Vallourec S.A.

Hello and welcome to the BALOREC Q1 2025 results release call hosted by Philippe Guillemot, Chairman of the Board and Chief Executive Officer and Sacha Biber, Chief Financial Officer. Please note this conference is being recorded and for the duration of the call, your lines will be on listen only. However, you'll have the opportunity to ask questions after the presentation And 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'll be connected to an operator. I will now hand you over to Conor Liner, Head of Investor Relations, to begin today's conference. Thank you.

Thank you. Good morning, ladies and gentlemen, and thank you for joining us for Valorex's first quarter 2025 results presentations. I'm Connor Lineup, Vice President of Investor Relations at Ballarat. I'm joined today by Ballarat's Chairman and Chief Executive Officer, Philip Guillemot, and Ballarat's Chief Financial Officer, Sasha Beaver. Before we begin our presentation, I would like to note that this conference call will be recorded. A replay will be available following the call. You can find the audio webcast on our Investor Relations website. The presentation slides referred to during this call are also available for download here. Today's call will contain forward-looking statements. Future results may differ materially from statements or projections made on today's call. Forward-looking statements and risk factors that could affect those statements are referenced on slide two in today's presentation. These are also included in our universal registration document filed with the French Financial Markets Regulator, the AMS. This presentation will be followed by a Q&A session. I will now turn the call over to Philip Pippo. Thank you, Kudo.

Welcome, ladies and gentlemen, and thank you for joining us to discuss VALUATE first quarter 2025 results. You can see today's agenda on slide three. I will move directly to slide five, where we start by discussing the highlights of the first quarter. We delivered another quarter of strong operating results and cash conversion in Q1. Group EBITDA of 207 million euros came in at the high end of the expected range, and the EBITDA margin improved sequentially from 20 to 21%. We generated strong cash flow, which brought our net cash position at the end of the quarter to 112 million euros. Turning to the outlook. We expect second quarter of 2025 EBITDA to range between 170 million and 200 million euros. Based on recent strong bookings, we also confirm that Group EBITDA will improve in the second half of 2025 versus the first half. In the quarter, we saw continued strength in our international bookings. We published press releases highlighting major contracts announced with Solatrack, Kuwait Oil Company, and Allseas for the buzios field in Brazil. These were won with a strong pricing that reflects the high value we bring to our customers. Meanwhile, in the US, market prices increased further in the first quarter and again in April. This will drive higher prices in our results in the coming quarters. However, the pace of U.S. price increases has been hampered by a high level of uncertainty on both trade policy and customer demand. Also in the quarter, we announced the planned divestment of Sherimax, our subsidiary focused on specialized welding technologies. This follows the successful turnaround of the business as part of the new value-added plan. The CEL follows our strategy of streamlining invested capital to focus on our core business of premium tubular solutions. I would also highlight that we received a strong endorsement from all three rating agencies recently, including an upgrade to an investment grade rating from Fitch. This marks Valwag's first investment graduating in about a decade. This is clear evidence of the degree to which we have crisis-proofed our business. Let's turn to the U.S. OCTG market on slide 7. The horizontal rig count has remained stable since mid-2024. Customer demand has been strong in the U.S. over recent months, as the industry inventories had become too low to serve today's level of drilling activity. Looking at imports, there was a noticeable uptick in January. We believe this was driven by the usage of trade quotas under the old steel import system. Recall that the shift to the new blanket tariff system occurred in March. Once again, this behavior was disproportionately driven by importers of commodity welded tubes. Imports moderated again in February and March. Market prices have been increasing as a result of strong order books across the US OCTG industry and these still tariffs. Based on this trend, our invoice pricing should improve in the second and third quarters. However, The market has yet to fully reflect the impact of tariffs due to the high level of uncertainty on trade policy and trading activity. On this later point, the recent volatility in oil prices has created uncertainty around U.S. activity levels in the second half of the year. Some ENPs have announced tweaks to their CapEx budgets. but there have been limited actual activity reductions so far. Should a downside scenario materialize, you can expect that we will remain highly disciplined and stick to our value over volume level. Let's move to the international OCTG market on slide 8. Demand, as measured by the recount, remains stable at the high level outside of the U.S. There has been selective softness in global activity. However, we have not seen a direct impact on our business. Our focus on high-end premium tubes in Middle East and North American gas, deep water Brazil, and also high-value areas has insulated us from this weakness. We noted last quarter that our bookings were outperforming the price indicators we have shown on the right. Let us turn to slide 9 to discuss this. On slide 9, we show the volume and price trend of our global OCTG bookings. We have split this data into North America onshore and the rest of the world. The rest of the world represents the markets we serve from our premium export hubs in Brazil and Asia, including North America offshore. You can see the strong trends I referred to earlier. Our group OCTG bookings volumes in Q1 were the highest they have been over the past year and a half. On the right, you can see an inflation in US pricing. More importantly, you can see resilient pricing in the rest of the world. This is a strong endorsement of our value over volume strategy. Recall that rest of world orders typically shift a few quarters after booking. Therefore, this trend supports the expected improvement in second half EBITDA and will support our results into 2026. Looking ahead, we still see a strong pipeline of opportunities across many core geographies. Outside of North America, we have a very heavy focus on national oil companies who are, in many cases, ramping up activity to deliver on multi-year plans. The rest of this international business largely serves high-end, low break-even projects for well-capitalized international oil companies. We remain optimistic about the outlook for our international customers' demand. I will now turn the call over to Sacha to discuss our financials.

Thank you, Philippe, and good morning to all of you. Thank you for joining this call. I start with page 11. We delivered a very solid quarter in the upper half of our guidance range. with a group EBITDA margin of 21%, supported by an excellent result in our mine and forest segment. Cash flow was equally very strong, leading to an increase of our net cash position to now 112 million, supported by a release of working capital. On page 12. While we sold 48 kilotons less than in the preceding quarter, our average selling price increased by 200 euro per ton sequentially. In line with our outlook, we expect this positive trend in the ASP to continue. A short reminder for the interpretation of the revenue mix by geography. First, these are tubes, not group revenues. Second, North America includes on and offshore applications. which are sold at different prices due to very different requirements. Therefore, the EBITDA contribution of our US onshore business to total tubes or even to group profitability is well below this revenue percentage. Page 13. Year-over-year profitability is down due to a much lower realized price for our US onshore business. While the profitability quarter over quarter remained roughly stable, in line with a positive expectation for the average selling price, we also expect the EBITDA per ton to develop favorably in the coming quarters. Page 14. We reported a very strong performance in our mine and forest segments with an EBITDA of 53 million. All levers contributed to this great result. including high volumes, a favorable market price, very good quality following our Phase I extension, as well as low cost. The non-cash IAS 41 forest revaluation contributed with plus $4 million in this quarter compared to plus $6 million in Q4 24 and minus $4 million in Q1 24. Moving to the net income of the group on page 15. Below EBITDA, we have 51 million depreciation amortization, I'd say a good run rate for the coming quarters. Then we have 10 million in net financial expenses, slightly better than the 15 to 20 million expected quarterly run rates. Finally, 17 million others include non-controlling interest book gains and losses, and some other items. Without any extraordinary items, non-controlling interest will be around 5 to 10 million per quarter. 44 million of tax expense with a tax rate higher than I would expect for the full year 25. Turning to page 16. In total, we have generated 104 million of cash and thereby started very well to fill the pot that is available for shareholder return related to the 2025 cash generation. Net debt improved by slightly less than total cash generation, as in Q1, we accrue for the interest that we will pay in Q2. In Q2, we will also pay the 1.5 Euro dividend per share already announced. Moving to page 17. Our net cash position improved to 112 million, while gross debt also decreased. On the debt side, we have further reduced our borrowings in Brazil, mainly the ACC and ACE loans, by substituting these external loans with internal financings when needed, thereby saving on the spread. Additionally, we have repaid in overdraft. Therefore, total liquidity remained roughly stable at close to 1.9 billion, with cash on balance sheet close to 1.1 billion. We've also further advanced our position with all three rating agencies with a WB plus rating and positive outlook from S&P and Moody's and an investment grade rating of triple B minus from Fitch. All of them acknowledge the improved business positioning, our strong balance sheet, and overall a higher resilience. With that, Philipp, back to you.

Thank you, Sascha. Let's turn to slide 19 to discuss our outlook for the second quarter and full year 2025. Starting with our tubes business in the second quarter, we expect volumes to be flat to slightly lower sequentially and EBITDA pattern to be flat to slightly higher sequentially. For the full year, the recent booking performance in our international tubes business should translate into an increase in international shipments in the second half of the year. Tube ZBDA patterns should improve further in the second half due to expected improvements in pricing on our ongoing cost prediction. For mine and forest, we expect our production sold to be approximately 1.5 million tons in the second quarter, and still expect total production of around 6 million tons for the full year. Our EBITDA will be contingent on market prices for iron ore, which have softened somewhat recently. It is likely that our results in this segment will normalize from the high level of profitability reported in the first quarter. At the group level, we expect our second quarter EBITDA to run between 170 and 200 million euros. Looking at the full year, we also confirm a second half improvement in the tubes business that will rise higher EBITDA at the group level. To conclude on slide 20, the first quarter featured continued robust earnings and cash generation demonstrating the strength of the new value bike. Secondly, our solid international booking volumes and prices give us conviction in our view of a second-half improvement in our results. Third, despite the volatility in today's macroeconomic and policy climate, we remain focused on delivering our efficiency programs, technology investments, and the streamlining of our invested capital. Thank you again for your attention. Sacha and I are now ready to take your questions.

Thank you, sir. As a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. And if you change your mind and want to withdraw your question, it's star 2. Please ensure your lines are unmuted locally as you'll be prompted when to ask your question. So again, to join the queue for questions, please hit star 1 on your keypads. The first question today comes from a line of Kevin Roger from Kepler Chevrolet. Please go ahead.

Yes, good morning. Thanks for taking the question. I was one maybe to understand a bit more the guidance for the Q2, and maybe as a starting point, Sacha, you said that in your Revenue North America is something like 40% contribution, but that on the EBDA level, it's not the same ratio. Can you provide us a bit of sensitivity? What's the US contribution to the group tube EBDA in Q1? And then it's to understand a bit more the Q2 dynamic, because you say roughly that volumes would be flattish, pricing would be around flattish. So From where the, in a way, 30 million potential decline in EPDA would come, please, just to understand based on those facts. And the second one, if I may, you mentioned the level of import, Philippe. It seems that in April, we have seen, again, quite an uptick in the level of import according to the license data. So any color that you can provide, maybe, on the potential driver of this increase in April compared to March, February, please?

Okay, so I will take import question after. And I will hand over to Sachar on your first question. But, you know, the beauty of New Valorike is that today our profitability is not depending only on one asset or one region. The U.S. was in the past. Today we are generating healthy EBITDA in all geographies. And obviously we are far less dependent from U.S. markets as we were in the past.

And now I hand over to Sachar. Thanks, Philip, and good morning, Kevin. Kevin, I'm starting with the Q2 guidance and maybe giving some additional sense regarding the Q2 versus Q1 development. As you rightfully noted, the midpoint of the Q2 guidance is somewhat below the actual of Q1. I think if you want to sensitize that very easily, you can really start by mining forests. By mining forests, EBITDA of 53 million. If you think about that going forward, if we were to do that every quarter, then you had a full year EBITDA of well above 200 million in mining forests. That is a possibility, but it is not something that we are assuming or that we are guiding for. So I think if you would take your mine and forest EBITDA somewhat down into Q2 versus Q1, you already have, you know, I'd say at least the lion's share of that reduction. On top of that, keep in mind, we may also have some FX translation effects. Both the, if I'm just taking the euro dollar as an example, the average rate in Q1 as well as the closing rates in Q1 is likely to be somewhat different in Q2. So I think if you take this one plus one, you are easily in that reduction. Your second question related to the importance of our US onshore business to profitability, I'd say it depends a little bit on the quarter. around 20 to 30 percent, depending on whether you have it as a percentage of tubes or group, 20 to 30, 25 percent of epithelium.

So, going back to the last question about imports, so the epithelium was mostly coming from nuclear weapons, Korea and Austria. Korea, as you know, it is welded pipes, so it's not impacting our seamless pipe business. onshore in the U.S. Second geography is Austria. And obviously, we assume that even though there is no more quotas, that the U.S. administration will continue to look carefully at what's going on on these imports.

And Kevin, just adding a thought. Obviously, for Q2, we have agreed prices and volumes with our U.S. onshore customers. As such, there is a limited risk from that side. It's all about invoicing. For Q3, I would say we are very advanced. So when you think about risks and chances for the year related to our U.S. onshore business, then it's predominantly in the fourth quarter.

Okay, now that's very clear for all the questions. Thanks a lot for the transparency. Thanks for that.

The next question comes from a line of Christopher Coupland from Bank of America. Please go ahead.

Yeah, thank you very much. Thanks for taking my questions. Maybe following on from your comment just now on Q4 risks, maybe you can go into a bit more detail what your comment about the second half is based on you've talked about international markets but I wonder what assumptions you've made for the US market can we assume that it's roughly based on current market conditions for that second half versus first half comment to come through and if I if I may just add a few more questions quickly on your pricing chart on page eight very helpful thank you always for providing those indicators. And it shows a trend, doesn't it, how the Middle Eastern index keeps dropping quarter on quarter, which I understand is the bulk of your regional mix. So I'm just wondering whether perhaps you keep showing the North Sea being flat because the North Sea pricing impacts some of the other regions that are not on this chart. So maybe you can give us a bit more color around pricing outside of the US by region. And then lastly, I wondered whether, Sacha, you could give us an outlook on the development of your networking capital position, considering you mentioned FX, but also prices that keep growing, and you've obviously had a decent inflow in Q1. How much do you think should we see in the remainder of the year? Thank you.

Okay. Well, I will hand over to Sacha on some of your questions. Before I hand over to comments, well, first, as you know, we have a much higher visibility on what we need to invoice out of the U.S. given the lead time, which is a few quarters. It's part of the business. And as far as the U.S. is concerned for Q4, you know, things seem to change day by day. But the barrel of oil is up again above $60. So it gives us, obviously, may have sold two weeks ago, even though even the guesstimate of what would happen with the oil price at 50 was a decline less than 5% by the end of the year. And now we are obviously not anymore in this situation. By the way, the graph you see on page nine is there to, we knew you would be looking at the high side index And for us, it's very important to remind you it's not a good proxy on how we perform on the market because of our mix of customers and the products we sell to these customers, which are, I remind you, high value-added products, inconsistent with our value-over-value strategy. So that's why we gave you this information, because we knew you would look at it and may maybe draw wrong conclusion from the Reichstag index. And now I hand over to Sergio Alonso. Your question.

I think Philip pretty much responded to question one and two. I mean, overall, I think we could say that our statement of H2 being stronger than H1 is a pretty solid one, which includes a reasonably conservative view on the U.S. and we'll see how that plays out and hopefully with my revenue slash EBITDA contribution comments for Q1, I was able to help you a little bit to sanitize things. On top of that, Chris, as always, we have FX translation risk in the coming quarters and therefore for the full year, generally speaking, A stronger dollar is better than a weaker one. On the transaction side, we do our good piece of hedging, but translation is generally open. And then we have the iron ore price, which impacts our mine and forest business. Again, I think we are taking a reasonably conservative assumption when we are planning for the rest of the year, but right now, plus it's trading at about 100, which that remains the case. I think our next quarters are even more solid. Last one, working capital, never easy to predict, but I'm with you. We will not have releases in each and every quarter, even though a diligent working capital management has been super high on the agenda since day one of the new value-added plan, and we have specific target and actions to improve the various levers, be it inventory receivables or payables. Given the expected pickup in H2, I'd not be surprised if somewhere between Q2 and Q3 we see an increase, but that increase should thereafter normalize once again, therefore not having a tremendous effect for the full year.

So in a nutshell, we expect H2 to be better than H1 based on conservative central. Understood.

Thank you very much.

Before proceeding to the next question, a reminder, if you would like to join the Q4 questions, please press star 1 on your telephone keypads. The next question comes from a line of Jean-Luc Romain from CIC Market Solutions. Please go ahead.

Good morning. I have two questions. One about the tax rate. It seems to have increased significantly in the first quarter compared to last year. The second is about the production, your production in the U.S. You mentioned you can produce all of your range for onshore production. What part of your range for offshore applications can you produce from inside of the U.S. and what parts do you have to produce from outside of the U.S. please?

Offshore in the U.S. I will take the question and then hand over to Sacha. Offshore in the U.S. are important but it's true for all players in the industry and there is no rolling mill in the U.S. able to produce the diameter which are needed and the type of pipes which are needed for offshore. Nevertheless, we have 18 months ago found a new route which allows us to have more value added in the U.S., namely heat treatment and shredding in the U.S. for this market. I hope this answers your question. Now I hand over to Sacha.

Good morning. Indeed, as I've commented, the tax rates in the P&L in Q1 is higher than I would expect the tax rate to be on average for the full year in Q1. If I recall that right, we were slightly above 30%. And for the full year as of today, I would expect that to be back in the 20s. On a quarter-by-quarter basis, it always depends on which... specific legal entities in which geography make which profit and loss. So in 2001, that was a bit unfavorable, but I expect that to normalize. Nothing extraordinary.

Thank you.

Last chance to ask a question. Before we conclude, please press star one on your telephone keypad. We seem to have no further questions coming through, so I hand back to you, host, to conclude.

So again, thank you again for joining us for today's call. Our recent bookings have given us a strong foundation to deliver continued, robust results in 2025. It has given us confidence to reiterate our outlook from last quarter. Today's climate is volatile, but recall one of the key objectives of the new value plan to crisis-proof our business. We receive a clear endorsement of our balance sheet quality with our recent upgrade to an investment rating. Our cash generation abilities have also been fairly demonstrated. Furthermore, our industrial footprint is ideal for today's environment. We have centralized our operations in cost-efficient production hubs close to our customers. We also remain focused on our objective to close the profitability gap with our peers. We are therefore in a position to manage and evaluate the benefits of our shareholders in any market condition. We look forward to our upcoming AGM and the distribution of our first dividend in decay later this month. Thank you again. Operator, you may close the call.

Thank you, sir, and thank you for joining today's call.