Tenaris S.A.

Good day and thank you for standing by. Welcome to Quarter 2, 2024 Tenatis Essay 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Giovanni Sardagna. Please go ahead.

Thank you, Gigi, and welcome to Tenaris 2024 Second 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 Podkurka, our Chief Operating Officer, and Luca Zanotti, President of our U.S. operations. I would like to start by mentioning that we will host an investor presentation in London on September 24, and we hope to see many of you there. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our quarterly results. Our second quarter sales reached 3.3 billion, down 18% year-on-year and 3% sequentially, mainly due to slightly lower volumes and average selling prices during the quarter. Average selling prices in our tubes operating segment decreased 17% compared to the corresponding quarter of last year. and 1% sequentially as lower prices have been greatly offset by favorable sales mix. Our ABDA for the quarter was down 34% sequentially to 650 million due to lower selling prices and an extraordinary provision recorder for an ongoing litigation related to the acquisition of a participation in Usiminas in 2012. Our ABDA margin for the quarter was close to 20%. Without this extraordinary provision, our EBITDA would have been $821 million and our EBITDA margin would have been 25%. With operating cash flow of $935 million and capital expenditure of $161 million, our free cash flow for the quarter was $774 million. After a dividend payment of $459 million in May and share buybacks of $492 million, our net cash position amounted to $3.8 billion at the end of the quarter. 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. During the first two quarters, our sales have remained remarkably resilient, considering a market environment in which drilling activity has reduced, and OCTG prices have been falling in the United States. This reflected the differential market positioning we have built up in North America with our rig direct service model, as well as in offshore projects around the world. The particularly high level of shipment we have been making in the Middle East and the contribution for our newly acquired Tenaris shock core coating business. I would also like to highlight our strong free cash flow of 774 million during the second quarter. when we were able to achieve a 285 million reduction in working capital. Thus, we were able to maintain our excellent net cash position of 3.8 billion, while we distributed 950 million to our shareholders. Indutrious spending on offshore projects, particularly in complex deepwater operations, has increased since 2023 and is set to increase further in the year ahead. For this project, we are a preferred supplier for the majors with a fully integrated offer of pipes and services. This includes large diameter conductor and surface casing with connectors, intermediate and production casing, tubing and accessories, stainless, high chrome alloy steels, dopless connection tested for use, in the new extreme application required by the Gulf of Mexico development. We are also supplying the 3D mapping services for high-collapse application, as well as offshore line pipe delivered with a full range of Tenere shock core coatings and advanced project management services. This quarter, we renewed our long-term contract for shale operation in the Gulf of Mexico, and have been selected by ExxonMobil for their upcoming operation in Angola. We were also awarded the supply of casing and offshore line pipe and coatings by Woodside for the Trion project in Mexico. In the second half, we will begin deliveries of coated line pipe for Equinor Raya project in Brazil. And we have an extensive backlog of order for offshore project going into 2025. Today, however, as we look toward the second half, we see that our sale will be lower than the sale in the first semester, affected mainly by three factors. In the United States, a record level of oil and gas production are being sustained even as drilling activity has decreased and reduced the overall demand for pipe. At the same time, OCTG imports. particularly from Asian countries, remain high, accounting for 40% of demand, which compares with 20% for other steel products, always in the USA. This level of import is affecting pipe prices and is causing damage to the domestic industry. In the Middle East, activity and consumption from the region remain at a good level, but in the main countries, we see a stocking trend beyond our original expectation. This, combined with the completion of deliveries for the NFE offshore pipeline in Qatar, will affect our sales in the region in the second half. The change in the government in Mexico and the uncertainty surrounding the policy for the energy sector are limiting drilling investment in the country. In Argentina, The necessary stabilization of the macroeconomic environment is delaying investment in drilling and the development of infrastructure in Vaca Muerte. This factor will affect our sales and result in the second half, when we expect that our sales volume will be 10 to 15% below those of the first half. And there will be further adjustment to our prices in the Americas, reflecting market conditions. This quarter, as anticipated, we are carrying out important investment and maintenance stoppages in many areas of our industrial system, aimed at recovering full operational capacity, improving efficiency, and reducing our carbon footprint. This investment includes a major overhaul of our medium diameter rolling mill in Mexico, the installation of a new electric arc furnace in our Argentine steel shop, the revamping of our copper steel shop in the United States to increase capacity and reduce environmental impact, and the finishing line of our Italian mill. We are also starting the construction of our second wind farm in Argentina, which will have a capacity for 92 megawatts and will allow us to supply 100% of the need of Argentina from renewable resources. The level of demand is requiring an adjustment in our industrial operation, concentration of production in the more efficient facilities, and the reduction of logistics and operational costs. Looking further ahead, we expect that all the regions in which we have a strong competitive position will drive an increase in our activity over time. Our global reach, competitive products, and service differentiation and unique portfolio of long-term agreements with established customer, position us favorably for serving the growing demand of energy across the world. I will leave now to any question you may have.

Thank you. Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mark Bianchi from TD Cowan.

Hi, thank you. I was hoping you could talk a little bit more about the progression of margin in the back half here. So now we've got volume i heard you down 10 to 15 in the back half with some weaker pricing um maybe maybe you could talk about the margin progression but perhaps first um before you say that or along with that talk to us about your expectation for the progression of pipe logics from here just so we can understand the context thank you mark as i mentioned in the in the remark

a in the last conference we're expecting the paper logic to destabilize in some moment but the level of import has been relatively higher to what was our expectation and so the paper logic is a register a minus three percent that appear yesterday on comparable set of data, and we expect that it will continue to maybe remain stabilized, but probably after one month more in which there could be some further reduction. We think it should stabilize, and also we think that the import to some extent should recede, as I mentioned in the opening remark. It is an important variable. Maybe, Luca, you may add, which is your perception of pricing in the U.S. market that is important also for other regions, for us, because it's part of the formula that we have in some of the countries, especially in the Americas.

Yes, thank you. Hi, Mark. I will go back to what I said or what we said already in the last earnings call. And here, Mark, the problem is the following. The industry, the OCTG industry, was somewhat tricked by some expectation of increased activity at the beginning of 2024. And for this reason, distributors placed an impulse order that has been flowing in during... the first quarter and the second quarter of 2024. Now, as we all know, this expectation of increased demand did not materialize, and so these imports ended up remaining in the inventory. Now, imports are expected to go down. Actually, they already went down a bit in the second quarter, and we expect these to go down. to some trade enforcement action that we've been able to successfully implement as a domestic industry. And to a certain extent, even Section 232, with the decrease in prices, we start to buy it. Also, we do expect a reduction in the domestic side of the supply. And so, as Paolo was to conclude, as Paolo was mentioning before, the adjustment is going to take a little bit more than what originally expected, but we see no reason why this should not happen going forward.

Thank you, Luca. The second question was about the margin. We were guiding the last conference call for our margin to be between 20 and 25. We ended up with this quarter close to the high part of this range. I think that in the second semester, we should be around the lower end of this range.

Thank you, Paolo. And may I just confirm, when you said the second half down 10% to 15%, was that a comment about volume or a comment about revenue?

No, it's a comment about volume. This is what we see today. We see volume going down for the reason that we mentioned in the prepared remark. And this is due to the factor that we mentioned basically. There is something that we also, just to recap briefly what we mentioned, the uncertainty in Mexico and in Argentina, just waiting for decision of the energy policy in Mexico and how Argentina could finance a development of our commerce that we frankly see as inevitable. So we are convinced that there is ample scope for expansion and for demand in Argentina, in LIMEPP, in OCTG. But the point is that the macroeconomic environment is postponing the moment in which this project could be reliably financed. So we are optimistic in this sense on the development, and it's an area in which we are very strong. But we need to register the fact that in this month, in the second semester, there will be not so much movement of this.

Yep. Makes sense. Thank you very much. I'll turn it back.

Thank you. One moment for our next question. Our next question comes from the line of Alessandro Pozzi from Mediobanca.

Good afternoon. Thank you for taking my questions. The first one is on the US market. You mentioned record level of production and yet drilling activities remains quite muted as a number of operators focus more on efficiencies and productivity. I was wondering, are we in a paradigm change where we are going to see even lower, let's say, drilling operations and for fewer rigs basically we could see even higher production and is that a concern for you for octg demand going forward in the u.s and one thing in u.s there has been a change as you mentioned in the pipe logics is the new basket more reflective better of your mixer and i was wondering if you can give us maybe your thoughts on how the basket has changed and whether it can capture better basically your average selling price That's the first question. The second question is on the share buyback. And the share buyback is going to terminate quite soon, maybe in the next few days or within weeks, certainly. Are we going to have a new share buyback, a new announcement with the November results? Because I believe there is still some room in the share buyback. The mandate is about 10% of the shares of spending, and potentially there could be another maybe 700 million to go before the next AGM or before the next EGM. Thank you.

Thank you, Alessandro. On the first one, on demand in the U.S., frankly, I don't think there are structural reasons that discourage investment. We mentioned last conference call the role that interest rate has clearly a reduction in the interest rate with support and financing of projects by the smaller company, and this could help. But the price of oil in the range of 75-80 is a good ground for investing in shale development. But it's also true that consolidation has led to some stop and reflection by some of the operators So probably the time we have now, the six months we have ahead with election in the United States, interest rates still relatively high compared to what we could expect in the long term. And consolidation on its way is maintaining level of drilling and activity at this point. It's clear that the efficiency and productivity of the wells realized is, let's say, gradually improving. So the production is at a very high level. But I think that the overall scenario is positive in this. There should be recovery in the line and also associated level of demand and recount over time. The problem here, as Luca was mentioning, is more on the side of the import. 40% of the market is a very high share of the market. And I think the issue here is how to contain the pressure on import on the domestic industry. Now, on the second point, Pipelogic, as I mentioned, we expect to continue to expect a stabilization of Pipelogic after, let's say, the impact also of this 3% on this month and the next one. But the mix has changed. Luca, you can give a comment on the change in the basket.

Yes. One point before we move into the basket specifics. I believe that this change of, even if the pipe logic readings is directionally correct, I believe that this change in basket may have introduced some, let's say, perturbations of the readings. So we need to see going forward. But to answer specifically to your question, yes, the change in basket is more reflective of one. The product range that is being sold in the United States in general, and specifically the ones that we are selling, in particular, one of the, let's say, major changes that PipeLogix introduced is the split between, in the semi-premium, let's say, space, where we differentiate between batteries like or batteries compatible connections and high torque connections like our wedge 400 series 441 461 which as you know are our best seller or have been our best seller over the last let's say many quarters so the answer is yes

i was asking because uh i mean if we look at the old one is down three percent and the new one gives a completely different picture uh up once a month so i'm not sure i mean is it going down or up based on what you see but based on your basket sorry can you repeat it because i'm not sure if we understood the question Yeah, because there is a big difference between the two indices. The old one is pointing to a meaningful decline, 3%, but the new one is, I think, a small up month to month. So the new one, are you saying, is more reflective of your business and therefore prices are starting to go up a little bit?

Yeah, I mean, in the end, what they did, they took out some items and they put in other items. And the items they took out were coming in at an absolute lower price than the one they put in. And so overall, you see this increase.

But responding to your question, I think that the new basket is probably more in line with our mix.

For sure.

so we should be able probably to have a lower reduction in our basket in our sales compare let's say to the original basket that is going down three percent we should be able to have a lower reduction in this this is uh let's say the the the analysis of the basket by the way it comes out yesterday i think we need to compare Remember, in some formula, we are not using the index as a whole, but we are using a specific part of the basket, adjusting to the need of the client. So there are different formulas, internationally or locally, and I would say that the impact is different in different clients, because the clients are selecting indicators that best reflect their demands. Another point you made on the share buyback. We are still doing buyback of the last branch of the program that we launched last year. And we will continue to complete this program. And then I think it's up to the board in November to decide what to do and how to take into consideration the environment, the situation and everything, how to proceed or not on this. I will leave this to the decision for the next board. The next board have the ability to continue using the delegation from the General Assembly or having extraordinary assembly to deliver further expansion of the program. I mean, there are no limitations in this, but the point is they will evaluate circumstances for the decision.

Very clear. Thank you very much.

Thank you. One moment for our next question. Our next question comes from the line of Arun Jaram from JPMorgan Securities, LLC.

Yeah, good morning. You know, Paola, I was wondering if you could elaborate on some of the destocking trends that you mentioned, you know, in the Middle East. And then, you know, as you think about reducing your prior expectations for second half volumes, Do you see this more as just lower demand or do you expect some of this, you know, volume perhaps in Argentina and Mexico to shift into 2025?

Thank you, Arun. Well, on the second point, as I told you before, I'm very confident that Argentina has relevant plans for developing Vaca Muerta by different operators. And there will be activity in the infrastructure and drilling. And so in gas, you have seen there are announcements of the decision taken in the new LNG plant. It will take time to formalize finance gets all the clearance for the project. But this will go on over time, and then also the export of oil will go on. So I'm very positive on the medium term, but it's a new government, six months in charge, seven months in charge, difficult situation to put under control from the point of view of inflation and fiscal equilibrium. So, Argentina will recover credibility and access to the market, but it will take a little more time. We were all probably over-optimistic in thinking that this could be done in the shorter term, but it will happen. In the case of Mexico, changing government, Implied changes also in the Secretary of Energy and the appointment in the key energy company, Pemex and CFE, has not been done yet. So it's more difficult to understand which is the policy of the new government and Claudia Sheinbaum looking in the future. Pemex needs action by the government in refinancing part of this debt but it's clear that Mexico needs energy. This last month, we had shortages of electric power, we had disruption, and it's clear that there is need of investment. So I'm also positive, but the assumption the new government will assume in October, something of this that we were expecting maybe in the second half will materialize later on. There will be, let's say, any policy action will have impact later. So we are positive on this, but we expect the postponement of some of the demand. As far as the Middle East in all its aspects is concerned, I would ask Gabriel to give an overview of how we see the situation and the demand in these six months.

Good morning, Arun. Regarding the Middle East, as Paolo anticipated in the opening remarks, the drilling activity remains strong with the NOC operating at a high level. For example, Saberamco, still at the 300 rigs, increasing on the unconventional, reducing on the offshore oil, keeping that level. UAE as well, operating at healthy levels of 120 rigs. So I would say that we see stability in the consumption of OCDG in the region in the main operators. At the same time, we see some of these NOCs in the region rebalancing their inventories and entering into a destocking mode in the next semester. Okay, so this is something that is important to mention and will affect our shipments in the second half of the year. In addition to that, we have the completion of the delivery of the NFE pipeline in Qatar. There are some other large projects in the region that are still not defined that we will see more into 2025, so this will also affect second half comparison versus first half so overall there's going to be a reduction still at high level of shipment in the second half of the region in the Middle East in the second half but lower than the record shipments that we had in the first half of the year great just my follow-up is on the buyback you know Paolo the company at the end of the quarter had you know 3.8 billion of net cash

I assume you don't want to turn Tenaris into a bank, but just some thoughts on capital allocation or what you think is the most prudent use of excess cash on the balance sheet.

Well, you know, on this last year, we open the door for a share buyback that is combined with our dividend policy at the same time we are looking for potential opportunity for investing the capital with high return in our business if we don't identify opportunity within our sector that has potential impact, well, it will be up to the shareholder and to the board to decide what to do. In the meantime, we manage prudently our cash. We are not a bank, but we try to protect the best we can the liquidity and to have a return on it that you can see in our financial statement. Great. Thanks a lot.

Thank you. One moment for our next question. Our next question comes from the line of Christopher Copeland from Bank of America.

Yeah, thank you very much. A lot of my questions have been answered, but maybe I can try again and ask you what you're hoping to present that'll be new in September without obviously expecting you to tell us the details and the content. But I'm intrigued by the timing. Do you expect to be through maintenance by then? Do you expect that we will have a better outlook on pricing progression in the US by then? Or do you expect to have more visibility on exactly what you've just highlighted, opportunities for M&A or not, i.e., in other words, the capacity to deploy your balance sheet for future buybacks, et cetera? And if I can sneak in one more on the litigation provision that you've taken, what kind of timelines are you attaching to that if we're looking for a resolution anytime soon? Thank you.

Thank you, Christopher. Well, I think it passed some time since the last time we did an investor day. The company has changed in its perimeter. There are new regions and new businesses. The profile of the company has changed and also our market and our competitive environment has changed. I think it would be useful to meet with our world of investors and to present where we are and where we see the key market in which we have a very relevant presence. Also, our industrial profile is changing because we are introducing technological change We are modifying this and we think that we will be prepared to increase efficiency and productivity and to reposition also our industrial structure from the point of view of decarbonization and environmental footprint. I think it will be important after some years in which we didn't have this opportunity to have an overview of where we are and also on the point that you mentioned, how is our capital allocation and what we see in the medium run as, let's say, the path that the company could follow, including the aspect concerning capital allocation. This is the first point. On the second point, the case that we have, in Brazil and in which we are registering a provision. Let me tell you that we have been required to make a provision as a result of this adverse decision by the Superior Court of Justice in Brazil in a litigation against CSN for the acquisition 12 years ago of Ximena. Let me tell you that I believe that such a decision is really contrary to the applicable substantive and procedural law. We cannot comment so much on it. This is not something that will end very quickly. We expect there will be additional space for litigation and we will pursue this as much as we can in all the areas. We plan to defend our position because, remember, this is a position that has been conferred in long line of decision by the administrative authority and also by all the level of court decision before. So we will file all the motion and appeals that are available to us. This motion and appeal will need to be resolved before the case becomes final. and there will be also included the determination of the actual payout amount if any that should be made this should be made by a lower court in a separate proceeding so it will take time to get the definition on this and we are we will do all we can to defend our position and establish let's say, our right to operate as we operate in 2012. Great.

I appreciate that. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Luigi Develis from Equita SIM.

Hi, good morning. Just three questions for me. The first one is on the cost. You mentioned that you are acting to reduce costs. Can you elaborate on the size of the cost reduction expected and when do you expect the rate impact of this action? The second question on working capital, so excellent reduction in second quarter. How do you expect this to evolve during the second half of the year? And the last question on the outlook. So can you elaborate on the exit speed in Q4 in terms of sales and profitability? And if you expect a better quarter entering 2025, if you have visibility on this, consider it's also the end of the stocking in Middle East, your visibility on U.S. redirect clients. Thank you.

Thank you, Luigi. This is on the first point. As we mentioned in our press release and in our open remark, we see this lower volume in the second semester and we take advantage of this situation for doing all the extraordinary maintenance and investment using this time also to address some of the extraordinary maintenance work that we are that are needed in because we were working at almost full capacity for a long period of time during this we will expand the level of automation renew the process and the technology in some of the core area of our business we have been successful also in this in this in the last year and the previous year in developing the full potential of our strong facility so facility like bay city today are operating at record level so we have efficient facility core facility they are operating even above the level that we were originally planned. So we need to restructure, reorganize also this closing or reducing operation in some of the facilities, in particularly the United States, but not only the United States. This will allow us to reduce our overall cost. At the same time, We think we can address some specific issue in which we can reduce cost. We have a plan of action for this. We think we can reach savings in the range of $200 million per year over, let's say, that could materialize between now and June 2025. This is a broad number. There are issues like devaluation or change in appreciation of the exchange rate that are relevant for our labor costs all around the world. Some of this is unpredictable. Something is something that is more under our control. As a whole, this adjustment plan is justified by the slowdown that we have seen in the sales in the second semester of the year. But we will not affect our capability to enter in 2025 and respond to, let's say, the opportunity that I mentioned that we see going on. The second point, this was related to the U.S. No, working capital exclusively all over the working capital. Well, working capital has been giving us a positive contribution to our cash flow in the second Q, extraordinary positive contribution. We'll continue to support our cash flow in the coming quarter. because we are reducing our inventory. We have good progress in our collection. So we expect this to continue to contribute, but probably not in the same volume and same amount as in the second Q. The third question is what we see and the visibility that we have in 2000 and for the next year. I think that at this point in time, we really do not have full visibility of this. The different regions, I mentioned Latin America, and as I tell you, I am positive on it. As far as U.S., over time, elections are important in the U.S., but maybe Luca, you can add something. Yes, Paolo. To the extent to which you think we have visibility.

Morning, Luigi. Obviously, election and the result of election are going to be a factor together with a cost of capital. And so there are a number of variables that are obviously beyond our control. And depending on the combination of these variables play out, we might see a different scenario in terms of overall activity. Now, when we get to our sales, probably the point that is worth mentioning is that there are still two big, let's say, consolidation that have not been yet cleared by the antitrust, being Diamondback with Endeavor and ConocoPhillips with Marathon. And obviously, should this transaction go through, as we all expect, This would be an important upside on our sales, being Diamondback and Conoco two very important customers within our portfolio.

For the Middle East and let's say the rest of the market, including the offshore, Gabriel, We know that there is not so much visibility, but still. Yeah, thank you, Pablo.

Yeah, Luigi, in terms of the international markets, including the Middle East and the offshore in general, the outlook is quite positive. The fundamentals are there. The NOCs in the Middle East continue to invest. There are infrastructure projects as well going on. And in the offshore space, the level of FIDs that have been announced are in the pipeline. We expect that that will sustain a multi-year cycle of a high level of complex. But as Paolo said, we have partial visibility into 2025. We already have some contracts that go into 2025, but this does not pertain to all segments and countries and regions involved. So overall, I would say positive outlook in the midterm, but this is a bit far down the timeline. Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the conference back over to Giovanni Sardagna for closing remarks.

Thank you, Gigi, and thank you all for joining us, and we hope to see you in London at the end of next month.

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