M&A Announcement

Aug 16, 2021

Ladies and gentlemen, welcome to the Media and Analyst Conference Call. I am Sandra, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Doctor. Norbert Klaper. Please go ahead, sir. Thank you very much, Sandra. Good morning, ladies and gentlemen, and welcome to today's call in which we will update you on a very important step for return. We will talk about the acquisition of 3 businesses from SAURA. You are familiar with the fact that SAURA has been a strong competitor of RIETE for many years. In June, 2 German SAURA companies filed for insolvency. And Witte and saurer have been able to structure a transaction, the transaction which we published this morning. As a result, insolvency proceedings in Germany will be stopped and three businesses will be transferred from SAURA to Rita. I guess you have done the numbers already. By this acquisition, we expect Rita to grow by more than 25% in sales and profits. In addition, Rita will close the gap in the product portfolio. This creates an opportunity for further profitable growth. Let me come to the key messages. Investment in completion of readers ring and compact spinning system, Schlarfrost automatic winder. This is the machine we are talking about and I will explain to you during the course of the presentation what this machine does and why it is so important to retail. And in addition to this machine, we will invest in 2 attractive components businesses, Aquatex and Temco. I have a slide on these two businesses as well. The combined turnover of the 3 businesses in 2020, the year of the pandemic, SAURA booked €142,000,000 In 2019, which was the trough of the investment cycle. As you might remember, Saurab booked €235,000,000 And in 2018, the last year, which we could call a normal year in our business from a market perspective, SAURA booked €260,000,000 in these three businesses. The purchase price on a cash and debt free basis is €300,000,000 and we financed the purchase price from cash and existing credit lines. We expect the transaction to be closed together with SAURA in August, and the full implementation will last 6 to 9 months because what will follow to the closing is a carve out of the businesses from the 2 companies where they are today. And we also have announced this morning a change in the Board of Directors. Let me come to the strategic rationale of the first portion of this acquisition, the completion of the ring and compact systems of retail. What you have on this slide here is the ring and compact spinning process, which starts with the blow room and it goes via the card and the draw frame, the comba in many cases and the rowing frame and the end spinning machine, ring and compact end spinning machine. And the last step in this process is the automatic winder. And the automatic winder is a process step, which Rita did not have so far. It is important to understand that the ring and compact spinning segment is the biggest segment in the market, in our market. In 2018, it represented roughly 56% of the end spinning market, the ring and compacting. And Rita is strong in this market as you know. But so far we have not had the complete system. We have the complete system in rotor spinning and we have it also in air jet spinning, but not in ring and compacting. And this is why this is so important that we have been able to acquire this business now. What does this machine do? It takes 50 gram portions of yarn from the ring and compact spinning machine. This is the end product of the ring and compact spinning machine. And what it does to the 50 gram portions, which are on so called cups, this is how the spinners call this. And the 50 gram portions have to be unwinded. What happens then is to cut out the yarn imperfections. This is very important on this machine. And then the machine connects the yarn ends and rewinds the bobbins, rewinds the yarn on bobbins of 4 to 5 kilos. This is what this machine does. And this is a very important machine in the process because it determines the quality of the end product, which is the end result of the spinning process. And of course, as you might imagine, this machine is a source of information on issues in the whole process chain, quality issues, inefficiencies, because in this final process step, everything pops up. This is why the machine is so important. It is a big market segment as well. SAURA reported sales in 20 18 in Winding of roughly €193,000,000 which represented a market share of 30%. And so far, Rita had no access to this market segment. There is also an additional sales potential in connection with Rita Systems here because the market share of Schlar Forst Winders on Rita systems is very small. And of course, it is our objective to increase the market share of Schlar Forst Blinders on retail systems. And the system integration is also an important point here. As I said, this machine, the winding machine is a source of information, which can help to improve the process from the beginning through all the process steps until the very end. And you know that we have the digital platform essential ready and the integration of the winder with the rest of the process via Essential will be key and will be a source of additional sales and profits. Let me come to the strategic rationale of the 2 attractive components businesses that we will also acquire. Acrotechs. Acrotechs are coxinatrans, and we have little photo here where you see an orange frame around the cots and the aprons on a ring spinning machine. The cots is the one which is at the lower part of the picture and the apron is above it. Both of them are parts which are made from elastomers and they are very important for the ring spinning process. AquaTex is a premium brand in this segment, and there is an attractive OEM and also, obviously, as it's a component of wear and tear business, which comes along with it, since 2018 were around €33,000,000 It is a very good fit to our components business. It we don't have that business today, only very small activities in the COGS and the Apron segment. And this helps us to improve our market position in the spinning in the end spinning components business significantly. And then we have a second components business here, TEMCO. And TEMCO is a company which works in the Filament business. You know that we have had our first attempt to go into this market by the acquisition of SSM. They are active in the Filament business as well. And now we add to this a second component business, which is very attractive. What they do is they do bearing solutions and texturing components for Filament machines. And also here, there is an attractive OEM and an attractive wear and tear business. Sales 2018 roughly €35,000,000 And when we come from the strategic rationale to the financials, on the next slide, you see the financials 2020, 2019, and 2018. You see the sales numbers that we have been talking about already. You see EBITDA, order intake and EBIT. And what we can also see here is, of course, the year 2019 where we had the trough of the cycle and 2020 where we had the pandemic. So that is why we said 2018 is the point of reference here. And I guess the numbers speak for themselves. Let's come to the next slide, Page 6, the key financial considerations. Very straightforward, purchase price €300,000,000 cash and debt free EBITDA multiple based on what we saw on the previous slide based on 2018 at roughly 9 and the purchase price financed from cash and available credit lines. And on the next slide, Page 7, you see the structure of the transaction, which needs to be explained. So the purpose of the transaction was to stop the insolvencies in Germany and then carve out the businesses that retail would acquire. And in order to stop the insolvencies, the mother company of the 2 companies, the 2 insolvent companies, receives the money that Rita will pay as a purchase price. And the company, which is the mother company, the parent company of the 2 German units is Sauron Netherlands. So Rita acquires 75 percent of the shares of Sauron Netherlands against the €300,000,000 which is the purchase price. And Sauron Netherlands, as you see in this slide, is the parent company of the 2 German units. And the next step is, and this is going on while we speak, the insolvency proceedings of the 2 German units, spin and tech will be terminated. This has been agreed with all parties involved. So this is going on at the moment. And what comes next is the carve out of the Schlarhorst automatic winder from Spin, and Saurer Spinning Solutions and Aquatex and Temco from Saurabh Technologies. And once this has been completed, we Rita will give back the 57% in Saurabh Netherlands to Saurabh. This is how the whole thing works. What we will do on the way is to agree on a supply agreement for automatic winders from Rita to SAURA. This is part of the concept. In addition to the transaction, we announced today a change in the Board of Directors. The Board of Directors on Page 8, we put this together. The Board of Directors intends to convene an extraordinary general meeting at which its members, Liqtak and Stefan Hasbelslag, are to be dismissed. The reason is Liqtak and Stefan Hasbelslag used confidential information on the acquisition of the SAUER businesses to compete with RIETE through their own offer. And in addition, RIETE has filed a criminal complaint against Liqtak and Stefan Hasbislar in this context. So far the presentation, we are open for questions now. The first question comes from Christian Arner from Stifel. Please go ahead, sir. Yes. Good morning, gentlemen. Two, three questions from my side. First, you were saying that your machines are running very seldom with our automatic winder. So with which machines or automatic winder have to be connected in the past? It will be my first question. The second question is, I mean, to take over the automatic winder of sour, that's very strategic for you, as I understand. And the other 2 components businesses, I mean, they are very profitable businesses, but it looks to me like more nice to have acquisitions. Did you have to take over these components? And did you want to take over these components? Yes, maybe a little bit your thoughts on that one. And the 3rd is more of a clarification question. I mean, in the first step, you were saying that you are acquiring 57% of SAUER Netherlands. But at the end of the process, I understood it correctly, you will own 100% of these businesses, right? That will be my questions. Thank you. Thank you very much, Christian. Yes, the machine, which in many cases stands behind the Rita ring spinning machines is the Murata automatic winder. So the market share of Schlarhorst winders behind Rita machines is not very big. The highest market share has Murata today. The second question, well, I have to say that I'm really happy that we have been able to agree with Saurabh on the transfer of the 2 components businesses. Components businesses have been our target for many, many years from an acquisition point of view. We talked about it a couple of times. So I'm very happy that they will come to Arita now. And they are a perfect match to our strategy. Arotech for the ring and compacting spinning system in addition to other spinning systems they also provide cocks and aprons for example for air jet machines. So this is really a core component business that Rita didn't have. And the second, Temco, is very, very good because it matches with the ambition to step into the Filament business via pre components. This has also been on the agenda for quite some time. And so the 2 components businesses are a perfect match. I'm very happy that we have been able to agree with Saurabh on this. And the clarification that you have been asking for, yes, this is how it's going to work. 57% in Sauron Netherlands now. Then the carve out and the carve out company and the businesses will be owned 100% by Rita. And at the end of the transaction, Rita will give back the 57% of SAURA Netherlands to SAURA. So that at the end of the transaction, SAURA Netherlands will be under the control of SAURA at 100%. And the businesses, which will be below SAURA Netherlands will be the rotor business, will be the air jet business that they have started to develop. It will be the ring spinning systems, their components business called tech parts and also Voigtmann, which is the twisting machines. That will be under Sauron evidence. And under Rita, 100% will be the automatic winder, Aquatex and Temco. Okay. Thank you. Maybe a follow-up question. I mean, this whole situation difficult situation of Sauder, how did you feel it already in your order intakes? I mean, the whole financial situation or difficulties they popped up in June. So did you feel anything from the market already in July or August so that you won more and more and more orders or businesses, which maybe you wouldn't have won when this situation would not have occurred? That is very hard to assess. What we know is that, Saurabh also enjoys a nice order intake. As everybody in the industry at the moment, Saurabh also enjoys a nice order intake. We're not sure whether we can say that customers placed orders with Rita because they were afraid of the situation or concerned about the situation in Saurer. That is hard to assess, in particular after only 8 weeks, where the normal negotiation cycle in a significant machine and equipment order would be a lot longer than 8 weeks. Okay. Thank you very much. The next question comes from Charlie Ferembach from AWP. Please go ahead, sir. Good morning, gentlemen. I have two financial questions. The sales of the acquired businesses, will these sales be in the current year closer to this EUR142,000,000 of 2020 or closer to the EUR 235,000,000 of 2019? Or you may could give a new guidance for the whole group, then reassess that, I guess, more than CHF 900,000,000 for the whole year. Maybe you can add this. And the second part of this is the profitability of the acquired businesses compared to Realtor. They made loss as you did in the last year. Where do you think will this go this year and maybe in the next year? And then I have two questions concerning the board members. Are these 2 concerned board members suspended from the ongoing board meetings at the moment? And LUKTEK holds more than 10% of Rietta. Do you don't you expect any problems to recall him out of the board? Concerned to this, you may know the position of Peter Spuhler in this question. Thank you. Okay. You want to talk about the financials? Yes. I can talk about numbers. So we don't give the guidance on 2021, but you can look at the historical numbers and you know our historical numbers. And they went somehow through the same cycle as we did. And then you can take the same assumptions. But fundamentally, they have a there's a good market. Norbord mentioned this before. We are in an an upswing at the moment in the market and this will also be reflected in the numbers of SAOR this year. Profitability of the business, it's the same answer. You can see it's a similar development as we had. We had a very bad 2020. These two businesses also were negative loss making. The 2019 was already the cycle to down and 2018 was more or less the last normal year. So based on this, you can make the assumptions. Okay. And regarding the board members, I can say that the way it works in Switzerland is they the 2 board members in question have requested to be suspended from their duties for the time of the transaction. And that has happened, but the transaction is over now. So now they are back on the board. And now the extraordinary general assembly will take place based on what we communicated this morning. I cannot speculate on what is going to happen regarding the share of Picanole, which Picanole has Edrieda. I don't know where we will be with this and what is going to happen. This would be pure speculation. Okay. Thank you very much. The next question comes from Edouard Treba from ZKB. Please go ahead, sir. Yes, good morning. Thank you very much. Just have a small clarification question concerning the winer market. You mentioned this that the Schlafel system represent approximately 30%. Is this correct? And that Murata is likely the major player? And how should we split the market 30% for or how should we think it? 30% on the Schafer system, 50% for Murata and 20% Savio? Is it something like this? Well, I have learned from Saurabh that they look at the market the following May. Market shares Saurabh and Savio were 30% each, market share Murata 40%. Understood. Thank you very much. The next question comes from Rene Zwayer from Freeland. Please go ahead, sir. Thank you. Welcome gentlemen. I have four questions concerning the Board members. The first one is, what does Rita think of the proofs available for this complaint? And if yes, would they be public? 3rd question, you said there is already filed a criminal complaint. So that did happen already or will it happen? And last question is Mr. Haspelah was introduced to the Board of Retail just in spring of this year. So in the knowledge of today, wouldn't you think that was a little bit short sided to appoint him as a member of the Board? Thank you. Well, I guess what Rita did this morning is to file the criminal complaint, So a Swiss prosecution will take that up and come to a conclusion on whether there is a crime, a criminal activity here or not. So this is the process and this is what we have started. We have, of course, told the Swiss prosecution what our position is and what Rita's position is and they will follow-up on it and do what is required here. That is the way it works. Well, when we and your 4th question, the nomination of Stefan Hasbazar, yes, at that time, there was no indication that we would end up in such a situation here. So I guess we can say that there is there was no reason to think differently about it at that time. So if I may ask a follow-up question, just repeating my first question. Well, I guess that is not up to us, yes. We Rita has determined the facts and put together the facts according to the way we understand them. And we have seen them happening and that is what we proceeded to the Swiss prosecutor. And now the process has started. It is not up to us to decide on innocence, yes or no. This is a juristical thing which is going on now. Okay. So last follow-up question again. The proofs you surely have, will they be available in public or not? No. They will go there along with the filing, which we did today and we will not publish then. Thank you. The next question comes from Andreas Meyer from Finance and Wirtschaft. Please go ahead, sir. Good morning, gentlemen. Yes, again, a question about Mr. Teck. How did you learned that he or his surrounding made an offer for Schlavhorst? Did you have been informed through SAUER? Or how do you I think he did it a bit in a hidden way. So I'm not supposed to disclose any details of what happened, yes? You saw the way we look at things, Rita looks at things from our announcement, and this is all I can say about it today. Okay. Thank you. The next question comes from Rolf Ferende from Helvea. Please go ahead, sir. Yes. Good morning, gentlemen. Thanks for taking my questions. Can you elaborate a bit more on potential synergies with these acquisitions? Just to understand better what it helps you with clients or with other things? Well, thank you very much. But I guess I expanded on that, yes. So there is a couple of synergies on the market side, which are quite significant, yes. What I don't expect to a large extent is cost synergies. I guess that is not what we're looking at here. And the market synergies in the winding business are that we have access to a market segment, which was not available to us so far. It was we also discussed about the potential it might have with retail systems and also the potential it will have when it comes to differentiation of the retail system compared to others. That is the 3 synergies we see in the ring and compacting systems. And in the components businesses, yes, there is the 2 businesses that we have to look at. There is also a synergy, which we expect from Aquatex because on the business today, the market share of Aquatex on our machines is can still be improved, I guess. And Temco is a company which opens the filament market to a higher extent to retail and this also brings along opportunities which we don't have today. Okay. Thank you for that. Yes, of course, noted that you explained it already a bit. But I'm looking for the reference number now, right? So it's €260,000,000 of sales in 2018, let's say, before there was a trough in the market and before there was a pandemic impact. So with the synergies you have, do you expect them do I understand right that you expect this number to be larger or even significantly larger in the future? We will do our homework on that, Rolf. And as soon as we have something well based and well thought through to tell, we will certainly do that. But for the time being, I guess the synergies that I have explained are what we understand and it all it has to be seen in the light of the market situation as well. So we will not give you a number today. Okay. No, thanks for that. That will be great to learn then when you have come, we'll work on it. You also mentioned that it enables you to monitor the quality at the end of the whole process much better. Do I understand right that this gives you also then a better edge than before for the whole service and maintenance of the installations from the clients. Steph? The biggest benefit here of this is to control the process in a better way and to take inefficiencies out. That might also have an impact on service and on spare parts and so forth. But the big thing here is to take sources of quality issues out and to improve the efficiency of the whole process. Yes. All right. Great. And is there a run rate of services of these businesses? Is it like, let's say, from the 100 of the 100 percent of sales is normally 20% services or so? Or is that difficult to share? You will see this in our service numbers once we have consolidated the businesses. Okay. Great. All right. Thank you. No more questions. Thank you, Rolf. Thank you. The next question comes from Sebastian Vogel from UBS. Please go ahead, sir. Hello. Good morning. Just one on the integration side. Can you quantify the integration cost and how much of an integration actually possible for these businesses? We have not determined the integration cost because the carve outs have not started yet. We expect the integration cost to be in the single €1,000,000 digit range. And then over some time or just 1 to 1st 1, 2 years, just a sort of rough ballpark there, if possible? I mean, it will take this year and next year most probably because a couple of things need to be done. The carve outs, once the carve outs have been made, the integration will start. And of course, you know that there is IT things to that, yes, and this will take some time. So I would expect the integration cost the majority of the integration cost to kick in next year. Understood. And one small question regarding the winder business. If I was calculating the suggested EBIT margin in the 2019, 2018, it is higher than your machine equipment your machine and systems business. Is that mismatch related to the service business that is included in that numbers? Say it again. It is higher than what? Is it just because that in there is like a combined equipment and service business? Yes. I mean that's certainly part of it. But as I said, we will sort that out and you will see it in our numbers when we have split up. Understood. Many thanks. Thank you. The next question comes from Alessandro Foletti from Octavian. Please go ahead, sir. Yes, good morning. Thank you for taking my questions. First of all, congratulations for the purchase of the winder. I think it's a big strategic step for you guys. Now unfortunately, I joined the conference a little bit late. So my first question maybe has already been asked. In that case, just give me a summary, please. I always thought that this business was super core also for SAURA. What is the reason they're selling? I mean, here you'd have to ask SAURA, yes. What I said already is that we have been sitting together with Saurer and try to find a way how both companies could benefit from solving the problem that Saurer had and that is what we try to do. We will continue to supply winders to SARBRA. That has been agreed and we will set up a corresponding contract during the carve out. Right. But you sort of have the insurance that they don't have a Chinese machine already in construction somewhere in Boujee or Suzhou or Beijing or somewhere? Well, what I can say is that we acquired their winder business. Right. Okay. The second question is this business is a full German business or does it have also a Chinese production site already? No, the production of the automatic winder is in the plant is concentrated in the plant in Ueberpahlenberg close to Hagen. All right. Okay, thank you. Congratulations again. Thank you. Thank you, Heissendorp. The next question comes from Christian Arnold from Stifel. Please go ahead, sir. Yes. Thank you for having this follow-up question. Closing expected August 21, full implementation 6 to 9 months. So in terms of consolidation, it will be consolidated for 4 months, right, for 2021 and then 12 months for next year and the future. I wonder if you could already give us some indication about additional amortizations or purchase price allocation. Do you have here any thoughts already? Christian is trying to build his spreadsheet. Yes, kind of, yes. Yes. First of all, yes, the consolidation is for 4.5 months in this year and then full consolidation next year for these businesses. Regarding purchase price allocation, you might know that this is a very tedious process to really elaborate on the numbers and to split it up between goodwill and intangible assets. So I cannot give you a detailed number at the moment. But just make a basic assumption maybe when you look at the SSM transaction, you see how the split normally is, and this will be in the same range. Can you remind me on the split? Sorry? Could you remind me on the split? You want to hear a number? Yes. I'll just take fifty-fifty. Okay. Okay. Thank you. The next question comes from Stijn Vuitt from Belgium Business TV. Please go ahead, sir. Thanks. Thanks for taking my questions. I have three questions regarding the issue with the board members. First question is, at what moment or on what occasion did you discover this possible misuse of internal information? And the second question is, do you see damages from these directors? And if so, to what amount? And the third question is, was there a possible conflict of interest by these board members discussed before their appointment? Was it discussed in the board or in the company? Thanks. Thank you very much for the questions, but I'm not supposed to answer these three questions. I cannot tell you at what occasion this came up. I cannot tell you about the damages, the potential damages. And I cannot tell you about the discussion a potential discussion of the conflict of interest. This is details to what has happened, which we will not disclose. Okay. Even the damages because that seems to me some financial information also for the company? Even the damages. Okay. Okay. That's a pity, but thanks. Thanks. Nevertheless. The next question comes from Georgiou Muller from Ense Tete. Please go ahead, sir. Yes. Good morning, sir. I just was wondering if you have the time frame for the extraordinary channel meeting, which you would like to convene. No, we don't have it yet. We are in the process of organizing it. And as soon as we have the timing, we will, of course, as we are obliged to publish it. So that depends on the ongoing criminal investigation? What will come out of that? Will you wait till then? Or is this something which are not related? I don't think so, Juju. No. No. These things run independently from each other. Okay. So you but it will be this year or you won't tell that? That is what I would expect, yes. This year, okay. Thank you. The next question comes from Mark Webb from Quaiyro. Please go ahead, sir. Yes. Good morning. I just wanted to have a little bit more of background on what's happening here in Saurer. Just to understand why they're selling these businesses? And obviously, you could suggest they call Saurer. But can you help us understand a little bit why these business don't fit in with Saurer? Secondly, what other activities in Saurer were up for sale considering the insolvency process in Germany and the Netherlands? And why did you not buy them? And what is the logic? Thank you. Yes. I mean the reason why SAURA was open to selling the businesses, I guess, was the insolvency of the 2 German companies. And that is that was the starting point of the discussions. And I've tried to explain that by this transaction, there will be sufficient financial means available to stop the insolvencies. And that is what is going to happen and that is what drove the transaction. Other activities up for sale? No, not to my knowledge, because we have to understand that the insolvency proceedings in Germany had not reached a level at which the administrator was asking for companies to hand in offers for the assets. So that has not happened. The process had started, but it was not completed. And this is how we did it together with Saurer. We discussed with the administrators and found a solution that stops insolvency proceedings now before the assets of the companies are up for sale. So just to understand, this suggests that the mother company in China did not have the means itself to stop insolvency? I can only speculate on this, but I'd say the transaction was important for that. That is what I can what I think. And just to follow on from an earlier question about whether is having any impact on your order bookings or your negotiation with clients who might be considering either your machines or sour machines. Do you expect this to have an impact this news this morning to have an impact over the coming months? This is very hard to say. I guess what the market will understand is that Zalvo will continue to do business that Zalvo has the financial stability now that they have been lacking for the last 8 weeks. And I guess that will be an important signal to the market. Understood. Thank you very much. Gentlemen, there are no more questions so far. All right, good. So thank you very much for bearing with us this morning. Thank you very much for your questions and the discussion. We are looking forward to talking to you again in October at the trading update. Thanks a lot. Thank you.