Ladies and gentlemen, welcome to the Saint-Gobain conference call. I now hand over to Pierre-André de Chalendar, Chairman and CEO. Sir, please go ahead.
Thank you. Good morning, everybody. I guess you have all seen our press release issued this morning about the settlement we have found with Sika and the Burkard family. Let me give you a bit more details and more background on this deal, which is very positive for Saint-Gobain in all aspects. As you remember, we signed our contract with the Burkard family in December 2014, and since then, we have been, against our will, dependent on the results of complex legal fights in Switzerland, which have generated growing uncertainties in terms of the ultimate result and also in terms of its timing. The position of all parties has become progressively more and more adversarial, pointing to a potentially difficult cooperation if and when we took control of the company.
A number of our shareholders have had a number of similar concerns which they have shared with us over the last few months. We have decided to seize a unique window of opportunity, which is allowing us to achieve three goals at the same time: deliver an outstanding financial result for us, remove all the uncertainties, and free us up to pursue our strategic goals. First, from a financial point of view, the result for us is just great. We will be recording an immediate positive impact on our net earnings of more than EUR 600 million. This is the accounting result, and this will at least be the cash result if we were to sell in the future at the current share price, which I believe is a conservative assumption.
From a risk perspective, one of the conditions for us to go for such a transaction was that it needed to be a tripartite agreement to make sure we were not exchanging one legal fight for another legal fight. This is achieved by the balanced structure we have found. Finally, from a strategic perspective, this is also a good outcome. It is less ideal than our initial plan of taking control of Sika, but it ticks many important boxes nevertheless. We'll restore our relationship with an important partner with excellent prospects in which we are now invested and with whom we continue to think we can deliver good value by working better together. Saint-Gobain will be the largest shareholder in Sika with a 10.75% stake.
We also keep financial room for maneuver to continue the development of our strategy, which we have actively pursued even while we were waiting for the legal decision on the dispute between the Burkard family and Sika. In summary, we have been opportunistic and have found a good deal, which is a very positive outcome for Saint-Gobain from a complex and uncertain situation and is a win for all three parties. All this has been made possible thanks to the very solid contract we signed in December 2014 with the Burkard family, which has allowed us to benefit from the increased value of Sika. I leave it to Guillaume, who is with me, to give you some more detail on the figure and the contract.
Good morning, everybody. I'll be short. As explained by Pierre-André, this is a very attractive deal for Saint-Gobain and our shareholders, creating a meaningful financial gain. Let me give you a little bit more details on the contract steps. First step, Saint-Gobain is buying SWH's 17% stake in the share capital of Sika for a total amount of CHF 3.22 billion. Second step, which has already happened, Saint-Gobain through SWH sells a 7% stake to Sika for a total amount of CHF 2.08 billion, which is the equivalent to CHF 11,758 per share or a 57% premium to the latest share price of Sika.
This means that for a cash outflow of CHF 1.14 billion or less than EUR 1 billion, Saint-Gobain is buying a 10% stake in Sika, which has a current market value of CHF 1.9 billion based, once again, on the latest share price. The resale of the 7% to Sika will result in a positive impact on Saint-Gobain's net result of more than EUR 600 million, including a currency hedge gain of EUR 38 million. One important fact is that our 10% holding in Sika and future movements in value will be equity accounted for according to the new IFRS 9 standard. The 10% holding is subject to a two-year lock-up period with restriction on how much further we can increase our stake for the following four years.
Third step, through an extraordinary general meeting, Sika will cancel the 7% holding acquired and simplify its capital structure to have just one class of shares. As a result, Saint-Gobain's position will mechanically increase to 10.75% of Sika's share capital. Now that we have detailed the transaction, Pierre-André and myself are happy to answer any questions.
Ladies and gentlemen, if you wish to ask a question, please dial zero and one on your telephone keypad. We have a first question from Mr. Paul Roger from BNP Paribas. Sir, please go ahead.
Yeah, good morning, everybody. Congratulations. Seems like a very sensible deal. Just three quick questions. Does this have any implication at all in terms of future capital allocation strategy? I guess some in the market might think now this is out of the way, Saint-Gobain may be able to do big deals again. Do you still rule that out? Maybe you could accelerate some share buybacks as well. Second question is, are there any tax implications of this deal? The third question is, you talk about expanding areas of mutual benefit. I wonder what exactly you mean by that. I mean, are there really significant business opportunities between Saint-Gobain and Sika given that you still will only own 11%?
Okay. I'll take the first question and the third one, and Guillaume, you answer the second one.
I can answer the second one very quickly because since the transaction is done through SWH, which is a Swiss holding, there is no taxation on the transaction. There is taxation, however, on the capital gain, on the financial gain on the hedge of CHF 38 million. The taxation rate on this one is 25%.
On future capital allocation, as you know, we have not been waiting for the Sika deal to be active in our capital allocation, as we explained to the Investor Day. We announced in our guidance EUR 500 million a year M&A last year. In fact, since one year, we have worked hard to identify relevant targets, and we have found more than what we anticipated. Yes, we have accelerated, and we are going to continue to accelerate acquisitions, probably more than the EUR 500 million a year. I do not want to give you a precise figure on that. Any given year could be different. Last year, we did EUR 640 million for the first part of the until now, I mean, this year, we have done more than EUR 300 million. As you know, size is not a major criteria for us.
We look more for strategic alignment and value creation potential. Our preference goes clearly to the continuation of small and mid-size acquisitions that we have done quite successfully over the last few years. I do not rule out to go a little bit bigger if it makes sense strategically and financially, but clearly, the priority is small and medium-sized acquisition. At the same time, we are going to continue our return to shareholders, and we will see opportunistically whether the speed at which we do it. We could accelerate depending on the opportunities. You know our goals in terms of dividend, and we have started this year. Also in terms of share buybacks, you know our objective.
Yeah, because it's interesting. Because I mean, even with this, sorry, even with this deal, I think you'll be on like 1.5 times Net Debt/ EBITDA potentially by the end of the year. It does look like you do have quite a bit of scope in terms of the buybacks potentially.
No, that's true. Although in terms of calculation, I think we're probably, I mean, like for like, if I look at last year, we finished the year at 1.4, and with the additional approximately CHF 1 billion debt that we would have, we would be at 1.6. Yes, we have room.
Yeah. Okay.
The third one was about business opportunities.
The third one was about business opportunities for Sika. As you know, in our initial deal, we had identified a huge number of synergies. I think so the potential of cooperation with Sika is clearly very significant. On the other hand, it is clear that during the last three years, there has been some animosity in the part of Sika, and there are some wounds which need to be progressively healed. I think this is going to happen. We see very significant opportunities, and we are going to, in the field of commercial field, we can extend some partnerships in the field of joint development or of innovation. I cannot be more precise at this time, but we are going progressively to work on that. I don't have a figure in mind.
I know the opportunities are large, but we are conscious of the necessary time to get back into positive mood and cooperative spirit.
That's great. Thank you.
Okay. Next question from Mrs. Elodie Rall from JP Morgan. Madame, please go ahead.
Hi. Yeah, good morning. Just a quick question on the math there. I mean, I think you had acquired a 16.1% stake originally, but if you add up the 7% plus the 10.75%, I think you get 17.7%. So I was a little bit trying to reconcile. And second, just to come back to the first question from Paul, I mean, you don't think that at this point, given your balance sheet and financial power, the proceeds you're getting here, it could be a good opportunity to actually accelerate your buyback program? I mean, I know you've answered that partly, but you've said you would look at opportunity. So when do you think there could be, I mean, at what point do you think it is opportunistic to actually increase the buyback program?
Okay. Elodie, I will take the first one. Yes, the initial deal was at 16.1%, but very quickly after that, it was updated to go to 17%. So precisely.
16.97.
Precisely 16.97%, I was going to say. We sell 6.97% to Sika, in fact. We keep 10%. Because the 6.97% are going to be canceled by Sika after the next extraordinary general meeting, we are going to mechanically carry our participation from 10% to 10.75%. That is the math about the percentages. I will leave it to Pierre-André about.
The second question, honestly, I think I already answered to Paul, Elodie. So same answer.
Okay.
Okay. Thank you.
Okay. Next question from John Fraser- Andrews from HSBC. Sir, please go ahead.
Thank you. Good morning. Just to follow up on where you could work with Sika. I assume in the distribution channel, as a customer of Sika's, perhaps you can do more there. Perhaps you could elaborate more than you've said so far on where any other opportunities are.
There are some geographic opportunities in terms of, and there are some cooperation innovation in some fields. As you know, the overlap, as clearly the European Commission said in the antitrust decision, the overlaps are quite reduced, but the complementarity are significant. We will explore all the cooperation we could have. I clearly don't think that we will get all the synergies that we had in mind in our first option, but I think we can progressively develop a number of cooperations in areas where there are clearly complementarities between Sika and Saint-Gobain. Honestly, it's a little bit too early to be precise on that.
Sure. Understood. Thank you.
Next question from Mr. Gregor Kuglitsch from UBS. Sir, please go ahead.
Hi. Apologies if you answered this, but can you actually explain the capital gains implication? I believe there's a change over time if you hold a stake for a certain period of time. If you could give us some details around that and kind of the rates. Obviously, you've got some math from the CHF 600 million. We can work backwards, but I would be interested nevertheless if that changes if you hold the stake for a certain period of time. My second question is, I guess, why the change of heart? I mean, this has been going on for three or four years now. Why now? I mean, couldn't you have done this already a year ago? Why did you wait so long to come up with this solution? Thank you.
For the first question, I'm not completely sure I get your question, but if the question is a question of taxation, does it change anything to taxation the fact that we are holding during two years? Because I saw that written somewhere in the newspaper. No, it doesn't change anything. The capital gain, it is tax-free in Switzerland, and so that's not going to change. In terms if the question is about future accounting of variations of the value of Sika for the 10% that we are retaining, what I said during the call is that we will choose to account for that in equity to not pollute the P&L by variations up and down of the Sika value in the future, which means that it's going to be accounted for in equity in the future as well as the exit, by the way.
If there is an exit.
If there is an exit. Overall, I think in terms of accounting, it's quite clear, and the fact that there is a two-year holding period doesn't change anything to the accounting.
Okay. Just to be 100% clear, you have no capital gains tax liability because you're holding this through a Swiss structure?
No.
Yeah. Okay. Thank you.
Absolutely not.
On the question why now, I mean, there have been some facts which have changed in the last two, three years. First, Sika is today not the company it was three years ago. Clearly, the share price linked with the evolution of the results, which have been better than all the analysts, and I would say myself had anticipated, makes Sika a different company. The share price, which is significantly above now the price of the initial deal, opens up different options for the three parties. Second, Sika has been regularly proposing a deal like that to Saint-Gobain. The third point is that the uncertain, and I would say the lengthening of the legal procedure, all those three points led to a new setup. As we have said, we have constantly been open since the beginning to talk with Sika.
I think these three circumstances have made a three-party deal possible. Because I insist, it was a bit complex because we needed to agree on a deal to have three parties to agree on that deal, each of them having their own, I would say, constraints or objectives.
Thank you very much.
I think that was not possible before, and I think it was a good time to do it.
Thank you. Very clear.
Ladies and gentlemen, let me remind you that if you wish to ask a question, you have to dial zero and one on the telephone keypad. You have a new question for Mr. Josep Pujal from Kepler Cheuvreux. Sir, please go ahead.
Yes. Good morning. Hello?
Yes.
Yeah. Good morning. Just clarification, please. You mentioned net profit, I think you call it, of more than EUR 600 million in the press release for your shareholders. When I compare the value of the market cap today of those 10.75% with what you pay net, I get close to CHF 900 million, which means EUR 780 million, let's say. What's the difference between what else do you account, or is it simply cautiousness? How do you get to those at least EUR 600 million, please?
Yeah. No, Josep, I think the difference between our calculations is that you do the calculation on 10.75%, assuming that the share price is going to remain exactly the same. Today, we are buying 10%. So we are buying a certain number of shares. I take that multiplied by the share price of today, and it will depend very much. I mean, the future evolution, I'm not speculating on that. There may be a revolution effect when Sika cancels the shares, but you know very well that all that is not completely automatic. The best way of calculating it is to take 10% today and multiply by the share price or the market cap of today. There are a few other small corrections, but they are minor. There is a little bit debt in SWH as well as lawyer fees, but that doesn't change materially the figures.
I think the main difference between your calculation and ours is probably this one, 10.75% compared to 10%.
Understood. Thank you.
Next question, once again, from Mr. John Fraser- Andrews from HSBC. Sir, please go ahead.
Yes. Just some follow-ups, please. Firstly, the lock-up period for two years, and then Sika's right of first refusal for a further four years. Was that influenced by your own ambitions for your residual share stake? That's the first question. The second is, could you say what this has cost Saint-Gobain in terms of legal fees so far since your original offer? Finally, has this decision to make an agreement with the other two parties, has it been influenced by the first legal decision of the Court of Zug?
Okay. The first question was about.
No, there are the legal fees.
Your first question was.
The lock-up.
The lock-up. Oh, yeah. The lock-up.
The lock-up period.
No, I understand. I remember the question. Let me give you a few details on that. I mean, first of all, I will take a step back. I will take a step back to say that it's a deal where the balance was difficult to find between conflicting objectives of three parties. So one parameter cannot be taken independently from the others. You need to read everything in link. Now, in terms of why the standstill particularly and the fact that we are not allowed for four plus two years to increase in capital, I mean, you realize that Sika is paying a very important premium on 7%. We mentioned a 57% premium on the share price, and it was normal that they would be concerned about what Saint-Gobain would do with the remaining 10%.
That's a little bit the reasoning behind the right of first refusal, the lock-up for two years, and the standstill for six years. Overall, as far as the lock-up is concerned, we are very comfortable with that because we are very happy to be invested in Sika. We think long-term the prospects of the company are very good, and it is not a problem for us. I hope it is a little bit clearer on the why. In terms of legal fees, as I said to Josep, legal fees are not material. We are talking something in the order of magnitudes of overall CHF 10 million, something like that.
Okay. Thank you. The last one on the legal decision of the court's decision.
Oh, did the legal decision influence? I mean, I think Pierre-André explained very well the fact that all of that is the conjunction of many things. It's a conjunction of the legal process taking more time, the conjunction of the share price increasing, of people's mindset also evolving probably. I don't think that there was one particular trigger like the first instance decision or like anything else. I think it was a long process. As we said, we have always been open to talks with Sika and with the family about how we could resolve to the best for the three parties the situation. Finally, a good window of opportunity, at least from the Saint-Gobain window, opened in the last few weeks.
Thank you.
Thank you. Next question from Will Jones from Redburn Partners. Sir, please go ahead.
Thanks. Two from me, please. Just based around the P&L impact, if that's okay. I'm sure we can go and work it out, but would you give us any formal guidance around what the associate equity impact will be as you integrate this into your P&L? The second was just you can remind us perhaps around the finance bill at Saint-Gobain. I think last year it was in the order of EUR 450 million. It came down quite nicely on the previous year. Can you just remind us what you were telling people would be the evolution of the finance bill through 2018, and to what extent, if any, really, this new money impacts that? Thanks.
Okay. I think, first of all, in terms of equity impact, I think the CHF 600 million that we are giving is all included. It is the restatement of what we are buying in SWH at market price, plus the capital gain, etc. It is an all-included amount. I think.
It has to be we have not made the it's around a little more than EUR 600 million. We will give you the exact number in July.
Yeah, yeah. Absolutely. The second thing in terms of financial cost, I think I'm not going to give a guidance any more than what we have done in the last controls about financial cost. If I look at this deal in terms of impact on the financial cost, you're going to have the hedge result, which is going to go formally in the financial cost line. For the rest, it doesn't change anything to our financial policy. There is nothing changed to the guidance that we have given at the beginning of the year, except for the hedge, which is going to be accounted for.
Okay. Thank you.
Thank you. Next question from Arnaud Lehmann from Bank of America. Sir, please go ahead.
Thank you very much. Good morning, gentlemen. Just firstly, the follow-up on the last question. What is the timing of all this? Have you finalized this deal, and does that mean you're going to start equity account for 11% of Sika from today? That's my first question. Secondly, obviously, there is a cap, I think, for six years on your potential stake in Sika. You won't be able to increase it in a meaningful way for the next few years. In the very long term, let's say, would that be your plan to increase your stake in Sika?
Yeah. Arnaud, I will take the first one. In terms of timing, everything was closed this morning. We bought SWH, and we resold everything, I mean, 7% to Sika. Now we are the owners of the remaining 10%. In terms of accounting, it starts today, but for 10%, not 10.75%, because the 7% have not been canceled today. Anyway, it's not a question of percentage. It's a question of number of shares. It starts today, and I will leave it to Pierre-André to say what we're going to do after six years.
First of all, I don't want to we don't want to decide at this stage what the time horizon of our participation will be. I'm not going to tell you whether we will sell at the end of the lock-up or during the next six years, or whether we will increase after the six years. For the time being, we think that Sika is a good company, and we are very comfortable being a long-term shareholder at this level. That's what I can say for today.
Okay. Thank you.
Thank you. Next question, once again, from Mr. Paul Roger from Exane BNP Paribas. Sir, please go ahead.
Yeah. Actually, I think my question's been answered, but I will just have one follow-up on the previous question. Actually, does your comment about being the long-term holder, does that pretty much rule out the fact that you might divest the 11% in two years?
I don't know. I'm not understood, Paul. What you said, does it rule out the fact that we could sell after two years?
No, I don't rule out anything. I just want to say I don't want to decide at this stage.
Fair enough. Thank you.
Everything is we have our options are open, but for the timing, if I tell you the likely idea for the short term, we are going to keep it for two years. I think at this moment, if you ask me my opinion, I think I'm comfortable with this 10%, and we will reassess the situation.
Okay. Thanks.
Thank you. Next question from Mr. André Lehmann from AWP. Sir, please go ahead.
Yes. Good morning, gentlemen. Just a quick question again on the legal fees. Could you just restate again the amount of legal fees?
We do not hear you. Can you speak louder, please?
Yes. Can you hear me better now?
Yes.
Much better.
Yes. Okay. Good morning, gentlemen. Could you just restate again the legal cost you had over these three and a half years? I just did not get the figure of the legal fees. Thank you.
I said in the order of magnitudes of 10 million, between 10 and.
Yeah. At the end of last year, we had CHF 8 million. Most of that was the antitrust fees at the beginning.
Yeah.
On this deal, it's not material.
Yeah. It's going to be this order of magnitude, 10 million.
Okay. EUR 10. EUR 10 million.
Okay. I gave an order of magnitude, so it's not precise 20%.
We have not finalized that.
Yeah.
Wonderful. Thank you.
Thank you.
Thank you. Next question from Mr. Gregor Kuglitsch from UBS. Sir, please go ahead.
Sorry. Very quick one. Just to be clear, when you equity account, do you put that into your operating income?
No.
That doesn't according to IFRS?
Or just below the line?
It's below everything. I mean, it's just like pensions. There are two options according to IFRS 9. One is to take it in the P&L with mark- to- market every six months, and the other one is to take it in equity forever. We'll take the option to put it in equity because we think it makes the rest, I mean, in cash, it's equivalent, but it makes the rest of the P&L more readable rather than having big variations every semester.
You don't put it into your operating income and the net income.
No.
It's just booked below the line. Okay. Thank you. That's clear.
That's after the initial net income, huh?
Yeah. The net income is going to impact the P&L, obviously.
Yeah. Of course. Below operating income, so.
Yes.
Yeah. Yeah. Okay. Clear. Thanks. Bye.
Perfect. We do not have any more questions for the moment. Ladies and gentlemen, let me remind you that if you wish to ask a question, you have to press zero and one on the telephone keypad. We have a new question from Mr. Eric Lemarié from Bryan, Garnier . Sir, please go ahead.
Yes. Good morning. Just one for me. You said initially the plan was to acquire 16.97% of the capital of Sika. Could you remind us the exact amount regarding the voting rights, please? Thank you.
The exact amount of what?
The voting rights. I remember that.
52.
52. 52.
52. Around 52. Yeah.
Okay. Okay. Not more than that because it was 52 when it was 16%, so.
Oh, 250. Anyway, I don't think he sees.
Okay. Fair enough.
Around that.
Okay. Fair enough. Thank you.
Perfect. Next question from Mr. Phil Roseberg from Bernstein. Sir, please go ahead.
Yeah. Good morning. Just a very quick thought afterwards after listening to all this. You've sort of accepted a lock-up, basically, on your share, the ability to buy shares with a six-year cap, whereas the company is now sort of more open or vulnerable to a full takeover than it has been in the past. Does this not rule out your ability to, well, to counterbid or even to become a sort of a white knight in case of a takeover offer for Sika? And why would you accept this?
In terms of the lock-up, it is two years. The standstill is six years. It rules out the possibility of launching a takeover on Sika for six years. It was the balance of the deal, obviously. What it does not rule out, first of all, is to participate and to bring our shares, if we want at some point, to a potential takeover. You were talking about white knight. All of that is quite possible in agreement with the company. As I said at the beginning of the call, it was a balance to be found between the expectations on everybody. I mean, it is quite understandable that paying such a high price, Sika wanted some protections on what Saint-Gobain would do in the next few years without their agreement. If they agree with it, we can absolutely do other things.
Okay. That's understood.
Yeah.
Okay.
Perfect. We don't have any more questions for the moment. Ladies and gentlemen, if you wish to ask a question, please dial zero and one on the telephone keypad. We don't have any more questions.
Okay.
Back to you for the conclusion, sir.
Yeah. Thank you to everybody for participating in this conference call, and I look forward to speaking to you again on July 26th for our half-year results. Thank you. Have a good day.
Ladies and gentlemen, thank you for your participation. You may now disconnect.