2008 Annual Report
Key figures 6,437 million in sales 66.4 % in the energy sector (Oil & Gas and Power generation) 51 production sites in 11 countries 18,600 employees 65.7 % outside the European Union Group Profile World leader in the manufacture of seamless steel tubes Vallourec offers a portfolio of diversified, innovative and high value-added tubular products, with an increasing focus on energy production (tubes for oil and gas wells and power stations). Specializing in the most complex and demanding industrial applications (extreme temperatures, pressures and corrosion), the Group is a leading global supplier, with manufacturing and sales operations worldwide. In a difficult economic climate, the Group is more determined than ever to continue investing for the future, remaining close to its customers, boosting its competitive edge, providing innovative solutions and seizing opportunities for growth. With the announcement, in early 2009, that it had forged closer ties with Sumitomo in the United States and had signed a cooperation agreement concerning stainless steel tubes, Vallourec demonstrates once again its ability to develop strong partnerships and thus expand its range of high value-added products.
Contents Vallourec in 2008 04 Statement by the chairmen 06 Highlights 07 Business performance 08 Shareholder information 10 Corporate governance A Group prepared for future challenges 16 Appropriate strategic choices 18 Growing energy markets 20 Advanced manufacturing facilities 22 A global player An increasing focus on energy 26 Oil & Gas 30 Power generation 34 Mechanical engineering 36 Petrochemicals 38 Automotive 40 Other markets A responsible Group 44 Social responsibility 46 Environmental responsibility 48 Economic responsibility 50 Balance sheet and income statement 52 Glossary
Vallourec in two thousand eight
Jean-Paul Parayre Philippe Crouzet
Vallourec annual report 2008 5 Statement by the chairmen Dear Shareholder, Before discussing the more difficult 2009 environment in which the Group is operating, we would like to review last year s performance. Our business again enjoyed robust growth in 2008, largely driven by the need to increase world production capacities for oil, gas and electricity. In an economic climate characterized by the high volatility of raw material prices, Vallourec managed to maintain a high operating margin thanks to its premium positioning and improved product mix. In addition, strong cash generation has enabled Vallourec to boost its industrial investments and continue upgrading its facilities. By purchasing three American companies specialised in premium tubular products and services for the oil and gas industry, the Group seized opportunities for external growth whilst remaining financially sound. Vallourec is today facing deteriorated market conditions caused by significant destocking, plummeting oil and gas prices, and a widespread cautious attitude in the markets. It is still too early to assess the impact of the global economic slowdown. But in this environment, the competitive edge and flexibility of Vallourec s production facilities, its position in high value-added market segments and its financial strength all constitute decisive assets. The Group has to be responsive by rapidly taking the necessary steps to adapt its plants operations. During these challenging times, Vallourec is making every effort to remain a responsible economic player and a committed partner to its customers. Strongly involved in the regional communities in which it operates, Vallourec is careful to follow a balanced development model that addresses both social and environmental concerns. Convinced of the major medium and long-term need for seamless tubes for oil and gas wells and power plants, Vallourec is continuing to plan ahead as evidenced by its ambitious investment programme. We are confident in our ability to strengthen the Group s global leadership. We know, more than ever, that we can rely on the very high motivation of Vallourec s staff. Jean-Paul Parayre Chairman of the Supervisory Board Phillippe Crouzet Chairman of the Management Board
Highlights The numerous decisions taken in recent months have enabled Vallourec to pursue its investment policy, improve its competitive advantage, carry out targeted acquisitions, develop commercial and industrial partnerships and expand the number of employee shareholders. 23 April 2008: inauguration of the new continuous caster for the Saint-Saulve steel mill The cornerstone of the process for producing steel billets, used for manufacturing seamless tubes, the new curved continuous caster at Saint-Saulve in Northern France is a major investment that will allow the Group to significantly increase its steel production capacity and thus reduce the share of external purchases. 16 May 2008: acquisition of three American companies specialized in premium OCTG products Vallourec finalized its acquisition of Atlas Bradford, TCA and Tube-Alloy from Grant Prideco. The three American companies boast leading-edge expertise in the field of premium joints, heat treatment and threading services for the oil and gas industry as well as an excellent reputation for customer service. 18 February 2009: cooperation agreement with Tubacex in stainless steel tubes Vallourec has entered into a cooperation agreement with Tubacex, a world leader in the production of seamless stainless steel tubes. The agreement concerns R&D and sales development of seamless stainless steel tubes designed for oil and gas production in extremely corrosive environments and in response to demands for tubes that can withstand higher temperatures and pressures in future power plants. 26 February 2009: stronger partnership with Sumitomo The two groups are strengthening their long-standing collaboration on premium joints for the oil and gas industry by merging VAM USA and V&M Atlas Bradford to create VAM USA LLC. The new 500- employee company is based in Houston, Texas, and is owned 51% by Vallourec and 49% par Sumitomo. In addition, Sumitomo acquired 19.5% of V & M TCA. Vallourec and Sumitomo have also decided to exchange shares in the amount of USD 120 million. 16 March 2009: capacity investments in nuclear energy Vallourec has chosen to invest 80 million to increase its production capacity for tubes designed for the nuclear industry. These investments are targeting the following production sites: Valinox Nucléaire in France and Valtimet in France and the United States. IN focus 16 December 2008: successful employee-shareholder plan,«value 08» The Value 08 plan, which aims to forge a closer link between employees and the Group s business and results by providing an opportunity to invest in Vallourec shares, has met with great success. Some 12,200 employees in eight countries, or 68% of the eligible workforce, subscribed to the capital increase reserved for them. By participating in this programme in such large numbers, the employees have clearly demonstrated their commitment to the company as well as their confidence in Vallourec s strategy and future.
Vallourec annual report 2008 7 Business performance 2008 featured a steady rise in sales prices against a background of very volatile raw material prices, which enabled Vallourec to keep its margin high and continue to invest. Robust business in 2008 Sales grew by 4.8% to end the year at 6,437 million. Production remained stable at constant scope. Oil & Gas and Power generation benefited from the successive price increases implemented during the year, posting sales growth of 4.9% and 16.9%, respectively. Non-energy segments, particularly the Mechanical engineering, Automotive and Construction industries, began to feel the impact of the global economic slowdown towards the end of the year. In terms of geographic breakdown, North America s share rose sharply, at 23.7% of sales compared with 18.6% in 2007, thanks to the strong performance by Oil & Gas and Petrochemicals and the consolidation of the three US companies acquired in May 2008. High operating margin Purchases increased by 11.5% compared with 2007 due to the steep rise in scrap metal prices in the first half and higher iron ore prices as from the second quarter. EBITDA totalled 1,694 million, corresponding to an EBITDA/sales margin of 26.3%. Net income came to 1,025 million, in line with the 2007 level. Sound financial structure Vallourec s financial situation is particularly sound. The Group made 528 million of capital expenditure, and acquisitions totalling 541 million during the year. At the end of 2008, the gearing ratio was limited to 10.7% thanks to strong operating cash flows. Trend in EBITDA over five years (in million and as a % of sales) 2008 1 694 26.3% 2007 1 751 28.5% 2006 1 665 30.1% 2005 1 061 24.6% 2004 455 15.0% The Group s financial strength, together with its responsiveness and capacity to adapt, are key factors for weathering the global economic crisis. These qualities enable Vallourec to pursue its investment policy to improve competitiveness and emerge even stronger from the present period. Olivier Mallet, Chief Financial Officer
Shareholder information In a difficult economic environment, Vallourec has decided to propose a dividend of 6 per share. This dividend reflects the good performance achieved by the Group in 2008 and is perfectly in line with the payout policy defined by the Group in 2003, targeting an average payout ratio of around 33% over the long term. A dividend of e6 per share Earning per share and dividend (1) (in euro) 2008* 18.3 33.2 % 6.00 2007 18.9 37.4 % 7.00 2006 17.8 34.7 % 6.00 4.00 2005 9.4 25.1 % 2.24 2004 3.0 23.3 % 0.64 Earning per share Dividend Exceptional distribution Pay-out ratio (2) * Proposed dividend. (1) the dividends paid have been recalculated to take into account the 5 for 1 share split on 18 July 2006. (2) Excluding exceptional distribution. Dividend It was decided to submit for the approval of the Annual General Meeting of 4 June 2009 payment of an ordinary dividend of 6 per share in respect of 2008, corresponding to a payout ratio of 33.2% of net income, Group share. Between 11 June and 26 June 2009, shareholders can choose between payment of the dividend in cash or in shares. Payment is scheduled for 7 July 2009. Etienne Bertrand, Director Investor Relations Our priority is to establish an open and constructive dialogue with our institutional and individual shareholders. In 2008, the Group considerably stepped up contacts with investors. Also, the Investor Day organised each year enables investors and analysts to gain better knowledge of the Group and to meet the operational managers. By the end of the year, we shall have a new window on the corporate website to keep our 100,000 individual shareholders even better informed. Capital breakdown at 31 March 2009 91.99 % (92.69 %) Public 5.73 % (5.72%) Bolloré group 0.76 % (-) Directly held by Vallourec 1.52 % (1.59 %) Employee shareholders As a % of capital As a % of voting rights Number of shares: 53,788,716 Voting rights: 53,438,648
Vallourec annual report 2008 9 Financial communication Vallourec makes every effort to produce rigorous financial information, ensuring complete transparency and equal treatment of shareholders, whether individual or institutional. The Group seeks to build a relationship of trust with its shareholders by providing the fullest information possible. The financial communication system draws on numerous media and actions targeting shareholders. The information is available to all, thanks in particular to the Shareholders and investors section of the corporate website. Some media are more particularly adapted to the general public, such as the shareholders letter dedicated to individual shareholders. Share price performance between 30 April 2007 and 29 April 2009 Vallourec share Listed on the Euronext Paris Eurolist (section A) Part of the deferred settlement section (SRD) ISIN code: FR0000120354 Indices: CAC 40, Euronext 100, MSCI World Index FTSE classification: engineering and machinery Market capitalisation 3.8 billion on 31 March 2009 On 30 April 2007 Vallourec: 202.00 CAC 40: 5,960.04 On 29 April 2009 Vallourec: 80.85 CAC 40: 3,116.94 Change Vallourec: - 59.98% CAC 40: - 47.70% 30/04/07 30/06/07 30/08/07 30/10/07 30/12/07 01/05/08 01/07/08 01/09/08 01/11/08 01/01/09 01/03/09 29/04/09 Vallourec share price in euro CAC 40 relative to Vallourec share price on 30 April 2007 The global economic and financial crisis led to a generalised slump in the stock markets in 2008. Vallourec s share price performance suffered in the second half of the year, in line with the other stocks in its sector. Financial calendar 13 May 2009: release of 2009 first quarter results 4 June 2009: Annual General Meeting 30 July 2009: release of 2009 first half results 24 September 2009: Investor Day Contact Etienne Bertrand 27, avenue du Général Leclerc 92100 Boulogne-Billancourt Tel: +33 (0)1 49 09 39 76 Email: etienne.bertrand@vallourec.fr Full information is available on the Group website at: www.vallourec.com 12 November 2009: release of 2009 third quarter results
Corporate governance Since June 1994, Vallourec has been governed by a Management Board and a Supervisory Board, which together provide for balanced management that safeguards the shareholders best interests. The Supervisory Board and its Committees The Supervisory Board (at 1 April 2009) The Supervisory Board met nine times in 2008. The absentee rate is very low and members who could not attend always appointed a proxy to represent them. Chairman Jean-Paul Parayre, Member of the Supervisory Board of Peugeot SA and Chairman of the Supervisory Board of Stena Maritime. Vice-Chairman Patrick Boissier (1), Chairman and Chief Executive Officer of DCNS. Members (2) Michel de Fabiani (1), Director of BP France and Rhodia. Denis Gautier-Sauvagnac (1). François Henrot, Managing Partner of Rothschild & Cie. Edward G. Krubasik (1), Vice-Chairman of the Federation of German Industries (BDI). Jean-Claude Verdière (1), Managing Director, Member of the Management Board of Vallourec until 30 June 2001. Société Bolloré (1), represented by: Thierry Marraud, Chief Financial Officer of the Bolloré group. Honorary Chairman Arnaud Leenhardt, Chairman of Vallourec s Board of Directors from 1981 to 1994, then of its Supervisory Board from 1994 to 2000. Censeurs (non-voting Board members): Arnaud Leenhardt, Chairman of Vallourec s Board of Directors from 1981 to 1994, then of its Supervisory Board from 1994 to 2000. Luiz-Olavo Baptista, Lawyer (OMC, ICSID, UNCC, ICC) and Professor of International Law. (1) Independent members within the meaning of the AFEP/MEDEF code of corporate governance. (2) The Supervisory Board s composition was completed on 13 May 2009 by the cooption of Jean-François Cirelli to replace Philippe Crouzet, appointed as Chairman of the Management Board with effect from 1 April 2009.
Vallourec annual report 2008 11 The Supervisory Board meeting of 6 April 2009 approved the agenda for the annual General Meeting to be held on 4 June 2009. The Board also verified that the principles applied by Vallourec in the area of remuneration and pensions for members of the Management Board complied with the AFEP/MEDEF code. Special Committees The Supervisory Board has set up three committees: the Finance Committee, the Appointments and Remuneration Committee and the Strategy Committee. These committees have an advisory capacity and prepare certain Board meetings. They issue proposals, recommendations and opinions in their respective areas. The duties of these committees are approved by the Board. The Finance Committee is composed of Messrs Jean-Claude Verdière (Chairman), Edward G. Krubasik and Thierry Marraud, i.e. three independent members out of a total of three. It advises the Supervisory Board on the relevance and consistency of the accounting methods adopted for the preparation of the Vallourec company and consolidated financial statements, particularly at the time of publication of the annual and half-year financial statements. It met five times in 2008. This Committee is informed of changes in the main financial aggregates and reviews the various elements of the Group s financial strategy. The Finance Committee supervises the selection of the Independent Auditors and issues an opinion on the fees charged. The Chairman of the Supervisory Board may decide to refer to the Finance Committee any issue requiring the Board s prior approval (transactions affecting the share capital, etc.), as well as any proposed acquisitions of significant value. The Appointments and Remuneration Committee is composed of Messrs. Jean-Paul Parayre (Chairman), Patrick Boissier, Michel de Fabiani and Jean-Claude Verdière, i.e. three independent members out of a total of four members. It met five times in 2008. Its duties are as follows: Appointments: preparation of the procedure used to select members of the Supervisory Board and Management Board and proposals for appointments and re-appointments. The Committee s choice of candidates for appointment as members of the Board takes into account, in particular, the desired balance of the composition of the Board in view of the composition of, and changes in, the Company s shareholder base. Remuneration: proposals concerning the amount and allocation of attendance fees paid to Board members, proposals concerning the remuneration of the Chairman of the Supervisory Board and of Committee members, opinion on the remuneration of members of the Management Board and on the Group s share subscription and share purchase options policies and allocation of bonus shares. In addition, the Committee is informed of decisions relating to the members of the Executive Committee and of their remuneration and succession plan. The Strategy Committee is composed of Messrs Edward G. Krubasik (Chairman), François Henrot and Jean-Claude Verdière, i.e. two independent members out of three. The Strategy Committee contributes to drawing up the Group s broad strategic orientations and its long-term strategy. It met 4 times in 2008.
Executive Committee members Philippe Crouzet, Jean-Pierre Michel, Olivier Mallet, Flavio de Azevedo, Pierre Frentzel, Jean-Yves Le Cuziat, Jean-Louis Merveille and Philippe Roch.
Vallourec annual report 2008 13 Corporate governance Management team The Management Board was renewed with the appointments of Philippe Crouzet as Chairman, Chief Executive Officer, Jean-Pierre Michel as Chief Operating Officer and Olivier Mallet as Chief Financial Officer, thereby combining wide-ranging business experience, expertise and in-depth knowledge of the Group in a spirit of continuity and complementarity. Vallourec has also adapted the composition of the Executive Committee to the Group s international profile with the aim of optimising operating efficiency. The Executive Committee is supported by a Strategy Group made up of the Executive Committee members and nine members representing the Group s main support functions. Management Board The Management Board comprises three members (1 April 2009): Philippe Crouzet, Chairman of the Management Board, Chief Executive Officer. Jean-Pierre Michel, Member of the Management Board, Chief Operating Officer. Olivier Mallet, Member of the Management Board, Chief Financial Officer, Legal and External Communication. Executive Committee The Executive Committee comprises the three members of the Management Board and the following five members (1 April 2009): Flavio de Azevedo, Chief Executive Officer of V & M do Brasil. Pierre Frentzel, Managing Director, Oil & Gas Division. Jean-Yves Le Cuziat, Managing Director, Energy & Industry Division. Jean-Louis Merveille, Director, Human Resources. Philippe Roch, Chief Performance Officer, Director, Controlling and Quality, Marketing and Purchasing. Strategy Group In addition to the members of the Executive Committee, the Strategy Group was composed of the following members as at 1 April 2009: Aude Baragnon-Bordessoule, Director, Financial Department. Etienne Bertrand, Director, Investor Relations, in charge of External Communication. Alain Dieulin, Director, R&D Department. Philippe Dupeyré, Group General Counsel Legal Department. Christian Galichon, Director, Purchasing Department. Geoffroy de Grandmaison, Director, Marketing Department. Eddy de Kerland, Director, Controlling and Quality Departments. Christophe Prasser, Director, Technology and Investments. Gérard Terneyre, Director, Strategy and Development.
A Group prepared for future challenges
Appropriate strategic choices Vallourec has undergone a thorough transformation since 1997, when it merged with Mannesmann, thereby paving the way for becoming the world leader in seamless steel tubes. The expansion that followed, notably in Brazil, the United States and China, have strengthened the Group s international base, enabling it take key positions in strong growth markets, particularly the energy market. Creation of a world leader Key events 1997 Merger of Vallourec and Mannesmann s seamless tube activities in a joint venture called VALLOUREC & MANNESMANN TUBES (V & M TUBES), 55%-owned by Vallourec. 2000 Acquisition of Mannesmann s Brazilian activities, renamed V & M do BRASIL. Vallourec is the only producer of seamless tubes in Brazil. 2002 Acquisition of North Star Steel s assets from Cargill and creation of V & M STAR. Vallourec becomes the second-largest producer of seamless tubes in the United States. 2005 Vallourec acquires Mannesmann s remaining 45% stake in V & M TUBES, thereby obtaining full ownership of V & M TUBES manufacturing assets and full control over its strategy. 2002-2007 Creation in China of five tube production and finishing units catering mainly for the country s domestic oil and gas and power generation markets, as well as two service companies. A coherent strategy All the recent decisions are consistent with the four pillars of Vallourec s strategy: growth, innovation, competitiveness and customer proximity. Growth The growth strategy took concrete form with the acquisition in May 2008 of three US companies with premium positions and offering an excellent fit with Vallourec s existing activities in the North American Oil & Gas market. The Group rapidly decided to merge VAM USA with V & M Atlas Bradford, one of the acquired companies, in order to speed up integration of the premium joints range, combine the Group s R&D capacities and achieve industrial and marketing synergies. Innovation Innovation enables Vallourec to sharpen its technological edge and respond more effectively to customer needs. The expanded tube technology marketed to Saudi Aramco is a good example. In particular, it enables the user to repair damaged wells and increase their productivity by sinking a pipe, which is then expanded using a ball to cover the well walls. To this end, Vallourec has worked on a new range of carbon steels and special joints that support very severe deformations. Competitiveness To enhance its competitiveness, Vallourec has reached a partnership agreement with Sumitomo Metals to create a new, stateof-the-art integrated plant in Brazil, which will mainly produce premium tubes for the more difficult applications in the oil and gas market. It will enjoy optimum conditions in terms of supply, logistics, infrastructure, expertise and skilled labour. Proximity Vallourec has notably invested in boosting its finishing capacity. OCTG threading units have been set up close to customers operations to provide them with even better service quality. The new threading unit in Nigeria is a clear example of this approach.
Vallourec annual report 2008 17 Edouard Guinotte, Head of Strategy and Development at the Oil & Gas division As the world s leading manufacturer of seamless stainless steel tubes, Tubacex is an ideal partner with which we have signed a long-term cooperation agreement. This industrial and commercial agreement will expand our offer in the areas of tubes for oil and gas and power plants by including very high value-added stainless steel tubes. Strong positions in markets with long-term growth potential Vallourec is co-leader in the global seamless steel tube market, with a market share of around 10%. In particular, it specialises in products for deep offshore, difficult, corrosive, and deviated wells for the oil and gas industry. It is also the world leader in tubes for power plants, both thermal and nuclear. Vallourec also has strong positions in the mechanical engineering, petrochemicals and building sectors. It has, however, sold most of its businesses in the European automotive sector. Strengthening our leadership in premium tubes
Growing energy markets The world demand for energy is structurally on the rise, driven both by demographic growth and the industrialization of emerging countries. For some 25 years, consumption has progressed steadily and the present slowdown, estimated (1) at -0.4% in 2008 and -1.5% in 2009, does not call into question the factors underlying this basic trend. Growing demand generates major equipment needs Fossil fuels oil, natural gas and coal will remain the main source of energy in coming decades for lack of alternative solutions. Demand for oil should stay robust, especially in the transport sector, while demand for gas will likely continue its upward trend, largely due to its environmental attractiveness. The rising demand for oil and gas, together with the normal depletion of existing wells, requires continuous drilling and generates an ongoing need to renew drilling and well equipment. Growing demand for electricity is also creating a strong need for tubes designed for power plants. China has increased its investments in recent years in response to growing urbanization. In developed countries, renovation of existing power plants, built over the past 40 years, is also driving growth in this segment. Moreover, many countries have launched programmes to build nuclear power plants, with a view to securing energy supplies and reducing CO2 emissions plants for which Vallourec supplies a complete range of tubular products. (1) Estimates, International Energy Agency March 2009.. Vallourec: playing a key role in the energy challenges of tomorrow
Vallourec annual report 2008 19 Growth in energy demand + 27 % + 11 % Source: AIE/BP stat review Toe: tonne of oil equivalent 2030 1.9 toe per capita 8.2 billion inhab. 15.3 billion toe 2000 1.5 toe per capita 6 billion inhab. 9.2 billion toe 1970 1.35 toe per capita 3.7 billion inhab. 5 billion toe Energy resources more difficult to exploit combined with more stringent environmental requirements Recently discovered oil and gas fields are more and more difficult to access and operating them has become increasingly complex. Well equipment must meet ever more stringent specifications, both technical (deep offshore, corrosive environments, deviated wells) and environmental (pollution risk management). The new supercritical and ultra-supercritical power plants provide improved energy efficiency while meeting stricter environmental standards. These facilities require tubes capable of withstanding increasingly high pressure and temperature conditions, a Vallourec speciality. The resurgence of nuclear energy is also fuelling much stronger demand for special tubular products. Vallourec: ideally positioned to meet current challenges Innovative, high-tech products will play a key role in exploiting future oil and gas fields and in the new generations of power plants. For this reason, the Group is giving top priority to premium tubes and joints, whose alloy steel grades and the heat treatment to which they are subjected will enable us to meet the most stringent safety standards. Over the past five years, the Group has invested over 300 million in research and development. Antoine Durand, Oil & Gas pre-salt Project manager Vallourec has been operating in Brazil for many years and we are working closely with our long-standing partner, Petrobras, to prepare the pilot production phase planned for the Tupi field in 2010. Vallourec has set up a 50-member R&D team to allow Petrobras to benefit from its expertise in deep offshore wells and rise to this technological challenge together. Rising to the challenge The Tupi oil field, located off the Brazilian coast, ranks as the second largest oil discovery of the past 20 years. Estimated reserves of 5 to 8 billion barrels of oil are to be compared to Brazil s proven reserves previously estimated at 12.2 billion barrels. Tupi alone presents all the major challenges raised by oil exploration and production. Petrobras, Brazil s national oil company, will require a very specific tube and joint architecture to explore the hydrocarbons buried under 2,000 metres of water and 2,000 metres of salt an environment that presents high collapse risks for the tubes in addition to the usual deep offshore problems of pressure, temperature and corrosion.
Advanced manufacturing facilities Vallourec s advanced production facilities use cutting-edge technologies to manufacture seamless steel tubes. Upstream integration allows the Group to manage the complete manufacturing process: effective control over most steel procurement flows, upscale rolling mills, finishing capabilities and services to customers. Investing in PFP TM to meet specific customer needs A unique new tool consisting of a piercing mill combined with a forge began operating at the Aulnoye plant in 2008. The new PFP TM («Premium Forged Pipes») installation was built at a cost of 52 million and has an annual production capacity of 100,000 tonnes of tubes. The vast majority of the steel required by Vallourec is produced within the Group Vallourec Group operates four integrated steel mills: Saint-Saulve in France, Belo Horizonte in Brazil, Youngstown in the United States, and a 20% stake in the German steelmaker HKM. The round steel bars (or billets) produced by these four mills covered more than 80% of Vallourec s steel requirements in 2008. This strategy enables the Group to control the quality and grades of the steel used in its tube manufacturing processes. Brazil unique situation Vallourec owns the Pau Branco iron ore mine in Brazil, which provides all of V & M do Brasil s iron ore requirements. Furthermore, the Barreiro steel mill uses charcoal rather than coke in its blast furnaces. In order to produce the charcoal needed for this process, V & M do Brasil cultivates around 100,000 hectares of eucalyptus forest. As the trees grow, they consume carbon dioxide and release oxygen, which directly helps to reduce the greenhouse effect. Upscale pipe mills Vallourec has ten fully automated pipe mills, allowing the Group to produce the world s most extensive range of pipes in terms of diameters, thicknesses and steel grades. Several different manufacturing processes are used, among which the two most widespread are continuous hot rolling and mandrel rolling. Where appropriate, alternative processes are used, such as the pilger rolling mill at the Rath plant in Germany, which produces tubes measuring up to 711mm in diameter, or the piercing and hot drawing process used in Reisholz to manufacture very large tubes (up to 1,500 mm in diameter and 250 mm thick).
Vallourec annual report 2008 21 The Group s main facilities are ISO 14001 certified Stefan Wiedenmaier, PFP TM Process manager at Aulnoye The main innovation is the pioneering use of a forging process to manufacture tubes rather than billets. The four hammers reduce the workpiece s external diameter and the mandrel determines the internal diameter. The manufacturing process is simpler with only three hot operations instead of six and we can handle tailored orders to satisfy certain special customer requirements. Finishing units on every continent After rolling, tubes undergo inspection and finishing. The Group has invested particularly heavily in this area, and now has 26 finishing units equipped with stateof-the-art technology. These facilities include heat treatment units, which strengthen premium tubes and ensure they have the required mechanical properties, and threading lines (installed either at the production facility or near the customer s facilities), which serve the needs of the oil industry in particular. Two balanced steel billet manufacturing processes Vallourec produces steel using two processes with different raw materials, thereby spreading the procurement risks. Pig iron process (55% of internal steel production) A mixture of iron ore and carbon is heated in charcoal or coke-fired blast furnaces to initially produce liquid pig iron. The oxygenation process, combined with the addition of alloying metals and 15-20% of scrap metal, yields liquid steel that can be cast into steel billets. Vallourec uses this manufacturing process in Germany and Brazil. Scrap metal process (45% of internal steel production) Scrap is melted in electric arc blast furnaces, mixed with various alloying metals to form liquid steel and then cast into steel billets. This process is employed at the Vallourec steel mills in France and the United States.
A global player Vallourec operates in 11 countries and owns 51 production sites, four of which manufacture steel. Main customers Oil & Gas Companies Aramco Petrobras Shell Sonatrach Total Oil & Gas Distributors Champions Pipe & Supply Pipeco Services Premier Pipe Pyramid Tubular Products Power generation Areva Alstom Bharat Heavy Electricals Dongfang Hitachi Power Trading companies Açotubo Buhlmann Minmetals Steel Salzgitter ThyssenKrupp Van Leeuwen Consolidated sales (in million) Vallourec generated sales of 6.44 billion in 2008, a rise of 4.8% (up 6.3% at comparable scope) due to the combined effect of higher prices and an improved product mix. 2008 6,437 2007 6,141 2006 5,542 2005 4,307 2004 3,038 Sales per market For the year as a whole, the Group s growth was driven largely by the Power generation (up 16.9%) and Petrochemicals markets (up 10.6%), while Oil & Gas sales grew by 4.9%. As a proportion of sales, energy (Oil & Gas and Power generation) now represents 66.4% of Vallourec sales. 20.3 % Power generation 11.1 % Mechanical engineering 10.7 % Petrochemicals 46.1 % Oil & Gas 6.1 % Other 5,7 % Automotive
Vallourec annual report 2008 23 Sales per region North America s share of sales rose in 2008 (23.7% versus 18.6% in 2007) due to acquisitions in North America and the firm trend in the OCTG market in the United States. Sales generated outside the European Union now account for 65.7% of total sales, compared with 60.5% in 2007. 17.8 % Germany 20.5 % Asia and Middle-East 5.6 % France 10.9 % Other EU countries 7.0 % Rest of world 14.5 % South America 23.7 % North America
An increasing focus on energy
Oil & Gas Vallourec ranks among the world s leading manufacturers of tubes and joints for oil well equipment and operations. It is also the no. 2 producer of drill pipes worldwide. The tubes that Vallourec designs and develops for the oil and gas industry are essentially seamless threaded tubes, called OCTG (Oil Country Tubular Goods). These tubes, made with standard threading or VAM special joints, are used in oil and gas well equipment and operations. Vallourec is a global specialist in products for deep, difficult, corrosive and deviated wells, particularly gas wells, which require a perfect sealing mechanism on drill pipes. The Group also offers a range of related services to oil companies to support their exploration and production activities.
Vallourec annual report 2008 27 Main Vallourec products Oil Country Tubular Goods (VAM special joints, API and Buttress standard threading) -Casing -Tubing Tubes and accessories for drill pipes (heavyweight drill pipes, drill collars, etc.) Special line pipes, risers Trends in Oil & Gas sales (in million) 2008 2,969 2007 2,830 2006 2,683 2005 1,829 2004 1,106 Oil & Gas as a proportion of Vallourec s 2008 sales 46.1 %
Oil & Gas In 2008, the Vallourec Group achieved sales of 2,969 million in the Oil & Gas sector, a rise of 4.9% over 2007. This performance was driven by the combined effect of very strong demand and sharp price rises against a backdrop of increasing raw material prices. What are our tubes used for? The new VAM HTF (High Torque Flush) premium connection is particularly suitable for use in so-called deviated oil wells, thanks to its remarkable torque strength. It was first installed in September 2008, in an onshore well in Texas operated by Devon Energy. In focus VAM has been the leader in the premium connections market for more than 40 years VAM products take their name from the initial letters of Vallourec (V) and Alexandre Madrelle (AM), who led the team tasked with developing the joint in the 1960 s. The VAM connection is a threaded fitting. The conical design of the thread ensures a tighter seal by allowing the joint to withstand greater pressure at the contact surface formed by the threads on the tube and the joint. Around 80 patents relating to VAM connections have been taken out since development of this product family began. Strong demand in all regions Demand for tubular goods by oil companies was very high throughout the world. There was growth in the offshore business, especially along the coasts of Brazil and Angola. Regarding onshore activities, the proportion of non-vertical wells continued to increase, particularly in North America, foreshadowing a rise in the share of premium products a segment in which the Group has a particularly strong position. Extended local coverage Against this backdrop, Vallourec continued to roll out its international growth strategy, opening locations in the immediate vicinity of oil and gas wells. In addition to purchasing three companies specializing in threading and tubing accessories in the United States, the Group consolidated its operations in several regions, opening sales offices in Nigeria, Russia and Angola, and establishing service centres in Duisenbeck in Norway, Onne in Nigeria and Luanda in Angola. Responding to the needs of its customers, Vallourec also decided to set up a threading facility in Nigeria (see Focus). Sustained sales activity The American market remained dynamic, despite being hit by two hurricanes. Demand remained buoyant, particularly in the second half, enabling the Group to keep prices high. In other regions of the world, Vallourec expanded its activities by signing contracts with new customers or in new fields, in particular in the United Kingdom, Norway, Russia, CIS countries, Angola, Algeria and Egypt. More and more requests are specific in nature: in Russia, for example, the Group supplied products designed for use at very low temperatures, whereas in China, products suitable for use in a corrosive environment (acidic wells) were required. Sales of drill pipes and drilling accessories also benefited from underlying trends in the oil and gas market, with good sales performances until mid-2008. Moving into 2009, the Group experienced a fall in new orders, attributable to high stock levels at US distributors and a «waitand-see» attitude by some customers. A sustained research and development programme Vallourec developed and successfully marketed several new products, including the VAM HTF premium connection (see Applications for our tubes ) and VAM Express, a high-performance connection with the necessary torque strength to allow larger holes to be drilled. As a result of these new products, the Group is well placed to satisfy oil industry requirements while retaining its technological lead over its main competitors.
Vallourec annual report 2008 29 Judson Wallace, President of VAM USA LLC The excellent fit between Atlas Bradford joints and the VAM range quickly led us to merge VAM USA with V&M Atlas Bradford. VAM USA LLC, the new joint business unit, now has a comprehensive and perfectly-integrated product range, as well as additional R&D resources and a stronger sales force. The company is now fully equipped to provide a first-rate service to our North American customers. New horizons While undoubtedly notable for the technical challenges that they represent, Brazil s Tupi, Jupiter and Carioca offshore fields also offer great potential for the coming years, due to the scale of their estimated reserves (see Focus on Tupi, p.19). Vallourec, which has already set up joint R&D teams with Petrobras and recorded its first orders for premium tubes to develop the Tupi field, is particularly well placed to capitalize on these new deposits. In focus A recent investment in a new threading plant in Nigeria The new premium tube threading unit, located in the tax-free zone at Port Harcourt in Nigeria, will begin operating in 2009. The aim is for Vallourec to be able to provide customers operating in this area with an integrated logistics solution that, in addition to the actual threading operation, will offer a series of related services such as storage, inspection, preparation and transportation of products to the wells where they are needed.
Power generation Present during all phases, from the construction of new power plants to the upgrading and maintenance of existing facilities, Vallourec is the world leader in tubes for the power generation industry, far ahead of its competitors. Vallourec supplies tubes capable of withstanding the extreme temperature and pressure conditions found in power plants, whether conventional, combined cycle or nuclear. Tubes are available in a range of materials (carbon steel, alloy steel, stainless steel, titanium and nickel); all shapes (smooth, rifled or finned); and for all applications, including boilers, condensers, header pipes, steam generators, feedwater heaters, superheaters and instrumentation. Vallourec is the only supplier in the world capable of providing the entire spectrum of tubes used in a power plant.
Vallourec annual report 2008 31 Main Vallourec products Seamless carbon alloy steel tubes Welded titanium and stainless steel tubes nickel alloy tubes Trends in Power generation sales (In million) 2008 1,308 2007 1,119 2006 903 2005 724 2004 467 Power generation as a proportion of Vallourec s 2008 sales 20.3 %
Power generation The Group generated sales of 1,308 million in the Power generation sector in 2008, an increase of 17% compared with 2007. Its sales in this industry thus grew by a factor of 4.5 over five years between 2003 and 2008. What are our tubes used for? The Group is supplying tubes for the third EPR (European Pressurized Reactor) unit in Flamanville, France, a power plant with a third-generation nuclear reactor and a capacity of 1,650 MW, scheduled for start-up in 2012. Vallourec is providing the plant s main tubular components: Valinox Nucléaire is producing nickel alloy tubes for the steam generators; Valtimet is manufacturing ferritic, stainless steel finned tubes for the moisture separators reheaters as well as bent pipes for the feedwater heaters and welded titanium tubes for the condensers; and V & M Tubes is providing water and steam pipes. In 2008, Vallourec continued to enjoy the buoyant market it experienced in 2007. Prices remained high, while the growing sophistication of power plants led to continuing improvement in the product mix. New power plants under construction worldwide In the area of fossil fuels, demand mainly involved supercritical plants, whose pressures and temperatures are increased to achieve greater efficiency and reduce polluting emissions. These new-generation plants require alloy steel tubes and the Group is well-positioned to provide them. Vallourec benefited from both capacities additions in certain countries, particularly South Africa, and the construction of new power plants in Europe to replace obsolete capacities. As an example, large orders, which will be fulfilled over the next two to three years, were signed in South Africa to supply equipment for 12 units with a capacity of 750 MW each, in Germany (two 800 MW units) and the Netherlands (three 800 MW units). The Group also won two major contracts in the United States (four 300 MW units) and Southeast Asia. In early 2009, some projects were postponed, mainly for financing reasons related to the economic crisis, which has resulted in a decline in order intake. In the United States, no coal-fired plants are scheduled for 2009 as the industry awaits new CO2 regulations. These rules, however, are likely to favour the combinedcycle and maintenance market, which is another of Vallourec s areas of operation. Good long-term visibility In the field of power generation, whether conventional (fossil fuels) or nuclear, average construction time is several years and the visibility on overall market trends is good. The Group benefits from recognized expertise and patented, authorized and certified high-end products, which provide optimal safety and are perfectly adapted to new-generation plants. Moreover, the location of its plants France, Germany, United States, Brazil, China, South Korea and India enables Vallourec to operate in close proximity to its international customers.
Vallourec annual report 2008 33 In focus The return of nuclear energy Gérard Kottmann, Managing director of Valinox Nucléaire Nuclear energy is recovering so fast that the 30% hike in Valinox Nucléaire s capacity achieved by the end of 2007 was used up in 2008. The investment announced in March 2009 will enable us to increase our annual tube production capacity at the Montbard (Côte d Or, France) plant from 1,800 km in 2008 to 4,500 km in 2011. It s an exciting project for Vallourec because it provides a good growth opportunity in a strategic business, and also for the Burgundy region since it will create jobs. The market for steam generator tubes used in nuclear power plants is restarting. In 2008, the Group delivered a record amount of nickel alloy tubing. Intake of new Chinese orders as well as the continued upgrading of EDF s nuclear plants ensure Valinox Nucléaire a workload of more than two years. This trend is also creating greater demand for welded titanium and stainless steel tubes to the benefit of Valtimet, the global market leader. EDF s acquisition of British Energy in the UK, the French government s announcement of new EPR units, China s stepped-up programme and the growing number of countries interested in nuclear energy all bode well for longterm growth.
Vallourec is active in all steel tube applications in the Mechanical engineering sector, including cranes, hydraulic cylinders, mining equipment and agricultural machinery. The majority of sales are made through European distributors. Main Vallourec products Tubes in standard or special grades and standard or custom sizes Hot-rolled tubes Cold-rolled rings Applications Tubes for cranes Hollows for machining Tubes for hydraulic cylinders Shafts and components for machinery and mechanical assemblies Tubes for bearings Mechanical engineering sales (in million) 2008 713 2007 707 2006 593 2005 573 2004 428
Vallourec annual report 2008 35 Mechanical engineering After a period of uninterrupted growth that had lasted since 2003, the Group s sales in the Mechanical engineering field stabilised in 2008. Sales amounted to 713 million - essentially the same as in 2007 and were affected by a downturn in the fourth quarter. The distribution chain plays an important role in this local and often fragmented market, by grouping together orders from end users that generally only require small quantities. Seamless tubes are used in a wide range of engineering applications. They offer excellent mechanical properties compared with alternatives such as welded tubes, pierced steel bars, cold-drawn tubes and forged or formed tubes. What are our tubes used for? Tubes of various diameters and thicknesses are used to manufacture lattice booms for Liebherr crawler cranes. These giant cranes, which stand 228 m tall and have a maximum lifting capacity of 1,350 tonnes, can raise a 330 tonne load to a height under hook of 120 m. Such capabilities make these cranes ideal for erecting wind turbines, for which demand is currently growing. Mechanical engineering as a proportion of Vallourec s 2008 sales 11.1 % Vallourec leads the field in seamless tubes for mechanical applications, ahead of its European, American, Japanese and Chinese competitors. The Group, via its subsidiary Valti, is also Europe s secondlargest supplier of hollows for ball-bearings. The downturn in activity observed at the end of 2008 has persisted in the opening months of 2009, although sales of tubes for cranes and mine props have held up well. The issue of destocking by distributors, which is affecting sales of tubes, has been compounded by a slowdown in the European market. Deliveries to Germany, in particular, are suffering from a decline in export orders for German durable goods attributable to the global economic crisis. Thomas Müller, Cranes Product manager We have been able to design tubular solutions suitable for the crane market, thanks to the very close working relationships between our product development staff, our distributor ThyssenKrupp and the crane-maker Liebherr. The three companies have cooperated efficiently at every stage in the process, from identifying the customer s needs to catering to some very specific logistics requirements. This constructive dialogue has been a key success factor for us.
Vallourec produces an extensive range of carbon, alloy, stainless steel and titanium products. These products are mostly used for pipework in chemical and petrochemical installations, notably refineries. They are used worldwide both for new plants and the maintenance of existing plants. Main Vallourec products Line-pipes for refineries Furnace tubes Heat exchanger tubes Fittings Trends in Petrochemical sales (In million) 2008 691 2007 625 2006 634 2005 461 2004 334 Petrochemicals as a proportion of Vallourec s 2008 sales 10.7 %
Vallourec annual report 2008 37 Petrochemicals Petrochemical sales came to 691 million in 2008, an increase of 10.6% over 2007. Vallourec supplies products for new installations as well as the maintenance, upgrading and expansion of existing petrochemical plants. Products are sold through distributors in all of our markets. What are our tubes used for? Vallourec is supplying some 3,500 tonnes of tubes for Total s Port Arthur Deep Conversion Project. With this project, Total will be able to increase by over 3 million tonnes the capacity of its Texas Port Arthur refinery in the United States to process ultra-low-sulphur diesel fuel, thereby reducing the facility s environmental impact. The unit will begin production in 2011. In addition to our primary markets covering traditional refining and petrochemical needs, a growing number of applications for gas liquefaction plants are being developed. End-customers technical requirements are changing, driving Vallourec to develop specific applications in order to offer increasingly high-end solutions. Armed with this expertise, the Group is boosting its competitive edge and market share and increasing the proportion of premium products (alloy steel and treated tubes) in overall sales. The European market contracted in 2008, but this was offset by strong sales in the Middle East driven by a large number of projects involving new refining capacities. Business also held up well in Asia. Stable in the first half of the year, the North American market experienced a temporary upturn in the second half, largely due to inventory adjustements. The petrochemical business nevertheless experienced a clear downturn in early 2009, caused by falling demand due to lower refining margins and difficulties in financing new projects. Destocking by distributors has accentuated this trend. Alain Gardinier, Petrochemicals Marketing manager By bringing their often antiquated installations into compliance with new standards, European refiners are taking advantage of the opportunity to adapt their production capacity to demand. There is an increasing demand for diesel, which requires using oil s heaviest fractions to produce fuel (conversion). But certain conversion processes, like hydrocracking, operate under high pressure and temperature conditions in a corrosive environment, which requires top-quality tubes like ours.
Vallourec supplies automotive tubes and components to major carmakers and parts manufacturers in Europe and Latin America. The Group works with customers engineering offices to develop innovative and customized solutions. Main Vallourec products Seamless tubes. Forged tubes. Tubes for braking systems. Injection tubes. Applications Chassis, suspension and transmission parts. Structural and passive safety parts. Shock absorbers. Bearings. HGV axles. Automotive products sales (in million) 2008 365 2007 513 2006 463 2005 483 2004 501
Vallourec annual report 2008 39 Automotive industry Sales by Vallourec to the Automotive industry fell by 28.8% in 2008 compared with 2007. This drop was mainly due to the disposal of a substantial part of the Group s European activities in 2007 (Vallourec Précision Etirage in July, followed by Vallourec Précision Soudage and Vallourec Composants Automobile Vitry in December). Automotive products now account for less than 6% of Vallourec s total sales. What are our tubes used for? In Brazil, Vallourec supplies tubular automotive parts to major car makers such as Fiat, Toyota and Volkswagen. More specifically, the Group produces a wide range of car parts including tubes for diesel injectors, bearing rings and drive shafts, which are used, for example, in the new Volkswagen Golf being manufactured in Brazil. Automotive products as a proportion of Vallourec s 2008 sales In Brazil, which is home to most of the Group s automotive business, sales previously buoyed by a booming car market suffered a sharp downturn at the end of 2008. This slowdown was particularly severe for private cars and motorbikes, due to the ligthening of consumer credit. In contrast, the agricultural machinery and heavy plant segment continued to grow in 2008, and Vallourec activity levels were boosted by the arrival of two new customers: Caterpillar and John Deere. In the heavy trucks segment, the Group was able to maintain its market positions by developing new products and expanding its work for Mercedes. Following the disposals of 2007, Vallourec s European automotive activity is limited to the production of redraw hollows and bearing tubes, which represent only a small share of Group sales. Orders in these segments suffered from the sharp slowdown in the European car market. This weakness has carried over into 2009, with stocks remaining high throughout the automotive supply chain. Pedro Figueiredo, Head of Automotive and Precision tubes in Brazil In 2008, we successfully expanded our activities in the market for agricultural machinery and construction site vehicles. Vallourec was listed by Caterpillar as a world-wide supplier, and the Group s products were approved by John Deere. We also decided to set up a new car parts department in the State of Rio Grande do Sul, to provide sales assistance and technical support in a region that is home to many manufacturers of agricultural machinery and construction site vehicles. 5.7 %
Vallourec offers a wide range of specific products for various industrial applications. These activities mainly concern structural tubes for innovative architectural projects, industrial installations, public facilities and private sector buildings. Main Vallourec products Structural tubes MSH hot-rolled structural hollow sections Micro-piles (Tecnipile ) Other Markets sales (in million) 2008 391 2007 247 2006 266 2005 237 2004 201 Other Markets as a proportion of Vallourec s 2008 sales 6.1 %
Vallourec annual report 2008 41 Other markets In 2008, Vallourec recorded sales of 391 million in these markets, a rise of 12.7% over 2007, despite a sharp drop in sales in the fourth quarter. As this segment is largely driven by major projects (for bridges, sports venues, factories and airports, etc.), it is particularly sensitive to changes in the economic climate. What are our tubes used for? Towering tubes! Vallourec is to supply the necessary parts for building the antenna for the planned Freedom Tower in New York. The 124 m antenna will be erected on top of the 541 m sky-scraper that is to be built in place of the Twin Towers. It will be assembled using 480 tonnes of hollow sections manufactured at Aulnoye plants in France and in the company s German factories in Düsseldorf-Rath, Düsseldorf- Reisholz and Mülheim. In the construction field, the Group specializes in sales of upscale tubular products under the MSH brand. The excellent mechanical properties of these products make them ideal for building hangars, warehouses and long-span bridges and walkways. Vallourec has developed a comprehensive, dedicated and coherent offering in this area, backed up by technical support that is genuinely appreciated by customers and seen as offering real added value. Over the past year, Vallourec took part in several projects for companies such as SMS Meer (see testimonial opposite), Siemens, Airbus and Hoesch. Vallourec tubes are also used as structural elements in oil rigs, particularly in South- East Asia. To maintain its competitive edge over more conventional solutions, the Group launched a number of R&D programmes to further enhance the properties of its existing products and extend its range of products and solutions. In parallel, Vallourec formed partnerships to promote its products in France and Germany, while also actively developing its sales network in other countries. Ole Josat, Civilian construction and foundations Product manager In the area of seamless steel tubes for the construction industry, our Preon line a modular system of prefabricated lattice beams has been a resounding success. This solution is proving a popular choice for constructing factories, warehouses and other industrial buildings including the structural frames of our own facilities! For example, some 14,000 tonnes of Preon components will be assembled to form the roof frame for the new Vallourec & Sumitomo Tubos do Brasil rolling mill currently under construction in Jeceaba in the State of Minas Gerais.
A responsible Group
Corporate social responsibility Vallourec anchors its development on the quality of its staff. Committed to its employees involvement and the transfer of expertise, the Group has developed a fair and motivating compensation policy. It is particularly attentive to its staff s hiring, working, training and safety conditions both in France and abroad.
Vallourec annual report 2008 45 Luc Chazot, Project manager, Value 08 plan With 12,200 subscribers in eight countries, the 2008 employee-shareholder plan was a real success and will probably be repeated in 2009. The plan s success was especially significant because it was finalized in late 2008 in the middle of the financial crisis. The goal was to involve as many employees as possible in Vallourec s performance and boost team spirit. By subscribing in such large numbers, employees showed their attachment to Vallourec. It is now up to the Group to build a lasting relationship with employee-shareholders and ensure their loyalty. Workforce grows as Group expands worldwide At 31 December 2008, the Group employed 18,561 people (excluding temporary staff), a 10% increase over 2007 due to acquisitions in North America and business growth in other regions of the world. In addition, the Group continued its efforts to integrate disabled employees, particularly by adapting jobs for personnel with reduced work capacity. Compensation: seeking a balance In 2008, the Group s payroll costs, excluding temporary staff, totalled 857 million, a rise of 4% compared with 2007. Vallourec bases its salary policy on a fair compensation system that takes account of local labour market conditions. In 2008, compensation included 59 million for employee profit-sharing and incentives. Training: a permanent concern to improve skills Working hours: flexible and responsive The Group s policy is designed to be flexible and responsive in line with customer demand. Flexible work patterns enable the Group to tailor its plant operations to production requirements. Most Vallourec sites have adopted continuous production (24 hours a day) five or six days a week with three, four or five shifts. Breakdown of workforce by geographic area 14% North America 31% Brazil Breakdown of workforce by category 22% Technicians, middle managers 8% Managers and experts 52% Europe 3% Asia/Africa 70% Operators Vallourec s training policy aims to reconcile the company s needs with the career aspirations of its staff. In 2008, the Group provided an average of 30 hours of training per employee, representing a training budget equivalent to 3% of total payroll. Work safety: a top priority In 2008, safety training accounted for more than one quarter of the time devoted to all training programmes and involved over three-quarters of the staff, both permanent and temporary. An action plan called Cap Ten Safe was launched with the goal of creating a genuine safety culture at Vallourec. Combining a managerial training programme and an internal communications campaign, the plan has already taken shape with over 500 safety audit and awareness initiatives. The Group intends to seek OHSAS certification for its major industrial sites by 2010. In focus Corporate societal responsibility Our Group s responsibility does not end at the door to our offices and plants. It extends well beyond through its influence on civil society. A partner committed to a balanced development model, Vallourec assigns great importance to the surrounding community and strives to establish relations of reciprocal understanding and trust. The Group is very active in Brazil, where it has created a variety of initiatives, including converting the Cine Teatro building in Belo Horizonte into a cultural centre dedicated to artistic production.
Environmental responsibility Through its environmental policy, Vallourec aims to minimize the environmental impact of its activities at all levels, and treats the well-being of future generations as a major priority. The Group is making constant progress in terms of environmental performance and has won special praise for its approach to issues such as water management in Germany, saving energy in France and cutting greenhouse gas emissions in Brazil.
Vallourec annual report 2008 47 Optimized use of resources In recent years, a series of initiatives have been undertaken to optimize consumption of resources such as water, energy and raw materials, and to improve the conditions in which they are used. Considerable efforts have been made to reduce water consumption at all Vallourec locations, in particular by recycling water and collecting runoff. As a result, water consumption has been practically halved over the eight years between 2000 and 2008, from 3.1 to 1.6 cubic metres per tonne. Green investment In 2008, the Group invested 28.4 million (representing 5.5% of total investment) in projects directly related to environmental and safety issues. These projects involved environmental compliance efforts (fume and dust filters and collection systems, etc.), safety improvements (fire protection systems, etc.), improvements in working conditions (lighting, heating and ventilation), noise abatement and water recycling. Antônio Claret de Oliveira, Head of sustainable development and external relations, Brazil V & M Florestal is a subsidiary of V & M do Brasil that cultivates 100,000 hectares of Brazilian eucalyptus forest as a source of charcoal for the steel mill s blast furnaces. As a result of this approach, we can legitimately describe our products as green tubes, as we use a renewable resource managed in accordance with environmental and social best practices. At the «Earth Dialogues» international discussion forum, the prize for environmental management in the state of Minas Gerais was awarded to V & M do Brasil in recognition of the company s exemplary commitment in this area and the effectiveness of its ISO 14001-certified environmental management system. For more information: Vallourec publishes an annual Safety and Environment report, which can be downloaded from the Group s website. (Paper copies are also available on request.) Lower emissions Vallourec is also working hard to cut pollutant emissions, reduce noise, decrease waste volumes and systematically recover and reprocess residual waste. In particular, significant progress has been made in the area of carbon dioxide emissions, as illustrated by V & M do Brasil s decision to use charcoal from eucalyptus forests in its blast furnaces as a substitute for coke. As they grow, the trees in these forests consume carbon dioxide and release oxygen. The overall carbon balance for the Group s steel manufacturing business in Brazil is neutral, with emissions from the steel mill being offset by absorption in the forest. With regard to implementation of the European Directive on management of carbon dioxide quotas, only the Saint-Saulve steel mill was affecteded in 2008, and managers at the mill took firm action by optimizing furnace loading plans and improving energy performance. All the indicators measuring the release of pollutants into the environment comply with regulatory standards, and performance has been consistently improved over the last three years. Products with a direct role in preserving the environment Vallourec develops products that help to preserve our planet s soil, air and water, reflecting the changing requirements in the area of sustainable development. Examples of such products include: The VAM threaded joint, which sets the global benchmark in terms of oil well safety and leak tightness, Various products used to generate clean energy or reduce chemical pollutions, Welded tubes for seawater desalination plants, Steel tubes used to lighten structures (in buildings and vehicles) VM12, a new grade of steel used in next-generation power plants. Certified facilities Regular environmental audits are organized in each country, to assess regulatory compliance, environmental performance and ecological risks. All of the Vallourec Group s main facilities had obtained ISO 14001 certification by the end of 2008, with certification at a few smaller sites scheduled for 2009. In focus The GreenHouse project As we shift to an economy in which the effects of global warming are a central consideration in strategic decision-making, Vallourec has launched the GreenHouse project, the main aims of which are to implement the new European Directive, cut the company s energy consumption by 20% by 2020, and develop carbon sequestration solutions.
Economic responsibility Economic responsibility consists in ensuring the company s long-term viability, strengthening its ability to compete and developing the conditions necessary for growth. While this responsibility has taken on added meaning in the current economic crisis, Vallourec owes its strength to having long included in its strategy all the factors that make the Group so successful today: a gradual refocus on premium, energy-related business lines; largely self-financed acquisitions; investment in upgrading and increasing the capacity of its production plants; debt control, and cost reduction.
Vallourec annual report 2008 49 Strong capacity for innovation By placing innovation at the heart of its strategy, Vallourec is ensuring it has the necessary tools to meet future technology challenges and remain the leader in its markets. Between the Aulnoye research centre in France, with its leading-edge technical and simulation resources, and the Group s various divisions and plants, Vallourec employs more than 500 engineers and technicians whose sole objective is to help customers continually push back their technical frontiers. From special alloys to new manufacturing techniques, the Group has invested over 300 million in research and development over the past five years. Investing in the future Vallourec also invested 528 million in 2008 to upgrade its production facilities and increase finishing capacities, notably in the United States, Europe and China. In Brazil, the Group devoted 116 million to the new Vallourec & Sumitomo Tubos do Brasil pipe mill project. This integrated pipe mill, set to open in 2010, will include a steel mill, rolling mill, and heat treatment and threading lines that will increase the Group s tube production capacity by 10%. Debt control Efficient financial management has enabled the Group to maintain a strong balance sheet and limited debt. At 31 December 2008, net debt totalled 347 million, or 10.7% of equity. Cash exceeded borrowings and bank credit facilities by more than 300 million. Over 94% of the 650 million in borrowings and long-term debts had a maturity of over three years. In addition, Vallourec has approved, undrawn credit lines amounting to some 1 billion, most of which come due between 2012 and 2013. Cost-reduction plan and economic-crisis measures To enhance competitiveness, in early 2008 the Group rolled out a gradual cost-reduction plan with the goal of saving 200 million a year by 2010. The plan involves all the operating and support units. As well as optimizing purchasing and overhead costs, Vallourec is focusing on the following areas: rate of tool use and savings on the consumption of energy and other resources. Additional efforts are aimed at improving quality, safety and productivity. Furthermore, the Group has responded to the fall in volumes resulting from the economic crisis by rapidly taking measures to adjust working hours to changes in production. Industrial investments (in million) 2008 528 2007 438 2006 282 2005 192 2004 103 Net debt (in million) 2008 347 2007-242 2006-41 2005 205 2004-55 Philippe Roch, Executive Committee member and Chief Performance Officer The Chief Performance Officer at Vallourec oversees the Marketing, Purchasing, and Management and Quality Control departments, which are responsible for developing ways of improving the Group s productivity and effectiveness. Our staff s main task in 2008 was to bring together all divisions around the Cap Ten competitiveness plan. This plan is proving its value against a backdrop of falling volumes by mobilising the staff, both to meet short-term challenges and to improve our structural performance. In focus VSB project moving full steam ahead In Jeceaba (Minas Gerais, Brazil), construction of the Vallourec & Sumitomo Tubos do Brasil (VSB) has been making great headway. By year-end 2008, all required licenses had been received or were under review. Excavation and levelling were 80% complete and foundation work was going smoothly.
Balance sheet and income statement Summary consolidated income statement (IFRS - in million) VALLOUREC 2007 As % of sales 2008 As % of sales Change 2008/ 2007 Sales 6,140.5 6,437.0 +4.8% Production taken into inventory 97.7 1.6% 107.1 1.7% Other operating revenues 35.2 0.6% 39.1 0.6% Purchases consumed -2,265.6 36.9% -2,525.6 39.2% +11.5% Taxes and duties -56.2 0.9% -51.6 0.8% -8.2% Payroll costs -827.0 13.5% -856.6 13.3% +3.6% Other operating costs -1,339.8 21.8% -1,442.5 22.4% +7.7% Net provisions -34.0 0.6% -13.0 0.2% -61.8% EBITDA 1,750.8 28.5% 1,693.9 26.3% -3.2% Depreciation -118.0 1.9% -165.6 2.6% +40.3% Impairment of assets and goodwill -21.1-1.4 Asset disposals and restructuring costs 10.9-5.1 OPERATING INCOME 1,622.6 26.4% 1,521.8 23.6% -6.2% FINANCIAL INCOME (LOSS) -29.0-18.8 INCOME BEFORE TAX 1,593.6 26.0% 1,503.0 23.3% -5.7% Income tax -575.3-480.7 Equity affiliates 6.2 2.4 CONSOLIDATED NET INCOME 1,024.5 16.7% 1,024.7 15.9% 0.0% Net income, group share 986.2 967.2-1.9%
Vallourec annual report 2008 51 Summary consolidated balance sheet (IFRS - in million) VALLOUREC 31/12/07 31/12/08 VALLOUREC 31/12/07 31/12/08 Intangible assets 21.7 260.9 Shareholders equity (1) 2,707.8 3,132.8 Goodwill 79.9 308.3 Property, plant and equipment 1,266.0 1,641.0 Minority interests 81.9 99.2 Investments in equity affiliates 55.0 76.9 Total shareholders equity 2,789.7 3,232.0 Other non-current assets 43.0 38.6 Bank loans and other borrowings 337.3 650.2 Deferred tax assets 26.6 36.9 Employee benefits 168.2 146.6 Total non-current assets 1,492.2 2,362.6 Deferred tax liabilities 101.8 84.0 Inventories and work-in-progress 1,168.7 1,443.6 Other provisions and liabilities 7.3 7.7 Total non-current liabilities 614.6 888.5 Trade receivables 1,048.6 1,203.6 Provisions 80.1 93.2 Derivatives - assets 158.1 26.3 Overdrafts and short-term bank borrowings 332.8 224.4 Other current assets 142.8 200.6 Trade payables 671.9 721.8 Derivatives - liabilities 28.1 113.3 Cash and cash equivalents 912.5 528.1 Other current liabilities 405.7 491.6 Total current assets 3,430.7 3,402.2 Total current liabilities 1,518.6 1,644.3 TOTAL ASSETS 4,922.9 5,764.8 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 4,922.9 5,764.8 Net debt -242.4 346.5 (1) including Group share 986.2 967.2
Glossary Alloy: combination of a metal and one or more other chemical elements that acquires greatly enhanced mechanical properties when subjected to mechanical and heat treatments. Billet: section cut from a steel bar (round tube) for the purpose of transforming it into a tube by mechanically working it while hot. Buttress: standard threading for OCTG products. Casing: tubes assembled by means of leak-tight threaded connections to form a column consolidating the walls of an oil or gas well. Supercritical or ultra-supercritical power plant: Enhanced-performance thermal power plants that operate at high temperature (>374 C) and high pressure (>221 bar). The term ultra-supercritical applies to plants operating at temperatures in excess of 600 C. Continuous caster: industrial facility that solidifies metal in a mould in a continuous process, forming long bars. Drill pipe: extremely strong tube used to drill oil or gas wells. Drill pipes are assembled end-to-end to form a drill string, which may be up to 10,000 m long. Hollow: Semi-finished tube, which can subequently be transformed into a product satisfying the specific requirements of a particular market. Threading: machined profile at the ends of tubes, allowing them to be assembled by screwing the male and female parts together. Drilling: use of appropriate tools to penetrate underground formations, whether for geological studies or to remove fluids (oil, gas, water, etc.) from the drilled terrain. Electric arc furnace: furnace designed for smelting scrap metal or prepared ore, in which the main heat source is an electric arc. Blast furnace: reactor that uses carbon (in the form of coke or charcoal) as an iron ore-reducing agent to produce iron. VAM joints: family of premium threaded joints invented and patented by Vallourec. VAM joints ensure a totally gas-tight connection and are suitable for a wide range of demanding applications. Rolling mill: plant where seamless tubes are manufactured in a threestage hot process: 1. pierce the billet; 2. draw the resulting hollow on an internal mandrel; 3. calibrate the final dimensions. Line-pipe : oil and gas transport pipes, generally consisting of seamless tubes in the offshore section and large-diameter welded tubes in the onshore section. OCTG : Oil Country Tubular Goods - casing and tubing products for oil and gas production. Premium : high-performance product - recognized as such by the market - for which a high price is justified. Premium products are manufactured by only a small number of producers possessing the necessary technological and industrial expertise. MSH section: trademark registered by the Vallourec Group for premium structural tubes. Riser: offshore pipe that carries oil extracted from the sea bed to the export facility on the surface. API standards: American Petroleum Institute (API): US organization that produces standards relating to the oil industry. Heat treatment: transformations in the structure of steel obtained by performing heating and cooling cycles for the purpose of improving the steel s mechanical properties. Structural tube (hollow section, micro-pile, etc.): round, square or rectangular hollow sections used in a vast range of applications in the mechanical engineering, construction and civil engineering sectors. Tubing : steel tubes assembled by means of gas-tight threaded connection to form a production string through which fluids are piped from a well bottom to the surface.
Direction and writing: Vallourec, External Communications and Investor Relations - DDB Financial. Design and production: Marie-Louise. Photo credits: Interlinks/Roberto Frankenberg, Ludovic Careme, Laurent Monlaü, Michael Stravato, Bernd Arnold - Franck Dunouau - Dirk Peiper - Patrick Jacob - Gustavo Lovalho - Thierry Truck - Ralph Baiker - Essen Steag - Ulrich Schiller - Peerakit - By courtesy of TOTAL (p.36) - Getty Images/Ron Levine, Michael Banks, Anna Grossman - Corbis - Masterfile - Vallourec, V&M Tubes. FSC certified printing in France. Trademark of the Forest Stewardship Council (FSC) indicates that the wood used to make the 2008 Annual Report comes from a forest which is well managed according to strict environmental, social and economic standards.
Registered Office: 27, avenue du Général Leclerc 92100 Boulogne-Billancourt (France) 552 142 200 RCS Nanterre Tel: +33 (0)1 49 09 39 76 Fax: +33 (0)1 49 09 36 94 Internet: www.vallourec.com French limited liability company (société anonyme) with Management and Supervisory Boards and issued capital of 215,154,864