Full year 2019 results and launch of a balance sheet strengthening plan to support execution of strategy
2019: EBITDA more than doubled, Free cash flow considerably improved Fourth quarter in line with expectations
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Strategic roadmap to take Vallourec to the next level Accelerate profitable revenue growth by capitalizing on:
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Outlook for 2020: €500 million EBITDA and slightly positive Free cash flow Based on current economic and market trends1, the Group targets:
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Launch of a balance sheet strengthening plan supporting the execution of Vallourec’s strategy to unleash the Group’s value creation potential
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Boulogne-Billancourt (France), February 19th 2020 – Vallourec, a world leader in premium tubular solutions, today announces its results for the fourth quarter and full year of 2019 as well as a Rights Issue and RCF refinancing to support the execution of Vallourec’s strategy. The consolidated financial information was presented by Vallourec’s Management Board to its Supervisory Board on February 18th 2020.
Key figures(*)
2019 | 2018 | Change YoY | In millions of euros | Q4 2019 | Q4 2018 | Change YoY |
2,291 | 2,364 | -3% | Sales volume (k tons) | 520 | 694 | -25% |
4,173 | 3,921 | 6% | Revenue | 1,004 | 1,116 | -10% |
347 | 150 | €197m | EBITDA | 94 | 89 | 6% |
8.3% | 3.8% | +4.5p.p. | As % of revenue | 9.4% | 8.0% | +1.4p.p. |
(17) | (277) | €260m | Operating income (loss) | (9) | (43) | €34m |
(338) | (502) | €164m | Net income (loss), Group share | (111) | (103) | -€8m |
(41) | (494) | €453m | Free cash-flow | 76 | 76 | - |
(*) IFRS 16 detailed impacts on EBITDA, net debt, lease debt and Free cash flow are described in consolidated results analysis (pages 4 & 5), financial position (page 5,6) and in appendices (pages 16, 17, 18 & 19).
Net debt
31 Dec 2019 | 30 Sept 2019 | Change over the period | In millions of euros | 1 Jan 2019 Post IFRS 16 | 31 Dec 2018 * |
2,031 | 2,104 | -€73m | Net debt | 1,999 | 2,058 |
* Net debt of €2,058 million at the end of December 2018 includes €59 million of financial lease debt
Commenting on these results, Philippe Crouzet, Chairman of the Management Board, said:
“2019 performance marked a decisive step in Vallourec’s turnaround with EBITDA more than doubling and Free cash flow considerably improving.
On the Oil & Gas market, as expected, the lower activity in US onshore was more than offset by EA-MEA Oil & Gas activity and the first step in the recovery of deep offshore in Brazil took place in Q4. In the Industry and Other markets, our revenue growth was mainly driven by higher iron ore volume and prices in Brazil.
We continued to implement our Transformation plan leading to a leaner and a more competitive group and I would like to thank all Vallourec’s teams for their continued involvement, which enabled us to achieve such a result. With €141 million gross cost savings achieved in 2019, we notably outperformed our targets with €586 million gross cost savings since 2016. Our top line growth and commercial momentum evidence the benefits of a reshaped industrial footprint and the successful implementation of new routes in Brazil and China. We continued downsizing our footprint in Europe and enhancing our cost competitiveness and sourcing flexibility.
With streamlined and more competitive operations, Vallourec is entering a new phase of its development and I am confident in the Group's future success under the leadership of Edouard Guinotte.”
Edouard Guinotte, Newly Appointed Chairman of the Management Board as of March 16th 2020, said:
“The strong dynamic resulting from our restored competitiveness should continue in 2020, supported by the ongoing recovery of EA-MEA markets and by higher O&G sales in Brazil on which we have strong visibility. We expect Vallourec’s financial performance to continue to improve with a €500 million targeted EBITDA and a slightly positive Free cash flow.
Beyond 2020, we will continue to accelerate our profitable revenue growth, capitalizing on strong positions on the most attractive and fast-growing Oil & Gas markets. We will also leverage our technological edge and brand recognition in order to develop new products and solutions for our clients. Our core capabilities also ideally position the Group to capture emerging opportunities for energy transition. We will also further enhance our competitiveness with additional €200 million in gross savings over 2021-2022 and increased utilization of our new supply routes.
In this context, we intend to strengthen Vallourec’s balance sheet and extend our liquidity through a €800 million capital increase and new credit facilities of €800 million that will provide us with the financial flexibility to execute our strategy.
With restored competitiveness and a strengthened balance sheet, I am convinced that we will succeed in reinforcing our position as a world leader in premium tubular solutions and I am committed to taking Vallourec to the next level.”
I - CONSOLIDATED REVENUE BY MARKET
2019 | 2018 | Change YoY | At constant exchange rates | In millions of euros | Q4 2019 | Q4 2018 | Change YoY | At constant exchange rates |
3,042 | 2,813 | 8.1% | 5.3% | Oil & Gas, Petrochemicals | 762 | 821 | -7.2% | -8.3% |
939 | 819 | 14.7% | 15.6% | Industry & Other | 205 | 235 | -12.8% | -10.4% |
192 | 289 | -33.6% | -33.6% | Power Generation | 37 | 60 | -38.3% | -37.7% |
4,173 | 3,921 | 6.4% | 4.6% | Total | 1,004 | 1,116 | -10.0% | -10.3% |
In 2019, Group revenue amounted to €4,173 million, up 6.4% versus 2018 (+5% at constant exchange rates), with EA-MEA Oil & Gas as main contributor. Volume effect was –3.1%, price/mix effect +7.7% and currency effect +1.8%.
Q4 2019 revenue amounted to €1,004 million, down 10% compared with Q4 2018 (-10% at constant exchange rates) with:
Oil & Gas, Petrochemicals (73% of annual consolidated revenue)
In 2019, Oil & Gas revenue totaled €2,752 million, an increase of 11% year-on-year (+8% at constant exchange rates).
In Q4 2019, Oil & Gas revenue amounted to €686 million, down 7% year-on-year (-8% at constant exchange rates).
In 2019, Petrochemicals revenue totaled €290 million, down 16% year-on-year (-18% at constant exchange rates), due to the decrease in volumes sold in North America.
In Q4 2019, Petrochemicals revenue amounted to €76 million, down 10% year-on-year (-10% at constant exchange rates), mainly due to lower volumes sold in North America.
Industry & Other (22% of annual consolidated revenue)
In 2019, Industry & Other revenue totaled €939 million, up 15% year-on-year (+16% at constant exchange rates)
Q4 2019 revenue amounted to €205 million decreasing by 13% compared with Q4 2018 (-10.4% at constant exchange rates). Revenue and volumes decreased in Europe, partially offset by higher iron ore sales in Brazil.
Power Generation (5% of annual consolidated revenue)
In 2019, revenue totaled €192 million, down 34% year-on-year (-34% at constant exchange rates), due to the decline in global demand for coal-fired conventional power plants.
In Q4 2019, Power Generation revenue amounted to €37 million, an anticipated decrease compared to Q4 2018 of 38% at constant exchange rates.
II - CONSOLIDATED RESULTS ANALYSIS
FY 2019 consolidated results analysis
For the full year 2019, EBITDA reached €347 million, improving by €197 million year-on-year, as a result of:
A net decrease in provisions of €21 million (versus €56 million in 2018) was included in EBITDA, mainly reflecting provisions released to offset losses recorded on the sale of depreciated inventories over the same period.
IFRS 16 impact on EBITDA for the full year was a positive €33 million.
Operating result was (€17) million, improving by +€260 million year-on-year thanks to:
Financial result was negative at (€244) million, compared to (€220) million for the full year 2018, mainly due to (i) higher interest expenses, (ii) the IFRS 16 impact on interest expenses on lease debt for (€11) million, (iii) partly offset by a decrease in foreign exchange hedging costs.
Income tax amounted to (€75) million mainly in Brazil.
As a result, net loss, Group share, has been reduced by €164 million, amounting to (€338) million, compared to (€502) million for the full year of 2018.
Q4 2019 consolidated results analysis
In Q4 2019, EBITDA reached €94 million, improving by 6% year-on-year with:
A net decrease in provisions of €19 million (versus €27 million in 2018) was included in EBITDA, mainly reflecting provisions released to offset losses recorded on the sale of depreciated inventories over the same period.
IFRS 16 impact on Q4 EBITDA was a positive €8 million.
Operating result improved by €34 million to (€9) million, thanks to a higher EBITDA and including a charge for “assets disposal, restructuring and other” at (€23) million, mainly reflecting the decision to close Reisholz Powergen plant in Germany. A (€7) million IFRS 16 impact (depreciation of right-of-use) was included in “amortization and other depreciation” which amounted to (€14) million in Q4 2019 compared to (€8) million in Q4 2018.
Financial result slightly deteriorated at (€66) million versus (€55) million in Q4 2018, due to a (€3) million negative IFRS 16 impact (interest expenses on lease debt) and higher interest expenses.
Income tax was (€36) million in Q4 2019, mainly related to tax charges in Brazil.
As a result, net loss, Group share, slightly increased by (€8) million, amounting to (€111) million, compared to (€103) million in Q4 2018.
III – CASH FLOW & FINANCIAL POSITION
Cash flow from operating activities
Cash flow from operating activities stood at (€6) million for the full year 2019 compared to (€210) million for the full year 2018 and at (€14) million in Q4 2019 compared to (€13) million in Q4 2018.
Operating working capital requirement
For the full year 2019, operating working capital requirement decreased by €124 million, versus an increase of (€155) million for the full year 2018. In line with our objectives, on a quarterly average basis over the full year 2019, net working capital requirement was reduced to 106 days of sales from 113 days in 2018.
In Q4 2019, operating working capital requirement decreased by €170 million versus a decrease of €154 million in Q4 2018. Net working capital in days of sales stood at 95 days at the end of Q4 2019, a similar level compared to Q4 2018 (94 days of sales).
Capex
Gross Capital expenditure was (€159) million for the full year 2019 versus (€129) million for the full year 2018 and stood at (€80) million in Q4 2019 versus (€65) million in Q4 2018.
Free cash flow
Free cash flow for the full year of 2019 was negative at (€41) million, an improvement of €453 million compared to (€494) million for the full year of 2018.
In Q4 2019 the Group generated a positive Free cash flow of €76 million, stable versus Q4 2018.
Net debt and liquidity
As of December 31st 2019, net debt was reduced to €2,031 million compared with €2,104 million as of September 30th 2019. It amounted to €1,999 million as of January 1st 2019. As a reminder, €59 million was reclassified from net debt to lease debt on January 1st 2019, as a result of the application of IFRS 16 (see table on page 18).
Cash as of December 31st 2019 amounted to €1,794 million, and €426 million out of the Group’s €2,128 million committed bank facilities were unused.
As of the same date, long-term debt amounted to €1,747 million and short-term debt to €2,077 million, including €110 million of commercial paper and €1,702 million drawn from the €2,128 million committed banking facilities.
As of December 31st 2019, the banking covenant ratio, as defined in the banking contracts and tested once a year on December 31st, stood at 81%. IFRS 16 implementation has no impact on the banking covenant ratio.
IV – RECENT ESG AWARDS
Reflecting its strong ESG commitments, Vallourec obtained very favorable rankings by environmental rating agencies in 2019:
A committee of the Supervisory Board dedicated to monitor ESG matters was formed in February 2019.
V – A SUCCESSFULLY EXECUTED TRANSFORMATION PLAN LEADING TO A LEANER AND MORE COMPETITIVE GROUP
Announced cost savings target overachieved
The initial 2016-2020 gross cost savings target of €400 million was surpassed in 2018 with €445 million achieved and the €200 million additional savings plan for 2019-2020 will also be overachieved with €141 million savings realized in 2019.
Since 2014, total headcount has been reduced by 21% to 18,827 at end of 2019, a reduction of 35% in Europe and of 19% in Brazil.
In 2019, Group headcount was reduced by 1.8%, from 19,164 employees to 18,827, with a stronger reduction in Europe (-6.3%). In Germany, headcount was reduced in 2019 by 392 employees as a result of the initiatives announced in February 2019 targeting a reduction of 600 by the end of 2020.
As a result of these measures and the deployment of new routes, manufacturing6 and SG&A costs per ton have been reduced by c.40% since 2016 to €1,035/t.
Radical downsizing of our European footprint
Vallourec’s European industrial footprint has been radically downsized with a reduction from 19 sites in France and Germany to 2 main production hubs. Europe has now been set up as a center of excellence for advanced premium products, serving local markets competitively while providing a flexible production route with a short lead-time for exports.
In 2019, the Group decided to close its Reisholz mill (Germany), which specialized in tubes for conventional power plants. The closure is expected to be effective in the second half of 2020.
Successful deployment of new competitive routes
New supply routes have been deployed leveraging cost-competitive production hubs in Brazil and Asia.
Brazilian operations have been rationalized and significant savings realized. Exports now represent approximately 60% of VSB’s total production.
Tianda, acquired at the end of 2016, has been fully integrated within Vallourec’s global network. The share of premium volume rolled in Tianda has increased from 4% in 2017 to 20% in 2019 and Tianda products are offered in recently awarded contracts in the Middle East and North Africa.
The utilization rate of new routes for premium Oil & Gas EA-MEA demand has increased from 19% in 2015 to 55% in 2019, resulting in an increase in premium products exported from VSB and Tianda from 40kt in 2015 to c.300kt in 2019.
A leaner, state of the art and flexible industrial set up
The cost savings, the rationalization of the industrial footprint with the share of Europe in total capacity down to 25% from 45% and the deployment of new routes have led to a significant decrease in the break-even point7 by 25% since 2017.
At the same time, commercial agility has considerably improved thanks to a flexible sourcing from highly competitive production hubs in Brazil and Asia.
Restored competitiveness already translating into accelerating commercial momentum
The €900 million mega-contract recently awarded by ADNOC testifies to Vallourec’s ability to offer competitive global solutions to clients supported by innovative digital services. Vallourec will deliver a comprehensive range of products from API to high-end premium products supplied from Europe, Brazil and China, for both onshore and offshore drilling and conventional and complex wells.
After doubling between 2017 and 2018, Vallourec’s OCTG tender hit ratio in EA-MEA8 continued to improve in 2019 thanks to the utilization of the new routes.
In Brazil, we have signed agreements with Petrobras and other large customers such as Shell and TechnipFMC, demonstrating our positioning as supplier of choice.
VI – STRATEGIC ROADMAP TO TAKE VALLOUREC TO THE NEXT LEVEL
Leverage supportive market fundamentals and strong positions in the most attractive markets
Capitalize on technological edge and brand recognition to develop new products and solutions
The Group also intends to capture incremental revenues by leveraging its technological edge and brand recognition to develop new products and solutions.
New VAM® connections for premium O&G markets have already been rapidly adopted by clients across the globe.
New digital solutions, including digital (Smartengo) are already on the market and contribute to Vallourec commercial differentiation.
Leverage core capabilities to capture emerging opportunities from energy transition
The Group is preparing for the future by developing sustainable solutions around energy transition opportunities in the following areas: geothermal, offshore wind, carbon capture utilization and storage (“CCUS”) and hydrogen.
The Group will leverage its industrial expertise, design capabilities, engineering know-how and relationships with customers at the forefront of the energy transition to capture those opportunities.
Vallourec has set up a dedicated organization to drive innovation projects related to energy transition and expects those opportunities to result in significant revenue by 2025.
Launch Acceleration program to reinforce competitiveness
The Group is committed to further developing its competitiveness with a new program, Acceleration, targeting additional gross savings of €200 million over 2021-2022, through both transverse and regional initiatives.
Transverse initiatives will focus on strengthening industrial excellence to boost performance and reliability and increasing the efficiency of support functions and SG&A.
Regional initiatives will encompass the following:
Allocate all demand increase for premium O&G in EAMEA to new routes
Following the successful ramp up of premium O&G EA-MEA volumes supplied by Brazil and Asia from c.40kt in 2015 to c.300 kt in 2019, Vallourec intends to further leverage the competitive advantage offered by these new routes. Future Oil & Gas growth in EA-MEA will be essentially served by the new routes, corresponding to volume growth from c.300 kt to c.500 kt in 2024.
This ambition will be enabled by the completion of the industrialization plan for premium grades in Tianda and by the certifications by Majors and NOCs of Tianda and VSB. The premium production ratio of Tianda will also increase from 20% in 2019 to c.40% in 2024.
VII – 2020 MAIN MARKET TRENDS
Oil & Gas
Industry & Other
Coronavirus epidemic
VIII – OUTLOOK
2020 guidance
Based on current economic and market trends9, the Group targets for 2020:
The quarterly phasing of EBITDA and Free cash flow will reflect the usual low seasonality in Q1. The second half of the year will be significantly stronger than the first half in terms of EBITDA and Free cash flow generation.
Beyond 2020 cash flow generation levers
EBITDA is expected to grow as a result of topline growth reflecting supportive trends and improved commercial competitiveness as well as further cost reduction with the implementation of the Acceleration program.
In addition to EBITDA growth, Free cash flow generation will also be enhanced by:
IX – RIGHTS ISSUE AND RCF REFINANCING TO SUPPORT TURNAROUND AND EXECUTION OF VALLOUREC STRATEGY
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