VLOWY - Vallourec S.A. (VLOUF) Q1 2023 Earnings Call Transcript
2023-05-17 14:24:05 ET
Vallourec S.A. (VLOUF)
Q1 2023 Earnings Conference Call
May 17, 2023, 3:30 AM ET
Company Participants
Connor Lynagh - Vice President of Investor Relations
Philippe Guillemot - Chairman and Chief Executive Officer
Sascha Bibert - Chief Financial Officer
Conference Call Participants
Guillaume Delaby - Societe Generale
Jean-Luc Romain - CIC Market Solutions
Kevin Roger - Kepler Cheuvreux
James Winchester - Bank of America
Presentation
Operator
Hello and welcome to the Vallourec First Quarter 2023 Results. My name is George. I'll be coordinator for today's event. Please note, this conference is being recorded, and for the duration of the call, your lines will be in listen-only mode. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions]
The conference will be Chaired by Mr. Philippe Guillemot, Chairman of the Board and Chief Executive Officer; Mr. Sascha Bibert, Chief Financial Officer.
I'd now like to turn the call over to Mr. Connor Lynagh, Vice President of Investor Relations at Vallourec. Please go ahead, sir.
Connor Lynagh
Thank you. Good morning, ladies and gentlemen, and thank you for joining us for Vallourec's first 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 there 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'll now turn the call over to Philippe Guillemot.
Philippe Guillemot
Thank you, Connor. Welcome, ladies and gentlemen, and thank you for joining us for this update on Vallourec's first quarter 2023 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 by giving you an overview of the highlights of the first quarter, followed by an update on the execution of our new Vallourec plan and a word on market environment. Sascha will then take you through our Q1 numbers and I will wrap-up with the outlook for the second quarter and full year 2023.
First, let's look at the highlights of the first quarter on slide five. Our first quarter 2023 EBITDA was EUR320 million, which reflects a EUR275 million year-over-year increase. Our Tubes EBITDA contribution was EUR279 million, a strong increase of EUR223 million year-over-year. This was supported by 28% average selling price increase comparing to Q1 2022. Mine and Forest EBITDA was EUR48 million, up EUR46 million year-over-year. This increase was largely driven by a 1.4 million tonne year-over-year volume recovery.
Free cash flow generation in the first quarter was once again strong at EUR147 million. I would note, we have added supplemental cash flow disclosures that Sascha will detail later. Our adjusted free cash flow, one of these measures was also strong at EUR194 million.
In the first quarter, we reduced net debt by EUR130 million, leaving us with net debt of EUR1 billion at the end of March. This robust Q1 result gives us confidence that we will be able to deliver on our previously provided outlook for 2023. Recall that this included a year-over-year increase in EBITDA, positive free cash flow generation and further net debt reduction.
Overall, the market environment for our products remains strong. We saw solid Q1 order intake driven by Middle East National Oil Companies and other Eastern Hemisphere customers. The aggregate price trend on Tubes orders remains favorable as international pricing has continued to move higher, offsetting a moderate sequential decline in US pricing.
The New Vallourec plan is fully on track to generate EUR230 million of annualized EBITDA uplift with the full effect starting in Q2 2024. As we have discussed, the plan encompasses a major CapEx program in Brazil to enhance our product offering and to enable the transfer of oil and gas volumes from Germany, which is now underway.
Turning to our Mine and Forest business. On May 5th, 2023, we obtained the necessary permissions from the state mining and environmental authorities for the full release of the Cachoeirinha waste pile at our Pau Branco iron ore mine. We expect the mine to return to full production in the second quarter, that April volume sold was already at 0.6 million tonnes.
Before turning to an update on our ESG journey, I would like to mention that shortly following our last earnings communication, Vallourec was recognized by Standard & Poor's Global for reducing its leverage and cost. Our long-term issuer rating was upgraded in March 2023 to BB- from B+ with a positive outlook.
Let's turn to slide six. ESG remains one of our key focuses and Vallourec is strongly positioned in this regard. We received incremental upgrades in our CDP, Water and Forest rating in 2022 and were recognized in the platinum class of Ecovadis sustainability ratings. Additionally, as detailed in our universal registration document, we have already surpassed our 2025 target for Scope 1, 2 and 3 emissions. We have further room for improvement as our ongoing production transfer from Germany to Brazil will further reduce our carbon intensity in addition to enhancing our profitability.
Let's turn to slide eight to review our New Vallourec Plan. As a reminder, the New Vallourec Plan was announced in May 2022. Our objectives are to cycle-proof our business and drive best-in-class profitability. We plan to drive a EUR230 million run rate EBITDA improvement and a EUR20 million CapEx reduction with a full impact starting in Q2 2024. For reference, our target 2024 industrial footprint is shown at the left.
I want to highlight the key first actions we have taken to achieve this goal. This is shown on slide nine. As you will recall, the three key levers in our plan are emphasizing value over volume, reshaping our industrial footprint and reducing overhead. In emphasizing value over volume, we structurally strengthened our pricing policies and reinforce our focus on contract terms and conditions.
Paired with the favorable market environment, this has led to a significant quarter-after-quarter increase in our Tubes average selling price. We are reshaping our industrial footprint by shutting down loss-making assets in Europe and transferring oil and gas production capabilities to Brazil. In 2022, we finalized the necessary social agreements in Europe, launched a real estate sales process and initiated EUR120 million investment program in Brazil.
Finally, we are reducing overhead. We are progressing a EUR100 million overhead cost reduction program and have simplified and unified our research and development organization. However, this is not purely a cost-cutting exercise. We have structurally improved the management teams in our organization to enable greater transparency and control of our operations. We have also refreshed our executive committee with a diverse set of managers and substantially improved incentive alignment across the organization.
Slide 10 provides some color on a few of the near-term items we are executing in the New Vallourec Plan. In Brazil, we recently began the primary phase of our capability enhancements program. While this is not an outright capacity growth program, it will expand the market addressable by our South America Tubes operations. We have a detailed plan in place to ensure on-time project execution and to mitigate the impact of upcoming capacity stoppages.
Finally, we are progressing well in the product qualification process with our key customers. This is a key step in the movement of our production from Germany to Brazil. In Germany, our activity rundown remains on schedule and we have the necessary order backlog for our 2023 production plan in hand. The sales processes for Mulheim and Duesseldorf-Rath are both ongoing, though we do not expect closing of the Mulheim sale in the near-term.
Now let's discuss the commercial environment. On slide 12, we focus on the US OCTG market, which is the largest market in our North America operations. Rig count a proxy for our demand has been around bound to start the year with a slight decrease observed from the late 2022 peaks. Meanwhile, OCTG prices in the US have begun to moderate versus the high levels they attained in late 2022.
We remain focused on value over volume, and thus, have preferred to slow our production count rather than cede large amounts of pricing. While we will need to adjust our pricing somewhat to middle market, we are optimistic that the high level of imports observed in late 2022 and early 2023 should moderate as we move through the year.
On the demand front, we believe current oil prices still allow our customers to generate solid returns in their drilling programs and have seen limited signs of a slowdown from our core customer base. Putting these factors together, we believe our US margin will remain strong in 2023.
On slide 13, we can see that the international OCTG market is evolving positively. I would note that here we refer to the international market similarly to other global oilfield service and equipment players.
That is to say this is a world outside of North America. Here, onshore and offshore drilling activity are on the rise. The Middle East has been a major driver of this and our order intake from the key National Oil Companies in the Middle East were very strong in the first quarter. However, this is not an isolated trend as we see demand increasing in most regions. As a result, pricing continues to increase across all major markets.
Moving to slide 14. Looking at our Tube business as a whole, Q1 2023 continued the positive trend observed over the past several quarters. We earned nearly EUR650 of EBITDA per tonne sold, a substantial year-over-year improvement. This reflects the strong market environment and the success of the new pricing policies we implemented last year.
As I previously mentioned, aggregate customer demand remained strong, while international pricing has yet to convert with pricing in North America, our orders generally showed a positive price trend in the first quarter. 2023 is set to be a transformational year for our Tubes business.
As mentioned, we recently initiated the primary phase of our capability enhancement program in Brazil. While we have a plan in place to mitigate the disruptions affiliated with this program, there will likely be some modest inefficiencies in the near-term in Brazil. This should abate in 2024, at which point we will no longer be burdened by our production losses in Germany.
Turning to our Mine and Forest segment on slide 15. Iron ore production was 1.5 million tonnes in the first quarter, in line with the expectations we communicated in March. The year-over-year increase reflects the return to partial production levels after the Cachoeirinha waste pile slippage that occurred in early 2022.
On May 5th, we obtained the necessary permissions from the state mining and environmental authorities for the full release of the Cachoeirinha waste pile. The mine will return to full production in the second quarter.
Now I will hand the call over to Sascha, who will comment on our Q1 2023 results.
Sascha Bibert
Thank you, Philippe, and good morning, everyone. Thank you for participating. We reported strong Q1 numbers today, which I will comment on in a second.
First, however, I start with page 17 and our revised free cash flow reporting. In our discussions with the market, we realized that investors and analysts found it difficult to work with our way of defining cash flow and also in sell-side models, we observed different ways of modeling the progression of debt based upon our communication.
As a consequence, we revised our disclosure in order to better separate restructuring and other non-recurring elements from the ongoing business, which is key to understand the business during the new Vallourec transformation phase. Second, create a cash metric that is generally closer to the change in net debt. And finally, we also did some cleanups, especially in the other categories to have more meaningful line items.
On this slide, I'm using the Q1 '22 figures to explain the changes. Specifically, we have moved the former other, including restructuring charges of minus EUR19 million to now below adjusted free cash flow, therefore, part of total cash generation. Next to moving the entire line.
We took three smaller items out of this bucket and moved them to non-cash items in EBITDA or financial cash out. Furthermore, we have split the former asset disposals and other lines of EUR25 million into a cash effective part and a non-cash effective part, the latter now being part of noncash adjustments to net debt. Other cash items, which are part of the minus EUR10 million includes dividends paid, changes in letter of credit and variation of financial leasing debt.
Non-cash adjustments to net debt totaling minus EUR50 million includes accrued interest and FX. As a consequence, we now have three cash-related metrics which are adjusted operating cash flow, adjusted free cash flow and total cash generation. The change in net debt is obviously not affected.
To ease the transition and to ensure that there is no change in the explicit or implied guidance, we will continue to report both the old and the new definition of free cash flow throughout the entirety of 2023. As Philippe will emphasize in the outlook slide, we continue to strive for a positive free cash flow in '23 according to the old definition or a positive total cash generation, excluding any potential benefit from asset sales in the new definition.
Moving to page 18 for the key figures. All KPIs are pointing into the right direction, acknowledging that Q1 '22 generally provided for a low comparison base. Next to a strong EBITDA in the first quarter '23 with an EBITDA margin of around 24%, I would like to point out that we had another quarter of positive cash generation leading to a further reduction in net debt.
Let's look at the numbers in more detail, starting with Tubes on page 19. Volumes and especially revenues are up strong year-over-year, leading to an increase in the average selling price of 28%, now at EUR2,990 per tonne. Please note that the average selling price is also up quarter-over-quarter.
On page 20, you see that the Tubes profitability either measured as EBITDA margin or EBITDA per tonne is up strongly, both year-over-year as well as sequentially. This profitability is currently dominated by the production in the US, however, we expect the geographic mix to become more balanced over the year as the profitability of the South American production improves.
On page 21, we display the performance of our Mine and Forest business. Production, revenues and EBITDA are all up year-over-year as in Q1 '22, we have the land slides. The EBITDA margin improved to 52%, also up sequentially as the average iron price improved to $125 per tonne. Following the release of the main waste pile, we can now go back to the full production. However, when it comes to earnings, we have to note that the iron ore price has come down somewhat in recent weeks.
On page 22, I'm taking the group view again. Revenues are predominantly driven by price increases, which by far also overcompensate cost increases, thereby leading to a substantial increase in EBITDA. The negative EUR50 million other in the EBITDA bridge contains multiple items, including the absence of positive items from last year and effects related to the VAD ramp down.
SG&A remained on a low level as a percent of sales and declined on an absolute basis both year-over-year as well as sequentially. When moving from EBITDA to a positive net income of EUR157 million, I note that D&A was steady at EUR63 million. In contrast to Q4, in this quarter, we did not book any impairments. Financial expenses were EUR46 million, of which net interest expense, EUR26 million and the remaining EUR20 million largely at fixed losses. The tax expense was EUR53 million, equivalent to a tax rate of 25%, predominantly driven by the US.
Moving to cash flow on page 23 and now applying our new cash definition. Adjusted operating cash flow was EUR299 million, substantially up year-over-year, but also sequentially driven by higher cash EBITDA, offset by the net interest and tax payments. Please keep in mind that the interest payments are generally higher in the second and fourth quarter of the year and that tax payments will also increase throughout the year as the US operation has now consumed all of its historic operating losses.
Adjusted free cash flow amounted to EUR194 million. In contrast to Q4, where we saw a substantial release of working capital, in Q1, working capital increased slightly, mainly driven by inventories in South America, partially offset by higher payables. Total cash generation was EUR151 million, reduced by EUR47 million restructuring and non-recurring items payments, of which the majority relates to Vallourec Deutschland.
This category is also expected to increase during the year, especially in the fourth quarter, in line with the outlook statement for a total restructuring cash out of less than EUR350 million. Using our old metric, the free cash flow would have been EUR147 million, i.e., very close to total cash generation of EUR151 million as there were no significant disposals.
Finally, net debt now stands at EUR1 billion. The EUR21 million non-cash adjustments primarily related to the accrual of interest, which precedes the actual payment of interest in the next quarter.
Now I hand back to Philippe for the outlook and key takeaways.
Philippe Guillemot
Thank you, Sascha. Let's look at slide 25 to discuss our outlook for both the second quarter and the full year 2023. For the second quarter of the year, based on our assumptions and current market conditions, we expect EBITDA to be similar to Q1 2023. Underlying this, we expect robust revenues in Tubes as international price improvement offset a moderate sequential decline in the US.
In our Mine and Forest business, we expect the Pau Branco iron ore mine to return to full production in Q2 2023. Based on current market prices, this sequential volume increase will be offset by lower prices. In the second quarter, we expect our total cash generation to be around breakeven. This is largely due to an assumed temporary and higher increase of working capital as a result of the CapEx plan execution in Brazil.
Turning to the full year, we reiterate our full year outlook for 2023. Specifically, we expect EBITDA to improve compared to 2022, net debt to decline compared to 2022 and free cash flow and total cash generation to be positive, excluding any potential benefit from asset sales. Within the cash flow outlook, we expect higher year-over-year tax payments, approximately EUR220 million of gross capital expenditure and restructuring and non-recurring items to require moderately below EUR350 million of cash outflows.
Returning to our EBITDA outlook. We expect our 2023 EBITDA to be somewhat weighted towards the first half of the year. In the second half of 2023, we will likely see some degradation from our planned volume round-down in Germany and sequential declines in US pricing.
That said, I would emphasize that we continue to expect the full effect of the New Vallourec Plan starting in Q2 2024 with a meaningful portion of the EUR230 million annualized EBITDA benefit to be realized in 2024. As a reminder, the largest portion of this benefit will come from the closure of our German operations, which we expect will generate losses of more than EUR100 million in 2023.
A few words to conclude on slide 26. We delivered strong earnings and total cash generation in the first quarter due to favorable market conditions, our Value over Volume strategy and strong execution. Our New Vallourec Plan remains on track to generate EUR230 million of recurring EBITDA uplift with full effect starting Q2 2024.
The execution of our major Brazil CapEx program is underway with a shift of production volumes from Germany to be completed by the end of 2023. Our Tubes earnings power remains strong, and our iron ore mine is set to return to full production in the second quarter. We remain committed to cycle-proofing our business and balance sheet.
Thank you for your attention. Sascha and I are now ready to take your questions.
Question-and-Answer Session
Operator
Thank you very much, Mr. Guillemot [Operator Instructions] Our first question is coming from Guillaume Delaby from Societe Generale. Please go ahead sir.
Guillaume Delaby
Yeah. Good morning. Congrats for the results and for the exhaustive presentation. Two questions, if I may. Thank you for providing color on Q2. So obviously, I'm going to try to get some color on Q3. So basically, if I understand correctly, in Q3, the decline in US pricing will be more important than the improvement in pricing in international market. So my first question is to what extent, I would say, this negative delta could already start to be, let's say, somewhat offset by the implement of your plan? This is my first question. And my second question, so you expect restructuring costs to be circa EUR350 million in 2023. If I understand correctly, it was only EUR47 million in Q1. Could we have maybe an indicative timing about those restructuring costs over the next three quarters? Thank you.
Philippe Guillemot
Thank you for your two questions. First, I will answer the first, and I will hand over to Sascha for the second. Yeah, price decrease in the US will not be fully offset by price increase out of the US. Nevertheless, let's put things in perspective. Even though there will be a sequential decline of prices expected in Q3 and Q4, we are still at price levels, which are fairly good because we are talking about a sequential decline compared to historically high price level in the US.
So that's -- as far as the plan is concerned, we will be impacted in H2 by our German operation losses. As you understand, we are in a ramp down of volumes, fixed cost at what they are. So as a consequence, we expect out of the more than EUR100 million losses in Germany to obviously have most of them in H2, which obviously will impact our numbers. But the good news is that this will disappear in 2024. So it's a temporary impact. And now I hand over to Sascha to give you some color on our restructuring cash out for the year.
Sascha Bibert
I will do so, Philippe. Just one more comment on the first question. I think Guillaume you also asked whether the implementation of the New Vallourec Plan could already offset some of the items at play in the second half.
I'm reminding something that Philippe has said in his speech, i.e. that the benefits from the New Vallourec Plan are really expected to kick-in starting with Q2 '24. And prior to that, honestly, there isn't that much since the losses in Germany will actually increase in the second half of '23, as Philippe just explained.
Now coming to the restructuring cash out, which you have noted rightfully to be guided at below EUR350 million for the full year, we had indeed EUR47 million in Q1. Guillaume, best expectations as of today would be that the first three quarters would be roughly similar and then the majority of the restructuring cash out to actually occur in the fourth quarter.
Guillaume Delaby
Thank you. [Foreign Language] I'll turn it over.
Philippe Guillemot
Thank you.
Operator
Thank you very much, sir. We'll now go to Jean-Luc Romain calling from CIC Market Solutions. Please go ahead. Your line is open.
Jean-Luc Romain
Thank you. You mentioned a moderate decline in prices in the US in the coming quarters. Should we expect the [indiscernible] of decline to be similar to what happened between Q1 and Q4 2022 or do you expect an acceleration of this decline?
Sascha Bibert
For Q2, we know already what it is. We already have gone into the quarter. So it's definitely a moderate sequential decline, very moderate. As far as what's coming next, I just keep repeating what I said earlier. Yes, there will be a higher decline in Q3 versus Q2 than we will see in Q2 versus Q1. But again, we are still at fairly high prices in the US.
Philippe Guillemot
Jean-Luc, an additional way of putting some color into it is could be that according to our view, any possible declines to come are likely to be of a lower magnitude versus the increases we have seen in '22.
Jean-Luc Romain
Okay. Thank you. Very clear.
Operator
Thank you, Mr. Romain. Our next question is coming from Kevin Roger of Kepler. Please go ahead sir.
Kevin Roger
Yes. Good morning. Thanks for taking the question and Philippe thanks a lot for the level of information that you provided in the slide. This is very much appreciated. Maybe one question and I don't know if you will be ready to share some colors with us, but there has been a number of questions and quite a bit of stress in the market recently, we used the pricing trend in the US, basically not focusing at all on the current trends that you see in the Middle East. So would it be possible for you to provide a kind of EBITDA per tonne metrics between US versus Middle East and where do you stand currently? Would you say that US is currently two times above the Middle East or any kind of color that you can provide, maybe to try to estimate the potential impact of the US and the offset coming from the Middle East. That would be the first question, please. The second question, Philippe, you mentioned in the comments that the disposal of Mulheim is not expected in the short-term. So maybe quite a change of tonne regarding what we were expecting recently. So can we assume basically that the discussion have ended or what is the situation on that one? And the third one may be a longer-term one, if I may. We have now, since few months the Inflation Reduction Act in the US. Have you seen any first commercial impact in terms of discussion for Tubes related to carbon capture activities, please?
Philippe Guillemot
Yeah. So obviously, I won't disclose the EBITDA per tonne in the US versus the rest of the world. I cannot just send you back to the presentation where we show that there is slowly, but surely equivalents of prices between US and the rest of the world, which obviously is a good proxy on what could happen on the EBITDA per tonne.
And anyway, the information we are disclosing are public information or market information and we are right now over-performing this public information. Mulheim, when we sell a piece of long wherever in the world, I think we have to ensure that the project is fully supported by all the stakeholders. And even though there is real and strong appetite for our property in Mulheim, we have not yet found a project which tick all these boxes.
So that's the reason why it takes longer than expected and that's why we don't expect to close this transaction in the near-term. And we are still progressing on the sale of the Mulheim-Rath property, which is a much bigger property, much more valuable property. And here, same thing, obviously, we pay careful attention to come with a project which will be supported by all stakeholders starting with the city.
As far as IR is concerned, definitely good news. I think on CCUS, we have seen many projects being similarly accelerated and we have been able to secure orders for carbon capture in the US, thanks to these higher mechanisms. I have to confess that this IR program translates very quickly into projects as they seem to be a very efficient funding available to the investors.
Kevin Roger
Okay. Thanks for the color. Have a good day.
Operator
Thank you very much, Mr. Roger. [Operator Instructions] Next question is coming from James Winchester calling from Bank of America. Please go ahead.
James Winchester
Good morning, guys. Just two from me, please. And the first one, I kind of wanted to follow-up on the question you had regarded in the second half. Because in your full year outlook, you used the term somewhat with respect to EBITDA being first half weighted. And if you kind of look at full year consensus numbers around EUR1 billion, do you see EUR740 million for the first half, it implies a 40% drop in the second half. So is that what you kind of had in mind for somewhat or is that a bit too aggressive? And then number two, could you just provide any sort of commentary with respect to the timing of the refinancing of your 2026 bonds. Thank you.
Philippe Guillemot
First, yeah, as you see, we had a very strong start of the fiscal year 2023 with our Q1 numbers. As I indicated, we expect similar numbers as far as EBITDA is concerned in Q2. And yeah, if you take EUR1 billion as a target for the year, you end up with a decline you just expected. We will see EUR1 billion is really the floor of our expectation for the year.
As far as timing of our refinancing is concerned, that's something, as I already said in the past, I will start looking at next year. As I have said many times, first, we need to demonstrate our ability to deleverage the balance sheet as fast as possible and in due time, obviously, we will contemplate and depending on market conditions because obviously we need to take this to rig count, we will refinance our balance sheet.
James Winchester
That's very clear. Thank you.
Operator
Thank you, Mr. Winchester. [Operator Instructions] As we do not have any questions at this time. I want to turn -- just one second please, just give everybody more of a chance to signal.
Philippe Guillemot
No more questions? Okay. Thank you very much. No? There is one?
Operator
No. I'd like to turn the call back over to you. I was just going to give everybody more of a chance to signal, but I think you wish to close. So I want to turn the conference back over to Mr. Guillemot for any additional or closing remarks. Sorry for the interruption, sir. Thank you.
Philippe Guillemot
Okay. Thank you. Thank you again for joining us for today's call. I just leave you with the following thoughts. The market for our products and the Vallourec product is strong and our order intake continues to support this. We are well on our way to realizing the substantial benefits of the New Vallourec Plan, which will be a substantial earnings tailwind in 2024. And finally, we remain focused on deleveraging our balance sheet, cycle-proofing our business and closing the performance gap with our peers. Thank you again. Operator, you may close the call.
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Vallourec S.A. (VLOUF) Q1 2023 Earnings Call Transcript