Tenaris S.A. (TS) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Q2 2018 Tenaris Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Giovanni Sardagna, Investor Relations Officer of Tenaris. You may begin.

Thank you and welcome to Tenaris 2018 second 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 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 Chairman and member of our Board of Directors; Germán Curá, Vice Chairman and member of our Board of Directors; Gabriel Podskubka, President of our Eastern Hemisphere Operations; and Luca Zanotti, President of our U.S. Operations. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our quarterly results. Our second quarter sales at $1.8 million were up 44% compared to last year, but down 4% sequentially. Sales rose in most regions except for Canada, reflecting seasonal effects and the East Mediterranean, where we had lowered treatment for offshore pipeline following the exceptional level recorded during the first quarter. Our quarterly EBITDA at $363 million continued to recover and was 81% higher than the corresponding quarter of last year and 2% higher sequentially. Our EBITDA margin at 20% was higher than the one of the previous quarter, mainly due to higher average selling prices despite lower shipment volumes. Average selling prices were up 7% compared to the corresponding quarter of last year and sequentially due to higher pricing in the U.S. and better mix. During the quarter, our working capital began to stabilize and our operating cash flow rose to $351 million. Following capital expenditure of $104 million and shareholder dividend payment of $331 million, our net cash position declined to $423 million. Now, I will ask Paolo to say a few words before opening the call to questions.

Thank you, Giovanni and good morning to all of you. Our results for the first half of 2018 show the strength of our competitive positioning and our ability to capture the opportunities that arise into the market. Following the strong recovery in shale drilling activity in North America last year, the recovery has begun to spread gradually to the rest of the world. Also this has yet to take hold in most offshore regions, new products are being sanctioned. We should translate into increased activity later next year. In this condition, our sales for the first half are up 52% year-on-year and our EBITDA has increased by 80%. Our free cash flow is positive again after several quarters of working capital bend to support our sales grow and redirect activity and the return to normalized level of capital expenditure following the completion of our Bay City mill. We expect to make further progress in optimizing our working capital in the coming quarter. Our financial conditions remained a source of competitive differentiation, giving us the flexibility to support customer, maintain dividend payout to shareholder and make strategic investment. In North America, we are consolidating our Rig Direct strategy, which has helped to strengthen our relationship with major customers across the main shale plays of the United States and Canada. Today, two-thirds of our OCTG sales in North America are Rig Direct and 54% were bought. We are ramping up production in our new Bay City mill and this July we produced more than 25,000 metric tons. With the Section 232 tariff on steel import in place, we are also increasing production at our Hickman welded pipe mill and our McCarty premium threading facility. In the coming months, we will reopen the pipe processing and finishing facilities at the Conroe mill that we shutdown in 2015 in response to the market downturn. Overall, we expect to create around 550 new jobs in the United States during 2018. Pricing for our U.S. Rig Direct customer is gradually improving, and we are confident that we will be able to transfer the full cost of the Section 232 tariff to the market. In South America, we are participating actively in the ongoing development of the Vaca Muerta shale play in Argentina, providing Rig Direct services and technological solution that contribute to reduce drilling cost and improve performance. In Brazil, we have consolidated our position as the supplier of surface and conductor casing strengths and connector for offshore, pre-sold to wells for Petrobras and for the international oil companies. In the Eastern Mediterranean, we delivered an export pipeline into the Zohr product in the first half of this year and now we are preparing to deliver the second one in the fourth quarter. Global demand for LNG has been increasing rapidly, particularly in the Asia-Pacific region where China has become the second largest importer as it implements policies to reduce their pollution from the use of coal. A number of expansion of and new development is underway. We have contract for expansion project in Australia and the Middle East and new frontier development such as Eni coral project in Mozambique, where we will deploy our Wedge 623 Dopeless connection. The application of Section 232 steel tariff and their retaliatory and safeguard measures adopted by many countries are changing the competitive environment in many ways. Tenaris, with its global industrial system, is better placed than any competitor to address the challenges caused by this fluid environment. All around the world, we continue to leverage our competitive positioning through global customer relationship, industrial excellence, product technology and leading service capability to take full advantage of the opportunities arising in the unfolding mass recovery. We can now take any questions you may have.

[Operator Instructions] Our first question is from Igor Levi from BTIG. Your line is now open.

Good morning, guys.

Good morning.

So, there has been talks of a potential agreement between U.S. and NAFTA and U.S. and the EU potentially to remove tariffs. So, if such an agreement is reached, I mean on one hand, its negative OCTG macro and potentially overall pricing, but on the other hand, these are markets where Tenaris has a very strong position and they only represent one-third of the U.S. imports. So, would you say the positive outweigh the negatives or how would you balance those two factors?

Thank you, Igor, for your question. While we really think that any negotiation on NAFTA will be very positive for Tenaris and you can imagine, a negotiation on reasonable term will preserve the space for energy sector between Canada, U.S. and Mexico. This is on one side positive for the investment in the different component of the energy sector. You can imagine Mexico and offshore, in onshore in Canada and so on. It would be really – you will be very good for the growth and the development of the infrastructure and of the development of the activity in the region. From our point of view, it will be also very positive to integrate the facility that we have in the United States from the [indiscernible] to McCarty to Hickman and Coral with the existing facility in Mexico and in Canada is important and we expect that any negotiation will imply a reduction of the 25% tariff that we are presently paying in accessing the U.S. market from Mexico and Canada. The potential agreement with Europe, in my view, will also be in general beneficial for us in allowing integration in terms of steel from our steel shop in Europe and will not be very negative on other account, but will be less relevant for Tenaris, if you consider the capacity installed in Europe and the situation of U.S. So this is how we see the possible negotiation. By the way, the recent uncertainty as you can imagine, today because we do not know if these two negotiations may advance and come to a decision within, let’s say the coming months.

Thank you. That’s very helpful. On the import front, I noticed that the import data is showing a big drop in imports from both Mexico and Canada into the U.S. and a bit of a pickup from Argentina, assuming the tariffs on NAFTA stay in place for the second half, what is your strategy to minimize the impact on – of these tariffs and to what extent do you have enough inventory at this point to draw from before you really have to start importing from Mexico and Canada again?

Well, basically we – our strategy is mainly focusing on serving in the best way our client into United States for the entire range of their need. So we are supplying from Argentina what is required by the market, but we are supplying especially from the U.S. operation. This step-up of Bay City production is very important. As I mentioned in my remarks, we arrived to 25,000 metric tons in June, so we expect to be above the figure, the running figure for annual production by the end of the year. In the last call – in the last conference I was mentioning 300,000 tons per year. I think we can do better than this by accelerating this ramp up. And then we complement with import from Tamsa in Canada. Even if we had to pay, as we are paying the tariff at present, we need this to support the demand from our client. The increasing prices has been – allow us to supply from Tamsa the market. In the case of Canada, we are just focusing on the markets that are logistically closer to Canada. It’s much more difficult from Canada to maintain in present environment importing to this stage.

Great. And just one last one, switching gears, we clearly want takeaway capacity in the Permian and are you seeing anything as far as increase in line pipe demand?

Yes. In general we see that the companies are making a big effort in addressing the bottleneck in the infrastructure. And this requires a line pipe installation. But I will pass it to Luca Zanotti for a comment on what we expect from this market in the coming six months.

Thank you, Paolo. Good morning, now as far as the line pipe specifically is concerned, of course there will be an increase in demand of line pipe. Now, let’s bear in mind that this line pipe are in the let’s say 20 inches up range, so the answer is yes.

Thank you. I will turn it back.

Thank you. Our next question is from Michael LaMotte from Guggenheim. Your line is now open.

Thanks. Paolo I guess the first half is with Korea, the import data shows that they have almost filled their quota for the year through May, which would suggest that the market is going to be short probably 600,000 tons or so in the second half of this year, I know you all are ramping up Hickman, I am curious to know your thoughts as to whether or not the U.S. has the ability to completely backfill for that in the second half of the year or whether we will see a good drawl on the ERW inventories and an acceleration of pricing in those particular products?

Thank you, Michael. I would say that as you say, in the second part of this year and then in the second half of this year, import for some of the country with quota, Korea in particular and Brazil also will be reduced to a minimum. But this is a very large market with large inventory on the ground. Production in – domestic production is stepping up not only from us, but also from our other producer. Some of the companies that are importing into states are fulfilling their commitment to the client, even if they have to pay the tariff. Some other companies are presenting the request of exclusion and they think they may have it, so they are continuing to feed into the U.S. market. I think that this will be – we will understand better the equilibrium between supply and demand in U.S. in the very last part of the year. When decision will be taken on the exclusion, when some of the commitment we may need to be renewed and at that point the 25% tariff in the present environment may not allow, let’s say a renewed extension or renewal of agreement. So we are in a transition stage. In the last quarter, I thought that this May, the 232 may have involved is likely part of reduction of import. Today, I think this is happening but the transition time will be longer than I expected in the last quarter.

Okay. So would it be fair as it is – as measured tightening – moderate tightening, is that fair?

Yes. In my view there will be a gradual price recovery, there will be a gradual tightening. To some extent, the situation in Permian and the limit to the infrastructure may also contain or preserve the level of rigs at the present level. So this is also something that may let’s say contribute to the overall equation of demand and supply in...

Okay. Thank you. And then as my follow-up, I would like to ask you about steel prices and flow through in the second half, iron ore in particular has been weaker than I would have thought given where we were in the beginning of the year, is there any potential for some margin uplift in the second half of the year because of lower average steel costs?

I don’t think so. I agree with you that – I would say overall price of metallic – I would say is today stable and may even go down slightly over time. But still in our cost of sales, there will still be some influence, some impact of increasing these costs due to what’s happened in the past quarters. So we will not see reflected in the next semester and this decrease in the price of iron ore. It may happen but later.

Okay, great. Thank you. I will turn it back now.

Thank you. Our next question is from David Anderson from Barclays. Your line is now open.

Hi, good morning. Paolo, so you had just said that the kind of transition stages take a little bit longer than expected, can you just put that into the context of how you see the Pipe Logix index increasing? I am just curious when do you think you see the full impact of 232 in the Pipe Logix index would that be by the end of the year or do you now think that might be more of an early ‘19 event? And then I guess secondarily, how long does it take – that should take about a quarter or two to flow into your realized prices. I just want to make sure I understand that correctly.

Yes. David, let me turn these questions to Luca on the Pipe Logix around this, because in general, I think gradually the word we are using is the tender goes up, but at a low pace.

Yes, thank you, Paolo. Good morning, David. I don’t have much to add to what you just said, Paolo, this transition is going to take some time. We do expect the market to be tighter towards the end of the year, but based on the three reasons that you mentioned before, this is going to take some time. And as far as the time needed to see this uplift in price in our books, it is fair to assume that the 3 month timeframe is good.

Okay, thank you. And the separate question on the deepwater side, I am just curious on something, Paolo, in your remarks you had mentioned there is some new sanctioning of projects out there, but in terms of what we are seeing overall in terms of your conversations with IOCs, I believe OCTG is one of the longer lead time items. Can you give us a sense as to where those conversations are today? When do you think you start seeing orders start coming in on some of those deepwater FIDs and should we be thinking about say a 2019 delivery or would that be more like a 2020 delivery?

Thank you, David. On this – I would turn your question to Gabriel Podskuba that has a very good overview of the project in the East Hemisphere and then we may add something about the rest.

Yes. Thank you, Paolo. Good morning, David. Related to the activity of new projects being sectioned, what we are seeing from the IOCs, we haven’t seen yet a major change in their behavior of sanctioning new projects. I mean, they have had clearly a strong improvement in the cash flow in the last couple of quarters, but we are still seeing them cautious on capital discipline and cost controls. There are signs that they are preparing new wave of projects for the future, deepwater LNG. Gas developments are the areas that are a bit with a brighter perspective. These are being happening. We have been particularly successful in some of the LNG expansions that are being prepared in the Middle East with multiyear contracts there. We also see new phases in the Phase 2 of the deepwater LNG developments in Australia. We are very well positioned with Chevron, Eni and ConocoPhillips. So, we expect that to happen as well. We delivered this into 2019 and beyond. And some of the new frontiers like Mozambique are starting to happen. Coral is an example of a floating LNG with 6 wells that we will deliver in 2019. So we start to see some dynamics. It’s not happening at a very high pace. There is some time to have those contracts in our books in 2019 and beyond. So, it’s going to be a gradual recovery, but it’s being positive, but not as positive as our uptick in their cash flow, let’s say, still there is some delay on behavior.

Let me add something on Brazil. Clearly, in Brazil, there is activity going on, planning still – my view activity will start basically in 2020, not in 2019. We may see some sanctioning of project during ‘19, but we really expect this to be medium term. As far as Mexico and Gulf of Mexico, we still see some direct, some small intervention and also major activity or activity let’s say appraisal activity going on in 2020 not yet, only a few cases in 2000.

Great. Thank you very much.

Thank you. Our next question is from Frank McGann from Bank of America/Merrill Lynch. Your line is now open.

Okay, thank you. Yes, just to follow-up a bit perhaps on that last question as well, you mentioned North Sea and Russia in your commentary as areas where you have been seeing some growth. I was just wondering if you could just perhaps give a little bit more color on that and how material that could be? And also with Argentina and Vaca Muerta, the trends that you think you will see over the next 12 to 24 months, do you expect to see an acceleration given [indiscernible] to move to full development in some projects from pilot projects and how big could that be if you think we will see a pickup?

Yes. Thank you, Frank. Well, as far as level of activity in North Sea or Russia, let me ask Gabriel to give you a brief overview on how we see this for the coming quarters?

Yes. Frank, North Sea in fact is one of the areas that is showing a higher level of activity within the offshore. It’s one of the brighter spots. We don’t see majors there as they have mainly exited the area, but we have the new independents that have been present, have been bringing rigs into the market, both in the UK and in Norway. So, that’s an area where we are positioned. We are increasing our share there. We have captured new customers. So, this is within let’s say a limited scale, but this is an area of growth for Tenaris into 2019 and beyond. And in Russia, we have been seeing in general a very resilient area for drilling, but we are present there only on niche projects that require high technology like extended reach or deepwater. So, we have been successful there as well, but we have participated on a limited scope.

On Argentina, you have seen the activity in Argentina has been increasing. We expect, however, that the increase in ‘19 will continue, but at a pretty low pace. There is a need to invest in the infrastructure to adapt regulation to an environment in which gas is more abundant, in which Argentina may need to be able to export in some of the summer months. So also there will be some definition needed in the functioning of the market for gas in Argentina and this may stimulate further investment during 2019. So what we see today, there will be increase, but at a pretty gradual pace. Some change in regulation allowing expert or redefining some rule for the domestic market, allowing different client to buy directly gas, this may stimulate additional investment and expanded the markets of gas for Argentina, but we will see in 2019 if this will be the effect.

Okay. And the oil side, are you seeing much activity in terms of gas moving towards more aggressive development or is that still relatively slow?

There has been a change as you know in the Ministry of Energy. The new administration, the new mining ministry is picking up and has to take decision on some issue concerning as I mentioned tariff, but also concerning pricing of energy commodities. This decision will be important in determining the reaction, the level of investment of the oil company in the oil development of Vaca Muerta. To the extent to which the market will be able to have international price for their production, this will be helpful in stimulating investments, so more clarity and the decision will help stimulating investment. I think we will see this in the coming months. And in my view, Vaca Muerta will be very essential engine for growth in Argentina. We will see this over time not only in gas, but also for oil provided that the right decision is taken on the regulatory side.

Okay, thank you very much.

Thank you. Our next question is from Marc Bianchi from Cowen. Your line is now open.

Thank you. I wanted to ask about the comment you offered in the press release for the business in the back half of the year, you said that next quarter will be close to the first two quarters before rising in the fourth quarter, if I just take the average of the first quarter, is that what that’s meant to imply, do you expect instead increase in the third from the second, I know that’s a seasonally weak quarter for you in the third quarter with turnarounds, but curious if you could provide some more color on the third quarter?

As we mentioned in the press release, we expect the third quarter to be more or less in line or slightly higher than the second quarter. They will be seasonally weak, as you know because of vacation time in the Northern Hemisphere. But basically we expect that some of the volume of line pipe that is coming due in the second semester may be concentrated more on the fourth quarter than in the third quarter. That’s the reason why we mentioned this. In the previous conference call, we were talking about more or less continuing growth. Now we are saying growth in the third quarter would be in line or slightly higher than what we have. But the increase will be more concentrated in the fourth. But this is mainly due to the movement in the line pipe project and according to the timing of delivery.

Okay, thanks for that, Paolo. And associated with the line pipe project, we saw a very nice working capital for lease or working capital performance here in the second quarter and free cash generation in the second quarter, do you consume working capital in the third ahead of this line pipe work in the fourth or could you talk to what we should expect for working capital in the third and the fourth as a result of Zohr?

Well, in general we think that for the coming quarter, we will have positive cash flow – free cash flow. But Edgardo, you can comment on the timing of the big pipeline and the expectation of cash flow for the third quarter.

Sure. Good morning and thank you for the question. Yes, we are probably going to be very much working capital neutral in the third quarter. It can be sand, steel increase not in tonnage base for the inventory, but probably the last increase on the raw material affecting our stocks. And I will anticipate there is probably some buildup of working capital in the fourth quarter because we are going to be concentrating basically a significant part of the invoicing in the last part of the fourth Q. So that will be probably increasing to some extent towards the end of the year.

Yes. But overall in this condition, with working capital condition considering the EBITDA and the level and discipline in CapEx, we will have positive free cash flow.

Okay, very good, I will turn it back. Thank you.

Thank you. Our next question is from Ian MacPherson from Simmons. Your line is now open.

Hi. Thanks. Given the slowdown in the Permian, I was wondering if you could elaborate a little bit more with regard to what you see in terms of the total U.S. Lower 48 activity in the second half compared to the first half, if the Permian is flattening, but the other basins are still continuing to grow, do you see decent sized sequential growth in U.S. in the second half versus the first half still?

Thank you. I will ask Luca to comment on this, the Permian and the Lower 48.

Yes. Thank you, Paolo. Good morning Ian. As you have seen with the differential commodity increasing and the takeaway capacity being crushed, Permian, we are looking here in relation which the growth in this basin that has shown the biggest growth is flattening out. Overall, if I need to talk about the U.S., we expect for now going to the end of the year that we remain kind of flattish or just as more increasing some reason. We are also listening, but we don’t see it happening yet of operators. They may be considering to moving out a little bit from Permian to other region. All-in-all, it’s going to be washed, so I believe it is fair to assume that we will not see a flattening of the rig activity.

Got it. Thank you. My other question, this is more on the periphery, but you had a really surprising margin increase in your other sales with the sucker rods and coiled tubing, etcetera, is that a structural improvement or is that an aberration?

Well, a lot of this is driven by the U.S. demand for quality. We are very successful in the promotion and sales of new product there. But Luca, you may comment. Sucker rod also is driven by Argentina, by Latin America, but also by – could be by U.S.

Yes. Thank you. Thank you, Paolo. Now yes, as you said I believe that we have been successful in repositioning our coiled tubing operations and the improvements that we have achieved are structural. So as far as this part is concerned, we – this increased, but I will hand it over to Germán, if they can elaborate a bit on this. Germán Curá: Thank you, Luca. Ian, what’s going now with coiled tubing is the BlueCoil product, which we introduced about 2 years ago, is gaining a very considerable amount of traction. The moment that coiled tubing is going from 2 inches to 2 and 5/8 inches, I would know. Obviously, longer lasting etcetera, etcetera, call for a higher yield trend and this is exactly the segment for which BlueCoil was developed. As a matter of reference, nearly 60% of our coiled tubing sales are today delivered in the form of BlueCoil. And I mean this is a structural change. This is unlikely we are going to go back to the old coiled tubing.

Yes. It looks like a nice tradition to your business. Thank you.

Thank you.

Thank you. Our next question is from Amy Wong from UBS. Your line is now open.

Hi, good morning guys. Just want to focus a little bit more onto the moving parts into the third quarter and specifically into the fourth quarter, what are the kind of moving parts that would draw in the margin, the way you are kind of talking about the pricing increases and offsetting costs seems to suggest we should be expecting a flattish kind of EBITDA margin profile, is that the right way to think about your second half numbers. And then in the fourth quarter specifically, if we strip out the Zohr effect, can you comment on kind of the growth trajectory of the other part of your business?

Thank you, Amy. First of all, general comment on, let’s say, the third quarter, the moving parts that we are referring to is basically the pace of adjustment of supply and demand to the change in tariff around the world. This has an influence on third and fourth quarters. The 232 is not being reflected fully in the situation in the United States during the third and the quarter, we will see what’s happened there. The decision on the NAFTA will be relevant for this, but also we will measure the dynamics and the strength of important commitment into the United States. But also as you have all very well known, every country has taken – most of the country has taken either retaliatory measure after the 232 or and safeguard action against diversion of commerce. So in this moment, we have action taken by Canada, action taken by Mexico, action taken on this to France by Europe and companies on the competitive environment is changing, because the entire supply chain for some of our competitor for us is to some extent distorted or disrupted in this. Now, this is some of the uncertainty that we see in the – what is, let’s say, what we call the moving parts that we need to understand in the coming two quarters. By the way, as I mentioned at the beginning, Tenaris is better positioned than anybody else in addressing the complexity and shifting the regulation on commerce, because of its presence in all of the different scenario in the market and in the production side. As a whole in the second half of 2018, our EBITDA will be higher than the EBITDA in the first half of the year. And in general, I expect that also well we were maybe close in terms of margin, but we will be higher in term of invoicing. So, we are continuing to grow in the sense maybe with the shift between the third and the fourth quarter even in this environment. Now, one of the very important issue for us is the efficiency of our industrial operation in this recovery and step up of operation in the United States. This is a factor that you can imagine very well, every tons that we produce additionally in the United States may reduce the need to start to resort to import from outside has value for Tenaris. The efficiency of our industrial system is in this moment one of my concern in an environment that we need to respond. So, we have an industrial plan that we are applying in different facility to respond to the changing in the market and in this condition. In this sense, one of the, I would say, the most important issue for us in the data system is safety. Let me mention this quarter is not being a good quarter for us. We had to register one fatal accident in our facility in Brazil, but these are, let’s say, a sign that we are coping with a difficult task in raising the level of operation of our industrial system, incorporating new people, assuring all the standards of safety comply with our demanding target in term of industrial excellence. I don’t know Edgardo, you want to add?

Yes. For the second part of the question, taking outside – taking out the impact you saw in the fourth quarter, Amy asked and Luca was saying, we see – I mean that probably a full impact of the price increase in the U.S. would take place in the fourth quarter, while the increase in the cost has been probably be fully reflected in our P&L up to the third quarter and there we will see some limitation in increase. Therefore, those are another additional part that you need to have the full picture of the performance in the fourth quarter.

Okay. Well, thank you, Amy. Sorry, one, I have to correct something, I say Brazil, our fatality has been in Mexico, sorry for the...

Okay, alright. That’s very helpful color. Thanks both of you for that very thorough response. I will turn it over.

Thank you. Our next question is from Rob Pulleyn from Morgan Stanley. Your line is now open.

Yes, gentleman. Just two questions for me if I may. So firstly, I think there were some pricing indicators out from the AMM for July, which indicated seeing those prices down month over month, which I thought was maybe a little bit counterintuitive to many people following the industry. I just wondered whether you could sort of explain whether – what that was or whether it’s part of this transitory period that you referred to or whether it’s the beginning of the trend that we should be aware of? And the second one there has been a lot of questions about 3Q, but I want to go over the same ground, but just to bring it altogether, consensus has 1.5 for the full year, given your indications around the second half, is that a number you are comfortable with or should we all revisit it? Thank you.

Thank you, Rob. On the second question, yes, we are comfortable with what we are seeing. This is in line with what we could expect from the entire year. With reference to the first question concerning price, Germán, maybe you can comment on the seamless price in AMM? Germán Curá: Yes, thank you, Paolo. Well, Rob, frankly we saw the AMM article that refers specifically to some seamless comments, seamless pricing J55, so carbon comments made by some distributors. We don’t really quite agree with that. It’s not what we see in the market, I said the opposite is in fact true.

Yes. Well, if you look at into the Pipe Logix, you see that the non-treated material show an increase above 4%.

Okay, that’s very rich. I will turn it back. Thank you.

Thank you. Our next question is from Alessandro Pozzi from Mediobanca. Your line is now open.

Yes, thank you for taking my two questions. The first one is on Mexico, I was wondering if you can give us an update on the market there. We have a new President, which appears to be supportive of the upstream sector. I think you have two priorities, including ramping up production. So, I was wondering whether maybe your outlook on Mexico has become a bit more constructive. Second question on the Section 232, I was wondering – I think you applied for an exclusion from inputs from Mexico, I was wondering when we expect a reply from the government and if not what sort of impacts could that have on the margins? Thank you.

Thank you, Alessandro. I would ask Guillermo Vogel to comment on Mexico expectation.

Sure. Thanks for the question, Alessandro. Well as you know, in Mexico, we have a new President elected since July 1, with Mr. López Obrador and he is going to take office until December 1. So, we still don’t see him operating but he has been sending some messages, strong messages. I think that in general terms, he has been – he sent strong messages in terms of how he wants to handle the country and he is talking about fiscal discipline. He is talking about respecting the autonomy of the central bank. He is talking about the flooring. So, he has been sending the right messages to the country. In terms of the energy sector, I think that there was some concern before the election about what position he was going to take in relation to the energy reform and the messaging that he has sent now is that he is going to review the contracts but he is going to respect the contracts, so that all the bidding that was done on the round 1, 2 and 3.1 is moving ahead, which that is going to – we are going to start to see that reflected in terms of market demand in Mexico. We are already seeing it today, but it’s going to be – it’s going to keep growing. Then in terms of – there was some questioning about the people that he appointed, that he is appointing to be – in terms of the relevant positions in the energy sector in Mexico, Pemex, CFE, etcetera, the Secretary of Energy, where some of the people selected were – before this process were against the energy reform. But I just saw today a declaration of Mr. Bartlett, for example, who has been appointed as CEO for the CFE that they are going to continue with the energy reform. So and then the other messages is that he wants – the Mr. López Obrador wants to increase the investment budget for Pemex because he wants Pemex to regain a strong position in the market. So I would say that overall, the expectation that we are seeing is our continued growth. We have been seeing a little bit more of activity in Mexico. In Mexico in the first quarter, we had around 30 rigs operating. The second quarter, we had around 36. On the third quarter we had 46 rigs. So we see this increasing. And I think what we are going to be seeing is a stronger support for a larger budget, maybe 40%, 45% higher. The budget is going to be defined by the end of the year. But I think that we should start to see a better 2019 and growing market in Mexico moving forward.

Thank you, Guillermo. On the second question is the due time of the exclusion that we requested for the import of bars for Bay City. Germán, maybe you can give us a picture… Germán Curá: Sure. Thank you, Paolo. Good morning, Alessandro. Very rapidly, Alessandro, the exclusive recourse was made public by the Department of Commerce the second week of July. The statute established that at least preliminarily, they were going to take 90 days to address and resolve their request. I would like to caution you around the notion that presently the DoC is dealing with over 20,000 requests for exclusions. Just short of 6,000 of them were objected and only 1,300 of these requests were addressed and resolved. So the DoC is up against a massive amount of work and would imagine that would introduce in a way some delays with respect to the original date. With respect to the second component of your question, as we have been indicating in the opening remarks, we are seeing that in a way we have been able to pass on the effects of the tariffs through pricing and I believe this is going to continue on in the coming months.

Thank you, Germán. Just integrating these questions, you were asking about the impact of the tariff on our profit and loss. In the last conference call, we thought that we may renegotiate the NAFTA – within the NAFTA for the third quarter. Today, we know that we are assuming that we will be paying tariff from Tamsa to get into the – from Mexico to get into the market, this is part of the reason for a more [indiscernible] forecast for our EBITDA in the third quarter to be higher, but not so much as we expected in the last quarter because of our expectation of tariff. But any change in this, any effective renegotiation in the coming months, obviously may change this. This is a relevant drag on us, so any change may impact it. On the study from the buzz, in our focus we are expecting to be paying this at least for the coming months and then we will see how the exclusion – our exclusion petition will be either accepted or rejected by the – resolved by the DoJ. Thank you.

Very helpful. Thank you.

Thank you. [Operator Instructions] Our next question is from Michael Rae from Redburn. Your line is now open.

Yes. Hi, thanks for taking my question and thanks for persevering with all these 2018 guidance questions. I have got another one unfortunately, which is can you achieve $1.5 billion of EBITDA this year without a product exclusion for Mexico and without any renegotiation of NAFTA?

This is our expectation, considering incorporating the fact that we will have to pay tariff for the period. Any change may result in improvement. And any lighter reduction in import from a competitor into the gross market would have an effect and impact on this.

Okay, that’s very clear. And could you just give us a rough steer on the cost to your business of the current tariff setup, is it kind of $30 million to $40 million a quarter, something roughly like that?

Edgardo, you can give some number reference?

Yes. For the third quarter, it’s going to be a little bit less than what you said because I mean we have some stocks that we imported in the U.S. prior to the June 1. And probably on the fourth quarter assuming everything remain the same, we are going to be in the range of $40 million to $45 million in total.

Okay, that’s great. Thank you.

Thank you. Our next question is from Pedro Medeiros from Citigroup. Your line is now open.

Good morning guys. Thanks for taking the question. I actually have a simple question after all these guidance questions, now with several quarters going and seeing a significant up-tick in activity in the U.S. in the first half and then at the end of last year, then why don’t you give us an overview of how has Rig Direct performed relative to your regional expectation targets and what kind of reactions are you seeing from your domestic competitors, is there anything that concerns you on that end, can you talk a little bit about the opportunities and threats around it? Thank you.

Thank you, Pedro. I will ask Luca to address your question.

Yes. Pedro, thank you very much and good morning. Now as far as the Rig Direct performance, we see that is aligned with our expectation. As we have said two-third of our sales in the United States and in North America in general are sold through Rig Direct. Now as far as our competitors’ reaction are concerned, let’s say that at the beginning of course they didn’t accept this model going in very easily. But the more the time goes by, the more they accept this and the more we can put our customer they are really delivering the value that we are promising and this is what we are focused on. And so far it is being pretty successful. Thank you.

Thank you, Luca.

Okay. Thank you. And just a second question, do you also like to comment on your flexibility to turn back on idle capacity in the U.S., how fast and to what extent you can do it, is it possible at any point to come back to a nominal capacity of like roughly 1.1 million tons, 1.2 million tons a year for your welded stream?

Well, Luca?

Yes. Thank you, Paolo. The capability of bringing up idle capacity is linked to the size of the demand. In terms of being able to bringing up capacity in the United States, it is not very difficult. We know that we have problems in availability of work labor. We have to be cautious because safety is a priority for us, but we can ramp up as we need. As a matter fact we believe that already in September we are going to be ready to bring back up our finishing capacity in [indiscernible] and we also are expecting to increase our premium capacity in McCarty and to show to an extent also our welding capacity in Hickman. So in this respect, we don’t see major problems in bringing this capacity backup again on strength. Thank you.

Alright. Okay, thank you so much.

Thank you. Our next question is from Michael LaMotte from Guggenheim. Your line is now open.

Thanks for the opportunity to follow-up. Edgardo I just wanted to ask about the tax for the second half of the year and also the charge taken for the $100 million, is an adjusted rate the appropriate one just $35 million to subtract that $100 million?

Yes, hi Michael. Yes, I mean as we commented in the press release, clearly, if you remember the first quarter of this year we have an appreciation of many currency against the dollar and we reflect that with a positive impact in the income tax. In this quarter, all the currencies in which we operate basically weakened against the dollar, mostly Argentina we devaluated by 43% and also Mexico. Those are reflecting the erosion of our tax base for the fixed asset base in which at the end of the day affect the deferred tax, which is clearly is non-cash items on the short run. And then to be honest today, I mean, as of today with the appreciation of the currency back to 5% to 6%, $30 million out of the $100 million has already been reversed in our books as of July. So really there is a fluctuation with the currency effect, but we will maintain our guidance that our tax rate basically fly at the level of 17% to 18%.

Okay, perfect. That’s what I was looking for. Thank you so much.

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.

Well, thank you very much for joining us in our call and well I hope to see you soon. Thanks. Bye.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect.