Description

Investment Overview:

Ringmetall AG (HP3), is a ~€85M market cap company that manufactures clamp rings for the industrial packaging (steel drum) end markets.  The company is a dominant player in a niche market with ~70% global market share and a significant competitive advantage in a stable/growing end market.  This is an attractive business that generates a decent ROIC of +15% but is masked by a second, barely breakeven, segment which is likely to be divested.  Management (with ~58% insider ownership) has plans to nearly double revenue to ~€200M and expand EBITDA margins to ~15% by 2021-22; most of it by consolidating additional parts of the industrial drum barrel system. 

Components of a Steel Drum:

What we like about Ringmetall:

• Strong Competitive Advantages:
  • The ultimate end-market of Ringmetall’s clamp rings is highly regulated where each drum/lid needs to be UN certified to fulfill strict safety requirements for transporting hazardous materials. Once certified and in a client’s production system, a single component cannot be exchanged without recertification (time & cost-sensitive) – making it very sticky.  
  • Ringmetall’s clamp rings are sold at a very low cost (~€1 per clamp) compared to the value of the drum (~€25), and even lower compared to the value of materials being shipped. The risk/ cost if the hazardous material spills due to a cheaper, low-quality clamp ring can be very high.
  • The unit economics of a €1 clamp ring (~50% cost of steel + 35% manufacturing = ~15% profit) is not profitable enough to attract new competitors. TAM is also not large enough to attract new capital.  Shipping clamp rings from a low-cost location is also uneconomical and hard to plan for.
  • Clamp rings have limited sales visibility (i.e., short lead time from orders to delivery) making it difficult to produce, ship, and deliver on time from a lower-cost location. Ringmetall, with 15 production sites in 7 countries, is typically in close proximity to its key customers.
  • Given the UN requirements and high safety standards, clamp rings can only be used a couple of times before they must be replaced – making it more like a recurring consumable product.
• Market leader consolidating a niche, stable/growing end market: Ringmetall has a commanding global market share of ~70% in clamp rings. The industrial packaging end markets (chemicals, pharmaceuticals, lubricants, bulk food, and beverages) are expected to grow in low-to-mid single digits over the next few years. The company has room to leverage its client relationship to grow within the drum systems other than clamp rings (i.e., lids, gaskets, drum liner, etc.). Ringmetall has strong, longstanding (+60 years) customer relationships and a high-quality specialized product gives Ringmetall a strong competitive advantage.  
• Margin expansion and FCF per share growth: Pre COVID-19, management had set a mid-term growth target of €200M by 2021 (vs €120 in 2019).  This translates into ~4-5% organic growth with the rest coming from M&A. In addition, management had targeted EBITDA margin expansion to 15% (vs ~8% in 2019 and ~10% on average over the past 5 years) by 2021. Most of the margin expansion should come from process automation, efficiency gains, and cost synergies. With CapEx of ~€3M per year, Ringmetall should see high-teens organic CAGR in FCF per share over the next couple of years; and even better if COVID presents an attractive acquisition target for them.  
• Strong leadership team and alignment of interest with shareholders: Management collectively owns a controlling 58% (Christoph Petri owns ~20% and Konstantin Winterstein owns ~34%) of the company. They have done a great job of consolidating the European and North American markets via acquisition. We expect to see them consolidate other parts of the drum barrel system over the next several years. Management participates in capital raises and has no intention to sell shares or dilute their ownership. Overall, we consider them a shareholder-friendly team.
• Reasonable valuation at ~8x EBIT and 10x PE: There is a limited universe of direct comps for Ringmetall.  However, we view ~8x EBIT as an attractive price for a niche manufacturer with a dominant market share, a fairly clean balance sheet, high-teens ROIC, and growing FCF per share. Given the cyclical nature of both segments and the compressed margins, we think ~1x the industrial packaging sales (~ €100M EV) seems like a reasonable valuation range.

Key Risks:

• Cyclical Industry: Current numbers already reflect some cyclical decline in Ringmetall’s financials. Further, COVID-19 and general economic slowdown can impact the volume of drum barrels. Recent (June 2019) key client’s commentary has been echoing lower demand; primarily for lubricants, paint, coating, and bulk commodity chemicals; which was partially offset by demand from customer restocking and increased disinfectants demand. 1H 2020 global steel drum volumes were down ~0.7% at this large customer (GREIF). 2020 supply/demand volume will be hard to estimate.
• Customer Concentration: Greif and Mauser (drum manufacturers) account for 40% of the company’s sales. However, their product quality standard, already UN certified product systems, low-value nature of clamping rings, and their long-lasting relationships make this a mutually dependent existence.
• Cost of Steel: Roughly 50% of the clamp rings selling price is the cost of materials/steel. However, the Company has the ability to pass the cost of steel to customers. They have a transparent pricing model with cost escalation clauses which allows them to adjust prices to offset the changing cost of steel. Typical unit economics should generate a ~15% profit margin (50% cost of steel/material and 35% manufacturing/labor).
• FX: ~1/3 of The Company’s sales is generated in non-Euro currencies (USD, GBP, TYL, and CNY) and is exposed to FX risk. The US operation (Self Industries and now Sorini) is ~25-30% of total revenue. The USD and Turkey Lira had a negative impact on performance in the past. Although smaller in size, Turkey is an important market – it’s the gateway to Asia.

Business Overview:

Ringmetall is a leading specialist for industrial packaging and handling solutions. The company was founded as an investment holding company in 1997, went public in 2007, and has consolidated most of the industrial drum clamp ring market in the US and Europe via M&A. Ringmetall is headquartered in Munich, Germany and has 15 production sites in 7 countries.  The Company generated revenue of €120M and EBITDA of €10M in 2019. Ringmetall operates under two divisions - Industrial Packaging (90% of sales) and Industrial Handling (10% of sales).

Industrial Packaging division (~90% of sales), manufactures tailor-made (1) drum closure systems (clamping ring, lid, and gasket) and (2) drum inliners (inner casing and bag-in-box systems) for open-top industrial drums that are primarily used to pack hazardous materials (chemicals, pharmaceuticals, lubricants, as well as bulk food and beverages).  As of year-end, ~85% of the segment revenue comes from drum closures and ~15% of sales are from drum inliners.

Ringmetall manufactures over 2,500 different types of clamping rings – this the primary source of revenue for the company. They are the world market leader (80% market share in the US and Europe) in clamping rings for industrial drums. These clamp rings are sold at a very low value (~€1 per clamp) compared to the value of the drum (~€25) and the value of the materials being shipped. They secure the drum lids to avoid the risk of hazardous material spills.

Ringmetall’s key clients are in the pharmaceutical, chemical, petrochemical, and food processing industries. These clients transport hazardous materials which must comply with a strict safety rule. United Nations (UN) safety standards require that a UN certified drum and lid system must be used when transporting these hazardous materials. Ringmetall manufactures +2,500 types of clamping rings with custom classification to meet the client's needs for lid/drum. The cost and risk of changing a certified product system are high for Ringmetall’s end customers; as a result, the clamp ring business appears to be very sticky. In addition, given safety standards of handling hazardous material, clamp rings can only be used a couple of times before they must be replaced – making it more like a recurring consumable product. There are over 25 million 55-gallon steel drum barrels produced in the US every year; Ringmetall generates ~1/3 of its Industrial Packaging segment sales (~$25-$30M) from the US.

Roughly 50% of the company’s sales come from three of the leading global drum manufacturers (Greif, Mauser, and Schuetz). The other 50% of sales come from over 50 other clients. Ringmetall’s relationship with these manufacturers is of mutual dependency. The Company is a key supplier to these drum manufacturers; delivering tailored clamp rings for specific client needs. Since the drum/lid are UN certified with the clamp ring attached, this creates a strong competitive advantage for Ringmetall. A single component cannot be exchanged without recertification – which takes months, costs money, and introduces uncertainty.

Key Client Include:

M&A Opportunities:  Management has done a commendable job consolidating this niche, clamp ring, market.  Going forward, management plans to target ancillary parts of the drum barrel systems. Here are some of their recent acquisitions:

• Nittel (€13 in sales) makes ~4,000 different types of inner casings for industrial drums
• Tesseraux makes aluminum inliners, round-bottom liners, and bag-in-box systems
• Sorini Ring (~$6M sales) a tuck-in acquisition of a clamping ring maker in Chicago

Industrial Handling division (~10% of sales)

Not much to be excited about in this segment; it is tiny, barely at breakeven, and cyclical.  We do not ascribe much value to this segment and will keep the writeup brief.  We think this division will eventually be divested.

Industrial Handling division manufactures special vehicle components for industrial trucks, tractors, forklifts and agricultural vehicles. These components include restraint systems and accessories for forklifts; break and clutch pedals; special trailer hitches for trucks and tractors for agriculture and forestry. This is a cyclical business that tends to follow the general business cycle with a delay of six to nine months. Below is the segment's result over the past few years.

The Company’s clients in this division are well-known trucks and tractor manufacturers. There is no customer concentration risk in this segment. Some of Ringmetall’s clients include:

In the past, Ringmetall had positioned itself as a contract manufacturer (“extended workbench”). However, due to the low degree of specialization, this segment was not profitable. In 2017, after successfully refocusing and investing in internally developed products, management was able to improve the segment’s profitability.  

Management/Ownership: Management collectively owns a controlling 58% (Christoph Petri owns ~20% and Konstantin Winterstein owns ~34%) of The Company. They participate in capital raises and have no intention to sell shares or have their ownership diluted below 50%. We think this will align management’s interest with shareholders, particularly when considering how M&A is an important part of the growth story. Management has also recently up listed Ringmetall to the Deutsche Boerse, and adopted IFRS reporting; both of which we view as shareholder-friendly actions.

Capital Structure: The company has a healthy balance sheet with net debt to EBITDA of less than 2x. Future M&A deals are likely to be financed using debt. Large deals will likely be funding with a mix of debt and equity. If equity is issued, we expect management to participate in the capital raise. As of 2019, the company had ~€21M in debt; mostly through bank loans with a variable rate of EURIBOR + 2.25%. 

Catalyst

Execution on consolidating other parts of the drum barrel system. 

Divestiture of the Industrial Handling system.