Tenaris SA (TS) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 Tenaris S.A. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host, Mr. Giovanni Sardagna, Investor Relations and Director of Tenaris. Sir, the podium is yours.

Thank you, Bryan, and welcome to Tenaris' 2017 Third Quarter 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 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; Guillermo Vogel, Vice President of Finance and member of our Board of Directors; Edgardo Carlos, our Chief Financial Officer; Germán Curá, Managing Director of our North American operations; Gabriel Podskubka, our Managing Director of our Eastern Hemisphere operation.

Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our quarterly results.

Our third quarter sales at $1.3 billion were up 32% compared to last year and 5% sequentially, mainly reflecting higher sales in the Americas due to the seasonal recovery in Canada, improved product mix and pricing in the U.S.A., and higher sales to private operators in Argentina, partially offset by lower sales in the Middle East and Africa and seasonal factors affecting sales in Europe.

Our quarterly EBITDA margin at 17% improved due to lower general and administrative expenses and the recovery in margins in our non-tubular businesses. Average selling prices were down 1% compared to the corresponding quarter of last year but up 1% sequentially as we should have reached the bottom in average selling prices.

During the quarter, cash flow used in operations were $2 million mainly due to the increase in working capital of $216 million. Our net cash position at the end of the quarter declined to $974 million after capital expenditure of $143 million during the quarter.

The Board of Directors approved the payment of an interim dividend of $0.13 per share or $0.26 per ADR to be paid November 22.

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. Two weeks ago, on October 18th, the first pipe was pierced, rolled and passed through the cooling bed in our Bay City mill. It was a flawless performance, and we are very proud of what we have achieved in constructing this new mill. In spite of the severe industry downturn, the mill was completed on schedule and budget after 10 million man hours. Today, up to now, we had only 3 lost time accident on this 10 million man hours. This is an extraordinary result from our point of view.

This is a pivotal moment for Tenaris as we start up our first seamless pipe mill at the heart of the world's largest and most dynamic market. The mill incorporates advanced technology and many innovations in its design and material flow, which makes it like none other in the Tenaris industrial system or the rest of the world. It will be the most productive and environmentally efficient mill built so far, and cost competitive with any of our mills. We will hold the inauguration ceremony on the 11th of December.

And we discussed in our recent Investor Day event the mill will make our Rig Direct service for shale customers in the U.S. even more efficient and responsive to their needs. We are focused on integrating product technology, digital tracking system, supply chain efficiency and technical support to optimize the use of casing and tubing in shale drilling operations.

Even as overall drilling activity has flattened, the number of Rig Direct customers in U.S. and Canada continues to rise. To support this continuing expansion, we acquired a 100-acre service center in Oklahoma in September and opened our new 80-acre center in Grand Prairie in Canada. Around the world, we are now serving around 300 rigs.

During the quarter, many of our employees were profoundly affected by the catastrophic effects of Hurricane Harvey and two earthquakes in Mexico. Also, there was no major impact on our operations. I was deeply impressed by how our employees in Houston and Bay City responded in very difficult personal circumstances and by the solidarity of our Mexican employees for the victims of the earthquakes. Our people are what makes Tenaris the company that it is and their response to the devastating events showed their commitment and compassion in the most trying times.

Since our last call, oil price has strengthened and the outlook for drilling activity in North America has become more stable. U.S. OTCG imports remained high during the quarter, but there are signs that this trend may be reversing as exports from Korea start to decline. The perception is growing that the U.S. administration will eventually introduce further measures to support the U.S. steel industry and address the trade imbalance in steel products including pipes.

In recent days, the U.S. Department of Commerce has made its preliminary determination regarding the Korea OCTG imports under the second review period extending from September 2015 to August 2016. In this determination, it has increased the antidumping duty levels well above those finally applied for the first review period. We continue to maintain that it will be difficult for the Korean producers to maintain their current level of imports, especially as the price of hot-rolled coils has increased strongly in Asia.

Outside of North America, the main drivers for our results in the coming quarters will be the shipments for our East Mediterranean pipelines and the solid drilling activity in the Middle East and the pick up in drilling and pipeline activity in Argentina associated with the investments in Vaca Muerta.

The results of Argentina's recent mid-term elections were highly significant in the historical context and have provided a positive boost to the investment climate in Argentina. They should hasten further investments in Vaca Muerta.

We are seeing a gradual increase in FIDs for offshore projects. Also, the market remains subdued. We have consistently achieved a successful positioning in the most important of these new projects. For the Liza project in Guyana, we were awarded the main casing contract with Exxon Mobil, appreciating the strength of our Rig Direct service proposal. We will also supply the OCTG for ENI's Coral project in Mozambique.

Another region where we are making encouraging progress is the North Sea. We have had a very good reception for our BlueDock connectors and other large diameter products with excellent feedback from customers on the 20% savings in rig time that they are achieving from running our products.

To further strengthen our Rig Direct services, we opened a new service center in Aberdeen in September.

As our production volume increase, our challenge is to ensure that we can sustain and improve the industrial performance throughout our system. This includes the startup of the Bay City mill and the mills we recently brought back into operation. Our focus will be to achieve solid improvement in safety, productivity and quality and to introduce further innovation in automation and digitalization of our operations.

In my view, the market recovery is well underway, supported by a more positive perception of the medium-term oil and gas outlook. Tenaris is well positioned for this recovery and on track to see an improvement in its results over the coming quarters.

Thank you. We are now open to any questions you may have.

(Operator Instructions) Our first question comes from the line of Ole Slorer, Morgan Stanley.

Yes, thank you very much and congratulations with a good quarter and maybe a better outlook for your trade balance with the imports in North America. The first question I have, actually more of a clarification on business mix. Because your volumes sequentially were up 4% with flat seamless and 25% growth in welded, yet your revenues were 5%, suggesting, as you highlighted, a better mix because you -- I think I caught that your average selling price was up 1%. So quite a big shift in -- implying quite a big shift in mix given that you also had growth in lower-value welded. So can you talk a little bit about this mix shift that you've seen in seamless? It must be quite important.

Thank you, Ole. Well, frankly, in fact, I think that -- I mean, we didn't have any major shift in our mix during the period. I mean, we are gradually growing. We will continue to report sales volumes in the next quarter and in the following. And this is occurring in different segments. The Middle East, for sure, will be a driver and this will be very much focused on seamless. But as far as the U.S. is concerned, we still are pretty balanced in our increase. So I wouldn't say that the change in the price, in the unit price, is really following a mix change. There is a recovery in the overall pricing that is coming from the gradual kick in of the formulas, the increase in Pipe Logix. And this is affecting either/or both seamless and welded indeed. Now one factor that will be relevant but this is not for today but for the coming quarter, will be the delivery of the large pipelines of welded pipes in the Mediterranean. You will see a large volume of welded, that will be very important in the first Q of next year and the second Q of next year. But if you look at basically the unit price in seamless, we're really very stable. I mean, the overall price you can see is in this range around $1,950. It didn't change so much over time.

So does that imply that the price list for your welded products are in line with the prices for your seamless products?

No, usually the mix of the welded is slightly different. There is more API, some semi-premium and there is no premium in welded. So the price, the overall price for welded is always lower. But even the price for welded did not change so much in terms of unit. There are in a project, but a small volume, some high-priced components, like a connector. But you're talking about a very small volume, and we are not, let's say, so relevant. You're talking about something that may represent 1%, 2% of our sales. These are high value-added, high-priced, high-margin products. Connector, very important, is a niche. But I wouldn't say that this is something that you notice in the overall, let's say, average price.

Okay. I'm just looking at the numbers revenue of 5% and all your growth came from seamless sequentially, so suggesting that something else is going on. But let's turn to the import aspect because looking at the latest monthly and weekly import data, you can see there is a meaningful decline finally in Korean imports, of course, being made up by imports from some of your regions. So did you sense that this is some start of a meaningful trend? I'm hearing from some of the smaller distributors that some of the sales that was made to them from Korean plants have now been canceled because they did not want to sell to the U.S. anymore. So what are you seeing there? And finally, is this taking effect?

Absolutely. I mean, you know there is the indicator of the actual import. There are the permits that we may monitor. But we may also monitor the export from Korea that are a kind of anticipating trend. If you look at this, you will see that what we can see in the most recent data, is a very substantial decline of exports, is an indicator that should be reflected in statistics of import with two months delay. So exports from Korea are going down. There are different reasons. One reason is the change in the price of hot-rolled coils in China. The Chinese steel industry is in the process of a deep restructuring, driven by the government, in reduction of capacity and in promoting consolidation, enforcing recovery at least to some of the profitability of the mill. This has reflected in a higher price for hot-rolled coils. And basically, this is affecting the prices of hot-rolled coils in Asia. It's an input that Korea is using for its, for production of welded. This is for sure one factor. The other factor is the determination of, -- on the revision of the antidumping suit against Korea. On this, Germán, maybe you can comment the change in the preliminary tariff and how meaningful this could be also, for reducing imports.

Sure. Thank you, Paolo. Good morning, Ole. In the last month, mid-October, we received the preliminary determination of the second administrative review that Tenaris together with the rest of the industry is in fact deploying. And we've seen substantial changes. One important Korean player, NEXTEEL, import duty went from 29% to about 46.5%. The other one from 2.7% to about 6.6%. And this is nothing else but capturing, in our opinion, the particular circumstances around the particular market situations all contained in the law, that are all linked to the price of hot-rolled coil, which these producers in Korea are obtaining from their domestic producers and China.

So these are, let's say, the main factors. Korea arrived to the point in which they were exporting around more than 100,000 tons or 120,000 tons in 1 month. If you look at the exports, that are anticipating the future, we are down to a level of 70 and we expect this to go down in the coming months.

Very good. So yes, you have a lot of spare capacity in your U.S. seamless facility, so maybe we can see some bigger volumes there, even bigger volumes going forward. But I want to turn it over to Guillermo Vogel. It's not so often we have -- I get the opportunity to talk to you anymore. So can you give us a little bit of an update on Mexico and the energy reform? You highlighted in the press release that is taking time. But could give us your perspective of how long we will have to wait before we should expect an increase in activity as a result of the energy reform? And what shape do you expect it to take?

Sure, Ole. It's very nice talking to you again. Let me tell you that the energy reform per se has been moving forward, I would say, on a nice pace. And we are seeing that all of the bids under the Round 1 and Round 2 have been assigned, plus a farmout with Pemex on Trion, on the Perdido field, and what we are expecting from that is that 106 wells have already been committed to be applied in the future. Of these 109 wells, 11 had already been drilled. And we have the expectation that this is going to start to be reflected in our selling books. There is Round 3, which probably is going to be assigned by March over next year. So that's going to increase these volumes. And then by talking to Pemex, I think that we expect to see another 10 to 15 farmouts within the following 12 months. So the perception that I have is that in terms of the market in Mexico, we have reached a bottom in 2016, 2017 is going to be marginally above that, but we're going to start to see, to reflect a better performance from there. And I think we're going to see a consistent increase because of what we see. To give you a little bit of a number, from what was assigned under Round 1 and 2 in Trion, we have, there's a commitment to invest around $2.3 billion. But if the fields are successful, the expectation is that the activity is going to increase very much and it can go up to around $40 billion to $50 billion in investments. So I think that what we will see is a gradual increase. In Pemex, when you see direct drilling by Pemex, this year has been very, very constrained. But although when you see the budget of Pemex, you're going to see that the level of investment is very much the same this year than next year under the new budget. When you see the assignment, what happened in 2017 is that Pemex used a large portion of this, in order to pay past due accounts. So we're going to see an increase also in Pemex next year. So I think what you will see is a gradual increase in 2018 and then a consistent and accelerating moving forward.

Makes sense. So I sense again the alarm bells going off in Mexico when you look at the national oil production levels. That seems to be really falling very steeply at the moment.

Well, you have to consider that during last quarter or during last month, there was a big drop of almost 200,000 barrels. But that was due mainly because Pemex had to undertake earlier maintenance of the Ku-Maloob-Zaap field because of Harvey, the hurricane. We're going to start to see a little bit of an increase to 1 point,probably, 85 barrels per day. But obviously, there is the big concern. Gas production has also fallen. And the perception that I have or at least the plan that Pemex has, is that Pemex plans to try to increase production but mainly basing a strategy of increasing drastically the farmouts.

Thank you very much for that, very useful, I'll hand it back.

Our next question comes from the line of Bill Sanchez from Howard Weil.

Thank you, good afternoon. Paolo, at your recent Analyst Day in late September, you essentially kind of affirmed your view on the second quarter call that 4Q would see a pretty robust improvement in seamless items. You noted the line pipe volume improvements as well and EBITDA margin of 20%. That guidance was suggesting that seamless volumes could be north of 600,000 tons in the fourth quarter. I guess, the commentary in the release seems to suggest you're still comfortable with that, number one. Number two, just given the lead time from order to delivery for your OCTG business and then the incremental line pipe awards, just trying to get a sense of how maybe the first half of 2018 looks to me. It feels like you have a fair amount of visibility that the 4Q run rate at least on seamless volumes can be maintained in the first half of next year and that margin, that EBITDA margin guide of 20% for 4Q is at least a good starting point for the first half of next year. If you could just speak to that, please.

Thank you, Bill. I think you're right. And let me tell you, the sense I have of the market is probably a little more positive today than when we had Investor Day because the price of oil is somewhat reflecting a perception of a strong worldwide economy and of a solid OPEC plan to extend agreement in 2018. So today, there is a little bit more confidence, in my view, in the operators looking forward for this. And as you say, we expect the 4Q to show new increase in volume, important increase in volume. And seamless will be higher, close to the range you are saying. When we look at the first quarter, again, we expect to have an increase in volume because we have some of the line pipe coming in strongly. And also seamless continue to increase probably at a lower pace. So this is what we expect in the first. And let's say, in the second quarter, we have somewhat less visibility to have a clear understanding of the volume or so. But in general, we also expect the EBITDA ratio in this environment of increasing sales to stay around the 20% you are saying and probably to extend, again, in an environment of increasing volume, around the same level during the first semester of 2018.

Great, thanks for that. My follow-up would just be around pricing. What are your thoughts, Paolo? I know we've seen a pretty sharp increase off the September 2016 troughs, as measured by Pipe Logix. We've seen a flattening here in the last few months. With the curtailing of the imports that you talked about, I'm sure your view that demand growth will increase again in North America in 2018 over 2017. Is there a possibility that you see pricing resuming an upward trend sometime next year?

Well, I think that in general, we see that prices are strengthening and that are gradually reflecting the increase in the past in the Pipe Logix. Because in the end, there is a delay for this driver to get into real contracts, with the formulas and so. So even if the Pipe Logix flattened in the last couple of months, there's been a substantial increase of around 34% since the bottom that's been reached. This is gradually getting in. Now when you look at the perspective of pricing looking ahead, really, there are factors that will be very relevant for this. One is, the reaction of Korean producers to the combination of increased cost and a high duty, even if preliminary, on the sales. Remember, this convey a high risk of retroactive application in the case, the final determination confirms the high level of duty that is being established in the preliminary. So continue to sell in this condition and the dumping situation involve a risk. The second point is the decision of the America, what the American administration will decide to do on the 232 or other measure of containment of the trade imbalance in steel. This will be also a relevant factor on both, the price of OCTG pipes and price of hot-rolled coils, that could be, let's say, a component of the cost providing more of our competitor than for us, or at least for some of our competitors. I think these two factors are important. There is also a negotiation underway for the NAFTA, for the North American Free Trade Agreement, that is also to some extent may have an influence. So I imagine that in the coming 3, 4 months, we will increase our visibility on which will be the condition and the situation in the market with more clarity. Today I mean, we see something on Korea, but we do not have a clear forecast or an understanding on how the rest could go.

Thanks for the time, I'll turn it back.

Our next question comes from the line of Michael LaMotte from Guggenheim.

Thanks, good morning guys. If I could ask just a couple of quick follow-ups on the U.S. trade situation. First, if the Korean imports fall to the 50,000 to 70,000 tons per month range that you talked about, Paolo, do you have a sense as to how much of the decline could be offset potentially by Taiwan and the Philippines? I've actually been surprised by the volumes coming from these 2 countries lately.

We saw the number. Frankly, I do not think that this could be sustained over time. And I think that the cost issue is also relevant for the Taiwanese producer. The question at the moment in the price of hot-rolled coils in Asia, is a relevant factor. Remember, a few months ago, the price of hot-rolled coils in Asia was closer to $370. Today it's about $580, around that figure, I mean, per ton, So the change has been substantial. There are many factors that are affecting this. But this is also affecting other producers in the region, not only Korea or China or other producers like Vietnam. So expect that this will be a factor and will not be sustainable over time, this level of high imports from Taiwan.

Good, that's great color. And then secondly, I understand that Secretary Ross has delayed the Section 232 trade investigation until Congress finishes up with the tax package. Is that your understanding as well? And if we get a decision in the first quarter that is favorable to the industry, how do you think that impacts the market in 2018?

Yes. Frankly, I think there is a lot of uncertainty around this. The administration has an agenda to get through in Congress. There are different items on it. There is also the 232 decision could be structured in a different way. I don't think we are in a position today to have a clear opinion on this.

Okay. Hopefully, by the fourth quarter call, we'll have some more clarity. Last one for me. Could you provide an update on the tendering activity and stock levels for the Middle East? I'm curious if there are any large projects out for tender that could still impact 2018 as the Egypt gas project will?

Yes. I think, Gabriel, maybe you can give a view of how you are perceiving this.

Yes. Thank you, Paolo. Good morning, Michael. In the Middle East, we continue to see the activity very strong in terms of our drilling activity. We don't see any negative impact on the good compliance of the main countries of OPEC with our production quotas. On the contrary, we're even anticipating some increase in rigs by Saudi. About 15, this is what we expect now, to be added during 2018. So drilling remains consistent there, for gas. These are going to be gas rigs. The tender activity we're seeing with the typical quarterly purchasing cycle of Saudi, is consistent with this outlook. And we have managed in this environment to consistently pass price increases and offsetting some of the concessions of prices given in the area, given during the crisis of '15 and '16.. Then, we have also Kuwait and UAE with a positive dynamic. And there we have major contracts that we have secured last year. These are going to be delivered during '18. And prices are going to be fixed. Those prices were fixed for 1 year. So in this market until the next tender activity comes, prices are going to be quite stable. And then, as Paolo anticipated, we are ramping up for the backlog of our pipeline projects in East Mediterranean. This is something that we are strongly ramping up production. At least you're going to see the impact in Q4, a first step. And then a second and stronger even step starting in first and second quarter in 2018. So there's going to be a good, interesting volume and price dynamic into the Middle East and Africa segment into 2018.

Very helpful, thanks so much.

You're welcome.

Our next question comes from the line of Frank McGann from Bank of America.

OK, good day, a couple of questions. One, just in terms of capacity utilization globally and maybe across different markets, what you're seeing, what you're seeing your competitors doing. Secondly, perhaps you could just give us an indication of where you see CapEx looking out over the next couple of years for Tenaris. And then thirdly, looking at Argentina and the improvements that you mentioned in the political environment, there have already been quite a few announcements prior to that this year about new JVs and new investments that were expected. I was wondering how much additional momentum you could see in the market and how quickly would you likely see things pick up in Argentina.

Thank you, Frank. On the first point about utilization, well, utilization of our plant is increasing. And actually, it's increasing even during these quarters. The expectation of increased volume for the fourth Q and the first Q of 2018 is also driving an increase in our inventory and in our working capital and in our utilization of the plant. Now, with the startup of Bay City, we will put a substantial capacity on our side, on the table. And during 2018, we will ramp up the production in Bay City. And this will stabilize the level of utilization basically in the rest of the system. Probably during 2018, we expect some increased utilization also in the welded plant in the United States. Part of this will depend on the import dynamics. If imports go down, we are ready to ramp up faster our capacity, not only in Bay City but also in our welded facility, to face, let's say, the situation in the market. As far as the situation in Argentina is concerned, I'm very positive. I think the mid-term election resulted in a strong mandate to the present administration to proceed with its policy. The administration is quickly presenting initiatives that will need to be discussed in a different Congress from the one we had before, is a Congress in which there will be more dialogue and more opportunity to get constructive consensus, a major issue that could be very helpful for stabilizing, increasing the previsibility of what we can expect, let's say from them. This, in my view, will drive investment program from many of the operators in the joint ventures than up to now, now, we're more focused on the appraisal of the assisted resources. When this will materialize, I would expect gradually during 2018. But basically, during the second half of 2018, we may see some more substantial program of development than of today, that are in the appraisal.

Okay. Just in terms of CapEx expectations, say, for 2018 and '19, it's early but...

Yes. CapEx, Edgardo, if you can comment how is our forecast.

Sure, Paolo. Thank you very much. Thanks for the question, Frank. Yes, in terms of CapEx, as we anticipated, basically, we are expecting to finish this year in the range of $600 million. I will say that 75% of this has been very much concentrated on Bay City. And moving forward into 2018, we are anticipating that this number will be down to $400 million approximately. So we don't have any visibility into 2019, but this is the most that we can provide at this time.

Okay, thank you very much.

Our next question comes from the line of Marc Bianchi from Cowen.

Thank you. A lot of commentary here about improved outlook, which is nice to hear, ramping utilization. It sounds like a lot of the margin improvement is coming from the ramp of utilization rather than pricing benefits. Pricing benefits could happen if we get some perhaps favorable stuff on the trade side. But just thinking if most of the margin benefit is coming from utilization as you ramp, is the thought to get to 20%, that really occurs retably and ultimately at some point in the first half or you're expecting to get to that 20% level here in the fourth quarter?

Thank you, Marc. No, we expect to get to 20% in the fourth quarter, around 20% in the fourth quarter. You're right in this moment, the improved outlook is driven by increased utilization, expansion of our market. We do not feel today, let's say, a strong growth offshore or other niches of very highly differentiated product that has a different margin perspective. Today we are basically driven by the increase in Middle East, in shales, in line pipe. And some of these line pipes are, in fact, being achieved in a very competitive condition.

Okay. Is, does line pipe eventually in early '18 begin to, -- or how should we think about line pipe, I guess, in the context of that statement from a margin perspective in 2018? Is it better or worse than the average margin?

Probably, some of the important large contract of welded line pipe are probably at the lower margin compared to our average total margin, our increase in volume, but the level of margin as I was saying. Some of this has been won. has been won in very competitive condition. That is one of the reasons why we are guiding this around 20% EBITDA ratio, even in the first semester.

If I may add something, Paolo. It's true that margin-wise, it's probably a little bit lower than compared to the rest of our portfolio. But at the same time, we have been very much flattening our SG&A. So as a percentage of revenue, with the increasing sales that we are expecting, that will be down and therefore helping to maintain a sound EBITDA ratio.

Okay, great. That was my next question, if you could maintain the G&A at this level, which it sounds like that's the case.

That's right.

Great, thanks. I'll turn it back.

Our next question comes from the line of Amy Wong from UBS.

Good morning guys. I have three questions today on Rig Direct. The first one is, if you can help us understand a little bit the incremental sales you are getting from rig -- well, I meant incremental to like selling the average sales price for just a ton of tubular. What are the incremental sales you're getting for the services, add-on services, for Rig Direct sales? The second question is, you've rolled out Rig Direct very aggressively in the U.S. And arguably, the landscape and the number of rigs being serviced has changed quite a bit as well. Can you comment a little bit on how the buying pattern of your clients maybe from a couple of years ago have changed as the number of rigs has ramped up over the last year or so vis-a-vis your Rig Direct clients? And the third question is just related to a your infrastructure in the U.S. Do you feel that you need to grow your -- I guess, how well is your infrastructure attuned to the U.S. market right now? Or do you see the need to grow the number of service centers to increase penetration of the U.S. market? Thanks.

Thank you, Amy. On this, I would like to, Germán, to get an overview on the three isssues. The first one on, let's say, if we are able to add service and if these are relevant, I think in my view we are able to do it, but are not so relevant in terms of overall margin invoiced. But Germán, up to you.

Thank you. Thank you, Paolo. Good morning, Amy. Very rapidly, I mean, then I could expand specifics. Let's say Rig Direct, as far as sales are concerned, are going to be probably tied to your first and third question, are first of all, gaining a tremendous amount of traction on a price environment of $50 as opposed to precisely what it was two years ago. And this is how and why you continue to see quarter-after quarter that our rig coverage continues to grow. We believe at this point, as far as infrastructure is concerned, we're fairly well established in the South. Our last center outside of Oklahoma City to cover the MidCont was a major step forward that complements what we do out of the Houston area Freeport, Bay City and, of course, Midland. Going forward, it is likely that you'll see us announcing deployments in the eastern region as we call it Marcellus, as well as the Bakken, to cover up the north deployment as well. Now as far as the volume pattern is concerned, the second question, what we've seen is that medium-sized to large rig operators are in fact capturing, proving in some ways, even creating the concrete cases, where they document two or three major important gains, efficiency gains in terms of actual concrete savings, but also reliability, quality, efficiency, our ability to ultimately provide our users at the rig site the opportunity of, for instance, optimizing wall thicknesses along the stream, profiting from the information provided by our pipe tracking system, as example. I must say that we have not yet fully penetrated the area of what we call the 1, 2, maybe 3 rigs operator as far as their buying pattern change is concerned, but we see that coming as long as we're capable of installing the appropriate infrastructure for us to in the end also look after those type of customers. I'm going to stop here, perhaps you would have a follow-up comment and I'd be happy to take it if necessary.

Yes. Just to go back to my first question on incremental sales. Is it possible to help us understand, in percentage terms, when you have a Rig Direct sale, how much more sales you're capturing terms of services as opposed to just selling a ton of pipe?

Oh, well, yes, of course, I'm not going to be awfully specific for competitive reasons, Amy. But let's say, in generic terms, our users are seeing that the offer that Tenaris provides today differs back to the buying pattern, the service offers that we're proposing today, differs from the traditional market one. So in a way, we're saying and demonstrating that we're now competing directly to the legacy distribution model in a variety of different forms and we have discussed this many times. This is, in fact, creating the opportunity for us to gain new customers where we compare ourselves to them relative to the ones we used to have, both in terms of customers, in terms of number of rigs recovery and the margin also in terms of market share.

Yes. Thank you, Germán. In general, Amy, we can say that Rig Direct has a very good acceptance. We are increasing clients. We are not losing anybody. We didn't lose any single contract once people get into the Rig Direct. They don't get back. They appreciate where they are, and this is important. The second point is all region, all the market is aware that there is Korea reducing its presence. 232 is an uncertainty. So to have a company like Tenaris, with multiple facility operating in the play, with multiple facility close to the States to be able to supply, ready to enter into long-term agreement and meeting security of supply is clearly a plus. Obviously, it is so for the strategic clients, people that have 10 rigs, 5 rigs, 6 rigs. But it's increasingly being so for a company that has 2, 3, 4 rigs, that's what we see.

Great, ok, that's very helpful. Thanks very much.

And our next question comes from the line of Maria-Laura Adurno from Goldman Sachs.

This is Maria-Laura from Goldman Sachs. The very first question I have is just based on the comment you made and I just wanted to make sure I heard it right, that you were guiding to 20% EBITDA margins for 1H '18?

We're guiding around 20% EBITDA margin in the first semester of '18 because it's the one with visibility. This is the result also of increasing volume, line pipe contract that we will be delivering during this period of time with margins that are relatively contained. That's the reason why we are expecting this EBITDA margin in the first semester.

Okay, thanks for clarifying this. Then the second question I had, I was just wondering if you could maybe speak about the latest pricing dynamic that you're experiencing in the U.S. Are you still in a position to push prices up? And also maybe if you can provide us with an update based on your own estimates as to where the OCTG inventory spend is in the U.S. currently?

Yes. Thank you. In general, I think that in the coming, in the last 6 months, we have been able to guide, to achieve better pricing in the States. But Germán, maybe, you can comment on the perception we have from now on, in my view, volatility is affecting, the lack of visibility is affecting, to some extent, the perspective of price.

I think this is correct Paolo, and good morning María Laura. We continue to deal with very high volatility, although we're also seeing that we have been able to recover a good component of pricing in somehow, some way aligned to how Pipe Logix has evolved in the last so many months. Now as we discussed earlier in the call, in the last couple of months, we've seen a little bit of a slowdown. But as explained, we believe that in the context where imports, particularly from Korea, are in a way contained, activity remains at the present level, say, it's 910, 950 rigs. In my opinion, there's no real reason for us not to see a gradual uptake in the coming months, which, by the way, we believe Tenaris, as just Paolo indicated, and also the rest of the domestic industry is fully capable of supply. So when and if the Korean imports were to come down, I think we, as an industry, are ready to respond to the aggregated pipe requirements. So as inventory is concerned, Maria-Laura, in our estimate, they are in an area of about 5.5 months' worth of consumption in absolute numbers is something close to about 2.1 million tons of pipes on the ground.

This is very clear. And my second question is around working capital dynamics where you mentioned that there was a hike in the quarter and that this is due to upcoming deliveries. But I was just wondering particularly as this has already started to come up with respect to 2018, what are your thoughts around, well, inventory levels? Are we going to continue seeing a buildup into the first half or generally into 2018? Or should we see a stabilization?

Well, thank you, Maria-Laura. I think we increased in this quarter working capital because we'll build up preparing for higher volume. We will also increase, to some extent, in the next quarter, and then we expect to stabilize the level of working capital, starting producing, to have again a positive free cash flow from that point on.

Thank you very much.

Our next question comes from the line of Michael Rae from Redburn.

Hi there, thanks for taking my two questions, and thanks for the great details so far. I just wanted to follow up on the Middle East in relation to pricing. Is there any reason why you're unable to push through pricing in the Middle East contracts that you're currently negotiating, is the first question. And the second one is just on this new kind of new hours-of-service rules that have come in, in the U.S. relating to trucking. And I'm just thinking about the proximity of Bay City to the Permian and to the Eagle Ford. Does that form a competitive advantage for you when it comes to the new rules for truck drivers? Or is that not a relevant issue?

Thank you, Michael. Competition is pretty tight in many parts of the international market. But maybe, Gabriel, you can give some color on how we are in the different regions, in the different situations.

Yes. Michael, just to be clear on the pricing on Middle East dynamics. As I said, Saudi quarterly tenders, operating as a spot market, so we have consistently gained an increased prices over the last 3 quarters, which you will see typically with a 6 -- 9-month lag in our shipments. Then some other countries like Kuwait and UAE have elected to hold the market with typically 1, 1.5-year contracts. Those are fixed prices and there are no mechanisms on changing pricing on existing contracts. That's how the rules are in those cases. And then in the long-term agreements that we have with the majors and IOCs in the rest of the international areas where we have typically formulas, mechanisms containing market indexes, cost indexes. In those, we typically have rational discussions absorbing the fluctuations of the market and those are progressing. And given the recent increases in cost that we had the last 6 months, pricing dynamics are moving upwards into that direction.

Second, Germán, on the specific of the service in the U.S.

Yes. Thank you, Paolo. Well, Michael, what -- just for the benefit of everybody because we don't get to talk about trucking a lot. The Department of Transportation is issuing a new rule, which is code-named ELD. This would mean the electronic log-in, the need for every company to install an electronic log-in device. The thing was so that so far, all the hours driven were reported in paper and it became impossible for regulator to ultimately understand what the ultimate picture was. The intent is that no drivers should be on the road for more than 10 continuous hours for safety reasons. And the intent ultimately is that this device would allow the DOT to have almost an online ability to verify that. From our perspective, we've been enforcing this rule to our service providers, and we don't really believe that this would ultimately create a bottleneck as far as transportation services is concerned, particularly in the South region, based on our experience, and in fact, our ability to, in the end, impose and monitor the rule.

I'm currently showing no further questions, and I would now like to turn the call back to Giovanni Sardagna for any further remarks.

Well, thank you very much for joining us in the call. And I hope to see you soon around. Thanks.

Thank you very much.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect. Everyone, have a great day.