Vallourec S.A. (OTCPK:VLOUF) Q3 2022 Earnings Conference Call November 21, 2022 3:30 AM ET
Company Participants
Karim Safsaf – Investor Relations
Philippe Guillemot – Chairman and Chief Executive Officer
Sascha Bibert – Chief Financial Officer
Conference Call Participants
James Winchester – Bank of America
Jean-Luc Romain – CIC Market Solutions
Kevin Roger – Kepler Cheuvreux
Daniel Thomson – BNP Paribas Exane
Mick Pickup – Barclays
Baptiste Lebacq – ODDO
Tom Gibney – BNP Paribas
Operator
Good day and welcome to Vallourec Q3 and 9 Months 2022 Results Presentation. Please note this call is being recorded. I would now like to hand the call over to Karim Safsaf, Investor Relations, Vallourec. Please go ahead.
Karim Safsaf
Thank you, Mario. Good morning, ladies and gentlemen and thank you for joining us for Vallourec Q3 and 9 months 2022 results presentation. I am Karim Safsaf, Investor Relations Officer. Joining me today to comment on these results, we have Philippe Guillemot, Chairman and Chief Executive Officer of Vallourec; and Sascha Bibert, Chief Financial Officer. This conference will be recorded and a replay will be available. It is also on audio webcast on our Investor Relations website and the presentation slides are available for download.
Before I hand over to Philippe Guillemot, I want to add that today’s conference call contains forward-looking statements and that future results may differ materially from statements or projections made on today’s call. For your information, the forward-looking statements and risk factors that could affect those statements are referenced at the beginning of the slide presentation and are included in our universal registration document filed with the French financial market regulator, the IMF. This presentation will be followed by a Q&A session.
Now I would like to give the floor to Philippe Guillemot.
Philippe Guillemot
Thank you, Karim. Welcome, ladies and gentlemen and thank you for joining us for this update on Vallourec’s third quarter results. So, my name is Philippe Guillemot, Chairman and Chief Executive Officer. And I am joined by Sascha Bibert, Chief Financial Officer; and Karim Safsaf, Investor Relations Officer.
Before proceeding, let me draw your attention to Slide 2, where you can consult our Safe Harbor statement. Let’s look at today’s agenda on Slide 3. I am going to start by giving you an overview of the highlights of the third quarter, followed by an update on the execution of our New Vallourec plan and some words on the market environment and our business development. Sascha will then take you through our Q3 numbers in detail and I will wrap up with an outlook for the year as a whole.
First, on Slide 4, the highlights of the third quarter. I am pleased to report that our performance in Q3 was solid. EBITDA stood at €198 million, up 55% year-on-year and by 24% sequentially. This was driven by the continued positive trajectory of the worldwide tube business, most notably in the U.S. Iron ore mine production amounted to 1.5 million tons. Civil works for the restoration of the core Cachoeirinha waste pile have been completed and the request to release the pile has been registered. The tube market remains well-oriented. OCTG price dynamics in the U.S. and the Middle East are robust, while long-term exploration and production fundamentals with positive trends for energy security prevail. We are seeing the benefits of the new company-wide pricing strategies implemented in Q2 and strong volume dynamics related to new or existing contracts.
In this context, we reiterate our fiscal year 2022 objectives, with EBITDA expected in the range of €650 million to €750 million and positive free cash flow for the second half as a whole driven by our expected strong Q4 performance. These objectives assume mine production continuing at just over half of its capacity utilization using alternative waste pile at lower market prices. The to-be-closed German operations will be impacted by higher energy costs. In addition, as part of our focus on inventory management, we have scrapped unallocated materials and inventories with low resale value potential, leading to one-off expenses in 2022. Most important, our New Vallourec plan is fully on track, with significant milestones achieved in recent weeks. We will not stop here as we have identified additional initiatives to be implemented in other regions, starting in Brazil.
Let’s turn to Slide 6. The New Vallourec plan announced in May 2022 is fully on track. The plan aims to generate €230 million of recurring EBITDA uplift and around €20 million CapEx reduction, with full impact starting in Q2 2024. It will contribute to making the group cycle-proof and to generate positive free cash flow even at the bottom of the cycle. In addition, the value-over-volume strategy incorporates portfolio rationalization to drive profitable growth. Vallourec aims to achieve best-in-class profitability levels and close the margin gap with peers.
Switching to Slide 7, let’s look at where we are in the New Vallourec plan execution, which is, as I said earlier, fully on track. Looking ahead, we will not stop here, but expand our initiative to other regions, including harvesting the full potential of the Brazilian tube business, driving performance in Asia and increasing production in the U.S. and Saudi Arabia. In order to be fully part of the energy transition, Vallourec New Energies has a clear plan to exploit opportunities in areas such as carbon capture, geothermal and hydrogen storage.
Let’s turn to Slide 8. In the last couple of months, major milestone has been achieved, which substantially de-risked the plan, with social agreements completed in Germany, France and the UK. I can confirm that the financial impact of these measures is in line with assumptions embedded in our restructuring provisions. This paves the way for the targeted reduction of around 3,000 positions by the turn of the year 2023-2024, when the German Oil & Gas activity is fully transferred to Brazil, with a timeline illustrated on the left hand chart. With the social agreements now negotiated, the teams can now concentrate fully on operational execution.
[Technical Difficulty] to discuss the market and business development. First, the market for tubes remains very well-oriented, both in terms of volumes and prices. As you can see from the chart on the left, the number of wells currently being drilled in the U.S. continues to steadily increase as does OCTG consumption per rig. On the right hand side, you can see that pricing in two important markets for Vallourec, the U.S. and the Middle East is also evolving favorably.
Turning to Slide 11, let’s look at Vallourec’s performance within this environment. Our tubes’ EBITDA pattern has risen consistently over the first three quarters of 2022 and is set to keep increasing in Q4. I will remind you that this increase in tubes’ profitability comes before the additional uplift to come from the New Vallourec plan. This reflects the new pricing strategy we have implemented since Q2 2022, our focus on value-over-volume and the priority on higher margin products. These new prices were more rapidly effective in the U.S., where lead times are shorter and are ramping up in other markets. Our long-term agreements are delivering strong commercial performance. Saudi Aramco, where Vallourec Saudi Arabia will increase production to support three call-offs in 2022 to be delivered in 2023; ADNOC, which is increasing call-offs to support an ambitious production plan; and Petrobras under a contract, which will include 18 inches seamless tubes, which will be produced in Brazil.
Turning to Slide 12, an update on the mine operations. As a reminder, operations at Vallourec’s Pau Branco iron ore mine were temporarily suspended in January 10, 2022 following flooding, which caused damage to its Cachoeirinha waste pile. Operations were partially restarted in May using an alternative waste pile, albeit at lower than normal capacity levels. Volumes extracted in the first 9 months 2022 amounted to around 2.6 million tons.
Vallourec has made significant progress towards restoring normal operation at its Pau Branco mine. Permission from authorities has been obtained to continue to use alternative waste pile until the beginning of Q2 2023. In parallel, the group has finalized civil works related to the restoration of the minimum safety factor of the core Cachoeirinha waste pile and registered the request for full release. For 2022, as a whole, Vallourec estimates production of around 3.8 million tons, which is embedded in our fiscal year 2022 EBITDA outlook.
Now, I hand over to Sascha who will comment on our Q3 2022 results.
Sascha Bibert
Thank you, Philippe and good morning everybody. Turning to Page 14 for our key figures. Tube volumes in tons are up more than 18% year-over-year and 7% quarter-over-quarter, while group revenues increased almost 54% compared to the prior year. Looking at our businesses, tube revenues grew even more than 70%, while the mine and forest revenues decreased by more than 40% as a result of 0.7 million tons reduced production and iron ore prices that were down 39% from the relatively high levels of a year ago. At group level, revenues would have increased 37% at constant FX.
For EBITDA, we report increases quarter-over-quarter, with continued positive momentum. Specifically, EBITDA is up 55% or 30% at constant FX. Importantly, tube EBITDA increased tenfold, while mine and forest EBITDA is down. Our tube EBITDA margin now stands at 13%, much improved, however, still way short of our ambition. Assuming a normal production of the mine and actual iron ore market prices, normalized EBITDA would have stood at about €250 million. Free cash flow improved compared to the prior year but is still negative at minus €81 million. However, looking at free cash flow before working capital and restructuring, it has increased more than 4x compared to prior year to now plus €82 million.
Flipping to Page 15 for the financial highlights. Revenues increased due to higher volumes and prices and also supported by FX, while mine and forest revenues are down. EBITDA increased as prices more than offset higher costs. The price and volume benefit was particularly pronounced in the U.S. However, our South American operations also benefited from those effects. Cost inflation includes raw material but also higher labor costs and increases in the energy costs, particularly in Germany. Within the category other, we have benefits from the release of provisions compensated by lower results from the pellet plant driven by both volume and price.
Commenting on a few additional aspects of the P&L summarized on this page with further details on Page 25. SG&A, as a percentage of revenues, decreased by 3 percentage points, down to 6%, also a meaningful reduction compared to the prior quarter. Depreciation and amortization was flat year-on-year. Asset disposals, restructuring costs and non-recurring items came in at minus €51 million, worse compared to a year ago but much improved compared to the second quarter when we recorded the big restructuring provision. The financial loss stands at minus €30 million compared to minus €8.3 million in Q2 and minus €36 million in the prior year. The net interest expense was stable at €25 million. The positive net income in 3Q was impacted by a high IFRS tax rate, influenced by movements in deferred taxes.
Turning to Page 16. Our free cash flow in the third quarter improved significantly compared to the second quarter when we recorded minus €171 million. However, it is still negative at minus €81 million. Adjusting for the increase in working capital and restructuring/other, we have generated €82 million of positive free cash flow, something that I will put into perspective on the next slide. There are no unusual developments in interest and tax payments. Tax payments are relatively constant throughout the year. Interest payments tend to be higher in Q2 and Q4 due to the semiannual payment of interest for our bonds. The restructuring/other category includes various elements, and I would expect this cash out to increase again in the fourth quarter. In the third quarter, about half is related to restructuring, the other half spread over minor effects, including interest on lease debts. So as a reminder, our reported free cash flow definition includes restructuring cash out, but it does not include the effect of disposals of assets. Those effects only impact the change in debt.
Working capital increased by €135 million. The increase relates to both inventory and receivables but also for an amount of around €20 million to changes in fiscal credits. CapEx was €54 million, with a progressive increase each quarter towards our full year guidance of around €200 million. Overall, we reiterate our guidance that the free cash flow, after all charges, will be positive in the second half, driven by a strong expected free cash flow in the fourth quarter. The logic is that cash-effective EBITDA continues to grow and working capital growth will start to normalize.
Moving to Page 17, when interpreting our free cash flow, it may be helpful to put aside the investment in working capital as well as restructuring/other cash-out. When we do this, you’ll find that our free cash flow was actually positive in every quarter in this year, growing strongly quarter after quarter. So our operations produce cash that allow us to fund interest and tax as well as CapEx, even though CapEx is above normal in both 2022 and 2023. Please also bear in mind that we are missing cash flows from the mine at full capacity utilization and that our new pricing strategies for the tube business were only implemented in Q2, with progressive effects coming through quarter after quarter. On the right side, you see the development of working capital. These are values from the balance sheet, so not one-for-one comparable to the values we have in the cash flow statement due to foreign exchange. Nevertheless, what is clear is that in order to support our business growth, we have invested significantly into working capital. Over the next quarters, we expect that – this growth to flatten, if not fall, providing an uplift to free cash flow.
On Page 18, net debt increased due to the aforementioned negative free cash flow and minus €24 million asset disposals/other. Behind this category, there are many movements, the most obvious being the accrued interest of about €22 million, which will be paid in the fourth quarter, then impacting the interest payments. Our liquidity is rock solid. In addition to more than €700 million as of September end, we closed an asset-backed loan facility in the U.S. in November, backed by top-ranked international banks. This more than assures that we have the means to grow, but it is also evidence that we have liquid assets in the group that attract interest from international players. We also do not have any refinancing needs upcoming, neither for our loans nor for our liquidity instruments. Overall, we expect net debt to decline at year-end, driven by the expected free cash flow in the fourth quarter.
On Page 19, before handing over to Philippe for the outlook, I want to give you a heads-up with respect to the new segmentation to come starting with the full year results 2022. This new segmentation, which is preliminary and final names for the segments are still under discussion, follows the direction we have taken since Q1 of this year in our communication, a clear separation of the main tube and mine activities within the overall guidance of IFRS 8. This new segmentation will replace the existing segmentation that we have thus far published in the annual report, with the two main segments called Seamless Tubes and Specialty Products. You can find it on Page 196 of the 2021 Annual Registration Document.
Seamless Tubes in the old segmentation included the mine and forest and a smaller company called Serimax owned 80% by Vallourec and acquired in 2010. Specialty Products includes Vallourec – Valinox China, which has been sold during 2021. What is now called tubes on this slide contains tubes but, for the time being, also our pelletizing plant. We will decide later whether a carve-out makes sense. The EBITDA of the pelletizing plant is dependent on volume and price but generally a lower double-digit million number.
The second major operating segment will be mine and forests. The forest, thus far, has not produced meaningful EBITDA and, therefore, is not distorting the figures very much, the exception being occasional fair value changes based upon IRS 41. Holding companies and others will include Serimax going forward. In addition, we generally reinvoice corporate costs to the regions. However, that is not possible in all cases, and therefore, we retain some costs centrally. Those costs are partially mitigated by the receipt of brand fees. Looking at the figures of 2021, I would expect tube EBITDA to improve at year-end 2022 compared to the prior year, mine and forest to come down and holding to also come down, i.e., deteriorate somewhat.
Let me now hand back to Philippe for comments on our outlook.
Philippe Guillemot
Thank you, Sascha. Let’s look at Slide 21 to discuss the business environment as we head into the end of 2022 and the beginning of 2023. As you can see, it remains positive. In North America, highly favorable market conditions are set to continue for the year-end and into 2023, with the OCTG market remaining tight in terms of available supply.
In the Middle East and Asia, the Oil & Gas market is expected to benefit from ongoing volume recovery in the coming quarters, most notably in the dynamic Middle East market, with a progressive recovery in pricing power. In South America, Oil & Gas prices and volumes are expected to increase. In contrast, we see a neutral volume outlook for Industry, albeit with price increases fully offsetting cost inflation. The only headwind is in Europe, where energy costs are impacting GDP growth. In this context, our decision to move Oil & Gas volumes from Germany to Brazil appears more than ever justified. We will be far less exposed the European industry environment from 2024 onwards.
Turning to Slide 22. This brings me to our outlook for the full year 2022. As I said at the beginning of our presentation, we are confirming all our financial objectives for the year, with EBITDA set to have its strongest quarter in Q4, driven by the tube business. We confirm our full year objective of landing within a range of €650 million to €750 million. We also confirm our objective of being free cash flow-positive for the second semester, driven by an expected strong performance in the fourth quarter.
To sum up on Slide 23. Q3 results were robust, with quarter-on-quarter improvements driven by the tube business. The mine will continue to operate in Q4 and Q1 2023 below full capacity. Works related to the restoration of the core waste pile are completed, and the request to release the pile is registered. Our fiscal year 2022 EBITDA guidance is confirmed, along with our objective of being free cash flow-positive for the second semester taken as a whole based on an expected strong Q4. The New Vallourec plan is fully on track and significantly derisked, with firm social agreements in France, Germany and the UK. Furthermore, we have identified additional initiatives, which will be rolled out in other regions.
Thank you for your attention. Sascha and I are now ready to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will take the first question from James Winchester from Bank of America. Please go ahead.
James Winchester
Great. Thank you. Good morning, guys. I have three, if that is okay. The first is, could you provide a bit of detail on what was the hit to the EBITDA number of the inventory write-down this quarter? The second one is, can you provide a bit of color on the utilization rates of each asset today and how you expect this to evolve into 2023? And then given that we are in late November, and so you probably have very good visibility on numbers at this point. When we kind of look at guidance, should we be considering above or below that €700 million figure? And I’m just kind of keeping in mind that we now have those incremental iron ore volumes? Thank you.
Philippe Guillemot
I will let Sascha answer on the inventory write-off.
Sascha Bibert
Yes, I’ll start with the inventory write-off. James, good morning. The one-off expenses related to the inventory write-off, they are actually low, I would say, very low double-digit million impact in Q3. However, I expect the same cost in Q4, all else equal. Let me remind you, and I think that relates to your third question, that both of the impacts are embedded in our full year guidance where we have neither narrowed the range nor have changed the midpoint.
Philippe Guillemot
Okay. Thank you, Sascha. As far utilization rate of our capacity is concerned, first, we have to be specific on which capacity we are looking at. If we talk about the rolling capacity, in some cases, the limiting factor is the steel plant’s capacity. Nevertheless, as I mentioned, we have plan in all the regions as part of New Vallourec. As an example, in the U.S., we plan to increase production so to further utilize our excess capacity of rolling mill by increasing production of our steel plant and, in some cases, buying billets to a third-party. So that’s one way to better leverage our capacity. As far as Brazil is concerned, it’s a bit the same, limiting factor being the steel plant. But we have plans to increase capacity of our steel plant, and this obviously will lead to increase in volume in the future. As far as China is concerned, here we are in a logic of value versus volume. So our goal is not to fully utilize this capacity but to make sure we use it to address profitable market, and that’s the plan we are working on right now with the Asian team. As far as third question is concerned, why we don’t narrow down the guidance even though we are close to the end of the year? It’s for a very simple reason. We are in a business where we depend on when we can invoice and collect. And invoice, in many cases, means that the boat has left the port from which we expedite our tubes to customers. And there are still uncertainties on some of these major shipments we explained by the end of the year, which is a very classic in this kind of business. So that’s the reason why we still have to wait at the end of the year to be fairly sure of where we land within the range we gave, which, as I said, remains valid.
Sascha Bibert
One small addition, James, if I may, since you mentioned the additional mine volumes since we now have the permission to continue to operate, which is a positive versus our prior expectation. So yes, there are more volumes for Q4 and also for Q1 ‘23. However, please also recognize that we are now planning with lower iron ore prices. So to a certain extent, higher volumes are offset lower prices.
Philippe Guillemot
Yes. And as we said, Germany is significantly impacted by higher costs, starting with energy, which likely will last next year. But again, the decision we made in May is such that we will be, by end of 2023, very little exposed to the European industrial environment, which obviously was the decision to be taken for the group.
James Winchester
That’s very clear. Thanks very much.
Operator
The next question comes from Jean-Luc Romain from CIC Market Solutions.
Jean-Luc Romain
Good morning. Thank you for taking my questions. The first question is on volumes for the iron ore mine. You produced 1.5 million in the third quarter. Is there a particular reason why it would decrease in the fourth quarter? And the second, you are not giving the EBITDA for the tubes and the mine, which is a very good thing. What would you see a kind of normative level for EBITDA margin in the tube business? Would you be closer to what your main competitor is publishing currently?
Philippe Guillemot
So let me take your two questions, first about the mine. The production of the mine is seasonal because we are entering in Q4 and in Q1 next year in the what is so-called rainy season. So we usually produce less during these two quarters as we have done in the past. By the way, as you have noticed and I have been clear on it, we have fully finalized all the civil work that we had to do, and you see it on Page 12 of my presentation. You can visualize what has been a few. What’s very good news is that we have done it just before entering to the rainy season. So we, from now, can really measure how well this civil work address all the issues we had to address post the landslide. So I think that’s really the very good news of this presentation on the mine. As far as – your second question was about…
Sascha Bibert
So-called normative margin in the tube business.
Philippe Guillemot
Normative margin in the tube business. Well, first, we are clear, we want to close the gap with our main competitors as far as EBITDA margin is concerned on the tube business. Nevertheless, our business model are different. As you know, one of our major competitor has a business model, so-called name Redirect, so carries inventory on this balance sheet and, as a consequence, had the margin corresponding to the one, which is with our distributors. So there will still be some differences, not to mention the weighted average of every geography and market. But as a group, we want to close the gap with our main competitors. So you know where they are. You know where we are, and you can easily get what the room for improvement we have. But all the plans we are implementing are there to close that gap. You have to keep in mind that the EBITDA of the tube business is made of a very healthy profitability on the U.S. market, a good margin on the domestic in Brazil but is impacted by margin on the exports from Brazil right now, which has to improve, thanks to our new pricing policy and a very high losses in Germany.
So what we are fixing is the losses in Germany, and this will be done by end of next year. And with the pricing policy, we are addressing the profitability of the export from Brazil, which is prone to significantly improve over the next quarters. And just to finish, in Asia, as I said earlier, we are not so much – we don’t have, as an objective, to fill that capacity, but to better use it to export to markets where we can extract good margin and sell the value of what we do through our more focus on premium sales from our Asian base, China combined with Indonesia.
Jean-Luc Romain
Thank you very much.
Operator
The next question comes from Kevin Roger from Kepler Cheuvreux.
Kevin Roger
Yes. Good morning. Thanks for taking the question. The first one, and sorry for that, is coming back on the guidance and the fact that €100 million gap between the low and the high end of the range is quite huge, assuming that we are in November. And so, is there any element that you can share with us to assume, okay, are you comfortable with the consensus? Should we anticipate maybe some plus or negative on top of what you said that will drive the earnings? Because notably on the mine, you have the volumes, and yet the pricing are not the one maybe that we had three months ago, but your guidance did not include any volumes. So, any additional volumes from the mine should be a plus. So, assuming that the plus that you announced today are coming into the P&L, should we assume that maybe we will be in the high end of the range or something like that? So, any color would be appreciated, please, and sorry for coming back on the guidance. The second one is on the German assets. Is there any update that you can share with us on the disposal program? Where are we on that side? And the third one, you just mentioned your main competitor. During the conference call, your main competitor mentioned that they expect the top line to grow by 20%, something like that in Q4, and by a single-digit trend in Q1. Excluding the mine, is it the same kind of thing that you see also in your business for the short-term? Thanks.
Philippe Guillemot
Okay. Thank you for your questions. As far as the guidance is concerned, yes, let’s be clear, we have confirmed our guidance. You are right, the mine volume is a plus compared to what we communicated in Q2. Nevertheless, as I said, we are doing – we are facing, in Germany, some headwinds with cost. And on top, we are cleaning up our inventory as we have, obviously, a program to better manage our inventory, and obviously, as a consequence, a narrowing gap. So, there are pluses and minuses. And on top, as I said, we have some major shipments to happen, I think right now. And depending on whether the boats leave or not the port, the numbers can be different. So, we still have this unknown. Nevertheless, we confirm the guidance. And obviously, the middle of the range being €700 million, you guess what we at minimum expect to deliver. As far as the German assets are concerned, a disposal of the land, that’s I assume what you referred to, I will hand over to Sascha, but the process is going on. So, it’s very premature to give you any indication on what’s going to be the process of this land. And then I will come back on your question about competition and volume increase for – sales increase for next year.
Sascha Bibert
Hey Kevin. So, number one, we confirmed the €230 million recurring benefit. Second, when it comes to the extraordinary impacts, either P&L or cash, we have today announced that we have – now have firm contracts for the severance in Germany, UK and France. That certainly de-risks the cash-out. And now thirdly, and coming to your question with respect to the sale of land, buildings and similar, process-wise, we are on track versus our original plans. So, optimistic on that side. With respect to the ultimate disposal proceeds, we have to see how it plays out. I have to acknowledge that the environment has somewhat worsened with respect to interest rates, for example, but too early to tell.
Philippe Guillemot
Yes. Thank you, Sascha. As far as, yes, what we can expect next year, not so much in terms of volume and revenue, because as I said earlier, we have pricing power in several geographies. So, prices are increasing. You see it much faster in the U.S. because the lag between price increase and invoice is, yes, two months max, three months max, a bit longer in all the markets. So, yes, you will see in 2023, an increase of the top line on the tube business, which is narrowing what our main competitors said, knowing that our geographic mix is different. So, you need to factor this in. But yes, definitely, we expect a strong beginning of 2023 as far as top line is concerned.
Kevin Roger
Okay. Thanks for the time.
Operator
[Operator Instructions] We will take the next question from Daniel Thomson from BNP Paribas Exane.
Daniel Thomson
Yes. Good morning gentlemen. Just one question on the U.S. outlook, I was wondering in terms of pricing, how structural is the level we are seeing at the moment in your view? Perhaps you could help us to understand by addressing expectations for imports, domestic production and activity levels into 2023? Thank you.
Philippe Guillemot
Yes. We will have to predict the whole year of 2023, but let’s be clear, the prices today in the U.S. market are not reflecting so much the cost increase, but the imbalance between offer and demand. And this is likely to still last when we enter into 2023. As far as import is concerned, you know that there are some restrictions, and they seem to be prone to last. So, it’s not likely that the market suddenly will solve this unbalance between demand and offer. And as a consequence, price will reflect it, for sure, at the beginning of ‘23 and maybe become structural, but again, too soon to tell. We will see it mid next year.
Daniel Thomson
Okay. Thank you.
Operator
The next question comes from Mick Pickup from Barclays. Please go ahead.
Mick Pickup
Good morning gentlemen. Mick here. Just can you just talk about 4Q and the dynamics in that EBITDA lift you are coming through? Obviously, 4Q is, obviously, a quarter with strong volumes. You have been running up 10%, 15% year-on-year through this year, just wondering volume expectations into 4Q. And then on the pricing side into 4Q, I think we were expecting a significant step-up in the second half. It hasn’t seemed to have materialized yet. So, what will you expect into 4Q and then start into 2023, please?
Philippe Guillemot
Yes. Again, to understand the dynamic of our revenue and EBITDA, you need to go back to our geographic mix. As I said earlier, the new pricing policy we have implemented since Q2 has had an impact much faster in the U.S. and the rest of the world, in the U.S., because we sell by cycle. So, in two months, you see it in the invoice. And as we have a short payment term in the U.S., you see it very quickly in our cash. In the other region, it takes more time. They are – the lead times are over six months. In most of the cases, payment terms are a bit longer. So, that’s why the best has to come, and the momentum is there and we see it. We see it in Q4 and even more in Q1 and Q2 next year. So, that’s the reason. Yes, had we – the vast majority of our revenue in the U.S., you will obviously see it much more than you see it in our numbers.
Mick Pickup
Okay. And just on 4Q volumes. Obviously, you did 510,000 tons in 4Q last year. Are we expecting to see an increase on that in 4Q this year?
Philippe Guillemot
Volume will not so much increase next year. The mix may be different, as I said, more in the U.S. than this year. But as we are running close to full capacity, where we decided to be at full capacity, the play is not so much on volume for next year. It’s more on the mix and the value versus volume strategy we are implementing.
Operator
We will now take the next question from Baptiste Lebacq from ODDO. Please go ahead.
Baptiste Lebacq
Yes. Good morning everybody. Just a very quick question. You mentioned that you plan initiatives to be implemented in other regions. What do you think about it? Is it cost-cutting measures? Is it, I don’t know, increasing capacity somewhere? How should we interpret this new initiative in other regions? Thank you.
Philippe Guillemot
Yes. To be more explicit, in Brazil to start with, we are reengineering the organization for more efficiency. So, we are organizing the whole operation in Brazil along with nine autonomous production unit, which will have inside all the resources to manage their perimeter. And as a consequence, it’s likely that we will streamline the organization in Brazil. Main philosophy is to have people where value is created, meaning in the plants. And we had – we discovered that we had, in Brazil, a high level of what’s so-called indirect people ratio versus direct people. That’s what we are going to fix before the end of the year. And again, purpose is to fully leverage the great assets we have in the U.S. I think we have very great assets here, but to make sure that the organization we have in place is prone to fully leverage these assets. As far as the other regions are concerned, I mentioned about the U.S. and the same for Saudi. We want to increase production to better leverage our rolling mill capacity in the U.S. and our finishing capacity in Saudi. So, that’s the plans we have here. So, here, we are not contemplating reduction in headcount, but the opposite, slightly increasing. And again, I am talking about production in the U.S. and capacity in Saudi to obviously answer to the call-offs of Saudi Aramco which are increasing and beyond the volume we had anticipated as far as the long-term agreement we have signed with them not long time ago. And in the rest of the world, as I said, we are on a value versus volume strategy. So, we are – obviously, we are planning to leverage our capacity in Asia, starting with China and Indonesia, obviously, to address markets where we can create value and increase profitability.
Baptiste Lebacq
Thank you.
Operator
[Operator Instructions] We will take the next question from Tom Gibney from BNP Paribas.
Tom Gibney
Hi. Thanks for taking my question. On Slide 11, you referred to a long-term agreement with Petrobras. Is that a – is that the reset of the broader framework agreement with Petrobras that was due to expire mid next year, or is this a separate agreement to that? And the second one is, what’s accounted for the increase in the item in your cash flow statement, which is provision and non-cash items? I presume maybe the inventory write-down, but I just want to confirm that. And then the third one, with respect to the new 5-year loan, what assets are backing that new loan? And which entity in the group is the borrower?
Philippe Guillemot
Okay. I will let Sascha answer the two questions you had on cash and the asset-backed financing line, and then I will switch to Petrobras.
Sascha Bibert
Good. Hey Tom. Starting with, I think your question with respect to the elements in our cash flow, which I think you specifically looked at provisions. No, these are predominantly release of so-called LMO provisions, loss-making orders, that we have set up at the beginning of the year and that we were now able to release. However, obviously, neither the setup nor the release is cash-effective, so that is the key correction in that line item called provision. When it comes to the ABL, these are related to the U.S. entities. And the assets behind that is inventory and receivables. I think now comes Philippe on Petrobras.
Philippe Guillemot
So, we are currently delivering to progress within the existing agreement, which ends 2023. But we have been publicly awarded a new long-term agreement that obviously will start deliveries in a year, I think when the current one expires. And what’s interesting is to note that within this long-term – new long-term agreement, we will deliver 18-inch seamless tubes as we will have made Brazil able to produce these outside diameters, which are currently produced in Germany.
Tom Gibney
Thank you. And what is the duration of the new agreement? And is it on – are you pleased with the results? Is it broadly on similar terms?
Philippe Guillemot
The 3-year contract plus 1-year extension option.
Tom Gibney
Okay. And are you pleased with it? Is it broadly on the similar terms to the last one?
Philippe Guillemot
We are pleased with it, yes.
Tom Gibney
And is it on broadly similar terms to the last one?
Philippe Guillemot
In essence, yes.
Tom Gibney
Okay. Great. Thank you.
Operator
That will conclude today’s question-and-answer session. I will hand the call back over to the CEO for closing remarks.
Sascha Bibert
Philippe will do the closing remarks in one second. I was just thinking one more comment on the question that I think Mick from Barclays was asking before. I think he talked about or asked about volumes in Q4. I just want to make sure that there was no misunderstanding. When we talk volumes, we think about tube volumes, and we think about tonnage. So, I think that’s when Philippe referred to our focus on value. When you talk about revenues for the tube business in Q4, obviously, you will have positive pricing effects, so I would expect the revenues from the tube business to be up markedly in Q4 year-on-year.
Philippe, your closing statement?
Philippe Guillemot
Thank you, Sascha. So, to sum up what we have discussed this morning, Q3 results were robust with quarter-on-quarter improvement, driven by the tube business, and obviously, the momentum is there for more in the future. The mine will continue to operate in Q4 and Q1 2023, below full capacity. But the works which were related to the restoration of the core waste pile are completed, and we expect now the release of the pile for full production. Our fiscal year ‘22 – 2023 EBITDA guidance is confirmed, along with our objective of being free cash flow-positive for the second semester, taken as a whole based on an expected strong Q4. And the New Vallourec plan is fully on track and significantly de-risked with the firm social agreement in France, Germany and UK. And last but not least, we have as I commented, identified additional initiatives in all the regions that will obviously start to deliver next year.
Thank you for your attention and looking forward to meeting you soon.
Operator
Thank you. That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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