Tenaris SA (TS) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Tenaris S.A. Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Giovanni Sardagna, Investor Relations Officer.

You may begin.

Thank you, and welcome to Tenaris 2019 Second 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; Edgardo Carlos, our Chief Financial Officer; Guillermo Vogel, Vice Chairman and member of our Board of Directors; Germán Curá, Vice Chairman and member of our Board of Directors, Gabriel Podskubka, President of our Eastern Hemisphere operations; and Luca Zanotti, President of our U.S. operations.

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

Our second quarter sales at $1.9 billion were up 7% compared to last year and 2% sequentially.

Sales rose in Mexico, in the North Sea and other Eastern Hemisphere markets, but were partially offset by a seasonal decline in Canada.

Our quarterly EBITDA at $370 million was 2% higher than the corresponding quarter of last year, but 5% lower sequentially.

Our EBITDA margin at 19% was slightly lower than the one of the previous quarter, mainly due to the nonrepetition of the $15 million tariff recovery recorded in the previous quarter and higher extraordinary maintenance costs in Mexico.

Average selling prices were up 6% compared to the corresponding quarter of last year, but flat sequentially.

During the quarter, our free cash flow was $245 million, as we continue to reduce our working capital in the amount of $147 million.

Following a dividend payment of $351 million in May, we maintained a net cash position of $706 million at the end of this quarter.

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

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

In the second quarter, we were able to consolidate the good performance we showed in the first quarter.

In North America, we were largely able to offset the impact on our sales from the Canadian seasonal downturn, through higher sale in Mexico where Pemex and the private operators have been advancing with their drilling plans and activity has increased significantly in the year-to-date.

The rest of the world sales rose not only in the North Sea and in the Asia Pacific region.

We continue to reduce working capital, and our free cash flow remains strong at $245 million.

In the next quarter, we will be affected by a major maintenance stoppages in Europe and in Tamsa.

After 3 years, we are having a substantial intervention in the steel shops and rolling mill in Tamsa, focused on reducing our environmental footprint and introducing further automation and process control.

At the same time, we will be making an important investment in our steel shop in Romania.

These stoppages will have an impact on our operations and costs in the third Q.

The U.S. market after a strong recovery over the past 2 years is adjusting, while operator focused on improving cash flow and generating returns for investors.

This has resulted in a slowdown in activity and pressure on prices for suppliers of equipment and services.

In this challenging market, the major had been leading consolidation initiatives, increasing investments and accounting for larger share of overall activity level.

Since 2017, the majors have increased their share of U.S. operating rigs from 9% to 16% today, and there has been significant consolidation among the large independents.

Tenaris is well positioned in this environment, supplying fully or partially all of the major and many of the large independents.

Here, our Rig Direct service alternative is considered a solid platform for collaboration in improving drilling efficiency, allowing flexibility and adapting to change in well design and introducing digital integration for simplifying pipe management and administration.

The acquisition of IPSCO, which would expand our U.S. domestic manufacturing capability, will enable us to provide more flexible and cost competitive solution and expand our customer base.

We are working diligently to obtain the requisite clearance from the U.S. antitrust authorities and expect to close the transaction before the end of the year.

In the Eastern Hemisphere, where demand for natural gas is growing rapidly, we are participating in major development, in the Middle East, in ONGC offshore gas development in India.

We are also working on our expansion initiatives with the integration of Saudi Steel Pipe in Saudi Arabia and our joint venture with Severstal in Russia.

Activity levels continue to grow throughout the region, and we are well placed to participate in this growth.

With the recovery in offshore and gas development, we recorded quarterly records for sales of Dopeless connection and 13 Chrome steel alloy grades.

We have recently introduced a new and improved version of our Dopeless technology, which is used mainly in offshore operations, while our 13 Chrome steel grade products, which are produced in our facility in Japan, are mainly used in corrosive gas wells.

Considering the ongoing uncertainty and difficult market environment, we have set an ambitious agenda for improving our cost competitiveness and the service level for our cost.

We are focused on execution, improving efficiency and productivity in our plants, reducing working capital and enhancing capital efficiency.

We can now take any questions you may have.

(Operator Instructions) And our first question comes from Igor Levi from BTIG.

Your line is now open.

Good morning guys.

I'd like to ask you about the Eastern Hemisphere bit.

It appears that's the one part of the world that's firing on all cylinders.

There's strength in MENA that's compounded by solid results in North Sea and Asia.

Could you provide some more color on which of these markets is seeing the strongest growth?

What is driving their growth, and whether you see risk to any of these markets over the coming quarters?

Thank you, Igor.

I will ask Gabriel to give an overview of all of the cylinder that are supposed to be firing.

Thank you, Paolo.

Good morning, Igor.

Indeed, we have some positive cylinders supporting a positive momentum in the Eastern Hemisphere.

In general, rig count year-on-year has already increased 10%, and we expect that trend to continue.

Middle East continues to be, as I have mentioned before, as the leading region.

Gas developments targeting domestic consumption and exports are the main driver of this.

Important activity in UAE, Saudi, Kuwait, India and Qatar, in which all we are very well positioned with differentiated products and services.

So we expect -- based on this, we expect an increase in our revenues in the second half versus the first half in the Middle East.

The second area that is also showing positive signs is North Sea, as you have pointed out.

We have had a record revenues in the North Sea in the second quarter.

And this is a demand increase coming from both U.K. and Norway.

And interactions that we have with our customers tell us that it is a momentum that will continue possibly into 2020.

This is a sophisticated customer base for which Rig Direct services and also the Dopeless technology, that Paolo mentioned in his opening remarks, are becoming a strong industry standard.

Sub-Saharan Africa is starting to pick up, but so far this is a contained increase.

But interaction with our customers and new FIDs is telling us that into 2020 this might also become an engine of growth for the Eastern Hemisphere.

And last but not least, as you pointed, also Asia Pacific has been having a very strong quarter.

Demand for gas in China in which we were -- we participate in highly differentiating niches.

Also some shipments associated with LNG in Australia that will stop in the second half, but will resume into 2020.

These are areas that are driving the growth into Asia Pacific.

The soft area in Asia Pacific is a reduction expected in drilling activity in Thailand associated with the changing concessions that will happen in early 2022.

But in general, we are in line in Asia Pacific to post a third year of consecutive growth.

So this gives you some color about, which are the cylinders and engines that are supporting this positive momentum.

Yes.

Thank you, Gabriel.

I would just add that in the offshore, we also see the contract with drilling ship and semi-sub drilling rig, but we expect that this will drive demand highly in 2020, if we see the contract at start, but probably this engine is starting to fight -- to fire, but we will see some more activity in 2020.

Thank you.

And our next question comes from Frank McGann from Bank of America.

Your line is now open.

Hi, thank you very much.

Just if I could take a little bit longer-term view, I was just wondering obviously that rest of this year, based on your commentary, seems to be quite subdued with the Eastern Hemisphere being a little bit more robust.

But as you look out to 2020, after a difficult year this year with the majors, particularly being much more cautious in terms of use of capital, how do you see 2020 developing?

And as you look out longer term, given what seemed to be major changes that have taken place in the oil markets, what is your outlook and how do you -- how is that affecting your capital allocation decisions?

Thank you, Frank.

Well, I think it is not easy to have a medium, long-term overview of the oil market today because factors like election in 2020, trade conflict are casting some shadow on the level of activity worldwide in 2020.

You see this every day in the newspaper.

There are pressures for the central bank, saying the different regions support expansion, but at the same time, there are factors that may indicate that after many year of positive growth, the momentum could be reduced in 2020.

I think this is important for the medium-term, long-term vision of the oil and gas market.

You see this reflected in the limited increase in the world demand, world demand for oil is showing slightly lower than expected because of this concern about growth.

And I don't think we have a clear view or visibility on how this trend will unfold in 2020.

In my view, and this is personal view, I think that the reduction in the investment in oil exploration and development in the last 3 years has been so big that in some moment, the system will require an increase in investment in -- not only in the United States, but also outside the United States in all of the region, including offshore, just to face a worldwide demand that may be increasing 900,000 barrels or 1 million barrels per year, but is basically picking up even in an environment of subdued growth.

We cannot -- I wouldn't say if this rebound of investment may happen in the beginning, first half of 2020, probably later on, but I think that this is inevitable and in some moment the level of activity, drilling and production will need to step up.

And this will be in every sector and in many of the regions, not only in shales.

Ok, thank you very much.

I appreciate that.

Thank you.

And our next question comes from David Anderson from Barclays.

Your line is now open.

Thank you and good morning.

Just a question on pricing.

Pricing has been quite weak all through the year.

You guys are guiding to kind of a recovery in the fourth quarter.

I was just wondering if you could talk about how pricing is embedded in your outlook for the rest of the year?

Do you expect it to get better and maybe if you could just provide some of the details behind that because we see welded pipe is gone and HRC costs have been coming down, there's a lot of inventories out there.

Can you just kind of walk through some of the dynamics that you see there on the pricing front?

I'm really kind of talking about the U.S. side, of course?

Yes, thank you, David.

Well, on pricing, you follow the dynamics of the Pipe Logix in the recent -- in the last 6 months.

Pipe Logix went down up to now, including yesterday, there's been a decline for it.

Pipe Logix has also been driven by the declining price of hot rolled coils.

It drove down the price for welded pipes.

Now I think this trend at least for the hot rolled coils is reversing now.

It reached a level at which there will be -- there is underway a rebound and it's very likely that this rebound will slowly continue in the coming months.

Even in this environment, the demand for pipes in the United States is to some extent subdued.

You can see this because of the reduction in the rig count.

And probably during next 6 months, rig count will stay there or remaining -- or going down slightly.

But we do not expect that this will rebound in the next 6 months.

In this environment, in the second semester compared to the first semester, the market and the demand for pipes will be lower and will be -- the prices will reflect the situation of limited demand, at least, in our view.

That's the reason why we are perceiving this pricing pressure.

Now this is the pricing pressure in the market.

I would say that for Tenaris, the situation is slightly different.

We, as we mentioned in the opening remark, are very much focused on client, on the major, that are relatively more stable.

And so we think that we can -- thanks to the service to the high level of Rig Direct, at this moment, we are in the U.S. more than 17% of our sale are from Rig Direct.

So we are compounding the price with the level of service.

We can defend a little better the price -- our level of price.

But we do not see so much pricing power in the coming 6 months for this.

Then in 2020, as I was mentioning, I expect some recovery in the rig count and this may change the dynamics of pricing.

Keep in mind, also, there are -- some of the factors that are affecting are also on the cost side, not only the recovery in the hot rolled coils, but some recovery, I mean, the strong price for iron ore is also putting pressure on some of the players here in term of this pressure to contain price reduction.

So Paolo, a related question there.

All of the kind of trade rulings we've seen over the last 6 to 12 months for the Section 232 or USMCA, they've pretty much all worked in your favor, pretty much everything that you could have hoped for happened.

Okay?

We haven't really seen any impact to the market itself.

And obviously, part of this has got to be the U.S. kind of slowing down here a little bit.

But do you think we underestimated how long it would take for those changes to work through the system?

Do you think it's just kind of a question working through inventories before you start seeing improvement?

Kind of what's your take?

Obviously, there is this kind of big consecutive trends, but what's your take on why is it taking so long to show up in either the numbers or the inventories, or I'm not sure exactly what you're looking at for improvement, so maybe just reflect a little bit on that, please?

Well, in general, as I mentioned before, this is an environment in which the level of rig count in the first quarter was around 1,045 rigs.

Today, we are in the range of 940 rigs.

It is a substantial reduction.

You can imagine that with this reduction in demand, we perceive that also the level of inventory went up slightly up to now, and this is the adjustment in the market we are referring to.

This as far as far as the market is concerned.

When we look at our situation, in this quarter ending, the third quarter, we still will not see a reduction in the duty in our pipe because the pipes that pay the 25% duty coming into the States will be delivered to the market during the third Q. So we are not really seeing a reduction in the duty in our profit and loss now.

In the third Q, we'll be also affected, as I mentioned, by the stoppages.

The cost of the stoppage, a sound reduction in our capacity because of the big intervention we are doing in the company.

So this is affecting particularly our third Q, but will reverse going on in the fourth Q. On top of this, we are executing a plan for acting on our cost that gradually will have an impact in our margins, a positive in the coming quarter, starting for the fourth quarter on.

And we think that we will -- this will enable us to defend our margin and to enhance our free cash flow in the coming quarter.

Thank you.

And our next question comes from Ian MacPherson from Simmons.

Your line is now open.

Hi, thanks very much.

I wanted to ask if you would be willing to quantify or even just provide a ballpark estimate of the impact of the maintenance in Q3, so that we can have a sense of the magnitude of that as we interpret the Q3 in the full year updated guidance?

It's the first question, please.

Thanks.

Well, we expect the stoppage to have an impact in the range of $50 million on the third Q, and some impact in limiting our capacity, it's a very extensive intervention.

As I mentioned for environmental reason, for reorganization of some of the production line, to increase productivity efficiency, automation.

I mean, we are intervening in the plant in Tamsa, in Romania, in Italy.

So this is something that we do every -- not every year, in the case of Tamsa, it's a large intervention.

The last time we did this was 3 years ago.

So this has been -- is the impact.

Direct impact of this, around the figure that I mentioned, and some instantly lower volume.

This is what you can consider for your account.

Thank you Paolo.

Good.

And so otherwise -- I suppose without the intervention, without the $50 million, your third quarter outlook would otherwise be higher than Q2, not necessarily by a lot.

Is that a fair interpretation?

This is a fair assumption.

This will be in absolute terms.

In terms of margin, remember, there will be also -- probably with margin, we'll be defended a little better.

Understood, thanks.

I wanted to ask, as a follow-up, how business is tracking in Argentina?

And I think it's been your biggest Latin America revenue driver the past couple of years.

The momentum has been positive.

But I think you mentioned some potential for deceleration or flattening in the region.

I wanted to draw in specifically on the outlook there in Argentina for the rest of this year?

And how you see it playing out next year, if you could look out that far?

Thanks.

As I mentioned, in the last call -- in the last conference call, we have a stable level of drilling in Argentina in this -- in 2019.

Operator are basically waiting for the election in Argentina, the election will be hold in October and then a possible ballotage in November.

This is an important issue for Argentina, and some of the operator will take this into consideration in defining their plan for the development, especially in Vaca Muerta, for oil and for gas.

My sense is that there are very high potential for increased activity in Argentina.

This is development of oil and development of gas not only for Argentina, but for export to the country like Chile or Brazil.

I mean there is a huge potential for development of this.

But we will see this in 2020, in my view, depending from the outcome of the election.

Also for Tenaris, this is important.

Recently, there has been a launch of tender for a large pipeline.

This would be an essential component of the development of Vaca Muerta, but could also be a big opportunity not only for our participation eventually in the tender for pipes, but also for the activity that this could trigger in the region in 2020.

Argentina has a great potential.

Very helpful, thank you Paolo.

And our next question comes from Amy Wong from UBS.

Your line is now open.

Hi, good afternoon.

A couple of questions for me, please.

The first one relates to the IPSCO transaction.

You gave a very high-level comment in the prepared remarks, but just if you can give us a bit more detail on kind of the milestones that we're going to be looking for to see the completion of IPSCO when -- a bit more kind of detail on what needs to happen there?

Secondly, there's been a lot of questions around the pricing in the U.S. I'd like to ask about kind of the pricing on the tenders that you're seeing in the Eastern Hemisphere, please?

Thank you.

Thank you, Amy.

As far as IPSCO transaction, Germán, you can update -- give an update on where are we now.

Sure.

Thank you, Paulo.

Good morning, Amy.

Very briefly, Amy, we are working very closely with the case team at the DoJ.

We are in the process of completing the submission of all the requested information.

We naturally are working with our team.

We know IPSCO is obviously also doing their part.

We're expecting based upon statute and conversations we have that the DoJ team highly likely will take something around 45 to 60 days to process the information and to come out with ultimately a position review.

We're expecting to close this towards the end of the year, most likely end of Q2.

And we remain very confident about the outcome -- sorry, it's Q4.

I am sorry.

Okay.

Is there just -- just a follow-up on that, Germán, is there any view that kind of the market conditions now versus when the deal was discussed in Q1 have changed?

And do you feel -- how do you feel about the deal now and the price paid?

I think for us, the project, the proposal and the merger is a very structural long-term view.

I don't think the change in market conditions of one quarter against the other is changing the substance of it.

The shale will be an essential component of the energy metrics of the world for the foreseeable future.

U.S. will be at the center of this.

That's very important.

It's not the only place.

Middle East also, Russia, China also, but you will recognize that U.S., from our point of view, is a substantial market, substantial, at the center of the energy metrics.

So I think, on this consideration, we have exactly the same view of this acquisition that we had 6 months ago.

This is -- will create a structure of our operation in the U.S., supported by a steel shop in the region, which we consider extreme important.

This level of integration is essential, will allow us to support also a part of our Canadian operation.

It will integrate the range of our seamless pipe in the region.

So I mean we see this as a very important step in defining our position for the very long term in the United States.

There is a second question on pricing in the -- Gabriel, you are...

Thank you, Paolo.

Good afternoon, Amy.

Regarding pricing in Eastern Hemisphere, truth of the matter is that for the large volume tenders, pricing remains competitive.

There is a positive momentum, as we talked about before, on the demand, but still there's available capacity from the bulk of our competition in the carbon space.

Having said that, there are some niches and product lines associated with demand for pipes with special grades, 13 Chromium or even higher Chromium associated with corrosive gas, where we see some -- we start to see some tightness.

So we're having some price increases.

There is some pricing power back to the manufacturers there as well.

So that is going to be having a positive impact with the rest of the most complex mix into this Eastern Hemisphere.

Having said that, also it is important to consider that compared to a year ago, we didn't have SSP and SSP is a contributing factor in the Eastern Hemisphere that has an average price lower than the typical average price of the Eastern Hemisphere.

So that's another component to factor into the growth on pricing dynamics into Eastern Hemisphere.

Ok, thanks.

That's very helpful Gaby, I'll turn it over.

Thank you.

And our next question comes from Marc Bianchi from Cowen.

Your line is now open.

Thank you.

Paolo, you mentioned some cost benefits that you're instituting part of the major interventions, and I was hoping you could talk a little bit more about that and perhaps give us some idea of how impactful this could be on dollars of profit or percentage margin basis for the company?

Well, thank you, Marc.

As I mentioned before, in this third Q, we'll be affected, as I mentioned, by the stoppage, by the fact that we still have the duty and by the existing pressure for prices.

But then in the four Q, there are factors that are contributing.

First of all, we will no longer have to pay the duty of the 232.

Second, we will not feel the impact of the cost of the stoppage, but we will be operating, hopefully, at full capacity or at least in the mill in which we intervene.

And third, we should start to see the impact of the action plan for improving our productivity there, our efficiency.

I expect this overall to give us around 2 point of margin gradually during the next 4Q.

We will, let's say, follow this action plan, is affecting not only the plant, but also our supply chain system.

We expect also to reduce our inventory, so to be able to contribute with a figure around in the range of $150 million of additional cash flow -- free cash flow from reduction in our working capital, mainly in our inventory and some in our receivable.

This will -- these 2 actions should bring us in 2020 with, let's say, improving our efficiency to some extent compensating for the pricing pressure that we are perceiving today when the market went down, there is some inventory overhang, and we feel the pricing pressure, especially in the United States.

Okay.

That's excellent, thank you.

And just a follow-up on the final working capital of $150 million that's between now and year-end.

Is that to be realized in the third quarter?

Sorry, can you repeat because we had an interference.

Sorry, the inventory reduction of $150 million, is that -- that's between now and year-end, that's for the second semester?

Yes, this is what we plan to execute overall in the coming 4 quarter.

OK, thank you very much.

I'll turn it back.

Thank you.

And our next question comes from Lillian Starke from Morgan Stanley.

Your line is now open.

Hi, thanks very much for taking my question.

I just had -- first of all, if you can provide a bit of color on how your -- you mentioned sort of the recovering the gas market in the Middle East, but instead what we're seeing in terms of offshore gas investments, is there anything that you have sort of seen of incremental demand going into 2020 or beyond that, that you have firm visibility on?

And then my second question was more on the trajectory of margins.

It seems sort of we're moving around a similar or a somewhat restricted range bound more or less, I know I was just wondering if you could maybe give a bit more color on whether there's anything else aside from this, maybe temporary factors than you think are holding back margins?

Thank you, Lillian.

Gabriel, you can give a view of the -- on the first question.

Yes, sure.

Good morning, Lillian.

In fact, gas

developments continue to be very important in the different areas of the Eastern Hemisphere.

There are expected ways of FIDs already going on or projected to be sanctioned soon on LNG regarding gas.

There's going to be activity into that in Mozambique, in Qatar, in Australia.

So this is a trend that we expect to continue, and we are well positioned to supply for the pipes to support that drilling activity.

And also there is a big push for domestic gas in China, in India, in Saudi, in UAE, in Kuwait, in Egypt.

These are countries that are starting to be -- to trying to shift some of their energy metrics into gas for different economic and environmental reasons, and this is driving a big push for drilling activity in these countries as well.

So these 2 components are giving us a midterm positive outlook on gas.

Yes.

Well, I think on the margin, we're commenting which are the main drivers downs and upside.

And as I mentioned in third quarter, that will be more critical for us, and in the fourth quarter in which many of these factors will reverse.

These are our basic comments on this.

It will -- it is inevitable that the market in which the demand go down because of the reduction of the rig, there is pressure on our price and we perceive this.

But as I mentioned before, there are factors that will gradually compensate this in the 4Q.

And by the way, even in this environment, Tenaris is very -- is a company with a very strong cash flow.

We expect the free cash flow to remain strongly positive in the third Q and in the fourth Q of this year because of the different actions we are taking and also because of the recovery margin that we expect after the third Q.

Okay, perfect.

And then just on that point of the free cash flow with the previous comment you had mentioned that you might end up with somewhat small net debt position following the IPSCO transaction with such a strong cash flow generation in the remaining part of the year.

Could we maybe see Tenaris still at a net cash position even after the acquisition of IPSCO?

Well, let me ask Edgardo to comment on the various factors that are affecting our cash flow and...

Thank you, Paolo.

Yes, we really -- as as we said in the last conference call, we are -- and Paolo has just mentioned, we are going to be generating free cash flow in the third and the fourth quarter of this year.

So we are aiming to target probably slightly above $1 billion free cash flow for the whole year, which will turn into our -- basically, if we consider paying probably in the last quarter the acquisition of IPSCO, we're going to be very much breakeven or slightly below -- with net debt very small one.

So very much the cash that we're going to be generating from now until the rest of the year, we'll be able to pay with cash in our hands to the IPSCO acquisition.

Ok, perfect.

Thank you very much.

I'll turn it over.

Thank you.

And our next question comes from Vlad Sergievskii from Bank of America.

Your line is now open.

Thank you gentlemen.

A very small question left.

Given all the drivers for volume in the fourth quarter of the year, is there any chance that volumes in Q4 will be the highest in 2019?

Or we are talking about volumes recovering to, let's say, the average level of the first half?

Thank you for the answer.

From what we can see today, we -- you're right.

We expect that in the 4Q, we should be able to have the highest quarter in term of volume of 2019.

That's great.

And in terms of drivers, is it fair to assume that volume drivers behind that would be primarily outside North America and therefore, the product mix will be supportive as well?

Well, I think the -- also in North America, the fourth Q will be possibly the highest in 2019.

It depends on how we are able to maintain our differentiation because in the end, our point is that the major are more stable in their planning, in the plans.

So the market is going down before the rigs reduction, but the rigs of the major are more stable.

I mean in this environment, the last quarter also for us in the U.S. will be highest.

But I will ask Luca if this is the view of the region, and if you think that this is something that we can achieve.

Yes, thank you, Paulo.

Good morning, Vlad.

Yes, I believe I don't have much to add to your point because you fairly represented.

But the only point that I would add is that different from any other players in the U.S., we are going through Rig Direct.

So this shields us from inventory dynamics that other are suffering based on the approach they take to the market.

This is my only point that I would like to add.

Yes.

We are more driven by the real consumption...

Consumption rather than the apparent demand.

Than from the apparent demand.

And we think that this should shield us in the fourth Q any more than other player.

. That's great, thanks very much.

Thank you.

And our next question comes from Alessandro Pozzi from Mediobanca.

Your line is now open.

Yes, thank you for taking my questions.

The first one is on Mexico.

I believe you mentioned that Mexico is offsetting the weaker sales in U.S. and Canada.

So I was wondering you maybe can give us a sense of how important is Mexico right now for Tenaris?

And also following from that, I was wondering is the rig count still the best proxy for your sales because what we've seen is falling rig count, but the number of completed wells is actually not too bad.

So I was wondering whether we should focus on the completed wells rather than rig count?

Thank you.

Yes, before passing to Guillermo for some comments on Mexico, it's clear that on the medium term, the volume of pipes processed by every rig per year has increased by in the range of 30% in the last 2 years.

Now my sense is that today, technology has stabilized the length of lateral and the productivity of the rig is more stabilized compared to the past.

And also the drilled and completed wells are going down, but there are no substantial variations that should affect our market.

So in this moment, rig count is a relatively good indicator for the size of the market.

Guillermo, you may comment on Mexican recovery, how you see this.

Yes, Paolo.

Hello, Alessandro.

Well, Mexico has been recovering very nicely since the end of 2017.

If you compare the first quarter -- or the second -- the first quarter of this year versus that, I think we've had a nice increase, mainly driven by the higher activity of Pemex.

But looking forward to the market, we see 3 engines that are going to contribute to, I would say, a gradual increase.

One is Pemex and higher activity of Pemex; secondly that we are already seeing, but we're going to continue to see an increase in terms of the activity of -- derived from the rounds that we're giving up because of the energy reform; and thirdly, now Pemex has assigned 5 contracts of integral services, which are going to cover 22 fields, which also we're going to start to see coming into our portfolio.

So second quarter was continuing to grow nicely, and we see a jump also in terms of rig count probably above 20% from the second quarter into the third quarter.

And then moving forward into 2020, I think we're going to continue to see a gradual increase.

So Mexico is becoming a nice driver, and we are quite fortunate to consider that because of the geological condition, Mexico requires a richer product mix, which are also going to [benefit] (corrected by company after the call) our operations.

Yes.

Thank you, Guillermo.

Also I mean, in this quarter, we had a good important pipeline in our sales.

This will not repeat in the third quarter in Mexico.

So the increase in the rig will bring an increase in the volume, but we will not repeat the pipeline for the -- in the next quarter for it.

And hopefully, Pemex would have the financial strength to support its expansion.

They are really determined to have.

Ok, thank you very much.

Thank you.

And our next question comes from Kevin Roger from Kepler Cheuvreux.

Your line is now open.

Good morning.

They have all been answered already.

So that's fine for me.

Thank you Kevin.

Thank you.

And our next question comes from Rodrigo Almeida from Santander.

Your line is now open.

Hi and good morning.

I have a couple of questions from my side here.

The first one is regarding the contracts -- the recent contract in the Equatorial Guinea.

I know it's a small contract, but I just wanted to get some color if that would impact margins anyhow or by when?

And also if you expect any other projects to come from the region?

I think you guys gave some color, but maybe if we could get some more color, it would be nice.

And the second question from my side is regarding Brazil, if you guys see any improvement in drilling activity here for the next year, both for the pre-salt areas and also for maybe redevelopment works in mature fields?

If you have any view on that side, it would be great to know.

Thank you, Rodrigo.

On the African Equatorial Guinea and on the African project, Gabriel, you can give us some additional color on this.

Yes, this was one of the -- good morning, Rodrigo.

This was one of the big incoming orders of the pipeline division of the quarter, which has been announced.

This is a deepwater pipeline in the range of 20,000 tonnes plus that we will deliver during the first half of 2020.

We'll be manufacturing Confab, so similar to that growth of manufacturing in Brazil like Confab like we have with Zohr.

Clearly, it's not in the same size range of pipeline, but it starts to show the development activity for -- in Sub-Saharan Africa that has been pretty much subdued.

So we haven't had a pipeline of this size in Sub-Saharan Africa.

So I think this is a positive sign.

The rest of the region, Gabriel, you see their activity in Angola because I have some good expectation on that project for 2020.

Yes.

Sub-Saharan Africa is an area where we expect some growth into 2020.

There's project that need to be sanctioned, but there is a positive momentum.

We are perceiving this from the different operators that we are engaging into discussions with.

There is an inventory situation as well because, believe it or not, some of the pipes that we sold in '13 or '14 are still being in inventory in different parts of Africa as well.

So after some of these rigs addition come on stream and the inventory is being worked out, I think that Africa is going to give us some good growth into the portfolio for the future.

Yes.

As far as Brazil is concerned, we see that Brazil is not only Petrobras, but also the major oil companies that are operating, are contracting drilling ships and semi-subs for performing drilling activity in the pre-salt and not only in the pre-salt, and activity may pick up, it will pick up, we think in 2020.

We do not see so much increase in the fourth Q. Maybe we will have some of these projects that requires pipes before the end of the year.

But I think most of the activity will happen in 2020.

, Thank you very much, it's been very clear.

Thank you very much.

Thank you.

And we do have a follow-up question from Frank McGann from Bank of America.

Your line is now open.

Yes, thanks again.

If I could follow-up on the question on Vaca Muerta.

Assuming that the election results lead to a desire to invest from majors, there seem to be a lot of projects that are on the cusp of some pretty important potential ramp ups.

So I was wondering, do you think that's the case and do you think there could be a major acceleration in 2020, if we get an environment that companies are more comfortable investing in?

Well, I'm very confident that in that case, if the price of oil remain in the range of Brent, in the range of $60 to $65, there will be activity on oil on a much higher scale and also, there will be a lot of projects for developing gas.

It could be that gas may require to have a longer time because it requires a more complex infrastructural work.

But I am very confident that Vaca Muerta is an absolutely relevant play by world standard in shales and is a great opportunity for development of a chain of value supply and use of gas and product for the country.

So I think that with a consistent government, this should be a relevant investment in pipeline, in treatment facilities in development of use and the value chain, and also preparing export, for sure, for oil, but also gradually for gas.

And our last question comes from Stuart Joyner from Redburn.

Good afternoon gents.

Thanks for taking my questions.

I just wanted to come back to the IPSCO guidance that you gave, the updated IPSCO guidance that you gave.

And just wondered if you could be a bit more specific about confirming that if that does complete as of 1st Jan 2020 that the synergies number that you gave at the time of the deal will be captured in full in 2020 or does that sort of slide -- slid back in terms of time table, mean do those synergies are going to be slow in terms of delivering through 2020, we may not get that full benefit in 2020.

And then just in terms of what that means in -- on a guidance perspective.

I think we're now looking at something like $1.5 billion EBITDA baseline for 2019.

So if we were to think about the business in pro forma terms, we've got obviously IPSCO giving you EBITDA of about $120 million synergies from the deal of about $40 million and tariffs removed around half year of about $70 million.

Is that where we should be thinking about the pro forma baseline of the business in EBITDA terms going into 2020?

Thanks.

Well, on the first question, yes, we have no reason to think that there are lower synergy.

We've mentioned something around 100 basis point of margin that we can reach on a consolidated company between Tenaris and IPSCO.

Well, we hope to conclude the deal before the end of the year.

It will take, you can assume, 100 days for integration.

This is our standard program to materialize and to implement gradually the synergies.

It will not affect the entire 2020, but it will gradually roll in during the year.

As far as the evaluation of EBITDA, well, I wouldn't enter into what could be the EBITDA in 2020.

I think it's too far away.

We have no full visibility what could happen.

You mentioned the $1.5 billion, and we mentioned also in our statement that basically, we think that overall, in 2019, we should be close to the level of margin that we had in 2018, and obviously, we'll be there.

Ok, thanks very much.

Thank you.

And there are no further questions at this time.

I would like to turn the call back to Giovanni Sardagna, Investor Relations Officer, for any further remarks.

Well, thank you.

This is, again, Paolo.

Before closing, let me extend all my thanks to Edgardo Carlos.

Edgardo will be leaving the company on the 5th of August.

He has been CFO of Tenaris for many years.

He worked 32 years with the group, has given a substantial contribution to our company, not only in Tenaris, but before in Ternium.

So we are very grateful of his contribution.

He is going to work in a challenging role in another company, listed company.

So we will probably continue to see him around in different occasion.

So thank you very much.

I want to wish all the best for your future, Edgardo.

And also, I want to give the warm welcome to Alicia Mondolo.

Alicia also has an extense experience in working in different companies, groups and knows very well also Tenaris, so will be an excellent CFO and will also enhance our diversity.

Thank you, very much.

Thank you, Paolo.

Thank you.

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

This concludes today's program.

You may all disconnect.

Everyone, have a great day.