Tenaris SA (TS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to Tenaris Fourth Quarter and Full Year 2017 Results Conference.

(Operator Instructions) And as a reminder, this conference is being recorded.

Now I would like to welcome and turn the call to Mr. Giovanni Sardagna, Investor Relations Officer.

You may begin.

Thank you, Carmen, and welcome to Tenaris' 2017 Fourth Quarter and Annual Results Conference Call.

Before we start, I would like to remind you that we will be discussing forward-looking information in the call and that 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, President of our North American operations; and Gabriel Podskubka, President 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.

During the fourth quarter of '17, sales reached $1.6 billion, up 52% compared with those of the corresponding quarter of the previous year and 22% sequentially, as we saw higher demand from Rig Direct® customer in the USA and Canada, higher shipments to Vaca Muerta in Argentina, a ramp-up in delivery for East Mediterranean pipelines, higher OCTG sales to customer in the Middle East and stronger demand for mechanical products in Europe.

Our quarterly EBITDA at $319 million was 85% higher than the corresponding quarter of 2016 and 42% higher sequentially.

Our EBITDA margin of 20% improved compared to the one of the corresponding quarter of the previous year and also sequentially, mainly reflecting higher shipments and better absorption of fixed costs.

Our operating income and earnings per share also rose strongly during the quarter.

Average selling prices in our Tubes operating segment were up 3% compared to the corresponding quarter of 2016 and 2% sequentially.

During the quarter, our net cash position declined by $294 million to $680 million, following the payment of an interim dividend of $153 million in November last year and capital expenditure of $121 million.

The Board of Directors has decided to propose for the approval of the Annual General Shareholders Meeting to be held in May, the payment of an annual dividend of $0.41 per share or $0.82 per ADR, which includes the interim dividend of $0.13 per share or $0.26 per ADR that we paid at the end of November.

If approved, a dividend of $0.28 per share or $0.56 per ADR will be paid at the end of May.

Now I will ask Paolo to say a few words before we can open the call to questions.

Thank you, Giovanni, and good morning to all of you.

2017 has been an important year for Tenaris, in which we have put the company back on track on a growth path after 2 very difficult years.

The market has begun to recover.

Our mill had been put back to work, and we have Bay City up and running.

We have made excellent progress with advancing our Rig Direct® program around the world, and our financial and economic results are improving rapidly.

The startup of our Bay City mill marks the culmination of an intense collaborative effort over 3.5 years.

It represents much of the best of Tenaris in terms of the scale and planning of the undertaking, the innovation of the design, the sharing of expertise among generations, the integration with local community and the final achievement.

The world's most advanced seamless pipe mill representing investment outlay of around USD 1.8 billion is ramping up to serve the market where imports account today for 60% of demand, just as a national debate take place on the importance of replacing import with domestic production.

In the inauguration ceremony held on the 11th of December, the U.S. Secretary of Commerce, Mr. Wilbur Ross, in a recorded address declared that the U.S. government "would vigorously defend this investment".

U.S. Energy Secretary, Rick Perry, expressed his hope that Tenaris will continue to play a role in the American energy revolution and manufacturing revival, and community leader praised Tenaris for keeping its promises.

Now we have our industrial and service infrastructure fully prepared to support our Rig Direct® strategy.

This is aimed at reducing overall drilling costs and simplifying the operation of our oil and gas customer, integrating and shortening the supply chain.

We have made important progress over the year, not only in the U.S. and Canada where the market has been growing rapidly but throughout the world.

In December, we provide Rig Direct® service to 360 rigs worldwide, up 50% from an year previously, covering 150 customers.

And today, close to 60% of our total sales of OCTG are channeled through the Rig Direct®.

In North America, most major oil companies and many large independent now use our Rig Direct® service.

During the year, we opened new service centers in Midland, in Oklahoma and Grand Prairie to serve this demand.

In the Eastern Hemisphere, we established Rig Direct® operation in Thailand, in Italy, in Indonesia.

We expanded our service in the North Sea and in Romania.

And will start new operation in the Emirates and for Shell's unconventional drilling operations in China.

In Latin America, we are expanding the range of our Rig Direct® services.

And we renewed our long-term agreement with YPF, with Ecopetrol and with Pemex.

This extension is transforming the relation that Tenaris has with many of its customer and provides further opportunity for competitive differentiation.

Our offshore line pipe business had an excellent year.

We have booked the majority of the relevant projects that have been sanctioned over the past 2 years, particularly in the Eastern Mediterranean.

We supplied line pipe for Anadarko's Constellation project in Gulf of Mexico, for Eni´s Sankofa development in Ghana, and we were awarded the Tengizchevroil Future Growth Project in Kazakhstan.

We have a large backlog to deliver in 2018.

Overall, for the 2 years, this represents a volume of around 500,000 tons, an important achievement even if prices reflect a very competitive environment.

During 2017, we made an important step in improving the environmental performance of our mills, approving investments amounting to over USD 50 million dedicated to this purpose.

The startup of Bay City and ramp-up of other plants in our system required the incorporation of more than 2,000 people in our headcount.

We delivered a record 1.4 million hours of training throughout the year.

Our economic and financial results have improved through the year.

In the fourth quarter, we were able to recover 20% EBITDA margin.

And in the year, we recorded a positive net income of $536 million, including the gain for $92 million for the sale of Republic Conduit business in the beginning of the year.

Our financial position is very solid.

We ended the year with a net cash of $680 million on our balance sheet, while maintaining our strategic investment.

Our working capital has increased to support a growing level of sales, the expansion of our Rig Direct® program and production of offshore pipelines that inevitably have a long lead time.

Based on our results and financial position, our Board of Directors is proposing to maintain our annual dividend.

Coming up from a profound crisis and after completing a substantial investment programs, these results demonstrate a strong differentiation from our competitors and leave us well placed to continue increasing our service level to our customers and respond to the challenges of our markets.

For the year ahead, we expect the recovery to continue in North America and to spread more broadly across our markets with the basis being set for the recovery in the offshore market in 2019.

A potential Section 232 action in the United States could create a structural change in the market.

However, to the extent it will be aimed at reducing import, it should be positive for us with our extensive domestic capacity.

We aim to take full leverage of the investments we have made to consolidate and strengthen our position throughout North America and worldwide.

Thank you very much.

We can now receive your questions.

(Operator Instructions) And our first question comes from the line of Igor Levi with Morgan Stanley.

Good morning.

Great quarter guys.

Thank you.

So with the 232 decision looming and some scenarios already laid out, this could result in quotas.

Could you talk a bit about how fast you think you could ramp up your new Bay City mill?

And what percent of imports could you replace?

Well, you kow, the indication by Secretary Ross of the possible option on the 232 Section just came out on Friday.

In our view, it is very early to have a clear understanding of the impact.

We perceive that there will be a structural impact by any decision, but we think that it is not clear yet which will be the final decision and how the different options could be compound according to product or countries.

So I think it's very early to have any, let's say, vision or scenarios possible for this.

What we think is that the basic objective of the 232 in the end is to increase the level of utilization of domestic capacity in the United States, one.

And second, that this will drive some increase in prices, almost inevitably any composition or any scenario that will result.

On this ground, our position is very strong in this -- in face of any scenario.

We are starting up our Bay City operation, ramp up will proceed during 2018.

It will be gradually, a plant of this complexity is always stepping up production slowly, not immediately.

We have capacity in our Hickman operation for welded.

We have capacity in our threading operation in Houston.

So we think we can gradually increase our position.

I would also mention that in the case of the energy sector, and particularly in OCTG, the share of import in the market is very important.

And in our view, it's very likely that the final scenario will include some exception for the NAFTA countries.

It will be very reasonable, and in December because in the end, it creates a space within North America of countries that are basically all bound to fair trade within the space and also create a space for the oil companies from the United States, from Canada, from Mexico to operate in this ground.

So in our view, it should be very likely that this space would be allowed some degree of integration in the interest also of maintaining continuity of supply of inputs into the industry.

This is what we see.

We consider that the outcome of, in the end the final decision of the 232, will be focused on countries that systematically enter into the States violating the fair trade approach to this.

So, this is our view.

Bay City will grow.

We'll be able to replace imports from these countries, together with increasing capacity from the rest of the system.

And could you comment on how much Bay City could produce, let's say, by the middle or by the end of this year?

Well, we have a first step in a range of 300,000 tons during 2018.

As you know, the final capacity of the mill is in the range of 600,000 tons.

It will depend from the decision -- the final decision on the 232.

We could take action to speed up and bring capacity underway even faster than this.

Great, thank you.

I'll turn it back.

Thank you.

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

Thank you, good morning.

Just to follow up on the Section 232 issue.

Could you remind us what percentage of your sales and volumes currently are in the U.S.?

And I was wondering, what the --on your view is on the effect that higher tariffs could have, perhaps, on the cost of steel?

And how exposed you are there?

And also how it would change your production and how you move your product around within your own operations from Mexico and from Argentina?

Well, today, U.S. is very important for us.

We are, let's say, above 30% of our sales are going into the U.S. and around more than 40% to North America.

So this is a space that, one, is very important for us.

Second, it's been growing consistently up to now, it's been the driver of the recovery of the industry in 2017.

And it's also the area in which we have realized the most important investment in the last 10 years.

So everything makes, the relevance of U.S. very high for us.

We think that following any decision that could be taken according to the 232, we will be able to strengthen our position and the ramp up of Bay City will consolidate and, hence, our presence.

You have a second, Frank?

Yes.

Relative to the costs.

I mean, the cost of the inputs into your production.

How would that potentially be affected by higher tariffs?

Well, an important component of our cost is the hot rolled coil of our welded operation.

In the end, the final decision of the 232 may imply increasing price of the hot rolled coil.

This is the main input that could affect our operation, but we really think that we will be able to transfer an increase of cost to the industries in this environment, because it will be an environment in which there will be some reduced import into The States also of pipes, not only of hot rolled coils.

Okay, thanks.

And if I could just follow up.

In terms of sales from Mexico, the Mexican plant and the Argentina plant, into the U.S., I don't know, how significant those are currently, but perhaps you could comment on that?

And how could those potentially be impacted by this move, depending on how it's structured, of course?

Well, as I mentioned before, I think there is a difference between the overall view of the steel sector in The States in which imports are in the range of 20% to 25% and the energy, let's say, related oil country tubular goods market, in which imports are much higher in the range of 60%.

So we think that in the end, this could be leading to a different approach.

In this approach, the preservation of the NAFTA agreement and the exception in this, would be very reasonable, would be allowing us to integrate some of our production to Mexico into the United States for the, even in the future, but it is too early to have a clear view on how this will be in the second part of 2018.

OK, thank you very much, very helpful.

Our next question comes from the line of Blake Hutchinson with Howard Weil.

Your line is open.

Good morning.

Just to kind of round out the Bay City discussion.

As we look at the 4Q result, is there any meaningful drag at such low levels of production or in startup phase from Bay City here that may tend to dissipate as the year goes on and provide a bit of a tailwind to overall margin performance?

Well, I would say that gradually, the more we increase the level of production from Bay City, the better will be the cost from Bay City because of a better absorption, and so.

But still this drag that you correctly mentioned, in my view, is not so significant in our 4Q.

Okay.

And then, I think in the last couple of quarters, switching regions here, you've talked a bit about the Middle East ex the line pipe business, kind of the standard OCTG business, moving from a kind of strict multiyear tender type of business to, not quite just in time, but more closer to, as demand in markets.

What does this mean as we think about the Middle East standard OCTG business for seasonality?

Should we still think about seasonality around, perhaps, 1Q and 4Q?

Or will the business tend to become more even for the Middle East OCTG over the course of the year?

I will ask Gabriel to take this point.

Yes.

Thank you, Paolo.

Good morning Blake.

In reality, we don't expect big seasonality issues in the Middle East.

In the past, we have fluctuations year to year, depending on the stocking, destocking or restocking modes.

But as in the Middle East countries, they are also looking now for efficiency, as well.

We believe that there is going to be more attention to working capital efficiency.

So probably it would be expected that in the future, apparent demand and consumption are more aligned.

And certainly, with our Rig Direct® model and experience, we can be a factor helping those customers in this part of the world.

But at this point in time, I don't think it will be a major issue of seasonality, at least, in 2018.

Exactly what I was looking for, thank you very much.

I'll turn it back.

You're welcome.

Our next question comes from the line of Vlad Sergievskiy with Barclays, your line is open.

Thank you Gentlemen.

Two questions from me, please.

First one on realized prices.

This was third consecutive quarter of realized prices increase for you guys, which obviously helped profitability.

What should we expect for first quarter '18?

Should we increase another improvement in the average realized prices for you?

Or your contracts already virtually absorbed by projects increased during 2017?

That's the first one.

And second one, more broad question on offshore.

You obviously had a very successful order intake last year, clearly gained market share in this important market segment.

What helped you to achieve that?

Is it product offering?

Pricing?

Payment terms?

Anything else from you guys?

And in this context, do you see any change in behavior of your competitors in the offshore market?

Are they somehow trying to regain market share?

Thank you very much.

Well, on the first question, you are correctly stating our realized price has been increasing during 2017 up to now.

But it would be difficult to have a forecast and having visibility on what may happen in the -- especially in the second part of 2018.

Really, the 232 and the decision that will be taken accordingly, will have an impact, and it will be, it is in my view very difficult today, to have an idea.

We have, let's say, some view of what's happened in the first Q. And basically, we do not see a major change in prices because on one side, we may have some additional price of some of our sale of OCTG, but we also have the delivery of the line pipe that has been taken with very aggressive margin.

So in the end, we do not expect change in the first quarter, and we do not have visibility in this moment in price because the 232 will be very relevant to affect the condition of the market in the U.S. and worldwide.

The second is offshore.

Offshore, I will ask Gabriel to get in.

The question is the competitive position, we've been very strong, we have been, let's say, very successful during 2017.

The point for Gabriel is if this competitiveness will be supported, could be supported over time and if our competitors will be reacting to this?

So Vlad, I will pass it.

Yes, thank you, Paolo.

Good morning Vlad.

Interesting point on the offshore market.

As you know, offshore market, in general, is still suffering from contraction.

You know that this year, we expect exploration and production investment in the range of $160 billion, which would be the fourth consecutive year of contraction in level of investment are at about 50% of those that we had in the pre-crisis level.

Still we have managed to secure a large volume of OCTG and line pipe associated with the demand of line pipe, as we were mentioning before about the line pipe projects, namely the Eastern Mediterranean, which we are starting to produce, and we are starting to see in the results of the Middle East and Africa segment in the quarter and probably we'll see another jump in the next few quarters into the year.

There are many factors that have been made Tenaris successful in this.

Some of these pipelines are sour gas, sour crude, so complex specs, ability to comply with those, relationship with majors and established customers that we have had for many years.

Many of these projects have also been sanctioned in ultrafast track mode.

So our ability to deliver in short time has also been a key success factor.

There are multiple factors in all of them.

And this is something on which we have been leveraging our position.

We expect the number of FIDs this year to continue to increase.

We saw an increase already in '17, and we expect more projects in the offshore segment to be sanctioned during this year.

So hopefully, this will also make a positive momentum on the demand and that continue to increase, maybe this will be translated into more demand -- into concrete demand in '19, but this is what we are expecting so far on the offshore market.

Yes.

Thank you, Gabriel.

Let me add one point on competitiveness.

Really what we have seen in these big projects for major oil companies is that we could leverage our financial strength.

These projects are large, they require production pipe, in some case welded acquisition of plays, is a very long lead time.

All of these projects are quoted, some of these require outside manufacturing for some aspect of this.

So there is a working capital requirement that is very substantial for this.

Now, on the other side, you're having a major oil company that has contracted vessels that are costing $500,000 a day, and they are taking big risks.

It is easier for large companies with strong financial shoulder and a good track record to be well positioned there.

The financial strength is an essential component of competitiveness, as a partner on these projects.

We are talking about hundreds of millions of dollars and even if this has an impact on our working capital, we really consider that is money well spent to get a position in this.

Very clear, thank you very much.

And our next question comes from the line of Marc Bianchi with Cowen, your line is open.

Thank you.

I wanted to ask a bit longer term.

As you think about Bay City and ramping up, 232 will perhaps play into what the ramp could look like for Bay City.

But as you think about fully utilizing Bay City at some point, when would you need another type of investment like that in the U.S.?

And how dependent is that on activity levels being higher from where they are right now?

Yes.

This really depends on the policy that the American administration would adopt.

Because in the end, as I mentioned at the beginning, the 232 in any of the options or in any of the scenarios will imply a structural action on the steel industry and particularly on the steel industry for the energy sector.

It's too early to understand and to evaluate or to speculate on the consequence for long-term investment decision into the sector.

As I said at the beginning, for sure, any measure will be aimed at increasing the level of utilization of U.S. plant.

We have invested $1.8 billion, we are waiting to increase utilization level in our plant.

So we are, I think, absolutely well positioned to fulfill the expectation of the American administration on this, but it's too early to understand which could be the next moves.

Okay.

And then second more near term.

As it relates to spending for Bay City, has all the CapEx now been spent?

Or is there a bit more to occur here in the first part of 2018?

No.

Up to now, I mean, we completed the investment, and we have no relevant additional investment needed within this path that should lead us to 300,000 tons of capacity by the end of the year.

Depending on the decision of the American administration, we may decide to speed up additional investment, but this is not something we can decide now.

Okay.

So then, is there any way, given the uncertainty, you could put a range around CapEx for 2018, maybe without 232 or with 232, just to sort of think about the scenarios?

Even if we are planning to spend in the range of $400 million, it's not in line with our depreciation during 2018.

And even if we need to decide additional investment, I mean, it will take time.

So the impact maybe felt more on CapEx in 2019 than on the CapEx on 2018.

Certainly makes sense.

Thank you very much.

Thank you.

Our next question comes from the line of Michael Shillaker with Crédit Suisse, your line is open.

Yes, thanks very much for taking my questions.

I got 3 questions, if I may.

Firstly, just on 232.

It seems somewhat implausible, but I think I have to ask the question.

Semis clearly have been included in the scope.

What -- is there any risk whatsoever that semis would be included and, therefore, you would suffer problems in terms of supplying Bay City.

And given the tail risk that, that happens, have you any contingency plan if that were to be the case?

I mean, it seems completely at odds with what Wilbur Ross had said, but just in case.

The second just on Bay City.

Can you talk a little bit about the technical ramp-up because we've seen various steel plants built in the last decade and quite a lot of them have had issues through the technical ramp-up phase.

Yours seems to be going very well indeed.

But can you give us just some feedback in terms of how the technical ramp is going up?

And if you reach the target of 300,000 tons through this year, can you give us some idea, at 300,000 tons, what kind of contribution Bay City would be making?

And then my final question really on cash flow and capital allocation.

Looking at where we are at the moment, by 2019, you could be doing $1 billion plus of free cash.

Can you give us your thoughts on capital allocation going forward?

On CapEx, you've talked a little bit about the need possibly to invest more in the States depending on 232.

So could you give us the potential from '19 onwards magnitude the CapEx could rise?

But I guess, there's no real big projects out there that you're planning.

M&A, I guess, had you been planning any material M&A, you had a great opportunity in the last 2 years to do that, you didn't.

So I guess, M&A in any grand scale is probably off the horizon, which leaves the third part of capital allocation, shareholder returns.

So can you tell us a little bit how you're looking at that from those 3 angles and in terms of how shareholders returns could progress over the coming years?

Thanks very much.

Thank you.

On the first question, we really think that the risk of having limitation in the semis for Bay City, being a company that invested close to $2 billion in U.S., exactly for doing what the administration is willing the industry to do, which is to invest in projects domestically, is a very marginal risk.

Obviously, if there will be tariff, the risk will be to pay tariff on the semis.

This is basically would be the plan B. But I consider this is really marginal risk.

Now Bay City will contribute by allowing us to increase domestic production.

This is the key.

So as soon as we ramp up Bay City, we will have a reliable, domestic source very close to our Rig Direct® service system into the United States, very close to Permian, very close to Eagle Ford, very well positioned to support this.

So contribution will be increasing domestic capacity and will be shortening of our supply chain to arrive to this market, giving, in my view, even more reliability to our proposal to our client.

We also according to the level of automation of the plant, we plan for having a cost effective facility, able to deliver this without having, let's say, any differential costs compared to our production sites in the rest of the world.

On the question of cash flow, this, I will ask Edgardo to give a brief overview on how we see our cash flow during '18, even if we have some visibility issue now for the reason that I mentioned.

Okay.

Thank you, Paolo.

Good morning, thank you for the question.

Yes, in terms of the free cash flow for 2018, first of all, I would like to say that during the first quarter, we're going to continue with increasing in working capital very much in line with increasing in shipments that we're expecting, basically translating into account receivables.

That we expect to reduce working capital starting the second quarter.

Then as Paolo was saying, the visibility is a little bit limited for the rest of the year, but overall, with better shipments that we are expecting and basically the reduction overall of the CapEx for the year, we are expecting to reach at least a free cash flow close to $400 million, $500 million during 2018.

This is basically what we have in mind today with all the caveat of the 232.

But very important in this will be the dynamic of prices and volume in the United States.

This will be very relevant.

Now as far as allocation of capital, we have a dividend track record.

You are -- you could follow this through the year, it's quite predictable.

We have been very steady in our decision even during the bottom of the crisis.

We are consistent in the crisis and conservative in the upturn, and I think this, from the track record, you can imagine how we can manage the situation that we will have in 2018.

OK, thank you.

Our next question comes from the line of Stephen Gengaro with Loop Capital Markets your line is open.

Thank you.

Good morning, good afternoon.

A couple of questions.

But the main question is, as we think about the near term, I mean, you mentioned some cost inflation in the short term and you also mentioned in the press release some rising prices likely to offset that.

Can you talk a little bit about sort of the dynamics of the timing on how you think that plays out?

And also I'd imagine -- I know you said there wasn't a big drag in the fourth quarter, but I imagine the conversion cost should be aided a little bit by Bay City going forward.

So can you kind of comment on those dynamics we see in the first portion of 2018?

Yes.

Well, as you know, the costs in the industry are going up.

In some cases, like in iron ore or scrap, there has been an important increase.

In some other case, like electrodes, there has been extraordinary increase.

Now what we say is that this increases in the first half of 2018, that is the one we can predict more easily, is turning out in an increase in our variable cost, yes, but this will be basically offset by the increasing volume of production and the absorption that higher level of production will allow us.

So basically cost increase but not so much as to be extremely relevant in our P&L.

Now I don't know, Edgardo, if you want to add something on the timing under which this will get into our profit and loss in our statement because this is a gradual, due to the IFRS...

Yes, as basically you mentioned, basically, I would say in the first quarter of 2018, we will have some moderate impact on the raw material cost, fully compensated for the better utilization of our mills.

But also which is very important is EBITDA ratio that we are targeting to maintain the level that we reached in the fourth quarter of 2017.

Basically, it's also the reduction, as percentage wise, of the SG&A with the higher volume of sales in an environment, which we are basically maintaining our cost structure.

So overall, the absorption of the fixed costs in the industrial component and in the general administrative component help us to some extent reduce the impact of the raw materials.

And the most important will be, if we can translate to the market part of this, no?

But this will depend basically from what's happened in the United States.

Thank you.

So is it -- it's relatively fair to say that the forces in the first quarter kind of lead to probably flattish margins as you referenced in the press release, but going forward, maybe the price and better conversion costs will start to lead to even a rise in margins from current levels assuming activity rises?

Yes.

We expect the margin in the first quarter to be more or less in line with what we had in the 4Q.

Okay.

Very good.

And just one final question, and I know this may be harder to quantify.

But the line pipe issues.

I mean, you mentioned the line pipe and you, obviously, have significant deliveries coming up here for the next 12 months or in 2018.

Any guidance on -- obviously, it seems like it's below average margin.

Is it a meaningful drag?

Like when that -- when those deliveries are done, will we see a visible pop in margins?

Or is it just a bit of a headwind?

Is there any way to quantify that impact?

Well, I will ask Gabriel to pick up this on the, let's say, the level of margin that we are having.

There are different projects, some is very complex in which we may defend a little better.

Other are projects in which we have to go, and we have been very aggressive, but please, Gabriel?

Yes, thank you, Paolo.

Stephen, I mean, it depends, as Paolo was saying, for the different specs, diameters, et cetera.

But to give you just a range, I would say that between 8% to 15% average lower price than the average of Tenaris.

This will be a broad figure to give you a reference.

Great, thank is very helpful, thank you.

You are welcome.

Thank you.

Our next question comes from the line of Maria-Laura Adurno with Goldman Sachs, your line is open.

Hello, I just have a quick question on the free cash flow.

So this year, clearly, you've also been aided with disposals.

And I was just wondering if you're still reviewing your own portfolio and potentially looking at other non-core disposals.

The second question is on Bay City.

So you mentioned theoretical production of 300k tons for this year.

And I do appreciate that there are plenty of different factors, which may vary.

But I was just wondering at what point in the year would you expect to be cost breakeven on this plant based your current plan.

And the third question is with respect to U.S. capacity utilization.

So the first one is, back in 2016, you had actually stopped production from some areas.

I was just wondering if now all your plants were all back on track.

And the second thing, if you could provide us maybe an indication in terms of percentage utilization for 2017 in the U.S.?

On the first, Edgardo, you can pick it up.

Yes, Paolo.

In our portfolio, we haven't seen any non-core business that we are targeting to disposal.

So basically, the one that we just sold last year was Conduit.

And so we don't see any particular activity expected for this year.

There are no major plans to dismiss anything in this.

Now on the second issue, I think, Bay City will increase gradually throughout the year.

But frankly, today, it's difficult to forecast the level of pricing for the second part of 2018.

And this will be relevant for the concept of breakeven for a plant or not.

So I wouldn't, let's say, set target of a moment for this, no?.

Level of utilization, we do not report usually level of utilization in our mill, welded, seamless, threading and so.

This is increasing clearly during this period, but we do not make specific comment on this.

So just on this, are all the plants now back on track?

Are they all being active?

Or are there still areas where you haven't started off production from the U.S. plants?

Well, I pass this to Germán.

Thank you, Paolo.

Good morning María Laura.

I think we discussed enough about the Bay City ramp-up, which is a major area of work for us as we speak.

Hickman it's always been active, including through the worst of the crisis that we've seen during '15 and '16 and we are gradually increasing domestic production of OCTG and line pipe in Hickman.

Our third plant was Conroe, who we had to have closed in the middle of the crisis.

And we are rationally making the appropriate plans to ultimately be in a position to restart it -- gradually restart it, consistent with, well, the scenario that we discussed during the call, at the beginning of the call.

It will be, I think, crucial to understand how this overall situation evolves to determine the need, market demand relative to domestic capacity.

Thank you.

Thank you.

Our next question comes from the line of Amy Wong with UBS, your line is open.

I have 2 questions, please.

The first one being on your activity in Argentina.

You're flagging that there is quite a more drilling activity there.

But in other parts of your commentary, you flagged that it's higher sales on line pipe in Argentina, and then it's not flagged in terms of an area of significant increase in OCTG demand.

So just wondering on how should we think about the demand for casing in Argentina, and how that can contribute to your South America operations in the next 1 or 2 years?

And then my second question relates to your working capital.

I appreciate that a lot of that buildup this year is related to your line pipe, your sales in the Mediterranean.

But thinking about -- how to think about working capital going forward?

How much of that is -- should we expect to reverse and how much of it is potentially structurally higher working capital investments required related to kind of the shift in business models?

Thanks.

Thank you Amy.

As far as Argentina is concerned, there has been a ramp-up during 2017.

The number of rigs increased gradually.

We are now in the range of 73, 74 rigs in all of the country.

Looking at the program of the oil company, we see that there are a number of activity of appraisal.

Development of Vaca Muerta on a massive scale is still not in the agenda of the oil company for the moment.

We hope that this will happen, maybe, during 2019, but we do not expect really much more activity and demand from casing in Argentina, maybe incrementally higher but -- during 2018, but nothing -- no a substantial change in the perspective of this.

Line pipe is different because the infrastructure to move gas from the field and -- to the plants and from the plants to the market are there.

There are many plants that are in way of completion.

There will be some increase in demand in line pipe projects.

So on the line pipe, we are more positive during 2018.

Now as far as working capital is concerned, as I mentioned, working capital increased because we increased our level of operation.

I mean, we increased only in the last quarter around, something like 17% is the increase in our level of activity.

And this inevitably has driven an increase in the working capital.

And then there is increase in U.S., the Rig Direct®, that today, we are aiming at 45 days of stock for the Rig Direct®, remember in an environment in which the material on the ground is many, many months today in the end of distributor.

Our system, with 45 days, once it's stabilized, we can do even better than this.

We'll be efficient, but growing as it is growing today, is requiring more working capital, and then there are the line pipes.

If I look at during 2018, I think there will be some reduction in some moment, especially depending from the shipment of line pipe but not a very substantial reduction.

And probably, if I may add something, Paolo.

Hello Amy.

We are coming from -- I mean, from the quick reaction when it started the crisis.

I mean, so we recovered $1.8 billion working capital in 2015 and '16.

And clearly, the growth in our operation and shipments really contributed to increasing working capital, overall, because the company has been managing this quite efficiently.

All right, thanks very clear.

Thank you very much, I'll turn it over.

Thank you.

Our next question comes from the line of Michael Rae with Redburn, your line is open.

Yes, hi there.

Thanks very much for taking my questions.

Maybe one for Edgardo.

Can I push you a bit on the outlook for 2018.

I understand the low visibility on margins and pricing.

But you're obviously growing in every region and you've got Zohr coming through this year.

So roughly, where you do you see sales for the full year, if we assume that there's no further increase in Pipe Logix from today, is the first question?

And the second one, I'm just wondering if you see any chance of breaking into the seamless market in Brazil since I think there's a quite big tender up for renewal there currently?.

Well, on the first point, as I mentioned before, I mean, we have visibility on the first Q, but it would be very speculative to make, let's say, a forecast for the entire 2018 in an environment in which there could be such a structural change that could affect volume and prices in the United States, in the NAFTA region, but also outside this.

So we wouldn't make, let's say, still a forecast until we have an idea of the decision that will be taken there.

On the question -- on the situation on Brazil.

Well, Brazil is tendering the next 5-year period for supply to Petrobras and at the same time, there are many companies that start to operate or are operating in the offshore area, level of activity is pretty stable.

The tendering for the 5-year, we are participating in a discussion for the product and the share in which we are involved.

This represents something like 20% or 25% of the overall demand of Petrobras.

We are very well positioned for this.

I expect not very substantial level of activity, but for sure, a decline in the level of price is inevitable.

But Brazil is changing the rule of local content, the companies are very aggressive, Petrobras is also very aggressive, so what we are negotiating is anyway a reduction of prices for the next 5 years.

This is what is on the table at the moment in Brazil.

Okay, thank you.

Could I follow up with a quick one on Zohr.

I mean, If I estimated that contract value around $700 million, does that sound reasonable?

And therefore, you would get something like 12% or 13% growth just purely from that contract at the revenue level.

And then, obviously, market growth would come on top.

Is that a sensible way to think about 2018?

Well, I will ask Gabriel on this to give an idea if this is reasonable and it's distributed on basically 2 years, no?

Yes.

We have done -- I think it's a little bit on the high side.

I think $500 million for this year is more in line for Zohr.

But there are other pipelines as well in the spectrum in the Middle East and in the Caspian.

But it's overall a good estimate.

Ok, thank's great.

Thanks for the great details on this call.

Thank you.

Thank you.

Our next question is from Pedro Medeiros with Citigroup, your line is open.

Hi guys, congratulations on the results.

My questions are already answered.

Thank you so much.

And I don't see any questions in the queue.

I would like to turn the call back to Giovanni Sardagna for his final remarks.

Well, thank you, Carmen.

And thank you, all, for joining us in our conference call.

And I hope to see you soon.

Bye.

Thank you very much.

Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program, and you may all disconnect.

Have a wonderful day.