Ladies and gentlemen, welcome to the Dometic webcast. Today, I am pleased to present Roger Johansson, CEO, and Per-Arne Blomquist , 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 Johansson speaking. I got, of course, Per-Arne with me here today, and we have also the M&A team with us on the call, and Scott Nelson, the President of Americas, is joining the call as well here. 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 that we're excited about. It's SeaStar Solutions. What we're going to cover here in the call is an overview of the case and the acquisition, an overview of the company itself, talk about the strategic path and, of course, financial impact and opportunities in general here. Let's move to the acquisition overview.
Let me start by saying SeaStar has been sitting very high on our M&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 this here for the past time, and we succeeded here yesterday, obviously. If we look at the company, it's a North American market leader in vessel control systems and several other aftermarket products. It focused on the sport and leisure boat industry, but touching also other types of boats here, but mainly this exposes us into smaller boats than what we used to work with, which is part of the great fit and complementary business. Expected sales are $320 million US, and roughly earnings of $85, obviously high margins, around 26%-27% here.
The rationale is that we create a very powerful platform for future growth in a much broader segment in the marine industry. To start with North America, but also opportunities outside. It complements our product offering, and it complements highly our distribution network. The transaction itself is we're paying $75 on a cash and debt-free basis, obviously, and it's 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 EBITDA margins and EPS. Return on investment is strong, and we see, at this point, sales and cost synergies of roughly $20 million. 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 is also a good synergy case. Timing is fast.
It's subject to mandatory customary conditions and regulatory approvals. We see no issues there. We're not exposed to any competition risk here in this case. We expect it to close this deal actually before the end of the year, so that we can start H2 on the key sheet of paper and have this fully aligned. This company brings us up 20% in sales and some 30% in earnings. Let's now go to the important stuff, and that is what is this company about and what is SeaStar? I want to take two 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 a market leader in vessel control systems and aftermarket products.
These are products that I call must-have and must-work type of products, exactly what we have in many areas in Dometic. These are critical products that needs to work for a boat builder, an engine builder, but most importantly, boat users. They're number one in most of the 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 roughly 2% of sales. They have 1,250 employees in U.S. and Canada in eight 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. SeaStar is the main brand, which also covers the biggest part of the business. SeaStar 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. Moeller Marine is a rather recently acquired company that puts SeaStar into fuel systems and fuel tanks, but they also produce water and waste tanks. They're strong rotomolders, where we also see an opportunity to actually utilize their competence and facilities for products that we have within Dometic today, actually. No part of the synergy so far. Xtreme is the brand for mechanical steering components like helms, cables, and bezels. Also very well known in this industry. When it comes to SeaStar and the innovation culture that is always impressive, let me tell you about one example that they call the SeaStation. 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 boat in position at very rough conditions. What else can I say?
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. These are components that customers and users are decently price insensitive to. Sometimes exposed to copycats like we have in some areas as well, but always winning long-term because of quality and reliability. Tremendous product portfolio for us. You see the geographic split for SeaStar as they are today, with obviously a very high dependence on North America, 87%, and 13 international. The channel split is very similar to ours. When it comes to business, obviously this is a very marine-heavy, and it should be, 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 them, I won't, but you see that they cover quite large range of product. 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's also moved down to smaller boats. SeaStar here is, and will be, the integrator when it comes to digital integration systems. They have a very superior solution, and that's something that we're also excited about being part of going forward. If you're a boater, you probably have been in a situation where you need to dock in a harbor with a lot of people sitting, watching, maybe even in bad weather.
They have a solution that they call Optimus 360 that basically is a parking assist system, which we have been testing together with key people from the company, it's groundbreaking technology for the marine industry. It's something where they have also a very solid and great solution that is going to be tremendously important for the future. Again, great product covering boats that we today are not necessarily exposed to. That kind of broadens our participation 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. Some six units, roughly 1,250 employees in Vancouver, British Columbia, where we have the hydraulic division with some 370 people, which is the biggest operation. Limerick, mechanical division.
Litchfield, Illinois, where we have all the distribution of the off-the-shelf parts under the brand of Sierra, but also growing into managing other products within the group. Sparta is the home of marine fuel tanks and Nashville, Tennessee, the fuel systems. Then we have a small unit also in Florida, actually neighbors to our Pompano Beach facility, with a small group of people there as well, Stuart. Nice facilities. We have been to most of them and obviously shared 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. outdoor market, which is one of the big reasons why we love them. 161,000 boats built last year. Is this a cyclical industry? To some extent, 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 the big vessels that we normally supply our agencies to. We like this exposure. There is a total installed base of roughly 8 million boats that has a continuous need for spare parts and dealing up the controls and fuel systems as they get older. A little bit of market dynamics, very similar to many of the businesses that we have. It might be interesting to know that 36% of U.S. households have boating participation, it's growing. Increasing millennials participation, we see similar patterns as we have seen in some of our other businesses also here. Different tastes it's going to potentially change this industry, we're going to be part of that, of course, to the better. There is a technology shift towards more advanced gauge systems .
I've described a couple of features to you, to have integrated controls. 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 engine screw boats. That is also something we see in non-leisure areas where they utilize these small textile fast boats for any type of commercial use. Now for 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 in the boxes here. We strengthen OEM, we strengthen aftermarket. We have a competitive cost base that can still be worked on.
We're going to dock them into Dometic, but we also want to be very smart about how to manage this company. They have strong brands. We're not going to touch them to start with, for sure. Then, take the right decisions going forward, whatever the best is for SeaStar and for the Dometic business going forward. If you move to the next chart, compelling strategic fit. As you know, we've had a clear target to better up our RV dependence. 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 in balance in the company. Small, reliable products without funny design. These guys, they live and breathe that for sure. Must-have, must-work products. Most importantly, it's been the DNA. I think 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. Barriers to entry are very similar to many of the businesses we have. Then the customers have brand allegiance. It ticks in the boxes there that are very favorable. Just to give you then how the profile looks, if you have the group on the left side on the chart and Americas on the right side. Sport with Americas where the comparables obviously change the most. We move from a 70% OEM to 65%, and we move from a 30% to 35% aftermarket mix, so stronger mix for Americas. When it comes to business areas, we move RV from 84% to 59%, and we move marine from 8% to 33%.
Much more, let's say, diversified American business, and that's obviously, as we have said, part of our strategy. On the left, you can see moves for the group, slight moves, not huge ones, but slight moves on the business area level from 65% to 55%, as I have already mentioned on the RV dependence. Looking at synergies then, we have obviously had a few teams doing the first rough looks at synergies. To give you an indication, we have put out $ 20 million there that we feel quite comfortable with. We've said three years. We also think that we can potentially do that 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 OE 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 products in other of our segments. For sure, we see a competency that they have that we can utilize and need to utilize within the Dometic business as well, which is quite compelling. On the cost side, we do see sourcing, distribution, logistics, and manufacturing. Last but most important piece here is that, we're really excited about this management team. They have a strong management. They have a cultural fit 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 we do. They like to run the businesses decentralized. They're used to must-have products. They're innovative in a smart way.
They understand the users 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 stay on. A key guy here is Yvan, that is the CEO that has done 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 powerful platform for future growth in the marine area. This is a number one key product area, strong brands, strong product leadership. New opportunities for us in a market for power vessels where we have been, if not non-existent, but very, let's say, weak or haven't had suitable products.
Good operating and cash flow fit. Very strong track record of profitable growth and a strong management team with proven M&A skills. Let me also at this point say a very important thing. Marcus, my successor, has been deeply involved here in the past weeks as we have moved along this acquisition, because it has been clear to me and to my team that we need to have him on board. I can just say in this regard, he is excited to get this on board into the Dometic family and to work with this team. He has also met with management. We have one view on why we do this and how to take it forward. Strong alignment between us and me and funding. Let me now move over to Per-Arne so that he can give you some of the financial highlights around the case.
Okay. Thank you. As Roger already has said, this is an acquisition which is immediately accretive on accounts to EBIT and EBITDA. We will close the deal before year-end. That's the ambition, and which means that all the costs for the transaction, which we'll come back to later on, will be taken in 2017. We will have a rather clean year on the EBITDA perspective 2018. The return on investment is to be above cost of capital within two years, and we talk about cost of capital group. Right now, we're talking about 7.5%, 7.7%, which I think it's a good step and we might even be there within shorter than two years. It's fully financed via cash and committed bank facilities.
We have a bank group that we will be working with, and the cost of this loan are just slightly higher than we have in the current estimate, which is very good for us. Of course, the leverage, that works every year will go up, where we are approaching closer to one now, and we will now go up to 3.3. But we will have a very good and quick glide path back. We have said that within 24 months, we will be back at around two. I think that we could even say that within 18-24 months we will be back to a safe return back. And we should remember that we have deleveraged this company very quickly from the IPO. We started at 275 two years ago, and we are now coming closer to one.
I don't see with these two companies combined, strong cash flow, decent investment needs, I don't see why we should not keep the pace with these two combined companies. Perhaps even more important, we will maintain the dividend policy of at least 40% of net profit. So that shows that we have a strong belief in this combination, and that we will very quickly come back to the very strong balance sheet that I have today and even with the 3.3 leverage, we have a strong balance sheet right now. Roger.
Thank you, Per-Arne. Summing up, on the last page, market leading products, must have product, must work product in attractive niche market. We strengthen our OEM business, we strengthen our aftermarket business, and it's company one and accretive on M&A. We are excited about this, and thank you for listening. We are opening up for Q&A.
Ladies and gentlemen, if you do have a question for the speakers, please press zero one on your telephone keypad now. And the first question is from the line of Lucie Collier from Morgan Stanley. Please go ahead. Your line is open.
Good morning, gentlemen. Thanks for taking my question. 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 years. That's question number one.
Yeah, they have had a, I will say, growth very similar to ours during the last, and it's a combination of both acquisitions and underlying growth. They have been growing with the market and also been growing outpacing the market as well. I think it's a decent growth what we have seen in the past years. When it comes to profitability, they have increased profitability during that. They're working hard with the further profitability. That will go on. We will see potential improvement of profitability going forward as well.
Thank you. Can you maybe calibrate a bit more precisely when you said they've been growing with the market or outgrow the market? Are we talking 5%, 10%? Just for us to get a sense, considering that the products they're doing are slightly different than yours. Then around the margin, we have the EBITDA number, but how should we think about the D&A charge or other type of adjustment to EBIT? Also regarding the free cash flow generation, because the CapEx seems quite small. 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. Going back then to the market has been growing with roughly 8%, the last five, six years. That will be more percent. We will come back more with the information around the company. Also, we have close to deal. Also when we present this during, we will have some in the beginning of January, and also have the Q4 report. We are a bit cautious right now given that we have just signed the deal
Okay, thank you. The second question I had is, I was wondering, is there really an overlap in terms of distribution between what you guys do already in marine and what they do? Are they the same distributors here?
Yeah. Hi, Lucie. It's Roger. It's similar. There are some overlaps in the network. There are also new ones coming up. We have seen some of the big ones where we use them as the same customer. To some extent, in distributors, they are more focused on smaller boats versus us in larger boats. As you know, we have been focusing a lot around AC components application to some extent. There you see the differences here. We see an opportunity in there. They have, by the way, a very broad customer network where we could also dock in product like even cooling boxes, we haven't opened up that box yet, a little bit, to utilize there. It's a good tack of new customers coming into us, and there are some that are overlapping, where we can also see the synergies, by the way.
How we are today, selling toward refrigerators, we have cooling compartments for smaller boats, I think that fits very well in this.
Thank you. Just my last question was on the aftermarket. As part of what you guys describe as aftermarket, there are also some products like cooling 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 install base? Is there any kind of incentive requirement from the customer to replace any of their components by SeaStar components? Just trying to understand how the aftermarket is defined and how that works precisely.
Explain again the question. What do you mean, to replace what product with SeaStar products?
What I mean, for instance, among the different products you were showing for them, let's say if 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 SeaStar, 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 boats will have to be replaced by SeaStar equipment if there is an issue.
Okay. No, it ties into what I talked about during the presentation about mission-critical products. I think that we've done a lot of interviews with, on the ground third-party interviews to understand how strong they are in the industry, and the reputation, I think, is very strong. This is a particular product that you don't want to be hit around buying. If you have a joystick that is damaged or you need to replace, you go to SeaStar. Of course, there are other solutions out there, but they have a very strong. I don't have any data on % about replacement rate, but for sure, this is a big piece of their strong position, yeah.
Yeah, also, I think it's exactly the same as we talked about when it comes to Dometic. It's a question of us having a lot, they also having a lot of product. It's good quality and very good quality and good distribution capacity. That's what it's all about in the aftermarket.
Okay. Thank you.
Thanks, Lucy. We'll come back more on these type of things once, as Peder said, especially around financials and what have you, when we have closed. We have just signed that, I guess. Okay?
The next question is from the line of Erik Kasa from Industrial Equity Partners. Please go ahead, your line is now open.
Thanks for taking my question, gents. How would you deem SeaStar's pricing power against its customers?
Hi, Erik. Strong.
They have been increasing prices the last couple of years, yeah?
They increased prices for a long time in a smart way. They also understand that they cannot overdo this. Same as with our positions. We have strong positions, but of course, there is competition somewhere, so we need to be smart about this. If you ask me, and what we have discussed with the management team and what we have looked into, is that they have good and strong pricing power.
Very good. Thank you very much.
Thank you.
Next question is from Agnieszka Vilela 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 SEK 20 million per annum, will it be an impact on the EBIT line? Also could you specify the kind of sales and cost synergies separately? Thank you.
No, it is a separate on the EBIT line. If I will make it very easy right now, I will say 50/50 when it comes to the cost and the sales.
Okay. Thank you. 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 strengthen their position in these markets?
Yeah. We have started to explore this. Obviously, we have not gone into this in the deep end, Agnieszka, there is an opportunity to do this, for sure. I think that the current management have seen on North America. You should also bear in mind that the market for outdoor engines and outdoor engine-powered boats is tremendously much higher in North America. Each of them will remain the focus. Having said that, they have shares in Europe that are mainly on control, that are mainly through competitors here. We see an opportunity with our strength, with our team in Europe and with our relations with the European boat builders and boat groups, that we can do much more here. We do not want to talk about that at this point, we see opportunity.
I think also we see opportunity in Asia, like I said, around Australia, where we have a strong outdoor market and also it's some engines. They could have three engines at 300 PS each, it's completely different boat than we have in the small lakes in Sweden. Yeah.
Perfect, thank you. Then some housekeeping questions. You mentioned that the costs for a loan would be slightly higher than the current one. You still expect about, say, 3% interest rate on that or even higher than that?
3% on that. We have the dollar loans, I would say that the margin that we pay on this is just slightly higher. I think it's going to be different because the loans for dollar is more expensive. If we are now at, let's say, 2%, I could guess that we come up close to 3% in interest rate.
Perfect, thank you. The tax rate that this company paid in the U.S.?
That's a tricky question. Let's see, because You know what the tax rate is in the U.S., and we are afraid that the mix with our taxes and also the potential tax reform will be difficult. Let me come back on this when we know more about the tax situation in the U.S. From our company's perspective, it could be slightly higher than we have today, just slightly higher. Let's come back on this.
Okay, perfect. Thank you.
Next question is from the line of Rasmus Engberg from Handelsbanken. Please go ahead, your line is open.
Yes, hi, good morning. First question. It sounds very much as though your focus is business on growing it rather than extracting synergies. Is that correct to assume that we should maybe add a higher figure than 2017, say, 2018?
Yes.
Yeah, okay. Secondly, there was just one question which I think was not asked. When you bought Safeboat, you have this amortization of intangibles. Is that something that you foresee might happen here as well?
Yeah, definitely. I'm not saying how much it will be. It depends on the due diligence we will do later on. From my side, that is a non-cash item, and I will also try to keep the balance sheet as clean as possible. We will try to depreciate as much as we can.
Yeah. Sure. At least trying to get to some sort of EPS effect here.
Let us come back because we can't see the model effect right now on the boat building.
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?
Yeah, we'll probably be at a conference with a complete impact to you at the beginning of January, and then we might give some information about that.
Cool, thanks.
Thank you, Rasmus.
We have a follow-up from Erik Karlsson 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 the cost synergies, but the business synergies, is that more slopping their product into your customer network and product suite? Or is it the other way around, reverse, so you can sell your product to their customer network?
Spontaneously, Erik, I think that it's probably more us into theirs, but it's going to be both.
Not so much them into ours in the U.S., but maybe in other areas of the world.
Very good. Thank you very much.
Next question is an additional follow-up from the line of Lucie Collier from Morgan Stanley. Please go ahead, your line is open.
Thank you for the follow-up. Two question. 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. The second question is, I see they have, of course, a very broad range of very different products, and some of them look indeed quite different. I was wondering how much of their production is outsourced, and how much is actually assembled by them?
First question is, we do not plan for immediate restructure here. They have done that on a continuous basis in a quite smart way. I'm sure that as we go along, we might see smart opportunities here, but that's not in the plan right now. Secondly, yes, they have a broad product range, and 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 very well.
Thank you very much.
Thank you.
Ladies and gentlemen, as a reminder, if you have any further questions, please press 01 on your telephone keypad now. There are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
Thank you for your interest, guys, and good questions. Obviously, we're excited about this. Follow up and you're going to see that this is going to be a great value driver and a great position for us throughout the marine industry here. Thank you very much. Bye-bye.
Thank you.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.