Q1 2020 Earnings Call

We are supporting our communities, where they everyday lives our families and networks have been deeply affected we are using our global capabilities, including our regional office in China to strengthen local health provider with the supply of medical again that could get an infrastructure as well as providing support for affect the person.

$6 million fund has been established for this purpose.

We're doing all we can.

With the resilience and ingenuity of our people to fulfill our commitment and strengthen our relationship with customer and supplier.

They were essential for our future and they should feel that we are comparing them during this period.

Looking forward, what we expect a substantial reduction in our sales and operations for an extended period of time, and we need to adjust to the company to these new reality.

To ensure financial stability and maintain the continuity to vote operation.

We are rapidly reducing production levels and implementing a plan to downsize our fixed cost structure and contain cost around the world.

The United States, we had to close many of our facilities and reduce our.

In other countries, we are using suspension and go and then programs in consultation with labor unions, why we're expecting government recommendation, particularly in relation to the population deemed as most entities.

We plan to reduce our fixed cost structure caused by 25% or around 220 million unrealized by the end of the.

We will preserve our capacity to react.

The eventual market recovery.

And our unique global and local deployment capabilities in a world where local content and service is only going to be more do become more relevant.

This plan involves salary adjustment at all levels, including reduction of 20% for top managers.

Yesterday, the member of our board also volunteer to reduce the emollient.

We will prioritize cash flow.

Focusing on reducing our working capital through the crisis, and reducing our investment to a minimum without compromising our long term transformational programs.

We plan to reduce our capex.

And our R&D investment this year by 150 media or over 35%.

While maintaining our long term investment plan focused on the environment and safety as well as digital integration initiatives aimed at reducing costs in our operation and those of our customer.

Digital integration has become a key feature of our unique rig direct value proposition.

The opportunities for simplifying operation becomes even clear.

Good morning, guys industry is being deeply affected by these prices.

And the competitive environment in which we operate will be transform the way that today's vehicle to anticipate.

As we concentrate on securing our financial stability and hide entertaining vitamin we're proposing to limit our 2019 fiscal year dividend to the amount already paid in November.

Eventually.

The world will resume a growth path.

And they blow past and the need for a reliable supply of energy will be essential for recovery.

Why do we need to be prepared for the future. We also need to act swiftly and aggressively in resolutely in facing the challenges of today.

Thank you how will we will again then receive your question.

As a reminder to ask a question you wanted to press star one on your telephone so why the Guy your question pressed the banking we ask that you. Please limit yourself to one question and one follow up question. Please standby well, we compile the Q and a roster.

Our first question comes from the line of Eagle Eye Levy from BTI. James Your line is now open.

Thank you.

So you mentioned that your margins will be potentially in the high single digits in the second quarter now if you count formal cost saving to you're expecting to achieve by the ended the year. What would you expect your EBITDA margin run rate to be when accounting for the cost savings.

Thank you.

For your question.

Well I think that.

It's very difficult today too.

And to understand the condition of the market pricing demand.

By the by the end of the what we're doing we are.

Preparing.

For a reduction we are taking the manager we need to take internally to adjust our structure and to reduce center.

The perimeter of our production.

Of our.

Production facilities.

But I think would be.

Difficult to be.

To forecast.

Level of magic by the end of there because this will be influenza, India and by the volume and pricing not only but our the measure we can take internally. So I will then.

Two they make it for it.

For our managing the on let's say the medium term like the end of the these cases.

It's being driven by.

And then acre and that.

There are not so many clue to forecast that.

How the recovery will occur and how far.

The recovery in mobility in demand for our inferring that.

May occur and the impact that this could have on our second on analysts.

Great. Thank you and.

Looking your free cash flow of around 450 million for the quarter came in a bit higher than we thought and it looks like you've got 300 million them, that's from reducing working capital.

How much more do you think working capital could come down over the next few quarters and do you think free cash flow could approach billion dollars again because of the working capital reduction I've seen this year.

Hey.

Well you know.

The structure of scenarios.

And the way we are.

We manage our supply chain.

Act in a way that allow us to reduce working capital in a crisis. It happened in the previous cycle and you have seen these with substantial cash generation end in it will happen also in this crisis part of these is due to the effect.

That's.

The rig direct means that we our theaters.

Basically move according to release consumption and demanded by the client and we are the owner of large part or the stock. So when the prices Devin and conceptual go down we reduced production and we reduced our own stock. So we are to some extent share.

By the.

Stock over ended in the market the stock is in our Ken.

And when the crisis texting we reduced.

So our cash generation in this environment.

Is that structurally strong.

And you are not far in your view of what we expect could be possible liberal look some of our cash flow during 2020.

Great. Thank you very much for that I'll turn it back.

Thank you Sir our next question comes from a line of Sean that came from JP Morgan. Your line is now open.

Thank you.

Maybe if we could just talk a little more about 35% reduction in sales that you forecasted potentially for the second quarter.

As you try to break apart what that could look like on a geographic basis.

I was initially thinking maybe that's something like a 50% cut to North American onshore.

And then international offshore markets, maybe down something like 15%, we'll get you to that kind of mix, but in the release. You also noted that most of the weaknesses in the western hemisphere.

But he is doing okay. So far so perhaps that means it's more tilt internationally towards Latin America, maybe just couldn't get a little more granularity on how you're seeing the different geographic region unfold in the second quarter that'd be very helpful.

Thank you.

So on that.

I would say that it.

The main reduction.

And we see coming for the next quarter is coming from.

The waste in Canada.

Canada.

It's all been affected us.

Strongly affected.

Ill.

Your industry is reacting faster in reducing their investments in face.

Of the collapse of the oil price that then what's Paulo in data is Latin America.

For different reasons, not only related to the oil prices.

But.

The level of operation drops in a gen Tina.

And also in Ecuador, and Colombia, I mean in all of Latin America, we see.

A reduction in.

Levin opaque Sean.

As I say before.

Wherever we operate on a rig direct basis.

So we may see let's say these reflect that choices.

So.

Lesser extent.

Sales, but there are another another part of these markets also it in which we are.

[noise] really affected by postponement of project.

And reduction of domestic demand. This is also true for.

Brazil, where petrobras.

Mean to some extend the reactor.

To the said to these are to this crisis and that.

The quarterly investment.

In the impact of that none of these crisis in the dropping is less.

Significant, especially in the middle eastern and in the long term project.

Is that a continuing on the on the normal basis. So these 35%.

That Sean.

I will say is mainly related today, what I'm, saying, Canada U.S.

Latin America.

In the source blades.

Understood. Thank you for that.

And then on the cost reduction.

Could you talk about how much you think gotta spend in terms of cash costs severance et cetera in order to achieve those reductions.

The when we would have.

Relevant restructuring costs third during this year because of the actual we are taking all around the world. We expect this figuratively and.

The angel above.

100 million dollar, India and the over the entire course of year.

With that.

Lets say this.

He is a program that will be executed.

All along the will not to be concentrated the only in the second though in that sort of.

This is that something that it will be affecting it will be implemented that during the course of.

Got it Thats very helpful. Thank you very much.

Thank you Sir our next question comes from the line of E. N next person from Simon airline has now been.

Thank you Hello.

This is an unprecedented time how are you.

Evaluating the.

Duration of your shutdown of your U.S. production lines.

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I'm not asking you when you think you're going to restart because you don't know book.

What signals are you looking at to determine when it's time to reopen.

Hey city or to reopen the new go assets that have been shuttered.

Is there a rig count formulation that you have in mind that you need to see.

Can you compare the.

Cost and difficulties of restarting facilities compared to.

The the swing capacity on the on the welded side that you brought often on over the past several years.

And thank you a yen well in fact a into in the United States.

They city will continue to operate a during this year. This momentum we have a temporary stoppage maintenance stoppage at we may have that.

A temporary stoppage and adjust to.

Reduce the overall production, but they seem to we'll be continuing to operate the together with other facility and what we know that sense.

We are.

We are actually investing in this moment in the corpus the shop to prepare.

This the software to supply the full range of products needed in the United States.

Probably by the beginning of next year. So we had a plan for managing the facility during the period of time.

And that to prepare.

For a recall that when it may come.

I would ask Luca.

To add some comments on the level of operation that we have today.

And then.

On the baby.

The plan as I mentioned for Copel.

It's off to stuff like that some moment the beginning of next year.

Yes, Thank you Paolo and good morning yen.

Frankly, not much Florida on top of would you just as they see it is currently down for the I don't want to shutdown, but we maintain a.

Our capability, all the operating and ER to a certain extent of course.

And ER the only thing that I would add is that our he direct Motorola provides another possibility or being some water.

Yes, effected by the overhang or inventory, so we want to keep maintaining the possibility of supplying from fresh will actually on a our our customers and any need that aircastle Emily they have in a in the future.

And I will conclude with.

Our capability to bounce back when needed and yeah, we say that we have no problem because even if we are committed to a strong reduction in cost while maintaining all the capabilities.

And.

All the potential to bring back at Wendy's.

We'll be needed.

For the rest.

Well you just said.

Thank you.

Okay.

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Thank you know our next question comes from the line of Marc Bianchi from Cowen. Your line is now open.

Thank you.

I wanted to ask about first on the restructuring that you mentioned about $100 million over the year is that from second quarter through year end or you counting the restructuring that occurred in the first quarter and then with regard to the guidance here for second quarter.

On the margin rate what is that reflecting restructuring.

And it would would be higher if we excluded the restructuring.

Okay.

Thank you Mark.

No. There is a restructuring charge I was mentioning was in the second third and fourth quarter. If you add the first quarter. These will be slightly higher and all 120 million in these ranger the restructuring charge for the entire ear.

It's one of the managing.

We are oh.

Talking about of the adjusted the managing that for the next quarter, we are not including the restructuring charges and also you know restructuring charges could that weighed on the second or third in a different way depending on the program how we.

Implement a program of reduction.

So when we talk about it.

Our forecast I imagine it.

Basically a forecast on the adjusted EBITDA without in considering that our carriage.

Great great. Thanks for that power.

In terms of that the total cost cuts that you're planning.

The the decline in revenue here for the second quarter I mean, what is what is the expectation for the remainder of the year in context of those cost cuts and really what I'm asking is you know what would you need to see in the market to maybe look at cost cuts greater than what you've outlined here.

Today.

Yes.

Well, if there were thinking before a disease that probably the most difficult to predict the crisis I mean, we we lived through many cries isn't they did in them and we did it internationally so that our over the life of the company, but this is it.

The most difficult one to have the prediction because basically depends on something that either the reaction to the fear in the different countries of the values the ability to come out to we've solutions that allow return to mobility over time and this is extremely on.

Okay. So I wouldn't be now in a position.

Mmm Acclimate can't forecast the beyond what we mentioned on the second Q.

We will see.

I'm sure.

That said over time the world would recover.

Mobility, and 11, new delivery of activity of economic activity and that the Sheila we led the role in overall, the oil and gas energy metrics worldwide I have no doubt about these so we know that the shale where you come back in some momenta.

But is that if you go to a have a forecast on how fast.

And how steep but could be these equal our adjustment.

In the structure of the company.

[noise] design considering.

It scenario.

Oh, a reduction in our label operation that will not be for a very short period of time.

But we will be prepare the anytime to recover.

If needed.

Great. Thanks, very much I'll turn it back.

Thank you Sir our next question comes from a line of Alessandro Foletti from Mediobanca. Your line is now open.

Hi, Thank you for taking my questions. The first one is on the loves down measures taken out in Q1 I was wondering whether that had the any and add extra cost that extra cost in the portfolio, which could be maybe affected again in Q.

Two.

And also I believe you mentioned Oh that describes it made it to perform changes in the company as well I was wondering how are you telling to keep some of the production idle maybe throughout 2020. Thank you.

Well.

For food the locked down in our operation on a in Italy.

You know Tina.

And occasionally some other parts of the war for for period of time.

We'll be impacting that I'll add them out as you know when results our costs are in there.

Second quarter.

This is a.

Hi reasonable.

But to it.

Today, the neighborhood of operation on the recording and that what is limiting level of football production today is that the evolution of the market and the need to reduce our wedding band. So it started with samco strain on our production side.

Now they are going to constrain on the demand side or at least that even by the need to reduce our our stock. Obviously this is enticing entailing.

Costs.

For fixed cost over the facility cost Oh follow a.

For our people.

Some situation is working only on limited time, we are contained in the sense, but this is driving some or additional cost deploy you now into our budget that is considering the forecast that we present now I do not envisage any.

Specific.

Additionally, as cost to put back into operation. The facility. We have no disruption we are not managing blast furnaces that has I think what a comparable accent.

Yeah.

Come back cost and timing, we are moving on electric arc furnaces, and rolling mill, the basically could get back to finish on the treaties mostly.

Now when we look over 2020, we are preparing.

Flora.

Keeping some of the facility either for an extended period of time, because we know that is very difficult the demand really cool that factor.

Simultaneously, but.

We are I'm not sure.

Doing paramount enter.

One down.

In any of the facility overseas demand.

Because we think that overtime Matt.

There will be Eric already and we would have to.

Have production.

In some of these facility some of these lets say data.

Important for local.

Market in different parts of the world and so we know that seems a moment when the TVT starting back again.

Detect have been present, we conducted at the TBT locally.

We'll be one of our differentiator.

We need to keep the resources to stock back even in countries in which we have it used to be a minimum or either.

Okay. Thank you just how long do you think that Q2, we go see the bottom of the rig count in the U.S., Oh, that's likely to be continuing into Q3 as well.

Yes.

I I think is very difficult to to the have predicted the level though.

Recounted beyond the next quarter, we know that the rig count we continue to go down.

For a while ago, but then that are factors like some of the company.

Maybe.

The they may have a hedge.

The production some other that needs to continue investments have financial position to do it.

And some other.

We'll continue to reduce level of activity these will depend on how faster.

The war the gets back to two.

Maybe though activity operation in mobility.

I think would be very difficult today to a habit forecast of rig the level of rigs operating there.

In the course of.

Let's say the third and fourth quarter.

This year, we know it will go down now, but we don't know to know where it will be.

Six months from now.

All right. Thank you. Thank you very much.

Thank you as a reminder, task of question you want me to press Star one on your telephone I wouldn't draw. Your question press. The banking, we ask that you. Please limit yourself to one question and one follow up question.

Our next question comes from the line of John Letizia from Stifel. Your line is now open.

Oh, yes instrument on for Steve and I was wondering if you can give us a little color on raw material pricing and maybe how you expect that to impart margins in the second half given the lag between.

Between the two.

As well.

In this environment, a I frankly expect some of ER.

Our material to go down the level of pricing, there or a whole turquoise huh.

So the.

To some extent.

The company the reduction in prices for our products.

The demand is clearly.

Are you seeing force craft also and so.

Also as Craig to some extent should go down there would be some impact from devaluation and some of the country, which we operate that also may added.

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The impact on reducing our costs, we have tpd say into consideration.

And.

And but our visibility on this.

As a pretty limited to the next quarter after the said.

This is inevitable pricing.

Raw material and then they would of course.

The inferences medical in China.

So in China May drive up at some of the iron ore.

But I see sense and that.

It will be difficult today to forecast that never know pricing room at the area then the metallic sand in the second faster.

But still.

What we see that change.

You have seen the declining prices so.

[noise] pipes.

There.

Yeah, that's all in cost will sort of a wind only.

Marginally and also through only graduating because it ended we have now what inventory large part of the past calls.

So.

We will see it actually called very gradually new battling which we have inventory to reduce.

Because of the I phrase.

Thank you and I wonder if I get to squeeze one more do you think the the rig direct model is gonna have a positive impact on market share during this downturn.

Or what's your take on that.

If I think the yes, I mean, because in the end and if it was saying we have following the in our say led that adoption.

In the consumption if I what lines that are using we've said we are reducing shipments, but we do we are kind of shelter from.

Hankering better inventory because at the end we have no intermediaries, we go straight to do.

To our plan and our client a low yields while the we have a good client base.

That.

Continue to work, we thought we'd be you some long term contract.

Period.

Obviously, we adjust pricing to have prices over the market applied to these contract nothing from a volume.

I think that did that he correct.

Give out stability and some simple tenancy could give up and it could give out there.

Yeah.

Increased market share now that is one.

The.

Very relevant diesel theater, but he led a female Vodafone visiting peak concern for us.

We see material entering into the integration of standing and it looks to me.

ER reasonable momentum, which everybody's traveling to support.

Local interest in it the same employment in so.

We still continue to very important theater in downtick conviction on this and I will ask a cut a man.

Well some comment because even for the very important.

It wasn't component that for the future.

The.

Sector the state no.

Thank you Paolo good morning.

And indeed, John the view, we hobbies or.

Given the market situation, which we have explained.

We are convinced that.

It's a substantial part of the imports are coming on their material dumping conditions, which together with.

The rest of the industry, we are evaluating on considering to initiate a train legal proceedings.

In the coming months.

Sure. Thanks.

Internally, we expect to increase or to defend way lower market share of increased slightly.

But.

I think we have an agenda that into the or actual onto containing for me at this moment.

Thank you I'll turn it back.

Thank you know our next question comes from the line of flat there Gansky from Bank of America. Your line is now open.

Yes, Hello, and thanks for taking my question or they want the working capital please and specifically on potentially for your three Denise cash from inventories I mean at the end of last quarter, you help $2.2 billion in inventories, which is about 700 million.

Yeah that the trough inventory number in the past down totaling 2016, and I'm wondering is there anything you can fool you know to be able to reduce inventory to the spin off 1.5 billion, you're starting to get fixed it.

As.

Right. Thank you.

John I am.

Compared to last try these our rig direct program that progress.

Well, so pot and not only in the United States that but ER.

It also another part of the war.

A so we will be as I mentioned before be able to reduce our rabbit of inventories sets.

And.

He modal relating the range as I was saying before.

Oh, yes, the age of $1 billion, an entire course of the era.

And I don't know, if we will be able.

Well much lower than this frankly I.

I hope that.

I'd coldly in the second part of the here on the Luvata will or maybe even reduce our cogeneration for working capital and we will need to protect some of the working capital for a market that may be per capita gain in the first quarter 2021, we do not to now you think.

We continue as they are and we've been very limited recovery.

[noise] my expectation that that we can.

Between inventor extent receivable that.

Contributed to our cash generation in the range that I mentioned.

Thank you very my follow for that and if I can quickly follow up on the most strategic points, obviously looking at your competition across the globe. It is entering this downturn in let's say, while net financial position do you think it office and market share by Q4 Tomorrow and then if yes.

That are there any particular regions, where you think you'll know physician to structure to gain market share.

Well, a you're absolutely right that tenacity separately is.

Financially.

Very strong company stronger than any of its competitors or the worldwide that.

There is a clear the parents and when that.

We you enter into a crises.

His financial de France that is very relevant.

Hi, Anthony proceed internationally as a solid reliable long term partner good for developing the relation good for developing long term supply.

Got you meant good for developing.

Product.

Innovation and habit support so.

No doubt, we think that faith in the face of a client the when the.

The market started to recover.

Our our financial strength to the quality of our facility and the positioning that we achieved over this year will be very bottom differential factor now.

Then.

The timing the is how that equally will take place the journey, which it will happen, we'll determine I mean that the how these are people equally repositioning could be more or less see voting that our overall global position, but the fundamentals.

For sure.

Strong and very different trauma.

ER that of all of our ER competitor and I think our client.

Where.

And the this could be factored that it may be relevant at the moment conviction that he then.

Ill turn of the tight.

Into this due to the.

To the interest.

Thank you very much and good luck.

Thank you for that.

Thank you know our next question comes on the line of James Evans from Exane BNP Paribas. Your line is now open.

Hi, good afternoon, essentially for taking my questions.

So some well.

Two please firstly I want to ask about the $220 million fixed cost reduction.

Thanks, a question keeps getting a sense of what the basis in terms of fixed cost very or what the reduction represents <unk> as a percentage, but the fixed cost.

That's my first question.

Second question, well never ask a little bit more about the middle east and beyond the Q2.

What are your middle eastern colleagues communicating to you about current touch it since the second I'll be honest and we've seen a very mixed picture with ramco, reducing its budget knocked baby to like some projects. It's obviously got very part production cuts Sir.

What would it be saying to you about their intentions.

Second half did you ever built thank you.

Well thank you James.

On the first question.

The reduction we had envisioned gaze at induction in our structure.

We are and it went the as when mm $120 million Dimensioner for this is an estimate but even estimate that represent at around 25% of I was at a fixed cost. So he's a reduction that is not to.

It really affecting our capacity to bounce back to when needed that disease that how it's been.

How were thinking or what is structurally at this moment.

Ill.

It's also focus on that he journey, which we perceive a so.

Yeah.

The market.

Ladies and gentlemen, please standby your conference will begin again long, apparently ladies and gentlemen, please standby.

I know today, you can hear me easy the reinforce Kuka. If you want I can answer you the catching up on their Gabriela.

Well enough.

Yeah, we connect Lpds Gabriela go on a go on with your answer.

Okay.

James So the environment into in the Middle East is challenging on a involved in a rapidly.

But clearly.

We proceed that this region is on the stronger side of the spectrum.

Under the few markets that I mean every dance or Richie unions remain here in the middle East.

Despite the OPEC announced Scott, we have not seen major adjustments some adjustment, but not major in the drilling programs of our you know see customers.

However, given the present circumstances this is not something that.

Can be a rule out in the future My house.

Not happen.

It'll give you some color on Sally we continue there to face some muted achievement.

You do their dystopian cycle.

But you never know last quarter, we have even on a positive nodes experienced a recent recovery on the purchasing activity, especially in the premium segment.

So this is a strengthening our backlog and giving up any boobies immediately towards the end over and over the year.

In the case over our no also there has been.

Just minor adjustment to the drilling program on on some more expensive area, but not the core of the drilling activity in the U.S. So we expect our shipments into you eight to two continues to grow and increased during the year, but still not reaching they're running rate over the full potential of the contract something I, probably would seem to twentytwenty.

One.

And in the rest of the Middle East. We also have a substantial backlog of long term contract, which give a certain resilient.

Our revenue line, so we expect.

To be Peter if he doesn't solid over the next few quarters, maybe with some adjustment downward.

But the lower than average for sure.

Yep. Thank you gather thank you James.

Thank you at this time I'm showing no further questions I would like to turn the call back over to Giovanni Sardagna for closing remarks.

Okay. Thank you again and thanks to all of you form 20-F in the call.

Sorry, again for being convenient to one of Atlanta, but Uh huh.

We made the point.

So we hope to see you soon thanks.

Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.

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