Schaeffler AG (SHA0) Earnings Call Transcript

Good afternoon, ladies and gentlemen. Thank you for standing by. My name is [ Frances ] your Chorus Call operator. Welcome, and thank you for joining the conference call of Schaeffler AG's Acquisition of Ewellix Group. Throughout today's presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Renata. Please go ahead.

Dear investors, dear analysts, welcome to this short notice conference call with Mr. Klaus Rosenfeld, CEO of the Schaeffler Group; Dr. Stefan Spindler, CEO of the Industry Division; and Mr. Claus Bauer, CFO of the Schaeffler Group; and of course, also us at the IR team. The purpose of this short call is to illustrate to you the acquisition, which was communicated with a document yesterday, and the presentation press release have been sent to you and uploaded this morning on our IR web page. Mr. Rosenfeld will introduce the deal, and hand over to Dr. Spindler, who will illustrate you the acquisition and its rationale. Within this short call, there will be the possibility to ask questions, and the conversation will be conducted after the disclaimer. Without further ado, I hand over to Mr. Rosenfeld, Klaus. The floor is yours.

Thank you very much, Renata. Ladies and gentlemen, thanks for joining the call. As Renata said, we are thankful that you joined to share the news on our latest acquisition to the Industrial division. We signed an agreement, as you read from the statement with Triton on Sunday to acquire Ewellix. If you look at the first page of our little deck, Page #2, you see that Ewellix is a global manufacturer of actuation and linear motion systems, with more than 50 years of experience in that sector, 1,200 employees, 6 manufacturing and customizing sites in Europe, U.S. and Asia, headquartered in Sweden. Stefan will explain the products and the strategic fit to you in all detail. So I'll skip the middle section here and go to profitability and revenues. The company made in 2021 approximately EUR 216 million in revenues and expected to make EUR 250 million in the year 2022. We said here on this page, profitability at par with the existing industrial business of Schaeffler. What does that mean? We are referring to our EBIT margin as a point of reference. And the statement here means that they are more or less in line with what we produced. You know the numbers from the first quarter. You will see the numbers on the second quarter in a few days, and you also know what our multiyear plan is so you can use that as a benchmark. And if we look for the EBITDA number, that is probably the more -- better way to calculate whether this purchase price is acceptable or not. Then we are talking something in the high-teens area EBITDA margin '22. We agreed a purchase price of EUR 582 million. This excludes EUR 120 million of approximate Ewellix net debt that we will assume as part of the transaction and closing is expected end of the year 2022. So if you model this, I would suggest to look at the full year 2023. Going forward, we think the price is in a competitive environment where such an asset is definitely scarce, is a fair and equal market price. It was generated through a pretty tough auction that we won. And if you just do your math, you will find that this is in line with comparative deals and also with what is paid for businesses of this quality. We'll finance the transaction 100% from existing internal and external debt sources, no capital increase needed fully in line with our midterm target of net leverage that we shared with you, 1.25 to 1.75. And in terms of transaction structure and integration this is a shared deal, that means we are acquiring 100% of the existing shares at Ewellix from Triton. And therefore, Ewellix will become a 100% subsidiary of Schaeffler AG. Let me summarize here before I hand over to Stefan. As we told you in several calls, we are -- we have reached a level of profitability in the Industrial division where Stefan's business has clearly earned the right to grow, not only internally, but also externally. This is an excellent growth opportunity for Schaeffler. And from my point of view, as group CEO, I am very much in favor of the acquisition because it broadens and strengthens our industrial division. It also gives us from the overall portfolio more diversification. That's why we always said M&A in the industrial has priority. And therefore, this is what we promised, we delivered and it will help us to make Schaeffler even stronger in this volatile environment. With that, ladies and gentlemen, I would hand over to Stefan for more details.

Yes. Klaus, thank you very much, and hello to everybody in the call. I would like to show you just a couple of slides to explain in more detail who Ewellix is and why this company is so attractive. You see here one of the leading players in electromechanical automation, active in secular growth sectors. So if we want to start with the sectors and which sectors is [Audio Gap] machines medical, and you can immediately figure out that those are sectors which have a sustainable growth path ahead of them. We could also choose other sectors like automated factory assembly or also food and beverage. In all these sectors, there is a trend towards electrification. So electrification is not only happening when we're talking about electric drives for cars. There is also a lot of electrification happening in the industry. Why? Because with electromechanics, you can fulfill certain automation tasks, if you have the electricity available, and you can do that also in a very efficient manner. And therefore, the sectors are attractive. That's one area. And the second one is also the electromechanical automation. As I said, serving sustainability requirements and also serving automation requirements. And I'll come to what do these electromechanical components do and why do we need their function in all these machines on the next page. But let me start with just explaining here a couple of these bullet points. Ewellix is a global player. Obviously, the strongest region is Europe, but also a very good setup in both America and Asia. And the portfolio is a sophisticated product portfolio technically, and we have convinced ourselves that there is a strong team behind that has invested a lot into R&D and also into application technology. And you see some of the products listed, and I'll show you examples on the next page. What has happened since Triton has taken over Ewellix, the former SKF Linear in 2018, the company has invested a lot into consolidating smaller sites in high-cost countries into lower-cost footprint sites, and basically done a very good job in cost improvement and also invested in the global sales network. The team consists of 1,200 people roughly worldwide, a very good innovation track record, very strong customer orientation and something where we are saying this team is -- has done an excellent job over the last years. And we want to use the momentum and basically let them execute on their plan, which is very aggressive and positive. So coming to the next page, and this is now the story where are we today in the industry and why does this company fit very well to us. We are showing the markets, in the Industrial division, in these 4 market clusters. Renewables, very good things happening there, also in general machinery and materials. But when we look on the right-hand side, transportation and mobility and also industrial automation, that's where you see the check mark. And that means those are the sectors where Ewellix is becoming mainly relevant. And I want to start with the bottom. You see again the 2 examples from the medical and from the robotics area. And you see also in the middle here, Schaeffler Industrial portfolio already includes, and then you see bearings, track rollers up to precision gears. That means, we are in the majority of these sectors, we are present with our existing portfolio, and now we have an additional portfolio, which we can offer to the market. And you see with the different dotted or with the different color dots where do we talk about actuators, columns or also rail guides. Basically, in order to move a piece of machinery upwards, downwards, from A to B, you need linear motion. And basically, this consists of a mechanical drive, driven by an e-motor, and the e-motor and the mechanical drive connected by gear box and then also adding sensors. And by that, you can figure out that it's not just a simple component which you take from a catalog and sell it, it's a highly engineered component and the component will look different when you go into a medical application than if you go into a forklift application. And the thing that Ewellix has managed very well is to have a modular program, which has certain core elements, which are always kept the same in order to get scalability. But on the other hand, to manage the application engineering and find the best fit for these applications. And then we look -- when you look upwards on the scissor lift, everybody knows these are platforms which you move up and down. They are very often used in closed buildings. And the more things are happening in closed buildings, the more people want to get away, for example, from hydraulics and apply electromechanics. And that's a typical application, which is growing. Also forklifts smaller ones used also in enclosed areas and definitely a real trend towards electromechanics. So the story is that the combination of our existing portfolio, together with this portfolio, gives us a real stronger exposure to the markets and to the customers, which we are showing here as an example. And then basically summarizing that, those are the items which I tried to illustrate. It's a market attractiveness. It's the fact that the portfolio is complementary. And when we look at the synergy potential, and I basically said it on the footprint optimization side, Ewellix has done a very good job and they have found a very good setup. They are now basically prepared for further growth with their footprint and with their investments that they have made on the production side. And we believe that by combining the sales efforts and also by finding the right cross-selling approaches between our portfolio and the Ewellix portfolio, that will give us even a further acceleration of the business plan that Ewellix has. And certainly, by combined purchasing and also using the combined distribution network, there is good synergies possible. And Klaus, I think you have said it, it will be accretive already in 2023. And we -- the closing is expected for the end of the year. So 2023 is the first year where we will then see really the effects of the combined effort. And with this, I hand back to you, Klaus.

Yes. Once again, thank you very much, Stefan. I think we are at the end of the deck, ladies and gentlemen. And we would go without further ado into your questions.

[Operator Instructions] The first question is from Akshat Kacker from JPM.

Akshat from JPM. Three questions from my side, please. The first one on financials. Can you please talk about the profitability track record of this asset before the pandemic and also in 2021? Just trying to see what was the track record over the last 5 years by just an overall summary. The second question is on the long-term margin potential. In 2018, one of your competitors, Timken, bought a very similar Italian asset, making 30% EBITDA margin. Should we think about similar levels on a long-term perspective? And the third question is on the balance sheet. Could you please talk about the balance sheet structure and the leverage ratio that you're comfortable with going into next year where we could see multiple economic uncertainties. And do you think there is room for more M&A in the current capital structure?

Akshat, let me maybe take the last one. Klaus, if you want to complement there, please jump in. You all know that we have a multiyear plan target out for leverage, 1.25 to 1.75. Knowing that we will close the deal not in June, but end of the year, and looking at this, you can easily calculate this for yourself. We are talking about something like 0.4x on top of what we have at the moment or what we're projecting for end of the year. If you take our targets for free cash flow, if you assume that the cash flow generation is a little bit this year more geared towards the end, I think we can, from today's point of view, assume that it's somewhere well in the middle of this 1.25 to 1.75 range. We think with the balance sheet strength and also with the liquidity position we have, that is an acceptable leverage even in this volatile environment. We know that, that has taken away some of the firepower. And then when you ask about more M&A, we have always said we want to be disciplined. We want to look for targets that -- and that's the primary first aspect that fit strategically, that fit into our growth strategies and that are affordable. This is definitely the case for this. And I can tell you, we'll now first digest what we have here and properly integrate it into Schaeffler Group without changing its course and it's good profitability growth. And then we see what is next. We feel good with that acquisition. That's a major step. So I would say, let us first digest this and stay the course on being disciplined with that M&A and also with leverage. Claus, I'm not sure whether you want to add something there. Otherwise, we hand over to Stefan.

Yes. I think, Klaus, you phrased it perfectly. I think financial discipline, that's really the key word. And we would apply that -- to be applied it in this process and also in future. I mean, that we are living in a time of uncertainty, I think that is clear, that is also clear to us. That is why discipline is so much more important. But we will do things that we think make sense from a risk-reward structure.

And maybe to add, Akshat, you remember we did -- we were participating in Dodge, also an auction process. At that time, no one knew what the world would look like a year later. And today, with hindsight, I have to say, I'd rather buy this asset than something that is much bigger and would put us in a much more difficult position when it comes to leverage. So you never get it right, but here, we feel comfortable that this is well digestible with the strength and also the leadership of Claus as our CFO.

And I think, Klaus, that's also a good example of financial discipline. I mean, in the Dodge procedures, once our walkaway price that we thought was financially sound and reasonable was hit, we continue the process. And I think that's exactly what we apply, of course, financial headroom and firepower is dependent and also how we think about the future. But be rest assured that, that is in our evaluation of any opportunity that also will come up in the future.

Stefan, would you take the 2 other questions?

Yes. On the profitability of Ewellix. Ewellix has been going through a similar transformation as we have done it in Schaeffler Industrial coming from a single-digit EBIT margin, done a lot of cost saving and footprint optimization efforts. And now after this optimization, they are in a good 2-digit EBIT range, a similar range as we are in Schaeffler Industrial. And the company has invested into structural things, but now also into growth. Like we have done it also. And as you know, from our expectations, we want to be in the range above 12% EBIT, and Ewellix will definitely support the journey of our profitability story.

Just one clarification in terms of the long-term potential. Is the asset very similar to Rollon, which was bought by Timken? Or is there something that we should think about when we think about the long-term potential?

If you compare, on the linear side, I think need to be a little bit careful comparing one target with the other. It very much depends on what products you're looking at. You're finding linear players which have a rather low profitability. And you're finding linear players which have a rather high profitability, but they are then in either super price competitive area or they are in a super highly engineered area. And the -- what we have with Ewellix is price competitiveness plus a highly engineered product, and it's a much broader application range and product range compared to other targets. So you cannot compare these linear targets one-to-one. It's not just -- that's one linear company, and that's the other linear company, you need to look at the content behind in order to compare them.

The next question is from Richard C. Carlson from Credit Suisse.

So I just want to ask you again. I guess, you brought up Dodge, obviously something you guys famously walked away from, and now you feel really good about it. How has the overall market acceptance for some of these deals going? Are you seeing this as maybe less aggressive than you saw Dodge? Or in general, just how has the market shifted?

Well, Richard, thanks for the question. I can say from the -- from the auction process that we went through here, and you'd never have full transparency the auction process. But we went through a full due diligence. This was not a preemptive situation. It was -- it turned out to be something that was very competitive, full detailed due diligence, more than a handful of buyers in this and, in particular, the strategic buyers as well. We were told by our counterparties that was very close. And again, as Claus said, we had a walkaway price also here, but that we didn't hit. We came out the winner. With heavy lifting at the -- over the weekend. So I would say the market is still looking at decent assets. This is a good asset. And as Stefan said, for us, in particular, because there is significant synergy potential, in particular, on the top line that we will raise. And I cannot emphasize again enough how the growth in the sectors that we are looking at is attractive. And therefore, that tells me that the market has not gone upside down on this. If interest in the assets come to market out of private equity portfolios, I think there will be interest in particular from industrial strategic buyers.

Got it. Got it. And then it sounds like this is a very strong performing business. Will you guys keep it as its own separate brand? And could you even move some of Schaeffler product complementary into that and to grow that brand?

Yes. I think we said this also in the press release. It would be wrong to now integrate this into -- and roll on the Schaeffler name on it. We'll integrate it over time. Ewellix is a proven name in the market. We will probably endorse it so that people understand it's part of the Schaeffler Group. But we will keep it also, integration-wise, separate. It has a very strong management team. People that have gone through private equity exercises know this. So we will leave them as much autonomy as it makes sense.

The next question is from Sanjay Bhagwani from Citi.

I have 3 questions. My first one is, could you maybe provide some more color on the funding? So what portion is going to come from the debt? And what would be the cost of debt you are anticipating? And my second question is on the synergies. If you could provide some more color on like what sort of synergies are you expecting from the top line versus from the cost synergies, so probably a kind of split from this revenue synergies versus cost synergies? And my final question is on the industrial rationale for the deal. Thank you for providing the slides which were quite helpful. But additionally, could you maybe provide some color on like any insights like why this, as I said, was substantially better fit for Schaeffler than for SKF, which was owning this? That would be very helpful.

I think, Claus, you should take the first one, and then maybe, Stefan, you can take the 2 or 3 last one.

So from a financing standpoint, I think we are prepared to fully finance that with external debt that was what we investigated in the market. As Klaus already alluded to in the beginning, we will also still accumulate a significant portion of free cash by the end of the year when this is about to close. And therefore, it will be a mix between our own cash and debt financing, which we think is possible at the reasonable rates that are now in the debt market. It will not be at least not in the first step will not be a capital market financing because, as you are well aware, the margins right now might be not attractive. But I think we will have the opportunity to finance that with debt at a reasonable cost.