Q2 / H1 2015 results Investor Presentation 30 July 2015
Information Full year consolidated financial statements at 31 December are audited Half year financial statements are subject to limited review by statutory auditors Quarterly financial statements are unaudited and are not subject to any review Unless otherwise specified, indicated variations are expressed in comparison with the same period of the previous year Information and Forward-Looking Reflections This document contains forward-looking reflections and information. By their nature, these reflections and information include financial forecasts and estimates as well as the assumptions on which they are based, statements related to projects, objectives and expectations concerning future operations, products and services or future performance. Although Vallourec s management believes that these forward-looking reflections and information are reasonable, Vallourec cannot guarantee their accuracy or completeness and investors in Vallourec are hereby advised that these forward-looking reflections and information are subject to numerous risks and uncertainties that are difficult to foresee and generally beyond Vallourec s control, which may mean that the actual results and developments differ significantly from those expressed, induced or forecasted in the forward-looking reflections and information. These risks include those developed or identified in the public documents filed by Vallourec with the AMF, including those listed in the Risk Factors section of the Registration Document filed with the AMF on 10 April 2015 (N D.15-0315). / 2
H1 2015 at a glance
H1 2015 financial results strongly impacted by challenging market conditions In millions of Revenues EBITDA (1) & EBITDA margin (2) Free cash flow (3) 2,693 444 37 2,070 16,5% -13.3pt H1 2014 H1 2015 66 3,2% H1 2014 H1 2015 3 H1 2014 H1 2015-23.1% (-28.7% at constant exchange rates) -85.1% - 34m (1) Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring costs (2) EBITDA over Revenues (3) Non-GAAP measure defined as cash flow from operating activities minus gross capital expenditure and plus/minus change in operating working capital requirement / 4
Vallourec is implementing its plans ACTIONS TO FACE CYCLICAL FACTORS Short term measures Flexibility levers to adapt the mills to the low load, i.e: Reduction in working hours Rolling mills stoppage Advanced maintenance works Reduction in contractors, Focus on cash & liquidity Working capital requirement strong reduction Valens ACTIONS TO FACE STRUCTURAL FACTORS European industrial plan announced in April 2015, European capacity to be reduced by 1/3 rd Costs excl. raw material to be reduced by 10% by 2017 Cash use optimization: capex average of 350m p.a. 2015 capex reduction to around 300m Additional 90m multi-currency revolving facility signed in June 2015 Global staff reduction of 1,600 jobs over H1 2015, incl. close to 1,000 permanent jobs / 5
Valens - Structurally reduce cost base 2014 cost base 2-year cost reduction targets (1) 5,701 >450 initiatives o/w 2/3rd started Targeted savings of 10% of added costs confirmed (1,753) 2% 10% 30m (2,495) 350m 240m 240m (598) 855 Raw materials SG&A & Other (568) 80m 2014 revenues Manufacturing & Direct cost on sales 2014 EBITDA Total Raw materials Manufacturing & Direct cost on sales SG&A & Other (1) Full year effect in 2017, Assuming same volumes & cost base as in 2014 Data presented in millions of, comparison year-on-year / 6
Focus on H1 2015 financial results
Revenues evolution severely impacted by drop in volumes In millions of, comparison year-on-year Lower volumes, notably in the USA and in EAMEA 2,693-31.7% +5.6% +3.0% 2,070 H1 2014 Volume Currency Translation Price/Mix H1 2015 / 8
Revenues breakdown for H1 2015 As % of total Group revenues, and change in % (comparison year-on-year) Revenues by market Revenues by region 28,7% -15.2% 31,7% 66.0% -25.1% 64.3% 18,8% -24.5% 18,5% 4.7% -15.0% 5.2% 10.3% -9.0% 12.2% 19.0% -25.9% 18.3% 24,4% -38.4% 19,5% 8,4% -26.5% 8,0% 19,7% -13.0% 22,3% H1 2014 H1 2015 H1 2014 H1 2015 Oil & Gas Petrochemicals Power Generation Industry & Other North America South America Asia & Middle-East Rest of the world Europe / 9
H1 2015: from Revenues to EBITDA In millions of H1 H1 2015 (1) 2014 Change YoY Revenues 2,070 2,693-23.1% Industrial margin 336 733-54.2% As % of revenues 16.2% 27.2% -11.0pt SG&A (2) (264) (273) -3.3% As % of revenues 12.8% 10.1% +2.7pt EBITDA 66 444-85.1% EBITDA and margin down: Lower revenues: strong negative volume effect, notably in EAMEA and the USA, together with iron ore price decrease in Brazil Mills operating well below production capacity in H1 2015 leading to inefficiencies and under-absorption of fixed costs Lower SG&A (-11.2% y-o-y in Q2) despite unfavourable exchange rates As % of revenues 3.2% 16.5% -13.3pt (1) As concerns the Amendment to IFRS 11, the impact of its application on the consolidated financial statements as at 30 June 2015 primarily translates to a 60 million drop in sales in consideration for purchases; a 165 million drop in non-current assets, in consideration for other provisions and long-term liabilities, and a drop in trade receivables of 33 million, in consideration for trade payables. (2) Before depreciation and amortization / 10
H1 2015: from EBITDA to Net Income In millions of H1 H1 2015 (1) 2014 Change YoY EBITDA 66 444-85.1% Depreciation of industrial assets Other (amortization, exceptional, restructuring, impairment ) (149) (148) +0.7% (145) (31) na Operating income (loss) (228) 265 na Financial income (loss) (37) (31) +19.4% Income tax (15) (74) -79.7% Non-controlling interests (5) 16 na Other charges of 145m mainly composed by restructuring charges and impairment related to the implementation of Valens ( 111m) Stable depreciation of industrial assets Income tax charge down Non-controlling interests: decline in US operations results Net income (loss), Group share (275) 144 na (1) As concerns the Amendment to IFRS 11, the impact of its application on the consolidated financial statements as at 30 June 2015 primarily translates to a 60 million drop in sales in consideration for purchases; a 165 million drop in non-current assets, in consideration for other provisions and long-term liabilities, and a drop in trade receivables of 33 million, in consideration for trade payables. na: non applicable / 11
Free cash flow & net debt In millions of Net Debt as at 31 Dec. 2014 Net Debt as at 30 June 2015 Net debt = 37.1% of equity Cash flow from operating activities Change in WCR (1) Gross capital expenditure Dividends paid Net debt = 42.5% of equity (1,547) (19) +111 (89) (66) Asset disposals & other items Free cash flow = 3m (60) (1,670) (1) Change in operating Working Capital Requirement, +decrease / (increase) / 12
Financial resources as at 30 June 2015 Strong and diversified financial structure Optimized cost of financing 15% Approx. 66% of gross debt raised on capital markets Bank & Other Debt Bond Debt 85% of gross debt is at fixed rate* Comm. Paper Variable rate Fixed rate 85% Long-term committed financing profile 4 000 3 000 2 000 1 000 0 Undrawn committed financing Drawn committed financing 1 835 1 835 1 790 1 190 1 190 1 778 1 770 1 733 1 031 1 017 1 078 605 Jun-15 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Figures as at 30 June 2015, unless otherwise specified *Fixed rate including commercial paper drawn with a 1-12 month maturity / 13
Outlook
2015 Outlook Q3 and Q4 2015 deliveries and margins expected to be significantly below the level achieved in Q2, which will likely result in a negative EBITDA for the full year Based on current market conditions and currency trends, Vallourec continues to target a positive free cash flow generation in 2015 through: operating working capital strong reduction capital expenditure revision to around 300m (vs. 350m initially planned) / 15
Appendix
Strategic Update and 2-year competitiveness plan
Valens: a 2-year global plan to improve competitiveness and drive efficiency Competitiveness plan Valens: 2015-2016 (full year effect in 2017) Costs reduction Cash use optimization Organization efficiency Target vs. 2014 (1) Target from 2015 (2) Effective as at 1 April 2015 350m Normalized capex 350m Leaner organization - 4 regions North America, South America, Eastern Hemisphere, Europe - Central monitoring of industrial resources (1) Full year effect in 2017, Assuming same volumes & cost base as in 2014 (2) Versus previously announced capex target of 450 million / 18
Valens - Reduce added cost base Targets 2015-2016 Base 2014, excl. Raw material In % In m base 2014 Costs reduction Manufacturing & Direct costs on sales SG&A Total 10% 14% 10% 240m (60% variable costs) 80m 320m (50% variable costs) Before inflation, Including avoided costs Full year effect in 2017, Assuming same volumes & cost base as in 2014 All types of costs addressed >450 cost reduction initiatives identified All divisions and regions covered Global project organization structure, dedicated resources to support the implementation, and specific tracking tool Acceleration of the Lean Management approach a significant part of the costs reduction for Manufacturing / 19
Valens - Enforce strict capex discipline Target Cash use optimization Normalized capex at 350m p.a. vs. 450m p.a. previously announced 450 Capex envelope sized for business development, mix improvement, and maintenance Rigorous capex qualification and authorization process 388 300 350 Premiumization / Business dev.: 100m- 150m Capex execution supported by project management resources Maintenance: 200m- 250m (1) Previously announced 2014 capex 2015e Beyond 2015 (1) Including forestation for 25 million / 20
Capital allocation framework in line with shareholders interests Decision framework Cash generated by operations 1 Capital expenditure to maintain and grow the company ROCE target ROCE above WACC in 2018 under normalized oil market conditions 21 Dividend 31 Conservative balance sheet management while ensuring operating flexibility Optimal allocation of capital to be driven by ROCE targets / 21
Optimization of the industrial set-up 2011 tube production capacity 2014 tube production capacity 2017 targeted tube production capacity 400kt 750kt 750kt 500kt 800kt 800kt 1,500kt 1,350kt 900kt Total 2,400kt 2,900kt 2,450kt / 22
ROCE definition ROCE = Net Operating Profit Less Adjusted Tax (NOPLAT) / Capital Employed Capital Employed as shown in the denominator is defined as the sum of Net Fixed Asset and Operating Working Capital, minus Goodwill NOPAT as shown in the numerator is calculated as EBITDA minus Depreciation and other non-cash items post tax shield (1- t(1)) (1) Taxes rate forecasted at 35% from 2015 onwards / 23
H1 2015 financial data
Our markets in H1 2015 Oil & Gas EAMEA: volumes and mix significantly down USA: volumes decline, destocking from distributors, prices decreased in Q2 Brazil: revenues slightly down y-o-y due to lower drilling activity -25.1% 253 108 378 278 127 510 H1 2015 H1 2014 11,778 1 331 Industry & Other Europe: very competitive environment Brazil: -25.9% worsening local macroeconomic environment iron ore sales significantly down Power Generation -9.0% Petrochemicals -15.0% Conventional: lower volumes along with pricing Lower demand and intense pressure competition Nuclear: favourable comparison base in 2014 Data presented in millions of / 25
Facing severe market conditions Key market assumptions - USA Likely stabilization of the active rig count at a very low level - EAMEA Destocking from distributors expected to continue throughout 2015 Weakening of the Euro - Price pressure started in H1 2015 intensifies Q3 and Q4 2015 results expected to be significantly below Q2, with no volume recovery in H2 2015 +/- - Brazil PBR s 5-year E&P capex plan reduced, focus on pre-salt maintained PBR s cash constraints Deteriorating local macroeconomic environment / Persisting oversupply in the iron ore market O&G H2 2015 revenues expected to be down vs. H1 2015 Industry & Other operations will continue to suffer in H2 2015 + - - - Power Generation: very competitive environment Industry & Other: very competitive environment Oil & Gas: - Very low level of order inflow - Ongoing destocking from some customers - Price pressure / unfavourable mix H2 2015 performance expected to decline vs. H1, despite the favourable effect of a stronger US dollar / 26
Capital Expenditure In millions of 677 873 909 803 529 567 388 300 350 89 2008 2009 2010 2011 2012 2013 2014 H1 2015 FY 2015e Beyond 2015 / 27
H1 2015 balance sheet In millions of 30 June 2015 (1) 31 Dec. 2014 In millions of 30 June 2015 (1) 31 Dec. 2014 Non current assets 4,882 5,077 Equity, Group share 3,519 3,743 Inventories and work-in-progress 1,443 1,490 Non-controlling interests 406 426 Equity 3,925 4,169 Trade and other receivables 895 1,146 Financial instruments 26 28 Other current assets 325 343 Cash & cash equivalents 975 1,147 Provisions and deferred tax 784 892 Bank debt 2,645 2,694 Financial instruments 206 173 Trade payables 555 807 Tax and other current liabilities 431 496 TOTAL ASSETS 8,546 9,231 Net Debt 1,670 1,547 Net Debt / Equity 42.5% 37.1% TOTAL EQUITY AND LIABILITIES 8,546 9,231 (1) As concerns the Amendment to IFRS 11, the impact of its application on the consolidated financial statements as at 30 June 2015 primarily translates to a 60 million drop in sales in consideration for purchases; a 165 million drop in non-current assets, in consideration for other provisions and long-term liabilities, and a drop in trade receivables of 33 million, in consideration for trade payables. / 28
H1 2015 cash flow statement In millions of H1 2015 H1 2014 Cash flow from operating activities (FFO) Change in operating WCR +decrease, (increase) Net cash flow from operating activities (19) +360 +111 (185) +92 +175 Gross capital expenditure (89) (138) Financial investments - - Dividends paid (66) (136) Asset disposals & other items (60) (9) Change in net debt (123) (108) Net debt (end of period) 1,670 1,739 / 29
Q2 2015 financial data
Q2 2015: from Revenues to EBITDA In millions of Q2 2015 Q2 2014 Change YoY Revenues 1,018 1,422-28.4% Industrial margin 142 403-64.8% As % of revenues 13.9% 28.3% -14.4pt SG&A (1) (127) (143) -11.2% As % of revenues 12.5% 10.1% +2.4pt EBITDA 13 248-94.8% As % of revenues 1.3% 17.4% -16.1pt (1) Before depreciation and amortization / 31
Q2 2015: from EBITDA to Net Income In millions of Q2 2015 Q2 2014 Change YoY EBITDA 13 248-94.8% Depreciation of industrial assets (73) (77) -5.2% Other (133) (15) na Operating income (loss) (193) 156 na Financial income (loss) (16) (11) +45.5% Income tax 2 (46) -104.3% Non-controlling interests (9) +11 na Net income (loss), Group share (199) 88 na na: non applicable / 32
Q2 2015 cash flow statement In millions of Q2 2015 Q2 2014 Q1 2015 Cash flow from operating activities (FFO) Change in operating WCR +decrease, (increase) Net cash flow from operating activities (38) +200 +19 +112 (128) (1) +74 +72 +18 Gross capital expenditure (41) (71) (48) Financial investments - - - Dividends paid (66) (113) - Asset disposals & other items (34) +1 (26) Change in net debt (67) (111) (56) Net debt (end of period) 1,670 1,739 1,603 / 33
Leader in Premium Tubular Solutions Euronext Paris: ISIN code: FR0000120354, Ticker: VK USA: American Depositary Receipt (ADR) - ISIN code: US92023R2094, Ticker: VLOWY Investor Relations Contact - Vallourec Group Tel: +33 1 49 09 39 76 / email: investor.relations@vallourec.com www.vallourec.com