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The views expressed are those of the author and do not necessarily represent the views of any other person. The information herein is obtained from public sources believed to be accurate, reliable and current as of the date of writing.  The author will not undertake to supplement, update or revise such information at a later date.  The author may hold a position in the securities discussed.

SEB is the global leader (about 12% global market share) in small appliances and household cookware under 31 brands, some global and some local.  Tefal, Moulinex and Krups are their flagship global brands but Supor only in China is a big one too.  Their global footprint is quite interesting if you as we are looking for non US dollar exposure – only 12% U.S., about 38% Western Europe, and 45% emerging markets. 

The business is family controlled, with the family trust owning about 35% and several big investors that aren’t going anywhere owning another 10% or so.

SEB has a major presence in China and Western Europe with the rest of their business scattered around just about everywhere – Japan, Thailand, Malaysia, Mexico… 150 countries!!! Think about how different cookware and appliances are around the world.    China is 23% of their business (though some of that is a JV partner).  Maybe something like certain kinds of pots or frying pans are universal, but to have this kind of global presence in such a local business is quite a statement.

Developed market demand is driven by innovation, replacement and trade-up.  Emerging market demand is very much a beneficiary of growing middle class.  Everywhere the business is shifting to ecommerce and SEB seems to be on top of that, especially in China where 2/3 of Supor’s market leading business is in this channel.

About 4% of the business is (was?) Russia/Ukraine.  Half of that got wiped out.

Note what is missing here.  They do not sell to restaurants.  Their cookware business appears to be 100% consumer – somebody else serves the restaurant segment which is big.  Strange that they have no presence there but they don’t call it out as a growth opportunity.  That must be a totally different channel and different products.

Covid Hangover?

Did this business have a covid benefit?  Yes, but with the US only 12% be careful not to project what we see onto the whole world.  That said, management acknowledges there has been a trend to “cocooning in the home” which has benefitted them to an extent.  Revenues in 2021 were only 10% higher than 2019 for a business that normally seems to grow 3 or 4% and there have been acquisitions in that period.  Margins were roughly the same in both years.  So we can infer that whatever benefit there was not particularly large, though of course some markets more than others.  Over the course of 2022 it was revealed that the major covid beneficiary countries were the U.S., France and Germany where they have seen 15-20% sales declines this year, though of course given what is happening in Europe and US housewares now that is not all because of covid.

They have a professional business which makes up about 8% of revenues.  This is primarily coffee machines for hotels, restaurants, cafes.  Deeply impacted by covid - still down high teens in 2021.  So that is about a 2% sales gap which offsets covid benefit from the other 90% of their business.   The professional business is all developed market meaning about 50% of the consumer business is emerging markets where the growth opportunity is the best.  

2021 earnings were also impacted by raw materials (stainless steel, plastics) and shipping costs.  To the extent they passed those through the revenues are even less “up” than they appear since 2019.

2022 YTD Has Been Nasty

Mid-February the stock was trading at about 130 and it did not look expensive or cheap at that level.  14.5x forward earnings.  A lot changed since then.

In late February of course Russia invaded Ukraine and Europe became “bad”.  Any of us who own European stocks know the pushback you get from investors today.  And of course in the short term things are bad.  Consumers in Europe are scared, energy prices are hitting consumers in different countries in different ways but none of them good.  And if you are manufacturing anything in Europe of course your costs are spiking.  If you had a Russian business as most European companies (but of course also many U.S. companies) do, it’s basically gone.  Will it always be like that?  I don’t think so.  Is this a European business?  Their biggest market is China.  Which doesn’t matter, Europe is bad and I’ve even heard the word “uninvestable”.  Love that word.

The stock went down in almost a straight line to 67, almost cut in half.  I won’t admit at which point on that slope I bit, but not my best shooting.

But I don’t at all mean to imply that it is just sentiment.  The second quarter financials were horrific.

Like for like sales were down as covid beneficiary markets normalized on top of a slowing consumer in Western Europe and the U.S.  This was offset somewhat by their biggest market, China, continuing to grow nicely.

Earnings were cut in half.  But the really scary thing about the second quarter was the cash flow statement.  The company burned 683 million euro of cash – huge number - in the first half of the year with working capital going from 13.8% of sales at year end to 22.3%.  Although free cash flow is typically second half loaded, the first half number cash from operations has never been negative going back ten years.  Huge outlier historically. 

They cite three reasons.  1) Higher inventories due to safety stock because of supply chain issues’ 2) Higher inventory in transit due to increased transport times and 3) Inflation.  Number 3 you would not expect to get back but the first two look temporary.  When you do your valuation work on this think about how much of that working capital now will be coming back in the future if that inventory unwinds.  That could be a substantial number which is very important when I value this on an enterprise value basis and subtract debt.

Things stabilized in the third quarter.  Cash flow stabilized, margins didn’t get any worse.

What management said about the fourth quarter was very interesting though.  First, management suggests in their guidance that margins will be back to year ago levels in the fourth quarter.  Nobody believes that, but they said they raised prices in September which will show up first in the fourth quarter.  They expect inventory to fall in the fourth quarter though not at all back to normal.  They hope to normalize working capital over the course of 2023.  So going forward a lot of cash is going to be coming out of the business and it should be demonstrated shortly that the earnings we saw in the second and third quarter are not some new normal.

Smart Acquiror

The company does a lot of acquisitions, but they are all right in the core, except for the professional coffee business which they acquired their way into in 2016 and bolted onto with an unfortunately timed acquisition in 2019. 

They see themselves as “a consolidator” of what is a very fragmented global business where they have #1 share of only 12% and are the only really global player.  They are looking for bolt-ons.  A country, a product, a business model – they appear to have stolen a very high growth internet business recently.  They acquire where they are the natural buyer with synergies. 

They show little interest in diversifying into new things which is smart – they are only 12% of a $75 billion market.  And if you’re a family owned pots and pans company in Mexico, who else are you going to sell to?  And the price is going to be measured in mid single digit EBITDA I would think.  That is how they built this franchise they have by doing a lot of these acquisitions right in the core business thinking globally (France ain’t growin’).  Over the years they say they have built up considerable experience sourcing and integrating acquisitions.

Their financials and their disclosure on some of the recent acquisitions indicate that they are a good acquiror.  They would have synergies when acquiring product as they have truly global distribution.  And the valuation which they have paid for some recent deals indicates that this isn’t tech – even high growth companies seem to go for low multiples.

In 2007 they bought a controlling interest in Supor in China and have added to that controlling interest by buying shares from the minority partners three times since then.  They now own 82% of it (23% of their consolidated revenues).  Supor is a VERY good business – we will see that again later in the writeup.

In July 2020 they completed the acquisition of Storebound, a U.S. social network marketing oriented home cookware business.  I italicize completed because they got lucky here – they negotiated the deal pre covid and closed it before it was clear they stole it.  $150 million of sales with “very rapid” growth.  I am sure there is a covid hangover here but they paid very little for it.  “Unparalleled knowhow in digital marketing” through social media.

In just eight years Storebound has developed its industry’s largest social media audience in the U.S.  It has been on Inc. magazine’s list of the fastest growth companies for four consecutive years.  SEB paid 46 million euro (including the value of earnouts) for a 55% interest in the company.  That calculates to roughly $100 million for the entire business.  0.7x revenues?  Really?  I would think 2021 was an exceptionally good year due to covid stay at home but it looks like they were growing rapidly well before covid.  That’s a hell of an acquisition.

This is not just an acquisition roll-up.  In the CEO’s letter, he says innovation is the key.  They spend 3% of revenues each year on innovation and design and have 1500 employees doing “R&D, Marketing and Design”.  This business is boring but they are active.

They have 1,250 stores which represents about 5% of their sales.  Not in the U.S.  They also have direct online presence in all their branches, though I would think the vast majority of online sales goes through places like Amazon.

Control Shareholders

This company was founded a long time ago – very European.  We own this alongside the 7^th generation of the founding family.  The name is Lescure but through marriage the names of the family Board seats are different, but the company makes it very clear who they are.  It is very clear they control the game here.  7^th generation!  Think about that.  You simply don’t see that in the U.S. 

Interesting disclosure about the family ownership.  There are 260 family members down the generations who own stock.  They put all their shares into a trust in 2019.  They control the Board.  Interesting statement in the annual report that the family intends to acquire more shares maybe with debt “pursued gradually”.  That is very unusual behavior for this kind of ownership structure in my experience.  The hint that they would use debt could indicate a bid for the whole company possibly though I guess this is a lot of people to get on the same page.  Hard to tell whether or not there is a leader here.

Supor - #1 in China

Now let’s look at their China business – they break this out with full financials because it is where the minority interest is.

Equity                                   1561

Less:  cash                             670

Capital Invested                ~900

Avg Cash from Operations last 2 years    ~260

Cash used by investing activities                ~50

That appears to be showing about a 23% ROIC for China.  And the free cash flow all appears to be dividended to the parent and the minority partners.

In the segment disclosure we see that Asia (which is not just China, but about 75% of it is) has the highest operating margin of any segment.

In fact, Supor trades on the public market – that’s the minority interest.  Zhejiang Supor Co., Ltd.  The valuation doesn’t look too high – 17x earnings for a growing, debt free industry leader with a high return on capital.

The market value at 45/sh for SEB’s 82% interest in Supor is:

32.4 billion RMB

X 82% ownership

X .13 Euro/RMB

= 3.4 billion Euro

The market cap of SEB is 4.3 billion euro.  That’s kind of interesting, no?   Though to be fair all of the debt is on the non-Supor side of the consolidated financials.

Supor made up only about 28% of SEB’s operating income after taking out the minority interest from the denominator.

I am not going to use the Supor listed value to appraise SEB, but if I did I would get a much higher number.

Financials

In addition to the Supor minority interest, there is one even bigger thing in the financials worth pointing out.  Capex on the Cash Flow Statement is too low  – there is a lease cash flow of about 95 million hiding somewhere in cash from financing but I don’t know where.  Probably in the change in debt line.  But if you’re trying to calculate free cash flow take out about 100 from CFO – (Capex + Intangible investment).  You will find a page later in the footnotes with the correct number, but don’t get fooled by the cash flow statement.  It’s a very easy mistake to make so I wanted to point it out.

There is also the minority interest of about 40 million that inflates any number except net income.

If you look back through past history, 9% seems like a pretty good number to use for EBIT margin.  It was a little higher than that through covid and a lot lower than that this year for a bunch of reasons outlined above.

So if we start with about 8 billion euro of sales, a 9% EBIT margin gives me 720 of EBIT.

Subtract a minority interest of about 50 for China.

I probably want to take out a little bit for Russia too, though it was only in 2022 for two months so that would not be material.  There is some deal amortization I would add back, but that is offset by rent expense in the interest line that I want to move above the line.  So all in all, 670 of EBIT.

At 4% we will have 104 of interest expense though with term of loans we won’t see that number for some time.  I also think excess working capital is going to come out in the next 6-12 months and the debt number will come down considerably.

566 pretax

440 after tax gets me to about 9x normalized earnings, which I would expect to grow mid single digits.  I appraise this at about 15x earnings which looks reasonably conservative based on the multiple it has traded at in the past.  You haven’t seen this low a trailing P/E since Europe’s Dark Ages in 2012.  Intrinsic value looks to me to be about 110.

Catalyst

earnings normalize

perception of European global companies as scary changes

big reversal of working capital produces a lot of cash