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Edited Transcript of VK.PA earnings conference call or presentation 19-Feb-20 5:30pm GMT

Full Year 2019 Vallourec SA Earnings Call

Boulogne-Billancourt Feb 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Vallourec SA earnings conference call or presentation Wednesday, February 19, 2020 at 5:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edouard Frederic Guinotte

Vallourec S.A. - SVP of Middle East Asia

* Olivier Bruno Benedict Mallet

Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board

* Philippe Crouzet

Vallourec S.A. - Chairman of the Management Board

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Conference Call Participants

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* Alan Henri Spence

Jefferies LLC, Research Division - Equity Analyst

* Amy Wong

UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst

* Guillaume Delaby

Societe Generale Cross Asset Research - Equity Analyst

* James Matthew Evans

Exane BNP Paribas, Research Division - Analyst of Oil and Gas

* Jean-Francois Granjon

ODDO BHF Corporate & Markets, Research Division - Analyst

* Kevin Roger

Kepler Cheuvreux, Research Division - Research Analyst

* Lillian Starke

Morgan Stanley, Research Division - Research Associate

* Sahar Islam

Goldman Sachs Group Inc., Research Division - Analyst

* Jean-Luc Romain

CIC Market Solutions

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Presentation

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [1]

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Okay. So good evening, everyone. And today is a kind of a special day for me, mostly because we announced a new step in our turnaround, strong results in 2019, positive commitment for 2020 and significant initiative to strengthen our balance sheet, including rights issue, which we announced today. And second, because it is my last meeting with you since, as you likely know, after 10 years as CEO of Vallourec, I will hand over in a few weeks, exactly on March 15, this position to Edouard Guinotte, who is, therefore, on stage with us tonight. And obviously, I will leave most of the floor today to Edouard and Olivier, who are the ones committing for the future.

So let me briefly start with the agenda of this meeting. As usual, I will introduce the highlights of 2019 and Olivier will provide you with more details. All in all, we delivered strong results in 2019 and more than doubling our EBITDA. And we ended the year close to free cash flow breakeven for the whole year and with almost stable net debt, which I think is much better than what was anticipated by many. Then Edouard will elaborate on his vision for the group's next steps.

And after the long and deep restructuring phase that we went through during the oil and gas crisis, Vallourec has definitely rebuilt its competitiveness. Our markets have drastically changed as well, as you know. But now they offer more visibility, and we have a better understanding of where the growth and the profit potentials are for the future. And we think that Vallourec is well positioned to capture them. So Edouard will highlight the various levers that he plans to use to complete the turnaround and to create value out of those growth potentials, bringing the group to the next level.

Those levers combine Vallourec DNA, innovation, technology with this new renewal -- renewed competitiveness and with new initiatives to enhance the top line growth and to continue improving costs and reducing breakeven. On that basis, we think it's the right time now to complement the operational recovery with financial fix, and Olivier will present the various initiatives to strengthen our balance sheet and extend our liquidity. And we will conclude by the Q&A session.

On the slide regarding the key highlights, I will just comment on a few of them. Of course, regarding the performance -- financial performance, the highlights are that we've been capable of delivering a nice growth of plus 6% in 2019 compared to 2018, plus 5% at constant forex. Nice, especially, if you take into account the 3 headwinds of the year; near collapse of our power gen business, negative trends in German mechanical industry and the poor H2 in North American oil and gas market. So given this, the 5% growth is definitely reflective of our commercial strengths and commercial successes in the oil and gas, especially in the EA-MEA region. And this is really the clear evidence of the improvement of our competitiveness. Thanks to all this and to our successful savings campaign, we delivered an EBITDA more than doubled compared to [2018] (corrected by company after the call) at EUR 347 million. And that's obviously a great satisfaction for all of us.

Last but not least, we ended the year with a good free cash flow, positive in Q4 as it was in Q2 and Q3, and fulfilling our objective of continuous improvement in working capital management with minus 7 days compared on a quarterly annual -- annual quarterly basis compared to 2018. This is a massive improvement in terms of free cash flow, an improvement of around EUR 450 million.

Lastly, I will comment on some of our most relevant commercial successes. And of course, we do not publicize all of them. One of these is the Middle East, a major OCTG contract, mega contract with ADNOC, which I think is relevant given, first, its size and duration, but as well its scope, integrating a very wide range of product and a lot of services, which is kind of premier in that region. Some of those services including new digital solutions. And so this is, for me, a very good example of what we can do now with our new global production footprint since the various components of this contract are supplied from our 3 geographies: Europe, South America and Asia. So this is definitely a great success for our new footprint.

The other contract we refer to, the Mero 1 with TechnipFMC for rises in Brazil illustrates our competitiveness in project line pipe for deep offshore, and this is one of the largest potentials for the years to come.

Very important for the future as well, digital. 2019 is the year when we launched our comprehensive offer for services based on innovative digital solutions. It's -- Vallourec.smart is the new brand we've selected, integrating that initiative. And we got a very positive acceptance from our customers, but I don't elaborate on that one, Edouard will.

Lastly, I would like to mention our recognition for ESG accomplishments. We've not been very vocal on that theme so far although we've been working on it for quite a while. The good news is that this work is now being recognized, and this is evidenced by a number of awards that we got in 2019, awards by CDP, by MSCI ESG and as well by Sustainalytics, 3 reference auditors with quite different scopes. All 3 rated us pretty high, especially on our strong ethics and anticorruption track record and on our carbon management. We are well ranked on carbon emission because we are not far from being already almost carbon neutral today as we speak, thanks to our continuous technical innovations on our furnaces. Thanks as well to a wide use of noncarbonated energies and to our forests in Brazil as carbon sink.

It is a comprehensive strategy shared with all our employees and supported by our Supervisory Board, which created a dedicated committee to follow-up on the matter. It gives us a lot of credibility when addressing the emerging opportunities related to the energy transition markets. Edouard will elaborate on that one as well. But I want to mention it because in that sense, it is definitely at the core of our strategy. And I'm pleased to conclude my last words with you on that particular topic which, I think, is extremely relevant.

Now I leave the floor to Olivier.

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [2]

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Thank you, Philippe. Good evening, everyone. So let's get into the 2019 full year and Q4 figures. Starting with revenue. Up 5% at same exchange rate compared to 2018, with, of course, bulk of this improvement coming as announced from the Europe, Africa, Middle East Asia oil and gas markets.

So starting with oil and gas, revenue up 11%, mainly in EA-MEA regions, where we enjoyed, as expected, higher volumes and higher price mix. In North America, the revenue is slightly up compared to the year before. It has happened in H1, while in H2, as you know, there has been some slowdown in the market, exacerbated by some destocking at distribution, which is by nature, temporary.

And finally, in South America, as you know, with 2 different schemes, the first 9 months were relatively low, leading to a decline in revenue on a full year basis, but a very strong pickup in the fourth quarter of the year that will be amplified over 2020. Petrochem is a small commodities business that I won't comment further.

Industry & Other was up 15% compared to 2018, not in Europe where the industrial macro environment, in particular in Germany, led revenue down. But in South America where higher revenue was coming from iron ore, reflecting both volume increase by 34% and higher iron ore prices. And we had a slightly lower revenue in the industry segment, per se, in South America.

And finally, power gen, which is, for us, mainly tubes for thermal conventional power plants. Revenue sharply down by 34% with the [inexorable] trend for declined demand in this area. And I remind you that we have decided to shut down the big German plant that was dedicated to this kind of tubes, and the closure would be effective in the second semester of this year.

Another quick word on the revenue bridge to highlight the fact that the big plus has come from price and even more from mix, plus 8% price mix effect, essentially, in Europe, Africa, Middle East Asia oil and gas areas.

Moving now to the EBITDA per se. Industrial margin first has been up by EUR 159 million, 27% or 2.9 points of our revenue. And this has come again to a large extent from positive price mix in oil and gas in EA-MEA, as well from the iron ore mine contribution in Brazil. And of course, from large cost savings. These positive elements having more than offset the lower contribution from North America onshore business.

We have continued again last year to cut our SG&As by 7%, and they are down from 10.3% to 9.1% in our revenue. Finally, EBITDA more than doubled, as already commented by Philippe.

On the lower part of the P&L below EBITDA, the operating result improved by EUR 260 million and came relatively close to breakeven at minus EUR 17 million. In addition to the positive evolution in the EBITDA, we had lower impairment charges than in 2018. And they were mostly related, it was in H1 '19, to the impairment of a plant dedicated to nuclear activity in China. And we had, as well, lower charges for asset disposal, restructuring and other, EUR 27 million, the largest part of that, EUR 23 million, being related to the closure of the Reisholz power plant that we have just decided.

The other comments I can make to be fast on this slide is that the pretax loss has been reduced by EUR 236 million. Our income tax did increase essentially in Brazil where we had recognized some tax losses carryforward the year before. And at the end of the day, our net loss has been reduced by EUR 164 million compared to the year before.

Some quick words on the Q4 now. First, revenue decreased by 10% compared to Q4 2018 with a strong volume effect, to some extent, in the U.S. due to the slowdown in the activity and temporary destocking and as well lower sales of the commodities products with actually low impact in terms of the margin. And the big plus came once again from a positive price mix effect of plus 15% in EA-MEA and with a nice pickup of the oil and gas deep offshore activity in Brazil.

EBITDA at EUR 94 million was up 6% compared to last year with a slightly reduced industrial margin due to North America. SG&A cost cut by a stronger 18% in this Q4. And on the rest of the P&L, I think I already mentioned the EUR 23 million for restructuring charge for the closure of the Reisholz Powergen plant in Germany. The other lines don't deserve a lot of comments, I think. And the net result group share was minus EUR 111 million in this Q4.

I propose you to now move to cash. Starting like every quarter with the working capital management and confirming, I would say, the steady improvement we are achieving in terms of days of sales of working capital. As you can see, for the full year of 2019, taking into account the average of the 4 quarters, we've been at 106 days of sales compared to 113 in 2018. So an improvement, which I think was a nice success for our teams in this regard.

What does it mean as far as free cash flow is concerned, considerable improvement in 2019 compared to 2018. The free cash flow was negative by EUR 494 million in 2018. It is close to breakeven in 2019 at minus EUR 41 million. This came first from the cash flow from operating activities with a larger improvement by EUR 204 million, leaving the cash flow from operating activities to be almost breakeven on a full year basis at minus EUR 6 million.

In terms of working capital, in 2018, we had increased our working capital by EUR 155 million. It has been decreased by EUR 124 million in '19, so EUR 279 million improvement. And the CapEx were relatively stable compared to last year. As far as Q4 is concerned, the free cash flow is similar to Q4 of the year before.

And to conclude this part, net debt, as a reminder, our net debt after the IFRS 16 reclassification impact that took place at the beginning of the year was EUR 1.999 billion. At the end of December '19, it stood at EUR 2.031 billion. So finally, a very modest increase in our net debt by only EUR 32 million. And the leverage, net debt-to-EBITDA of 5.9. Of course, what we will comment later on in the presentation will dramatically and very positively impact these figures of net debt and leverage.

And now I will give the floor to Edouard.

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Edouard Frederic Guinotte, Vallourec S.A. - SVP of Middle East Asia [3]

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Thank you, Olivier. Good evening, everyone. I will now walk you through our strategy for Vallourec for the years to come.

First of all, I will show you that the transformation plan, which was steered by Philippe, Olivier and the management team at Vallourec, results in a company which is deeply restructured, clearly more competitive and significantly more successful commercially. My ambition for Vallourec is to capitalize on these achievements to accelerate value creation through well-identified levers.

Vallourec's transformation plan, which was launched in 2016, relied on a combination of sharp cost-saving programs worldwide, significant restructuring, downsizing in Europe, along with deployment of our new routes -- new production routes in Brazil and in Asia. All this resulting in a leaner, more flexible, more resilient footprint already positively impacting our commercial performance.

As displayed on the top left graph, we have constantly overachieved our gross savings target for the past 4 years. We accumulated close to EUR 600 million savings 1 year ahead of the initial target. This represents around 7% of annual gross savings, well above the inflation. This, combined with the deployment of our new routes and capacity rationalization, resulted in a 40% average decrease of our manufacturing costs over the period.

Very concretely in the bottom left graph, it translated into a 20% headcount reduction worldwide, reaching as high as 35% decrease in Europe. This 35% reduction in Europe is the result of a radical downsizing in our European operations, which you can visibly appreciate on these maps. From 19 sites in France and Germany, we now retain 2 production hubs, upstream in Germany around Düsseldorf and finishing in the North of France. In addition, we have 2 specialty sites in Burgundy. Post restructuring, our European operations are now set up to serve their local markets and as our center of excellence for advanced premium products.

As a complement to Europe's restructuring, the deployment of new competitive routes in Brazil and in Asia is a success. In Brazil, the combination of 2 subsidiaries in Barreiro and Jeceaba is yielding the expected capacity optimization and sharp productivity improvements.

In Asia, the integration of Tianda, which I oversaw over the past few years in the group, is completed by the premium finishing capacities of Citra Tubindo in Indonesia. And all of this is a success, both from the operational and the commercial standpoint. We plan on building up on this success. All of this resulted in a sharp improvement of the proportion of premium products which are produced in what we called our new routes from 19% in 2015 to 55% in 2019. And this corresponds to an increase of 260,000 tonnes more produced on these routes. And therefore, bringing the average production cost down, and there is more growth to that number to come.

As a result of Europe's downsizing and the deployment of our new routes, our center of gravity, as you can see on this map, has changed dramatically. Our industrial footprint is now well balanced with 4 blocks of roughly similar capacity. North America is essentially focused on its local market. Europe, acting, as I said, as the center of excellence for advanced premium, serving its local market as well. And 2 highly competitive hubs in Brazil and Asia serving both their local markets and exporting over the Eastern Hemisphere; the Europe, Africa, Middle East Asia region.

Importantly, in the process, we improved our breakeven point by -- we improved our resilience, sorry, by reducing our breakeven point by close to 25%. So we are more capable to resist ups and downs in the market. And as announced, this is all translating into significant commercial successes and momentum.

I'm providing here a couple of high-profile examples, both in the Middle East and in Brazil. But more importantly, our commercial hit ratio continues to increase in 2019 after doubling between 2017 and 2018. And this supports our activity forecast for 2020.

As you know, I was directly involved in the preparation and negotiation of ADNOC's mega tender, and I'm very proud and very happy for our teams for the success. Also because fundamentally, it's really epitomized what we expected and the success of our transformation plan. Our success in this contract relied in our capacity to offer simple products which are going to be produced in China, premium products -- conventional premium products which are going to be produced in Brazil and very advanced products which are going to be produced in Europe. So we supply the full monty of our capacities, and it's completed by service packages, leveraging some of our newly developed digital solutions. So it's a real good example, giving a lot of confidence to our teams going forward.

Now Vallourec achieved a lot since 2016, resulting in the significant improvements, which were presented by Philippe and Olivier. My ambition for Vallourec going forward is to take the group to the next level, both operationally and commercially. With the management team, we want to capitalize on the achievements, strong positions on key growing markets to accelerate revenue growth, while at the same time, relentlessly pursue cost competitiveness improvements.

So looking at the market fundamentals. First of all, we want to reiterate our belief that our core oil and gas markets will remain well oriented. Not so much because of increasing oil demand, but predominantly because investment remains constantly required to compensate natural field depletion. Depletion depends on the characteristics of each field and range from 4.5% to 8% per year. And it peaks in the U.S. shale with close to 40% depletion rate per year.

This expected E&P CapEx evolution is shown on the graph on the right hand side, and what's very important to add to this graph is that the global evolution or compound to the global evolution, we are particularly well positioned on fastest growing territories, Brazil and EMEA in particular.

So let's have a look at Brazil. Brazil is set to be the fastest growing offshore market in the coming years. This is evidenced by the significant acreage shown on the top right graph, acquired by Petrobras. But not only Petrobras, other high-profile international oil companies have acquired significant acreage since 2017. And this is planned to translate into a doubling of offshore well drilling in 2020 and beyond. On this market, there's no news to you, Vallourec offers a unique value proposition, combining local production (technical difficulty) service offer and very tight proximity to customers. As a result, we've enjoyed a signed agreement with Petrobras over the years and more recently won all the tenders launched by IOCs in Brazil in 2019.

In Brazil, we enjoy another unique assets, our iron ore mine, which sells most of its production to the local markets and supplies the remainder to our Jeceaba site and, therefore, contributing to the extremely low-cost base of Jeceaba. This mine operates at benchmark level in many operating KPIs and is ideally positioned on the cost curve.

We have decided to launch, in 2020, an extension CapEx of EUR 65 million, which will increase the production by over 2 million tonnes per year in 2022. This is an excellent CapEx from an economy standpoint, providing a payback close to 2.5 years.

In Europe, Africa and Middle East Asia, we expect a steady, if not spectacular, growth of E&P CapEx. This will importantly include a higher share of offshore projects, as shown in the dark blue bar of the graph, which is ultimately enriching our product mix. On these EA-MEA markets, we will definitely benefit fully from our complete and competitive offer, leveraging our new routes as well as associated services.

Finally, North America, as you know, is a very big and very volatile market. We don't expect a significant activity uptick in the U.S. in 2020, while our deliveries should be brought back in line with consumption after the end of the destocking phase, which occurred at the end of 2019. In this market, we enjoy a leading position on the premium and semi-premium segments, relying on a fully integrated local production routes, extremely flexible to react to increase and possibly decrease in the market.

To strengthen our position on the markets, innovation has always been at the core and part of our DNA. Notably, we never stopped investing in R&D program and innovation during the crisis. This is paying dividends, is resulting in a steady release of new VAM patents increasing by close to 50% over 2017, 2019 compared with the previous period. This is where our R&D agreement with our partner, Nippon Steel, is instrumental in our product innovation and in maintaining VAM, our premium connection brand, as the world-leading connection brand.

To give you a bit more concrete example of this, I'm highlighting on this slide a few recent examples of new products launched in the market and already generating revenue. VAM HTTC on the left are extreme high-torque connection for (inaudible) application, is part of our package to ADNOC. It was also supplied to a significant extent to Saudi Aramco starting in 2018. VAM SLIJ3 is being qualified to equip the new generation of HPHT wells in the Gulf of Mexico.

CLEANWELL, our advanced coating, is being progressively deployed with very successful running and very positive feedback from customers in the North Sea and Africa.

In terms of services, we are combining physical attributes like addressability, supply chain management, yard inspections with digitally enhanced technologies to develop solutions aiming at supporting our customers' operation, making them quicker, or maximizing the life of their assets. You can see a few examples here, which were presented at major oil and gas trade fair all along the year in 2019. First of all, at Rio Offshore Oil and Gas Fair; then in Houston at the Offshore Technology Conference, OTC; and finally, in late October at ADIPEC in Abu Dhabi.

Each time, it generates great interest from customers and generate additional development programs with them. Best Fit, for example, allows customers like Subsea 7 or TechnipFMC to optimize their welding operation in the field. It was successfully tested and sold to them in 2019. Smartengo inventory, as an another example, is part of the service package we will provide to ADNOC. So this development is a reality.

Finally, and maybe looking more ahead into the future, on top of our core oil and gas markets, we are determined to combine our customer base with our core technologies and expertise to offer significant innovation on selected segments related to the energy transition. I listed them here. In geothermal, we are already active and plan to expand. In the wind offshore, we are at the development phase -- the prototyping phase and ready to go to market. Carbon capture and utilization and storage as well as hydrogen are certainly the 2 more promising segments where there are clear opportunities for innovation with our technologies. We don't expect -- or we expect the revenue translation to occur later in time, probably around 2025.

So as you can see, we have a strong confidence on our ability to grow revenue on our core oil and gas markets and beyond. However, our strategy rely also and as well on continuously improving our competitiveness. First, through additional cost savings. I launched together with the Vallourec management team -- Vallourec's Executive Committee, the acceleration program earlier this year, targeting and generating an additional EUR 200 million of gross savings, which will -- to be precise, which will be added to the already achieved and overachieved savings targets and impacting the P&L starting 2021 and over into 2022.

The acceleration program is a combination of transverse initiatives like industrial excellence, relying on Industry 4.0, improving the efficiency of support functions, completing by significant regional projects like the 1 mill concept in Europe or the mini-mill program in Brazil.

In addition to individual growth savings in each areas, we will also benefit from the further deployment of our new routes to have the full flexibility to switch production between Europe, Brazil and China to combine up the best offer to our customers. This will result in more volumes being produced in Brazil and in China or in Asia with our new route utilization rate expected to increase from 19% in 2015 to 55% in '19 and up to 70% by 2024. This very concretely means that almost all of the expected growth in premium oil and gas products in EA-MEA region will be produced in Brazil or in China and, thereby, further decreasing our average cost base. So this is the strategy and very concretely what does that mean in terms of 2020 guidance and financial perspective.

To be very direct, our guidance for 2020 is to reach EUR 500 million of EBITDA and a slightly positive free cash flow. This is supported by realistic market assumptions and tangible activity drivers for our operations. In EA-MEA, we benefit from an already existing long order book, particularly in special steels. We'll also benefit from the start of the deliveries of ADNOC's contract.

In North America, we benefit from a rebound in Q1 following the 2019 destocking. And in Brazil, we will gladly follow the growth of Petrobras drilling plans. On top of that, we'll keep pushing our cost-saving efforts worldwide. And finally, we've launched initiatives to further reduce our working capital requirements below 100 days of sales. So we go further, what we already achieved successfully in 2019, and we will maintain our CapEx discipline around EUR 200 million, and this includes the announced expansion CapEx in the Mine.

Looking ahead, of course, the -- together with Vallourec's teams, our ambition is not to stop at positive free cash flow. 2020, we consider 2020 to be the turning point, sorry, of our financial trajectory. We believe we have now a great platform to significantly increase cash flow generation through EBITDA growth, continuous reduction in working capital requirements and contain CapEx, while benefiting from the financial benefits obtained from the announced capital increase.

So this is where I hand over to Olivier to walk you through the details of the financial restructuring in our balance sheet.

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [4]

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So thank you, Edouard. What we intend to do is a combined transaction made of the rights issue and RCF refinancing. So let's start with the proposed rights issue. Its amount will be EUR 800 million. It has been sized based, on one hand, on our expected cash flow generation over the next years, and on the other hand, on the pro forma leverage that it will -- to have in 2020, which we believe is adequate.

This rights issue is already fully underwritten. For 1 part by our core shareholders, Bpifrance and Nippon Steel, will support, of course, this operation and will contribute to it. And the balance of the rights issue is underwritten on a standby basis by the global coordinators, syndicate of banks, who are global coordinators for this operation.

The proceeds of the rights issue will be used essentially to deleverage our balance sheet and, to a little extent, to finance the exercise of a call option on too expensive and old lease contract in Brazil.

From a process and timing point of view, we will convene an AGM that will take place on April 6 to approve the rights issue. And depending, of course, on the market conditions, we intend to launch it after this AGM.

As I was saying, one of the biggest benefits of the capital increase will be to strengthen the balance sheet by reducing the debt and the leverage. Looking at that on a pro forma basis, I showed you a few minutes ago that we did end up 2019 with around EUR 2 billion of debt, a leverage net debt-to-EBITDA of 5.9x. Taking into account the proceeds of the rights issue, it would still, in 2019, bring back this leverage to 3.5x. And looking at 2020, the leverage would be at around 2.8x, which we believe is adequate.

So this is the first part of the transaction. The second one is refinancing our bank liquidity. It's done as well. We have put in place, with our core banks, a new RCF of EUR 800 million that will replace the existing banking lines and which is subject only to the rights issue completion, the right issue being already underwritten, as I just told you.

In addition to bringing liquidity, this new RCF will as well extend its maturity since it will be 4 years plus 1-year extension option. And the documentation, the terms of this new RCF are basically almost exactly similar to the existing lines we have with, for example, unchanged and single covenant of a maximum gearing of 100% and will be, of course, way below that after the rights issue.

A few figures on the pro forma cash and liquidity position, what it should bring us. I told you, again, a few weeks ago that our cash position at the end of '19 was EUR 1.8 billion. If we deduct from that what we will repay, which is currently drawn on our existing RCF, it's minus EUR 1.7 billion. Then the cash in from the rights issue plus EUR 800 million and the new RCF EUR 800 million, which will bring us to a position where we will have cash for EUR 900 million, and some undrawn RCF of EUR 800 million. This new banking facility is not at all meant to be drawn on a permanent basis, but to be a sort of a backup line. And I can remind you as well, on the bond side, that we have no bond maturity and no debt maturity before Q3 2022.

And on this word, I will give again the floor to Edouard for the conclusion.

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Edouard Frederic Guinotte, Vallourec S.A. - SVP of Middle East Asia [5]

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Yes, I felt after such a complete and comprehensive presentation, it was worth winding up the presentation with the main points to be retained. First of all, the 2019 results we are announcing today and the 2020 guidance is a demonstration that our transformation plan is complete or almost. And it confirms the expected benefit on our operations and our financial trajectory. In particular, we have now a very resilient, extremely competitive industrial tool, which we can rely on going forward to secure our commercial expectations.

We are ideally positioned on the key oil and gas markets for the next few years. And we are ready or getting ready in the case of the energy transition to capture significant future growth opportunities, both in services -- digitally enhanced services or on energy transition-related segments. We won't stop the competitiveness improvements where we are today. We launch additional cost reduction and cost improvement initiative with the acceleration program and the further deployment of our new routes.

Based on all of this, the capital increase, combined with renegotiation of our credit lines, which we are announcing today, is giving us the flexibility -- the financial flexibility to finish our turnaround and find -- and ensure the execution of our strategic objectives.

I would like to conclude on a slightly more personal note. Vallourec strategy is powered by Vallourec's team -- group, a quite incredible group of men and women, extremely dedicated professional, highly motivated, and I'm personally very honored and privileged to lead them through the achievement -- the achievements of our strategic goals. As we are about to launch this capital raising process, I can tell you that I, together with our executive committee, are totally committed to reaching our strategic objectives. And I look forward to an active and transparent dialogue with all stakeholders of the company.

With this, it seems we managed to catch up with our initial delay, which I will take as a good omen, and we are ready to answer any questions. Thank you.

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Questions and Answers

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Kevin Roger, Kepler Cheuvreux, Research Division - Research Analyst [1]

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Kevin Roger from Kepler Cheuvreux. Three questions on my side, please. The first one is that basically over the past months, you clearly stated several times that you do not need any capital increase. You generated Q4 earnings that basically seems to be well accepted by the management. So why did you change your mind right now with EUR 800 million capital increase?

Second question is related to the covenant, the gearing ratio. You did not mention that for the end of 2019. So where are we on that side at the end of the year?

And the last question is related to the U.S. entity. If I well remember, during the last, I'd say, impairment -- large impairment that you did, you impaired the value of the European and Brazilian units, but didn't touch the value of the U.S. over the past months. We have seen a number of oil services companies making a large impairment of the -- on the U.S. assets. So if you can reassure us on that side also that we should not see any impairment coming from the U.S. entity space?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [2]

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The second question, Kevin, I'm not sure...

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Edouard Frederic Guinotte, Vallourec S.A. - SVP of Middle East Asia [3]

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Okay. So, maybe I'll get this. So on the opportunity to launch the rights issue now after 2019, the point is precisely, 2019 is a demonstration, both for us and for the outside world that our transformation plan is working from an operation standpoint. But this being said, we consume most of the EBITDA created in financial expenses. So our turnaround to a certain extent benefits more to bondholders than to shareholders.

And when we look at the perspective in 2020 and beyond, we consider that it's the right time to complete the operational turnaround by financial turnaround, let's say, to strengthen the balance sheet with the capital increase and the extension of our credit lines. So the 2 elements combined give a great opportunity to really capture the value created by our operations starting 2020. So that would be for the first question.

As for the gearing, I think it's 80% in '19, and post rights issue, I believe it's between 40% and 50%.

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [4]

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Absolutely. And on the last one, should we face a risk of impairment in the U.S? As you know, we are a strong actor on this U.S. market, typically with margins that tend to be better than our local competitors who publish their results. So like every year, of course, we make an impairment test with our external auditors. And based on our results in the U.S. in our perspective, there's certainly no need to book any kind of impairment in this market.

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Guillaume Delaby, Societe Generale Cross Asset Research - Equity Analyst [5]

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Guillaume Delaby, Societe Generale. Maybe I would like to have just one question, basically, on your outlook regarding Brazil. You have been quite optimistic regarding Brazil since Q3 2019. Just would like to know whether it is based only basically on Petrobras drilling plan? Or does it also include a possible switch from ultra deepwater flexible pipes, which historically has been the preferred solution for Brazilian development toward rigid?

I mentioned that because I think 2 or 3 weeks ago in the specialized press, there has been some article mentioning once again some static problems with flexible. So I just would like to have your point of view on this subject?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [6]

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Yes, thank you. So first and foremost, the 2020, specifically 2020 outlook is predominantly tied to Petrobras drilling plant. As you know, we are very close to their teams because we have to align their drilling plan with the production schedule of our plants in order to be able to supply them in -- just in time. So we know very, very well what the plan is. It's already materializing in Q4, and it was an important factor in the results we posted in Q4. And so we are strongly confident that the scenario envisaged, which is mostly accelerating in Q2 and H2, will take place. We are also very well aware of the debate between flexible and rigid risers. We do have enough plants to supply some projects with rigid riser, but in later years. And maybe it will accelerate based on the difficulties faced by Petrobras, but a little bit early to tell.

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Jean-Luc Romain, CIC Market Solutions [7]

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Jean-Luc Romain, CIC Market Solutions. You have mentioned growth revenues outside of the oil and gas sector, I think CCUS, hydrogen and offshore wind to name a few. I remember but back end, it's long way ago, 2011, you mentioned the kind of prototype or concept called pre-earned for offshore wind. What kind of market size do you see or what kind of revenue do you see in a few years for those growth revenues, please?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [8]

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So it's premature to give a very precise numbers for these projects apart from geothermal, which, as I said, is already largely in our offer. All of them depend on either the success of some of our developments and/or the true development and the speed of this development of new ecosystems. So it's the case for CCUS, and in the case of hydrogen. So I won't give you a very accurate number. But since I mentioned it as part of our strategy, you can be sure that what we target is not a few million euros. So it's -- our ambition is more 3 digits.

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Unidentified Company Representative [9]

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We're going to take some questions from the phones, [Yuan].

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Operator [10]

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(Operator Instructions) The first question over the phone comes from Amy Wong at UBS.

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Amy Wong, UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst [11]

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I had a couple of questions, please. Just looking at your guidance for 2020 of hitting about EUR 500 million of EBITDA, how much of that do you think will be due to the cost savings you are able to realize in your income statement in 2020, please?

And then secondly, slightly related question as well. You have been through several cost saving programs, including balance on the previous transformation plan. So I'm quite curious if you can give us more concrete detail of how you're able to find more structural cost savings in the business, please?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [12]

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So in terms of the guidance, the EUR 500 million is a combination of revenue growth, in particular, in Brazil, EA-MEA and the cost savings program, which we commented already. Not going to give you a detailed split between the 2, but those are 3 important drivers in the EBITDA increase.

As for where do we find ideas? Well, that's the beauty of having very motivated teams. The point is yes, as we've been working on cost savings for many years, it so happens that you always have the combination of new flows, new products, new organizations also.

And so the opportunities to find new ideas is almost infinite.

In the particular case of acceleration program, together with the, [ex comm] we decidedly focused it on a number of work stream where we considered we had been maybe working a little bit less in the previous savings program. So typically, the work on the support functions efficiency, the work on improving our purchasing strategy, the look at our support functions, administrative processes to improve them, all of these are topics where when we look at international benchmarks, we are not that bad. But not that bad is not good enough for us, and we are convinced that there is an opportunity for the amount of savings we are targeting. So the whole team is very much on board to go get these savings.

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Amy Wong, UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst [13]

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Could I just have a follow-up on my first question and ask it slightly differently? Considering you did about EUR 94 million EBITDA in the fourth quarter with -- I think you called out a EUR 19 million provision release in there as well and then calling a slower 1Q 2020 start as well.

So it seems to be very second half weighted in terms of your EBITDA guidance. So can you give us a bit more assurance and confidence on how, why you see that ramp-up coming in the second half for you?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [14]

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Olivier, you want to take this one?

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [15]

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Yes, if I heard you well, Amy, I'm not pretty sure. I think the question was what gives us confidence in H2 being stronger than H1? First, it's the usual seasonality, where Q1 is already relatively a low point, both in terms of EBITDA and in terms of free cash flow. In terms of EBITDA because some important areas for us like Brazil, it's a summertime in Brazil in Q1, we have as well some vacations in China. And from a working capital point of view, as you know, there is a seasonality as well. The inventories in the plants are quite empty at the end of each year or before Christmas, and we restock at the beginning of the year.

So the second point, which makes us quite positive about your question, was mentioned by Edouard speaking about Petrobras. Since in the frame of what we call collaborative planning, we have a precise view of what will be the needs of Petrobras for 2020 and this is starting strongly, mostly as from second quarter and then in Q3 and Q4. And maybe a last point I can mention with regard to one of the other main, main drivers of the EBITDA improvement in 2020, which is the fact that we have very good, very profitable orders for niche, but big profitable niche products called special alloys or high alloys of, (inaudible) where we did benefit from a very tight market in 2019. We have been capable of building backlog that covers the vast majority of our sales in 2020. So all this does control our guidance.

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Operator [16]

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And our next question on the phone comes from Alan Spence at Jefferies.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [17]

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I've got a few questions about the rights issue. And I'll actually just take them one at a time. The first one, how confident are you that this would be approved at the vote at the AGM? And can you please tell me the threshold for the vote that's necessary?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [18]

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Yes. We have -- as you know, we have the complete support of our reference shareholders, both Bpifrance and Nippon Steel. So this should be a strong factor. And overall, we have the conviction that it's a compelling business case. So this should -- this should give us the approval of our shareholders.

As for the thresholds, I'm going to turn to my specialists.

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [19]

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It's 2/3 of the votes. Knowing that our quorum usually at the AGM is about 50% or so, the stake in our capital of Bpifrance is close to 15%, Nippon Steel as well. So all this make us really very comfortable about this part of the rights issue story.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [20]

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Okay. In terms of just how far in advance this has been announced, do you have concern that this is going to weigh on shares (inaudible) up until April 6, effectively forcing you to issue more actual shares than you had initially planned on?

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [21]

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So it's always very difficult to predict what the share price will be at any point in time. And this is true as well when you announce a rights issue. The only answer I can tell you is that, we are very convinced that what we are doing is the very best way to ensure value creation for our shareholders. And as well that's seen from many shareholders with whom we speak during roadshows or interviews. Our level of debt was seen as a sort of a cap on the share price as well as our liquidity situation. And this is why we believe that this should be a nice success for our shareholders.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [22]

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Okay. And last one from me, and I'm going to be fairly blunt here. Given your past commentary about not needing to do something and guidance for improving EBITDA, improving free cash flow and better demand in some of your core markets, are you not diluting your current shareholders close to the bottom of the cycle or of the bottom, a low point in your own share price?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [23]

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So again, we believe that we have come to a point after the 2019 positive results, where the benefits of our transformation plan and our repositioning as a more competitive and more successful company is a fact now, and it should be a fact for the external world. Based on this and still very tangible and very documented market and activity opportunities, the outlook for 2020 and beyond is positive. And so the remaining part of the puzzle was to strengthen the balance sheet. And let's say, as Olivier said, remove the cap on our share price and quite contrary, therefore, offer a clear value creation proposition to our shareholders. So this is naive and our conviction.

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [24]

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Then additionally, from a technical point of view, please don't forget that this is the right issue with preferential subscription rights, which simply means that there is no dilution at all for existing shareholders that will use this preferential sufficient rights. And for those who wouldn't want to use them, they will be able to sell them on the market.

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Operator [25]

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The next question comes from Vlad Sergievskiy at Bank of America.

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Unidentified Analyst [26]

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I will ask business-related questions. First on the EUR 500 million, EBITDA guidance. You mentioned a number of positive drivers behind it. Would you mind arranging those drives, which are the biggest ones, which are less important? And how significant do you also think this restocking effect in the U.S. is a driver to achieve this EUR 500 million EBITDA as well? So that's the first question.

The second question will be on cost savings. In particular, does this additional yield EUR 200 million cost-saving program includes the closure of the power gen business in Germany? And if it does not, then what sort of impact from this closure do you expect on your P&L?

And lastly, on the iron ore mine, you are mentioning EUR 600 -- sorry, EUR 65 million CapEx and the potential payback of 2.5 years on this investment. And I'm wondering what sort of iron ore price you are using in your estimates to define this 2.5-year buyback?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [27]

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Okay. So that's a lot of questions, Vlad. Basically, on the levers supporting our EBITDA guidance, you're asking me which of my children I prefer. So I'm not ready to do that. I will -- I would say that both Brazil, the increase in activity in EA-MEA and cost savings are 3 very significant drivers supporting our guidance. The one-off effect of recovering after the destocking in the U.S. would be of lower order of magnitude, I would say.

Then what's the next question? Cost savings. So [high sulfs] is not part of our 2020 impact. It will -- the savings or, let's say, yes, the savings will start materializing in our P&L more towards 2021, as a result of the negotiations with personal representatives in Germany. The closure costs, however, are fully provisioned in our account already at the end of 2019.

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [28]

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And to be even more specific, the way we calculate savings. So what is included in the EUR 200 million we announced '21 and '22 does not take into account the positive effect of plant closures, which we classify as change of scope and not selling. So definitely, it will have a positive impact because this is a loss-making activity, but it's in addition to the EUR 200 million.

Another comment is that we booked a restructuring charge, as I said, EUR 23 million. We didn't book an impairment for this high sulfur side because the external estimates we have on the value of the assets lead us to believe that the value is above the book value of these assets.

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [29]

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And on your last question related to the iron ore price. So we are not, let's say, full professional miners. It's not completely our core business. So we don't build our own price scenarios. We rely on the consensus, which I believe is around $80 per ton in 2020 and goes down from there in the next years.

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [30]

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And of course, we have built a sensitivity analysis before voting for this CapEx and almost in any case, given the very low cash cost of the mine, this CapEx is definitely a no-brainer.

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Operator [31]

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The next question comes from...

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [32]

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On the professional miners -- sorry, just as a complement, I don't give justice to our teams in Brazil. The mine itself, the operations are clearly at benchmark level in Brazil from an operations and cost standpoint. So in this respect, they are extremely professional.

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Operator [33]

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And next up, we have Lillian Starke from Morgan Stanley.

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Lillian Starke, Morgan Stanley, Research Division - Research Associate [34]

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I have 2 questions. The first one is, if you could provide a bit more detail on what you're doing on the working capital to enable the improvements on the reduction of data that you're guiding for in 2020?

And then the second question I had was a bit of a follow-up to the mine. I would just -- I mean, you're highlighting that $80 per ton for your payback. I'm assuming that's the same level that you're embedding in the 2020 guidance? And also, considering that, and as you see, this is a no brain investment. At some point, is this something that you would like to dispose off? Or you still believe the mine is a core asset to Vallourec?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [35]

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Okay. So on your first point regarding working capital requirements improvements, so we launched a very structured task force at the beginning of last year, with the support of specialized consultants who helped us to attack all 3 components of the working capital requirements. So from lowering customer receivables, decreasing inventory and controlling payables. Most of the improvement last year came essentially from better control of our production flow and supply chain management, and thereby, reducing the amount of work in progress.

You may realize that since we have a very balanced industrial footprint we move products quite significantly from Brazil to Middle East, from China to Indonesia than other countries. And so the ability with which we're able to avoid overstocking, ordering too early is critical to control the working capital. So what we did essentially is to visualize and set limits in terms of work in process at each step of the way and support the teams to avoid building unnecessary buffers in their supply chain management. Of course, we were also very strict in making sure our customers pay us on time, and we also relied on controlled payables. So that's what we did on the working capital requirements.

With regards to the mine, your question was whether the price scenario of the CapEx was retained in 2020? The answer is yes, but you have to keep in mind that the first additional iron ore production will materialize only in 2022. So there is a CapEx impact in 2020, 2021. The revenue impact essentially starts in 2022.

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [36]

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Then on your last question, which was -- should we dispose, although we have in mind to dispose the mine. The answer is no, definitely. It's still the very first time we get this question and probably one of the very best decisions we made over the last few years has been not to sell the mine, which is a highly profitable asset. When you look at transactions for comparables, the market value is not satisfying for us. So definitely, it's an excellent asset that we want to grow, which we are doing and to divest.

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [37]

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By the way, I could add that one of the side benefits of the CapEx we are launching in the mine is to also expand its useful life much later into the 21st century. So we are definitely double dipping on this asset.

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Operator [38]

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And the next question comes from Sahar Islam from Goldman Sachs.

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Sahar Islam, Goldman Sachs Group Inc., Research Division - Analyst [39]

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So to follow-up on the disposal point, does the capital raise mean that assets are noncore and particularly assets like the forestry assets will not be disposed now i.e., did you look at disposals as a way of de-gearing the balance sheet too?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [40]

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So the answer is yes to that question, but similarly to the mine. So far, we have concluded that the value we could get on the market from our forests wouldn't significantly help the deleveraging. And more importantly, maybe we start to see huge interests from some of our core customers like Total, Shell and others in either buying the forest or partnering with us in the forest as a way for them to capture CO2 emissions. And so it's our belief that the value of our forest is probably only going to increase. And so therefore, it's not the right time to divest them.

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Sahar Islam, Goldman Sachs Group Inc., Research Division - Analyst [41]

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Okay. Thank you. And then my second question was on the tendering process. Is that still healthy? And what are the key projects we should expect you to bid on in 2020? And from the projects you are bidding on, is it still largely a volume recovery? Are you seeing pricing starting to recover as well in EMEA?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [42]

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Sorry, is your question about the U.S. specifically or across the world?

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Sahar Islam, Goldman Sachs Group Inc., Research Division - Analyst [43]

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No, is more international tendering?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [44]

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Okay. International tendering. So international tendering, international markets, EA-MEA are typically very open, very competitive markets. And we -- let's say, we expect a differentiated price scenarios depending on the segments. The simpler the segments, the most competitive and anyway in our plans, we don't include any significant uptick in prices from the level reached in 2019.

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division - Analyst [45]

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Jean-Francois Granjon from ODDO BHF. 3 questions, please. The first one, could you come back on the free cash flow generation. We have seen a strong improvement in 2019 compared to 2018. So these are pretty good results. But I'm surprised by the limited level expected for 2020. So you mentioned a breakeven level. So it opens our limited improvements compared to the huge improvement expected for the EBITDA compared to last year. So why -- can you explain why were you expected to simply deliver?

The second question regarding the exploration post 2020. So due to the cost-cutting plan expected, do you expect the same magnitude improvement for the EBITDA in 2021, 2022 compared to 2020?

The last question, could you comment on the coronavirus impact in China? You had a huge part of your capacity, 25% of the total capacity of the group based in China. So can you explain also the potential impact or negative impact?

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [46]

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So I'll let Olivier answer the first 1 and I'll take over for the last 2.

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [47]

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Yes. The first one is a concern to help you in your calculations. As you have seen in 2019, a part of the very strong improvement in our free cash flow was coming from a strong collection in working capital. We intend to increase our revenue in 2020. So that even if we decrease, which is our objective, once again, our working cap in days of sales, it doesn't mean per se that it will decrease in euros. So this may not or much less help in 2020. Another comment I can make is that, as you all understood, our mine has made an extremely positive net result in 2019. We have increased the production by 34%, and iron ore prices went up quite nicely in 2019 as well. Like in many countries, there will be taxes to be paid upon that in Q1 2020. So these are one of the -- one of the elements. If I want to help you further, in terms of restructuring cash out, while no big change compared to 2019. So still few tens of million euros. Here, it's more in 2021 and later afterwards that we should see a significant reduction in the cash out coming from restructuring because most of what we have to do will have been done. And over time, as well, we will benefit more and more from the decrease in financial charges, thanks to what we are doing. What we expect in terms of improving your rating from our rating agency that will progressively provide a positive evolution in our financial charges.

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [48]

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Yes. As for your question on the EBITDA outlook after 2020, first of all, we don't give a precise guidance for 2021 and beyond. One thing is for sure, is our ambition is to -- is not to stay at EUR 500 million EBITDA and EUR 0 million free cash flow, but to significantly improve the cash flow generation from our company.

If I -- if one way for you to approach it is look at the main EBITDA improvement drivers for 2020, Eastern Hemisphere, Brazil and savings to a certain extent. The impact of the new savings plan on the EBITDA will probably be comparable. But keep in mind, the net results will also depend on inflation, ForEx evolution and then you have to factor in your market and activity growth scenario. Last but not least, in 2022, we'll have the additional benefit from increased activity at the mine. So it's qualitative, but the outlook for additional EBITDA growth are very real and material.

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [49]

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Coronavirus.

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Unidentified Company Representative [50]

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Coronavirus, yes. That's one topic I am monitoring very closely. So as you know, we have 4 plants in China. They have restarted production on 10th of February after being clear to do so by the Chinese authorities. They restarted in a slightly degraded mode for 2 reasons: One is the fact that not all employees were allowed to go back to the plant. Those who went out of the city to visit their relatives were not allowed to come back in a strict attempt by the Chinese authorities to contain the virus. So we are -- basically, at this stage, we think we have 70% to 80% of our staff back on sites. And the second limiting factor is the transportation. There, again, the Chinese authorities are placing huge constraints in transport from one city to the other, from one region to the other. And this is constraining our ability to source feeding material and to ship our finished products. So all of this is monitored on a daily basis. So far, we benefit from the fact that be it in Chuzhou, where we have Tianda, and in Changzhou where we have some of our other plants, the number of active coronavirus case is limited.

It's 50:1 and 15 for the other. And on a day-to-day basis, we start to have a little bit more freedom to move our material out and away from our plants. So there will be an impact operational in our Q1 results. The magnitude of which is still being evaluated.

As far as with our customers, our commercial team are in contact with them on a daily basis to manage the situation and avoid any significant disruption in the operation. So situation is being monitored, production has restarted, and we will have a more precise evaluation of the impact on Q1 and the full year in the coming weeks.

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [51]

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Maybe one initial comment since as a vast majority of the production of Tianda, in particular, is going to the local market for commodities with rise in margins, it's not really material when we speak in terms of margins anyway so far.

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Operator [52]

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And the next question over the phone comes from James Evans at Exane BNP Paribas.

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James Matthew Evans, Exane BNP Paribas, Research Division - Analyst of Oil and Gas [53]

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I actually have just more than a couple. Firstly, I just wondered on the free cash flow breakeven, sort of normalized level that you need in terms of EBITDA. I think before you talked about EUR 550 million, I presume with the reduced financing and maybe a little bit lower normalized CapEx as well, that's a bit low. So it's -- is EUR 500 million the right level?

And then secondly, I kind of want to ask a bit more medium term. I mean, obviously, a big deleveraging today and hopefully in the future, operationally. What is the right level for Vallourec in the medium term to net debt to EBITDA, where do you want to aim this business?

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Olivier Bruno Benedict Mallet, Vallourec S.A. - Chief Financial and Legal Officer & Member of Management Board [54]

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So on the first point, I think you have all the main figures in mind. So below the EBITDA, cash flow wise, what do we find? Financial charges as of today, cash out was at/or slightly above EUR 200 million, that will be reduced. We gave figures by EUR 50 million, quite mechanically through the right issue and the consolidation of the lease in Brazil. And then going forward, although we, of course, are not in under pressure to refinance on the bond market, we will be opportunistic.

We believe that the right issue will definitely have a strong and positive impact on our rating, on our bonds trading. So these are opportunities to do clever things in this regard. Of course, we'll do them. So this is about financial charges. Then you have a CapEx. CapEx wise, EUR 159 million in 2019. It was slightly below this level the years before. We communicated in the presentation and the press release that our normative CapEx is between EUR 200 million, EUR 250 million. So depending on the years, we will leave within this envelope, and we are flexible in this regard as we have demonstrated.

And then you have 2 lines, which I tend usually to group, which is tax and restructuring cash out. So you know our figures for the last few years. There is no reason for them to change significantly in the short term. So altogether, something around EUR 100 million cash out. And I said on a previous question, that the cash out for restructuring charges should start to decrease after 2020 when we will be past the completion, in particular, of the German restructuring plan, we are implementing as of today.

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Operator [55]

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Thank you. And we have no more questions on the phone and very last one in this room.

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Unidentified Company Representative [56]

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Okay. So in such case, I will conclude. Thank you very much and Philip.

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Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [57]

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Let me say the last words. And just basically, to thank you all of you, investors, analysts, advisers, bankers, all the friends in the room or on the screen, if I may say, I want really to thank you for supporting us for attending all those meetings.

Thank you for your help, and good advice. Thank you for being loyal to Vallourec through the good years. The beginning was glorious and easy, of course, recently was much tougher.

But let me tell you that I'm very, very convinced that under Edouard's leadership with Olivier and all the team. I do really convinced, and I think you shared that hope that the company will go back to those glorious days. Thank you very much. Bye-bye.

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Operator [58]

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This concludes today's teleconference. You may now disconnect your lines.