U.S. Markets close in 3 hrs 3 mins

Edited Transcript of VK.PA earnings conference call or presentation 26-Apr-17 4:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Vallourec SA Earnings Call

Boulogne-Billancourt Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Vallourec SA earnings conference call or presentation Wednesday, April 26, 2017 at 4:30:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Etienne Bertrand

Vallourec SA - IR and Financial Communications Director

* Nicolas de Coignac

Vallourec SA - SVP of North America

* Olivier Mallet

Vallourec SA - CFO, General Counsel and Member of Management Board

* Philippe Crouzet

Vallourec SA - Chairman of the Management Board

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

Conference Call Participants

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

* Alessandro Abate

Berenberg, Research Division - Head of Metals and Mining

* David Richard Edward Farrell

Macquarie Research - Oil and Gas Research Analyst

* Guillaume Delaby

Societe Generale Cross Asset Research - Equity Analyst

* Hin Kin Wong

UBS Investment Bank, Research Division - Executive Director and Analyst

* Kevin Roger

Kepler Cheuvreux, Research Division - Research Analyst

* Maria-Laura Adurno

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Michael Shillaker

Crédit Suisse AG, Research Division - MD and Head of Global Steel and European Miners

* Nicholas James Green

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Raphael Veverka

Exane BNP Paribas, Research Division - Research Analyst

* Robert John Pulleyn

Morgan Stanley, Research Division - Analyst

* Vladimir Maximovich Sergievskiy

Barclays PLC, Research Division - Equity Research Analyst

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

Presentation

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

Operator [1]

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

Good day, ladies and gentlemen, and welcome to the Vallourec First Quarter 2017 Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Etienne Bertrand, Head of Investor Relations. Please go ahead, sir.

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

Etienne Bertrand, Vallourec SA - IR and Financial Communications Director [2]

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

Thank you, Gail, and dear all, good evening. Thank you for joining us tonight in Paris here. And with me today, we have, to comment the 2017 Q1 results, Philippe Crouzet, CEO; Olivier Mallet, CFO; and Nicolas de Coignac from Houston, Vice President, North America.

I would like to inform you that this conference is available by our conference call website. It's going to be recorded and the replay will be available. I will comment -- the management will comment on the slides during the presentation, and the slides will be available for download on our website, both on the homepage on the Investor Relations Sections in the Financial Results page.

Before I hand over to Philippe, I must now warn you that today's conference call contains the 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 filed with the AMF. This presentation will be followed by a Q&A session.

And I would like to leave the floor now to Philippe.

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [3]

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

Thank you, Etienne. Good evening, everyone. I'll now start by giving you an overview of the highlights for the Q1 period and then I'll leave the floor to Olivier for some more comments on the financials.

Let me start right on Page 4 with the volumes. Our shipped volumes grew from 251 kilo tonnes in Q1 2016 to 475,000 tonnes over the first quarter of 2017. This is mainly the result of 2 effects. Firstly, the integration of Tianda and the full consolidation of VSB in Brazil. And second, the positive oil and gas momentum in the U.S. So the significant rebound is related to those 2 effects, and the rebound in other markets and regions is still to be seen.

As shown in the next slide, the financial performance improved significantly in Q1 compared to both Q1 of last year and Q4 of 2016. And this is due to a positive combination of first scope as I commented of volume growth, enabling better absorption of fixed costs and of nice savings despite price deterioration. Our transformation plan is being executed as planned over this quarter. We have disposed our Saint-Saulve steel mill, and we've implemented our reorganization. And we now keep overall focus on industrial optimization.

Free cash flow is mainly impacted by the working cap needs linked to the rebound in our activities, especially in North America. I will let Olivier give further detail on the revenue growth. Let me just mention 2 things. On the positive side, of course, we have scope and ForEx and it is illustrated in the chart on the Page 6. And you see us well, a very strong volume growth offset by negative price mix.

I hand over now to Olivier.

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [4]

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

Good afternoon, all. Good morning to everyone. So I will start on Page 8 by the Q1 revenue breakdown. No big change by market. Oil and gas is still, of course, our largest segment by far, at 62% of our total revenue in Q1 '17. More interestingly, the evolution by region, which reflects the good momentum in the U.S. OCTG business as North America does slowly rebound from 19% a year ago to close to 24% of our Q1 '17 volumes.

South America's contribution is up by over 6 points to 20.8%. Many thanks to higher OCTG deliveries to their raw sales than usual, which are quite concentrated over this quarter. The significant increase for Asia and Middle East share, mainly that's from a scope impact VSB arena to this area and Tianda. And finally, the decrease in the share of the rest of the world is due to unfavorable comparison base leading to last year raise in Q1 '16.

Moving to the top of the P&L from revenue to EBITDA. As already explained by Philippe, our revenues benefited from a positive scope effect, with the integration of Tianda and the full consolidation of the former VSB and as well from a positive ForEx impact. Excluding these elements, the positive volume impacts in North America, mostly in Brazil as well, has been offset by a negative price and mix effect in North America and EAMEA.

In terms of industrial margin, it has improved significantly due to this higher revenue, combined with the benefits of this transformation plan with good savings in Q1. It has though to be noticed that the unusually high level of deliveries for pre-salt in Brazil in Q1 contributed as well to this positive volumes compared to last year. The benefits of our transformation plan are also noticeable in the improvement of our SG&A and all this led to this EUR 51 million EBITDA improvement at minus EUR 21 million.

On the rest of the P&L, not a lot to comment. Our operating loss was significantly reduced compared to last year and the previous quarter, mostly thanks, of course, to our better EBITDA, but also to the absence of restructuring and impairment charges this quarter unlike in Q1 '16. As a result, the net result, group share is improving, still negative at minus EUR 126 million compared to minus EUR 284 million last year.

Moving to the free cash flow. At minus EUR 220 million, slightly improved compared to Q1 '16. We saw some improvement in the cash flow from operating activities, mostly linked to the improvement in the EBITDA that is partly offset by an higher increase in working capital in Q1 this year compared to Q1 the last year. And this is due on top of the usual seasonality effect on working capital to the rebound in the activity in North America. And as you can see, CapEx are still very strictly monitored at EUR 34 million, slightly below 2016.

What does it mean in terms of net debt? It stands at EUR 1,533,000,000 at the end of Q1, with an increase in the debt net, due mostly to the negative free cash flow. Our gearing ratio is up 42%.

On Page 13, some comments on our liquidity first. It does, of course, remain strong. At the end of Q1, it was made of EUR 1 billion of cash and EUR 2.3 billion of long-term committed bank facilities, of which EUR 673 million were drawn, which has been done. At the time, we did reimburse our EUR 669 bond in February. And the short-term debt amounted to EUR 1.5 billion.

As you know, no change on debt. Most of our bank facilities are maturing beyond 2019, and there is no bond repayment to be made until 2019 as well.

Finally, we have gained some increased financial flexibility vis-à-vis our gearing covenant that has been raised with the agreement with our banks from 75% to 100% for all our long-term committed bank facilities and for the annual test occurring at the end of 2018, '19 and '20. This is a clear sign of all banks' confidence in our financials and liquidity profile.

And I will now hand over to Philippe, who will tell you more about the outlook

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [5]

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

Thank you, Olivier. So the beginning of the year confirms the good dynamics in the U.S. and this is expected to continue. In other regions, the timing of the recovery is still uncertain. And therefore, we remain cautious on this front as Europe, Africa and Middle East and Asia will still be impacted by low tendering activity and still low prices.

As far as Brazil is concerned, we still expect the drilling activity to remain stable all-in-all versus 2016, and we see no major changes in the other group businesses.

On the positive, of course, we should continue to benefit from our transformation plan and benefit from our cost-reduction initiatives. Therefore, in the current volatile and still uncertain environment -- global environment, we confirm our EBITDA improvement targets of between EUR 50 million and EUR 100 million versus the full year of 2016, and now expect this to improve in the upper part of that range. Thank you for your attention.

And now it's time for question and answers.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Our first question is coming from Raphael Veverka from Exane.

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

Raphael Veverka, Exane BNP Paribas, Research Division - Research Analyst [2]

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

The first one would be on your revised guidance, which would still imply an EBITDA run rate for the rest of '17 below what you have reported in Q1. So I'm wondering if you could give a little bit of color on that, and perhaps notably on the expected Q2 versus H2 sequencing?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [3]

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

Raphael, so what we can say about that is that it's likely I would say or very likely that Q2 will be below Q1. As I mentioned during the presentation, in Q1, we had unusually high deliveries of tubes for pre-salt in Brazil due namely to the fact that in Q1, Petrobras had to drill some extraordinary wells for the Libra field. So it happened in Q1, it led to the phase in Q1 that will not replicated and this will have some impact on the volumes between Q1 and Q2. The other problems I can mention is that we expect H2 to be above H1 definitely because mostly of the increase in prices and to some extent in volumes as well in the U.S. As you know, we have announced quite significant price increases in the U.S. OCTG market. They don't apply for most of them to H1 activity. In H1 it applies only to what we call spot order for very small customers. We are negotiating them at this moment for H2 with our big so-called program customers, but the market situation in the U.S. make us very comfortable in achieving this price improvement, which will contribute to a better H2 versus H1, and this will be the major point that we'll explain better second part of the year.

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

Raphael Veverka, Exane BNP Paribas, Research Division - Research Analyst [4]

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

Okay. And maybe just as a follow-up. I know you might not want to comment at this stage, but for H2, do you see potentially a return to positive EBITDA territory? Or would you say it's too early to comment?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [5]

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

I may not want to comment it at this stage.

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

Raphael Veverka, Exane BNP Paribas, Research Division - Research Analyst [6]

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

Okay. Okay. And my last question would be on the international OCTG markets. Do you see any positive signs that gives you -- or are you may be a bit more constructive for H2 tendering activity taking into account the visibility you have at the moment?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [7]

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

Raphael, I think, so far we perceive that the activity outside North America and outside onshore North America remains pretty subdued. Most of the major oil companies are definitely giving a priority to short cycle investment buyback type of things, extending existing operations. We do not see major changes in their attitude regarding big projects. So we know there's a lot of work being done at their engineering teams, but really, the final investment decisions are not being taken. So, so far the tendering activity is the normal one in the Middle East and not more, not less. And so we do not expect significant change, for now, at least anything impacting the second half of 2017.

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

Operator [8]

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

The next question is coming from Amy Wong from UBS.

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

Hin Kin Wong, UBS Investment Bank, Research Division - Executive Director and Analyst [9]

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

Question on your price mix. You said the aggregate impact was about 38%. Can you just give a little bit more color in terms of how much of that was due to the mix of lower ASP volume versus the actual kind of realized pricing in your sales during the quarter, please?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [10]

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

I think basically, there are 3 elements that contribute to that. One, which is the largest one is EAMEA, our negative price impact that has taken place both in North America and in Middle East, Africa. In North America, because you certainly remember that prices were going down in the course of H1 '16 and has been then stabilized in H2 '16 and not fully improved yet in Q1 '17. So that we -- in the comparison between Q1 '16 and Q1 '17, we see this negative price variance for our North American OCTG business. So does the same story for the EAMEA region, where deliveries made in Q1 '16 were still based on orders and prices of mid-'15, whereas what we have been delivering in the early part of '17 is based as you already know on orders taken somewhere around mid-'16 at prices that were lower, probably at the lowest point. So this is the first element. The second one is a mix element that is pretty strong in Q1 compared to Q1 '16. If you go back to press release of a year ago, we had flagged the fact that our deliveries in the EAMEA region was made with a very good mix in everything product wise, customer wise. This was due to the timing of the deliveries. So this is a very unfavorable basis when we compare that with Q1 '17, where the mix was much more normal. And the third element that played some role as well is that the volume rebound since Q1 last year has taken place mostly in the U.S., where margins are not worse than in other parts of the world, but where the average selling price is lower than the average in the group. So that's a result of a geographical mix effect that impacts in the variance calculation this mix evolution. And finally, for the variance specialists there is so-called conjugate variance effect, which tells you that in the way variances are usually built, when you have a price decrease taking place in parallel with the volume increase and this is the case at this time. This conjugate variance (inaudible) is taken as a price effect, which is sort of optically increased, but you know everything.

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [11]

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

Maybe, Olivier, you could add that this significant price mix -- negative price mix in Q1 will decrease quarter after quarter all along the year.

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [12]

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

Absolutely, Philippe. You're right to add that because the prices -- the oil prices increased mostly in H2 in the U.S. market, so the basis for comparison will get better. And at the same time, we will start increasing our prices, of course, especially, they are almost exclusively at the time in the U.S. market as well, so that quarter after quarter or half year after half year, it would be more in H2 compared to a H1 phenomenon. This negative price mix will decrease for the pure price part of it and for the mix, it all depends on deliveries quarter after quarter.

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

Hin Kin Wong, UBS Investment Bank, Research Division - Executive Director and Analyst [13]

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

Can you give any -- could you give any more color on your volumes sold out of Tianda and your volumes sold to NSSM, please? And how -- what's the kind of impact it would have on the ASP for both?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [14]

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

I guess, you -- we don't give the ASP or things like that by business or by plan specifically. But you know the orders of magnitude. I guess, you know that the production capacity or production in Tianda year-after-year is between 400,000 tonnes and 500,000 tonnes. So if you divide that by 4, you will sort of get the impact on Q1 volumes. There is as well some volume impact, but to a much lesser extent at least tonnage wise, coming from the full consolidation of VSB after the merger. And I guess, you have as well (inaudible) price of Tianda that is way below the rest of the group, of course.

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

Operator [15]

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

Next question is coming from Alessandro Abate from Berenberg.

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

Alessandro Abate, Berenberg, Research Division - Head of Metals and Mining [16]

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

Just basically, my questions have been answered. Just a follow-up to Amy's one. On Tianda, just can you give a little bit the steps on the planning to implement for the next 12 months? And what kind of contribution you might be expecting? So what the strategy is? And how you'd think is going to develop throughout the next 4, maybe 6 quarter?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [17]

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

And -- Alessandro, I'm sure you're aware that Tianda is attractive for us, basically because it has good equipment, good tools, which will potentially enable us to produce premium quality products from China. But so far, that's not yet the situation. Clearly, Tianda is positioned as an API supplier and -- both to the Chinese domestic market and exporting, especially to the Middle East and maybe to other regions as well. So it means that as far as this year is concerned, 2017, the contribution will be relatively limited based on domestic sales in China, which are not profitable as everyone knows. And only on the API exports, mostly, largely API exports to the rest of the world. So our focus in 2017 will definitely be to, of course, move the company up to our standards. First, in safety and second, in quality and reliability because we have plans, of course, as you know, but more on the medium-term perspective to use Tianda as a basis for our new routes to a variety of markets, which we intend to supply including for premium products. But definitely, this will not be immediate. It's a kind of -- not like if we were kind of ramping up a new rolling mill except the fact that it is up and running, but we want it to our standards and definitely, this will take time. But it's ongoing. We've already started, of course, supporting the company with our technical teams and technical experts. And I'm pretty confident that we will develop according to our plan and contribute to improving the profitability of the group as planned in our transformation plan.

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

Alessandro Abate, Berenberg, Research Division - Head of Metals and Mining [18]

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

Okay. So just a follow-up. Just excluding a little bit development, the market outside of China, in China, when do you think the full efficiency of Tianda will be materializing on the P&L, excluding any kind of potential change improvement or deterioration of the markets?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [19]

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

I think it's a matter of 2 to 3 years. That's what we said when we presented our transformation plan. And I have only reasons to confirm that kind of road map. In other words, we've not found anything contrary to that road map to be even clearer, since we are the -- we've been owner -- full owner of that company. So everything seems in line with our expectation.

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

Operator [20]

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

Our next question is coming from Rob Pulleyn from Morgan Stanley.

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

Robert John Pulleyn, Morgan Stanley, Research Division - Analyst [21]

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

A few questions, if I may. Firstly, in terms of the working capital investment in the first quarter, could you give a bit of a steer for the full year? I appreciate there's some seasonality in there, and also U.S. activity is picking up. Have some idea of whether we'll see inflows of working capital in the second half as usual would be encouraging. Secondly, if I could just check, a bit of a modeling question here, but on the D&A and CapEx, given obviously, we have the consolidation of Tianda and VSB. Is the D&A and CapEx we've seen in the first quarter sort of a good run rate for 2017 for us all to use? And thirdly, again, if I may, you talked about Libra exploration wells benefiting the Brazil mills in 1Q. When do you expect the product for the development wells to come through because I imagine that will be a positive mix?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [22]

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

Okay. So I think most of these questions are for me. So on the working capital side, there is an increase of EUR 104 million in Q1. There are 2 elements there. One is pure seasonality each and every year, except, of course, when the activity is just falling. There is an increase in the working cap for many reasons, and this was EUR 61 million, if I'm not wrong last year. On top of that, there is this impact of the rebound in activity in North America, which is actually probably limited in terms of the impact on the working cap. It's -- if we assume there's an assumption that the similarities are same as last year, it will need about EUR 40 million, an increase in the working capital in the U.S., which is not that big compared to the very strong increase in volumes. And I remind you that this is one of the many, many benefits of our distribution model in the USA. We sell to our distributors. They carry inventories. They carry the receivables, vis-à-vis the final customers. We only carry the receivables, vis-à-vis our distributors, with the usual payment terms in the U.S., which has quite short. And we don't carry inventories of finished goods. So that's the increasing activity in this part of the world doesn't represent such significant burden on our working cap. The latter part of your question and that is, of course, more difficult to answer. It's what do we see on a full year basis? The easy answer would be to tell you it will depend on the activity level at the end of the year and beginning of '18. And this is certainly part of the answer. What I may add to that is that we are seeing the actual significant positive results of what we are doing in order to improve our performance in cutting or reduce -- in reducing our inventories in terms of days of future production. We have already seen that at the end of last year. It was extending part of the very good Q4 performance, and this is, again, the case in Q1. We are continuing this effort. And we expect from this effort to mitigate probably to a large extent the effect on our working cap for this year, due to the increasing activity on the U.S. market mostly. On your second question, for D&A and CapEx, yes, the run rate you see for the D&As is probably what you'll see more or less for the remaining quarters. And as a reminder, we had some additions with Tianda and the full consolidation of the (inaudible) Brazil. On the other hand, we have cut capacity in Europe and this has a positive impact. But all in all, D&As are going up to some extent. On the CapEx side, we are having the same envelope for the full year as the one we did communicate you a year ago, which is say about EUR 200 million CapEx. And finally, on Libra, don't expect too much in -- or even anything in '17. The production wells will be drilled later on. So on this drilling activity in offshore Brazil, we confirm what was previously said, being sort of a stable activity in '17 compared to '16 and with this little peak in Q1 that will be a reverse in the next quarters.

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

Robert John Pulleyn, Morgan Stanley, Research Division - Analyst [23]

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

Okay. And one quick follow-up, if I could. On the last conference call, you mentioned that your U.S. mills were running at quite a sporty utilization rate, and you were looking to rehire workers in the U.S. Could you just -- for the benefit of color for ourselves, just tell us where the utilization of your U.S. mills is today? And how those efforts to increase production through rehiring are actually progressing?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [24]

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

I think, this one is for you Nicola.

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

Nicolas de Coignac, Vallourec SA - SVP of North America [25]

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

Yes. Sure. Well, Rob, we are currently still hiring in some of our plants. We will probably reach the level of staffing that we wanted to reach around the month of May. And we will have by then our main plants probably running close to full capacity by the end of Q2. Okay. Does it answer your question, Rob?

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

Robert John Pulleyn, Morgan Stanley, Research Division - Analyst [26]

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

Yes. I think, so yes, by the end 2Q, so moving into the second half, you'll be at effective capacity on what's that 3 shifts at each mill, whereas, today you're a little bit lower?

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

Nicolas de Coignac, Vallourec SA - SVP of North America [27]

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

Yes. We'll be running at full capacity in our main mills, absolutely.

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

Operator [28]

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

The next question is coming from Maria-Laura Adurno from Goldman Sachs.

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

Maria-Laura Adurno, Goldman Sachs Group Inc., Research Division - Equity Analyst [29]

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

I just had a couple of questions. So the first one coming back to the utilization of your plans. I was wondering if you could maybe just update us with respect to where it stands in the U.S., but also for overall -- for the overall group. So that would be my first question. The second question, indeed, we didn't see any impairments or restructuring charges. Should we assume that this is likely to be the case for the rest of the year? And then the final question is clearly, you saw better EBITDA generation into the quarter. Revenue was actually down quarter-on-quarter. And I was just wondering if you could help us understand how we should think about revenue for the next 3 quarters.

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [30]

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

Maybe a quick one on utilization rates. So you've heard the answer by Nicolas regarding North America. And I would say that, that in Europe, we are pretty loaded now since we've divided our capacity by 2. So we have only 2 big rolling mills running plus specialty mills, but the rolling mills are running, I would say, close to full capacity as well. And lastly, Brazil is the place where we still have room for expansion and of course to address a potential recovery from other markets when it comes. And in the meantime, we are exporting, so (inaudible) load Brazil to export to the North American markets to support, of course, the recovery taking place there. So I would say that overall, if you combine all this, we are probably in Q1, around a utilization rate globally of, let's say, 60%, 65% and, of course, moving up along the year, especially in North America.

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [31]

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

And for your 2 other questions. First, about processing an impairment. So we don't plan as of today, any significant impairment charge in 2017. As far as restructuring, nothing significant in either, I think from a booking point of view, we need to book a little bit for the pre-requirement packages in Germany, where everything cannot be booked at the very beginning of the process, but it will not be a very significant amount. About the revenues for the next quarters. Given what has been said about the business environment, no big change to be expected really with some pluses and minuses. The biggest plus should come probably from North America, mostly driven by prices, but nothing very significant to comment on the other parts of the business.

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

Maria-Laura Adurno, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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

Okay. And just one last question. Given that you're within covenants, what was the rational for actually increasing it?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [33]

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

Well, the rationale is that it's -- when we can, it's always better when you are a CFO to gain some actual headroom vis-à-vis your covenants. Of course, as you know, we have a strong liquidity and there is no need -- identify need in the short term to change these covenants, so it was more sort of an opportunistic move. And at the end of the day, the main objective was to be able to pass message, especially to the credit investors that none of them should see or anything in this regard for the coming years, so that we expect that to facilitate when we'll believe that there are some market opportunities or access to the debt market.

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

Operator [34]

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

The next question is coming from Vlad Sergievskiy from Barclays.

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

Vladimir Maximovich Sergievskiy, Barclays PLC, Research Division - Equity Research Analyst [35]

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

Could you please give some additional color on the market activity outside North America? In particular, if we would be talking about global offshore, excluding Brazil, how do you see your volumes developing in this segment? Do you see currently, your book-to-bill ratio around one or you are still working through existing backlog? And also, if you could comment on pricing in the Middle East region, and how has it developed in the past quarters and months?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [36]

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

Yes. Well, in a nutshell, it's pretty simply -- it's pretty quiet. And the last quarter, Q1 has been very quiet season. I should say in the Middle East and other offshore -- more offshore areas, like West Africa or Southeast Asia, not a lot of activity there. So yes, we are eating in our backlog there. Not a lot of comments regarding prices precisely because the tenders were pretty limited. So this is clearly -- offshore is clearly still a very quiet area I would say.

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

Vladimir Maximovich Sergievskiy, Barclays PLC, Research Division - Equity Research Analyst [37]

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

And if I may, a quick housekeeping question on your balance sheet. I know it is EUR 87 million of shareholder loan. Can you please give some color what this loan actually is about? And what is the reason, why you guys are not including this loan into your net debt calculation and covenants calculation?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [38]

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

So this is a loan made by Nippon Steel in Brazil locally to the new VSB. And I think it's including the net debt in the covenant calculation.

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

Vladimir Maximovich Sergievskiy, Barclays PLC, Research Division - Equity Research Analyst [39]

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

Okay. Perfect. And if I may ask a quick sales question. Will you be willing to disclose the EBITDA contribution of Tianda in the first quarter this year?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [40]

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

Typically, we are not fully willing to disclose any EBITDA contribution from any business. But what I can tell you is that it's moderately positive.

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

Operator [41]

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

The next question is coming from Nick Green from Bernstein.

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

Nicholas James Green, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [42]

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

Firstly, are you able to give the closing headcount of the group as of the end of March? For a reference point, at the end of December, it was 19,242. Second point, it was extremely helpful you giving the like-for-like sales Q1 '16 versus Q1 '17, the 1.5%. Are you able to do the same for tonnage, please? We've got 475,000 tonnage in Q1 '17 against 251,000 tonnage in Q1 '16? It would be great to have that 475,000 number on a like-for-like basis, please? And then the final point is on net working capital. You have a 141 days' worth of working capital, that's on a rolling 12-month basis as of this data point. My model is telling me that, that is the highest net working capital balance you've ever had actually as a company. Certainly, ever since 2000. And it's quite a large reversal on the position at Q4. I know you mentioned that it was seasonality-driven, but it is a -- are the days' worth of sales? It is a significantly higher number than you've had in the past, and it's a bit of a worrying change of direction. So I just like to get a sense whether you think that is likely to come down in the next couple of quarters because of the management steps you put in place, which you discussed in the previous quarter? Or whether, in fact, we can expect it to stay as those kind of levels until, I guess, you'll -- the ramp up in the mills has finished?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [43]

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

Maybe I can answer on the headcount. And the permanent headcount is still going down, month after month. I think the order of magnitude end of Q1 is probably down 2% or 2.5% compared to December ex Tianda, of course, ex Tianda. So it means that we keep on reducing our fixed cost as committed to and as part of our transformation plan. So this is for the headcount.

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [44]

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

For the voluntary share -- I'm not sure I did catch your question, but basically, what I was telling is that the volume contribution of Tianda is somewhere slightly north of 100,000 tonnes, you add a few tenths, not that much thousand tonnes coming from the consolidation of VSB and you have it. What was surprise, Nick, is what you say about the working capital because when I look at my payable, receivable inventories, there's actually a very strong improvement compared to a year ago, especially as far as the inventories and the overdues are concerned. So maybe this is linked through the consolidation effect, the premature effect. It's probably coming from that, but basically, our performance in (inaudible)

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

Nicholas James Green, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [45]

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

May I just confirm on the headcount then? Are you able to give a -- just a -- you said you gave a number excluding Tianda or a direction, are you able to give us just the groups closing at the end of March? On the volume point, Olivier, that's very helpful with that broad guidance. I just wondered if you could give specifically the 475,000 tonnes for this quarter. If you could just give that number on a like-for-like? And then on the net working capital, I understand the absolute balance is going down. The thing that we find surprising is relative to the amount of sales, that number is going up a lot. But perhaps there's no further comment on that. Just those first 2 questions, if you're able to give any further, that would be helpful?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [46]

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

In terms of the headcount, the headcount -- permanent headcount, which is basically, what I follow because that's the fixed costs related, of course. We are down from 17,600 end of 2016 to now 17,200. So let's -- as I said, less 2%, 2.5%.

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [47]

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

And on the other point, we -- we'll come back to you on that because we don't have further information on that.

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

Operator [48]

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

The next question is coming from Michael Shillaker from Crédit Suisse.

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

Michael Shillaker, Crédit Suisse AG, Research Division - MD and Head of Global Steel and European Miners [49]

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

A lot of my questions have been answered, but I'll ask a couple if I may. Just could you give a little bit more color on the market outside of the U.S. in terms of demand? Is there any sign that there's still destocking going on? Do you have any real visibility on inventory, for example, in the Middle East? I know there haven't been many tenders recently as you said, but for the tenders that there had been, were prices still falling? Or is there a sign of price stability? And I think, if you could comment on the relative supply-demand balance right now between the U.S. and outside of the U.S. because one would normally imagine with a lag ex U.S. pricing to pick up after the U.S., but is there a risk that the supply-demand balance between the U.S. and ex U.S. is now so different that actually it -- either pricing doesn't pick up outside of the U.S.? Or it just takes a lot longer to do that? That is the first part of my first question. The second just on Tianda. Can you give us a little bit more color on the technical ramp-up that's necessary in terms of improving actual tooling itself to get up to your premium standard versus the market or the client size, which would, I guess, be some form of approval process? And how long that approval process if required would actually take?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [50]

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

Well, on the last point, my answer to the -- I think, Michael's questions are -- no, Alessandro's question regarding Tianda was when do we expect Tianda to completely or fully contribute, but of course, we will not wait 2 or 3 years before using Tianda on a case-per-case basis to answer some of our customers inquiries. And some of them are eager to get qualification and those who are moving forward, we will obviously supply. So it's not that much a matter of technical equipment. It's partly a matter of implementing our own standards, especially, in terms of quality and reliability and partly, a question of, are customers willing to qualify the mill according to their procurement policy. In terms of the situation in -- especially, in the Middle East. As you mentioned, no, I do expect the pricing trends that we are experiencing North America to step-by-step develop as well in the Middle East. We had some first signs of that trends up in the course of last year -- the end of last year. But again, Q1 has been very quiet. So it's hard to say that the trend is continuing, but I do think it will continue. As always, our prices are developing the same way globally. It goes faster up and down by the way, in North America than elsewhere. But logically, it should develop as well in North America. You -- as in North America -- as you are -- as you well know, outside North America, most of the sales are done through tenders. So of course, the predictability is not the same -- the way the market works is different from North America. But so far, we confirm that we've hit trough in terms of pricing in those regions last year, especially in the middle of last year and since then, the few tenders, which we've gone through have shown price increases.

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

Michael Shillaker, Crédit Suisse AG, Research Division - MD and Head of Global Steel and European Miners [51]

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

And is there any visibility? I know there's been a bit of a tricky problem, but is there any visibility on inventory levels outside of the U.S.?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [52]

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

Not really -- to be honest, not really. As you know, the -- these are regions where the -- a number of players are not as focused on inventory management as let's say North America, and there are almost no statistics to exactly state what the situation is. And so no, I have no visibility to be honest on that particular point.

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

Operator [53]

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

The next question is coming from Guillaume Delaby.

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

Guillaume Delaby, Societe Generale Cross Asset Research - Equity Analyst [54]

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

Two housekeeping questions, if I may. Just could you give us a flavor about -- in Q1, about the contribution of the Brazilian mine? I would guess it is something between EUR 5 million to EUR 10 million. Second, thank you for having provided the headcount at the end of Q1. Could you give us some flavor regarding what you expect for the total headcount of the group by the end of 2017?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [55]

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

So on the first point, Guillaume, we positively don't give this element. As you know, the full year EBITDA from the mine is always a few tens of million euros. And it has, of course, benefited in Q1 compared to a year ago from the increase in the iron ore prices that were still at the high level in Q2. We expect, but it's very difficult to predict, of course, some decline in the iron ore prices in Q3 and Q4.

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [56]

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

And regarding headcount, no, I won't provide you with the figure of year-end because obviously, if and when needed, we'll use flexible workforce, interim workers, agency workers when needed in order to, of course, leverage the market situation. So this part is depending, of course, on the market activity. But the permanent workforce will keep on diminishing. I remind you that this part of our workforce is come down by approximately 1/4, 25% over the last 2 years. So basically, it will keep on going down.

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

Operator [57]

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

The next question is coming from Kevin Roger from Kepler Cheuvreux.

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

Kevin Roger, Kepler Cheuvreux, Research Division - Research Analyst [58]

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

Two questions on the U.S. by me, please. At the end of Q4 '15, you said the Q1 will be negatively impacted by some mobilization and reactivation costs actual means. Could you please quantify it? What's the impact in Q1 for the group? And also, you said that at the end of Q4, you had around 80% of your volumes that were made under client program and only 20% from the spot market. How did it evolved in Q1, please? At the end of quarter, what's the split between the spot and the client programming in the U.S. please?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [59]

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

So on the first point, the actual costs are probably not very meaningful in Q1, leading to this reactivation. On the second one, I think, Nicolas, probably will answer.

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

Nicolas de Coignac, Vallourec SA - SVP of North America [60]

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

Yes. Well, Kevin, the mix between spot and program doesn't change that much quarter-over-quarter. So the 80-20 remains valid.

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

Kevin Roger, Kepler Cheuvreux, Research Division - Research Analyst [61]

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

And should we expect it to remain stable over the year, or are you trying to, I would say the shorter the time of the client program as the pricing is increasing?

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

Nicolas de Coignac, Vallourec SA - SVP of North America [62]

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

Well, not really. Actually, a lot of the commitments we took with some of our program customers were valid until Q2. So we're currently, as Olivier was mentioning earlier, in process of discussing those prices and increases, of course, for H2. So we definitely expect to keep those customers and negotiations are ongoing.

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

Operator [63]

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

(Operator Instructions) Our next question is coming from David Farrell from Macquarie.

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [64]

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

David, are you connected?

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

David Richard Edward Farrell, Macquarie Research - Oil and Gas Research Analyst [65]

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

Yes. Can you hear me?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [66]

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

Yes. Sure.

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [67]

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

Yes. Go ahead.

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

David Richard Edward Farrell, Macquarie Research - Oil and Gas Research Analyst [68]

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

Yes. A couple of questions for me. First, kind of North American revenues were down quarter-on-quarter. Previously, you've really outperformed in terms of revenue growth relative to the rig count growth. So was there an element of restocking in the fourth quarter, which wasn't replicated in the first quarter this time? Or is it Canada? Or is it Gulf of Mexico? So that's my first question. My second question, again, relate to kind of North America. Obviously, pricing is going very favorably for you, but we're seeing other service companies start to pursue price increases as well. Do you have any concern as we get into the back end of this year that clients are going to rethink their drilling plans because of -- perhaps impact upon profitability of the high service costs?

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [69]

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

Well, Kevin, I think that's something we hear from time to time. And I think that it is part of the messages, which are being sent to the market and it's up to the supply chain. When we talk to our customers face-to-face and on a one-to-one basis, my feeling is that a number of them are projects to go further down in their cost reduction and increasing efficiencies. As you know, this is the key element, which has completely changed the face of the market in North America. It's all about efficiencies. It's all about how many wells can be drilled per rig over a period of time and how many -- how long the laterals are. And we know and our customers know and they say that there is still room for improvement there. So I think there is a -- we are in a situation when both our customers and the suppliers or partners can win together and that's a situation where we are. And this is why we think that the price increases are not only necessary because I remind you that the price of the raw materials, the scrap metal has gone up steeply as well, but it's acceptable by our customers. We -- each of them were working a lot on finding additional efficiencies service-wide in terms of the supply chain, et cetera. So we do think that we are at a point in time as far as the North American market is concerned, where both of us, both our customers and their suppliers can win without putting at risk, of course, the development of the North American market.

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [70]

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

Well, on your first one for the further sales in North America in Q1 compared to Q4, so sequentially if I got your question. Actually, for the mainstream of our sales in the U.S., which are OCTG related, there's almost no change between Q4 and Q1, high level of tonnage and sales with no significant change in prices over this period of time. So that the changes have occurred in other much smaller segments that have a more erratic behavior in term of quarter year sales. You know that on top of OCTG, we shipped to the U.S. some products of Powergen, mechanicals, line pipes, joining products, things like that which are the ones that will move to some extent, but it's not really meaningful from a recent point of view.

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

David Richard Edward Farrell, Macquarie Research - Oil and Gas Research Analyst [71]

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

Okay. Got it. Just one follow-up. Just thinking about kind of raw material costs. What is the lag of between kind of today's steel scrap price and when that's going to flow through your P&L?

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [72]

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

It's very short actually. We don't carry a lot of inventories of raw materials. So depending on the regions it's a few weeks to maybe 2 months at most.

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

Operator [73]

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

There is no further question over the phone, sir.

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

Philippe Crouzet, Vallourec SA - Chairman of the Management Board [74]

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

Okay. So maybe let me conclude. I think Q1 reflects a significant progress in implementation of our transformation plan behind improvement of our industrial margins as mentioned by Olivier, there are some top line special positive deliveries, but there is as well, more deeply that the benefit of the cost-saving initiative that we are rolling out all over the world, so this will continue to bring additional benefits to our P&L along the year. The rest, as you've seen, is very, very contrasted between North America, where we got volume and some prices and the rest of the world, which remains very subdued. So not yet a global growing world, but as far as we are concerned as far as our self-help initiatives are concerned, a pretty positive situation, I guess.

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

Olivier Mallet, Vallourec SA - CFO, General Counsel and Member of Management Board [75]

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

Thank you. Well, this is concluding our today's session. Good evening or good afternoon, and we'll be happy to answer your questions individually, if you have any queries to the analyst. Thank you. Bye-bye.

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

Operator [76]

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

Ladies and gentlemen, you may now disconnect. Thank you very much for your participation.