Founded in 1993 by brothers Tom and David Gardner, The Motley Fool has helped millions of people

Founded in 1993 by brothers Tom and David Gardner, The Motley Fool has helped millions of people achieve financial freedom through our website, podcasts, books, newspaper columns, radio shows and cutting-edge investment services.
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool has helped millions of people achieve financial freedom through our website, podcasts, books, newspaper columns, radio shows and cutting-edge investment services.
You are reading a free article whose views may differ from those of the premium investment service The Motley Fool. Become a Motley Fool member today and get instant access to top analyst advice, in-depth research, investment resources and more.read more
Good afternoon and thank you for your support. Welcome to Tenaris SA’s Q3 2021 conference call. [Instructions]
I would now like to hand over the conference to today’s speaker, Giovanni Sardagna. please continue.
10 Stocks We Like Better Than Tenaris Pay to listen when our award-winning analyst team gives stock advice. After all, the Motley Fool Stock Advisor newsletter they’ve been running for over a decade has tripled the market. *
They just unveiled ten stocks that they think are the best buys for investors right now… and Tenaris is not one of them! That’s right – they think these 10 stocks are a better buy.
Thank you Gigi and welcome to the Tenaris Q3 2021 conference call. Before we begin, I would like to remind you that we will be discussing forward-looking information during the call, and actual results may differ from those stated or implied in this call. Joining me today is Paolo Rocca, our Chairman and CEO; Alicia Mondolo, our CFO; Guillermo Vogel, Vice Chairman and Member of the Board of Directors; Herman Kura, Vice Chairman and Members of the Board; Gabriel Podskubka, President of our Eastern Hemisphere operations and Luca Zanotti, President of our US operations. Before giving Paolo an opening statement, I would like to briefly comment on our quarterly results. Our third-quarter sales were $1.8 billion, up 73% year-over-year and 15% sequentially, mainly because higher sales in the Americas are larger than those in the Middle East due to the ongoing destocking and declining sales. The decrease in sales was influenced by seasonal factors in Europe. Our EBITDA for the quarter increased sequentially by 26% to $379 million, reflecting higher volumes, better prices and strong operating performance.
Our EBITDA margin rose to over 20% thanks to higher ASPs, while cost growth was driven by pent-up improvement in operating performance and higher fixed cost coverage. The average selling price in our tubing increased by 10% year-on-year and 6% quarter-on-quarter. During the quarter, operating cash flow was $53 million and capital expenditure was $74 million. Our free cash flow was slightly negative. Funds from operating activities increased by $276 million in the quarter, mainly due to continued growth and higher levels of business activity in the US. Our net cash position at the end of the quarter decreased to $830 million from $854 million in the previous quarter. The Board of Directors approved the payment of an interim dividend of $0.13 per share or $0.26 per ADR on November 24.
Thank you Giovanni good morning everybody. Over the past few months, we have seen the impact of tighter energy markets as global demand rebounded as the economy slowed down due to the pandemic last year. Oil prices have risen above pre-pandemic levels as inventories are below normal and OPEC+ countries and US state-owned shale operators maintain supply discipline. Natural gas prices, especially LNG on the spot market, are reacting to supply constraints, leaving some of Europe’s storage capacity empty ahead of winter. Here’s what happens when an industry comes under scrutiny as a meeting of world leaders leads to consideration of how to strengthen and accelerate energy transition adjustments. Although the target is clear, the pace and direction of movement remain uncertain, with a lot of moving debris around. These energy upheavals, combined with supply chain disruptions and the ongoing effects of the pandemic, create both risks and opportunities for Tenaris. On the one hand, we have faced rising costs for raw materials, energy and logistics, as well as some disruptions in production planning and customer drilling programs. On the other hand, demand is growing as activity grows in support of oil and gas supplies.
Under these conditions, our results continue to show a strong recovery momentum, with sales rising quarter-on-quarter and margins rebounding. Our EBITDA margin is currently over 20% thanks to higher volumes, higher prices and cost control. In the future, we expect this trend to continue. Our sales in North America in the third quarter were up another 28% sequentially and up 155% year-over-year. We expect further strong growth in the next quarter as we meet growing customer demand and curb market price increases. As we mentioned in previous calls, we are ramping up production in the US and rolling out Rig Direct service to meet the growing demand and needs of our customers. In August, we reopened our seamless pipe manufacturing facility in Ambridge, Pennsylvania. In October, we reopened our heat treatment and training center in Baytown, Texas. Production at our Bay City facility continues to grow. We are undertaking this expansion in the challenging labor market in which we have established our company – since October last year we have hired 1,000 new employees and expect to bring the total to 1,000 by June 2022, 1,600 people. US Steel and several other competing welded pipe companies have filed anti-dumping investigations into oil well pipe imports from Mexico, Argentina and Russia, as well as anti-subsidy investigations into Russia and South Korea. The US Department of Commerce has accepted a motion to open an investigation, and the US International Trade Commission is due to issue a preliminary damage determination on November 19.
We believe the petition is unfounded and we will seriously question any suggestion that our imports are being dumped or harming or threatening local industry – sorry for hurting local producers. Over the past 15 years, Tenaris has invested more than any other company in acquisitions and expansion to build a competitive OCTG manufacturing system in the United States. While we cannot predict the impact of this investigation, we are confident that we can continue to serve our customers regardless of the possible outcome. This morning we announced to our Japanese employees that it is with regret that we and our partner JFE have decided to end our successful partnership with NKKTubes and close our seamless pipe plant by June 2022. This follows JFE’s previous announcement in June 2020 to close the Keihin steel mill, where our plant is located, which provides steel and basic services [inaudible]. NKKTubes has been a big contributor to Tenaris and even JFE over the past 20 years, but its closure is imminent. After the plant closes, we will be manufacturing high chromium alloy products that NKKTubes supplies to customers around the world at our industrial facility. JFE will support us in this transition with the exemplary spirit of cooperation that is always typical of joint ventures. Our staff in Japan showed great perseverance when we made the announcement this morning and we will support them in the coming months.
In October, we extended our long-standing relationship with Sandvik to supply CRA or stainless steel pipes for another five years. Here we combine Sandvik material technology with our premium connection expertise and Dopeless technology to include these advanced specialty pipes in our [proposal process]. This is a growing market segment. In Qatar, we received a $330 million contract to supply welded and seamless pipes for gas supplies under LNG contracts. Deliveries are scheduled to begin in the second half of 2020. This complements our existing contracts for the supply of OCTG pipes in the region. This increases our order book in the Middle East, the impact of which will be visible in our results starting in the second quarter of 2022. In Argentina, we have agreed with YPF to extend our long-term agreement to strengthen our rigs for another 5 years of direct service from 22 April. We continue to advance our plans to reduce the carbon intensity of our operations. We are finalizing an investment to expand the size range of our medium diameter mill at Dalmina to include pipes up to 18″ diameter, resulting in significant energy and carbon savings for this larger diameter product. We are also actively looking to invest in or acquire renewable energy for many of our plants around the world, including Italy, Argentina, Romania and the US. At the same time, we are expanding sales of hydrogen storage tanks for refueling in Europe and California, and we have won a contract with Air Products to develop a pipeline to supply hydrogen to Saudi Arabia. In a challenging and rapidly changing environment, Tenaris fulfills its obligations by improving its financial performance and maintaining a strong position to support its customers around the world.
[Operator's Instructions] Our first question comes from Ian McPherson of Piper Sandler. Your line is now active.
Hello. Thank you. Paolo, I think you — we discussed last quarter that you can expect consistent double-digit revenue growth in the third and fourth quarters. You broke it in the third quarter by 15%. Is it — did you bring in any income? Or are you still expecting double-digit revenue growth in the fourth quarter?
Thanks Jan. I think we should increase our income again in this range, in the teenage range. I mean, the market is growing in different regions, especially in North America. So we think we can do it. And I think this trend may continue into the next quarter.
GOOD So, this is like ASP growing 6% or 7% in the third quarter, and the rest will be due to volume? As a result, growth in volumes and prices was fairly even.
Basically, it will be — maybe more differences. But as you can see, Pipe Logix’s growth this month has been significant. As you said, this will also gradually support revenue growth in the fourth quarter and the first quarter of next year.
GOOD This is very helpful. Then I also want to ask about the end of the NCC. Can you talk a little about the importance of the Japanese joint venture compared to 2021 numbers and what we should be thinking about the spin-off after the middle of next year?
Well, the joint venture made a very significant contribution during its formation in 2000. At that moment, it helped us a lot to complete our range and enter the Japanese market. But over the past year, total production has fallen sharply. The total production level last year was about 50,000 tons per year. In a sense, the current solution is relatively limited, as in 2020 JFE decided to close the site where our facility is located, and it will cost not immediately, but in 2023, the supply of enclosures for the facility, we are faced with the inevitable – We are inevitably forced to make this decision. I wouldn’t say it has a significant impact on our balance sheet because we also have provisions for which a significant portion of the cost is likely related to this closure. The problem will be that we are ready to refocus production, especially advanced raw materials, for the rest of our industrial system.
Yes. thank you very much. Interesting, I’m not sure what you have to say at this point other than just commenting on a potential trade deal. Obviously you have emphasized what you think is merit. Is there any data to point to, or just some industry data that suggests or supports your position?
Yes. Essentially, is there any data in your own operations or in the market that supports your opinion that the claim is unfounded. Basically just wondering if you can expand as far as you can support your position.
Oh yeah. Thanks Connor Well, in general, over the past 15 years we have invested a lot of money in the US in both acquisitions and non-organic growth. In addition to the acquisition, we have installed a new state of the art facility in Texas. Our investments exceed $1.8 billion. We stepped in to expand the capacity of the former Maverick and Hydril plants, as well as those acquired by IPSCO. So we have a very strong manufacturing capacity in the US and we supplement our local production with imports or products that in some cases also make up the shortfall or supply parts of our market where there is no local production, no local production, domestic production is still not enough, domestic production is not enough. That’s our position in this situation, it hurts, we didn’t harm the internal [INAUDIBLE] under the contract. We are an integral part of the inner [inaudible].
We are basically our thoughts and our will – the arguments we are going to make in defense of our cause are the DOC on the one hand and the harm of the ITC on the other. We have a very strong case. At the same time, we are ready to increase local production as needed – as the growing market continues to demand – by increasing market demand. As I mentioned in my opening remarks, we’ve been consolidating since October last year — we’re going to be consolidating over 1,600 employees to support the expansion of production at our facilities. This solution is independent of any issue or trade case and will be improved to provide our customers with security of supply on our side for all contracts we have. The eight sites that we currently operate are, in fact, eight sites in the United States. These are the Bay City steelworks, Hickman and McCarthy, Baytown, Conroe, Koppel, and possibly the Blytheville oil pipeline. I mean, it’s the most reliable seamless and welded manufacturing system in the United States. So if we think a trade case is unfounded, we will vigorously defend it. Also in terms of price, you saw that Pipe Logix is ​​up 98% compared to last year. So in this case, a 100 percent price increase is hard to make up for the damage. In addition, as you know, American steel companies are now showing record numbers. So we’re going to defend ourselves with the Department of Justice in a personal injury case.
This thank you very much appreciate the color there. So, sticking to the US market, one of the questions we often get is how HRC, lower prices or higher welding prices will be an incentive to restart factories there. Just given your advanced welding skills, what do you need to see in the market to really justify re-activating any of these abilities?
Well, you have seen strong price increases that will stimulate the launch of welded pipe plants, there is no doubt about that. We’re going to… we’re going to do it in Hickman. HRC has reached a point, maybe a limit, and we can imagine that if you look to the future, the price of HRC may decrease somewhat over time during 2022. But, in my opinion, higher prices for oil country tubular goods will encourage the launch of capacities. However, if we assume that demand increases – as we expect the number of rigs to continue to grow in the next quarter, we expect the number of rigs, and we expect the number of rigs, and our clients confirm this point of view of other analysts. from now on, add 100 rigs in the second half of 2022. Therefore, with the growing market for OCTG, the price of hot rolled coil will gradually decrease in the future, and we see that welded types will enter the market. However, demand will continue to squeeze supply. In my opinion, the price will continue its positive dynamics.
Good morning. So for the first time in a long time, I remember your press release on offshore improvements in many regions. If I remember correctly, a strong offshore business was a key factor in pushing EBITDA margins above 25% in the last cycle and we haven’t seen that since 2014. So, how much do you guys expect offshore recovery in 2022? If you had to guess, how soon will we see margins above 25%?
Well, we agree that we are seeing offshore business starting to recover. From the first quarter of next year, we may see more of this recovery begin. This will be an initial bounce, but then the process will continue. We expect some major projects to make final investment decisions in 2022 and gradually affect our position and sales or demand in the second half of 2022 and 2023. It takes time. Today we are seeing more interest. Offshore business is emerging, especially in Latin America, Mexico, Brazil and Guyana. In these areas, for example, signs of recovery are beginning to show. But I think that in 2023 other regions will also join – there will be new mega-projects in the Eastern Hemisphere, Africa, which will come for investment decisions and execution. That’s right, he’s getting better…
great. As a side note to Connor’s question about the trading business, could you elaborate a bit on how much of your US sales are currently made in the US? Assuming your US factories start operating at full capacity, what will be the demand in the US – the US demand for what you sell, what you can produce locally? Are there any types of pipes that simply cannot be produced here and must be imported?
Hello Igor. Maybe the line in Buenos Aires is not working, I don’t know, maybe Luca or Herman will answer this question.
We are all in this together. Well, thank you, Igor, and we are in German. When we reopen the line from Buenos Aires, I would say, firstly, that we plan to require that we be absolutely able to serve our existing and growing customers. As we have announced over the past few weeks, we currently have a US facility where we plan to employ 1,000 people. We have about the same amount to increase our internal capabilities. Igor, we don’t usually reveal origins etc but you have to think of Tenaris as a global industrial system that has naturally built very significant domestic manufacturing capacity as we have announced through an investment of over $10 billion. It also complements production from other parts of the global industrial system, and we intend to do so in this way. Hope this solves your problem.
Thank you. Our next question comes from Alessandro Pozzi of Mediobanca. Your line is now active.
Hi, thanks for accepting my question. You mentioned that in the fourth quarter you could see — growth around adolescence. I’m wondering maybe at this stage you also have a better understanding of the growth rate in the first quarter, and I’m wondering if it is possible to increase the growth rate in the first quarter. Perhaps as a follow-up, I believe you mentioned that starting in the second quarter of next year, you will be able to see the positive impact of increased sales in the Middle East. I’m wondering if you could tell us more about the recovery you’re seeing in the Middle East and next year.
certainly. certainly. While we wait for Paolo, I’ll answer the second question about the Middle East, where we’re seeing ongoing drilling suppression. So far, we have seen a modest recovery. Compared to the beginning of the year, the number of drilling rigs in the Middle East increased by only 5%. We are still about 35% below pre-pandemic levels, but we are seeing this changing. We are seeing a decline in the number of rigs and expect drilling to pick up pace by the end of this year through 2022 in line with operating spending plans to ramp up and increase production. Another important area limiting our revenue in the Middle East is the changing supply structure in the UAE. You know we’re moving to Rig Direct, so there’s a reduction in inventory. In addition, there is a gap between the old and new contracts of Kuwait. So that also affected the apparent demand over the last few quarters and the next two quarters. In this context, as you mentioned, we expect our sales in the Middle East to remain roughly the same over the next two quarters compared to previous quarters.
But, as stated during the last call, we expect the corresponding jump to start in Q2 22 and beyond as we have a significant number of pending contracts in the region. To add color to you, in Saudi Arabia, we provided an unconventional development of the Jafura deposit. We have seen how Saudi Aramco has restarted several major offshore expansion projects. In Kuwait, we received our first cancellation order, which leaves us with uncertainty about deliveries in the second quarter of next year due to the multi-year stimulus we commented on a few quarters ago. In addition, activity in the UAE has been promising, with Rig Direct deliveries to ADNOC planned to increase throughout 2022. We have also seen interesting gas explorations in the UAE, not only in Abu Dhabi but also in Ras Al Khaimah and Sharjah, very challenging wells that require rich mixtures. Last but not least, in his opening remarks, Paolo mentioned Qatar, which recently won a major Qatari pipeline contract and added OCTG to our contract portfolio. We are still here and this market will also remain strong for us in the future. Therefore, I believe that from the second quarter of 2022 there will be a corresponding leap forward and a new benchmark in the Middle East.
When do we expect the Middle East to possibly return to pre-COVID-19 levels? Is it 2022 or something next year?
Yes. By 2022, this jump should bring us back to the 2020 revenue line and hopefully even 2019, but to these levels.
GOOD Returning to the first question about potential further revenue growth in the first quarter, should we expect double-digit revenue growth in early 2022?
GOOD No, that’s the same comment I mentioned earlier, we estimate that our revenue growth in the first quarter of 2022 will be in the mid-teens.
Thank you. Our next question comes from Frank McGann at Bank of America. Your line is now active.
OK, thanks a lot. Just two questions, if I may. First, in terms of what you have seen. As you mentioned in the past, you mentioned in your press release that private producers are the main growth drivers. I’m wondering how it’s going – how do you see it moving forward? Is this starting to change? Are you seeing more and more public companies starting to at least open up their spending a little? And then, in terms of the price pressure that you’re seeing, prices obviously went up so fast that it seems like it more than makes up for it, resulting in a very strong increase in volume. But — do you see a cost difference that starts to become a problem after two or three quarters?
Thanks Frank. Well, first of all, I would like to ask Luca Zanotti to comment on how private and public companies are investing differently these days.
Yes. Thank you Paul I mean, look, the predictions that our customers are making are still based on commodity prices, which are now fully influencing the more constructive environment that we are seeing right now. So this may change. In the current state of affairs, we see that the private sector continues to play the largest role in this growth in capacity. But then again, if you read the big independents, the public big independents, you’ll find that they imply that the future may change depending on the environment. As I said, the environment seems more constructive than in the past. In addition, there is another factor to consider, which is that M&A is still going on, which may also slightly change the outlook for the future. I hope this works for you. Yes. Thanks Luka. In terms of costs, you are well aware that we are going through a period of extreme volatility due to significant changes in the cost of metals and energy, as well as what is happening in Europe today. But, for example, in terms of metals, the price of iron ore went up very quickly, and then China decided to cut steel production so suddenly and by such a large amount that they cut the price of iron ore a lot. Now coal is getting more expensive, getting more expensive due to restrictions and bottlenecks in the energy sector. The marriage has increased, but recently the net worth has decreased. So there is some decoupling between the variables we used together before, so it’s not easy to predict. But for now, cost – justifying the cost of raw materials, energy, and logistics – is on our list. By the fourth quarter, I think the full impact will be reflected in our cost of sales. It is compensated, as you said, by less production and better assimilation. If I look into the future, I think that some of these variables will become more normal, for example, we expect a gradual decrease in the cost of energy, perhaps after spring – European spring, after winter. So even the cost will be — the supply chain will respond and we may be able to contain a little bit of these extreme disruptions and instability that we’ve seen in the last month. In our reporting, I think this will be fully reflected in the fourth quarter and the first quarter of 2022.
Thank you. Our next question comes from Stephen Gengaro of Stifel. Your line is now active.
Thanks to. good afternoon. Good morning gentlemen. You have answered a lot. I’m just curious how this relates to a trade case when you think of your domestic or US production versus product from other markets. I know you don’t want to reveal the details of these volumes. But when you think about the potential price advantage, I know that in the past few years, if these cases materialize, prices in the US market tend to rise. What is the net impact on your profitability. Is there a way to explain any interaction between the benefits of US production and the cost-cutting tariffs flowing into the country?
Well, you are right, as in the past, this could affect the price. But, as you know, US prices have been rising for the last 13 months. Months and months, prices are rising and strong as Pipe Logix prices rose 12% last month. So there is an upward trend in prices. Now – with this trend, any supply-side restrictions or reduction in imports, especially for niche products, could lead to a spike. This can happen too. But it seems to me that supplies are tight. In terms of the impact of inventories, inventories were at a high level earlier this year, which to some extent dampened price increases as inventories shifted from demand to consumption. Now inventories have been reduced to four months, 4.5 months. Thus, the level of stocks is normal or low at the expected level of consumption. So this is also something that positively affects the price. So it seems to me that even regardless of the trading case, we will see price pressure. And then, perhaps, a trade case could justify an additional surge in some areas of consumption.
Thank you. Our next question comes from the Vaibhava Vaishnava lineage from Cocker Palmer. Your line is now active.
Good morning everyone and thanks for answering my question. First, just a matter of clarification. I think you guys are targeting Q4 average revenue growth, but were you also talking about Q1 22 average revenue growth?
Although the Middle East is flat. What drives them? Are there many of them in North America? Or what drives them?
Well, North America definitely plays a role. And I mean in Latin America drilling activity is on the rise. Oil prices around $80 are significant compared to where we were last year. U.S. gas prices are around $5 and LNG is also supporting a higher level of activity. So it’s driving – Canada is a factor. When I mention revenue, I include the price. So if there is quantity, there is price. The combination of volume and price, demand and density, drives income growth.