Vallourec S.A.

Hello and welcome to the Valorack Q1 2024 results release call. Please note this call is being recorded and for the durations of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand you over to Valorac to begin today's conference. Thank you.

Thank you. Good morning, ladies and gentlemen, and thank you for joining us for Valorac's first quarter 2024 results presentation. I'm Connor Lina, Vice President of Investor Relations at Valorac. I'm joined today by Valorac's Chairman and Chief Executive Officer, Philip Guillemot, and Valorac's Chief Financial Officer, Sasha Bieber. 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 markets regulator, the AMF. This presentation will be followed by a Q&A session. I will now turn the call over to Philip Kimmel. Thank you, Conor.

Welcome, ladies and gentlemen, and thank you for joining us to discuss ValuX first quarter 2024 results. Before proceeding, let me draw your attention to slide two, where you can consult our safe harbor statement. Today's agenda is on slide three. I will start with the highlights of the first quarter of 2024, followed by an update on the market and commercial environment. Sacha will then take you through our first quarter numbers, and I will finish with our outlook for the second quarter and full year 2024. First, let's look at the highlights of the first quarter of 2024 on slide five. Our results demonstrated the clear benefits of the new value-added plan and our value-over-volume strategy. Despite lower U.S. pricing, our group EBITDA margin expanded 177 basis points sequentially, and our cubes EBITDA margin was up 277 basis points sequentially. Our tubes EBDA pattern at 751 euros expanded by 100 euros sequentially and year over year to the second highest level we have seen in the past 15 years. This was only surpassed by our results in the second quarter 2023. Overall, our group EBDA in the first quarter was 235 million euros. As further evidence of the progress we have made in reshaping Valorec, we generated 172 million euros of adjusted free cash flow and reduced our net debt for the sixth quarter in a row. Our net debt now stands at 485 million euros, which is 515 million euros lower year over year. Looking ahead, We expect our second quarter EBITDA to moderately decline versus the first quarter due to sequentially weaker market dynamics in the United States. However, despite this lower EBITDA, we expect to further reduce our net debt in the second quarter. Moving to our commercial and operational updates, the international OCTG market remains strong. Pricing remains very healthy and we have a robust pipeline of potential demand across multiple geographies. In the US, demand has been stable for the past several months. However, market pricing has decreased in March and April. As compared to the start of the year, market expectations have reset. lower due to pressure on gas-directed breathing activity, though we continue to see OCTG supply and demand as balanced. We continue to see strong momentum in our new energies business and particularly in our Delphi vertical storage solution. In early April, we signed a partnership agreement with Nexkem. through which we will integrate our vertical hydrogen storage solution, DELPHI, into global hydrogen and green ammonia production projects, where NETSCAN is a technology provider. We continue to target the first commercial DELPHI system deployment in 2025. We will update you on this and more at our All-Noir One Research and Development and New Energy site visit on June 4. In April, we completed a significant step in our new VALOREC journey by executing a comprehensive balance sheet refinancing. We have decreased our cost of debt, extended the maturities of our senior notes and liquidity facilities, and preserved significant flexibility for our future capital allocation. This finalizes a major step in crisis-proofing our business. We are well ahead of our plans to reach net debt zero by year-end 2025 and expect to meaningfully reduce our debt from the Q1 2024 level by year-end 2024. Accordingly, we now target the initiation of returns to shareholders in 2025 at the latest. Now let's discuss the commercial environment on slide 7. We focus on the US OCTG market. The horizontal rig count, a proxy for our demand, remains stable. It has been effectively flat since last October. We continue to expect it to remain at a similar level for the next several months. While not shown here, imports took a step higher in January and February but have decreased again in both March and April. Accordingly, industry inventories are now slightly above five months of demand, below the long-term historical average. However, many market participants started the year expecting demand to increase. As gas-directed activity has weakened, we have seen decreases in spot market pricing in March and April. That said, we continue to see OCTG supply and demand as balanced and remain disciplined in our pricing strategy. On slide 8, we turn to the international OCTG market. Drilling activity has remained stable at strong levels for the past several quarters. Our leading technology offering positions us extremely well in the current market environment. In the Middle East, some of our largest customers are focusing on developing their gas resources. Our suite of premium gas-type connections are the preferred solution for developing this field. Global investments in offshore fields are also at the highest level. They have been in years and are likely to continue to grow. There have been several high profile exploration successes and project development activity remains high. This is stimulating strong demand for our high-end premium tubes that assure the safe development of complex offshore fields. At the market level, Pricing has remained relatively flat at every level. We continue to see a favorable booking price relative to our invoice price in international OCTG markets, indicating a tailwind to future results. Let me wrap up to comment on our tubes business on slide nine. Our first quarter results demonstrated the power of the new value-add class. In spite of lower U.S. pricing and volumes, we saw EBITDA patterns improve again in the first quarter of 2024 to the second highest level we have seen in more than 15 years. This reflects the cost reduction we have executed as well as a mixed shift we have implemented with the value over volume strategy. As I discussed in the previous slide, the international OCTG market remains strong. We continue to see a robust demand pipeline across several geographies, including the Middle East, Africa and the North. I would also reiterate that our gas-oriented product portfolio in the Middle East is well positioned for our top customers investment strategy. In other words, we have seen no change in demand resulting from the well-publicized all-week suspension in Saudi Arabia. In North America, we continue to align ourselves with some of the largest independent EMPs and distribution partners who remain committed to our value-over-volume surgery and are staying disciplined on pricing despite the recent spot market evolution. Let's turn to our mine and forest segment on slide 10. Iron ore production was 1.4 million tons in the first quarter, in line with our expectations. Unanticipated, the favorable iron ore price environment has been supportive to our EBITDA, which was slightly above the €100 million annualized run rate we guided at our capital market statement. With iron ore prices down marginally versus the first quarter level, we expect EBITDA will return closer to that €100 million annualized level in the second quarter. We continue to advance our phase one and phase two extension and will update you on these as we progress through the year. I will now end the call over two sessions to comment on our financial results.

Thank you, Philippe, and good morning, everybody. Thank you for joining, starting on page 12. We reported the sixth straight quarter of positive cash generation and subsequent net debt reduction to now below 500 million. For the group, year-over-year results are impacted by 139 kilotons of lower tubes volumes, of which close to half relate to the closure of Germany. Furthermore, in this time period, we have seen a substantial reduction in U.S. prices, decreasing our invoice prices in that region by around $1,500 per ton year over year. Sequentially, we have lost some EBITDA, which we have recorded in the last quarter of operation in Germany in Q4, and also now have slightly lower EBITDA in the US, as well as in the mine and forest business. On the positive side, international tubes earnings continued on their upward trajectory and increased quarter over quarter. Please also note that in our Q1 2024 EBITDA, we have 10 million of non-cash expenses compared to a minor non-cash benefit in Q4 2023, as you can see in our cash flow bridge. Over to page 13. We performed strongly once again in our pricing, with the average selling price up year over year and sequentially, despite lower prices in the US, a region which constitutes almost half of the troops' revenues. The sequential reduction in tonnage is due to a mix of factors, with Germany contributing about 20% to the quarter over quarter reduction in tonnage. The rest is largely timing, and I would expect the volumes to pick up again in coming quarters. On page 14, profitability has increased both year-over-year and sequentially, which is remarkable given the change in market circumstances in the U.S. So you clearly see the impact of both our value-over-volume strategy, but also the general strength of the international tubes market. With a pickup in volumes in the coming quarters and a further decline in invoice prices in the U.S., I would expect the margin to reduce somewhat in Q2 and then in Q3 remain roughly stable. On to page 15. Year-over-year volumes and prices declined slightly, and in addition, we are now mining lower-quality ore, which is why we have embarked on a two-phase expansion. Next to the aforementioned factors, EBITDA is furthermore impacted by the non-cash revaluation of the forest. In Q1 2024, the revaluation effect was minus $4 million, while plus $1 million a year ago. In the coming quarters, we expect the EBITDA to be aligned with the $100 million annual run rate guided for during the capital markets day. On to page 16. Similar to our cash performance, we are now building a track record of positive net income generation. In Q1, there was nothing major to mention. With respect to financial income or loss, I'm just reminding you that in Q4 2023, we had a 40 million extraordinary gain. In Q1 2024, financial income is not yet impacted by the refinancing. Refinancing will have effects on the P&L balance sheet and cash flow, but I will explain those effects with real numbers in the next quarter. Not surprisingly, the effects are generally positive. On page 17, overall we report 102 million of cash generation, then offset by 17 million non-cash items, mostly accrued interest for an 85 million reduction of net debt. As indicated in my opening remarks, cash-effective EBITDA was actually $10 million higher than reported EBITDA. Behind those non-cash items, we have the fair value movements of our biological assets, i.e., the forests, as well as expenses for our management equity plan, following IFRS 2. On to page 18. I can be quick here, as we have further slides explaining the way forward. Key messages that we expect net debt to continue to decline meaningfully until year end, while we should also see a trend reversal in gross debt and total liquidity, which will also decline following our refinancing. Specifically, we will use cash on balance sheet to reduce gross debt, thereby safe on the spread. So on page 19. With our refinancing, we have a new bond with a longer tenor, but lower volume, as well as upsized liquidity facilities with reset maturities. On a full year basis, we calculate that the benefit of this overall refinancing is about 30 to 35 million per year. A broad range of international financial institutions participated in this refinancing. clearly giving evidence that Valuwek now has become an attractive counterparty, once again leaving the financial restructuring behind us. This is also visible in our ratings. Standard & Poor's gave us the fourth upgrade within 18 months, and both Fitch and Moody's have us on a positive outlook, with Fitch being one notch below investment grade. With respect to the bonds, we have issued in dollar but swapped into Euro. This means that we have created a synthetic Euro bond in our financials with a Euro coupon of around 5.8%. FX gains or losses from the dollar bond will be offset by an equivalent loss or gain from the swap. On page 20, you see the performer effects of the refinancing on the balance sheet. Over the course of the year, we will reduce gross debt by more than 550 million to below 1 billion, with a state-subsidized loan, PGE, to be reduced in two steps. In addition to the new bond, these transactions will be financed by cash on hand, though total liquidity will benefit from our upsized RCF and ABL facilities. Overall liquidity should be sufficient to support the company in any market conditions, thereby contributing to making Valorec a robust and reliable counterparty, while the cash on balance sheet gives us sufficient operational flexibility. Let me now hand back to Philip for the outlooks.

Thank you, Sacha. Let's turn to slide 22 to discuss our outlook for the second quarter and cool year 2024. Starting with our tubes business. In the second quarter, we expect that our volumes will increase sequentially due to higher international shipments. However, our will decline primarily due to the lower US pricing. For the full year, we expect a strong international market environment with persistence, with our results benefiting from favorable pricing for orders that are already in our backlog. In our mine and forest business, we expect U2 production source to be slightly higher than Q1 due to the rainy season impact in the first quarter. Full year production source is expected to be 6 million tons. At the group level, we expect EBITDA will moderately decline in the second quarter, largely due to the US market dynamics discussed previously. We expect EBITDA margin to remain strong through 2024 due to robust international tubes pricing and further operational improvements. We expect to meaningfully reduce our net debt through the full year 2024, including a reduction in the second quarter. To conclude on slide 23, our successful balance sheet refinancing has established a sustainable capital structure aligned with a new value-added footprint. The durable strength in the premium cubes market will contribute to another year of robust results in 2024. Finally, with our ongoing deleveraging, we can clearly say we are ahead of plan in reducing our net debt. We expect to begin returning capital to shareholders in 2025 at the latest. Thank you for your attention. Sachin and I are now ready to take your questions.

We'll take our first questions from Mick Pickup from Barclays. Your line is open. Please go ahead.

Good morning, everybody. Thank you for the presentation. A couple of questions, if I may. Firstly, you talk about the U.S. market being imbalanced. Can you just talk about what you're seeing on the leading edge on those pricing of that at the moment? And secondly, in your press release, you talk about Middle Eastern gas Now, clearly, Middle East has brought unconventionals into the mix. Can you talk about the opportunity set that Saudi and Abu Dhabi unconventionals could pose for you?

Yeah. So, US market. When you look at the drivers of prices and volume in the US, they are rather positive. I think oil production in the US is still expected to be around 30 million barrels of oil. Recount has been stable for a long period of time. Uncompleted wells are at a low point in 10 years. Imports are at low level. Inventory is low level. So there is expectation that market will stabilise. And as we said, we see no imbalance between demand and offer. So I think we remain positive on the US market in the next two quarters. As far as the Middle East is concerned, you're right. I think the recent announcements are rather positive for us, as switching from oil to gas means the need of more premium products, gas-tight connections, which is our sweet spot. So for us so far, as I said in my comment, we see no impact on our demand, even the opposite, as it is a demand for more premium products.

And that's even premium products in unconventional work in the Middle East. Yes, for sure. Okay, thank you.

Thank you. We will take our next questions from Kevin Roger from Kepler Chevro. Your line is open. Please go ahead.

Yes, good morning. Thanks. Just maybe a follow-up on the U.S. The last call that... we had with you to say that the pricing stabilization was imminent. Now clearly it seems that it's a bit postponed with the comment that you have said. So what's your view right now on the pricing dynamic? Do you expect the price to continue to go down for a few months, a few weeks, a few quarters? So when do you expect now the pricing stabilization, please? And the second question, you have changed a bit the tone on the shareholder remuneration. because you were potentially anticipating a shareholder remuneration in 2025, and now you said that it would be at the latest. I was wondering if you have also think about the potential way you will remunerate the shareholders, and if you are thinking about the dividend, the buyback, or also if you are thinking a bit more on that side, please.

Yeah, it's clear that there was a few months ago consensus that price would stabilize imminently and we are not the only one saying it. There has been a reset. It's clear that the gas directed activity has had an impact, but for us it's a temporary impact. Now, I would not bet anymore on how prices will evolve. But again, when I look at the drivers behind volume and price in the U.S., the one I mentioned earlier, I see no reason to be overly worried. And again, you know, we have visibility, short-term visibility in the U.S. What's going to be Q4, we don't know. We don't know. But for the time being, all the drivers behind prices and volume are rather positive. As far as the expectation for the return, yes, we have improved, in fact, in our communication on return because now it's at the latest. So it's clear that it is directly driven by our deleveraging. You've seen that we are ahead of plan on our objective of net debt zero by end of 25 at the latest, and as we said, this will continue throughout the year. As far as under which form the return could be, I think you have named the options, to be discussed with the board, and obviously to be approved through SGM in due time, but it's clearly becoming more and more, obviously, a priority on our agenda. And maybe... Maybe Sacha can complement my answer.

Kevin, just as an addition, next to the actual deleveraging that we have had respectively, the net debt reduction that we are now expecting for the coming quarters, what also has helped that we now have the refinancing behind us that clearly gives us visibility going forward also on the financial structure. When it comes to the form of shareholder return, I mean, you know that in principle we are agnostic. We will look at both dividends, share-by-backs, warrants included. With that said, dividends will commence after the AGM of 2025. We don't have a dividend resolution for the AGM 2024. That means any shareholder return prior to the AGM-25 will be in the form of share by backslash warrant purchases.

Okay, very clear. Thanks a lot.

Thank you. Our next question comes from Jamie Franklin from Jefferies. Your line is open. Please go ahead.

Hi there. Thanks for taking my questions, and thanks for the clear guidance on 2Q. I was just wondering if you could give us any steer on volumes in the third quarter and at least maybe directionally if you would expect volumes to step up again after a step up in 2Q. And then secondly, I just wanted to check on the moving parts of the cash flow. You did previously guide to 200 million restructuring cash outflows. So just checking that remains and what the phasing of that will be through the year. Thanks.

Yeah, as I said in my comments, we expect volume to increase in Q2 versus Q1. And we have a very robust backlog of orders, as we said, on the international market that we will obviously invoice in Q2 and Q4. So volume will remain at high level in the rest of the year. As far as restructuring cash out is concerned, I hand over to Sachon.

Jamie, thanks for the question. You may recall that in Q4 we had a page where we tried to give some support in estimating the various cash outflows for the year, restructuring included. I'll come back to that in one second. CapEx on the slide, full year, around $200 million. I would reiterate that. We had financial cash out on that slide for the full year of around $100 million. I would reiterate that. The refinancing effect on cash flow will be predominantly in the year 2025 onwards. That is different in the P&L and balance sheet. And there's also no change when it comes to the indication regarding tax cash out, i.e. user mid to high 20s rate on pre-tax income. Restructuring cash out, we guided for at around 200 million. The message was that the year 23, with around 360 million restructuring cash out, was clearly the peak. This is now coming down, even though it is still substantial in the year 2024. You can somewhat approximate the number in that year or any year thereafter by looking at the provisions on the balance sheet, restructuring provision being one of them. I think at the time of December 23, the restructuring provision was standing at 270 million and obviously has declined a bit at end of Q1, given that we have utilized some of those provisions. So long-winded answer to say yes, directionally, it is still true. There might be some movements between line items, but directionally, not a bad indication. What we have not guided for is change in working capital. That is also a difficult one to forecast, but I would be marginally more optimistic versus a quarter ago or so when it comes to the potential release of working capital in the full year.

That's great. Thank you.

Thank you. We will take our next questions from Joshua from Bank of America Securities. Your line is open. Please go ahead.

Good morning, gents. This quarter marks the second successive quarter on a kind of 12-month trailing basis that your net debt EBITDA has been within that 0.5 times corridor. I was just wondering whether you could, given that on a technicality you've reached, zero net debt, whether you could guide us to a kind of nominal net debt figure that you feel comfortable with when assessing potentially the restart of cash returns. Thank you.

Yeah. Well, first, before I hand over to Sacha, we are committed to remain very, very disciplined as far as net debt is concerned. so any return to capital to shareholders should be viewed obviously within the limit of what we consider our max leverage and now i hand over to sasha to give you more color on the how we we see the management of this limit yeah so once again message today is we are ahead of plan we feel pretty confident which is why we have made a

a number of wording changes to both the net debt outlook as well as to the timing of shareholder return. You're right, if you use that trading perspective, we are well within the 0.5 times leverage, which is one of the indicators. But if you go down that route, maybe next to looking at a nominal level as you have requested, also keep in mind that whenever we do return money to shareholders in whichever shape and form, that in itself is also a cash outflow. So you want to take that into account when you run your math.

Sure, thank you. And then perhaps just one more on the warrants, potential for repurchasing warrants. The short interest held by warrant holders has not really budged since the last time that we spoke on the fourth quarter. Given that you're going to have a pretty significant cash outflow with the refinancing, How do you look at the potential for repurchasing those warrants, given your now lower just gross cash on the balance sheet?

I will let Sacha answer that. Our net debt trajectory gives us more and more room to maneuver, still being very disciplined and remaining within the limit we have set for our Never, but I will hand over to Serge.

It's technically true and it was actually intended that we are using some of our cash on balance sheet, which has surpassed a billion, if I got that right. to also finance the refinancing next to the inflow of the new bond. So technically speaking, post-refinancing, cash on balance sheet is lower. It's still at a very healthy level. But when I combine that with expected cash generation in periods to come, I think we have sufficient flexibility to act, be it on warrants or be it on something else. With respect to the warrants or short interest, I think we're looking at the same market data. The short interest possibly related to the warrants hasn't really changed that much, but still there would be the opportunity to engage with individual warrant holders to see if we do agree on value and then act accordingly going forward.

Very clear. Thank you very much.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. We will take our next questions from Daniel Thompson from BNP Paribas. Your line is open. Please go ahead.

Hi, good morning. Just two questions, please. I was wondering if you could tell us what you're assuming for the direction of U.S. pricing and volumes in the second half of this year from the end Q2 level, given in your outlook. And then secondly, just coming back to the Saudi Arabia MSC-12 announcement, and you've said this could be a sort of net benefit, particularly on the profitability side, but in relation to your mid-cycle volume number that you gave last year, I think 1.7 million tons, it does... Is this a significant enough change from a very significant country, or does that sort of 1.7 million tons stay valid regardless? Thank you.

Okay. Well, as far as the volume and prices in the U.S., we expect them to be lower in Q2 and offset, as we said, by our LC backlog and voicing the rest of it, not fully, partially. So just, yeah, just confirm what I've said earlier. As far as the new drilling plans for key customers we have in the Middle East, this is covered by our long-term agreement. So I think we are already in a position to supply the technology that will be needed for their new focus on gas-directed investments. As far as the 1.7 million, I will hand over to Sascha.

Maybe one additional on the U.S. pricing, just reminding the technicality, i.e., that we should differentiate between booking prices and invoice prices generally, not specifically for the U.S., The time lag between the two is reasonably short, i.e. three months. So given the market pricing as we speak, we do know that we will have a negative impact on the invoice prices in Q3. The subsequent question then is, and that was asked prior, when will market prices stabilize? But to that I have no further comment on top of what Philip said. On the overall volumes in this year or any other in relation to the 1.7 million ton assumption used in our mid-cycle, I think for the time being, you will see two developments relative to the mid-cycle developments, mid-cycle assumption. Number one, we are continuously outperforming, and I would say significantly outperforming On the margin side, or specifically EBITDA per ton, I remind you that in that mid-cycle simulation, we have used a tube EBITDA per ton of €450 per ton, so we're significantly above that. one of the reasons being our value over volume strategy includes including adequate pricing for the products that we have on the flip side we are on a lower volume trajectory for the time being compared to that 1.7 million tons I mean, one way to look at it is the tonnage that we actually reported in 23, which was 1.5 million tons. You then acknowledge that in that 23 tonnage, we did have volumes related to Germany, which we will no longer produce. So you do have a step down from that 1.5 million tons in 24 at first. Once we are sufficiently comfortable that value over volume is really applied in all of our jurisdictions, then in years further out, I can also see that volumes will pick up somewhat, but in 24, they will be lower.

Yeah, I would add that, as you understand, since volume is not the primary focus of our way of managing value work, so we pay careful attention to address markets which value the technology we are selling. And as I have commented earlier, I think the market is becoming more and more favorable for us in the implementation of the trade. Second, obviously, we continue to improve our cost structure to further improve our margin, which obviously translates in the numbers that Sacha just commented.

All right. Thanks for the call.

Thank you. We'll take our next questions from Baptiste Lebarque from Odoo BHF. Your line is open. Please go ahead.

Yes. Good morning, everybody. I have just one question regarding your land in Dusseldorf. Can we have an update regarding the situation? Is it evolving or is it on a pause, if you can say like that? Can we have an update on this situation? Thank you.

Yeah, you're right, I think this asset is still for sale. We have received unsolicited offers, so we are clearly contemplating launching a new sale process. Obviously, first we have to align with the City of Düsseldorf to be sure that the requirements for such sales and projects are compatible with this research process, but yes, definitely we're still working on it.

It could be, let's say, concluded by your end.

I won't commit to any timing, but obviously the sooner the better, provided we can secure the price that makes sense.

Thank you very much.

Thank you. As a final reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take our next questions from Kevin Roger from Kepler Chevro. Your line is open. Please go ahead.

Yes, sorry, it was a follow-up on the land in Germany, so the question has been asked and answered, so all fine for me. Thanks.

Okay.

It appears there are no further questions. I would now like to hand over back to our host for any closing or additional remarks. Please go ahead.

Okay. Thank you very much. Thank you again for joining us for today's call. I would like to leave you with the following thoughts. First, with our successful balance sheet refinancing, we have completed a major step in crisis-proofing our business. With our extended majorities, ample liquidity, and reduced cash costs, we are well positioned for the next several years. We expect 2024 will mark another strong year in the new value of Germany, and we are looking forward to initiating our returns to shoulder, which we target in 2025 at the latest. Again, thank you again. Operator, you may close the call.

Thank you. This concludes today's call. Thank you for your participation.