Tenaris S.A. 2007 Fourth Quarter and Annual Results Summary
Business Context and Reporting Period
This Form 6-K filing, dated February 28, 2008, presents Tenaris S.A.'s audited consolidated financial results for the fourth quarter and full year ended December 31, 2007, prepared in accordance with IFRS. Tenaris is a global manufacturer of tubular products and services for the oil and gas industry. The reporting period includes the reclassification of the Hydril pressure control business as a discontinued operation following an agreement to sell it to GE.
Key Financial Metrics
| Metric (US$ Million) | Q4 2007 | Q4 2006 | FY 2007 | FY 2006 |
|---|---|---|---|---|
| Net Sales | 2,628.0 | 2,460.9 | 10,042.0 | 7,727.7 |
| Operating Income | 756.7 | 812.6 | 2,957.2 | 2,792.5 |
| Net Income | 595.8 | 612.0 | 2,076.1 | 2,059.4 |
| Shareholders' Net Income | 546.5 | 574.8 | 1,923.7 | 1,945.3 |
| EBITDA | 890.9 | 901.6 | 3,449.3 | 3,045.6 |
| EBITDA Margin | 34% | 37% | 34% | 39% |
| Free Cash Flow (Q4) | 118.1 | N/A | N/A | N/A |
| Net Debt (Dec 31, 2007) | 2,970.2 |
Per Share Data (FY 2007): Earnings per ADS: $3.26; Earnings per Share: $1.63.
Material Changes vs. Prior Period
- Revenue Growth: Full-year net sales increased 30% to $10.0 billion, driven by a 25% rise in tubular sales and a 93% surge in pipeline project sales. Q4 sales rose 7% year-over-year.
- Profitability Pressure: Despite revenue growth, FY operating income grew only 6% and net income rose 1%. Earnings per share declined 1% due to higher costs and interest expenses.
- Margin Compression: EBITDA margin decreased from 39% in 2006 to 34% in 2007. Cost of sales as a percentage of sales rose from 47% to 52% for tubular products due to higher raw material costs.
- Debt Increase: Net financial debt increased by $874.9 million to $2.97 billion, primarily to finance the acquisitions of Maverick and Hydril.
- Regional Shifts: Sales in South America and Europe grew significantly, while North American sales faced headwinds from a 27% annual decline in Canadian gas drilling activity.
Guidance, Outlook, and Risks
Outlook: Management expects sales to increase in 2008, led by higher sales of specialized, high-end OCTG products. This is anticipated to result in higher operating and net income. Global apparent demand for OCTG is expected to resume growth in 2008, supported by drilling activity outside North America.
Dividend Proposal: The Board proposes an annual dividend of $0.38 per share ($0.76 per ADS), a 27% increase over 2006. A final payment of $0.25 per share is expected in June 2008 if approved.
Risks and Contingencies:
- Cost Inflation: Steelmaking raw material, energy, and labor costs rose in 2007 and are expected to rise more steeply in 2008.
- Market Volatility: Increased volatility in economic conditions and commodity prices could affect market conditions in the second half of 2008.
- Discontinued Operations: The Hydril pressure control business is classified as discontinued; future results will exclude this segment.
Investor Verification Checklist
- Verify the impact of rising steel and raw material costs on 2008 gross margins.
- Confirm the status and timeline of the Hydril pressure control business sale to GE.
- Assess the sustainability of the 27% dividend increase given the 1% decline in shareholders' net income.
- Monitor the Canadian gas drilling rig count and its specific impact on North American tubular sales volumes.
- Review the amortization expenses related to the Maverick and Hydril acquisitions ($236 million in 2007) and their effect on future operating income.