Description

Austrian company Andritz AG is a conglomerate made up of four separate industrial business units that have grown both organically and inorganically (>60 acquisitions since 2000). All four business units show similarities in that Andritz is a global leader in each of them and they all have significant aftermarket consumable and service/maintenance components to them.

Pulp and Paper is the largest of Andritz’s four business units, contributing c.50% of revenue and >70% of operating profit. This division supplies equipment, systems and services to producers of all types of pulps, paper tissue and cardboard. Andritz expanded into the consumables segment of this market with the 2018 acquisition of the US company Xerium. Xerium supplies the belts and rolls used to dry and press the pulp into paper. This business provides a nice recurring revenue element (c.95% of orders are repeat sales) as these belts and rolls have to be replaced every few months. Customers tend not to switch suppliers as the products are customised for their production lines and represent less than 5% of the total cost of operating a plant.

Andritz’s second largest business division is ‘Hydro’. This unit provides electromechanical equipment (e.g. turbines and generators) to the hydro power industry. In addition, Hydro's service portfolio supports the entire life cycle of a hydropower plant, from design and engineering to manufacturing, installation, on through to commissioning and training. The company has an installed base of over 30,000 turbines. With 54% of the installed base more than 30 years old, 50-60% of orders are modernisation orders, c.25% are related to the servicing of plants and the remaining 15-25% are greenfield.

The company’s ‘Separation’ division supplies filtration and separation equipment (centrifuges, presses, thermal drying) to a variety of end industries including pharmaceutical, mining and agriculture. This is a highly segmented industry with many different technologies in which you need to be a specialist for each different segment. In some of these segments Andritz’s market share is greater than 50%.

Andritz’s ‘Metal’ division supplies equipment for metal working and forming. c.75% of sales are to the automotive industry with railway (wheels), aerospace and mining being other end markets. The presses supplied by Andritz are used to hot stamp or cold form metal parts for cars like doors and panels. The Metals business is the global market leader in the supply of pressing machines with a relative market share of 2x versus its nearest competitors. It has close to 100% market share with the premium German auto manufacturers. However, even with its strong competitive positioning, this division was until recently loss making due to an uncompetitive cost base. It is currently going through a significant restructuring which management is confident will return it to profitability. Recent results provide evidence that this restructuring is beginning to bear fruit.

Andritz is owner occupied, with Dr Wolfgang Leitner owning a third of the company. Dr Leitner has been with the business for 34 years, the last 27 as CEO. In 2021 he announced his intention to retire from the position of CEO and transition directly to being a member of the company’s supervisory board. We rate Dr Leitner highly both in terms of his business acumen and approach to corporate governance. We believe having someone of Dr Leitner’s experience on the board is a significant positive for the company. Dr Leitner gained a PhD in chemistry and worked as a research chemist before joining McKinsey. He left McKinsey to start a pharmaceutical business which he took public and later sold to Bristol Myers Squibb. He used a proportion of the funds made from this to invest in Andritz. It is also interesting to note Dr Leitner built a medical device company which he later sold to a subsidiary of Berkshire Hathaway. Dr Leitner, throughout his career, has proven to be an astute allocator of capital. In our interactions with him he has come across as very smart, modest and low ego. Similar to Warren Buffett, he has gained a reputation amongst German and Austrian entrepreneurs as the person to call when they are looking to sell their businesses but want to be sure that the culture of their life’s work will be retained.

Andritz operates in mature industries that still have tangible underlying growth drivers. In Pulp & Paper, the secular decline of print paper has now been overtaken by the growth of packaging driven by ecommerce. This growth results in a need for one new plant per annum (each plant averages $500m of revenue for the supplier) – a scale sufficient to keep demand volume stable for Andritz and Valmet for the foreseeable future. However, there is an additional growth tailwind from the long-term switch in pulp and paper manufacturing from the Northern Hemisphere, where tree cultivation takes 30 years, to the more efficient Southern Hemisphere, where the rate is only 7 years. As the installed base of pulp and paper manufacturing plants grows, Andritz is able to sell more profitable consumables and services into this largely captive customer base.

In Hydro, the climate agenda is driving renewed interest, particularly in pumped storage hydroelectricity, where hydro plants are effectively used as batteries to store energy generated by wind and solar, which is not always generated synchronously with demand. Andritz has 40% of this market. Furthermore, the existing installed base is ageing and Andritz is well positioned to take a share of the long-term need to upgrade and replace these old stations.

Whilst the main driver of future value in Metals is the recovery of its margins, there are longer term tailwinds from the switch to electric vehicles, as these have additional flat metal content (e.g. battery casings). Andritz is well positioned for this growth, with 33% of its revenue coming from EV production today (Tesla is a customer).

Andritz has a conservative balance sheet with a net cash position and trades on a forward PE of c.12x.

Catalyst

Expansion of margins in Metals division through restructuring.