Q3 2022 Tremor International Ltd Earnings Call

<unk> the structure.

And we are confident of our pathway to install this permanent financing structure foreign advance of closing.

In addition to the financing markets, we have a number of tools at our disposal within the company to help optimize the pro forma capital structure the.

The first of which is the strong ongoing cash generation on a pro forma basis, we expect the company to have free cash flow conversion of over 90%, which will be available for debt repayment.

Additionally, as I mentioned last week, we have identified certain subsidiary businesses that have the potential to be divested that are not aligned with the core strategy going forward.

And also are easily able to be separated without impacting the synergies that we have laid out here today.

We are aware that there are strategic strategically interested parties and we have had inbound as latest as recently as last week about the about the potential purchase of these businesses. So I would say that in general we would expect any potential divestitures to be accretive both financially and not impact synergies and be able to.

To quickly turn from existing situation into cash to pay down debt.

Taken together, we're confident in our market access the attractiveness of the combined story to debt investors and our ability to put in place a <unk>.

Flexible permanent capital structure in.

Advanced at closing, which is fully backstopped by the JP Morgan and Morgan Stanley financing commitments.

To conclude you can see the merits of this combination on slide 32, so at.

33.

It was with much conviction that we took this on and then we look to this combination to double our aftermarket expand geographic and product depth take advantage of the high growth specialty markets with more content and play an additional ESG oriented end markets. The.

The synergies combined with the immediate combined double digit revenue growth and high quality EBITDA margin as a percent of sales with a quick path to low twenty's as a percent of sales provide a swift roadmap to your one execution, we look forward to sharing more information with you in the weeks ahead.

And now Sherrill, please open it up for Q&A.

Thank you to ask a question. Please press star one on your telephone keypad to withdraw your question. Please press star one again, please limit yourself to one question and one follow up.

Your first question is from Rob Brown of Lake Street Capital markets. Please go ahead. Your line is open.

Hi, Joe Thanks for all the sterile good information.

Youre welcome.

I just wanted to clarify that the growth rate you sort of see on a pro forma basis of the business you said double digits.

Clarify what drives that growth rate and how you see the combination of our growing.

Particularly the aftermarket growth as well.

Yeah, Yeah. So the way that we look at the combined business first of all is that each of us is growing.

Meaningfully faster than we were in the history of our respective businesses and then put together not just from the synergies, but also from the penetration into the markets that I laid out on slide 12 of the deck that brings us to kind of in that mid teens overall combined business growth rate.

With respect to the aftermarket. This is this is a area that has the opportunity for significant growth ahead of us. So in just the base case in Houghton's World, it's kind of around a 10% rate across the across the next coming years.

We see the penetration that we can do further in the combined business and across our platform to the to be significantly higher than that so I would estimate that to be certainly 15%.

And upward.

Okay.

Okay, great. Thank you and then just.

Just coming back to the synergies a little bit.

You have a pretty high level of confidence here, how much more can be done on the synergies at this point.

Sort of what's the timeline of getting those in the first year do you expect to sort of see activity fairly quickly there.

Sort of a sense of the timeline to get the synergies.

Yes, so theres been a lot of work done already to identify the level of detail that we felt comfortable to be able to.

Get to this number and actually our internal number as you might imagine is meaningfully larger than what we've what we've included here. There is the majority of the synergies that we have identified our actionable immediately upon closing and in particular, you've got the footprint. Because these are moving one shop into another so we think those are kind of.

First first quarter type of moves in addition, the the sourcing and the indirect <unk> elements of that that can be accomplished very early in the first quarter. After closing and then some of the longer tail moving things onto to global agreements probably takes about six to nine months type of period.

Overall this is the first six months of drive for the majority of these synergies in year. One and then go also in addition to that for the upside that we have identified.

Much work is being done in being are being worked on but a good path was already identified before before we signed the agreement for the transaction.

Yeah.

Okay. Thank you I'll turn it over.

Rob.

Your next question is from Sam Burwell of Jefferies. Please go ahead. Your line is open.

Hey, good morning Jill.

Maybe just a high level, one and then it goes without saying that the initial reaction to the deal Hasnt been good. So I just wanted to get a sense from you where do you think the market is most wrong I mean are people not appreciating how synergistic the deal is.

Improvements to gross margins EBITDA et cetera are people, a little bit too fixated on the topline growth element and maybe on the financing side. I mean do you feel that people are optimistic enough about your ability to obtain.

Debt financing at low cost and favorable terms.

So I think that first of all the reaction was a perception around what the business used to look like and the combination is extraordinarily compelling as you can see that.

It is the playbook, we have deployed over the last few years. The same playbook that has been deployed but we're doing it now at scale and this brings us.

More than what we had done before so if you looked at our acquisitions over this versus the last few years from a charge perspective, what you would have seen was aae acquisition that got us more access into one particular specialty end market. This gives us access to and further penetration in multiple of these specialty high growth end markets.

One thing I think maybe was underappreciated or unappreciated coming out of the gate around the announcements the quality of the financial combination also is something that.

We have high conviction in it adds.

The irony being there was I believe person misperception that this is a cyclical business is actually add resiliency through a cycle gives us high quality EBITDA margin higher EBITDA margin as a percent of sales in us on our own so the financial merits the strategic merits are.

Very well laid out here.

In terms of the financing I think that the fact.

In fact that we have the firm commitment on the financing side from both JP Morgan and Morgan Stanley in the form of the committed bridge as well as them very real time, telling us are working with us on our action plan for the takeout permanent financing.

Including reinforcing the level of.

Blended rate that they believe we can get in terms of the debt markets in that seven to eight 5% range.

<unk>.

There's maybe a little bit of a view that let's wait and see how that works out but the conviction level from the multiple big banks that were working with on this is high. So all told again, where we feel like this is an incredible strategic combination with <unk>.

Specific steps on the execution side, both from a financing perspective as well as from an achievement of the synergies and and the quick turn that we can get from a financial perspective right out of the gate.

Okay.

Got it no. That's all certainly very helpful. I mean, maybe one follow up quickly on the Howden side I mean, it's an entity that's.

Grown a lot due to the roll up in another bolt on acquisitions over the past few years as well as owning it. So curious how has the integration process on all of those additions is that effectively complete and then masimo. He is going to be joining the team and leading the integration effort how long.

Will he be with short for is that open ended or a year or any other details you can give around.

The point for.

For him going forward.

So the first part of the question is yes, the acquisitions at Howden has completed their they have a very strong integration process and those are complete.

Reinforce that each of those acquisitions that were completed for them in the last few years were at or above what was the original return metrics that they had.

So overall the integration process that they have very similar and very strong to what we have Massimo we're thrilled that he's going to lead the integration and he is going to be a forever chart Guy.

Okay, great, let's appreciate it Joe.

Sam.

Your next question is from Martin Malloy of Johnson Rice. Please go ahead. Your line is open.

Good morning, and thank you for providing this additional information is helpful.

On the financing side.

Is there any help you can give us in terms of.

The rates.

Your DC.

The assumed rates on the.

Senior secured or unsecured notes.

Sure. So the banks have been providing me with a lot of information around the the mixture in combination of the permanent financing in kind of the directional side is that seven to eight 5%.

Range is achievable at these levels and that's also based on.

Current debt markets are open and operating and there is precedent transactions that have been completed in.

In the in that range and Thats, not one or two precedent transactions its numerous.

Okay, and then in terms of accretion to EPS in the timing of when that is achieved.

Assuming that.

The $1 1 billion of preferred stock is utilized can you.

Help us with with one this might be accretive to EPS.

Sure. So just to just to indicate and reinforce the position on the preferred convertible that that is a.

A backstop just as JP Morgan Morgan Stanley committed bridges are and.

If it is in place there's a variety of different levels that it can be in place at the up too is an important piece of the flexibility on the on the preferred.

With that said the.

The accretion portion would we would be in certainly by the end of the first year given the financial profile.

Great. Thank you very much I'll turn it back.

Thanks, Marty I appreciate it.

Your next question is from Ben Nolan of Stifel. Please go ahead. Your line is open.

Yeah. Thanks.

Yes.

Real quick.

Hopefully this doesn't count as one of my question, but just on the on the aftermarket did you say, 15% is sort of how you envision the aftermarket growth there or is that all altogether, including a strong aftermarket growth.

So.

Good morning, Ben by the way.

Yes.

We are we would envision that combined business certainly to be able to grow.

In that mid teens range in that the aftermarket definitely in that range. The standalone on the aftermarket side is kind of 10, 7% to 10% is what it's been running at.

And then combine that with all these other high growth end markets, where we're comfortable and confident that the combined business certainly grows in double digits with the with the vision here in the tactical steps to have the combined business growing in the mid teens.

Okay. So now on to my actual real questions.

Okay.

I was curious do you walked through a whole lot of things a bit hydrogen and other some of the high growth areas that are as you guys have it outlined now in the specialty market.

And I know, it's probably early to have.

Anything definitive as it relates to the Tam.

But.

Any sense as to what this does to the Tam just maybe roughly on an absolute basis for that specialty business and then along with that how do you think about your market share does it does it.

Move meaningfully so in other words is this more about gaining market share within the Tam or.

Meaningfully growing the Tam.

So this is a meaningfully growing the Tam and also gaining market share within this answered both.

I'll take your AR that Didnt count as an answer.

Good question.

Yes.

Okay. So the Tam on hydrogen specifically in the renewables for 2022 to 2026 would Howden is estimated at $6 4 billion and that's just specific to that category.

Ian generally has very little overlap to our existing Tam given the fact that they are strong in the gaseous hydrogen side of things. In addition to that you have these other clean markets that the Tam will expand in and I would estimate that based on the figures that we've seen and again the timeframe is a little bit different.

We have to refine their timeframe is the 2022 to 2026, but the Tam for the other others are certainly in the.

Closer to the high single digit billions on top of that $6 four for hydrogen.

So this is a near term.

Real real access to addressable market for us and just like we have seen our tans continue to expand based on changes in the public and the private sector.

And we also see penetration further as adoption goes up in these in these areas, so big big big opportunities for us and highly complementary.

Spaces of the Nexus of clean with more time and more Tam penetration opportunities.

Okay, and then and then for my last question.

This is <unk>.

Hopefully.

I'm not trying to be serial here.

But as you saw the response of the market in the last few days and last week.

Did did it at all cross your mind, Okay should we should we pull the plug on this and maybe just backtrack.

Or.

Or and if it did why have you sorted.

Shows into what was the motivating factor to move forward or was this such as.

Yeah.

No.

The deal was was solid and just misunderstood and so you really never had any debt.

I've never had any doubt.

Had strategic conviction execution conviction in this combination we've been watching this business for years now and had this great opportunity to bring what I think probably the most misunderstood portion here has been that the strategic pivot that you all have watched us do in the last four years, taking our.

Portfolio in hitting these high end high growth end markets is the exact same thing that Houghton has done it's just been not in the public domain and so it's my job to articulate what we have seen in these spaces and the highly complementary nature. So so the short answer is no no. This is this.

Is a great combination for the future I realize that people have a view of the immediacy here, but this is it's our job to make an incredible industrial combination that hits every aspect of the energy transition of the Nexus of clean that we've talked about over and over again and expand that opportune.

Entity with a more resilient and a higher margin profile of the combined business.

So we are we are we are excited.

Alright good.

Strong definitive answer I appreciate it thanks.

Thanks Ben.

Your next question is from Connor Lynagh of Morgan Stanley . Please go ahead. Your line is open.

Yes. Thanks, we've covered a lot of topics here. So just one question for me.

Can you explain a little further sort of customer engagement and basically.

Why owning versus partnering is the correct decision, maybe you could walk us through an example of.

How that might better competitively positioned.

On approaching a project.

Sure. So first of all it's complementary.

Tent that these two businesses have so while you could partner into these <unk> that would have essentially no benefit to us because theres no opportunity for us to bring just a chart piece of equipment has to go as a combined solution, which brings the two sets together to those end customers.

Customers the customer engagement portion also we've seen I'll give you a couple of examples in these markets we have.

We've had some we've had some small wins on the marine side Marine we've been working on penetrating organically ourselves and this is a this is an industry that has a core set of players that.

They have contacts that provides them over years and years and to penetrate that is hard to do organically, but if you go together with somebody who is.

Is well known in their world, but with a full solution. It's a much higher probability to win customers in renewables. They want a complete solution. We see that we've seen that over the last few years, where if you're in a situation where you've got a buyout of component and it is the longest lead time item that <unk>.

Can be the differentiator, whether you win or you lose so the combination the engineering expertise the complementary nature and then the access to these other markets like even if we partnered with someone on getting to gaseous hydrogen it doesn't get us gaseous hydrogen content, we need those products in those.

<unk> two to actually penetrate those markets.

Okay.

Okay.

Thanks very much.

Got it.

Your next question is from Roger read of Wells Fargo. Please go ahead. Your line is open.

Yes. Thank you good morning.

Hey, good morning, Roger.

Joe just maybe to understand since the after market is a big part of the.

The attraction of Houghton and obviously, we're trying to do going forward.

Just curious as you look at it.

Give us a little bit of a breakdown if you could on houghton's aftermarket, particularly cheap.

China is a big part of this.

China is a new market to you, but just trying to understand that <unk> got.

Those youre going back into the.

More conventional energy like coal and so forth and then what you see moving forward.

Sure so.

China is not a huge current part of the aftermarket service and repair business warehousing certainly there's the opportunity to penetrate that region. Given like you said these are more traditional in coal.

Applications.

We see this as a.

Global play and that means across the existing footprint of installed base not just for housing but across the board. We also are seeing.

As a result of the energy security energy access whatever you want to call that macro trend that customers, even as they're doing new project on whether it's LNG or renewables or hydrogen are also spending money on.

Upgrading expanding or just keeping keeping their current existing facilities up and running so this concept of the retrofit and the refurb that I've talked about that.

Having come into play for US this year in the chart business on the LNG side. This really expand that capability for us the other thing I would I would.

Point out on the aftermarket side is that.

We frequently in the chart business.

Get access to project opportunities that would be field service in the middle East and in Africa. So places that we're deploying field service tax from the United States and Howden has a global field service group that is that is obviously far larger than ours, just given their aftermarket presence, but also.

So in these regions that we could deploy someone in a matter of a day versus right now it takes getting a visa or time to get them. There, so having that breadth and that leverage to get out to two of field service job on like a quick ship for our Brazos aluminum heat exchanger is something that.

We see as immediately beneficial not just to the top line, but also to the bottom line.

Yeah.

So I guess, let me follow up on that then part of the integration argument here then.

You can use people that had previously been housing people to do.

Chart aftermarket I mean, I'm just trying to think like it's one thing to have a visa for somebody it's another for that person to be dealt right person for the job so deserves that much interchange ability or interoperability within the two companies.

Yes, there is we have experience in.

Across the board they are experienced across the board, there's obviously nuances to that answer where if there's a specialty around like a particular kind of welder that is required for the job that certainly is something we have to get into the specificity on but these are people that are cross trained across all products is working.

In industrial applications, so very similar to what we do.

We also.

Have a have a plan to ensure that were resources that have those respective skills are cross trained with each other and that's something that I think will be an immediately impactful. So not necessarily every single job can have that answer, but certainly there is overlapping skills and capabilities.

In their field service team two hours.

Okay.

Okay. Thank you I appreciate it.

Thanks Roger.

Your next question is from <unk> <unk> of Goldman Sachs. Please go ahead. Your line is open.

Hi, Joe Good morning.

You are outlining about $700 million to $900 million in Jetblue down between closed on 2024 to get to your.

<unk> leverage target can you walk us through the FTF confidence there so between charter existing business Holden's contribution between 2020 four.

What are the annual adjustment expectations as of right now the potential size of the divestitures that you are targeting and then maybe touch on the potential contribution from LNG projects that aren't in your backlog over the next two years to the extent that you can talk about that.

Sure so from the cash profile of the two businesses and then you add the synergies there.

That's the combination how it and has a higher cash generation as a percent of sales in chart does and I think we've laid those releases percent you can kind of back into that.

And then for year one.

The $175 million of cost synergies.

To that.

In addition to that one of the things that I think Youre. Your point is we are sitting right now as we look into 2023.

A couple of big LNG projects that we have in our backlog have milestone payments of over $230 million. Obviously some of that goes to working capital and so but that gives you a little bit of a.

Parameter a bookend around the confidence in the cash that is coming in into the business in that timeframe when you get into.

The divestiture side of things you know there is without going into specifics of the businesses, but knowing that theres a couple that do not touch the synergy profile, that's estimated kind of the $500 million to $600 million range, if we're able to execute on.

The ones, we're talking about here, obviously that number isn't firmed up and so you can you can use the estimate based on based on what you think you'd get but.

There are hundreds of millions of dollars is my point on that answer that would immediately be utilized to reduce that leverage ratio.

And maybe one other kind of just general point that I think has been pointed out about.

Chart on an ongoing basis is we are a low ongoing capex user and Howden is is the same as we are.

In terms of percent of revenue.

Great. That's helpful and then any any guidance around the potential adjustments on an annual basis that you're talking about when you think about the FTF before 2024.

Yes, there should be.

Minimal adjustments it would be around the cost to achieve the synergies in particular, we also.

And those cost to achieve we've lined out kind of in the $12 million to $16 million range for the first year.

We also anticipate that we are certainly in our business over the last 18 months, we have been holding safety stock from an inventory perspective.

And that is something that we're starting to reduce that safety stock until you'll see that flow through the working capital as a percent of sales.

Hopefully that answered your question Ali.

Yep. Thank you.

Turn it over.

Thank you.

Your next question is from Craig Shere Tuohy Brothers. Please go ahead. Your line is open.

Thanks for the update this morning.

So two quick ones for me one as far as the stability of the can.

<unk> company brings you focused a lot on aftermarket services, but I wonder to what extent the combined entity could materially increase your product leasing business, which has great margins and obviously.

<unk> stability and.

And my second question is there any prospect.

Zero.

So widening up some agreed upon divestiture pre close so that there's a better sense of how things are working.

Before everything is finalized.

Yeah, So and I think that's a good point, we stressed the resiliency and the growth profile and the margin profile of the aftermarket service and repair, but what this will allow us to also do is take more assets into into the leasing business and also take our assets across different geographies from a leasing perspective.

So that's that's a great point to point out and then I'd also say like on the resiliency side and the growth profile.

We tried to lay out here today the access to these higher growth end markets related to macro tailwind of Q2 emission reduction the sustainability, even COC shortages.

Goes on of the ones, we've we've been drum beating over the prior few years. That's this further penetration into that and so with the multiple diverse end markets that are each in high growth mode that also adds the ability to have levers to pull and grow even faster as a combined business.

And couple that with the fact that specialty tends to be.

In both businesses higher margin as a percent of sales not as high as aftermarket.

And then lastly, one of the things that I had been hearing.

<unk> is one that.

We're getting more project oriented in the chart business, which is great from a mid mid sized project in the Big LNG project.

<unk>, the shorter book and ship to us and it adds the aftermarket piece. So all of that is adds to the capability and operational execution of this high growth combination so high growth and higher quality EBITDA margin as a percent of sales in a more scaled.

More access to high growth end markets with multiple different opportunities such as you lay out on the leasing side that.

I think just what we've laid out here today is it's truly a base case and what we said last week. It is truly a base case.

There is so much opportunity ahead with the combined complementary nature of this business for for energy transition all of these clean and markets that.

It's a it's a stellar combination of companies.

Great.

The potential no promises, but the potential for any divestiture or news before close.

Oh, Yeah, I voted that one day.

That wasn't meaning to forgot.

Let's put it this way you can talk about.

Okay.

That was rolling there my passion for it.

So.

I can't get into any specifics what I can say is that.

There is the larger chunk of.

The opportunity of the businesses that I am referring to.

Is.

Set up already in a way that it can be taken out of the current business and.

Sold to someone so it's not a it's not having to be carved out where you would normally see overlapping saves are overlapping personnel. This is.

Fairly already carved out a bowl entity or a business.

There is the potential and we will have conversations between now and clothing to have.

Construct where immediately upon closing or very shortly thereafter that we would get that cash in hand, and turn that business out.

Want to do it that way not only for the the cash portion, but also for keeping the teams focused on the core parts of the business and not have I don't want to be spending time integrating Massimo is not going to integrate something that isn't integrated bowl or it doesn't need to be integrated. So there's two reasons that we would.

Like to have that that outcome be that way, but again I I, that's about the level of specificity I can give.

And confidentially 10, confidentiality around any conversations that we could be having.

Very helpful. Thank you.

Thank you Craig.

There are no further questions at this time. This concludes today's conference call. Thank you for your participation you may now disconnect.

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