Beijer Ref AB (publ) (BEIJB) Earnings Call Transcript & Summary

Welcome to the Beijer Ref press conference 2022. [Operator Instructions] And afterwards, there will be a question-and-answer session. Today, I am pleased to present CEO, Christopher Norbye; and CFO of Ulf Berghult. Please begin your meeting.

Thank you. Hi, everyone. Christopher Norbye here. And then I have Ulf working from home with COVID. So thanks for -- sorry, thanks for calling in. So today, we have the exciting news that we have entered the U.S. with a platform acquisition. So the purpose of this call is to go over our presentation and explain a little bit the transaction, why the company and our conclusions, and also value creation and also on the financing of this acquisition. So I think we'll get started. We can move to Page 2 right away, which is the transaction highlights. So Beijer Ref now entering the U.S. is finally becoming, I would say, a global company with strong and balanced sales to now the U.S., Europe and APAC. So we have acquired Heritage distribution in the U.S. It's paid in the Southern part, which is the region that we feel is the critical part in the U.S. for demand for HVAC and supply. So we'll come to that. Headquarters in Atlanta, Georgia. We have paid -- you see the transaction purchase price, about SEK 13 billion, which also includes SEK 1 billion of tax assets. So including that, around 12x EBITDA. We'll come back also on the multiple. We always expect on the platform to move into the U.S. to pay a fair price. We think it's a very good deal for Beijer Ref and our shareholders. And then, of course, we have a journey to do with add-on acquisition through this fantastic platform. The LTM sales, $640 million and around $95 million of EBITDA, which also gives you a margin around 15%. So it's a highly profitable company, and I'll also come back to why that is. And of course, that's a strong value for us and also a company growing very good on the organic side, and we'll come back to that for that. We don't expect any challenges on approval because we don't have any business in the U.S. We expect it to be improved towards end of January. So it will not be a long period between signing and closing. So very high level on the rationale, and we'll come back in the presentation more on details. But of course, what's exciting about the U.S. is there's a lot of things and trends changing now in the U.S. that we are experiencing right now in Europe, and we also see the light in the rest of Asia Pacific, especially in countries like Australia and New Zealand. So that makes this market very interesting from a timing point of view of us. I mean you have the basics, the world's largest market. It's a fragmented market, which is always what we like as being part of driving consolidation in the market. So they have a lot of trends moving into what's happening in the U.S. They are now moving to this system of banning different HFC gases. What we've been doing the last 5, 10 years in Europe, moving into lower GWP CO2-based system, propane and other things. And that's, of course, core. And we see strong growth in the U.S. going forward in this area, and we can add value to our competent product and knowledge to expand that in the U.S. through this platform. So that's very, very exciting. And they're also going through the energy efficiency, new standards coming in place in the U.S., January 1 of [indiscernible] with a complete new product portfolio that's being launched with more energy-efficient product that also will drive growth in the market. And you have the inflation Reduction Act that also gives incentives for low and midterm housing to put in more electrification of products moving into electrification of AC also on the heat pump side that will drive the trends, which is all these areas that we've been working on in Beijer Ref for the last 10 years. And of course, you can see the trends within Beijer the last 2 years on the growth side. So for us, the timing is fantastic. We have the skills here. Plus, we're buying one of the leading platforms in the U.S. on a stand-alone basis is a very strong business. We like the culture of the company. It's based on this family of companies, all these companies family, so we will continue running with the professional managers, as we invested in Beijer Ref for the long term as well. So very comfortable with the setup. And then we also see opportunities here, as I talked about the green OEM to drive that going forward. So for us, it's a very strategic acquisition in a new platform and a new part of the world with similar growth trap that we see now accelerated in Europe over the last 5 years. Okay. Next page, Page 3. As we said on the financial impact, it will be accretive to EBITDA margin running at 15% versus our 12%. They've also been very good at growing organically, outgrowing the market over the last 12 years, which is also a testament to the strong business model how they are working. And then EPS will also be accreditive on this. The financing also come back to a little bit more in the end, we'll start with a bridge loan and then we have a fully refinance, fully underwritten rights issue to support this. And then also, EPTs, our main shareholder supports the acquisition and undertaken to subscribe to prorate that right, which is also, I think, fantastic there, strong believer in our business model, this acquisition and the future of Beijer Ref. Okay, next page. So why the U.S. and why the timing? I touched upon this, I leveled even in the summary in the beginning. It is the world's largest market. We are not part of it. You have a very stable underlying business with a large installed base. And this company that we have acquired 95% in the replacement business, which is for us the best place to be, both from a stability, growth and margin point of view. The market, as I said, is very fragmented. So there's a lot of opportunities for us long term to continue to drive the consolidation and then create need a stronger platform. We'll also see the distribution is outpacing the OEM, which is a good growth set for us. We see the trend now also moving into more energy-efficient solution that's more expensive. But of course, long term, will also create more focus on this electrification that's going through in the U.S., which is a positive trend for us. There's a lot of discussion in the U.S. as the rest of the world on air quality and this type of solutions. And I also see that the structure now in the U.S. new building houses that everyone figure out more and more AC put into your house as it's getting warm and warmer, especially in the part of the U.S. that this platform is paid for. For the U.S., we have a lot of regulation that's coming in. Just what I had mentioned on the EPA announcing that they're phasing out HFC gases here from 2025. It's part of their line of the Kigali amendments that were related to before. So it's a big change in the U.S. and also for the growth, but also the cutting more green. And that's something, as I said, that Beijer Ref is very strong with it. Yes, the Series 2023, I talked to that more energy-efficient products needs to be sold by January 1, 2023, which means you cannot sell a lower energy products. These products, of course, price that are higher cost, but also more energy efficient for the market. And also supported by that is the inflation reduction act that gives positive incentives for the households to install this type of product. So the U.S. is moving in this direction, which is very good for this company and then for the key knowledge of Beijer Ref. So moving on to the next slide, a little bit on the company. Heritage Distribution, it's headquartered in Atlanta, Georgia, around 800 employees. They have been merging 3 of the strongest brand in the market, which is in supply [indiscernible] supply. So they have a very strong platform for professional management together with a strong family-owned companies. And all these people are now also invested in the Beijer Ref as they rolled over their equity part of it to us, to be sort of very strong. Things very strong that they also believe in the journey going forward and they're also very committed together with us. If you look at the financials, strong organic growth, long term, short term, very good margins, good cash conversion, as you would expect in this business. It's a similar day-to-day business with small installers, tens of thousands of customers that comes in every day. What we also really like about this business. They're focused on parts and supply. So almost 55% to 60% of the business is related to aftermarket, maintenance, service, fixing things, which is a very stable business and also more of a solution for the customers. And then the ad market related to that is 95% repair replacement. So we really feel strong about the sweet spot that this company had where we feel comfortable on the future potential and also the underlying performance of the company. 64 branches, and we'll come back to that. So next slide. Won't get into details here. There is mainly on is in the HVAC side. They have parts and supply majority in all these categories. The thing that's worth mentioning here for us is refrigeration about 5% of the business. It's growing fairly fast, but you have all these changes coming a lot. And this is also, of course, where Beijer Ref, with refrige and all our global contracts will be working together to continue and expand this business. So we see very good synergies here. We'll come back to that. And then also, we see on the HVAC side possibilities on further expand the product portfolio. Next slide. Where you see the location of Heritage. They are very strong here in the South, Southeast, which are the biggest markets in the U.S. It's the fastest growing market. You have high replacement cycles, support and maintenance of the product and we'll continue to, of course, grow in that sense, it's getting all on more this trend going forward. And then we have a very strong market position here, as you can see and expect with the best product portfolio, very long at all the local installers and also supporting to the infrastructure but small and midsized installers. This is in our sweet spot. That's how we run our business in the rest of the world as well. So we're very happy to be able to do this acquisition with this type of company. Next slide. During the journey here, they've been very strong, the management they have, to consolidate the business and they've been consolidated this platform based on [indiscernible] and net supply mainly. And these are major companies in this platform that will continue to work with and the professional management that's in place. So we were very comfortable with the underlying performance and also the possibilities to continue to grow this, that they have built over the last 2 years an integrated ERP system and drive the process. But of course, we also expect very good synergies when we start working more and more with these companies on the underlying performance and purchasing pricing another key aspect of it, that's also a good value creation going forward. But a very strong company to see. They all established 1914, 1930, 1957, '69, so very established in the markets that we have thought. Okay. Next slide. High level on the synergies. As I touched upon most of these, but we see the electrification happening in the U.S. So real and we expect that to continue to drive growth in the future. You have the CO2 products and the knowledge that will continue or will start working with them as a platform in the U.S. as we see now this coming into play as the U.S. has started to phase out IG W2 HFC gases moving more into alternative solutions that we worked in Europe now for a while. We all see post on the HVAC side with our global contracts to work with the platform in the U.S. to expand that, which is very interesting. We have the private label that we launched in the refrigeration and also integrate into the U.S. and work together with. The global sourcing agreement, that's something we'll start looking into [indiscernible] start working now with our suppliers. And there's 2 sides to that. Of course, we have pricing power, but we also have possibility to see which suppliers, we can launch in these type of markets to get even better leverage long term. Pricing is something we'll work together with them. That's a journey that just started. We'll also support e-commerce in the U.S., together with this company, something that we're growing very fast in the rest of the world. Further growth pattern also on the organic side is continue to open branches and strengthen the portfolio there. And Beijer Ref, of course, a lot of experience and can support the organic journey as well. And then we'll continue to work on signing the right M&A targets together to further strengthen this asset to the U.S. So for us, it ticks all the critical boxes of being a very strong satellite company, but on top of that, be able to create value together over the long term. Next slide. So here, it's just a little bit positioning. We put these 2 companies together on LTM 12 months. As you can see, Beijer Ref running up SEK 21 billion, now together with SEK 27.5 billion. And also an EBITDA going from SEK 2.4 billion to SEK 3.4 billion, and also be accreditive here on the EPS of the margin. So we're extremely happy on the financial side as well. And this will, of course, drive a lot of improvement or expanding our financial numbers. And then you can also see in the mix that we're moving into around 62% HVAC versus 52%. And this is one of the fastest-growing segments here in our market. So we also see the trends now being even more mix towards high-growth areas for the future. So we also think that's very positive. And then you can also see the balance of the company in North America will be 24%, 25% of our sales. Europe, 60%. APAC, 40%, 50%. South Africa, 6. We've come truly more global company, balanced view of the company, which we also believe is very positive. Next slide, maybe Ulf, if you want to go over the financing.

Yes. So there's a standard Page #11. So we -- initially, we have secured a bridge financing through [indiscernible] billion. And then I will then -- we are then starting to work of doing the right issues. It's a fully backed up right issue with -- including Handelsbanken, Nordea and Citi. So that is a work that we initiated immediately. And also then the shareholders, the CEO and [indiscernible] to get control in 53% of the votes that have undertaken to vote in the favor of the right issue at the next ordinary general meeting. And also then just opposite the equity as an undertaken to subscribe to its pro rata share remaining close to 30% of order share capital. And then we have this, as I said, fully underwrite -- underwritten share issue. So yes, basically, that's it.

Okay. And then maybe the timeline.

Yes. So next page is turn the Page 12. So we -- in Q1, so we expect them to close the deal in Q1 -- early Q1, the first half of Q1. And then we will then have the Extra General Meeting, and then we will then to get approval of the rights issue and then to the first half of 2023, and then to get the right issue to be completed, which is then be in beginning of the quarter 2. So it will be quite a speedy process there.

Yes. I think that's good to mention also that as we don't expect any long lead times of closing the acquisition end of January, beginning of February, we also expect to have a fairly -- straightforward process to also go through the debt and then the share issue. So I think that's positive as well. Then final slide, Page 13, a little bit of a summary. You heard all of it now, a couple of times. But North America, we see it as, first of all, it's the largest market in the world for HVAC, is a fragmented market on the distribution side. And also the trends now is changing into moving into a more green energy-efficient market, which is changing the fundamentals of the future, which is we believe, absolutely the right time for Beijer Ref. Plus, also the underlying company that we managed to acquire a leading position in the South Southeast, which is the fastest-growing segment. So for us, of course, that's extremely positive and something that we can build out, both on a stand-alone and together with our synergies. And we talked about the global OEMs, we'll get scale for. We have product offering, we can work together. And then you have a accretive on the margin, also on the growth on the EPS. And that's, of course, also pre-synergies. And then it gives us now the platform to continue to build in the U.S. together with Europe and APAC, which I commented will create an even better company, more stable growth trends supporting it and a possibility to continue and create a lot of value for the long-term future. So with that, I am finished. So we'll open up for any questions and comments around this. Thank you.

[Operator Instructions] Okay. Currently, there seems to be no questions coming through from the phones. And as I said, we just had one come through, and it's from the line of Karl Bokvist of ABG Sundal Collier.

I apologize for the poor sound. I hope you can hear me. My question is just on the product portfolio. If it's possible for you to give any details about the brands that they currently distribute and any synergies there, for example?

Yes. I think it's a wider question than that, but I'll try and answer it in a specific way and we can align, of course, also offline on that. But if you look at the business, if I start with the parts of supply and refrigeration, there's hundreds and thousands of suppliers. And there, they also cover the brands that we work that's a strong global brands like the Comps and Bracco, Natpost and all these. So for us, that's something we will look into how we can align that better in the future. So they will carry spare land and everything else that we also have most of global agreements. So that's one part of the question. On the HVAC side, their prime brand, which is -- it's called Re, which is one of the leading HVAC OEMs in the U.S., working through distribution. I would say that probably to 4 or 5 and also one leading on the technology side. So there for us is to work more together with them how we can continue to expand and build their business in the U.S. And of course, Rimas business in Europe and APAC as well that we look into, we already had a discussion here just prior to the announcement that we'll work with Ri. We like their REIT platform very well, is one of those brands we were looking for, if we could, as I mentioned on some calls that were also when we did our analysis, we're also looking for what we believe the best OEMs to continue to grow, which where Rem is one of the strongest one. And also on the technology side, one of the best ones. So that will be maybe my short answer to the question and Karl, and we can discuss it further down the road as well.

Understood. And then does the Swiss company have a history of also pursuing acquisitions in other regions in the U.S.? I mean now you decided on the South, Southeast, but how do you see the scope of using this, as you say, platform into expanding into other parts of the U.S.?

Yes, it does. I mean, this company has been put together over the last 2 years through acquisitions on starting Wichita as the strong in the middle and then adding a supply, Benoist Coastal, to build this, which means that we're getting 2 things. They have put together professional management that runs this, that's reinvested also, as I said in the beginning. Plus, you have the divisional president for [indiscernible], that's also part of that management team. So you have a strong team making acquisition and consolidate the market. So there is a strong pipeline. There's a lot of discussions around there. And a little bit maybe to describe it as mostly we do in Europe that most of that will work here will continue to be the strong family-owned companies that we have to this platform and the people very good connections with and continue to grow. So we will continue to look at smaller acquisition that you strengthen your market position where you be, and then continue to also expand from here when we feel that we have the right partners. So this will be an ongoing discussion, but this is the platform one. So this is a big one. As we don't expect the next acquisitions to be at this, we'll continue to be more add-ons like we do in Europe or in APAC. So the acquisition will be smaller to midsize scenario to continue to build the platform and further improve the strengths, if that answers your question.

Understood. And my final one is just on the sellers, Gryphon Investors. If it's -- does this constitute of a wide array of owners? Is it families from parts of the combined businesses? Or is it a financial player?

So Gryphon is a financial player. So Gryphon has been the financial sponsor to build this portfolio up. And the way we have structured the deal is that the management and the absolute key people running these assets have then turned around and invested a large part of their equity to Beijer Ref, which means that in the press release, we buy the company and they're all over. So the management will own about 2% of the company, and we'll own 98% of the company.

[Operator Instructions] Our next question comes from the line of Gustaf of Pantechnicon.

It's Gustaf Lindskog from Pantechnicon. I have 2 questions, but I'll start with one. First of all, can you disclose the split between residential and HVAC -- sorry, residential, HVAC and commercial just to get a better sense.

Yes. I would disclose it a high level. The residential versus commercial -- HVAC is 5%-ish. So it's not a big part. It's by far majority of the residential side.

So sorry, commercial was roughly 5%. Was that correct?

Yes.

Yes.

Got it. Perfect. And -- but I mean, perhaps just if you can talk to current trends. Lennox spoke yesterday on their Investor Day about 23 volumes being down mid-single digits. Obviously, in the great financial crisis, replacement volumes fell a whole lot more than that. So kind of do you think you're isolated on the back of the trends that you have described on the call on better kind of demographics in the areas that you're operating in or will be operating in? Or should we expect kind of volume weakness to look like overall U.S.?

No, I think that there's a lot of different analysis on that. I think it depends on also where you, as you allude to where you're located in the U.S. If I start with that, this asset is 55% to 60% parts and supplies. And then you have 40% HVAC. And you have a business that you would say it's a little bit also counter cyclical. If HVAC goes down, there's more fixing replacement service and maintenance, which, of course, supports the parts business even further is that we have shorter replacement cycles in the South than you have, of course, in the rest of the U.S. Then you also have trends now when you have the SEER-16 that's running to now in the South. You have the new models coming out that you have to implement by January 1, they are priced significantly higher than your all serious requirements and energy efficiency. So I would say what balance the possible drop on HVAC, as you move through these times is, of course, the pricing as you move into the new product portfolio, and also that you have a strong 60% part in supply. So we have also gone through this and did our, and that's also what we think this asset is something we really like because of how the portfolio looks versus maybe a lot of other companies in the U.S. that's much more just HVAC heavy.

That makes a ton of sense. And maybe if I can just squeeze in one final one. Obviously, kind of really attractive profitability, the 15% that you're alluding to, has it been roughly at that level over the last few years? Or have we seen volatility in the returns?

No, I won't be in for that. I'm sure we'll do as we go through our perspectives and everything. But the reason why this company is, I would say, running at -- if you compare maybe with those listed assets that you can on higher margins is, of course, they do make more money on parts, supplies and spares, and they have a higher mix of that. And that drives why you have a higher margin than maybe what you would expect in other type of assets. So I would ask it this way. And because of that, yes, you have a good history on the margin side as well. Are we wrapping up or?

I think so. The host? Are you there?

There are no further questions at this time. So I'll hand back to yourselves for the closing comments.

Okay. Thank you. So thanks for calling in on this short, short notice. We'll continue and share information. We're also open to having one-on-one meetings to continue to go through it more in detail. We want to be very clear, and we want you also to be very clear on what we're doing and why we're doing it and also what we believe is a very strong move from Beijer Ref to create long-term value for us, the company and the shareholders. So please don't hesitate to reach out to me and Ulf, and we'll be scheduling calls up to, I guess, Christmas because of the timing. But please feel free to reach out if you want to have more clarification on this. So thank you very much for calling in, and I appreciate your time, as always.