Vallourec SA

PAR:VK

Earnings Call Transcript

[Operator]

Good day, and welcome to the Q3 2018 results. Today's conference is being recorded. At this time, I'd like to turn the conference over to your Investor Relations Officer, Jean-Marc Agabriel. Please go ahead, sir.

[Jean-Marc Agabriel]

Thank you for joining us for Vallourec's presentation of Q3 and 9 months 2018 results. I'm Jean-Marc Agabriel, the new Investor Relations Officer. With me today to comment on results are Philippe Crouzet, Chairman of the Management Board; Olivier Mallet, member of the Management Board and Chief Financial Officer; Didier Hornet, Senior VP, Development and Innovation; Nicolas de Coignac, Senior VP, North America. This conference is available by conference call, which will be recorded and a replay will be available. It is also audio webcasted on our Investor Relations website, and the presentation slide are also available for download on our website. Before I hand over to Philippe Crouzet, I must warn you that today's conference call contains forward-looking statements and that future results may differ materially from statements or predictions 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 slide presentation and are included in our annual registration documents filed with the French financial markets regulator, the AMF. This presentation will be followed by a Q&A session. Now I would like to leave the floor to Philippe.

[Philippe Crouzet, Chairman of the Management Board]

Thank you, Jean-Marc, and good evening, everyone. I'd like to start this presentation with an overview, a rapid overview of the key highlights, so for Q3 and the first 9 months of 2018.Starting with Q3 on Page 4. The main takeaway is the continued good progress recorded in our EBITDA, which is up EUR 20 million sequentially and EUR 34 million year-on-year. As anticipated, this is essentially due to the price increases that we were able to pass on OCTG products in the U.S. But cost reductions from our Transformation Plan also contributed to the improvement in profitability. Revenue-wise, Q3 was broadly stable year-on-year at EUR 961 million, and down 2% sequentially. This is mainly due to the decline of Power Generation activities. Outside Power Generation, our sales performance remained solid, growing at a double-digit pace year-on-year at constant currency rates. The free cash flow was negative EUR 153 million in the quarter, slightly better than Q2, but significantly below last year. It was impacted by higher working capital requirements. This increase, in fact, reflects higher activity, resulting in temporary buildup in inventories. Olivier will come back with more details later, but we expect an improvement in working capital in Q4.Moving now to Page 5 and to the 9-month highlights. The positive impact of both volume and price increases is even more obvious. It was clearly the result of the good momentum in the U.S. Overall, our volumes were up 4.3%, and the price mix up 8.6%. This positive trend was partially offset by significant currency impact, minus 8.2%. As you can see on the slide, revenue growth would have been almost 13% at constant exchange rates.From an EBITDA perspective, we improved over 9 month by EUR 70 million over last year, moving from a loss of EUR 9 million up to a profit of EUR 61 million, driven again by a combination of improved business conditions in the oil and gas market in the U.S., and by the results of our Transformation Plan, which led to increase our industrial margin and reduce our SG&A expenses.Despite this good operating performance, our free cash flow decreased from minus EUR 397 million -- negative EUR 397 million to negative EUR 571 million, essentially due to a rise in working capital requirements over the first 3 quarters. This increase was driven mostly by higher activity, as I already mentioned earlier.The group cash flow from operating activities recorded a slight improvement over the period compared to last year, and our CapEx remained in line to the needs -- on the needs of the group, and especially given our new industrial footprint. Let me now give you some color on revenue by markets, and this is on Slide 6. Our 3 main divisions contributed to the revenue growth, although the positive momentum in the U.S. continued to be the main driver of our performance, both volume and price-wise, over the first 9 months. The main takeaways are the following: On our largest market, oil and gas, revenue is up around 12% at constant exchange rates, driven mostly by the strong momentum in North America. Average rig counts in the U.S. is, as you know, up almost 20% versus last year. In EMEA, we benefited from higher OCTG revenues, but this was offset by a significant negative ForEx impact and lower deliveries for pipe projects compared to last year. And in South America as well, the increase in revenues were offset by ForEx in Brazil, notably. Industry & Other activities were up 17% at constant exchange rate, driven by higher prices for mechanical engineering and automotive application in Europe and higher volumes in Brazil. One note, there was a temporary slowdown in Europe in Q3 where we saw some destocking for distributors.And lastly, Petrochemicals recorded, again, the strongest increase at close to 60% at constant exchange rate, and again, largely thanks to the recovery of that business line in the U.S.Only Power Generation was down, significantly down, essentially due to lower sales both in nuclear and conventional power generation, but not the new trend, of course. Let me now hand over to Olivier, who will further present our 9-month financial performance.

[Olivier Bruno Benedict Mallet, CFO & Member of Management Board]

Thank you, Philippe. And good evening to everyone. So let me start on Slide 8 with some more detail on our revenue growth for the 9 months. As Philippe mentioned, we delivered strong performance in volume and prices since the beginning of the year, leading for volume growth at constant exchange rates of 12.9% compared to the first 9 months of 2017, and this was partly offset by ForEx evolution. Our industrial margin improved by over 14% to EUR 373 million, which represents a gain of EUR 46 million and of 1.1 point of revenue. And this is thanks to the U.S. momentum, of course, but also to savings generated by our Transformation Plan, and despite adverse currency movements and raw material cost increase.The Transformation Plan and favorable ForEx impact also led to reduce our SG&A by 7.4% to just below EUR 300 million over 9 months, which represents 10.7% of the revenue, 1.4 point less than last year. As a result, EBITDA improved by EUR 70 million year-on-year, moving from a loss of minus EUR 9 million to a profit of EUR 61 million. On the next slide, Slide 9, some comments about the P&L items below EBITDA. Operating results improved by EUR 43 million, slightly less than the EBITDA itself, the main point to highlight being the increase of nonrecurring items booked in H1 for an amount of EUR 72 million compared to EUR 14 million last year. This reflects the additional restructuring measures that have been set in Europe and booked in Q1 as well as the sale of drilling products businesses. Financial charges were up EUR 25 million higher due to higher interest charges as a result of the bonds issued in October '17 and April '18. And we, as well, recorded a reduced tax gain, thanks to the results recovery in North America. These factors led to a net income of minus EUR 399 million. Now let's turn to free cash flow on Slide 10. First cash flow from operating activities progressed by EUR 10 million with an increase in EBITDA, but also with higher financial interest and less restructuring cash-out. The change in working capital requirement is an increase of EUR 309 million compared to EUR 103 million over the same period last year. This increase was driven by higher activity and a temporary buildup in inventories. We can remind you as well that we did end up 2017 with a very good performance in working capital, which therefore was quite low at the start of this year. As Philippe mentioned earlier, working cap is expected to decrease in Q4 '18. And finally, CapEx stood at EUR 64 million, lower by EUR 22 million compared to last year, at a level which is consistent with our reduced needs, thanks to the reshaping of our industrial footprint. Moving now to Slide 11. Our net debt reached slightly more than EUR 2 billion at the end of September, compared to EUR 1.5 million at the close of last year and EUR 1.9 million at the end of June '18. The rise in debt net is essentially reflecting the free cash outflow recorded over the first 9 months since the disposal of Vallourec Drilling Products and some ForEx impact, contributed only or slightly positively. And lastly, Slide 12, on liquidity, shows that Vallourec's liquidity position remains strong with at the end of September, cash position of EUR 769 million, and on top of that, EUR 2.2 billion of undrawn committed bank facilities. As you know, the next significant debt maturity is due in August '19 and has already been refinanced through the EUR 400 million senior notes issued in April 2018. I will now hand back over to Philippe, who will tell you about our outlook.

[Philippe Crouzet, Chairman of the Management Board]

Thank you, Olivier. I will move to Slide 14, where firstly I'd like to insist on the fact that the long-term prospects of our industry remain very positive. The fundamentals remain solid like, of course, Vallourec continues need for strong structural hydrocarbon globally and the continued field depletion, and this should help support oil and gas companies' activities globally in the coming months and quarters. Now focusing specifically on the fourth quarter. We anticipate the following trends in the U.S., the rig count should remain stable at a high level. But we expect some softer demand for tubulars due to temporary inventories, which were built in anticipation of Section 232, which are being used now. This effect should not last, and Section 232 is expected to continue benefiting to U.S. domestic producers, including, of course, Vallourec. In Brazil, drilling activity is expected to remain stable. And in the rest of the world, Vallourec's oil and gas operations should benefit from higher volumes and better prices or mix/prices. We will continue, of course, to deploy our most competitive manufacturing routes, in particular, VSB and Tianda. The commercial integration and industrial integration of those routes is clearly enhancing our competitiveness. And then these routes have already generated and will continue to generate new commercial successes. Last but not least, our Transformation Plan should generate higher cost savings over the second half of the year compared to the first half. Therefore, all-in-all, we expect the fourth quarter of the year EBITDA to show a continuing progress and to exceed the EBITDA of the third quarter. Thank you for attention. We are now ready to take your questions.

[Operator]

[Operator Instructions] We will now take our first question from Kevin Roger from Kepler Cheuvreux.

[Kevin Roger, Research Analyst]

Three questions on my side, please. The first one is regarding the working capital position that you have right now. At the end of the H1, you were guiding for full year impact for 100 to 150, so implicitly a release of working capital to EUR 100 million for issue. I was wondering if you still expect to have a full year of negative impact on the working capitals to EUR 100 million to EUR 150 million. That's the first question. Second question, you were previously saying that you [ were only ] say, okay, the EBITDA concern is for the full year, which is close to EUR 150 million. You are close to EUR 60 million for the first 9 months. So does it mean that you expect something like EUR 19 million for the Q4? And the last question is, can you please provide more details on the restructuring plan because you say more saving in H2 versus H1? H1 it was EUR 60 million gross saving. So what has been the Q3 impact gross savings from the restructuring, please?

[Philippe Crouzet, Chairman of the Management Board]

Maybe I'll take the third one. We do not provide detailed figures, Kevin, on the restructuring on a quarterly basis, and by the way it doesn't make real sense. But what is true and certain is that over the second half, we'll have the benefit of certain specific restructuring initiative that we've been implementing at the end of H1 and beginning of H2, namely, closing our blast furnaces -- last blast furnace operating in our old mill in Belo Horizonte, Brazil. So the steel mill is now closed as well. And it is a significant, of course, cost saving for the all Brazilian operations. And we have as well because this is public -- publicly announced, we are in the process of shutting down one of our borderline in France, in Northern France on the site of Saint-Saulve. And this will as well have a direct impact on our savings in the second half of the year. So definitely, the overall amount of savings in the second half will be higher than the one in the first half, at least for those 2 specific initiatives, okay?

[Olivier Bruno Benedict Mallet, CFO & Member of Management Board]

Well, look, Kevin, I guess the 2 other questions are for me. So first, what is the situation in terms of the working capital? First, I guess as a reminder, if you look at our performance in terms of days of sales for working capital, quarter-after-quarter, you can see that the average of the first 3 quarters of 2018 still again shows an improvement compared to the average of the 3 first quarters of 2017. And this shows [ all you folks ] we're continuing to put and improving our performance in this regard after the big progress we have already done in '16 and '17. This being said, there is higher level at the end of Q3. And I think we mentioned 2 main elements in our press release: one is good activity level, and this is, of course, triggering higher need for building inventories, for instance, for some deliveries to take place by the end of the year. And in addition to that, we have some temporary effects, like the fact that under Section 232, some exports to the U.S. are still waiting for newer quota to get out from the working capital as things die down. So all in all, as we say in the press release, we expect a decrease in working capital in the last quarter of the year. This being said, due mostly to our level of activity, we hardly don't expect this year that you had mentioned of a decrease of EUR 100 million. Compared to the end of H1, it will be mostly a decrease on the Q4. Then on the EBITDA consensus, I think the consensus is EUR 144 million as of today. So I should quit the bad habit to comment the consensus, so I will not do that. Just telling you is that there is no material change in our expectations for this year despite the small downslide here -- slowdown that we mentioned in the U.S. and for us, we had compared 2 or 3 months ago. So no significant evolution in this regard.

[Operator]

We will now take our next question from Amy Wong from UBS.

[Hin Kin Wong, Executive Director and Analyst]

It's Amy from UBS. I got a couple of questions, please. The first question relates to, kind of, what you are seeing in the U.S. market, if -- how much more production capacity could be coming on in 2019? So if you can give us some of what you're seeing there? The second question is just to pick up on your last answer, Olivier, where you said no material changes, there were some small downs, which is the inventory issue you were highlighting, and some small ups. If you can just actually just entertain us and give us a bit of color on what those small ups or small downs, that would be very helpful, please.

[Olivier Bruno Benedict Mallet, CFO & Member of Management Board]

I guess, on the U.S., Nicolas is on the line. So Nicolas?

[Nicolas de Coignac, Senior Vice President of North America]

Yes, Amy, on the capacity in the U.S., we do expect, and I don't know if your question was specific about Vallourec or more largely the U.S. market, domestic market. So you know that there are still some trends that are -- yes, the whole U.S. domestic market. So there are some new plants that are still ramping up. So we definitely see still an upside in supply in 2019. Some of our competitors' plant are ramping up and coming to full capacity at some point in time in '19, so there will be some more supply. We are working ourselves still on the same topic that I've mentioned over and over on the last quarters about debottlenecking some of our operations, and we'll have also some of this happening in 2019.

[Olivier Bruno Benedict Mallet, CFO & Member of Management Board]

So on your second question, to get more clear, if I can, I think that if we compare the current situation on 2018 compared to 6 months ago, you had some pluses and minuses. On the minuses side, one which is not brand new being the Section 232 will quota all our Brazilian exports to the U.S., which had an impact on working capital, but also as well, of course, are now ferreting the U.S. as the margin to be recorded on these sales. And the other one, which is more recent, is what was mentioned about the fact that there are some inventories on the ground in the U.S., which had been very likely built by some guys in anticipation of the Section 232 implementation. It's difficult to assess because there are no public data or even the public data available do not show this increase in inventory. But we are -- we see it and this is while waiting in lesser demand from customers and distributors as of today. And we can add to that as another factor that typically is our taxes are being paid on inventories at the end of the year in the U.S., which also pushes distributors to catch as much as possible in the inventory. So these are the minuses. On the pluses side, we've got more demand, more contracts, more volumes coming in Oil & Gas on the [ EA and EMEA ] regions. And this allowed us to refill the Brazilian rolling milling operations to offset to a large extent the minus coming from the Section 232. So this was a very good mitigating factor, which by the way shows as well the successes we are getting now on our markets when we offer tubes on VSB or from Tianda, which are all very competitive, and we had some unanticipated commercial successes due to this very structural evolution of our footprint. I can mention as well, but I think smaller of magnitude is the fact that probably the [ FX ] is slightly better now than what we were seeing on the spot markets a few weeks ago, impact growth with the strengthening of the U.S. dollar, which is good news when you translate into euros the positive result we make in the U.S., and which could be a good news as well for what we hedge as of today for deliveries to come in the next few quarters. We hedge currently at much better rates than what we had on these market.

[Hin Kin Wong, Executive Director and Analyst]

Can I just go back to your first answer, Nicolas, about the U.S. domestic market? Other than the Bay City rolling mill that's ramping up, there's been some talk of other rolling mill potentially unmothballing and coming back? Is -- can you give us a sense -- I mean, help us out with kind of a tonnage that you would expect to come on into 2019?

[Nicolas de Coignac, Senior Vice President of North America]

Well, especially, keep tonnage -- sorry if you want to go -- specifically about tonnage, I'm not sure I can be that specific. We don't really see other seamless mills that would resume any kind of operations that were -- would fall at 20x. We do see some finishing operations that are restarting just to take advantage of the heat treatment capacity and threading capacity. But as far as rolling capacity, other than the ones you mentioned, we don't see other operations reviving from any shutdown or mothball.

[Philippe Crouzet, Chairman of the Management Board]

If I may add a point, Amy, one of the most striking thing happening on the North American market is the increase in the percentage of seamless versus ERW. And this is the direct consequence of the 232. 232, in fact, has had an effect, a significant effect in reducing the [ imports ] of ERW. And not that much on seamless, by the way. But of course, this void can avoid created on the ERW. As you know, there is some kind of overlap between seamless and ERW, specifically on the vertical part of the wells. And this is benefiting to seamless. So I think this factor is to be taken into account as well. And we consider it as kind of structural. So once the temporary, let's say, use of inventories that were mentioned by Nicolas and Olivier will be consumed then we will benefit from this high percentage of seamless versus welded tubes.

[Operator]

We will now take our next question from Guillaume Delaby from Societe Generale.

[Guillaume Delaby, Equity Analyst]

A question, I know that you're on different markets which are at different positions today within the cycle, but globally, when you look at the Vallourec group overall, just would like to have your opinion about where do you believe -- where are we currently in the cycle? Do you believe that we are maybe at 1/3, 1/2 of the recovery? And I know it's not time yet to talk about 2019 guidance, but given what is your view about where Vallourec is in the cycle today, what could be your future working capital needs for 2019 and 2020? So a broad question.

[Philippe Crouzet, Chairman of the Management Board]

Very broad. And to be honest, I don't think we should look at the -- at our industry with one single global cycle. There are definitely different regional cycles, if I may say so. I won't repeat what was already said on the North American market. We definitely think it is strong, solid, and it has potential to grow further high clearly, with very limited impact on our working cap, given the fact that, as you know, we work distribution so our working cap in North America is very limited. What's probably in your mind is the rest of the world, let's say, what you call EMEA, so Middle East, North Africa, Southeast Asia, and to name a few markets. There, we definitely see some recovery on strengthening at least of the line pipe -- Project Line Pipe activity, so there are new tenders being launched everywhere in the world, which is probably even more, let's say, clear changing trend compared to a couple of quarters ago. We are being quite successful there, but as you know, these are typically the kind of orders which take quite a lot of time before being delivered. And so this is already part of our increase in activity and working capital. And we'll definitely have an impact in 2019. Now to be very specific on that is extremely difficult. Each tender is different in nature, time to deliver, et cetera. So I would say broadly these are the 2 major trends, having in mind that Brazil should remain relatively stable in 2019 compared to 2018. There is huge potential for growth in Brazil, but it will take a couple of years before we see an effective impact of the international oil companies investing in Brazil. So looking into 2019, I think I gave you the broad picture on the 2 key markets moving forward in oil and gas, of course.

[Operator]

We will now take our next question from Vlad Sergievskii from Bank of America.

[Vlad Sergievskii, Research Analyst]

I have actually 3 and this time very specific questions. First one, it seems like your third quarter EBITDA once again was assisted by a provision release. Could you give an idea when you're talking about better EBITDA in the fourth quarter, are you implying for the provision releases? And if yes, by how much roughly? That's the first one. Secondly, FX was clearly headwind in Q3, with recent developments on support favorable developments. When we should expect to get a tailwind from FX for you? Is it Q1 or further into 2019? And lastly, would you be comfortable in giving us some color, what was negative from part from FX hedge on your EBITDA in Q3?

[Olivier Bruno Benedict Mallet, CFO & Member of Management Board]

Vlad, so on the first one, you also reported last year in Q4, we benefited from quite significant provision release, which contributed to an EBITDA which was at that time, I think, if I'm correct, EUR 11 million of positive, but thanks to a larger provision release. This year, we anticipate an increase in EBITDA in Q4 compared to Q3, but without any significant provisional release, or much lesser than last year. And so it will be helped by provisional release like it has been last year, a not significant event. On the ForEx, I think the 2 other questions were on ForEx, in Q3, we had a very small negative ForEx impact, which did hit mostly H1. And we are starting to benefit from a stronger U.S. dollar vis-à-vis euro, and as well when we sell from Brazil in U.S. dollars, we are benefiting from the weaker real vis-à-vis the dollar and a stronger dollar, which is to some extent, not only to some extent, offset by the fact that when we translate there are resulting reals into euros. This is negative. So all in all, a very small negative, I think, ForEx impact in Q3. And it turns slightly a positive to be seen, but as soon as in Q4.

[Vlad Sergievskii, Research Analyst]

Okay, that's great. And if I may, to follow up on the U.S. market conditions, I might need more new color. In terms of your pricing for Q4, realized prices, what are you seeing here, just in Q3? Is it slightly down? Any color would be very much appreciated.

[Philippe Crouzet, Chairman of the Management Board]

Nicolas?

[Nicolas de Coignac, Senior Vice President of North America]

Well, on the -- as you know, we have pushed prices quite significantly in Q3 in line with what we announced in Q1 even before the announcement of 232, so this has been materialized in Q3. For Q4, we see a status that is about flat in line with, I would say this, the market catching its breath, so probably flat in Q4 compared to Q3.

[Operator]

We will now take our next question from Igor Levi from BTIG.

[Igor Levi, Director]

Well done in continuing to grow EBITDA and executing on the Transformation Plan. I have 2 questions. The first is on your margin upside potential. I mean, if you look today, seamless prices, they're within 10% of where they were in 2014 in the U.S. Scrap costs are similar, so aside from pricing and raw material, what would we need to see before your EBITDA margins could recover to prior cycle level of low to mid-teens? I mean, would this be possible given the consolidated Tianda mill? And I mean, are the key drivers, is it mainly the incremental cost save that you have? I think it's EUR 300 million to EUR 400 million. I mean, is that a shift in mix? And how important is an offshore recovery to this? So that's my first question. And my second question is about your free cash flow outlook. I mean, I know you had a lot of pent-up working capital this year, given the working capital relief after especially imports resume from Brazil potentially next year. I mean, is there a certain EBITDA margin or dollar or euro level that you need to first achieve to see cash flow positive for a sustained amount of time? And is there a medium- to long-term target of EBITDA to free cash flow conversion?

[Philippe Crouzet, Chairman of the Management Board]

I'll take the first one and -- the broad picture is that, as you mentioned, we're not that far from where we were before in terms of the prices in North America. And we think that given the balance between supply and demand and with the support of 232 measures, this is something which could be achievable in North America meaning coming back to the kind of prices we had before. Maybe with a different mix, with probably a little less premium than in the past given the nature of especially the Permian area, which requires less premium products than the rest of the U.S. plays. For -- the real challenge in terms of price recovery is elsewhere. It's 2 factors. First, offshore versus shallow waters and onshore drilling, as you well know. Offshore is way down compared to where it was in the years prior to the crisis. It's still kind of being delayed. I mentioned that there are more activities. There is a recovery but from a very low level of activity. Clearly, this is related to the, let's say, the risk adversity that becomes the name of the game for many oil and gas operators, and offshore clearly being the most risky kind of operations. We tend to see an activity which is lagging behind the recovery of other type of operations. So that's factor number one, offshore. And factor number two is the Middle East, and there is a good level of activity in the Middle East and big tenders continually to flow to the market. We are having some success there. But clearly, the level of prices is still very low compared to where it were before. This is some kind of an anomaly but that's the situation. And it's very difficult to predict exactly when we will be in the position to recover at least a significant part of the price decrease. We are making progress but it's pretty slow.

[Olivier Bruno Benedict Mallet, CFO & Member of Management Board]

Igor, maybe on your second question, but the level of EBITDA is necessary to get back to a positive cash flow generation. I will give you, again, the big orders of magnitude. What do we have below EBITDA? We have some CapEx, of course. And for the last 3 years, we guided every year on the start of every year on an envelope of about EUR 200 million. Finally, we did end up lower than that. So in terms of CapEx, between EUR 150 million and EUR 1,200 million seems reasonable level. In terms of financial charges, it's getting higher because it's the price of the nice liquidity we have built. So let's say it's around EUR 200 million. Then you have some taxes to pay, some versatile cash-outs year-after-year. So all in all, on these 2 elements accumulated, say EUR 100 million. And then working capital, depending on the years. We'll go to some extent. So all in all, what does it tell us, probably a level of EBITDA to depending on the year between EUR 500 million and EUR 600 million, to be a positive in terms of free cash flow.

[Operator]

We will now take our next question from Jean-Luc Romain from CM-CIC Market Solutions.

[Jean-Luc Romain]

My question relates to the outlook you gave for Europe, Africa and Middle East, Asia, improving volumes and some mix in Q4. Do you see it as the beginning of a trend? Or is it more exceptional? And for Power Gen, nuclear tubes, was it, kind of, low quarter? Or is it continue to trend low?

[Philippe Crouzet, Chairman of the Management Board]

Well, as far -- I'll let Didier answer on the first one. As far as Power Gen, specifically nuclear, I would say the whole year has been pretty low as far as nuclear is concerned. There is a low level of activity on that specific segment, which is a small segment for us, as you know. Chinese opportunities are by far most significant but there were not that many in 2019 and as far as European market is concerned, mostly, of course, EDF in France and in the U.K., we've had some success, but to deliver rather next year than this year. So that's on the nuclear segment. Didier, on the...

[Didier Maurice Francis Hornet, Senior Vice President of Eastern Hemisphere]

Yes, [ Eastern ] of this year, OCTG, we see a tendering activity which is increasing and we commented that already. We see also an increased [ hit ] ratio, which means that everybody is reloading its mill. So definitely, we believe, we should benefit from higher volumes to come with a better mix and price. So Philippe was commenting not to the level of precrisis for sure, but definitely an improvement compared to 2018.

[Operator]

We will now take our next question from Amy Wong from UBS.

[Hin Kin Wong, Executive Director and Analyst]

Just wanted to follow up a bit more on your cost savings. Going into -- you said you don't give it on a quarterly basis, but do you envision your second half overall cost savings to be bigger than your first half cost savings? And secondly, is there scope -- have you guys found any more additional opportunities? As SG&A is down again this quarter, where do we see that trending into the next -- into '19?

[Philippe Crouzet, Chairman of the Management Board]

Yes, Amy, definitely, we foresee more savings in the second half than in the first half. I think I kind of mentioned some initiatives, which will show a significant impact in the second half like closing down our steel mill and last blast furnace in Brazil, in the old mill of Brazil. And definitely, we keep on working on new initiatives and new ideas. It's a continuing process. And so we will continue definitely to work with that state of mind. I think all the operations are looking for opportunities to become leaner. It's not that much SG&A; it's as well industrial fixed costs, improving our performance in the mills, i.e. variable than industrial costs and all this sum up in significant potential savings. So yes, we are definitely aiming at more savings in the future.

[Operator]

[Operator Instructions] We'll now take our next question from Kevin Roger from Kepler Cheuvreux.

[Kevin Roger, Research Analyst]

Just one follow-up, please. Regarding -- for you, Olivier, regarding the net debt position. Can you please provide the giving provenance at the end of the 9 months, please, because you just provided in the slide at the end of the H1? You were close to 60%, so can we have the EBIT of the 9 months, please?

[Olivier Bruno Benedict Mallet, CFO & Member of Management Board]

No. The answer is no. We had a debate internally to be very transparent with you and it seems it's a figure that doesn't exist at the end of each quarter. It's just either once a year. It's at the end of December, as you know. It's not even calculated. But since I like you very much, I will try to help you and just to remind you that it's very different from the accounting gearing that you have. At the end of Q3, accounting gearing is around 90%. Keep in mind it's important that the collections that are done in the covenant calculation, especially in terms of impacts of the fine currency evolutions, it's the difference between the accounting gearing and the covenant gearing is between 15 and 20 points. So that we have entered margin vis-à-vis all covenants as we can foresee towards the end of the year.

[Kevin Roger, Research Analyst]

Okay, so we should assume something like close to 75%?

[Olivier Bruno Benedict Mallet, CFO & Member of Management Board]

I'm not allowed to tell you more.

[Operator]

That concludes today's question-and-answer session. I would like to turn the conference back to you for any additional or closing remarks.

[Philippe Crouzet, Chairman of the Management Board]

Well, thank you. As you've seen and read in our communication, we are pleased with the continuing progress on our -- of our EBITDA. And it's a long way, but I think all our internal efforts are beginning to bear fruits. Not only on the saving sides, but more and more visibly, the fact that based on our improved competitiveness, based on our new routes, we are gaining ground and increasing market share in quite a number of markets. So definitely, the combination of internal efforts for cost savings and improvement of our top line growth will lead to the improvement of our EBITDA and cash that we need to come back to positive free cash flow, which is and remain our milestone in the coming quarters. Thank you very much.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.