Saurer Netherlands Machinery Company B.V. (RIEN) Earnings Call Transcript & Summary

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 Dr. Norbert Klapper. 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 Rieter. We will talk about the acquisition of 3 businesses from Saurer. You are familiar with the fact that Saurer has been a strong competitor of Rieter for many years. In June, 2 German Saurer companies filed for insolvency, and Rieter and Saurer have been able to structure a transaction, a transaction which we published this morning. As a result, insolvency proceedings in Germany will be stopped and 3 businesses will be transferred from Saurer to Rieter. I guess you have done the numbers already. By this acquisition, we expect Rieter to grow by more than 25% in sales and profits. In addition, Rieter 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 Rieter's ring- and compact spinning system. Schlafhorst 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 Rieter. And in addition to this machine, we will invest in 2 attractive components businesses: Accotex and Temco. I have a slide on these 2 businesses as well. The combined turnover of the 3 businesses in 2020, the year of the pandemic, Saurer booked EUR 142 million in 2019, which was the trough of the investment cycle. As you might remember, Saurer booked EUR 235 million. And in 2018, the last year which we could call a normal year in our business from a market perspective, Saurer booked EUR 260 million in these 3 businesses. The purchase price on a cash and debt-free basis is EUR 300 million, and we financed the purchase price from cash and existing credit lines. We expect the transaction to be closed together with Saurer 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 Rieter. What you have on this slide here is the ring- and compact spinning process, which starts with the blowroom and it goes via the card and the draw frame, the comber, in many cases, and the roving frame and the end spinning machine, ring- and compact and spinning machine. And the last step in this process is the automatic winder, and the automatic winder is a process step which Rieter 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 Rieter 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 cots, 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, everything pops up. This is why the machine is so important. It is a big market segment as well. Saurer reported sales in 2018 in winding of roughly EUR 193 million, which represented a market share of 30%. And so far, Rieter had no access to this market segment. There is also an additional sales potential in connection with Rieter systems here because the market share of Schlafhorst winders on Rieter's systems is very small. And of course, it is our objective to increase the market share of Schlafhorst winders on Rieter's 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 require. Accotex. Accotex are cots and aprons. And we have a 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. Accotex 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, sales 2018 were around EUR 33 million. It is a very good fit to our components business. It -- we don't have that business today, only very small activities in the cots and the apron segment. And this helps us to improve our market position 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 EUR 35 million. 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, EUR 300 million, cash and debt-free. EBITDA multiple based on what we saw in the previous slide, based on 2018, at roughly 9x. 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 Rieter would acquire. And in order to stop the insolvencies, the mother company of the 2 companies -- 2 insolvent companies receives the money that Rieter will pay as a purchase price. And the company, which is the mother company, the parent company of the 2 German units, is Saurer Netherlands. So Rieter acquires 75% of the shares of Saurer Netherlands against the EUR 300 million, which is the purchase price. And Saurer 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 is -- 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 Schlafhorst automatic winder from SPIN, Saurer Spinning Solutions, and Accotex and Temco from Saurer Technologies. And once this has been completed, we -- Rieter will give back the 57% in Saurer Netherlands to Saurer. 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 Rieter to Saurer. 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, Luc Tack and Stefaan Haspeslagh are to be dismissed. The reason is Luc Tack and Stefaan Haspeslagh used confidential information on the acquisition of the Saurer businesses to compete with Rieter through their own offer. And in addition, Rieter has filed a criminal complaint against Luc Tack and Stefaan Haspeslagh in this context. So far, the presentation. We are open for questions now.

The first question comes from Christian Arnold from Stifel.

Two, three questions from my side. First, you were saying that your machines are running very seldom with Saurer automatic winder. So with which machines or automatic winder have they been connected in the past will be my first question. The second question is, I mean, the takeover of the automatic winder of Saurer, 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 third is more of a clarification question. I mean, in the first step, you were saying that you are acquiring 57% of Saurer Netherlands. But at the end of the process, I understood it correctly, you will own 100% of these businesses, right? That would be my questions.

Thank you very much, Christian. Yes, the machine, which in many cases, stands behind the Rieter ring-spinning machines is the Murata automatic winder. So the market share of Schlafhorst winders behind Rieter 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 Saurer 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, yes. So I'm very happy that they will come to Rieter now. And they are a perfect match to our strategy, Accotex for the ring and compacting spinning system. In addition to other spinning systems, they also provide cots and aprons, for example, for air-jet machines, yes. So this is really a core component business that Rieter didn't have. And the second, Temco is very, very good because it matches with the ambition to step into the filament business via 3 components. This had 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 Saurer on this. And the clarification that you have been asking for, yes, this is how it's going to work: 57% in Saurer Netherlands now then the carve-out. And the carve-out companies, the businesses will be owned 100% by Rieter. And at the end of the transaction, Rieter will give back the 57% of Saurer Netherlands to Saurer. So that at the end of the transaction, Saurer Netherlands will be under the control of Saurer at 100%. And the businesses which will be below Saurer 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 Texparts and also Volkmann, which is the twisting machines. That will be under Saurer Netherlands. And under retail, the 100% will be the automatic winder, Accotex and Temco.

Okay. Maybe a follow-up question. I mean this whole situation, difficult situation of Saurer, 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 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 Saurer also enjoys a nice order intake. As everybody in the industry at the moment, Saurer also enjoys a nice order intake. We're not sure whether we can say that customers placed orders with Rieter 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 equipment order would be a lot longer than 8 weeks.

The next question comes from Charlie Fehrenbach from awp.

I have 2 financial questions. The sales of the acquired businesses, will the sales be in the current year close to this EUR 142 million of 2020 or close to the EUR 235 million of 2019? Or you maybe could give a new guidance for the whole group and [indiscernible], I guess, more than CHF 900 million for the whole year? Maybe you can add to this. And the second part of this is the profitability of the acquired businesses compared to Rieter. 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 2 questions concerning the Board members. Are these 2 concerned Board members suspended from the ongoing Board meetings at the moment? And Luc Tack holds more than 10% of Rieter. Do you -- don't you going to expect any problems to recall him out of the Board concerned to this? You may know the position of Peter Spuhler in this question.

Okay. You want to talk about the financials?

Yes. Okay. 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 -- there's a good market, Norbert mentioned this before. We are in an upswing at the moment in the market and this will also be reflected in the numbers of Saurer this year. Profitability of the business, it's the same answer. You can see it's a similar development that we had. We had a very bad 2020. These 2 businesses also were negative, loss-making. Their 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.

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 Picanol, which Picanol has at Rieter. I don't know we what this is, where we will be with this and what is going to happen. This would be pure speculation.

The next question comes from Edouard Riva from ZKB.

Just have a small clarification question concerning the winder market. You mentioned that the Schlafhorst 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 should we think at 30% on the Schlafhorst system, 50% for Murata and 20% Savio? Is it something like this?

Well, the -- I have learned from Saurer that they look at the market the following way: market shares, Saurer and Savio, 30% each; market share, Murata, 40%.

The next question comes from [ Rene Troy ], freelance.

I have 4 questions concerning the Board members. The first one is what does Rieter think of the presumption of innocence of complaints towards, let's say, with this strong content? Then secondly, are there any proofs available for this complaint? And if yes, would they be public? Third question, you said there is already filed a criminal complaint. So that did happen already or will it happen? And last question is Mr. Haspeslagh was introduced to the Board of Rieter just in spring of this year. So in the knowledge of today, wouldn't you think that was a little bit shortsighted to appoint him as a member of the Board?

Well, I guess what Rieter this morning is to file the criminal complaint, yes. So 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. The -- we have, of course, told the Swiss prosecution what our position is, what Rieter'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 -- when -- in your fourth question, the nomination of Stefaan Haspeslagh, 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.

If I may ask a follow-up question, just repeating my first question. Presumption of innocence is a basic rule of all criminal procedures. So I'm missing a little bit this declaration in your announcement of this morning.

Well, I guess that is not up to us, yes. We -- Rieter 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 them.

The next question comes from Andreas Meier from Finanz und Wirtschaft.

Yes, again, a question about Mr. Tack. How did you learn that he or his surrounding made an offer from Schlafhorst? Did you have been informed through Saurer? 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, Rieter looks at things from our announcement and this is all I can say about it today.

The next question comes from Rolf Renders from Helvea.

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 Rieter systems and also the potential it will have when it comes to differentiation of the Rieter 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 Accotex because on the business today, the market share of Accotex on our machines is -- can still be improved, I guess, yes. And Temco is a company which opens the filament market, to a higher extent, to Rieter. And this also brings along opportunities which we don't have today.

Okay. I, of course, noted that you explained it already. I'm looking for the reference number now, right? So it's EUR 260 million of sales in 2018, let's say before it was as tough in the market and before there was the pandemic impact. So with the synergies you have, do you expect -- do I understand right? Did you expect this number to be larger or even significantly larger in the future?

Well, we will do our homework on that, Rolf, yes. And as soon as we have something well based and well thought through to tell, we will certainly do that, yes. 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. That will be great to learn then when you have done more 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?

The biggest benefit here of this is to control the process in a better way than to take inefficiencies out, yes. 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.

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% 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.

The next question comes from Sebastian Vogel from UBS.

Just one on the integration side. Can you quantify the integration costs and how much of the integration is actually possible for these businesses?

We have not determined the integration cost because the carve-outs have not started yet. We expect the integration costs to be in the single million-digit range.

And that over some time or just one -- the first one in 3 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-out, once the carve-out has 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 2019 and 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 number?

Say it again. It is higher than what?