Arbonia AG (ARBN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Arbonia sells its windows division and strengthens remaining divisions conference call and live webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Alexander von Witzleben, CEO. Please go ahead, sir.

Yes. Thank you very much. Good morning, ladies and gentlemen. Thank you for attending our first conference -- video conference in the equity markets this year. Yes, we announced this morning that we have signed a contract -- actually yesterday evening to sell our Windows Division to the Danish VKR or DOVISTA Group. Those of you who know them or have taken a brief look at that group, most likely have seen that this is a group that has 1 specialty or specialized on windows. If you look at their marketing claim, to let light into the house, it's very clear Windows in every sense. Most of you know that the buyer has a very, very dominant and famous brand within its group called VELUX roof windows in Europe, a very, very strong business. And on the other hand, that group is the certain market leader in the Nordics and including U.K. and Ireland for Windows. And having said that, and if you compare that to our business, our Windows business, which is a CHF 350 million to CHF 360 million business, mainly in Switzerland, the Czech Republic, Slovakia, Poland and in Germany, you can see the perfect fit that the new buyer, VKR Group and our Windows Division in a combined group are that this buyer is the perfect buyer for our division, and that's a perfect set. We have sent to you via mail 2 fact sheets, a fact sheet about DOVISTA, where most of the facts that I have been just referring to are displayed and a fact sheet about our Windows Division. And if you flip between these 2 slides, you can see nicely where we are positioned, where we have our fact sheets, where DOVISTA and VKR is positioned, and you can see nicely how these 2 groups fit. In a nutshell, I would say, the VKR group is a better owner than our group, Arbonia Group, is. And if I just recall the history of our Windows Division, I have to say and many of you have been following us for a couple of years, when we started restructuring with the new major shareholder, Arbonia, in 2015, our Windows Division was a business in Switzerland, producing PVC and wood, aluminum windows in Switzerland for Switzerland, heavy loss-making. We had negative gross margins. We were facing the currency policies that were changing of the Swiss National and our Central Bank. Remember, the exchange rate was before 2015 fixed to CHF 1.20 to the euro. And then the Swiss National Bank allowed the Swiss franc to float freely and the exchange rate was going down to 1:1, or Swiss franc was appreciating to 1:1 whatever, however you want to see it. And we were facing heavy losses in that context in our Windows Division. On the other hand, we had 2 loss-making Eastern European businesses, 1 in Slovakia, 1 in Poland. And the decision in summer 2015 was should we simply liquidate our Windows business or should we turn around, face the situation and start a restructuring process that -- and where the plan was to integrate your 3 businesses into 1 European window company, integrating sales, marketing, technology, in other words, using fittings, the same profiles, the same glass and last but not least, also to integrate sourcing. In that context, we acquired a German company to also be able to serve the German market. And that was the major task that we decided to do in 2015. We decided to close the manufacturing sites in Switzerland and transfer them and relocate them in Eastern Europe, and I would include East Germany to Eastern Europe. And the plan was to completely get rid of all the manufacturing in Switzerland and to relocate it in Eastern Europe and the Swiss market was only going to be marketing sales, installation of windows, but we had a market position still then of more than 25% market share in Switzerland. And with the relocation of the factories, that Swiss business was profitable again and had a lot of competitive advantages to the remaining Swiss companies that have not gone the way that we have been going in restructuring. On top of that, our plan was through integrating -- through the integration of Slovakia and Poland into 1 European group, we wanted to take the advantage of higher numbers in production, in other words, utilize economies of scale. On top of that, we decided to add value-added to our manufacturing lines, in other words, glass that we were sourcing as insulated glass before we decided to produce our own insulated glass and some other production steps that we brought in house. And we went through this process, over 5 years, invested CHF 100 million, had heavy losses in the first 2 or 3 years. And then the business turned around, and we are expecting that this division, we don't have the final numbers yet, will have an EBITDA for 2020 of roughly CHF 40 million. So if you look at that process, we had a swing of roughly CHF 15 million EBITDA between 2015 and 2020. We invested CHF 100 million, and we are getting paid now for that business. And that's what we mentioned that today, we are getting CHF 350 million in cash proceeds. This is net of taxes and also costs related to the transaction. The EV is, of course, higher than that. And if I include the free cash flow that we recognized in 2019 and '20 already, our shareholders will get out of the sale of the division, purchase price plus free cash flow, roughly CHF 400 million minus CHF 100 million that we net -- our net investment. So there's a huge return for our shareholders. In our Board, we had a discussion when the offer of VKR came in, in the second quarter last year, we had a discussion, is this attractive for the shareholders on the 1 hand? What is the potential of the Windows Division for our future? And is the potential new owner, a better owner than we could be in the upcoming years? The discussion also went on in the Board. If we sell the division, what will be the effects on the remaining group? I will come later to this. But it was very clear that we had a situation on our desk in the Board and also the management team that this was a very attractive offer, our shareholder make a good profit on it. There's a good new owner and what -- and should we realize this offer that we had on our desk or not? And the Board went into strategic discussions. What do we do with the proceeds? What is the potential of the Windows business? And what could be the scenario, the road map for the whole group in the upcoming years? It was in the beginning, when we started 2015, very clear before we discussed strategic options in the Windows Division, it was very clear that we had to fix this division before we have any chance about strategic discussions. In 2018/'19, it became clear that the fixing would be successful that the business would be profitable again, that we were going to be able to utilize our market positions in Switzerland, the Eastern European countries, but also in Germany. And it became clear on top of that already 2 years ago, and I was putting -- or I was going already into discussions in the Board at that time saying, in the long run, Arbonia has a problem that we have 2 divisions, Windows and Doors, moderate, mature businesses growing with [ 2% ], maybe a little bit higher in Eastern Europe, with EBITDA margin somewhere between 10% and 12% on the 1 hand side, with comparable businesses trading between 6 and 8x EBITDA. And on the other hand, we have our HVAC business, which we -- which also went through a strategic transition from a manufacturer of heating components to heating systems. And this division has, other than in the Doors business, a very bright future. Just to mention 1 idea or 1 concept is a Green Deal, the Green Deal policies of the European Union and the corresponding policies in the other -- in the European countries of the European Union. And it was very clear that with the Green Deal with all the CO2 discussions about -- that you all know that the HVAC Division had a very bright future and that we have to invest into this division to utilize for our shareholders the potential that we have here. And the future of our HVAC Division is not flat panel radiators, but heat pumps, ventilation systems, filters, air handling units. And last but not least, batteries. And the pandemic that we are all running through at the moment is actually putting an even brighter light on our HVAC Division because not only the Green Deal is coming, but also air conditioning systems, wherever you look at hospitals, governments, schools, government buildings, schools, et cetera, need better air conditioning systems and with installed filters, et cetera. So we were facing already a situation that our HVAC business is going in a completely different direction, has a higher potential growth rate in the future. And that the trading multiples of our peers are far higher than the blended EBITDA multiple of Arbonia. In other words, if we would run into a situation where we want to invest into HVAC companies to integrate them in our HAC Division, we would most likely be facing situations where EBITDA multiples are paid that are high double digit. And it was very clear that if we go on with Arbonia as a conglomerate with Doors and Windows and HVAC and other side that we were in the situations where we are not -- where we have a competitive disadvantage to other companies. So the concept of splitting the group into 2 different areas, that concept was already being discussed 2 years ago. And the initial idea that I was discussing with the Board was, shouldn't we divide Arbonia Group in '21 or '22 in 2 different business segments, Windows and Doors on 1 hand side and HVAC side in the other? That was already being discussed and then the offer of VKR came in. And for us, it was then a question. All right. We have to split up the group for the reasons that I just discussed on the 1 hand side. And on the other hand, yes, we said is this -- this offer is on our desk now? And is the -- how can it -- are they -- the numbers, the metrics, the purchase price, the cash, are they rewarding us for the effort that we were seeing in the past? And are they reflecting in a decent way, the projections that we had about the division, the Windows Division? And the Board came after many, many discussions to the conclusion, yes, there is -- we should split Arbonia into 2 different companies anyhow. And why don't we take this offer that we have on our desk now and use the cash and the proceeds to invest into our Doors Division to make it even stronger. And even more important to reinvest some of the money, yes, that is coming in into our HVAC Division to completely utilize the potential with all the government programs, with all the CO2 discussions, with all these things that you all know, for the future and realize double-digit growth rates and also margins there. And at the end, that Arbonia is going to be for the shareholders, a more profitable business after all. So you can see from what I'm describing here and from the discussions that I'm telling you that we had on the Board that we decided to accept this offer. We are selling for more than 8x EBITDA. If you take a closer look, you could say, for almost 9x EBITDA, which based on a record year 2020, we don't know if '21 is going to be just as profitable as 2020. I hope, yes. Maybe, we have also some risk that we are running in, we don't know. But the Board decided, yes, it is a decent price and we [ accept ] this offer. And Arbonia will be in a very good position after that deal has been executed. Some rough numbers here. Arbonia is -- and this is not an official guidance I want to share with you now. It is more of an indication to give you some numbers, what Arbonia's multiples are likely going to look like on a pro forma basis without the Windows Division. We -- the indication that we want to give the market is an EBITDA for 2021 of roughly CHF 120 million, slightly more than CHF 1 billion in sales. Our shareholders' equity to be more than CHF 1 billion and net cash of more than CHF 200 million, CHF 220 million. But the official statement that I want to make is CHF 220 million. Please remember that we have roughly CHF 60 million in IFRS 16 financial debt, which are reflecting lease contracts, cars, et cetera, et cetera that we cannot pay back. So in other words, our cash position, after the transaction has been executed, is going to be somewhere closer to CHF 300 million and CHF 200 million. And please don't forget that we still have some surplus real estate of somewhere between CHF 20 million and CHF 30 million that we are planning to sell in the next 24 months. So in other words, the firepower that we have, the cash firepower to reinvest into our Doors Division and into our HVAC Division is more than CHF 300 million. And if we put or add the possible leverage, it is easy to say that we have roughly CHF 0.5 billion in cash available to go on with the group. So the -- in a nutshell, Arbonia is going to be, in '21 on a pro forma basis, more than CHF 1 billion in sales, CHF 120 million EBITDA, cash then CHF 200 million and real cash, roughly CHF 300 million. And we have a lot of projects that we have already on our desk, and you will certainly, as in the past -- can expect that we will come up with ideas. If you allow me, I would walk you through some aspects about the other remaining business, too. The remaining business to start with the Doors Division. The Doors Division has had in 2020, a very successful year. In 2021, we expect roughly CHF 50 million plus EBITDA. The Doors business started last year to invest into a new factory which will add 15% to 20% on our capacity with the same workforce. So profits we expect in that division after '21 to accelerate. The new factory will come -- the building, the infrastructure was finished in 2020, and now we are moving in equipment and production is going to start in 2022, and then we will see here an acceleration in profits and margins in the Door business. So you can expect 2022 ongoing more than CHF 60 million EBITDA. And you see that we have -- that we will use some of the proceeds here to finish this big project. And in the HVAC Division, we have some projects in Eastern Europe, but also some ventilation acquisitions on our desk that we are discussing. So we have enough ideas and potential to use the proceeds in the remaining divisions and to bring up our pro forma indication EBITDA 2021 to even higher number in 2022 and 2023, ongoing and all the cash that we have also on our bank accounts. Some more remarks on our Windows Division for political reasons, let me call it that way. The DOVISTA and VKR Group will take our business over as they are being run by us today. The workforce will go one-to-one over, there are no closures and no restructuring or anything planned. They will continue to run our business as we did it. And I guess that they will profit in the future from synergies that they would have within their group. So I think that our Windows Division will have a very bright future together with VKR in the future, too. So this is what we can tell you for a moment. And I'm happy to take your questions now if you have some. Please go ahead.

[Operator Instructions] Gentlemen, there are no questions from the phone.

All right. Moderator?