Welcome to this teleconference about the announcement of ASSA ABLOY's acquisition of the Hardware and Home Improvement division of Spectrum Brands in the U.S. My name is Björn Tibell. I am heading Investor Relations. Joining me at this call is ASSA ABLOY's CEO, Nico Delvaux, and our Head of Americas Division, Lucas Boselli. We have about 30 minutes available for this call. We will get straight into it. Firstly, I would like to note that we will be referring to some presentation slides. They are available on our website, assaabloy.com under Investors. We will now start this teleconference with a presentation of the acquisition before we open up for some questions. With that, I would like to hand over to you, Nico.
Thank you, Björn, and good morning, everyone. Indeed, very 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 we are a strong leader in South America, both on the residential and on the commercial side. We are a leader in North America on the commercial side. Now through this acquisition, we will also become the leader on the residential side. Very excited about the opportunity that this acquisition will represent for us. HHI has 7,500 employees, headquartered in California.
They have an attractive manufacturing footprint, factories in the U.S., in Mexico, Taiwan, Philippines, and China. A strong product platform. Very innovative products with their the famous patented SmartKey Security technology, but now also moving into the electromechanical side of things. 75% of their business of their SEK 1.3 billion, SEK 1.4 billion top line is after-market. 35% is new construction, and the vast majority is still mechanical products, 80%. They're also moving now into electromechanical and digital. That part represents today around 20% of their total business. They realize an EBITDA margin of around 19%.
They have very established customer relationships with the large home improvement centers, plus an extensive wholesale distributor network, home builders, and then they also work together with online retail providers. Strong brands and a strong product portfolio, as you can see on slide number 3. The HHI division is split up in three segments. The security segment, the biggest segment, around 70% of top line, with very strong brands, Kwikset, Baldwin, and Weiser in Canada, providing residential, electronic, and traditional security products. Then the builders hardware forms around 10% of top line with their National Hardware brands. Then 20%, something that is a bit new for us, a plumbing business.
A broad range of plumbing fittings for different application with the Pfister brands. Clearly 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 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. Will give us the opportunity through their large installed base, through their strong channels to market and also with their strong brands, to further accelerate our transition from mechanical products into electromechanical digital products and solutions.
They give us also a strong inroad to the residential DIY retail and home builder channels. We also see international growth opportunities in South America, but also overseas. They have a consistent strong financial performance. 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. We are confident that together we can accelerate our profitable growth, an acquisition that delivers on our M&A strategy.
They definitely have the potential to reach group profitability levels once we realize the synergies identified. 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 Assa Abloy Group. We've seen it with the synergies up to $100 million on EBIT level once they fully kick in, and we expect that to be the case around 2025. We will have the possibility to leverage their technology together with our technology and make a stronger combination. I believe that there is clearly a strong cultural fit. We go to slide number 6, financial impact and funding.
This acquisition will be accretive to Assa Abloy at the beginning. As we will amortize part of the intangibles, the exact value is still to be determined. The operating margin will, at the beginning, be dilutive for the group. We expect a dilution at the start to be around 60 basis points. Then as synergies, $100 million US EBIT synergies start to kick in, we will then over time bring EBIT levels within the 60%-70% bandwidth. They will add 14% to our group sales. There is also important tax benefits. We've estimated annual tax savings of around $50 million-$60 million US for the next 15 years.
We will fund the transaction fully a new debt. We rightly committed to maintain strong investment-grade credit rating profile. In other words, This acquisition will also still give us the possibility to continue our successful acquisition journey, like we have done in the past, where we buy 50 to 20 mainly smaller companies per year. That's very important that we can continue that journey because that's really part of our DNA. When it comes to the transaction details on slide number 7, a purchase price of $4.3 billion on a cash and debt-free basis. That represents a multiple of around 14 times EBITDA.
If you calculate with adjustment for synergies and tax benefits, the multiple is around 10 times EBITDA. We expect this transaction to close fast somewhere now in Q4, but it's subject to regulatory approval. In summary, a great addition to the Assa Abloy Group, really the missing piece for us in the Americas 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. Require also together with the strong brand names, a strong business, also great people, great people with very good knowledge in channels where we were not strong until today. We buy a company with strong proven financial performance. Again, very excited about this acquisition. With that, I can hand back to Björn for the Q&A.
Thank you very much, Nico. It's time to open up for questions now. Given the limited time available, I would please ask you to limit yourself to one question each, so we can allow as many people as possible to ask a question. Operator, this means that we are ready now to open up for the Q&A session. Can you please take over from here and guide us through the Q&A?
Yes, thank you. We will now begin the question and answer session. We already received the first question. It is from Mattias Holmberg of DNB. Your line is now open. Please go ahead.
Thank you. I'll keep myself quick. 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 the 15-20 smaller bolts and M&As that you talked about earlier, with a net debt EBITDA, which I get to is gonna end up closer to three times after closing?
The short answer, Mattias, yeah, no. We have no doubts. We will be able to continue to work on our strategy of accelerating our profitable organic growth and complement that with good add-on acquisitions like we have done, I would say since we are born, but definitely since over recent years. Yes, we will have still the capability to do those 15, 20 acquisitions per year like, yeah, we are used as doing.
Thank you.
The next question is from Andreas Willi, JPMorgan. Your line is now open. Please go ahead.
Good morning, everybody. My question is on the EBITDA that you assume for the business. Spectrum Brands disclosed about $340 million for the year ending, or for the fourth quarter ending in the summer. When I use your 14x multiple, it implies quite a bit less, around $307 million. For the four quarters ending in September, which implies a much lower Q4. Is that the right way to understand it? 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?
Yeah, on the bottom line, like for all of us, is today also affected by raw material increases. That might be, I would say, the main reason for the deviation in the two numbers that you mentioned. Of course, when we take over, we will start to amortize part of their intangibles. The amount still to be seen. That's also why we say that the acquisition will be dilutive around this 60 basis points at the beginning because we have the amortization of the PPA.
We have all the integration costs and acquisition costs at the start. As I explained, when the synergies start to begin throughout till 2025, then by 2025 we are confident we can bring the margins within our 60%-70% benefit on EBITDA level. Historically, you will see that the EBITDA has been cruising around this 19%-20%. They've been quite stable in margins, bottom line wise on EBITDA and EBIT level throughout the years also when three, four years they were at lower bottom line levels.
Thank you very much.
The next question is from Alasdair Leslie, Societe Generale. The line is open. Please go ahead.
Yeah. 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, they were a little vague. Perhaps you could just highlight if there's any areas at all, or overlaps where you think there could be any issues. Thank you.
The easy answer is that we don't see any issues. As you might have read, we also agreed to pay an important breakup fee under certain conditions of $360 million. Of course, we will only commit to such a ticket if we are quite sure or very sure that this deal can go through. We are very confident that this can be a fast closing in the sense that again, as we always told you in our analyst calls, our challenge was that we are not a very low represented on the residential side, that our business is mainly on the commercial side. HHI is exclusively on the residential side.
You could argue that, yeah, we both do digital door locks, but even there, the channels are very different, very much on the high end, where they are much more in the let's say mass market and also the more cost competitive offering also through different channels. As a matter of fact, so that actually interesting to see when we were talking to their management in the management calls. They never 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 side and they do on the residential side, and how in that way we could be very complementary. That being said, and of course, with antitrust authorities, you never know. We expect a smooth process and a quick approval.
Just a follow-up, if I may. Could you give us a sense of how big that smart locks business is at Kwikset within HHI, and any insights you can give us on how fast the products like Kwikset Kevo, et cetera, have been able to grow, given the focus on the mass market and strong channel access, perhaps relative to your own brands?
Yeah. We don't want to give you an exact figures. You can see on the slide 2, on the revenue breakdown, you can see that the electromechanical business is around 20% of the total business. They are on that journey, like I explained earlier, like all of us are, them, us, and many competitors on the journey of moving from mechanical to electromechanical and digital.
Great. Thank you very much.
The next question is from Lucie Carrier, Morgan Stanley. The line is open. 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 five or six years, the business hasn't really grown. 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 ask Lucas to start because it's 2:00 in the morning for Lucas. He made the effort to stay awake for this call. Perhaps Lucas, you start, and then I can add to it. It's a little payback time for Lucas because I had to stay up a long night over the couple last weeks. Lucas, go ahead.
No, Nico, thank you. We see tremendous opportunities both on new construction and in the aftermarket for this business. There's still 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, which fits very well the geographic presence of HHI. Also their presence in the channels in the aftermarket from a big box e-commerce in wholesalers. 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.
No, Lucie, like I wrote 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. That has to come from a couple of things. Like Lucas said, we believe that mid and long-term residential market in the U.S. will remain a very attractive market with good, strong, long-term growth drivers. We will of course move also into a higher inflation world, which helps and fuels from a pricing perspective. Also here, the move from mechanical to electro-mechanical digital will accelerate part of that growth. Next to that, we also see some international expansion possibilities with the strong brands and also the strong operational footprint they have into other territories.
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?
That 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 operations side, they have very good operations. We have visited their main factories. They run the operations in a very good way. Lucas also visited their new state-of-the-art warehouse in the U.S. There, I think, that's not the case. Where we see investment opportunities is in lifting further the quality image of their different brands.
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 brands. Next to that, I think we will, of course, further invest in their different channels to market, through leveraging the organization they have and through the new product development I was talking about. Lucas, feel free to add.
Thank you. Back in the queue.
I think, you know.
Lucas, go ahead.
From my end, just going on top of what you said, Nico, 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&D, and definitely on the digital side. There's a lot of opportunities for us on digital channels and digital marketing. We're looking forward to accelerating some of those efforts.
Lucie, no, you should not expect that tomorrow, margins will drop with 5% or whatever because we have to make these very huge investments. That's not the case. It's business as usual investments while we go.
Okay, thank you. Go back in the queue.
The next question is from Andre Kukhnin, Credit Suisse. Please go ahead. The line is now open.
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 segment. Do you view these as core to your future offering or will they be considered for potential disposals?
As it's definitely not core for us today because we are not in plumbing. The honest answer 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. Too early for us to comment.
You would see, potentially, Sorry, as a follow-up, you see potential of you building up a plumbing business around the five brands and what you've acquired, acquiring with HHI?
Again, I don't want to comment in one or the other direction. We have only learned plumbing during the due diligence process, but our knowledge so far is limited. We first have to close the acquisition talk with the people, understand better the dynamics and so on before we can decide on the strategic direction, yes.
Got it. Thank you.
The next question is from Gael de-Bray, Deutsche Bank. Please go ahead. Your line is now open.
Thanks very much for the time. Good morning, everybody. It seems pretty clear that you and HHI are pretty complementary in terms of channels and in terms of brand positioning. On the technology side, do they have any technology, a technology that you do not already own or master yourself? I'm just in particular curious about difference between their master key technology and your own solutions.
You want to take that, Lucas, also on the SmartKey Security technology?
Sure. I think from a technology perspective we're very excited about leveraging the SmartKey Security portfolio across different regions around the world, but also including some light commercial segments. 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. We also feel that from a innovation and IT perspective, we both complement each other. There's complementary there not only from a business and channel, but also from a technology and IT perspective.
Lucas, perhaps you can explain a bit for the audience what is this SmartKey Security technology? Not everybody knows and understands.
The SmartKey Security is the ability of a homeowner in North America to rekey their locks alike to the existing key that they have in their pockets. This greatly speed up the process, both retail and locksmith, so that the user can have a single key across all their homes. Also there's significant opportunity and advantage from an e-commerce perspective that customers can buy a lot online and rekey themselves in a pretty rapidly way. 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.
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 digits for the past four quarters. In calendar Q2, their sales were already 18% above 2019. Is there a risk that you might be buying the business on peak?
For sure they have, like all of us seen a strong growth after a difficult COVID-19 year. If you look at again the drivers of the residential business, you can see the shortages of residential, mainly single family houses in the U.S. We believe that the residential market is also mid to long term, a very good market to be in in the U.S. Again, we don't buy companies for the next quarter or the next couple of quarters. We buy companies for the long term. Again, we believe long-term residential business in the U.S. is a good business to be in. I don't know, Lucas, if you can give a little bit more, flavor on the dynamics in the residential market and the shortages that we see, in housing.
Definitely, Nico. I think the comparables are definitely gonna become harder. We believe the overall fundamentals of the market and the overall trends are very favorable for us long term in this business.
I think we have to move to the next question.
The next question is from Daniela Costa, Goldman Sachs. The line is open. Please go ahead.
Hi. Good morning. Thanks very much for taking my question. The line has been a little bit patchy, sorry if someone has already asked this. Could you give a bit more detail on the SEK 100 million synergies on what drives them exactly? What is cost and what is revenue synergies? Perhaps related to that, if you intend to move the brand, consolidate the brands with your own, I don't know, to Yale, for example, or if you're keeping them separate. Thank you.
Perhaps just on the branding, they are very strong brands. If you take the Kwikset brand, the Baldwin brand, for instance, they are very strong brands. We also buy the company because of the strength of those brands. We have no intention to change the brand or merge the brands. I think the same is true on the other side. If you take the August brand or the Yale brand, they're all also strong brands that we want to keep separate. When it comes to the synergies, Lucas can give a little bit more flavor afterwards. It's like in any other acquisition is 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. The easy answer is a little bit of a combination of both, but a little bit more sales than cost. Lucas, 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, have to close the deal. Yeah, therefore some of the details we'll only be able to give you once the deal is closed. Lucas, feel free to add a little bit of more flavor.
Yeah, Daniela, on the cost side, we see good opportunities in manufacturing, capacity utilization, distribution and material. On the growth side, as Nico mentioned earlier, definitely growth opportunities in Latin America and South Pacific on the Asia side. I think overall, also, let's not forget we have a very strong demand creation, feet on the street in U.S. on the commercial side and how can we leverage that end user in multifamily and several other verticals in our spec writers to really add fuel to the HHI business. Significant on the cost and also some growth opportunities that give us a lot of excitement and confidence in the future.
Thank you.
The next question is from Vivek Midha, Citi. Please go ahead, your line is now open.
Hi. Thanks very much for taking my questions. Just as a follow-up on some of the earlier questions. You talked about, getting group organic Sorry, the business organic growth to around 5% in line with your targets. It seems to be a step up on history, end markets are at a high level. What timeframe are you thinking about in terms of getting to roughly 5% organic growth trajectory? Thank you.
Of course, it depends a little bit on market conditions in general and then in particular also how COVID-19 will further evolve with Delta, Gamma and X variant or whatever. We believe that some of the identified synergies that can boost top line, they should kick in on a shorter term. Today we don't talk about the timeframe 2025, we talk about a shorter timeframe.
Thank you.
The next question is from William Mackie, Kepler Cheuvreux. Please go ahead, your line is now open.
Thank you. Good morning. Likewise, I had a bad line, so excuse if I'm repeating. 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? 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 HHI 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 six to two months, since the process started where, yeah, it was a competitive process where there was a traditional first round where the people had to put in a first bid. Some people were selected, at least we were selected to go into the second round. We went into a more in-depth due diligence. Yeah, we were selected as the best buyer for this business. Of course, we only know the process from our side.
If you really want to have insight on the details of the process, you should call David Maura, the CEO and Chairman of Spectrum Brands. He will know the details. I can say from our side that it was a very nice and good progress, a process where we had very good interaction with David and his team and the HHI management team, where we had several management calls. You could really feel from the beginning that there was very good chemistry. Really two 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, of course we did all the necessary due diligences in the different streams from, legal, tax, finance, sales operations, you name it. We had also our experts visiting the most of the factory and that's all the main factories, the main distribution centers. I think it was a, I would say fast but good quality process. When it comes to the second question on the market and on their positioning in the market, Lucas can give a little bit more flavor. If you look on the residential side, of course, there is two strong companies.
It's on one side, second brand with HHI and then Kwikset brand in the first place, definitely if you look at the DIY channel. You have Allegion with the Schlage brand. Together, they are very strong in the market. You have many, many very small players on the residential side as being one of those many small players. That's why it's so interesting because we would never have been able to reach this to the very strong market-leading position on the residential side in the U.S. if we would not have been able to either buy HHI or buy the residential business of Allegion. That's why this is a unique opportunity. When it comes to the market, Lucas, I don't know if you can give a little bit more details.
Yeah. I believe the different segments of HHI plays in different, in different segment, in different markets, as far as the plumbing, and the security and builders' hardware. We believe both of those segments are multibillion markets in both U.S. and Canada. We believe there's, as Nico mentioned, it's the position in the market attractiveness and size is very appealing to us. And it's a growing market as well. We believe as consumers make the migration from mechanical to electronic process, that the market will continue to increase much faster than the previous rates. It's an attractive market size and an attractive market growth for us.
Thank you. 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. Could you perhaps share some of your thinking about the ability to push your own ASSA product portfolio through the channels that you will acquire? Perhaps more mechanically, give us a schedule of how you expect the synergies, the SEK 100 billion target to be realized over the next four years. Is it a 25%, 50%, 75%, 100% of the target? Is it more of a convex expectation for the synergy goals?
On the synergies, I cannot give exact mathematics. It's clear if you have synergies on the operation side, it takes time if you want to implement things in a factory or in a logistics supply channel. Of course, it doesn't take five years, but you cannot expect it to happen in a couple of months. You should see this more in a term, once we have decided what to do, a year later, you should start to see the first results. 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, you have to count in development side. There is, of course, some quicker short-term wins. We can take some of the product portfolio they have and start to sell it through other channels and in other regions. That can go, of course, much faster. It's a little bit, it's a little bit of a combination. The only thing I can say is that, yeah, before everything is realized, we believe it's ambitious to say 2025, but you should start to see, yeah, a good significant part of the synergies already much, much early. Not in the first month, definitely in a shorter time.
Thank you very much, and congratulations to you all.
Thank you.
Thank you. We're running out of time, so we'll have time left for one more question, please, operator.
Yes. We take the next question. It is from Agnieszka Vilela of Nordea. Please go ahead. Your line is open.
Thank you. Good morning. 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 from the PPA amortization. Just thinking about the multiples that you yourselves provide for this acquisition, 13x EBITDA. Do I understand correct that this is before the PPA amortizations and then the 10x multiple that you also referred to is after both PPA synergies and the tax benefit? Is it correct thinking? If you could provide us details on the tax benefits and the PPA.
I think perhaps first on the tax benefit is just if you buy the company, you buy the goodwill, you can then re-evaluate and that can then be deducted as a tax benefit, and you can do that over the next 15 years, and that's where that number, as we mentioned in the presentation, comes from. When we talk about the two multiples, the 14, if you just take the standalone HHI business as it is today with the EBITDA numbers and the price we pay for it, we come to that figure of around 14. The other figure is if we take into account the full tax benefits and we take into account the day that we have all synergies realized. If the $100 million EBIT synergies are completely in, you will talk about the other multiple that you are referring to. That's how you should read the numbers.
All right, great. The PPA amortization size, if you could give us some guidance there and all this, yeah, let me stop there. Thank you.
I think it's too early to say. We have to we have to wait and understand better how much will go into amortization of intangibles and how much will go on the balance sheet as such.
It will be done after the consolidation.
Great. Thank you.
Thank you.
Thank you. This means that we have come to the end of this call. I know that there are a couple of maybe 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. 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.