Tenaris S.A. (TS) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for standing by. Welcome to Tenaris First Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Now, I would like to welcome and turn the call over to Mr. Giovanni Sardagna, Investor Relations Officer. You may begin. Giovanni Sardagna. You may being.

Thank you, Glenda, and welcome to Tenaris' 2018 First Quarter Conference Call. Before we start, I would like to remind you that during this conference call we will be discussing forward-looking information 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; Edgardo Carlos, our Chief Financial Officer; Guillermo Vogel, Vice President of Finance and Member of our Board of Directors; Germán Curá, President of our North American Operations; and Gabriel Podskubka, our President of our Eastern Hemisphere operation. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our quarterly results. During the first quarter of 2018, sales increased 62% compared to the corresponding quarter of last year and 17% sequentially, mainly reflecting a high level of sales during the peak Canadian drilling season and the high level of line pipe shipments for the Zohr project in Egypt. Our quarterly EBITDA at $354 million continues to recover and was 79% higher than the corresponding quarter of last year and 11% higher sequentially. Our EBITDA margin at 19% was slightly below of the one of the previous quarter due to higher raw material costs and to lower margins on the Zohr shipment. Average selling prices in our Tube operating segments were up 1% compared to the corresponding quarter of last year but down 2% compared to the previous quarter due to a less favorable product mix. During the quarter, net cash flow used in operation was $30 million as we had a further increase of working capital of $364 million, reflecting an increase in receivable associated with the high level of sales toward the end of the quarter. After capital expenditure of $92 million, our net cash position declined to $557 million at the end of this quarter. Now I will ask Paolo to say a few words before we open the call to questions.

Thank you, Giovanni, and good morning to all of you. As market condition improve and demand for our products and services increases, the effort we have made over the past years to strengthen our market positioning and our industrial and technical capabilities are being reflected in our financial results. These are recovering, and we are confident that they will continue to do so in the coming quarters. In this quarter, we completed the delivery of pipes for the first of two export pipeline for the Zohr project of Eni and Petrobel in Egypt. For this project, we had to upgrade the capabilities of our welded pipe mill in Confab to produce and handle the large diameter heavy wall as our service line pipe specified for the project with each pipe weighing eight tons as well as accessory, which tested the limits of material feasibility. To comply with the very demanding project schedule, we completed the delivery of the 165,000 tons of pipes with 128,000 tons dispatched and invoiced during this quarter. These achievement with all its technical and managerial challenges, position us well for market requirement for fast-track project design and execution in complex environment. In Canada, thanks to our Rig Direct strategy, we had our highest level of quarterly sales volume in the past five years. Over 80% of our OCTG sales in Canada are now with Rig Direct services, and we are serving over 40 customer or twice that of a year ago. Customer appreciate the combination of high-quality material, supply chain expertise and technical support that we bring to their operation. We have strengthened our position in this important market. Rig Direct has also been gaining ground with major customer. We have renewed our worldwide long-term agreement with ConocoPhillips for five years and agreed to convert all their operation to Rig Direct service within this year. We have also renewed our long-term agreement with Petrobras for surface and conductor casing and connector for the three years incorporating Rig Direct services. With Exxon Mobil, we have qualified our Dopeless technology worldwide and are introducing Rig Direct services with Dopeless technology for their Liza deepwater project in Guyana. We have also transformed the competitive position of our coiled tubing business after developing our BlueCoil technology. This technology offers customer coiled tubing strength, which can be used in longer laterals and generate substantial savings through enhanced fatigue resistant properties that double the useful life compared to standard coiled tubing strengths. After initially imposing Section 232 tariff on 25% on import of all steel product, including steel pipes, the U.S. government granted temporary exceptions to a number of countries who are negotiating quota limits to maintain the exceptions in place once they expire on May 1. Korea has already agreed to a quota limits on their imports that imply a reduction of more than 50% of their 2017 import. Some other countries are also expected to agree to limits in their imports. In parallel, a process for product-specific exclusion request has been put in place. While the eventual outcome of the Section 232 process is still unclear, it is expected to benefit, in general, domestic producer. The U.S. OCTG imports remain at a high level during the first quarter but are now expected to decline following the Section 232 measure. We are steadily ramping up production at our new Bay City mill and preparing the rest of our industrial system to ensure the supply of pipes for the growing energy investment. Looking forward, Tenaris has an ambitious agenda focused on the transformation and modernization of our industrial system, expanding our customer partnership through service and technology development and optimization of our working capital to improve our cash generation. I would open the floor now, and we are ready to receive any question you may have.

[Operator Instructions] And our first question comes from the line of Blake Hutchinson from Howard Weil. Your line is now open.

Good morning.

Just a couple of questions on notes that – things that were called out in the release. First of all, Paolo, you expressed a higher degree of confidence with regard to pricing increases being able to keep ahead of raw material costs from here. Should we take this as a comfort level with current pricing versus the lag time for raw materials to catch up to current pricing? Or are customers accepting raw material cost increases and that transparency is helping you push price? Or would you say there's a real kind of fundamentally driven improvement in kind of your net pricing posture?

Thank you, Blake, for your question. I think there is a trend of increase in pricing. You can see this reflected since the beginning of the year in the Pipe Logix. This, in our view, will continue in the coming quarters and will continue and will be reflected in our profit and loss. The cost increase will also be reflected gradually, but to a lesser extent. So we expect our margin to increase gradually throughout the year. If we look at the medium term, the impact of the 232 Section application will be also something important to consider in the pricing, especially in North America. This is not entirely clear today, but we expect that in the coming weeks, we may understand a little better how will be the results of the action undertaken by the administration. Pricing is also increasing internationally, because reflecting the increase in cost. But I would say that this increase, when you look at our profit and loss, will also be affected also by the mix of product between line from OCTG affected sometimes by like in this quarter, by large order for pipelines. By the way, we perceive that the cost increase has been nearly stabilized as of today, and we do not expect iron ore or scrap or energy to continue to increase compared to what we have today.

That's a good data point. And then just to – and I think you touched on this a bit in your answer, but you also in the release, you talked about improving sequential quarter EBITDA and operating income despite the fact that volumes comparisons will probably be lower than a really big first quarter. Was that commentary meant to call out absolute EBITDA and operating income? Or just to talk about the fact that percentage margin itself would see relief due to mix in the coming quarters?

As we mentioned in the press release, we expect in next quarters to have slightly lower volume than the first, but we expect EBITDA in absolute term to be higher and also the ratio to be higher, slightly higher than the 20%.

Okay, thank you very much. I will turn it back.

Thank you. And our next question comes from the line of Michael LaMotte from Guggenheim. Your line is now open.

Thanks, and good morning. I appreciate the clarification on the guidance. A couple of quick follow-ups. The depreciation expense, Edgardo, was lower quarter-on-quarter and back in line with third quarter levels. What would be a good run rate to assume for 2018?

Edgardo, I pass the question to you. You know depreciation.

Basically, we should be very close to, all in all, $575 million approximately, altogether.

Okay, for the full year.

For the full year, yes.

And then on working capital, we've seen six quarters in a row now of working capital growth. Is 2018 going to be a year where we see a more seasonal, normal seasonal pattern of working capital growth in the first half and then reduction in the second half?

Michael, in the quarter and in the last few quarters, clearly, we expanded our working capital. This is due to increasing volume and, to some extent, in price invoicing, but also to the expansion of our Rig Direct program that is growing faster, as I mentioned in the Indonesia, Latin America, in Canada, in United States, in those international. This Rig Direct is demanding in term of working capital. And in the first quarter, the large line pipe for Zohr has also required additional working capital. There's a long-lead time order of a massive volume. We will start to reduce the receivable in the next quarter. So we expect that to be able to contain our working capital expansion. I will ask Edgardo maybe to give some comment, additional comment if needed on trend that we expect over 2018?

Sure Paolo, thank you.

Yes, as you commented, I mean, after following three consecutive quarter, we are increasing basically 15% to 18% volume-wise every quarter. We've been building up inventory up to the point of – probably now we reached a steady state. So what we are expecting is starting in the second quarter, turning back to a free – positive free cash flow. That will be followed also in an environment in which the CapEx, as you see this quarter, are basically being reduced compared to the last year. So we are expecting to restore our cash position starting in the second quarter for the rest of the year. So, we will end up basically with a much better position as of the end of the year.

That is very helpful. Thanks Edgardo and thanks Paolo. If I could have a quick follow-up for Germán quickly. On Hickman and Conroe, how much lead time do you need to get volumes going at those two facilities? Obviously, inventories are still very high and crane imports haven't yet responded to the quotas. But as we look at the second half of the year, obviously, it should be much better. I'm curious as to what the lead time is on ramping your U.S. welded volumes. Germán Curá: Thank you, Mike. Well, we're already working on that, Michael. And naturally, consistent with the requested additional volumes, we're filling up the plants. As stated at the beginning, obviously, we are concentrating our efforts on ramping up Bay City for the reasons we mentioned. I don't want to get awfully specific in terms of how long do we take to ramp up, say, a production shift for competitive reasons, but we've done it in the past. We're responding to the increased volumes that are requested. We've done it already. I think I like to stop here before providing you a specific number for the reasons I mentioned. That is something that we're doing. We've done it. Yes. And it takes, say, a few months. That's probably as far as I could probably go.

Which already you are getting requests? Germán Curá: Yes.

Okay, great, thanks so much.

Thank you. And our next question comes from the line of Marc Bianchi from Cowen. Your line is now open.

Thank you, following up on the last question about the domestic facilities, maybe to ask in a little different way. With 232 and the quotas, what's the opportunity in volume growth for the U.S. OCTG manufacturers? If I think about the industry in aggregate, what kind of volume growth could you capture from these changes?

The 2017 import represented around 60% of the OCTG market in the United States. Now application of Section 232 is not entirely clear today. There will has been agreement on reduction of import by Korea. We could say that, considering also other countries, we can see a reduction up to now of import in the range of 10% to 15% of the overall market. But this is not yet finished. In the coming days, in the coming weeks we will understand reaction and negotiation from other countries that will determine in the end the space that will be open for domestic manufacturing. We are moving faster to assure continuity of supply to our client and also to be able to prepare ourself for supplying demand in the market. But it's difficult today to define clearly, let's say, the change in the mix between domestic and import in the space of OCTG in 2018. We also have to take into consideration that we expect the market in 2018 to be higher than the market in 2017, following the increased number of rigs and the response of the companies to their increasing the price of oil.

Okay, that is very helpful, thank you. I guess my next question relates to line pipe. The Zohr Project, you mentioned, Paolo, has some very differentiated work that you did to deliver that specific product for the customer. What are the other opportunities like that in over the next, call it, two or three quarters for you to be awarded? And is there anything on the horizon as meaningful as Zohr?

Thank you, Marc. I think, Gabriel, you can give an outlook on what we have in our backlog and, I believe, may have or what could come out in the near future.

Good morning, Marc. Thanks, Paolo. Indeed, our team did a terrific job. Our teams in Brazil, Europe and Egypt executing on time a very difficult project and massively, which we concluded this quarter. As you know, this is the first line we have in our backlog, a very similar line for which we are preparing a production. And this year, we'll see probably shipment and invoicing towards the end of the year. We have a fairly almost identical backlog in the pipeline, this we can assure. In the rest of the offshore market, the situation is still a bit uncertain. I mean, the offshore environment is recovering very gradually. We don't see still the majors sanctioning a lot of new projects which require the high CapEx greenfield project. They are still focusing on tie backs and smaller near field development, which require less of a infrastructure buildup. So we have a good second pipeline in the backlog. But we are a bit cautious and gradual about offshore recovery, in general, in the market.

Thank you, Gabriel.

Understand that. Thank you, very much.

Thank you. And our next question comes from the line of Ian MacPherson from Simmons. Your line is now open.

Thank you, very much. I am trying to calibrate what the impact of Zohr was on your average pricing in the first quarter. Did I hear it correctly that the ton shipped in Q1 were 165,000 for Zohr?

I think around 125,000 in the quarter and 165,000 was the whole project.

Okay, got it. And so you average selling price across the segment was down 2%. But the prior several quarters, the sequential increase had been averaging between 1% and 2%. Would it be fair to assume that if your mix had been normal that, that same 1% to 2% higher price increase probably would've been evident in the first quarter, excluding Zohr?

Yes, I think that, excluding Zohr, this will be a reasonable assumption. Mix is not only influenced by Zohr. Mix is changing. But as I say at the beginning, we expect the prices to increase in the second quarter because of the change in price in the United States and also because of the impact of the changing in index in our contract worldwide. Mix there will be important.

Understood. And than do you expect seamless volumes to increase sequentially throughout the year as – that's what I have modeled, that's what I believe has been the assumption up until now. Is that still the outlook despite total volumes declining, seamless should be on an upward trend?

Yes. Seamless would be – the increase should be gradual but should be both in a – in seamless. I would say, in seamless, it will be gradual increase during the year. And if you are excluding Zohr, we will probably be relatively stable with low increase in the third and 4Q for welded.

Understood. Thanks very much, Paolo.

Thank you. And our next question comes from the line of Vlad Sergievskiy from Barclays. Your line is now open.

Thank you, gentlemen. Thanks for taking my questions. The first one is on pricing, really. So in the last three months, we've almost seen 15% increase in Pipe Logix. Is it fair to assume that second quarter, we'll see only a small proportion of this increase captured and then a bigger proportion will come later in the second half? And then also, let me please check what proportion of your international shipments are this or that way linked to Pipe Logix or linked to U.S. pricing and therefore will benefit us well?

Well, on the first question, I think you are right, the price increase will get gradually into our sales. Then keep in mind that the Zohr project in the last quarter may have again some impact on the overall price because the price of this has been comparatively lower than the price of our seamless premium, semi premium overall mix. But you are right on this. On second question, which is the impact of Pipe Logix, I would say that just a mathematical impact into the former, it's probably be relatively limited. But renegotiation and new quote in salt take into consideration the increasing prices. So even if it's not directly influential into the pricing, it has a relevant influence in sales.

Perfect. Thank you very much. And then if you could help me a little bit on your volume side. So you are guiding for a small sequential increase in the coming – sorry, small sequential decline in the coming quarters. Is it just the function of less shipments for the second pipeline for Zohr? Or there are other big moving parts which we should keep in mind?

No, no. It's basically the 120,000 tons shipped this quarter. This has – and due to the spike, something that we may have also in the fourth quarter whether we will have the second big line of Zohr. Volume, if you exclude this, will be basically stable in the beginning and probably increasing over time. There will be influence of the 232 Section in this.

Yes, understood. Thank you very much for the answers.

Thank you. And our next question comes from the line of Frank McGann from Bank of America. Your line is now open.

Okay, good day. Thank you very much. Just in terms of your commentary in the release, it seemed as if, at least on the margin, you're – the outlook description was just slightly more cautious, still optimistic, but a little bit more cautious. And it seemed to be tied towards a little bit less robust activity in Canada that you may be seeing post a strong first quarter as well as, perhaps, some delays in some of the pickup in Vaca Muerta. I'm just wondering if you would expand on that a bit if that interpretation is correct, and what you're seeing in those markets or other markets that lead you to be more or less optimistic.

Well, first of all, we are pretty positive on the Canada development, on our deployment of the Rig Direct, on our presence and position in the market. So Canada will have a positive impact during 2018. We also considered that the development of Vaca Muerta, will be also expanding but gradually. So we expect this to increase but, let's say, at a pretty slow pace. In general, I think that the price of oil is driving sustained activity by the oil companies in the United States. There has been some constraint in the infrastructure, transport of oil in Canada or in the U.S. This maybe is slowing down some of the project, but we are pretty positive on this. Now the uncertainty introduced by 232 application is clearly conditioning our view of the second half of 2018.

Okay. Great, thank you very much. Very helpful.

Thank you. And our next question comes from the line of Michael Rae from Redburn. Your line is now open.

Yes, hi there. Thanks for taking my questions. First, can you just talk a bit more about the contract with Conoco? Did you say that you've got global exclusivity with them and that they'll move to Rig Direct? I'm not sure if I heard that correctly. And then the second question just on Bay City. Is it fully staffed now? And have you seen any impact from wage inflation or constraints just as you ramp up there? And similar thoughts with Hickman, are you seeing any kind of labor cost inflation that we should be aware of? Thanks.

Yes. Well, on the first question then. In the global view, Gabriel, of Conoco operation, and our agreement for five year, if you can expand on it.

Yes. They're mentioning was a – the renewal of our long-standing relationship we have with ConocoPhillips. We just finalized the negotiation, and we agreed to extend it for five years with a – plus a option extension. This will cover all their OCTG global demand. This entails the rigs activity that they have in the U.S., activity in Norway and the U.K. and also drilling activity of Australia. And compared to the past, we have made a major impact in positioning since all of these rigs, specifically in the U.S., have been all converted under the Rig Direct all for the geographies in the U.S.

Yes. In – on the second question on the constraint that we may have in ramping up production if needed, German, maybe you can – I know you can expound. Germán Curá: Sure, Paolo. Thank you, Michael. Two short answers. Bay City is, in fact, fully staffed. And we're ramping up production and continue on increasing production output month-after-month. And no, we have not seen limitations in terms of our ability to rebuild our production staffing in Hickman. Hope that answers the question, Mike.

Okay. Okay. And then just a short follow-up on Bay City. So I think you were previously targeting 300,000 tons run rate at the end of this year. Has there been any sort of acceleration just because of the changes with Section 232? Are you pulling forward those volumes at all? Or you're just ramping up linearly as you were before?

This is what we have in our plan. We may – by focusing on it, we may set even more aggressive target as a running rate by the end of the year. It will depends on the circumstances, the changes in relative price. For sure also the activity of our client is relevant. And if our client will move on faster, then we may need to focus and increase the running rate by the end of the year.

Okay, that’s great. Thank you.

Thank you. And our next question comes from the line of David Farrell from Macquarie. Your line is now open.

Hi, good morning. I have one question from me. Just in terms of raw material costs, could you explain a little bit more detail how you're allocating production around your global facilities? It seemed to me kind of the raw material input costs have probably grown the most in the U.S. So is that actually causing you to redirect your production elsewhere?

Well, if you look at the changes in raw material, we had some impact in iron ore. But if you look at iron ore, iron ore is stabilizing since the third quarter of 2017, and so it's not changed so much. Scrap dynamics also looks like having touched a peak at the end of this year, and now we should be – more or less, we anticipate a stable situation for it. So in this consensus, there are no major shift due to change in cost in overseas and also because in the end, we – seeing that the fundamentals have driven these raising costs up to now, but also from now on, we expect this remain relatively stable. We do not anticipate major spike, in general, in the cost in the coming quarter.

Okay. And just to be clear, kind of given the moves we've seen, should we expect kind of the maximum pain from raw material cost inflation to be felt in the third quarter?

We will – you are probably right. We will have a small increase in the next quarter, in the next because of the reflection of higher price into our inventory. So the – this will impact cost in the second until the third.

Okay, thank you.

Thank you. And our next question comes from the line of Rob Pulleyn from Morgan Stanley. Your line is now open.

Thank you. Just two questions, if I may. Firstly, you talked about infrastructure constraints, but you seemed to have an emphasis on Canada. Did you expect takeaway capacity in the Permian with now large crude price differentials depressing wellhead prices to limit the pace of activity in the Permian going forward? And secondly, we talked about working capital earlier. But with the Rig Direct strategy being a key difference versus the last cycle, could you maybe help us indicate where working capital to sales will normalize in coming years as the cycle stabilizes and, obviously, as your facilities have ramped up?

On the first one, I would ask German to give us a view of how some of the infrastructure constraint may have impact on the number of rigs and the investment of the contract. Germán Curá: Yes, thank you, Paolo. Well, Rob, our observation is that, and this is particularly true for the Permian, we're starting to see, say, two levels. One, is the ability to, in the end, manage the 10 million barrels a day of production together with the liquids. This is creating particularly around causing some logistics limitations. And at the same time and to a lesser extent, some say specific services for lead times are slightly longer than what they were. Of course, we need to also contemplate the number of rig count, the rig count that we have in Permian, which is at the same time, in a way unprecedented. We tend to say that rig count at this pricing level would have increased faster if these constraints would have not been in place. But at the same time, flip side of that is that the pace of growth that we've seen in the last, say, number of weeks is something that, at this pricing level, in my opinion, would be sustainable.

And the second point is on the impact of Rig Direct on our stock. I'm pretty confident that we will be able to reduce our working capital gradually as soon as we improve confidence, predictability, improve the demand planning. This is a process that has been moving very fast. We are now serving more than 400 rigs worldwide. This has been a very strong increase compared to last year. There are, for sure, areas in which we are being cautious in keeping the right inventory or even [indiscernible] on top is something more than the right inventory to assure consistent, flawless operation in Rig Direct. I think we are improving. We are more confident on planning. And we will be gradually reducing our working capital starting for the next.

Very interesting. Thank you.

Thank you. And our next question comes from the line of Amy Wong from UBS. Your line is now open.

Hello, I just want to clarify some questions on your working capital seasonality. Can you comment whether some of that receivables have been collected post quarter? And then given your guidance on another ramp-up in Zohr deliveries in the fourth quarter, should we expect also another uptick towards the end of the year? So can we get some view on what your working capital development is going to be over the course of 2018, please? Thank you.

Yes. Now on the second question, yes, when we have the second line, we will have to acquire the place to ship it to Brazil. I mean, this is a long lead time process, it's possible it's something that may have an impact on our working capital. But for the receivable, Edgardo, can you comment on.

Good morning, Amy. Yes, as you said, the – basically, the account receivable that has been accumulated at the end of the quarter, we are expecting to be able to connect this basically in this quarter and probably in some part of the very beginning of the next quarter. So we are targeting to reduce probably the DSO by, I would say, 10 days from the 76 days that we have today by the end of June. And then, Amy, you're right. I mean, as Paolo was saying, I mean, at the end of the year, we will have some probably small increase depending very much of the way that we will be shipping the sort – second stage.

All right. Okay. Do you have any firm timing as it's definitely going to make it end of this year as I'm – am I right to get the impression that perhaps there was a little bit of phasing with line 1 that is – maybe half the shipments happened a little bit earlier than you guys expected?

No. Basically, we deliver on time.

Yes. We know, Amy. Good morning. We comply with the delivery schedule that we have. Everything has been moved through Fastrack. So there was a need from ENI and the Egyptian authorities to have the gas producing as early as possible. So we did everything that it was in our power to meet the schedule, and we did.

All right. Great, that’s very clear. Thank you.

Thank you. And our next question comes from the line of Alessandro Pozzi from Mediobanca. Your line is now open.

Thank you. I was wondering if you can maybe give us an update on your operations in the U.S. market specifically? I was wondering if perhaps the one in Bay City is already translating to higher market share? And maybe if you can maybe give us your view on where consumption per rig is going, appreciate, was getting longer, but probably are getting more complex as well. So maybe it may take longer to drill. So if you can maybe give us a color on that piece as well.

German, you can comment. We usually do not comment on market share. On this Bay City ramp-up and what you – we see in the consumption price of rig. Germán Curá: Sure. Paolo, thank you. Well, Alessandro, we try not to be awfully specific on market share. But let me just briefly tell you, as indicated initially, the Bay City is on the path that we designed and aimed, in principle, at a run rate of 300,000 tons towards the end of this year. And that may change consistent with ultimately, the final format that the 232 resolution may take. Now Rig Direct is continuing to occupy the space and is translating in our ability to ultimately expand the presence of Tenaris in the states. Hopefully, that conveys the idea. Rationally, we won't get into detail specifics. Now with respect to the consumption per rig, I think the increased laterals and everything that we have discussed, we want to say rough indication. We've seen today that the new rigs are capable of ultimately consuming something in the area of about 1,200 tons of OCTG, metric tons per rig. And this is substantially higher, say, per quarter, of course. And this is substantially higher than what we've seen, for instance, Q1 2014 where numbers were more in the area of 850, 900 metric tons per rig per quarter.

Yes, thank you, German.

And well, do you think that – going to think it's going to increase even further over the next few quarters or stabilize?

Well, when we look at the graph of all of the oil field, you see the – that in every area from Bakken to, Gulf Coast, the Rockies and Everest [ph], this continues increasing. I mean, it's growing. And I expect this to continue. I mean, it looks like the industry is capable of managing slightly longer lateral but – especially to reduce the timing of drilling. I mean, so we see some company that is drilling in a very short period of time. Probably if you implement the best practices in all of the region, we will continue to see some increase in the consumption of pipes per rig per quarter.

That’s very clear. Thank you.

Thank you. And our next question comes from the line of Kevin Roger from Kepler Group. Your line is now open.

Hey, good afternoon. Thanks for taking the question. I was just wondering how should we think about your operating leverage for the coming quarter and so the impact from your EBITDA margin. Because in Q1, you clearly say that you had a good assumption of your fixed cost into a large shipment, especially for Zohr. But for the coming quarters, you say that the shipments should be lower. And on the over side, you have the ramping up of Bay City, meaning that you're adding capacity. So I was wondering if you could give us some color regarding your operating leverage for the coming quarters and so the impact on the margin, please.

Well, if I understood well the – your question, I mean, the – in the coming quarter, the volume will be slightly lower. But in term of invoicing, we will be close to the level of the first quarter, in that range. So in this sense, we will continue to maintain the present ratios in term of weight of general cost of – basic cost for these. In term of margin, as I mentioned before, we will increase margin, as I mentioned before, slightly above 20%. And this is the result of the mix and price.

Okay. I understand. And if you can please precise the region concerned by the sale that you have made at the end of the quarter and which, I believe, to be trend in increasing in receivable. Is it in the – mostly in the U.S. or in the international side?

No. We were mentioning basically Zohr. But – I gather you can – Middle East and Africa are the region in which we increased receivable because of the line pipe project. And we will be collecting them end of the second quarter or beginning of the third.

Okay, understood. Thanks.

Thank you. And our next question comes from the line of Luigi De Bellis from Equita SIM. Your line is now open.

Yes, good morning. Just a quick question for me. Could you elaborate on the tax rate expected for 2018 and also going forward? Thank you.

Okay. As we commented in our press release, I mean, this – in this quarter, our tax charge was very limited because of the positive effect of the currency appreciation in Mexico that affected deferred tax and the tax basis of our subsidiary in Mexico. Going forward, I will say that depending very much of the exchange rate, because as you see, I mean, the Mexican peso has been depreciating again after the closing of the quarter, first quarter. So taking aside the impact or the effects, I will say that probably we should be flying by the 18% to 20% tax rate.

Thank you very much.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the call back over to Giovanni Sardagna for closing remarks.

Well, thank you, Glenda. And thank you all for joining us in our conference call and – well, I hope you – see you soon. Thank you. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.