XP Power Limited (XPP) Earnings Call Transcript & Summary

[Audio Gap] For both of them, their capabilities in the high-voltage space, which we think will very much accelerate our strategy in this area. So what are we like -- 150 employees in 2 sites in Germany, one in Munich and one in Stuttgart. Both have design and manufacturing capabilities, so it -- so significantly enhancing our high-voltage capability. The acquisitions also extends our position with some of our customers, our leading customer globally is also a customer of FuG, but in a completely new area. So FuG and Guth have no exposure to deposition etch or ion implantation, where we work in the semi industry, but they introduce us to iron beam lithography and other areas like that. The other point, it brings scale in the important German and surrounding markets and it's an investment for us in Europe, which we still feel is an area we can grow faster. If we turn to Page 4, just to cover a bit of the background of the businesses. They were formed about 70 years ago, and Dr. Simon Consulting took them over in 2005 and 2008. You can see there in Southern Germany, quite a significant distance from our sales office and warehouse. Hence, there's no cost synergies. This is all about revenue growth. The businesses produce predominantly high-voltage products for the industrial and semiconductor sectors. So sectors we know well, but new areas within those sectors, which makes it most exciting. So things like electron beam processing, chip manufacturing, further exposure to semiconductor manufacturing equipment, but in new areas, environmental technology, surface coating areas like that. FuG is the larger of the 2 businesses. That's the one near Munich, and they develop high precision, both low and high-voltage power solutions for semi and industrial applications. Guth the smaller of the businesses, is high-voltage applications more in the heavy duty area like charging capacitors, insulation and measurement. And what's also exciting is both bring new technologies and capabilities to XP. The -- our Glassman high-technology businesses use air insulation with FuG, particularly, it brings encapsulation or potting. So it means we can take the product smaller. The other piece, the FuG products have very high precision and accuracy. So our XP products would be accuracy to about 100 parts per million, which is fine for things like iron implantation, but FuG takes it down to 10 parts of million or even part 1 million, which is where you get into microscopy and areas like that. So the strategic rationale on Slide 5 is very clear for us -- sorry, this -- and I'll cover most of these points. The area -- I'll show you in a minute, but it's very highly complementary to our power portfolio, and there is minimal overlap between FuG and Guth and also in our XP portfolio. And I'll illustrate that in a moment. It also brings an additional design center, some more engineers, which is a core of our business and a manufacturing facility and very much complements our current footprint. Revenue synergies is where we're focused. We're looking to grow the businesses, both XP and FuG and Guth faster. And neither business have a mature sales team. Guth don't have a sales team. It's a very small sales team in FuG that's focused on Germany, Switzerland, Austria. We will look to put this through our global customer base and through our sales team to accelerate growth. We will be going through the exercise to look at where we should go direct and where we should go through the existing distributors. So both have a significant expansion capability. And then finally, to reiterate the point, it strengthens our position in Germany, the largest market for power solutions in Europe. If you turn to Page 6. You'll have seen this chart before and showed how we've increased our target market through the acquisitions of Comdel, Glassman and EMCO over recent years. What we've added is then how FuG and Guth add further to that portfolio. So we're going up the voltage levels and up the power levels and into certain low voltage areas that we haven't been able to address previously. So hence, why we're saying these are very, very complementary acquisitions for us. I'll turn to Oskar to cover the financials.

Good morning, everyone. The -- as you can see from the slide, the combined revenue of Guth and FuG is anticipated to be about EUR 18 million. We haven't finalized the year. That's why it's anticipated with an adjusted EBITDA of about EUR 4.5 million. We are not planning any cost synergies at this stage. The strategy is entirely about growth, as Gavin has just outlined. We expect the future revenue to grow at high single digits. And the earnings is expected to be enhancing already from 2022 onwards with additive to group margins. It will be funded from existing debt facilities. And even with that, we'll have a very strong position afterwards with net debt adjusted EBITDA expected to be below -- well below 1x EBITDA. So attractive returns, and it's accretive to XP.

Thanks, Oskar. And just finally, a quick reminder of our investment case and why this fits so well into it. We're exposed to fast-growing markets, and we see the potential to outperform these. FuG and Guth add to that. We have attractive margins and FuG -- both FuG and Guth are going to be accretive to our operating margin to the overall group operating margin. We generate lots of cash. These both businesses are very cash generating and that funds CapEx, R&D, our growing dividend and future M&A. Our culture is very entrepreneurial. This has been -- these businesses have been owned by an entrepreneur for the last 10-plus years, and we feel we can bring more maturity and growth to them. And we have a strong supply chain that has been fully tested in recent periods. And the German supply chain here is equally as strong, and we're confident in the way they perform and what they can deliver. And then finally, as we know, we lead on ESG in our industry, and we see opportunities to improve that in the German facilities that we have here. So on that note, operator, can I open the floor up for any questions you may have?

[Operator Instructions] Okay. The first question in the queue is coming from the line of Christian Hinderaker from Liberum.

I'm Christian Hinderaker from Liberum. I guess, interested to your first deal in around 3 years or so. But prior to that, you obviously had quite a strong track record of M&A. I'm interested to understand whether this might be a signal of intent for a more broad ramp-up in acquisitions or whether it was somewhat sort of opportunistic in nature?

We've always said we would only do M&A when we could do physical due diligence and face-to-face and really get to know the businesses. And we haven't been able to do that during 2020 and 2021. We've expected to do it in -- we met the -- we first started talking to these guys in early 2020. It would have been -- we would have hopefully have completed earlier. Is it signal intent? It's a signal to say we are open to our acquisitions. We see that as a core part of our growth but only for the right deals where we see the culture is fitting and it being growth enhancing.

And the next question is coming from the line of David Farrell from Jefferies.

I just wondered if you could talk through some of the challenges maybe of taking this product into Asia and the U.S. What do you think the problems are tend to be in terms of achieving the revenue synergies? Are there kind of competitors in place, which will be hard to use up or anything like that?

I think I'm actually quite excited about the U.S. and Asia because I actually feel they're almost virgin territory, they go to those markets through distributors who -- their sales into the U.S. of EUR 300,000. So very, very small. And Asia, it's been very -- China has been very, very small. And those are big attractive markets for these products. There are some existing competitors. This takes us, we think, to #3 in high voltage behind Spellman and Advanced Energy. But I'm confident with the products they've got, they can compete effectively and really and enter those markets. It's interesting Glassman and FuG saw themselves as competitors. But once you actually get to understand the businesses, you see they really are complementary. And I think this is an offering that other people don't bring. And if you look at our -- the other point I'd make, the main growth we've had from the Glassman and Comdel regions -- businesses have been in North America and in Asia. Hence, the confidence we have in those things, and that's through our direct sales team.

The next question is coming from the line of Katherine Thompson from Edison.

My question kind of follows on from the last one. Really just to understand who the 2 companies' competitors are. I think you mentioned who they are in the U.S. and Asia, but helpful to know who they compete with in Europe?

1 Yes. The 2 main competitors -- well, the 3 main competitors, they saw it was Spellman, Advanced Energy and us through Glassman. They have -- there is clearly a broader range of competitors. But as you know, there's a lot of smaller players in that high-voltage market. But the -- a lot of the people we know well. So TDK have a presence -- might actually saw that particularly in Asia have a presence, but then you really start getting down to some smaller players that we see -- that we come across in any way with Glassman.

Okay. And just one accounting question. So the German business, I'm assuming that's going to push your overall tax rate up by a couple of percentage points? Sounds about right?