Tenaris S.A. 2018 Third 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 and nine months ended September 30, 2018. Tenaris is a global manufacturer of tubular products and services for the oil and gas industry. The financial statements are prepared in accordance with IFRS and presented in U.S. dollars.
Key Financial Metrics
| Metric | 3Q 2018 | 3Q 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net Sales ($ million) | 1,899 | 1,303 | 5,554 | 3,700 |
| Operating Income ($ million) | 258 | 79 | 693 | 167 |
| Net Income ($ million) | 247 | 95 | 649 | 374 |
| EBITDA ($ million) | 394 | 225 | 1,110 | 624 |
| EBITDA Margin | 20.7% | 17.3% | 20.0% | 16.9% |
| Earnings per ADS ($) | 0.42 | 0.18 | 1.10 | 0.65 |
| Operating Cash Flow ($ million) | 50 | (2) | 372 | (9) |
| Capital Expenditures ($ million) | 78 | 143 | 274 | 437 |
| Net Cash Position ($ million) | 408 | 988 | 408 | 988 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 46% year-over-year in 3Q 2018, driven by a 2% volume increase and a 4% rise in average selling prices. North America sales rose 40% YoY due to higher prices compensating for tariffs and seasonal demand in Canada.
- Profitability Expansion: Operating income surged 227% YoY to $258 million. This was fueled by better absorption of fixed costs, higher sales prices, and improved gross profit margins.
- Net Income Drivers: Net income rose 160% YoY. Key contributors included lower deferred tax charges due to the revaluation of the Mexican peso and higher equity earnings from non-controlled companies (Ternium and Usiminas).
- Working Capital: Operating cash flow was $50 million in 3Q 2018, a significant decrease from $351 million in 2Q 2018. This was primarily due to a $301 million increase in working capital, driven by inventory build-up for the Zohr project and Canadian winter season, alongside higher raw material costs and Section 232 duties.
- Capital Expenditures: CapEx declined to $78 million in 3Q 2018 from $143 million in 3Q 2017, reflecting the conclusion of the Bay City, Texas seamless mill project.
Guidance, Outlook, and Risks
- Market Outlook: Drilling activity in North America paused in 3Q due to pipeline takeaway constraints in the Permian and Canada. Latin America saw growth in Colombia and Guyana. Offshore activity remains subdued globally.
- Management Expectations: Management expects a strong finish to 2018 with high shipments to the Zohr project and seasonal sales increases in Canada. Margins are expected to remain at current levels through Q4 2018 and Q1 2019.
- Future Risks: Future results will be influenced by the implementation of the USMCA agreement and the application of Section 232 tariffs. Risks also include uncertainties regarding future oil and gas prices and their impact on customer investment programs.
- Dividend: The Board approved an interim dividend of $0.13 per share ($0.26 per ADS), totaling approximately $153 million, payable November 21, 2018.
Investor Verification Checklist
- Tariff Impact: Verify the extent to which price increases in North America successfully offset Section 232 import duties and raw material cost inflation.
- Working Capital Trends: Monitor the sustainability of the $301 million working capital increase in 3Q 2018 and its impact on future free cash flow.
- FX Sensitivity: Assess the volatility of net income driven by foreign exchange movements, specifically the Mexican peso and Argentine peso revaluations.
- Zohr Project Execution: Confirm the timeline and volume of shipments for the second Zohr offshore welded pipeline in Egypt, a key driver for Q4 2018 sales.
- Equity Earnings: Review the performance of non-consolidated investments (Ternium and Usiminas) which contributed significantly to net income.