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Tenaris S.A. 2019 Second Quarter Results Summary

Business Context and Reporting Period

This Form 6-K filing contains Tenaris S.A.'s press release announcing unaudited consolidated results for the quarter ended June 30, 2019 (2Q 2019), and the six-month period ended June 30, 2019 (6M 2019). The company manufactures and sells tubular products and services for the oil and gas industry. Financial statements are prepared in accordance with IFRS.

Key Financial Metrics

Material Changes vs. Prior Periods

• Revenue Growth: Net sales increased 7% year-over-year (YoY) in 2Q 2019 and 4% for the first half of 2019. The 6M 2019 increase was driven by a 10% rise in average selling prices, offsetting a 6% decline in volumes.
• Profitability: Net income surged 44% YoY in 2Q 2019 and 20% for 6M 2019. This improvement was primarily due to a significantly lower income tax charge (reduced by ~$25 million in 2Q and ~$32 million in 6M due to Argentine fiscal inflation adjustments) and a better operating environment.
• Operating Income Variance: While 6M operating income rose 14% YoY, 2Q operating income declined 9% sequentially. This sequential drop was caused by the non-repetition of a $15 million tariff recovery from the prior quarter and higher maintenance costs for a major overhaul in Mexico.
• Segment Performance: The Tubes segment accounted for 94% of sales. Sales volumes for seamless pipes increased 5% sequentially, while welded pipe volumes declined 6%. The Middle East & Africa region saw a sales decline in 2Q due to the completion of the Zohr project deliveries.
• Financial Results: The company reported a financial loss of $6 million in 2Q 2019 due to currency appreciation (Argentine peso, Japanese Yen, Euro) against the U.S. dollar, contrasting with gains in prior periods.

Guidance, Outlook, and Risks

• Market Outlook: Drilling activity in the USA is expected to remain subdued due to disciplined capital expenditures. Canada's activity remains low with no recovery expected before year-end. Latin America faces uncertainty regarding Argentine elections and Pemex's financial position. The Eastern Hemisphere shows improvement led by Middle East gas developments.
• Q3 and Full Year Expectations: Management expects Q3 sales to be impacted by lower average selling prices, seasonal factors, and major maintenance stoppages in Mexico. A recovery is anticipated in Q4. The company aims to mitigate lower prices with cost reductions and expects to finish the year with an overall EBITDA margin similar to 2018.
• Liquidity: Following a $331 million dividend payment in May 2019, the company maintained a net cash position of $706 million. Working capital was reduced by $147 million in 2Q and $346 million in 6M.
• Risks: Forward-looking statements are subject to risks including future oil and gas price volatility, which impacts operator investment programs. Currency fluctuations continue to affect financial results.

Investor Verification Checklist

• Tax Charge Volatility: Verify the sustainability of the reduced income tax charge, which was heavily influenced by specific Argentine fiscal inflation adjustments and currency revaluations.
• Maintenance Costs: Confirm the duration and total cost impact of the major facility overhaul in Mexico affecting Q2 and Q3 margins.
• Volume vs. Price Mix: Monitor the trend of declining sales volumes (down 6% in 6M) versus rising average selling prices to ensure long-term revenue stability.
• Regional Exposure: Assess the impact of the slowdown in North American drilling (US/Canada) and political/financial uncertainty in Argentina on future order books.
• Net Cash Position: Review the composition of the $706 million net cash position to understand liquidity flexibility following the recent dividend payout.