Vallourec S.A. (VK) Earnings Call Transcript & Summary

Hello, and welcome to Vallourec Q1 2020 results. My name is Jose, and I will be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Jerome Friboulet, Head of Investor Relations, to begin today's conference. Thank you.

Good evening, everyone. Thank you for joining us for Vallourec's Q1 Results Presentation. I am Jerome Friboulet, Head of Investor Relations. With me today to comment these results, Edouard Guinotte, Chairman of the Management Board; Olivier Mallet, Member of the Management Board and Chief Financial Officer; Didier Hornet, Senior Vice President, Development and Innovation; Bertrand Frischmann, Senior Vice President, North America. This conference will be recorded and a replay will be available. The slides of the presentation are available for download. Before I hand over to Edouard Guinotte, I must warn you that today's conference call contains forward-looking statements and that future results may differ materially from statements and projections made on today's call. For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the beginning of the -- of your presentation and are included in our annual registration document filed with the French financial market regulator, the AMF. This presentation will be followed by a Q&A session. Now, I would like to leave the floor to Edouard Guinotte.

Thank you, Jerome. Good evening, everyone, and thank you for joining us on this call. I hope everyone has been keeping well and safe. Last time we spoke was only 3 months ago, although it feels more like 3 years ago. Since then, as most other companies in our ecosystem, we are dealing with the impact of COVID-19 pandemic first on our operations; and secondly, on our customers' demand. Both as a company and as individuals, we are living through really extraordinary times. I would like to take this opportunity to thank and commend our management teams and all our employees worldwide for the way they handheld themselves and confronted the situation. They showed continued focus and result, maintained their utmost professionalism and strong collective engagement, which is all very necessary to work through this crisis. Again, I thank them for that. Moving on to the highlights for this call. The points mentioned here will be detailed during the call, but I would like to emphasize a few. Our Q1 EBITDA margin was up 1.5 percentage points year-on-year at 8% of revenue, thanks to a stable EUR 68 million EBITDA despite the 17% drop in revenue. Our working capital requirement did increase as it usually does this time of the year and was also impacted by some operational disruptions linked with COVID-19, leading to a negative free cash flow in Q1. Strong adaptation plans are launched across the group, first of all, to ensure the health and safety of our team, while maintaining our service to customers. I'm happy to report that the number of cases in our company has been kept under control. And most importantly, we didn't suffer any death among our employees, which we are all very satisfied with. Secondly, we launched strict capacities adjustment and cost control measures to protect margin and limit cash outflows. All in all, for 2020, we target the full adaptation of our variable costs, including direct labor to the activity. And on top of that, EUR 130 million of additional cost savings. We also adjusted our CapEx envelope by 20%, while keeping the mine expansion project and plan to reduce our working capital requirements through the year. While our liquidity is strong at EUR 1.8 billion, we work intensively to improve our balance sheet. And we intend to proceed with a capital increase of EUR 800 million as soon as the operating environment stabilizes and market conditions allow us to do so. Looking at the remainder of the year, our business will be impacted by COVID-19 crisis and its consequences on our customers' activity. It's very significantly in North America as well as on industry segments. And this should be, to a large extent, but not fully, offset by the increase of offshore drilling in Brazil, resilient iron ore prices for our mine, also in Brazil, and the delivery of our solid and long backlog of high alloy products in EMEA regions. After this long overview, I will turn it over to Olivier for a deeper dive into our Q1 results.

So thank you, Edouard. Good evening, everyone. So let's start on Slide 7 with more details on our revenue evolution. Our revenue for the quarter was down 15% at same exchange rate. Starting with our largest segment, oil and gas. Revenue there was down 18% year-on-year. In EA-MEA, this decrease reflected lower shipments but just according and in line with the general schedule for some larger orders. On the other hand, the region had a better price/mix. In North America, the decrease was driven by lower deliveries due to the onshore market slowdown that started around last year as well as the pressure on prices, which continued in Q1. And in South America, the oil and gas revenue decrease was due to a currency effect. Petrochem revenue was down 9%, mainly with regard to line pipes sold in the U.S. Industry and other were down 12% at same exchange rates. In Europe, it reflected mainly lower volumes. In South America as well for strictly industrial products, while the mine revenue was almost stable. And finally, power gen was down 6%. And I remind you that we have decided to shut down our German plant in Reisholz dedicated to these products and the closure will be effective in the second half of this year. On the next slide. First, some more details on the revenue bridge, showing you that the volume effect was significant, minus 21% and offset to some extent by some positive price/mix effect of 6%, mainly reflecting a better price/mix in oil and gas for EA-MEA regions, which did more than offset lower prices in North America. Moving now to the EBITDA. As already said, it was stable at EUR 68 million, and the EBITDA margin was up 1.5 percentage points at 8%. This covers, first, an industrial margin of EUR 161 million, only slightly down compared to last year since the lower activity in oil and gas in North America was offset to quite a large extent by positives in the other business segments. And once again, the SG&A costs were reduced by 3% year-on-year. On the next slide, some quick comments on the relevant lines of the P&L below the EBITDA. First, the operating result decreased by EUR 10 million due to the restructuring provision of EUR 21 million related to our very large adaptation plan in North America. This is being partly offset by lower depreciation of industrial assets. Second important topic, the financial result showed a EUR 26 million improvement compared to Q1 last year. This was due mainly to a positive settlement of very old legal dispute in Brazil. Income tax increased to some extent due to profit in Brazil. And finally, the group net result improved by EUR 16 million year-on-year at minus EUR 74 million. Let's move now on Slide 10 to cash elements, starting with working capital. As you know, it's marked by a strong usual seasonality. So that the net working capital requirement at the end of March reached 119 days, relatively close to the 117 days of Q1 '19 and better than any other Q1 number of days of the years before. On Slide 11, a summary of our free cash flow, which was a negative EUR 181 million compared to a negative EUR 159 million in Q1 '19. The cash flow from operating activities at minus EUR 31 million was almost stable compared to last year. The seasonal increase in working capital by (sic) [ to ] EUR 119 million was only a EUR 6 million above the amount of last year, so same order of magnitude. And finally, the CapEx increased by EUR 14 million. As you can see, it was at a quite low level of EUR 17 million in Q1 '19. And I will conclude with the net debt, which stood at EUR 2.267 billion at the end of March. The main driver of this evolution, of course, was the free cash flow. You can notice a relatively significant amount of EUR 55 million negative on the asset disposals and other items. The main part of it EUR 45 million is ForEx impact on the net cash position we have in Brazil and the rest of it is the usual EUR 10 million per quarter payments under IFRS 16 leasing debt. And on this, I will give back the floor to Edouard.

Thank you, Olivier, for this comprehensive yet synthetic overview. I will quickly share with you what we are confronted with on the oil and gas market. You will probably find this very familiar because we are not the only ones confronted with similar topics. So the oil industry is confronted to a massive demand collapse, driven by the COVID-19 pandemic. This -- the drop in oil demand has been estimated as high as minus 25% in Q2. And this demand collapse is unfortunately not offset by the announced cut in supply, be it by OPEC+ or by non-OPEC+ production reduction. So as a result, this has driven the oil price significantly down, even temporarily negative for the WTI late last April. And this, in turn, lead all oil and gas operators to look back at their CapEx plans and initiate significant reduction. This is mostly marked in the U.S. where onshore operators are cutting CapEx by more than 50% in 2020. This is not so marked in the rest of the world, where most of the international oil companies are announcing CapEx cuts between minus 20% to minus 25%. And it depends on the winning and losing regions, I would say. And this CapEx reduction is expected to be less when it comes to national oil companies, in particular, in the Middle East. Looking ahead, of course, a lot of analysts, very professional analysts are looking at when we could see a rebalance in the supply and demand of oil. And most recently, the International Energy Agency in the -- in its latest scenario indicated that they have expected the demand impact from COVID-19 to progressively phase out in H2, while at the same time, the supply cuts will remain in place for longer, leading to a possible balance of supply and demand towards some time in H2, allowing for progressive drawdown on accumulated inventories. So there is some hope around the balance or the -- yes, the rebalance of the oil supply and demand situation. This being said, we are taking decisive measures to adapt to the immediate evolution of our customers' demand. So I will highlight, and I -- well, first of all, I will remind everyone, as we commented extensively back in February that we are a leaner and much more competitive company. Thanks to the accumulated effect of our transformation plan. Despite this, we launched very significant and very quick adaptation measures. And on top of that, we do have in mind to benefit from some areas of resilience in our business portfolio. So in terms of the history, I will just remind you that our cost base has been drastically reduced since 2016, minus 40%, 4-0, through the combination of capacities rationalization, accumulated savings almost EUR 600 million since 2016 and the development of our new routes. You can see on the bottom right graph, that the share of Brazil and China in our production is close to 50% when it was only 20% back in 2014. This being said, we launched strong adaptation measures, as you can see on the following slide. And so in North America, as we already commented, we launched the reduction of our workforce by more than 1/3, more than 900 position are being cut. Actually, it will be probably close to 1,000 position when it's all set and done across all plants, but also impacting our support functions. This is being implemented as we speak and will be completed for the most part at the end of May. In the rest of the world, we work on cost savings by adjusting working hours to the activity in each country, which means we are relying extensively on the furlough or short time work measures in Europe but also in Brazil. We are strengthening the expenditure control, and we are also -- we also implemented hiring freeze and travel bans. On top of that, we implemented a strong cash control measures by the reduction of the CapEx envelope by EUR 40 million to EUR 160 million. And the working capital requirement will reduce, thanks to our action plan, reflecting the activity decline and the usual reverse seasonality effect towards the end of the year. The result of all these adaptation measures is expected to be the full adaptation of our variable costs, which I remind you, include direct labor. And on top of the full adaptation of the variable costs, we plan to generate EUR 130 million of additional gross savings in 2020. Last but not least, I will highlight a few areas of resilience in our business. First and foremost, Brazil. You can see on the graph on the top right, that the expected number of wells -- new wells to be drilled offshore is expected to increase year-on-year. So the increase, of course, and unfortunately, is not as high as we initially expected, reflecting the decrease in CapEx announced by Petrobras, for instance. But still year-on-year, we will benefit from almost 20% increase in the well count, which will be reflected by our deliveries, mostly in H2. And I will point out as well that not only Petrobras is active in offshore Brazil, most of prominent IOCs are. They all confirm their plan because, again, offshore Brazil is set to be one of the most -- the fastest-growing area in the world. And we announced tonight that we were awarded or we extended our supply contract with Equinor, which marked the latest success in Brazil for our company. So on top of offshore Brazil, we benefit from the dampening effect, so the stabilizing effect of our mine which I remind you is very well positioned in terms of cost base and efficiency. The volume produced are stable year-on-year. And the iron ore price is showing great resilience year-on-year. And as I mentioned briefly, the expansion project is maintained, which will result in an increase in production and therefore, revenue as soon as late 2021 and predominantly in 2022. Finally, in EA-MEA, we benefit from diverse customer base and strong NOC exposition, which will be more resilient than other operators in a low oil price environment. And we also benefit from a strong accumulated backlog for high alloy products, which will support our results in 2020. And finally, this is the area where our renewed competitiveness with the development of our new routes will allow us to secure the minimum activity we require. Moving on to the outlook for 2020, and if I go region by region. In EA-MEA, the oil and gas market will be marked by the reduced CapEx in most IOCs. NOCs will be more stable and resilient. Our deliveries in coming quarters will benefit from our backlog in high alloy products. Conversely, on the industry market in Europe, we expect demand to be strongly impacted by the COVID-19 crisis. In North America, as you know, the operators are drastically and very quickly cutting rigs and cutting their drilling plants following the massive drop in WTI prices. This has led the rig count as low as 374 last Friday, which is more than 50% reduction compared with December 2019. And more noticeably, it's below the trough of 2016, which was reached in late April 2016 at 404. We do expect a continuous reduction in rig count, which will have a strong impact in our OCTG shipments over the year. In Brazil, as I said, we expect an increase in our deliveries following Petrobras activities. But on the industry segment, we do expect a strong reduction of deliveries as well as in Europe. And the iron ore will play its usual stabilizing role. So if I recap our expectations in terms of adaptation measures, again, full adaptation of variable costs, including direct labor and EUR 130 million on top, CapEx envelope reduced by EUR 40 million to EUR 160 million and the reduction of working capital requirements. So to summarize, if I compare with Q1 2020, the following quarters should see severe deterioration of our results in North America and on industry markets, which should be offset to a good extent, but not fully, by increased activity offshore Brazil and sustained iron ore prices and the deliveries of our order book of high alloy products in EA-MEA. Finally, I will conclude this opening statement. If you can -- so we are evolving in an unprecedented context, and our first concern remains to preserve health and safety of our teams, while maintaining service to customers. Thanks to the successful execution of our transformation plan, Vallourec is leaner and a much more competitive company than in 2015, 2016, and we will benefit from the resilience of part of our business portfolio. Despite this, we very decidedly implemented all necessary adaptation measures, and we accelerate our cost savings plan. And while our environment and our markets remain very volatile, the group intends to proceed with the execution of our rights issue as soon as the operating environment offers improved visibility and when general market condition allow it. This concludes the short overview of our results today. And Olivier and I as well as Bertrand and Didier are open for the Q&A session.

[Operator Instructions] The first question comes from Alan Spence from Jefferies.

Two for me. On the guidance on the consumption of the cash flow to be significantly reduced from Q1. Just want to make sure I'm understanding that right. Should we assume that free cash flow will remain negative? Or do you think there's a potential that it will be positive in Q2 and Q3? That's my first question.

Yes. So on this, just to make sure everything is clear. So the free cash flow is significantly negative in Q1, again, reflecting expected seasonality. And what we expect for the remainder of the year is to benefit from both the reverse seasonality effect, which usually occur in Q4 and the release of working capital requirement, aligned with the level of activity. So this, combined with all the other margin protection measures and expenditure control, should lead our free cash flow on the following quarters, so Q3 onwards to be positive, therefore, reducing the negative free cash flow obtained in Q1.

Okay. That's very helpful. And on the rights issue, I know you don't want to give a direct time now. But is there a certain point in your leverage where you might say, look, we need to get this done right now even if perhaps timing isn't the most ideal? Do you have the capacity or the willingness to wait until 2021, if that was necessary?

So our plan and the way we look at this together with our reference shareholders and other stakeholders is to be ready to launch the capital increase as soon as both our operating environment and market conditions allow, which we still hope can happen in 2020. So we have no intention to wait until 2021.

Okay. And one last quick one, if I may. Sorry. Can you perhaps quantify your expectations for the decline in shipments in Q2?

So on this, we typically don't give guidance quarter by quarter, and we think more in terms of EBITDA than in terms of volumes or revenue. So that the overall comment that may not be that different from one quarter to another one, is that if you take Q1 as a starting point, as a reference point over the next few quarters, we'll have a significant or very significant decline in revenue and EBITDA, especially in North America. No big surprise there, given the huge drop in terms of rig count and activity. There will be as well, but to a much lesser extent, a decline in result coming from what we sell for the industry, both in Europe and in Brazil where are our main industrial markets. So this will be the big negative that will happen in Q2, Q3 and Q4. In front of that, we'll have some Brazil. The main plus coming from the local oil and gas market in Brazil, where, as shown by Edouard, the number of wells to be drilled by Petrobras and the IOCs, although being lower than what was planned initially before the COVID crisis by Petrobras and IOCs, we'll still show a significant increase compared to 2019. And you may remember as well that our pricings in this market have increased in the second part of 2019. So that will have a full year effect of this nice price increase. Then we'll have as well the support of the very strong order book that we've booked in 2019 for the EA-MEA regions for stratum corneum high alloy products where the most part by far of our 2020 deliveries is booked with no order cancellation at all. And this very highly contributive deliveries will at least offset, if not more, via CapEx cuts from IOCs in this part of the world. And finally, there is this big island of resilience, which is our mining operation in Brazil. You know even if you may not have the exact figure, that it's extremely profitable. Our production in 2020 will be in the same order of magnitude as in 2019. And as you can see every morning on your computers, so far, the international prices of iron ore are very resilient compared to last year. So it's a big chunk of profitability. That should -- unless if iron ore prices were to suddenly drop should remain very steady compared to last year. So these resilient areas in Brazil -- in particular from Brazil will not completely offset the decline due to North America and industry compared to this reference point of Q1, but it will offset it to a good extent.

The next question comes from Kevin Roger from Kepler Cheuvreux.

First one will be related to -- as a follow-up regarding the EBITDA. Based on the answer that you just made, can we understand basically that Q2, Q3, Q4 EBITDA will be lower than the one that you reached in Q1 that Q1 would be, let's say, the maximum EBITDA of the year because you say that the pluses will not entirely offset the minus that you will face? And the second question is regarding, let's say, the relationship with the bank. Because today, you have EUR 1.6 billion of cash, but this is basically entirely linked to the credit line because you have more than EUR 2 billion of short-term debt. So I was wondering if you can comment the relationship with the bank that before the COVID-19 situation crisis gave their support to the capital increase. What have been the discussion with the bank over the past weeks, please?

Yes. Thank you, Kevin. So on your first question regarding EBITDA, I would say that generally, your understanding is correct. Indeed, we think EBITDA for the next quarters will be lower than Q1. But what we are also pointing out, it's not -- you shouldn't expect a complete collapse. There will be some impact. And part of it will be -- a good part of it will be offset by supporting factors, which Olivier detailed. With regards to our relationship with banks, I would qualify them as very close. As you remember, they agreed to extend part of our credit lines beyond 2021, along with the capital increase, and their general position is to share our conviction that the best way for Vallourec to improve our balance sheet is to successfully launch the capital increase, again as soon as market conditions allow. So we work very, very closely with them to monitor when is the best timing to do so. Olivier, you want to complete more?

The next question comes from Amy Wong from UBS.

A couple of questions from me, please. The first one relates to your comments on -- a couple of your comments on the EA-MEA market. You mentioned that you have a long backlog of high alloy products to be an ever booked in '19. Can you give some sense of when the timing of those deliveries and how long they stretch out for? And in a somewhat related question about same market, EA-MEA. You say that the NOC should maintain most of their tendering activities. Given we are a couple of months into the oil price collapse, now can you give us some color on those conversations with your clients what's happening with the rate of tenders being issued? And how much of those are converting into actual orders?

Okay, thank you. Thank you, Amy. So maybe on the -- so on the order book, I would say it's generally spread over the next quarters. I mean it's not a straight 1/3, 1/3, 1/3, but it's generally a spread along the next quarters. So you will see the impact in all quarters. With regards to the activity in the Middle East, in particular, so yes, as we expect most of the NOCs there are, let's say, more resilient to low oil prices. And we see tendering activity being quite sustained. And I would cite predominantly Saudi Arabia, whereby their purchasing activities has been quite limited in 2019. And so now as we expected in 2020, they need to resume a sustained purchasing activity, which we definitely hope to take part of -- take part in relying on our local operations in Dammam. I would also cite Kuwait, which there again has recently released some tenders as expected. Now the timing of the deliveries may be spread over a longer period of time. But in general, as is generally the case and as was the case in '15, '16, the operations of national oil companies, particularly in the Middle East, is more resilient than elsewhere to low oil prices.

And -- okay. And just on your rights issue question there. I understand that you have agreements with banks and also some cornerstone investors. Is there any time requirement on those agreements?

So as far as our core investors, so Nippon Steel and BPI are concerned, yes, there is a time, but we are in permanent dialogue with them. We are speaking again with Nippon Steel this morning, Edouard and I, and they fully support definitely the rights issue because they fully understand that it is in the best interest of any shareholder to have this rights issue in place. As far as the banks is concerned -- are concerned, the key there and what we are doing with them is to constantly monitor the market situation. And I mean by that both the general equity market condition, which has been relatively shaky during the last few months and as well the oil and gas market environment because we believe that we need some more stability and visibility to be capable of issuing the rights issue in good conditions. So together with them and we are absolutely in the same boat there, we are monitoring constantly the market in order to be ready to launch it as soon as market conditions allow for it.

So with the standby commitment with the banks, there's no date kind of backstopping that then with the banks?

It's more than anything else, what matters is market conditions. You know it's our core banks. It's the banks who lend us. So we are definitely aligned with one single objective for all of us, which is to execute the rights issue. But for that, we have to make sure as well that the market is stabilized enough to allow for it.

The next question comes from Sahar Islam from Goldman Sachs.

My first one was on pricing in the international market, particularly Brazil and Middle East, if you're seeing any pricing pressure there because there've been some comments from other suppliers that they are renegotiating part of their servicing. And then secondly, on the balance sheet, is there a scenario where you would look at disposals of assets like the forestry asset, which I guess in this ESG world is probably more valuable and possibly easier to sell than it was a couple of years ago?

Okay. Thank you. So first of all, on pricing, let's just say we received some moderate requests from some customers for price decreases. But very quickly, we made them realize that their supply base as a whole didn't catch up in any shape or form the type of margins and prices we enjoyed back in 2014. And so therefore, the message to our customers, through our commercial teams, is that we have absolutely no flexibility towards prices, and we get ready for lower activity by adapting workforce and capacity, but that we won't entertain pricing adjustments. In the case of Petrobras, very specifically, the contract includes price revision formulas, which at the end of 2019 led to a price increase instead of a decrease, which we benefit from this year. So all in all, yes, we receive some pressures, but we clearly explained that there was no room for this kind of flexibility. With regards to asset disposals, so the question revolves or has revolved around the mine and the forest. When it comes to the mine, you understood that we definitely took the decision not to sell it. And to the contrary, fully benefit from it and double down on it by investing to expand it. And when it comes to the forest, this is something we constantly test. But so far, the value we receive from potential acquirers doesn't reflect what we believe is the intrinsic value of the forest. And as you very rightly pointed out, we expect that in the years to come due to increased pressure to improve ESG ratings, the value of this forest in Brazil will most likely increase. And so therefore, we -- although we test the markets, so far, we haven't found a satisfying value for these assets.

The next question comes from Jean-Francois Granjon from ODDO.

I just had 3 questions, please. The first one concerns the impairment and the test. Do you expect some write-offs for the next quarter? Do you make some impairment test at that time? The second question regarding the EBITDA. So I understand that we should have for the next quarter some lower level compared to Q1. Is it reasonable to expect negative EBITDA in Q2 and Q3? And the last question, regarding the right issue, due to the context, do you consider that high EUR 800 million previously expected is not sufficient, and probably you could need to have a higher level adapt for the rights issue?

Yes. So I will answer on EBITDA. So again, we -- I repeat what we said. What you need to do is take Q1 as a reference point. To this Q1, there will be some negative factors, which we highlighted, which will be offset to a large extent by some supporting and positive factors. So the result of this, as I alluded to with Kevin, I believe, is that we anticipate lower EBITDA in upcoming quarters, but not a collapse in EBITDA in the coming quarters. So the other more financial questions, I will ask Olivier to answer.

Yes. So on the impairment, Jean-Francois, when you do that, you need some visibility on your long-term business plan scenarios, which is quite difficult to have at the time being. And in addition to that, we had some margins, some headroom on our major casualty units at the end of last year. So we concluded that since Q1, it was not really a relevant question. As far the EUR 800 million and whether it's enough, I would just like to remind you that when we announced the capital increase and the associated new RCF on a pro forma basis at the end of 2019, it was providing us with very large liquidity of between EUR 1.6 billion and EUR 1.7 billion. So that even if we will still have to assess precisely the impact and the duration of the oil crisis, this amount of liquidity was giving some headroom and to some extent, was calibrated taking into account the cyclicality associated with our oil and gas exposure.

The next question comes from Jean-Luc Romain from CIC Market Solutions.

You mentioned strict price and production discipline on your part. Do you expect all of your main competitors to behave the same? Or could we have some lack of discipline in some cases?

Well, as you know, we don't talk to them, so we refrain from speculating. But we do have some clear evidence that the mindset is quite similar to ours. You only need to see the amount of layoffs, capacity idling and not to say capacity closing -- closures in the U.S., which were announced by our competitors. I need to name a few. U.S. Steel announced that they would be idling their 2 significant mills. Lone Star, which produces ERW pipe and, Lorain, which is involved in the seamless pipe production. If you look at Tenaris, they quickly communicated towards the stoppage or closure of most of their newly acquired plants and even on production reduction at their brand-new Bay City mill. And finally, I believe Evraz announced the closure of their Rocky Mountain Steel Plant in Colorado. So all in all, when you compile all the announced capacity closure or reduction, you come very quickly to the realization that the open capacity in the U.S. has been or will be quickly reduced by more than 50%, which means that as an industry, we seem to all agree and converge that there is very little point in fighting for volumes, which simply do not exist. And we are far better off maintaining a strict or as strict as possible price discipline on the market. You can also look at the rest of the world, where our competitor in Austria has communicated on a 25% capacity reduction, I believe. Some of the other European suppliers have either faced some disruption linked to the coronavirus are also announced relying on short time work or capacity idling. So all in all, and even though I cannot fully consider, I know what the competitors are going to do. It does seem that everyone is considering that the best way forward is to adjust capacity to the demand rather than enter in a losing game, trying to lower prices to chase volumes, which are simply not there.

[Operator Instructions]

Okay. It seems we have no further questions. So on this, I will thank you all for your numerous attendance. And...

Sorry.

Sorry?

Sorry. We have a couple of questions coming through. The next question comes from Alan Spence.

Just one really quick question for me. Just you mentioned the stability in the iron ore price and being able to see that in the screens each morning. Do you actually sell it based off of CFR China? I would imagine that should be more of an FOB Brazil price for iron ore? And with all we read out freight rates growing up, are you seeing perhaps more pressure on the local price you sell on rather than kind of the well-published CFR China?

So Alan, you're right, we are using the international indexes like Platts as a reference, but our contracts are indeed FOB Brazil. But they are very tightly linked to the evolution of Platts. And I don't think we experienced significant pressure on freight prices.

Okay. I meant more moving into Q2 rather than in Q1, just if you've seen any impact of that?

No, no, the way -- so we have different contracts with different customers. But I don't think that we just follow directly the freight cost evolution. So that every indication we have does converge to a very good stability of the result of our mine in 2020 if the Platts Index were to stay at or even slightly below where it is as of yesterday night.

The next question comes from Kevin Roger.

Yes. Sorry, me again. Just one follow-up, please, regarding the financial charges. Can you explain us the decline that we see this quarter in the financial charges in the P&L that are close to EUR 30 million this year versus the EUR 60 million over the past quarters, please?

Yes, Kevin, I think I mentioned that, but probably I was too fast when I was going through the slides. It's due to the fact that we have the good news in Brazil to benefit from a positive settlement or judicial settlement of a very, very old, more than 10 years old, local litigation, which did result in cash-in and the recognition of this cash-in on financial income of EUR 26 million that were provided to us by a local company called Eletrobras.

The next question comes -- sorry, showing no further question. I will hand you back to your host to conclude today's conference.

Okay. So with this said, I thank you all for your attendance. And wish you a very pleasant and safe evening. Thank you all. Take care.

Thank you for joining today's call. You may now disconnect.