Tenaris S.A. (TS) Q3 2022 Earnings Report, Transcript and Summary

Good day. And thank you for standing by. Welcome to the Q3 2022 Tenaris' Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Giovanni Sardagna. Please go ahead.

Thank you, Gigi, and welcome to Tenaris 2022 third quarter conference call. Before we start, I would like to remind you that we will be discussing forward-looking information in this call, and that our actual results may vary from those expressed or implied during this call. With me on the call today are Paolo Rocca, our Chairman and CEO; Alicia Mondolo, our Chief Financial Officer; Guillermo Vogel, Vice Chairman and member of our Board of Directors; German Cura, Vice Chairman and member of our Board of Directors; Gabriel Podskubka, President of our Eastern Hemisphere 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 sales in the third quarter of 2022 reached almost $3 billion, up 70% compared [technical difficulty] those of the previous year, and 6% sequentially, mainly led by further pricing gains which more than offset lower shipments which were affected by lower deliveries to pipeline projects and seasonal factors. Average selling prices in our Tubes operating segment increased 54% compared to the corresponding quarter of 2021, and 12% sequentially. Our EBITDA was up 17% sequentially, to $946 million, while our EBITDA margin was up at around 32% as higher prices more than offset increases in energy and raw material costs. Our quarterly net income, of $606 million, was slightly down sequentially as it was affected by non-operating items which impacted our results from our equity participation in Ternium and Usiminas, and in our financial expenses. Cash generated by operating activities during the quarter was $242 million. Our free cash flow for the quarter was $113 million after capital expenditure of $129 million, while our net cash position at the end of the quarter increased to $700 million. Our Board of Directors approved the payment of an interim dividend of $0.17 per share or $0.34 per ADR to be paid on November 23. The interim dividend is up 30% compared to the interim dividend we paid last year. Now, I will ask Paolo to say a few words before we open the call to questions.

Thank you, Giovanni, and good morning to all of you. At the end of September, we celebrated the Tenaris' 20th anniversary on the New York Stock Exchange by ringing in the closing day. Following day, we held an investor day where we presented our view that an increasing investment will be need in energy, and that all sources will be needed to meet the growing demand for energy that will accompany population and GDP growth in the long-run. This includes investment in oil and gas, which in recent year has fallen behind what is required to maintain production in a sector that still account for the majority of primary energy demand. We highlighted the transformation that Tenaris has made over the past 20 years, and we have grown to become a company that is uniquely positioned to service the tubular need of our sector globally in the years ahead, and how, in the current environment, we are reaching record levels in our financial results. Our third quarter results reflected the sales and margin improvements that we have shown over the previous 18 months, with an EBITDA of $946 million and the margin above [31.8%] [Ph]. We are confident that we can continue to build on these results in the quarter ahead. Last week, the International Trade Commission, in the United States, determined that OCTG import from southern countries, including Argentina and Mexico, have injured the domestic industry. As the largest producer and investor in the domestic industry, we find it difficult to understand these findings which contradicts the evidence that domestic OCTG prices are at their highest ever level and that domestic producer are showing record results for their tubular businesses. That said, Tenaris continue to be strongly positioned to serve the growing needs of the U.S. oil and gas industry. And to improve the competitiveness [technical difficulty] a majority of these customers have standardized on the use of these connections in the production streams for their shale operations. In September, I visited Canada, where we inaugurated there our new welded pipeline facility at Sault Ste. Marie in the presence of the Honorable Mary Ng, the Canadian Minister of Trade. This will strengthen our competitiveness in the Canadian market and the service we provide to our customer in a market where Tenaris has the opportunities for further growth. During August, we renewed our long-term framework agreement with ENI for five years, covering their OCTG requirement across 20 countries, and supporting their drilling and pipeline operations in further 10 countries around the world. ENI will play an important role in addressing European energy crisis, and this partnership is a very valuable one for Tenaris and our position in deepwater project in Sub-Saharan Africa, our pipelines and drilling operation in the Middle East, and in the Mediterranean. Also, it will be important for the newly emerging CCS development, like HyNet in the U.K., where we will be supplying the injection well with specially tested materials. Over the next year, we expect the Middle East and the deep offshore will be areas that will drive further growth in sales. In the Middle East, the Emirates has announced an acceleration and extension of its oil and gas production capacity expansion plans. Tenaris is working closely with ADNOC, and there our long-term agreement where we are providing 50% of their OCTG requirements with redirect services, and are investing in a local premium trading facility which will be beginning operation next year. [Saudi Aramco] [Ph] Qatargas, where we also have long-term supply agreement in place, also have planned to increase their drilling activity. In the third quarter, we increased the deliveries of casing and BlueDock connector to ExxonMobil deepwater operation, in Guyana. In the following quarters, we expect to increase the sales for a number of deepwater operations in the Gulf of Mexico, in Brazil, in Sub-Saharan Africa, and in Oceania. We have established a strong competitive positioning in the deepwater market based on the quality and reliability of our extensive range of product and our ability to serve customers in remote and complex environment. In Argentina, we have begun shipment for the Nestor Kirchner pipeline. This and other pipeline infrastructure investments are moving forward. There is a growing consensus around importance for the country of realizing the potential of Vaca Muerta shale development. Even in environment of high geopolitical and macroeconomic risk and slowing global economic growth, Tenaris is well-prepared to build on the leading position it has established over the years in the energy market. The same time, we continue to invest in our industrial system to reduce production bottleneck, improve operational efficiency and safety, and to reduce carbon emission and environmental impact of our operation. We are ready now to take any question you may have.

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

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

Thank you, Marc, for your question. Well, in the first place, we will [technical difficulty] commit to raise the level of production in our facilities in United States. So, we will step-up our effort to hire people, which is an important considering today because we have still capacity that we can utilize. And second, we will launch investment that will allow the bottleneck part of our and data system. And then, as I say, Marc, we will rely [technical difficulty] I think that this will have only marginal impact. It's true that we may have some lower margin on some of these projects; it depends on the project, but will not be a very significant impact on our margin.

Understood. Thank you very much.

Thank you. [Operator Instructions] Our next question comes from the line of Arun Jayaram from J.P. Morgan.

Yes, good morning. I wanted to see if you could maybe first start with the international market, and I'd be interested to see, in U.S., I think you mentioned 80% or a lot of your volumes today are coming through Rig Direct. How about internationally, how much of your order flow comes from Rig Direct? And is there the potential to ship more of your international customers, I think you're doing this in Latin America, towards some of the Pipe Logix indices that some of your North American, I think Latin American customer are on?

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

Okay, thank you, Paolo. [Technical difficulty] In the last few [technical difficulty] that the cost increases, but I think now we are at a different stage where the increase in demand is creating another positive dynamic on pricing, lead times are getting longer, customers, as they are projecting their -- the new demand on FIDs, on offshore especially, and complex projects in the Middle East are raising their awareness of material availability to be able to execute the projects. This is particularly noticeable in premium connections, high alloys, and in deepwater pipelines as well. So, we are seeing a positive momentum in terms of pricing, and this will become visible towards -- as we progress into 2023.

Great. Just my follow-up would be, we're -- we were at Schlumberger's analyst day yesterday, and they highlighted how they're seeing an inflection point in the deepwater in Middle East, just as you were mentioning this morning. I was wondering if you could talk about deepwater offshore, you posted almost a 32% EBITDA margin in 3Q. You highlighted some opportunities in Qatar, Guyana, and Brazil. And so, one of the things we're thinking about in terms of the model, as you see a higher mix of deepwater offshore, do you think this would be accretive to your margin profile on a go-forward basis?

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

Great, thanks a lot.

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

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

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

Okay. As you know, because we have been sharing this for quite some time already, we were already engaged there in a ramp-up process. And, obviously, on the wake of the anti-dumping decision, we're going to accelerate on this. We still have capacity that is ready to come online. The only thing that we are missing is people, but the plans are actually prepared to come back. So, we're going to accelerate on that side, and we have significant capacity that can be added. And at the same time, as Paolo was mentioning, we are also looking at additional investment that could strengthen our industrial footprint in the area in which we still experience bottleneck. With this said, I believe that we are positioned to be able to follow and accompany the excess of the domestic industry that we're still seeing, going forward in 2023.

Yes, okay.

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

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

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

Great. Now, thank you for the details.

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

Hi, thank you for taking my questions. The first one is on Brazil. I think that’s probably one of the few regions in South America where maybe as strong as the competition there. And I was wondering if you can use the maybe ruling -- the antidumping ruling to be a bit more aggressive in Brazil and going after higher market share. Overall, if you can maybe comment about strategy in Brazil given that their number of offshore development that would be sanctioned over the next few quarters? The second question is on working capital. We have seen quite a big increase in Q3. Is that just function of the higher prices? Or maybe if you can give us more color if there is any item that has pushed building in working capital in Q3? And, last question if I may, just on offshore revenues -- deepwater revenues, can you tell us maybe where we are and where you expect to go next year as a percentage of the gross revenues? Thank you. A – Paolo Rocca: Thank you, Alessandro. The first question concerning Brazil, well, Brazil you know our contract or the tender are launched for COVID in the demand of long-term -- long timeframe now for Petrobras mainly. We have a strong position in the range of 50% considering casing and conductor in sharing these contracts is a solid position. It’s not something that we change in the short term. We reached this position and we will basically deliver on this. There is not so much we can do and not something that we intend to do in other short-term demand that is by the way very reduced in the case of Brazil. And the question of working capital, it is true our working capital increased in 3Q. This is driven by increase in the inventory in our stock and increasing receivable. Now, costs are going up. Prices are going up. And our volume is growing. We expect that also in the 4Q our overall sales will go up in the range of 20%. So, we need to build up the inventory needed to support this increase in sales. In the next quarter also, there will be increase in the working capital. But this time mainly due to trade receivable because increase in the volume of sale is increase in higher price and higher volume. And so, we will have to increase our receivable while the inventories will stabilize much more. This is the trend we expect for the working capital increase. On the last, I don’t think we will disclose for competitive reason the share that this product may have in our sales. But I can tell you they are very relevant for our overall business worldwide when they look at your shore, shallow shore and the deeper shore with different competitive environment in the two segments.

Okay, thank you. You mentioned on the working capital you expect a substantial increase in sales even in the first-half of next year, you know… A – Paolo Rocca: I was mentioning the increase in sales. The 20% I mentioned is in the fourth quarter of 2022. And I am saying that then also in the next quarter in the first quarter of 2023, there will be some increase but will be the single digit range.

In Q1 and Q2 of next year? A – Paolo Rocca: Well, in Q1 it is what we can evaluate, then when you go on a longer time I mean many thing could happen. There is lot of uncertainty worldwide and from different point of view.

All right, got you. Thanks very much.

Thank you. I would now like to turn the conference back over to Giovanni Sardagna for closing remarks.

Well, thank you, Gigi. And thank you all for joining us. We look forward in seeing you soon. Thank you.

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