Norsk Hydro ASA, Sapa AS - M&A Call
Jul 10, 2017 AM CEST
NHY.OL - Norsk Hydro ASA
Norsk Hydro ASA, Sapa AS - M&A Call
Jul 10, 2017 / 01:00PM GMT
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Corporate Participants
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* Eivind Kallevik
Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board
* Stian Hasle
Norsk Hydro ASA - Head of IR
* Svein Richard Brandtzæg
Norsk Hydro ASA - CEO, President and Member of Corporate Management Board
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Conference Call Participants
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* Daniel Dominik Lurch
Exane BNP Paribas, Research Division - Analyst
* Fraser Rowat Jamieson
JP Morgan Chase & Co, Research Division - Research Analyst
* Jason Robert Fairclough
BofA Merrill Lynch, Research Division - Head of the Developed and Emerging EMEA Metals and Mining Equity Research
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Presentation
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Operator [1]
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Good day, and welcome to the Norsk Hydro ASA Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Stian Hasle. Please go ahead.
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Stian Hasle, Norsk Hydro ASA - Head of IR [2]
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Thank you. Good afternoon, and welcome to Hydro's conference call on the acquisition of Sapa. We will start with a short introduction by President and CEO, Svein Richard Brandtzæg, followed by a Q&A session, also joined by CFO, Eivind Kallevik. For those of you who did not see this morning's webcast of the result presentation, it is available on hydro.com. And with that, I'll leave the word to you, Svein Richard.
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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [3]
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Thank you, Stian, and good afternoon. And let me just start with a few words before moving over to Q&A. This transaction will make us #1 in aluminum products, solutions and applications. It gives us industry's broadest products and service offering and confirm Hydro as a clear aluminum technology and innovation leader. With regard to the transaction details, we have this morning signed agreement with Orkla to take over the 50% interest in Sapa making us 100% owner of this company. The transaction is giving Sapa an enterprise value of NOK 27 billion for the full company.
Given Sapa's speed of improvements and performance so far this year, we expect this to be EBITDA multiple of around 7, last 12 months Q2, this represents an attractive pricing of Sapa as we see it. (inaudible) is accretive to earnings and with Hydro benefiting from strong cash generation from Sapa starting already at day 1.
(inaudible) the another layer synergy case, we do believe that we will be able to realize around NOK 200 million in annual synergies from this deal, mainly related to the areas of remelt and recycling. As it has become customary for Hydro, the funding of the deal is based on our strong balance sheet, and we will fund acquisition through available cash and undrawn credit facilities with a plan to enter the bond market at a later stage. We will continue to have a strong balance sheet as top priority for the company along with the commitment to retain an investment grade credit rating and our dividend policy will remain the same.
The acquisition will be subject to regulatory approvals in several jurisdictions, but we estimate to close this deal in the second half of this year. The strategic rationale for this deal is that it will really make us a global force in the aluminum industry for 3 of all reasons. First, it will assume -- we will assume global leadership to a worldwide production and customer offering that will be unique in our industry. Furthermore, it will be backed up by unparallel capabilities in technology, research and development, innovation and product development, great for customers today and essential for aluminum's future competitiveness.
And second, it will provide further growth, opportunities and optionality all along the value chain and across the aluminum market, allowing us to target the most attractive areas and segments of the global aluminum industry.
And third, with true value chain control and the industry's most ambitious climate strategy, we will be ideally placed to provide responsible low carbon products to a world where sustainability has become a key decision making factor for our customers, for end-users, regulators and civil society, circular solutions for the circular economy.
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Stian Hasle, Norsk Hydro ASA - Head of IR [4]
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Thank you, Svein Richard. Operator, we're now ready for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) We will go first to Jason Fairclough with Bank of America Merrill Lynch.
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Jason Robert Fairclough, BofA Merrill Lynch, Research Division - Head of the Developed and Emerging EMEA Metals and Mining Equity Research [2]
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Look, I was just wondering if you could give us your thoughts on the timing of this acquisition versus the cycle? Are the earnings of Sapa cyclical or not?
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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [3]
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Jason, thank you very much for the question. Obviously, that what we believe here is that the cyclicality is, of course, over the year. We have -- in this business, we have a very strong first quarter and second quarter, and we have some holiday in the third quarter and Christmas already in the fourth quarter. So from that perspective, there are seasonal variations. And of course, you can also ask what is going to happen in North America market after so many years with positive development. We don't find any weaknesses in the North America market as we see it now. And I think, it is still a good reason to believe that we can continue a positive development going forward. So it is always difficult to estimate the next downturn in the market, but as we see it now, it's -- no urgent changes that is worrying us that -- with respect to that. But of course, we have to go top to continue to develop and maintain the strong market position of Sapa, that will now become extruded solutions in Hydro going forward after closing.
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Operator [4]
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(Operator Instructions) We will go to Daniel Lurch with Exane.
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Daniel Dominik Lurch, Exane BNP Paribas, Research Division - Analyst [5]
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Just a quick follow-up on the timing question. What caused the decision to acquire Sapa now? Because from our previous discussions, I understood that there was no really hurry or it could be considered in next 1 to 2 years. And can you give us a bit of more detail on that one? And secondly, on your synergy number, can you explain -- do you expect to need any CapEx to achieve that number?
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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [6]
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Daniel. With regard to the timing again, of course, this is a process that we have been prepared for. When it start, we just have to -- we have done it, and we finalized now in middle of the European summer holiday, not necessarily optimum for analyst point of view maybe. But again, when we established this joint venture in 2013, we already communicated that this is an option for Hydro. We will follow the development carefully. It could be a situation where we would conclude on an IPO together with Orkla. We mentioned we could also either have a minority position or we could take the full control of the company. And we concluded that to take full control of the company is the best value equation -- potential for Hydro and all shareholders going forward.
With regard to synergies, we -- it depends. With regard to the NOK 200 million in synergies per year, we estimate there also on cost and also some integration costs, and Eivind, may be you can comment on that. But with regard to the areas where we find synergies is very much about remelting and recycling. We are bringing to the table from Hydro 1 million tonne capacity of remelting and recycling capacity. Sapa has, in fact, the same magnitude capacity, 1 million tonnes. So all together 2 million tonnes. That means we have a fantastic opportunity to dig deeper into the scrapyard and bring post-consumer scrap to a greater extent into the value chain. As you know, aluminum can be recycled unlimited most of the times and be brought back to the value chain at the same value level as before. So we see potential here of coordinating procurement of scrap. We see potential within operation excellence because we see clearly that this is not well developed, and we see also the opportunity potential. But -- Eivind can comment on the numbers there.
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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [7]
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Daniel, we expect to spend some approximately NOK 400 million for both the integration phase of the project -- or for this acquisition as far as costs related to taking out the NOK 200 million in annual synergy benefits.
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Operator [8]
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(Operator Instructions) We will return to Jason Fairclough with Bank of America Merrill Lynch.
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Jason Robert Fairclough, BofA Merrill Lynch, Research Division - Head of the Developed and Emerging EMEA Metals and Mining Equity Research [9]
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Just to come back here. Could you give us a little bit your thoughts on China as a competitive threat both in terms of pricing and, but then I suppose, also in terms of volumes?
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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [10]
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Jason, it is very difficult for China to compete in the extrusion market in Europe or U.S. or also even in many countries in Asia. We are talking about the market where customers are ordering 1,200 kilos or more from 1 day to the day or the day after -- to the next day or the day after. So it is very short lead times in this business. You have to be very fast and flexible, and that is the culture that has been developed in Sapa over the years. So what the competition from China will be very much more related to aluminum -- finished aluminum product whether it's ladders or it could be other products that becomes in aluminum that is reducing the total amount of aluminum outside China. But in the extrusion markets, as such it is very difficult for Chinese players to act in the -- except for the domestic market in China. But again, this is a development that we are following carefully. We know that there are some Chinese players that want to establish themselves outside China. But again, then they will compete with the same conditions as Sapa has today and then Sapa is in a well position to have their strong position also going forward, and we will take good care of that also in Hydro.
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Jason Robert Fairclough, BofA Merrill Lynch, Research Division - Head of the Developed and Emerging EMEA Metals and Mining Equity Research [11]
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Okay. And maybe I'll -- just a follow-up question, if that is okay, because didn't saw it was -- so many of us on the call here. Just in terms of this acquisition, what message should we take from this acquisition on the direction of future investments for Hydro? So should we say, no more upstream from now on? You're only going to be spending money downstream? Or is it going to be balanced across the value chain? How should we think about that?
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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [12]
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That's also an important question because we are to some extent limiting ourselves with regard to growth upstream. Very much related to the development in the market where customers are asking for more sustainable solutions. And that's why we are not going to invest in smelters based on coal-fired fossil fuels. So we know there are smelters available in the market, but as long as it is not based on renewable energy, it is not of interest for us. So if you look at the growth development for us going forward, we see that with Sapa, we are establishing wide optionality for the company. Not saying that this is about every time we are going to invest in this transforming transactions. I think, in Extrusion, which is a very fragmented industry, there are many different options to grow carefully, slowly and take small steps. At the same time that we see also organic growth opportunities for Sapa, not necessarily with building more volumes on -- for presses, but to do even more value-added activities after the press. So it doesn't in a way change our strategy for growth because we have already limited ourself with regard to growing into more sustainable areas, smelters based on renewable energy, and we will also be very careful, as I said before, to invest in greenfield alumina capacities or greenfield -- or brownfield smelting capacity. So we still maintain our position that we are not going to extend (inaudible) 2 or to build projects in Brazil for the next foreseeable future. So if you then look at growth opportunities for us, it's -- could be some more development in rolled products, but with extruded solutions on both, it can give us also another platform for growth. But we are not growing only to be bigger, it is -- most important for us is to be more profitable. And we also from that perspective see good opportunities in Extrusion going forward.
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Operator [13]
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We will take our next question from Fraser Jamieson of JPMorgan.
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Fraser Rowat Jamieson, JP Morgan Chase & Co, Research Division - Research Analyst [14]
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One quick follow-up on the NOK 400 million of cost Eivind mentioned. Over what sort of time period should we be anticipating that being spent? Second one, again fairly quick one. Working capital, roughly how much does Sapa have? And to what extent do you see that just being immediately consolidated into Hydro's numbers once the transaction is settled? Or to what extent is there an opportunity to reduce some of that working capital, I guess, is the other way of asking that question? Then the final one is a slightly wider one. The JV has, obviously, over the last few years proved to be very successful, and it would decide the scope for you to do more with that business going forward. Could you maybe talk a bit about the opportunities or otherwise in rolled products? Is there the same kind of consolidation opportunities potentially available in that division as we have -- as we've seen in extruded?
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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [15]
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Maybe I'll answer the cost side first. The NOK 400 million, and again, this is part of what we will detail out in the integration planning period as we go into now (inaudible) but assume that, that will be spent in the first 1 to 2 years post completion. I think that is as exact as we can point at the moment.
When it comes to net operating capital, the answer is almost the same. Let's go through the integration planning phase, we'll get some more insights and then we will come back with that post closing. Net operating capital at the moment is more or less NOK 4 billion.
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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [16]
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Okay, Fraser, maybe I can comment on opportunities within Extrusion. If you look at Sapa today, 35% of the volumes of Sapa is now going into automotive. But there's significant, I will say, volume that Sapa is now producing, that is more commodity-based products with lower margins. And Sapa has started on the journey. They call it margin over volume or value over volume. And there is still a long way to go before that has come to an end. So we see still opportunities for increasing the margin development in this business. If you look at the margin picture of (inaudible) for Sapa, there are still potentials to improve. So that is one area where we see opportunities. How that will be done is very much, again, optimizing the segmentation of the market. It's about added value activities after the extrusion presses, as I mentioned, and there are several other elements to it that Sapa is going to work with and that we will be following up after the closing of the deal. A question about rolled products and consolidation, I'll say that it's no secret that Hydro would like to have a position in North American market, but we're not going to pay any price for that position, and we have not found any interesting opportunities for us in the North American market. And then we limit ourselves to have all production facilities in Europe, which is okay today. And again, it depends very much on the case-by-case opportunity. It's not a target in itself for Hydro to consolidate all Polish industry. This is -- there are some good companies and some not so good companies there. And for us, it's very much more able to value creation and make sure that we have -- are allocating our capital to areas where we are increasing the value creation of the company.
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Operator [17]
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(Operator Instructions) We'll return to Daniel Lurch with Exane.
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Daniel Dominik Lurch, Exane BNP Paribas, Research Division - Analyst [18]
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So just two quick follow-up questions, if I may. The first one on synergies again. This morning on the call you mentioned that there could be more optimization potential, as you outlined the current synergy numbers based on your recycling and remelting operations. Could you -- I mean -- and there will be more detail in your information memorandum. But could you outline where there are further areas of -- where you see potential opportunities for optimization? And the second question is quickly on the competition approval in the Western Europe, do you see that this is -- do you feel comfortable here? Or do you see any issues with regard to specific extrusion product maybe where there could be market share issues?
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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [19]
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I can ask on -- Daniel, I can ask -- answer the last part of it and Eivind can take the first part. With regard to the competition approval, at least our advisers don't see any problems with it as such. We are quite comfortable with the process, but we just have to give it the time that is necessary for the final approval. And that's why we expect that in the second half or maybe in middle of the second half of this year, it will be approved. But we are not 100% sure about that. We just have to make -- or let it take the time that is necessary, but there shouldn't be any problems as such with the approval there.
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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [20]
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(inaudible) for the synergies, it is something that we will look at again, although we started the second phase of integration planning together with Sapa. There are several areas that we will look at and then, if we find something and what we find, we will then communicate when we are comfortable with those numbers. But I don't have anything more specific to give you today, Dan.
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Operator [21]
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Thank you. We have no further questions holding at this time.
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Stian Hasle, Norsk Hydro ASA - Head of IR [22]
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Okay. Since there seems to be no further question, we can end this call for now. Thank you for joining us today. And if you have any follow-up questions, please do not hesitate to contact us. Thank you, and have a nice evening.
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Operator [23]
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Thank you for your participation. That does conclude today's conference. You may now disconnect.
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