Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Etienne Bertrand – Investor Relations

Philippe Crouzet – Chairman of the Management Board

Olivier Mallet – Member of the Management Board, Chief Financial Officer: Finance and Legal

Analysts

Michael J. Shillaker – Credit Suisse

Alexandra Ebling – JPMorgan

Gael de Bray – Societe Generale

Julien Laurent – Natixis Securities

Amy Wong – UBS

Rob J. Pulleyn – Morgan Stanley & Co. International Plc

Vallourec S.A. Ord, (OTCPK:VLOUF) Q1 2013 Earnings Call May 2, 2013 12:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome the Vallourec First Quarter 2013 Results Conference Call.. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) I must advise you the conference is recorded today, 1st or the 2nd of May 2013. And I would now like to hand over to your speaker today, Etienne Bertrand, Investor Relations Director. Please go ahead, sir.

Etienne Bertrand

Thank you, Tracy, and good morning or good afternoon to all. First let me remind you that the slides we will comment are now available on our website at www.vallourec.com. You should go to the home page, you will find the presentation and the press release or if you go to page Finance within the section Investor Relations, you will find the slides as well, where Olivier and Philippe will refer to the slides.

Before I hand over it to Philippe, I must caution 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 Group’s statements are referenced at the beginning of slide presentation and are included in our annual registration document filed with the AMF. I switch now to Philippe. Philippe?

Philippe Crouzet

Good evening or good morning. Basically, I will say that our first quarter results are in line with our expectations. As you may have seen already, our sales are stable versus Q1 of 2012 at €1.2 billion, with volumes slightly down. EBITDA is at 26% versus the Q1 of 2012 at €191 million and more importantly, margin is up 3 points at 15.7% over the quarter versus 12.7% in Q1 of 2012. This is essentially the reflection of the higher proportion of Oil & Gas in our total mix, total mix sales. Now, Oil & Gas sales represent 64% of total sales over the quarter, and confidently to that, of course, we maintained our cost reduction initiatives and it is clearly bearing fruits.

Bottom line, the net income Group share is €35 million at 21% from Q1 2012 and we will provide more details about that. These results basically illustrate the good performance in our Oil & Gas segment, and I would specially mention Brazil and Middle East are key contributors over the quarter. Vallourec continued to benefit from its strong market position and premium offering enabled us to achieve higher sales in the most complex oil and gas plays, which is really the name of the game today for us

Unfortunately, this is partly offset by continued lower performances in the non-Oil & Gas operations, as you all would’ve seen, Vallourec’s other market face difficult environment marked by low visibility and overall low demand. So the Group remains focused on improving operation efficiencies, reducing costs, and leveraging our technical hedge especially in the Oil & Gas most demanding markets.

Based on the first quarter, our vision for 2013 has not changed since the full year results announcements and based on the current market conditions and the progresses granted for the new mills, we confirmed our objective of sales to increase an EBITDA margin to improve into 2013. Let me quickly update you on our new mills. In Youngstown, in North America, we are advancing according to plan and the rolling mill is ramping up in satisfactory conditions, sales deliveries between times are growing and the new finishing lines are on schedule for commissioning in the second quarter.

In Brazil, in VSB the qualification process we continue to delivering premium products is advancing as scheduled and it will be completed for most of the key customers by the end of H1 as planned. And lastly in Saudi Arabia, the recent qualification of our finishing mill has allowed us to delivery our first locally threaded banned premium connection to customer there Aramco, this mean is really definitely key advantage to strengthen our relationship with the local players and more specifically Aramco. All in all, I would say that we are in line with our development plan globally, and I’d like to say but the timing is right to start and ramp up those capacities from a market standpoint.

I now leave the floor to Olivier for more detailed comments on the results and equations.

Olivier Mallet

Thank you, Philippe, good morning and good afternoon to everyone. So we’ll quickly make a review of the sales by segment before moving to the financials and the outlook. So on page 8 for the breakdown of our sales in Q1, first by business where, as you can see, oil and gas is the main component of our total sales with 64% of our sales in Q1 to be compared with the 58% in Q1 of last year. The share of Petrochemicals and Powergen in total sales decreased slightly year-on-year due to a stable flat Powergen sales and to Petrochem sales down 11% due to few deliveries on projects to be delivered in Q1 this year. Non-energy sales were down to 19% of our total sales as these sales were affected by low demand in Europe and in Brazil since the beginning of 2012.

The figures on the breakdown by region; first, North America is representing 26% of total sales in Q1. That was 31% a year ago. This is due mainly to a decline in our oil and gas sales despite stable volumes, but with price adjustments and as well a one-time effect due to one-time contracts for growing products that was delivered one year ago in Q1 2012 in right amount. The share of South America is going up. This is up 11% representing 25% of Q1 sales. Asia and Middle East sales went up and that’s compared to last year’s 48% driven of course by oil and gas. And finally, no surprise, Europe is down from 25% to 21% with impact of the economic environment compared to the beginning of 2012.

Moving to page 9 on the oil and gas market indicators; in the U.S. first, we see a stabilized rig count since the beginning of the year and we do maintain our estimate that this rig count is likely to multiple progressively within the next months, and we should add to that 20 of the rig fleet moving forward, which will mean more OCTG consumption per rig within the coming quarters.

As far as the international rig count excluding USA is concerned it was up in Q1 by 7% compared to the first quarter of 2012, with increased activity notably in Africa and Middle East and North Sea.

Moving now to some comments about the oil and gas sales percent. In the U.S. in Q1, we have stable OCTG volumes I mean by that once again we have been working at full capacity in our Youngstown facility, with strong very first volumes coming from the new mill over there. Despite the lower OCTG consumption on the market, thanks to our good market positioning especially in the oil shale plays.

And as already said some price adjustment was made as already announced. The outside of the U.S. sales, in African and Middle East and Asia, we continued to enjoy a good volume momentum in a stable pricing environment and in Brazil, we did benefit and we continue to benefit from strong demand for very high premium grades and connections for offshore.

If we look forward for 2013, the trends we shared with you in February are globally unchanged. In the USA, we share the market vision that the rig count is expected to rebound from current level and we will benefit actually from the contribution of our new mill Youngstown. We still see strong positive in the Middle East, which is currently a very active part of the world. And in Brazil, the product mix will, of course stays at very good with the Petrobras and the other oil and gas actions.

Moving to Power Gen on Page 11, so sales were stable year-on-year in Q1 with four conventional plants project still be largely concentrated in Asia and stable in our space as well year-on-year remind you, of course, as a big quarter of power nuclear is always Q4.

For the full-year, in conventional, there is no significant change expected. And from nuclear, sales should benefit from EBS life extension program in France and from new project in Asia especially with green light and now given by the Chinese operators through their nuclear program.

And finally on Page 12, about Industry & Others, industry sales were about 16% year-on-year and continued to be impacted by the global economy business production in Europe. More strategically as far as mechanical are concerned, which is as you know primarily European dealers. The current environment is stable more or less, with no sign neither of a clear rebound nor of a further deterioration. In Automotive, where sales are for about two-thirds in Brazil, we are now seeing a gradual recovery after a low 2012. And finally, for Construction & Other, Q1 has remained impacted by the decline in the iron ore contract price before the rebound, which is taking place in the second quarter.

Moving now to the financial on Page 14, in terms of the EBITDA, €191 million, higher by €39 million, 26% compared to a year ago and with margin up by 300 basis points to 15.7% of our sales. This is due to our sales being at 12% with a negative volume effect minus 3% due to non-Oil & Gas activities and negative translation effect of minus 4%. This being slightly more than offset by the various awards on mix effect due to our Oil & Gas sales growth. We benefitted from lower cost of sales and SG&A due to a better mix, due to favorable hedging for exports from Europe particularly in (inaudible). This will continue in Q2 and we benefitted as well from our cost reduction program, which is advancing according to our plan and you can see for yourself on the SG&A line that we are 8% below a year growth in terms of SG&A.

Moving to the rest of the P&L, the depreciation and amortization alone went up €9 million compared to last year following, of course interchanging our new mills. The other line includes the provision of €20.6 million related to a product in industrial transform which took place in one of the Vallourec subsidiaries in Q1, the group has initiated the litigation action, seeking compensation for this damage. And the last comment on this slide is about the level of income tax, the effective rate of 35% as already announced due to the low recovery of some impact of fees carry-forward, so with normal cash impact of this increased developed section. And finally, our net result in Q1 was €55 million, up 21% compared to Q1 2012.

Moving to cash flow Page 16, over the quarter, our net debt was up €121 million with the cash from operations being more than offset by higher working capital mainly due to the one-third of our new mills and the subject for more generally speaking (inaudible) for the next quarter. €19 million CapEx, which by the way can be compared to €114 million in Q1 2012 leading us to a confirmed estimates of our total CapEx to be around €650 for the full year 2013.

I won’t comment the slide 17, which is mostly the reminder of the elements you already know, showing that our balance sheet structure is strong, as well as our liquidity of profile. And I will conclude with the outlook for this year. And as already said by Philip, our vision for 2013 has not changed since the full-year 2012 results in our 2012 February. And therefore, the outlook presented here is simply a confirmation of the view we had already. We’re based on current market conditions. Value rate continues to except volumes and sales to increase. EBITDA margin to improve on a full year basis compared to last year. Philip?

Caroline Philips

I think we can probably go now to the Q&A session. Kristy?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question this evening comes from the line of Michael Shillaker from Credit Suisse. Your line is open.

Michael J. Shillaker – Credit Suisse

Yes, thank you very much. A couple of questions, if I may. First of all, I think the (inaudible) to whether premium would encourage with standard both changing and rating connections or whether it would actually converge given capacities? And it’s interesting to know talking on that call today suggesting that in the U.S. they had seen especially in the shale oil full premium moving into semi-full premium suggesting that that were some pressure downward pressure on pricing at the top end. It is not a trend you’re seeing and is not a trend you’re worried about. As people get familiar, more increasingly familiar especially in shale oil and shale gas, that actually they will be able to take a step down into terms of qualities?

My second question is just looking at the [aggregate] a little bit more detail if I look at your Q1 over the last few years, it’s always been substantially lower than the full year run rate, your Q1 this year I think was probably, well, significantly better than consensus and probably better than we had thought, are you expecting a similar pattern in terms of the progress from Q1 EBITDA on both, in terms of what we’ve seen in the prior year in terms of potentially fairly significantly better Q2, Q3 and Q4 thereafter?

And finally, can you talk a little bit more about the bigger picture drivers that you are seeing against now what you’re talking on the call today, a little bit about the positive in Mexico that they are saying similar positives in China potential for shale gas there, but the flip side is they were talking about some delays from Petrobras, so if you could give us some color on that. That would be very useful. Thank you very much.

Unidentified Company Representative

Maybe give you first on the – on your first question, which in fact is both technical question and sales and marketing one, where do we use premium connections and where semi-premium connections are required, this is one aspect and the other aspect is what are the pricing trends for various products, and so we see and we confirmed the growing trend for shale oil and shale gas within, specifically these days, shale oil, and shale drilling is coming to maturity, it is an industrial activity, which means that operators are seeking for cost optimization, and the best value from M&A, which means that we still see an increase of premium joints. So we are growing the volume of premium joints we sell to this market. But we also see an increase of semi-premium offering, and to some extent recently the growth rate of semi-premium has been slightly above the growth rate of premium joints.

Part of your questions was whether we are wondering or not about it. And I will say we are not so much because also semi-premium is offering us the opportunity to differentiate ourselves. We are launching to the market after launching VAM SFC, VAM SG, we are now launching VAM HP. So these are these kind of semi-premium or premium connections better adapted to each segment of the market.

And last but not least part of the semi-premium is authorized today because of oil and shale oil as soon as shale gas. We will pick up, we are expecting to be back on even maybe higher growth rate for premium joints than semi-premium. So that’s our view on what’s happening.

So in a nutshell in the growth of semi-premium versus premium, the first driver is that the market is now oil oriented than gas oriented that we should never forget that the oil market requires more semi-premium than premium, so there was just a technical aspects in the gross of semi-premium, so I think that’s really that was your first question, Second?

Michael J. Shillaker – Credit Suisse

So maybe on your second question, Michael So, Q1 is as it is already the cash is below our Q4 last year. Q1 seems to be the higher than the market expectations and some of your guys expectations, then being said, Q1 is in line with our all expectations. And as we said our vision for the full-year of 2013 is totally unchanged compared to what we had in mind a two months ago, so we therefore really don’t expect the market vision for this year to have to change much after this Q1 event.

Unidentified Company Representative

And your last question was about Shale gas, Shale oil development in China I think you’ve mentioned…

Michael J. Shillaker – Credit Suisse

And again the combination of the benefits in Mexico I think the new government there opening up lot of energy policy, what’s going to happen with Mexico and oil position for and also China Shale gas, is it the great opportunity or what’s that [Doug]?

Unidentified Company Representative

Well concerning Mexico, yes, we’re selling in Mexico, we see some opportunities for premium development portion and China is starting to develop shale oil – shale gas, we’re starting from sell a little bit we just think that the complete market development will take a bit more time than it took in the U.S., but we are present on the market expecting growth opportunities.

Michael J. Shillaker – Credit Suisse

Okay, and third part of that question that I asked initially, anything on Petrobras delays that I think now it’s related to earlier today.

Unidentified Company Representative

Yes, we don’t feels results, record any delays for Petrobras, we can say that we have given some request for acceleration. We have very strong strategies for Petrobras in quarter fourth and we’re at even the confirmation that we had for the – especially for ENP.

Michael J. Shillaker – Credit Suisse

Okay, great, good numbers. Thank a lot.

Unidentified Company Representative

Thank you, Michael. Next question please.

Operator

Thank you. Your next question comes from the line of Alexandra Ebling, JPMorgan.

Alexandra Ebling – JPMorgan

Good evening to everybody and congratulation on the results. I just have one question left on Petrobras, if you can just refresh the situation in terms of expectation that you are having for net result. What is the expectation in terms of volume for 2013, 2014 and going forward? And if can give a little bit more color on what kind of impact you might be seeing in terms of Powergen considering now that there is slightly better picture in terms of CapEx for gas power station in China. Thank you.

Unidentified Company Representative

Petrobras is drilling or will be drilling 27 wells with 18 rigs that they have for petrol. And this is roughly 20,000 tons in the year for net at least, we believe because each of these pipeline effective from us. So these could double or triple during the next three to four years.

Unidentified Company Representative

And then maybe to give you a little bit of color of what we are doing with it so far we just delivered the first riser concept with them for (inaudible) and we just delivered 16,000 metric tons of eight new frac designs specifically delivered and designed for Petrobras.

Alexandra Ebling – JPMorgan

Thank you, Jean. Can you give a little more color how you see the development of power gen market now that probably a number of projects about to take off in China? Thank you.

Jean-Pierre Michel

Yeah, it’s the long story. We’ve gone through many periods where projects were about to take off and we are still waiting them to reach that point. So yes, we hear and read more about that, yes, we’ve taken some orders with the relatively delay delivery to you, keep in mind that delivery time lead time for power gen is at least nine months and typically more than a year. But we have to remain very cautious there are still issues to finance those projects. This is an issue in China, but this is an issue in India as well, which is the second market for power generation. So yes, you are right, the trend is slightly more positive, but it will have a very limited impact in 2013.

Alexandra Ebling – JPMorgan

But Jean, can I go to this in a moment power gen segment in terms of supportive profitability basically at the tough?

Jean-Pierre Michel

I would say that in terms of the conventional power generation, yes, in terms of the nuclear power generation, which is the other side of the coin, if I may say. It should normally improve based firstly on China as well because they have this huge nuclear program and as mentioned by Olivier, this is now resuming after a long, long technical delays following for pushing up and now its growing better. And on top of that we have the French program of maintenance, well, it’s big maintenance. In fact, it’s reconstruction of all the 53 steam generators of the 53 nuclear reactors in France over a number of years, of course. This is going to take off as well this year and next. So there, it’s not – we’re not starting from the trough, but we expect some, some improvements.

Alexandra Ebling – JPMorgan

Thank you. Just a little follow-up question on the level of net debt that you said you expect it to be slightly up in 2013, you have stated from the net debt that you released today, €1.75 billion?

Unidentified Company Representative

Yeah, so we said and we confirm that again in 2013, we will probably have a negative free cash flow before turning positive in 2014, so that the net debt will increase and it should increase relatively by a big order of magnitude that’s compared to the current levels.

Alexandra Ebling – JPMorgan

Okay. That’s helpful on my end. Thank you very much.

Unidentified Company Representative

You’re welcome. Next question please.

Operator

Thank you. The next question comes from the line of Gael de Bray, Societe Generale. Your line is open.

Gael de Bray – Societe Generale

Thanks very much. Good evening everyone. I guess, I’ve got three question please. The first one relates to the inventory development because the inventory to sales rose quite significantly and to roughly 32% in Q1 as a percentage of sales, which looks like a pretty high number for the higher level that we’ve seen now, well, probably since Q1 2009. So what’s driving the increase here and is there a risk actually that could have been a little bit too opportunistic in Q1 in terms of production rate vis-à-vis how the end markets have developed.

The second question is, I’m not sure you gave the figures answer or if you gave them already, but could you be a bit more specific on the ramp up of the new mills that was achieved in Q1 in terms of the natural for both the U.S. and Brazil? And also, say, if you still expect to achieve roughly 120, 150 kilotons in Brazil this year and also about 200 kilotons in the U.S.? And, well, if I can, the last question is about the margin breach. Obviously the 300 bps margin improvement is quite positive in the first quarter. Could you help us understand a bit more how it worked and how much of that improvement came from more favorable hedging, came from the lower ramp up cost and may from the mix as well? Thank you

Philippe Crouzet

So maybe I will take the first one first. I think I’ll be always ready to our own inventories.

Gael de Bray – Societe Generale

Yes.

Philippe Crouzet

And if we look at them at the end of Q1, you know that (inaudible) of the inventories is to look at that in comparison to the sales to come, because inventories are that to future delivery and when you look at them in terms of number of days of deliveries to come and there is nothing unusual or abnormally high in what you see at the end of Q1, we just mean that we have a high delivery in Q2 and Q3. The second question?

Philippe Crouzet

Okay so you were asking about the ramp up situation of the different projects, we confirm that there is small dimension pipe here in the U.S. We will have an incremental pipe supply of 200,000 metrics tons in 2013 from the U.S., and concerning VSB in Brazil, yes we confirm that we’re planning to deliver between 120,000 tons to 150,000 metric tons, value add shares from VSB. Most importantly we are still targeting to be at two third of VSB capacity in the fourth quarter of 2013.

Gael de Bray – Societe Generale

Okay and sorry how much was it in Q1.

Philippe Crouzet

Prefer to give you the guidance for the full-year.

Unidentified Company Representative

Okay. And maybe in the last question again so when you look at the margin improvement in Q1 compared to last year, it’s series of elements. One of them being according to most important one, is this very mix effect due to the increase in the shale of our oil and gas sales, and oil and gas meets premium especially due to the failure as we commented, our sales increase is very premium or premium legends that when we speak about Middle East, increased the premium sales with very nice margin, same story of course of local Brazilian market, where our Q1 has been very good as the next quarter’s display significant forum. Cost reductions as well, we are in line as we’ve been in 2012 with our capital program, where we see last year before inflation a little bit more than €100 million on our cost, variable cost, our fixed cost, you’ve seen the G&A 5 times last year and again in Q1.

So when you compare Q1 this year to Q1 2012 all these accumulated savings (inaudible) a short margin and the hedging which has been as well. You all know I think our sensitivity to the euro/dollar transaction effect on hedging and our hedge rates in Q1 2013 has been $1.29 for €1 compared to $1.40 in Q1 last year. So this – that helps and this will be the same thing in Q2 where we have about the same kind of comparisons. This effect will disappear in H2 this year, while the hedge rates would be very much the same as the hedge rate of H2 2012 about $1.51 for €1, so these are the main elements again.

Gael de Bray – Societe Generale

Okay. Thank you very much.

Unidentified Company Representative

Thank you. Next question?

Operator

Thank you. Your next question comes from the line of (inaudible). Your line is open.

Gael de Bray – Societe Generale

Yes, good evening, and thank you for taking my question. I had two questions, in fact, first one on first, have you quantified the potential synergies to expect from the combinations of V&M do with the existing V&M STAR plant and just could you may share that a little bit with us and whether this is see increased already in the kept in first targets or is it comes on top of that? And my second question was if you could talk about the given price environments in the U.S. and also if you have been successful in raising the stock price by $100, but then if I remember correctly that was mentioned at the last call and so how you see the next contract negotiations? Thank you very much.

Unidentified Company Representative

Raphael, clearly, we expect synergies in Youngstown having two rolling mills on the same side is obviously enabling us to leverage a number of fixed costs and it is not part of the capital employed it’s really part of our business model. Capital employs are really focusing on improvement in yields and all client opportunity savings. So of course in 25, but it part of our targets if I may say.

Gael de Bray – Societe Generale

Okay.

Unidentified Company Representative

And to complete on that maybe our strategy is concerned at least. Don’t forget this that we had this price adjustment in the beginning of the year that remarked 10% price reduction in the U.S. which has an impact of course. Since it happened, we can basically access the market as of today in term of pricing being stable market. So we don’t see so far any trend allowing us to increase the prices on the other hand there is no price we can expect in non-U.S. market at this moment.

Gael de Bray – Societe Generale

Okay. Thank you very much.

Operator

Thank you. The next question comes from the line of Jeffrey Stern from Shipper. Your line is open.

Jeffrey Stern – Shipper

Yes. Good evening. I just had a couple of question. First of all on volumes, what should we expect for the upcoming quarters, answering a question on the working cap and inventories you mentioned that obviously, it implies higher deliveries in Q2 and Q3, so I was wondering if you could be a bit more specific on this? And then also a question on the working cap again. What should we expect in the upcoming quarters or let’s say by year-end in terms of changing working cap? And then a final one, given the recent significant, I would say, decline in the Japanese currency compared to the U.S. dollar, you see [a little more] I guess, getting much more competitive, so I was wondering if you’ve seen anything lately in the (inaudible) that let’s say a little more – could you try to be a bit more aggressive in terms of pricing? Thanks.

Unidentified Company Representative

So maybe I’ll address first one and yes, we have higher (inaudible) in the coming quarters and this explains controlling evolution. This being said, in terms of growth overall, because it’s what matters to you at the end of the day, the largest just part of the cost compared to last year we (inaudible) H2, as you’ve seen our face in Q1 are up 1% compared to last year. You should expect the same kind of trend this quarter and maybe through the – to keep on activity at the end of H1 and the Bank of Norges (inaudible) by year end on top of our two new facilities and is scheduled for again one.

So in terms of working cap, I want to elaborate on each area of our peer growth if you will inventory. Just keep as a consequence that compared to our first year, about days on average this year may change significantly with the caveat of additional working cap that’s what within along with our one third of all these values. We already have some of that at the end of the year in Brazil and we’re addition margin now as well as in the U.S.A. And all in all this will lead as I will tell you that it is reasonable to some increase our debt value over the year compared to the current level.

Unidentified Company Representative

So your last question was concerning, Sumitomo, let’s say NSSMC we did not see them so far more aggressive on the market, don’t know what they will do. That is what the case so far. You just keep in mind that when the currency helping them to the most sales price, it’s also unfavorable for all raw material purchases. So they also have a negative or the positive.

Jeffrey Stern – Shipper

Alright, okay thank you.

Unidentified Company Representative

Thank you. Next question please?

Operator

Thank you. The next question comes from the line of Julien Laurent of Natixis. Your line is open.

Julien Laurent – Natixis Securities

Good evening. I was just wondering if you could come back on minorities in the P&L down for that in the project in which Sumitomo are involved both Brazil and the U.S. not gathering momentum so far. Am I right?

Unidentified Company Representative

You’re not right as far as Brazil is concerned, because (inaudible) doesn’t appeal in the minorities will concentrated that on a proportional basis. What you will see on other subsidiaries of us with minority partners then as of the USA are concerned, we have some minority partners and starting with return on the price declines that depends in Q1 as already mentioned.

Julien Laurent – Natixis Securities

Okay, thank you. And another question regarding…

Unidentified Company Representative

And the orders start across the (inaudible) in the U.S.

Julien Laurent – Natixis Securities

Yeah, sure, okay, and regarding the growth in term of geography it’s clear that Middle East is a engine in this quarter where the volumes delivered in Middle East, where it produced is it from the European slums and the next question would be if Saudi Arabia is clearly the big order of this quarter, do you think it would set anybody in the future course, these clients used to be when known for being a quite aggressive during couple of quarters and then be quite? Thank you.

Unidentified Company Representative

Yes, the Middle East was one of the engine not the only one, but was one of the engine in the first quarter. Most of the banks, it’s not all the banks are delivered from European basis and more and more will be and finished in Saudi. Now whether what the outlook for the Middle East, we are still very confident with this outlook. Aramco is now running without one for few weeks they were 120 last year, they are expecting to grow to 170 with even see up to 180, 200 so they are extremely active, we are just to give you a bit of color again answering a new gain tender for about 120,000 metric tons, one center after answering these same kind of tenders few months ago. So, yes we are positive about Middle East opportunities.

Julien Laurent – Natixis Securities

Thank you.

Unidentified Company Speaker

Thank you. Next question.

Operator

Thank you. The next question comes from the line of Amy Wong from UBS. Your line is open.

Amy Wong – UBS

Hi, just a quick question on the volume increase expected through the year. Where are we expecting the volumes in terms of kind of division and by the end markets, do we expect a rebound in some of the non-energy areas and how will that effect the overall mix in margin and average sales price?

Philippe Crouzet

We don’t really see as of today in the market any sign of rebound specifically for the Powergen business. We’ve made you one exception, but it’s really, it’s a small part of our overall turnover to the alternatives and trust in Brazil and where there is some result. That is clearly the exception and our first (inaudible) chemical confliction, total segments are concerned. It’s really stable, so I don’t know that’s a good news or bad news. But we don’t see any sign of recovery or degradation and of course these are stabilized anyway. We see that big part of the growth would come from the oil and gas and there is no big surprise there. The new [mill] in the U.S. sales is lumpiness as expected, so that the additional local production will take place as already planned and announced and roughly the same trend in this. So that’s a large part of the growth in H2 as in H1, compared to last year would be coming from oil and gas.

Amy Wong – UBS

Great. Second question from me is just to do with this exceptional charge that you have in the first quarter. It looks unfortunate. But can you explain the mechanics of what you’ve actually done? Does this – is there any actual future cash outlay for this provision and/or in fact that you are in litigation, are you expecting to recover all of this provision at some point in the future?

Olivier Mallet

Yes, the cash out two plays already, as well as the accounting product. So what we’ve done positively with the bank for which the transfers were carried out given its obligations with (inaudible) litigation in order to recover this damage. So far you have the maximum impact cash wise and accounting wise, generalize in our Q1 books and we hope one day to be able to reduce that.

Amy Wong – UBS

All right. Thank you very much.

Philippe Crouzet

Thank you, Amy. Next question?

Operator

Thank you. The next question comes from the line of Rob Pulleyn, Morgan Stanley. Your line is open.

Rob J. Pulleyn – Morgan Stanley & Co. International Plc

Hi, good evening, gentlemen. A few questions and remaining if I may. So could you give us some tax guidance for the full year, given the tax rate was a little hard than we expected in the first quarter, and that’s the first question?

And the second question I think we would appreciate that the non-energy business particularly in Europe remains quite tough, could you give us an idea of the profitability of that business, is it profitable or is it a drag on the group that will obviously become smaller as you ramp-up your new plants with oil and gas products?

The third question is, in terms of service revenues proportion of the whole. You normally give us some ideas to what that is to do so again that’d would be great? And that’s it for me.

Unidentified Company Representative

So, as far as the tax rate is concerned, you can assume it to stay for the balance of the year at above the same 35% level as it has been in Q1 and I remind you that the increase compared to the 30% also we had last year is due to the non-recognition of some tax rate going forward, so accounting is no judging factor involved with that. Then as you know with regards the non-energy, European business, you know that we unfortunately don’t typically disclose our margins by business after business, but definitely clearly it is very less profitable than oil and gas, so this is why we focused on oil and gas and this is way the growth, in our oil and gas sales will overtime be less profitable business.

Unidentified Company Representative

Any time may insist on that and the intrinsic margin of the non oil and gas business is lower and at this very moment with the low load of European mills, it’s even tougher, so I think you have to keep this in mind not everything is going great. I heard from beginning that caller a lot of positive comments treated by your questions on oil and gas that North America, Brazil, Middle East all this is true and then we definitely our confidence on the future of that businesses and the future of those areas. And that’s why we’re investing, that’s why we’re developing our capacities, but don’t forget that this is not all of the story. We also have more let’s say, tough businesses now visiting schedule right over time we are diluting those difference into a broader portfolio of (inaudible) businesses that its over time.

Rob J. Pulleyn – Morgan Stanley & Co. International Plc

Thanks very much. And on the service revenue and as a proportion of know-how?

Unidentified Company Representative

Maybe you’re referring to the type of services we do in the Oil and Gas business. I think we commentated already when we do it the revenue maybe about 10% of our sales and EBTIDA generated by this additional activity is higher than the average of the Group. But this is a rather smaller volume of activity compared to the signs of the Group overall.

Rob J. Pulleyn – Morgan Stanley & Co. International Plc

Sure. Thanks very much. I’m sorry just one follow-on question if I may, and I apologize if I missed this earlier. But the D&A charge or deprecation charge particularly for the first quarter, when is that broadly the run rate we should expect for the rest of the year?

Unidentified Company Representative

Jean?

Jean-Pierre Michel

Actually, we already have commented to go directly to the end of your question if that our full-year you could expect something on $370 million gain.

Rob J. Pulleyn – Morgan Stanley & Co. International Plc

Thanks very much.

Unidentified Company Representative

Thank you, Rob.

Operator

Thank you. Your next question comes from the line of (inaudible). Your line is open.

Unidentified Analyst

Yes, good evening. I just have two questions, so first one, I confirm your comments regarding the expectation, I think you are very cautious over the next quarter for the full year and why you’re so cautious compared to the products here in the first quarter with some margin higher than expected for the consensus. So why are you so cautious for the next quarter in terms of sales or in term of gross margin? And second question is, could we have color about what you expect for the improvement for the EBITDA margin quarter-after-quarter. Do you see some more strong growth in Q2, Q3, or also higher gross for the second half compared to the first quarter, could we have some more color about that. Thank you.

Unidentified Company Representative

Maybe you think we are very cautious, but that’s what we said at the beginning, we are stable our cautiousness if I may say, all over the year. As you know, we have definitely a very low visibility now for a number of non Oil & Gas businesses, so it’s very difficult to anticipate what’s going to happen in the next quarters. And on top of that raw materials to be volatile, we’ve not commented on that since the beginning of the call, but it’s not an easy situation there in terms of scrap price, for example, it’s not very comfortable. So I would not say we are more cautious than we were at the beginning of the year. We’ve achieved what we had in mind and we expected for us to any concern and this is our state of mind looking at the next quarters. Obviously kind of second question. Sorry [Jean] could you repeat that question, I was…

Unidentified Analyst

Mexican question, for some point the improvement of the EBITDA margin for the first quarter yes, compared to the first quarter, there are high diverse for the first quarter.

Unidentified Company Representative

I’m sure that Dave will tell you everything.

Unidentified Analyst

No, I hope to.

Unidentified Company Representative

And let’s tell you we have a (inaudible)

Unidentified Company Representative

So [Chen] has a good feeling as it relates to, so I want and I would just speak to all comment about what we see for this full-year. Remaining the first like many of our business don’t have a lot of visibility, so we have to stay very crucial stage in what we say and importantly nothing of what we see as of today on our markets oil and gas and other markets, that lead us to change our view about this full-year even in Q1 our goal is better than the consensus, it’s totally in line in the own expectations, therefore it doesn’t lead us to change at all, that our vision for the rest of the year, so that message is, that should change your own expectations for the rest of the year.

Unidentified Analyst

Okay, thank you very much.

Unidentified Company Representative

You’re welcome.

Unidentified Analyst

Thank you (inaudible)

Operator

Thank you, the next question comes form the line of (inaudible) your line is open.

Unidentified Analyst

Good afternoon, my question relates (inaudible) you mentioned this could impact from the second quarter of this year due to the increase in the stock prices given that spot prices started, seems starting to decrease again in the second quarter, how long do you expect this for to get back to remain positive

Olivier Mallet

Tell you what is the price will be three months from now, I will tell you, but unfortunately I don’t, so we clearly had a very strong rebound in Q2 compared to Q1 prices. Actually so far reasonable stock price staying at $130, $135 per ton deliver to China, which is at the price at which we sell on the local Brazilian market. If we believe that the overall EBITDA impact of our iron ore sale to third party on a full year basis, to be slight negative compared to last year because the average price in 2012 was still in tact. So to be actually small double digit negative EBITDA impact compared to last year.

Philippe Crouzet

And I do insist on a low visibility when we listen to our guys on the iron ore market, which we participating at the small scale as you know, we hear a lot of noise about new capacities coming on stream in some areas of the world, and referencing to iron capacities which may have a negative impact on the spot price even before your end according to some experts, so this is an area where we really have to be pretty cautious. And so that’s just an addition to what Oliver’s comments.

Unidentified Analyst

Thank you.

Olivier Mallet

Thank you.

Operator

Thank you. The next question comes from the line of [Sanjaya Satapathy] Bank of America. Your line is open.

Unidentified Analyst

Hello. Good evening, gentlemen. A couple of questions from me please. First, relating to the 20.6 million euro exceptional charge (inaudible). Hello? The line broken or what?

Philippe Crouzet

Yeah. It’s much better now. Could you just repeat the question because it was not heard at all.

Unidentified Analyst

All right. Good evening. I’ve two questions please. Firstly, on the 20.6 million euro exceptional charge, if I add that back to the reported number that gives me a very strong EBITDA margin of almost 500 basis points of improvement over the first quarter of 2012. And I appreciate that you have very low visibility and won’t be able to guide us for the next quarters. But would you – from what you see right now in terms of your oil and gas fields, is this something that you will be able to maintain for the rest of the year? And secondly, in terms of the ramp up in the VM2 and VSB, is there any risks that you see going into second half in terms of the qualification processes or are you relatively comfortable with the pace? Thank you.

Olivier Mallet

Well, the first point I would start and try to guide you to give you this additional position, this exceptional 20.6 million euros is below the EBITDA, is regarded for as an exceptional item. So it’s not included in the 15.7% EBITDA margin.

Philippe Crouzet

Concerning the risk on the VM2 and VSB, I think we are operationally risk. We are qualifying – finishing the qualification, customer qualification within (inaudible). It should be finished end of H1, early third quarter at the latest, but in some cases we have customer qualifying the need and expect more amongst that what had in mind now to receive official certificate and to be to move the (inaudible) for example, and concerning the end tool. We have 25 work (inaudible) to qualify and so far it’s on plan.

Unidentified Analyst

That’s very helpful, thank you so much.

Unidentified Company Representative

Okay. I think we’ll take the last question (inaudible).

Operator

Thank you. Your final question comes from the line of (inaudible) BPI. Your line is open.

Unidentified Analyst

Just a quick question on CapEx. You confirmed a €960 million guidance and…

Unidentified Company Representative

[€66 million].

Unidentified Analyst

[€66 million], sorry, and you’re at [€98 million] can you just remind us the maybe the seasonality first of all you expect on this CapEx and also the destination of those CapEx please? Thanks a lot.

Unidentified Company Representative

Yes. So there is more difficulty that in fleet (inaudible) of each and every little project, closer up to (inaudible) comment I can make, is that within the €660 million (inaudible). We got about €200 million for the completion of the (inaudible) and are willing to in the year.

Unidentified Analyst

Okay thanks a lot.

Unidentified Company Representative

(inaudible) when the equipment is fully commissioned, so later in the year.

Unidentified Company Representative

Of course.

Unidentified Analyst

All right. Okay. Thanks a lot.

Unidentified Company Representative

Okay, Tracy, this will end our conference call. I want to thank you and I didn’t mention the people around the table (inaudible) Philippe, CEO; Olivier Mallet, CFO, Jean-Pierre Michel, COO; and Didier Hornet, Managing Director of the OCTG Division.

Please note that we will hold our AGM at the end of this month in Paris on the 30 of May, so those who are (inaudible) and listening to us, please make sure that you will vote. Our resolutions are available on our website, and do not hesitate to call me if you have any questions.

Just to conclude, please note on your agenda the September the 26 and 27 in the U.S. where we will host our Investor Day in Pittsburgh and in Youngstown. We will send you a common invitation in June with all the details and we account that it could be very interesting for you guys to see these new equipment. Not that we have seen in Brazil, you’re going to see now a brand new in the U.S. Thank you very much. This is the end of our conference call and talk to you later. Bye bye.

Operator

Thank you. Ladies and gentlemen, this concludes your conference for today. Thank you all for participating and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Vallourec's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts