Tenaris S.A. (NYSE:TS) Q1 2024 Earnings Call Transcript

Tenaris S.A. (NYSE:TS) Q1 2024 Earnings Call Transcript April 26, 2024

Tenaris S.A.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to Q1 2024 Tenaris 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Giovanni Sardagna. Please go ahead.

Giovanni Sardagna: Thank you, Gigi, and welcome to Tenaris 2024 first 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 Móndolo, our Chief Financial Officer; Gabriel Podskubka, our Chief Operating Officer; and Luca Zanotti, our 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 first quarter sales reached $3.4 billion, down 17% year-on-year and flat sequentially, as an increasing volume and the full consolidation of the coating business acquired in the previous quarter offset the impact of lower selling prices in the Americas.

Average selling prices in our tubes operating segment decreased 15% compared to the corresponding quarter of 2023 and 6% sequentially. Our EBITDA for the quarter was up 1% sequentially to $987 million. Our EBITDA margin remained flat at around 29% as the reduction in average selling prices was offset by a strong operating performance, a positive contribution for our newly acquired coating business, and a $25 million gain from legal claim’s resolution in Mexico and Brazil. With operating cash flow of $887 million and capital expenditures of $172 million, our free cash flow for the quarter was $715 million. Following share buybacks of $311 million during the quarter, our net cash position increased to $3.9 billion, up from $3.4 billion at the end of last year.

Now, I will ask Paolo to say a few words before we move the call to question.

Paolo Rocca: Thank you, Giovanni, and good morning to all of you. We have had a good start to the year, maintaining our sales and EBITDA at the same level as in the fourth quarter of last year, despite the unfavorable pricing environment that is affecting our sales in the Americas. This reflect the strength of our global positioning as well as the solid performance across our business lines. In the coming quarters, however, our results will be affected by a soft U.S. rig count, affected by low natural gas prices, by an increase in the OCTG imports, and an extended decline in prices. Our free cash flow will remain solid. During the quarter, our newly acquired TenarisShawcor pipe coating operation, where we successfully completed an exceptionally large project with concrete weighted coating for a pipeline in Mexico, made positive contribution to our sales and EBITDA.

TenarisShawcor was also awarded a $108 million project to supply wet insulation and anti-corrosion coating, or the offshore pipeline for the ExxonMobil Whiptail development in Guyana. This project will be supplied during 2025. Around the world, offshore projects are moving forward, and with our extended reach, we are providing a wide range of integral solutions for this complex development. The Middle East is another area which has seen growing inactivity. In Saudi Arabia, we are benefiting from the increasing demand for their gas development program and the consolidation of our GPC large diameter welded pipe operation. In the United Arab Emirates, with our new premium threading facility in full operation, we have been awarded a 2-year extension of our Rig Direct contract.

By our long-term agreement with QatarEnergy LNG has also been extended for 3 years to cover the drilling in the northwest field to supply the latest expansion program. In Canada, we have been successfully repositioning our variation and extending our Rig Direct program following the Canadian government decision to impose normal value on Chinese OCTG imports and the investment we made in our Sault Ste. Marie mill. As the LNG Canada and other LNG projects move forward, operators are increasing their operation in the Montney shale, and we recently awarded a long-term Rig Direct contract to supply a major operator there. We participated in the several week conference last month, where we were able to serve you on the energy transition and the prospect of the oil and gas market over the long-term.

What came out from the discussion? With the sense that more pragmatic approach to the complexities of the transition is required. We should focus on reducing emission using all means available across the energy industry and its value chain. At the same time, due to the enormous cost and complexity of the transition, oil and gas will continue to be required for many years to support the growing demand for secure, affordable energy, particularly from developing countries and to support technological development such as artificial intelligence. This year, in the third quarter, when we have a seasonal slowdown in demand, we will implement a major investment and maintenance program that has been postponed over the last 2 years of intensive operation.

This really will involve stoppages in our five steel shops and our main seamless rolling mills. In Argentina, we will install an electric arc furnace that will be fed by a Consteel scrap reheating furnace by our DRI plant. Once we complete our second wind farm in 2025, the new furnace will use 100% renewable energy to produce steel with a minimal level of carbon emission. In the U.S., we will upgrade our Koppel steel shop, installing a new backhaul system to reduce missions. In several of our facilities, we are enhancing our capabilities to produce high alloy chrome products as demand for these high value products is growing. In Mexico, we will have the first major maintenance of our Tamsa medium diameter rolling mill in 4 years. In addition to a maintenance shutdown at overseas [ph] steel shop.

This investment will be executed within our previous CapEx guidance, but they will limit to some extent our capacity during the second half. We are now ready for any question you may have.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Arun Jayaram from J.P. Morgan Securities LLC.

Arun Jayaram: Good morning, Paolo and team. Gentlemen, I wanted to get your thoughts on trends in U.S. pricing. We received the latest Pipe Logix number, which did suggest continued declines in the 3%, 3.5% range. And so maybe I was wondering if you could give us a sense of your average selling price in 1Q trended where leading edge prices is per the Pipe Logix Index, and how does this impact your thoughts on 2Q in the back half of the year?

Paolo Rocca: Well, thank you, Arun, for your question. You are right in looking at the decline in the Pipe Logix is a relevant factor. This is mainly due to increased import in the United States. Some soft view on the recount and the volume, and this to some extent has been affecting. But I would ask Luca to give us the view on the perspective for the next quarter and for the second half of 2024.

Luca Zanotti: Okay. Yes, thank you, Paolo. Good morning, everyone. Yes, just picking up what Paolo was saying before. I believe that in this Q1 – first of all, looking at the spot price in one-single-month like April, it really is not representative. We see Pipe Logix rating that were better maybe in the past, and so I believe that we need a more long-term approach to these ratings. But getting back to what Paolo was saying, here in the first quarter, what we saw is an industry that was expecting a little bit higher activity getting into the first quarter, second quarter of 2024. And as a consequence, domestic and especially imports increased. So what happened is the distributors went out, started buying mainly from Korea that had the reset of quotas Taiwan, also in Thailand.

So the combination of a slightly softer expectations on demand and higher imports led to this pressure on prices. And this will delay the stabilization of the Pipe Logix. When it gets to our pricing you always have to remember that we have a one quarter delay between the Pipe Logix’s rating and the way it gets into our profit and loss. So you’re going to see this even going forward.

Arun Jayaram: Thank you, Luca. Great. And I wanted to see, Paolo, if you could comment on some of the maintenance activities that you plan for the second half. Could you help us think about what kind of impact this could have to volumes? I mean, we’ve generally been thinking that the company could ship 4 million tons of product this year, but give us a sense of what kind of impact that could happen in the second half?

Paolo Rocca: Well, as I mentioned in the opening remark, we’ve been working at full capacity for almost 2 years, and then we will take advantage of this slight reduction that we see in the rig count and in the demand for concentrating some key intervention on our industrial system, part of this is maintenance. But also we are focusing on some major investment from our point of view, which is the change in the furnace in Argentina and also investment in the other steel shop in the finishing line of our mill in different parts of the world. We think that we can take advantage of this time for changing our profile in terms of emission, increased automation, and productivity, and also cost reduction over time by this cycle of investment.

As I mentioned in the opening remark, this will be in line with our focus for CapEx in the age of $730 million during 2024, so there is no change with this. Our volume will be impacted only in seamless to some extent, but I would call it not something substantial but it will be impacted in our seamless component. So the welded will remain at the level of last year, the third quarter is seasonally below. Overall, the volume will not be very different from last year volume, but with a participation of welded higher than the participation we had of welded last year.

Arun Jayaram: Great. Thanks a lot.

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

Alessandro Pozzi: Good afternoon. Thank you for taking my questions. The first one is on the outlook for the rest of the year. In the Q4 conference call, you mentioned average EBITDA margin of 25% for the first half of 2024. And given that you have printed 29% in Q1, it looks like potentially you are going to have higher margins in Q2. But then, I was wondering given that you have the stoppages in Q3, what should we assume for EBITDA margins in the second half of the year, based on what you see, obviously, at the moment? And also, my second question is on the DUCs. So we’ve seen those DUCs halving since they’ve reached the peak. And I was wondering, is that going to be potentially a trigger for having a higher rig count at some point down the line this year?

Paolo Rocca: Well, thank you, Alessandro. What we expect is that our margin in the first half of 2024, as you are saying, will be slightly higher than we anticipated, because we had margins slightly higher. If you look at the adjusted EBITDA, it is in the range of 28 point or something. We think that in the second Q, we will have lower EBITDA than 25%. But as a whole, on average, we will be slightly higher than 25%. When we look at the second half of 2024, there is not so much visibility on price. But for what we are seeing in the evolution of the Pipe Logix, we should be prepared to an EBITDA margin between 20% and 25%. We don’t know, let’s say, yet how far the price reduction will go and also our reaction in terms of cost reduction that will accompany the pressure that we are feeling.

There are many pieces moving here. One of the important pieces is also Argentina recovery in its oil and gas sector. There are also, let’s say, some uncertainties about the evolution of the rig count. So when we speak about the second half of 2024, we are considering a range. It is very difficult to have, let’s say, a number for a semester in which we will have a different factor affecting our sale and our profitability.

Alessandro Pozzi: Yeah. So just in Q3, given the loss of volumes from seamless, should we assume EBITDA margins more towards the 20% just for that quarter in Q3?

Paolo Rocca: We will have, as I was saying, still the prices for the third Q are not being entirely defined yet. But if the reduction in the Pipe Logix is going on and imports maintain this level in the U.S., we will be slightly higher than what you are saying, but still close to the number you are saying. Now, talking about the DUC and the possible influence on drilling, I will ask Luca to give us a view of the possible impact of this.