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

Hello, and welcome to the Vallourec Results 2021 Conference Call. My name is Stefano, and I will be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Jerome Friboulet, Head of Investor Relations, to begin today's conference. Thank you.

Thank you, Stefano, and thank you for joining us for Vallourec's Q1 2021 Results Presentation. I am Jerome Friboulet, Head of Investor Relations. With me today to comment these results, we have Olivier Mallet; he's member of the Management Board and Chief Financial Officer; and Edouard Guinotte, Chairman of the Management Board. The conference will be recorded and a replay will be available. It is also audio webcasted on our Investor Relations website, and the presentation slides 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 or projections made on today's call. For your comments, the forward-looking statements and risk factors that could affect the statements are referenced at the beginning of our slide presentation and are included in our universal 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 give the floor to Edouard Giunotte.

Thank you, Jerome. Good evening, everyone. I'll start with a few highlights for the Q1 results. So that would be Slide #4. Starting with Q1 results being, I would qualify them as encouraging with an EBITDA at EUR 80 million, which is up 18% compared with Q1 2020, which was, to a large extent, a prepandemic. The free cash flow improved significantly compared with Q1 2020, but those remain negative at minus EUR 62 million, leaving our cash position at EUR 1.2 billion as of March 31. We have increased our outlook and our guidance for 2021. This was released end of April. So we are targeting now the EBITDA for the full year between EUR 350 million and EUR 400 million. And the free cash flow remained largely negative between EUR 260 million, negative, and minus EUR 340 million as a result of a combination of PRI increase and several one-off events. We will continue focusing on cost savings throughout the year and maintain a strict cash control, which, in particular, our CapEx envelope at EUR 160 million. The other significant piece of information for today is the update on the implementation of our financial restructuring, which is set to be completed on June 30 of this year. As you may have seen, our safeguard plan was officially approved by the Commercial Court of Nanterre yesterday. And we will proceed with the launch of EUR 300 million rights issue, backstopped by the Converting Creditors, which is planned beginning of June. So again, this will lead to the closing of our financial restructuring at the end of the month of June, including the capital increase reserved to the converting creditors. So this financial restructuring will put us in the position to roll out our strategic plan, which heavily relies on reinforcing the profitability of ROIC on our core business as well as activating additional value creation levels like the extension of our iron ore mine in Brazil, as a result of heavy CapEx, which was launched last year. And also, the ambition to innovate in low-carbon energy solutions to seize energy transition growth opportunity. I will have the opportunity to come back on the strategic plan at the end of this call. I will now hand over to Olivier Mallet for more detailed look at our Q1 results.

Thank you, Edouard. Good evening, everyone. So I'll start on Slide 6 with the key figures of Q1 '21. Volume-wise, the volume of tons delivered was minus 20% compared to a year ago. Q1 revenue at EUR 702 million was down 18% compared to last year, but only 5% at constant exchange rates. EBITDA reached EUR 80 million, up 18%. And free cash flow was negative at EUR 62 million, an improvement of EUR 119 million compared to the same period of last year. On Slide 7, some details on the revenue evolution by activity and by region. In our largest segment, Oil & Gas, which represented 52% of our total revenue, the revenue was down 26% at constant exchange rates. In North America, which reacted, as you know, strongly and immediately to the oil price decline post-COVID last year, the revenue decrease was driven by much lower deliveries and slightly lower prices. In EA-MEA, the revenue decrease reflected mainly significantly lower volumes. And in Brazil, the revenue did increase despite an unfavorable currency conversion effect, reflected higher volumes and several price/mix, which demonstrated once again the very positive trend, driven in Brazil by pre-sold E&P, which was definitely in 2020, a positive exception in the oil and gas environment. In petrochemicals, revenue was down 15% year-on-year, mainly driven by lower deliveries, also linked to the Oil & Gas business environment. On the opposite, in Industry & Other activities, the revenue went strongly up, plus 61% at constant exchange rates. In Europe, this was driven by higher volumes. In South America, it came partly as a result of higher revenue from the iron ore mine, reflecting both higher prices for iron ore and higher volumes, which reached 1.9 million tons, up 28% compared with Q1 2020. We also increased our sales to the industry market in Brazil, even taking into account the unfavorable currency conversion effect with increased volume and prices. Finally, Power Gen revenue was down 22% year-on-year, mainly due to the shutdown, mid-2020 of our German plant in Reisholz that was dedicated to tubes for thermal conventional power plants. Moving on to Slide 8 with some other details on Q1 2021 revenue and EBITDA. The revenue decrease of 18% year-on-year was explained as already partly touched upon. First, by a volume impact on the tons delivered of minus 20%, mainly driven by Oil & Gas in North America and to a lesser extent, in EA-MEA, while volumes in Industry were up both in Europe and in Brazil. Secondly, a positive price/mix effect of plus 15%, reflecting a better price/mix in South America as well as the higher mine contribution. And finally, a negative currency conversion of 13%, mainly related to the Real, the Brazilian Real weakening. Moving now to EBITDA on the same slide. Q1 EBITDA reached EUR 80 million, up EUR 12 million year-on-year, with a margin up 3.4 percentage points to 11.4% of revenue, reflecting firstly, an industrial margin slightly up to EUR 168 million or 23.9% of revenue, reflecting a higher mine contribution, combined with the results of the strong saving initiatives launched across the group, which more than offset the decrease in the oil and gas activity in EMEA and in North America. And secondly, once again, a significant reduction of our SG&A costs by 14%, reflecting here as well our strong savings made across last year. On the next slide, some comments on the most relevant lines of the Q1 P&L below the EBITDA. Firstly, the operating result was positive at EUR 27 million compared with a negative EUR 29 million in Q1 last year, reflecting the higher EBITDA, lower depreciation and amortization and limited restructuring charges. Secondly, the financial result was negative at minus EUR 82 million compared to minus EUR 35 million in Q1 2020. While net interest expenses remained stable, other financial charges included the accelerated amortization of the existing bonds costs for EUR 16 million and EUR 7 million of debt restructuring fees incurred to date. While on the other hand, Q1 2020 has been positively impacted by a nonrecurring effect of EUR 26 million in Brazil. Currently, income tax amounted to EUR 40 million, mainly related to Brazil compared to EUR 20 million in Q1 last year. And finally, net result group share amounted to a negative EUR 93 million compared with EUR 74 -- negative. Moving now to cash items, starting on Slide 10 working capital. Net working capital requirement in data sales decreased to 214 days of sales in Q1 '21 to be compared with 119 days in Q1 2020, reflecting as you can see on the slide, the continuous improvement in our working capital management. On Slide 11, some comments on the free cash flow, negative by EUR 62 million in Q1 2021 compared with a negative EUR 181 million in Q1 2020, so a significant improvement. It was mainly driven by firstly, positive cash flow from operating activities at EUR 13 million compared to a negative EUR 31 million in Q1 2020, reflecting the EBITDA increase. And as well, the freeze of the payment of financial interest under the safeguard proceeding opened on February 4 for EUR 44 million, these positives being partly offset by the nonrecurring positive effect that we had last year of the settlement of a dispute in Brazil for EUR 26 million. The working capital requirement increased by EUR 47 million to be compared with an increase of EUR 119 million in Q1 2020. You know that every year, we have a seasonality effect with a working cap increase in Q1. And finally, CapEx remained stable compared with a year ago at EUR 28 million. I will now conclude this part with net debt and cash on Slide 12. The group net financial debt as of March 31 stood at EUR 2.364 billion, an increase of EUR 149 million compared with the end of 2020. In addition to the negative free cash flow of minus EUR 62 million, there was as well a negative EUR 89 million of asset disposals and other items, reflecting, in particular, the accrued interest related to the financial restructuring period for EUR 44 million, the accelerated amortization of the existing bonds cost for EUR 16 million; the last reimbursement of the Nippon Steel shareholder loan to VSB for EUR 9 million; and the acquisition of the Nippon Steel shares in VSB for EUR 7 million. Important point, of course, the cash position amounted to EUR 1.242 billion at the end of March 2021. And on this, I will give back the floor to Edouard.

Thank you, Olivier. So let's move to Page 13 to have a quick look at the outlook for 2021, which reflects what we consider are good dynamics, at least, in some areas. Starting with North America, where the OCTG market is showing a progressive improvement with higher prices and volumes. As far as South America is concerned, the oil and gas deliveries are expected to increase compared with 2020 and in the industry segment, overall, the level of activity is expected to continue its recovery from 2020. Finally, we continue to expect an increased contribution from the iron ore mine, although we factor in and expect a gradual decrease of iron ore prices from the peak levels we enjoy today along the year. In addition, we will continue our strong focus on savings measures, which are necessary for the group to continue to lower its cost base and ensure strict cash control, be it on the PRI and with a strict control of CapEx with an envelope of EUR 160 million. So this has led us to upgrade our guidance for the full year. The EBITDA is now targeted between EUR 350 million and EUR 400 million, while the free cash flow will remain significantly negative between minus EUR 260 million and minus EUR 340 million. Of note, the new free cash flow guidance includes a EUR 60 million additional cash outflow resulting from the exercise of a repurchase option for the debt of a lease contract, the infamous DBOT in Brazil, which will result in lower financial expenses and lower operational expenses for this activity. So this is for 2021. And I'd like to spend a few minutes to walk you through some of the main elements of our strategic plan because as the financial restructuring is complete, we will have all the means in our hands to roll out and execute what we consider is a very robust strategic plan, relying on enhancing the profitability of our cost business through a combination of cost measures, innovation and value additive services. This will allow us to fully benefit from what remains supportive medium-term trends in our core oil and gas market. And in addition, we will activate accretive value creation levels like the iron ore mine in Brazil and new business development expected in the energy transition segment. We have a much leaner and rebalanced financial structure to execute it. After a EUR 1.8 billion debt reduction, a sustained amount of liquidity, allowing us to absorb what remains an extreme volatility in our market and significantly reduced financing costs by around EUR 100 million per year. In addition to all that, we'll benefit from the support and the expertise of our new reference shareholders, Apollo and SVPGlobal, which, all combined, sets Vallourec on a clear path to value creation and allow us to write a new chapter of our history. Moving on to the next slide. And before I detail some of our strategic axis, I would like to highlight that this is all rooted in very strong ESG commitment, which are not new. We've been working on these topics for many years and which explains why we start from already significantly very good and significantly better KPIs than some of our customers. We only highlighted a few. Maybe the most important one is the carbon intensity of our activity at 1.7, 1.66 to be very accurate. In terms of CO2 produced for each [indiscernible] of pipe that we produce and sell. This compares quite favorably to the average of our peers, which is around 2. In terms of energy, it's worth noting that right around 50% of the energy we consume is coming from low carbon sources and 97% of our waste is already recovered. We also carried out a group-wide evaluation of the average salary gap between men and women. And it's not 0, but pretty close at 2.5%. So this situation is what explained our pretty good ESG ratings. We only named the 2 here. We are evaluated AA by MSCI. So that puts us clearly in the top 10% of the companies they evaluated. And similarly, Sustainalytics rated us #13, so again, in the top 10% of their companies in the energy sector services. This being said, we won't stop here. We have set for ourselves the target to reduce by 25% the emission of greenhouse gas of the group by 2025 when we compare with 2017, which puts us in line with the objectives of Paris Agreement, and this was validated by the science-based target initiative, SBTI, last year. So we will have the opportunity as we promote the upcoming capital increase to detail the main elements of our strategic plan. This being said, I'll walk you through the main components. First, as I said on Page 17, the first element is to enhance the profitability of our core business through a combination of enhanced competitiveness and innovation on both products and new services. I think I had the opportunity to comment it already this competitiveness stems from the optimized usage of our most competitive routes, as you can see, on Page 18. The premiumization. So the proportion of premium products produced by Vallourec Tianda, for instance, is targeted to reach close to 50% coming from 2023 these days. And as a result, the proportion of our premium products produced either out of Brazil, that means VSB or out of China in Vallourec Tianda, will quickly reach close to 75% from 62% today. In addition, in Page 19, we continue an extreme focus on gross savings. We have announced a program to generate EUR 400 million of additional gross savings targeted by 2025. This is achieved through a combination of continuous process improvement. It is the result of a very structured and detailed cost savings program initiatives with 200 -- more than 250 initiatives identified and monitored at good level on all our entities. Combined with significant sourcing initiatives, including -- to only name 2, spend control towers and increased sourcing from low-cost countries. This is empowered by specific actions at regional level. In particular, in Europe, the adaptation of our production capacity to plan demand as a result of the closure of the heat treatment plant in Deville in France, which was announced last year and will be completed by midyear 2021. The implementation of headcount reductions across the sites as well as structural working time and shift pattern reduction in Germany. In Brazil, in particular, we have major cost reduction potential at the steel plant as well as the optimization of production flows across our sites, and the internalization of some key functions. And in North America, the name of the game is to maintain an extreme flexibility of the workforce as well as to focus the production on our most competitive flows. Competitiveness is not all about cost savings. It's also the results of continuous innovation efforts. It's significant to note on Page 20, that even in 2020, we patented or we registered 20 patents, 20 new patents, which is very much in line with previous years, and it's a testament of our continuous efforts on R&D. We'll also leverage the brand equity of our VAM product range, which is #1 in the world market for premium connection. This is also supported by what we call the VAM system, a combination of licenses around the world for maintenance and repair, and field service, running services, which is organized around the world. We continuously rely on core innovation with customers. We only highlight a few. I would like to mention the -- an industry-first, which is the first water bushing accessory. This is a safety critical component, which was produced with 3D printing and delivered and run by Total in the North. This will be complemented, completed by a range of services, combining on-site assistance and digital solutions. I've had the opportunity to mention this before. What's interesting for you is to note that the amount of customer reference or the amount of concrete usage of these services is increasing. Be it Smartengo Best Fit, be it Smartengo Inventory or in [indiscernible]. And we have launched our e-commerce platform in September 2020. So this ambition is already taking shape. As I said, this competitiveness will put us in the best position to leverage or to benefit what we consider our supportive term market trends. You can refer to Page 23. As most, if not all analysts, we expect the oil demand to come back to pre-crisis level, around 100 million barrels per day. Some say it will go above, some say it will stay around 100. 100 is what we consider. And what's most important for us to consider is on top of this demand recovery, the industry has to compensate for the natural field depletion. I gave you a few numbers on the slide between minus 3.5% and minus 8% or 9%, which means that on an average basis, the industry has to replace, at least, 3.5% of the oil production to ensure its sustainability. So inevitably, this will result in new E&P CapEx, particularly in what we call winning regions, among which we can mention, Middle East, Brazil and to a lesser extent, United States and China. You have a bit more detail on this in Page 24. I will not dwell on it for the sake of time and highlight the additional levers of value creation. So one should be well-known to you. The exploitation of the full potential of our mine in Brazil. We launched, despite the crisis last year, and expansion CapEx of around EUR 60 million, which will result in the increased production by our mine in Brazil and a very positive payback. I'd like to remind everyone that we are quite proud that our mining operations in Brazil are considered by the authorities as a reference in terms of environment. And it's also best-in-class in terms of cost structure. So we definitely plan to double down on what is a very profitable asset of value. And last but not least, as I had the opportunity to comment already, we have started a couple of years ago, a structured plan to identify and innovate in low-carbon energy solutions to see what we anticipate will be strong growth opportunities in the energy transition. The segments, which we target, are geothermal, wind offshore, fixed wind offshore structured, carbon capture, hydrogen and solar structured. And you have on this slide, a bit more concrete information on what we do in these segments. As you know, we are already active in geothermal. We are already active in solar and the most promising segments, but later in the business plan cycle, are CCUS and hydrogen. So finally and maybe stepping in Olivier's shoes, you have on Page 29, the main elements of our leaner financial structure after EUR 1.8 billion of debt reduction, along with reduction -- yearly reduction of financial expenses, EUR 110 million. Will keep our normative CapEx below EUR 200 million, thanks to our state of the art industrial footprint and a very structured and strict CapEx validation and execution program. And all in all, this -- we will enjoy a much reduced debt leverage going forward. So all in all, a reset balance sheet, new reference shareholders with Apollo and SVP supporting the execution of our strategic plan. Vallourec's teams are extremely engaged. So everything is set to place again, Vallourec on the path to sustainable value creation and write a new chapter of our history. And I'll hand over to Olivier for a few details on the upcoming rights issue.

Thank you. So thanks to this path to value creation that was described by Edouard. We will now soon launch the rights issue of EUR million to be offered to our existing shareholders. You have on this slide, a reminder of the key elements of this operation. So EUR 400 million, a price of EUR 566 per share, which just represent a significant discount of 30% compared to the price of the reserved capital increase with contacting creditors. The transaction will result in the creation of 53 million new shares that represent 23% of the share capital post restructuring before exercise of the warrants. Bpifrance and Ponstel have committed to subscribe for, respectively, EUR 20 million and EUR 35 million. This capital increase is backstopped by the converting creditors and its proceeds. Will be used to repay a portion of their claims. In terms of timetable, we planned to launch it at the beginning of June. Of course, after I of the French AMS. And this concludes this informative presentation.

So we can start the Q&A session, no?

[Operator Instructions] The first question comes from the line of Mr. Alan Spence from Jefferies.

I've got 2 questions. I'll just take them one time. The first is on volumes, which was surprised to see lower sequentially. I'm imagining there would have been some boost from North America, but can you just speak to the performance of the other regions? Were they broadly weaker? Or was it one particular region that pulled it down?

So on the volumes, you may remember that traditionally, Q1 is a seasonally lower quarter than Q4, right? Because I'm not sure when you talk about the comparison, if you compare with Q4 or Q1 2020. If you compare with Q1 2020, you have to keep in mind that this was prepandemic and of course, we are still very much affected by the situation. So apart from North America, in the EA-MEA region, clearly, we are still affected by the lower amount of E&P CapEx by our main customers, on top of a mix, which is not as rich as last year.

Okay. And then a second one, guidance upgrade 3 weeks ago, but spot iron ore prices have jumped nearly $25 per ton in that time. You referenced your assumptions about the declining iron ore prices. But what if prices stay above $200 per ton for a while? How long do you need to see that before your current guidance look conservative?

Let's say, generally speaking, I can confirm that the higher the iron ore price, the better it is for us, quite clearly. We -- I mean, it's hard to answer to your question. We do consider, and we are not alone, by the way, we rely on the consensus. So everybody expects that the current iron ore prices will eventually go down. So this is what we have in our forecast. Of course, if iron ore prices remain at a very high level, this will reflect in our results.

Just one quick last one. The iron ore volumes in 2022, the target of $8.7 million, I think that is a little bit higher than previously communicated. Do I have that correct? And if so, was there a certain optimization or debottlenecking that was driving that?

No, I don't -- generally speaking, the production target for the mine has not changed materially. There may be minor optimization because the teams, they are constantly trying to beat production records, but globally speaking, the order range has not changed.

The next question comes from the line of Mr. Guillaume Delaby, Societe Generale.

[Foreign Language] Congratulations for your results. Two indiscrete questions, if I may. The first one relates to the mine. On the 1.9 million ton, which has been produced in Q1, could we have basically an idea about how much has been used by Vallourec for its own needs? That's my first question. And my second question is about Valinox. I think you mentioned -- not today but a few weeks ago that you wanted to dispose Valinox. Is it still the case? And maybe don't you think it might be worth or might be considering changing your view because maybe Valinox in the current future could become a very interesting asset.

Yes. I will start with Valinox. So I can confirm, we are in the process of divesting. I think it's been pretty advertised in the press, and we expect to close the transaction in the coming weeks. And we stick to our decision, which was to consider that the prospects for the nuclear industry are very uncertain and probably very late in our business planning process. And so for Valinox and for the French nuclear industry, we consider that Valinox will be in a much better environment with the acquirer than with us. As far as the mine is concerned, I'll ask Olivier to answer.

So order magnitude, Guillaume, 25% internal use.

We currently don't have questions on the line. [Operator Instructions] There are no more questions on the line.

Okay. So it means we've been either very, very convincing or not at all. But so I will thank you...

Sorry to interrupt. We have 2 questions that have just appeared on the line, if that's okay.

Just in time.

So the next question comes from the line of Mr. Alan Spence from Jefferies.

I was just wondering if you could speak a little bit about your CO2 emissions target to 25%. Is that CO2 intensity? Is that total mission? And just a brief overview of kind of what you think drives that emission reduction?

So to be clear, it's the total emission. And it's a combination of a lot of factor, in particular, of course, reducing the intensity itself. And bringing this under control in all our plants across the world. Also looking at -- obviously, the upstream content of the CO2 as well as the electricity.

The next question comes from the line of Jean-Luc Romain, CIC Market Solutions.

My question also relates to CO2 emissions. Could you remind us how much the forest -- your forest in Brazil contributes to the reduction in CO2 emissions of Vallourec? And maybe in the reductions of CO2 per ton of tube, is EUR 1.7 billion already including the absorption of CO2 per forest?

Yes. So I'm not sure you want me to start detailing the exact evaluation of the amount of CO2 captured by forest in the roots, in the leaves and in the trunks because -- so the international agencies, which validates our numbers, do not consider the CO2 absorbed by the growth of the trees as sustainable. So the only part to take into account is the CO2, which is captured in the roots of the trees, which is only a minor part. So I would slightly correct your statement. The reason why our carbon intensity is lower than maybe some of our peers directly relates to the low carbon content of the electricity we use, primarily, I would say, and the use of scrap steel in some of our operations, coupled with very high-efficiency of our processes probably compared with our peers.

Okay. I didn't mean to minimize your performance. But I was -- I [indiscernible] that had more of an impact than it was more considered as sustainable.

We currently have no questions on the line. [Operator Instructions] We currently have no more questions on the line.

Okay. Thanks, everyone, for your attention, and have a great evening. Bye-bye.

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