Accelerating transformation - Investor Presentation 1 February 2016
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Accelerating transformation Investor Presentation 1 February 2016
Information
This document was prepared by Vallourec to provide a summary of the matters described herein, and does not purport to be complete. The information in this document has
not been independently verified. No representation or warranty, express or implied, is made as to, and no reliance should be placed upon, the fairness, accuracy, completeness
or correctness of the information or opinions contained in this document, and Vallourec, as well as its affiliates, directors, advisors, employees and representatives accept no
responsibility in this respect.
This document contains certain statements that are forward-looking. These statements refer in particular to Vallourec management’s business strategies, its expectations
regarding future operations, future events, trends or objectives and expectations, which are by their nature subject to risks and contingencies that may lead to actual results
materially differing from those explicitly or implicitly included in these statements. Forward-looking statements generally include or are preceded or followed by words such
as “believe”, “expect”, “project”, “anticipate”, “seek”, “estimate” or similar expressions. Such forward-looking statements are not guarantees of future performance. Vallourec,
as well as its affiliates, directors, advisors, employees and representatives, expressly disclaim any liability whatsoever for such forward-looking statements. Vallourec’s ability
to realize the objectives described in this document may be affected by a number of factors, including those described as “risk factors” in Vallourec’s registration document
filed with the Autorité des marchés financiers (AMF). Vallourec does not undertake to update or revise the forward-looking statements that may be presented in this document
to reflect new information, future events or for any other reason and any opinion expressed in this presentation is subject to change without notice.
This document contains information about the Vallourec’s markets, the size of its markets and its competitive positioning. Unless otherwise indicated, this information is based
on Vallourec estimates and is provided solely for information purposes. Vallourec estimates are based on information obtained from its customers, its suppliers, trade
organisations and other stakeholders in the markets in which Vallourec operates. Although the Vallourec believes its estimates to be reliable as of the date of this document,
Vallourec cannot guarantee that the data on which its estimates are based are accurate and exhaustive, or that its competitors define the markets in which they operate in the
same manner.
This document does not constitute an offer of securities or the solicitation of an offer to purchase or subscribe for, securities. Any such offer or solicitation, if it were to occur,
would be made exclusively by means of a prospectus, offering circular or other offering document that will explicitly relate to such an offer or solicitation, and that may
contain restrictions on distribution or subscription in certain jurisdictions or by certain categories of investors.
This document constitutes an advertisement and not a prospectus or other offering document. No offering to the public may be made in France except by means of a
prospectus that receives a visa from the AMF.
Securities may not be offered, subscribed or sold in the United States absent registration under the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”), except
pursuant to an exemption from, or in a transaction not subject to, the registration requirements thereof. The shares of Vallourec and any rights that may be distributed to
shareholders have not been and will not be registered under the U.S. Securities Act, and Vallourec does not intend to make a public offer of its securities in the United States.
The distribution of this document in certain jurisdictions may be restricted by law, and persons into whose possession this document comes should make themselves aware of
the existence of, and observe, any such restriction.
/2Information
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 Statements
This document contains forward-looking statements and information. By their nature, these statements 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 statements and information are reasonable, Vallourec cannot
guarantee their accuracy or completeness and investors in Vallourec are hereby advised that these forward-looking
statements 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 statements 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).
/3Executive Summary
/4Transforming Vallourec through key decisive actions
1. Project to reshape European operations*
Reduce capacity by 50% vs. 33% previously targeted
Rationalize and specialize our European operations
2. Develop highly competitive production hubs in Brazil and China**/***
Brazil: Merge VSB & VBR to create a unique optimized production hub
China: Create a new competitive route by taking control of highly competitive
Tianda operations
3. Reinforce partnership with NSSMC**
Increase industrial cooperation in Brazil
Enhance worldwide R&D cooperation on VAM®
Reinforce equity-based relationship
4. Strengthen Balance Sheet
Mix of equity instrument reserved to Bpifrance / NSSMC and rights issue, for
a total €1bn (respectively €490m and €510m, of which €445m to be subscribed
by the market ****)
Main tranche of the reserved equity instrument priced at €11 per share
Bpifrance and NSSMC to increase their stake to 15% each
Subscription commitment from Bpifrance and NSSMC representing half or
more of equity raised in all scenarios
Operational and financial transformation to secure long term
profitability and reinforce shareholding base
* The implementation of the project is subject to prior consultation with relevant workers council
** Subject to competition authorities’ approval /5
*** Subject to relevant PRC authorities approval (including Competition authorities)
**** Subject to shareholders’ meeting approval and completion of the right issueSetting the path for a strong return to profitability and
cash generation
TARGETS BY 2020
€1.2bn - €1.4bn
Strategic initiatives to generate EBITDA
c.€750m EBITDA contribution
Most measures in place by end 2017
Normative FCF of
€500m-€600m
assuming €350m
Progressive volume recovery to annual Capex
generate c.€900m of EBITDA
Assuming volumes back to 2014 level
ROCE > WACC
Weathering short-term challenges to fully benefit from market recovery
/6Focus on Strategic Initiatives
/71. Project to reshape European operations:
Fixing capacity issues*
Project to streamline our European operations…
o Closure of 2 out of the 4 large rolling mills
50% tube production capacity reduction vs. 2014 (1/3 in Valens plan)
o Downsizing finishing capacities
Closure of 1 heat treatment and 1 threading line
o Additional G&A reduction
o Total headcount reduction of 1,000 FTEs (in addition to Valens plan)
o Asset disposals: confirmation of the planned sale of a majority stake in Saint-
Saulve steel mill, and ongoing exclusive negotiations to dispose of Vallourec
Heat Exchanger Tubes (VHET)
… to create an optimized European footprint
o Rolling activities concentrated in Germany, finishing activities mostly
concentrated in France
o Optimizing load factor by retaining 1 mill for each range of diameters
o Sustained emphasis on R&D
European overcapacity addressed, focusing on high value, specialized
activities
* The implementation of the project is subject to prior consultation with relevant workers council /82. Develop highly competitive production hubs
Brazil: Optimizing operations*
Rationalization of production set up with continued
industrial cooperation with NSSMC
o Merger of VSB & VBR to create Vallourec Soluções tubulares do Brasil,
owned by Vallourec (84.6%), NSSMC (15.0%) & Sumitomo Corporation
(0.4%)
o Supply agreement maintained with NSSMC
Allowing for
o Shut down of Belo Horizonte’s 2 blast furnaces and steel mill
to concentrate all steel production in Jeceaba state-of-the-art facility
o Capex avoidance and rationalization of forest assets
o G&A and tax synergies
o Additional headcount reduction of 450 FTEs
Leveraging Jeceaba superior competitive position for export
o Optimal operational performance in Jeceaba premium mill
o High operational leverage with associated margin improvement potential
o Highly competitive export route
o Supported by BRL/USD parity
Optimized and highly competitive Brazilian operations
* Subject to competition authorities’ approval /92. Develop highly competitive production hubs
Brazil – New industrial set-up*
2018 target
Current industrial set up
A single integrated and optimized
Two independent production sites
production set up
VSB - Jeceaba Vallourec Soluções tubulares do Brasil***
Vallourec – 56% NSSMC – 44%** Vallourec – 85% NSSMC – 15%
Renew partnership Jeceaba
between NSSMC
and Vallourec
VBR – Belo Horizonte
Industrial B.H
Vallourec – 100%
re-organization Jeceaba
Blast Steel Rolling
furnace mill mill
New, highly competitive industrial set-up
* Subject to competition authorities’ approval
** Including 3.6% owned by Sumitomo Corp. / 10
*** Sumitomo Corp. owning 0.4%2. Develop highly competitive production hubs
China – Overview of Tianda
A Chinese seamless pipe manufacturer since 1993, listed on the Hong Kong
Stock Exchange
A state-of-the-art PQF mill (2010): 500kt production capacity coupled with
finishing capacities
Production costs at the lowest end of industry standards
Qualified by Tier one OCTG customers
A successful partnership with Vallourec:
o 19.5% stake acquired by Vallourec in 2011
o Two organizations already very close with existing operational co-management
Tianda Oil Pipe Company: a partner ready for integration within Vallourec
/ 112. Develop highly competitive production hubs
China – Taking control of Tianda*
Strong rationale to reinforce
Key parameters of Tianda acquisition
production footprint in China
Share purchase agreement signed on 29 Highly competitive route for Chinese and
January 2016 with the majority shareholder for international O&G markets
an additional 50.61% stake
Production costs lower by 30%-40% compared
Mandatory General Offer to be launched to existing routes for comparable products
subsequently for all remaining share
Enables an enlarged and highly competitive
Deal to be closed in Q4 2016 after clearance offer combining VAM® connections with Tianda
from PRC authorities low cost standards for pipe production
Maximum cash out of USD175m Supporting VAM®’s market share
A breakthrough addition to Vallourec global set-up
* Subject to relevant PRC authorities approval (including Competition authorities) / 123. Reinforced partnership with NSSMC
A long lasting relationship
2009 Acquisition of a 1.7% stake in Vallourec by
Sumitomo Metal
2007 Creation of VSB, joint operation between Vallourec and
Sumitomo Metal
1985 First VAM® R&D partnership between Sumitomo Metal
and Vallourec
1984 Creation of VAM USA with Sumitomo Metal
1976 Licensing agreement between Sumitomo Metal and
Vallourec on VAM® connections
1965 Development by Vallourec of VAM®, the first premium
connection
/133. Reinforced partnership with NSSMC
New step taken today
Enhance R&D cooperation
o Improving the efficiency of the 40+ year technical cooperation on
VAM® connections development
o Adding resources to the joint R&D operation for VAM® connections
to accelerate development and release of new products and reduce
time-to-market
o Enabling to strengthen VAM®’s worldwide premium positioning
Create Vallourec Soluções tubulares do Brasil*
o 85% - 15% Vallourec – NSSMC / Sumitomo Corp. held new entity
as the result of merging VBR and VSB
o Continued technical and engineering partnership in Jeceaba mill,
leading to high operational efficiency
Reinforce equity-based relationship**
o NSSMC participating in Vallourec capital increase to achieve a 15%
equity position
* Subject to competition authorities’ approval /14
** Subject to shareholders’ meeting approval and completion of the right issue4. Strengthening the Balance Sheet
€1bn equity raise*
o c. €510m in the form of a rights issue**
• Commitment from NSSMC and Bpifrance to subscribe to the offering; €445m to be
subscribed by the market**
• Goldman Sachs and Société Générale mandated as Joint Global Coordinators and
Joint Bookrunners on the rights issue
o c. €490m in the form of a reserved equity instrument (mandatory
convertible bond)**
• c. €365m tranche convertible into shares at a conversion price of €11 per share**
• c. €125m tranche convertible into shares at the issue price of the rights issue**
• Subscription by NSSMC and Bpifrance
o Execution targeted for Q2 2016, subject to Vallourec shareholders’
approval and market conditions
Intention by Bpifrance to potentially acquire shares on the secondary market
prior to the launch of the rights issue
o Participation of Bpifrance in the reserved equity instruments to be sized so that, in
combination with potential secondary purchases, Bpifrance increases its overall ownership to
15% after dilution from the rights issue and the conversion of the bonds
o Depending on the number of shares eventually acquired by Bpifrance on the market, market
subscription may vary by up to +/- approximately €90m
Benefits anticipated
o Finance the Group’s recovery journey and transformation
o Reinforce the headroom vs. the gearing covenant
o Path to investment grade
o Anchor the capital structure around 2 long-term strategic and financial partners
* Subject to shareholders’ meeting approval and completion of the right issue /15
** Mid-point scenario4. Capital Increase: Key Features*
Instrument €490m Mandatory Convertible Bond
Nippon Steel & Sumitomo Metal Corporation
Beneficiaries
Bpifrance
Commitment from NSSMC /
2 tranches: Bpifrance as Anchor Investors
o Tranche A: €365m, convertible into shares at a
Reserved Structure conversion price of €11 per share
Equity o Tranche B: €125m, convertible into shares at the
Instrument issue price of the rights issue NSSMC and Bpifrance to bring
long-term support to Vallourec
Conversion into shares subject to antitrust clearance through aligned 15% stake each
Conversion Bpifrance and NSSMC ownership post conversion:
15%1 Commitment to maintain
independence of Vallourec
Approval at shareholder meeting on 6 April 2016 o Voting rights capped at 15% for
Timing
Execution in Q2 2016, subject to market conditions both NSSMC and Bpifrance
o Standstill agreement for the next
15 years
Instrument €510m Rights Issue
Commitment of Bpifrance and NSSMC in the rights
Rights Features issue through exercise of rights owned by each
Issue Remainder, €445m, to be subscribed by the market
Approval at shareholder meeting on 6 April 2016
Timing
Execution in Q2 2016, subject to market conditions 1Taking into account 1.5% shares already owned by
NSSMC, 5.3% shares already owned by Bpifrance
and shares acquired by Bpifrance on the market
before shareholders meeting
* Mid-point scenario /16Transformation mostly achieved by end of 2017
2016 2017 2018
1
Saint Saulve steel mill asset disposal
Project to reshape
VHET asset disposal
European operations*
Streamlined and specialized Europe
2
Develop highly VBR-VSB merger Closure of Belo Horizonte blast
competitive production Closure of Belo Horizonte blast furnace number 2 furnace number 1 and steel plant
hubs in Brazil and
China**/*** Tianda control
3
Mandatory convertible bond
Reinforce partnership
with NSSMC**
Improved efficiency of the R&D and industrial cooperation
4 Strengthen Balance
Capital increase
Sheet****
Operational and financial transformation launched today to secure long term
profitability and reinforce shareholding base
* The implementation of the project is subject to prior consultation with relevant workers council
** Subject to competition authorities’ approval / 17
*** Subject to relevant PRC authorities approval (including Competition authorities)
**** Subject to shareholders’ meeting approval and completion of the right issueTowards a New Vallourec
/ 18Towards a new Vallourec
Key challenges today Transformed Vallourec
Overcapacity issue in Europe
Overcapacity issues in Europe
addressed
Non competitive average production Development of 2 highly
costs competitive hubs
Strong and flexible Balance
Potential short-term pressure on Sheet
Balance Sheet Ability to fully fund the new
strategic plan
Cost competitiveness
Increasing competition Innovation
Best-in-class Offer
/ 19Reorganized industrial setup at a glance
NORTH
AMERICA EUROPE
Rolling capacity: Rolling capacity:
2014: 1,350kt, i.e. 46% CHINA
2014: 750kt, i.e. 25%
2018: 750kt, i.e. 27% 2018: 700kt, i.e. 25% Rolling capacity:
2018: 550kt, i.e. 20%
incl. 200kt for export
BRAZIL
Rolling capacity:
2014: 800kt, i.e. 27%
2018: 800kt, i.e. 29%
Global capacities rebalanced, Europe down to 25%
Unique position with state-of-the-art rolling and finishing capacities in every key region
Two highly competitive routes developed for international O&G markets: Brazil and China
at 30% – 40% lower costs compared with current routes for comparable products
A competitive industrial set-up with low cost routes
/ 20c.€750m additional EBITDA from transforming initiatives
Change in scope
€100m Positive EBITDA impact of full consolidation of Tianda and VSB
c.€250m Optimization of production footprint
New hubs production costs lower by 30%-40% compared with previous routes
Valens plan
2/3rd of “Valens” savings already initiated, with c.€100m achieved in 2015
Remaining savings to materialize on a short-term basis: 2016-2017
New transformation plan
€400m* Savings related to the European capacity reduction by 50%
Synergies related to the merger of VSB and VBR in Brazil
Most measures implemented by end-2017
Only recurring savings assumed beyond 2017
2020 vs. 2015
Full benefit of transforming initiatives to generate c.€750M by 2020
Most measures implemented by end-2017
* Gross savings / 21Strengthening the Balance Sheet
1
Net Debt Leverage ratio (Net Debt / EBITDA) below 1.0x by 2020
2
Gearing Significant headroom vs. the existing gearing covenant at all time during the
Covenant next five years
3
No liquidity issues over the next five years, including if financial facilities
Liquidity maturing in 2017/2019 are not refinanced
4
Rating Rating on an Investment Grade rating trajectory by 2018/2019
/ 22Looking beyond the trough
Recovery of drilling will happen even with low oil prices
Depletion estimated at +/- 6% p.a. to be aggravated by currently heavily reduced E&P investments
Productivity gains and cost deflation in E&P activities will contribute to reduce the oil price needed to
sustain sufficient development of new oil sources worldwide
A progressive E&P Capex recovery as from 2017 is widely considered as the most likely scenario
Global accumulated production needs Upstream E&P CAPEX evolution
725 717
704
656 662
574 577
528 530
490
472
435 435
341
257
193
171
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
North America Latin America Africa Europe Russia & Caspian Middle East Asia-Pacific
Source: International Energy Agency, “Oil Medium Term Market Report” – Source: IHS Upstream Spend Report – November 2015
February 2015
More than demand growth, field depletion is the key factor
/ 24Vallourec is best positioned to serve market recovery
Incremental Oil Production 2014 - 2025
Total world North Total world
Brazil OPEC RoW
liquids supply America liquids supply
110 2014 2025
0,8
105 4,1
1,6
100 1,4
5,5
Kb/d 95
107,3
90
93,8
85
80
2014 2025
Source: IHS – Annual Long term strategic world book – April 2015
Ideally positioned in premium OCTG markets in the USA,
Brazil, and OPEC countries
/ 25Guidance
Full Year 2015
EBITDA 4Q-15 EBITDA below 3Q-2015
Cash Flow Guidance confirmed: positive Free Cash Flow
Net Debt Slightly lower than 2014 year end level
Full Year 2016*
EBITDA Negative EBITDA
Cash Flow Negative Free Cash Flow c. €-600m
Net Debt Net Debt not to exceed €1.5bn by year-end, after Tianda
acquisition, full consolidation of VSB and capital increase
* At end of 2015 exchange rates
/ 26Long term targets by 2020
Reach €1.2bn - €1.4bn EBITDA
Restore financial strength & flexibility:
o Normative FCF of €500-€600m assuming €350m annual
Capex
o Net Debt/EBITDA < 1.0x
o Back to Investment Grade rating
Generate ROCE above WACC
/ 27Leader 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
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