Tenaris S.A.

Good day and thank you for standing by. Welcome to the third quarter 2023 Tenaris SA earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1-1 on your telephone. You will hear a message advising your hand is raised. To withdraw the question, press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to turn the call over to the Head of Investor Relations, Mr. Giovanni Sardagna.

Thank you, Carmen, and welcome to Tenaris' 2023 Third Quarter Conference Call. Before we start, I would like to remind you that we will be discussing forward-looking information in the call and that our actual results may vary from those expressed or implied during this call. With me on the call today are Paolo Rocca, our chairman and CEO, Alicia Mondolo, our chief financial officer, Gabriele Podkuska, our chief operating officer, 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 2023 reached $3.2 billion, up 9% compared to those of the corresponding quarter of last year, but down 21% sequentially, mainly due to lower volumes and prices throughout the Americas, lower quarterly shipments to offshore projects, and lower pipeline shipments in Argentina. Average selling prices in our tubes operating segment increased 2% compared to the corresponding quarter of last year, but declined 5% sequentially. As anticipated, our EBITDA, excluding a one-off gain of $32 million, fell just short of $1 billion, with the margin at 31%. The sequential EBITDA decline was mainly driven by the ongoing price declines in the Americas. Our net income for the quarter at $547 million was affected by non-cash charges of $144 million related to the re-measurement and recycling of CTA to the income statement of our direct and indirect investment in UCMinas. Cash generated by operating activities during the quarter was $1.3 billion, while our free cash flow for the quarter was $1.1 billion, with a further reduction in working capital of $415 million. Our net cash position at the end of the quarter rose to $3.3 billion. Our Board of Directors approved the payment of an interim dividend of $0.20 per share or $0.40 per ADR to be paid on November 22. The interim dividend is up 18% compared to the interim dividend we paid last year. In addition to the dividend, the Board of Directors also approved a share buyback of 1.2 billion to be executed within the next 12 months. Now, I will ask Paolo to say a few words before we open the call to questions.

Thank you very much, Giovanni, and good morning to all of you. As anticipated, our third quarter results were affected by, among other factors, lower onshore drilling activity, and an ongoing adjustment in market price level in the Americas and the lower level of shipment in certain regions following a strong second quarter. On the other hand, we had another extraordinary quarter for cash flow with the generation of 1.1 billion of free cash flow, making the 3.1 billion in the year to date. With this cash flow adding to our already strong financial position, yesterday we announced the launch of our first share buyback program together with an 18% increase in our interim dividend. The share buyback program, which is for an amount of up to 1.2 billion, is to be carried out over the next 12 months. We consider that buying back our own shares would constitute a better use of our excess cash than our current liquidity investment. During the quarter, we invested $90 million on the acquisition of additional heat treatment and trading facilities in Houston, which will help us to bottleneck our U.S. industrial system. We also acquired a small pipe coating facility located close to our dominant plant in Italy for $10 million, and announced the acquisition of the larger Showcore global pipe coating business. This remains subject to the abstention of regulatory approvals and is expected to be concluded by the end of the year. The expansion of our pipe coating operation at the global level will help us to serve customer with an integrated offer for complex and offshore line pipe projects. In North America, we expect a recovery in drilling activity as we look toward 2024. In the United States, the relatively low level of drill and uncompleted wells and the DAC and the crude oil inventories, favorable oil price and rising natural gas prices should support an increase in investment as oil and gas companies reset their budgets for the next year. With OCTG inventory declining from excess level, the declining prices for several product items is starting to slow down. the pipe logic index can be subdivided into different products item groups whose performance is not uniform. For example, item groups such as surface casing and tubing, which are most exposed to low quality imports, have fallen further than higher quality product item groups, such as production casing, which are largely produced by domestic producers. We expect that if inventory continue to come down, market pricing should start to stabilize by the end of the year. At the same time, we are increasing the level of differentiation through our rig direct service. By the end of 2023, around 85 of our OCTG sales in the US will be supplied under our rig direct service model. And 75% of those sales will be done with our new run ready service included. This compare with 65% and 30% respectively at the end of last year. In Canada, we also expect during the activity to pick up as we head into the peak winter drilling season. We are repositioning ourselves following the revision of normal values on Chinese OCTG import made by the Canadian government earlier this year. and an expected increase in activity in the mountaining shale. In the Middle East, the Saudi market is growing particularly strong as Aramco is rapidly increasing gas drilling activity, both conventional and unconventional. An investing pipeline construction under is Master Gas 3+. We recently won a tender with a value of $600 million to supply seamless casing and tubing with short delivery times For this increased activity, ESAMQ has reduced stock levels during the pandemic. Our recently consolidated GPC subsidiary, which invoiced $52 million during the quarter, is positioning itself to supply the large diameter conductor casing used in most wells in Saudi Arabia. Our new premium trading facility in the Emirates, in the United Arab Emirates, will begin operation this month. This will be the first industrial facility of its kind in the Emirates and has been built along with a special Tenaris University training facility to increase the local content provision under our multi-year rig direct agreement with ADNOC. Offshore drilling and pipeline construction activity is in an expansionary cycle. We have been quick to capture the first wave of this cycle and our sale to offshore projects will be 50% higher in 2023 than they were last year. Our position in Guiana and Brazil has been central to this achievement, and in October, at the OTC event in Rio, Petrobras awarded us a 2022 Bait Supplier Recognition in the category of Goods for Drilling and Completing Well. Our research and development area and technical teams continue to develop material and product solutions tested for the specific conditions involved in more complex low-carbon energy applications, such as CCS, carbon capture and storage injection wells, and hydrogen storage wells. In October, we were awarded a contract to supply high-chrome alloy tubing for carbon injection wells for the EU-founded PORTOS project in Rotterdam. The materials were selected to withstand the high corrosion risk and expected cryogenic thermal shocks. In Argentina, our first 100 megawatt wind farm has entered full operation and is delivering power through the interconnected grid to our operation in Campana. We have secured the opportunity for a second 90 megawatt wind farm, and we will go ahead with $214 million investment to be completed within 24 months. Both wind farms will provide cost-competitive electric power with capacity factor of 55% and above with no subsidy. With the investment in the wind farms and our ongoing investment in energy efficiency, we expect to meet almost 100% of our energy requirement in Argentina through renewable energy. Digitalization is central to our strategy. One investment that is currently coming on stream is a $20 million digital global programming and scheduling system that will help us to improve production lead times cost and compliance. With favorable market conditions ahead, we are strengthening our competitiveness and focusing on service and margin differentiation. We are now ready for any questions you may have.

Thank you. I will open the lines for questions. And as a reminder, to ask questions, press star 1-1. Please stand by and wait for your name to be announced. One moment for our first question. It comes from the line of Alessandro Pozzi with Mediobanca. Please proceed.

Hi there. Thank you for taking my questions and congratulations on the good sets of results. My first question is on the average selling price. As you pointed out, there are different categories. We are seeing different movement in prices. And if I look at your average selling price in Q3, it's not that different from Q4 in 2022, marginally down, but not as much as the pipe logic. So the question here is, is there a growing disconnect between your ASP and the pipe logic, or is it just a matter of the time lag between the two? And we will see your ASP actually falling in line with the pipe logics maybe in the coming quarters. And on this point, maybe if you can give us some color on where you see sales going in Q4 and Q1 with the EBITDA margin. That's the first question. The second question is on the share buyback. Maybe if you can clarify when you're planning to start the share buyback and whether maybe Techint is going to participate or when we will know whether Techint is going to participate. Thank you.

Thank you, Alessandro. As far as your first question, concern you know they did the association and between the pipe logic indicator and our overall price is influenced by many different factors on one side the majority of our prices are driven by different factor compared to the Pycologic, some of the formulas are taking into consideration cost or different variable independent from the Pycologic. Even within the US and North America that is more influenced by Pycologic, the formula we have with our client are reflecting specific product within the pipe logic portfolio that in some cases are not moving in the same direction as the average of pipe logic. There are differences between, for instance, premium or complex product and more simple product. So I don't think we can drive a strict correlation between the pipeline and the overall average price of Tenaris. Yes, we have a more strict correlation with our operation in North America. But North America is very important in our overall sales, so I will ask Luca Zanotti to add some color on this relation between the pipe logic index and the dynamics of our price.

Yes. Thank you, Paolo. Good morning, Alessandro. As Paolo was saying, when we look at the North America and we look how the demand is structured, you see that always more and more we have a predominance of seamless heat treated. If you look at, for example, a key component of the demand, which is the production casing, which is more or less 40-45% of the total market. The great majority of this is seamless. When we cope this with the structure of the pipe logics and the price, you see that these items are the ones that suffer less of the decrease within the pipe logics. So, for you to come up with a conclusion, you should put together the structure of the market and the way the different items are moving within the pipe logics. And this is one point that is worth mentioning. The second point that is worth mentioning is that when you look at the United States, our formula with our customers are not necessarily 100% related to the pipe logics. We have our indicators, and obviously these indicators in this context are much less volatile than the pipe logics itself. I believe that these are the two main reasons why you see a sort of not perfect match between our prices, even in the United States, when you look at the pipe logics.

Then, Gabriel, you can comment on the wide range of prices. and the dynamic that is very different that we have in many other markets of our system.

Yes, Paolo, thank you very much, and good morning, Alessandro. Indeed, the dynamics of the prices in the international markets differ from the dynamics of the pipe logics. Internationally, we are benefiting from an increased demand on Middle East and offshore markets, and we have at the same time a tight supply of premium products, sophisticated grades, our service or high chromium grades as well so these segments are not linked or influenced by no means by the pipe logics the products required the competitive environment completely differs from that influence by by logics so in international markets we continue to see in the high end of the market opportunities to enrich our mix and drive prices up there is a typically a lag of six months to nine months in this part of the world from booking prices and into deliveries. But we see a positive trajectory on the international pricing into the end of this year and into 2024.

Thank you, Gabriel. And on the second question, which is the share buyback, the share buyback will be executed in quarterly tranche from now until within one year. And we didn't receive any specific information on this from our majority shareholders.

Okay, thank you. And just to follow up on the evolution of margins for the next couple of quarters, is there any additional color that you can provide?

Well, you know, to the extent to which the pipe logic is influencing, at least as Luca was explaining, part of our sale in North America and in some cases also other markets, we will see this reflected in our margin with some delay. So the decline that you have seen in this quarter will also be reflected in the next and possibly According to the evolution of pipe logic in the coming months, November and December, we will see if this trend will continue or not. To this extent, this will be reflected in our margin. As you have seen, last quarter we anticipated the margin in the range of 30%. This is where we are today. Considering all the factors, I think that we can have slightly lower margin in next quarter, but we will remain, let's say, between 25% and 30% over time. This is also our long-term view.

Okay. And potentially picking up from Q2, pipe logic stabilizes. Is that fair?

Difficult to predict. There are many factors that will be influencing demand and supply in, let's say, during the first half of 2024. There is activity that is important, the level of drilling, the demand of pipe, the level of import is also relevant. Import went down, but we have to see if this is a trend that will continue. In general, we perceive a reduction in the level of inventory in the market, which is positive for giving support to the overall price level in the U.S.

Thank you very much for the call. I'll turn it back. Thank you. Thank you. One moment for our next question, please. And it comes from the line of Arun Jayaram with JP Morgan Securities.

Yeah, good morning. My first question is on the US, perhaps for Luca. I was wondering if you could comment on what you're seeing in terms of the import of products into the US. How is lower pricing impacting imports into the US?

Thank you, everyone. Luca, you can comment on this.

Yes, and I can tie back to what, Paolo, you were saying on the inventory. So when you look at the imports, we have seen imports to go down. And this is... Basically, with the exception of Koreans that are complying with their quota quarterly, all the importers have come down, both ERW and seamless. Now, one thing that was not mentioned before, but it is important, is that also the domestic production, especially on the ERW side, came down, which helped reducing the inventory on the ground during this month. But getting back to your point, obviously, as price goes down, some importers will start to face the 25% imposed on the Section 232, especially as they complete their quota. And in the case in which we're going to see a recovery in demand starting 2024, obviously this is going to have an impact on the possibility of some very low imports to come in. However, we believe that the imports are high and So this is a problem that the domestic industry is going to take care of.

Okay. And just a quick follow-up is, what about the potential, if the imports are declining into the U.S., could that impact international pricing if the imports find a new home?

Well, I don't think there is a clear overlapping between the material that some companies are importing in the States and the international market. For instance, the space for welded products outside the United States is very limited. The international demand is different. There could be some redirection of import, but it is a much lower scale to what is imported in the States because of the overlapping. Also, this is a market in which qualification, establishing the product in every different place in the different companies is a complex process. In the U.S., it is easier for a producer with relatively limited experience and track record to penetrate some segment of the low-end in the market.

Great. And, Paolo, I just want to get a quick thought on the Argentinian election. Obviously, there's a candidate who is proposing dollarizing Argentina, but just some quick thoughts. I know we still don't know the outcome yet.

We are in an election process. There will be a ballotage on November 19. Whoever wins the ballotage will assume the presidency on December 10. I think that whatever the outcome of the ballotage, there will be the need in Argentina for an adjustment program that will require reduction of public spending, devaluation, and it's possible that economic activity may be reduced to, let's say, align some of the variables that today are out of the normal situation for a country like Argentina. So we will see. There is no clear indication on the results of the ballotage, and there is no clear indication on the program that will be implemented after the assumption. Okay, thank you.

Thank you.

One moment for our next question, please. Comes from the line of Mark Bianchi with TD Cowen.

I thank you. Maybe following up to the last question, you had previously discussed some concern on South America in the back half of the year because of election uncertainty. Could you talk about how that's evolved? Obviously, there may be still some uncertainty for Argentina, but the rest of the region and thoughts heading into 24 would be helpful.

Well, I mentioned Argentina. As I say, we expected that after the assumption, Argentina will need to implement, as I was saying, an adjustment program that will have some impact on, as I say, the exchange rate, public spending, no doubt. To some extent, we may expect a reduction of the level of economic activity, but any government will need to promote export and attraction of investment. Argentina has a very important potential for attractive investment in the oil and gas sector, in the agricultural sector, in lithium, in development of lithium, in development of renewable, and in other area of its economy. I think this will be part of the program of any of the two candidates, and also the condition of the agricultural sector in 2023 has been extremely difficult due to the drought that affected the country. This will help the next government in facing the challenges of the adjustment process. So this is where we stand, and I think that in the case that the program is successful, the need to develop infrastructure in the energy sector for oil and gas is very relevant. We think that potential in Paca Muerta is very important. As far as Brazil is concerned, Brazil is stable, developing its oil and gas industry. Petrobras has a very ambitious target for increasing its production level. Contracts like the one that we signed with Equinor are indicating that also the private sector and private company are investing in Brazil with large projects that has relevant infrastructure content, areas in which we participate from CONFAB in all the segment of drilling and conduct evacuation line pipes that are used for this. In the case of Mexico, also in the case of Mexico, it will be logical for Mexico to, after the new refinery is coming on stream to invest in the energy sector and to support financially Pemex. And also to what we see today is that there are private company investing in development of Mexican resources. But it's also true that this is financial situation of Pemex is very difficult. And we as other companies in the oil service system in this moment are facing some delay in payment from Pemex. It will be very important over the coming months, let's say for Pemex at the same time, to expand this operation if possible, and also to reduce the payable to part of the supplier. One of the system areas. The case of the rest of Latin America, in Colombia after the election, We expect that some of the decision in the oil and gas sector may be reconsidered, and I feel there could be also in the case of Colombia during 2024 and 2025, let's say, some recovery from the situation where we are today after the reduction during 2023 that has been pretty strong, either stable or improving.

Thank you for that, Paolo. I want to ask a couple more quick ones on sort of the direction of business over the next couple of quarters. Volumes were down 17% in third quarter. It sounds like you're anticipating volumes to improve in the fourth quarter. I'm curious if you think a million tons a quarter is sort of the right number to be thinking about for fourth quarter and entering 2024, and then if there's any regional comments around that.

Yeah, you're right. I mean, this is what we expect. The situation in Argentina may influence some of the decisions on the pipeline, moving this in time between the different quarters. But basically, we are in the range that you mentioned. This is what we expect in the coming quarter.

Okay, great. And then the other one was just related to profit per ton, you know, the guidance of 25 to 30% or so for the fourth quarter would suggest you're maybe over $800 a ton of EBITDA. The long-term average has been around 500 and there's, you know, another company out there saying the normalized price or average margin is 500. Do you think you can maintain this 800 and why do you think it would be better than the long-term average?

Well, I think that there has been a structural change both on the side of the market and on the positioning of Tenaris in this market. Today, I think the relevance of the the activity and investment in the U.S. is much more accessible for Tenaris. We have deployed our asset in the last five years especially, but even we started with our investment in the States in 2007 on a substantial way. And this is positioning Tenaris very differently in a very important area oil and gas market. So we are, in this sense, structurally different. We are also structurally different because of the expansion of the differentiated product and services. The RIG Direct is giving us additional margin, in my view, and in my view we can defend the differentiation coming from the RIG Direct and the level of service that we are adding to our product delivery. This was not the situation five years ago. We progress over time. Also, our positioning in the Gulf, in the Middle East, is substantially different today with the investment in Saudi Arabia, the new plant in the Emirates. Let's say the positioning of Tenaris has changed. So the combination of the change in the market because you know the concentration will also help concentration of oil producer and the international oil company to some extent is favoring producer like Tenaris that has an established global footprint and There are, let's say, having standards from quality to safety to environment that fit with the demand of international companies. Also, this has introduced, in my view, a structural change that justifies a level of margin higher than the level of margin that is the average of the last 10 years.

Thank you very much.

Thank you. One moment for our next question, please. All right, and it comes from the line of Luke Lemoine with Piper Sandler.

Good morning. Just one question. With your RIC Direct program in the U.S., you have pretty good insight into some of the larger operators' programs. Just wanted to see if you could comment on how you see future activity unfolding over the next three to six months.

Thank you, Luca. I think, Luca, you can... Yes, sure.

As I was saying before, we see activity increasing from the current levels. And when we look at, let's say, a large portion of either our direct customers or customers prospects or that we are in a relationship, we see this going up. And our, let's say, estimation of this activity increase is very much in line with what the drillers that already hold our, sorry, their earnings goal have said. We see activity moving up 5%, 6% from current levels.

into first world over 2024 this is what what we're seeing okay that's perfect thanks so much thank you and as a reminder to ask a question simply press star 1 1 on your telephone one moment for our last question please it comes from the line of david anderson with barclays

Hi, good morning. So if we assume that the U.S. rig count bottoms here in the next month or so, can you talk about how you see volumes trending over the next 12 months? Middle East continues to ramp up, as you highlighted, Saudi and UAE. Offshore should be close to speed by mid-year. I would think volumes in the second half of 24 should be quite a bit compared to the second half of this year, perhaps even up double digits. Am I thinking about kind of that trajectory, right, in terms of how you're seeing the market developing for volumes?

Thank you David. I think it is difficult to guide expectations for such a long distant future because the world is moving fast on different aspects. There are conflicts around and there are issues that are really out of our control. We can perceive and we can see our horizon the next couple of quarter, that is the one that we try to represent. It's difficult to understand for us where we could be in the second part of 2024. Probably the area on which we can have a medium term is the area of offshore projects that are, let's say, possibly more stable over time. Once they are decided, they go. Gabriel, maybe in this sense you can add some comment on what you see for the second part or medium term, let's say, 2024.

Sure, Paolo. Good morning, David. Indeed, offshore drilling continues to increase. The number of rigs that we have operating today globally in the offshore are even increasing the pre-pandemic levels, both in shallow water and deep water. So every discussion that we have with our customers, FID projections, CAPE projections, indicate that this is a multi-year cycle. The activity is robust and will continue to grow. There is traction virtually in all offshore basins around the world. And as a matter of fact, Denali has already benefited from this growing trend. If you consider, as we are closing November and December shipments, our sales revenues in 2023 will be at least 50 percent higher year on year at 2022 so this is already a trend that is embedded in our sales in 2023 and we see this continuously increasing we have seen during the the quarter also some signs of increased activity in the exploration this is an important niche for us and we had some awards on exploration campaigns in egypt in angola offshore Colombia as well. So we have a strong backlog in offshore, mainly on the development, OCDG and pipeline. With deliveries into 2024 and some of these projects will even arrive to deliveries into 2025, we see this as the early part of a multi-year cycle. And I think our acquisition of the coating facility in Italy and the announcement of the shock or voting division is a sign of our confidence on this segment where we already have a differentiated portfolio and have an established position. So we see that this will be an ongoing contribution within the portfolio.

Thank you, Gabriel. Still, let me add, we have some caveats. The situation in the world is exposed to very different issues that could come out. Disruption, I would say, that would come out. You know, the price of LNG globally continues to be influenced by the situation in Europe. The price of oil may be influenced also by the situation in the Middle East. Our operation also, for instance, in the Eastern Mediterranean Sun Oil Project has been cancelled. In general, also in Latin America, in Mexico, now in Argentina. So, the overall view is the one that we expressed, but we need to take into consideration the potential for disruption that is for sure something that exists in 2024.

Very much understood, Paolo. One final question as it relates to the buyback that you announced today. Is this targeting just the open float of shares, or will the closely held shares be participating in the buyback as well?

I don't know. I mean, we launched the program. having in mind the return that we can get from our cash by investing in the company compared to the investment we can get by managing the liquidity. This is a key factor for this decision. As I mentioned, we will have an intermediate bank to perform the acquisition in the coming four quarters, starting next week, probably. And we will see. I don't think we can add more on this.

Okay. Thank you very much, Paolo. Appreciate it.

Thank you. And we have time for one more question. One moment, please. And it comes from the line of Jamie Franklin with Jefferies.

Hi there. Thank you for taking my question. I was just wondering if you could give us any color on CAPEX plans for 2024 and 2025. Obviously, there's been the announcement of this second investment in a wind farm in Argentina, which is great to see. Beyond that, should we be expecting further bolts on M&A, and where specifically would you be looking? And what about the possibility of adding seamless capacity internationally? Is that an option? Thank you.

Thank you, Jamie. We will be spending in capex in the range of $350 million in the first semester of 2024. And we plan to spend a similar amount in the second half. So we're running at a pace of around $700 million in capex. We have among our investments, as you mentioned, in the wind farm in Argentina. The wind farm in Argentina, we completed the first one in line with our budget, more or less, with very small difference. We consider that this is an area in which is the first priority for decarbonizing Tenaris because we can do it in very effective condition and very competitive condition. We will continue with the development of the second wind farm. Then we have intervention in improving in Argentina, in improving our operation in the steel shop reducing also our energy consumption that goes in the same direction and add, let's say, improve operational conditions for our. We also have investment in our patient in Darwin and in the U.S. in our shopping corp. So these are basically the issues that are, let's say, receiving investment of, let's say, relevant size. Then we will have to, let's say, to consolidate the acquisition of SOCOR and see, once we receive the antitrust clearance, if this goes on, maybe that this will require, let's say, additional investment or consideration for this. that we cannot predict now. I think these are the main areas. We do not see, after the position of the Republic, specific target or areas for our M&A, but we, as always, are analyzing and considering our strategic positioning in every region of the world. Tenaris is a global player, is leader worldwide, and has to maintain, let's say, an exercise of strategic focus in all of the region in which we operate to understand how we can strengthen structurally our position. But for the time being, we have nothing so relevant to consider.

All right. Thank you.

Thank you. And ladies and gentlemen, this concludes the question and answer period. I would like to turn the call back to Giovanni Sardagna for his closing comments.

Thank you, Carmen, and thank you all for joining us on our quarterly call, and we'll see you soon. Thanks.

Thank you, ladies and gentlemen, for your participation, and you may now disconnect.