Rico Group GmbH (SEM) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for joining us at such short notice. As you most likely have noticed, we just signed the share purchase agreement with the 3 founders of Rico Group earlier today. Now we would like to introduce the company briefly, both to explain the synergic rationale of the takeover and to be at your disposal for Q&A later. With me on the call is our Chief Operating Officer, Kristian Brok; and our Chief Financial Officer, Helmut Sorger, who will present on the operational highlights and financials, respectively. Let me first start with strategic rationale on Slide 2. At this point, let me recall our strategic priorities as defined in 2020. Already back then, it was our aim to target the existing industrial polymer business adjacent and/or in a proximity of the value chain. We targeted innovative sectors with high growth characteristics and focus on companies with a leading market position. As you know, innovation and technology are ranking high on our agenda, and we aim to achieve global leadership and differentiation through technology in our M&A strategy. This announcement of our industrial elastomer strategy in January 2020, you are aware that we are looking for attractive opportunities to expand our expertise and leveraging growth. With the Austrian-based RICO Group, we are actively addressing highly relevant business change in our 4 major areas. First: Health Care & Life Science; second, Household & Sanitary; third, Electrification; and fourth, Mobility. At the same time, we strengthened our market access and presence in North America as well. In terms of the product portfolio, we are now in a position to complement our offering with high-performance advanced materials by focusing on liquid silicone, also called liquid silicone rubber or LSR in abbreviation. I would particularly highlight that RICO Group has a global technology leadership in liquid silicone, consisting of high-end tool making expertise with process know-how, high automation and large-scale production. In financial terms, we are adding a value accretive business, and Helmut will take you through the financial terms of the transaction in a few minutes. For me, this is strategically not only a highly attractive asset but a conveying case for elastomer growth trajectory. Over the page, I would like to introduce the corporate profile of RICO Group briefly. RICO was founded 29 years ago, and the company has become a leading global player in LSR based solutions, with annual sales of around about EUR 90 million and about 500 employees in Austria, Switzerland and in U.S. Based in Thalheim, Upper Austria, RICO Group is situated in the so-called Austrian Silicon Valley with its world-class technology and high skilled employees. Its leading tool-making expertise provides RICO Group with the industrial capability to offer cutting-edge solution for very complex projects. In this respect, relevant examples include multi-component injection moulding, overmoulding and "clean room" manufacturing. One of the outstanding features and the key attraction from our perspective is the high level of automation with individual tailor-made solutions according to the customers' need, but also allowing a large-scale production in an even more scalable business model. With this, let me hand over to Kristian to take us through some operational highlights at RICO Group.

Thank you, Karl. And I will start with the global footprint of the RICO Group as it's shown on Slide #4. While the headquarter and the original tool-making facilities are based in Thalheim, in Upper Austria, there are extended capabilities for high-volume liquid silicone or LSR manufacturing and multi-component automation both in Switzerland and in the U.S.-based subsidiaries, both with their local brands and sales relationships and customer base. In addition to RICO Group also owns the majority of HTR, so that's a specialist in hardening of tools and other metal products, steel products, and that is based in Thalheim, in Upper Austria as well. At the same time, the main production facility at the Thalheim side is currently in the process of being expanded through a combination of new production facilities, storage holds and offices, which is expected to be open later in 2023. Further on, on Slide 5. In terms of our expanded product portfolio, I would emphasize that the liquid silicone implies superior features not only in terms of feeding chemical resistance, it's simply inert. It's outperforming a lot of other polymers, a lot of elastomer products and rubbers as well. And that is also the, in essence, the growth potential of the material. These beneficial material characteristics ensure a long product life cycle, and we provide some product examples on the slide from different industries. We also summarized some of the major technologies applied single shot, double shot and multiple shots as well as overloading to explain the industrial capabilities of the RICO Group. The important point to make here is that RICO elastomer, the original silicone production facility in Thalheim, is now significantly integrated along the value chain for tool making and parts production, delivering not only tools to its subsidiaries in Europe, but also in the U.S., but also complementing other entities. Turning to the page and looking for new market opportunities through liquid silicone or LSR, Semperit is not only expanding through the acquisition of RICO applicable in high-quality tool-making capabilities but also enable to differentiate itself by delivering complex projects with a high growth potential in this new field of business. Some minutes ago, Karl already outlined some of the relevant business trends in Health Care & Life Science, Consumer & Sanitary, Electrification and Mobility. Suffice to say here that the market size for silicone moulded products, and this includes liquid silicone and heat-cured rubber, which is the industrial version of silicone is estimated to be close to USD 8 billion this year with a 7% weighted average growth rate, quite significant numbers in this day and age. For me, as to see here, the most striking feature is RICO Group's superior performance in liquid silicone and the fact that over the years, it has become the partner of first-choice for numerous highly reputable customers and that across the globe. The combination of 2 making the manufacturing of turnkey systems and automated assembly of multiple-moulded parts creates not only deeply integrated partnership with customers, but also higher margins and lower lead times. At the same time, 2K or multi-component injection moulding, over-moulding and clean room capabilities for the manufacturing provides additional market access in Health Care, Consumer as well as Sanitary and Mobility. With this, I hand over to Helmut to take us through the financial aspects of this deal.

Thank you, Kristian, and good afternoon to you all from my side. In terms of the transaction summary, I may ask you to turn to Slide 7. We are very pleased to have acquired a high-growth company. I mean we see from the period of 2010 to '20 annual average growth rates of 14% for RICO Elastomer and about 16% from the years '20 to '22 for the RICO Group. The purchase price multiple is at 12x EBITDA and a 3 years target multiple we see at 7x. Here, we also include our considerations into CapEx for the next 3 coming years of about EUR 45 million to EUR 50 million. Revenues were at roughly EUR 90 million and the recurring EBITDA of the existing business is assumed to be approximately EUR 16.5 million. We obviously haven't acquired only a very successful business, but I'm very pleased to welcome about 500 highly skilled employees who will be the backbone for future growth opportunities and part of these employees, we've just met downstairs. We're sitting here in Thalheim bei Wels. As there are a number of authority approvals required mostly in Austria and the U.S., the process of a merger clearance has started, and we expect the closing of the transaction for the third quarter of '23. Over the page on Slide 7, let me just remind you about our strong cash position as we had reported with our full year '22 results only a couple of weeks ago. As of the 31st of December '22, we had a net cash position of EUR 54 million and an equity ratio of 61.5%. The acquisition of the RICO Group will therefore be financed through a combination of this cash and a term loan with an ESG component. The newly arranged term loan amounts to EUR 150 million. In this process, our financial framework will further involve implying a healthy leverage through the new financial structure. And finally, we'd remain committed to the existing industrial growth plans, both for Semperit as you've seen at several occasions, but also the plans to develop RICO Group further. And of course, we will provide you with an update in due course. Let me now hand back to Karl for his final remarks.

Thank you, Helmut, for this explanation. So let me just wrap up by saying that we are extremely excited that we are able to sign the share purchase agreement today as we truly believe that acquisition of RICO Group offers an excellent strategic fit for Semperit. We are not only able to expand our elastomer competence through LSR knowledge, know-how, but also add global leadership in high-end tool-making. And this through a high automated, high volume on highly scalable production setting. At the same time, we are making further progress in penetrating attractive markets and serving high-growth industries such as Health Care & Life Science, Consumer, Sanitary, Electrification and Mobility. Finally, we are strongly encouraged to be able to strengthen our market access and, most importantly, our presence in North America, which is a key pillar of our industrial strategy. With this, we have come to the end of our presentation and Kristian, Helmut and myself are now at your disposal for any questions you might have. And lastly, I would like to apologize for the delay of the call because we had to inform the employees of RICO Group before, and it was a little bit longer. We apologize for that.

[Operator Instructions] We have the first question from Markus Remis from RBI.

My first question would relate to the EUR 16.5 million EBITDA. You attached the term recurring to it. Can you please put that into perspective what's included in recurring or what's adjusted? And maybe you can also give us the stated EBITDA figure for 2022?

Yes. Mr. Remis, of course. We provide you an ongoing EBITDA figure for the existing business. As Kristian has explained before, this is a business here at the site in Thalheim, which is expanding. There is a new hall at the site, which can be filled with machines. The hall is under construction. So basically, the EUR 16.5 million does not include growth potential for this. We have not received '22 million final figures, but they will be in the vicinity of EUR 16 million. That's about EUR 0.5 million in there of an adjustment, a onetime adjustment. So very close to reported figures. But as I explained, with the investment of EUR 45 million to EUR 50 million in growth CapEx, one part, of course, into infrastructure, the other part into new machinery and expansion. We see the potential to increase this EBITDA significantly, as you've certainly noticed with the guided target multiple of 7x. I hope this answers your question.

Yes, it does, but it also gives me the prelude to my next one. If I do the math and put EBITDA at 7x, it implies roughly EUR 30 million in EBITDA or 20% per CAGR over the next couple of years -- over the next 3 years. Can you maybe help us understand the growth part and the synergy part? And if there are synergies, is it mostly cost driven? Is it kind of top line driven, cross-selling, get some insight on this aspect, please?

Let me start with the synergies, which is a very clean cut case. There's no significant synergies, no significant cost synergies apart from the usual ones that are basically back-office licenses, insurances and of course, the treasury and the financing front. It's a completely new business that's limited overlap, manufacturing wise and also back office wise. Cross-selling, it is a potential that we see, but it's not included in this target figure. So that's on top of it. But it's truly a growth case basically. There's a whole -- there's space, and there's market out there. As you certainly can see from the historic growth rates, and I think there's strong support that this market is going to continue to grow. But Karl Haider can explain the situation much better.

And you have realized how RICO Group has 3, let's say, countries active: Switzerland, in U.S. and in Austria. And all 3 facilities having opportunity of growth. They have in U.S. opportunity, they have in Switzerland opportunity, and they have the potential to grow in the same speed as they have done in the past is very clear, visible and also supported from Semperit.

Okay. And I guess kind of the earnings growth that should also come with the margin improvement? Or is it basically already kind of...

Yes. You're absolutely right because certainly, once you have the infrastructure ready at these sites and the new hall, the new manufacturing hall is right next door to the existing one. So you can certainly appreciate that you have a certain operating leverage, which is considerable in that business. RICO is capable of doing highly automated production and is able to do what is referred to in the industry as lights of shifts, which means fully automated production without manual labor on sites.

Okay. Okay. And what's kind of the required, say, top line growth in order to get to this EBITDA target multiple?

You have seen in the past the top line growth in elastomer, over 10 years of 14%. And you have seen the last 3 years, the whole RICO Group is 16%. The market is sizable. The market is their, and we aim to grow in the same speed as in the past.

Can you -- final question before I get back into the line. Can you give us an idea of the capacity utilization that is kind of based on the EUR 90 million. And Yes, that's kind of the -- and maybe also a word on the current trading. I mean is it a business which is, I don't know, very cyclical or is it more of a stable anchor?

I think it's -- thank you for the question. It's a business of a certain nature. These -- the products that RICO Group is producing are not their own products, so to say, it's solutions for somebody who knows this product. So this cyclicity is there for sure, but that is highly depending on the individual customers. The product or the customer mix balances that to a large extent. But of course, there is a dependency in that respect. As to capacity utilization, the equipment is highly dedicated. The production equipment is very specialized, which enables what also Helmut was alluding to before, the old lights out production, which means that manufacturing equipment is specific and dedicated in the vast majority to specific customers. So it's the utilization is driven by the customer demand itself.

And just to add to that, it's basically a customization of the process with automation and with the forms, I think this is the very important part here on standard machines. So the injection moulding machines that are used, this is standard equipment that can be easily obtained and technology of RICO is in the process and in the form. So it's the utilization that is relevant in this business, is the utilization of the forms and the automation that is specific to customer specific.

The next question comes from Christian Obst from Baader Bank.

First, going back to the customers of the contract structure, maybe. So how are you depending on certain customers? Or you rely on specific customers? And what kind of long-term contracts do you have? Do you have some kind of price clauses where you have to deliver a certain productivity over the time? And can or can you adjust prices when you have rising costs on the other side?

Thank you, Mr. Obst for this question. The secret of this business lies in the design of the tooling and the tooling. And when the tooling is finished and the prototypes are done and, let's say, approved from the customer, then of course, there's a long-term fixing with the customer, with the technology, because 2K, this technology is quite complex. So from that point of view, the customer mix is very stable. It's a relationship both customer wins and RICO Group wins. And so a very preferred situation from a simply point of view.

So when I have seen right on the website of RICO, sales grew from EUR 45 million in 2020 to approximately EUR 90 million, so almost doubled in 2 years from 2020 to '22. Is that right?

The growth rate was 16% in average the last 3 years.

It's just the group was newly formed in 2020, so you basically have with the results, the starting have to consolidate.

Okay. And then we have -- with the EUR 16.5 million EBITDA. We have EBITDA margin of 18% in a time where you just installing new capacities. So this is more the low end of a possible margin which we can expect. Is that right?

Correct.

Yes. The new machine, you have a scaling effect on the new machines, which are coming into the play in the future.

You have an operating leverage on [indiscernible] labor.

Okay. The risk is more on the upsides here. And then you say, okay, do you have the 7 multiple of 7 targeting in '25 then or '26 or something like that. This would include either a 20% margin, was it EUR 150 million of sales or a higher margin with lower sales? But when are you get you right, what you are assuming is that you might reach the EUR 150 million of sales with some kind of a 20% margin?

That's correct.

Okay. And then coming back to the financing. And if I conclude everything which we have now, so the dividend payout of what -- we start with the EUR 50 million of net cash approximately, with the dividend payment of approximately EUR 100 million purchase price recall, EUR 200 million, approximately Semperit divestments -- Semperit divestment cash-in EUR 100 million CapEx for everything, approximately EUR 100 million at least, and a positive operating cash flow. So I end the year very rough guess with a net debt of approximately EUR 200 million. Is that some kind of a share assumption?

I would say, a very fair assumption is.

Which is then approximately 2x EBITDA or a little bit less?

It's well within my comfort zone of 2.5x.

Okay. So can you say, when it comes to customers, are there customers which have the so 5 customers responsible for approximately in 10% or 25% or 50% of entire sales?

It's different between RICO elastomer in Thalheim in Switzerland and Semperit in the U.S., but we are not commenting on detailed figures here.

Yes. This might be a possible risk when some customers might change supplier or whatsoever. Okay. Last question is...

Sorry, just a small comment. The loss of customer is minimal because the transfer of this high complex, highly developed tool is not easy to do.

Yes, of course, I understand that. Last one is for the new capacity, you are now building, because you have expanded the company for a certain time and then for more or less highly utilized everything quicker than expected. Is the new capacity, which are you installing now, is there -- do you also already have some orders for the customer? So is this new equipment also purely dedicated to a certain contract, let's say, put it that way.

Every piece of equipment is dedicated to a contract. So in principle, nothing is built before there's a contract in place. So -- what do you say, it's smaller increments. You say the bigger investment is the building, the infrastructure and the incremental comes with business is, in relative terms, smaller. But very difficult.

But one thing, it's all good. But everything is so good. So why have the 3 owners sold business?

They are playing around with this idea already since the years. Therefore, they created this RICO Group, [indiscernible] why did it could be transferred. And all 3 gentlemen are on the age, and they had to take decision for, let's say, a long-term prospering RICO Group for the future. And this is the outcome and 3 gentlemen feel very comfortable that the journey can continue.

Okay. Is that will -- some kind of a competitor of you?

We are not commenting on this.

[Operator Instructions]

So there is no any questions, now it's coming.

It's coming, yes. Bingo. Then the next one will be from Daniel Gehlen from DPC.

I just have one. Can you give us any additional information on the D&A or the maintenance CapEx profile of RICO? And maybe also anything that you can say of the returns on capital that the company has achieved in the past?

The maintenance CapEx is about EUR 3 million a year. And this is in line with the historic figures that we've seen. In forming RICO is at the cutting edge of the technology as far as C&C processes and machining processes are concerned. So of course, you will have to -- we will have to stay at the cutting edge of this, but this is pretty much standard equipment. The know-how is basically the programming the technology and the digital processes. And I did not get your second question. I'm sorry, apart from maintenance CapEx.

The other one is just the -- if you can say anything on the returns on capital of the company? Capital base of the employee maybe?

Attractive, but no detailed figures. We will not but you can see the [indiscernible]

The next question comes from Vladimira Urbankova from Erste Bank. Please go ahead.

That was already answered. Just one question regarding the bank financing. You mentioned EUR 150 million new loan based ESG component. Could you a little bit share with us some more details about the terms of the loan, like duration, like interest, cost and yes, something what to imagine here?

Yes. The term of the loan is a 5-year term plus 2 1-year expansion periods. Interest in the relevant leverage ratio that we see for this is 180 basis points above a year ago. And the ESG component of it is 2 basis points up or down whether ESG targets are met or not. I'm sorry. 3, correct, 3 basis points.

The next question comes from Roland Könen from Value-Holdings.

Yes. Almost -- most of the question has been answered, thanks to Markus and Kristian. Just one question on your extra dividend. Is it still right that this dividend will be paid only after the closing of the mid transaction?

Yes, this is correct.

We have a follow-up question from Mr. Remis.

A couple of more, please, from my side. Firstly, is there anything you can already tell us with regards to the asset breakdown in the consolidation? I'm asking specifically about the amount of goodwill that you will have to recognize.

Markus, you will appreciate. We signed the deal. We are now in the process of preparing the details for the PPA, but we cannot give you guidance on the difference from the acquisition price at the moment.

Right. But it's fair to assume that there will be one or the other EUR 1 million or more?

I think this is a fair assumption.

All right. Okay. Can you maybe help me also understand the ramp-up of the new capacities and kind of the trajectory you've built in for the EBITDA improvement?

Yes. So basically, the building -- the erection of the building and the new capacity is happening as we speak. So this is a 2023. The first phase is going to be completed and also to largely extend -- the large extent we built out already in 2023. And that is, of course, built in into our plans. This is exactly as we said before, maintaining the trajectory of the CAGR that has been realized over the past years. But the projects are in the pipeline, they are defined. The customer agreements are in place. So this is -- this is not a disruptive approach. This is continuing the business as it has been and as it will be.

2 pronounced CapEx waves in there, which -- one is in '23 for the infrastructure, the completion of this building and one is planned in '25 when the expansion of the site in the U.S. is happening. It's a rent...

In Switzerland.

And just to be -- Remis, the building is, as Helmut said, is happening. And of course, the building has a bigger size, but it's also refreshing, as Kristian explained already. The machines coming with the contracts of the business. There are a couple of contracts already in place, the machines that are coming in 2023, but not the full building is fully load with the machines in 2023. This comes gradually over the next years.

The U.S. rented building where there's an expansion opportunity, basically 2 sides of the building and there's an expansion to the second part of the business, which can also be ranked. Just for clarification.

Okay. So '23 will be the peak of CapEx than a little less in '24 and '25 we'll see another increase and that adds up to the EUR 50 million?

Not to the extent of '23.

Okay. Got it. Just checking. Yes. How should we think about your further M&A appetite now post this acquisition?

So a very good question. But please take care, we have the divestment of med running towards closing. We just signed this deal today. And therefore, the organization is adjusting this as we speak. And therefore, of course, we have very nice ideas as Executive Board here, but everything needs to be step-by-step.

That's a prudent approach. Final question, the closing of the med divestment, any news you can share with us on the time line?

It's going according to plan. That's it.

Okay. So that is -- that means by the end of summer or so?

Yes, as we have communicated last time, summer.

There are no further questions at this time, and I hand back to Mr. Haider for closing comments.

So thank you very much for dialing in on the short notice on this. But I think you are interested in the same way as we are. We are developing Semperit in the right direction. And this acquisition gives us for many points to be explained a next step in our strategy of developing Semperit in industrial focused company. Thank you very much and enjoy the late afternoon.