M&A Announcement

Sep 9, 2021

Press Release

Welcome to this teleconference about the announcement of Assai Abloy's acquisition of the Hardware and Home Improvement division of Spectre Brands in the U. S. My name is Janti Bellam, Headings Investor Relations. And joining me at this call is Azza Abloy's CEO, Nico Delvaux and our Head of Americas division, Lukas Buseli. We have about 30 minutes available for this call, so we will get straight into it. But firstly, I would like to note that we are we will be referring to some presentation slides and they are available on our website, so asaabloy.comunderinvestors. So we'll now start this teleconference with a presentation of the acquisition before we open up for some questions. So with that, I would like to hand over to you, Niko. Thank you, Bjorn, and good morning, everyone. Indeed, we're excited to announce that we reached an agreement with Spectrum Brands to acquire their hardware and home improvement division, the HHI division, which will put us now also, I would say on the map, on the residential side in North America. As you know, we are a strong leader in South America on the residential side. We are a leader in North America on the commercial side. Zener. And now through this acquisition, we will also become the leader on the residential side. So very excited about the opportunities that this acquisition will represent for us. HHI, 7,500 employees headquarters in California with an effective manufacturing footprint, factories in the U. S, in Mexico, Taiwan, Philippines and China. A strong product platform, very innovative products with the famous patented smart key technology, but now also moving into the electromechanical side of things. 75% of their business of the SEK 1,300,000,000, SEK 1.4 SEK 1,000,000,000 top line is aftermarket, 25% is new construction And the parts of the world is still mechanical product 80%. They're also moving now into mechanical and digital. That part represents today 20% in the total business. They realize a EBITDA margin of around 19 Stetel. We have very established customer relationships with the large home improvement centers, was an extensive wholesale distributor network, homebuilders and then they also work together its online retail providers. Strong brands and a strong product portfolio, as you can see on Slide number 3. The HHI division is set up in 3 segments: the security segment, the biggest segment around 70% of top line with very strong brands, Frixet, Boltin and Wizen in Canada, providing residential, electronic and traditional security products. Then the builders hardware Spark, around 10% of top line with their national hardware brand. And then 20%, something that is new for us, plumbing business, a growth range of plumbing physics for different application with the Pfizer brand. Really a strong strategic rationale for this acquisition as we can see on Slide number 4. Again, this will make us the market leader on the residential side in North America. As you know, We were very small, I would say, on the residential side. Our U. S. Business today was almost exclusively on the commercial side. So very complementary with what we do today. S. So give us the opportunity through their large installed space with their strong channels to market and also with their strong brands SABLOY to further accelerate our transition from mechanical products into electromechanical digital products and solutions. S. And give us also a strong in growth to the residential DIY retail and homebuilder channels. S. And we also see international growth opportunities in South America, but also overseas. Zalind. They have consistent strong financial performance. And of course, we get also through the acquisition a skilled and passionate group of people and a very strong, seasoned management team. We had the opportunity to engage with the management team throughout the process. Very good chemistry, really speaking the same language, really seeing the same opportunity. So we are confident that together we can accelerate our profitable growth. Citi. An acquisition that delivers on our M and A strategy. We definitely have the potential to reach group profitability levels. Once we realize the synergies identified, Zalind. They are really in the core of what we do. 80% is really security and hardware. We see a good strong growth potential when they become part of the Acebloix group. And we've seen it with the synergies at US200 $1,000,000 on EBIT level S. Once they fully kick in, and we expect that to be the case around 2025. So we have the possibility the leverage that technology together with our technology and make a stronger combination. Slide number 6, financial impact and funding. This acquisition will be accretive to the business of the beginning. But as we will follow the transaction amortized part of the intangibles and the exact value still to be determined. The operating margin will, at the beginning, be dilutive for the group. The expected dilution to start to be around 16 basis points. But then as synergies, dollars 100,000,000 EBIT synergies Stautegi Inc. We will then over time bring EBIT levels within the 16% to 17% benefit. St. David had 14% to our group sales and there is also an important tax benefit, the best estimated annual tax savings of around USD 50,000,000 to USD 60,000,000 for the next 15 years. St. Lucerne, the transaction fully a new debt. And we are like we rightly committed to S&P's strong investment in its credit rating profile. In other words, this acquisition will also still given the possibility, sorry, to continue our successful acquisition journey Stellix like we have done in the past where we buy 50 to 20, many smaller companies. It's very important that we can continue that journey because it's really part of our DNA. Aspen. And then comes to the transaction details on Slide number 7. The per share price of US4.3 billion dollars on a cash and debt free basis. That represents a multiple of around 14x EBITDA. And if we then calculate this Adjustment for Synagies and Tax Benefits, the multiple is around 10x EBITDA. We expect this transaction to close fast, somewhere now in Q4, but it's subject to regularity approval. St. Louis. So in summary, a great addition to the Azza ABLOY Group, really the missing piece for us in the Americas S. And in North America, U. S. In particular, highly complementary to our business. And we are convinced that together we can accelerate the transition from Mechanical to Digital Products and Solutions. They require also, together with the strong brand names, strong business, also great people, great people with very good knowledge in channels where we were not strong up till today. And we buy a company with strong proven financial performance. So again, very excited about this acquisition. And with that, I can get back to Bjorn for the Q and A. Thank you very much, Nikku. It's time then to open up for questions now. Given the limited time available, I would please ask you to limit yourself to 1 question each, so we can allow as many people as possible to ask a question. S. Operator, this means that we are ready now to open up for the Q and A session. So can you please take over from here and guide us through the Q and A? We already received the first question. It is from Matthias Krumberg of CMB. I'll keep myself quick. S. Do you have any concerns that the gearing you will have after this deal will limit other growth initiatives? Or You still think that you have the financial flexibility you need to drive strategic investments and sort of the 15 to 20 smaller bolt on M and As that you talked about earlier With a net debt to EBITDA, which I get you is going to end up closer to 3x after closing? So the short answer, yes, no, we have no doubt. We will be able to continue to work on our strategy of accelerating our profitable organic growth in complement and with good add on acquisitions like we have done. I would say since we are born, but definitely since over recent years. S. Yes, we will have still the capability to do those 15, 20, I believe, per year like we are used as new. Thank you. The next question is from Andreas Willi, JPMorgan. The lines are open. Please go ahead. Good morning, everybody. My question is on the EBITDA that you assume for the business. Spectrum Brands disclosed about CHF 340,000,000 for the year ending or the Q4 ending in the summer. When I use your 14x multiple, it implies quite a bit less, around 307 for the 4 quarters ending in September, which implies a much lower Q4. Is that the right way to understand it? And related to that also, what do you assume as kind of the normalized Starting Point, both on sales and profits for this business after it had a huge boost during COVID? Yes, of course, the bottom line like for all of us is today also affected by raw material increases. And so that might be, I would say, the main reason For the mitigation in the two numbers that you mentioned. And of course, when we STAKOVER. We will start to amortize part of their intangibles. The amount still to be seen. That's also I would say that the acquisition will be dilutive around this 60 basis points at the beginning because we have the amortization of the PPA. And of course, we have all the litigation costs and acquisition costs at the start. But then as I explained, when the synergies start to begin throughout 2020 5. Then by 2025, we are confident we can bring the margins within our 60% the 17% benefit on EBITDA level. Historically, you will see that the EBITDA has been closing around this 19%, 20%. Stell. They've been quite stable in margins, bottom line Wiesen EBITDA and EBIT level throughout the years also and day for years they were at lower supply levels. Thank you very much. The next question is from Alastair Leslie, Societe Generale, Bonnay. Yes. Hi, good morning. Thanks for the question. Just like a quick turnaround to deal closure. I was just wondering whether you could talk a little bit about antitrust risks, maybe how the authorities might look at defining the relative market. Spectrum Brands Management yesterday didn't sound kind of any alarm bells, but they were a little vague. So perhaps you could just highlight if there's any areas at all Or Evelachs, where you think there could be any issues? Thank you. Very easy answer is that we don't see any issues. As you might have read, we also agreed to pay an important break up fee under certain conditions of $60,000,000 Of course, we will only commit to such Zalp. I think as we are quite sure, very sure that this deal can go through. We are very confident that this can be a path, closing in the sense that again, as we always thought during our analyst calls, our challenge was that we are not of a very low representative of the residential side with our business. It's mainly on the commercial side. NSSI is exclusively on the residential side. We could argue that we both do diesel door locks, But even their channels are very different, very much on the high end, where they are much more in the the mass market and also the more cost competitive offering also through different channels. As a matter of fact, it was actually interesting to see when we were talking to their management in the management's calls. Sinevra talked about us as being a competitor in the residential field. When we talked about synergies, it was more on the things we do on the commercial site. And they do on the residential side and how in a way we could be very complementary. That being said, and of course, with the asset quality, you never know that the we expect a smooth process and a quick approval. ZAR. Just a follow-up, if I may. I mean, could you give us a sense of how big that SmartBox business is at Kwikset within HHI? And any insights you can give us on How fast the products like Kwikset, Kevo, etcetera, have been able to grow given the focus on the mass market and strong channel access perhaps relative to your own brands? Zalind. Yes, we don't want to give you an exact figures, but you can see on Slide 2, on the revenue breakdown, you can see that the electromechanical business is around 20% of the total business. And they are on the journey, like I explained earlier, like all of us are our hands. Them and impending competitors on the journey of moving from mechanical to electrical and digital. Zalind. Great. Thank you very much. The next question is from Gupteik Horja, Morgan Stanley. St. Helane Steltsen. Please go ahead. Good morning, gentlemen. Thanks for taking my question. Maybe a follow-up on the financial of the business you're acquiring. I think a quick look at the annual report of Spectrum Brands kind of suggests that over the last 5 or 6 years, the business hasn't really grown. I mean, We calculated an average organic growth less than 2%. How do you think about the dynamic here? Because it seems quite low compared to The level to which you have grown yourself and in terms of how well the business is invested? Perhaps I'll ask Lukas to start because it's 2 o'clock in the morning for Lukas. He did the effort To stay awake for this call, so let's look at your start and then I can add to it. It's a little bit payback time to look at, because I had to stay up long nights over the couple of last weeks. So Lucas, go ahead. Nico, thank you. Yes, I think we see St. Tremendous opportunities both on new construction and in the aftermarket for this business. I think there's A. We see a lot of tailwind from a single family deficit in U. S, but also the growth in the Sun Belt states As we see the migration to Southern states, this fits very well the geographic presence of HHI And also their presence in the channels in the aftermarket from a big box, e commerce in wholesalers. So we believe there's a lot of opportunities to really grow this business on a 5% and beyond looking forward on an ongoing basis. I don't know, Nico, if you have anything else to add? Zalind. So Lucie, like I wrote in the or like we wrote in the presentation, we really have the ambition to grow this business above this 5% organically, so in line with our organic growth ambitions. And that has to come from a couple of things. Like Lucas said, we believe the mid- and long term residential market in the U. S. Will remain a very attractive market, good sir, strong long term growth drivers. We will, of course, move also into a higher inflation world, which helps and fuels from a pricing perspective. And then also here, the move from mechanical to electromechanical digital will accelerate part of that growth. Zalind. And then next to that, we also see some international expansion possibilities with the strong brands and also the same strong operational footprint they have into other territories. Z. Just maybe if I can have a follow-up on your ambition to grow the business. Does that mean that you will need to invest significantly In the business maybe to change their profile or improve the distribution to kind of gear to that 5% organic growth And beyond. Yes. There also Lucas can add, but I would say it's more ongoing and doing things that you are used us as doing. First of all, on the operation side, they have very good operations. We have visited their main factories. The rental operations in a very good way. So there's also this is their new state of the art warehouse in the U. S. So there I think that's not the case where we see investment opportunities is in listing further the quality image of the different brands. And that comes on the marketing and branding side and that comes also like we always do by bringing new innovative products focusing on innovation and through that innovation get that higher quality image of the brand. And next to that, I think we will, of course, S. They invest in their different channels to market through Yes, leveraging the organization they have and through the new product development I was talking about. But Lucas, feel free to add. Z. Yes. I think just going on top of what you said, I think Tim and the team have done a good job investing back. I think there's still great opportunity for us To focus on innovation, R and D and definitely on the digital side. I think there's a lot of opportunities for us on digital channels and digital marketing, us. And we're looking forward to accelerating some of those efforts. So Lucy, no, you should not expect that tomorrow margins will be up with 5% or whatever because we have to make this very huge investment. That's not the case. It's business as usual, investors while ago. Okay, thank you. I'll go back in the queue. Zalind. The next question is from Andre Kukhnin, Credit Suisse. Please go ahead. Your line is now open. OBS. Good morning. Thank you very much for taking my question. I wanted to ask about HHI portfolio that you're acquiring and especially the plumbing and the builders hardware segments. ZE. Do you view these as core to your future offering? Or will they be considered for potential disposals? Well, as you know, it's definitely not core for us today because we are not in planning and We almost all of it is we don't know too much about plumbing yet. It's the part of the business, the 20% of the business that we have to learn and to understand better. So too early for us to go on. So you would see potentially sorry, as a follow-up, you'd see potential of you building up a plumbing business around the Pfizer brand and what you've acquired acquiring with HHI? Well, again, And also to comment in one of the other direction. We have only learned plumbing during the due diligence process, but our knowledge of ours is limited. So we first have to close the acquisition, talk with the people, understand better the dynamics and so on before we can decide on the strategy direction here. Got it. Thank you. Zalind. The next question is from Gael De Bray, Deutsche Bank. Please go ahead. Your line is now open. Zalind. Thanks very much for the time. Good morning, everybody. So it seems pretty clear that you and HHI are pretty complementary in terms of channels and in terms of brand positioning. But on the technology side, Do they have any technology that you do not already own or master yourself? Z. And just in particular, curious about the difference between their master key technology and your own solutions. You want to take that, Lukas, also on the SmartKey technology? Zalind. Sure. I think from a technology perspective, we're very excited about leveraging the SmartKey portfolio across different regions around the world, but also in some light commercial segments. So we think that their mechanical technology portfolio is very attractive. Also, they have some interesting technology on the digital side that is complementary to us. And we also feel that From innovation and IT perspective, we both complement each other. So there's complementary there not only from a business and channel, but also from a technology and IT perspective. And Lucas, perhaps you can explain a bit for the audience what is this smart key technology, but I guess not everybody knows and understands. Yes, the smart key is the ability of a homeowner in North America to rekey bill of locks alike to the existing the key that they have in their pockets. So this greatly speed up the process, both retail and locksmiths, so the user can have a single key across all their homes. And also, there's a significant opportunity an advantage from an e commerce perspective that customers can buy a lot online and rekey themselves in a pretty rapid way. So It's a very attractive technology. HHI has done a great job in not only inventing, but also continue to develop and invest on the technology and there's a good opportunity for us to build upon it. Zalind. Okay. Thank you for this. Can I have a quick follow-up, generally speaking, on the business and on the exposure to the residential markets? They've grown double digit over the past 4 quarters. In calendar Q2, their sales were already 18% above 2019. So is there a risk that you might be buying the business on peak? For sure, they have, like all of us, seen strong growth after a difficult COVID-nineteen here. But if you look at, again, the drivers of the residential business. If you see the shortages of residential, mainly single family houses in the U. S, We believe that the residential market is also mid- and long term, a very good market to be S. In the U. S. And again, we don't buy companies for the next quarter or for the next couple of quarters, we buy companies for the long term. And again, we believe long term residential business in the U. S. Is a good business to be in. I don't know if I can give a little bit more flavor on the dynamics in residential market and the shortages that we see in housing. Definitely, Nico. I think the comparables are definitely going to become harder, but we believe that the overall fundamentals of the market and the overall trends are very favorable for us long term in this business. The next question is from Daniela Costa, Goldman Sachs. Your line is now open. Please go ahead. Hi, good morning. Thanks very much for taking my question. The lines have been a little bit touchy, so sorry someone has already asked this. But Could you give a bit more detail on the $100,000,000 synergies on what drives them exactly? What is cost and what is revenue synergies? And perhaps related to that, if you intend to move the brands, consolidate the brands with your own, I don't know, to yield, for example, or SKU Kibing and Sverdrup? Thank you. So perhaps just on the branding, no, they are very strong brands. If you take a quick the bolt in brand printers, they are very strong brands. We also buy the company because of the strength of those brands. So we have no intention to change the brand or margin brand. I think the same is true on the other side. If you take the Ogles brand or the Yale brand, they're all also strong brands that we also keep separate. When it comes to the synergies and then Lukas can a little bit more flavor afterwards. But it's like in any other acquisition, it's of course a combination from cost synergies and top line synergies. As these companies, of course, run-in a very cost efficient way, that's also the DNA you have to have if you want to be successful in the DIY channel. Here, synergies are a bit more perhaps towards top line and less towards fewer cost savings, although we also see a good opportunity still on the cost side. So the yields are a little bit of a combination of both, that a bit more sales than cost. And then, Lukas, perhaps you can comment a bit more In detail, of course, we cannot go too much in detail yet because we still have to close the deal. And Yes. Therefore, some of the details we'll only be able to give you once the deal is closed. But Lucas, you'll need to add a little bit of more flavor. Yes, Daniel, I think it's on the cost side, we see good opportunities in manufacturing, capacity utilization, Distribution and Material. And then on the Gro side, as Nico mentioned earlier, definitely growth opportunities in Latin America and South Pacific on the Asia side. And I think overall, Also, let's not forget, we have a very strong demand creation feed on the street in U. S. On the commercial side and helping to leverage that end user in multifamily and several other verticals in our spec riders to really Adfuel to the HHI business. So significant on the cost and also some growth opportunities that give us a lot of excitement and confidence in the future. Zalind. Thank you. The next question is from Vivek Mehta, Citi. Please go ahead. Your line is now open. Hi. Thanks very much for taking my questions. So just a follow-up on some of the earlier questions. Zalind. So you talked about getting group organ I don't see the events in organic growth to around 5% in line with your targets. It did be a step up on history and ready markets at a high level. So what sort of time frame are you thinking about in terms of getting to roughly 5% organic growth trajectory? Thank you. Well, of course, it depends a little bit On market conditions in general and then in particular also of COVID-nineteen will further evolve with Delta Gamma and X variant or whatever. Zal. But we believe that some of the identified synergies that can boost top line, they should kick in on a shorter term. So there we don't talk about the timeframe 2025, we talk about the shorter term. Thank you. The next question is from William Mackey, Kepler Stavrou. Please go ahead. Your line is now open. Thank you. Good morning. Likewise, I had a bad line, so excuse if I'm repeating. St. The first thing, could you just briefly walk through the background? When did the process for the deal start? And was it competitive? And the duration of the due diligence and depth of it. And then the second question would be about the markets in which HHI is operating. Can you just give us a flavor of your analysis for the size of the residential lock market in the U. S. I note that HI have number one positions, but what do you think their market positions are in aggregate versus their competitors? Thank you. If we Start on the first question on the process. I think we talked about a period of around 6 to 2 months, I guess, since the process started where Yes, it was a competitive process where there was a traditional first chance. The people had to put it in 1st bid and then some people I guess were selected, at least we were selected to go into the second round and then went into a more in-depth due diligence. And then, yes, we were selected as the best buyer for this business. Because we only know the process from our side, if you really want to have an Inside on the details of the process, you should call Dave Maurer, the CEO and Chairman of second brand. You will know the details. But I can say from our side that it was a very nice and good progress, the process where we have very good Interaction with Dave and his team and the HHI management team where we had several management calls. ZAR. You could really see it from the beginning that there was very good chemistry, really 2 companies speaking the same language, seeing the same opportunities, understanding why it was a good thing for them to join our Assa Abloy family. When it comes to how deep it was, yes, of course, we did all the necessary due diligence in the different streams from legal, tech, finance, sales operations, you name it. And we had also our experts visiting their most of the factory, and that's still the main factories, the main distribution centers. So I think it was, I would say, fast, but good quality process. When it comes to the second Question on the market and on their position in the market, Lucas can give a little bit more flavor. Z. And if you look on the residential side, of course, there is 2 strong companies. It's on one side Spectrum Brands with HHI and then Wixet landed in the 1st place, definitely if you look at the DIY channel. And then you have and together they are very strong in the market. And then you have many, many very small players on the residential side as being one of those many, many, many small players. So that's why it's so interesting because we would never have been able to Aegis, a very strong market leading position on the residential side in the U. S. If you will not have been able to either buy ACI or buy residential business of Allegiance. Obviously. That's why this is a unique opportunity. And when it comes to the markets, Lukas, I don't know if you can give a little bit more details. Yes. I believe the different segments of HHI plays in different segments in different markets as far as the plumbing and the security and builders hardware. We believe both of those segments are multi billing markets in both U. S. And Canada. So we believe there's, as Nico mentioned, its the position and the market attractiveness and size is very appealing to us. So and it's a growing market as well. So we believe as consumers make the migration from mechanical to electronic process that the market will continue to increase much faster than the previous rate. So it's an attractive market size and an attractive market growth for us. Thank you. Can I take sorry? Go ahead, William. Thank you. I just wanted to follow-up on the synergies question. When we talk about you broadly, you're increasing your channels and routes to market in the residential sector, you've highlighted that synergies will be biased towards revenues. So So do you perhaps share some of your thinking about the ability to push your own Azza product portfolio through the channels that you will acquire? ZAR. And then perhaps more mechanically, give us a schedule of how you expect the synergies, the €100,000,000 target to be realized over the next 4 years? Is it sort of a 25%, 50%, 75%, 100% of the target? Or is it more of a convex expectation for the synergy goals? Well, of course, on the synergies, I cannot give you exact mathematics. That is clear, if you have synergies on the operation side, it takes time if you want to implement things in a factory logistics supply channel. Of course, it doesn't take 5 years, but you cannot expect it to happen in a couple of months. So you should see this more in a in a time Once we have decided what to do, a year later, you should start to see the first results. I guess on the sales side, it's very similar if we want to do joint product development or if we want to start modifying products from one side to be used on the other side. It has to count in development side. Then there is, of course, some quicker short term. Short term means, of course, we can take some of the product portfolio they have and start to sell it to other channels and in other regions. And that can go, of course, much fast. So it's a little bit of a combination. The only thing you can say is that, yes, before everything is realized, we believe it's ambitious to say 2025. But you should start to see a good significant part of the synergies already much, much not in the 1st month, but definitely in the shorter time. Thank you very much and congratulations to you all. Thank you. Thank you. We will have we're running out of time. We'll have Time left for one more question please, operator. Yes. Then we take the next question. It is from Aneska Villela of Nordea. Zalp. I have a question and I would like to hear if you could clarify the tax benefits, Where they come from? And also what are your expectations in the PPP amortization? And then just thinking about the multiples that Yourselves provide for this acquisition, 14 times EBITDA. Do I understand correct that this is before the PPA amortizations? And then the 10 times multiple that you also referred to is after both PPA Synergies and the tax benefit. Is it correct thinking? And then if you could provide us details on the tax benefits and the PPA. I think perhaps first on for the tax benefit is just if you buy the company, you buy the books, well, you can then Yes, we evaluate and that can be deducted as a tax benefit. So you can do that over the next 15 years and that's where that number that we mentioned in the presentation comes from. Zalind. We talk about the 2 multiples. The 14, if you just take the standalone HHI business as it is today with EBITDA numbers and the price we pay for it, we come to that figure of around SEK 14. And the other figure is, if we take into account the full tax benefit and we take into account the data we have all synergies realized. So if the 100,000,000 Zoloft EBIT synergies are completely in, then you will talk about the other multiple that you are trying to St. Helens. All right. Great. And then the PPA amortization size, if you could give us some guidance there? And all Yes, I can stop there. Thank you. I think it's too early to say. We have the way they understand better how much will go into amortization of intangibles and how much will go on the balance sheet Assurant. It will be done after the consolidation. Great. Thank you. Sverdrup. Thank you. I guess this means that we have come to the end of this call. And I know that there are a couple of number of questions left, but we'll try to answer as many of you as possible. If there are any follow-up questions, feel welcome to contact us at Investor Relations. And in the meantime, we wish you a great day today and look forward to speaking to you in the coming weeks. Thank you. Thank you.