Good morning, everyone, and welcome to Hydro. It's a big day for us today, as we are announcing that Hydro is buying the remaining 50% stake in Sapa, the world's largest aluminum solutions provider. The transaction will be presented by Hydro CEO, Svein Richard Brandtzæg, with the CFO of Hydro, Eivind Kallevik, and the CEO of Sapa, Egil Hogna. After the presentation, we will have time for a Q&A. Svein Richard.
Thank you very much, Inger Sethov. It's a great pleasure for us to announce today the acquisition to make Hydro 100% owner of Sapa, the world-leading extruded solutions company. It's a historic day for Hydro, confirming our integrated strategy for further value creation. It's a historic day for Sapa, too, after 20 years of restructuring and synergies, now entering a new chapter for further value creation and development. It's also a historic moment for the global aluminum industry, because we are now establishing Hydro as the global leader in aluminum. Together, we are stronger to the benefits of customers, shareholders, employees, and other stakeholders. Before going into the strategic background for this acquisition, let me first go through the main elements of the transaction.
We have today signed a binding agreement with Orkla to take over 50% ownership in Sapa, which makes us full owner when this transaction is closed. We have agreed to an enterprise value of NOK 27 billion. With the current EBITDA level in Sapa, that correspond to a multiple around 7. This deal is accretive to earnings, and it is generating cash from day one from Sapa. This is not a typical synergy case, but we have identified synergies within re-melting and recycling of NOK 200 million per year. Sapa will become a new business area in Hydro after closing. If you go to financing, we have a strong financial position in Hydro, and we will use our cash position and also enter the bond market.
We will start that process in the second half of this year. We are committed to keep our investment-grade rating and also continue to keep a strong balance sheet. We are also committed to continue our policy with regard to dividend, which is 40% of the income over the cycle. With regard to timing, we expect this transaction to be closed after regulatory approvals, which has to be done in several jurisdictions within the second half of this year. The excitement of this deal is about global leadership, growth, and infinite solutions. Global leadership, because we will have a worldwide production setup and customer offering backed up by the unparalleled competence and technological capabilities. With Sapa, we will have another platform for optionally growth opportunities.
We will have a platform for further developing Hydro as a leader in the most attractive markets in aluminum. We will continue to promote sustainable solutions in aluminum. Since Hydro became a pure aluminum player in 2007, we have pursued an integrated strategy. We have a long value chain of Hydro, but it is more than a two-dimensional value chain from mining to solutions. It's also about integration into different market segments. As you see on this slide, Hydro is already supplying products and solutions into several market segments aluminum from different parts of the value chain. It is not only the downstream, it is also midstream and upstream into different market segments of aluminum, which is the largest and also the fastest growing.
Here we will have a unique interface with customers. Sapa is coming in with 30,000 customers, and this gives us a fantastic information about what is ongoing in the market. Become closer to customers, closer to markets. We can react faster, and all the information we are gathering from this market can be fueled back to the processes to be optimized further, and also to offer services and products even faster and better into the marketplace. This is digitalization and Industry 4.0 in practical terms for Hydro going forward. Before going further into the strategy, just let us then move into what Sapa is about.
We are talking about a company with about 100 units in 40 countries with more than 22,000 employees. I've been responsible for downstream, including extrusion myself before I became the CEO of Hydro in 2009. I would like the CEO of Sapa to go through this part of the presentation, which will explain more about what Sapa is. Please, Egil.
Thank you, Svein Richard Brandtzæg. Good morning, everyone. It's a pleasure for me to be here today to present Sapa and how we can contribute to make Hydro an even better company than it already is. Sapa is the world's largest extrusion company. Extrusion is the production process where we take a solid aluminum billet, we press it through a die or a matrix, producing a long profile of many different shapes. We then work with that profile. We cut it, we paint it, we anodize it, we bend it, and we put it together with other parts to produce a product or a module, which we then sometimes sell to an end customer, but very often also to another company producing, for example, a car or a train or a windmill.
As you can see on the left-hand side of this exhibit, we are clearly the largest in terms of volume. However, we seldom talk about volume because our business is all about creating value for our customers. Being close to our customers is imperative. We very often refer to ourselves not as a multinational company, but a multi-domestic company, because we source most of our raw materials locally, we produce locally, and we sell almost all of our production to customers in the same market where we produce. Our most important markets are building and construction, where approximately half of the products are branded and sold directly to builders as windows, doors, and facades. The other main segment is transportation, which together with automotive, is even larger than building and construction.
This is a segment which is growing very fast by approximately 6% per year, partly due to the trend with electric vehicles, where Sapa is a strong participant. The final two main segments, industrial and distribution, are products going into, for example, windmills, elevators, lighting, and so on, growing at approximately 4% per year. Sapa has three main competitive advantages. Number one is unmatched technology competence in our industry. We have approximately 1,000 engineers, and at roughly 40 sites around the world, we have some sort of research or product development where we work closely with our customers to develop new innovative aluminum solutions. This is a competitive advantage which will be even stronger when we combine it with Hydro's strong R&D upstream and in terms of process competence.
The second competitive advantage is a deep and wide value chain, giving us a complete assortment which we supply to our customers all around the world. Here again, the alloy competence of Hydro will further strengthen Sapa in this area. The final competitive advantage is about a global network, but also local presence. With a global network, we provide supply security to our customers so that if there is a production problem at one site, we have a large network of other sites which can support our customers. However, the local presence also means that we follow the trends in the market very closely, and we're also part of shaping the trends of tomorrow when it comes to how to use aluminum. Let us take a closer look at our four different business areas.
Approximately 70% of our business is Extrusion Europe and Extrusion North America. Two regional business areas focusing on general extrusions for all different kinds of applications. Both in Europe and North America, we have more than 20% market share, and we are the largest player in both of those regions. Precision Tubing and Building Systems are both approximately 15% each of our turnover. Precision Tubing is probably the most advanced business area we have with technologically rather complicated processes in order to produce precision extrusions and tubing for use in both automotive and stationary heat exchangers.
The last part is also called HVAC&R or heat ventilation, air conditioning, and refrigeration. Here we see a strong growth due to the substitution from copper to aluminum. Finally, Building Systems, which are branded products, facades, windows, and doors being sold directly to builders.
Here we have approximately a 20% market share in Europe. When you look at the numbers on this slide, you will see that comparing our EBITDA to revenues, the margins are not as high as they are in other parts of the aluminum value chain. However, an important difference between Extrusion and Rolled Products and Upstream activities is that there is less capital involved. We have a less capital intensive business, so that with these margins, we actually have a very attractive business from a return on capital employed point of view. Let's take a look at our strategy. Our strategy is, put very shortly, a value over volume strategy. We target the most advanced segments of extrusion where we provide tailored solutions, and on the picture on the left-hand side, you can see a bumper system.
We produce some finished products, and here you see an example of a solar-powered light pole. We also have cradle to cradle solutions, where we buy obsolete light poles, for example, from municipalities, we re-melt them, and we produce modern state-of-the-art light poles, which we then supply back to the customer. Finally, we have the service element, which is extremely important for our customers, because getting the products at the right time, with the right level of upgrading, with the right packaging, and so on, often makes the difference between a profitable and an unprofitable business. The evidence that this is working, we see in the financial figures. On the left-hand side, we see a graph which I think everyone in Sapa is very proud of. It shows the 12-month rolling EBITDA quarter by quarter.
As you can see, every quarter since the joint venture was established four years ago, we have been able to increase this measure. Meaning that every quarter we have been able to deliver a better result than the same quarter the year before. If I add on the return on capital employed line, you will see that it is improving even more, because we have, in addition, been able to reduce the working capital significantly during the same time period. In the middle, you will see one of our most important key performance indicators. It is the net added value per kilogram. This is really what our job is. Our job is to make sure we add as much value as possible to the metal, which we buy, before we finally sell it.
Over the last two years, we have been able to increase this measure by 35%. Finally, the first two years after the establishment of the joint venture, 2014 and 2015, were years of restructuring. We went through quite an elaborate period with plant closings and cost reductions. During that period, we reached the NOK 1 billion restructuring target one year ahead of plan. During the last two years, 2016 and 2017, our focus has been on perfecting operations and making sure we implement our new value over volume strategy. This strategy still has considerable potential for further improvement, but we have now also arrived at the stage where I think a combination with Hydro makes perfect sense. With that combination, we will be able to get more and better solutions for our customers, and we will have an excellent platform for profitable growth going forward.
With that, I would like to give the word back to Svein Richard Brandtzæg.
Thank you very much, Egil. As you have seen, Sapa is a great asset, and we will make sure it is going to shine also in the Hydro family. Let me then revert to the strategic rationale behind this acquisition. That we become stronger together is quite evident when we look closer to what we bring to the table here. Hydro's contribution is very much about the operational performance, the improvements that we have done during the last years in the upstream part, especially of the value chain, and also positioning rolled products as a superior player in the automotive body-in-white market. We have succeeded in moving our assets down the global cost curve, and we are well-positioned in the first quartile with our primary smelters.
We also have very strong competitive position in with regard to the global cost curve, with regard to bauxite and alumina. We also have strong market positions in metal products and rolled products, and we have a high quality resource and asset base. Sapa bring also to the table a business which is leading globally, extruded solutions globally, also very strong on innovation, technology, research and development, working very close to customers, and developing new products together with customers, and also with the performance culture characterized by flexibility and high speed. All in all, this will give us the global leadership that I've referred to previously. It gives us also the options with regard to growth going forward, and also further on developing sustainable solutions for a low carbon economy.
If you look at the total picture of Hydro with our market positions in metal products in Europe, in U.S., and Asia, globally, with the market position of rolled products, especially in Europe, but also some global positions, and then also Sapa with the global network of assets and customer base, this map is no less than a map of a global leader. This is a very good starting point for further value creation in our company going forward. With regard to technology, Hydro decided from a strategic point of view to take a global leadership in technology, in primary smelting, also in specific areas of castings, cast those technologies, and also involved products.
This is, for example, manifested by Primary Metal now starting up the technology pilot at Karmøy in the first quarter this year, which will produce aluminum with the lowest energy consumption the world have ever seen, also with the lowest emissions. In Rolled Products, we are a leader in body in white sheet for automotive, which is the fastest growing market segment in this business. We have broad competence from Hydro that is covering, as Egil also said, material science and specifically alloy development competence. Sapa is also coming forward with leading competence and leading technology. There are no other companies that have this kind of technological leadership in extrusions as Sapa, which is then giving Sapa the possibility to develop products and innovations, solutions faster than any other companies.
If aluminum is a power game, then the future will be decided by brain power. With Sapa, Hydro will have the best brain power in this industry along the whole value chain of aluminum. We have now a long value chain of Hydro. This gives us several options for further development. It is differentiating Hydro from other aluminum companies. We have high quality assets along the whole value chain, from mining, energy, metal production, metal product production, rolled products, and now extrusions, and then also recycling. With Sapa, we become less dependent on the global metal price of aluminum, as Sapa is a clear margin business, which is depending on other elements than the global metal price. Growth opportunities is also important strategic elements behind this acquisition.
If you take a closer look at the growth elements and opportunities, aluminum is still the fastest growing base metal in the world today. There are several market segments with very satisfactory growth rates going forward, and within these market segments, there are niches that are growing even faster. Automotive is one example where the customers are working hard to reduce emissions, to reduce fuel consumption, and where aluminum is the preferred solution. Here, Hydro for many years has been working together with automotive customers as well as Sapa, that also have developed aluminum solutions together with such customers. Building and construction is one of the biggest market segments of aluminum.
Also here, Hydro has been working for quite a long time to supply this market with products, and Sapa has a very strong market position in building systems. The customers in this segment is asking for security solutions, for fire protection solutions, for energy efficient solutions, and in all these areas, Sapa is a leading company. Egil mentioned the heating, ventilation, air conditioning, and refrigeration market segment, where the customers are taking benefits of the high thermal conductivity of aluminum. Where aluminum is now becoming more and more the preferred material and substituting copper. This is a fast-growing market with a very attractive value creation potential.
Further on the growth element in automotive, as you see on this slide, 25% of the Primary Metal production today from our Primary Metal business goes into automotive already today. Similar, when we have automotive line three in full speed in Germany, 25% of the rolled products business is also going into automotive. In Sapa, 35% of the total volumes goes into this market segment. If you take a closer look at the opportunities in automotive, it has been quite an interesting development during the last years, where several new applications of aluminum has been developed by Sapa, by Hydro, helping customers to reduce the need for fuel and reduce emissions. This is just an example of the versatility and the flexibility of aluminum as a preferred material.
With different alloy compositions, different chemical and physical properties, we can offer a wide range of products to this industry. If you then also add body in white, we see that Hydro has a very, very strong position now in this market as also a European leader in body in white products to the European automotive industry, and we are delivering to BMW, Mercedes, Audi, Citroën, and Peugeot in France. Also Jaguar Land Rover, by the way. We have very strong customer base, and together with Sapa, we will strengthen our position in this market segment. The third element behind this acquisition is very much about sustainability and future solutions for a low carbon economy.
We are doing quite a lot through all the organizations that we are participating in to promote aluminum as the preferred material, and also to make sure that the standards in this industry is becoming higher and better. We are working closely with customers, as I mentioned. We have a picture of a Jaguar on this slide, where both Sapa and Hydro has been working to find better and better solutions for them. We have building and construction, electronics, also a picture here of IKEA furniture, where Sapa has been working together with IKEA for quite some time to develop sustainable solutions for consumer goods. This will again lead to a stronger position for Hydro with regard to the future of innovative solutions.
That brings us also over to recycling and re-melting, because this is the area where we see also synergies in this transaction. Hydro is bringing to the table a 1 million ton capacity, including 500,000 ton re-melting capacity in primary smelters. We have been working during the last years to increase the volumes of recycling, of post-consumer scrap. We have developed and acquired the most advanced sorting technology in the world for aluminum sorting, which means that we can source scrap and sort aluminum out of the scrap in a more optimal way and produce high added value products. Sapa is bringing to the table similar capacity, 1 million tons of recycling or re-melting capacity.
Sapa has not been working so much with post-consumer scrap as Hydro, but they have done quite a lot, and we see even bigger potentials in that respect. Synergies here is very much about procurement optimization, operational best practices and several other elements that will all together give synergies of NOK 200 million per year. With that, I will then move over to transaction details, and our CFO, Eivind Kallevik, will move through the details with all of us. Please, Eivind.
You will, of course, recognize some of this from Svein Richard's slide, but I will try to get into some more details as I go throughout my presentation today. As mentioned, the enterprise value for Sapa on a 100% basis is NOK 27 billion, and for the 50% that we then acquire is NOK 13.5 billion. Now, if we look at Sapa's improvements efforts so far, the financial performance so far, we do expect an enterprise value to EBITDA multiple pre-synergies of roughly 7x when we close out the second quarter results in just a few weeks. We believe this represents a very attractive pricing multiple for this transaction, giving us a lot of opportunity also to create future value going forward.
The final purchase price will then be the enterprise value adjusted for customary post-closing adjustments such as pensions and net debt. This deal will be accretive to earnings as of day one. As you all know, the strong improvement efforts in Sapa has also led to a very strong cash generation capability, also meaning that we will have significant cash flow generation from day one. This has last time been exemplified by the NOK 3 billion dividend that Sapa paid to its owners in May this year. As Svein Richard Brandtzæg has said, from a high level, this is not really a synergy deal, but it's still important synergies to be captured. We have estimated so far that this is roughly NOK 200 million per year, primarily driven by coordination within the re-melt and recycling worldwide businesses.
Of course, we will use the next phase of the integration to look for even more business synergies to be captured and delivered upon. I will come back to how we plan to finance the acquisition, the dividend levels, as well as our commitment to long-term strong balance sheet a little bit later on in the presentation. This deal is subject to regulatory approvals from the competition authorities in Brazil, in China, in Canada, Turkey, as well as the European Union. This is, of course, a process that we take very seriously, but we do believe that we will have a relatively quick process enabling us to close within the second half of this year.
If we then move into the estimated pro forma EBITDA figures for the new company and how Sapa will significantly add to the cash flow of Hydro. If you look at the figures in 2016, Hydro had an EBITDA of some NOK 11.5 billion. This includes NOK 777 million of net income after tax as our share from Sapa. Now if we include the NOK 3.5 billion that Sapa generated on 100% basis, subtract the NOK 777 million, we'll see that the new Hydro EBITDA would be NOK 14.2 billion, again, indicating that there will be strong cash flow provisions from Sapa from day one.
In addition, this will also increase Hydro's downstream earnings quite significantly from around 20% today to more than 35% going forward, again, reducing the relative importance of aluminum exposure in the portfolio. We do estimate the Sapa capital employed when it comes into the Hydro books to be around 23-24 billion NOK. This represents the acquisition value for the 50% that we buy and the written-up value of the 50% that we currently hold on our balance sheets. We will get back to more detailed information and certainly around what depreciation levels will be going forward when we issue the information memorandum, which is due within 30 business days post-signing as we have done today.
Also, when you look at capital employed, this will also help balance the portfolio when we see that our share of capital employed on the downstream side will grow from some 24%-35% for closing, while upstream, of course, still will be the most significant part of the capital base. In addition to providing a solid cash flow and balancing out EBITDA and capital employed throughout the value chain, we also see that this acquisition makes the company more balanced across the value chain from a volume perspective. We will continue to retain a long position on bauxite and alumina, but we'll be more or less balanced between primary production and the metal consumption within our downstream businesses.
This transaction will reduce our exposure to the global markets prices like LME and PAX and increase the share of volumes in earnings to the more stable businesses and margin businesses downstream, where we are much better equipped to control our earnings and differentiate our performance through our service offerings and specialized products that we can give to our customers. A strong balance sheet has always been one of the key competitive strengths of Hydro. This is also again proven by this transaction, where we were able to consummate a significant deal by tapping into our cash position as well as entering into Norwegian and international bond markets. From a timing perspective, we do expect to enter the bond markets in the second half of 2017.
In the meantime, you should remember that we have a $1.7 billion credit facility currently undrawn that we can utilize to do any bridge financing necessary to fund the transaction at closing. Even though we are doing this transaction, and obviously we'll put some leverage on the balance sheet, we are also very much still committed to keeping our investment-grade credit rating going forward. In the preliminary pro forma figures that we have, we see that we're still in a relatively comfortable position when we measure against the two typical targets that we measure against, funds from operations to net adjusted debt and net adjusted debt to equity.
Based on the pro forma figures for 2016, we would be around 50% on funds from operations to debt and roughly 30% on debt to equity, well within the communicated ratios of 40% and 55% respectively. As Svein Richard mentioned, the dividend policy remains in place. It is 40% of net income over a cycle, and you should still consider 1.25 NOK per share as the floor for 2017. Finally, when it comes to capital and sustaining capital going forward, the new guidance for a combined entity would be roughly 5.5 billion NOK per year going forward. Hydro, as you know, has a guided level of roughly 4 billion NOK in the long term, while Sapa will bring a sustaining capital of roughly 1.5 billion NOK.
With that, Svein Richard Brandtzæg, I will give the word back to you to go through the indicative timeline on this historic transaction.
Thank you, Eivind. As I said, previously, Sapa will become a business area in Hydro. The name will be Extruded Solutions, and Egil Hogna will be the head of this business area after our closing. This is a decentralized business, and we will take good care of the decentralized business model in Extruded Solutions going forward. The Sapa company name will disappear. The company name is Hydro, but the valuable brands, brand name such as Sapa, WICONA, TECHNAL will continue. Speaking of the timing, we will within the next 30 working days send out the information memorandum with the pro forma figures. We expect, as I mentioned, approvals within the second half of this year.
During also the second half this year, we will start the financing activities and enter the bond market for financing of parts of this deal. All in all, in conclusion, this deal is positioning Hydro for the future. We are very, very well aware of the mega trends in this market, where customers are asking for more complex solutions. We are very well aware of the importance of technology and competence to develop this business, and also about the need for more sustainable solutions in the future. The platform we are now establishing, global leadership, growth, and innovative solutions are key elements for Hydro to become better, bigger and greener. Thank you very much for your attention.
Thank you very much, Svein Richard Brandtzæg . I will ask Egil, Svein, and Eivind, all of you to come back here, and we'll open then for a Q&A. Questions here from the audience, from this great, huge audience here today. Then also questions, if there are any, from webcast. Siam, do we have any? Okay.
Question from Menno Sanderse, Morgan Stanley. Does this transaction limit Hydro's ability to act on the 40% equity stake in MRN?
As Eivind has shown, we will maintain a strong balance sheet also after this transaction. This is not again influencing on our strategy with regard to MRN, and also the option for us further. As we communicated last year, we have not agreed with the seller, Vale, but we'll see what happens in the future.
Another question from Menno. Is there a target distribution of capital employed between upstream and downstream after this transaction? If so, what is that?
Overall, we will of course target the optimal way for further development of the company. I think, Eivind, you may give some more flavor to this.
There's not really any target in terms of how we should look at capital employed between the business areas that we do have. Important for us now is that we are growing quite significantly in the downstream areas, giving us more growth opportunities going forward, and balancing out between being exposed to global LME and FX prices versus businesses where we can control our own destiny to a larger extent.
I also have a question from Fraser Jamieson in JP Morgan. The synergies of 200 represent less than 0.5% of total operating costs. Could you talk about the potential for additional synergies and the areas that you might be able to focus on to deliver greater synergies over time?
We are very well aware of there are also other synergies waiting. So far we have identified the NOK 200 million initially in recycling and remelting, as I have already explained, and we will come back to further information about this later.
I think if I can add as well, I mean, NOK 200 million in terms of operating costs doesn't sound like a lot. If you do NOK 200 million as a net present value and compare that to the deal size as such, it is actually quite a significant and important contribution of making this a very profitable Acquisition going forward.
Another question here from James Gurry in Credit Suisse. Do potential U.S. import restrictions pose risk given Sapa has such a strong U.S. presence and a lot of Sapa's primary aluminum input probably comes from Canada?
Yeah. Maybe Egil can answer that. In general, Sapa is very well located in North America market with several assets in this North America Extruded Solutions market, and maybe you can further elaborate on that, Egil.
Yes. Thank you. In North America and in the United States, we actually have our largest system of remelters. We import very little primary metal from Canada. This is not an issue.
Last question here from, again, from Menno Sanderse in Morgan Stanley. Has Orkla indemnified Norsk Hydro for the investigation in the U.S. against Sapa?
Yeah. The agreement with Orkla is that it is a similar situation as before the deal. It is 50/50 on this situation.
Okay. Any more questions from here? No? Then I would like to say, thank you very much, for joining us, this morning, and have a wonderful day. Thank you.
Thank you.