Tenaris S.A. (TS) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Tenaris Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference call is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Mr. Giovanni Sardagna, Investor Relations Officer. Sir, please begin.

Thank you, Howard, and welcome to Tenaris 2019 third quarter results conference call. Before we start, I would like to remind you that during this call we will be discussing forward-looking information and that our actual results may vary from those expressed or implied during the call. With me on the call today are Paolo Rocca, Chairman and CEO; Alicia Mondolo, 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 results. Our third quarter sales at $1.8 billion were down 7% compared to the corresponding quarter of last year and 8% sequentially mainly reflecting ongoing activity reduction in the U.S. and Argentina, which is also affecting selling prices in the Americas. And a slowdown of our sales in Europe, which were also impacted by the seasonality. Our quarterly EBITDA at $322 million was down 13% sequentially and our EBITDA margin at 18% was affected by a decline in our selling prices and the impact of major maintenance stoppages in the Northern Hemisphere, principally in Mexico. Average selling prices were down 1% compared to the corresponding quarter of last year and 3% sequentially. The decline was mainly in North America where prices have come down due to softer demand and lower steel cost. During the quarter, we generated a free cash flow of $287 million or 16% of revenues, which included a further decline in working capital of $157 million. And we ended the quarter with a net cash position of $964 million. The Board of Directors approved the payment of an interim dividend in line with last year or $0.26 per share, $0.26 per ADR, that we will pay in November – on November 20. 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. In this quarter, we continue to generate a strong free cash flow amounting to 16% of revenues as we work on reducing our working capital. In the year-to-date, we have reduced working capital by $500 million. And we expect to reduce this further in the first half of the next year. On the other hand, this quarter, we incurred higher costs and operational inefficiencies then we had originally estimated for the extensive program of major maintenance and investment that we carried out in these past months. During this stoppages, we made important investments focused on reducing vehicular emission, installing new nondestructive controls and in expanding our product and pipe tracking capabilities in several plants. These investments will improve the competitiveness and working conditions of our industrial system as well as the ever more stringent quality and accuracy requirement of our customer. The initial cost affected the results of the quarter, and we also affect our fourth quarter results. In the U.S., the drop in operating rigs has been greater than we had anticipated, driving down the Pipe Logix price index by 8% in the last three months, and this is affecting our prices throughout the Americas. Most oil and gas operator are focusing on capital discipline and free cash flow generation, looking for high return on asset in the short and medium term and preparing for the next cycle. This is more noticeable in the small and medium operator, while the major have been more consistent in maintaining the level of their operation. In my view, provided that a price fall does not fall from current levels, the company should begin to generate a positive free cash flow and the number of operating rigs should begin to stabilize in the current month. In this environment, Tenaris with its focus on serving the majors and large independent and with our Rig Direct business model that require less talk on the ground than the rest of the market, should be able to navigate relatively better than our competitors. At the end of August, our second request for the tariff-free import of steel bar for our Bay City mill was granted, thus helping to consolidate the competitiveness of our operation there. Meanwhile, we continue to expect a positive outcome from our ongoing antitrust process relating to the IPSCO acquisition before the end of the year. In Argentina, with the recent election oil and gas companies are putting their plans on hold pending more clarity on the policy measure that will be adopted by the incoming government. Given the importance of the development of Vaca Muerta’s potential for the Argentinian economy over the coming years, we are confident that the new government will create the condition for further development of this exceptional resource. In the Middle East, we won a long-term contract valued at $1.9 billion to supply a large part of ADNOC’s OCTG requirement over the next five years. This award is the first in the region to introduce Rig Direct condition and reflected the effort of our team to promote our services and product and technologies such as duplex connection. It also reflect our commitment to support ADNOC’s goal of increasing local content and providing training and development opportunities for the nationals. We are seeing a gradual recovery in a shore drilling around the world, which is confirmed by the expanding commitment that have been made during the year. An important proportion of this increase in the drilling activity is happening in Latin America. We’re participating in projects such ENI Amoca development in Mexico and ExxonMobil Liza development in Guyana. As we move into first half of 2020, we expect the recovering sales and margins considering our current backlog and ongoing cost reduction programs. We should also be able to continue generating a good free cash flow. Thank you, and we can now receive your questions.

[Operator Instructions] Our first question or comment comes from the line of Frank McGann from Bank of America. Your line is open.

Thank you. Good day. Just in terms of the IPSCO acquisition. You indicated that you expect approval by the end of the year. I’m just wondering how you’re feeling about it now in terms of – with the further deterioration in the market in terms of the potential for synergies? Is there any potential for renegotiation of the price being paid? Or any other thoughts you have now versus when you initially announced the acquisition?

Thank you, Frank. Our discussion with the – for getting the approval of – from the antitrust are proceeding well. We expected to close this deal by the end of the year. This has been an investment that is aimed for the long run. It is a strategic move on our side. It gave us access to steelmaking in the U.S., so it’s something that we view as a move for the long run on one side. And the element that suggested this investment to us are still there. In terms of synergies, as we also said in the last conference call, we estimate that the synergies that we estimated for the deal are in place and will be the same over the – in – over the future. So we see no changes from this point of view. We have a contract sign, we have a condition for it, we respect it and go on. So we do not expect any changes in the condition of the deal.

Okay, thank you. If I can just follow up. In terms of EBITDA looking forward, typically, you have a nice pick up in the fourth quarter. I was just wondering if you’re – you still expect to see that this year? Or weaker conditions could reduce the impact that usually have seasonally? I mean are there any thoughts on level of profitability as you go into 2020?

Well, on this account, the – we have seen a reduction in the level of rigs that exceeded our expectation. Remember in the last conference call, we were more optimistic on the fourth Q because we were considering the level of rigs will go down but not so much as it happens. So today, as we say in the – in our press release, we expect to be able to maintain the margin that we have in the third Q also in the fourth Q. The factors that are affecting the fourth Q are – in first place, a level of rigs that is, let’s say, below what we estimated three months ago. Second important factor is Argentina. In Argentina, due to the expectation of the change of government, the oil companies put many of their investment and their activity on hold, waiting for definition on the economic energy policy. This is affecting the level of drilling and operation in Argentina in the fourth Q. Also, the extra cost in the efficiency that we had in the maintenance stoppages in the third Q, this has been a very major intervention in many mill. We had an over-costing completing all of this. And this will be distributed amount third Q and the fourth Q. So this is also affecting to some extent the result in the fourth Q. So all in all, as I say at the beginning, we expect the fourth Q to be more or less in line with the third Q. In the beginning of 2020, we expect recovery in our margins for construction and sales that we have in our backlog and for some rebound in some of the activity related to offshore and to the Eastern Hemisphere. So stability for the fourth Q and some increase in the first Q of 2020.

Okay, thank you very much.

Thank you. Our next question or comment comes from the line of Igor Levi from BTIG. Your line is open.

Hey guys. My first question is on U.S. pricing and margins. You saw CTG prices from the start of the year till today are down about 15%. But costs at the same time have recoiled down over 30%, scraps down over 40%, which suggests a $200 a ton drop in cost and $200 ton drop in prices. So this would suggest similar EBITDA margins, EBITDA per tons to start the year but this appears not to be the case, and commentary around margins has been quite negative. So, I was hoping you guys can help me reconcile the discrepancy here?

Yes. Thank you, Igor. Well, basically – I think the basic impact is due to the fact that the reduction in the number of active weeks has reduce the size of the market. And so the loss in volume because of the allocation and the impact of fixed cost and so on is having an influence in reducing slightly our margins as of now. You should also consider that the hot rolled coils, as you were saying, went down pretty substantially in the last quarters. This had an influence on our cost, but we will see this influence more in the coming quarter because of the accounting and the way we account for the cost of our imports into the cost of sales. So we see the price down, and we will see the cost down later on. But this decline in the hot rolled coils has also increased competitiveness of the welded pipe to some extent. So this is also a factor that affected overall price level to some extent. The share of welded pipe in the overall market increased slightly. So this also reduced slightly the volume of our sale. And that’s – these are the element that led to the margin that you see in our result, slightly lower compared to previous quarters.

Great. Thank you. That’s very helpful. And to what extent has the drop in Pipe Logix affected prices in the rest of the Western Hemisphere? And then secondly, has there been any price weakness in the Eastern Hemisphere where activity is actually improving?

On this issue, I will ask Gabriel to give a review on the pricing situation and impact of Pipe Logix on the pricing in the region.

Okay. Thank you, Paolo. Good morning, Igor. In fact, there are no major variations in international market in terms of pricing. Even though the pricing there remains competitive in general. There is a positive momentum in our battle of contracts that allow us to decouple really from the present price strand that you and Paolo were commenting before from the Pipe Logix in the U.S. As a matter of fact, the demand of offshore and complex projects is increasing. So we also continue to serve this market with our service grids, corrosion resistant alloys, which we are experiencing and seeing the market tightness of supply. So in some of those niches, we are also seeing prices going up as a matter of fact.

Yes. And as you noticed that we mentioned the influence of Pipe Logix prices on the Americas because some of the countries in the Americas have a component of Pipe Logix in the formulas.

Great. Thank you very much. I’ll turn in back.

Thank you. Our next question or comment comes from the line of Sean Meakim from JPMorgan. Your line is open.

Thank you. First, I think we can maybe just try to unpack some of the margin components a little bit further. So pricing is a challenge in North America and in some parts of international, other parts are still relatively stable. But as you are seeing less revenue in North America, perhaps, more offshore you are going to 2020, can we talk about how you’d expect the mix to shift between welded versus seamless and larger diameter cubes versus – I mean what you see in North America. How some of that could influence the margins that you’d see next year?

Thank you, Sean. I will see that the Pipe Logix has been influenced by the decline in the rigs. I mean the reduction in the size of the market is driven down the prices. This is what you realize now. When we look at 2020, I think that overall in the mix, as you were saying, the offshore and [indiscernible] component would have a positive effect on this. But when you look at the margin and we look at our cost, the size, the volume of the market is important in defining absorption. This is a important factor also. And what we should also consider for the margins in the quarters in 2020 is the plan for cost reduction, streamlining of our operations that we have underway. In our forecast, we expect that all in all, the margin in the first quarter of 2020 [ph] should be two points higher than the margin we have in this quarters, considering the combined effect of a better mix and the other factor that we can see as of today.

Thank you. That’s very helpful. And I’m assuming you could follow up a bit on the Rig Direct award in the UAE. So can you give us as to how that contract ramps? Is fairly level load or is it starts lower next year? And how does that influence your expectations for the Middle East region in 2020?

Yes. Gabrielle, you can comment. I mean the ADNOC – let me tell you the job, it has been a very great achievement. We’re getting more than 50-plus-percent of the contract and is a massive operation in a leading countries, say, in the Middle East. So that has been a very relevant for the entire organization. Gabrielle, you can add on this and expected this is his opening [ph].

Yes. Thank you, Paolo. Hi, good morning, Sean. Indeed a very big achievement of our team in the Middle East to finally land a contract that we have worked hard to win. It has been a very good collaboration with ADNOC that really show the willingness to modernize and transform and bring best practices into the Middle East. It will be the first contract of this size, of this magnitude on the rig in the Middle East. The contract of $1.9 billion, as Paolo was mentioning, will cover five years with the possibility of an extension of two. We are working on a transition. We are working through the information of the stocks [indiscernible] programs of ADNOC. We are in that process, as we speak, mobilizing resources and preparing for that. It would take some time until the full volumes and shipments materialize in our books. We expect the contract to start with some impact on the second half of 2020, but to really start 2021 and thereafter with the full impact. We’re also working on upgrading our service center. We are – we have committed to have a state-of-the-art also premium manufacturing facility in Abu Dhabi. This was also part of our distinctive and winning proposal. The fact that to invest in local content and manufacturing in the Emirates to train and to help the Emirates diversify their economy, that was part of the success story there, coupled with a local and global track record that we have on Rig Direct. This – as you can imagine, for ADNOC and the country, the revenues oil and gas is a major part of economy. And to rely on a company to be handling and managing 50% of the supply chain the tool [ph] is a massive vote of trust and commitment on our side. So we are mobilizing the resources. Also it’s important to note that our range of products, we cover really all the drilling environments. We’re the only company that would be covering both the onshore and the offshore. So this is, of course [ph] our service, Chrome, Dopeless, or the spectrum. So we’re really satisfied in mobilizing the resources to deliver value because we expect that this to be the first in the Middle East. But our expectation is that this to become a showroom for the rest of the region as well.

Got it. That makes a lot of sense, gentlemen, thank you very much.

Thank you. Our next question or comment comes from the line of David Anderson from Barclays. Your line is open.

Hi, good morning. So Tenaris, obviously, has quite a bit of exposure to Argentina. I was just wondering if you could just kind of talk through some of the scenarios that you’re thinking about? The timeline, like, when do we expect to hear something from Argentinian government? And could you just kind of tell us what would be good and what would be bad in terms of the industry? So in basic terms, what we’re looking for? I know price controls has certainly been talked about. But maybe just talk about the different scenarios that you’re envisioning?

Thank you, David. Well, I think the – in Argentina, we will see the change in the government is important, but the new government is still, I think, needs to evaluate the circumstances and the different factor that are affecting the economy didn’t make up yet all of these views for the future. And we didn’t work through yet a plan for leading the economy into a growing path in the coming year. There are several issues, high inflation, the need to face debt that is relatively high for Argentina. It need to redefine the agreement or at least to validate the agreement with the monetary fund. And the number of decision on internal – on the internal market. And last but not least, how to manage the energy policy for the country. And how to support the development of Latin America. Our view is that the government will resume in – on the 10th of December. It will take its time to prepare the – a plan and deal with the team. Today, this is not yet clear, expect in the coming months that we will understand much more about this. Now development of Vaca Muerta is essential. It’s one of the key component for recovering sustainable growth in the economy. So this will be the key component of the program of the future government. We hope that the government will set in place an energy policy that will promote investment by local and foreign companies. This is very important. But at the moment, we have no indication of which will be the direction that government might take. You’re saying what is good and what is bad? In my view, it is important that the government has an understanding with the monetary fund and with the external creditor that stabilize the external sector. And also that may preserve the rules in place up to now for the energy sector. This is something that we will understand and see in the coming weeks before the 10th of December.

Okay, thank you. On a separate subject. You talked about your mix is improving – going to be improving next year with a little bit more offshore work. You had mentioned Latin America. Could you just perhaps give us an indication of kind of where some of the pockets of strengths are on your offshore business right now? And maybe what you’re hoping to see, maybe some areas that haven’t quite emerged yet that may be might think happen later in 2020?

Well, Latin America is important in the future of offshore. We consider that the production that may come for the future project – that the addition of future project in offshore, to large extent, will be based in Latin America. Between 40% and 50% of this additional production should come from Mexico, from Guyana, from Brazil, general from offshore and Latin America. We think we have a very strong position in Mexico. Menchan [ph] one of the project in NEI development is the first to enter into production stage. But there are many other that are coming. Guyana, it’s not only Liza, a number of projects around this that will continue growing during 2020. And in Brazil, the activity will move aggressively probably in the second half of 2020. Gradually, we will expand activity with Petrobras, [indiscernible]. Maybe for Mexico, how we see Pemex and private, Germán, you can add some specific comments. Germán Curá: Well, in – I think Mexico, Paolo, we have good news in terms of the dynamics of the market. The drilling activity continues to increase driven by both Pemex and coming up of the different rounds. Just to mention a number, we have on the third quarter the double of the number of rigs we had in the first quarter of last year. We expect another jump in the fourth quarter in the number of rigs that we’re going to be seeing an increase of another 20%, 25% increase in the number of rigs in the fourth quarter. And then we continue to see an improvement of the conditions. The mix in Mexico is a very good mix. We also have the deepwater projects. We have the [indiscernible], we have the farm-out with Shell. So, I would say that in terms of the market activity and in terms of the product mix, Mexico is going to continue to be good news.

Yes. I think these are the major driver of activity in South America. Outside South America and in Eastern Hemisphere, Gabriel, some comments on the main project that where you see the more dynamics?

Yes, Paolo. In the international markets of the Eastern Hemisphere also the offshore is showing positive dynamic, gradually recovering. The area that has been most active has been the North Sea. We see there a number of midsized projects coming on stream. Also a lot of number of types [ph] and smaller-scale projects as well. We have also seen a comeback of exploration, especially in Norway. So we’re very well-positioned there with our technologies and services platform to take advantage of that positive momentum. So, Central Africa is also on the move to a lower extent that the North Sea but it's also moving in the right direction. And we are seeing a good amount of advance work on greenfield projects, deepwater projects in Angola, Mozambique and some other places as well. Nigeria is also moving only on the onshore and the shallow waters. Still we don't see major products on the deepwater in Nigeria. So overall, sub Sahara and Africa is starting to move as well. When we go to Asia, well, China has a big drive for gas, both on onshore and offshore as well, so that's another pocket where we are participating and we are seeing prospects going ahead. And South East Asia has been quite stable, at one time, we have some positive dynamics associated with the deepwater drilling to the LNG in Australia like we had in the – I think, it was in the second quarter of this year, and we will have at the beginning of 2020. And the weakness, there has been the Gulf of Thailand as there are changes in concessions going ahead. There has been some softening of the drilling activity. But all in all, across the Eastern Hemisphere, we see a continued strength on offshore gradual recovery.

That’s good to hear. Thank you very much gentlemen.

Thank you. Our next question or comment comes from the line of Marc Bianchi from Cowen. Your line is open.

Thank you. Paolo, if I heard you correctly, talking about two percentage points of margin improvement for the first quarter, might put your EBITDA maybe a little over $350 million in the first quarter of 2020. I'm curious, how you see that developing over the course of the year? It sounds like you anticipate increases from there? Is it reasonable to think that we could be looking at a EBITDA number above $1.5 billion for the year just kind of based on the outlook that you guys have today?

I don’t think we have visibility beyond that. And also considering the previous experience in the last quarter in which we were overly optimistic on the recount in the U.S., we will not make any forecast of the evolution after the first quarter. This is where we see that we can, we have contract in our backlog. We have, let's say, predictable vision also of where the prices are going and the action we are taking in our cost that should allow us to give this 200 basis point in additional EBITDA for the first quarter. But it would be very difficult to have if – you know, the world today is very volatile world. There are many unpredictable issue going on. And so I don't think it's easy to have a medium-term forecast beyond what we did with the first quarter.

Yes, certainly understand. I guess in terms of the cost, the cost progression beyond first quarter – which maybe you do have some more visibility to – are all the cost actions you're taking going to be completed and benefit the first quarter? Or is there additional benefit to be realized beyond? And what's the impact that you anticipate from that? And then also you talked earlier about HRC and the effect on your margins. Could you talk a little bit about scrap? And how that – how you see that developing?

Well, there are two components. One is the permanent work on cost reduction that is underway. We – let's say, we have a number of programs that gradually bring benefit allocation among plants that improve efficiency within the plants. And also the return that we get from the investment. We are maintaining a level of investment every year in the range of $350 million that has an impact on our efficiency on our cost. And this is something that is underway. And in all of the past five year, we got every year some improvement in our cost due to this permanent reduction, continuous improvement action. Then there is a cost of imports. Basically, scrap is very important for us. As you know, Tenaris is close to 90% scrap based. This is very good from our environment position and CO2 emission. It's also something that is, let's say, making our operation depending on scrap in the different market. What I can see – I mean you are aware of the price of hot rolled coils and scrap went down in the recent – in the last quarter. The hot rolled coils went down pretty abruptly. This has an influence in the cost of our welded products, but also, it's driving down prices of welded pipes. And this something that is part of the price decline in North America. So, these are the moving parts that are affecting our cost. It is difficult to have a forecast – medium-term forecast on scrap price. This depends to a large extent from issue like sanction against Turkey, the level of operation in Turkey. And so these are difficult to forecast for the medium range. What we know is that our continuous improvement will give us a permanent cost of reduction over time and provided that we are able to maintain the level of volume – the volume of production more or less in line with what we are doing today.

Okay, very good. Thank you for the comments.

Thank you. Our next question or comment comes from the line of Amy Wong from UBS. Your line is open.

Hi, guys. A couple of questions from me please. The first one relates to your international tenders. Could you comment on how the competition is shaping up? Is it getting more or less competitive or is it pretty much the same players that are tendering for these projects? And my second question relates to your North America business. And it's just a bit more qualitative. But could you help us understand that, now that you've got a that you've got a bit more penetration in your Rig Direct, how the – your experience with the flow down you're seeing? I mean how do you think Rig Direct is actually helping you out in the current slower environment, please? Thank you.

Thank you, Amy. On the international tender, I will ask Gabriel to give us an overview of how is in competitive environment.

Yes. Hello, Amy. In terms of tenders in the international markets in the competitive environment has been not changing dramatically. As I was saying, higher demand on the complex projects has been mainly played by the same traditional Tier 1 competitors. And that's where the tightness and strengthening the price is. So not much change. Still we don't see deepwater projects or complex projects where new players are being introduced. I think that still our industry is very conscious of potential issues regarding to failure of product and importance of quality in our space. Then if you go to the lower end of the competition, really, where if you want the low specs or commodity types of pipes, that's not the market, where we are in. That has been occupied to a large extent to the – by Chinese or lower-end players. This is not the part of the market we see here where in the majority of the cases we take part. And then there's a medium spectrum, where we only participate where we are able to differentiate products, services, local content. And these are the intricacies of the 50 countries that we monitor and we do business in the Eastern Hemisphere where we see a chance to have a genuine and sustainable competitive advantage. So all in all, there is not a massive change in the landscape of competitors.

Thank you, Gabriel. North America and Rig Direct, Luca, I will ask you to comment on it.

Thank you, Paolo. Good morning, Amy. Well, there are a number of benefits. One was mentioned in your introduction, Paolo, which is the Rig Direct allow us to be more close to the real consumption. So, we work Rig Direct with much less inventory and so one of the benefits is that, relatively speaking, we should be better position to live through this downturn. The second that I would mention is that carrying out all the intermediation, we create benefits and synergies that we tend to share with our customers. By this in time, come to our benefit as well. And the third one that I would mention is that being very close to our customers; we can really develop what is needed by the customer. I don't want to go into many details for competitive reasons. But we recently developed specific products for rig operator. And this certainly will give us, in the long term, a possibility to establish tighter bonds and a better relationship with this customer and the relationship in which with our efficiency and cost down on their side and gain relationship and value on our side as well. I believe that these will be the three that I would mention. Of course, we can talk one hour about this.

But this is – I mean – by the way, the penetration of this, we are now 75%.

Yes. we are 75%.

Under Rig Direct process, this has been very relevant penetration in relatively small period of time. This is the main comment. Now, this Rig Direct comes together with many features. One of this is the trustability and tracking of the entire pipe by pipe, product by product. I mean we are managing inventory. Over time, I think, we should also be able to reduce the level of working capital, thanks to the way we manage our inventory. In the end, the market region is more than five to six months of inventory. We're managing Rig Direct with much less of this in the range of two months or less. I think we will do even better in introducing very high integration with the client, including IT – information technology integration with the client. We should be able to reduce inventory to a much lower level. This is what we consider a strong competitive advantage.

All right, that’s very clear. Thank you. I hope the higher penetration is not just because of the number of rigs dropping off. But very, very good there, very good progress there. I'll turn it over.

Yes. This is – you're right that the rig is coming down, that is true. But let me tell you that most of our client that are major or independent are more stable than the entire market. Remember, half of the market in the U.S. is being driven by very small companies many in part drilling in the field. So in this sense, our operations are more stable even in the situation of capital discipline, extreme, I would say, capital discipline and part of most of the operator. This is more aggressive, it's carried out more aggressively by the small operator and small independent and by the large – the large independent.

Thank you.

Thank you. Our next question or comment comes from the line of Ian MacPherson from Simmons. Your line is open.

Hi, thanks. I wanted to just sort of follow the bouncing ball from the third quarter, fourth quarter, first quarter EBITDA progression. And I know that we were expecting about $50 million of non-recurring maintenance impact as we go from Q3 to Q4. I just want to see if that's still the case? If it is, obviously, it implies an otherwise significant decrease from Q3 into Q4. And that to me just makes it a little bit harder to reconcile fully to the higher EBITDA in Q1. So I just wanted to sort of re-audit that progression of the maintenance impacts with regard to how we get from 320 in Q3 or 322 and then to a better number in Q1? That will be helpful. Thanks.

Thank you, Ian. Well, basically, as I mentioned in the beginning, we have – for the way we account for major maintenance, we have a program of maintenance for the entire year. And we distribute quarter-by-quarter. If we have 100, we distribute 25, 25, 25. When we realize the investment in August – and we have overrun there. I mean it was so big and so relevant. We had overrun overall in the range of close to $20 million of an overall program that if we consider not only maintenance but I mean, the entire operation, was very substantial. We distributed this $20 million into third Q and the fourth Q. Because we have to adjust overall year with the real investment, the real maintenance expended in the overall year. This is the reason why this overrun is also impacting in the fourth Q. Now when we get into the first Q, position changes because the maintenance plan expenditure that we plan for 2020 is substantially lower than the one that we plan even without it. The overrun for 2019. So the expenditure for maintenance will go down one quarter to the other by around $20 million. This will be the reduction in this account. When we complete the plan, I hope we can drive it down by $30 million, something more – I mean conservatively between $20 million and $30 million will be the shift from Q4 into Q1.

That’s really helpful. Thanks, Paolo. I would just like to say kudos on the free cash flow here. There's a lot discussion about free cash flow and energy these days. The evidence of it in Tenaris is, well, very unique and appreciated. I'll pass it over.

Thank you very much.

By the way, we plan to continue to generate cash flow now for the production.

Thank you. Our next question or comment comes from the line of Stephen Gengaro from Stifel. Your line is open.

Thanks. Hello everybody. So, actually, following up on your comment you just made on free cash flow. Going forward, I mean obviously, you have the acquisition on the horizon here. But how do you think about uses of cash? I mean do you – are there areas that you want to expand geographically that you may be looking at from an acquisition perspective? Or is it – or do you think there'll be potentially more cash coming back to shareholders as you continue to generate cash going forward here?

Thank you. Well, as you say, we are very much focused on cash generation. The reshaping of the supply chain and the focus on reduction on – talking processes – is one of the driver in our management and controls and our actions. So, we are focusing on this. On the receivables, on the rest of working capital, we also try to improve permanently on this. And this we have been pretty successful in this year. By the end of the year, you will – and we will end it up with a free cash flow in the range of more than $1 billion, $1.1 – some number in this range by the end of the year in cash and free cash generation. Now, when we enter in the next quarter, we will expect higher level of sales, as I was mentioning. So to some extent, in the last – in the December, we may need to have some higher inventory in – just to prepare for sales in the first quarter. But this overall, I mean it should not have too much of an impact on our cash flow generation. As far as application of this, as you saw, we are maintaining a very consistent dividend policy with a pretty relevant payout. And this is something that we plan to continue to propose to our Board or even in the future. On the other side, apart from the acquisition that you mentioned, we have a number of initiative that are consolidating our position in the different region underway, and we will continue with this activities in 2020. As we announced, we are participating in a project in Siberia. This part of this program for establishing stronger roots in key region and key market. We think that it's very important to have resources for pursuing this action of strengthening our position in regional scenarios apart from investing in procurement and improving in our plant and also the other issue and the other point on which our – we have an extensive investment program is environment and the decarbonization of our processes. So in the end, regional set up, improvement in technology and innovation for our industrial supply facility, information technology for relation with client and digitalization of the chain. But environment and decarbonization is the other point on which we have a constant flows of investment. And we plan to continue to do this in 2020.

Thank you. And if I can just ask one more question. I'm not sure how much you want to comment on this at this point. But when you think about the potential integration of IPSCO, does it – how well does that fold into the Rig Direct mile in U.S.? And is there – are there any sort of thresholds of sort of size where Rig Direct can go? And I am just trying to figure out is there any kind of conflicts it creates in the supply chain with distributors? Or can you start a push a lot of this through the Rig Direct system?

Well, I do think Well, I do think that the Rig Direct is our way of building relationship with the client and it will transform our supply chain in that direction. We will continue to do this. But Luca, if you can add in regard of the American – North American situation and the possible integration with IPSCO?

Yes, Paolo. Good morning, Stephen. IPSCO fits perfectly with our Rig Direct model, because it gives us the possibility to expand very efficiently also to the northern region of United States. As you know, we are very strong geographically in the South. And IPSCO with our facilities and services in the North are perfectly fitting with our strategy. And going back to your point that you mentioned already, Paolo, before, that the model as demonstrated to be pretty successful because today, 75% of our sales are channeled through this for this Rig Direct model, and we don't see this changing with the acquisition of IPSCO.

Very good. Thank you, gentlemen.

Thank you. Our next question or comment comes from the line of Lillian Starke from Morgan Stanley. Your line is open.

Hi, good morning, gentlemen and thank you for taking my questions. I do have a quick follow-up as well in the free cash flow. If you're looking to 2020 and these initiatives that you have ongoing, more or less the level of CapEx that you're anticipating in order to continue to support the free cash flow, more or less should we expect it to be around – excluding the investments in Siberia and IPSCO, of course – around the $250 million level? Or are there are there any other initiatives we should be taking into account? And then just a second question I had was more on the timing of the recovery in the international markets. You mentioned Mexico and Brazil add nothing more of a contribution in the second half. Just wondering if there's anything in the first half that could support revenues from the international market during the first half, I mean?

Yes. On the first question, all right, we expect the level of investment to remain in the range of $350 million, $360 million. This has been the level of investments that we expect for 2019. And this is what we plan to have in 2020. This is not including, obviously, the IPSCO acquisition or in any case any other acquisition or [indiscernible]. Let me confirm this also, Alicia, is the number that we have in our plan, no?

Yes, it is. We are planning about 35 – $335 million a year is for 2020 year.

Yes. So, this is the number. And then on the second question, I'm not sure I understand it well. Could you tell exactly which is a point that you mentioned?

Yes. You mentioned the contribution from products in Brazil, the Middle East, even a bit of Mexico having more of an impact in the second half of 2020? I was just wondering outside of the U.S., what contribution are you expecting from these other markets offshore, et cetera. You’ve already provided good color of where it seems to be improving. But is it something that we can anticipate in the first– for having an impact in the first half? Or is it still mostly second half 2020 effect?

Yes. Let me tell you, all of the element that I mentioned that are affecting our forecast for fourth Q, the ones that we made three months ago, one was Argentina. Argentina in the end turned out to be much lower than expected. This is one area in which if the government put in place a consistent, predictable and solid energy plan, I expect that Argentina could get back to a level of investment and operation, maybe during 2020. But this is something subject towards it. In the case of Mexico, as Guillermo was saying, we're very confident on – in the market from private offshore and onshore development. This will be important for us. In the case of Brazil, I was mentioning the second part of 2020 and probably – I mean gradually, the program for offshore in Brazil will go on. We hope that we will have opportunity in Brazil in the second part of 2020, not so much before. In the case of the Eastern Hemisphere, Gabriel?

Yes. Thank you, Paolo. Good morning, Lillian. In fact with the positive dynamic that we are mentioning in the Middle East and also in the different regions of the offshore in international market, we've been able to create a strong backlog into 2020. So we expect second half of 2019 with higher sales in the Eastern Hemisphere than the first half of 2020. I am – and I am also pretty confident that the revenues for the first half of 202 would be higher than the second half of 2019.

Okay, perfect. Thank you very much for the additional color.

Thank you. Our next question or comment comes from the line of Edward Vaughan from Redburn. Your line is open.

Hi and thanks for taking my question. The clarity on the IPSCO acquisition, I was just wondering if you could give a bit more guidance in terms of the timing of integration. I think you last spoke 100 days or so. Is that still your thinking? Thank you.

Let me understand if I understand you well. The timing of the closing of the acquisition, is this correct?

This is the timing to the integration for the synergies as the…

Yes, for the integration on that. Well, we plan to close this by the end of the year. And then we expect – I mean we have a program for 100 days for, let's say, the first degree of integration, that is a basic integration of the business. And then the continuous improvement will take on over time. But let's say after three months, we assume that we're able to have in place all the major processes of Tenaris into the company.

Okay. Thank you.

Thank you. I’m showing no additional queues – questions in the queue at this time. I’d like to turn the conference back over to management for any closing remarks.

Okay. Thanks a lot for joining us and I see you soon around. Thanks.

Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.