Tenaris SA

MIL:TEN

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Q3 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 Third Quarter Results Conference Call.

Before we start, I would like to remind you that we will be discussing forward-looking information in the call and that 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 the floor to Paolo for his opening remarks, I would like to briefly comment our quarterly results. Our third quarter sales at $1.8 billion, were up 73% compared to the corresponding quarter of last year and 15% sequentially, mainly due to higher sales in the Americas which more than offset lower sales in the Middle East due to continued destocking and lower sales in Europe affected by seasonal factors.

Our EBITDA for the quarter was up 26% sequentially to $379 million, reflecting higher volumes, better pricing and a good industrial performance. Our EBITDA margin rose above 20%, following an increase in average selling prices while the increase in cost of sales was contained by improved industrial performance and higher absorption of fixed cost. Average selling prices in our Tube operating segment increased 10% compared to the corresponding quarter of last year and 6% sequentially.

During the quarter, cash provided by operating activity was $53 million, and with capital expenditure of $74 million. Our free cash flow was slightly negative. Working capital increased by $276 million during the quarter, driven by the continued ramp-up of operation in the United States and by higher activity levels. Our net cash position at the end of the quarter declined to $830 million compared to $854 million in the previous quarter. The Board of Directors approved the payment of an interim dividend of $0.13 per share or $0.26 per ADR to be paid on November 24.

Now I will ask Paolo to say a few words before we open the call to questions. Thank you.

[Paolo Rocca, executive]

Thank you, Giovanni. Good morning to all of you. Over the past months, we are seeing the effect of tighter energy market as global demand rebound as the last year pandemic induced a slowdown.

Oil prices have risen above pre-pandemic levels as inventories has fallen below normal levels and the OPEC+ countries and publicly owned U.S. shale operator maintained the supply discipline. Natural gas prices and especially the LNG traded in spot market are reacting to limit in the available supply response, which are leaving Europe with partially unfilled storage capacity ahead of the winter season. This is happening when the sector is under enhanced scrutiny as world leader meeting led to consider how to reinforce and accelerate to adjust energy transition.

While the goal is clear, the pace, the direction of travel will remained uncertain and there are many moving pieces around. This volatility in the energy sector, coupled with supply chain disruption and the lingering effect of the pandemic are driving risk and opportunity for Tenaris. On the one hand, we have rising raw materials, energy and logistics cost and some interruptions in production dispatch and customer drilling programs. On the other hand, demand is increasing with more activity to support oil and gas supply.

In this environment, our results continue to show a good recovery with quarter increases in sales and the recovering margin. Our EBITDA margin has now surpassed the 20% level, thanks to increased volume, rising prices and cost containment. Going forward, we expect this trend to continue.

Our sales in North America in the third quarter increased by a further 28% sequentially and are up 155% year-on-year. We expect a further strong sequential increase next quarter as we meet the rising customer demand and pass on the market price increases. As we have mentioned in our previous calls, we have been ramping up our production in the United States and deploying our Rig Direct service to meet the rising demand and the need of our customers. In August, we reopened our Ambridge seamless pipe facility in Pennsylvania. And in October, we reopened our heat treatment and training facilities in Baytown, Texas. Production of our Bay City mills continue to increase.

We are carrying out this ramp-up in a challenging labor market in which we are already incorporated -- we have already incorporated 1,000 new employees since October last year and expect this total to reach 1,600 by June 2022. U.S. Steel and several other welded pipe competitors have brought forward a petition to open antidumping investigation into the OCTG imports from Mexico, Argentina and Russia and countervailing duty investigation against Russia and Korea. The U.S. Department of Commerce has accepted the petition to open the investigations while the U.S. International Trade Commission should make a preliminary determination of injury on November 19.

We believe the petition has no merit, and we will rigorously challenge any claim that our import has been dumped or causing or threatening industry to local -- injury, sorry, to local producers. Over the past 15 years, Tenaris has realized substantial investment, more than any company in -- any other company in acquisition and capacity expansion to build up a competitive OCTG production system in the United States. While we cannot predict the impact of this investigation, we believe we are well placed to continue serving our customers whatever the eventual outcome might be.

This morning, we announced to our employees in Japan that regrettably we and our partner, JFE, have decided to bring to a close our successful association in NKKTubes and shut down seamless pipe mill by June 2022. This follow JFE previous announcement made in June 2020, that it will be closing its Keihin steelwork where our plant is located and which supplies steel and essential service to [indiscernible]. Over the course of the last 20 years, NKKTubes has made substantial contribution to Tenaris and indeed to JFE, but its closure has become unavoidable. Following the closure of the mill, we will produce the high chrome alloy product that NKKTubes supply to customers around the world in our industrial facility.

JFE will support us in this transition with the same exemplary spirit of cooperation that has always characterize joint venture. Our employees in Japan showed great fortitude as we made the announcement this morning, and we will support them in the coming months.

In October, we renewed for a further 5 years our long-standing alliance with Sandvik for the supply of CRA or stainless steel pipes. Here, we complement Sandvik material technology with our expertise in premium connection and Dopeless technology to include these high specialty pipes in our [ offer process ]. This is a growing segment of the market. In Qatar, we were awarded a large pipeline contract with a value of USD 330 million for welded and seamless pipe to be used for the supply of gas to the LNG-producing contracts. Deliveries are scheduled to start in the second half of 2020. This complements our existing contracts for the supply of OCTG in the region. It adds to our substantial order backlog for the Middle East, the impact of which we will start to see in our results from the second quarter of 2022.

In Argentina, we have agreed with YPF to extend our long-term agreement, strengthening our Rig Direct service for a further 5-year period from April 22. We continue to advance our plan for reducing the carbon intensity of our operations. We are completing an investment to extend the size range of our medium diameter rolling mill in Dalmine to include pipes up to 18 inches, which will provide substantial energy and carbon emission savings for this larger diameter products.

We are also actively looking at opportunities to invest in or acquire renewable energy for many of our sites around the world, including Italy, Argentina, Romania and the U.S. At the same time, we are expanding our sales of hydrogen storage vessel for use in refueling station in Europe and California, and we're awarded a contract by Air Products with the supply of line pipe for a hydrogen development in Saudi Arabia.

In a challenging and fast-changing environment, Tenaris is delivering on its commitment, improving its financial results and remain well positioned to support its customers around the world. Thank you, and we can now take any questions you may have.

[Operator]

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

[Ian MacPherson, analyst]

Paolo, I think that you -- we discussed last quarter that you could expect double-digit revenue growth sequentially for Q3 and for Q4. You blew through that in Q3 at 15%. Does that -- did you pull forward some revenue forward? Or do you still expect to achieve double-digit revenue growth in the fourth quarter?

[Paolo Rocca, executive]

Thank you, Ian. I think we should be, again, having an increase in our revenue in this range, in the range of the mid-teens. I mean the market is growing in different regions, especially in North America. So we think we can do this. And I think that this trend may extend also in the coming quarter.

[Ian MacPherson, analyst]

Okay. So -- and would that look similar to the third quarter where you've got maybe 6% or 7% ASP increase, and then the rest of it would be volumes? So kind of a fairly even mix of volume and price increases.

[Paolo Rocca, executive]

Basically, this will be -- there may be more different. But as you have seen the increase in the Pipe Logix in this month has been very relevant. And gradually, this will also support, as you were saying, the increase in revenue in the fourth quarter and in the first quarter of next year.

[Ian MacPherson, analyst]

Okay. That's helpful. And then I was just going to ask also on the wind down of NKK. Can you talk about the materiality of the Japanese joint venture relative to maybe 2021 results and how we should think about that deconsolidation after the middle of next year?

[Paolo Rocca, executive]

Well, the joint venture has made a very relevant contribution over the period of time was established in 2000. And in that moment, it helped us very much to complement our product range and to have access to the Japanese market. But then in the most recent year, the overall volume of production went down pretty much. The overall level of production in the range of 50,000 tons per year in the last year.

And the current solution were relatively limited in the sense when JFE decided in 2020 to close the site in which our facility is located and spend not immediately, but in 2023, the supply of buildings for the facility, we were facing an inevitable -- we were forced inevitably to take this decision. I wouldn't say that the impact would be material for our balance sheet because also we have provision, large part of the costs that could be related to this closure. The challenge will be and we are prepared to reposition the production, especially for the higher raw material in the rest of our industrial system.

[Operator]

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

[Connor Lynagh, analyst]

I was wondering, I'm not sure how much you can really say at this point, but just commentary around the potential trade case. Obviously, you've highlighted you feel it's about merit. Are there any data points you could sort of point to or just sort of industry data that would suggest or support your position there?

[Paolo Rocca, executive]

Sorry, I didn't get the last part of your question concerning the trade, which was a point?

[Connor Lynagh, analyst]

Yes. Basically, are there any sort of data points you could point to within your own operations or within the market that would sort of support your view that the claims don't have merit. Basically just wondering if you could expand on where -- how you're supporting your position.

[Paolo Rocca, executive]

Oh yes. Thank you, Connor. Well, basically, we -- in the last 15 years, we invested in the United States a very substantial amount of money in acquisition and inorganic growth. We install, apart from the acquisition, a brand-new state-of-the-art mill in Texas. We have an investment over $1.8 billion. We intervene in expanding production capability of the facility of the former Maverick and Hydril and IPSCO acquisition.

So our production capability in the United States is very substantial, and we were complementing our production locally with import or product that also, in some case, are solving shortages or our supplying segment of the market, which there is no local production locally, no local production, domestic production or not enough, not sufficient domestic production.

Now this is our stance in this case, the injury, we didn't create injury to the domestic [indiscernible] on the contract. We are an integral part of the domestic [Indiscernible]. We -- this is basically what we think and what we will -- the argument that we will present in defending our case with the DOC on one side, and with the ITC also for the injury. We have a very strong case. At the same time, we're prepared as needed to -- as it is still needed by a growing market -- by growing demand by the market to increase local production. As I mentioned in my opening remarks, we are now, since October last year, incorporating -- we will be incorporating more than 1,600 people to support expansion of production in our facilities.

This is a decision taken independently from anything or a trade case that will be strengthened to give our client the security of supply on our side in all the contracts that we have. Eight facility that we are now operating are -- we are operating basically 8 facility in the United States. It's Bay City, Hickman and McCarty, Baytown, Conroe, the steel shop in Koppel and probably also the Blytheville tubing facilities. So I mean, this is a very strong, the most -- the strongest production system in seamless and welded in the United States. So to this extent, we feel that the trade case has no ground, and we will defend it vigorously.

Also in terms of prices, you have seen that the Pipe Logix increased 98% in the last 1 year. So in this condition, with price increase of 100%, it's difficult to support injury. Also, as you know, steel company in the States in this moment are showing record results. So we will defend on all side with DOC on the thing on the injury case.

[Connor Lynagh, analyst]

That's -- very much appreciate the color there. So sticking with the U.S. market, one of the questions we get a lot is what it would take either on HRC, price coming down or welded price coming up to incentivize mills to reactivate there. Just a high-level framework thinking about your welded capacity, what would you need to see in the market to really justify reactivating any of that capacity?

[Paolo Rocca, executive]

Well, you have seen the prices when come up strongly, and this will drive the opening of plant for welded pipe and no doubt on this. We will -- we are planning for doing this in Hickman. The hot rolled coils touching a point, there is probably a limit and there probably we can imagine, if you look at the future that the price of hot rolled coils may go down over time during 2022 to some extent. But increasing prices in the OCTG in my view will drive a start-up of facilities.

Still, the increasing demand if we assume -- as we are considering that the rig count will continue to increase in the coming quarter, we expect the rig count as also other analysts that we expect that the rig count and our clients are confirming this view to increase in the range of 100 rigs from now to the second semester of 2022. So in an increasing market for OCTG with price of hot rolled coils that we -- according to the future will gradually get down, we see that there will be welded type coming to the market. But still, the demand will be the supply will be tight. And in my view, price will continue a positive trend.

[Operator]

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

[Igor Levi, analyst]

So this is the first time in a long time that I remember where your press release highlighted offshore improvement in multiple regions. And if I remember correctly, strong offshore business was a key factor to push EBITDA margins above 25% in the prior cycle, and we've not seen that since 2014. So how much offshore recovery are you guys expecting in 2022? And if you had to guess, how soon can we see margins surpass the 25%?

[Paolo Rocca, executive]

Well, we agree that what we see is that the offshore start to recover. And we will see the beginning in this recovery probably more in the -- starting in the first quarter of next year. It will be initial rebound but -- then this process will continue. We expect that some of the large projects will come to a final investment decision during 2022 and affect gradually also our position and our sales or demand during the second part of 2022 and '23.

It will take time. We see more interest today. Offshore is moving in -- particularly Latin America, in Mexico, in Brazil, in Guyana. And these are the areas that are, let's say, starting to show signs of recovery. But I imagine there by the '23 also other region will join in -- there will be new sizable project in the Eastern hemisphere, Africa that will come to find investment decision and to execution. So it's true, it's recovering...

[Igor Levi, analyst]

Great. And as a follow-up to Connor's question on the trade case, could you talk about how much of the U.S. sales are currently produced in the U.S.? And assuming your U.S. mills begin operating at full capacity, how much of the U.S. demand -- your U.S. demand that you sell can you produce locally? And are there certain grades of pipe that you just simply cannot produce here and have to import?

[Giovanni Sardagna, executive]

Hello, Igor. Maybe the line in Buenos Aires is down, I don't know, maybe Luca or German can answer this question.

[Germán Curá, executive]

We are all together. Well, thank you, Igor, while we -- this is German speaking. While we recover the line from Buenos Aires, let me just say that, number one, we are planning calls for us to be absolutely able to supply our existing and growing clients. As we have announced in the last so many weeks, we have a current plant in place in the U.S. that contemplated the already hiring of 1,000 people. We have about the same number going forward for us to increase our domestic capability.

We typically, Igor, do not disclose the origins, et cetera, but you need to look at Tenaris as a global industrial system, which naturally has built a very important domestic production capability, as we have announced through investments north of $10 billion. And that's also complemented with production coming from the rest of the global industrial system, and we intend to proceed in that way. Hopefully, that addresses your point.

[Operator]

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

[Alessandro Pozzi, analyst]

You mentioned that in Q4, you could see a growth of -- in the mid-teens range. And I was wondering, probably at this stage, you have more visibility on the growth in Q1 as well and I was wondering whether that rate of growth can be maybe extended in Q1.

And maybe as a follow-on, I believe you mentioned that from Q2 of next year, you could see the positive impact from higher sales in Middle East. And I was wondering if you can give us perhaps a bit more color on that recovery that you see in Middle East as well as for next year.

[Giovanni Sardagna, executive]

Gabriel, you want to discuss the Middle East, yes?

[Gabriel Podskubka, executive]

Sure. Sure. While we wait for Paolo, I will tackle the second question regarding Middle East, where we see drilling activity continue to be subdued. We are seeing so far a mild recovery. The rig count in the Middle East has only increased 5% from the beginning of this year. And we are still about 35% below pre-pandemic levels, but we see this changing. We see rigs being contracting and we expect drilling activity to accelerate towards the end of this year into 2022, in line with the OpEx plan to ramp up and deliver higher production levels.

The other important aspect that has been containing our revenues in the Middle East has been the change in the supply model in the UAE. You know there that we are transitioning into Rig Direct, so there has been some destocking going on. And also, there has been a gap between the old and new contract in Kuwait. So this is also affecting apparent demand for the last few quarters and for the next 2 quarters as well.

In this context, as you were mentioning, we expect our sales in the Middle East to remain broadly flat compare for the next 2 quarters, compared to the recent quarters. But as commented also in the last call, we expect a relevant jump that will start in second quarter '22 and onwards as our large backlog of contracts for the region kicks in. To give you some color, in Saudi Arabia, we have been awarded for the Jafurah unconventional development. And we see Saudi Aramco reactivating some large offshore expansion projects. In Kuwait, we have already received the first call-off that give us uncertainty on the deliveries of the second quarter of next year related to that multiyear award that we commented a few quarters ago.

Also, the activity in the UAE has been promising, Rig Direct shipments to ADNOC are scheduled to ramp up through the whole 2022. And we're also seeing some interesting gas exploration across the Emirates, not only Abu Dhabi, but also in Ras Al Khaimah and Sharjah, very complex wells requiring a rich mix. And last but not least, Paolo mentioned that in his opening remarks about Qatar with a recent large award on the pipeline in Qatar, complemented by our backlog of OCTG contracts. We remain -- this market will also remain strong for us going to the future. So I believe that starting in the second quarter 2022 for Middle East, we're going to be seeing a relevant jump and a new baseline from there going forward.

[Alessandro Pozzi, analyst]

When do we expect a potential recovery to a pre-COVID level in the Middle East? Is it something for 2022 or the following year?

[Gabriel Podskubka, executive]

Yes. In 2022, that jump should be getting us back in line with the revenue line over 2020, even hopefully 2019 as well, but back to those levels.

[Alessandro Pozzi, analyst]

Okay. And also going back to the first question about potential further revenue growth in Q1, should we expect still a double-digit revenue growth at the beginning of 2022?

[Giovanni Sardagna, executive]

Paolo, you are back?

[Paolo Rocca, executive]

Can you hear me now?

[Giovanni Sardagna, executive]

Yes. Yes, we can hear you.

[Paolo Rocca, executive]

Okay. No, this is the same comment as I mentioned before, we are estimating that also in the first quarter of 2022, we will have top line growth in the range of the mid-teens.

[Operator]

Our next question comes from the line of Frank McGann from Bank of America.

[Frank McGann, analyst]

Just two questions, if I might. One, just in terms of what you're seeing. You mentioned in your press release as you've mentioned in the past that private producers were the key drivers of a lot of the growth. I'm wondering how that's -- how you're seeing that moving forward? Is that beginning to change? Are you seeing more of the public companies starting to at least marginally open up their -- the spending a bit.

And then in terms of the cost pressures that you're seeing, prices obviously have been moving up so fast that it seems to have way more than offset that, and that's led to the very strong volume improvements. But is -- are you seeing something different in cost that 2 or 3 quarters down the road start to be a concern?

[Paolo Rocca, executive]

Thank you, Frank. Well, on the first point, I would ask Luca Zanotti to comment on how is the different approach from private company and a public company into an investment in these times.

[Luca Zanotti, executive]

Yes. Thank you, Paolo. I mean, look, the forecast that our customers are putting forward are still based on commodity prices that are now fully affecting the more constructive environment that we are seeing in this moment. So this may change going forward. As it stands today, we see that the private are still playing the lion's share in this capacity increase. But again, if you read through the large independents, public large independents, you see that they are suggesting something may change going forward depending on the environment. And as I said before, the environment seems more constructive than in the past.

And then there is also another factor that needs to be taken into consideration that there is still M&A going on, and this also may change a little bit the outlook going forward. I hope that this helps.

[Paolo Rocca, executive]

Yes. Thank you, Luca. As far as the cost are concerned, it's clear to you that we are living through a period of extreme volatility in the sense that there are major movement in the cost of metallic and the cost of energy and what is happening today in Europe. But for instance, in the case of metallic, iron ore went up very fast and then the decision of China to reduce steel production so suddenly in such a big size of reduction has reduced the price of iron ore substantially. Now coal is getting up, is rising because of the constraint and the bottleneck in the energy sector. Scrap increased, but the net was coming down in the recent time. So there's been some decoupling between variable that we're going together before, so it's not easy to forecast.

But for the time being, the cost -- the proof of cost on raw material, energy and logistics is getting into our inventory. By the fourth quarter, I think the full effect will be into our cost of sales. As you were saying, offset by decrease in production and the better absorption. If I look ahead, I think some of these variables will become more normal and we expect that, for instance, energy over cost will go down gradually, maybe after the spring -- European spring, after the winter. So even cost will -- the supply system will react, and we probably have some containment of this extraordinary disruption and volatility that we've seen the recent month. In our accounting, this will be, I think, fully reflected by the fourth and first quarter of 2022.

[Operator]

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

[Stephen Gengaro, analyst]

You've answered a lot. I was just curious and as it pertains to the trade case, when you think about your domestic or your U.S.-based production versus products which come in from other markets. And I know you don't want to disclose the specifics of the volumes. But when you think about the potential price benefit, I know in prior cases over years, there tends to be a price uplift in the U.S. market if these cases go through. What would be the net impact on your profitability. Is there a way to think about sort of the interplay between the benefit you get from U.S. production and the offset from tariffs coming into the country?

[Paolo Rocca, executive]

Well, you're right that as in the past, there could be impact on prices. But as you know, the prices are coming up in the U.S. in the last 13 months. Months after months, prices were coming up and strongly because last month, it was 12% in the Pipe Logix. So there is a trend of increasing price. Now in -- over this trend, any constraint on the supply side or reduction of import, especially in niche products, may cause spikes. This is also something that could happen. But in my view, the supply is really tight. And the impact of inventories that in the beginning of this year, there was a high level of inventory that were, to some extent, lowering down the increase in the price because the inventory went into the demand to the consumption.

Now the inventory went down to 4 months, 4.5 months. So the level of inventory is normal or low considering the expected level of consumption. So this is also something that has a positive impact on prices. So in my view, even independently from the trade case, we will see pressure on prices. And then maybe the trade case may justify some additional spikes in some segment of the consumption.

[Operator]

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

[Vaibhav Vaishnav, analyst]

First, just a clarification question. I think you guys guided to mid-teens revenue growth for 4Q, but did you also say mid-teens revenue growth again for 1Q '22?

[Paolo Rocca, executive]

Yes, it's correct.

[Vaibhav Vaishnav, analyst]

And that is despite Middle East being flat. What drives that? Is it more North America? Or what drives that?

[Paolo Rocca, executive]

Well, North America is, for sure, a factor. But also, I mean, in Latin America, the drilling is going up. And price of oil around $80 is important compared to the situation we had last year. And the price of gas in the U.S., around $5 and LNG are also supporting some higher level of activity. So this is driving the -- Canada is a factor. And when I mentioned revenue, I'm including prices. So there is volume, there is price. The combination of volume and price, demand and tightness is driving this increase in the top line.

[Vaibhav Vaishnav, analyst]

That's helpful. So maybe if I think about your guidance for 4Q, that gets you like roughly $425 million EBITDA. If I assume the flattish margins even despite you're talking about pricing, we can get to like $475 million EBITDA for 1Q. If I annualize that, that gets you to close to $2 billion of revenues -- $2 billion of EBITDA for 2022. Street is at $1.4 billion. I'm just trying to -- like not trying to pin you down for a number, but is there a reason why we should think that EBITDA declines from 1Q onwards despite higher margins of Middle East coming in? Or am I missing something?

[Paolo Rocca, executive]

So as you see, the top line will increase in -- for the visibility that we have. EBITDA ratio will remain more or less in the present level, at least for the coming quarter. And maybe if the market maintain, let's say, thrive and there are no unexpected movement of cost, we could also add something in the first quarter of next year.

[Vaibhav Vaishnav, analyst]

Got it. And if I can squeeze in like maybe one last question. This is like a common question that we get on the working capital. So if you look at your inventory levels of, call it, $2.5 billion. This was like this -- if I have to go back to, let's say, 2018, 2019 or 2013, 2014, when the revenues were much higher than we had like $2.5 billion of inventory. As we think about revenues improving in 2022, how should we think about working capital at least in the first half of 2022?

[Paolo Rocca, executive]

Well, in working capital, as I mentioned in the last conference, we are increasing -- still increasing our working capital. And with this increase in prices that I was mentioning that is reflected in the Pipe Logix evolution, we will have a higher receivable in -- also in the fourth quarter. So there will be some increase in our working capital in the fourth quarter because increasing price is important, the increasing cost also. So to some extent, we will have some increase in working capital in the fourth quarter to support the increased volume and the prices.

Now remember that today, we are working at a very high level of Rig Direct and our level of service to the client implies an important level of working capital anyway. And then when the volume gets up, also our route in our industrial system are more demanding in terms of working capital because we are activating route that imply, for instance, movement of material from one rolling mill to the heat treatment or to the trading line in different places. So when we grow the level of working capital will be increasing for the receivable, for the prices and to some extent, also for the Rig Direct and the level of inventory that we have in the chain. I was saying in the last conference that we will stabilize in the fourth quarter, we will stabilize in the first quarter of 2022 instead.

[Operator]

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

[Luigi De Bellis, analyst]

Three questions for me. The first is on the free cash flow generation. Can you elaborate on the CapEx for next year? The second question on the Middle East. Can you quantify your backlog in the Middle East and how this compared to the previous quarter? And the last question, a clarification on the outlook. Can you quantify how much of the mid-teens quarter-on-quarter sales growth in Q1 '22 will be driven by prices and how much from volumes? And can you elaborate on why profitability will remain flattish in percentage quarter-on-quarter despite the strong increase in by projects?

[Paolo Rocca, executive]

If I understand well, the first question about the CapEx, we would expect an overall CapEx in the range of $260 million in the next -- in 2022 over the entire year. As far as Middle East, maybe Gabriel, you could add some comment on this question?

[Gabriel Podskubka, executive]

Yes. Thank you, Paolo. Luigi, in terms of backlog in the Middle East, I prefer not to give a specific figure, although it's logical to assume that with a big award of $300 million plus on Qatar, certainly, our backlog for the region has increased, but these are some fixed contracts, punctual contracts of fixed quantities are related to drilling activity over many years. So I think it was more relevant in the guidance that we gave before of a broadly flat revenues for the next 2 quarters and a step jump, starting second quarter of '22.

[Paolo Rocca, executive]

Yes. Thank you, Gabriel. The last question in the increase that we expect for the first quarter of 2022, I would say that it should be basically balanced between price and volume. I mean these are driving the -- what we expect as an increase in revenues.

[Luigi De Bellis, analyst]

Okay. So just a follow-up. And why with the, let me say, 6%, 7% of price increase, the profitability in percentage will remain substantially flattish and the higher absorption of fixed costs driven by higher volume? Just a clarification on this.

[Paolo Rocca, executive]

You are saying why we are the -- well. I mentioned that gradually, the cost increase is getting into our cost of sales, in our good sales. So there is some pressure of cost. Some of this cost pressure, like the energy impact in Europe went up pretty suddenly. This will enter into our cost of sales and the absorption this level of increasing volume will not be enough to compensate entirely for the increasing -- the expected increase and the one that we see today in our cost. That's the reason why we basically expect margin to be slightly -- probably slightly higher, but not very far from where we are today.

[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]

Well, thank you, Gigi. Thank you all for joining us in our third quarter conference call, and we see you soon. Thanks.

[Operator]

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