Tenaris S.A. Form 6-K Summary: Q2 2018 Results
Business Context and Reporting Period
This filing reports the unaudited consolidated financial results for Tenaris S.A. for the quarter ended June 30, 2018, and the first half of 2018. Tenaris is a global manufacturer of tubular products and services for the oil and gas industry. The results are presented in U.S. dollars in accordance with IFRS.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net Sales ($ million) | 1,788 | 1,243 | 3,655 | 2,397 |
| Operating Income ($ million) | 222 | 51 | 435 | 88 |
| Net Income ($ million) | 166 | 73 | 402 | 279 |
| EBITDA ($ million) | 363 | 200 | 717 | 399 |
| EBITDA Margin | 20.3% | 16.1% | 19.6% | 16.6% |
| Operating Cash Flow ($ million) | 351 | (33) | 322 | (7) |
| Free Cash Flow ($ million) | 247 | (188) | 126 | (301) |
| Net Cash Position ($ million) | 423 | 1,168 | 423 | 1,168 |
Material Changes vs. Prior Periods
- Revenue Growth: Net sales increased 44% year-over-year (YoY) in Q2 2018 and 52% for H1 2018, driven by a 47% increase in shipment volumes and a 4% increase in average selling prices.
- Profitability: Operating income surged 332% YoY in Q2 and 397% for H1. Margins improved due to higher selling prices and better capacity utilization, offsetting higher raw material costs.
- Net Income Volatility: While Q2 net income rose 127% YoY, it declined 29% sequentially from Q1 2018. This sequential drop was primarily due to a $100 million deferred tax charge resulting from the devaluation of the Argentine and Mexican currencies.
- Segment Performance: The Tubes segment accounted for 94% of H1 sales. North America and Middle East & Africa saw the strongest sales growth (60% and 64% respectively in H1), while East Mediterranean sales dropped sequentially due to the completion of major pipeline projects.
- Liquidity: The company maintained a net cash position of $423 million at June 30, 2018, following a $331 million dividend payment in May. This represents a decrease from the $1.17 billion net cash position at the end of 2017.
Guidance, Outlook, and Risks
- Outlook: Management expects shipment volumes in the second half of 2018 to be similar to the first half, with higher activity in North America offset by lower East Mediterranean pipeline shipments. Selling prices are expected to rise moderately to compensate for US Section 232 tariffs.
- Earnings Expectation: EBITDA and operating income are expected to be close to the first two quarters in Q3, with a rise anticipated in Q4.
- Market Conditions: US shale drilling activity faces constraints due to pipeline takeaway capacity. Latin American activity remains slow despite reform progress, while global onshore drilling is recovering gradually.
- Risks: Key risks include the impact of US Section 232 tariffs on steel pipe imports, fluctuations in oil and gas prices affecting customer investment, and foreign exchange volatility (specifically Argentine and Mexican peso devaluations).
Investor Verification Checklist
- FX Impact: Verify the specific magnitude of the $100 million tax charge related to Argentine and Mexican currency devaluation and its impact on future tax provisions.
- Tariff Exposure: Assess the company's ability to pass on US Section 232 tariff costs to customers without losing market share.
- Working Capital: Monitor the stabilization of working capital, which increased by $358 million in H1 2018 due to higher production and shipments.
- Dividend Policy: Confirm the sustainability of the dividend policy given the reduction in net cash position following the $331 million payout.
- Project Pipeline: Evaluate the timing of future East Mediterranean pipeline projects to understand the sequential revenue volatility in that region.