Georg Fischer AG

SIX:GF

Earnings Call Analysis

GF's Strategic Shift and Financial Outlook for 2024

GF is undergoing a strategic transformation to focus on Water and Flow solutions while divesting its Machining Solutions division for CHF 630-650 million, with a potential CHF 20 million earn-out. Although facing challenges in the European automotive and construction markets, GF anticipates flat organic sales and a comparable EBIT margin of around 9% for 2024. The company aims to become a market leader in water solutions by reaching CHF 5 billion in sales by 2030, supported by anticipated bolt-on acquisitions. Proceeds from the divestment will help reduce net debt, potentially reaching a ratio of 2.5-2.7x by mid-2025.

Navigating Through a Challenging Environment

GF has demonstrated its resilience in a tumultuous market, particularly in the European automotive sector, where recent months presented significant headwinds. While the overall economic environment has been challenging, GF has set the outlook for 2024 at a relatively flat development in organic sales and a stable EBIT margin around 9%. This margin indicates a solid performance, especially during times of adversity.

Strategic Shift and Divestment

A key highlight from this earnings call is the strategic decision to divest GF's Machining Solutions division to United Grinding Group, expected to finalize by early 2025. This transaction is valued between CHF 630 million and CHF 650 million, inclusive of a potential earn-out of CHF 20 million linked to the EBITDA performance through the end of 2025. The divestment is anticipated to significantly enhance GF's balance sheet and reduce net debt, providing them with greater flexibility for future strategic initiatives.

Focus on Water and Flow Solutions

GF is refocusing its strategy toward becoming the leading provider of water and flow solutions, a sector poised for growth given increasing sustainability demands. The company targets CHF 5 billion in annual sales by 2030, bolstered by expected market growth rates. This comes as GF has already seen robust growth in the Piping Systems and Building Flow Solutions segments, with a compounded annual growth rate (CAGR) of around 5% and 4% respectively over the past decade. These segments not only contribute to growth but have also maintained an average EBITDA margin well above 15%.

Financial Outlook and Debt Management

The company's ongoing financial strategy includes proactively reducing debt levels. With existing debt expected to be around 3 times the net debt to EBITDA ratio at the year's end, they anticipate this ratio will improve to between 2.5 and 2.7 times post-transaction. These efforts to manage debt are crucial as GF continues to enhance its financial flexibility for future acquisitions, particularly in a fragmented market with ample growth opportunities.

Outlook for Acquisitions and Market Opportunities

GF sees potential for bolt-on acquisitions in the water and flow solutions sector, specifically targeting deals in the range of CHF 50 million to CHF 200 million. The CEO expressed optimism about ongoing and future acquisitions that could solidify GF's market leadership in a rapidly growing and evolving industry landscape. Their ability to capitalize on a fragmented competitive market positions them to effectively pursue these growth opportunities.

Proactive Moves Amid Economic Pressures

While GF faces economic pressures, particularly within the automotive sector in Europe, the outlook remains stable as they pivot away from lower-performing divisions towards more lucrative areas like water management. This strategic focus aligns with long-term growth trends in sustainability and efficiency, ensuring that GF not only weather the current storms but also emerges with greater strength.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, welcome to the GF Conference Call for Investor and Media and Live Webcast. I'm Sandra, the Chorus Call operator. [Operator Instructions]. And the conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Andreas Muller, CEO. Please go ahead, sir.

[Andreas Müller, executive]

Ladies and gentlemen, welcome, and thank you for joining today's webcast. On Slide 3, with today's announcement, we accelerate our strategic direction to focus on Water and Flow solutions. Our CFO, Mads Joergensen, will provide some insights into the financial implications of the transaction, including on GF's balance sheet and we will conclude the presentation with an update on our business and strategic outlook.

Here with me is Mads Joergensen, our CFO; Nadine Gruber, Head of IR; and Beat Romer, Head of Communication.

Let's turn to Slide #4. The most important acquisition in the history of GF's last year provided GF with the unique opportunity to become the leader in sustainable water and flow solutions. It further acted as a key catalyst for our portfolio transformation.

In the course of this reposition, GF has signed an agreement to divest our machining business to United Grinding Group, a global leader in grinding technology. In addition, GF is reviewing all strategic options for the Casting division. As a consequence, GF's strategic flexibility is increasing, and we will be able to capitalize on attractive investment opportunities in the water and flow solutions industry in the years to come. Hence, GF will be able to accelerate profitable growth and increase its long-term resilience.

Slide 5. With this high-quality transaction, we announced today, GF Machining Solutions and United Grinding Group will combine forces to form the leader in ultra-precision machining. UNITED GRINDING is a global company with Swiss roots employing more than 2,000 people globally. A privately held UNITED GRINDING Group and GF Machining Solutions will together provide a comprehensive portfolio at the highest quality standards of ultra-precision machining solutions. This combination promises to offer the best value for all stakeholders, including customers, and our employees. The transaction is expected to close in quarter 1, beginning quarter 2, 2025, pending regulatory approvals.

The next step in the transformation of GF. Let's move to Slide 7. The strategic acquisition of Uponor marked a pivotal step in GF's portfolio transformation. With the ongoing expansion of the piping markets, primarily driven by rising demand for water solutions and a still highly fragmented competitive landscape, we are in a strong position to capitalize on these dynamics and become the leader in this industry.

Let's turn to Slide 8. As a water and flow solutions company, GF solutions directly address attractive long-term growth trends driven by investments in mission-critical solutions for industrial flow processes, sustainable water management in urban areas and energy efficiency in buildings.

Let me give you an example. Climate change significantly affects the water cycle already today, changing precipitations and temperature patterns, increasing intensity and frequency of floods, so-called 1 in a 100-year event, but also increasing pressure on the reliability of our aging water infrastructure measures. Our solutions such as storm-wise, but also our reliable piping systems for gas and water are addressing these challenges.

I also picked one of the examples out of many industrial innovations. The rapid development of strategic industries like data centers, to accelerate the future development of artificial intelligence are driving the introduction of new technologies such as direct liquid cooling. Here GF is perfectly positioned with its Flow solutions offerings.

Slide 9. Not only on favorable market trends, but also our ambition to become the leader in water and flow solution builds on a proven track record of our 2 Flow solutions divisions.

GF Piping Systems substantially contributed to GF's performance over the past 10 years with an organic CAGR, compounded annual growth rate of 5%. GF Building Flow Solutions grew organically at the same time by more than 4%. And not to forget that the last 18 months have been substantially subdued in Europe. Moreover, both divisions, we are constantly expanding their profitability and achieved an average comparable EBITDA margin well above 15% over the last 3 years. By focusing on water and flow solutions, GF therefore, capitalizing on its fastest growing and most profitable business.

Our CFO, Mads Joergensen, will now give some insights into the implications of the transaction.

[Mads Joergensen, executive]

Thanks, Andy. As I mentioned, I will now provide you with some details on the impact on the divestment of GF Machining Solutions on Slide 10. The transaction value is as mentioned, between CHF 630 million to CHF 650 million, including a potential CHF 20 million earn-out until the end of 2025. The proceeds are subject to customary adjustments of closing accounts such as net debt and net working capital. Once closed in 2025, the transaction will lead to a consolidated book gain at EBIT and net income level.

As you can see on the right-hand side, we intend to use the proceeds from the divestment to partially repay our Uponor transaction financing, which consists of a bridge loan and a term loan. Hence, the transaction will lead to a substantial reduction in our net debt.

Furthermore, we will, in the coming weeks, issue a corporate bond, which will be used to replace a part of the bridge loan before year-end. And these 2 refinancing steps are foreseen to reduce our interest expenses by CHF 20 million to CHF 25 million per annum. We also plan to launch another corporate bond in the first or second quarter of 2025.

Concerning financial reporting on the left-hand side, GF Machining Solutions will, of course, remain part of our consolidation area for 2024, most likely, also, the first quarter of 2025. However, we intend to disclose the division separately, a so-called discontinued business for both financial years 2024 and 2025.

I now give the word back for Andy, who will give you update on the business as well as the strategic outlook.

[Andreas Müller, executive]

Thank you, Mads. Slide 12. With the ongoing integration of Uponor, 2024 is a transformational year in which GF again demonstrated its resilience. Over the course of the third quarter, GF faced increasing headwinds in the European automotive industry. Some delays in large industrial projects worldwide and a continuously subdued construction market in Europe.

Furthermore, the portfolio adjustments are in full swing. Despite these challenges, GF is able to gain, demonstrate its resilience and expect for 2024 rather flat development in organic sales and a comparable EBIT margin around 9%.

Let's move to Slide 13. Let me conclude our presentation today with the strategic outlook. Today's announcement marks the next phase in the transformation of GF. Our target for 2030 is to become the #1 water and flow solutions market leader, targeting a CHF 5 billion annual sales level. As a global market leader, GF is providing superior water and flow solutions for the 3 segments: Industry; Infrastructure; and buildings. GF will accelerate growth with its seamless and reliable solutions by addressing attractive long-term trends.

As a recognized market leader, GF will capitalize on a fragmented competitive landscape with further potential for consolidation. With a substantial improvement in our sustainability profile, GF further drives its ambitious ESG agenda. We will provide an update on our Strategy 2030 in the course of the coming year.

Thank you. Thank you for your attention, and we are now ready for your questions.

[Operator]

[Operator Instructions]. Our first question comes from Jörn Iffert from UBS.

[Joern Iffert, analyst]

Can you hear me?

[Andreas Müller, executive]

Yes.

[Joern Iffert, analyst]

It's 3 questions. I will take them one by one. Starting with a technical question, please. Can you give us more details on the earn-out and the potential one-off cost to carve out the businesses.

[Andreas Müller, executive]

Thank you very much, Mr. Iffert, for your question. I think I will pass on this to our CFO.

[Mads Joergensen, executive]

Thank you very much, Mr. Iffert, for the question. Details on the earn-out, it's linked to the EBITDA of the Machining Solutions division by the end of 2025. And it is the customary type of earn-out where they have to follow our accounting standards on a comparable basis. As to the fulfillment of this, we have no further, let's say, statements, whether we can expect to receive it or not. One-off costs are minimal in this sense. It's connected to the separation of our IT systems, the separation of our HR systems, patent services as such, and we do not expect any material one-off costs from the separation.

[Joern Iffert, analyst]

And just to follow up on the earn-outs, I mean, are they materially? I mean, are we speaking about CHF 30 million, CHF 40 million, CHF 50 million earnout? Or is it low teens? Just as a very rough feeling what can be the earn-outs be?

[Mads Joergensen, executive]

As stated, it is CHF 20 million. It's CHF 20 million.

[Joern Iffert, analyst]

Okay. And the second question, on casting, you said you're evaluating strategic options. But do you have a task force in place, how you will deal now with customer relations because I'm sure there will be a lot of questions coming up. And also, if you're already in advanced discussions to find a solution for casting or how does it look?

[Andreas Müller, executive]

Thank you for this question. I think components, strategic decision has been felt to find strategic options, and we would like to see a similar high-quality transaction as we have seen with our divestment of Machining Solutions. So we believe a strategic combination will be the best option to foster the business going forward, but also to ensure a smooth transaction foremost for our customers and our employees. So we will not neglect the fact, as GF always did, when divestments happened to keep all stakeholders in the group. We have a task force for that. I think it goes without a word that we have a team working on this evaluation. Any further information will be provided at the moment when they occur.

[Joern Iffert, analyst]

And then if you allow me a last question, please, quickly, on the guidance adjustment. Can you tell us what the guidance is implying in particular for piping. Is piping also flattish on organic sales for the full year. Is it down? Just that we have a rough feeling what really piping is implied.

[Andreas Müller, executive]

I think, as usually, I have to ask for your patience on that one. We are not disclosing individualized or divisionalized guidance information at this point of time. So the overall statement is a flattish organic development on the GF Group as well as EBIT in the range of 9 percentage points.

[Operator]

The next question comes from Walter Bamert from Zürcher Kantonalbank.

[Walter Bamert, analyst]

So in this case, does the 9% EBIT guidance indicate the ongoing business? Or could you at least give us some indication what's happening currently with Machining Solutions that we can calculate what's going on with the ongoing business?

[Andreas Müller, executive]

Thank you, Mr. Bamert. I think I'm going to repeat myself. This is the entire GF Group guidance that in all businesses are included, even so when we will disclose as discontinued business, Machining Solutions. This guidance is for the legacy businesses of GF, including our 4 divisions, Building Flow Solutions, Piping Systems, Casting Solutions and Machining Solutions. And as already said to Mr. Iffert, we will not specifically go into the details of the divisional forecasts.

[Walter Bamert, analyst]

You mentioned in your press release this morning, several reasons that make you adjust the guidance. So they're across the existing -- the ongoing business and the business to be discontinued. So it's a little bit worse in all divisions in this case.

[Andreas Müller, executive]

I think as we are all in the same economical environment, I think it goes without a word that the automotive industry across Europe is being hit hard, especially, in the last 2 months, which have been also earmarked -- with a lot of media release, which are well known to every one of us. So if you would have to ask me now in terms of from which area and which sites the macroeconomics are hitting the hardest, it's most likely the automotive European business.

[Walter Bamert, analyst]

Okay. And then you also mentioned that the water M&A is certainly now even more intensified is also that the opportunities in water M&A are now, let's say, easier to identify, is there more M&A targets around and more willingness on the side of the sellers?

[Andreas Müller, executive]

I think this is a highly fragmented market. And as we always have said, we have thousands of local nationwide competitors. I think having a close eye on potential bolt-on acquisitions was always in our duties. So therefore, we will continue, but we most likely will also intensify to pursue over the next couple of years, further bolt-on acquisitions in that field.

[Walter Bamert, analyst]

Okay. And then I have a last question for Mads. He mentioned that there will be a gain also from the disposal. Is there a lot of currency losses and goodwill to be recycled?

[Mads Joergensen, executive]

That is correct, Mr. Bamert. We have previous goodwill. We have currency translation adjustments that needs to be recycled. But still, we're going to look at a one-off capital gain probably in the area between CHF 150 million to CHF 200 million.

[Operator]

The next question comes from Remo Rosenau from Helvetische Bank.

[Remo Rosenau, analyst]

While the sale of Machining Solutions is fundamentally sound as investor told you also for the last 20 years. A few question marks still come up about the timing in my view. You're selling now this division in the middle of a cyclical downturn with profits and outlook deteriorating. Hence, you get an adequate price within these circumstances. However, a few years ago, with EBIT between CHF 60 million and CHF 70 million, you most likely could have generated a significantly higher price. But you always quite categorically refuted this idea at the time.

Now you do it, which raises the question, if you came under pressure in view of your debt levels? Did you face potential downgrades in your debt ratings or were you -- were there some debt covenants becoming a problem because the overall business is not going as expected. Now could you just give us a bit more insight in your thought process, which made you come to this conclusion now and not like, for instance, a few years ago?

[Andreas Müller, executive]

Thank you, Mr. Rosenau. I think there's a couple of topics which might have to be straightened out. First of all, I think our businesses in Machining Solutions addressing very attractive niche markets, an accelerating momentum in the aero-engine businesses across the world, but also addressing niches with ultra-precise machine tools, suited now to machine, sustainability applications. I will not elaborate too extensively on that one, but it lasts from e-engine, conceptual design technologies, but also it goes to hydrogen production and so on and so forth. I would not say that we are now in a situation where the Machining Solutions market for our GF Machining Solutions is particularly bad.

The journey of the transformation, as we said, when we have acquired Uponor more or less a year ago that we have been investigating into this portfolio accomplishment already some 1.5 to 2 years before marks most likely the point of departure. So this is not a decision which is driven by any, let me say, external pressure. I think it's a logical consequence. But with the Uponor transaction, we have been able to catalyze the further portfolio transformation, which was a logical consequence. And the discussions on this topic are lasting already, more or less, more than a year in terms of finding a solid and profound owner for this business. So this is not something which has happened under pressure. And I think we believe that we have achieved a very fair valuation for all stakeholders with this transaction.

[Remo Rosenau, analyst]

Okay. So the decision to divest was basically taken -- you say about 1, 1.5 years ago.

[Andreas Müller, executive]

I think whether you call it the decision, but I think, I would call it the decision to evaluate the portfolio going forward has been taken.

[Remo Rosenau, analyst]

Okay. Okay. So no pressure from banks or on the debt side or covenants of debt ratings?

[Andreas Müller, executive]

Yes. I will pass that to my CFO.

[Mads Joergensen, executive]

No. No. I can say that's not -- under no circumstances, have we been in financial distress because of the debt level. This is -- we've been able to service our debt through the entire period. And we also have presented a clear plan to reduce that debt over the next coming years. Now of course, we are accelerating it, creating more degrees of freedom to make further strategic moves.

[Operator]

The next question comes from Alessandro Foletti from Octavian.

[Alessandro Foletti, analyst]

Can I ask you 2 details. Maybe first on the earn-out. You mentioned in the press release CHF 630 million to CHF 650 million. Is this CHF 20 million the earn-out difference?

[Mads Joergensen, executive]

Thank you, Mr. Foletti. Yes, that is correct. That's the earn-out difference.

[Alessandro Foletti, analyst]

All right. And then the second point, I'm not sure I got you right. When you say that you show the discontinued operation, et cetera, but I'm not sure that under Swiss GAAP FER, you can do the same as under IFRS. So are you just showing sort of a pro forma besides on top of the whole accounts? Because I assume, as you report this year, you will still bring the whole accounts.

[Mads Joergensen, executive]

You are right. Actually, there is no specific guidances say on this topic. So you're absolutely right, Mr. Foletti, on this topic. However, there are certain cases in the past, where you are showing this discontinued business in a separate column. Of course, we have to report the entire corporation as a total, but it is still allowed. I think historically, a famous company like [Datwyler] has done that, and it's, therefore, a practice we will follow.

[Alessandro Foletti, analyst]

So it's going to be similar to what you did with Uponor, where you showed this additional column last year, right?

[Andreas Müller, executive]

We were disclosing in the presentation this separation, but now we will even have it flow into the financial statement of the year. You will see that separate color.

[Alessandro Foletti, analyst]

Right. And when we talk -- maybe my last question, when we talk about the strategic options for casting, did I got you right that at the end of the day, your preferred solution is a divestment, a divestment for cash, not -- I don't know, a listing or , I don't know, divestment to management like you did for the iron casting business.

[Andreas Müller, executive]

I think it's a very good question. And as we said, we will investigate into multiple strategic options. There's definitely a line of priorities in terms of what we would like to achieve, and I think a divestment to a strategic buyer would be our preferred option.

[Operator]

[Operator Instructions]. The next question comes from Patrick Laager from Berenberg.

[Patrick Laager, analyst]

Most questions have been addressed actually, but just 2 or 3 from my side. In terms of leverage, to what extent can you deleverage your balance sheet by and, let's say, '25 in terms of net debt to EBITDA. This would be my first question.

And then coming back to your potential acquisitions you might conduct in Water and Flow Solutions. I mean, currently, you are still in the process to digest this big acquisition of Uponor. You said that the market is -- remains very fragmented. So basically, there are many opportunities here. But what could be a kind of specific gap you'd like to fill in terms of M&A. Is there anything missing in Water and Flow Solutions. This would be my second question.

And then the last question, the third question is about casting again. I mean you shared a lot of insights regarding all the options. What about the timing? Are you confident that this will happen next year in '25?

[Andreas Müller, executive]

Thank you, Mr. Laager. I think I will pass on the leverage question to our CFO.

[Mads Joergensen, executive]

Yes. Thank you very much, Mr. Laager. The leverage that we expect at year-end will -- 2024, that's pre-transaction, still will be around 3x. But it will not be below 3x. At the end of the first quarter and using the proceeds to reduce the debt, we should be, by midyear come down to around 2.5x to 2.7x net debt EBITDA.

[Andreas Müller, executive]

Coming to your question...

[Patrick Laager, analyst]

This is pre-closing -- excuse me, the 2.5x, 2.7x.

[Mads Joergensen, executive]

That is post closing of the deal.

[Patrick Laager, analyst]

Post. Okay, post-closing. Okay. Good.

[Andreas Müller, executive]

I think, as I mentioned in our outlook in terms of potential acquisitions, bolt-on acquisitions, it's about regional coverage, but it's also about technology solution coverage. So it can be both sides. I think we would target acquisitions in the usual magnitude as we did it in hindsights, in the range of CHF 50 million to CHF 200 million. That's what we are interested in. And I think we will look into infrastructure accomplishments that could be all sorts of, I will not further elaborate on that one.

And the timing for our Casting Solutions division since this is also now an announced process. And as I said earlier, we have a project team working on this project. We have at least the ambition to materialize these transactions within a decent time frame within the next year.

[Operator]

The next question comes from Tobias Fahrenholz from Stifel.

[Tobias Fahrenholz, analyst]

Just a quick follow-up on the '24 guidance. Speaking on group level here. Looking at the tricky environment, is it fair to assume that you have or had to book additional one-off here? If so, about what kind of magnitude could we think about.

[Andreas Müller, executive]

First of all, I think we are sticking to our statements in terms of one-off items as we did it midyear. There is no particular one-off items associated with this updated guidance of the solid performance of GF.

[Operator]

[Operator Instructions] Gentlemen, there are no further questions so far.

[Andreas Müller, executive]

We would like to conclude this webcast this morning. I would like to thank you for your interest in our company. With that, thank you very much. Goodbye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines.