Vallourec SA

PAR:VK

Earnings Call Transcript

[Operator]

Hello, welcome to Vallourec Q3 and 9 Months 2023 Results. My name is [ George ]. I'll be your coordinator for today's event. Please note, this call is being recorded.

[Operator Instructions] The conference will be chaired by Mr. Philippe Guillemot, Chairman of the Board and Chief Executive Officer; and Mr. Sascha Bibert, Chief Financial Officer.

I'd now like to turn the call over to Connor Lynagh, Vice President, Investor Relations of Vallourec. Please go ahead, sir.

[Connor Lynagh, executive]

Thank you. Good morning, ladies and gentlemen, and thank you for joining us for Vallourec's Third Quarter 2023 Results Presentation. I'm Connor Lynagh, Vice President of Investor Relations at Vallourec. I'm joined today by Vallourec's Chairman and Chief Executive Officer; Philippe Guillemot and Vallourec's Chief Financial Officer, Sascha Bibert.

Before we begin our presentation, I would like to note that this conference call will be recorded and 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 available for download here as well. Today's call will contain forward-looking statements. Future results may differ materially from statements or projections made on today's call.

The forward-looking statements and risk factors that could affect those statements are referenced at the beginning of our slide 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.

[Philippe Guillemot, executive]

Thank you, Connor. Welcome, ladies and gentlemen, and thank you for joining us for this update on Vallourec's third quarter 2023 results. Before proceeding, let me draw your attention to Slide 2, where you can consult our safe harbor statement.

Today's agenda is on Slide 3. I will start by giving you an overview of the highlights of the third quarter followed by an update on the execution of our New Vallourec Plan and a word on the market environment. Sascha will then take you through our third quarter numbers and I will finish with the outlook for the full year 2023.

First, let's look at the highlights of the third quarter on Slide 5. Our third quarter 2023 EBITDA was EUR 222 million, which reflects a EUR 24 million year-over-year increase. Our Tubes EBITDA contribution was EUR 193 million, an increase of EUR 25 million year-over-year. This was supported by a 20% average selling price increase compared to Q3 2022.

Mine & Forest EBITDA was EUR 39 million, which was stable year-over-year. This result was driven by higher volumes and prices, offset by lower noncash forest revaluation. Our adjusted free cash flow was very strong once again, coming in at EUR 217 million.

In the third quarter, we reduced net debt by EUR 127 million leaving us with net debt of EUR 741 million at the end of September. I would note that we have now cut our net debt level in half over the last 12 months and see further deleveraging ahead by year-end, driven by another quarter with positive total cash generation.

We have raised our full year 2023 EBITDA range to EUR 1,075 million to EUR 1,175 million versus our prior EUR 950 million to EUR 1.1 billion range. Strong market dynamics in the Eastern Hemisphere and our expectation of continued solid operational performance are the key drivers for this improved outlook.

Moving to our commercial and operational updates. The international tubes market remains strong. Demand and pricing have continued to increase and our prices on new orders have continued to grow. As we noted at the Capital Market Day, we received a $300 million order in Saudi Arabia on top of an existing long-term agreement.

In a press release issued last night, we specified that these orders have been signed with Aramco. These volumes will be in our revenue in 2024. In addition, we are further progressing on our premiumization strategy in China which is supported by a tight supply-demand balance for premium tubulars worldwide.

The U.S. market has continued to normalize and we are now seeing some bright spots in the market. Our order volumes recovered in the third quarter and lower distributor inventories and substantially reduced imports are meeting with stabilizing and likely improving demand. We expect market prices to stabilize in the near term.

Let's turn to Slide 6 to review our New Vallourec Plan. As a reminder, the New Vallourec Plan was announced in May 2022. Our key objectives are to deliver best-in-class profitability and cycle-proof our business. Versus the 2021 baseline, we plan to drive a EUR 230 million EBITDA improvement and then additional EUR 20 million CapEx reduction with a full impact starting in Q2 2024 and continue to work to close the profitability gap with our primary peers.

We also aim to deliver positive free cash flow through the cycle and achieve zero net debt by year-end 2025 at the latest. For reference, our target 2024 industrial footprint is shown on the right.

Slide 7 provides an update on the near-term target for the New Vallourec Plan. In Germany, our tube production will be finalized shortly, which is ahead of schedule. The EBITDA impact of our German operations will be zero in 2024. The corresponding investment in Brazil that will enable the transfer of the oil and gas volumes from Germany to Brazil is also proceeding well. The final project phases are underway and we expect we will see the full benefit of this investment in 2024.

Beyond this transfer of activities, we have also laid out a EUR 100 million overhead cost reduction target as part of the initial phase of the New Vallourec Plan. This has also been executed according to plan, and this will be substantially completed around year-end.

Our premiumization strategy in China that we discussed is also moving forward well. We are now implementing improved pricing policies which will help us generate adequate returns for the premium products we plan to sell from this competitive export hub.

Finally, our local capacity expansion in Saudi Arabia is also progressing. We have completed 1 of the 2 phases of our capacity expansion and expect the full benefit of the second phase in early 2024. As we near the end of 2023, I'm pleased -- very pleased with the progress we have made in many areas. And still see significant opportunities ahead for the group.

Now let's discuss the commercial environment. On Slide 9, we focus on the U.S. OCTG market, which is the largest market in our North America operations. The horizontal rig count, a proxy for our dividend, seems to be forming the bottom. We agree with the market consensus that there will be a recovery in drilling activity from here given supportive oil and gas prices and favorable customer drilling economics.

Following exceptionally high OCTG imports in the fourth quarter of 2022 and first quarter of 2023, imports have now fallen to multiyear lows, extending the trend observed through the summer. Domestic shipments also fell in the third quarter. Distributor inventories have been declining steadily for several months now.

Pricing has continued to normalize towards global averages but recent surveys have shown better trends for premium products. Semi premium production casing showed very small declines in the latest surveys. We expect broader stabilization in pricing in the near term.

On Slide 10, we focus on the international OCTG market. Onshore and offshore drilling activity has remained stable at healthy levels for the past several months. In addition, there remained positive tailwinds in offshore markets driven by global deepwater projects and robust shallow water activity in the Middle East. Offshore developments tend to demand higher end tubes. So continued growth in this market will be positive for Tier 1 players like Vallourec.

We believe that globally speaking, capacity for premium OCTG is limited, and at Vallourec in particular, will have demand in excess of our premium capacity. While the third-party data shown here points to some moderation in market prices, we believe this is overly conservative.

In fact, the prices of our new orders have continued to show a positive trend for the year. The prices at which we are booking new international orders continue to exceed those you see in our third quarter results. Therefore, we still expect to have a positive price tailwind in our results outside of the U.S. for the next few quarters.

Moving to Slide 11. Looking at our tubes business as a whole, our third quarter profitability took a step lower versus the excellent level we saw in the second quarter. Nonetheless, we saw meaningful year-over-year growth in EBITDA per tonne to EUR 563 versus the EUR 364 seen in third quarter 2022. This reflects the strong market environment, the success of the new pricing policies we implemented last year and strong execution by our Eastern Hemisphere operations.

EBITDA outside of the U.S. continued to grow accordingly. While U.S. volumes and pricing were down sequentially in the third quarter, our bookings recovered and will drive higher volumes in the fourth quarter.

Looking ahead to 2024, we still have meaningful earnings tailwinds in our portfolio. We expect the benefits of the capacity enhancement program in Brazil and capacity expansion program in Saudi Arabia will be fully operational in 2024. As previous discussed, we are also improving our pricing policies in China, which will improve margins for volume produced in Asia as we progress through 2024.

Turning to our Mine & Forest segment on Slide 12. Iron ore production was 1.8 million tonnes in the third quarter. The year-over-year increase reflected our return to higher production levels following the full release of the Cachoeirinha waste pile in May. However, as explained during our last call and the Capital Markets Day, our volumes were down slightly versus the second quarter level due to the more difficult reserves we are currently exploiting.

We reiterate our 2024 expectation for the 6 million tonne run rate we guided at the Capital Markets Day. We continue to advance on Phase 1 and Phase 2 extensions and are currently working with regulators to obtain the necessary permits for Phase 1.

In addition, we are executing significant project planning and CapEx analysis to ensure the project execution of these extensions occurs with the same rigor and quality that we have delivered in our tubes enhancement CapEx in the country.

I will now hand the call over to Sascha to comment on our financial results.

[Sascha Bibert, executive]

Good morning, everyone, and thank you for participating to our third quarter call. We reported very robust results ahead of our expectations due to continued strong execution with a favorable operating environment.

Our key figures on Page 14 demonstrates the positive effects of our value over volume strategy leading to lower tonnage and subsequently lower revenues. However, an EBITDA improvement year-over-year to EUR 222 million in the third quarter. I would like to emphasize that our Q3 EBITDA was burdened by about EUR 20 million FX losses year-over-year, and by EUR 11 million noncash expenses that we had in this quarter, as you can see also in the cash flow bridge.

We have made further progress in our deleveraging ambitions via consistent cash generation and have reduced net debt further to now EUR 741 million. We expect this positive trend to continue in Q4 and beyond towards net debt zero, which will then allow us to return significant amounts back to our shareholders.

Moving to our tubes business on Page 15. Volumes are down 26% year-over-year and 13% sequentially, while the average selling price was up strongly year-over-year. In the fourth quarter, we expect volumes to rebound in the U.S., but also elsewhere with the exception of Germany, which is to be closed. Tubes EBITDA on Page 16, the related margin and profitability per tonne has all increased year-over-year, however, down sequentially as expected.

Moving to the Mine & Forest performance on Page 17. Year-over-year production and prices increased. However, the revenue increase was more muted as the quality of the ore mined was lower. We expect the ore quality to remain towards the lower end of our historic range expressed as percent of plus, in line with an EBITDA run rate of about EUR 100 million per year, until we start mining in our new expansion areas as outlined during our Capital Market Day.

The reason for the almost flattish EBITDA in the context of rising revenues is our forest which is also included in the segment. In Q3 2022, we had a higher noncash revaluation effect in the forest, specifically EUR 6 million. While in Q3 2022 -- that was 2023, it was only EUR 1 million, i.e., a minus EUR 5 million year-over-year delta. If you adjust both quarters for this effect, then the year-over-year increase of the Mine & Forest segment is 19%.

Moving back to the group level on Page 18. Given that I talked about volumes and EBITDA already, I will make a few more comments down to net income. Depreciation and amortization at EUR 50 million is a bit lower compared to prior year and sequentially. The financial loss of EUR 22 million equally improved year-over-year and sequentially, driven by lower net interest expenses.

The EUR 30 million other includes primarily asset disposals, restructuring and other effects. It improved as we now have lower adaptation measures. SG&A stayed flat at EUR 85 million sequentially but increased as a percent due to lower revenues.

Moving to cash flow on Page 19 with a bridge walking you from EBITDA to the change in net debt. Adjusted free cash flow came in at EUR 217 million, supported by a working capital release of EUR 97 million. All working capital levers contributed to this. However, the major part coming from lower receivables.

Restructuring and other nonrecurring items was EUR 63 million, a charge that we expect to increase significantly in the fourth quarter to about EUR 180 million. Noncash adjustments to net debt were EUR 23 million of which the majority related to the accrual of interest. This effect will reverse in the fourth quarter.

On to net debt and liquidity on Page 20. Net debt has come down every quarter over the last 12 months and now stands at EUR 741 million, 50% lower than a year ago. We expect this reduction to continue in the fourth quarter in spite of the heavy burden from restructuring and other nonrecurring items.

Gross debt is EUR 1.679 billion slightly lower than in the prior quarter. I expect the slight reduction in gross debt to continue as we lower our amount of export financing in Brazil. With consistent cash generation, our liquidity continues to grow and is now close to EUR 1.6 billion.

Let me now hand back to Philippe for the outlook.

[Philippe Guillemot, executive]

Thank you, Sascha. Let's look at Slide 22 to discuss our outlook. For the fourth quarter, we expect further improvement in our international EBITDA due to the current strong market environment and improved operational execution. We expect lower pricing in the U.S., but this will be largely offset by a recovery in sales volumes.

In our Mine & Forest business, as previously discussed, we expect production volumes to be down slightly to 1.7 million tonnes and production cost pattern to be similar sequentially. We have raised our full year 2023 EBITDA range to EUR 1,075 million to EUR 1,175 million versus our prior EUR 950 million to EUR 1.1 billion range.

Strong market dynamics in the Eastern Hemisphere and our expectation of continued solid operational performance are the key drivers of this improved outlook. Importantly, despite the significant restructuring in cash used in the fourth quarter, we still expect to have positive total cash generation and further reduce net debt in the fourth quarter excluding any potential benefit of asset sales.

Looking beyond 2023. We continue to see the premium tubes business in a multiyear upturn due to the strong oil and gas market fundamentals our customers are experiencing. Relative to the 2021 baseline, the full EUR 230 million effect of the New Vallourec Plan will be in our earnings run rate in Q2 2024. We remain focused on creating an organization that can generate positive free cash flow through cycles and reducing our net debt to zero by year-end 2025 at the latest.

In addition, the profitability tailwinds from our premiumization program in China, our operational excellence initiatives in Brazil and the delivery of our Phase 1 and Phase 2 mine extensions will drive differentiated EBITDA growth for Vallourec over the next several years.

A few words to conclude on Slide 23. We are on track to realize a full EUR 230 million EBITDA benefit of the New Vallourec Plan in 2024, and we see further opportunities ahead. The premium tubes business remains in a multiyear upturn due to robust customer activity and constrained supply.

And finally, we remain on track to deleverage our balance sheet and then aim to distribute a peer-leading 80% to 100% of our total cash generation to our shareholders potentially as early as 2025.

Thank you for your attention. Sascha and I are now ready to take your questions.

[Operator]

[Operator Instructions] Our first question today is coming from Kevin Roger of Kepler.

[Kevin Roger, analyst]

I have 3 questions, if I may. And the first one is maybe asking on the quarterly trends that you can see on the EBITDA for the coming quarters. Taking the middle of the range that you provide for the full year, Q4 EBITDA will be around EUR 200 million with some losses that are coming from Germany. Those losses will be off.

With the positive message that you are giving us on the international, U.S., et cetera, would you say that from Q4, then you will see a kind of recovery in quarterly EBITDA? That would be the first question, please.

The second question is in the press release and during the presentation, you mentioned several times that your expectation for debt reduction are without disposal. So does it mean that we can expect something here in the near term that will help you on the deleveraging?

And as a kind of follow-up on the debt side. So clearly, Q3 cash flow was very good. You improve also the tone for Q4. So what are in a way, refraining you from not giving us a more optimistic outlook on the deleveraging and keeping the 2025 at least statement?

[Philippe Guillemot, executive]

Okay. Yes. So yes, you did the math yourselves to have a sense of what we expect to deliver in Q4. Well, I've said in my comments on our Q3 numbers and outlook for the year, that Germany has no impact on our numbers this year because we have managed to rundown our production in Germany without incurring the losses we expected at the beginning of the year.

I think there was a very good execution of the orders for the year with very high quality levels beyond our expectations. So as a consequence, I think Germany doesn't have the negative impact on our numbers this year as we expected.

So as far Q4 is concerned, it's true that Q4 gives an indication on how we are going to enter next year. So it's obviously for us a very good indication on what we could potentially expect to deliver in 2024 without, as I repeat, giving you any guidance for next year as we never do. And by the way, our -- we just don't either. But as we progress through the year, obviously, as you have seen, we are more and more precise.

Debt. Yes, all the indication we give on our -- everything is before any potential asset disposal. We are working on asset disposal. And as you know, the main asset for disposal are our loans. We have loans in Germany, loans in France. We are promising more to come when we communicate in the next few quarters.

As far as deleveraging is concerned, since I joined, you clearly understood that one way to improve our cash was to work extensively on our working cap. But as usual, when you work on working cap, it's not recurring. You make a step change and then once you have done it, it's done.

So that's why the reason with which we are improving this year is obviously significantly contributing to our cash generation. I cannot expect to get the same reason in the years to come, especially in '24. Nevertheless, we are highly committed to be net debt zero at the latest around '25, and obviously the earlier the better.

[Operator]

We'll now move to Jean-Luc Romain of CIC Market Solutions.

[Jean-Luc Romain, analyst]

My question was actually relating to Germany, but you just answered it. How about the -- what it cost to close it and you just mentioned that you managed to close it without a specific loss. So no more questions.

[Philippe Guillemot, executive]

Thank you.

[Operator]

[Operator Instructions] We'll now move to Guillaume Delaby of Societe Generale.

[Guillaume Delaby, analyst]

Yes. Congrats on your results and especially for the high level of EBITDA per tonne. I missed, and I do apologize for that, the beginning of the call, so maybe you spoke about it. However, so my question is, is EUR 563 per tonne of tube EBITDA, given what you are seeing for the next 3 quarters, Q4, Q1 and Q2, knowing that we will have the impact of the restructuring plan in Q2, is EUR 563, I would say, a good proxy for EBITDA per tonne for the next 3 quarters. So it's very direct, very simple. No more questions after that.

[Philippe Guillemot, executive]

It's an indirect way to ask me for guidance for next year, as you just have to multiply this number by the volumes. Now I won't answer your question. I would just put some color.

Obviously, EBITDA per tonne at group level depends on, obviously, how much volume we have in the U.S. versus the rest of the world, the international market. But the overall dynamic, obviously, we extensively comment the U.S. market. So you have all information in.

What I would like to insist is, as I said in my comments on the slide, we have further room for improvement of our EBITDA per tonne on the international market as we see prices of the order we book today being higher than the one we invoice currently.

So overall, even if EBITDA per tonne may normalize at the level it is or even lower, we may expect an increase in the international market. So the weighted average, I guess, I'll let you guess what it could be.

[Operator]

[Operator Instructions] We'll now move to Daniel Thomson of BNP Paribas.

[Daniel Thomson, analyst]

Just a couple on the U.S. markets, if I could. Firstly, what are your expectations on U.S. rig count additions as we go into 2024, but particularly the shape of that growth? Are you expecting sort of -- early on sort of a few additions or sort of incrementally through the first half?

And then I also wondered maybe a more difficult one to sort of get your view on. But expectations for tonnage per rig next year versus the sort of 7% increase we've seen since 2014.

I know you showed a chart at the CMD. But obviously, we've seen sort of shale production being pretty resilient on a lower rig count. And I wondered sort of going into next year if maybe the tonnage per rig could be a bit higher than the average increases we've seen.

And then lastly, just any comments on your expectations for imports into the U.S. market next year given the current level of pricing that we're at, at the moment.

[Philippe Guillemot, executive]

Yes. In fact, yes, you [Technical Difficulty] drivers for demand for our product. And -- Okay. And pricing, so recount, low single digit for next year, I think mid-single-digits. I think that's obviously something that changes as we go, and as you know, sentiment is changing, but the oil price where it is today should lead to this slight increase.

Tonnage per rig, we just confirm what we said at the Capital Markets Day, I think nothing more to add. I think we see a longer, longer string used by -- for the wells. And as far as imports are concerned, as I mentioned in my comments, I think we are at a fairly low level, historical low level.

This -- will this last? We don't know. But as you know, the U.S. market is such that, okay, there are trade buyers. And there is now a balanced -- supply and demand in the U.S. are such that it may be not as necessary after the significant increase of demand over last year to have impacts.

[Daniel Thomson, analyst]

Okay. So into the start of next year, I mean, we have seen typically exporters making use of their quotas, but are you sort of saying that could be a bit more gradual as we kind of look at the outlook for prices next year rather than the sort of a bit of a dump in the first quarter maybe?

[Philippe Guillemot, executive]

Yes. I think distributors -- there was a timeline between the order and the time when product landed in the U.S. And I think there are lessons to be learned. I'm sure distributors deliver on this. So if anything happens, it will be much more gradual than what we have observed end of last year, beginning of this year.

[Operator]

We'll now move to Baptiste Lebacq of ODDO.

[Baptiste Lebacq, analyst]

Yes. Two questions from my side, if I may. The first one is regarding China. If I'm not wrong, during the Capital Market Day, you mentioned that China was now at breakeven. Can we expect, let's say, a positive EBITDA for next year due to maybe deliveries from Middle East?

And second question is regarding bonds to '26. Clearly, deleveraging is accelerating and ongoing. Can we imagine after the new industrial setup put in place, let's say, financing optimization from this point?

[Philippe Guillemot, executive]

Yes, as far as China is concerned, we already described our strategy for this asset during our Capital Market Day, and you can see that it works. And obviously, posting a positive EBITDA in China is not something for the future. It's already a reality.

In general, I would say that, as I said when I joined, there is no room anymore in Vallourec for assets which are not generating positive EBITDA. And I think we have reached that point.

As far as financing is concerned, yes, for sure, it could be a little bit in 2024, as we are progressing very well toward our objective of being net debt zero by end of '25 at the latest. And obviously, on top, as you see, we have benefited from a rating upgrade, we are benefiting slowly but surely of better rating of our debt.

[Operator]

[Operator Instructions] Here we have Mr. Daniel Thomson of BNP Paribas coming back with follow-up questions.

[Daniel Thomson, analyst]

Look, maybe going back to the CMD again, you flagged around 1.7 million tonnes of sort of sales volumes in the mid-cycle scenario, but then at the same time, there's a pretty positive multiyear outlook that we've spoken about. So I sort of wondered where -- how close do you think volumes would get to, to your max capacity, which I think is around 2.1 million tonnes after all the restructurings as we go through the up-cycle?

[Philippe Guillemot, executive]

Well, again, I insist the strategy that I've been implementing since I joined is value versus volume. So we continue, obviously, to deep dive on the use of our existing capacity. And again, volume is not our primary objective.

So I may decide to close some capacity if I conclude that they are not creating value and generating EBITDA. So again, what matters for us is really the EBITDA per tonne. And obviously, as a consequence, total absolute of EBITDA we can generate with our existing assets.

[Daniel Thomson, analyst]

Sure. I'm just trying to understand the strength of the up-cycle we're seeing here relative to your base case, but yes, point taken.

[Philippe Guillemot, executive]

Yes. Again, our objective is to sell premium products. And the capacity that matters is heat treatment. We are fully utilizing our heat treatment capacity. We have plans to increase if we -- whenever -- wherever we can this capacity, that's what leads at the end to the volume we wish, obviously, to deliver to the market because it comes usually with better value, better prices.

[Daniel Thomson, analyst]

Okay. Understood.

[Operator]

As we have no further questions at this time. I'll turn the call back over to Mr. Philippe Guillemot for any additional or closing remarks. Thank you.

[Philippe Guillemot, executive]

Thank you again for joining us for today's call. I leave you with the following thoughts. We are nearing the end of 2023, which will be a successful transformative year for Vallourec. And we have more to do and constantly find new ways to improve shareholder value.

As we progress into 2024, our capital allocation focus will turn towards achieving our deleveraging targets. Before we will have the opportunity to deliver peer-leading capital returns. Thank you again. Operator, you may close the call.

[Operator]

Ladies and gentlemen, that will conclude today's conference. Thanks for your attendance. You may now disconnect. Have a good day, and goodbye.