Tenaris SA

MIL:TEN

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Q3 2022 Tenaris 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 2022 Third 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 operation; 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 third quarter of 2022 reached almost $3 billion, up 70% compared to those of the previous year and 6% sequentially, mainly led by further pricing gains, which more than offset lower shipments, which were affected by lower deliveries to pipeline projects and seasonal factors.

Average selling prices in our tubes operating segment increased 54% compared to the corresponding quarter of 2021 and 12% sequentially. Our EBITDA was up 17% sequentially to $946 million, while our EBITDA margin was up at around 32% as higher prices more than offset increases in energy and raw material costs. Our quarterly net income of $606 million was slightly down sequentially as it was affected by nonoperating items, which impacted our results from our equity participation in Ternium and Usiminas and in our financial expenses.

Cash generated by operating activities during the quarter was $242 million. Our free cash flow for the quarter was $113 million after capital expenditure of $129 million, while our net cash position at the end of the quarter increased to $700 million.

Our Board of Directors approved the payment of an interim dividend of $0.17 per share or $0.34 per ADR to be paid on November 23. The interim dividend is up 30% compared to the interim dividend we paid last year.

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

[Paolo Rocca, executive]

Thank you, Giovanni, and good morning to all of you. At the end of September, we celebrated Tenaris' 20th anniversary on the New York Stock Exchange by ringing in the closing bell. Following day, we held an Investor Day where we presented our view that an increasing investment will be needed in energy and that all sources will be needed to meet the growing demand for energy that will accompany population and GDP growth in the long run. This includes investments in oil and gas, which in recent years has fallen behind what is required to maintain production in a sector that still account for the majority of primary energy demand.

We highlighted the transformation that Tenaris has made over the past 20 years, and we have grown to become a company that is uniquely positioned to service the tubular need of our sector globally in the years ahead and how, in the current environment, we are reaching record levels in our financial results. Our third quarter results reflected sales and margin improvements that we have shown over the previous 18 months with an EBITDA of $946 million and the margin above 30%. We are confident that we can continue to build on these results in the quarter ahead.

Last week, the International Trade Commission in the United States determined that OCTG imports from certain countries, including Argentina and Mexico, have injured the domestic industry. As the largest producer and investor in the domestic industry, we find it difficult to understand these findings, which contradicts the evidence that domestic OCTG prices are at their highest ever level and that domestic producers are showing record results for their tubular businesses.

That said, Tenaris continue to be strongly positioned to serve the growing needs of the U.S. oil and gas industry and to improve the competitiveness of our Rig Direct service model. More than 80% of our supply of casing and tubing to the U.S. market is being met from domestic production and is being complemented by importers from our global industrial system. The ITC ruling and the antidumping duties will not substantially change this situation. However, we are already moving rapidly to ramp up our domestic production, and we will invest further in expanding our production capacity and strengthening our Rig Direct service model.

As well as the service we provide through Rig Direct, our U.S. customer appreciate the new line of Wedge Series 400 connections that we develop for using production casing in long horizontal wells. Today, a majority of these customers have standardized on the use of these connections in the production streams for their shale operations.

In September, I visited Canada, where we inaugurated our new welded pipeline facility at Sault Ste. Marie in the presence of the honorable Mary Ng, the Canadian Minister of Trade. This will strengthen our competitiveness in the Canadian market and the service we provide to our customers in a market where Tenaris has opportunities for further growth.

During August, we renewed our long-term framework agreement with Eni for 5 years, covering their OCTG requirement across 20 countries and supporting their drilling and pipeline operations in the 10 countries around the world. Eni will play an important role in addressing the European energy crisis, and this partnership is a very valuable one for Tenaris. And our position in deepwater project in sub-Saharan Africa pipelines and drilling operations in the Middle East and in the Mediterranean. Also, it will be important for the newly emerging CCS development, like HyNet in the U.K., where we will be supplying the injection well with specially tested materials.

Over the next year, we expect the Middle East and the deep offshore will be areas that will drive further growth in sales. The Middle East -- the Emirates has announced an acceleration and extension of its oil and gas production capacity expansion plans. Tenaris is working closely with ADNOC, under our long-term agreement, where we are providing 50% of their OCTG requirements with Rig Direct services and are investing in a local premium trading facility, which will be beginning operation next year.

Saudi Aramco and Qatargas, where we also have a long-term supply agreement in place, also have plans to increase their drilling activity. In the third quarter, we increased the deliveries of casing and BlueDock connector to ExxonMobil deepwater operation in Guyana. In the following quarters, we expect to increase sales for a number of deepwater operations in the Gulf of Mexico, in Brazil, in sub-Saharan Africa and in Oceania. We have established a strong competitive positioning in the deepwater market based on quality and reliability of our extensive range of products and our ability to serve customers in remote and complex environment.

In Argentina, we have begun shipment for the Nestor Kirchner pipeline. This and other pipeline infrastructure investment are moving forward as there is a growing consensus around the importance for the country of realizing the potential of Vaca Muerta shale development.

Even in an environment of high geopolitical and macroeconomic risk and slowing global economic growth, Tenaris is well prepared to build on the leading position it has established over the years in the energy market. At the same time, we continue to invest in our industrial system to reduce production bottleneck, improve operational efficiency and safety and to reduce carbon emission and the environmental impact of our operations.

We are ready now to take any questions you may have.

[Operator]

[Operator Instructions] Our first question comes from the line of Marc Bianchi from Cowen.

[Marc Bianchi, analyst]

I think you addressed this Paolo, but I just want to be sure, the trade case -- as you move forward, do you need to increase your imports for any reason? I know you've sort of repositioned the imports in response to the trade case, but I'm just wondering if some of that might be temporary and you can only do that for so long.

[Paolo Rocca, executive]

Thank you, Marc, for your question. Well, in the first place, we will commit to raise the level of production in our facilities in the United States. So we will step up our effort to hire people, which is an important constraint today, because we have still capacity that we cannot delay.

And second, we will launch investment that will allow debottleneck part of our industrial system. And then, as I said in my remark, we will rely on import from different sources to complement the product or the specific situation in which we may need support from import to the local capacity. We think we have no problem in doing this from different sources.

[Marc Bianchi, analyst]

Okay. Great. The other question I had relates to the welded volumes, which grew significantly again for the second quarter in a row. I'm curious what your outlook is for welded versus seamless going forward and what the impact may be to margins, if any.

[Paolo Rocca, executive]

Well, the -- you see the welded -- our welded production in sales to go up. This is basically driven by the pipelines in South America and also in the Middle East. In the case of Argentina, we started delivering of the Nestor Kirchner pipeline. So this is part of what we see in our increase in the welded component. And during the coming quarters, we will deliver a larger volume of this.

I think that this will have only a marginal impact. It's true that we may have some lower margin on some of this project. It depends on the project but will not be a very significant impact on our margin.

[Operator]

Our next question comes from the line of Arun Jayaram from JPMorgan.

[Arun Jayaram, analyst]

I wanted to see if you could -- maybe first start with the international market. And I'd be interested to see -- in the U.S., I think you mentioned 80% -- or a lot of your volumes today are coming through Rig Direct.

How about internationally? How much of your order flow comes from Rig Direct? And is there the potential to shift more of your international customers, I think you're doing this in Latin America, towards some of the Pipe Logix indices that some of your North American, I think Latin American customers are on?

[Paolo Rocca, executive]

Thank you, Arun. In general, we can say that globally, worldwide, our Rig Direct sales are in the range of 60% of our OCTG sales. This is something -- somewhat higher in the United States. It's lower in the international market. But I will ask to Gabriel to give some view of the area in which we are stronger on Rig Direct and also on the issue on prices, to which extent the international prices are following or recouping some of the trend of the Pipe Logix.

[Gabriel Podskubka, executive]

Okay. Thank you, Paolo. Good morning, Arun. Regarding Rig Direct, as Paolo was saying, this is a global service capability that we have deployed in Latin America and North America, but it also have gained momentum over the years in the international markets.

Today, we are serving the majority of our customers in the North Sea and the Rig Direct. We have also have in Continental Europe established operations where Rig Direct is pretty much our standard. And as you know very well, we have introduced also in the Middle East another key area of the Eastern Hemisphere, pioneering the Rig Direct in Abu Dhabi supporting ADNOC. 50% of the requirements of OCTG of ADNOC are serviced by Tenaris with a service center -- state-of-the-art service center in Abu Dhabi.

This is a practice that we expect to continue in the region. This is, in a way, a showroom for the region because there are clear advantages on availability, cash flow and service level for the operators. This is also a practice that has been extended in some pockets in Africa, in Ghana, for example, in Indonesia, in Australia. So this is a practice at a different level of NOCs and IOCs have, bringing on momentum and bringing, let's say, the synchronization of the manufacturing capabilities with the rig's consumption.

Regarding the point of pricing, Paolo, in the international market, we are seeing a positive trend in pricing. Clearly, in the last few quarters, the pricing are moving up, trying to offset the cost increases. But I think now we are at a different stage where the increase in demand is creating another positive dynamic on pricing.

Lead times are getting longer. Customers, as they are projecting their new demand on FIDs on offshore, especially in complex projects in the Middle East, are raising their awareness on material availability to be able to execute their projects. This is particularly noticeable in premium connections, high alloys and deepwater pipelines as well. So we are seeing a positive momentum in terms of pricing, and this will become very visible towards -- as we progress into 2023.

[Arun Jayaram, analyst]

Great. Just my follow-up would be we were at Schlumberger's Analyst Day yesterday, and they highlighted how they're seeing an inflection point in the deepwater in the Middle East, just as you're mentioning this morning.

I was wondering if you could talk about deepwater offshore. You posted almost a 32% EBITDA margin in 3Q. You highlighted some opportunities in Qatar, Guyana and Brazil. And so one of the things we're thinking about in terms of the model, as you see a higher mix of deepwater offshore, do you think this would be accretive to your margin profile on a go-forward basis?

[Paolo Rocca, executive]

To some extent, yes. As I mentioned, we expect that in the coming quarter, we will continue to increase our sales and to some extent, also slightly the margin. Partially, this is true, driven also by the more complex project. And for sure, the deepwater project that you mentioned, our project, and we issued the demand for material, rely on our capacity of supply. We have a very differentiated position for this project. And so as you were saying, this is contributing positively to our margin.

[Operator]

[Operator Instructions] Our next question comes from the line of Stephen Gengaro from Stifel.

[Stephen Gengaro, analyst]

So two things for me. The first is more of a -- just your perspective and curiosity on this. I mean the trade case, it seems like OCTG prices are awfully strong and there's -- supply/demand is tight, and we were surprised by the outcome. And how do you think about the outcome there? And does that change your sort of thought process on just sort of how you run the U.S. business going forward?

[Paolo Rocca, executive]

Thank you, Stephen. Well, I think we need to react just to the conclusion of the trade case. And I will say before, we will step up our production level in the U.S. And this is something that we could do by concentrating on hiring of people and using our capacity, but also on the investment in the bottom line. On this, for a more specific comment, I will ask to Luca Zanotti to give additional commentary. Luca?

[Luca Zanotti, executive]

Okay. As you know, because we have been saying this for quite some time already, we were already engaged in a ramp-up process. And obviously, on the wake of the antidumping decision, we're going to accelerate on this. We still have capacity that is ready to come online. The only thing that we are missing is people, but the plants are actually prepared to come back.

So we're going to accelerate on that side, and we have significant capacity that can be added. And at the same time, as Paolo was mentioning, we are also looking at additional investment that could strengthen our industrial footprint in the area in which we still experience a bottleneck. With this said, I believe that we are positioned to be able to follow and accompany the growth of the domestic industry that we're still seeing going forward in 2023.

[Paolo Rocca, executive]

Yes. I think this is important with our positioning ourselves, and we will adjust to be able to accompany the growing demand from our clients in the United States.

[Stephen Gengaro, analyst]

So -- just so that -- I want to make sure I completely understand, the duties you've been paying, you said in the press release, since early May, so your quarter reflects the impact of those duties already, right? So is that a true statement, that your margins, which are quite strong in the quarter, already reflect the impact of the duties you're paying? And so theoretically, that could even get -- your margins could actually get a little better as you sort of work through some of the issues with U.S. production to offset maybe some of the cost increases. Am I thinking about that right?

[Paolo Rocca, executive]

You're right. I mean we were paying duty since the establishment of preliminary duty in May. And this is embedded in our cost of goods sold up to now and will continue to be embedded in our cost of goods sold in the coming quarter because, to some extent, in our overall complementing effort to -- I mean, the effort to complement from import our domestic production, we will also rely on capacity coming from the country affected by the antidumping duty.

[Operator]

[Operator Instructions] Our next question comes from the line of Alessandro Pozzi from Mediobanca.

[Alessandro Pozzi, analyst]

The first one is on Brazil. I think that's probably one of the few regions in South America where maybe as strong as the competition there. And I was wondering if you can use the -- maybe the ruling, the antidumping ruling, to be a bit more aggressive in Brazil and going after higher market share. And overall, if you can maybe comment about strategy in Brazil, given that their number of offshore development will be sanctioned over the next few quarters.

The second question is on working capital. We've seen quite a big increase in Q3. Is that just a function of the higher prices? Or maybe if you can give us more color if there is any items that have pushed the build in working capital in Q3.

And last question, if I may, just on offshore revenues, deepwater revenues. Can you tell us maybe where we are and where you expect to go next year as a percentage of the group revenues?

[Paolo Rocca, executive]

Thank you, Alessandro. The first question concerning Brazil. Well, Brazil, our contract and the tender are launched for covering the demand of long-term -- long time frame for Petrobras mainly, we have a strong position in the range of 50%, considering casing and conductor in sharing this contract. It's a solid position. It's not something that will change in the short term. We reached this position, and we will basically deliver on this. There is not so much we can do and not something that we intend to do in other short-term demand -- that is, by the way, very reduced in the case of Brazil.

In the question of working capital, it's true. Our working capital increased in the third Q. This is driven by increase in the inventory in our stock and increase in receivable. Now costs are going up. Prices are going up. And our volume is growing. We expect that also in the 4Q, our overall sales will go up in the range of 20%. So we need to build up the inventory needed to support this increase in sales.

In the next quarter also, there will be increase in the working capital, but this time, mainly due to trade receivable because it's increasing the volume of sales, it's increasing higher price and higher volume. And so we will have to increase our receivable while the inventories will stabilize much more. This is the trend we expect for the working capital increase.

On the last -- I don't think we will disclose for competitive reason the share that this project may have in our sales. But I can tell you they are very relevant for our overall business worldwide. When you look at the offshore, the shale offshore and the deep offshore, we have different competitive environment in the 2 segments.

[Alessandro Pozzi, analyst]

Okay. You mentioned on the working capital, you expect a substantial increase in sales even in the first half of next year? Did I...

[Paolo Rocca, executive]

I was mentioning the increase in sales. The 20% I mentioned is in the fourth quarter of 2022. And I'm saying that then -- also in the next quarter, in the first quarter of 2023, there will be some increase, but will be in the single digit range.

[Alessandro Pozzi, analyst]

In Q1 and Q2 of next year.

[Paolo Rocca, executive]

Well, in Q1, it is what we can evaluate. Then when you go on a longer time, I mean, many things could happen. There is a lot of uncertainty worldwide and from different point of view.

[Operator]

Thank you. 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. We look forward in seeing you soon. Thank you.

[Operator]

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