U.S. Markets open in 54 mins

Edited Transcript of VK.PA earnings conference call or presentation 14-Nov-19 5:30pm GMT

Q3 2019 Vallourec SA Earnings Call

Boulogne-Billancourt Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Vallourec SA earnings conference call or presentation Thursday, November 14, 2019 at 5:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Didier Maurice Hornet

* Edouard Guinotte

* Jean-Marc Agabriel

Vallourec S.A. - Director of IR

* Olivier Bruno Benedict Mallet

Vallourec S.A. - CFO & Member of Management Board

* Philippe Crouzet

Vallourec S.A. - Chairman of the Management Board

================================================================================

Conference Call Participants

================================================================================

* 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

* Igor Levi

BTIG, LLC, Research Division - Director and Energy & Shipping Analyst

* Jean-Luc Romain

CM-CIC Market Solutions, Research Division - Analyst

* Kevin Roger

Kepler Cheuvreux, Research Division - Research Analyst

* Sahar Islam

Goldman Sachs Group Inc., Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, and welcome to the Q3 9 months 2019 Results Conference Call. My name is Lydia, and I will be your coordinator for today's event. (Operator Instructions)

I will now hand you over to your host, Jean Agabriel, Head of Investor Relations, to begin today's conference. Thank you.

--------------------------------------------------------------------------------

Jean-Marc Agabriel, Vallourec S.A. - Director of IR [2]

--------------------------------------------------------------------------------

Thank you, and thank you for joining us for our Q3 9 months results presentation. I am Jean-Marc Agabriel, Head of Investor Relations. With me today to comment these results, we have Philippe Crouzet, Chairman of the Management Board; Olivier Mallet, Member of the Management Board and Chief Financial Officer; Nicolas de Coignac, Senior Vice President, North America; Edouard Guinotte, Senior Vice President, Middle East Asia; Didier Hornet, Senior Vice President of Development and Innovation; Hubert Paris, Senior Vice President, Europe, Africa.

This conference is available by conference call, which will be recorded and a replay will be available. It is also audio webcasted, and the presentation slides are also available for download. Before I hand over to Philippe Crouzet, I must warn you that today's conference call contains forward-looking statements and that future results may differ materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the beginning of our slide presentation and are included in our annual registration document and with the French AMF regulator. This presentation will be followed by a Q&A session. Now I leave the floor to Philippe Crouzet.

--------------------------------------------------------------------------------

Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [3]

--------------------------------------------------------------------------------

Thank you, Jean-Marc. Good evening, everyone. I'm pleased to present our 2019 Q3 and 9 months results. As you may have seen already, it's another good quarter indeed and brings evidence that we are well on track on our recovery path. I will start by going through the highlights, and Olivier will detail our financial results.

So let me start on Slide 5 with the usual overview of the key achievements of the quarter. The main takeaway is, I guess, for Q3 first, are the following. First, in Q3, we delivered once again a good set of results, aligned with our guidance. Note that despite some expected headwinds from the U.S. market, where I'll remind you, we make approximately 30% of our total revenue. We benefited from high oil and gas sales in the EA-MEA regions. And this drove our revenue growth as well as our profitability. Our revenue grew 10% year-on-year. While our EBITDA almost doubled compared to last year, third quarter at EUR 84 million. Second, free cash flow performance was another key achievement of the quarter as we did in Q2, we generated a positive free cash flow of EUR 26 million in Q3 compared to an outflow of EUR 153 million last year. Thirdly, we continue to benefit from a sound liquidity position, and if they will stay on that point.

Lastly, a few words on our outlook, we'll elaborate more in the last part of our presentation. But for now, let me just highlight that based on our solid third quarter and on the current macroeconomic and market trends, we confirm our targets for 2019. We continue to target, therefore, a strong increase in EBITDA for the full year with the EBITDA generation achieved in the first semester confirmed in the second one. The lower activity in North America oil and gas market should be offset by an overall good level of activity in the group's other markets and by stronger savings targeted in H2 compared to H1. And in addition, we now target a free cash flow to be positive for Q4 2019 as well.

Let me now rapidly go through the details of the key figures of the third quarter on Slide 6. So strong operating results at all levels. Top line first, revenues up 10% year-on-year, 7% at constant exchange rates with a price mix effect positive by 5%. And volumes slightly up at 2%. Again, the growth was largely driven by our oil and gas activities in the EA-MEA regions. And this, of course, more than compensated the decrease in revenue in North America. In addition to that, we continue to benefit from high volume and prices of iron ore in Brazil. Second, we significantly improved our profitability, as I've said EBITDA that almost doubled in Q3. And this makes us confident in reaching our objective of a strong EBITDA growth for the whole year. The margin grew by more than 3 percentage points.

Lastly, free cash flow remained positive at EUR 26 million as a result both of increased cash flow from operating activities and from the actions undertaken to manage our working capital requirements. Free cash flow generation, of course, remains our top priority.

Now moving to Slide 7, you have a similar picture for the first 9 months of the year. Revenues are up as well, double-digit at plus 13%, 11% at constant exchange rate, both reflecting higher volumes and a better price mix effect, again, mainly driven by the good performance of our activities for oil and gas in EA-MEA regions. Of course, mining revenue in Brazil benefited as well from higher iron ore prices and volumes, whereas power gen continued to decrease steeply as anticipated. Over the first 9 months, EBITDA was multiplied by more than 4 year-on-year to reach positive EUR 253 million and EBITDA margin growing by almost 6 percentage points. It shows that the strong positions of evaluating the EA-MEA regions, combined with the mining operations and with the benefits of our transformation plan, we are definitely driving substantial operating leverage. Coming to the free cash flow for the first 9 months, it is still in the negative territory, but only due to Q1. And it shows a very meaningful improvement of EUR 454 million compared to the same period of 2018.

On Slide 8, a few words on our Transformation Plan almost specifically on 3 initiatives. Regarding gross savings, the new initiatives announced at the beginning of the year are progressing well. The reorganization of our German operations and the continuous optimization of operations in Brazil resulted in EUR 48 million of gross savings achieved in H1. But on H2, we target to generate higher savings than this amount. And we will be well in line with our objective of at least EUR 200 million of additional growth savings over 2019 and 2020.

Regarding now the conventional powergen business. As you may remember, we announced we will exit that business. As already mentioned in July, due to the higher tariffs applied by the Chinese authorities since the month of June 2019 on a significant part of the steel pipes that are produced in Germany for the Chinese conventional powergen market, the divestiture of the German part of our conventional powergen our business has become unlikely. Therefore, we are currently evaluating different industrial and social scenarios for our facilities located in Germany.

Lastly, regarding our project to expand the production capacity of our iron ore mine in Brazil, I'll remind you that this project aims at increasing the capacity of the mine up to around 8.5 million tons per year as of 2022. We've been granted the required license to proceed with the construction, as we already told you in July. The investment proposal approval procedure is in process. And we should make the final investment decision in the next few months. In the meantime, we'll continue to work to improve, to increase the production volume through productivity improvements. And I'm pleased to confirm that through these actions, we will increase the production capacity of the mine from 4.7 million tons in 2018 to around 6 million tons 2019, and we expect our production to remain at that level until full completion of the expansion project.

I'll now hand over to Olivier who is going to review in detail our financial results.

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [4]

--------------------------------------------------------------------------------

Thank you, Philippe. Good morning or good evening, everyone.

On Slide 10. First, let me give you more details on our revenue growth by activity and by geography. Starting with our largest segment, oil and gas, which represented 63% of our total revenue. Revenue was up 7% year-on-year or 4% at same exchange rate. As Philippe pointed out, this strong performance was as expected, first and foremost, driven by the Europe, Africa and Middle East Asia regions, EA-MEA, with a higher price mix and higher volumes. In North America, oil and gas revenue decreased year-on-year due to the current U.S. market slowdown, impacting volume and prices. And lastly in South America, oil and gas revenue was down year-on-year, with a relatively low level of offshore OCTG delays.

Petrochemicals revenue amounted to EUR 84 million, up 5% year-on-year, mainly driven by higher volumes sold in Middle East Asia and South America. Industry and other activities were strongly up, plus 20% at same exchange rates while Industry in Europe revenue remained under pressure. Mining activities in Brazil continue to enjoy higher volumes and prices compared to last year.

Power generation was up 6% in Q3, but still at a low level. While for the first 9 months of 2019, the revenue was down 32% year-on-year due to the decline in global demand for coal-fired conventional power plants.

Switching now to Slide 11 with more details on the revenue and EBITDA. First, we continue to record revenue growth in Q3, in absolute terms, plus EUR 100 million year-on-year, primarily thanks to price mix and volumes with ForEx contributing as well for 3%. The industrial margin improved significantly by 26% to EUR 177 million, adding 2.1 percentage points of margin. It mainly reflects the higher price mix in oil and gas in the EA-MEA regions, the higher contribution from the mine as well as the cost of savings that has been achieved. They largely offset a lower contribution from North America. Tight cost control continued on the SG&A, which decreased by 6% year-on-year. SG&A represented 8.8% of revenue against 10.3% in Q3 '18. So in summary, a strong growth in EBITDA, almost doubling year-on-year.

On the next slide, some quick comments on the key lines of the rest of the P&L. The first element to highlight is EUR 39 million year-to-year progress of the operating income. This was driven entirely by the EBITDA contribution evolution. You can notice as well that operating income turn positive in Q3 of this year. Financial charges were slightly reduced, thanks to lower foreign exchange hedging costs, and the group net loss was reduced by EUR 32 million to amount -- to minus EUR 60 million.

Going to Slide 13. Let me comment on working capital management, with again, a nice performance in Q3. This is a slide that we have been presenting for a few quarters now, which shows you the evolution of our net working capital requirement in days of sales quarter-after-quarter. At the end of Q3 this year, networking capital requirement in days was down by 19 days compared to Q3 2018 to 105 days. This is, by far, the best level which -- for over the last 10 years.

Now if we look at the average of the first 3 quarters of 2019, net working capital requirement in of days was reduced to 110 compared to 120 for the same period of last year. This is fully in line with our objective to reduce the working capital in number of days on a quarter year average, and it does demonstrate that our efforts to tighten working capital measurement are successful.

Now moving to Slide 14 to comment on free cash flow. As Philippe mentioned in his opening remarks, free cash flow was again positive in Q3 at plus EUR 26 million to be compared with an outflow of EUR 153 million last year -- in Q3 last year. This is an improvement year-on-year of EUR 179 million. About 1/3 of this improvement comes from the recovery in profitability with the EBITDA recovery translating into higher cash flow from operating activities. This cash flow from operating activities was close to breakeven and up EUR 52 million compared to Q3 '18. The rest comes from the tight management of working capital requirement, which decreased by EUR 71 million versus an increase of EUR 73 million in Q3 '18.

Capital expenditure was slightly up to EUR 43 million in Q3 '19 compared to EUR 26 million in Q3 last year. As a result, the free cash flow for the first 9 months of 2019 was negative at EUR 117 million, with a very significant improvement of EUR 454 million year-on-year, with more than [EUR 200 million] coming from an improved cash flow from operating activities and the rest coming essentially from working capital management.

Moving now to net debt on Slide 15. The group net debt as of September 30, 2019, stood at EUR 2.104 billion. This is slightly less than the EUR 2.111 billion, which at the end of June. Aside from the free cash flow movements, there is no specific item to highlight that impacted net debt in Q3.

To conclude my part, a few words about liquidity on Slide 16. Vallourec's liquidity, as you know, is strong and basically unchanged compared with the end of June. We have access to a total liquidity of around EUR 2.2 billion, including cash for -- above EUR 1 billion and EUR 1.1 billion of undrawn committed bank facilities. In August, we paid back the EUR 400 million private placement, and we have no major bond maturity before Q4 2022. We have as well, no major bank client maturity before 2021.

At the end of September, the banking covenant ratio, which is tested once a year at the end of December, was estimated at 81%, still far from the limit of 100%. And I'll remind you that the calculation of this covenant ratio is not impacted by the implementation of IFRS 16.

And with these words, I now leave back the floor to Philippe.

--------------------------------------------------------------------------------

Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [5]

--------------------------------------------------------------------------------

Thank you, Olivier. So before we open the Q&A session, I'd like to end our presentation with some comments on the trends we see on our main markets.

Starting with oil and gas, what we see at the moment is the following. In the EA-MEA regions, the market growth should remain robust, notably for special steel products, where supply and demand situation is pretty tight at present and should remain so in the near future. Obviously, this reflects mostly the positive dynamics of the deep offshore activities. In North America, the operating environment remains more challenging. Operators maintain a strict CapEx discipline. We have distributors that are in the process of just adjusting down their inventories, which leads us to anticipate lower shipments and prices in Q4. In South America, we expect the anticipated pickup in deliveries in Brazil to Brazilian customers to materialize in the latter part of the year and then to accelerate into '20. As you may know, this is driven by a significant increase in drilling activity for exploration in deep offshore fields, which we think should last for the next few years.

As far as our industry and other segment is concerned, we see the trends experienced in the recent quarters to continue into Q4, namely in Europe, low demand with pressure, both on volumes and prices, in particular in Germany. Whereas in Brazil, iron ore production is targeted. We expect, as I said, a total production of 6 million tons in 2019, which represents an increase of 25% compared to 2018 in volume.

I will now conclude with our outlook for 2019. Basically, no change. In other solid performance achieved in Q3, we confirm the full year targets that we communicated last July. That is a strong increase in EBITDA, with EBITDA generation achieved in the first half confirmed in the second half. The current slowdown in the North American market should be counterbalanced by an overall product production and sales level strong in our other markets and by higher savings in the second half of the year. We continue as well to target working capital improvement, the diminishing number of days on a quarterly average basis. And our CapEx envelope for the year is unchanged at around EUR 180 million. As a result, we now target a positive free cash flow in Q4 following positive Q2 and Q3.

Lastly, based on all these objectives, we reiterate our confidence that the group would respect its banking covenant at the end of 2019.

This concludes our presentation, and we now open the floor for the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Alan Spence of Jefferies.

--------------------------------------------------------------------------------

Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

The first one, just on your reported EBITDA of EUR 84 million. You note in the release that it would be EUR 64 million, excluding IFRS 16 and the provisions. IFRS 16 was about EUR 9 million impact, implying EUR 11 million from provision. Can you give us a little bit of an idea about what that provision was related to? And if there would be any expected repeat of that into Q4?

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [3]

--------------------------------------------------------------------------------

Yes. We continue to give this indication. Honestly, compared to 2, 3 years ago, the variations and provisions now are really not meaningful. What can happen is that, in some cases, we still can take some orders below full production cost, then you take a provision and you reverse it when you deliver the product. It can happen as well that we have [grew] in provisions in front of tax questions and supply that. So nothing really meaningful. Just keep in mind that this level of movements and changes in provisions is now not really significant anymore and has no reason to pick up again.

--------------------------------------------------------------------------------

Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

Okay. And turning to working capital, you've made significant progress this year. Do you think you could achieve a similar level next year in terms of lower per quarter amounts? On the days outstanding basis?

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [5]

--------------------------------------------------------------------------------

So it's a little bit too early to comment on next year. What I can tell you is that one of the key reasons for this improvement this year is due to the fact that we have put together a team at the beginning of 2019 in order to push what we call the PRI, payable receivable inventories, task force. And with the support by the way of a consulting firm to develop rules, initiatives in each and every significant operation in the group to continue to improve our working capital management. So this has started to deliver some successes along 2019. We definitely believe that these initiatives that have started early this year, with, first, the diagnosis phase. And only since a few months is the execution phase, has still a good potential in particular as far as inventories are concerned that we, of course, intend to deliver next year.

--------------------------------------------------------------------------------

Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

And the last one for me, speaking to the power gen business. Can you give us just a sense of what its EBITDA impact has been either Q3 or year-to-date '19?

--------------------------------------------------------------------------------

Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [7]

--------------------------------------------------------------------------------

Clearly, it's in the present situation where sales have gone down dramatically due to the decision taken by the Chinese authorities. It is not a positive contribution to our overall performance. And so that's clearly the reason why we will solve that situation in the next few months.

--------------------------------------------------------------------------------

Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [8]

--------------------------------------------------------------------------------

Any sense of scale you can give us?

--------------------------------------------------------------------------------

Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [9]

--------------------------------------------------------------------------------

No, it's not massive, but it's negative.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question comes from the line of Jean-Luc Romain of CM-CIC Market Solutions.

--------------------------------------------------------------------------------

Jean-Luc Romain, CM-CIC Market Solutions, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Do you hear me?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, yes. Yes, we can hear you.

--------------------------------------------------------------------------------

Jean-Luc Romain, CM-CIC Market Solutions, Research Division - Analyst [13]

--------------------------------------------------------------------------------

You mentioned increased deliveries for EA-MEA in Q4 or at least strong growth. Do you believe increased deliveries will make up for lower deliveries in North America? That's my first question. Second question is about the mine expansion. What should we estimate as capital expenditure for that expansion, please?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

On the first point, what we say is that the slowdown in North America will be offset by EA-MEA sales but by Brazil as well. So Q2, 4 should definitely see the first, let's say, positive trend or acceleration trend in the sales for -- in the South America region. So this is the shape of Q4. It's not only EA-MEA, it will be Brazil as well. Olivier?

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [15]

--------------------------------------------------------------------------------

On the mine expansion, you know that we will get all the local approvals that were necessary in July. So we are in the process of finalizing the file. There is no doubt that it will be very profitable CapEx and the green light should be given in the next few months. We are, technically speaking, in the process of gathering all the quotes from equipment suppliers. So it's a little too early to give you an exact number for the CapEx. Take maybe a range between EUR 60 million and EUR 80 million or dollars, and you will be not far from what is expected.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Sahar Islam of Goldman Sachs.

--------------------------------------------------------------------------------

Sahar Islam, Goldman Sachs Group Inc., Research Division - Analyst [17]

--------------------------------------------------------------------------------

If I can start with one on Brazil. And as you increase the shipments into the year end, could you talk a bit about what that means for the margin mix for the group? And then also for working capital, is there a drawdown from those particular deliveries?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

On that particular one, it's -- as you know, most of what we sell in the oil and gas domestic market in Brazil go to offshore, deep offshore and especially pre-salt areas. So it's quite a valuable product and with high margins, of course. The impact on the working cap is limited since we have a very integrated supply chain with our top customer in Brazil. We've been implementing this kind of mill-to-rig service since quite a while in Brazil. By the way, that's the kind of service we will implement as well in the Middle East in the coming months. And so it results in a very limited working capital addition. So that is basically the situation in the coming quarters in Brazil.

--------------------------------------------------------------------------------

Sahar Islam, Goldman Sachs Group Inc., Research Division - Analyst [19]

--------------------------------------------------------------------------------

Great. And thank you for the update on the balance sheet. Just a couple of follow-ups. So firstly, I noticed a small amount, but this EUR 300 million of banking facilities which expire next year, what's the plan for those? And am I right in thinking you drew down on the revolver this quarter? So what's the logic behind that? How do we think about the balance between drawing down the revolver, putting cash on the balance sheet?

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [20]

--------------------------------------------------------------------------------

So on your first question, yes, it's about the amount you mentioned, our banking lines that have a maturity in the course of 2020. You know that we have extended until 2021. The vast majority of the club deals results who are set to expire next year. Given the very strong liquidity we have, there is no need to act vis-à-vis this EUR 300 million in 2020. And in due time, of course, we'll do the refinancing before the maturities expire in 2021.

As far as the way we withdraw or not or reimbursed on the bank lines, we have already drawn, to some extent, at the end or before the end of H1, and we commented on that. We have increased our drawings to some extent. In particular, in anticipation of the repayment of the bond of EUR 400 million that we have repaid early August. And we have, to some extent, build maybe in a typical conservative way, some extra cash at [home]. So this is what it was about.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from the line of Igor Levi of BTIG.

--------------------------------------------------------------------------------

Igor Levi, BTIG, LLC, Research Division - Director and Energy & Shipping Analyst [22]

--------------------------------------------------------------------------------

Could you talk a bit about the $900 million contract with ADNOC? At first, is it all incremental? EUR 180 million a year? And then when can we expect it to start? And is this going to be accretive to margins?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Edouard, maybe you can answer.

--------------------------------------------------------------------------------

Edouard Guinotte, [24]

--------------------------------------------------------------------------------

Yes. Thank you, Philippe. So these huge contracts will be definitely incremental when you compare with 2018 and 2019 because during these years, we delivered very little to ADNOC just because of the sheer timing of their previous tender. So in average, yes, it's an increase. Now with regards to incremental margins within this contract, as you realize, we will supply the whole range of products from commodities to very high end. And on top of that, we have a fair share of supply chain management services on top. So this would definitely add to average margin made in the countries -- in this country over the past couple of years.

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [25]

--------------------------------------------------------------------------------

From a timing point of view, if I can complement. The first deliveries are expected to take place in the second half of 2020. And then, as you know, the contract does last for 5 years with the potential extension for 2 additional years.

--------------------------------------------------------------------------------

Igor Levi, BTIG, LLC, Research Division - Director and Energy & Shipping Analyst [26]

--------------------------------------------------------------------------------

Great. And could you also provide us an update on what other sizable tenders are still outstanding? And have any new ones been issued since the recent award?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Maybe, Didier?

--------------------------------------------------------------------------------

Didier Maurice Hornet, [28]

--------------------------------------------------------------------------------

Yes. Thank you, Philippe. So let's say, we have large tenders still open in the Middle East, Oman, typically; Iraq; closest, Egypt, for example; I would have forgotten about Aramco in the Middle East; North Africa also. So let's say, the tendering activity is definitely very active. And while it's difficult to anticipate, but recently, our hit ratio has been significantly up.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Amy Wong of UBS.

--------------------------------------------------------------------------------

Amy Wong, UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst [30]

--------------------------------------------------------------------------------

So two questions from me, please. The first one is just to pick up on your comments about the high tendering activity, particularly in EA-MEA. Could you be a bit more specific? I.e., give us a sense of where the pricing on kind of these new tenders are going? A sense of where that's heading, whether a bit stronger or where we could be seeing some headwinds or tailwinds? And that's my first question, please.

--------------------------------------------------------------------------------

Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [31]

--------------------------------------------------------------------------------

Edouard, maybe on the Middle East?

--------------------------------------------------------------------------------

Edouard Guinotte, [32]

--------------------------------------------------------------------------------

Yes. So I think Didier already highlighted some of the big tenders we expect coming to fruition in the next few months. Now in terms of prices, what we expect is definitely some sustained tightness in the special steel products. So on this one, probably a positive traction on price. When it comes to the more standard commodity products. There's usually quite a large amount of available capacity in the market. So we don't expect any positive traction on this particular segment of the market.

--------------------------------------------------------------------------------

Amy Wong, UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst [33]

--------------------------------------------------------------------------------

All right. Okay. My second question is a bit more of a housekeeping. It looks like you've recorded an impairment of assets of EUR 9 million in the quarter. Can you explain what those impairments are, please?

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [34]

--------------------------------------------------------------------------------

Yes, it's a smaller shop that was making very noncore product in Brazil. I think that we have stopped, so it's an impairment of the shop.

--------------------------------------------------------------------------------

Amy Wong, UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst [35]

--------------------------------------------------------------------------------

Okay. So it's a fixed asset impairment? Just to clarify.

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [36]

--------------------------------------------------------------------------------

It was fixed asset. Yes, it's a fixed asset impairment.

--------------------------------------------------------------------------------

Amy Wong, UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst [37]

--------------------------------------------------------------------------------

Okay. Yes. Just -- I mean, there seems to be quite a drip feed in the impairments, where if you look at the last few quarters, there seems to be high single digits or tens of millions being impaired. I mean what should -- can you talk us through a bit about how you are thinking about that line going forward?

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [38]

--------------------------------------------------------------------------------

So Amy, if you compare with the past years, there has been a significant impairment. I would say that most of the job has been done in Europe to a very large extent. And you can never say that it's over and that we are done forever with the potential impairments. But definitely, if new ones were to happen, it will be for small and meaningful magnitude.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Our next question comes from the line of Kevin Roger of Kepler.

--------------------------------------------------------------------------------

Kevin Roger, Kepler Cheuvreux, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

A few questions on my side, please, still related to the EA-MEA, please. I was wondering if you can quantify your backlog at the end of Q3 compared to what you had in hand at the beginning of the year. Is there a single growth -- single-digit growth, double digit? If you can quantify the backlog that you have right now in the EA-MEA?

Second one is related to the credit line. As was just mentioned before, you have to drawn something like EUR 0.7 billion offshore of credit line in the quarter. I was wondering if you can quantify the impact on the financial costs for the coming quarters.

And the last one is related to your comment that you made previously. You say that basically, the decline in the U.S. activity in Q4 will be offset by the improvement in the Middle East and Brazil OCTG. But what about the decline of the iron ore pricing that we see since the beginning of Q4 going down from $120 to $80? What would be the impact on your profitability, please?

--------------------------------------------------------------------------------

Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [41]

--------------------------------------------------------------------------------

Maybe I will briefly answer on the backlog. Of course, we do not provide detailed figures, but the trend is clearly up. Of course, on the one hand, we have this great success with the ADNOC tender, which -- had no equivalent at the beginning of the year, of course. And generally speaking, as Didier mentioned, we are improving our hit ratio of positive gains or wins, if I may. The number of times, the competitiveness of ours, this is definitely reflective of the successful implementation of our transformation plan.

And I insist, it's not only about savings. Of course, we deliver on savings, as you know. But it's as well related to the new routes that we are successfully implemented. Let me enter some the fact that -- for example, the ADNOC contract, since it's a public information, it's one I can comment on. It will be supplied from Europe for part of the product line, of course, the highest valued products, but as well from Brazil and from China. And this is definitely a great success for a new business model. And this is what really drives our growth at the moment. And obviously, this makes us much more resilient to some regional events like the North American downturn. And so this is my comment on the backlog. Definitely up compared to the beginning of the year for OCTG, especially, of course, the situation is very different for power gen activities. Olivier on the two other ones.

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [42]

--------------------------------------------------------------------------------

Yes. Maybe just if I can add something on the backlog. One of the beauties of the business model in EA-MEA is that we answer tenders following FIDs, which gives, at the end of the day, quite a nice visibility. Because it's a very long process between the FID, the tender, the award, the manufacturing time. So that if you look at the number of FIDs in the world, the behavior of the NOCs, it gives you not in terms of backlog but in terms of trend: what would be orders raised maybe 1 year from now. So the market, if you look at the FIDs, it's well oriented. In addition to what has been mentioned, the mix is tending to improve progressively with more offshore compared to onshore projects with more gas compared to only oil. So all this goes slowly, but definitely, in a good direction and will have a positive impact in our next quarters and beyond there.

Moving to your other questions, Kevin. Of course, when we drawn our credit lines, so it has a cost. Don't overestimate it because, as you know, even on the bank lines, which are not drawn, we pay a commitment fee which is a significant compared to what we pay when it's drawn. So it has some cost but not a very large one.

Finally, in terms of iron ore prices, we had anticipated a few months ago when we spoke at the end of July that iron ore prices will go down to some extent in H2. This has happened. Actually, it's a little bit less than what we are anticipating. So if we want to compare H2 vis-à-vis H1 in terms of potential EBITDA generation, there is a decline in the U.S. with no doubt and probably a little bit significant than expected by everyone with fewer months of growth. On the other hand, the level of activity on other businesses is doing well. We have a really strong pickup in our derisk to Petrobras, deep offshore in Q4 compared with the previous quarters. And if I may, I remind you that this pickup in exploration drilling in Brazil will be a key driver, if not to say the #1 driver, as already notified of a further results improvement in value in 2020 compared to 2019. And we have as well, as Philippe was highlighting, higher savings expected in H2 compared to H1.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Guillaume Delaby of Societe Generale.

--------------------------------------------------------------------------------

Guillaume Delaby, Societe Generale Cross Asset Research - Equity Analyst [44]

--------------------------------------------------------------------------------

Yes. One simple question for me, please. Regarding the recovery in -- basically, in the Middle East, my question is simply, is the Middle East start to be significantly supplied by tender? Or is it still essentially products coming from Brazil? So what is the ramp-up of tender in terms of basically of the premiumization process and in terms of exports?

--------------------------------------------------------------------------------

Philippe Crouzet, Vallourec S.A. - Chairman of the Management Board [45]

--------------------------------------------------------------------------------

Edouard?

--------------------------------------------------------------------------------

Edouard Guinotte, [46]

--------------------------------------------------------------------------------

Yes. So in the Middle East, we -- I would say, we supplied the -- or we leveraged the full power of our industrial network. So typically, higher end products tend to come from Europe while conventional premium would come from both Brazil in China and very basic commodity products, mostly from China. So we really rely on the full array of availability in terms of tender premiumization. It continues to progress continuously. If you recall, we were at low single digits of premium products coming out of China in 2017. We should end up 2019 over 20%, and we expect this to continue to increase in the next few years.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

(Operator Instructions) This now concludes the question-and-answer session. I return the call over to your host.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Thank you. Thank you very much. So let me conclude by a few words about how we view this year-end. So Q4, as you understood, will be a mix of positives and negatives. Positive, as Olivier mentioned, in EA-MEA regions and Brazil offsetting the downturn in North America. Net positives as well on savings, but there will be, obviously, a significant impact in North America. So all in all, we really target to confirm in H2 the EBITDA achieved in H1. That, I think makes us pretty different from other players in the overall industry related to oil and gas.

The other point I'd like to highlight is, as we mentioned at the very beginning, the fact that our debt is stabilized. Quarter-after-quarter, we confirmed that the combination of operating efficiencies and hard work on working capital is delivering good performance. And if you compare our debt level to a year ago at the end of Q3 of last year, it was very similar to where we stand today. As you know, Q1 is always a bit up in our model due to seasonality, but we are clearly significantly improving our performance as far as debt is concerned. So this concludes my comments and our presentation. And I'll take this opportunity to wish you a very nice year-end. Bye-bye.

--------------------------------------------------------------------------------

Olivier Bruno Benedict Mallet, Vallourec S.A. - CFO & Member of Management Board [49]

--------------------------------------------------------------------------------

Thank you. Goodbye.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Thank you for joining today's conference. You may now disconnect your lines. Hosts, please stay connected.