Welcome to the Beijer Ref press conference 2022. Throughout the call, all participants will be in listen-only mode. Afterwards, there'll be a question and answer session. Today, I am pleased to present CEO Christopher Norbye and CFO Ulf Berghult. Please begin your meeting.
Thank you. Hi, everyone, Christopher Norbye here, and then, Ulf working from home with COVID. Thanks for... Sorry.
No, no, it's fine.
Thanks for calling in. Today, we have exciting news on that we have entered the U.S. with a platform acquisition. The purpose of this call is to go over our presentation and explain a little bit the transaction, why the company and our conclusions and also value creation, and also on the financing of this acquisition. IW e'll get started. We can move to page 2 right away, which is the transaction highlights. Beijer Ref now entering the U.S. is finally becoming, I would say, a global company with strong and balanced sales to now the U.S., Europe and APAC. We have acquired Heritage Distribution in the U.S.
It's based in the southern part, which is the region that we feel is the critical part in the U.S. for demand for HVAC and supply, so we'll come back to that. Headquarters in Atlanta, Georgia. We have paid, you see the transaction purchase price about SEK 13 billion, which also includes 1 billion of tax assets. Including that, around 12x EBITDA. We'll come back also on the multiple. We always expect on a platform to move into the U.S. to pay a fair price. We think it's a very good deal for Beijer Ref and our shareholders. Of course, we have a journey to do with add-on acquisition through this fantastic platform.
The LTM sales, $640 million, and around $95 million of EBITDA, which also gives you a margin around 15%. It's a highly profitable company, and I'll also come back to why that is. Of course, that's a strong value for us and also a company growing very good on the organic side, and we'll come back to that for that. We don't expect any challenges on approval because we don't have any business in the US. We expect it to be approved towards end of January. It will not be a long period between signing and closing. Very high level on the rationale, and we'll come back in the presentation more on details.
Of course, what's exciting about the U.S. is that there are a lot of things and trends that are changing now in the U.S. that we are experienced right now in Europe, and we also see the light in the rest of Asia-Pacific, especially countries like Australia and New Zealand. That makes this market very interesting from a timing point of view of us. Y ou have the basics, the world's largest market. It's a fragmented market, which is always what we like as being part of driving consolidation in the market. You have a lot of trends moving into what's happening in U.S.
They are now moving through this system of banning different HFC gases, what we've been doing the last 5, 10 years in Europe, moving into lower GWP, CO2-based system, propane and other things. That's, of course, core, and we see strong growth in the US going forward in these areas. We can add value through our competent products and knowledge to expand that in the US through this platform, s o that's very, very exciting. They're also going through this energy efficiency, new standards coming in place in the US January 1st of SEER2 16, which a complete new product portfolio that's being launched with more energy efficient products that also will drive growth in the market.
You have the Inflation Reduction Act that also gives incentives for low- and mid-come housing to put in more electrification of products moving into electrification of AC, also the heat pump side that will drive the trends. Is all these areas that we've been working on in Beijer Ref for the last 10 years. Of course, you can see the trends within Beijer Ref the last 2 years on the growth side. For us, the timing is fantastic. We have the skills here, plus we're buying one of the leading platforms in the US on a standalone basis is a very strong business. We like the culture of the company. It's based on this family-owned company.
It's all this company is family that will continue running with the professional managers as we invested in Beijer Ref for the long term as well, so we're comfortable with the setup. We'll also see opportunities there as I talked about the green OEM to drive that going forward. For us, it's a very strategic acquisition in a new platform and new part of the world with similar growth trends that we've seen now accelerated in Europe over the last 5 years. Next page. Page 3. As we said on the financial impact, it will be creditive to EBITDA margin. They're running at 15%, versus our 12.
They've also been very good at growing organically, outgrowing the market, over the last 12 years, which is also a testament to their strong business model, how they are working. EPS will also be creditive on this. The financing also come back to a little bit more in the end. We'll start with a bridge loan and then we have a fully refinanced, fully underwritten rights issue to support this. Also EQT as a main shareholder supports the acquisition and have undertaken to subscribe to pro-rate their rights, which is also fantastic. They're strong believer in our business model, this acquisition, and the future of Beijer Ref. Okay, next page. Why the U.S. and why the timing? I touched upon this high level in the summary in the beginning.
It is the world's largest market. We are not part of it. You have a very stable underlying business with a large install base. This company that we have acquired 95% in the replacement business, which is for us the best place to be, both from a stability, growth, and margin point of view. The market, as I said, is very fragmented, there's a lot of opportunities for us long term to continue to drive the consolidation and then create an even stronger platform. We'll also see the distribution is outpacing the OEM, which is a good growth trend for us.
We see the trend now also moving into more energy efficient solution that's more expensive, of course, long term will also create more focus on this electrification that's going through in the U.S., which is a positive trend for us. There's a lot of discussions in the U.S. with the rest of the world on air quality and these type of solutions. I also see that the structure now in the U.S. when you're building houses is that every month you have bigger houses and more and more AC put into your house as it's getting warmer and warmer, especially in the part of the U.S. that this platform is based out of. For the U.S., you have a lot of regulation that's coming in now.
Just what I mentioned on the EPA announcing that they're phasing out the HFC gases here from 2025. It's part of the alignment with the Kigali Amendment that we related to before. It's a big change in the US, and it will support the growth, but also becoming more greener, and that's something, as I said, that Beijer Ref is very strong within. The SEER2 2023, I talked to the more energy efficient products, needs to be sold by January 1, 2023, which means you cannot sell a lower energy product. These products, of course, priced at a higher cost, but also more energy efficient for the market. Also supported by that is the Inflation Reduction Act that gives possible incentives for all the households to install these type of products.
The U.S. is moving in this direction, which is very good for this company for the key knowledge of Beijer Ref. Moving on to the next slide. A little bit of the company. Heritage Distribution is headquartered in Atlanta, Georgia, a round 800 employees. They have been merging three of the strongest brand in the market, Wittichen Supply, Benoist, and Ed's Supply. They have a very strong platform for professional management together with a strong family-owned companies. All these people are now also invested in Beijer Ref as they rolled over their equity part of it to us. It gives us two things. It gives very strong that they also believe in the journey going forward, and they're also very committed together with us.
If you look at the financials, strong organic growth, long term, short term, very good margins, good cash conversion as you would expect in this business. It's a similar day-to-day business with small installers, tens of thousands of customers that comes in every day. What we also really like about this business, they're focused on parts and supplies. Almost 55%-60% of the business is related to aftermarket, maintenance, service, fixing things, which is a very stable business and also more of a solution for the customers. Then the end market related to that is 95% repair and replacement. We really feel strongly about the sweet spot that this company has, where we feel comfortable on the future potential and also the underlying performance of the company.
6 before branches. We'll come back to that. Next slide. We'll get into details here. They're in mainly on, you see, the HVAC side. They have parts and supplies majority in all these categories. The thing that's worth mentioning here for us is refrigeration is about 5% of the business. It's growing fairly fast that you have all these changes coming along. This is also of course where Beijer Ref with Refrigerant and all our global contracts will be working together to continue and expand this business. We'll come back to that. Also we see on the HVAC side possibilities on further expand the product portfolio. Next slide. There you see the location of Heritage Distribution. They are very strong here in the South, Southeast, which are the biggest markets in the U.S.
It's the fastest-growing markets. You have high replacement cycles, support and maintenance of the product. They'll continue to, of course, grow in that sense. It's getting warmer and warmer to support this trend, going forward. They have a very strong market position here, as you can see and expect with the best product portfolio, very local to all the local installers, and also supporting through the infrastructure, both small and mid-sized installers. This is in our sweet spot. That's how we run our business in the rest of the world as well. We're very happy to be able to do this acquisition with this type of company. Next slide. During the journey here, they've been very strong.
They're the management they have to consolidate the business, and they've been consolidated this platform based on the Wittichen Supply, Benoist Brothers Supply, and Ed's Supply mainly. These are the major companies in this platform that we'll continue to work with and the professional management that's been in place. We feel very comfortable with the underlying performance and also the possibilities to continue to grow this. They have built over the last two years an integrated ERP system and driving the process. Of course, we also expect very good synergies when we start working more and more with these companies on the underlying performance on purchasing, pricing. Another key aspect of it that's also a good value creation going forward. A very strong company to see. They're all established 1940, 1930, and 1957, 1969.
Very established in the markets that we have bought. Okay, next slide. High level on the synergies. I touched upon most of these, but we see the electrification happening in the U.S. for real, and we expect that to continue to drive growth in the future. You have the CO2 products and the knowledge that will continue or will start working with them as a platform in the U.S. as we see now this coming into play as the U.S. are starting to phase out high GWP, HFC gases and moving more into alternative solutions that we worked in Europe now for a while. We also see possibility on the HVAC side with our global contracts to work with the platform in the U.S. to expand that, which is very interesting.
We have a private label that we launched in the refrigeration that we can also integrate into the US and work together with. The global sourcing agreement, that's something we'll start looking into, and we have a bit to start working now with our suppliers. There's two sides to that. Of course, we have pricing power, but we also have possibility to see which suppliers we can launch in these types of markets to get even better leverage long term. Pricing is something we'll work together with them. That's a journey that just started. We'll also support an e-commerce in the US together with this company, something that we're growing very fast in the rest of the world.
Part of the growth pattern also on organic side is continue to open branches and strengthen the portfolio there. Here Beijer has, of course, a lot of experience and can support the organic journey as well. We'll continue to work on finding the right M&A targets together to further strengthen this asset in the US. For us, it ticks all the critical boxes of being a very strong stand-alone company. On top of that, be able to create value together over the long term. Next slide. Here is just a little bit the positioning when you put these two companies together on LTM 12 months. As you can see, Beijer Ref running at SEK 21 billion and now together with this is SEK 27.5 billion.
An EBITDA going from SEK 2.4 billion to SEK 3.4 billion, and also be accretive here on the EPS and also the margin. We're extremely happy on the financial side as well. This will of course drive a lot of improvements or expanding our financial numbers. You can also see on the mix that we're moving into around 62% HVAC versus 52%. This is one of the fastest-growing segments here in our market. We also see the trends now of being even more mixed towards high-growth areas for the future. We also think that's very positive. You can also see the balance of the company. North America will be 24%-25% of our sales. Europe, 60%. APAC, 14%-15%. Africa, 6%.
We've become a truly more global company, balanced, view, of the company, which we also believe is very positive. Next slide. Maybe, Ulf, if you wanna go over the financing.
Yeah. This is the page number 11. We initially will have a secure bridge financing through Nordea and Handelsbanken on SEK 14 billion. We are starting the work of doing the right issue. It's a fully backed up right issue with including Handelsbanken, Nordea, and Citi. That is the work that we initiate immediately. Also the shareholders, the CEO and your management are down to get a controlling of 53% of the votes that have undertaken the vote in the favor of the right issue at the next ordinary general meeting.
A s Christoph said earlier, they could see as an undertaking to subscribe to its pro rata share, remaining close to 30% of the share capital. Then we have this, as I said, fully underwritten share issue. Yeah, basically that's it.
Okay. Maybe the timeline, of...
The timeline. Next page is then page 12. We then in Q1, so we expect them to close the deal in Q1, early Q1, the first half of Q1. We will then have the extra general meeting, and then we will then leave them to get the approval of the right issue and then to the first half of 2023 to get the right issue to be completed, which is then the beginning of quarter 2. It will be quite a speedy process this.
Yeah, that's good to mention also as we don't expect any long lead times of closing the acquisition end of January, beginning of February, we also expect a fairly, if I may use the word straightforward process to also move through the debt and then the share issue. I think that's positive as well.
Yes.
Final slide, page 13, a little bit of a summary. You heard all of this now, a couple of times. North America, we see it as first of all, it's the largest market in the world, for HVAC. It's a fragmented market on the distribution side. Also the trends now is changing into moving into a more green energy efficient market, which is changing the fundamentals of the future, which is we believe absolutely the right time for Beijer Ref. Also that underlying company that we managed to acquire has leading position in the South Southeast, which is the fastest growing segment.
For us, of course, that's extremely positive and something that we can build on, both on the stand alone and together with our synergies. We talked about the global OEMs we'll get scale for, we have product offering, we can work together. You have the credit given on the margin, also on the growth and on the EPS, and that's of course, also pre synergies. It gives us now the platform to continue to build in the US together with Europe and APAC, which are, which I'm convinced will create an even better company, more stable growth trends supporting it and a possibility to continue and create a lot of value, for the long-term future. With that, I'm finished.
We'll open up for any question and comments around this. Thank you.
Thank you. If you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial 02 to cancel. Once again, that's 01 to ask a question or 02 if you need to cancel. There'll be a brief pause now while we register any questions. Okay. Currently, there seems to be no questions coming through from the phones. As I say, we just had one come through from the line of Carl Bokvist of ABG Sundal Collier. Please go ahead. Your line is open.
Thank you. Good morning. I apologize for the poor sound. I hope you can hear me. My question.
Yep.
Is just on the product portfolio, if it's possible for you to give any details about the brands that they currently distribute, and if you see any synergies there, for example?
Yeah. I t's a wider question than that, but I'll try and answer it in a specific way, and we can align of course also offline on that. If you look at their business, if I start with the parts and supply and refrigeration, there's hundreds of thousands of suppliers. They also cover the brands that we work that's a strong global brands like the Copeland and Sporlan , Danfoss and all these. For us, that's something we will look into how we can align that better in the future. They will carry it as Copeland and everything else that we also have mostly with global agreements. That's one part of the question.
On the HVAC side, their prime brand, which is, it's called Rheem, which is one of the leading HVAC, OEMs in the US working through distribution. I would say they're probably the four or five and also one of the leading on the technology side. There for us is to work more together with them, how we can continue to expand and build their business in the US and of course, Rheem has business in Europe and APAC as well that we look into. We already had a discussion here just prior to the announcement, how we'll work with Rheem. We like their Rheem platform very well.
It's one of those brands we were looking for, if we could, as I mentioned on some calls that we also when we did our analysis, we're also looking for what we believe the best OEMs, to continue to grow, which where Rheem is one of the strongest one and also on the technology side, one of the best ones. That would be maybe my short answer to the question and call, and we can discuss it further down the road as well.
Understood. Then, does this company have a history of pursuing acquisitions in other regions in the U.S.? N ow you decided on the South, Southeast, but, how do you see the scope of using this, as you say, platform into expanding to other parts of the U.S.?
Yeah, it does. T his company has been put together over the last 2 years through acquisitions on starting with Wittichen Supply as the strong in the middle and then adding Ed's Supply, Benoist Brothers Supply, Coastal Supply Company to build this. Which means that we're getting 2 things. They've put together professional management that runs this, that's reinvested also, as I said in the beginning, plus you have the divisional president for these that's also part of the management team. You have a strong team making acquisition and consolidate the market. There is a strong pipeline. There's a lot of discussions around there.
A little bit maybe to describe it as mostly we do in Europe, that most of the add-ons will work here will continue and be the strong family-owned companies that we have through this platform and the people very good connections with and continue to grow. We will continue to look at smaller, acquisition that just strengthen your market position where you base, and then continue also expand from here, when we feel that we have the right, partner. This will be an ongoing, discussion, but this is the platform one, so this is a big one. We don't expect the next acquisitions to be at this. It will continue to be more add-ons like we do in Europe or in APAC.
The acquisition will be on small to mid-sized scenarios to continue to build the platform and further improve the strength, if that answers your question.
Understood. My final one is just on the sellers, Gryphon Investors. Does this constitute of a wide array of owners? Is it families from parts of the combined business or is it a financial player?
No, Gryphon is a financial player. Gryphon has been the financial sponsor to build this portfolio up. The way we have structured the deal is that the management and these absolute key people running these assets have then turned around and invested a large part of their equity into Beijer Ref, which means that in the press release, we buy the company and they roll over, so the management will own about 2% of the company, and we'll own 98% of the company.
Understood. That's all for me. Thank you.
Thanks, Mark.
Thank you once again. If there are any further questions, please dial 01 on your telephone keypads now. Our next question comes from the line of Gustav of Pentechnica. Please go ahead. Your line is open.
Hi there. Thank you very much. It's Gustav Lindskog from Pentechnica. I have two questions, but I'll start with one. First of all, can you disclose the split between residential and HVAC, Sorry, residential, HVAC, and commercial? Just to get a bit better sense.
Yeah.
Of this business.
I would disclose it high level. The residential versus commercial HVAC is 5-ish%, so it's not a big part. It's by far majority the residential side.
Sorry, commercial was roughly 5%. Was that correct?
Yes. Yep.
Got it. Perfect. But perhaps, Gustav, if you can talk to current trends. Lennox spoke yesterday on their Investor Day about 2023 volumes being down in single digits. Obviously, in the great financial crisis, replacement volumes fell in a whole lot more than that. D o you think you're isolated on the back of the trends that you have described on the call on better kind of demographics in the areas that you're operating in or will be operating in? Should we expect kind of volume weakness to look like overall U.S.?
No, I think that there's a lot of different analysis on that. I t depends on also where you're, as you allude to, where you're located, in the US. If I start with that, this asset is 55%-60% parts and supplies, and then you have 40% HVAC. You have a business that you would say is a little bit also countercyclical. If HVAC goes down, there's more fixing replacement service and maintenance, which of course supports the parts business even further if that. You have shorter re-replacement cycles in the South than you have of course in the rest of the US.
You also have trends now when you have the SEER2 16 that's running through now in The South, you have the new models coming out that you have to implement by January 1st. They are priced, you know, significantly higher than your old series requirements and energy efficiency. I would say what balance the possible drop on HVAC as you go through these times is of course the pricing as you move into the new product portfolio, and also that you have a strong 5% to 6% parts and supply. We have also gone through this and did our...
That's also why we think this asset is something we really like because of how the portfolio looks, versus maybe a lot of other companies in the U.S. that's much more just have HVAC heavy.
That makes a ton of sense. Maybe if I can just squeeze in 1 final 1.
Yeah.
Obviously, really attractive, profitability, the 15% that you're alluding to. Has it been roughly at that level over the last few years, or have we seen volatility in the returns?
No, I won't be into that. I'm sure we'll do it as we go through our perspectives and everything. The reason why this company is, I would say, running at, if you compare maybe with those listed assets that you can on higher margins, is of course they do make more money on the parts, supplies, and spares and have a higher mix of that. That drives why you have a higher margin than maybe what you would expect in other type of assets. I would answer this way, b ecause of that, yes, you have a good history on the margin side as well.
Okay. Thank you very much.
Thank you. Are we wrapping up or?
Yeah, I think so.
The host, are you there?
There are no further questions at this time, so I'll hand back to yourselves for the closing comments.
Okay, thank you. Thanks for calling in on this short notice. We'll continue and share information. We're also open to having one-on-one meetings to continue to go through it more in details. We wanna be very clear, and we want you also to be very clear on what we're doing and why we're doing it and also what we believe is a very strong move from Beijer Ref to create long-term value for us, the company and the shareholders. Please don't hesitate to reach out to me and Ulf and we'll be scheduling calls up to Christmas because of the timing. Please feel free to reach out if you want more clarification on this.
Thank you very much, for calling in and, appreciate your time, as always.