Welcome to the Clas Ohlson presentation regarding the acquisition of Spares. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to CEO Kristofer Tonström and CFO Pernilla Walfridsson. Please go ahead.
Good morning, everyone, and welcome to this Clas Ohlson webcast, regarding the acquisition of Spares Europe, a leading company within spare parts and accessories in electronics and batteries. My name is Kristofer Tonström, I'm the CEO, and I'm here with Pernilla Walfridsson, CFO. So we will go through a presentation where we will introduce Spares, the transaction structure, and the key rationale, and then we will open up for questions at the end. So first, a short introduction. So for us, this is a strategic acquisition, and it's very much complementing our existing Clas Ohlson core business and strategy. It's also a great enabler for us to continue to deliver long-term profitable growth, and the deal will be EPS accretive as of day one.
We intend to operate Spares independently as a standalone subsidiary, with, of course, longer-term synergy potential, and I'll come back to that in a second. We're also happy to retain the founding team, which has a strong track record and delivered profitable growth over the last 10 years since the founding of the company. This is also a step for us to further strengthen our own business model when it comes to circularity, and the transaction will not have any impact on our financial targets or our dividend policy. Just starting with how this fits into the Clas Ohlson strategy. In our updated strategy that we rolled out during 2022, we've talked a lot about us focusing in across 5 major consumer missions, as well as also working with spare parts and consumables.
And this acquisition fits extremely well into our consumer mission that we call Connect and Enjoy Your Home. Looking at the spare parts offering, it's also a complement to the already existing spare parts assortment within Clas Ohlson, where we have reported growth over the last quarters. Also Clas Ohlson today is a battery destination, and we have a main focus on consumable batteries, whereas this acquisition will help us complement with lots more specialty batteries across a lot of different categories. Spares is also well-positioned as an online category expert, so Spares do not have any stores, and operate all of their brands and companies as online focused. And the company also has a track record of profitable growth.
So looking a bit more deeply into, into Spares, the customer offering is very competitive. It's as for the rest of Clas Ohlson, it's very much based on good value, relevance, and trust, and we'll get back to the relevance part, but it's obviously very much need-based shopping. The company has a very broad assortment. We'll also come back to that, in a second. And over the last few years, Spares has also built up, a couple of private labels with SiGN and NextBatt, and today they represent 20% of the business, and it's, growing significantly.
We also believe that Spares is well positioned in a growing market, and we do see a big trend towards circularity in terms of the Right to Repair movement, but also looking at the household economies of our customers, it's also a growing trend to repair rather than to buy new. The company was founded by Talal and his brother Michel in Malmö, a bit more than 10 years ago. Both Talal and Michel and the rest of the key persons in the Spares team will stay and continue to operate as a subsidiary based out of Malmö in Sweden, where they have approximately 75 employees, as well as their own fulfillment center.
And as you can see to the right, the company has delivered profitable growth ever since founded back in 2012. We saw a small dip during 2020, 2021, very much based on very much based on some shortages of products during the COVID period. But nevertheless, it's shown a very strong track record. Then looking a little bit more into the Spares Group, as it consists of a few different subsidiaries and brands. So starting to the left, we have products for electrification and digitization of everyday life, so very much accessories to electronic products. So again, similar to what we in Clas Ohlson sell under the Connect mission. And here we have Teknikdelar.se, .no, etc., which is a business-to-consumer-centric part of the business.
Then we have Batteriexperten, which is a company that was founded in Halmstad many years ago, and is a business-to-consumer-centric company focused on specialty batteries. Then in the middle, we have spare parts and accessories for mobile phones and computers, and here we also have the two brands, Spares and ZandParts, which are more business-to-business focused, selling spare parts for mobile phones and computers. But also part of that assortment is available on Teknikdelar for consumers. And then to the right, we have the batteries business, where Batteriexperten supplies batteries for more than 200,000 electronic devices. So a lot of specialty batteries as a complement to the more consumable batteries that we're selling in Clas Ohlson.
Some of that assortment is also available on Teknikdelar. The companies have local websites in Sweden, Norway, Finland, Denmark, Germany, and the Netherlands, and during 2022, 1.3 million customer orders were fulfilled. Looking a bit more into the customer angle, this is a very Nordic-centric company, with the biggest business in Sweden, representing 57% of net sales, followed by Norway. So very similar to the Clas Ohlson structure. Then with the addition of Denmark, representing 7% of sales, and then Finland, 5%, and then rest of Europe is a smaller part.
Looking then at the offering, again, this is, the main focus of the company is very much into spare parts, which represents almost 70% of sales, but then also accessories, devices, and then some other, products. But again, a very focused, focused assortment. Looking at the, the, composition of brands, 20% of sales is, represented by private labels, with SiGN brand and with the NextBatt brand. And as we can see, both of those two private labels are growing significantly. So with that, I will hand over to, Pernilla to talk a little bit about the transaction structure.
Thank you. Good morning. Let me start by saying that I am as excited as Kristofer to make this announcement. We see that the transaction will accelerate our presence in an already prioritized growth segment for us, as well as contributing financially to the group from day one. Looking a bit closer on transaction structure, the enterprise value for Spares in the transaction is SEK 500 million. This SEK 500 million is the enterprise value on a debt and cash-free basis. The initial purchase price amounts to SEK 430 million. There is also an earn-out component in the deal structure, meaning that there is an additional purchase price that could amount up to SEK 225 million.
The final potential additional purchase price is decided by the fulfillment of growth and profitability targets during a period that ends in Q1 2024-2025. The value of Spares is currently set at 10.1x multiple. If the stated earn-out structure reaches the maximum of SEK 225 million , then provided that growth and profitability targets are met, the valuation would be 10.5x enterprise value divided by EBITA. Figures mention of pro forma, meaning unaudited management accounts for last twelve months up until June 2023. The financing of the deal is based on bank facilities and Clas Ohlson's balance sheet.
Looking at the combined net debt divided by EBITDA, based on Clas Ohlson's Q1 report, we would, after the deal, be around 0.6 times, compared to minus 0.1 times at the end of Q1 2023, 2024, and well within our framework of two times net debt EBITDA. Clas Ohlson will acquire approximately 91% of the shares in Spares Europe AB. Sellers in the transaction is venture capital from Verdane, as well as the management team of Spares. I also think it is worth highlighting that the management team also will reinvest significant part of their current share ownership. Current CEO, as Kristofer mentioned, and Co-Founder Talal, will remain in the role as CEO of Spares and continue to run the business in a decentralized structure.
Last but not least, we expect to close the deal during November this year, and the transaction is subject to customary closing conditions and regulatory approvals. Over to you, Kristofer.
Thank you, Pernilla. So looking at the rationale for this transaction, the first one, and we'll go through one, these ones a bit more in depth, each of them. So the first one is very much complementing with attractive product categories to the Clas Ohlson business. We also believe that this is well-positioned in a growing market, and there are a lot of structural trends playing into the advantage of Spares. And this is a business model that really promotes circularity, and the company has a track record of profitable growth. And we also believe that this is a growth platform for us looking forward, also with synergy potential, and we'll come to that.
So looking at the first part, I've already mentioned a little bit the different categories in which Spares play, but we really judge that this is a very interesting complement and with very attractive product categories. Spares is authorized as a reseller for spare parts and thereby has access to more than 5 million spare parts, which is obviously a big complement to the spare parts that we currently supply from Clas Ohlson. And you can also see here at the bottom, which is an illustrative picture of our presence in Clas Ohlson, and also the current depth of products that we supply across these categories. So as you can tell, we believe that this is a very interesting add-on, both on accessories, spare parts, and batteries.
Obviously, within accessories and batteries, Clas Ohlson is already very strong, but this complements with a much broader offering. Within spare parts, this is where it will have the biggest impact from a product category point of view. Looking a bit more into the kind of category characteristics of this business. First of all, this is very much need-based shopping, which is again, fully in line with the Clas Ohlson strategy. We are focusing, as you all know, on Clas Ohlson. It's very focused on need-based shopping for your home, and our purposes as companies are very much aligned. Looking at the products, the average product price is fairly low, so also well-positioned also in tough economic times.
And given that it is very need-based, it's also very limited in terms of discount and share of sales, and also the company has a good ability to sell a lot at full price, given that it's need-based. It's also a very attractive online business. The packages are very small, they're easy to ship, they're cheap to ship. So it's very much positioned for a solid online business. And also, the company has profitability as of the first order, and given the nature of the products, the return levels are very low. Looking at the right, as I mentioned before, this is a business that has both a business-to-business aspect and a business-to-consumer.
The combined total gross margin is around 32%, and whereas the business-to-consumer has higher gross margin, that represents many more orders, whereas the business-to-business is fewer orders at higher value, but also slightly lower gross margin. Important to note is that as we consolidate this into Clas Ohlson, we have slightly different accounting principles, so we will get back to the overall margin impact for Clas Ohlson, but as you can tell, it's slightly below the Clas Ohlson average. Looking at the markets, we do see a big trend towards customers and consumers out in our markets keeping electronic devices for longer, whether it's mobile phones, tablets, PCs, et cetera.
That is obviously driving a big emerging trend on the repair and used market, and you can see the graphs here to the right. So again, this is very much focusing in on a circular business model. We also see that there are lots of new legislation coming from the EU in terms of the Green Deal and the Right to Repair Act, which again, we believe will further drive this trend. Also, electronic devices tend to increase in price per device, which also means that from an economic point of view, there is a big carrot for the households to repair what they've already bought, rather than constantly buying new devices.
Looking more specifically then at the business model, and as we talk about promoting circularity, the whole purpose of Spares is extending the life of electronic devices. That's the core business. And they're selling approximately 2 million spare parts every year, which means that so far, they've extended the life of approximately 1.6 million electronic devices. So this is really making a big, big difference. And as I mentioned before, there is a breadth of spare parts available, and today, obviously, the main focus is across mobile, IT, et cetera. So with that, I'll hand over to Pernilla again.
Mm-hmm. As Kristofer mentioned before, Spares has, since 2012, shown a track record of profitable growth.
The sales development in the last three years shows steady growth from SEK 608 million, reported in 2021, to SEK 710 million in 2022, and approximately SEK 820 million pro forma last twelve months, up to June 2023. This growth has been achieved while maintaining profitability with an adjusted EBITDA margin of between 5%-6%. The combined sales of Clas Ohlson and Spares would imply that Clas Ohlson sales last twelve months, approximately SEK 10 billion. In addition of Spares, it is also earnings per share accretive by adding SEK 49 million to EBITDA. Also, these figures counted as last twelve months pro forma up to June 2023. So then I hand over to Kristofer again. Thank you.
So as I said before, we believe this is a very strategic acquisition to really help evolve Clas Ohlson and also help us drive focus on the key focus areas and defined areas which we're already working on, and this would help us accelerate that. On top of that, we do see synergy longer term looking at first of all getting a very entrepreneurial company into Clas Ohlson with our 105-year history. We believe it's very interesting from an organizational point of view. This company has been around for a bit more than 10 years, and Clas Ohlson for 105 years, and we believe there's a lot of interesting combinations to be had longer term.
Also, Spares has been extremely focused on their main categories, and obviously, that category expertise will really help also in terms of the evolution of Clas Ohlson and our connect mission, as well as our focus on spare parts and batteries. This is also an interesting platform for growth. Looking at the Spares Group over the last year, the Spares Group acquired Batteriexperten and the company Zand. So obviously now it's a combination of four different destinations, and they've proven that they can do this in a very efficient way, and thereby it's an interesting platform for future growth. When it comes to synergies, we haven't put any numbers on the synergies at this stage, but over time we believe that there are lots of interesting opportunities.
First of all, when it comes to selling synergies, obviously, Clas Ohlson has a very robust physical store network with 221 stores and growing. And we believe there are lots of interesting products and categories in the Spares assortment that you can hardly actually find physically today. So over time, obviously, there is an interesting aspect of cross-selling from Spares into the Clas Ohlson universe, but also likewise, from the Clas Ohlson universe into Spares. There are lots of interesting categories and products that only Clas Ohlson can supply. The second aspect links more into sourcing. Here, obviously, Clas Ohlson has a very long history of sourcing from multiple geographies.
We have our strong in-house IPO team based in Asia, sourcing from China, Vietnam, India, but also our office purchasing office in Poland and our purchasing office in Insjön, Sweden. We believe that there are lots of interesting opportunities to look at joint sourcing over time, and also potentially to realize sourcing synergies. Last but not least, the Spares business is obviously a native online business, built up, as I briefly mentioned before, into a very efficient online business. Very much focused on driving profitable growth online, which again fits really well into the Clas Ohlson strategy, given that that's one of the top three growth drivers also for Clas Ohlson.
And we believe there could also be interesting synergies here when it comes to running the online business, both in Clas Ohlson and then, of course, in the Spares Group. I won't go through this in full, but we will share this as part of the overall presentation. So we have overall the transaction in summary, with the highlights, the financing, governance, and also timeline. So we expect this to close in November, which means that the Spares business will be consolidated into the Clas Ohlson numbers, expected as of our Q3. That's the presentation, introducing a little bit the strategic rationale for doing this, the transaction structure, but also to have a first chance to deep dive a little bit into the Spares business.
With that, we will move into Q&A.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Magnus Råman from Kepler Cheuvreux. Please go ahead.
Yes, hello, it's Magnus Råman here from Kepler Cheuvreux. Thank you for the presentation. I wanted to ask if you had been a customer to Spares before the acquisition, or if they've only been distributed to very small companies or, or also to, to larger retailers?
Clas Ohlson has not been a customer of Spares before. So they've distributed to other companies.
All right. So if I understand that correctly, they have not been distributing to sort of retailers of your size or your competitors. It's more to very small type of business counter parties or?
A big part of the business to business is focused on companies repairing IT products, mobile phones, et cetera. That's a big part of the business to business. And given that, Spares also has the authorized dealership of some of the key brands, that's also the only way to get access to some of these spare parts. But no, there's no broad retail reach of the assortment today.
I see. All right. Interesting. So do you mean that this 5 million product catalog, the catalog or something that you mentioned? Do you deem that you would be allowed from sort of those, the providers to list this whole offering, if you wish, on the sort of Clas Ohlson's key websites?
Yes, we will have access to all the products, but then obviously not everything will be relevant for the Clas Ohlson customer. So, but we will have access to the full assortment that carries currently ships with Spares.
I see. Great. Then, what can you perhaps share the approximate revenue mix here between this business to business and the business to consumer side?
It's approximately 50/50, but a vast majority of the orders is business to consumer, and then there are fewer orders at higher value, but net sales wise, it's approximately 50/50.
Right. Great. Yeah, maybe just final one here on you talked about their fulfillment center in Malmö and how they're specialized then in sort of online retail. You are based out of in Insjön are operating both from your fulfillment center. So do you see that there is an opportunity to transfer some of your or online fulfillment or Clas Ohlson's online fulfillment to this center, or how is your thinking here?
No, that's not the plan today. Looking at the fulfillment center, Spares actually this spring moved into a new fulfillment center, and it's very much focused on their business, and they're supplying everything from that fulfillment center, both the B2C and the B2B business. Obviously, given that we have a very efficient logistical network for the Clas Ohlson e-com business, there are no plans to do any integrations there.
All right. Thank you. Thank you.
The next question comes from Rebecca Gustafsson from Carnegie Investment Bank. Please go ahead.
Good morning, Kristofer and Pernilla. Interesting news indeed. A couple of questions from, from my side. I was curious, does the Spares have a service offering as well, given that it seems to be more of specialty spare parts and batteries than, rather than regular consumer ones? And, if so, how large of a share of sales is that?
So Spares do currently not have their own service. They're not selling services, but they're supplying the spare parts to a lot of other companies that are providing the service, but they are currently not playing themselves in the service in the service market.
Okay, perfect. Thank you. And secondly, given that you continue to have a strong balance sheet, will you continue to be looking for to make more of these types of acquisitions going forward? Or, just curious to hear your thoughts regarding the M&A market in general.
No, there are no other M&A plans for us now. We have the big focus for us is obviously working now together with Spares and build this longer term. So, so currently there are no other, other plans there. And of course, we want to reap all the benefits of having a combined Clas Ohlson Spares. And obviously, we do look at this very, very long term as well. We're not a company that buys and sells companies. It's really about reaping the long-term benefits of this.
I see. Excellent. Thanks. I'll get back in line.
Thank you.
The next question comes from Nicklas Skogman from Handelsbanken. Please go ahead.
Yes, hi, good morning. I have two questions, please. The first one is, it seems to me like there's a big mobile phone exposure here. What percentage of Spares sales are related to mobile phone accessories or spare parts?
So a majority of, a majority of sales of the spare parts, is, towards the mobile phones, but, the company also has the authorized dealership for lots of broader IT spare parts, and also from some of the brands, that they're authorized for, they have a much broader assortment. But the Spares group has very much focused in on, spare parts and accessories for mobile phones and, what they label as IT, which is then everything else, related to, computers, tablets, et cetera. But a big part of it has been focused on mobile phones, which is, of course, where the consumer demand has been increasing the most, given how much the price per device has gone up, and the, also, need to repair these products.
Today, that's been very much the focus, but that's also, of course, an area where we are interested longer term, given that we sell spare parts for lots of different categories. But the focus of Spares is very much, as you say, on mobile phones and then broader IT.
Okay, so the clear majority is mobile phone exposure somehow.
Mm-hmm.
Okay, good. Second question is, what is or what would be preventing you from building this business yourself? What are the key, sort of, unique attractiveness of actually acquiring this company rather than trying to build it yourself?
I mean, I think there are lots of different reasons for doing this. One is obviously that this company has had a very high focus for more than 10 years in this market, and they are experts, and it is a fairly complex market where they are very much experts, and that's why they've been rewarded by the authorized dealership for lots of big well-known brands. Clas Ohlson obviously also has knowledge and expertise within the connect area, but we judge that here we have a company that is true category experts. And then also in terms of the access to order the existing product catalog is also a way to accelerate.
and then given that the company has a history of profitable growth, it's also accretive to Clas Ohlson, and thereby it is interesting to see what we can do together. And then last but not least, I think in terms of softer factors, having a company that has been built up online first with an entrepreneurial culture, we believe that this could be a very fast-moving growth platform also for us forward.
Okay, very good. Perhaps a follow-up on this authorized dealership credentials. Is there one brand that represents a very large share of sales? And how are these authorization structured? Are they running for a few years at a time and so on?
No, so these authorizations, traditionally, run for a very long time. And you can find all the brands on the Spares.com website. You can find all the brands that they're representing. So obviously, a few of the big ones are Samsung, Lenovo, HP. And Samsung is a big one, given that, Samsung has obviously launched a lot of mobile phones over the last year, so there's huge demand for Samsung spare parts.
Sorry, but these are not exclusive authorizations, right? For like a specific country.
There are only a number of. It varies between the companies, but there are only a certain amount of spare part authorizations that they hand out. And then those are the only companies that can supply these spare parts, and that varies then per brand, per country, but only the companies with authorization can supply the original spare parts.
Okay. Just, I assume Samsung is the biggest supplier, then. How long is that authorization contract running for currently, or what's the contract length right now?
So the Samsung contract has been with Spares over the last 10-15 years. So obviously, Spares was running before the Teknikdelar company was founded. And then these are the authorization contracts. They are standard contracts, and it's very much depending a bit by brand, but it's standard contracts with different lengths. But the key is the long-term relationship that the companies have together with these brands, and then also the infrastructure to supply all the spare parts to a broad customer group.
All right. Thank you very much.
Thank you.
The next question comes from Andreas Lundberg from SEB. Please go ahead.
A question. You know, as you know, it's been a few turbulent years now in the industry or consumer space. Where are Spares in the cycle? Do you have any, you know, pandemic effects, backlash, et cetera?
So looking at the graph I shared earlier in terms of the historical development, the one thing that has impacted the company negatively was the big shortage of spare parts post the pandemic, given that a lot of the factories of the suppliers were closed down. As they open up again, there's of course been a lot of focus on producing new products. There was a negative impact during that time. Apart from that, the demand has been constantly rising, and it's been constantly growing. Given the profile of the business in terms of fairly low average product values and good value position, we've not seen any other big kind of market cycle impact, but the pandemic did have an impact on accessibility of supply.
Okay, cool. And what takes for this company, so say, to get to the profitability thresholds or targets you have set up for potential earn-out payment?
Sorry, can you repeat the question, Andreas?
It seems that, you're looking going from, what do you have? SEK 49 million EBITDA as of now or last year. You need to go to SEK 60+ million, if I'm correct, to meet the threshold. Is that the right calculation?
We have not communicated, I mean, the target regarding profitability, the growth and profitability targets to reach the earn-out.
Okay, but you set a multiple or implied multiple to get there, right?
There is a combination of a growth target and a profitability target, and you are... Yeah, you can, you can estimate it, but we have not
... communicated the figure.
Okay, cool. Are there any big support or drag from, say, input costs, currencies, et cetera, that you, you budget here for, for the coming year for that company?
No, not that we have identified.
Okay. And lastly, you talk about 91% ownership for Clas Ohlson. Is that also correct or, or the right-
Yes.
Figure after management reinvestment?
Yes, that's correct.
Okay. And what kind of growth do you see for this company if you look in a three-five year horizon?
We haven't communicated any specific targets, but obviously, looking at their track record, obviously, we want to continue delivering profitable growth. And we want this, of course, to enable the total Clas Ohlson target of the 5% organic growth and the 7%-9% EBIT margin. So we believe this will support that, but we haven't communicated any standalone targets for Spares.
Okay. Thank you so much.
Thank you.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.
Okay, thank you very much for calling in with very short notice, and thanks for all the great questions. We will all get together again on December sixth when we report our Q2 report. Then obviously, the Spares business will not be consolidated into Clas Ohlson. That will happen in Q3, but then we will also have a chance to, to answer any further questions if there might be so. So thank you very much for calling in.