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[Audio Gap]Edouard Guinotte, Chairman of the Board and Chief Executive Officer; and Olivier Mallet, Deputy CEO and Chief Financial Officer. I'm pleased to welcome you to the Vallourec Q3 2021 results. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to Jerome Friboulet, to begin.
Good afternoon, everyone. Thank you for joining us for Vallourec's Q3 2021 results presentation. We meet today to comment these results we have, Edouard Guinotte and Olivier Mallet. This conference will be recorded and a replay will be available. It is also webcast -- audio webcast 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 those future results may differ materially from statements or 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 our slides 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 leave the floor to Edouard Guinotte.
Thank you, Jerome. And moving on to the key highlights of this call on which we will come back in more details throughout this intervention tonight. So first of all, looking at our Q3 results and comparing year-on-year, we are posting solid -- both solid revenue and EBITDA growth, driven by essentially the strong dynamism of the oil and gas market in North America. And also the higher mine contribution compared with last year. This is driving us to reach EUR 128 million EBITDA, which is up 80% year-on-year with the EBITDA margin increasing to 15.3%. I will also point to the acquisition of the minority shares of VAM USA and Vallourec Star in the U.S. for a combined amount of EUR 118 million, which is leading us to enjoy the 100% ownership of these entities at a time when this market starts to boom again. Finally, as Olivier will detail, we have a strong liquidity position at the end of September at slightly above EUR 1 billion. In terms of the outlook for the full year 2021, Vallourec is not immune to the recent decline in iron ore prices. And so based on their current level, we target full year EBITDA to be close to the lower end of the previously communicated guidance between EUR 475 million and EUR 525 million. The other piece of this outlook is we enjoy stronger than anticipated order intake leading into 2022. And this, combined with the evolution of raw material and energy prices, will result in a larger increase in inventories and working capital requirements through year-end. As a result, Vallourec now targets free cash flow consumption for the full year to be between minus EUR 380 million and minus EUR 300 million, representing mainly, again, the rebuilding of working capital along with the activity recovery and, of course, inclusive onetime costs associated with the financial restructuring incurred earlier this year. The second part of our communication tonight and arguably the most important is our announcement of a decisive move to strengthen Vallourec's competitiveness and profitability. It's a 2-legged transformation with, on the one hand, launching the disposal process of our German assets, combined with the progressive transfer of their rolling activity for oil and gas in EA-MEA to our Brazilian unit. It's expected to be a game changer for Vallourec's performance in international oil and gas markets. Our hub in Brazil will be able to deliver the full range of premium tubular products for this market, allowing the group to benefit fully from its better competitiveness, enhanced margin and cash flow generation. In addition, this will generate a significantly positive impact on our carbon footprint, driven by the excellent carbon intensity -- CO2 intensity of the Brazilian operations when compared with Germany. So this decisive move is expected to generate clear benefits for Vallourec and its stakeholders in the form of an additional EUR 130 million EBITDA run rate increase, combined with a CapEx reduction of right around EUR 20 million.And as I alluded to, the CO2 intensity of pipe produced in Brazil is lower than the ones produced in Germany by over minus 30%. So this is the highlights. I'll now hand over to Olivier for the detailed look into our Q3 results, and I'll then take over to give more details on this last move.
Thank you, Edouard. So good evening, everyone. On Slide 6, a reminder of the key figures. Volumes up 23%, revenue up 16%. EBITDA up EUR 57 million or 80% and a negative free cash flow due largely to the working capital rebuilding along with the stronger activity.On Slide 7, highlights on the revenue evolution by market, starting with the largest one, Oil & Gas, 49% of our total revenue, where the revenue was stable compared to Q3 2020. In North America, it's more than doubled with higher volumes and higher prices. In EA-MEA, as expected, revenue decreased, reflecting the lower level of orders booked during the COVID crisis. And in South America, revenue increased, reflecting mainly higher deliveries of project timeline.In the small Petrochemicals segment, revenue up 43% year-on-year. In Industry & Other Activities, a strong increase, plus 64% at same exchange rate. In Europe, driven by higher volumes. In South America, resulting both of higher revenue from the iron ore mine, as well as higher sales to the industry market in volumes and prices. Finally, the Power Generation segment revenue was down 54%, reflecting notably the disposal of Valinox Nucléaire at the end of May 2021.Moving to Slide 8 with the revenue bridge and highlights on the EBITDA evolution. First, the revenue increase year-on-year can be broken into, first, the volume impact of plus 23%, mainly driven by Oil & Gas in North America and by Industry, offset by a negative price mix effect of minus 8%, mainly coming from mix elements and from Oil & Gas in EA-MEA, more than offsetting the recovery in prices in North America. And there was a small positive currency conversion effect.Moving now to EBITDA. It was up EUR 57 million year-on-year, with a margin up 5.4 percentage points to 15.3% of revenue. It did reflect, first, an Industrial margin of EUR 207 million to be compared with EUR 154 million in Q3 2020, reflecting higher deliveries and prices in Oil & Gas in North America, higher contribution of the mine in volume and pricing and savings, all this much more than offsetting the increase in raw material and energy prices and the lower results in Oil & Gas in EA-MEA. Our SG&As were again slightly reduced. And in percentage of revenue, they stood at 9% versus 10.9% (sic) [ 10.8% ] in Q3 last year.On Slide 9, some comments on the most relevant lines below EBITDA. First, the operating income strongly increased and was positive at EUR 72 million compared with EUR 7 million in Q3 last year, mainly resulting, of course, from the EBITDA improvement. To be noticed, as well, the financial income was negative at minus EUR 36 million compared to minus EUR 64 million in Q3 2020, reflecting the new balance sheet structure with less indebtness. To be noticed as well, income tax amounted to EUR 41 million compared with EUR 21 million last year, mainly related to Brazil. As a result of all these elements, net income group share amounted to minus EUR 7 million to be compared with minus EUR 69 million year-on-year.Let's move now to cash and starting with working capital on Slide 10. As you can see there, the net working capital requirements, although increasing in value since the start of the year due to the recovery in our activity, was reduced in days of sales compared with Q3 2020 at 111 days compared with 120 days. What does it mean in terms of free cash flow? Slide 11 with a breakdown of this negative free cash flow of EUR 103 million compared with a positive EUR 35 million in Q3 last year. Cash flow from operating utilities first was up at EUR 18 million this year compared to a negative EUR 32 million in Q3 last year, reflecting mainly improved EBITDA and the lower financial interest paid, partially offset by higher tax cash out. The working capital requirement increased by EUR 93 million as a result mainly of the activity increase versus a decrease of the same amount, EUR 94 million in Q3 last year, when our activity was at the trough of the COVID crisis. And CapEx was similar to the one of Q3 last year at EUR 28 million. I will conclude this part with the net debt evolution. Net financial debt at the end of September stood at EUR 993 million, up from EUR 720 million at the end of June 2021. This increase to be noticed, include a negative EUR 171 million in the line asset disposals and other items, resulting in particular on the acquisition of the minority shares in a VAM USA in July for EUR 35 million and in Vallourec Star in September for EUR 83 million, giving us the full ownership now of all our subsidiaries in the U.S. as we have done in H1 in Brazil.Our liquidity position at the end of September is solid at slightly more than EUR 1 billion made of cash available for EUR 552 million and our undrawn committed credit facility for EUR 462 million. And on this, I will hand over to Edouard for him to detail the group's outlook and present our initiatives in Germany and Brazil.
Thank you, Olivier. So moving on to the outlook for the full year 2021. And just to give a bit more details on what I said in my introductory remarks. So in North America, the Oil & Gas market improvement is confirmed and continue to materialize in a significant increase in prices, in addition to the progressive recovery in volume driven by the rig count. In South America, as far as the Oil & Gas segment is concerned, the volumes delivered is confirmed to increase compared with last year. On the Industry segments, the activity is maintained at a high level and benefit from favorable pricing in Brazil. And finally, the mine, again, comparing with the full year 2020, is expected to bring higher contribution even though at the tail end of 2021, we are affected by the sharp decrease in iron ore prices, which is far sharper than what was earlier anticipated. The picture is quite different in the area, Europe, Africa and Middle East, Asia. 2021 on the Oil & Gas market remains significantly impacted by the sharp slowdown in order intake last year. However, there's a positive trend in the tendering activity as well as the order intake which should positively impact 2022 deliveries. As far as the Industry segment is concerned, the economic recovery translate into higher volumes. However, the very competitive nature of this market is further affected by high raw material price and energy inflation weighing on margins.As far as the operations are concerned, the cost savings initiatives are progressing very well in line with our targets. And we maintain a strict control on cash, particularly. Maintaining the CapEx envelope as planned around EUR 160 million. So as a result of all of this, as I already indicated, full year EBITDA is expected to be close to the lower end of the previously communicated target, EUR 475 million to EUR 525 million target. And the stronger-than-anticipated order intake leading into 2022, combined with the evolution of raw material and energy prices, will result in a larger increase in inventories and working capital requirements through year-end. And as a result, we targeted free cash flow consumption to be between minus EUR 380 million and minus EUR 300 million, reflecting mostly the rebuilding of working capital, along with the activity recovery and taking into account the onetime costs associated with the financial restructuring.So this ends up our coverage of Q3 results and 2021 outlook. And I would like now to dedicate a bit of time to detail this decisive move we announced today.So first of all, I will come back for the ones who are not too familiar with our setup, a few reminders on the slide about our industrial footprint, which has been significantly transformed already over the past years. As you can see on Slide 17, our production capacity is now equally balanced between our 4 operating regions. And we progressively, since [ 2016 ], increased the share of what we call our new production route -- so the Brazilian hub and the Chinese hub, to serve Oil & Gas EA-MEA customers. As a percentage of our activity, 19% of our sales used to be supplied through either Brazil or China in 2015. This percentage has increased to 62% as of 2020, too. So we had already started to strengthen our competitiveness on these segments. In addition, as I said, throughout the year, we acquired significant minority shares held by our former partners, Nippon Steel and Sumitomo Corp, both in our U.S. subsidiaries, VAM USA and Vallourec Star, and also VSB. So in the U.S., as I said, it gives us full ownership and full operational flexibility in our industrial footprint. At the time, markets are rebounding. So we consider it a well-timed acquisition of interest. And in Brazil, this gives us an additional 300,000 tonnes per year of additional capacity accessible for us from this very competitive hub. So all in all, we have more flexibility to develop a global and integrated low-cost supply strategy to serve our Oil & Gas market.So the result of all this is shown on the map, Slide 19, where you can see that North America is very well suited, very low CO2 intensity to supply the U.S. market, which is very well oriented. And we have in Brazil and China very competitive hubs to serve both their domestic market and the competitive Oil & Gas EA-MEA market. And the share of Europe is shrinking with upstream operations located in Germany, 3 rolling mills, smaller finishing activities in France and in the U.K., serving both the local industry markets focused in Europe and completing the premium offer from Brazil and China to serve Oil & Gas EA-MEA with the very specialized products. So this is the situation as of today. And we have to realize that the setup in Europe and particularly in the Germany are still significantly challenged, as indicated on Slide #21. So 21, again, for those who are not familiar with our activity we detailed the setup in Germany and the rest of Europe. So Germany is where we host the rolling mill, so where we transform the steel bar into stainless steel pipe, with 3 workshops and 2 locations all around the Düsseldorf area. One is dedicated to the small diameter, Mülheim, and the other 2 in Rath, in the suburbs of Düsseldorf, dedicated to medium tubing and large tubing , and as I said, dedicated to both Oil & Gas EA-MEA and Industry in Europe.The financial performance of this setup has been challenged for the past few years as a result of 2 things: number one, the industry markets in Europe are very competitive, suffering from overcapacity, and additional capacity available from producers in Eastern Europe. And the share of the Oil & Gas activity, which we allocate to the German mill, has been decreasing along with the increase in Brazil, resulting in a too low load of the German mills, shown on the top right graph. And the margins generated by this activity resulted -- was too low -- proving to be too low to cover the fixed cost of these operations. And this has resulted for the past 6 years -- 7 years, including this one -- in an annual cash consumption of above EUR 100 million per year as a result of this. And this despite several turnaround savings plan which were implemented in 2015, '16, '17. So last year, as you remember, we closed a plant in Reisholz which was dedicated to the conventional power generation business. So the teams in charge of this area have tried many, many different improvement plans but ultimately due to the dynamics of our market, they proved to be insufficient to solve the issue. And so -- in addition to this difficult situation, as I mentioned earlier, we recently acquired additional capacity in Brazil. It's giving us additional opportunity to serve EA-MEA customers much more cost effectively. Slide #24 give you a couple of details. So as I said, through the exit of Nippon Steel earlier this year, we acquired for a relatively cheap amount, 300,000 tonnes per year of rolling capacity. And to give you an order of magnitude, the variable cost difference between a pipe rolled in Germany, shipped to the Middle East and the same pipe produced in Brazil, shipped into the Middle East, is about 25% in favor of Brazil, despite higher transportation costs. So by launching this transformational move, we aim at doing 2 things. We launched the disposal process of the German assets. And we are going to expand the capabilities and the capacities from Brazil to maximize our competitiveness and our market share and our margins on the Oil & Gas EA-MEA market. So it's a game changer for our performance on international market. The Brazilian hub will be able to deliver the full range of premium tubular products to these customers, leveraging an already optimized cost base and allowing better absorption of our fixed costs. So this will result in better competitiveness and enhanced profitability on Oil & Gas market, delivering for the group a strong EBITDA improvement and cash flow generation.And in addition, there is a strong positive impact on our carbon footprint, driven by the excellent footprint of our Brazilian operations, relying on charcoal production and hydroelectric power, which is obviously very low -- which has a very low carbon intensity. A bit more detail on the disposal process. The scope is all the German manufacturing assets. We are open to a modular asset deal depending on the interest from potential acquirers. And we are generally flexible to maximize the buyer universe. Our rationale is a new operator decidedly positioned to serve the European industrial market could be interested in acquiring these assets in a market where we have divested. We will look for responsible and sustainable owner for the -- to ensure the best possible future of the assets, their employees and the broader stakeholders. The process will be launched in the next few days, if not weeks, and we target to receive binding offers in Q2 2022.If no buyer is identified or interested, we will look at all alternatives, including up to a potential closure of the site.To be able to fully expand the premium Oil & Gas capabilities in Brazil, we will implement a significant CapEx program right around EUR 100 million, part of which is any way necessary to serve the domestic Oil & Gas market. And ultimately, this will enable Brazil to offer the full range of our premium tubular products to serve both Brazil and international Oil & Gas customers. All in all, this transformational move is targeted to generate significant EBITDA impact to the tune of EUR 130 million additional EBITDA as a run rate, combined with a reduction of CapEx, which will no longer be necessary for our European and German assets, EUR 20 million. So that's a combined EUR 150 million per year once the project is completed. And along with that, the difference in CO2 intensity between Brazil and Germany is above 30%, which will obviously significantly support the achievements of our ESG targets, which we already communicated. So this is what we wanted to share with you tonight. As you can see, significant move for Vallourec and its stakeholders. I'll stop here and hand over for questions and answers.
[Operator Instructions] The first question comes from the line of Alan Spence, Jefferies.
I've got a bunch of questions, but I'll hold myself to 2 for now. The first one is just on the order book, and I'm assuming at this point, it's relatively solidified for the first quarter of '22. If we can exclude the mine, could you give us any color on the margin upside you're seeing from what's already in the order book?
So it's a little bit early to speak about early 2022. What we can say is that yes, there are some positive trends, of course, in North America where, as you know, prices on the OCTG [indiscernible] market have kept increasing very significantly since Q2, and it's still the case when we had towards the end of this year, and we see whether we can continue in the first part of 2022. So definitely, together with the volume increase this nice price situation in the U.S. will be favorable for our results, both in Q4 and at the start of 2022. We have seen progressively this year as well a restart in the EA-MEA regions of the tendering activity for Oil & Gas, a progressive restart. Compared to what we had in mind a few months ago, the orders that we have and what we see in our sales plans lead us to higher deliveries than expected, once again, a few months ago in Q1 and Q2 of [ 2020, too ], which should lead to a better margin in this part of the world as well.
Great. And then I have a 2-parter as my second one. What is the book value of those certain assets you're looking to divest? And how quickly will you be able to transition the volumes, I guess, service declines from your Brazilian operations?
As far as the book value is concerned. As you know, we have made some depreciation, especially in the recent years, including on our German assets. So that -- what we have as of today is relatively limited. So the message there is that you should not expect at the end of the year or very likely to see any exceptional amortization or impairment of these assets. What will be done will be to compare this book value vis-a-vis what is the valuation from a market point of view of these assets. So don't be too concerned from this point of view.
And then just the -- how quickly will you be able to transition the volumes to Brazil and be able to meet those customer demands?
Yes. So this is an ongoing process and already today, whenever -- it's really based on capabilities. And as you saw on some of our slides, Brazil already accounts for a significant portion of our order book. As far as the new capabilities or the ones which are related to new CapEx, it's a pretty significant CapEx program, which will span over 2022, 2023. 300,000 tonnes will only be achieved in 2023 because everything which is today feasible in Brazil, is allocated to Brazil. So the end of the industrial plan is end of 2023.
[Operator Instructions] Next question comes from the line of [ Tom Zhang ] of Credit Suisse.
Can I ask, is the EUR 130 million of potential EBITDA benefit from the kind of closure of Germany in addition to the EUR 400 million of cost savings and initiatives which were identified at the time of the restructuring? Or was this kind of always included within that number? That's my first question.And just on the free cash flow guidance, historically, I think year-to-date free cash flow is around negative EUR 300 million, which is the sort of lower end of the EUR 300 million to EUR 380 million negative that you're guiding for the full year. Historically, there's typically always been quite a large working capital release since the year-end. Should I take it that, that is not expected this year? And can you just shed a bit of light on why that would be the case? And that's it for me.
Yes. As far as the savings is concerned, I think this move is reshuffling pretty significantly our footprint. So [ the lines might reset ] a little bit of everything. Obviously, we won't stop the savings plans, particularly in Brazil and China and the U.S. so this remains. But the part of the EUR 400 million savings which were going to be achieved in Europe is obviously not going to happen. So I think we reset everything. There will be continuous savings efforts in our plants everywhere. And in addition to that, we would cut the losses incurred in Germany. And we would add on to that increased profitability by producing more from Brazil. So I'm not sure I have a completely square answer to your question, but it's a bit of both.
On your second question, yes, it's true that we are in a phase of activity [indiscernible], which to some extent, does change the seasonality that we see in our working capital evolution. And in addition to that, but it's a lesser big of an explanation, the increase in raw material or energy prices have some effect on the valuation of the inventory at the end of the year.What is important, I think, to keep in mind is that within this free cash flow target for the full year 2021, the largest part of this cash flow consumption by far, is representing by this increase in the working capital which is taking place this year, preparing for the higher level of activity starting in 2022. And there is a quite significant amount as well of the one-offs. In particular, those linked to the financial restructuring, [ one of that ] has been taken into account mostly in Q2 this year.
[Operator Instructions] Next question comes from the line of Baptiste Lebacq, ODDO.
Just 2, if I may. The first one is regarding the CapEx in Brazil of EUR 100 million. Is it a story for 2022, 2023? And the second one is also dedicated to Brazil. With the increase of your capacity in Brazil, should we understand that your forest is -- must be regarded as strategic right now?
Yes. So as far as the CapEx are concerned, as I said, they will be executed over 2022, '23 and ramp up during the course of 2023, depending on the topic. So the impact will start in 2023 towards the end of the year.As far as the forest, so you have to keep in mind that we have a forest acreage which far exceeds what we need strictly speaking to produce the charcoal we use to produce our steel. And we have over the past few years, looked at different projects to extract the best value from these assets. In some cases, we sold them. We have some investigations going on to figure out ways to better extract value from these assets by obviously using the wood or produce charcoal to produce charcoal or biochar or vegetable charcoal. So all kinds of products. Those customers may be interested in a low carbon content for these products. It's still at the development stage. So we don't anticipate any significant impact in the very, very short term but this is something we keep working on.
We currently have no questions on the line. [Operator Instructions]
Okay? So it seems there are no further questions so -- somebody is waiting?
Next question comes from the line of Alan Spence from Jefferies.
Sorry, a bit of technical difficulty getting back in. Two more on the U.S. Could you give us a bit of a sense of the incremental attributable capacity from the buyout of the minorities?And you've made reference to being able to now access some of the net operating losses there. What's the scale of those?
Okay. I'll start with the capacity. So the minority shares we acquired, if we look at Vallourec Star, in particular, which is the biggest subsidiary, is 19%, slightly above 19%. So that's what was acquired. As far as NOLs, I defer to Olivier.
So it's several hundred million USD. So it's a fairly favorable amount.
But maybe what I can add is beyond the capacity strictly speaking, the benefit of this acquisition is that from an operational standpoint, we have now 100% of all subsidiaries, giving us the full flexibility to optimize operations between the various entities, whereas in the past, they had different shareholding structure, making it more complex to organize, especially at a time when the market is rebounding very, very significantly. So the main benefit is really this operational flexibility, and also to avoid, let's say, a minority leakage at a time, the situation on the market is a complete turnaround and we will arguably benefit from the increased activity and prices.
So more question yourself -- on your question on NOLs, it's close to $200 million.
And if you could just please help me so I don't need to dig it out, but what is the total capacity of Vallourec Star? Just trying to see what the 19.5% might represent?
So the total capacity is right around 700,000 tonnes per year.
We currently have no questions on the line. [Operator Instructions] There are currently no questions on the line. I will hand over to your hosts to conclude.
Okay. So I think we've exhausted the available questions. So thank you again for your attention tonight and talk soon. Bye-bye.
Thank you for joining today's conference. You may now disconnect.