Tenaris S.A.

Good day and thank you for standing by.

Welcome to the Q4 2021 Senatis S.A. 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. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Giovanni Sardagna. Please go ahead.

Giovanni Sardagna Thank you, Gigi, and welcome to Tonares 2021 Fourth Quarter and Annual 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 the 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, Alizio Mondolo, our Chief Financial Officer, Guillermo Vogel, Vice Chairman and member of our Board of Directors, Germán Cura, Vice Chairman and member of our Board of Directors, Gabriel Podskubka, President of our Eastern Hemisphere Operations, and Luca Zanocchi, 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. During the fourth quarter of 2021, sales reached $2.1 billion, up 82% compared with those of the corresponding quarter of the previous year, and 17% sequentially, mainly driven by the ongoing recovery in wind activity and prices in North America, where OCPG inventory levels of distributors have fallen to normal levels. Our ABBA for the quarter was up 27% sequentially to $483 million, reflecting higher volumes, better pricing, and a good industrial performance. Our ABBA margin rose about 23% as better volumes and higher average selling prices, more than offset the increase in the cost of sales. Other selling prices in our tubes operating segment increased 20% compared to the corresponding quarter of 2020, and 11% sequentially. During the quarter, cash flow from operation was $36 million. Our net cash position at the end of the quarter declined to $700 million following the payment of an interim dividend of $153 million in November last year and capital expenditure of $69 million during the quarter. The Board of Directors has decided to propose for the approval of the annual General S.A. meeting to the end of the beginning of May, the payment of an annual dividend of 41 cents per share or 82 cents per ADR, which includes the interim dividend of 13 cents per share or 26 cents per ADR that we paid at the end of November last year. If approved, a dividend of 28 cents per share or 56 cents per ADR will be paid on May 25th. 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 the fourth quarter, we close 2021 with a third sequential increase in sales and margin, further reinforcing the recovery in our results that we have seen through the year. Taking the year as a whole, our sales rose 27% year-on-year, while our EBITDA more than doubled, with the margin surpassing its pre-pandemic level. Our net income was additionally boosted by our participation in the results of our investment in Ternium and Usminas, which benefited from breakout steel price. As a result of these annual results and our solid financial position, with a positive net cash balance of $700 million, We are proposing to restore our dividend revenue repayment for the 2021 fiscal year to the pre-pandemic level. This achievement would not have been possible without the structural measure we took in 2020 to improve our profitability over the longer term, as well as the strategic positioning we have built up over the past years in North America and the rest of the world through major investment, acquisition, and implementation of our redirect service model. Nor would it have been possible without extraordinary resilience and determination of our employees who bore the brunt on the impact of pandemic in their working environment and on their families over the last two years while adjusting to rapid change in the data production, supply chain and customer requirements. It is a tribute to their professionalism that we have maintained the high standard of our safety performance over the past year, with a lost time accident frequency rate of 1 per million man-hour worked, even when adding 4,000 shop floor samples, representing 33% of the total. The United States, and more generally North America, has been at the center of our recovery over the past year. Not only has the U.S. been at the forefront of the recovery in demand for our products, It has been the third of our industrial reactivation. From October 2020 until the end of 2021, we added 1,200 employees in the U.S. and expect to add a further 1,000 during 2022. Production at our Bay City mill has reached full capacity, and we have reopened many of the facilities we had to close when the pandemic struck, including the recently acquired copper steel shop. where we expanded the production range to supply steel to Bay City as well as the Cambridge Mail. Now, with hot-roll coil prices falling from record levels, we are also reactivating our welded pipe facilities to complement our supply of seamless pipe in specific products where welded pipes are suitable. U.S. spot market OCD prices, as represented by the pipe logic index, have reached their highest level since 2008, after rising 124% since October 2020. As distributed inventory level has grown from 10 months of consumption to four months of consumption. During this period, we have strengthened our rig direct service model by introducing digital integration service and reducing working capital requirements. Today, 80% of our U.S. rig direct customer are using our RegDirect portal to integrate to other management processes, and our pipe tracer application is being used to make digital tallies. Our sales in North America now represent close to 60% of our total sales. In Canada, we are making a major investment to integrate our seamless and welded pipe production, in short summary, and expand the range of products we can produce domestically. The trade case raised by our welded pipe competitors against our import from Mexico has been dismissed after a final determination of no injury. The offshore market is also recovering, so at a different pace, and that recovery is mainly taking place in Latin America, Brazil, in Guyana, and Mexico. In Brazil, we are complementing our traditional supply of large-diameter welded casing to Petrobras with seamless medium-diameter casings. and many more. In Guayana, we were recently awarded a 10-year contract to supply the casing requirements, including large diameter connectors, dockless connection and pipe management service for the largest development in the region. Onshore market in Argentina and Colombia is also recovered from the pandemic load. This week in Argentina, The government has issued a decree authorizing a project to build a major new gas pipeline from Neuquén in Vaca Muerta to Buenos Aires. This should enable a further expansion of drilling activity in the Vaca Muerta share formation and reduce the need for future LNG import. In the Middle East, the recovery is at an earlier phase and our sales during the year were affected by the stocking of excess inventories. We have won important long-term tenders for supply to major customers in the United Arab Emirates, where we have introduced our rigged direct service, in Qatar, where we are providing a full range of OCTG and line pipe, and in Kuwait. We expect a significant recovery in our region from the second quarter of 2022. In other markets, our sales to industrial markets have also recovered. of what particular note is the expansion of our sales of tubular components for airbags, where we are currently completing an expansion of a component facility in China. Autoliv, our main customer in this segment, recently awarded us with their 2021 Best Supplier Award. Over the course of the year, we have confronted significant raw material and logistic cost increases. and more recently we have seen an unprecedented surge in energy cost which is affecting our European operation. A large part of these increases are already embedded in our fourth quarter results. We are advancing on the roadmap we set out to reduce the carbon emission intensity of our operation and achieve the 2030 target we set for ourselves. Yesterday our board approved a 190 million investment project to build a wind farm in Argentina which will supply close to 50% of the electric energy requirement of our Siderca integrated seamless pipe facility. This is an important initiative in a country where there are limited incentives for projects of this nature. We have developed and tested specific material chemistry for use in hydrogen application and introduced a new brand, Thera, Sales of Terra storage vessel system for hydrogen refueling station are growing strongly, as are our sales for other low-carbon energy applications. This product still represents, however, only a minor proportion of our overall sales. Over the past year, Tenaris has recovered strongly from the impact of the pandemic on energy markets. Thank you and we are prepared to answer your questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ian McPherson from Piper Sandler. Your line is now open.

Hello. Thank you for taking my question. You mentioned in the earnings release that you expected continuing expansion of your EBITDA margin through the first half, and I know that some of your international markets are expected to accelerate from Q2 forward, but I wanted to ask for a little more detail with regard to where margins can go. And I think also from the prior call, we were looking for a minimum – or approximate 15% revenue growth from Q4 into Q1. I wanted to get a refresh on that out. Thanks.

Thank you, Ian. First on the overall revenue, you are correct. We continue to estimate our revenue increase for the first quarter in the region of the mid-teens. and also we estimate that our margin for the first queue will be slightly higher than the margin we had in the fourth queue. In this environment, the company is continuing to grow.

I was intrigued, Paolo, by the comment regarding the development of wind power to support your artesian operations. Is that a big ticket CapEx item? Can you talk about the expenditure as well as the time frame? And maybe just a general comment on CapEx for the company this year as well?

Well, if I understand your question, you're referring to our investment in the wind farm in Argentina. We launched the investment now. The overall investment will be in the range of $190 million. We expect to put the wind farm into operation by August 2023. So the investment will be basically distributed along this time. This investment will raise our expected investment for 2022 because we will end up and we have in mind with this investment to be in the range of 400 and Thank you for taking my questions.

Pretty impressive quarter, so kudos to that.

Maybe I think like

People or investors are a little bit worried about are we reaching peak margins over here? And I know you guys talked about margins improving in 1Q and probably again in 2Q. Maybe if you can help think about we are currently around $600 a ton of EBITDA. Back in 2013, 2014, we were closer to $750 a ton. Given what the prices are doing for commodities, is there a pathway of reaching from the 600 to maybe 700, 750 tons per ton that we saw earlier?

Thank you, Babes. Well, as you are saying, we are anticipating a slightly higher EBITDA margin in the coming quarters. and our EBITDA per ton will also increase. I won't give a precise number, but for sure it will increase. You know, in our sales, there will be some projects and some areas in which we have still some prices that are not reflecting today's environment and that are affected by the increasing cost of energy in some cases. And on the other side, we have increasing prices in in other regions. So overall combined, we expect an increase in EBITDA per ton without giving a precise figure for this.

Got it, got it. Completely fair. Maybe if you can talk about the welded pipe supply demand situation in the U.S. You talked about you are increasing your capacity for the welded pipe. Maybe if you can talk about how does that supply-demand dynamics look today and then also going forward if the HRC scrap prices are falling, how does that impact your margins and what's the lag?

Well, on the first question, we are ramping up our weld type production because The price of the hot-roll coils went down pretty abruptly in the last month. I personally think that considering also the pressure of cost, we are close to leveling up for the hot-roll coils. And there are signs in the international market that are showing even some rebound in price of slabs and price of hotel records outside the United States. So, I mean, we are close to some leveling of this. In this environment, I think there is some scope for welded production in the States within limits because the nature of drilling today, the extensive use of seamless and He treated the demanding product in the production casing for the column. He's leaving a space to welded which is probably not as extensive as it was historically in the past. So, there is room. We are ramping up for the specific product in which we feel that welded could complement our product offering. and we expect that also other producers may raise production of whelped pipe but to start facility, hiring people and so probably this will be a slow process.

I mean it sounds like overall if I just You talked about mid-teens growth and maybe modestly higher margins sequentially. So that gets you like 550, about 15% higher versus street. It seems like the EBITDA, you talked about EBITDA per turn still improving. So it seems like the EBITDA from 1Q should continue to modestly improve. That's my last question. Am I reading that correctly? Yes.

Sorry, but I didn't catch exactly what your point is on this question.

All I'm saying is based on your guidance for the 1Q, EBITDA could shake out somewhere around $550 million for the first quarter. And it seems like based on what visibility you have, the EBITDA, I'm not trying to get you to a number. I'm just trying to say directionally the EBITDA should improve from 1Q as we go through 2022.

Yes, basically, as you listen to my anticipation of the revenue line and on the margin, you may have an idea of where we're heading. Got it. That's very helpful.

Thank you for taking my questions.

Thank you. Our next question comes from the line of Connor Linne from Morgan Stanley. Your line is now open.

Yeah, thanks. I wanted to follow up on something you were saying in response to one of Bev's questions, which I thought was interesting. It seemed to be you were saying that you think there's actually sort of a stickiness to the market share games that Seamless Pipe has had in the U.S. Historically, the U.S. has been sort of mixed between Welded and Seamless. I'm curious, is that specific customer comments that are leading you to believe that, or is that just sort of a high-level view of where production is going to be? What's driving that thought?

Well, I think I can turn to Luca for commenting on the relative position of seamless and welded over time and what we see looking ahead.

Okay, thank you. Thank you, Paolo. Look, what we have seen over time is that as the laterals grow, and the productivity of the rigs increase, customers, at least our customer base, is more, let's say, keen in using seamless for some application. I'm referring particularly at the production casing. Now, if you consider the production casing within the lower 48 Scope is a large portion of the market. We would say that in this production casing, we would say that 80-25% of the market is seamless to a certain extent. And so this represents a major advancement, which in our understanding is linked to the application. And this is basically where we found our statement that the seamless has gained a position that is more sustainable in the long term.

That's interesting. So I guess the question is sort of related, but basically, you know, if you look at supply today, certainly there's been a lot of news that pipe is very tight within the U.S. and certainly seamless pipe is mostly what this is referring to. Do you see potential for significant increases in imports to alleviate the pressure there, or do you think that domestic welded mills are going to have to fill the gap?

Well, you are right that the market is being tight. If you consider that the pipe logic increased by around 120% in one year. So this is also a reflection of this year. On top of this, the level of inventory went down substantially. Today we have around four months of inventory on the ground. So the conditions that were basically putting pressure on the market one year ago now are kind of disappearing. Inventory and also the very high price of the hot-roll coils during 2021. It was a discouraging weather. Now, I think on import, there are measures of containment and negotiation of agreement with Europe, Japan, limitations that have been established over time, like 232 are, to some extent, slowing down or in my view, preventing an increase of imports at a very fast pace. But Luca, maybe you can add on your view on imports. Yes, Paolo, thank you very much.

No, I believe that you fairly summarized the situation. When you look at the imports, even if you see the recent developments over the last years, we don't see imports jumping up Very, very fast. And when you do some math, you see, you realize that actually there are not many places that can increase when you take into consideration all the different trade restrictions that we have in place. At least this is as far as we can see in the medium term. Then, longer term is always very difficult to anticipate.

All right, appreciate the time. I think this is a response of this, you know, an increase in our ramp up in our facility is contributing to satisfying all the increasing in the demand, and there will be some increases from the welded pipe also over time as well.

Yep, understood. Thank you.

Thank you. Our next question comes from the line of Nick Konstantankis from BNP Paribas. Your line is now open.

Hi, guys, and thank you for taking my questions. Two, if I may, please. I just wanted to ask a clarification around the anti-dumping case.

You say it was dismissed or was it just that for Mexico? What about the other regions and where are we? Any more color around that would be helpful. Secondly, Even with some working capital absorption to be expected, 2022 should have pretty solid cash flow generation and positive free cash. Can you just remind us your priorities around capital allocation and in particular, how do you feel about M&A at this point in the cycle and in this cycle in particular? Thank you.

Thank you. First, a clarification and a point on the decision by the Canadian authority to dismiss the case against import from Mexico to Canada based on finding of no injury. This is a good result. It's showing that at this moment there's been no injury caused by Mexican import into Canada. This is the final determination. I think it's important because also, to some extent, creating a precedent for the decision on the injury in the anti-dumping case in the United States. It is very difficult to prove injury today in a moment in which the pipe industry in the States is having record results. This is our argument in Canada and I think it also will be a good argument in the case of U.S. As far as the allocation of capital, working capital, you know, the growth in the market is pretty strong, the growth in our sales is strong, and we are supporting This increase with an increase in our working capital. The days that we have overall in our working capital are in the range of 160-165 days looking back. This is due also to our model. We are arriving straight to the client. When the demand increases, we are increasing our working capital and we are also increasing our trade activity. But on the long run, we expect to be able to reduce these days overall to around the range of 130 or something in this range. So we think that over time, the allocation of capital to working capital when the market will stabilize and we will limit growth. Also, we have an ambitious target in the digitalization of our supply chain to reduce the lead time in the mail and to reduce the lead time in our chain. You have also to take into consideration in capital locations, working capital, that looking at the disruption in the supply chain, in freight, in production, and some of our input, we have been conservative in having some level of high inventory in areas in which we were more exposed to delay by our supplier or to disruption in the supply chain. It's a moment in which we prefer to be on the safe side in facing a market that is growing. On the last point on M&A, You know, as always, we are looking at our strategic position worldwide, the positioning in every region and in every segment that could contribute to the strengthening of our long-term positioning in face of all of the difficult circumstances that we may be facing in the different parts of the world. So we keep open This is an option to strengthen our strategic position in the different regions.

Thank you.

Thank you. Our next question comes from the line of Alan Spence from Jefferies. Your line is now open.

Thank you. I had a question about the wind farm but slightly different in terms of its CO2 reduction. If I'm thinking about this the right way, the reduction works out to about 0.05 CO2 per ton of steel on your global operations basis, which would mean that by the end of 2024, you've achieved roughly two-thirds of your 2030 target to reduce the intensity by 30%. Is that the right way to think about it? And then if you just talk a little bit about what else you'll be doing to achieve the target. And I've got another question I'll ask after that.

Well, I think this is the direction in which we are doing. Today we are, we had in 2021 a specific intensity of CO2 in scope 1, 2 and 3 of around 1.2 tons of CO2 per ton of steel. Our target for 2030 is to arrive to 0.98. Now, the wind farm will support, let's say, some close to 3% reduction of our global intensity. because it will contribute to substantial reduction of CO2 emissions in our Argentinian operation, but the impact on the overall denarius will be in the range of 2.5 to 3% of our CO2 intensity per ton. We are complementing this with many other steps. But this is a pretty relevant one. The other steps that have been implemented has been the shift of production of large diameter pipe to a single rolling operation in Dalmine, another important saving for gas, energy, and CO2. And likely when we complete a phase-out of our Japanese operations that are mainly based on flat furnace, We will probably also, we will for sure do another step. So step by step, we get closer to the target.

Thank you. That's very helpful. My second question is about working capital. I know it's early in the year, but just with the view of a good demand outlook, any rough estimates of what you think your working capital requirements will be this year?

As I mentioned, Alan, in the previous question, I mean, our aim is to arrive to a level of 130 days by the end of this year, looking backwards. Today, we are in the range of 165, 170 days. This means that in the end, or in the first, broadly, The first factor, even after having paid the dividend, we expect a positive cash flow for the company, a significant positive cash flow for the company, also due to a reduction of capital allocation to working capital over time.

All right. Thank you.

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

Okay, great. Thank you very much. So you have two questions if I could. Just to follow up on the ESG question or the wind farm question, you're doing it for 50% of the electricity needs at Siderica in Argentina. I was wondering, is that just a first step? Could you go to 100%, double the size of it? I realize there might be other issues. in terms of transmission capacity or other things that could affect that. But I was just wondering what your thoughts are longer term. Could you do that in other facilities as well, in other locations to improve the carbon footprint that you have? And then I have two other questions. One just similarly on the hydrogen strategy. If you could provide a little bit more detailed update on what you're doing there. And then lastly, the The Geneva sale, which obviously seems like it was very small, but it's one that seems at least periodically you're selling off some of these smaller, less core products. I'm wondering what the strategy is there. Is it just to get rid of smaller operations that are not that core, or is ESG part of why you're reducing some of those operations?

Thank you, Frank. The first point on the farm, you know, Argentina has special conditions. The wind farm in Argentina may have, like in this case, very high efficiency, above 55%. So it's a very special situation. Argentina, the wind farm, will be in the southern part of the Buenos Aires province. is an area with sustained wind over time. It is a particular condition in which we think it makes sense to do first step. I don't think our aim in this moment would be after this to continue in Argentina to invest on projects of this size. And in the other region we are analyzing other projects that may contribute to the reduction of our footprint, but it is more difficult to identify a project that has similar impact, I mean large size impact. We are progressing and analyzing different technology from the carbon capture and usage or storage Energy Savings in our operation. We're working on the scope 3, reducing our purchase of high carbon input. Everything is compounding our roadmap for reducing this. This on the first question. On the second question, We are trying to streamline and concentrate on, let's say, the core of our operation. In the case of Geneva, Geneva is a very small mill focused on a segment that is very different from our driver, and so we are trying to focus as much as we can in the core Business of Tenaris. Considering also the opportunity that may come from the energy transition, this would be a different story. We may get into area of product that may enhance or use our competitive advantage for advancing in the area of hydrogen or other energy transition related projects. Our project for hydrogen, we are completing one furnace in Italy that will be capable of being heated by hydrogen. We have two pilot projects for testing the technology of carbon capture to see if we can identify technology that could be used in separating CO2 from our furnaces, and to understand if we can scale up this test. But these are more R&D so that there is a limited scale. In fact, it could only happen later on over time.

Okay, great. Very interesting. Thank you.

Thank you. Our next question comes from the line of Alessandro Pozzi from Mediabanca. Your line is now open.

Thank you for taking the questions. The first one is on the EBITDA progression. I understood that margins are expected to marginally grow quarter after quarter. But at the same time, I think we have a pending decision in terms of duties of imports from Mexico and Argentina into the U.S. And once the preliminary duties are imposed, I guess, I'm not sure whether you will be able to continue to import from Argentina and Mexico. Is that going to have an impact on margins or is that reflected already in the guidance you've provided us?

As I tell you, and this was a point that we touched also in the last conference call, we really think that it is difficult to put an injury in this and to go against the import from Mexico and Argentina in the present circumstances. So we are confident that the case in the end will be dismissed. Now, results, the final determination will come between September or October. It depends on the timing of the final investigation, but I mean, we'll be coming in the second part of 2022. For the time being, we are, first of all, planning on the scale-up of our facility in the United States. The ramp-up, as I mentioned in my prepared remarks, Very substantial. We are hiring people in all of the aid facilities in the United States. So we are positioning ourselves for any way an increase of production in the United States. And this is how we are projecting, let's say, our position. We are keeping in mind in our projection the fact that these new facilities are extending to some extent our supply chain, are requiring some additional working capital. This is something that you see today in our working capital. Some of these lines of production require moving pipes from one place to the other, moving semi-finished products, and this is, at the beginning, let's say front-loading our working capital and these are also the results of this ramp-up. Over time, this, as I was saying before, will normalize.

And with regards to the duties, is there already a date set for the preliminary duties on when they will be applied?

Sorry, I didn't get your...

I was wondering if there is a date for the preliminary duties on the imports already set.

Preliminary duties should be around May, in my understanding, if the DOC decides to have a preliminary duty on Mexico and Argentina. Okay.

Thank you.

My second question is on costs. I believe that you mentioned that quite a lot of costs have already been embedded in the Q4. I was wondering to what extent we will see an increase in costs in Q1. And probably there are some costs that are stickier, like logistical costs, but maybe some other costs linked to energy prices. Maybe it could be less so if we see a normalization of As I mentioned in the opening remarks

The large part of the increasing cost is embedded in our cost of sales of the fourth quarter, but because of the IFRS, there is a part of this additional cost that we are paying today that will also get into our cost of sale of the first and the second Q. We are buying energy in Europe, no doubt. As you know, we have a power generation unit and we buy gas in Italy and we buy power in Romania. We are reacting, organizing our operation in a way that tries to minimize the impact, but the cost is there, no doubt. We will have probably to face higher energy costs in Europe for a period of time. It's difficult to estimate when there could be a normalization of energy equilibrium in Europe, but for the time being, part of this is in our costs already.

You're buying spot prices or you have long-term contracts with your suppliers?

We have a combination of long-term, short-term. I mean, it's a mix of contract and also spot.

All right. Thank you very much. I'll turn it back.

Thank you. Our next question comes from the line of Kevin Roger from Caprera Shuzhru. Your line is now open.

Yes, good afternoon. Thanks for taking my question. I have two actually. The first one is related to the U.S. because you mentioned the tight supply on the seamless side. If we just focus on the seamless, I understand that the utilization rate of Bay City is already at 100%. Can you give us a bit of color on how much you can add in terms of supply from Mexico and Argentina currently on the seamless capacity in terms of volumes to add to the country? And the second one is related to Middle East and Africa. I was wondering if you can update us on the bidding activity current. How do we stand compared to the pre-pandemic level? In terms of volumes, and what do you see currently on the pricing side? Because on the paper, the pricing in the Middle East should in a way follow the Pipe Projects Index, but it has not really been the case over the past months, if I well understand. So what's the situation on the pricing side now in the Middle East, please?

Thank you, Kevin. Well, the first question about the overall mix of our sales, the share that is coming from Mexico, share that is coming from U.S., if I understand well, if you want to understand, I think we have a balanced source, but maybe Luca could tell us with the ramp-up of operation how We will dismay change.

Good morning, Kevin. Now, for competitive reasons, we don't disclose all the details. However, I can tell you that once we have fully ramped up our seamless facility, which, as I said before, actually Paolo said before, Bay City is almost at full capacity. and we are strongly ramping up our umbrage. We're going to be in the position of defending our position in Seamless from the United States. I don't know if this is helpful or you have other questions on this.

It was just to try to estimate in terms of volume how much, let's say, you can answer on the seamless side in terms of additional demand from the U.S., but also from Mexico and Argentina. What's the maximum demand that you can answer on your side?

Well, as I said before, Kevin, we don't release this number for competitive reasons, but what I can tell you is that once... The execution of our ramp-up, which is well underway in Bay City and it is coming up in Enbridge, we're going to be able to defend our position on Seamless in the United States. And this is something that frankly we already envisioned before and we are ramping up. We started our ramp-up already back in October 2020. So, this is part of the process that we already initiated and undertook well before the anti-dumping case.

Yeah, well, this is something that we started before and is part of our strategy for the United States. In the case of Canada, for instance, after the case was launched and the dumping duty was established, we continued to export material from Tamsa and with the dismissal of the final, This money, the money paid for the duty will be reimbursed to us. There may be something also similar occurring in the United States. I mean, depending on the duty, we may decide what to do and how to organize our metrics of supply in the United States. As far as the second point is concerned, I mentioned in the remark the relevance of the offshore in Latin America. But I would like to, Gabriel, to comment on your point on the investment in Africa.

Yeah, yeah, thank you, Paolo. Good morning, Kevin. I think you were asking about the activity and some color in the Middle East and some pricing dynamics as well, so. In terms of activity, I will tell you that the drilling in the Middle East is showing a consistent recovery. Consider that the core of PEC countries are already producing at similar levels to the end of 2019, but still the recount remains below, about 30% below those pre-pandemic levels. So there is a clear room for activity to continue to accelerate during the year, and really this is going to occur as we see Our major customers contracting rigs. So our sales in the Middle East will remain subdued in the first quarter, but we expect, as Pablo anticipated, a relevant jump starting the second quarter as our large backlog of contracts of the UAE, Kuwait, and Qatar kick in. Saudi is also active. We have recently secured several contracts across different business segments, confirming that stronger activity is coming ahead in the kingdom as well. Iraq has been quite active as well. We received call-offs there in OCDG, and we have awarded pipelines as well. So we expect that from second quarter onwards, our revenues in the segment of Middle East and Africa will be running back to pre-pandemic levels. Talking to our customers here in the region and reviewing their plans, there is a pretty strong perception that the outlook is quite positive, that we are entering a multi-year So this is to give you some color and perspective on the following quarters on the region. Regarding the pricing dynamics and that comparison that you were making with the U.S., I think I need to clarify that the pricing dynamics in this hemisphere is substantially different from North America. We are facing a different competitive environment, a different business cycle, so there is no or very limited link to the pipe logics index. Our main business here in the East Texas Hemisphere is associated with local content positions, high-end products, and rig direct services, which allow us to earn differential prices and margin. The dynamics here on our long-term contracts are following formulas. All the contracts with IOCs, the formulas have already been negotiated and are already in place, and we're going to start to see that starting in early 2022. For the NOCs, we have formulas as well. But this process will take a bit longer. It will be later in the year. Typically, there's an inertia and a longer cycle with the NOCs. And within our backlog, also, it's important to mention the large pipelines that we have, Turkey and Qatar, because in this case, the prices are fixed, and these average prices are below the average of OCTG as well. Regarding new offers, either for spot or long-term agreements, our new pricing has been repositioned according to the new input levels. And the market is reacting positively to this reset. We see a positive dynamic, and we start to begin with new contracts, new business towards the year end or even into next year.

Okay, perfect. Thanks a lot for all those answers. Thank you, Gabriel.

Thank you. Our next question comes from the line of Carsten Rieck from Credit Suisse. Your line is now open.

Thank you very much. A few questions left from my side. The first one is on outlook. In your guidance, you mentioned a significant improvement in volumes from Middle East and Africa. Could you narrow the guidance, especially for Middle East, as we have seen in the past, a rather wide range here of volumes and sales achieved? That's the first one.

Okay, thank you, Carsten, again. Gabriel, could you focus a little more in the comment that we made on the outlook? Yes, Paolo.

Yes, Paolo. So, Carsten, as I was just commenting a few moments ago, the guidance is for pretty much in range first quarter in the segment of Middle East and Africa compared to the fourth quarter. and a step jump in the second quarter going back to averages of pre-pandemic from there. And we believe that this will be a new step for the region going forward. Hopefully that clarifies and gives you some color of where we're going to land.

Perfect. I might have missed that. Sorry for that. The second one is a more technical question. I still see that the depreciation and the capex levels are wide apart. Do you expect that gap to close? That means... Thank you for this. I don't think that CapEx normalization should go, let's say, much higher because

This $190 million for the wind farm is a pretty large investment. In general, we are in the range of $250 million per year to support also the ramp-up of our operation in the U.S. Then there are these specific large investments But I do not see, apart from eventually special product or special project that may come from changes in the market, I do not see that we should change this, let's say, this level. This level should be sustainable. Perfect. 250. Then the energy will come depending on the opportunity. Okay.

Okay. Thank you very much. The other question I have, in your statement you mentioned that the investments in oil and gas are unlikely to return to pre-pandemic levels, and hence I would guess the volumes would be even less so given the inflation which we have. How do we see the competitive environment going forward? Because at the other side, we see actually new supply areas or Idle Supply coming back to the market. Could we see a more competitive environment? And if so, would you believe that the tubular players behaving more rational than in last cycles?

Yes. In my view, it is difficult to make a forecast because of the level of uncertainty that is worldwide that may challenge some of the existing assumptions. I mean, the crisis of energy in Europe, the disruptions In the energy that could come from the Russian-Ukrainian conflict. You know, Russia is supplying 17% of the world gas and 10% of world oil. There are geopolitical tensions and the energy transition also is facing challenges because of... The difference between expectation and what is actually happening and feasible. So I think this may change the way investors are looking and companies are looking at investments in the oil and gas. We don't know yet, but I think that during 2022, we may have a sign of some different attitude. We have seen a lot of discipline by the operator in different parts of the world. When the price was $80, if the price of oil is in the range of $95, $100, everybody will have to get back and think again. And the gas issue is also relevant. So, I think that it's difficult to make A solid statement of which will be the level of investment, also inflation in the years to come. What we see is the short term. But the long term is difficult to evaluate today.

Perfect. That helps already. The last question is rather on the associate income, because in 2021, You have seen quite a substantial step up here in associate income from your participations in Ternium and UC Minas in particular. What are your assumptions for 2022? Because I'm pretty sure the half a billion is a bit far off given the circumstances the Brazilian steel industry is currently in. It looks like it's a little lighter. but could you share your assumptions here for that position because it is cash relevant of course as well.

Well, you are right that 2021 has been an extraordinary year. On the other side, you know, Ethereum has relied the cycle of investment that is positioning the company very well especially in front of, let's say, growth in the American market. So the result will be not the one, I think it will not be the one in 2021, but it will be a very solid result for 2022.

Okay, perfect. That's fine. Thank you very much.

Thank you. Our next question comes from the line of Luigi Develli from Equitas. Your line is now open.

Yes, good morning. Two questions for me. The first one on the price is considering the demand supply in a situation in the U.S. and the low level of inventories, what expectation do you have about Pipelogic's price in trend for the next month? Also considering the strong drop of oil coil and can you remind us how much of your worldwide contracts are linked to the pipe logics? And the second question on the U.S. market, can you update on where do you see U.S. recount by year-end with the current level of oil prices and capex announcement by the oil companies? Thank you.

Thank you, Luigi. Maybe you can comment on the perspective for the pipe logics that we see today and the recounts where we...

Yes, on the pipe logics, HRC, supply-demand. Here there are two factors that are playing. On the one hand, the strong demand. And in our opinion, the... and many others. The inventory level is extremely low. Now in our calculation we are slightly below four months and this is historically low for this market. So there is also a matter of somewhat replenishing this inventory. And this certainly will tend to support the pipe logics. Now, it is true that the HRC going down is a threat, but as Paolo was saying, he knows this much better than myself, we see this downward trend So, balancing these two facts in the long term is very complicated because there are many factors at play. Now, when we get into our prices, please remember that our prices that are linked to the pie logic in a significant way are usually suffering of a three-month lag. So when you come to our prices, you're going to see our prices increasing even if biologics start trending down. And as far as the U.S. market is concerned, after a big jump during 2021 and reading and studying what the E&P operators are using as a budget, we see Thank you very much. consolidating some acquisitions that are not fully within their full scope of operation. And this I'm talking about the 2022 or this is the first semester.

Thank you, Luca. I think this was the last question.

Yeah, thanks.

Yeah. So there are no other questions?

Thank you very much.

So thank you everybody for attending the conference call and good luck to everybody. Thank you.

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