Arkema S.A. (ASH) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Arkema's conference call. I will now hand over to Thierry Le Henaff, CEO. Sir, please go ahead.

Thank you very much. Good morning, everyone. Thank you for joining us on this call at such a short notice. I am here together with Bernard Boyer of Strategy and M&A; Marie-José Donsion, our CFO; and Vincent Legros, Head of Bostik. Also with us is the IR team. You have seen a set of slides, which we have just sent to you, which you can use as a reference for this call. So as you know, we have organized this conference call. As we announced earlier this morning, the project to acquire Ashland's Performance Adhesive business. And as you can imagine, I'm very pleased to announce this transaction as it is a company that we have been looking at for a number of years now and following Ashland's strategic announcement in May. So we are very keen to pursue this opportunity. As you know, the adhesive market is still fragmented globally, and there are many small targets available that we acquired and will continue to acquire, but attractive major targets are much harder to come by. So this really was a great opportunity. Besides, I must tell you that over the past few years, we have been very selective regarding acquisition despite our significant firepower, and we have walked away from a number of potential targets in different fields as we have stuck to our stringent criteria of strategic fit and value creation. So Ashland Performance Adhesive is a high-quality business with leadership positions in industrial adhesive in the U.S. This business enjoys very good margins, a strong growth potential and a very talented management team. The strategic fit between Ashland's Performance Adhesives and Arkema is evident. This is the case at a group level, as this business will contribute to strengthening our Specialty Materials platform in line with our 2024 ambition to be a pure Specialty Materials player. And it is also the case, obviously, at Bostik's level, as we have many times expressed our strong ambitions to grow our adhesive business over the long term. In my view, for the strategic reasons, we were the natural buyers for this business. The timing for this transaction is also optimal, as it comes in the context of Arkema's current positive dynamic, with the recent disposals of functional polyolefin and PMMA, the start on the strategic review of fluorogases and a strong cash flow generation on the back of our excellent results this year. In a nutshell, Ashland adhesive should generate sales of around $360 million this year, with an EBITDA margin in excess of 25%. With both first-class technologies as well as diversified end market exposure, with a presence in building and construction, transportation, labels and flexible packaging to name the most important ones. Adhesives business division is highly complementary with Bostik from a geographical viewpoint, Ashland has a limited presence outside of the U.S. And the company has technologies that can be easily rolled out in Europe and Asia, where Arkema and Bostik have a stronger foothold. From an application viewpoint, Ashland product ranges can be found in flexible packaging, hot-melt pressure-sensitive adhesives and high-performance industrial adhesives where Bostik already has a presence. Apart from this obvious and significant synergy with Bostik, there are clear synergies with our Coating Solutions segment on 2 levels. Firstly, with the acrylic value chain, which is the backbone of pressure-sensitive adhesives. And secondly, in the formulation of emulsion, which is an area where we can complement and reinforce Ashland's knowhow. From a financial viewpoint, the offer is based on a multiple of 15x EBITDA taking into account the value of the tax asset. Besides the level of synergy is very high, given the potential of cross-selling and geographical expansion, we estimated them at around 12.5% of sales, which is high, as you can see, which comes to around $45 million once fully achieved. Taken into account the full amount of synergies, the multiple will be then reduced to 8.7x EBITDA in 2026, which is much closer to our own multiple. The first transaction is EPS accretive for year 1. And by 2026, according to our forecast, we will gain EUR 1 of earnings per share. So this transaction is highly value creative for our shareholders. Following this acquisition, we decided to revise upwards our midterm guidance for Bostik. By 2024, the segment sales should exceed EUR 3 billion. So nothing has changed, but the EBITDA margin should stand at least at 17% versus our initial guidance of 16%, positioning Bostik among the very best in the sector. So as a conclusion, because we wanted to keep this call short and concise and get your questions, I will conclude by saying that the acquisition of Ashland's performance adhesive represents a unique opportunity and constitutes a key milestone in the group's transformation and for Bostik development in particular. More importantly, the deal is highly value creative for our shareholders, given the excellent strategic fit and strong synergy potential. And at the same time, it will increase the group's earning resilience, thanks to an improved business mix. So I would like to thank you for your attention, and I'm ready together with the rest of the team to answer your questions.

[Operator Instructions] The first question comes from Alex Stewart from Barclays.

Congratulations. I can see why you've adjusted the purchase price to reflect the lower effective tax rate to these assets now that you can deduct it with amortization from pretax profit in your tax calculation. But could you tell us what the effective tax rate is in the business and how that compares with Arkema today because that will help us do a like-for-like comparison on valuation multiple? And then just related to that, could you confirm whether you have taken into account the current value of money on the tax synergies to be discounted the benefits over time? Or have you just taken them at nominal value?

Okay, Alex. Thank you for your question. I will hand it over to Marie-José.

So Alex, regarding the tax rate, as you know, there is currently a tax reform in the U.S. that will probably move things a little bit in the next year. But at present, the tax rate of Ashland's adhesive business is around 24%, 25% effective tax rate, which is actually higher than what we have at group level for Arkema. Since you know we are more around, let's say, 20% effective tax rate in our case worldwide. The assumption we've taken to assess the tax synergies on this transaction is based on basically an allocation value of 85% to the U.S. with an amortization period of goodwill over 15 years and reduce the WACC of 7.5%.

Thank you, Marie-José. So -- yes, go ahead.

Sorry. Can you -- taking those into account, can you tell us what the effective tax rate would be of the assets when you've acquired them to take into account the goodwill amortization?

As I said, because there is a tax reform coming in the U.S., in fact, the current tax rate is probably not the right assumption to consider in the future. But at this present time, the rate we consider for the U.S. is indeed less than 12%.

Which means that our assumption, Alex, is conservative by definition because the tax rate in the U.S. will increase and the benefit will be higher than that, that the one we have taken.

The next question is from Martin Roediger, Kepler Cheuvreux.

On the synergies, you mentioned the 12.5% compared to the sales of the target company. But compared to other M&A deals in the chemicals, this is rather a high ratio. What makes you really confident to achieve that figure? You mentioned cross-selling opportunities due to the complementary fit. So is your estimate based purely on top line synergies? Or also does it include cost synergies? And if so, can you elaborate on that cost synergies? And once the asset is fully integrated, how can you measure in the year 2026 that you have achieved these synergies? That was my first question. The second question is on the financing. Maybe this is a misunderstanding from my side. But you mentioned in your press release that you look at this acquisition also with the perspective that you currently do the strategic review of your fluorogas business. And in this context, my question is do you make progress and received already interest for that asset by strategic or financial investors? And as a follow-up, do you consider to sell the whole fluorogas business or just the commodity part?

Okay. So two very different questions, Martin. So on the synergies, we have first 60% top line and 40% cost. And the cost is between, let's say, raw material-linked synergies and fixed cost, and fixed cost in industrial optimization and G&A. We have 2 advantages in this unique deal. The first one is that Ashland is very, very strong in the U.S., but has a limited presence outside of the U.S., which mean Europe and Asia where both Bostik and Arkema are, as you know, very strong. So because of this difference of -- which is significant in market positioning, the geographical synergies are very, very strong. And we can really duplicate very happily what we have in the U.S. to the other region. It's one thing which makes it unique. And the second thing is that we benefit, and I think this is why also we are a natural buyer of the acrylic value chain because the acrylic is a specific backbone to the Pressure Sensitive, and this makes the difference between, I would say, high synergy, but in the current range, I'm sure you have in mind something like 8% synergy, which is more typical and we announced 12% and the differences between the 8% and 12% comes from these 2 features; this geographical complementarity and the support of the acrylic value chain. This means that the synergy are not only with Bostik, but also with the coating platform, which is great, in fact. With regard to fluorogases, so I will not -- otherwise, you would have been informed before, so I think the process, as you know, has been launched. What we want to dispose of the fluorochemicals, pure specialty non-emissive, fluorochemicals emissive business, which is linked to air conditioning, which is a good business and making a lot of cash and name. But we are very consistent with what we have said so far to the market. This is what we want to dispose all. And we keep the specialty, which are really linked to the natural market of Arkema, which is linked to the energy, housing efficiency or linked to battery. And I would say the process is developing as planned, but there is no breaking news to answer to your question. But clearly, you can see synergies and thank you for the question. What we are doing and we have been doing since the market day -- Investor Day, now it's 1.5 years, where we have sold the functional polyolefins and the PMMA, we have launched fluorogas disposal, and we have made some small bolt-on acquisitions in the middle, and now we have the major acquisition. This is about portfolio evolution, and we are really moving very fast to reach our goal of becoming a 100% specialty material company.

The next question comes from Chetan Udeshi from JPMorgan.

A few questions from my side. Number one, it seems Ashland mentioned their last 12 months EBITDA of about $82 million versus what you guys are talking about pro forma EBITDA of $95 million. Is the delta entirely because of the different time frame? Or have you adjusted certain items from their numbers to get to $95 million. That would be first question. The second question was, I'm just curious, why is the margin of this business so high? Like is it a function of product mix, et cetera? And can you also help us understand how has this business grown pre COVID? I'm just trying to understand, what is the business where maybe there wasn't any investment in growth and maybe that explains why the margin is high. And last question was on financing, can we assume that eventually this -- or sorry, essentially this deal will be financed using the cash on the balance sheet? So in other words, no new debt will be issued?

Okay. So obviously, Marie-José will answer the last one. I will take the first 2 ones. So I would say the first one is the classical difference between seller and purchaser. There is important allocation of corporate cost. When you look at reported accounts of Ashland, so -- which gives you the $80 million. And when you take out what needs to be taken out, which this allocation of cost, which is our view. So pro forma adjustment, which has been really been used in detail many times, plus a little bit of a time difference. You have also a few million time difference, you come to this $95 million. So we are quite comfortable on the $95 million, which gives you the multiple we have explained. And after that, we take, as Alex mentioned, the tax benefit. With regard to the growth, first of all, everybody, which is more or less familiar with the adhesive business knows -- knew already that Ashland's business was a very good one in terms of quality, management, customer intimacy. It's true that they have excellent technologies, which are very difficult to copy because even outside, we have never been able to match them. So where they are in niches, high value-added applications, superior knowhow plus customer knowledge and intimacy, which has been built over years, as it can happen in certain fields in adhesives. So it's really a combination of management focus, long-lasting customer intimacy and what is superior knowhow with innovation on certain fields, which are growing regularly above GDP. So it's really a combination of all that, which give you this kind of margin. We know that because we are inside Bostik but also in the rest of Arkema, which is like that while you've superior margin for exactly the same reasons. For the financing, I will ask Marie-José to answer.

Okay. So regarding finance, you understood correctly. So we are -- we have liquidity level of close to EUR 3 billion. So we are paying cash for this transaction. Basically, the group pro forma that we expect end of the year -- basically the normative level we have currently is around EUR 1.3 billion net debt prior to this acquisition. So then we have the enterprise value of the deal that we should be paying in the coming, let's say, 4 to 6 months. So let's say the pro forma net debt to EBITDA ratio should be in the range of, let's say, 1.8x, 1.9x EBITDA at end of this transaction.

The next question comes from Jaideep Pandya from On Field Research.

First of all, many congratulations on this deal. Just one question from my side. Can you just give us some color on the pressure sensitive adhesives industry in terms of how big is this business for Ashland? And then in the competitive context, what would be their market share versus players like [indiscernible]? And then when it comes to sort of growth, could you talk about growth around liquid adhesive for this business? And overall growth, do you think that this business is very similar to the top of the pyramid Henkel in terms of growth? Or would you say that actually the growth is somewhere in between for the traditional adhesive businesses which is 3%, 4% at the higher end, which is north of 5%?

Okay. Thank you, Jaideep, for your question and your nice comments. So pressure-sensitive adhesives is good -- is a strong market, growing at more than 5% a year. However, you have application in different films, graphic films, labels, specialty. So there is not one pressure-sensitive adhesive, different momentum. And in terms of technology, we have a different range of technologies with different presence, solvent-borne, waterbornes, UV. I would say that Ashland is really a key player in North America and Europe in solvent-borne pressure-sensitive adhesives, where, I would say, on the side of Arkema with an exit more from knowhow in waterbornes is very complementary. And again, we have some potential development, thanks to our Sartomer business line on the UV technology. So I would say it's really sum of difference -- so it's difficult to talk about 1 market, and it's a sum of different markets where I would say, Ashland is more U.S. and solvent-borne oriented whereas Bostik and the rest of Arkema is more waterborne in other regions. So it's very complementary. But the good thing is that it's in each market, very performance-oriented. I don't know if we would say high end of the pyramid, but it's certainly a high-quality niche and the market growth well above GDP at -- above 5%.

Just 1 follow-up on the topic. Basically, are you saying that with your knowhow in UV and waterborne, in the future, when I say future, maybe in 2 years' time or so, you can enter the water and the UV borne adhesives market, which actually is not present right now?

Yes. Ashland has already started some developments, which are interesting. We had some other routes. So it's very good to share them and to see how we can accelerate. But clearly, the idea is where Ashland is more limited in presence, we can really complement with -- and this is what we call cross-selling with Bostik and Arkema coating resin presence. So it's very interesting from this standpoint, very complementary in role, geographical presence and the technological competency. So very good from that standpoint.

The next question comes from Geoff Haire from UBS.

Congratulations on the deal. Just 2 questions from me. First of all, could you just sort of comment on what the organic growth of the business has been over the last 5 years and also high EBITDA margins have trended over that time? And the second question is, how many years do you think it will take the ROIC of the acquisition to get back to the group's cost of capital of, I think you said 7.5%?

I think for growth with Ashland, we should be there for 2024 ambition. This is too much the cost of capital. In terms of growth, well, certainly, if I'm right, we have delivered something like 3%, 4%.

4%.

4% of that part of growth. And we believe that if not the whole, we can nearly double this growth with this, what I explained to Jaideep, which are these geographical and the technology synergies. So this is the idea. You have -- we have external growth that we have had in the past 4%, and we will nearly double it with this cross-selling synergies that we see from the geological standpoint and the complementary knowhow. So this is very exciting from this sentiment.

Do you think organic growth for the business will be 6% to 8%?

Exactly. Yes. Exactly.

The next question comes from Graham Hunt, Morgan Stanley.

Just 2 for me, please. First one is on capital investment and one-off costs. I wonder if you could just talk a little bit about the phasing of the -- of any additional CapEx as you integrate the business and also just in terms of quantity around one-off costs. And then the second question, just on -- a little bit on the digital footprint of this business and how that will compare to Arkema's current digital footprint in the adhesive solutions division and where you see that going over the 5-year integration.

So I would say with regard to one-off cost, we assume EUR 15 million, 1-5, EUR 15 million one-off integration cost, typical administrative cost, information system, et cetera, on the business. And with regard to CapEx, we have planned for over the period of 3, 4 years, EUR 45 million CapEx to implement the synergy because as you have understood, the nature of the synergy are mostly geographical. And because of that, we need to make sure to extend the capacities in the regions where we are more limited. And so all in all, it's what we have put in our model. With regard to the digital footprint, I think it's too early to answer. We are really focused on -- I don't know if one of the team wants to answer instead of me, but I think -- we think that will be interesting, certainly complementarity, but it's too early at this point.

The next question comes from Andreas Heine from Stifel.

Andreas Heine from Stifel. First, just a clarification. Did I get that right? The closing should be at the beginning of next year, so more to 6 months it would mean? One. The second is the acquisition lifts your margin to a new level. Does that mean that performing bolt-on acquisitions will be more that they selective and future acquisitions also meet this higher targets of -- target is 17%, but in addition, we made -- it is more than the region of north of 30% after synergies. That's the second question. And the last one is the same split different to what you have published by now is industrial assembly and construction consumer. Will you share more broader split on your adhesives business in the future?

So Marie-José will answer the last one. So with regard to the second question, can you repeat it? The line was not very good.

Sorry. So the acquisitions in the future probably have not always been margin accretive from the outset at a much lower level. So when you go now to 17%, then I think it requires a number of acquisitions or targets we are looking at to have considerably lower margin and would be within this synergies diluted. So does it mean that in the future you will look for a pretty good profile of acquisitions in the adhesive business?

Okay. So with regard to the date of closing, we expect 4 to 6 months of closing, obviously, the earliest is better, all of us. So we start now already tomorrow, really a big priority to try to speed it as possible, but take 4 to 6 months. In terms of acquisition for the adhesives, each acquisition is of a different nature. You can have half synergy or you can have more top line synergies. So depending on which kind of synergy, you can start with acquisition with lower margin that where the synergy are very high. But I would say more and more with Bostik, if it is your question, we focus on the acquisition with margin already above 15%, okay? And this has been the recent experience with [indiscernible], with Fixatti, with Prochimir and we have done this one. So this one is rather unique and with EBITDA margin almost 25%. But I would say, if you look recently, most of our acquisition has been at least 15%, and we should continue in this direction. So not really any change. And don't forget that a significant part of the increase of EBITDA of the Bostik will not come from acquisition, it will come from the continuous improvement by the team of the current business, which is direct value creation. Marie-José, the last one?