M&A Announcement

Dec 19, 2016

Hello, and welcome to SCA's telephone conference for investors, analysts and media about SCA to acquire BSN Medical, a leading medical solutions company. My name is Josephine Edwell, Head of Communications for SCA. Today, Magnus Groot, our CEO and President, will, together with Friedrik Roestek, Executive Vice President and CFO, go through the highlights in today's announcement. And we will have a Q and A session in the end. You can also follow the presentation on our website, sea.com. So with this, I leave over to you, Magnus. Thank you, Josephine, and good morning, everyone. I'm very excited to announce the acquisition of BSN Medical today, a leading medical solutions company. BSN Medical is an excellent strategic fit with SA's vision to improve well-being through leading hygiene and health solutions. And BSN is a medical solutions company within wound care, compression therapy and orthopedics, and we'll look at these different areas in more detail soon. The purchase price is €2,740,000,000 on a debt and cash free basis, which will be fully debt funded. In 2015, BSN reported net sales of €861,000,000 with an adjusted EBITDA of €201,000,000 And looking back at the financial performance of BSN, I think it's worth underlining that's been a very, very resilient business in good times and bad with a steady growth both in top line and in profits. The acquisition is expected to be accretive to SA's earnings from year 1, and we expect annual synergies of at least €30,000,000 and closing is expected to take place during the Q2 of next year. Before getting into this exciting acquisition, I just want to put it in the overall perspective of Essay's ongoing transformation journey. As you know, in August, we announced the plan to split the group into 2 listed companies, Hygiene and Forest Products, subject to approval of the shareholder meeting in April. What's also evident from this picture is the long experience that SCA has from acquisitions, mergers and divestments. And this is what we're doing today, yet another step in this journey for the hygiene part of SCA. There's a very, very strong link to our strategic framework and our vision, which is dedication to improving well-being through leading hygiene and health solutions. And actually, in the strategic work that we have been doing over the years in SCA, we have been looking at medical solutions market ever since 2011, 2012 as a very attractive opportunity for future growth. And it turned out that this opportunity that's been on our target list for several years became available earlier this year, fitting extremely well with the transformation journey that we're undergoing in general. So we're very happy to be able to close this acquisition now. Looking at the bottom of the page here with our 4 strategic priorities, we will see during the rest of the presentation that there's an excellent fit with our strategy to win in chosen geographies and categories with many cross selling opportunities and of course, adding high margin categories to our existing portfolio of products and brands. Also when it comes to our focus on customers and consumers, we see great complementary fit here with BSN being very strong in some channels like hospitals, while SCA has a long history in the retail channels, but also an overlap that can strengthen both businesses. And thirdly, our strategy of innovating bigger brands, which is very much supported by BSN, which is very much a company characterized by fantastic innovation and strong brands in many areas. This is not an efficiency case. That's not why we're making this acquisition, but rather to grow into new areas. So driving efficiency is a smaller part of this acquisition. But overall, a very strong fit with our vision and our strategies. Both SCA and BSN are benefiting from a number of favorable market trends, not least a growing and aging global population. And with the aging of the population, there's an increased prevalence of chronic conditions such as obesity and diabetes and also cancer. And these trends support increased usage of BSN's products, but also, of course, of many of SCA's products like our incontinence products. The rapid growth of emerging markets leads to increased spending in health care in these countries. And in many of the categories where BSN is present and also SCA, there's a significant under penetration of the products that we're selling, so a huge opportunity for growth in the future. Another strong trend is consumerization, which is transforming many parts of the health care market. We see an increase move of what used to be health care products to retail and both SCA and BSN have opportunities in benefiting from this trend. And again, we believe that SCA's strong presence in the retail channels can benefit BSN going forward. And specifically then for BSN, we see important trends towards more proactive treatments to reduce overall health care costs in many areas and not least in Advanced Wound Care and in compression, which then will drive growth in the future. So many favorable market trends benefiting both SGA and BSN and the 2 companies together. Now I move over to an overview of BSN Medical. And as I already mentioned, it's a very innovative company with well known brands such as LEOKOPLAST, Q2MEL, JOBST, DELTA and ACTIMOVE. I'm sure you've used or seen these brands at some point or the other. BSN has sales in more than 140 countries with the top three countries being Germany, U. S. And France. It's a company that has a financial profile of high cash conversion with a very asset light business model, which is exactly what we're looking for from an SA perspective. And the general attributes of BSN that we really liked when we did our due diligence and when we made our overview of the Medical Solutions market is the company's excellent go to market with a large sales force, actually around 1600 sales reps, which enables a range of excellence models. And we know from our own Inco business that it's so important to have tailor made go to markets for different channels and different customer categories and different reimbursement structures. We also like that this sales force has a direct interaction with key influencers and prescribers like nurses and physicians. And this is an area where BSN complements SCA's marketplace in an excellent way. One area which is very important for us is BSN's strong R and D capabilities and pipeline, and there are a number of areas that are quite overlapping for both companies and the 2 areas I'd like to mention is R and D for improved skincare and also absorption, which are 2 prioritized areas for both companies. And specifically BSN have a very attractive pipeline in a number of fast growing market segments like Advanced Wound Care and Lymphology. During our due diligence and as we've been getting to know the company better, we also understand and appreciate that BSN has a high very good know how in technology and in operations. So even though it's very asset light, it's a very sophisticated supply chain that we have learned about. Product overview to show then the different areas where BSN is active and I will not go through all these in detail. Starting with Wound Care, which is then over 1 third of the business typically divided into Acute Wound Care and Advanced Wound Care. BSN has a very strong market presence in acute wound care, as you can see being number 2 globally and number 1 in Europe. In Advanced Wound Care, BSN offers a number of very innovative and fast growing products, and this is a very important growth platform that we look forward to develop together with BSN. Compression therapy is an area that's really benefiting from the growth drivers I mentioned earlier, and this is approximately onefour of the business. And compression typically consists of stockings, medical compression garments, bandages, wraps and other compression products. And as you can see also here, BSN has strong market presence in both these areas. And finally, Orthopaedics accounting for a little over onethree again, consisting of 3 different parts where BSN has strong market presence and strong market shares. And down at the bottom, again, you can see the brands that I mentioned before and that we all have seen in these different areas. Looking at the sales split, and this is from 2015, we spoke about the business areas. Looking at geographies, the sales split is very much overlapping with SCA sales splits. So a little over half of the sales in Europe and then 23% in North America and interesting platforms in Asia Pacific and Latin America. And this is good, having an overlap in these areas because that means that SA and BSN can really benefit from supporting each other's businesses going forward. Also per sales channel, it's a very interesting fit with BSN being stronger in hospitals and specialists and SCA, but also very much present in pharmacies and sanitary shops just as SCA with our INCO offering. So again, good opportunities for driving growth in both businesses. Now I'd like to move over to looking at the global medtech or medical solutions market more in general since I know that many of the analysts following SCA are not specialized specialists in this area, just to give a brief overview of the medical solutions market. And also where SCA and BSN is present. So what this slide shows is that RCA with our big and marketing position in incontinence products in wet wipes, it's very much at the left and the less complex Medical Solutions products, including supplies and disposables. While with the acquisition of BSN, we move up the value stream into products with higher growth and higher margins, such as wound care, compression garments and fracture management. But we're not moving too far away. These are still disposables. These are still products that we understand and products that are sold in the same way and to the same buyers and in the same channels as SA's products. So we like this. We wouldn't want to get too far out to the right here in one step because this I would perceive as too much of a risk. But these areas actually complement us in an excellent way. So an overview of where SGA together with BSN will be present in the medical solutions market going forward. And out of this market space, the addressable market is approximately €11,600,000,000 and wound care being the biggest one with around €5,300,000,000 of sales, orthopedics second and compression, the smallest one, but with the highest growth. And I'm sure some of you are also running and jogging and so on, are seeing more and more compression products all over. So we think this is an interesting growth area not only in healthcare, but also in the retail space. Moving on to Wound Care specifically, growth is around 4% and just to show the relative sizes here of the traditional wound care and advanced wound care where BSN today has very strong market positions in the traditional or acute wound care space, but with attractive and interesting growth opportunities in the advanced wound care area. Orthopaedics, consisting of fracture management, soft goods and braces and physiotherapy and BSN being present in all of these areas. And finally, the compression therapy market, which consists of 3 similarly sized parts: bandages, garments and pumps and BSN has a good presence in all these areas. So where are these products sold? And similar to incontinence care products and many of SGA's existing products, North America is still the biggest market with a healthy growth of 4% Europe, Middle East, Africa being close with CHF3.9 billion of sales, somewhat slower growth currently, followed by Asia Pacific and Latin America. So very good overlap actually with SCA's current market positions, as already mentioned. And we see opportunities here for accelerating growth in all of BSN's areas, both in the mature markets and in developing markets. And as you can see, in Asia Pacific, the growth is 5% in Latin America, even 7% as spending on health care increases. So interesting opportunities there. To sum up before handing over to Fredrik to talk about the financials, again, I believe that SA and BSN together has an excellent strategic fit supporting SGA's vision. It's a new growth platform for SGA entering into new and attractive categories. We see future industry consolidation opportunities in Medical Solutions, and we see that not only will we be able to grow in Medical Solutions in the BSN categories, but this will also support SA's global leading position for incontinence products. And as I mentioned now several times, the underlying market and customer characteristics are very same and also the customer offering channel presence and market access. We see a potential to strengthen BSN. Even though it's a very strong and successful company, we can add again the cross selling opportunities with our incontinence care products, our strong presence in health care and retail sales channels and SGA's extensive knowledge in brand building and not least, SGA's focus on digitalization, which will be important also for the BSN categories. Synergies are expected to be at least CHF 30,000,000 in 3 years' time and the synergies are primarily in actually revenue increases rather than cost cutting. So what we expect here is that as we get the full force of the 2 strong sales forces, we will be able to increase our top line at a faster rate. So with that, I hand over to Fredrik to talk about the financials. Thank you, Magnus. I will give a few details relating to the transaction and to start with Slide 19. The transaction is structured as a equity purchase and the price of equity is fixed to a value of €1,400,000,000 If the transaction would have closed at December 31, 16, we estimate that the total transaction value would have been €2,740,000,000 including an estimated net debt of €1,340,000,000 Total tangible capital employed and by that I mean tangible fixed assets and net working capital That amounts to approximately €310,000,000 and hence the total value of intangibles relating to the transaction 2.430. Out of this estimated amount, our preliminary purchase price allocation analysis indicates that approximately SEK960 1,000,000 of that is attributable to items such as trademarks, customer relations and the likes and that will be amortized over time. In the PPA analysis, these €960,000,000 requires recording of a deferred tax of approximately €270,000,000 So therefore, the total estimated goodwill of the transaction amounts to €1740,000,000 The estimated total annual amortization of the acquisition after completion is approximately €75,000,000 A more detailed analysis of course will be done in the course of the year, but this is the preliminary estimate. BSN is already prior to the acquisition amortizing approximately €45,000,000 and hence the total annual increase is estimated to be €30,000,000 If we turn to the next slide, BSN as you can see has over the years 2013 to 2015 grown with a compounded rate of approximately 9%. In the same period, adjusted EBITDA has increased by 4.8% and the slower growth in EBITDA has therefore resulted in lower margins. The reason for this decline in margins is partly due to increased investments in the period for future growth, including increased spending on R and D and strengthening of the sales force. And the other reason is due to acquisitions that have been executed by BSN in the period. These acquisitions have generally had a lower margin than BSN and this has resulted, of course, in a strong overall growth, but falling average margins. The company has worked a lot intensively with the integration of these acquisitions, thereby creating the foundation for future growth and of course also margin expansion. If we look at the pro form a 2005 SCA and BSN Medical, if you look at 2015 BSN had approximately SEK8 SEK8.1 billion of sales, SEK1.9 billion of EBITDA and SEK1.3 billion of operating profit. And this, as I mentioned previously, includes an annual amortization of around SEK 45,000,000 The EBITDA margins was 23.3 percent and operating margin 15.9 percent and return on capital employed including all intangibles on a standalone basis amounted to 7 point 7 percent. If the transaction would have been completed in January 1, 2015, SGA's EBITDA margin would have increased with 0.4 percent whilst operating margin would have remained at approximately the same level due to an additional CHF300 1,000,000 of amortization of intangibles. ROCE would have declined with around 1.3% to 10.7%. We look at some other financial information as Magnus already alluded to the transaction is fully debt funded and we have committed acquisition bridge financing in place. We have a finance policy stating that we should retain solid investment grade rating and we remain fully committed to this policy. Of course, the bridge funding will be replaced as we go along here in the course of next year with ordinary funding. Transaction costs amount to approximately €25,000,000 and out of that advisory fees including legal and general advisory is SEK 15,000,000 and then we also have an insurance for additional SEK 10,000,000. The SEK50 1,000,000 we will record as items affecting comparability already this year in Q4 and the remaining cost during Q2 of 2017 as the acquisition is expected to be completed. And with that, Magnus? Thanks, Fredrik. To sum up, this is a value creating acquisition for SCA with an excellent strategic fit with SCA's vision to improve well-being through leading hygiene and health solutions. It gives us a new growth platform through the entry into the medical solutions market. We see future industry consolidation opportunities and the opportunity to strengthen our already leading global position for incontinence care products. We also see the possibility to drive and strengthen the medical business already managed by BSN today through coordinating in a positive way with the TENA brand, a leading incontinence care brand and with the support of SSA's strong presence in health care and retail sales. We believe that with SA's extensive brand building expertise, we can further strengthen BSN's already very strong brand portfolio and also strengthens BSN's presence in the digital space. And again, this is a company with high cash conversion and an asset like business model, which is exactly what we're looking for and also a business which is very resilient to macroeconomics and that has strong fundamental growth drivers that will continue to be strong and actually even stronger into the future. So Josephine, time for questions. Thank you, Magnus and Fredrik. So please, operator, let's open up for the questions from the telephone. Thank We have a question from the line of Stellan Hellstrom from Nordea. Please ask your question. Yes, good morning. Firstly, I had a question on the synergies here. If can give some kind of indication how much is sales synergies and how much is cost synergies? Thanks. The sales synergies are higher than the cost synergies. Okay. And you wouldn't give any more detailed split? No. Okay. And then I'm just thinking the maybe you went through this, but the split on how much is business B2C and B2B? Yes. Depending on how you define it, we have that on Slide 11. And actually I could even jump back to that slide here in the presentation if you have it in front of you where you can see the sales channels where hospitals and specialists are B2B and sanitary shops and pharmacies is actually mostly it depends actually. So I'd say it's a good mix of B2B and B2C where SSA and BSN together are have a strong presence in both channels. All right. Very well. Then just also a question on the working capital. Maybe that was also correct. I don't know if you could just give some kind of idea about that, Sachs? Yes, I can do that. I mentioned, Stellan, that total tangible capital employed is roughly SEK 310,000,000 that's the estimate at the end of December 2016 and slightly more than half relates to working capital, net working capital. All right. Very well. Thank you. Thank you. Your next question comes from the line of Jeremy Fialkow from Redburn. It's Jeremy Fialkow, Redburn here. I've got a question on the historic growth of BSN and some of your future expectations, particularly with regard to pricing. Can you talk if you look at the components of BSN's growth, can you talk about, 1st of all, roughly what its historic organic growth has been? And then secondly, what the pricing element within that has been? And then secondly, what your expectations of future pricing of the BSM business? And just put that in the context of your own institutional incontinence business, which is typically sees a certain element of price deflation every year? Thanks. Sure. So the underlying net sales of this last time period since 2013 has been around organic sales growth has been around 3%, and there is an underlying price pressure in these categories similar to what we've seen in Continence, even though price pressure is stronger in the incontinence care business than what we can see in the different categories of BSN. So price pressure, but less so than for incontinence care. So actually a healthy underlying volume growth over this period. Thanks a lot. Did that answer your question? Yes, yes, yes. I guess you're assuming similar sorts of rates of pricing attrition going forward? Yes. It's very similar to incontinence care. This is something that's been going on for a long time. So we don't expect any changes going forward. Thanks. Thank you. Your next question comes from the line of Carey Rinter from SHB. Please ask your question. Yes, thanks. I have 2. Firstly, could you just talk a bit about the BSM Medical's management? How long have they held their positions? Are they EQT appointed? Or have they been there even before when EQT bought them? And how have they been incentivized in the recent years? And how do you make sure that you retain the key employees after the transaction has been done? Thanks. Okay. So the BSN management team is a good mix of employees with a very long history within BSN and newly appointed members who add new competence. And as I mentioned earlier, this is not a cost synergy case. But for us, it's very, very important to retain all the competence in BSN. And this is in every area from sales and marketing to R and D to, of course, supply chain and other parts. So we have a plan for retaining the BSN management and BSN employees in general. And of course, we believe that being part of SCA is a very attractive opportunity for all employees in BSN. We have staff in SA that are very, very dedicated and stay with us for a long time and appreciate working for SCA. So I hope that BSN staff will feel very, very welcome to SCA and that our merger will be done in a way to the benefit of all employees. And of course, the specific retention agreements, we cannot discuss at this point in time. All right. Fair enough. Then few numbers questions. Firstly, this return on capital employed of 7.7 percent that would indicate a capital employed of SEK 1,800,000,000 Is that a sort of a pre or post Has that been calculated with this deal? Or is it a sort of a pre deal? That's a pre deal. And this is with the intangibles that are on a standalone basis. So what's basically in BSN today. So the impact you see there is also another 0.3% and of course some more capital as I mentioned before. So that's why the total impact is what it is. All right. And then the cost of debt that you're taking over, is that a what kind of interest rates are you paying on that debt? Yes. Actually, we don't take over debt. So the debt will be repaid at point at time of acquisition. And that's why we also have secured funding with the committed facility. All right. That's helpful. Thank you. Thank you. Your next question comes from the line of Oskar Lindstrom from Danske Bank. Please ask your question. Yes. Good morning, gentlemen. You talked about the BSN Medical acquisition being a platform for further acquisitions in the medical field. Do you primarily foresee those acquisitions being sort of other wound care products companies? Or do you have a wider sort of scope when you're looking at the medical field that you're now entering? Yes? I think it's very much early to speculate about this. We're super happy about the acquisition we've done today, and we will spend the next couple of years integrating this in a good and successful way. And further constellation opportunities are further into the future. So for now, we're very happy with the acquisition that we are announcing today. Your next question comes from the line of Celine Pannuti from JPMorgan. Please ask your question. Yes, good morning. My first question is in terms of the pricing dynamic, how much of these are reimbursed products and how much are paid by the patients? And you didn't want to comment on the cell synergy versus co synergy, but roughly speaking, if I expect a high portion of sales synergy, that's quite I mean, I have about 15 percent of sales synergy on the acquisition sales. Does that number look realistic? And if so, can you explain exactly where is it coming from? So you mentioned expansion into retail. Is that one angle? Or the geographical expansion Since this is a big part of the synergy, I would appreciate if you could comment. Okay. Your first question, which proportion is reimbursed or self paid? Actually, I don't have an answer to that, so we'll have to get back on that. But it's a good and relevant question. So sorry that I can't answer that. When it comes to the synergies, we have said at least CHF 30,000,000 and that a larger part of the synergies are from revenue expansion rather than costs. And of course, one reason for stating this is that it's difficult for us to estimate cost synergies also at this point in time since this is quite a different business than the businesses that we are operating today on the cost side. And looking then at the revenue synergies, we have estimated today that most of it will be coming from cross selling in existing geographies so that the BSN sales force would, where it's relevant, sell incontinence care products and vice versa, that SCA sales force both in retail and in business to business would then sell some of BSN's assortment. Okay. Is there I mean, is that easy in terms of the specificity of the product for 1 sales force to sell other product? I really don't know in terms of the knowledge of the product. Actually, it's quite common or rather more common that our competitors in the incontinence category are selling these types of products than not. So we, as SA today, are almost the exception selling only incontinence care products. And then last, how are you going to structure the reporting? I mean, is that going to be a new division? Or are you going to put it into Personal Care? Yes. Maybe I can answer that Celine because we or rather I cannot answer because we as you know, we're also engaged into spinning off or split of the company in the Forest and Hygiene division. And we will come back during the course of early part of next year to actually disclose how we intend to do this. And this is, of course, part of the equation. So we'll wait with that answer. But of course, we're eager to secure a good transparency and you to be able to analyze the company. So hopefully, we'll come up with a good proposal. Thank you. Thank you. Your next question comes from the line of A quick follow-up. You mentioned that U. S. A. Was the 2nd largest market for BSN. So I was just curious that how do you see that? What kind of an organization they have there? And could that help you in your incontinence efforts in North America when it comes to the institutional side of the business? That's my first question. Thanks. It's a bit early to go into that level of detail. But in general, also in North America, we are working with many of the same distributors and in the same channels. Okay. But that's the level of detail that you want to give now? Yes. I think we need to close this transaction and get to know BSN in more detail and work together with them to develop how we can strengthen the offerings of both SC and BSN in different markets going forward. And it's quite specific per market and difficult to actually give that level of detail today. Fair enough. And then just out of curiosity, you mentioned that you have been looking at Healthcare since 2011 'twelve. So just to understand why you bought this or why you are planning to buy this company and why you maybe didn't buy something else because in early 2015, Sederov was sold to Orkla. And it's a clearly smaller company, but it was sold at clearly lower multiples. So just to help us understand the decision making process, why did you chose to not buy that company and now you chose to buy BSN instead? If you can give some indication of the thought process. Of course, in general, there are always high uncertainties around M and A. So it's not that you can pick and choose always exactly what you want. But BSN has definitely been at the top of our list for a couple of years, and this is because it's big enough to be a new growth platform for us. A much smaller company wouldn't make that difference to establish a completely new growth area for us. The different categories they're in are very exciting, both the ones with very high growth like Advanced Wound Care and Lymphology, but also the ones that are more stable where we see that SAES expertise in branding and in retailing and the digitalization can actually support further growth in those areas. And so it's the right size. We like the categories, and we also like the categories because it's stepping up the value chain compared to where we are with the SEA categories today, but it's not taking a 2 big step. So we think we're limiting the risk here with this sizable acquisition. We also like the strong sales force and the resilient financials that even in good and bad years, BSN Medical has been performing in a very resilient way financially, which is important, of course, for our business model and our commitment to our finance policy. Thank you. Your next question comes from the line of Charles Manso from Societe Generale. Please ask your question. Yes, good morning. I believe you said that the organic sales growth has been about 3% and the underlying growth of the category is around 4%. I mean, it's not a great difference, but maybe you could talk about which segments BSN is maybe losing a bit of share, where and why and what SCA can bring to the party to And thirdly, how important is innovation in the BSN sort of model versus SEA's hygiene category? Thank you. Okay. So starting with your first question. The 3% organic growth of BSN is more a matter of mix than share as we can see it. And in recent years, BSN has focused very much on the fastest growing segments of their sales, which is then Advanced Wound Care and Lymphology and Parts of Fracture Management as well and are seeing very, very good growth figures in some of those areas with slower growth in some of the more traditional areas. However, those traditional areas we see as very attractive from SA's point of view and an opportunity to support growth in those areas. So rather a matter of mix than share maybe. Moving to your last question before handing over to Fredrik about the cost of debt. Innovation is super important to both SEA and BSN and absolutely essential to the long term success. BSN has a higher proportion of sales invested into R and D than SCA has. And we see that with the strong finances of SCA, we can support that going forward and also especially in the areas where there's a joint interest in further R and D and innovation. Yes. The question on cost of debt. At completion of the transaction, we will all debt will be repaid. So the current cost of debt for BSM is of no relevance going forward. And of course, we will initially fund with we have a bridge funding facility in place, a committed bridge in place, And then we will replace that bridge over time with our normal funding. So cost of debt will be in line with what we have in SCA, of course, going forward. Thank you. Your next question comes from the line of Ivan Brari from Perjurens. Please ask your question. Hi, good morning. I wanted to ask you about the tax rate of BSN, please. Yes. We have made assumptions, but no detailed assumption just yet. So we will come back to that when we have a more specific and exact distribution of debt, etcetera, during the course next year or first half of next year? We have no further questions on the phone lines at this time. Thank you. So thank you very much. And then let's conclude today's conference, and we wish you a season greetings to all of you. Thank you for calling in today, and goodbye.