Tenaris S.A. Half-Year 2013 Filing Summary
Business Context and Reporting Period
This Form 6-K filing, dated August 5, 2013, contains the unaudited Half-Year Report for Tenaris S.A. for the six-month period ended June 30, 2013. Tenaris is a leading global manufacturer and supplier of steel pipe products and related services, primarily for the oil and gas industry. The company operates an integrated worldwide network with facilities in the Americas, Europe, Asia, and Africa. Financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and expressed in U.S. dollars.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|
| Net Sales | $5,508 million | $5,419 million |
| Gross Profit | $2,148 million (39.0% margin) | $2,113 million (39.0% margin) |
| Operating Income | $1,132 million (20.5% margin) | $1,187 million (21.9% margin) |
| Net Income (Parent) | $843 million | $895 million |
| Earnings Per Share (Basic/Diluted) | $0.71 | $0.76 |
| Operating Cash Flow | $1,174 million | $1,022 million |
| Capital Expenditures | $364 million | $401 million |
| Cash and Cash Equivalents | $606 million | $694 million |
| Net Debt/Position | Net Cash of $214 million | Net Debt of $271 million (Dec 31, 2012) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 2% year-over-year, driven by a 3% increase in the Tubes segment. This was due to a 4% increase in average selling prices (richer product mix) partially offset by a 2% decrease in volumes.
- Profitability Decline: Operating income decreased 5% to $1,132 million. Despite stable gross margins, operating margins compressed due to a 10% increase in Selling, General, and Administrative (SG&A) expenses, driven by higher provisions for contingencies and increased selling costs in the Middle East.
- Segment Performance:
- Tubes: Sales rose 3% to $5,107 million. Operating income fell 4% to $1,079 million. North American sales dropped 16% due to weather and market conditions, while Middle East & Africa sales surged 62%.
- Others: Sales declined 10% to $400 million, primarily due to lower industrial equipment sales in Brazil. Operating income fell 23% to $53 million.
- Liquidity: The company improved its balance sheet from a net debt position of $271 million at year-end 2012 to a net cash position of $214 million as of June 30, 2013, following strong operating cash flow and a dividend payment of $354 million in May 2013.
Guidance, Outlook, and Risks
Outlook: Management expects drilling activity in North America to pick up gradually in the second half of 2013. Sales in the Middle East and Africa are projected to show strong year-on-year growth. However, South American sales may be impacted by project delays in Brazil, and European sales may face headwinds from a weak industrial sector. Margins are expected to be lower in the third quarter due to sales volume and product mix but should recover in the fourth quarter.
Principal Risks and Contingencies:
- Venezuela Nationalization: Tenaris continues arbitration proceedings (ICSID) against Venezuela regarding the expropriation of its subsidiaries (Tavsa, Matesi, Comsigua). The company seeks adequate compensation but notes uncertainty regarding payment and currency convertibility. Investments are carried at their 2009 book value.
- Usiminas Litigation: A lawsuit filed by CSN in Brazil alleges Tenaris (via subsidiary Confab) failed to launch a mandatory tender offer for minority shareholders following a 2012 acquisition. Tenaris believes the allegations are groundless and has not recorded a provision.
- Market Risks: Demand is highly correlated with oil and gas prices and exploration activity. The company faces risks related to raw material costs, foreign exchange fluctuations, and political instability in operating regions.
Investor Verification Checklist
- Verify the status of the ICSID arbitration proceedings against Venezuela and any potential impact on asset valuations.
- Monitor the outcome of the CSN lawsuit in Brazil regarding the Usiminas tender offer requirement.
- Assess the sustainability of the 62% sales growth in the Middle East & Africa region versus the 16% decline in North America.
- Review the composition of SG&A expenses to understand the drivers behind the 10% increase and its impact on future margins.
- Confirm the timeline for the new seamless mill construction in Bay City, Texas, and its impact on future capital expenditures.