Tenaris SA

MIL:TEN

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by. Welcome to Q1 2024 Tenaris S.A. Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Giovanni Sardagna. Please go ahead.

[Giovanni Sardagna, executive]

Thank you, Gigi, and welcome to Tenaris 2024 First Quarter Conference Call. Before we start, I would like to remind you that we will be discussing forward-looking information in the call and that our actual results may vary from those expressed or implied during this call. With me on the call today are Paolo Rocca, our Chairman and CEO; Alicia Mondolo, our Chief Financial Officer; Gabriel Podskubka, our Chief Operating Officer; and Luca Zanotti, our President of our U.S. operations. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our quarterly results.

Our first quarter sales reached $3.4 billion, down 17% year-on-year and flat sequentially, as an increase in volume and the full consolidation of the coating business acquired in the previous quarter offset the impact of lower selling prices in the Americas. Average selling prices in our Tubes operating segment decreased 15% compared to the corresponding quarter of 2023 and 6% sequentially. Our EBITDA for the quarter was up 1% sequentially to $987 million. Our EBITDA margin remained flat at around 29% as the reduction in average selling prices was offset by a strong operating performance, a positive contribution for our newly acquired Coating business and a $25 million gain from legal claim's resolutions in Mexico and Brazil.

With operating cash flow of $887 million and capital expenditures of $172 million, our free cash flow for the quarter was $715 million. Following share buybacks of $311 million during the quarter, our net cash position increased to $3.9 billion, up from $3.4 billion at the end of last year. Now I will ask Paolo to say a few words before we move the call to questions.

[Paolo Rocca, executive]

Thank you, Giovanni, and good morning to all of you. We have had a good start to the year, maintaining our sales and EBITDA at the same level as in the fourth quarter of last year despite the unfavorable pricing environment, that is affecting our sales in the Americas. This reflects the strength of our global positioning as well as a solid performance across our business lines. In the coming quarters, however, our results will be affected by a soft U.S. rig count affected by low natural gas prices by an increase in the OCTG imports and an extended decline in prices.

Our free cash flow will remain solid. During the quarter, our newly acquired Tenaris ShawCor pipe coating operations, where we successfully completed an exceptionally large project with concrete weighted coating with a pipeline in Mexico made positive contribution to our sales and EBITDA. Tenaris ShawCor was also awarded a $108 million project to supply wet insulation and anticorrosion coating for the offshore pipeline for the ExxonMobil Whiptail development in Guyana. This project will be supplied during 2025. Around the world, offshore projects are moving forward. And with our extended reach, we are providing a wide range of integral solutions for this complex development.

The Middle East is another area which has seen growing in activity. In Saudi Arabia, we are benefiting from the increasing demand for their gas development program and the consolidation of our GPC large-diameter welded pipe operation. In the United Arab Emirates, with our new premium credit facility in full operation, we have been awarded a 2-year extension of our redirect contract. While our long-term agreement with Qatar Energy LNG has also been extended for 3-years to cover the drilling in the North West Field to supply the related expansion program. In Canada, we have been successfully repositioning our variation and extending our Rig Direct program following the Canadian government decision to impose normal value on Chinese OCTG imports, and the investment we made in our [indiscernible] mill.

As the LNG Canada and other LNG projects move forward, operators are increasing their operation in the Montney Shale. We recently awarded a long-term rig direct contract to supply a major operator there. We participated in the CERAWeek conference last month where we were able to share you on the energy tradition and the prospect of the oil and gas market over the long term. What came out from the discussion was the sense that a more pragmatic approach to the complexities of the transition is required. With a focus on reducing emission using all means available across the energy industry and this value chain. At the same time, due to the enormous cost and complexity of the transition, oil and gas will continue to be required for many years, to support the growing demand for secure affordable energy, particularly from developing countries and to support technological development such as artificial intelligence.

This year, in the third quarter, when we have a seasonal slowdown in demand, we will implement a major investment and maintenance program that has been postponed over the last 2 years of intensive operations. This [ event ] will involve stoppages in our 5 steel shops and our main seamless rolling mills. In Argentina, we will install an electric furnaces that will be fed by Consteel scrap or heating furnace and by our DRI plant. Once we complete our second wind farm in 2025. The new furnace will use 100% renewable energy to produce steel with a minimal level of carbon emission.

In the U.S. We will upgrade our copper-steel shop installing a new baghouse system to reduce emissions. In several of our facilities, we are enhancing our capabilities to produce high alloy chrome products as demand for these high-value products is growing. In Mexico, we will have the first major maintenance of our Tamsa medium diameter rolling mill in 4 years. In addition to a maintenance shutdown at our steel shop. This investment will be executed within our previous CapEx guidance. but they will limit to some extent our capacity during the second half. We are now ready for any questions you may have.

[Operator]

[Operator Instructions]. Our first question comes from the line of Arun Jayaram from JPMorgan Securities, LLC.

[Arun Jayaram, analyst]

Gentlemen, I wanted to get your thoughts on trends in U.S. pricing. We received the latest Pipe Logix number which did suggest continued declines in the 3%, 3.5% range. And so maybe I was wondering if you could give us a sense of your average selling price in 1Q, trended world leading-edge prices as per the Pipe Logix index? And how does this impact your thoughts on 2Q and the back half of the year?

[Paolo Rocca, executive]

Well, thank you, Arun, for your question. You are right in the -- looking at the decline in the Pipe Logix is a relevant factor. This is mainly due to increased import in the United States. Some soft view on the rig count and the volume. And this, to some extent, has been affecting. But I would ask Luca to give us the view on the perspective of this for the next quarter and for the first -- the second half of 2024.

[Luca Zanotti, executive]

Yes. Thank you, Paolo. Yes, just picking up what Paolo was saying before, I believe that in this Q1 -- first of all, looking at the spot price in one single month like April, it really is not representing. We see pipe logics reading that were better, maybe in the past. And so I believe that we need a more long-term approach to these ratings. But getting back to what Paolo was saying, here in the first quarter, what we saw is an industry that was expecting a little bit higher activity getting into the first quarter, second quarter of 2024. And as a consequence, domestic and especially imports increased. So what happened is the distributors went out, start buying mainly from Korea that had a reset of quotas, Taiwan, Austria and Thailand.

And so the combination of a slightly softer expectations on demand and higher imports led to this pressure on prices. And this will delay the stabilization of the Pipe Logix. When it gets to our pricing, you always have to remember that we have a 1 quarter delay between the Pipe Logix rating and the way it gets into our profit and loss. So you're going to see this even going forward.

[Paolo Rocca, executive]

Thank you, Luca.

[Arun Jayaram, analyst]

Great. And I wanted to see, Paolo, if you could comment on some of the maintenance activities that you planned for the second half. Could you help us think about what kind of impact this could have to volumes? I mean, we've generally been thinking that the company could ship 4 million tons of product this year. But give us a sense of what kind of impact that could happen in the second half?

[Paolo Rocca, executive]

Well, as I mentioned in the opening remarks, we have been working at full capacity for almost 2 years. And then we will to -- take advantage of this slight reduction that we see in the rig count and in the demand for concentrating some key intervention on our industrial system. Part of this is maintenance. But also we are focusing on some major investment from our point of view, which is the change in the furnace in Argentina. And also investment in the others steel shop and in the finishing line of our mill in different parts of the world. We think that we can take advantage of this time for changing our profile in terms of emission, increased automation and productivity and also cost reduction over time by this cycle of investment.

As I mentioned in the opening market, this will be in line with our forecast for CapEx in the range of $730 million during 2024. So there is no change with this. Our volume will be impacted only in seamless to some extent, but I would call it not something substantial, but it will be impacted in our seamless component. So the welded will remain at the level of last year. The third quarter is seasonally below. Overall, the volume will not be very different from last year volume, but with participation of welded higher than the participation we had welded last year.

[Operator]

Our next question comes from the line of Alessandro Pozzi from Mediobanca.

[Alessandro Pozzi, analyst]

The first one is on the outlook for the rest of the year. In the Q4 conference call, you mentioned average EBITDA margin of 25% for the first half of 2024 and given that you have printed 29% in Q1, it looks like potentially, you are going to have higher margins in Q2. But then I was wondering given that you have the stoppages in Q3, what should we assume for EBITDA margins in the second half of the year based on what you see, obviously, at the moment.

And Also, my second question is on the [ docks ]. So we've seen those [ docks ] holding since they reached the peak. And I was wondering, is that going to be potentially a trigger for having a higher rig count at some point than the line this year?

[Paolo Rocca, executive]

Well, thank you, Alessandro. What we expect is that our margin in the first half of 2024, as you are saying, will be slightly higher than we anticipated because we had margin slightly higher. If you look at the adjusted EBITDA is in the range of 28-point something. We think that in the second Q, we will have lower EBITDA than 25%. But as a whole, on average, we will be slightly higher than 25%. When we look at the second half of 2024, there is not so much visibility on price. But for what we are seeing in the evolution of the Pipe Logix, we should be prepared to an EBITDA margin between '20 and '25. We don't know, let's say, yet how far the price reduction will go and also our reaction in terms of cost reduction. That will accompany the pressure that we are feeling.

There are many pieces moving here. One of the important piece is also Argentina recovery in its oil and gas sector. There are also, let's say, some uncertainty about the evolution of the rig count. So when we speak about the second half of 2024, we are considering a range. It's very difficult to have, let's say, a number for a semester in which we will have different factors affecting our sales and our profitability.

[Alessandro Pozzi, analyst]

Yes. So just in Q3, given the loss of volumes from seamless, should we assume EBITDA margins more towards the 20%, just for that quarter in Q3?

[Paolo Rocca, executive]

We will have -- as I was saying, still the prices for the third Q are not being entirely defined yet. But if the reduction in the Pipe Logix is going on and import to maintain this level in the U.S., we will be slightly higher than what you are saying, but still close to the number you are saying. Now talking about the DUC and the possible influence on drilling, I would ask Luca to give us a view of the possible impact of this.

[Luca Zanotti, executive]

Yes, Paolo, thank you. Alessandro, on the DUCs, yes, you're right, in March '24, according to the Energy Information Administration, we had a number of DUCs that was the lowest over the last 10 years. And for example, if you just go back 5, 4 years and in Permian, we had 3,200 DUCs. And in March, we had slightly less than 900. So you might think that here, there is a potential upside, and you may be right. This upside is not in our forecast, and we may have it. On the other hand, I do believe that the business model by which E&Ps were building large inventory of DUCs, given the capital discipline is no longer on the table. But you're right, there are two aspects that may play on the upside, which is a number of DUCs, one, and also the fact that with this lower rate activities, the U.S. is maintaining crude production above the 13 million barrel per day -- so 13 million-barrel per day, which is pretty significant.

[Operator]

Our next question comes from the line from Marc Bianchi from TD Cowen.

[Marc Bianchi, analyst]

I'd like to just first clarify, Paolo, if we could, the progression you outlaid on the margins. I think I heard that second quarter could be below 25%. The second half would be between 20% to 25%, with the third quarter approaching 20%. Did that capture it?

[Paolo Rocca, executive]

In the first half, we will be slightly higher than 25% because we had a good first quarter. In the second half, as you are saying, for the visibility that we have, we will be in that range. And in the third quarter, because of the reduction of seamless, we will probably be above 20%, but let's say, slightly above 20%. 20%, 25% is, let's say, what we can visage today.

[Marc Bianchi, analyst]

Okay. That's helpful. Can you -- the press release talked about the Tenaris ShawCor that contributed to first quarter. Could you maybe discuss how much of a contribution that was? And help us think about what the maybe normalized contribution from that business should be as we progress?

[Paolo Rocca, executive]

Thank you, Marc. The focal business is -- has ups and downs, depending from large project, now is a business that depends on relevant contracts for relevant projects run. But I would ask Gabriel, to give us a view on how we see the perspective of Shawcor for the foreseeable future.

[Gabriel Podskubka, executive]

Yes. Thank you, Paolo. Yes, indeed, ShawCor has contributed importantly to the result of the first quarter, given the last stage, the tail of a large concrete weight coating project in Mexico in the Altamira region. So this has a -- had a contribution of about in revenue, specifically in the first quarter for this project that we will not carry further down in the year. But we are very pleased with the ShawCor acquisition. The brand of ShawCor is very well recognized as a global leader, a global footprint of facilities, R&D centers to track record and product knowledge that complements and strengthens very well the position of Tenaris in the offshore segment.

As a matter of fact, Pablo announced in the opening remarks, the recent order related to the insulation coating in Guyana development, more than $100 million order in insulation coating with good margins and contribution. So we expect the ShawCor business to continue supporting revenues and our position in the offshore segment, I would normalize in annual revenues in ShawCor after this Altamira projects in the range of $250 million to $300 million. Annually, this would be a running rate where we see ShawCor contribution going forward.

[Paolo Rocca, executive]

Thank you, Gabriel.

[Operator]

One moment for our next question. Our next question comes from the line of Dave Anderson from Barclays.

[John Anderson, analyst]

I wanted to ask a bit about the Middle East and how that's going to impact your volumes, kind of thinking about kind of 25% and beyond. You just noted a 2-year extension on the on the UAE Rig Direct. But I believe that contract has actually been -- the volume has been fairly slow because they've been working down a lot of the inventory. So I'm curious if you start to see that spike and start to pick up over the next couple of years? And then secondarily, you also mentioned unconventionals in Saudi. And that looks like a massive opportunity there. And I'd love to understand a little bit from your perspective of how you see that changing things. The Jafurah wells, I believe, are quite a bit more OCTG-intensive than even U.S. onshore conventional. If you could talk about those 2 markets, please?

[Paolo Rocca, executive]

Yes. Thank you, Dave. Also on this question, I will ask Gabriel, an overview for Middle East in general and unconventional in Saudi, which also we share the view that is a very relevant development for Saudi, now important for us.

[Gabriel Podskubka, executive]

Yes. Thank you, Paolo. Dave. Yes, what we see in the Middle East is that the drilling activity remains strong. We see continued investment in expansion of capacity, both in oil and in gas with a very positive momentum. Saudi, clearly remains the brightest spot. During the last quarter, the Kingdom announced and revise upwards the target of gas production increase for 2030. Now we are targeting an increase of 60%, previously target was 50%. So we see that the drilling in gas, onshore gas related also to the unconventional that you're mentioning, Dave, will more than offset the decrease in the offshore rigs related to oil that were also announced during the last quarter.

So overall, in the Saudi, the strong level of activity also the CapEx guidance for 2024 for the year of Saudi was given a range, but it's importantly, higher than 2023. So we believe that with the backlog that we have, the position that we have in the country for OCTG and pipelines, Tenaris is well positioned to remain delivering strong shipments into the Kingdom. The Emirate is also expanding. Paolo mentioned the extension of our long-term agreement with ADNOC. We extended for another 2 years. We had the chance to incorporate other coating services, digital services, and also expanded our Dopeless range in the Emirates, where we have our facility up and running. So overall, we also see strength coming from the Emirates in the Middle East. And last but not least, Qatar also during the quarter, made an announcement about an expansion of further development expansion for their LNG project.

This is a North West Field project. This will require drilling of approximately 50 production and injection wells. In Qatar, also our long-term agreement with Qatar Energy LNG was extended for another 3 years. So this is a demand that we intend to cover with this year. So with all this backlog plus the network of contracts that we have. We have a very good visibility into 2024 and even 2025. The revenues in the Middle East in the whole region will keep the core and high levels going forward.

[Paolo Rocca, executive]

Thank you, Gabriel. We are doing good inroad in the region. It is also a region in which there is competition. And to some extent, some area also, I mean, prices are also receiving, let's say, the competitiveness in our business.

[John Anderson, analyst]

If I could just follow up on that question. You have some capacity in Saudi itself, and I believe you have a seamless mill. I'm just curious -- talked about I mean, a competitive advantage, that is certainly a competitive advantage you're having production in country. Would you expect to maybe build out that capacity? Do you expect to maybe expand the capacity of that facility in Saudi, in order to improve your competitive position?

[Paolo Rocca, executive]

We are developing plans for expansion. On this sense, even the SSP is listed in the local market and the expectations are very high also from the investor. But Gabriel, you can give us some indication on how we can make grow the position we have and the activity that we have in Saudi, which are expensive.

[Gabriel Podskubka, executive]

Yes. Of course, we monitor capacity level with the demand expectations so far, with a finishing premium capacity that we have in Kingdom, we feel comfortable to accommodate this demand, and this is something that we'll continue to monitor. The same on the well, the ERW capabilities. And on the GPC, the new recently acquired facility, we are expanding. We are, at this point, commissioning our second line, which roughly will double the capacity for pipelines and conductors in the kingdom to accompany the trunkline and the expansion of oil and gas transmission in the Kingdom. So we are certainly willing and capable of expanding capacity in the kingdom as we see need for it.

[Paolo Rocca, executive]

Yes. We are preparing for an expansion of the gas master plan, that should go on in Saudi. But hopefully, I mean, the new line and so will let's say, increased capacity, but this will be for probably later on at the beginning of 25% or so.

[Operator]

Our next question comes from the line of Luke Lemoine from Piper Sandler.

[Luke Lemoine, analyst]

Luca, you've given us various pieces kind of a U.S. land, but could you just talk about your activity outlook and what you think maybe the rig count will do for the balance of the year and what conversations with customers you like on activity levels.

[Paolo Rocca, executive]

No. Sorry, I didn't understand the first part. Can you repeat please, to be clear on [indiscernible].

[Luke Lemoine, analyst]

Just asking about -- you talked about imports in the U.S., but if you could just talk about general activity and how you see that unfolding for the balance of the year within U.S. land?

[Paolo Rocca, executive]

Yes, I understand -- on U.S. land. Here, also, Luca, which is your view on basic level of activity that we may expect in, if we ask from your view.

[Luca Zanotti, executive]

Yes. Thank you, Paolo. Luke, as we look forward, what we see is certainly some weakness on the dry gas side. with these gas prices, we don't see this increasing. Actually, we see this probably going down a bit from where we are today. But the importance of the share of the gas drilling in the U.S. is limited. So -- what we expect is some weakness over there that is going to be offset from one upside, some upsides on the oil side. In general, we see a flattish drilling activity going through 2024. But this is what we see today. We don't know how this will progress in the second half. There are many factors at play in this case. And we need to go a little bit ahead in the year to give a more firm view on the second half of the year.

[Paolo Rocca, executive]

Thank you, Luca. Frankly, from my point of view, with this price of oil in the WTI, the level of uncertainty and volatility in the market. Maybe a further reduction in the interest rate in the states. This is also an important factor in this. I think that in oil there should be -- if the interest rate is going down in the second part of the year, this should be a pickup or stabilization first, but also maybe a pickup of the level of drilling. But we will see, as Luca is saying, it's a little early today in an electoral year to have an evaluation of what will happen in the second half of 2024.

[Operator]

Our next question comes from the line of Joseph Charuy from Bank of America.

[Joseph Charuy, analyst]

Congrats for a solid set of results. Two questions from me. So net cash now sits at $3.9 billion. If free cash flow is to remain solid across the year, is it safe to assume that the buyback program needs to continue post November? And if so, could we even see a step up in the run rate above your current $300 million a quarter? Secondly, and again, talking about U.S. onshore, as we see some consolidation via M&A, how has your market share evolved? And how much extra tonnage does this represent?

[Paolo Rocca, executive]

Yes. Thank you, Joseph. Well, on the first part, we enter into our buyback program. This is not, it's a decision a decision that will have to be taken by the Board in due time. We have a large cash position, and as I was saying, a very solid free cash flow even considering the investment and the commitment that we have, this will be kept into consideration. Also, we will, as we say in the past, always look at the option. But I would say that if there are no major change, it is likely that this program may proceed. On the second point, which is we don't give information about market share in -- usually. But Luca, you may elaborate a little on our positioning in this environment.

[Luca Zanotti, executive]

Yes. On the consolidation, obviously, we don't provide sensitive information. But what I can say, Joseph, is that our presence with our redirect model in the large operators is very strong. So we have been benefiting from the consolidation. And if further consolidation is going to happen, we're going to be continue benefiting from this consolidation on this segment. Now bear in mind that in some cases, we are already on both sides of the transaction in terms of supply. So you wouldn't need to take this face value because this would be misleading. But certainly, consolidation has benefited us. And if further consolidation would happen on this side of the market, this will continue benefiting us.

[Paolo Rocca, executive]

Thank you, Luca. To some extent, the consolidation may be one of the reasons why the rig count is stable in spite of a relatively high level of price on oil. I'm not saying gas in which it's more understandable. But in my view here, there is -- the company are taking time because also these consolidation are announced but are not really executed in some case because still they need authorization. So let's take time, and we will see. Logical thing will be for us, the Pipe Logix and rig count, over time to reflect deployment of this consolidation on -- in a more active level of activity, especially as I was saying before, interest rates go down to some extent.

[Operator]

[Operator Instructions] Our next question comes from the line of Luigi De Bellis from Equita SIM.

[Luigi De Bellis, analyst]

The first one is on the South America. So you mentioned in the political and economic volatility affecting the activities of -- can you elaborate on the expected trend for the coming 2 quarters in Argentina and Mexico, even in terms of rig count expectations? And the second question on the pricing. So what is your pricing evolution in your margins outlook for the coming quarters? And when do you expect the bottoming out of Pipe Logix prices, and you perform it very, very well in terms of cost in Q1. How much room do you have to improve the cost structure in the coming quarters?

[Paolo Rocca, executive]

Thank you, Luigi. The first point on South America. Well, Argentina, after the change in the government, the stabilization plan underway is successful in terms of reducing inflation, reducing the country risk substantially, almost halving the country risk. Now the government is in the process of asking for approval of a very relevant set of laws in the Congress, if they succeed in this, these set of law include specific treatment for large project and in hydrocarbon law that, in my view, will stimulate investment in the sector. So we are in a kind of standstill while everybody is waiting for understanding if the government is able to get approval for transformational load, like the one they are proposing today in the Congress. Once this is done, and I think will be done, I think that the company will move on, it will take time. I would expect in a positive environment, starting in the beginning of 2025, we will see actual action because today, the rig count is slightly lower than last year. There are -- marginal rigs are not operating. But there are new equipment coming in, into Argentina moved from the U.S. So in preparation of raising level of activity, but we will see this, in my view, full in -- during '25. At the same time, there are activity for the evacuation of oil and transportation of gas. These are projects that in the case the law for our large project is approved, we will also be putting motion. Now to put in motion in the project, sign the financing, private financing, organizing all of these will take time. So again, I think this will -- we will see, let's say, really bit and acquisition of key inputs in the beginning of 2025. So not so much during the coming quarter. Brazil is growing. Brazil is moving on, has a program for developing resources. Resources are reached. So I think this is more predictable. We'll gradually moving on in developing deepwater reserves and increasing the level of rigs. Venezuela is what it is only Chevron will be allowed to continue to operate, and we were serving, in fact, Chevron in Venezuela, but it's a relatively limited set of operation. Colombia is going down because of the policy adopted by Petro. Still, the number of rig must be 10% below the level of rig last year and may be reduced even further. Mexico -- For Mexico, the level of operation -- of rig operation in Mexico is basically going down slightly in waiting for the change in the government. The new government will have to define the policy for Pemex, probably refinancing the -- or restructuring the debt of Pemex and deciding after the construction of the refinery that is being almost completed in [indiscernible]. We'll decide which will be the next stage of development for Pemex. Also this, I expect in 2025, we will see a stable or increasing activity in '25 would be very logical with this price of oil and the need of oil and gas development in Mexico. The new government will assume in December of 2024. This is the overview for Latin America.

The second question is the [ bottoming up ] of the Pipe Logix, this basically will depend from import, imports, some of these in unfair trading condition has been getting in, in this quarter. I don't know if going on we will see similar volumes of import, but I would expect the Pipe Logix to level up to level, let's say, by the middle of the year because if there is let's say, a slight reduction in import, the level of inventory will could go down slowly and this will allow the level of the Pipe Logix to level off. In terms of costs, you are right that we have been -- we had a positive quarter. Cost, we are considering the reduction in Pipe Logix. We are launching specific actions all around our system to contain variable direct and direct costs. We expect to help us to contain the reduction in the Pipe Logix and to defend our margin, especially in the second part of 2024.

[Operator]

Thank you. At this time, I would now like to turn the conference back over to Giovanni Sardagna for closing remarks.

[Giovanni Sardagna, executive]

Well, thank you, Gigi, and thank you all for joining us in our -- at our conference call, and see you soon. Thanks.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.