Good day and welcome to the Norsk Hydro conference call. Today's conference is being recorded, and at this time, I would like to turn the conference over to Mr. Rikard Lindqvist, Head of Investor Relations. Please go ahead.
Welcome to Hydro's conference call regarding the stock exchange announcement from this morning. My name is Rikard Lindqvist, and I'm Head of Investor Relations. With me here is Executive Vice President and CFO, Jørgen Rostrup, who will start with a brief summary of the transaction, and then we open up for questions.
Good afternoon, and thank you for listening in to our conference call this afternoon. As you are aware of this morning, we announced together with Orkla that we have agreed to combine our respective extrusion businesses, which are Profiles, Building Systems, Tubing businesses, in order to create what we regard as a world-leading aluminum solution provider. The intention is to name the company Sapa. It's going to be a 50/50 joint venture between the two holders. We believe that we are with this move going to create a very strong company, which is well-positioned for value creation. We believe the company will have definite number one positions both in North America and in Europe.
We also believe that the company will have significant and interesting positions in emerging markets. Significant competence base, both out of the activity in Europe and U.S. We believe a very experienced and strong management team put together from the two companies. This company should be positioned both for restructuring, which is indeed one of the key drivers, but also for value creation over and above restructuring effects. If you look a little bit closer to the various elements of the transaction, as I said, a 50/50 joint venture between the two owners.
There is a compensation element in the transaction that the new company is going to pay Orkla to compensate for the relative valuation, NOK 1.8 billion. Remember that Orkla owns half of that payment as an owner of the company. The compensation element between Hydro and Orkla is then half that amount. There is a sales and metal supply agreement for extrusion billet established between Hydro as a supplier of billets and the new company. The intention is to create exit opportunities such as through an IPO approximately three years after closing. Obviously the deal will be subject to approvals from various competition authorities.
We have so far assumed that the transaction could be completed within the first half 2013. Let me say that I believe this is a value-creating and a fair deal for both companies. We are, as I said, creating a global industry leader which will be even better equipped to serve customers in various regions of the world to conduct research and the development of new alloys and to bring new applications to the market, to the benefit for the application of aluminum and for the benefit of various customers along a long and large range of applications in all parts of the world.
Overcapacity and challenging markets is part of the present situation in extrusion, as many of you are aware of, in particular in Europe. Hydro is significantly exposed to building and construction in Europe in our present portfolio, and we believe the new company will have a much better geographical and application spread. In the last two years of the depressed part of the cycle, we have seen that earnings potential has been over and above NOK 2 billion EBITDA. We also believe there are significant synergy potential in the deal, and so far the two owners have evaluated that to be in the range of NOK 1 billion.
Obviously with a cost attached to taking out those synergies, approximately NOK 1.5 billion-NOK 2 billion. There are approximately a couple of years of investment period for extracting those synergies. I believe also that through this transaction Hydro has once again taken leadership in shaping the aluminum industry as we did with the Vale transaction and taking moves that is both good for the company, good for the industry, and also good for stakeholders, customers, and other. We value it though that way that the deal creates value for Hydro from day one. I think that was my introduction, and I'm more than happy to have a discussion around this and other topics with you.
Please, put forward your questions on guidance.
Operator, we'll open up for questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question today, please press star one on your telephone keypad. Please ensure the mute button has been switched off to allow the signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Once again, please press star one to ask a question. We will take our first question from Joakim Ahlberg of Cheuvreux. Please go ahead.
Yes, hello. It's Joakim Ahlberg from Cheuvreux here in Stockholm. I have some questions here. If we start with the CapEx and the spread of that, how do you see that come over the years? Also, how do you think the savings will pan out over these years ahead? On the CapEx, who will be paying that? I heard before that you will be paying the full amount. Is that correct?
Well, I think maybe we should clarify a little bit. When you're talking about the latter part of your question, when you're talking about the CapEx and who is going to pay, you might be alluding to the compensation of 1.8, net NOK 1.8 billion as part of the total transaction. That amount is going to be paid from the new company shortly after closing of the transaction. The 1.8 point is then being built up as debt in the new company is going to be paid to Orkla. Then my comments was, remember then that there are two shareholders in the new company.
This equals a compensation from Hydro to Orkla in order to reach a 50/50 solution of around or shortly less than NOK 1 billion.
Okay, how do you think it will be spread over the years, the savings?
Well, first of all, obviously, from now on until closing, we will work with the authorities to get the transaction approved, and we will work on integration planning jointly with Orkla and the new company to be within the frames of what the law is allowing us to do. After the transaction is closing, there will be a very ambitious and targeted synergy program released. Obviously the first couple of years of that will require investments and also compensations for closure of facilities and so on, according to how this is decided.
You will reap the benefits of that activity from, I would assume, year two of operation and onwards.
Okay, maybe you can have some kind of restructuring in the second half of 2013, and we'll see the savings come in the fourth quarter at the earliest. Is that a best, good best guess?
That's an okay way of putting it. Remember that until the deal is approved and closed, Hydro will do its utmost to run its extrusion business as good as possible in order to create as much value as possible in the interim period. We have all reason to assume that Orkla will do the same. Restructuring is part of a normal day in extrusion these days, but also to develop the positions Hydro has invested in in China and in Brazil. We will obviously work further on that, and I assume that the other party will do the same.
From a new company perspective, you might say that you will see the company hopefully operating by next summer, and then you will see investments in restructuring and the benefits from that coming hopefully shortly after.
Okay, thank you. I have one last question on that, on the regulatory framework. How do you see that now in Europe and America, especially as you will have a fairly large market share in the NewCo? What's your preliminary expectation of the market shares in Europe and U.S.?
Well, we believe that this company, as I said, will have a number one position in both markets. I'm a little bit hesitating to go into how much market share, et cetera, because, you know, that might always change and be adjusted, but it's a significant position in both markets. We think that is beneficial for the market and for customers because it gives some of the companies enough capacity to be a front runner in developing new applications and new alloys and new qualities. With regard to authorities and approval, we are just going to do whatever it takes.
We will start the discussions and the work together with the right governmental bodies, including the E.U., obviously, immediately. We will follow their views and instructions, and we believe this is solvable and we should be able to close hopefully during first half of next year.
Do you think currently, if you have to take the two assets together, do you think you will have a 50% market share or more in any area right now?
No, we don't believe we will reach that kind of numbers. No.
Okay. Thank you. That's all for me.
As a reminder, ladies and gentlemen, to ask a question, please press star one on your telephone keypad. We will now take our next question from Neil Sampat of Nomura. Please go ahead.
Hi. Good afternoon. I also noticed on the announcement that, well, the Rolled Products division wasn't included in the transaction and Orkla are looking to divest their Rolled Products division going forward. Could you give some color as to whether Hydro would be interested in that as a separate transaction, or can we infer that it wasn't, you know, the fact that it wasn't included in this downstream transaction means that's probably enough from, you know, the Hydro interest isn't there?
Thanks, Neil, for that question. Well, I'm a simple guy, so I can assure you it was definitely enough this week to put it that way. You should just think that the two parties has come together to discuss what measures to take that would benefit the owners, the companies and the customers in the extrusion part of the business. That from that starting point it made very well sense to do the cut off the way we did it. As you also might know, we are running the extrusion business and the rolling business as two very separate businesses.
We are quite happy with how our Rolled Products business is developing. It's always kind of noticed the tough markets to some extent, but has a much broader and more global portfolio and has a very good structure around the core assets in Germany. This for us is two very different topics. We are very much concerned now about the value-adding transaction that we have announced and getting that started on a good foot and getting all the work done so we can close it as soon as possible.
Okay, thanks. Sorry, just another question on the synergies. Would I be right in thinking that the majority of the synergies are gonna be in terms of shrinking the production footprint within Europe? If so, what kind of capacity utilization do you think the enlarged group would need to be running in Europe to hit your NOK 1 billion estimate?
Yeah, thanks. That's a good question. I would say that, you know, first of all, we will extract synergies, I believe, in all the different parts of the business. Obviously, they are bigger where you have a significant overlap and where you have, on top of that, a very challenging market, which is calling for tough measures. Thereby, we first and foremost reach Europe, as you are pointing to. I would say also in North America, also in Tubes, where in both places it's more a discussion about adding some business from one partner to a larger system from the other party.
You will have it, and you will have it definitely in Building Systems, where you also have an interesting subject around brands and number of articles and number of outlets, et cetera, et cetera. On top of that, obviously also shared services, corporate functions, sourcing and things like that has been looked into, and we expect to bring also good value and good feedback. The benefit obviously of putting together two systems is that you get more and better options for efficient restructuring and that is behind the case.
Brilliant. Thank you. As a reminder, ladies and gentlemen, to ask a question today, please press star one on your telephone keypad. We will now take our next question from Luc Pez of Exane. Please go ahead.
Hi, gentlemen. I had one or two questions mostly related to the underlying level of CapEx would be contemplated for the merged entity. Whether you could comment on the sustained and gross CapEx, if any, you would expect from it. Thank you.
Well, again, obviously it's a little bit early to go into detail on this. We are quite occupied with letting first closing the transaction and then letting management get started on their work. I would say that approximately around NOK 1 billion in sustaining CapEx level is what you should picture.
Thank you.
As a reminder, ladies and gentlemen, if you'd like to ask a question today, please press star one on your telephone keypad. We have no questions in the queue at this time.
Okay. Thank you. Thank you once again for listening in to our conference call. As I said, we believe the deal creates value for Hydro from day one. We have high expectations to the synergies and the potential for the new company. We also believe that the transaction will contribute to strengthen our position as a world-leading, and I would say resource-rich aluminum company with robust activities across the whole value chain. Thank you and have a good afternoon.
That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.