Tarsons Products Limited (TARSONS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tarsons Products Limited Acquisition Update Call. This call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rohan Sehgal, Whole-Time Director. Thank you, and over to you, sir.

Good afternoon, and a very warm welcome to everyone present on the acquisition call for Tarsons Products Limited. Along with me, we have Santosh Agarwal, CFO, and Compliance Officer for Tarsons and SGA, our Investor Relations advisers. So the global plastic labware market is estimated at approximately [ INR 15,000 crores ], and we have not even scratched the surface of it yet. Tarsons has proudly positioned itself as a leader in the plastic labware product line within the Indian market serving the dynamic life science industry. While our success in India has been noteworthy, we acknowledge that the global market represents a very vast landscape. In lieu to enhance our focus on the overseas markets to tap the enormous opportunities that lie through the inorganic channels, we were evaluating few potential acquisitions. We are happy to announce that we have successfully completed the acquisition of Nerbe, a Hamburg-based company specializing in plastic labware products. This acquisition is in line with our strategy to expand our reach in the global market through channel partners to make deeper inroads in those geographies, given the significant market size. Nerbe serves us as a gateway for expanding our footprint in Europe in terms of geographical expansion and also in terms of expansion of our product reach. And we are optimistic of the long-term growth opportunities through this acquisition. Let me give you some information about the company Nerbe. So this company is headquartered in Hamburg specializing in labware as well as certain testing and medical products with a sales footprint in Germany as well as some other countries in Europe. Nerbe offers a comprehensive line of products, including pipette tips, petri dishes, screw cap containers, swabs, tubes and source these products globally. It is a 4-decade-old entity in the business of developing and distributing plastic labware and it's run by a family based out of Germany. Nerbe has a well spread-out product portfolio as well as a client base. We are happy to address that, Philipp Nerbe, the CEO of Nerbe, along with the management will continue to run the business and the operations would continue in just the way it was. Our main goal is to grow the Nerbe business in the European markets with its vast experience, extensive reach and large basket of product portfolio. As we now move forward, we remain steadfast in our commitment to excellence and we look forward to the exciting opportunities and challenges that lie ahead in this new chapter of growth and expansion for Tarsons. The acquisition of Nerbe represents a pivotal movement in the Tarsons' journey, opening up new horizons for growth and reinforcing our commitment to being a leading force in the global labware market. Let me now give you some details on the deal structure as well as how it's funded. Through our wholly-owned subsidiary in Singapore, Tarsons Life Science Pte Ltd, we have secured the complete 100% shareholding of Nerbe. The estimated equity value of Nerbe ranges between EUR 10 million and EUR 15 million, with adjustments possible at the time of closing. I would also like to highlight that in alignment with the current slowdown in the life science industry, Nerbe has experienced a decline in revenues in this current 2023 fiscal year. Despite this, it possesses immense capability to generate revenues going forward as we integrate it with Tarsons. We have funded this acquisition through internal accruals. The completion of this transaction is contingent upon fulfilling through customary conditions precedent as outlined in the share purchase agreement and is anticipated to be finalized by January 2024. With this, I open the floor for questions and answers. Please note that this call is for the acquisition update for Nerbe and we would like to restrict the questions pertaining to this acquisition only. Thank you.

[Operator Instructions] The first question is from the line of Jaiveer Shekhawat from AMBIT Capital.

Congratulations team for acquiring the entity. Firstly, Rohan, could you elaborate on how you identified this opportunity. And if you're looking for more such opportunities in the pipeline?

So yes, we continuously look out for opportunities which could help us open up our business in international markets. I think primarily our focus is to look at companies which would help us grow our global footprint as probably 98% of the business comes outside the country and we have a very established presence through our brand in the country. So we -- the promoters as well as the management through conducting business over the last various years have a fair idea about the company is operating in different geographies, and we follow the process of having a consultant in place and approaching companies which would be interested for such collaborations.

Understood. And just to understand the business of the target entity better, could you specify whether they are solely a distributor? Or do they -- do any contract manufacturing for large players? Or do they also sell their products under their own brand as well? And just more clarity on that.

They sell the products in their own brand, completely on their own brand. They act as a brand and they, in fact, outsource a lot of manufacturing. So they are involved in the development of their product lines to their specifications, to their customization and to their needs. So they do have a lot of contract manufacturers available in Europe as well as globally for them for their brand.

Right. So would your strategy be to in-source majority of their supplies then from the Panchla facility and then supply to the entity? And how soon would you be able to sort of reach the kind of revenues that they have already done, let's say, in CY '22, for example?

So at this point, it's too early to say that about the revenues as well as about the strategy of in-sourcing. I think they have a well-established network at this point of time with strong partners, both on the supplier as well as the customer level. So the company would run status quo at this point of time with its entire team and former promoter continuing as Managing Director. And we'd allow him to lead the company while our main focus would be to widen the geography because Europe is a huge continent with about 40-plus-odd countries and Nerbe is very strong in selected countries, which are the major ones like Germany and some neighboring countries. So we try to widen the product line because Tarsons has a wide product line compared to what they offer as well as widen the geographical reach. So our immediate goal would be to assist them in scaling up their operations with what we can at Tarsons rather than making too many changes. And we'll set out the [ mid-term ] and long-term strategy as we move ahead in this deal.

Sure. And in your opening remarks, you mentioned that there has been further decline in revenue during CY '23. So one, what would be your expectation, say, for this year? I mean possibly you might have already done, seen the first half numbers as well. What's the kind of decline that you've seen in revenues? And then secondly, even in terms of margins, given the margins also are quite inferior versus what you make at Tarsons. So how do you see that gap sort of getting bridged over a period of time? What's your strategy there?

See we'll -- at this point of time, we just signed the deal. We have not even closed it. So we haven't had an opportunity to go deeper into detail on these things. But I think the COVID numbers of '21 -- 2020 and '21 have been unrealistic, not so much for us as a company at Tarsons. We've still been able to maintain numbers, but most companies have seen significant amounts of drop in their revenue, and Nerbe is no different to that because there were a lot of opportunities available in the European market, which they capitalized too and such opportunity -- opportunities don't exist today. And our goal of buying Nerbe was not looking at the '21, '22 or the current numbers, but strategic proposition what Nerbe brings on the table for Tarsons, it gives us an opening into the very large European market, the second largest market in the world after the Americas. And this gives us a very strong opportunity to be able to scale up Tarsons and scale up our presence and penetration into this huge geography and that's the primary goal of this transaction, and we stick to that.

Understood. And just to better understand, by when do you expect to sort of scale up the in-sourcing part of it? Or would you want to run the entity as is for the next 1 to 2 years?

I think the whole idea is that the promoter or the owner is known well to me for a long period of time. And apart from that, the company has 45, 50-odd people. And Germany being the kind of country it is, I think it's better that we should understand the culture, know the people. It's our first acquisition, let the promoter run the way the company is being run, and first be able to understand what it is. As I said, sourcing could be an important thing for us, but it's not the first thing what we are looking at. We are first looking to see how we can use the legacy Nerbe brand to be able to scale up what they don't have through Tarsons as well as scale in terms of geographically as well as product line. So we'll try and see what Nerbe can -- what products can be added to Nerbe what they don't have and as well as scale up the geographies. And then if any opportunities come up after that in the future, we own the company, we will see whatever best decision is at that time.

And just to add what Rohan said, our idea is not to disturb the supply chain operations, our idea is to support them and to help them and act as a shareholder and to give him freehand to the Managing Director to run the company.

The next question is from the line of Abdulkader Puranwala from ICICI Securities.

So first question is on the selection of this particular target. So sir, I mean, could you try to help us understand the kind of market opportunity which Germany or the nearby countries offer to you and for the product set what you are already into through this acquisition?

Yes. So I think what was very clear was that we were looking for something in Europe because we targeted Europe to build and grow our presence. I think it's a major economy where a very small percentage of our international revenue comes out of and we see a large runway for growth out there. And when we look at Europe, I think Germany, France, U.K. are 3 major countries. So looking for a brand or a company within this territory will probably propel our growth the fastest as well as give us a better platform as compared to some of the other smaller countries in Europe. So the rationale behind the acquisition was to find a company like Nerbe. I think such companies are very far and few, which come as a good fit where we can be able to build and grow on that without much tweaking and changes. So that was the primary rationale behind this acquisition.

Okay. Okay. And sir, in terms of their entire team, so what you mentioned that the previous promoter would be running this business even after you guys acquiring them. But in terms of the team, how big is the team and what all geographies are they currently covering apart from presence in Germany?

So they're present in about 25, 30 countries outside Germany. But I think there's a lot of work and a lot of runway for growth in those countries. They're very, very strong in and around Europe. That's their forte and that's always been their forte and concentration, very similar company to Tarsons like how we've always been very focused on our domestic country with also export. I think similarly for them, I think they are approximately, give or take, 45, 50 people along with the management team.

Okay. Okay. And last one from my end. So this acquisition price what you mean approximately EUR 10 million to EUR 15 million, so that seems to be a wider range. So I mean you enter a deal but the prices are not yet fixed. So what are the adjustments here? I mean is it related to the working capital or what basically?

No, there are adjustments related to closing numbers, which are working capital and other related things as well as there are certain criterias for growth over the next 1 year, which would propel them to receive some sort of an earn out, so that's hence the range.

The next question is from the line of Aman Agrawal from Carnelian Capital.

Congrats on the acquisition. So just getting an idea on the direction, like from 2022 numbers, are the '23 numbers more or less similar because looking at '22 numbers, the acquisition is at almost 2x to 3x EBITDA, right? So trying to understand why the company basically sold and if they are continuing as a management like why at such low valuations to us, like...

No, I think it's not reasonable. We have not closed the deal at 2 to 3x of EBITDA and that is on FY '22 numbers. The deal is purely strategic in nature and based on projected '23 numbers, which are yet to be finalized and audited. I think what I can say at this point of time is that we've been able to close the deal as per market standard. It's neither an expensive deal nor a cheap deal. It's a very, very premium and hard-to-find company, and we paid the right price for it what this company deserves. And it's as per market standard, similar to the last deal or last 2 deals what you've seen in this space in India.

Understood, sir. That was really helpful. Second thing, sir, on the product overlap, like how much product overlap we would have with this company, like any idea on that thing?

So I think we'll start looking at opportunities now. But more or less, they have their business of plastic as well as some testing and medical products like swabs, something which we don't do. But in the plastic labware-side, we are already present. So the overlap is on the plastic labware side, not so much on the swab or the medical side. So that's an overlap. But as I said earlier to Jaiveer and as I've been saying the whole idea at this point of time is not to look at the small picture of being able to source for Nerbe, but the larger picture which is to be able to expand Nerbe across the European geography as well as being able to expand the product line by using Tarsons' manufacturing prowess. That's the whole idea.

Understood, sir. The third question was on the R&D center. So we have also acquired the R&D company. So how many scientists we have there and which products are they engaged in? And do we see a synergy of basically using our own R&D, and not having R&D in Europe, which would be costlier for us?

Aman, where is the R&D. What is that name? You can see the R&D, name is here, but there is no R&D as such in this company. It's more like a distributor. Now they are not doing any kind of manufacturing kind of thing, so there is no R&D as such.

So they have a team of 1 or 2 people who are involved in development with suppliers, the product line as per their customization, but that are -- these are standard developments, and these are actually research and development. So they're not innovating something which is new, which has never been there in the world, but they are innovating commoditized products, which are present in the world to their own means.

And they have a strong...

Understood, sir. A final question from my side, sir. We are getting into 2, 3 product categories recently, right, PCR, PETG and cell culture. So like, do we have any synergy with this company on that side, like do they have similar product? Can we get some...

They don't have PETG and cell culture. As you rightfully -- this is -- but they have PCR.

Okay. So we can see some synergy on that side maybe in future?

So the Tarsons' portfolio has been larger than the Nerbe portfolio. And Nerbe has done very well to build a lot of trust and a lot of customer retention, especially in Germany and surrounding areas. And we look to build on that and use our capabilities to help further strengthen and grow that in Europe.

We have the next question from the line of Udit Bokaria from Catamaran.

I wanted to understand if you can talk a little bit about, as you mentioned, right, after acquiring this company, you will help them grow much faster, right? So historically, what has been the reason why the company was not able to expand to other countries outside Germany or onboard more number of clients? And the second question is, if you can talk a little bit about their current customer profile. Like is it primarily big pharma? Is it primarily institutes, research institutes? If you can just share some color like what is their current strength while -- and what kind of customers are they serving?

They present their products to labware market, just like how we do as a company. So it's a mix of customers. And they are not focused on 1 particular customer, group or range. It's spread out. And I think that's a question which maybe is something which I may not be in the right place to answer, but it's a lengthy business, family business, which was started by Mr. Philipp's father who spent the majority of the time running the business. And I think Philipp took over the business some years ago, maybe 8 -- 7, 8 years ago. So I think it was their ability, their vision as well as their willingness to scale up beyond a certain region. I think they wanted to be more focused only particularly for a few countries and not go beyond that. COVID presented them with a large opportunity hence their revenues bumped up significantly. But apart from that, they've been a very niche solid brand, providing great products and great service and that's what they're known for. And they're focused on that throughout their 40-year-old history.

If you can share some of the big pharma names whom they currently work with and what is their percentage contribution? just want to get a color, like is it just...

It's business strategy. I can't do that.

Understood. And how many sales team people, how big is the sales team people in that company?

10 to 15 people.

The next question is from the line of [ CA Garvit Goyal from Nvest Analytics ].

Am I audible?

Yes, you're audible.

Sir, my question is like you mentioned using Tarsons prowess, you people are going to improve their efficiency. So are we open to share our tech know-how with them? Like as far as I remember in the past, we have been a little bit reluctant in doing so?

So yes, there's no technology which we need to share. It's going to be more on customer sharing, growing the geography, growing the product line where we have the technology, we have the manufacturing prowess as I said earlier. So the whole idea is about upping the supply chain, providing more products, providing wider geographies. There's no question out here of technology or technology transfer.

So right now, our strategy is to -- I mean like you mentioned their product portfolio is quite less as compared to our product portfolio. So are we looking for capitalizing on their distribution network and deploying our products in their distribution network. Is that understanding correct?

See, at this point of time, I don't know whether it would be our product line in terms of our brand that would go through their brand. But your understanding is broadly correct that we would use their reach and network in Europe to expand the reach and network as well as expand it through our larger product portfolio as well.

Understood. And sir, like you mentioned, we are also open to inorganic opportunities as well like maybe some coming in the pipeline as well. My question is on the margin side. Like if you see EBITDA margins of the acquired entity, so these are low as compared to our own margin. So what is the -- we can say what is the minimum margins you people look for in the acquired entity?

See, we don't look at margins in acquired entity as long as the business is sustainable. And having said that, we are not in the business of buying loss-making companies or companies that could make margins and trying to turn it around. But we saw this as a right fit and right strategy to be able to expand our presence in the European market. That was the primary goal. The margins were not as high as ours, but that was something which we -- once we enter into the company now after closing, we'll try and see if we can add synergies, if we can add certain cost advantages to help improve that. But the idea of buying businesses is not their EBITDA margin or their profitability. It has to be profitable. That's about it. But the idea is to be able to grow our scope and grow Tarsons' scope in those markets which that acquired entity presents, that's the whole idea.

And sir, you mentioned the company is suffering. Obviously, the numbers are also indicating the same, like we do headwinds in the life science industry. So what is the near-term outlook over there?

Can you repeat your question, please?

I was asking for the outlook...

What -- sorry, could you just repeat your question?

I was asking like the numbers are indicating the company is suffering from headwinds in the life science industry, right, because that's where their revenues are falling over the years. So I was asking for the near-term outlook in that industry.

At this point, we can't say that because the numbers up to 2023 are under review. They've not even closed the year and then it's not audited at this point of time. So it's difficult for me to answer at this point of time, but the numbers are definitely -- numbers of '21, '22 are not sustainable, and these were all onetime which were driven by testing products more than laboratory products, large volumes of testing products like swabs, which were used in COVID testing and so on. So the '21, '22 numbers are not the realistic numbers and those EBITDA multiples which the -- a lot of people in the market are assuming that we have bought in, definitely not anywhere there. We bought it at the right price as per industry standards.

And just to add, we have not bought this company on the basis of EBITDA multiple only. We have taken a strategic call how to do the synergy. So it is -- this is not a business that you only give emphasis on EBITDA multiple. There are a lot of other factors out there which we considered to take this call.

The next question is from the line of Harsh from Marcellus.

Rohan, just wanted to check like who will be looking after the acquisition from Tarsons' side? Like have you recruited someone specifically for this purpose?

No. It would be from the internal team only.

Okay. Okay. And you mentioned something about the deal value being a bit different on the basis of how the 1-year performance will be. Can you elaborate on that?

So at this point, I cannot because the number of '23 are not opened [indiscernible] unaudited and not closed fully. But there is a significant growth from the '23 earnings to the '24 earnings and if that is achieved as a payout.

Okay. So there's a milestone-based payment, right?

Absolutely. Yes.

And that will only be there for CY '24 or it will be there for much longer period after?

Only '24. Only '24.

Ladies and gentlemen, due to time constraints, that will be our last question. I now hand the conference over to Mr. Rohan Sehgal for closing comments. Over to you, sir.

I take this opportunity to thank everyone for joining the call. We will keep updating the investor community on a regular basis for incremental updates on your company. I hope we have been able to address all your queries. For any further information, kindly get in touch with us or SGA, our Investor Relations advisers. Thank you once again.

Thank you. On behalf of Tarsons Products Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.