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.
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. With that, I'll leave the word to you, Svein Richard.
Thank you, Stian, and good afternoon. Let me just start with a few words before moving over to Q&A. This transaction will make us number one in aluminum products, solutions and applications. It will give us the industry's broadest products and service offering, and confirm Hydro as a clear aluminum technology and innovation leader. If you go to the transaction details, we have this morning signed the agreement with Orkla to take over a 50% interest in Sapa, making us a 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 improvement and performance so far this year, we expect this to be an EV/EBITDA multiple of around seven last 12 months Q2. This represent an attractive pricing of Sapa as we see it. Our deal with Orkla is accretive to earnings and with Hydro's benefiting from a strong cash generation from Sapa, starting already at day one. Although not primarily a 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 has become customary for Hydro, the funding of the deal is based on our strong balance sheet, and we will fund the 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 a 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 H2 of this year. The strategic rationale for this deal is that it will really make us a global force in the aluminum industry for three overall reasons.
First, 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 unparalleled capabilities in technology, research and development, innovation and product development, great for our customers today and essential for aluminum's future competitiveness. 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. Third, with full value chain control and the industry's most ambitious climate strategy, we will be ideal placed to provide responsible low carbon products to a world where sustainability is becoming a key decision-making factor for our customers or end users, regulators and civil society. Circular solutions for the circular economy.
Thank you, Svein Richard. Operator, we're now ready for questions.
Thank you. If you'd like to ask a question, please press star one on your touch tone phone. Please be sure you are unmuted, so your signal reaches our equipment. Once again, that's star one, if you would like to ask a question. We'll go first to Jason Fairclough with Bank of America Merrill Lynch.
Thanks, gentlemen, for the call. Appreciate the opportunity. 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?
Jason, thank you very much for the question. I would say that what we believe here is that the cyclicality is of course over the year. We have in this business a very strong Q1 and Q2, and we have a summer holiday in the Q3 and Christmas holiday in the Q4. From that perspective, there are seasonal variations. Of course, you can also ask what is going to happen in the North American market after so many years with positive development. We don't find any weaknesses in the North American market as we see it now. I think there's still a good reason to believe that we can continue a positive development going forward.
It is always difficult to estimate the next downturn in the market. As we see it now, there are no urgent changes that are worrying us with respect to that. Of course, we have to work hard to continue to develop and maintain the strong market position of Sapa that will now become Extruded Solutions in Hydro going forward after closing.
Okay. Thank you.
Thank you. Once again, star one if you would like to ask a question. We'll go to Daniel Lurch with Exane.
Hi, good afternoon. Thanks for taking my question. Just a quick follow-up on the timing question. What caused the decision to acquire Sapa now? Is it because from our previous discussions, I understood that there was no real hurry or it could be considered in the next one to two years. Can you give us a bit more detail on that one? Secondly, on your synergy number, can you explain, do you expect to need any CapEx to achieve that number? Thank you.
Thank you very much, Daniel . In regards to the timing again. Of course, this is a process that we had been prepared for when it started. We just had to work on it and we finalize now in the middle of the European summer holiday. Not necessarily optimum for analyst point of view maybe. 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 say have a minority position or we could take the full control of the company.
We concluded that we're to take full control of the company is best value creation potential for Hydro and our shareholders going forward. With regard to synergies, it depends. With regard to the NOK 200 million in synergies per year, we estimate there are some costs and also some integration costs. Eivind, maybe you can comment on that. 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 ton capacity of remelting and recycling capacity. Sapa has in fact the same magnitude capacity, 1 million tons, so altogether 2 million tons.
That means we have a fantastic opportunity to dig deeper into scrap yard and bring post-consumer scrap to a greater extent into the value chain. As you know, aluminum can be recycled unlimited amount of times and be brought back to the value chain at the same value level as before. We see potential here of coordinating procurement of scrap. We see potential within operational excellence because we see clearly that this is not well developed, and we see also other synergy potential. Eivind can comment on the numbers there.
Hi, Daniel. We expect to spend some approximately NOK 400 million for both the integration phase of the project or for this acquisition, as well as costs related to taking out the NOK 200 million in annual synergy benefits.
Okay, great. Thank you.
Thank you. Again, star one if you would like to ask a question. We'll return to Jason Fairclough with Bank of America Merrill Lynch.
Thanks. 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, but then I suppose also in terms of volumes?
Thank you, 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 some 100 kilos or more from one day to the day or the day after, to the next day or the day after. 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.
What the competition from China will very much be more related to aluminum finished aluminum products, whether it's ladders or it could be other products that comes in aluminum that is reducing the total demand for aluminum outside China. In the extrusion markets, as such, it is very difficult for Chinese players to act except for the domestic market in China. 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.
Again, then they will compete with the same framework conditions as Sapa has today, and then Sapa is very well positioned to have their strong position also going forward, and we will take good care of that also in Hydro.
Okay. Maybe I'll just a follow-up question, if that's okay, because it doesn't sound like there's 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? Should we say no more upstream from now on, you're only gonna be spending money downstream, or is it gonna be balanced across the value chain? How should we think about that?
That's also an important question because we are to some extent limiting ourself with regard to growth upstream. Very much related to the development in the market where customers is asking for more sustainable solutions. That's why we are not going to invest in smelters based on coal-fired fossil fuels. 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. If you look at the growth development for us going forward, we see that with Sapa, we are establishing a wider optionality for the company. Not saying that this is about every time we are going to invest with 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 the building more volumes on for the presses, but to do even more value-added activities after the press. It doesn't in a way change our strategy for growth because we have already limited ourselves with regard to growing into more sustainable areas, smelters based on renewable energy. We will also be very careful, as I said before, to invest in greenfield alumina capacities or greenfield or brownfield smelting capacity.
We still maintain our position that we are not going to extend Karmøy with Karmøy Two, or we build a CAP project in Brazil, for the next foreseeable future. If you then look at the growth opportunities for us, it could be some more development in rolled products, but with Extruded Solutions on board, it can give us also another platform for growth. We are not growing only to be bigger. It is most important for us is to be more profitable. We also from that perspective see good opportunities in extrusion going forward.
Okay, thanks very much. Very clear.
Thank you. We'll take our next question from Fraser Jamieson of JP Morgan.
Yeah. Hi. Hi, everyone. Thanks for taking the question. One quick follow-up on the NOK 400 million of costs that 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. The final one is a slightly wider one. The JV has obviously, over the last few years, proved to be very successful.
It looks like there's 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've seen in Extruded? Thanks.
Maybe if I answer the cost side first. The 400 million, and again, this is part of what we will detail out in the integration planning period that we go into now, Fraser. Assume that that will be spent in the first one to two years post completion. I think that is as exact as we can point it 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 insight, and then we will come back with that post-closing. Net operating capital at the moment is more or less NOK 4 billion .
Okay, thanks.
Okay, Fraser, maybe I can comment on the opportunities within extrusion. If you look at Sapa today, 35% of the volumes from Sapa is now going into automotive. But there's still a significant, obviously volume that Sapa is now producing that is more commodity-based products with lower margins. Sapa has started on the journey they call it margin over volume or value over volume. There is still a long way to go before that is come to an end. We see still opportunities for increasing the margin development in this business. If you look at the margin picture for Sapa, there are still potentials to improve.
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 prices, as I mentioned, and also have a lot of elements to it that Sapa is going to work with and that we will come following up after the closing of the deal. The question about rolled products and consolidation, I say that it's no secret that Hydro would like to have a position in North American market, but we are not going to pay any price for that position. We have not found any interesting opportunities for us in the North American market.
We limit ourselves to have our production facilities in Europe, which is okay today. It depends very much on the case-by-case opportunity. It's not the target in itself for Hydro to consolidate the whole powders industry. There are some good companies and some not so good companies there. For us, it's very much more about value creation and make sure that we allocate our capital to areas where we are increasing the value creation of the company.
Okay, thank you.
Thank you again. Star one for questions. We'll return to Daniel Lurch with Exane.
Hi, thanks very much. 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 potentially. You outlined the current synergy number is based on your recycling and remelting operations. I mean, I imagine 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? The second question is quickly on the competition approvals in U.S. and Europe. Do you feel comfortable here, or do you see any issues with regard to specific extrusion products, maybe where there could be market share issues?
I can also, Daniel, answer the last part of it, and Eivind can take the first part. With regard to competition approval, at least our advisors 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. That's why we expect that in the H2, maybe in the middle of the H2 of this year, it will be approved. We are not a hundred percent sure about that. We just have to let it take the time that is necessary. There shouldn't be any problems as such with the approval there.
I think when it comes to the synergies, it is something that we will look at again now that we start 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. I don't have anything more specific to give you today, Daniel.
Yeah, thanks.
Thank you. We have no further questions holding at this time.
Okay. As there seems to be no further question, we can end this call for now. Thank you for joining us today. If you have any follow-up questions, please do not hesitate to contact us. Thank you, and have a nice evening.
Thank you for your participation. That does conclude today's conference.