Vallourec's Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Vallourec SA (VLOUF)

Vallourec SA (OTCPK:VLOUF) Q4 2013 Results Earnings Conference Call February 27, 2014 4:30 PM ET

Executives

Etienne Bertrand - Investor Relations

Philippe Crouzet - Chairman

Olivier Mallet - Chief Financial Officer

Didier Hornet - Managing Director, OCTG Division

Analysts

Michael Shillaker - Credit Suisse

Raphaël Veverka - Exane

Gael de-Bray - Societe Generale

Henry Tarr - Goldman Sachs

Alessandro Abate - JP Morgan

Julien Laurent - Natixis

Rob Pulleyn - Morgan Stanley

Geoffroy Stern - Kepler Cheuvreux

Jean-Luc Romain - CM-CIC Securities

Etienne Bertrand

Thank you for joining us tonight. With me to comment the fourth quarter and full year 2013 results are Philippe Crouzet, Olivier Mallet, Jean-Pierre Michel and Didier Hornet.

I would like to inform you that this conference call will be recorded and a replay will be available. This conference is audio-webcasted on our investor relations website www.vallourec.com. The slides that will be commented tonight by the management during the presentation are also available for download on our website, both on the Home page and on the Investor Relations section in the financial results page.

Lastly, before I hand over 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 our slide presentation and are included in our annual registration document filed with the AMF. Philippe?

Philippe Crouzet

Good evening or morning or afternoon. Thank you for joining. We had a series of targets for this year consistent with our strategic plan. And I'm pleased to see that we received all of them in 2013.

The first target was to resume profit growth. And as you may have read by now, our EBITDA grew by 17% and net income Group share by close to 19%. And we reached the breakeven for both of our new mills in Brazil and the U.S. So, this was target number one.

And as you know our medium-term plan is to improve the sales mix and increase the oil and gas sales as part of our overall portfolio and we’ve achieved that as well. The sales of our oil and gas activities grew by 14%, close to 14% year-on-year. In fact, 19.3% at constant exchange rate and they now represent 60% of the total Group sales, while they were about a half of our total sales in 2009.

2013 was as well a milestone year in reshaping our industrial set up and we effectively ramped up both of our new mills, pretty rapidly in the case of the U.S. mill. The Brazilian mill VSB is now almost fully qualified and we started, last but not least to deliver our first product from our finishing unit in Saudi Arabia Vallourec, Saudi Arabia.

Next on the list were series of action plans to reinforce the Group’s basics and we delivered on each of these as well. In terms of savings, our Capten+ program delivered as expected enough savings to offset cost inflation and over the last two years saving close to €300 million and we delivered on our safety program and quality program, Capten+ Safe and Capten+ Quality and we delivered an innovation as well with 19 patents filed in 2013. And last but not least, we had announced a focus on cash generation. And there, I am pleased to say that we delivered more than anticipated, you may have seen that our free cash flow generation was negative only 41 million versus more than 300 million in 2012 and we even reached positive free cash flow generation in Q4 of 2013. This resulted in almost stable debt which I think is a good achievement given the fact but we still invested close to €600 million of CapEx this year below initial targets but nevertheless a significant amount.

On the next slide, I am referring to page six, we summarize graphically the key achievements. So sales volume up 3% year-on-year but sales revenues up 5% and in fact 10%, close to 10% at constant exchange rate. EBITDA up 17%, meaning 1.7 points for 170 basis points compared to last year, up to 16.5% EBITDA margin and net income Group share up 19%. Next, we refer to our proposed dividend up 17% year-on-year which is in line with the payout of last year.

These were for the key financial elements, let me now switch to few comments on key operations, clearly oil and gas was very successful last year, we achieved the third consecutive year of up double digit growth with 13% up compared to 14% last year and 21% the bottom year, bottom of the cycle in 2010. So, this is really nice over the last year, since 2009 our oil and gas sales increased by close to 65%. And this is really the core of our strategy, rebalancing our portfolio towards the growth areas that are related to oil and gas exploration production of course.

Second consequence of that oil and gas now represent 2/3 of our total sales versus only half five years ago. They are clearly the engine for our growth and the engine as well for the improvement of our EBITDA margin which is the reason why we invested so much over the last years, and we are very pleased to have really captured the market growth into dynamic areas like North America, Brazil and generally speaking EAMEA.

Let us now have a quick look at the new operations in terms of new the mills in North America, now mill really ramped up very rapidly throughout 2013 and we are very pleased with that. In the case of VSB, the challenge with more qualification to be recognized by our key customers as a premium product supplier. And we (inaudible) every qualification, we targeted in 2013. And this enabled us to start selling premium products and breakeven of the EBITDA in Q4 on the year as targeted.

I have already commented about our Saudi Arabian finishing mill delivering to our local customer

Saudi Aramco in all over the year in (inaudible) in H1 of 2013, and minor and non-OCTG operations in China and Abu Dhabi respectively for nuclear pipes and drilling coating were dedicated and started to produce nicely during the second half of the year. All this makes up our industrial setup, it enables us not only to capture the growth where it is as well to ship and from a different locations, depending on opportunities, depending on quality and all this enables us to improve our service to our customers and this obviously pretty consistent without our strategy.

So this concludes my initial comments, and I leave the floor to Olivier for more detailed comments on the financial results.

Olivier Mallet

So, hello everybody. On page 11, you have a reminder of the key figures already mentioned by Philippe. So, I will comment in detail each of these lines during the next pages, starting with the sale evolution on page 12.

Starting with Q4, Q4 sales were up 9.8% compared to last year of 16.5% at constant exchange rate. They benefited from higher volumes, 9.3% and positive product mix plus 6.2%, resulting in particular from the higher proportion of oil and gas sales. These elements did much more than offset negative currency effect of minus 5.7%.

Full year sales were up 4.7%, or 9.8% at constant exchange rate. Thanks as well to higher volumes and better mix, despite the negative translation impact of minus 5.1%.

On page 15, let's move to oil and gas sales comments. First our oil and gas sales were up 13% on a full year basis in 2013 compared with 2012 or up 19% at constant exchange rate. Sales increased in particular in EAMEA where we benefited in the Middle East from the high level of activity from major players such as Saudi Aramco, Q4 deliveries were particularly strong with an excellent performance of our operations.

In the USA, it has been a mixed bag. We benefited in 2013 from higher volumes especially during Q4. Thanks to our extended offering supported by the new rolling mill. On the other hand, the product mix was gradually affected by the increasing sales of semi-premium and API products, resulting from a tubular demand essentially driven by the shale oil activity. Prices were impacted by the adjustments made in Q1 2013 and then remain broadly stable for the year.

Following the antidumping trade case preliminary decision of last week, the pricing environment is likely to remain competitive at least in the short-term.

In Brazil, we benefited from a very strong product mix driven by the domestic offshore market, despite the temporary reduction of casing deliveries to Petrobras during Q4 as previously announced.

On slide 14, power gen sales were down for the full year and Q4. The market for conventional power plants is still poor and deliveries for some nuclear project were rescheduled over to 2014.

And finally on page 15, our industry and other sales were down 5.7% on a full year basis and stable at constant exchange rate. The market environment remained depressed from mechanical particularly in Europe and we had some [positive] such as the recovery on the automotive and agricultural markets in Brazil.

Let’s move now to comments on the EBITDA, in Q4 first on page 16. Compared to Q4 last year, EBITDA was up EUR 22 million or 9.3%. This improvement was due to stronger oil and gas premium sales in EAMEA region with the better mix which did more than offset the expected lower oil and gas sales in Brazil.

Furthermore, we continued our cost reduction efforts both in the mills and in SG&A. Concerning the full year 2013 results, page 17, the EBITDA was at EUR 920 million, up 16.8% year-on-year. The EBITDA margin improved by 170 basis points compared to 2012 at 16.5% of sales as we benefited from overall solid performance in our oil and gas operations. Indeed, despite lower contribution from the U.S. oil and gas operations with a deteriorated price mix, we benefited from increased sales mix in EAMEA and an improved mix in Brazil.

In our other markets, the business environment remained difficult with continuous pricing pressure. The EBITDA benefited as well from the positive impact of the ramp up of our two new mills and from the continuing cost reductions. The industrial margin was up by EUR 155 million or 160 basis points and SG&A were reduced by close to 3% and 80 basis points.

On the next slide, 18, a few words on the rest of the P&L [below] the EBITDA. On a full year basis, the depreciation of industrial assets was higher than last year as anticipated following the start-up of our new mills. The financial results were stable and effective tax rate was at 33.3%. Finally the net income group share was up 18.6%, up €262 million.

Let’s focus on the free cash flow on page 19, with a free cash flow generation negative by €41 million, a large improvement compared to the €328 million negative in 2012. This improvement came first from the CapEx, reduced from €803 million in 2012 to €567 million in 2013, which is better than the initial 2013 [envelope] that holds at €660 million. It came as well of course from the cash from operating activities improved by €168 million mostly linked to the progress in EBITDA. And finally, the working capital increased by €183 million, out of which €80 million for payables, receivable and inventories, which we have taken at over a long period.

Q4 was extremely good in this regard with the working capital reduced by €130 million. This result was partly attributable to non-recurring elements such as high down payments from customers on some projects which are not expected to happen again in 2014. Still, despite the rigorous effects of these [mandatory] survival elements, we target in 2014 a positive free cash flow generation.

On page 20, a quick look on the CapEx, which in 2013 has been well under control at €568 million below the original budget as already said. This was achieved thanks to savings on some projects and to very selective approach.

When we confirm that it’s not about carryover to the following years, we confirm our plan of the maximum amount of CapEx of €500 million in 2014 before going to about €450 million on average from 2015 onwards.

As a result, on page 21, the net debt has been almost stabilized compared to end of 2012 at €1.6 billion and our [gearing] ratio was up 32.7% at the end of December 2013.

Finally the slide 22 is a summary of our financial structure and financial resources, which drove our strong balance sheet structure and liquidity profile. We should just let it here, the signature in February 2014 of a multi-currency of realizing credit facility of €1.1 billion with the maturity of five years, plus two exemption options of one year each. This was done in order to renew our pre-existing €1 billion facility enabling the growth to increase its financial flexibility and to extend the maturity of its financial resources.

And now I’ll let Philippe conclude on the outlook.

Philippe Crouzet

If you go to slide 24, you have a brief summary of the key market assumptions on which we base our target for 2014. As far as oil and gas is concerned, we still foresee a mixed bag in North America. We anticipate and target higher volumes but we'll continue to see a mix deterioration year-on-year. And we think we will operate in a pricing environment likely to remain pretty competitive.

In Brazil, the first half will obviously be impacted by the lower level of well construction activity year-on-year, but we do confirm, we anticipate the recovery of the deliveries of Petrobras in the pre-salt areas by midyear 2014.

And lastly, in EMEA our oil and gas sales are continuing to benefit from dynamic Middle East market as well as South Africa by the way. And which we keep on supply it from new industrial set up combining the European mills, but now VSB from Brazil as well and our local finishing units.

We do not anticipate any significant change in trends as for the convention power generation activity. Only the sales for nuclear power plants should benefit from the rescheduling of some projects from 2013 to 2014. And in industry and others the visibility remains very limited and obviously we do not anticipate significant changes neither. Finally I want to insist on most recent trends and specifically the strengthening of the euro over the past month because definitely negatively affected. The hedged rates for last part of deliveries from Europe and any it would be for the negative, which work to continue.

So based on these assumptions, you'll find on page 25, the new set of priorities for 2014 and the management will obviously focus on free cash flow in generation and we will work on costs, optimizing on European cost and offsetting cost inflation to our recurring Capten+ savings program. We will reduce CapEx to a maximum of €500 in 2014 and keep on tightly managing the working cap. Based on the trends I’ve just described market trends and of course notwithstanding further changes in those plans both market and currency wise. We target stable to the moderate increase in sales and EBITDA and a positive free cash flow generation in 2014.

So, this ends our introduction and now begin for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Michael Shillaker of Credit Suisse. Please go ahead, sir.

Michael Shillaker - Credit Suisse

Yes. Good afternoon gentlemen. Two questions if I may. First of all, when I look at your Q4 EBITDA to 59 and I broadly analyzed that obviously around a billion or so and then when I look at your guidance it’s a lot more muted. It tells me maybe low 900s depending on your reading of the wording, but it certainly doesn’t feel like you’re guiding towards a billion or so. So what actually changes, because in principal I understand Petrobras missing in the first half of the year but you said they’re still going to be back in the second half of the year, VSB and the U.S. should I guess still be ramping up and therefore net-net better all things equal. It doesn’t feel like industrial is getting any worse. In some cases it feels like it’s getting better. So on a run rate basis given we guess that Petrobras were missing largely from the Q4 number anyhow. I am not quite sure that I fully understand why things are going to get worse than the underlying current run rate for the full year? Is question number one.

Question number two is in terms of Petrobras, how is your level of confidence here because, I think we’re still picking up fairly mixed messages about how committed they are to returning in the second half of the year. On the Middle East Tenaris did talk about a destock overstocking last year and a destock which again you don’t seem to allude to. So two of your key sort of markets Petrobras H2 and the Middle East can you please give us a little bit more color on that your confidence at both Petrobras come back and the Middle East doesn’t destock.

And then I suppose my final question I have three not two. Just on gas prices in the U.S. clearly there are higher things that a lot of people expected. I think Tenaris we are getting to stage of being potentially bullish on what that can mean both for the mix and gas drilling. And again I see your guidance is pretty muted in terms of you expect the ongoing mix deterioration in the U.S. so can you again give some color in terms of what you think beyond the first half you could see in terms of gas drilling in the U.S. shale gas? Thank you.

Philippe Crouzet

Lots of questions, maybe Olivier you start the year-on-year.

Olivier Mallet

Yes. So I guess the first one is probably as far as the overall guidance, of course the first and most important comment is that at this stage we still have a lot of norms, as far as H2 2014 is concerned, so that we prefer the stage to give you a fairly a broader range it’s fixations. Then you are concerned with this, what is going more difficult than what you were thinking. I think the key factor of that (inaudible) underestimated and that we have already mentioned in the past is all of pretty high sensitivity to the euro, dollar, rate. You know we have already commented about that, that’s what exposed to mainly two currencies, the Brazilian currency and the dollar.

As far as the Brazilian currency is concerned, as I think I said during our last conference call is pretty much neutral when the real gets weaker vis-à-vis the other premises as it has been the case in 2013 and significant as of today. We have the negative translation effect, when we translate into euros result that we make in Brazil, but this is offset to a very large extend by a positive transaction effect seems we normally and what is being sold in U.S. dollars as from the Brazil.

So what again makes the difference is our exposure euro dollar which is significant because we sell out of Europe quite a significant share of our sales in U.S. dollars. And as everyone has seen during the last month we have the conferences, we are more or less expecting the U.S. dollar to strengthen vis-à-vis the euro, it did not happened and it went even to a large extend on the other way.

To give you some idea about the impact on us, you know that we comment about that every quarter that our average hedge rate for last year deliveries on average was $1.3 per euro, as of today with weakening of the U.S. dollar for the last few months and we are at $1.34 per euro for our hedge rate and so far we have totally hedged H1 2014 and some good part of Q3.

So that it could even get a little bit worse for hedge in Q4 is dollar fair to run in [37] also. Large order of magnitude to be very precise about that, $0.01 for the euro-dollar-pound has an impact that is slightly above €10 million on our EBITDA on a full year basis, on top of that some translation effect for the result we make in the U.S., the decision even look smaller of magnitude. So this is I would the important negative for 2014 compared to 2013 and this is (inaudible) something that has materialized during the last few months where the strength of the euro did not meet the market expectations and our expectations so that we will be happy as soon as the euro would start look to be although evaluated as it is, as of today. And when you will see that happening on your virtual screen, it will have an impact on our deliveries, seven, eight months later on, which is the average maturity over our hedges. So, this is the important impact that I wanted to mention right away. As far as the evolutions are concerned, at least for H1 business wise, the EAMEA region is still very well oriented. You know that we had good bookings over the last few quarters. So, we have a very good volume wise and mix wise order book at the time being. And this should be a survival driver for results in H1, also it will be more and more mitigated by this currency effect I was mentioning.

In the USA quickly because (inaudible) there we’ll have a positive volume effect with ramp up of our mill but largely offset by the negative mix we see under market as of today and some uncertainties of the prices for H2 since the pricing environment as of today in state is uncertain. Brazil, for the local market, nothing new either. We’ll have a low H1 after a low Q4. The good news there is that the more we grow, the more we have confidence about the rebound of the deliveries to Petrobras as planned in H2.

But I am quick about that I'm sure we'll conduct with these questions. And finally as our other markets are concerned, power gen industry, automotive, iron ore, we don't see as of today, at least for the beginning of the year, any big change to make it simple. So, sorry if I’m being a little bit long, but I think it was an important question.

Philippe Crouzet

If I may continue Michael, you compared the 4 times Q4 and you took kit as a reference for the full year, let me remind you that the fourth quarter is traditionally high and so that’s if I may not -- the relevant comparison, we have to compare full year to full year. In addition to what Olivier commented on the significant impact of currency changes, just let me remind you that if we compare year-on-year to ‘14 to 2013, there are two elements which again as a full year impact and both negative, one is the change in mix in North America which took place during year 2013 and we anticipate that it will be effective all over the year 2014. And as mentioned already by Olivier, this is some kind of the significant change. And the other one is obviously two negative quarters of Petrobras versus only one last year of course.

So you had a specific question on Petrobras and you asked us what makes us confidence that the recovery of casing products will recover or start again by midyear. Well, this confidence is based on our knowledge of the drilling program of Petrobras, we have good visibility on those drilling programs. And we as you know work on what we call a collaborative planning with them which means that we are updated every 15 days on their drilling schedule and for the next 9 to 12 months. And what I can tell you is that this is not changing. This is strictly consistent with what we said a couple of months ago as well and our level of confidence is based on our knowledge of that program. And on top that their inventory of casing product is reducing and so we really see the risk of another big shift from drilling completion as very, very low, nothing won (inaudible) during the presentations made over the last hours in Brazil by Petrobras management. So, this is what we base our confidence upon. By the way let me add that if I am right, Petrobras management confirmed their CapEx program E&P for the next four years and even a bit more than in their prior strategic plan.

You had series of other questions. Yes, on the Middle East, maybe I will let Didier jump in.

Didier Hornet

Yes, good morning Michael. So our sales to the Middle East and to Aramco were very strong in 2013 especially in Q4 2013 as it was commented. And we are still expecting strong sales to this region in 2014. It is clear though and when we already had few indications that Aramco may start destock a little bit, postponing some deliveries within 2014. So, this is sometimes a little bit in contradiction with a very active tendering process from Saudi Aramco. So it is pushing us to be a bit cautious especially for the second half of 2014. Your last questions I think was regarding the gas price in the U.S. and where we see the market going. Again back to 2013 and especially Q4, 2013, we commented and we saw mixed deterioration which is stabilizing through Q4 and we believe through 2014.

So how could we improve again our mix in the U.S. is simply when drilling for gas will restart and this is typically calling for price of gas between $4.8, $5 per million Btu that today most people believe will not be reached in 2014. So restarting that drilling will mean mix of power gen development from gas versus coal, petrochem and people believe it will only happen by about 2017, and for sure increased LNG exports from 2016.

So for the time being let’s say being back to drilling gas as we were few years ago is expected by the market 2015 and further.

Michael Shillaker - Credit Suisse

Okay. Look, many thanks for very thorough set of answers as always. Thanks a lot.

Operator

Thank you. We will now move to Raphaël Veverka of Exane. Please go ahead.

Raphaël Veverka - Exane

Yes, good afternoon. Thank you for taking my question. Two question, if I may, first again on your guidance for stable to slightly up sales and EBITDA. Could you just precise, is that only for the full year on an average basis, or does that also apply to H1 compared to H1 last year? And my second question is on the Petrobras. Can you confirm that the negative EBITDA impact within the range of 40 million in Q4 and is it a similar impact we are looking for Q1 and Q2? And second, Petrobras, based on the reiteration of their strategic target, is it fair to assume we could see a strong positive impact on volumes and mix from maybe end of this year or 2015 onwards? Thank you.

Philippe Crouzet

Olivier, maybe...

Olivier Mallet

Yes, the first question is about whether our guidance applies to full year and/or to H1, so it applies to full year of course with all the uncertainties we still have at this period of the year. And what if you look more specifically at H1, I think we’ll have two effects which will go in opposite directions. On the positive side, as I was saying the backlog for EAMEA region is very high, which could lead to some improvement compared to H1 2013. On the other hand Brazil Petrobras would be lower for very well unknown reasons compared to last year. As far as Petrobras is concerned, you’re asking whether the about €40 million negative in Q4 that we mentioned is what happened. Yes, it is the order of magnitude.

Philippe Crouzet

And let me add a few words on Petrobras. It’s impossible at this stage to be very specific on what’s going to happen into 2015. I think we're more short-term oriented in terms of their drilling program. But what I got from their recent communication a few hours ago was really a renewed commitment to E&P CapEx and most specifically to offshore drilling and this is really where we are efficient, where we are of course specifically their supplier. So I would rather say that we are comforted in our commitment to the Brazilian offshore market. You know that Petrobras really need to grow their production from deep offshore and that's really the take out on my side from their recent comments.

Raphaël Veverka - Exane

Thank you.

Operator

Thank you. We'll take the next question from Gael de-Bray of Societe Generale. Please go ahead.

Gael de-Bray - Societe Generale

Yes. Thank you very much. And good evening everybody, I've got a couple of questions, please. Firstly, I'd like to better understand the mix profile during the ramp-up process of the new mills in both the U.S. and Brazil. I mean what proportion of the additional tonnage in 2013 was premium and how much was, let's say, API or non-heat treated products? And how quickly do you expect the mix to improve in 2014?

And secondly, have you seen any signs of improvement in Europe yet? I mean in terms of either volumes or prices? And the last question, still on the guidance, I mean do you consider the current consensus EBITDA, which is slightly above €1 billion in 2014 to be totally out of reach or are there a few positive items that need to be confirmed, let’s say in the second half of the year that could make you reach this consensus expectations? Thanks.

Olivier Mallet

So maybe a quick comment about the mix profiles of the new mill. I will start commenting that these mills today are fully integrated, so VM2 or let’s say the small diameter pipe in the U.S. within the Vallourec in just (inaudible) and VSB is fully integrated within the eastern hemisphere in just (inaudible) including the finishing we have in the UK in Saudi and in Tunisia. So it’s a little bit difficult to be specific on that.

What is clear is that we are -- we continue the ramp up of both VSB and VM2 in the total volume, but also in its premiumisation chapter being able to ship more and more and premium threaded [jars] either transformed locally for VSB or and finished within our local capabilities.

Philippe Crouzet

Or to say a bit differently if I may, as far as North America is concerned we are a big player there so basically we follow the trends of the market. And we already commented that this market is not going to an improved mix, if it were we have full capacity to deliver, but that’s not the situation now. As far as eastern hemisphere, as you know we are much more bias towards premium products, it is proving exactly on those premium products and we have the capability now that we are qualified to follow that trend and that is a positive evolution as far as this area is concerned.

But let me continue on Europe to be honest, no we don’t see any significant improvement. Maybe I would say the moral of the German industrial mechanical sector is slightly improving. We will get a better activity as the year is starting. But to be honest, this is just incremental nothing that I would consider as significant.

In terms of power generation unfortunately situation is desperately flat in terms of conventional power generation. Nuclear is going to improve with the ups and downs in the borders that may change from one quarter to other. But apart from nuclear, we do not foresee any significant positive change as far as activities based in Europe are concerned.

Gael de-Bray - Societe Generale

On the guidance…

Olivier Mallet

I think you had a question on the guidance basically towards to know whether €1 billion EBITDA was totally out of reach. The answer is that we are very top of the range we are kind of providing. Cannot say more, but today there is still again unknown.

Gael de-Bray - Societe Generale

Okay. Thank you very much.

Etienne Bertrand

Thank you, Gael. Next question please.

Operator

Thank you. We’ll now move to Henry Tarr of Goldman Sachs. Please go ahead.

Henry Tarr - Goldman Sachs

Hi there. Two main questions, the first one is just around the U.S. antidumping, I guess it’s in the preliminary determination. Do you expect the change the final determination or do you have any comments around kind of when we surprise with the initial results? Secondly, just on the nuclear impact in 2014, it would be great if we could get some sort of order of magnitude for could be placed into this year, early today? Thanks?

Philippe Crouzet

Okay. Maybe on the trade case in North America, to be honest, although we are supporting that case, we are not experts including about the tubes and it seems that the disappointment is on that particular area. As far as seamless products are concerned, the preliminary rights are pretty high in terms of [weather] especially coming from Korea, they are at this stage zero. Again we are not that familiar with the worldly situation, so we cannot really comment on that.

The only comment is that obviously it is not favorable to the overall pricing environment in North America, but as far as the legal case is concerned, I don’t think we have anything to add to those who are not experts in the weather tubes; I don’t know if you have anything to add, Olivier? Okay, nothing. And your second question….

Olivier Mallet

On nuclear.

Philippe Crouzet

Yes. On the nuclear and what kind of order of magnitude we can give to the rebound particularly in 2014. It’s correct that 2013 has not been that of a good year for nuclear. We have in midyear a delay in (inaudible) order to our French client because of some process between the client and the Nuclear Safety Authority that towards -- getting some delay for the green light to start the production, so we inherited upon this issue in the process.

And we are as well some degree that we’re postponed some change in these markets in year 2014. So 2014 should be a back to a good level of activity with the positive impact on the EBITDA. It’s still watching the small business in Vallourec as you know may be 2%, 3% of our total sales.

So it doesn’t change the face of the world. We are positively bound could be double-digit figure in terms of negative EBITDA, but relatively a small line.

Henry Tarr - Goldman Sachs

Okay. Thanks. And just one last question and just what are you assuming in terms of kind of pricing when you look forward this year and into the guidance range?

Olivier Mallet

So in terms of prices I would say that in most regions what we see as of today is stable pricing, so far OCTG it was one for the modern industrial product where we had a difficult year, last year, but it seems now that it has bottomed up. And in the U.S. specifically, the risk there is from (inaudible) as of today and to the competitive environment.

But what has been actually more important for us efficient H2 last year and winding bottoms as well as this year is mix rather than price and it is clear pretty clear that when we sell more EAMEA or in Brazil for offshore even with stable prices that trend is a good mix.

Henry Tarr - Goldman Sachs

Can you give just a quick split of the mix for the quarter then or for the full-year, premium versus more commodity shares?

Philippe Crouzet

Typically what we give, but it's really a proxy with a percentage of heat treated products, what we have as of today is about 65% of our production.

Olivier Mallet

While 55% up I would say yes.

Henry Tarr - Goldman Sachs

Thanks very much. I'll turn it back then. Thank you.

Operator

Thank you. We'll now move to Alessandro Abate of JP Morgan. Please go ahead.

Alessandro Abate - JP Morgan

Hi, good afternoon everybody and congratulations at least on the Q4 results. I have the few questions. Mainly seems to be basically the most rewarding market at the moment. Considering the U.S., it was actually happening and Brazil as well, because it favors a bit your expert was this area. Don't you feel that these areas might be actually overcrowded in 2014?

The second question is related to ArcelorMittal plant there, 600,000 tons, basically just shipped the first part in November. Do you consider ArcelorMittal potential threat for the stability of projects in the Middle East or basically this is not going to compete directly with you?

The third question I have is related to something is always happening on a rollover basis, which is when your patents expire. Apparently there is a number of patents that are basically expiring at the moment. Do you fear any potential threats from third party players, not really including the [list] of premium producers? And if so, what kind of difference do you see in the U.S. market and the market ex- U.S.?

And the fourth question, the last one, is related to the press release that just came out before your earnings results this comes as with Petrobras with basically mostly logistics and other activities. Is it possible to have a quantification, this impact has to be positive? Thank you.

Philippe Crouzet

Okay. Yes concerning your first question about the Middle East being at least to be overcrowded as you said. We are acting in the Middle East and specifically for Saudi Aramco in what we call the advanced premium segment. So it’s the most complex segments of the premium we deliver both in terms of type standards and in term of threat standards. So it will take time to ArcelorMittal even if they’re on location to be able to deliver the kind of mix that we are able to deliver to there with some other competitors to Saudi Aramco. So that will definitely more act on the API market than advanced premium segment and on the API market there are already lots of products coming from various areas of the world. So I think there would be one amongst many supplying the API market where it is, that is basically in Iraq and in all the area, but nothing no value that they really bring to those markets.

So on the second question we’re referring to patents. We always have patents expiring and the new patents coming on line. What’s important to understand is that let’s say our product differentiation is a little bit more than the drawing and it’s knowhow it’s the quality standard and is what we call the one system that we are offering to customers, which they have typically recognized as a different shatter on top of some of the thread drillings. So this is what we are pushing and what we continue to develop and promote even when some of the patents are being expired.

Olivier Mallet

I think it’s a good transition to the next question about the Petrobras contract service basically to [expand] on what Philippe was saying what we are providing is not only technology but innovation on the existing technology and services around the technology and this the new contract is a good example. I think this is the first time that Petrobras ever sub-contract to a third party this kind of service. So it’s an innovation of in its own kind. We cannot provide more specific figures on that but it will definitely contribute to the improvement of our performance. And of course not immediately in 2014 it’s going to be a ramp up phase and a learning curve for both of us but in the future. And the good thing with that kind of service is that in terms of return on capital employed it’s obviously more attractive that the sticking the new running mill, the capital we have to involve in this kind of activity is lower. So it is consistent as well with our focus on cash generation and return on investment.

Alessandro Abate - JP Morgan

Can I ask a follow up question on the guidance, unfortunately I wasn’t able to capture completely your answer the €1 billion that basically is pretty much more concern is expecting for 2014 is the top end of your right, of the potential range, but there are some unknown in H2 2014 here, that’s what I captured?

Philippe Crouzet

Yes, to the lot of unknown, that could be the less even towards the better of the range, to the top of range.

Alessandro Abate - JP Morgan

Thank you very much. Thanks for especially for this agreement with Petrobras commenced the long term relation that you will be done, thank you very much.

Olivier Mallet

Thank you.

Philippe Crouzet

Thank you Alessandro. We take the next question.

Operator

Thank you. The next question comes from Julien Laurent of Natixis. Please go ahead.

Julien Laurent - Natixis

Yes, thank you. Just a quick question. On the balance sheet the next proceeds in the balance sheet are they are most accounting values, they are done by €150 million instead of still significant CapEx. So could you elaborate a bit regarding the evolution of the value, the continue value of your assets, thank you?

Philippe Crouzet

Yes, Julien. Due to the affect that a significant part of our assets is in foreign currencies and the weakening of the real in particular in 2013 had a significant impact again there, so it’s truly a constellation impact.

Julien Laurent - Natixis

Okay. And regarding the potential for restricting in Europe. Do you need to reduce the value in your balance sheet before closing any non-profitable capacities?

Olivier Mallet

No, I mean I don’t think so. In Europe we service of initiatives which are consistent in adapting our capabilities capacities to what we consider is that the medium term needs, but it doesn’t require a significant write offs. It is more willing working on fixed cost or improving variable costs and efficiencies, but no significant factors.

Julien Laurent - Natixis

Thank you.

Olivier Mallet

Thank you, Julien. Next question please.

Operator

Thank you. The next question is from Rob Pulleyn of Morgan Stanley. Please go ahead.

Rob Pulleyn - Morgan Stanley

Thanks and good evening gentlemen. Few of my questions have been answered, but just a few aspects of clarification. You said earlier that the mix effects in the U.S. would offset, the benefit from the volume increase as VM2 ramps up. Just so I understand you clearly, does that mean there is going to be limited incremental EBITDAR from the VM2 ramp up for 2014? That's the first question. Second question; dividends payout ratio now is close to 40% of earnings, is that something you would like to maintain going forward? And if not what are the other plans for the free cash flow which obviously you’ve guided to be positive?

And thirdly, in the guidance regarding sales and EBITDA being higher, obviously working back to your guidance this time last year, you also highlighted the EBITDA margin would be higher. Is that also the case this time just to check? Thank you.

Philippe Crouzet

So on the first one, Bob the North America business, yes it scales that. We will have the full year impact of the mix deterioration that took place to a large extend for a midyear last year and this would be a strong negative offsetting to a very large extend for the positive volume impact that you should not include in your model too much increase in our EBITDA coming from this part of the world. We’re expecting for that to have some good news in the course of the year.

Olivier Mallet

News meaning, we start-up gas drilling and let be specific on that, this is really what basically would trigger a recovery in the mix, more premium, less API or semi-premium. And this is what we do not anticipate at this stage as the base case for 2014.

Didier Hornet

And if you look at the three factors, volume wise we're doing well in the USA, the technical ramp up of the mill is doing really well. So [commercial] went up as well, we’re providing a very short delivery time to our customers, very good quality. So, that all the incremental capacity we offer our customers is going to order from our customers. So volume is good, mix is not good and prices as we already commented are stable in H1 and our prices have been already negotiated for H1. And for H2, there is still this uncertainty, relatively and competitive pricing environment.

Rob Pulleyn - Morgan Stanley

Okay, very clear. Thank you.

Philippe Crouzet

Next question was on the dividend policy. Okay, on the dividend policy basically, there is no change. I mean we are just repeating to what we said or proposed last year, what was decided last year. But basically, as a reminder our mid-term policy is really based on the payout ratio of approximately one-third. It is true that over the last years, we’ve proposed and decided and shareholders decided slightly more, in fact in order to reflect the fact that due to decrease in our net profit of course the payout, the total payout was lower. And we don’t want shareholders to receive a negative message, when we are confident regarding the future of the Group. So now, so far no change in the dividend policy.

You mentioned and referred to the positive free cash flow, I think it’s really important. And let me remind you that the last year when we had positive free cash flow was 2009, so clearly we are entering in a new cycle after four years of very heavy CapEx in order to reorganize our all industrial sector to reposition our capacities in growing areas. Now, we’re entering in a new phase where we are going deliver cash. But this being said as far as 2014 is concerned, the top priority is 2014 and 2015, will obviously be to reduce our debt, we want to keep our rating and of course this drives us to have some discipline in terms of the dividends. So, I think that answers your question.

Rob Pulleyn - Morgan Stanley

Fair enough. Thank you.

Olivier Mallet

And your last question was about the margin, EBITDA margin.

Rob Pulleyn - Morgan Stanley

Yes. Whether we can actually see an improvement in margin due to operational efficiency as well as absolute improvement in sales and EBITDA?

Olivier Mallet

Well, I confirm to you that our guidance applies in the same terms both to sales and to EBITDA, which implies more or less the stable margin with some pluses that you were mentioning among others and some minuses, the negative currency effects on our hedge rates have of course a negative impact on the margin as well as to low quarters vis-à-vis Petrobras compared to last year.

Rob Pulleyn - Morgan Stanley

Very clear, thanks very much.

Etienne Bertrand

Thank you. Rhonda, we’re running a bit late, maybe we will take two last questions.

Operator

Thank you. The next question is from Geoffroy Stern of Kepler Cheuvreux. Please go ahead.

Geoffroy Stern - Kepler Cheuvreux

Yes, good evening. Philippe just a one question actually, but I’ll try to be pretty quick. With regard to your [€1.2 billion] could you give us the volumes delivered in 2013 and your expectation for 2014?

And the second question again I mean mostly housekeeping question, in Q4 we see a significant jump in the line called [other] in which you have amortization, restructuring and so on. Is it the €116 million recorded in 2013, is it 100% recurring or what should we expect for 2014 in terms of total depreciation and amortization it amounted to €385 million in 2013 what about 2014, 2015?

Also with regard to tax rate, is it fair to assume something flattish in 2014? And with regard to working cap you highlighted that you want to be really to have a good management of the working cap. On average in 2013, you were I think at 26%, 27% of total sales. Do you assume this ratio to be stable in 2014? Thank you.

Philippe Crouzet

I fear that I am not going to answer precisely to your first question. As you know we targeted for 2013 to reach breakeven for both mills which we achieved during the second half of the year. Now looking into the future -- this breakeven as you know and you are well aware of that corresponds to utilization rate of about two-thirds for both cases.

Now looking to the future it make no sense refer to one specific line because both running mills are integrated in one, the North American system and the other one European system as well and so we play on each two depending on first the quality, second the service, the lead time, the currency, some cases et cetera it makes really no sense to look at the specific tool versus the others. When you look at the total shipped and could be the way we would have deal with those new equipments in the future. Olivier?

Olivier Mallet

So about housekeeping, tax rate we were in 2012 at 29%, at 33.3% in 2013. I remind you it was about the new activation on certain tax services in some areas. We should come back in 2014 to a tax rate that could be around 30%.

In terms of working capital, as we have stated in the press release, we had really good performance at the end of 2015. Our working capital in percentage of sales was about 23% at the end of 2013 and like it has been closer to 25% at the end of 2012, and at the end of 2011.

So this very strong improvement in December 2013 is due to two elements. Some [efforts] who are doing, not only actual and that quarter-over-quarter, it was better efficiency even though now in terms of our working capital and we are well benefited from some non-recurring positive elements at the end of 2013 that will reverse at the end of 2014 lately.

Then finally in terms of depreciation and amortization everything included for 2014, we should be sort of (inaudible) around 270 or something like that.

Geoffroy Stern - Kepler Cheuvreux

What you say around sorry, 300?

Olivier Mallet

270.

Geoffroy Stern - Kepler Cheuvreux

All right, would be good. Okay, thanks for this.

Etienne Bertrand

Thank you, Geoffroy. So then final question?

Operator

Thank you. The final question comes from Jean-Luc Romain of CM-CIC Securities. Please go ahead.

Jean-Luc Romain - CM-CIC Securities

Thank you there is two questions. You always mentioned good sales of premium runs in Brazil; we are getting more aggressive there? That's my first question. Second question is about relying just on top of EBITDA other income and expense, it has increased quite significantly in the fourth quarter and on the full year 2013. Should we expect the same proportion for next year?

Philippe Crouzet

On the first one, I guess, I’d suppose – it’s working (inaudible) products which our weather products and we’re competing on that particular segment, and we don’t make any larger recorded. Nowhere in the total world, not housekeeping in the one, for to gain the housekeeping one if you regain (inaudible)

Olivier Mallet

So about this our expenses line the main reason for the increase in Q4 2013 was a French profit sharing system and we can see the fact has that the financial performance and the operation performance of our French entities did improve in 2013. This profit sharing is based partly of the financial figures, but partly as well on the performance in terms of safety at work, in terms of cost savings. So, I don't know yet what it will be at the end of 2014. We should to have to increase again; it would reflect again on improvement in our performance.

Jean-Luc Romain - CM-CIC Securities

Thank you.

Etienne Bertrand

Thank you very much. I think this is closing our session today. Sorry, we've been a bit late to probably some people asking question, I might be available later in the coming days. Thank you again for listening to this conference call and good night. Bye, bye.

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