Vallourec S.A. ($VK)

Good day, and welcome to Vallourec 2026 First Quarter Results Presentation hosted by Philippe Guillemot, Chairman of the Board and Chief Executive Officer; and Nathalie Delbreuve, Chief Financial Officer. [Operator Instructions] And now I would like to hand the call over to Daniel Thomson, Director of Investor Relations. Please go ahead, sir.

Thank you, Laura. Good morning, ladies and gentlemen, and thank you for joining us for Vallourec's First Quarter 2026 Results Presentation. I'm Daniel Thomson, Director of Investor Relations at Vallourec. I'm joined today by Vallourec's Chairman and Chief Executive Officer, Philippe Guillemot; and Vallourec Chief Financial Officer, Nathalie Delbreuve. Before we begin our presentation, I would like to note that this conference call will be recorded. A replay will be available following the call. You can find the audio webcast on our Investor Relations website. The presentation slides referred to during this call are also available for download here. Today's call will contain forward-looking statements. Future results may differ materially from statements or projections made on today's call. Forward-looking statements and risk factors that could affect those statements are referenced on Slide 2 of today's presentation. These are also 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. I will now turn the call over to Philippe Guillemot.

Thank you, Dan. Welcome, ladies and gentlemen, and thank you for joining us to discuss Vallourec's First Quarter 2026 results. You can see today's agenda on Slide 3. Before we discuss today's results, I want to briefly address the situation in the Middle East and what it means for our employees. From the very beginning, ensuring the safety of our people has guided every decision we have made. Given our strong footprint in affected areas, I would like to express my deep appreciation to our teams for their dedication and professionalism over the past several months. Now let's turn to Slide 5 to discuss our results and outlook. As described in our press release this morning, we have changed the presentation currency from the euro to the U.S. dollar which better reflects the performance of our activities, which are mainly carried out in U.S. dollars. In the first quarter, we delivered robust results with group EBITDA of $220 million or EUR 187 million above the midpoint of our guidance. EBITDA margin improved by 200 basis points sequentially to 22.6% in thanks to our intense focus on execution and cost management. In the Tubes segment, EBITDA per tonne of $724 returned to the high point we achieved in Q3 last year, above our guidance provided in February. This was achieved despite the challenging environment in the Middle East. We generated strong cash flow, once again, converting over 60% of EBITDA to cash which was 10 percentage points higher than in Q1 2025. This clearly demonstrates the continued improvement in our earnings quality, driven by our strong focus on operational efficiency and working capital management. After $107 million of share repurchases, we increased our net cash position to $67 million at the end of the quarter. Turning to the outlook. We expect Tubes volumes and EBITDA per tonne to decrease sequentially in the second quarter, temporarily impacted by the Middle East conflict which I will provide further details on later in the presentation. In Mine & Forest, production flow is expected to be around 1.4 million tonnes. As a result, we expect Q2 EBITDA to range between $175 million and $205 million. We expect Q2 to represent the low point with improvement in EBITDA in H2. In the U.S., booking activity remains very strong, and we are seeing certain customers preparing to increase drilling activity. This, combined with lower imports and recently announced trade investigations is leading to improved market pricing to be reflected in our results from the third quarter. In international markets, our primary customers in the Middle East have remained resilient. Meanwhile, in select Middle East countries where we do not maintain local presence, order postponements and shipping delays have impacted our invoicing talents. Outside the Middle East, tendering activity is high, and we see customers moving to accelerate their development activity notably in offshore markets. We expect to communicate on several important high-value contracts awards in this domain over the coming weeks. In New Energies, we see clear commercial momentum demonstrated by the recent signing of our long-term agreement with Fervo Energy were up to $800 million in potential revenue over the next 5 years. This follows the announcement in January of our partnership with proving the need for reliable, clean baseload energy to facilitate data center built out in the U.S. I am pleased to announce that Vallourec will post a deep dive on the geothermal market and our favorable positioning on June 15 to further illuminate this long-term opportunity for our investors and stakeholders. Turning to capital allocation. We repurchased EUR 91 million of shares in Q1, while the pace of the buyback has slowed, we reiterate that any unused funds from the program will be added to the interim extraordinary dividend in August. Let's move to Slide 6. With the excellent Tubes performance in Q1, we delivered a higher quarterly EBITDA per tonne than our primary peer for the first time since the launch of the New Vallourec plan. We also continued to outperform on return on invested capital. This result demonstrates the effectiveness of our value-over-volume strategy, excellent cost adaptation enabled by our fit-for-purpose in the [indiscernible] and our ongoing efforts to improve the efficiency of our operations. Turning to Slide 8 for an overview of the Middle East market in the context of the ongoing conflict. The region accounted for 22% of our Tubes revenue in 2025 within the typical contribution of 20% to 25%. Importantly, Saudi Arabia and the UAE, where we have local presence account for around 2/3 of our Middle East sales. It is also worth highlighting that most of our sales are focused on onshore drilling applications where reactivity has been more stable compared to offshore applications since the onset of the country. In Middle East, countries which we serve directly from our export hub in Brazil and China, OCTG demand has remained resilient. We have not seen any other cancellations to date. However, we have been experiencing select order postponement and shipping delays in certain countries. We continue to work closely with these customers to leverage alternative logistic routes to support their current programs and recovery plans. Notably, thanks to the commitment of our teams, revenue in the region increased year-over-year in Q1. Let's turn to Slide 9 for a closer look at Vallourec operating model in the key Middle East markets. In Saudi Arabia, which accounts for more than 50% of the regional rig count. Vallourec has a strong local presence. In this market, domestic steelmakers typically source iron ore from India delivered through Oman. We sourced the majority of our same finished tubes locally from suppliers such as MPTG. We then heat treat and read these Tubes tubes in our in-country facility in demand. We also provide tubular management services, including warehousing at our yard and therefore, maintain several months of finished tubular inventories. This local presence ensures that we are well equipped to continue supporting our key customers in the current environment. [indiscernible] we also provide tubular management services and therefore, maintain several months of inventory on behalf of our major local customer. However, this market is sell from our international export hubs. We have tested and approved alternative routes by passing the Strait of Hormuz to serve our customers, including ports in Oman and the Red Sea. Outside of Saudi Arabia, we serve customers directly from our export hubs and do not maintain significant inventories on the ground. So far, we have seen a limited number of shipments being diverted or offloaded for future delivery. We continue to work with our customers to use alternative logistic routes, including trucking. Overall, for our largest customers in Saudi Arabia and the OE business has largely continued and interrupted. While we are experiencing select order postponement and temporary delays in shipping in the remaining countries. For these reasons, and assuming no volatile deterioration, we maintain our outlook for higher volumes internationally in the second half. Let's turn to Slide 10 to examine or value is poised to respond to increased drilling activity. With the increase in oil and gas prices and rapidly strengthening supply fundamentals our customers around the world are beginning to respond by accelerating their development plans. We expect this increase in activity to translate first to higher short-cycle activity in regions like the U.S. and in certain offshore tieback project while longer cycle projects should support higher activity from 2027 onwards. We expect higher levels of tubular demand as a result, and we are well positioned to deliver incremental volumes as we support our customers with our plans. As we highlighted last quarter, we are making several investments into value-added downstream capacity that will debottleneck our operations. This now also includes the upgrade of our recently acquired coating facility in Brazil. Turning to our new energies offering on Slide 11. As energy security concerns play an increased role in national level decision-making, we have developed proven technologies that support countries to develop and store more of their own energy sources. This includes traditional and next-generation geothermal tubular solutions our deli vertical underground resolution for green hydrogen and Tubular solutions for the underground storage of natural gas and CO2. We have also entered into collaboration with key stakeholders to explore and support the development of white or naturally occurring hydrogen and helium production. Now let's turn to the international OCTG market on Slide 12. You can see on the left chart, Demand remained stable in international markets outside the Middle East in Q1. Within the Middle East, you can clearly see the divergence between onshore activity which was relatively stable and much weaker offshore activity. I remind again that Vallourec is mostly exposed to onshore drilling activities in the regions. Impacts by country very widely. And in fact, Saudi Arabia's rig count has increased in every month in 2026 so far, confirming the activity acceleration expected this year despite the contract. Looking ahead, we are encouraged by the size and breadth of the tendering opportunities we see in both OCTG and our line pipe business many of which relates to offshore and deepwater development in both established and emerging basins with favorable economics. We also continue to see a robust and growing demand in markets with higher levels of unconventional activity. On the right-hand chart, the latest outlook from Rystad shows an inflation in market pricing in Q1. As mentioned on previous calls, our premium portfolio allow us to outperform these indicators. Let's turn to Slide 13, where we focus on the U.S. market. On the demand front, the oil rig count remained stable over Q1 and has not yet responded to higher prices. That said, recent market commentary and the bookings cadence of our customers suggest higher levels of activity are planned from H2 2026. Gas-directed activity fell slightly over the quarter but remains up around 20% year-on-year. We expect gas-related drilling to be well supported by increasing demand for U.S. LNG as projects come online and the U.S. substitute for gas blocked behind the Strait of Hormuz. Looking at the supply side, imports remained below the 12-month average in the year-to-date, especially for seamless products. We expect the recently launched investigation into unfair trade practices in Austria, largest single source of seamless imports always as Taiwan and the UAE to result in greater market share for local producers such as Value. On the right, seamless spot pricing has increased every month since January and distributor sentiment has rapidly improved. We will see the benefit of higher prices in our P&L from the third quarter. Overall, we see a positive oil and gas market ahead complemented by the growing activity levels of our existing and prospective geothermal customers. I will now hand the call over to Nathalie to comment our financial results.

Thank you, Philippe. Let me now walk you through our Q1 2026 results. For the first time this quarter, they are displayed in U.S. dollar as the group changed the reporting currency of its consolidated financial statements as of January 1, 2026. The reason for this change in reporting currency from euro to U.S. dollar is to better reflect the performance of our activities, most of our revenues being denominated in U.S. dollars and to make our financial information more visible as our main customers and main peers already reported in U.S. dollars. To ensure a smooth transition, you can still find all our usual figures denominated in euro in the appendix of our results press release published this morning. Starting on Slide 15. We see on this slide our execution track record with key metrics. In Q1, as I will now show you, we have delivered another strong quarter. despite the ongoing disruption in the Middle East adding further challenges. Resilient margins and strong generation strong cash generation, leading to further balance sheet strengthening. Group EBITDA on the top left, the margin was strong at 22.6% in Q1, improving versus Q4 2025. It reflected a more favorable product mix and strong cost allocation. Total cash generation in the quarter remained robust at approximately $135 million reflecting stable free cash flow and lower restructuring and nonrecurring items year-over-year. Net working capital days were at below 90 days in Q1 at 86 days, with a slight increase mainly as a function of the decline in volumes and revenues. In Q1, we still released cash from working capital. Net cash at the end of the quarter is positive and slightly stronger than at the end of December 2025. after $107 million share buyback. So in Q1, we continued to build on our solid track report. On Page 16, a Group revenues amounted to $975 million, down sequentially mainly due to lower shipments to the Middle East and to the Gulf of America. However, EBITDA reached $220 million, slightly higher than Q1 2025. The year-over-year slight improvement was driven by higher pricing and improved mix over all regions in Tubes, partially offset by lower volumes in Tubes and a lower contribution from Mine & Forest. Adjusted free cash flow was $177 million, demonstrating strong cash conversion again this quarter. We ended the quarter with a net cash position of $67 million, an improvement of $21 million versus year-end 2025 after $107 million of share repurchases. On Page 17, in Tubes, volume sold declined to 272,000 tonnes, reflecting temporary shipment delays and select order postponements to the Middle East as well as lower shipments mainly to the Gulf of America. Average selling price, as you can see, remained high at $3,304 per tonne supported by an improved mix. Geographically, on the bottom of the slide, we can see a higher share of revenues from the Middle East compared to Q1 2025. This is supported by resilient customer activity, especially in Saudi Arabia and the United Arab Emirates. Moving to Tubes' profitability on Slide 18. Despite lower volumes versus Q4 2025, Cub's EBITDA remained at a high level at $196 million and the EBITDA margin significantly increased quarter-over-quarter to 22%. EBITDA per tonne reached $724, up 14% sequentially and 31% year-over-year. This strong performance reflects a favorable mix as we maintain our focus on value over volume and the very good adaptation of our cost base during the quarter. Turning to Mine & Forest on Page 19. Production sold amounted to approximately 1.3 million tons, down 15% year-on-year. This was mainly impacted by record rainfalls in the Minas Gerais region during the quarter. Segment revenues were stable at $95 million. EBITDA for the quarter is $38 million with margin of approximately 40% with lower iron ore volumes and some negative FX effects. On Slide 20, we continue to deliver, as you can see, a solid bottom line on this chart. In Q1 2026, net income group share was $87 million. That is 9% of total revenue. from EBITDA to net income, we can see depreciation and amortization, very much in line with previous quarters in Q4 2025 financial results as well at minus $20 million, and the other pillar of the bridge is quite limited. It includes, as usual, restructuring and some one-off impacts. Turning to Slide 21. Cash generation remained very strong, with adjusted operating cash flow less CapEx at around 56% of EBITDA. We achieved a further working capital release in Q1 following the Q4 performance, mainly reflecting disciplined inventory management and solid collections. CapEx increased slightly quarter-on-quarter but well in line with our expectations. That is to be towards the upper end of our previously stated EUR 150 million to EUR 200 million range. That is USD 175 million to USD 225 million. On Slide 22, you can see that our financial position remains very strong. As of March 31, 2026, our net cash position amounted to $67 million, with gross debt reducing to $994 million. Liquidity remained strong at approximately $1.9 billion. This robust balance sheet gives us significant flexibility to navigate market volatility and continue investing in select growth opportunities. I will now hand the call back to you, Philippe.

Thank you, Nathalie. Let's turn to Slide 23 to discuss our outlook. Starting with our Tubes business. In the second quarter, we expect volumes and EBITDA per ton to decrease sequentially given a longer period of disruption in the Middle East compared to the first quarter. We expect to be compensated for certain concerted costs later in the U.S. For the full year, we expect sustained strength in sales volume, thanks to Vallourec's market share gains during 2025 and higher activity levels among certain customers. We expect U.S. market prices to increase further on improving industry supply-demand conditions more than offsetting increases in energy and raw material costs. In our international Tubes business, we continue to expect lower sales volume in H1 2026 due to slower bookings in 2025. as the previously mentioned logistical delays in some Middle East markets. We see activity recovery in key international markets, setting the stage for higher second half volumes assuming no further deterioration in the percent. We expect market pricing to remain broadly stable versus the second half of 2025 with discrete customer contracts, driving selective price upside. For Mine & Forest, we expect production so to be around 1.4 million tonnes in the second quarter, and we confirm our prior full year guidance for 5.5 million tonnes of sales volume. At the group level, we expect our second quarter EBITDA to range between $175 million and $205 million with Q2 expected to be the low point of the year. Let's conclude on Slide 24. We are delivering further improvements in profitability driven by our intense focus on operational excellence and cost management. Our local presence and product mix is supporting performance in key Middle East markets with resilient customer activity. We see high tendering activity in international market, setting the stage for volume growth from H2 2026. Meanwhile, certain U.S. customers are increasing their bookings tenants with upside for U.S. pricing. Thank you again for your attention. Nathalie and I are now ready to take your questions.

[Operator Instructions] We have a question from Matt Smith from Bank of America.

I wanted to start on costs, if I could. Exceptional cost control in the first quarter, a very strong EBITDA return number in Tubes despite the lower top line that you've referred to I just come back to picking into the details a bit how much of that is product mix in the quarter, I suppose, just trying to get to how sustainable the current cost level that you booked in the first quarter is? And I suppose could I tack on to that could additional costs related to logistics in the Middle East change that picture at all on the cost line as we go through the year, please? And then the second question would be turning to the U.S. as you noted, seeing some early signs of increased activity, certainly seen signs of increased pricing. I guess my question was just do you -- from a Vallourec perspective, do you see upside in terms of sales volumes as well to your U.S. unconventional customers? Where are you versus your maximum capacity, I suppose, is my question.

Well, going back to your first question. In fact, we have to go back to the New Vallourec plan. You see what is our industrial footprint today. and the geographies where we are operating. And what you see in Q1 numbers is the consequence of this New Vallourec plan. We are in geographies where we know how to flex capacity when volumes are decreasing. And as a consequence, we are able to post positive margin even with fairly low volume in some of the plants we have in these regions. So this is structural today. This is a given, this is an asset. And this means, by the way, that we have a significant operating leverage when volume will pick up, obviously, this will translate in even better margin. So the mix has obviously a role to play. But here, in the case of Q1, definitely, it's our ability to manage cost, to flex capacity when needed that has led to this very strong EBITDA per tonne, which is, as we mentioned, higher than our main peers. Going to the U.S. volume has been strong for the last few months. As we said, we anticipate it will be the case in the next few months, too. And you saw last year that we announced a major investment in our young stand plant with a new line to produce our latest generation of [ high ] to connection. So this will come live at the beginning of next year. So this is just an example of what we do and where we invest in order to be able to obviously capture additional volume.

We have a question from Guilherme Levy from Morgan Stanley.

I have 2 questions, please. The first 1 on your second Q guidance. Could you perhaps walk us through the building blocks between the low end and high end of the guidance and how that relates to the sort of timing assumptions that you are working with in terms of the reopening of the trade? And then secondly, you mentioned a compensation cost overruns post second Q to this year. Could you also say a few words about insurance discussions, how that compensation might take place? And if the recovery of those costs is expected at the moment more for 3Q? Or is there any chance that could potentially slip into next year?

Yes. As usual, we give a range for our guidance. So we see -- but impact in Q2, as I said earlier, we see some impact volume in Middle East and extra costs that, as you mentioned, will be negotiated with customers and recovered later after Q2, typically logistic costs. We have alternative routes to deliver this incur additional cost to be discussed and negotiated with customers, which, by the way, understand that obviously, they need to look at it and enter in a fair negotiation on this cost because they need us today. They need us to continue to operate as they are, especially the ones who are still at full theme like [ ADNOC ] in the [indiscernible]. So I think, yes, that's normal life. That's part of the business. Will we conclude all this negotiation in H2 and some of it in early '27 could be, we'll see. But today, we see a good will on our customer side to enter into this discussion for the reason I explained earlier. Now let's step a bit backwards on assumptions behind Q2 about the Strait of Hormuz. Let's put things in perspective. Again, I keep telling you 2/3 of our revenue in Middle East is with customers that can bypass the Strait of Hormuz where we have a significant local content, as you have understood from my description and a note that we can deliver using all the costs and trucks to deliver the pipe. So even if the Strait of Hormuz remain close for a while and as long as these 2 customers continue to operate, I think we'll continue to perform in the regions and we will continue to have volume maybe even higher this year than they were last year in the region as we had in Q1. So -- and is the Strait of Hormuz remain close even longer. It's likely that all the regions in the world where we are, we'll compensate for the few countries that are depending on the Strait of Hormuz. It could be the U.S. could be Brazil where we are as an example. So again, this just to illustrate the fact that we are very value very resilient in the current circumstances.

We have a question from Jean-Luc Romain from CIC CIB.

I have 2 questions, if I may. First question is about your new framework agreement with Petrobras, which starts in Q4, do you expect more volumes or more prices or both? And what kind of increment should we expect in terms of mix price? Is it 1 figure, 2 figures? We're not sure you want to tell this. Second question is about an investment in geothermal previous management did in [ GreenFire ] Energy in 2022. Could you update us on this investment?

Well, Petrobras, as you mentioned, we expect the first volume of this new long-term agreement to come end of the year in Q4 this year. But what's going on right now just make this contract even more valid. As I said in my comments, we see a lot of offshore activity and tendering activity, and we will announce in the next few weeks, a few major contracts in this area, both in OCTG and Land Pipe. So more to come. and even more Land Pipe. As you know, we have now added the thermal insulation business to our portfolio with the acquisition of [ Terme ] which is running at full speed right now. And that, obviously, we invest into. You mentioned the investment in GreenFire, which happened just at the time I joined. So it was not my decision. Nevertheless, it was a bet. When you invest in new development, new start-ups, sometimes you win, sometimes you lose. Well, I won't say that GreenFire was a great bet. Nevertheless, we have starting in '22, started to work with ADS and we help them to develop their new geothermal concept, advanced and enhanced geothermal concept. And this 1 are very successful. And when you see at Fervo, the contract we have signed and the volume, obviously, we have already now this year with them, it's definitely a clear success. More to come on June 15th, we have the opportunity to obviously tell you more about this new geothermal concept, our contribution to their development and we see what potential market it represents for value.

[Operator Instructions] We have a question from Guillaume Delaby from Bernstein.

Yes. Congrats for the results. And I think it's a great stuff to organize [ Geosol ] day because it's going to be significant. I would like maybe to come back to the first question, the question of future operating leverage. So a naive analysis for your kind of industrial business is you increase EBITDA and EBITDA margin by a combination of growing volumes and higher pricing. Up to now, we had higher EBITDA, mainly thanks to value over volume. But in fact, we increased EBITDA despite a decline in volume. So my question is very, very simplistic, if we have an increase in volume in Q4 2025 in Q4 2026 and in 2027. This should logically, correct me or not, translate into significant operating leverage, correct?

Yes. So thank you, Guillaume, for your comments. Operating level yes, you remember that after the New Vallourec plan, I announced that we have launched a new plan with NIM is from good to great. So we have many activities to improve our way of managing our operations. And all this starts to translate into the numbers you see beyond the higher flexibility we have on our cost, obviously, we are improving on every front, making things good first sign makes a difference at the end of the day on our cost structure. So this is what you see. And obviously, there is more to come because it's a multiyear program, which we are deploying throughout the group. So going back to your question, can we expect when volume will increase to see, yes, to -- yes, the impact of this ability to better manage costs, to reduce costs, combined with the already value over volume and pricing strategy. Yes, definitely, I can answer positively. You remember that when I launched the New Vallourec plan, I had 2 main objectives: one, to make the balance sheet of the group net debt 0. This was achieved end of '24, and to close the margin gap with our main peers. And you can see quarter-after-quarter how we progress towards this objective. So I remain totally focused with my team to deliver, obviously, this second objective.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you. Well, there is much uncertainty around the situation in the Middle East. I'm confident that our business can adapt more rapidly than before and take advantage of the improving medium-term outlook we see ahead with our local industrial footprint and premium technical offer, alongside ongoing efforts to improve Vallourec's operations and capture rapidly expanding addressable markets in new energies, we are well positioned to drive further value creation. Operator, you may end the call.