Ladies and gentlemen, welcome to the Medic Webcast. Today, I am pleased to present Roger Johansen, CEO and Pierre Arne Lundqvist, CFO. For the first part of the call, all participants will be in listen only mode, and afterwards, there will be a short question and answer session. Speakers, please begin your meeting.
Thank you. Good morning, good night to some and good afternoon to some as well. This is Roger Johansen speaking. I got, of course, Per Arna with me here and we have also the M and A team with us on the call. And Scott Nelson, the President of Americas is joining the call as well here.
So thank you for joining on short notice. We want to inform you and educate you about a tremendously well fitting acquisition that we signed during the night and we're excited about. It's Sleepwell Solutions. What we're going to cover here in the call is an overview of the K20 acquisition, the an overview of the company itself, talk about the strategic trust and of course financial impact and opportunities in general here. So let's move to the acquisition overview.
Let me start by saying C Store has been sitting very high on our M and A wish list for quite some time. We have seen this company and we have seen the fit to us. And now the opportunity arose, and we have worked on the situation we have for the best time, and we succeeded here yesterday, obviously. So if we look at the company, I mean, it's North American market leader in vessel control systems and several other automotive products. It's focused on the transport and leisure boat industry, but touching also other types of boats here, but mainly this exposes us into smaller boats that we used to work with, which is part of the great fleet and complementary business.
Expected sales are $320,000,000 and roughly earnings of $85,000,000 So obviously, high margins around 27%. The rationale is that we create a very powerful platform for future growth in a much broader segment in the marine industry. To start, we know it's America, but also opportunities outside. It complements our product offering, and it complements highly our distribution network. The transaction itself is with $8.75 on a cash and debt free basis, obviously, and is fully financed via cash and committed bank facilities.
I'm going to talk about that later on. What's nice is that this is immediately accretive both to EBIT margins and EPS. Return on investment is strong. And we see at this point, sales and cost synergies of roughly $20,000,000 I think that we are still quite conservative on this. We're going to work with the company to identify further opportunities here.
But it's also a good synergy case. Timing is fast. I mean, obviously, it's subject to mandatory customer conditions and regulatory approvals. We see more issues there. We're not exposed to any competition risk gains in this case.
We expect you to close this deal actually before the end of the year so that we can start 'eighteen with a key sheet of paper and have this fully aligned. Obviously, this company brings us up 20% in sales and some 30% in earnings. So let's now go to the important stuff, and that is what is this company about and what is seesaw. I want to take 2 pages here to go into that. It's important that you understand the business and why we do this.
We're excited about what this company does and how they do it. As I said, they're market leader in vessel control systems and off market products. These are products that I call must have must work type of products, exactly what we have in many areas in domestic. These are critical products that needs to work for a boat builder, an engine builder, but most importantly, boat. They're number 1 in most of their positions in key product categories.
I've mentioned the financials. It's a well invested company. We don't expect CapEx to move outside of rough 2% of sales. We have 12 50 employees in U. S.
And Canada in 8 facilities. Let us move to the next page to talk a little bit about the business and the products. It consists of a handful of very strong brands with strong reputation and strong entrepreneurial and innovative heritage. C Star is the main brand, which also covers the biggest part of the business. CStar used to be Teleflex, which was world known for controls and controls quality.
This company is very acquainted with developing and producing products for very demanding applications. Molle Marine is a rather recently acquired company that puts C Star into fuel systems, fuel tanks. They also produce water and waste tanks with a strong rote molders where we also see opportunities actually to utilize competence and facilities for products that we have within the market today actually. Not more to the scenery so far. Extreme is the brand for mechanical steering components like hands, cables and bevels, also very well known in this industry.
When it comes to C Store and the innovation culture that is called is impressive. Let me tell you about one example that they call the C Station. It's something that holds the boat in position via GPS. It's a very practical and it's a safety feature that keeps the bolt in position at very rough conditions. What else can I say?
The Sierra, we haven't talked about Sierra. Sierra is the go to provider of reliable spare parts for engines and controls. Again, must work, must have components. And these are components that customers and users are deeply driving intensity to. Sometimes exposed to public apps like we have in some areas as well, but always winning long term because of quality and reliability.
Tremendous set of product tremendous product portfolio for us. So you see the graphic split for SeaStar as they are today We're obviously very high dependent on North America, 87% and 13% international. The channel split is very similar to ours. And when it comes to this, obviously, this is a very marine heavy and it should be
a product company.
If you look on the next chart, you see similar to what we have when we show our RV pictures. We have one that shows a smaller vessel outboard engines on it. And you can see the overview of different products on the boat. Even if I'm tempted to go through, then I won't, but you see that they cover quite large range of products. And one thing that is also important to mention is that as larger vessels and ships have become almost completely electronically controlled during the past years and decades.
It also moves down to smaller boats. And SeaStar here is and will be the integrator when it comes to digital integration systems. We have a very superior solution, and that's something that we're also excited about in Portugal going forward. If you're a bolter, you probably have been in a situation where you need to dock, dock in a harbor with a lot of people sitting watching, maybe even at bad weather. They have a solution that they call OPTIMALS 360.
But basically, it's a parking assist system. We have been testing together with key people from the company, and it's groundbreaking technology for the marine industry. And it's something where they have also a very, very solid and great solution that is going to be tremendously important for the future. So again, great product covering the boats that we today are not necessarily exposed to to kind of broadens our classification in the marine industry. We have been looking for this for a long time.
Go to the next page. This just gives you a flavor of the operational footprint. From 6 units, roughly 1250 employees. In Vancouver, British Columbia, where we have the hydraulic division with some fake 170 people, which is the biggest operation. Limerick Mechanical Division, Midfield, Illinois, where we have all the distribution of the office headquarters under the brand of Sierra, but also growing into managing other products within the group.
Sparta is the home of Myrtle Fuel Tanks. And Nashville, Tennessee, the fuel systems. And then we have a small unit also in Florida, particularly neighbors to our Pompano Beach facility with a small group of people there as well, Stuart. So, yes, nice facilities. We have been to most of them and obviously have shared the insights of all of these with the management team.
Let's look at the market. Obviously, this is a company that is primarily exposed to the U. S. Outbound market, which is one of the big reasons why we love them. So 161,000 boats built last year.
And it is a cyclical industry, yes, to some but it's very similar to many other things we have in the company. I think that these are not as big investment as huge RVs or big assets that we normally supply our agencies to. So we like this exposure. There is a total installed base of roughly 8,000,000 moats that has a continuous need for spare parts and dealing up the controls and fuel systems as they get older. Favorable market dynamics, very similar to many of the businesses that we have.
It doesn't need it might be interesting to know that 36% of U. S. Households have voting participation, and it's growing. Increasing millennials' participation, we see similar patterns as we have seen in some other businesses also here. Different taste is, and it's going to potentially change this industry, and we're going to be part of that, of course, to the better.
There is a technology shift towards more advanced in systems. I've described a couple of features to you and also to have integrated controls. And also the value per vessel is growing. Important for you to know is that also, especially in the U. S, there is a strong trend towards increased number of engines per volt.
And that is also any type of commercial use. If you look at the strategic fit, here we could go for a long time because we really feel good about the fit. You see our strategy, We've talked to you guys a lot about that. There are several ticks and ticks in the boxes here. We've taken OEM and strengthened aftermarket.
We have a competitive cost base that can still be worked on. We're going to dock them into domestic, but we're also going to be very smart about how to manage company. They have strong brands. We're not going to touch them to start with for sure. And then take the right decisions going forward whatever the best is for C Store and for the Tumeric business going forward.
If you move to the next chart, it's compelling strategic fees. As you have as you know, we've had a quick target to our RV dependence. And with this acquisition, we do that. We move the RV dependence from 65% to 55%. And we move the marine exposure from 10% to 22%.
Great shift imbalance in the company. Small reliable products outstanding design. These guys, they live and breathe that, for sure, must have, must work products. But most importantly, it's been the DNA. I think that's we're consolidating the market.
We're both in number 1 or 2 positions. We like to have products that have technology content, not only non technology products. We see differentiation opportunity here, of course. There is to enter very similar to many of the businesses we have. And then the customers' preferences.
So it's in the boxes that are very favorable. And just to give you then how the profile looks, if you have a group on the left side on the chart and Americas on the right side, obviously changed the most. So we moved from a 70% OEM to 65% and we moved from a 30% to 35% Automarket mix, so stronger mix for the Americas. But when it comes to business areas, we moved ROE from 84% to 59% and removed Marine from 8% to 33%. So much more, let's say, diversified American business.
And we're that's obviously, as we have said, part of our strategy. Then on the left, you can see moves for the group, slight moves, not huge ones, but slight moves on the level from 65 to 55 as I had already mentioned on the organic dependence. So looking at synergies then, we have obviously had a few teams doing the first rough looks at synergies. We need to give you an indication, we have put out we have put out the EUR 20,000,000 there that we feel comfortable with. We've said 3 years.
We also think that we can potentially even get faster. More importantly is that I think that once we start to work with this company, I think that we're going to see more. When it comes to the commercial synergies, it's about cross selling for sure, both in OEM and aftermarket channels. We want to utilize our network to penetrate this company outside of North America. We also want to, where possible, leverage their product in other of our segments.
For sure, we see a competency that they have that we can utilize and need to utilize within the domestic business as well, which is quite compelling. On the cost side, reducing sourcing, distribution logistics and manufacturing. Last but most important piece here is that we're really excited about this management team. We have a strong management. We have a culture shift to us that has been tremendous during the talks with them.
These guys come from the same type of heritage as we do. They look on businesses as we do. They like to run the businesses decentralized, reduced to master products. They're innovative in a smart way. They understand the uses of boats, the builders of boats and builders of engines, and they have extremely good customer relations.
Important statement is to say that key leaders are committed to sell. So a key idea is Ivan, that is the CEO that has done a tremendous work with his management team. And he's also committed to stay on here for a couple of years, which is important for us also to build the future together here. If we sum it up, this creates a clearly a top of strategic growth in the marine area. We this is the number one key product area, strong brands, strong product leadership, new opportunities for us in a market for top four vessels where we have been, it's non existent but very, let's say, weak or haven't had suitable products.
Current operating in Qatar sits very, very strong track record of profitable growth and a strong management team with proven M and A skills. And let me also at this point say a very important thing. My successor has been deeply involved here in the past week as we have moved along this acquisition because it has clear to me and to my team that we need to have him on board. And I can just say disregard and say he's excited to get this on board into the direct segment to work with this team. So he has also met with management.
We have one view on why we do this and how to take it forward. So strong alignment between us and me and Claudio. So let me now move over to Frode so that he can give you some of the financial highlights around the case. Okay. Thank you.
As Rodio has said, we still are in
a position which is not immediately agreed to one account here that We will close the deal for year end. That's the ambition, which means that all the costs for the transaction, which will come back later on, will be taken into 2017.
So we will have a broader clean
year on EMEA, because
of 2018. The return on investment
is to be above cost of capital within it's a it's a good step and we might even be there within shorter than 3 years. It's fully financed via cash and committed bank facilities, we have the bank group that we're working with and the cost is slightly higher than we have in the commitment, which has done very, very
good for us. Of course, the leverage
for the Netherlands workers' EBITDA will go up. We are approaching closer to 1 now, and
we will now go up to 3.3. We will have
a very good and quick client path back. We have set up within the 4 months, we will be back around 2. I think that we could even set up within 18 to 24 months. We will be back, let's just say, return back. And we should remember that we have deleverage discount from the IPO.
We started at 275, 2 years ago, and we are now coming closer to 1. So and I don't see that these 2 companies combined with strong cash flow, these and the investment needs,
I don't see why we should not be the case for the digital combined company. Even more important, we will maintain
the dividend for the sale of the lease, for example, on the profit So that shows that we have a strong belief in this combination. We will very quickly come back to the very, very strong balance sheet that we have today and our even 3.3 leverage that has a strong balance sheet right now.
So Roger? Thank you, Teo. So sum it up on the last page. Market leading products, must have products, must work product in an attractive niche market. We strengthened our OEM business.
We strengthened our Optumarket business, and it's probably one of the accretive under the new year. So excited about this, and thank you for listening. So we're opening up for Q and A.
Question is from the line of Ouchi Kalia from Morgan Stanley.
I will have three questions actually. The first one, I was wondering if you could give us more indication regarding the growth profile, the EBIT margin profile and the free cash flow generation of this business over the last few years. So that's question number 1.
Yes. I mean, there have had any, I would
say, growth where it's in
the 30 hours during the low season and it's a combination of both the sales and underlying growth. So they have been growing with the market and also been growing outpace in the market as well. So I think it's a decent growth what we have seen in the past years. And when it comes to profitability, they have increased profitability. You will be working hard with the improvement of profitability.
So it's and that is the one we
will see potential support improvements to profitability going forward as well.
Can you maybe kind of calibrate maybe a bit more precisely when you said you've been growing with the market or kind of aggrading the market? I mean, are we talking 5% and percent? Just for us to get a sense considering that the products they're doing are slightly different than yours. And then around the margin, I mean, we have the EBITDA number, but how should we think about the D and A charge or other type of adjustments to EBIT? And also regarding the free cash flow generation, because the CapEx seems quite small, but considering it's a new business, it would be helpful to understand whether the working capital requirements are maybe different or not.
And what is their profile in terms of free cash flow generation?
Okay. I have to go back to this. I mean, this market has been growing with roughly 8%, the last exactly the last 5, 6 years, so that will be more and
more percent. But we will
come back more with the information around the company also we have closed the deal. And then also when we present this during, we will have some
Okay. The second question I had is I was wondering how much I mean, is there really an overlap in terms of distribution between what you guys do already in Marine and what they do? I mean, are they the same distributors here?
Yes. Hi, Jose. It's similar. There are some overlaps on in the network. There are also new ones coming up.
We have seen some of the big ones where we used not the same customer. But to some extent, they are in distributors, they are more focused on smaller boats versus us in larger boats. And as you know, we have been focusing a lot around the AC component sanitation to some extent. And there you see the differences. I mean, we see an opportunity in there.
They have, by the way, a very, very broad customer network where we could also drop in products like even cooling boxes, but we haven't opened up that box yet. To utilize this. It's a good track of new customers coming into us and there are some that are overlapping, but we can also see
Thank you. And then just my last question was on the aftermarket. I was just because I mean as part of what you guys described as aftermarket, there are also some products like clean boxes and so on, which are not really an automatic replacement on the equipment which are installed in the RV or the boats and so on. I was wondering, in their case, what is the conversion rate that they have on their installed base? I mean, is there any kind of incentive requirements from the customer to replace any of their components by ST store components.
I'm just trying to understand how the aftermarket is trying and how that works precisely.
But explaining on the question, what do you mean to replace what product with C Stop products?
What I mean so for instance, among the different products you were showing for them, let's say, there is one is broken, I don't know, maybe the joystick control, if it's broken, not working, is there an incentive for the customer or the user to replace with C Star? Or can they replace with any other type of joystick manufacturers? I'm just trying to get a sense of the conversion rate, I. E, whether all of the equipment they sell on the boat will have to be replaced by fixed car equipment if there is an issue.
Okay. No, but it ties into what I talked about during the presentation about mission critical products. I think that we've had we've done a lot of interviews with underground interviews to understand how strong they are in the industry and the reputation is very strong. And this is a typical product that you don't want to be sheep around buying. So if you have a joystick that is damaged or you need to replace, you go through Ctrip.
I mean, of course, there are other solutions out there, but they have a very strong I don't have any data and percentages about replacement rate. For sure, this is a big piece of the strong position here.
Yes. And Carlos, I think it's exactly the terms we talk about when it comes to the market. It's a question of having over the course of the product.
It's good quality, very good quality and good distribution capacity. So and that's what it's all about in the open market.
Okay. Thank you.
Thank you, Jose. And we'll come back more on these type of things, as we have said, especially around financials and what have you on when we have closed, which we have just signed last time, yes.
And the next question is from the line of Erik Kelsen from Industrial Equity Partners. Please go ahead. Your line is now open.
How would you deem Seastar's pricing power against these customers? Hi, Erik. Strong. So they have been increasing prices the last couple of years, They have they increased prices for a long, long time in a smart way. I mean, they also understand that they cannot overdo this, The same as with our positions.
We have strong positions. Of course, there is competition somewhere, so we need to be smart about this. But they have ask me and what we have discussed with the management team and what we have looked into is that they have good and strong price impact. Comp.
Our next question is from Anishka Villalena from Carnegie. Please go ahead. Your line is open.
Hi, thanks for taking my questions. The first question I have on synergies. Could you tell us if this $20,000,000 per annum, will it be an impact on the EBIT line? And also could you specify the kind of sales and cost synergies separately? Okay.
And then also can you elaborate on the strategy that you could have when it comes to expanding that business into Europe and other markets? Who will you compete with? And how can you kind of generate their positions in these markets?
Yes. We have started to explore this. We have not got into this in the deep as in yesterday, but there is an opportunity to do this pushover. I think that's the current village really has been deliberately focusing on automatic China. And you should also bear in mind that outdoor the outdoor market the market of outdoor engines and other engines for boats is tremendously much higher in automakers.
So each other will remain a focus. Having said that, they do sell some, they have shares in Europe and they are mainly on bond control, they are mainly through competitors here. But we see an opportunity with our with our team in Europe and with our relations with the European Board of Directors and Board groups that we can do much more here. But we are not we do not want to talk about that at this point, but we see opportunity.
And nothing
Perfect. And then some housekeeping questions. You mentioned that the costs for loan will be slightly higher than the current one. Should we still expect about, say, 3% interest rate on that or even higher than that?
3% on that. We have the dollar lows, and I will say that expensive. So
if you
are now at, say, 2% could you maybe
come up with those 30% in the interest rate?
Perfect. And then the tax rate that this company agreed in the U. S?
That's a tricky question. Let's see. But we also have I mean, you know what the scrap tax rate is in the U. S. And we are separate.
But the mix with our taxes and also the potential tax reform will be difficult. So let me come back on
this one. We know more about
the situation in the U. S. Both from
our company's perspective and it could be slightly higher than we have today, yes, slightly higher. But let's go back on this.
Okay, perfect. Thank you.
And next question is from the line of Rasmus Inger from Handelsbanken. Please go ahead. Your line is open.
Yes. Hi, good morning. Just a quick question. It sounds very much as though you're going to focus this business on growing it rather than sort of extracting synergies. Is that sort of correct to assume that we should maybe at a higher figure than 2017 sales in 2018?
And secondly, there was just one question, which I think was not asked. I mean, when you bought the platform, do you have this commoditization of intangibles? Is that something that you foresee might happen here? So I'm Yes, sure. Please try to get to some sort of EPS effect here.
Yes. But then let's come back to the Saudi default in the market right now and the market loan to change in.
Yes. Yes. And do you think you will give us more information before Q4, which I guess is sometime in late January, February? Or would you hold until then?
Yes. We'll probably be at the conference with the competition back to you at the beginning of January, and then
we might give some information on this.
And we have a follow-up from Eric Carlson from Industrial Equity Partners. Please go ahead. Your line is open.
Thanks for taking my question. Just curious, do you think the business synergies, if we don't talk about cost synergies, but the business synergies, is that more slotting their products into your customer network and product suite? Or is it the other way around, reverse, so you can send your product to their customer network? So James, Eric, I think that it's probably more up into theirs, but it's going to be both. Not so much there into ours in the U.
S, but maybe in other areas of the world. Very good. Thank you very much.
And next question is an additional follow-up from the line of Brisee Klier from Morgan Stanley. Please go ahead. Your line is open.
Thank you for the follow-up. Two questions. One is, I was wondering if you are already foreseeing any kind of restructuring or divestment you would want to be doing out of the company that you see could be necessary to be done for the portfolio? And then the second question is I see they have, of course, available range of very different products, but some of them indeed quite different. I was wondering how much of their production is outsourced and how much is actually assembled?
Yes. First question is we do not plan for immediate restructure here. They have done that on a continuous basis in a quite smart way. So I'm sure that as we go along, we might see smart opportunities here, but that's not in the platform right now. Secondly, yes, they have a broad product range.
And they are as we are, they're quite vertically integrated. So of course, they source some products, but the core products, they produce themselves and they do that every
And there are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead.
Okay. So thank you for your interest, guys, and good questions. Obviously, we're excited about this, so follow ups, and you're going to see that it's going to be a great value driver and in a great position for us throughout the marine industry here. So thank you very much. Bye bye.
Thank you.
This now concludes the conference call. Thank you all for attending. You may now disconnect your line.