Tenaris S.A. 2019 Third Quarter Results Summary
Business Context and Reporting Period
Tenaris S.A., a global manufacturer of steel tubular products, reported unaudited consolidated results for the quarter and nine months ended September 30, 2019. The filing (Form 6-K) includes a press release detailing financial performance prepared under IFRS, alongside non-IFRS measures such as EBITDA and Free Cash Flow.
Key Financial Metrics
| Metric | 3Q 2019 | 3Q 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net Sales ($ million) | 1,764 | 1,899 | 5,554 | 5,554 |
| Operating Income ($ million) | 187 | 258 | 681 | 693 |
| Net Income ($ million) | 101 | 247 | 583 | 649 |
| EBITDA ($ million) | 322 | 394 | 1,082 | 1,110 |
| EBITDA Margin | 18.2% | 20.7% | 19.5% | 20.0% |
| Free Cash Flow ($ million) | 287 | (28) | 994 | 98 |
| Net Cash Position ($ million) | 964 | 408 | 964 | 408 |
| Earnings per ADS ($) | 0.18 | 0.42 | 1.00 | 1.10 |
Material Changes vs. Prior Period
- Revenue Decline: Third-quarter net sales fell 8% sequentially and 7% year-over-year. This was driven by a 6% volume decrease and a 3% drop in average selling prices. North America and South America saw significant declines due to reduced shale activity in the US and Argentina, and lower industrial sales in Europe.
- Profitability Compression: Operating income dropped 28% year-over-year to $187 million. Margins were pressured by lower selling prices and major maintenance stoppages in the northern hemisphere (primarily Mexico).
- Net Income Volatility: Net income decreased 59% year-over-year to $101 million. This sharp decline was exacerbated by a $76 million income tax charge related to currency devaluations in Argentina and Mexico, and a reduced contribution from the equity investment in Ternium.
- Strong Cash Generation: Despite lower earnings, Free Cash Flow improved significantly to $287 million in 3Q 2019 (16% of revenue), compared to a negative $28 million in 3Q 2018. This was aided by a $157 million reduction in working capital.
- Liquidity: The company ended the quarter with a net cash position of $964 million, up from $408 million in the prior year period.
Guidance, Outlook, and Risks
- Market Outlook: Management does not expect a recovery in US shale drilling activity in 2020. Canadian drilling remains low. In Latin America, Argentina's activity is on hold pending government policy clarity, while Mexico's offshore activity is increasing. The Eastern Hemisphere shows improvement led by Middle East gas developments.
- Q4 Expectations: Sales are expected to be affected by lower prices and activity slowdowns in the US and Argentina. Management aims to mitigate price impacts through cost reductions to maintain EBITDA margins in line with Q3.
- 2020 Outlook: A recovery in sales is anticipated for offshore and gas drilling activity, along with improvements in margins and cash flow.
- Dividend: An interim dividend of $0.13 per share ($0.26 per ADS) was approved, totaling approximately $153 million, payable November 20, 2019.
- Risks: Key risks include uncertainties in future oil and gas prices, currency devaluations (specifically Argentine Peso and Mexican Peso), and the impact of US Section 232 tariffs on import levels.
Investor Verification Checklist
- Verify the sustainability of the $157 million working capital reduction in Q3 and its impact on future cash flow.
- Monitor the impact of Argentine and Mexican currency devaluations on future income tax charges and net income.
- Assess the timeline for recovery in US shale drilling activity and its correlation with Tenaris's North American sales volumes.
- Review the performance of the equity investment in Ternium, which contributed significantly less to earnings in Q3 2019 compared to prior periods.
- Confirm the execution of cost reduction initiatives intended to offset lower average selling prices in Q4 and 2020.