then Russia and export markets on top of that. 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, and it's usually six to 24-month project to get those, but we know how to get those, and then we've been doing that in the past. 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, and 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. With their project teamwork who's been very successful in the turnkey bids, I think there are learnings we can do, and we can take that in the baby steps to other markets as well. On the revenue stream, adjusted EBITDA and EBIT, Ari will take you through in more detail on that. I think as a summary on this one, Harvia becomes stronger in the heater and component market. We continue our journey on 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 sauna market in that respect, and especially on the premium and professional is the extra and incremental for Harvia. Now I will pass the word to Ari, and Ari will take you through the financials in more detail. Please, Ari.
Thank you. You may remember that Harvia has quite a strong cash position and also strong profitability and cash flow, and so is also EOS. Since this is a long-term investment, we will finance it with a long-term debt. Now the preliminary purchase price is EUR 19.7 million, but it will be specified after the closing period, the exact number. The additional long-term debt, what Harvia will get, is EUR 20 million. 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. Because of that, the valuation of that minority will be also booked on our balance sheet as a long-term debt.
As a result, our net debt based on the year-end 2019 figures would increase approximately from EUR 28 million to approximately EUR 49 million net debt. The long-term liabilities from EUR 38 million to EUR 61 million. 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. We are expecting that the closing and the transfer of the shares can happen even end of March but at least during April. That's the case.
Since there are two structures, the German unit and then the Russian unit, the German unit may close a bit faster than the Russian unit, but this is all already signed and agreed, the next steps. 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 Harvia Group and family. Especially happy we are that Mr. Rainer Kunz will join the management team of Harvia. He will continue running the EOS. At the same time, his colleague, Vasilij Sosenkov, will continue running EOS Russia operation in Moscow and the CIS countries. I think it's time for questions or comments, there's a chat available as well as the phone option on that. Please. On the chat so far, there are no questions.
Telephone.
Over the phone, do we entertain any further questions or comments?
We have a question from the line of Maria Wikstrom of Danske Bank. Go ahead, your line is now open.
Maria Wikstrom .
Perfect. Can you hear me, gentlemen?
Now we can hear you.
Yes.
Hello.
Hello, Maria.
Okay, perfect. Yeah, congratulations for the acquisition, I think. Did we have this call in English or Finnish? English, I guess.
Please.
Yes.
English first, at least.
Yeah. It's a bit of hassle here in the home office, but yes. It seems that the market is liking the acquisition as well. Personally visited a hotel in Berlin a month back, and they had an EOS heater. It's definitely in a good spot. Can you little bit, talk about given that the company has 75 years history that, why are they interested in selling now? The second question that, can you also little bit, I probably missed the fact that, the Rainer Kunz becomes a shareholder in Harvia. How does that share transfer work?
This is my story.
Okay. I think on the appendices, we have the history of the company. Mr. Kunz and Mr. Mais have been running the company for some time. I think now for the family reasons, Mr. Mais wanted to step down. Mr. Kunz was looking for an option how to take it forward. We've been known the company for some time. We've also been knowing Mr. Kunz for some time. I think he basically believes in the philosophy, together we are stronger. I think they had also several other options, but I'm very happy that they selected Harvia to be in the same deal with them. 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.
No
in detail, but it will be a decent substantial amount.
It's also very important for us that he will join the management team, and we have more international player there from Central Europe, than what we had until now. That supports also our international growth and opportunities to leverage the synergies for the international business with EOS together.
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. Kunz?
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. 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. Now, we have all these restrictions in place, for traveling, people staying at home, and especially that this EOS is more placed on the spas than hotels, and I think some of the investments may be put on hold in this situation. How do you currently see the corona situation affecting you guys?
I think in general, Harvia has been sailing under rather favorable winds, we escaped the China issue very fast. We came back to business two and a half years, date delayed after the Chinese New Year, and only had a minor issues with some of the packing materials and some of the componentry. Thanks to an excellent team in China, we've been actually doing all of the needed output and been matching the demand on that. Very happy. In our order books until I think, end of last week, no impact at all. Now we realize that, okay, there's 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.
In the Scandinavian marketplace, we also realize that there is 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 receptions, the meeting rooms and all of that.
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, also on demand of our board of directors, a very thorough analysis of the situation. We played different kind of scenarios through for three, six or 12 months, what will happen on the market. This decision was discussed very carefully many times. We think that this is really a long-term investment and this current market situation is just a temporary situation.
I think there is no analogy which will tell how future will go, but based on what last time happens on the financial crisis, Harvia was very resilient as all of the other sauna companies in that respect. We have some anticipation. All of the scenarios we run, they were proving out to be good, solid or excellent. I think in that respect, we were brave enough to make the deal. There's a question on the chat. It's about the organization culture, and how does Harvia and EOS fit. I think in general, they are sauna and spa people. The basic cultural fit is very good. You may understand that like the car people or 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.
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?
Just to remind everyone, if you would like to ask a question, please press zero one on your telephone keypad. We have another question from Maria Wikström. Please go ahead. Maria, you may go ahead and ask your question.
Yes, perfect. Just a little bit further on the deal. You said the market share will go up from 11%-14%. I have hard time seeing that the competition authorities would basically have any say into this one. Is there some of these considerations in any of the markets that you would see that you would be two dominating players, or you see it more of a complementary acquisition that would also be a competitive authority's view?
We run a very tedious and delicate legal diligence, and this was on the topic and tested in that respect, and we don't see any issue on this.
My final question that you guys have had some of the difficulties in the Russia market, at least to find growth. Can you a little bit elaborate on how has it been for EOS and, I mean, they segment where they operate, and how they have seen the Russia market performing for them in the last, I mean, two to three years?
I think we tend to play in very different fields, and we were interviewing our own Russian team and guys on the EOS and how visible and how good they are on the Russian marketplace, and the answer was a bit of a surprising. They said, "We don't see them at all." I was, "Come on, you need to see them somewhere." They play on a super luxury and super premium league, and they have very different clientele than a typical Harvia customer is in Russia. In that respect, it's complementing very well, and I think on that type of a clientele, the buying power is there. 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. It's really state-of-the-art and a very good addition.
I think in the dynamics on the Russian market where we play with three individual distributors, this will put bit of a new dynamics in place, I think it may also potentially improve some of the working disciplines and ways of working in the marketplace, where people realize that, okay, Harvia has also other opportunities, 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. 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, Maria, your question in that respect.
Yes, I think you did. 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 this, the old distribution relationships in Germany. When you have had various talks with Mr. Kunz, is this something that he sees that, I mean, now he can actually bring the Harvia and Sentiotec brands in the existing distribution networks and leverage from there. 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 Harvia has its own clientele. 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 question whether it's good enough for the demand or strong enough or professional enough for that demand. 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 I think it's more outside of Germany than in the German-speaking area.
Thank you. Our next question comes from the line of Mika Karppinen of Handelsbanken. Please go ahead. Your line is open.
Hi, this is Mika from Handelsbanken. Can you hear me?
Yes.
Yeah, we can hear you.
Yeah. Good. Harvia has been growing organically in recent years quite well, while at the same time EOS sales have been quite flattish. What's the reason for that? Have they been focusing more on improving profitability, or what's the reason for such a sluggish development in recent years?
That's maybe a question I don't have a very solid answer. They've been very focused on their own segment and category. 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. On the other hand, we want to really honor the current partnerships they have built, and we'll keep that on the top priority. We'll not do anything which would harm the reputation or the excellent distribution structure they've been able to develop. I think we can help them in order to grow in that respect, in the existing markets. On top of that, there are clearly markets where we can help them to grow.
I think that's in the plans.
EOS has also been continuously improving its performance and profitability and in this respect, very similar to Harvia. We like that. It's good, a perfect fit in that respect also.
Okay, good. Thank you very much.
Now we have on the chat a couple of questions. Let me just try to read through. The first one comes from Petri Kajaani 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 Harvia factories in the near future? I may have the latter one, Ari, 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, Harvia has some capabilities to supply some of the componentry maybe for EOS, which they're currently outsourcing. Those synergies we are for sure testing. At the same token, on the sourcing synergies, we see opportunities on that respect. No immediate transformation of place of manufacturing for the heaters and componentries in place.
Yeah. 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. On the other hand, the gross margin, even if they are healthy in Harvia, they are even healthier in EOS. The gross margins of the direct costs, they are good.
The next one is also from Petri Kajaani, Inderes: what part of EOS sales is product sales and how much is project sales? I think most of the net sales out of the German unit is product sales, almost to a 99%. Whereas the EOS Russia unit, which is roughly on the ballpark figure, EUR 4 million in net sales. Of that, EUR 1 and a half is product sales, rest is project sales. That's including 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. There is a Petri Kajaani: 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, five years from now?
Ari, 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.
I think basically it guarantees that we will have a very smooth and solid ride, and there is motivation for people to deliver and perform. Let me see if there are any other questions on the chat. Not really. How does it look on the teleconference?
Telephone part. Sorry, go ahead.
Still one coming, or okay? Thank you for your time and attention, and I wish you a very good day. Thank you.