Türkiye Sise Ve Cam Fabrikalari A.S. (SISE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Sisecam Merger Update Webcast Audio Call. Our speakers will be walking you through the merger update presentation, firstly, in Turkish and then in English. At the end of the presentation, we will be having a Q&A session. During the session, we will be accepting, firstly, the questions asked in Turkish and then in English. All questions will be answered in both languages simultaneously. Now I will repeat this in Turkish and will hand over Mr. Gorkem Elverici, the CFO, to start the webcast in Turkish afterwards. [Foreign Language]

[Foreign Language] Now we are moving to the English part of the presentation. Good afternoon, and I'd like to thank everyone for joining us today, and we hope that you and your families are keeping well at this time. It has been almost 3 months since we first announced our intention to simplify our legal and shareholding structure by merging our 5 listed companies, namely Sisecam, Trakya Cam, Anadolu Cam, Soda Sanayii and Denizli Cam and the Pasabahce business unit into 1 single listed business, Sisecam. As you know, we applied to the Capital Markets Board yesterday for the merger transaction. While we realize that the time we took until applying to Capital Markets Board has been slightly longer than we had initially announced, needless to say, it was mostly due to corona, whereby the valuation report and all the projections of 69 companies had to be revised in order to reflect the possible consequences of the pandemic on our operations. So let me thank you for your patience during the last couple of months. Tolga Ismen, who is General Counsel of Sisecam Group, is together with me today to address any detailed technical legal questions. Today, we would like to update you on the transaction and the next steps in this process. Before we begin, we would like to highlight that the Capital Market Law was amended on February 25, 2020. And while the amendment has not had any major impact on the merger process, it had certain changes in the exit rights mechanism. The interpretation of these changes will be determined by the Capital Markets Board with a new significant transactions communique. CMB should address significant transactions communique on March 16, 2020. However, it has not come into effect yet. We have very effective communication lines with the CMB, and we commit our views under that communique. The current communique is still in force, and in order to avoid further delays in the process, we prepared and filed the application based on the current communique. The exit rights constitute a minor portion of the CMB as a review of the application. The most cumbersome portion of the review will be inspecting the valuation report of the expert, which has nothing to do with the amendments to the law. We will make the necessary arrangements once the new communique is legalized by the CMB. Until that point in time, we can only give you answers based on the communique, but there is no assurance that the CMB will adapt the addressed communique as announced on March 16 or apply the new communique to our merger transaction. We will keep our investors informed accordingly once we have further clarification on this topic. On Page 2, we will begin by recapping the transaction rationale, the steps we have taken so far in the process and the upcoming next steps. The focus of this session will be on the expert valuation report as part of the application to CMB, which was published yesterday. And we will then take you through the anticipated post-merger structure. At the end of the presentation, we will open the floor for your questions. I'd like to walk you through the rationale on Page 3. Since its founding in 1935, Sisecam has grown into one of the largest industrial companies in Turkey. Today, we are a truly global company with a footprint in more than 150 markets. With this expansion, however, our structure has become increasingly complex, making up 69 subsidiaries operating under 4 business units and with 5 listed entities. In order to achieve further growth, improve governance and achieve greater strategic alignment between the different parts of the business, the Board has been committed to simplifying our structure. While we have made significant progress with the simplification process, the business structure remains more cumbersome than we would like, which reduces our agility as well as our ability to deliver our strategic objectives and to fulfill our potential. So as the many opportunities that we see ahead of us, we are now seeking to merge our 5 listed companies and our Pasabahce business unit into 1 listed entity. This simplified structure will better position us to improve our strong reputation on the global stage. By creating a single stock with greater appeal to both local and international investors, this transaction will have a positive impact on the valuation of the group, creating a long-term sustainable value growth for investors. The merger will increase liquidity, creating the opportunity for higher saving volumes, eliminating cross-trading and removing what we believe to be a holding company discount on the stock. Operating as one Sisecam will allow us to maximize shareholder value, increase our competitive advantage and build on our position among the top 3 players in the glass manufacturing sector. A successful transaction will reduce operating costs, synergies between business units will be easier to identify and unlock that will result in a run rate of at least incremental 200 to 300 bps per EBITDA margin starting from next 2 to 3 years after the merger. And revenue generation will be centralized, leading to lower revenue leakage. Centralization of supply chain is expected to unlock the path to a further operational efficiency at the human resources level and to enable the group to attain its operational targets without the necessity to increase the current level of white-collar employment. 2/3 of the cost improvement that the first phase is projected with this respect. The remaining 1/3 of it is expected to come from the centralization of logistics and of singularization of client services. In brief, we believe that under a simplified structure and with a unified identity, we will be even better placed to accelerate our growth plans in the near term or into the future. Now we will share our road map in detail on Page 4. The day after we decided to start the merger talks as it will also announced -- it was also announced on the public disclosure platform, we made PricewaterhouseCoopers as the expert valuation company by signing an agreement. PwC has conducted the valuation process of the group, prepared the expert valuation report and opinion and determined the conversion rates, which are all subject to Capital Markets Board approval. We would like to draw your attention to the fact that as the expert valuation report has been completed, we have formally submitted an application to the Capital Markets Board as of yesterday for the evaluation and approval consideration of this proposed merger. We have several steps ahead of us before we can officially finalize the merger process. The first step will be to get the CMB and the other legal and regulatory approvals. We do expect to have them in place in the first half of July. CMB will review the expert valuation report and have them in place in the first half of July -- sorry, CMB will review the expert valuation report and approve the disclosure document. As you know, this will be the largest merger in the history of Turkish capital markets regulation, and therefore, it will require significant effort and resources from CMB to finalize their review. We will assist them during the whole process. Energy Markets Regulatory Authority approval process will also be conducted in parallel to the CMB evaluation phase. Due to the timing restrictions imposed by the legislation, we should finalize the general assembly in which the merger will be approved prior to the end of August. Therefore, once we obtain the approval of the CMB to the disclosure document, we will be proceeding with the extraordinary general assembly announcement of Sisecam and the subsidiaries subject to the merger as soon as Board of Directors make a final review and kept in favor of the transaction. The final documentation will be available for the shareholders to review at least 30 days prior to the relevant general assembly. Shareholders that will have the right to utilize exit rights should participate in the general assembly and cast their votes. The participation can also be done via electronic voting. We will ensure that all the shareholders can use their rights in an effective manner. The Board of Directors may set a threshold for the exit rights and propose to the general assembly to withdraw the merger if that threshold is exceeded. Such decision will be taken after the CMB's review and with the decision to convene the general assembly. Our target is to successfully complete the process by holding the extraordinary general meeting before the end of August, in line with the legislation. On Slide 5, you may also see the chronological presentation of our road map. And moving to Page 6, you will see the details of expert valuation and opinion. In January, we engaged PwC to work on the valuation and opinion report needed for the formal transaction application to the Capital Markets Board. We are pleased to have received the report by yesterday. With the COVID-19 pandemic severely disrupting markets, PwC recalculated its projections and updated assumptions to reflect the impact of the pandemic on our companies and subsidiaries approach to different markets we operate in. The valuation report is based on 2019 year-end financial results and a projection period of 5 years, 2020 to 2025. For the purpose of Soda Sanayii investment, a longer period is taken into consideration to capture the benefits of that project. The methodology to calculate the total share value was a combination of the DCF, peer comparison, relative value, book value and market value, weighing them 30%, 30%, 20% and 20%, respectively. A very large group of experts worked very hard to finalize the valuation report. While the calculations for book value and market value are relatively straightforward, DCF model required a lot of work. They needed to review all historical performance and projections of 69 companies and value them one by one to reach to the value for the sum. The spread of COVID-19 pandemic further complicated the process since all projections needed to be revised and to be reflected in the DCF model. I need to say that PwC carried out the very effective work and through the whole process maintained their independence. In many instances, they challenged our projections and conducted their work accordingly. I'm very happy to state that the valuation conducted by PwC is in line with the management's expectation. It represents a significant discount on the market value of the group in comparison to the DCF and the relative value. The valuation of the company is based on the ratio as mentioned before at roughly TRY 18 billion for SISE, around TRY 5.5 billion for Anadolu, around TRY 6.8 billion for Trakya and around TRY 9.3 billion for Soda. These figures enforce our conviction that the merged one Sisecam will be the right platform to unleash this hidden value. The conversion rates calculated based on this valuation are 1:1 for SISE, 0.67615 for Trakya Cam, 0.88239 for Anadolu Cam, 0.53423 for Pasabahce, 0.33089 for Denizli Cam and 1.15997 for Soda. PwC expressed clearly in its report DCF and relative value metrics, which have the highest rate in the valuation with 30% each, reflects future possible scenarios while the methods of book value and market value have 20% share in the valuation that were calculated based on historical data. Only DCF method incorporates the potential impacts of COVID-19. On the top of the left-hand side, you can see the value of shares subject to merger for each company and the conversion rates. Provided conversion rates, which were also included in the valuation report, were calculated by the expert valuation company as a result of the valuation studies conducted. We would like to draw your attention to the fact that the exit rights provided on the right-hand side of the slide are calculated based on the existing communique. Sales per share exit right are arithmetical mean of corrected weighted average prices traded on the stock exchange within 30 days prior to the date of the first disclosure of the transaction to public, excluding the date of disclosure. Exit rights prices are regulated by the special decisions communique, and it is not something that the company or the experts have any discretion on. We only applied the formula provided by the legislation to determine the exit rights price. The current communique sets forth the 30-day average stock prices, the fair value for the exit price. We just applied calculations, and the valuation of PwC mentioned earlier has no relation whatsoever with the exit rights price. Once the dividend payment for 2019 takes place, exit rights prices were adjusted accordingly to incorporate the payments made, and adjusted exit rights price will be announced following the dividend payment. If this is required to provide the exits rights while submitting the CMB application, and as draft communique has not yet come into effect, exit rights calculations have been based on the existing legislation. Should the legislation change on exit rights, we will update the valuation methodology accordingly. On Page 7, anticipated post-merger structure is here. In our post-merger structure, we expect share capital to increase by TRY 814 million to TRY 3.064 billion. Isbank will continue to be the largest shareholder, holding circa 51% of the new entity. The free float will increase by circa 21 percentage points, so that we have circa 43 of shares that's free float. Sisecam Group and PwC continues to maintain close communication with Capital Markets Board in an effective manner. Before we begin to Q&A session, we would like to remind you once again that the CMB significant transaction communique has not come into the force, and we will not be able to answer any questions on that topic at this point because of the reasons that I have mentioned before. We will keep our investors informed as appropriate once we have further clarification. Now we can move to the Q&A session, starting with the Turkish.

[Operator Instructions] [Foreign Language]

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[Foreign Language] Now I will be switching into English. First, raise the question and then answer. There has been 3 questions that has been raised. The first one, was the public disclosure made by the main shareholder, Isbank, that they will not be approving the possible merger if they will be going less than 50% in the final picture after the merger process, and is there any other red lines or any decisions made by the Board of Isbank regarding the merger process? And the answer to that is that is the only thing that we know and that is what we also heard from the public disclosure made by Isbank. And as far as we are informed, there has been no other disclosures or decisions that are taken by the Board of Isbank. If it's a so -- or if there is any other decisions that will be made in the coming future, we are perfectly sure that public disclosures will be made by the bank to just inform all the public. The second question is, as COVID-19 is creating delays in the process, is there a possibility that time frame, which is end of August, due to the legislation might be extended so that there can be the successful completion of the transaction? And the answer to that question is with all the discussions we have made until now with the Capital Markets Board, we are not informed or we are not aware of any decisions made so far regarding this point. But as we have just recently applied, the perfect issue that Capital Markets Board will be going through thoroughly over the documents. And if there's a necessity based on their requirements, they might consider something like this. But our plan A is to provide all the necessary support ourselves, together with PwC, so that we can create all the necessary support the Capital Markets Board that they can finalize the approval process before the end of first half of July. And the third question was around the expected EBITDA improvement of 200 to 300 basis points, whether that is regarding the roughly around TRY 18 billion top line of Sisecam itself. And the answer to that is yes. And we are expecting this mainly through the cost optimization as we already shared with you during the presentation, mainly in the area of the supply chain, supported with the optimization in marketing and sales and additional revenues that can be generated in revenues and sales. And to support this, the centralization of the procurement that has been done almost 3 years ago in Sisecam on a holding level, I should say, has already brought more than 200, even 300 basis points of EBITDA improvement on a consolidated basis in almost 3 years' time. We can continue with the Turkish questions.

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Now I'll switch to English. The question is one of the points that were highlighted in the report, which is the possible limitation for the total amount of the exercising the exit rights issues, and has there been any limitations as this is set forward for the transaction? And what are the possible sources of funding, has there been any discussions yet? And the question for the question is -- the answer to the question is there has not been any decisions taken yet regarding the limitation of usage of exit rights. But there are so many dependencies at this stage, the largest one being the draft communique whether it will be in effect before the end of the approval process. And if so, what will be the rules that are set by Capital Markets Board in that communique. So for sure, after the approval process and considering the existing regulations, the Board will be considering whether to set a limit or not. And that will be made public before the call for the general assemblies for the merger has been done, and all the investors will be informed accordingly. And regarding the funding resources, there has been discussions made with the largest international financing institutions. And there has been at least a high-level approval that has been obtained. And regarding the liquidity position and the balance sheet of the company, that provides us the comfort for any possible exit rights that can be done by the existing shareholders in the merger process.

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So switching into English. The question was regarding the valuation of Pacific Soda LLC, which is the subsidiary of Soda business in U.S. The initial announcements that were made in the public disclosures made has come up with higher valuations beyond $1.25 billion to $1.75 billion when the investment was announced back in mid-2019. But looking at the valuation report, the 50% regarding the cash flows until the end of 2018 is roughly around TRY 2.5 billion. So what is the rationale behind the fall down in the overall evaluation of Pacific Soda LLC, and whether you will be able to provide further information regarding this point? The answer to the question was all the valuations are down. This is including the DCF by PwC by making a thorough examination of the existing and the possible DCF that can be generated from the existing and possible investment. And all the details has already been submitted to the Capital Markets Board yesterday in their extended valuation report. And if there is need of the investors for providing further information regarding to this big investment, for sure, we will get in touch with PwC to provide further information to all our investors.

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So the question was regarding the disclosure we made that the exit right usage will be done by the shareholders that are holding shares by 25th of February 2020. And what will be the mechanism regarding this and if the new communique will not become effective before the end of the approval process by Capital Markets Board that we will be proceeding with the existing communique or not. And the answer was there was a new law, but the secondary legislation, the communique isn't -- although the draft has been shared, is not effective yet, and we don't know the final structure of the communique. So as we didn't want to delay the process, we need to provide the maximum time to Capital Markets Board so that they can go through this large documentation. We have to apply with the new law, but existing communique that is effective as of now. So all the exit rights calculation and the mechanism regarding the exit price usage are with the already existing or we may call in a way the old communique that is affected. So if there are any changes before the approval process has been completed, for sure, we will do -- if there are any changes to exit rights calculation in the new communique, we will do the necessary calculations and disclose it accordingly through the public disclosure announcement mechanism. And the only announcement we will make, if we make dividend payment before the CMB approval is in place, is the corrected prices of exit price usage based on this dividend payment. And we will disclose this through the public disclosure mechanism also.

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[Foreign Language] So the question is, first, there has been a comment that we received so many questions, especially from the investors regarding the conversion radio -- ratio of Soda to Sise. And due to any applications made by the shareholders to the Capital Markets Board or any other reason, if you are not able to complete the merger process by the end of August, whether we are considering to restart the process with the half year-end results to complete the merger. And the answer to that is our main concentration is to do everything we can do on our side also by supporting the Capital Markets Board that we complete the process before the end of August. But due to any reasonings -- due to reasons that has been supported by the -- our analyst or any other reasons, if there is a delay in the process, then it will be the, let's say, authorized bodies, which is the Board of Directors, that will for sure, reconsider their position and also due to necessary discussions with Capital Markets Board how to proceed. And the final decision will for sure be announced through the public disclosure mechanism.

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[Foreign Language] Now turning into English. There has been some remarks made by one of our Trakya Cam investors, the first thing is the coincidence between the calculated exit rights price and the closure price by the end of yesterday for Trakya Cam and the calculated price done by the experts provided in the valuation report, [ these ] identical, whether there's a coincidence or not, and that's creating a future hesitation among the individual investors of Trakya Cam. The answer to that was there are different mechanisms for the calculations for all these 3 different prices. And first one, the price that has happened by the end of yesterday during the closure of both [indiscernible] is totally a demand and supply balance created between the individual and corporate investors, both locally and internationally, regarding their expectations on Trakya Cam. There was no involvement of Sisecam in trading of those shares, apart from the already disclosed, in one way, we can say the buybacks we have done to our subsidiaries. And as soon as we do them, we make all the necessary disclosures, the amount that has been acquired by the company, the pricing levels and the nominal values of the acquired amount. The exit price calculation is done totally regarding the existing communique, and it can be easily calculated by any of our investors because it is the base that will show up last 2, 3 days before the announcement. That is simple way to average calculation. And they are perfectly right that the numbers there are so close, but it is not something that can be affected by the company itself. And regarding the valuation or the share price value of Trakya Cam regarding the experts' value report, the figure is 5.427 and the conversion ratio of Trakya Cam to Sisecam shares is, as I mentioned before, 0.67615. And we respectfully take all the comments made by our investors. But in all of the transactions that are done, especially regarding the stock exchange, there are expectations that are met or that are unmet, unfortunately. What we have done all through this process, a very condensed 3 months of work, to provide all the necessary financial projections and strategy in as much as detailed as possible to PwC, so that the calculations that are made by the experts are the optimum number regarding the royalties of the company as we see from the existing point that we have, and the provided services and the financial projections are perfectly aligned. It's already approved strategies of the business unit have by the Board of Directors, and we try to create the P/S for all the 6 partners that are taking place in this merger process as much as possible. And we feel ourselves confident that both ourselves and PwC has done what could have been done so far.

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[Foreign Language] So the question was about dividend payment, whether there is any dividend policy changes considered or the payments, whether they will be made in full amount and on the basis regarding the general assembly meetings we have done almost a month ago. And the answer to the question is that we are not going to make any policy changes, and we are willing to pay the full amount on the basis that were already approved during the general assembly. But you know that we recently -- the ministry has made some new regulations regarding the limitation of dividend payment, and it's bringing to advanced payments. So considering our position right now, we are almost able to make the full amount in almost all our companies regarding the general assembly approvals we have taken almost a month ago in full amounts and on the basis that were already announced. And unless there are any further legislation changes, we will stick to that.

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[Foreign Language] So there has been 3 questions and there are comments associated by our individual investors. So the first one is all the disclosures made by the company, we're highlighting that. The merger process will be on the favor of all parties, and it will create additional advantage for the performance of the company. But when we are looking at the market itself, we can see, although the glass companies are benefiting from the value of TL, there are stock sales that are happening in the market, constraining all the public companies of Sisecam. Do you see this as a trust issue to Sisecam Company itself? And the answer to this was, especially after the pandemic case are taking effect in Turkey, we have seen in the Turkish stock market a considerable amount of value losses almost for all the companies, including the larger ones. And when you look at the respective position of Sisecam itself and the other -- most of the other glass companies, including Soda also, their respective performance has been better than the market. So one of the comments brought by our investors, this is mainly due to the supports from the buybacks that has been made by the main shareholder, both Isbank and Sisecam. And we believe that has, to some extent, support, but when you look at the performance gap, we don't believe that this can only be explained with single buyback reasoning. We believe that there is an effect coming from all the measures that has been taken by Sisecam Group of Companies to keep their performance during the pandemic also and the announcements that are made and the expectations of the investors regarding the performance of the company. Second question was also linked to this. Almost all the questions are coming around exit rights prices. Why do you think that so many investors are willing to leave the company? The answer was, together with the people who are willing to leave the company, we are also receiving so many messages that are also happy due to the transaction that is being carried out. But for sure, in all the larger transactions, there might be a differentiated point of views of the investors regarding their position, regarding their cost of the shares of Pasabahce. So leaving or exercising the exit rights can be due to their unwillingness to take part in the merger, but also just to realize the arbitration opportunities that might be happening due to the exit rights prices and the spot prices in the market. And the last question if you are willing to make an IPO of Sisecam, would you be using the exit rights prices or the experts' report that has been published? And the answer to that was, for sure, we would be more willing to get the higher price, as we will be out in the market to get the best possible valuation. But the thing is that when we consider the reality of this merger process, there has been 6 companies, which 5 of them are listed with considerable amount of shareholders in the process. And the conversion ratios that have been identified there is to find the most optimal fairness point for the best interest of the shareholders. And as the management who is in charge of running these processes, we are trying to create the best level of fairness for all our investors. And we will try to stick to this principle also during the rest of the process.

[Operator Instructions] [Foreign Language]

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[Foreign Language] The question was regarding who will be able to use their exit rights, will the people who are holding this by the end of 25th of February or anyone who has current shares as of now will be able to exercise their exit rights? And the answer to that was, now, we have a new law dated 25th of February and the existing communique. And regarding them, the law made it clear that only the people who are holding the shares as of 25th of February will be able to exercise their exit rights. But as the new regulation in line with this new law has already not been in effect yet with its final form, we are also waiting for the final announcement that will be made or the new regulation that will be set forth by Capital Markets Board to see how the mechanism will work for exit rights usage.

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[Foreign Language] So the question was regarding the exit rights price and also pricing that was provided by [indiscernible] regarding the experts' value report and the fair pricing highlighted there. And we try to clarify that it is not the fair price. It is the price of the stock regarding the weighted average provided by the expert in their valuation report. And we are a little bit sensitive in calling anything the fair price because fair prices are already defined in the already existing legislations, and we prefer to stick to that. And the calculation and the announcement we made as far -- regarding the existing position is perfectly aligned with the existing legislation in place. And there was another comment regarding the OYAK Cement merger process that has been completed recently, and they have a lot of people who were not able to use their exit rights, even the ones that acquired their shares after a defined period. And we try to make it clear that OYAK Cement was bound with the old laws and old regulations, which the old regulations is the existing regulation -- secondary regulation that we have already in place. And in the -- in that regulation, people who have their shares in their hands, until the moment they acquire, until the moment that the merger general assemblies has been hold, have the right to their exit rights. So that was a different position than we have, so we can perfectly understand, as these 2 mergers are happening too close to each other, and there has been a quantification about the legislation that is in place or that might come effective in the coming future, but we try to make it clear that the legislation that both transactions has been bound to it are already different regarding the law that is affected. And the second legislation, the regulation might also differ, which is the same as of now. But exit rights usage, as it defined in the law, is different with what it was in the OYAK Cement merger case.

[Operator Instructions] [Foreign Language]

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[Foreign Language] So the question was linked with the comment, so it was coming from Trakya investor. So they think that with the valuation methodology that was used, the Trakya Cam investors are punished in a way, and he commented that they believe that -- or they feel that this methodology has been formed to punish Trakya Cam investors. And when they look at the pricing that is coming from the expert's value report, that was 5.483. And when they looked at the exits rights price, the existing in the calculation, it is 3.47. So why we are using a different exit price than the experts' value price that is there? And I try -- the answer was we tried to make it clear that the valuation report that was used for defining the conversion ratios of the merged parties in Sisecam and the stock price calculated by the company value that's calculated there is different from the exit price due to the legislation that is already in place. And the exit price calculation is totally made in line with the legislation that is in place, and that is what we need to perfectly obey. So the main reason why there is a differentiation between them is this. And he made the comment that we don't need to make a very complicated calculation to come up with this. It should be easier, and it is hard for us to understand and track how the calculations are done. So our IR team is -- will be affording him to provide further details. And we will consult with some of our investors as a type of a pilot test to see if this is a widespread situation for our investors. We will get in touch with PwC to come up with further details of the calculation that will help all of our investors get the details better.

We have no other questions. Dear speakers, back to you for the conclusion. [Foreign Language]

I would like to thank all of our investors for their participation in the webcast today. And we have tried to provide as much as details and clarification for any of the questions that might be arise in our investors, whether they are local, international, institutional or individual ones. We will try to do our best to provide further details through the course of this approval process. And if there is a case that regulations are changed and there is a new regulation in place that is approved by Capital Markets Board, we will, for sure, make the necessary modifications in our documentation, and we will make them public again. [Foreign Language]

Ladies and gentlemen, this concludes today's webcast call. Thank you all for your participation. You may now disconnect your lines. [Foreign Language]