Good morning, ladies and gentlemen. Thank you for waiting, and welcome to the SKF acquisition of Kaydon Corporation. At this time, all lines are in a listening mode until we conduct a question and answer session, at which point you can press star followed by one on your telephone. I'd like to remind you that today's conference call is being recorded on the first of the fifth of September. I'd like to hand the call over to Ingalill Östman, Communication Director for SKF Group. Please begin your meeting, and I'll be standing by.
Thank you so much. Good morning, everyone. This is Ingalill Östman. Before we start the conference, I just want to introduce who is represented from SKF here today. It's Tom Johnstone, President and CEO, Henrik Lange, Executive Vice President and CFO, Marita Björk, Head of Investor Relations, and Rebecca Janzon, Director, Press Relations. By that, I'd like to hand over to Tom, please.
Thank you so much, Ingalill, and good morning, everybody, and welcome to this this conference call and what is a very good day for SKF, a very good step forward for SKF in delivering on our strategy, and I believe also in delivering on our financial targets. Now, we have put a presentation on the website and on the link to the conference call, et cetera. So therefore, you will be able to follow slides that I will go through on that as I go through the presentation. Give you a few more facts about the company, a few more bits of information of how we see the value that brings to SKF and how we see things going forward. And, of course, a few comments on the transaction. So let's start, if we could.
I want to go into the slide presentation, and after the safe harbor statement, there is a slide that says Kaydon is a leading manufacturer of bearings and other custom engineered products. And then we move on to Kaydon key facts, the next slide there. Kaydon is a company that is over 70 years old. It's a company that has a turnover of last year of $475 million, headquartered in North America, in Ann Arbor, Michigan, and over 2,100 employees. Its business, Kaydon, really fits very well with the SKF Group. It's got three areas of business. It's got friction control products, which is 54% of the sales. And I'll come back in detail to what's in each of these areas and the end markets they sell.
The friction control products, very bearings related, 54% of sales. Velocity control, which is about, gas springs, industrial gas springs, industrial shock absorbers, dampeners, which is, 23% of the group, and in specialty products, which is primarily rent and sales and filtration, another 23% of the group there. If I switch to the next slide, there you see the split of Kaydon's business. If I take from a geographical viewpoint, 62% of their sales are in North America, 24% in Europe, 12% in Asia, and 2% in other areas of the world. And I think that's good because it hits two very important points for us. One, it helps improve our position in North America.
And secondly, we have the opportunities to take the Kaydon products worldwide, using our distribution network, using our sales network. That's an area the group has already started working on and has invested in resources over the last years to do things, but now we will be able to work on that and accelerate that through our organization. From an industry viewpoint, you see, the automation and robotics is the largest area, 18% of their sales, 13% in power generation and 13% in aerospace, both. And then 6% military, then heavy equipment and a number of different areas. Again, from an industry viewpoint, some very close match to what we do in SKF.
However, when you look at certain industries, and we'll talk about that later, they have a better position in certain industries than we have, and that, therefore, will help us, move into, other industries or strengthen our position in other industries. And make us better able to serve our customers in these industries. Let us move to the next slide, which is, headed, Kaydon, leading market position, strong brands, attractive end markets there. And let's go through each of these. So friction control. What is in friction control? Primarily, there are four. Under the Kaydon brand, there are, ball bearings, roller bearings, thin section bearings. There are Slewing Bearings. They're under the Cooper brand. They have Split Bearings, and then they have also, precision balls in that operation, under the ITI brand.
The majority of the business, of course, is in the bearings area there. The split bearings, the slewing bearings, the thin section, and standard ball and roller bearings there. Major markets for them, if I take slewing bearings, they work, of course, in renewable energy, but also into areas, for example, like medical and into standard bearings there. The split bearings, heavy industry, very much industries like steel, like marine, power industry, heavy equipment, industrial equipment as well. And of course, then the thin section ball bearings, they go in also to areas like medical as well as many industrial applications. So a number of applications there, again, complemented with SKF.
Moving to the next area, the velocity control products, which I mentioned, the gas springs, industrial gas springs, industrial shock absorbers, and dampening devices. That's a business we've grown over the last years. We started very much with the ACE business, which they acquired some years ago, long, long time ago. And over the last three years, they've acquired two other companies, both Hahn two years ago in Fabreeka, last year, which strengthened their assortment there. These type of products are used in material handling, robotics, machine tool, medical, et cetera. Also, it's interesting to note that that part of the business has a much more European bias than the general business there, because also of the acquisitions that they've made there.
And then the last area, specialty products, which is in rings and seals, which they have, and the filtration equipment. Major markets, aerospace, and areas like locomotive, process industries, etc. And it's sort of split 50/50 between both filtration and rings and seals. And one of the things they've been working actively on over the last years is to build an environmental services portfolio in this area, building on their filtration knowledge. And again, that fits well. I'll come back to that later. Next slide, the global manufacturing footprint. They have a strong bias of manufacturing in the USA, with 13 facilities in the USA. They then have one in the U.K., one in Mexico, two operations in China and two in Germany, which came through the acquisitions there.
So that will strengthen our manufacturing footprint in North America, and of course, then we have the opportunity in the rest of the world to take and develop the business there. Next one, onto the financial track record. I think they've got a solid financial track record. They have been one of the leading performing industrial companies for a long, long period of time, delivering good, solid results over a long period. And that's reflected, by the way, in their share price, where you obviously in the stock market value that strong performance that they've had there. Sales development has been pretty steady the last few years with the changes in the marketplace.
Their EBITDA margin, EBITDA margin dropped a little bit as they've acquired some companies and also been impacted by some changes in the mix in the business. And then they've had a strong cash flow generation there, a robust cash flow generation in total. I don't want to get into more details on their financial results at this point in time, because we must remember, we are still competitors, and the deal is still not closed. But I think these figures, and there's a lot more information available for them on their website and on their filings as well. So a little bit. That's a little bit about the facts of Kaydon. Now, let's move on to why is Kaydon a good fit for SKF?
Why, why is it one of the companies that we've looked at for a long time? We've long admired them as a company, and we've long seen the opportunities that they bring to strengthen our operations. Let's go through that. First of all, I think this is a strong addition to the SKF Group. It's a leader in a number of product categories, split bearings, thin section bearings, and of course, some of the other highly engineered products. They have very well-recognized brands in the market. I mean, if you go in, for example, in split bearings, the Cooper brand is synonymous with the split bearings in the marketplace. They also, Hahn is very well recognized, Fabrica is very well recognized, Purafil recognized, and they target high value global market segments. Their product offering is very complementary with SKF.
For example, even when we look at areas like sleeve bearings, we don't go into the same industries. We have different assortment there. So it's very, very complementary to our offering there. And they target a number of segments, where we maybe have not quite a strong presence. Switching to the next slide, we see that, bringing that into SKF really supports our objectives to become a, and continue our journey to become a knowledge engineering company. As I mentioned earlier, this will expand our manufacturing footprint in North America and, and support the strategy we've got for North America. As you know, I've said for some time that I believe strongly in the improving industrial environment in the North American market.
It's been a little bit slow in starting during this year, but I believe going forward, with the steps it's taking of more industry in North America, with the opportunities from, the energy costs are going to bring to them, that we're going to see a good development from an industrial arena in North America. And this, combined with a number of other steps that we've taken over the last years, we must remember, it's only a few years ago, we acquired, Lincoln, we've acquired the PEER company and GBC from a second brand, which is Chinese manufacturing, but a North American business. We've opened solution factories in the North American arena. We've invested in our existing operations, et cetera. I think this helps support very much our emphasis and our strategy for North America.
Secondly, the product portfolio will enable us to serve our customers in a much better way. It will widen the assortment. This sort of fills gaps in our assortment, and complements what we've got just now. From a service viewpoint and solution viewpoint, the technology they bring in will enable us to develop even more solutions, and from a service viewpoint, very important. Take, for example, filtration. Filtration is very important from an environmental viewpoint, but also for the performance of facilities. With our lubrication business, with our services business, filtration is a natural link into us and something we've been looking at, for some time. So this will strengthen our service offer to the marketplace.
Our distribution network is the, in my opinion, the best industrial distribution network in the world, and we will be able to take their products and help make them available to our industrial distributors on a global basis, therefore changing the sales footprint of the Kaydon product portfolio from where it is today to a more global footprint there. And I think that's exciting. And as I said earlier, that was a journey that was already started by them, and it's a journey we can accelerate very much with our operations there. And the people we've met, we've been very impressed with the management, and I think you see that. I have always said that companies that perform well are managed very well there. So we've seen good managing, good competent individuals in their organization.
Switching to the next slide, and you actually look at the ones which is by five, the five technology platforms that they have. And you see really the product portfolio that Kaydon bring in actually fits four of our five platforms, and actually you could say five of them, because the filtration actually runs right between lubrication and services. The sales business that they've got in the ring business for the aerospace supports our sales area. The bearing assortment I've mentioned already. The gas dampers, the shock absorbers, actually are very linked to our mechatronics and linear actuation business. And already today, we market some of these products to the marketplace, so this will strengthen our ability to do that there.
As I mentioned earlier, the services that they bring with filtration and with the product assortment, there will help us, in total. So really, they've hit the buttons in a number of our technology areas. They strengthen our product assortment, strengthening our services business. So with all these positives, I'm sure you're saying we must have lots of synergies, so within this. And I think we see real synergies, and we see it in two areas there. First of all, sales synergies. We believe as we, over the next 1-2 years, ramp up the knowledge of our organization to the product portfolio, service portfolio that Kaydon brings, and also, put it the other way, ramp up the knowledge that Kaydon's got with the industries we're less represented in.
They have their people with the contacts there, that we will take our products to their organization, their products to our organization, and actually leverage the go-to-market in a good way to better serve our customers, give them a better product portfolio there. Our distribution network, I've already mentioned, will be good. So when we look at that, we say, as we go out, it'll take 1 or 2 years to get that going, as it always does, because you have to build the product knowledge. But going out in a 5-year period, I expect our sales to increase for their product portfolio by SEK 50 million, which is about more than 10% increase in their sales just now.
From a cost viewpoint, they make many products that even if they're not the same as ours, use similar raw materials, components, et cetera, that we get. So we see cost synergies, cost and sourcing. If they're buying certain components from certain sources cheaper than we are, there'll be benefits to our organization and vice versa there. So sourcing benefits are very important for us. We must also realize that there is a cost associated with being a listed company with regulations, et cetera. And of course, as we are able to move forward and complete the acquisition, then these costs will go away as a part of the SKF group. And thirdly, we'll find ways to integrate the corporate structure within the organizations.
We have opportunities, and they've got very good, strong management people. We have opportunities to utilize this and avoid, for example, other steps that we may take to bring in people. So, together, I see that being a synergy of around $30 million, and we expect to get that in maximum, 3 years. And that's an important step that we're taking and a high focus for us, just now. Let me switch on to there. So synergies are good, good in sales, good opportunities in, cost. Let's switch on to the transaction highlights. I won't go through all the major details that you see it there.
The price that we have agreed is $35.50 per share, which is just over 20%, 21%-22% premium on their current market price and their average price over the last 30 days. It's about 12.7 times their EBITDA, long-term EBITDA there, and it will be accretive to SKF earnings in year one. The total cost, the total transaction value for us, $1.25 billion, which also includes us taking over their debt. What's happening now is we will be preparing and putting in place a tender offer to the shareholders of Kaydon that will go out on the sixteenth of September. That tender offer, of course, is open to customary terms and conditions, regulatory approval, et cetera, et cetera.
And then, upon completion of the tender offer, if we've got the majority over to us, we will then complete that using the structure of a short-form merger there. That should enable us to close this in Q4. We believe that this price represents very good value for the shareholders of Kaydon. It represents the value where they are just now in the business, where the market has valued the current price. It also recognizes the value they bring in to the SKF group. But it's also very good for our shareholders, because this, as I say, will be accretive for us from year one.
As we develop and move the synergies, the combination of their technologies, their people, their market presence in certain industries with ours, will be good for our shareholders and will help very much us deliver on our financial targets and deliver on our objectives and strategies. Next question: How will we finance the deal? Well, it's valued, as I said, at $2.5 billion. We will pay it through cash and our existing funds and credit lines there. That will, what we'll do to pay upfront. But going forward, of course, then, Henrik and the team will work on longer-term long-term debt financing after the closing of the deal there.
Last but not least, from a financing, I just want to say, you know, we put clear criteria, as you know, on acquisitions, which is they should be EPS accretive in the first year, it should cover their cost of. within two to three years, including all the PPAs, et cetera, that's in there, and this does that. Absolutely meets the financial criteria. So it meets our business criteria and our financial criteria. Let me close off then by summarizing that. I see Kaydon as a real positive addition to the SKF group. It strengthens and complements our existing product and service portfolio. We bring into SKF some very good, well-recognized, leading brand. It gives us complementary geographical coverage and, as I say, strengthens our manufacturing base in North America, and it supports our growth strategy for North America.
We do see significant synergies, SEK 50 million in sales and SEK 30 million in costs, in a relatively short period of time. The performance of the company and the margin it operates is around 16%-17% EBIT margin. It's running the adjusted EBIT margin that absolutely is in line with our targets. As I said earlier, I think it's a good return for shareholders of both companies. We bring into SKF also a strong management team that will further help us develop our business. And I think another thing, for both groups of employees, employees of Kaydon and employees of SKF, it gives more development opportunities and mobility opportunities for those who wish to develop themselves going forward. All in all, as I say, I think in summary, good acquisition for SKF.
We've still got some ways to go through. The offer is not closed. The tender offer will go out on the sixteenth, and then we have to go through that offer process there. But I think it's absolutely in line with our strategy, in line with our financial target, and supports what we've been saying for SKF, we really want to kick SKF going forward. With that, I think I can close. I hope you were able to follow that going through, but there's a lot of material on the website, this presentation on the website for it. Let's switch back over to questions, Ingalill.
Thank you, Tom. So, before we close the conference, we have some time to take questions, so please go ahead with your question.
Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, please press star one on your telephone, and to cancel your request, you can press the hash or pound key. Once again, that's star one to register your question and the hash or pound key to cancel. There will be a short silence while participants register their questions. The first question comes from the line of Erik Øwre-Johnsen. Please go ahead. Your line is now open, and I'll see your company.
Thank you. Erik Øwre-Johnsen here with ABG Sundal Collier. A couple of questions, three of them. First of all, on the military exposure, you highlight that it's around 6% military exposure in Kaydon Industrial split there, but if you include military aerospace, isn't it a bit higher, more than 10%? If that's correct, then how do you look upon acquiring such assets?
Yeah, I actually think if you bring in the military exposure in the aerospace, I think it's up to total around 15% of their business that goes to the military. It goes in a variety of different aerospace programs, engine programs, et cetera, and other military equipment there. Remember, 85% of it is non-military as well. So even if there's 15% military, 85% is non-military. In the big picture for SKF, it still doesn't make SKF a very strong military business.
Okay. The next one, just have a look at this now. It looks like Kaydon's Q4 performance was quite strong here on both sales and profitability development. Could you help us understand a bit what's behind that or cost structure here, what percentage of aftermarket or services it did, et cetera? And then, the last question, if I understand correctly, they've had some issues with their wind bearings business and are currently restructuring it. What is it that's happened there? Thank you.
Yeah, the wind, yeah, yeah. The wind business, they took a write down last year in their wind business to write down certain assets in North America, due to the reduction in the total wind business in North America. With the PTC still now being reestablished in USA, the wind business is developing better, as they said in their release. Their restructuring is gone absolutely according to plan, there for them. If you look at their business over time, yeah, they've had a change in mix in their business over the last year. They've brought in other businesses and which has impacted their margin.
But we do see that, and you can see that actually in the results, that they've seemed to have bottomed out, and we see positive opportunities going forward for them. I don't want to dig into too much specific detail in the results right now, because of the fact that they are—as I say, we are competitors still as well in the market. We need to close the field there. But I can say we are comfortable with the work that we've done and the actions that they've put in place in their business to develop it and move it in the right direction going forward.
Could you give any indication of the relative share for services?
Oh, yeah. The services business at the moment is not huge in that, yeah. I think it's the services business is an area they've been building up, and I talk pure services here. They, they've got distribution business as well, but the services business is one they've been building up. I really see that their environmental services with the filtration, et cetera, fits perfectly with our Beyond Zero portfolio. And as I said, filtration is an area we've looked at for quite a bit of time, both for lubrication and for services, to help us from an environmental viewpoint. So this fits in pretty well.
Okay, thank you.
Next question, please.
The next question comes to the line of Nick Wilson. Please go ahead. Your line is now open.
Hi, good morning. It's Nick Wilson from Espírito Santo. Tom, I know it's very early days, but, two questions related to the synergies. Number one, just overall confidence, obviously, in achieving this and the opportunity maybe to achieve some slightly faster than kind of three-year on cost and five-year sales. And then the second question, in terms of the $30 million cost synergy benefits. Can you or are you willing, I know it's early days, to try and get any kind of split between simple, corporate head office savings, et cetera, versus maybe plant rationalization and some granular detail on that?
For sure. How confident am I in the synergies? Yeah, I'm confident. We spent quite a bit of time looking at the opportunities, and especially in the cost area, we can see the areas that we see real opportunities there. I don't want to split down the three elements at this point, but as we go forward, be clear, I can give you indications of that, as we close and we do other things, I'll give you a little bit more detail on that. Can we do it a little bit quicker? Hopefully, there, but I think, if we've got certain things in purchasing, it may require certain approvals and certain changes there that requires customer approval. So make it a little bit.
That's why I look at the 3 years timeframe there, but I'm confident in that there. When it gets to the sales side, the sales side, I must say, as we look at it, as we look at the portfolio there, I think the $50 million is a good figure and is one that we will be able to deliver on, absolutely will be able to deliver on. I can see the opportunities already. It's an area we've been looking at actually for some time, these products there, how could we do something there? Because we see the market opportunity globally. As I said, also, they see that as well, the opportunity globally, because they've been investing in people.
There is a demand, there is a need, and I think we can strengthen the work they've been doing and accelerate the work they're doing. In short, I'm confident that we can deliver on both of these areas, and I'm confident we can deliver in the timeframe. If we can do it faster, we'll let you know.
Okay, thank you.
Thanks. Next question, please.
Next question comes from Lana Paderfolin. Please go ahead and announce in your company.
Yes. Good morning, Handelsbanken Capital Markets. On the coming back a bit about the synergies on the sales side, you mentioned, Tom, that this, I mean, distribution synergies are sort of on the way. From my understanding, I mean, they have a pretty decent distribution network, at least in North American market. Do you have any split on what's through distribution for Kaydon as a whole? And in that question then, is this to take the products abroad that is the most dist-- the immediate distribution sales synergy?
Finally, I would say, if you look at the they acquired this Fabrica not long ago, and I mean, it's a small versus a small business, but have you any opinion about the market position, the market share in this and in that total industry, so to speak?
If I go in the first one, there, there are two ways the distribution will work. We see, as you rightly point, the Kaydon Bearing business in North America is well recognized. It's in the distribution, et cetera, there. I think there are opportunities to further strengthen, for example, the Cooper business into North America, but also the Kaydon business globally there. And if you also look at the sales, they don't have a lot of presence in a strong presence in Latin America. We have opportunities in East Europe, we have opportunities in other parts of the Asia there. So it's distribution.
There will be some of the European into North America, due to our position and our ability to serve the distributors there, but a lot of it will be taking their products from North America into the global distribution area. I don't have a split that we can share. They have not shared that information publicly. I don't want to share that information publicly at this stage. When it goes to Fabrica, yeah, I mean, Fabrica and Hahn, if you look Fabrica, Hahn and ACE together are pretty good businesses, very complementary businesses. Hahn and Fabrica are recent acquisitions in the last couple of years. Again, they have not shared that. I don't want to give out market share information until we complete the business.
Okay. And maybe Henrik, hi, on the cost synergies, is there anything about your financing and their financing in that, or is it sort of above that in the turnaround?
No. No, no, not, not, not as of yet. They, they have financing that we will take over, of course, and there might be an opportunity there, but otherwise, no.
But that's not in the 30?
No.
No. Okay, that's fair. Okay, I'll get back in line. Thanks.
Thanks, Peter.
Thanks. Next, please.
The next question comes from Marcus Sherling. Please go ahead and announce your company.
Hello, Marcus.
Hello, can you hear me?
Yeah.
Yes.
Hi, Marcus Sherling here with Morgan Stanley. So first of all, you say that you have followed this for a long time. Just, I guess, what made the deal come together at this point in time? That's my first question. The second is on the ownership structure. Do you have gotten any approvals from any key shareholders already? And then in terms of overlapping products, is it all complementary, or do you have any overlapping products? And then on just a housekeeping question, will this be part of industrial strategic industries?
Okay.
Thank you.
Why now? I mean, it's a very good question, why now? It's a company we've followed for a long time. We've seen them. I think just the opportunity was right at this moment in time, both in their development of their company and where they see their company going and where we see relative to our North American business. There's no specific issue that triggered it. I think just that the cards on their side and the cards on our side just fell into place at this right moment in time there. Key shareholders, they were quite a diverse shareholder base. There's no big one dominant shareholder within there. I think the top 50 shareholders make up something like 70% of the shareholding. So there's a number of important ones there.
Have we had direct contact with them? No, we've not had direct contact with them. We are very, there's very clear rules in what you can and cannot do, and we follow them. In terms of overlaps, that process will work now going forward. In terms of overlaps, there is no significant overlap. So therefore, when you go into things, there's an earlier question on plant closures, et cetera. We don't see that, plant closures. In fact, what we actually see is the ability to use their manufacturing footprint in a good way, and maybe vice versa, for them to use our manufacturing footprint. For example, we have a couple of operations in Suzhou, China, but we have today 18 facilities in China.
Is there more we can do utilizing our facilities and their technology to bring into our operations today? That's something we'll explore in more detail. So there's no major overlap. We both, as I said earlier, make screw things, but they're different sizes or different industries that we target there. In terms of housekeeping, very good question. I should have mentioned that. We will keep it at this point in time, outside of the three business areas, from a reporting viewpoint. The logic behind that is to drive the integration into SKF. The introduction into SKF is to ensure we deliver on these key, especially the cost, targets there. But of course, there'll be links in to SKF, so there'll be purchasing activities underway jointly between the operations.
We will look at how we utilize the sales channels between both organizations there. Is it best to take this through their sales channel or through our sales channel? How do we develop that going forward? We feel, though, to get our arms around the company and to really bring it into the company in a good way, we will set it outside of the 3 business areas in total, but we will work to drive the synergies in the go-to market and the synergies in the purchasing specifically, there. And then going forward 3, 4, 5 years, let's see how things develop. Let's get things moving first.
Okay, thank you.
Welcome.
Thank you. Next question, please.
The next question comes from the line of James Moore. Please go ahead, announcing your company.
Yeah. Hi, Tom, Henrik, Ingalill, Marita. It's James from Redburn. I've got a few questions. I've just looked at the Kaydon financials for the last decade, and I see that between 2003 and 2008, the EBIT margin averaged 23%, and now we're at sort of 16-17, and you mentioned mix. My key question is, should we expect margins before synergies to pick back up to historic levels? Or should we keep them flat and just add the $30 million of year three synergies to that, are you getting back to 22-23? So I'm just wondering whether 22-23 is the year three thinking, or whether it's beyond that because of some underlying pickup. Just a question on wind power. How much of the 13% of power gen is wind? Is it all wind? And what proportion is geared versus gearless?
I'm just thinking of the structural risk there. Do you have anything on PPA? And just finally, if it's going into other ops with GBC and Peer, can we assume Kaydon will also operate under their own brand in the same way?
First of all, last one, we'll keep the brands. We'll keep the brands there, but we'll link them very much to SKF. It won't be. It will not be like Peer and GBC, because Peer and GBC are second brands for us. They will be brands that will be more like what we also still do with Lincoln, where we endorse the brand there. Because they have a strong product brand. If you take, for example, a slew ring, split bearings, Cooper is a strong product brand there. And going forward, we will endorse that. You know, Cooper, a part of the SKF group, will be there with it there. Going back, yeah, in margins, I mean, again, I don't want to give a margin forecast for the company going forward.
We need to complete the closure on that. We've looked in, of course, and we've got our views on things going forward, but I don't want to give of their standalone business a margin forecast going forward. That, that's up to if the management wished to do that at this point. So if you want to put your model in, how they are, plus the synergies, I would say stay at that place at this moment in time. And I can tell you, you won't be in the wrong side of the equation with that there.
Okay.
In terms of wind, their business is primarily in pitch and yaw, so that's not impacted by gear or gearless, their way, because it's pitch and yaw. So it's the bearings on the blades and on the turret that we've turned there. Not all of their business, but quite a bit of it is in the pitch and yaw arena there. And that's what's good for us, because in pitch and yaw, SKF is really not a player in the pitch and yaw business. We have some business, but we're not a big player. And if you look at bearing potential on a wind turbine, 50% of it, roughly, and that depends whether it's geared or gearless.
But if you take a broad, broad-brush figure, 50% is more in the Pitch and yaw, 50% in the rest of the bearings there. So this strengthens our ability, gives us a more complete offer for the wind turbine manufacturers there. How much of the power generation? They've got power generation in both areas. The majority, though, is into wind. Anything else? Did I miss something?
No. PPA, too early?
PPA, too early. Too early. We've got some provisional views on that, but a little bit too early on that, James.
Okay, great. Thanks, Tom.
No, thank you, James, and good to, good to talk to you.
Yeah.
Okay.
Thanks.
Thank you. We can take the next question, please.
The next question comes from André Kukhnin. Please go ahead, announcing your company.
Good morning. It's André from Credit Suisse. A couple of questions, please. Firstly, would you consider disposing any of the businesses that you're acquiring within Kaydon? And secondly, more broadly, this is clearly another step and sort of third step in the developing multi-brand strategy in bearings and other industrial components. Is there a pipeline that you have built up, and are there any further candidates, and how much further would you be interested in taking this in terms of number of brands and brand positioning across the different segments of the market? And also in terms of the leverage of financial leverage with SKF, if you're prepared to take.
And then just very final question, the share price reaction of Kaydon last year in February, am I right to think that was all wind write-downs related? And can you just confirm you're comfortable with that now being kind of resolved and worked through because you're offering a price that was pre the decline?
Yeah. Well, yeah, I would say wind, wind, we think they've worked that through. They've done a good job in the wind area there. They've written down the assets that impacted their results. They sized the company for a different size in the wind business, so I'm comfortable that's worked through there as well. In terms of disposal, we have no plans to close facilities, no plans to dispose. In fact, as we look at different areas, we can see the opportunities they bring into our platform portfolio. And as I showed in the presentation, you can see they fit in to a number of different platforms. So from that viewpoint, no plans at all. Going to this multi-brand, look, look, we must be clear that this is different to Peer and GBC.
Peer and GBC operate as a second brand, independent of the SKF sales organization, the SKF Group, with no link to SKF in the market. They're targeting a different performance level in the marketplace. Kaydon and Kaydon brands, that they bring in there, Kaydon, Cooper, et cetera, they are brands of the premier area operating in the same arena as the SKF Group, and we will utilize both the sales channels of Kaydon and the sales channels of SKF to go to market. So this is, these are brands because they have a very strong product identity that we will keep. Now, where we'll go going long, long term, let's see, but they have a strong product brand there. So it's different to the Peer GBC situation, in that they will be seen as part of the SKF Group.
They will be linked to the SKF brand. They will be in many areas going through the same sales channel that we've got there. But to your point, I'll. Do we have other things that we're looking at? We've said for some time that we would like to strengthen especially our second brand portfolio, Peer, GBC, and others, and that is something that's still on, still on our agenda. Clearly, we've got to absorb this one a little bit. It has an impact, of course, on our financials, so we have to absorb this one. But we are still looking to see what is available there in that market, but don't expect something in the short term.
Got it. Thank you.
Thank you.
Thank you very much. Okay, next question, please.
The next question comes from Martin Wilkie. Please go ahead and announce your company.
Yeah, good morning. It's Martin from Deutsche Bank. Just a couple of questions. Firstly, just come back to the write-down of wind. Does that now mean that the growth rate of Kaydon should be similar to what you expect for the SKF Group overall? There's no sort of lingering tough comp or anything like that that we should factor into growth expectations. Secondly, just in terms of Kaydon management, are the entire management team joining SKF, or should we expect any departures as part of the acquisition? Thanks.
I think on the first one there, I think the going forward, they should be more in the. The tough comps are behind. Going forward, they should be more in line with the market development. But in line with their end industry market development, which is a little bit different to our end industry market development. Regarding the management, let us come back to that. We see a strong management within their team. We want to keep and work with their management there, but let's come back to that specific issue at closing, please.
Okay, thank you very much.
Thanks, Martin. Thank you.
Thanks. Next, please.
The next question comes from the line of Joachim Haglin. Please go ahead and announce your company.
Hi, thank you. I have two questions. The first one is regarding sales synergies. Hopefully, I understood correctly that you say you will add about 10%, or Kaydon will add 10% to the sales being a part of SKF, right? Yeah.
10% to their sales. So $50 million. Their sales are $475 million before them coming in, excluding normal market development-
Mm-hmm.
Excluding normal market development, an additional 10% will come through sales synergies, through our ability to take their products to our market and vice versa.
I mean, that would be about, say, 2%-3% additional growth per year. If you look at their geographical exposure, they aren't very much exposed to the sort of your what you call main markets-
Correct.
Europe and Asia. Do you think you could be a bit cautious here, or, or, how should we see upon it?
I think, You know, the issue with cost synergy, and I think both ended, Joachim. Cost synergies are something that's under your control. You can drive the costs. You can manage that in a very good way to save. So that to me, you can work on sales synergies. You have your ambition to do things, but there's other things out there which are called competitors and customers, that you have to convince and beat your competitors and convince your customers and distributors. So therefore, we put in a figure that we can deliver on. We are confident in that figure there. Could it be more? Hopefully, yeah, and that would make it even better. But I think this is a figure we can deliver on.
Okay, thank you. Secondly, I wonder, you have talked about sort of adding or increasing your footprint in the US in terms of production and so on. Now, you said that hopefully you can use sort of Kaydon's facilities to add on your own or your other product lines. Should—Is this the way you will use in the future as well, to sort of find a bigger footprint through acquisitions rather than sort of greenfield CapEx plans?
First, that's a good, very good question. I'd say, Joachim, that, Greenfield activities we've already done, the major greenfield activities. I don't see SKF doing any other big significant greenfield activities, one or two in the next five years, but I think we've put the footprint in place there, as well. So I don't see any other big major greenfields. When you look at this year, this brings a lot of things to us. It's not just the footprint. We must realize the products and technologies, the presence in the market, the brand names that they have, and the team that they have, and the performance that they have. These are a lot of elements we get there, and on top of that, we get an improved manufacturing footprint, which is good for us there.
The improved manufacturing footprint was not the driver. It's a good benefit we get as a result of what we've done here, but that wasn't the driver to do it. It's actually the products, technologies, market presence, brand that we bring in, and of course, a good financial performance.
Perfect. Thank you so much.
Thank you, again. Thanks.
Thanks. Next question, please. The next question comes from the line of Ben Sheridan. Please go ahead and announce in your company.
Yeah, thank you. Morning, it's Ben Sheridan from Bank of America Merrill Lynch. Morning, Tom. Morning, Henrik. A couple of questions, please. Firstly, just coming back to sales synergies, which often don't come through in the way they're predicted or very difficult to measure. Can you just talk a bit about the success you've had on previous deals, you know, Peer, Lincoln, General Bearing, in capturing these sales synergies? Because obviously, they're difficult for us to see in the overall growth rate for SKF. And then secondly, on your. You mentioned very, very quickly, I missed your comment, sorry, the financial criteria for M&A. Just at what point you think you cover the cost of capital on this deal?
Because if you use, very quickly, consensus forecast and add some synergies and PPA, it just seems to take longer than 2-3 years. And maybe related to that, just what cost of financing are you assuming, on the deal? Thank you.
Okay. Success in the past has been good. There's been a little bit different vis-à-vis, of course, Peer and GBC, because they are really very, very standalone businesses. But they are delivering on their plans. We're seeing good development and growth in their business, both in Peer and GBC, and good profitability there. If I go to Lincoln, that's probably one that's more relevant within the—because that's one we've integrated much more within the lubrication. And then, I'd say overall, if I exclude the market development there, the things that we've targeted in for them to grow has come through. If you remember, we didn't push a hell of a lot of big sales synergies in that operation there.
No.
But there was sales synergies there. But it is run very well. That's why I'm pretty confident, very confident with the figure of $50 million. I really believe the opportunity to take these forward, we have a good opportunity to do that. As you rightly point out, it is not easy to follow because you have to factor out the market development, and then you never know with the end markets and all that, how to do it. But we will keep it very tight and follow that up going forward. In terms of acquisition criteria, our acquisition criteria are twofold. One is to be EPS accretive year one, which this will be.
and secondly, is to cover cost of capital in two to three years. The calculations we've done, I don't want to get into what we've put as financing in at this point in time because, and rates and all that. But Henrik, from my understanding, all the things I would say, it's there?
Yes, it is there. And as we say, we finance it with cash and existing credit lines now, and then we will bring through on that financing before and closing of the day. And we will go through the details of that, going forward.
Okay.
Okay.
Okay.
Okay, thanks.
Thanks. Next question, please.
The next question comes from the line of Mads Rosendal. Please go ahead and announce in your company.
Hey, hello, Danske Bank Markets. I just want to ask, from this deal, your leverage is obviously set to increase, and you're on a negative outlook at the S&Ps. So are you, are you concerned, being downgraded to a triple B plus, or how do you see that, your credit rating going forward?
I think that's something that we'll discuss in detail with the credit rating agencies going forward. I think what's important is that if you look over with the cash flow that we've got and activities we've got, with the cash flow that they've got, yes, we will go above our debt equity ratio, but within a not too long time, we will be back in line with our targets there. So from my viewpoint, I think that we will have discussions with them, and then we need to see how they see things going forward, and whether they keep on a negative outlook or they do a slight downgrade for us at this time.
Let's get back to that as and when they've made their decision to what they're looking at there. From my viewpoint, the strong balance sheet, the strong credit rating is important for us, and we will work actively through cash management, through cash flow, to get back to the message which are in line with our targets there, so that we take away that risk.
All right. Thank you very much.
Thanks, Matt.
Okay, next, please.
The next question comes to line of Michael Hagmann. Please go ahead and announce in your company.
I was just wondering if I remember the business model of Kaydon correctly. In the nineties, it was a very bespoke kind of business model with kind of smaller business runs. And if you look at the SG&A costs, it still seems to be a business model which requires quite a lot of SG&A. And, that actually brings me back to a question earlier, and how critical is it to retain the management of Kaydon for the success of the integration?
No, I think they've got strong, strong management. The business they're in, though, is a different business, the friction control areas. When you look at thin section, Cooper, the slewing bearings, the ball and roller bearings, yes, they are different assortments. But remember, within the SKF group, we also have businesses which have smaller runs, smaller assortments, as well as the higher volume business, especially in our industrial unit, especially in our aftermarket business there. So the cost to serve that market is high, and that's where economies of scale are very, very important. And we will be able to utilize our organization and their organization to push more down to there. So from that viewpoint, I don't see any major issues there.
I think, actually, there's more opportunities, more upside than downside in that area. When it comes also to their other product areas, I think our linear motion mechatronics footprint is very complementary to their footprint as well. So I'm sure we're gonna be able to take down the channels more, products and solutions to our customers. We're gonna have a better offer for our customers. But what is critical in that is technical knowledge, technical support, and strong management. And that is why it is important, and we do see the management of Kaydon as being very important to us. And we want to work with them to stay with SKF there. And I think we provide them better opportunities also for them to develop. So it is important that they.
We are able to retain them, and that's something that's a clear objective.
Thank you.
Okay. May I just remind you that we have about 8, 9 minutes left of the conference call, and we're ready to take next, next question now, please.
Thank you. Next question comes from Sebastian Growe. Please go ahead and announce your company.
Hi, good morning. First question, I am not sure I understood, but on the sales synergies, are you talking about the impact on the, operating profit, $50 million, or are we talking about the impact on the top line? A follow-up will be, out of the $50 million, just to be clear, how much of that is, driven by, increased Kaydon sales, through SKF distribution? That will be the first question.
Okay. So the $50 million is a sales figure, it's not a profit figure. It's a sales increase that we get. So that's relative to the 475 that they've got, and that is our ability to take their products through our channels to the market and vice versa, what we could do with their channels there. So that $50 million is a sales revenue figure, not a profit figure. Of course, the $50 million cost is a profit figure.
Yeah, okay. But I'm struggling a little bit to see how you can create value over 2-3 years, unless there is a strong increase in demand for Kaydon's market.
The sales is over five years.
Yeah, but if I, if I add the $30 million on top of the, you know, current operating profit of the group, plus, you know, some operating leverage on the $50 million, sales synergies, I'm struggling a little bit to see how you can create value over two-three years and meet your cost of capital. Can you guide me?
Yeah, yeah. But you've got to look at. We can manage that. We will come back to that.
Okay. And just a final question on the product mix. You mentioned that was one of the driver behind the margin deterioration over the last few years at Kaydon. Can you give us some flavor about which product are we talking about? What are the underperforming or outperforming products within Kaydon?
No, I think I will not go into details on them. They're a listed company. At the moment, we have not completed the acquisition, and I think you should go into what the Kaydon management have said on their results at this point. But I am confident that the steps that they've taken and the level they're at just now is a platform to build and improve going forward, combined with the additional steps that we will take.
Okay, understood. Many thanks.
Thank you.
Thank you. Next question, please.
Next question comes from Arnaud Brossard. Please go ahead and announce your company.
Hi, everyone. Thank you. Arnaud Brossard, Exane BNP Paribas. First, Kaydon is more profitable than SKF today. Could you tell us whether you think it could have an effect on your long-term targets, long-term margin targets, for example, for the whole group? Or what, what effect you believe it could have? Second, again, on the military exposure, we discussed that previously, but it's 15% of Kaydon's sales. So that means, yes, you still have 85% that are a lot more diversified, but can you tell us about your view on the outlook for the military market? And based on that, what's your view on the multiples you are paying for Kaydon? And finally, you told us you, you've been looking at the company for a long time.
Was there something that prevented the acquisition in the past?
I mean, if you look at it, there are many factors that come into acquiring a company. You need two parties to be willing to do that there. And it just, as I said, the cards fell in place just now for it to happen there. That was the major reason just now. Go back to military. Of course, if you look at the steps that the U.S. government has taken, the U.S. government is reducing military spending, but of course, there is still spare parts, there is still replacement business, there are new programs that are being worked on just now. So we have looked at that and reviewed it through the bid for a review of the business there. And again, I'm quite comfortable with the assumptions that are in there just now.
But clearly, as you right, as you probably allude to, the U.S. government will be reducing their military spend going forward. But we look at the programs that are on in this business and are comfortable with that. And again, it is a 15% of the business. Am I comfortable with the multiples that we're now playing for the group? Of course, I would not be going forward with the acquisition if I was not comfortable on the multiples we're playing there. The board would not have accepted that if they were not comfortable in the multiples.
And also actually the market itself, if you actually look at the, the share price, the share price development, over the last year of, last 12 months of the, the Kaydon Group, if I remember correctly, it's up some 40%-45%, which shows that the. Also, the stock market, which is similar, by the way, to many of their peers in, in North America, I would say. But if you look at it, it shows that the actions that they've taken to reduce their costs, to implement lean in their operations, to invest in, in growth in their business, plus address areas which really have a, a tougher, a different demand environment, it's coming through in their business there. Will it change their long-term margin targets? No.
No, it will not change their long-term margin targets. It's part of. If you look at all the elements we put in place to deliver the long-term margin targets, acquisitions is one of the elements that we put in place to enable us to do it. So, no, it doesn't change.
Great. Thank you very much.
Thank you.
Thank you. Now we have time for one more question. Please go ahead.
Our final question comes from Elmar Zurek. Please go ahead and announce in your company. Hello, Elmar, your line is now open.
We can't hear any question on our side.
No. Elmar, can you check if you're mute, please?
Otherwise, you need to take the next-
We take the next question, please.
The next question comes from the line of Johann Eliason. Please go ahead and announce your company.
Yes. Hi, this is Johan Eliason from SEB. Thank you. Just a follow-up question on the shareholder acceptance. I'm not sure I understood your, your answer, but I'd be interested to know how much shareholder acceptance or any indication how much acceptance you have received at this stage from the, from the current shareholders?
Oh, we have not discussed with the current shareholders.
All right. And no indication at all, then?
No, we've not discussed with the current shareholders because there are certain rules in what you can do, et cetera, there. We followed the rules clearly in what we can do. That process will, our discussion has been with the Kaydon manager, of course, the Kaydon board, there, and the Kaydon board, and if you look at the Kaydon management, they, they believe that this is a, this is real compelling value for the shareholder, or they would not have accepted it, there.
Okay, thank you.
Yes.
I think that's all.
Yeah.
Thank you for calling in and participating in the conference.
Thank you so much, indeed.
Thank you.
If you have any further questions, you've got Marita and Rebecca's numbers on the press release, so please feel free to call them. Thank you very much. Thank you.
Bye.
Bye-bye.
Bye. Ladies and gentlemen, thank you for your participation today. This concludes today's conference, and now disconnect your line.