Tenaris SA

MIL:TEN

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Q2 2021 Tenaris S.A. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

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 2021 Second 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; Guillermo Vogel, Vice Chairman and member of our Board of Directors; German Cura, Vice Chairman and member of our Board of Directors; Gabriel Podskubka, President of our Eastern Hemisphere Operations; and Luca Zanotti, 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 sales in the second quarter of 2021 reached $1.5 billion, up 23% compared to those of the previous year and 29% sequentially, mainly driven by a recovery in sales in North and South America, but with sales increasing in all our reporting regions.

Average selling prices in our Tubes operating segment declined 6% compared to the corresponding quarter of 2020, but increased 6% sequentially as higher prices are compensating higher raw material costs.

Our EBITDA for the quarter, which included an extraordinary gain of $33 million from the recognition of fiscal credits in Brazil, was up 54% sequentially to $301 million, reflecting higher volumes and our good industrial performance. Our EBITDA margin was up at around 20%. Our quarterly net income of $294 million benefited again from a strong contribution from our investment in Ternium and Usiminas.

During the quarter, working capital increased by $314 million mainly due to higher inventories, which reflects the increased levels of activity. Cash used in operating activities during the quarter was $50 million, with capital expenditure of $51 million. Our free cash flow for the quarter was negative $402 million. After a dividend payment of $165 million in May, our net cash position declined to $854 million at the end of the quarter. Now I will ask Paolo to say a few words before we start -- we open the call to questions.

[Paolo Rocca, executive]

Thank you, Giovanni, and good morning to all of you. As we ramp up our activities to meet higher demand, Tenaris is acting on all fronts. We are hiring and training new employees as we increase production throughout our global industrial system. Our team is managing disruption from the ongoing effect of the pandemic and confronting the rapid increases in raw material and logistic costs.

Once again, our team is demonstrating the resilience and capacity to respond to changing conditions that is a hallmark of our company. In this dynamic environment, our second quarter results show the progress we are making in North America and the rest of the world. For the second consecutive quarter, our sales in North America increased by more than 30%, as we extended our Rig Direct sales model and fully recovered the market position in the U.S. that was affected during the lengthy IPSCO takeover process.

We're moving quickly to bring production at Bay City to full capacity, to step up production of [indiscernible] for our U.S. and Canadian seamless pipe mills and to bring online our Ambridge mill and the Baytown finishing facility in Houston.

Since October of last year, we have taken on 700 new employees in the United States and plan to hire a further 450 by the end of the year.

Digital integration is a key feature of our Rig Direct service, both in the United States and around the world. We now have 50 customers using our Rig Direct portal around the world, who account for 50% of all items ordered under our Rig Direct program. Within this program, we also offer full pipe traceability through our PipeTracer application.

In South America, sales are also recovering. In Brazil, Petrobras awarded us the contract to supply sour service and high alloy seamless casing for the Libra pre-salt field. Petrobras will use our seamless product, including our Dopeless and PipeTracer technology in the Brazilian deep offshore, an important step in our positioning in this market.

The Libra discovery and now renamed Mero is one of the world's largest and most important deepwater fields. The reservoir in the Santos Basin is located 4,000 meters below the seabed at a total depth of 5,900 meters. It has estimated total recoverable reserves of 3.3 billion barrels, and the development plan aims for a production rate of 720,000 barrels a day.

In Argentina, we began offering pressure pumping and coil tubing services in Vaca Muerta as a complement to our full Rig Direct service in the country, with a backlog worth $70 million over the next 12 months. Worldwide, we expect to invoice around $400 million in service and accessories over the same period. With these services, we have the opportunity to reinforce the relationship that we have with customers and extend our knowledge of operating conditions.

In Europe, industrial production has been recovering following the pandemic. New sales opportunities in hydrogen storage, carbon capture -- carbon capture and storage infrastructure and the inspection of electrical grids are appearing in connection with the energy transition. In industrial sector, I would like to highlight our global automotive business, where we expect to invoice around $200 million this year, with over 50% coming from tubes and components for airbags, a segment in which we have a 40% global market share.

To meet the demand growth in this sophisticated segment, we are expanding our component facility in China. This quarter, our sales growth amounted to 29%, and we expect that our sales will continue to grow in the coming quarters. And as we move into 2022, we should also see a stronger contribution from the Eastern hemisphere, with the large backlog of order we have in the Middle East that we discussed in our previous call and the reactivation of activity in some offshore projects in Africa and the North Sea, where we are well positioned.

The substantial increase in raw material costs that we have seen since the beginning of the year are just starting to appear in our cost of sales, and it will not be until the fourth quarter that they are more fully reflected. Prices are also increasing with some lag, particularly in North America, as drilling activity recovers and tubular inventories held by distributors decline. Against this background, we're confirming our guidance for a 20% EBITDA margin level during this third quarter.

As the world prepare for the COP26 Climate Summit in Glasgow, with expectation that current decarbonization targets will be reinforced with more specific actions in support of those targets, Tenaris stands ready to contribute with the investment in decarbonization that we have committed to carry out over the coming years.

More customers are asking us about our carbon emission and how we plan to reduce them, and we see this as an opportunity to reinforce our competitive differentiation.

I will leave the floor open now for any questions you may have.

[Operator]

[Operator Instructions] Our first question comes from the line of Ian MacPherson from Piper Sandler.

[Ian MacPherson, analyst]

I guess I wanted, Paolo, to follow up on your comment regarding the material cost inflation that will be more fully reflected by the fourth quarter as opposed to the third quarter. Does that present any risk that the 20% EBITDA margin will just be sort of a 1-quarter event? Or on the other hand, do the throughput and price increases that you have coming through give you confidence that you're going to hit 20% margins and stay there with the platform to improve next year?

[Paolo Rocca, executive]

Well, thank you, Ian. We are estimating an increase in our top line and in the range of, let's say, double digit, low double digit for the next quarter. And we are estimating the EBITDA margin in the range of 20%, considering the -- how the increase in the cost of input and raw material is getting into our cost of sales.

Now there could be risks on it. Some of this may come from disruption in the logistics or in some specific issue. It could also be related to pandemia. But in general, I think that we should be able to achieve this level of margin, considering the price increase that we know are embedded in the contract for this third quarter and, basically, the level of cost that we have in our inventory.

[Ian MacPherson, analyst]

Okay. That's great. And then I was going to ask also, just looking ahead to 2022, when the Eastern Hemisphere is going to materialize in a bigger way than it has so far this year. Generally speaking, historically, for Tenaris, that is a higher-margin hemisphere for you, is it not? So that would be a tailwind for margins?

[Paolo Rocca, executive]

Yes. Thank you for your question. You are right that in 2022 we will increase our shipment to the Middle East. And in fact, the mix of our product is pretty poor in the second half of 2021. We'll improve in -- going on during 2022. But maybe, Gabriel, you can give more color on the timing of the contract and the backlog that we have in your region.

[Gabriel Podskubka, executive]

Sure. Thank you, Paolo. Ian, thank you for your question. Yes, indeed, we see drilling activity in the Middle East has started to pick up in the recent months. This is something that a positive trend that we expect to continue as the OPEC enters in the phase of production increases. The recovery is being gradual, but the signs are very clear and consistently positive. We are seeing rigs being added. Large projects are reactivating, for example, Marjan and [ Suluv ], 2 large projects in Saudi Arabia, And we expect the new tenders in Saudi as well coming to market for demand in 2022.

In the other 3 core markets of the region, UAE, Kuwait and Qatar, as you know, the large OCD tenders have been already played. We are well positioned there by our backlog of multiyear contracts. This will start impacting in 2022, likely in the second quarter of 2022 will be the first strong sign of this. It will depend on the drilling plans, stock management and also [indiscernible]. So overall, we expect the shipments in the Middle East to remain broadly flat in the second half of '21 compared to the first half of '22. But in 2022, we should see a recovery path, estimating probably a double-digit growth in the first half versus this current half, given the contract that we have.

In those contracts as well, we have formulas. With the NOCs, we have formulas reflecting both cost and market indicators. There is typically, in this regional, a lag so it will take some time, but also, there's going to be some pricing adjustment to the cost situation in these Middle East contracts as the year 2022 progresses.

[Operator]

Our next question comes from the line of Igor Levi from BTIG.

[Igor Levi, analyst]

Could you provide some more color on your energy transition initiatives in carbon storage and hydrogen? And how are the projects recently awarded been coming along? And are there any new projects you guys are bidding on that are on the horizon?

[Paolo Rocca, executive]

Thank you, Igor. We are following a number of projects. Our exposure to the energy transition-related business is increasing. It's mainly focused on projects for carbon capture and use and storage, like the Northern Light. This is a project that we will see -- we will be shipping this during 2022. These kind of projects, we are monitoring what's happening in different regions. But let's say, many of these are still in a stage of design and engineering.

Other area related to the energy transition in which Tenaris is in acting is cylinder for hydrogen. We are working and we have -- we're increasing our shipment of cylinder for storage, for service station that are supplying project. But today, I would say, are still pilot project. We do not see yet a massive project in this area. These projects are similar to the one that we also, as a company, have in our mill in Dalmine that we will develop for this. So I would say that the stage of this project is still a level of pilot project.

We are also looking in all the actions that should be taken to transform infrastructure from gas to include a component of hydrogen that may require a tubular product or a substitutional pipeline also. But even there, I would say that this is still in a very -- at the very beginning, let's say, of the process.

We are also exposed to geothermal. That is a small niche. I mean these are not volume that will move -- will change, let's say, the overall exposure of this. Geothermal, CCS, the large vessel for hydrogen, these are areas in which we are operating. And there are also something in the biomass in which we have, let's say, a participation. But I would say that is still a small part of our business. We'll be increasing. We need to be participating in this pilot so to have the chance to be part of the project when they are launched, as in the case of Northern Light.

[Igor Levi, analyst]

Great. And with 20% margins just a quarter away, what would it take to get back above 25% levels seen a decade ago? Would an offshore recovery be required? Or could increased onshore demand and stronger pricing get us there?

[Paolo Rocca, executive]

Well, I think that after the, let's say, the pandemic and the impact on the investment, the market is recovering strongly. And the -- some changes happening in the market. Today, I would say, is much more based on regional situation. Regional -- in some regions, we perceive that the increase in demand is giving us some more pricing power, and this is visible and is important to increase our EBITDA margin.

In some other regions, the supply/demand balance is still pretty tight, and the situation of pricing is different. So the restriction to trade, the strategy of the oil companies in the different region, the redefinition of the supply chain are creating regional -- some kind of regional fragmentation in this. And we see that we are recovering pricing power in some regions, in which the demand is increasing pretty fast.

During 2022, I think that we will see this trend to proceed when the pandemia will fade out compared to where we are today in many regions of the world, not only in Europe or U.S. Today, still, the pandemia is affecting the economies in the emerging market, and this is a factor. So if you ask me when the trend will recover, I cannot tell you if this will happen in some moment during second half of 2022 or before. It will depend also from factors like the stabilization of the economy and the measure of stimulus for the economy that may be taken, in particular, in the United States.

[Operator]

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

[Marc Bianchi, analyst]

I first wanted to ask about third quarter, just to clarify. In second quarter, we saw the fiscal credits from Brazil helped the margin. I'm just curious if there's anything that might be like that helping your third quarter margin.

[Paolo Rocca, executive]

Yes. Thank you, Marc. I would ask Alicia to give us a comment on possible extraordinary factor that may affect the third quarter.

[Alicia Mondolo, executive]

Thank you, Paolo. Marc, actually, we are not expecting another extraordinary impact in the third quarter. This was very extraordinary and was something was -- have been resolved at the Brazilian justice. And now we are not expecting any more like this.

[Marc Bianchi, analyst]

Great. In the prepared remarks, you mentioned pressure pumping and coiled tubing services in Argentina. I'm curious what the aspiration is for adding these types of services, maybe as a percentage of your business over time and how do you think about that from a margin perspective versus the rest of the business.

[Paolo Rocca, executive]

Well, we're moving in, in this service as a complement to our Rig Direct. We perceive that the client, especially in the local market in which we have built strong track relation with our clients, are very open and very willing to have our support. In this service, they are indirectly related to tubulars. So in the case of Argentina, we decided to move in. We see this as a profitable business. The first year invoicing will be in the range of $70 million, but we plan to expand this service only in a market in which we have a very strong root and in which we can complement a full package of supply from pipes to tubing, casing and services that are related to the column and to the completion of the well.

Clients are trusting our ability to execute. And we are doing a pretty good job. We decided to step in, in the situation. We see this as profitable. We will not move in, in the market in which there is very high competition and in which these services are much more commodity.

But there are areas in which this is -- could be really complementing what we are doing in service to the client. That's the reason why in the prepared remarks, I also mentioned that, as a whole, our invoicing of pure service with no tubulars are -- the figure in the range of $400 million is pretty relevant for our top line.

[Operator]

Our next question comes from the line of Vlad Sergievskii from Bank of America.

[Vladimir Sergievskii, analyst]

I'll start with the 2. So what are the key contributors to revenue growth in the second half of the year? Is it volume? Is it price? Is it mix? Is it everything? And what are the key regions that are driving growth?

And another one, on the margin progression through the second half of the year, you obviously gave us the reference for third quarter. And you highlighted that there will be cost inflation in the fourth quarter. I'm wondering whether top line growth and, perhaps, better pricing in the fourth quarter will be sufficient to offset this cost pressure in Q4. Or there are other factors in play?

[Paolo Rocca, executive]

Thank you, Vlad, for your question. As I mentioned before, we expect our sales and top line to increase in the range of low double digits in the next quarter and to grow again, more or less, in the same region in the fourth quarter. So volume, for sure, will act.

Price will also have a relevance. Because in the end, the price, as you can see in the Pipe Logix, are getting into our long-term contract in our Rig Direct agreement. We are, in this sense, coming with a lag. Because in the end, we are not selling in the spot market. We're more selling in the agreement. So the price is entering into our top line with a lag, but this will be a factor.

Mix in the third and fourth quarter will act again. Because in the end, growth will be very concentrated in North America. And so we will have a mix that is comparatively more poor compared to the mix that comes from the international project and especially from the complex project in the offshore that, in my view, will be coming on stream later on during 2022. So the cost increase will also be contained by the absorption. Because in the end, the increase in the volume is giving us improvement in the absorption.

And we are stepping up activity in the U.S., but we are putting into operation mills that has been idle for more than 2 years. So in some case, we have additional cost. We are hiring more than 1,000 people. We need to train them. And this is something that we are doing today. Some mills like Koppel is ramping up. Some other like Ambridge will ramp up, but the people, we are training the people. So we have some cost now that we think will gradually be absorbed by the -- when the mill will be fully operational.

So all of these components are considered, are giving us this reference on which we are guiding. And as I was saying before, there is -- our risk -- well, the pandemia is a risk. Because in the end, we are trying to do what we can to have our people vaccinated, but there are countries in which we have no access to vaccine and the vaccination is moving slowly and in which always industrial operations are at certain risk of disruption.

And also, another reason that I mentioned is always the logistics. Because increasing the activity worldwide is putting a strain on logistics, on water, on logistic rail, on many of the issues, for instance, related to container. These are issues that could also, to some extent, affect us, hopefully not so much as other industry like the automotive or other that you may imagine. So this is the factor that are having an impact on our margin. I hope that this will answer to your question.

[Vladimir Sergievskii, analyst]

Yes, absolutely. It's very comprehensive and very clear. Can I ask a follow-up question on the U.S. marketplace? How much spare capacity do you have seamless do you think have at this moment? Is there a line of sight on U.S. seamless complex being fully utilized with demand getting better? And then what needs to happen to U.S. OCTG prices to incentivize welded mills to start producing? Because obviously currency spreads are very low.

[Paolo Rocca, executive]

Well, I will ask here to Luca to answer. We are putting an operational plant like Ambridge. We have capacity that is coming in. And we have potential. But Luca, maybe you can give an answer on the 2 questions, one on the capacity and the other one of when the welded will enter into the field.

[Luca Zanotti, executive]

Yes. Thank you, Paolo. Vlad, thanks for the question. Now in terms of capacity, we are adding capacity. But when you look at the activity ramp-up that we see through the end of the year, when you look at the rig consumption, rig consumption is growing. When you look at the inventory, our inventory are below the 5 months. I will touch the cost of steel later on, on the second question. You see that capacity is coming in. Our competitors are ramping up. But the factor that I discussed before are going to make the market, in my opinion, significantly tight going into the fourth quarter and 2022.

Now as to your second question, which is what would take to get the ERW domestic back. If you look at the HRC prices and you consider that this is more or less where, on a level, the ERW are buying, you will need to see a jump -- a significant jump in the price of pipe before this can get back. So -- and this will provide additional strength to the price.

Now how much this can be? Well, it's difficult to estimate. But today, there is no spread between the Pipe Logix and the ERW prices. So you will need to assume a significant step-up to see this component of the local production to come back significantly. And this is it, basically. I will turn it back.

[Operator]

Our next question comes from the line of Connor Lynagh from Morgan Stanley.

[Connor Lynagh, analyst]

I just wanted to stay on U.S. capacity. Just wondering if you could clarify for us how we should think about your effective capacity trending as you're ramping towards full capacity at some places, reopening in other places. Basically, how much sales capacity or sales volume do you think we should account for over the next few quarters, and at what pace?

[Paolo Rocca, executive]

Thank you, Connor. I think, Luca, maybe you can add some comment on this. But Connor, keep in mind that Tenaris for the United States is a pretty complex and extended system. We arrived there from Bay City, from Ambridge for seamless. We have a finishing facility in McCarty, in Baytown, Hickman. Hickman has capacity also for welder. We're arriving there from Canada. Canada, in this moment, is ramping up also. Canada has capacity outside of the season in Canada. So there are quarters in which we have also additional capacity from there. And Mexico and the rest of the system could support for specific products.

So in the end, the -- our production comes from different sources, and we have space for responding to an increased demand in the market. I don't know, Luca, if you want to -- or you have some color, more specific, if the problem for capacity comes from the difficulty to hiring people, or do you think that the investment plan underway will be a factor for expanding capacity. Can you comment on this?

[Luca Zanotti, executive]

Yes, Paolo. Thank you. Connor, well, I believe that you articulated pretty well the complexity and the sophistication of our supply system to the U.S. As far as capacity in the U.S. is concerned, we have, with the plan that we have in place, capacity to follow the growth that we see for our customers. And we know this very well because with our different programs, we know what the activity is going to be in the medium -- in the short and the medium -- and in the medium term.

Now there may be constraints, and you correctly said this. We don't know what was going to be the effect of the pandemic and now with this variant and how much this is going to or may, let's say, affect operations. But this is not a nice problem. This is the economy -- an economic problem. And so it is very difficult for me today to give you an exact estimation of what this impact will be. But in general terms, we have capacity to follow the growth of our customers as they are communicating to us in our weekly forecasting meeting.

[Connor Lynagh, analyst]

Okay, I understand. Yes, I take the point on the global system or the North America system. But certainly, I can infer from the fact that you're opening additional capacity that you're either seeing incremental demand from other regions that those non-U.S. mills serve or incremental U.S. demand. I guess, could you just update on a more global sense? Are you seeing the need to add shifts or reopen or accelerate capacity elsewhere outside of the U.S. as well?

[Paolo Rocca, executive]

Well, we incorporated in the last months around 4,000 people in our system, apart from the -- let's say, including what we mentioned for the U.S. So we are responding on a global level to the increase in demand to prepare the system for supporting the increase that I mentioned in the top line for the next 2 quarters.

What I can tell you is that the increase in the sales in North America are running at a pace higher than the overall increase that I mentioned for Tenaris. North America is the most dynamic market in this moment.

[Operator]

Our next question comes from the line of Alan Spence from Jefferies.

[Alan Spence, analyst]

Most of my questions have been taken. So I just have one remaining, and it's around tax. The effective tax rate in the P&L was very low in the second quarter. I was just wondering if you could talk about what drove this and how you see that progressing from a rate perspective in the coming quarters.

[Paolo Rocca, executive]

Well, thank you, Alan. I will ask Alicia to give us a view of the, let's say, the evolution that we may expect in our tax line.

[Alicia Mondolo, executive]

Okay. Thank you, Alan. Thank you, Paolo. Alan, we are expecting, for the rest of the year, an effective tax rate from 20% to 22%. In this quarter, you see a smaller effective rate because we have many effects coming from inflation adjustment in the countries where they disallow it, like Mexico and Argentina.

In Argentina, in this quarter, the Congress approved an increase of the tax rate from 30% to 35%, but it has been offset because of the effect of the inflation adjustment. We're still expecting this effect for the rest of the year because we are forecasting that the inflation adjustment will be higher than the devaluation effect. So this is the reason because we are expecting this kind of effective tax rate for the rest of the year. I don't know if it did answer your question.

[Alan Spence, analyst]

Yes, it did.

[Operator]

Our next question comes from the line of Vaib Vaishnav from Coker Palmer.

[Vaibhav Vaishnav, analyst]

Maybe if I can start with -- we already have on ADNOC and KOC orders, and I think you mentioned some Saudi Arabia contracts. How should we think about the magnitude of the revenue step-up from '21 to '22 from those projects? My thinking is that, that could be maybe around $400 million revenues step-up. But what I'm trying to see is like if there are any offsets from any projects rolling off.

[Paolo Rocca, executive]

Thank you, Vaib. The question here is the contract between -- the change between '21 and '22 in Saudi Arabia. Gabriel, maybe you can pick up this question.

[Gabriel Podskubka, executive]

Yes, Paolo. Thank you, Vaib, for the question. Yes, the increase will be gradual during the year 2022. As we said, volumes in second quarter '22, and then also adjustment in prices according to the formula. We see this as a growing trend. We are not giving specific figures on the increase. We said that is on the high double digits, so it will be -- it wouldn't be important, but we keep it there. I would not disclose any more information. Also, there are specific issues about stock management, drilling programs that will fine-tune the pace of growth, but it will be important compared to 2021.

[Vaibhav Vaishnav, analyst]

Got it. Okay. And maybe switching to near term. So you guys talked about low double-digit revenues in 3Q, 20% EBITDA margins in 3Q and maybe similar revenue growth in 4Q. I guess, from investors' point of view, it would -- what they would be -- would be helpful is if you can talk about, can we maintain this 20% EBITDA margins in 4Q and probably in 2021, just given the concerns around inflation, but maybe offset by cost absorption, better mix? It would be helpful just to think about directionally how the EBITDA margin progressed beyond 3Q.

[Paolo Rocca, executive]

Thank you, Vaib. I think this is going in line with the previous answer on margin. Here, there is a volume effect. Increase in volume has a positive impact on cost. That contributes to offset the cost inflation that we are seeing in our cost of sale. There is a price effect. Price -- increase of price. The Pipe Logix is a good reference, especially for North America. It's getting into our top line, and this is contributing to this margin of 20% that we estimate. And as I say before, the mix of product for all of Tenaris explaining on the other way. Because in the end, there will be a quarter with a relatively low level of premium product as a share of our global sales. But when you consider these different factors are guiding -- are supporting our estimate of the margin for the third and the fourth quarter.

[Operator]

Our next question comes from the line of Stephen Gengaro from Stifel.

[Stephen Gengaro, analyst]

Gentlemen, so just a quick one for me. When we think about what some of the larger service companies have said about international growth, sort of Eastern Hemisphere growth, they're talking about double-digit-plus growth in 2022. And curious, in an environment like that -- and maybe the similar question for kind of a double-digit growth rate in the U.S. market, how do you think you guys perform on a relative basis from a top line perspective?

[Paolo Rocca, executive]

Well, I don't have here a close comparison. What I see is that, usually, we are moving in parallel to -- on the top line, with all of the oil service company. We followed it. Usually, if you look over time, you see that we have been able to follow or to top the evolution of sales and top line of a major service company. Now in this case, concerning the Eastern Hemisphere and the perspective of '22 and the project for offshore that is supporting the statement and the valuation, the estimation of the oil service, maybe, Gabriel, you can add something -- some comment on this if -- to understand if this rate of increase in the overall business is in line with what we see there.

[Gabriel Podskubka, executive]

Sure, Paolo. In fact, we see the offshore, in addition to the Middle East, also on a recovery path. Within the Eastern Hemisphere, we are seeing a positive dynamics across areas. The North Sea is in motion. Both Norway and U.K. are active. In fact, during this quarter, we captured a new LTA with Vår Energi in Norway to supply their full needs of OCTG, a very rich mix, and also services.

And as you mentioned, also the North Sea, like the rest of Europe, will be a leading area for the energy transition where several CCS studies are underway. So we are seeing positive dynamics there.

We see also some projects proceeding in the offshore Mediterranean. We have just secured a relevant contract with Mellitah ENI in offshore Libya, covering OCTG needs for their 30 wells. It will start impacting also in 2022 and beyond.

Finally, also Sub-Saharan Africa is offering some initial positive signs after 2 very tough years. I would highlight also Angola as a promising spot. We have there indications of an increase in activity underway. And this will support gradually increase of our OCTG and line pipe products in this part of the world.

And finally, Southeast Asia is also showing some reactivation of projects. I would highlight Indonesia, Australia and Papua New Guinea as positive contributors in the offshore in 2022. This is regarding Eastern Hemisphere, but probably it's important to consider in the specific deepwater space that activity is strong in the Americas, whereas, today, 50% of the global drill ships and semi-subs are operating if you consider Brazil, part of Mexico, both sides of the border, and Guyana as well. So again, we believe that there is a path of recovery in the offshore, and this will be a positive contributor in 2022 and onwards, supporting the double-digit trajectory that we talked about and in line with the service company.

[Paolo Rocca, executive]

Thank you, Gabriel. I think just let me add one thing that is differential between ourselves and the oil service company. In this moment, the level of price of the hot-rolled coils is putting a drag on our welded pipe competitor for line pipe and for OCTG. This is a -- has a positive effect for us in the North America for OCTG, but also has a positive effect on our space for the line pipe. Because in many cases, we can, let's say, capture with seamless project that otherwise could be captured by welder pipe in different regions. This is something differential. In the end, the high price of rolled coils is positive for us, not only because we also have good results from our participation in Ternium.

[Stephen Gengaro, analyst]

So just as a follow-up to that, it's interesting, historically, when HRC was rising and activity was fairly strong, I believe -- and I have to go back and look at the exact numbers, but they're clearly -- it seemed like you generated pretty strong margin expansion off of that and the ability to recover plus and boost margins. Is that a potential strong headwind -- or excuse me, strong tailwind to margins next year? And could 20% of the bogey kind of be on the low side?

[Paolo Rocca, executive]

Well, in general, you are right. The increase in price of rolled coils is beneficial for us. But you have to keep in mind that, in the case of hot-rolled coils, the market declined much less due to the pandemia and reacted much faster than the market for oil and gas services. So we are -- the pandemia, the slowdown in the investment by the oil industry because of mobility and reduction in demand [indiscernible] much more than the flat product. So we are starting from a different level, much lower in terms of overall market worldwide. But you're right, the high price in hot-rolled coil are, in general, positive for us.

[Operator]

Our next question comes from the line of Luigi De Bellis from Equita SIM.

[Luigi De Bellis, analyst]

I have 3 questions. The first one is on the pricing. What do you expect from the Pipe Logix index in the coming months considering the supply-demand balance and inventories level? Do you expect the positive trend to continue in the coming months?

The second question is on the cash flow. What can you expect from working capital for the coming 2 quarters?

And the last question on the LatAm region. Can you elaborate a little more on the trend expected in Argentina, Mexico and Brazil on the coming quarters? And what kind of feedback have you received from the program of international companies entering 2022 for these 3 countries?

[Paolo Rocca, executive]

Thank you, Luigi. On the first point on pricing and on the, let's say, the Pipe Logix perspective, we have seen the Pipe Logix rising fast, very fast in everything that is related to welded product, OCTG and line pipe. And I would ask Luca on how we see this moving in the coming months.

[Luca Zanotti, executive]

Yes, Paolo. Luigi, I believe that the answer to your question is an affirmative yes. We see the trend going ahead and maybe improving, given the number of reasons that I tried to explain already before. So activity increasing consumption -- specific consumption increasing, inventory being down, relative difficulties of year value. So short answer is yes. I mean we will see Pipe Logix to increase and continue to increase through the end of the year and given the reasons that I just mentioned.

[Paolo Rocca, executive]

Yes. Thank you, Luca. On the second question on the cash flow, well, in this quarter, in the second quarter, our cash flow increased more than we expected at the beginning of it. But this is also part of a decision. Seeing some increase in the raw material, we took some decision to increase [ top percent ]. For instance, in the case of iron ore for Argentina, we decided to bring in a little more, considering that the price evolution was going up. So we increased the level of inventory. And also, the price, the cost of this went up pretty fast, and that is part of the reason why our working capital has been higher in the second Q.

We expect this to continue to some extent in the third Q. We will -- this time, we will continue to increase the working capital because the market is growing, because the prices are going, because the cost of our imports are also growing. So we will have some increase in the working capital in the third Q calls. Then I think that everything will stabilize, and there shouldn't be additional increase in the fourth Q.

The third question, well, I would be very, very brief. Frankly, we do not see any substantial changes in trend. Argentina is developing gas, need to develop gas. The price of LNG is very high. So the government is supporting the development of Vaca Muerta to supply the country with gas. And this is supporting a reasonable level of drilling and activity. We even have some record in fracking last month compared to the past. Activity will continue now at that level. And also, there may be some more activity for developing oil for export, but it will depend for the evolution of the Brent price.

In Mexico also, I have Pemex and the private companies, international companies, proceeding with the project, but without big increase or decrease of their level of activity in the coming quarter. I mean it looks to me relatively stabilized, and we cannot -- we shouldn't expect big changes in this.

In the case of Brazil, as I mentioned in the opening remarks, Brazil is moving on, on some very interesting deepwater project, in which we are present, with our welded and seamless and sophisticated line of product. Still, we do not see large pipelines in the past. But the level of activity there is sustained, without even here abrupt change in the level of demand from Petrobas from the joint venture operating offshore.

[Operator]

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

[Marc Bianchi, analyst]

I wanted to follow up on the dividend. If I take the outlook for third quarter here and multiply it by 4, you're kind of back to where you were in 2019 in terms of EBITDA generation. And you had no problem paying that prior dividend. I'm just curious if the outlook is any different now if you want to hold on to more cash for whatever reason or how you're thinking about the potential to restore the dividend to the prior level.

[Paolo Rocca, executive]

Well, the world today is very volatile. There are many risks around from different reasons. This will be left to the Board decision in November. They will consider, overall, the situation and will take a decision on dividend for Tenaris, as they did in the past.

[Operator]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Giovanni Sardagna for closing remarks.

[Giovanni Sardagna, executive]

Thank you, Gigi, and thank you all for joining us in our conference call. And see you soon. Thank you.

[Paolo Rocca, executive]

Thank you very much to everybody.

[Giovanni Sardagna, executive]

Thank you.

[Operator]

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