Q3 2019 Earnings Call
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Third quarter 2019 earnings conference call at this time, all participants are in listen only mode. After the speakers presentation. There will be a question and answer session asked the question. During the session you read the press Star then one or your telephone.
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I like to have accomplished or what's your speaker today, Giovanni Sardagna Investor Relations Sir please begin.
Thank you our and welcome to come out its 2019 third quarter results conference call.
Before we stopped I would like to remind you that during the school, we wouldn't be discussing forward looking information.
Actual results may vary from those expressed or implied during the cool.
With me on the call today are followed all Cup chairman and CEO or do you see them onto <unk>, Our Chief Financial Officer, Jim Vogel, Vice Chairman Amendment of our board of director, Michael that Vice Chairman, a member of up or though that I don't have any input cost guy, but I see that of our eastern hemisphere operation and look at or not.
Actually then all the U.S. operations.
Before passing over the coal to follow for his opening remarks, I'd like to briefly comment our results.
Oh, so forth assays 1.8 billion went down 7% book that to the corresponding quarter of last year, and 8% sequentially, mainly reflecting ongoing activity reduction in the U.S. inappetence Deanna.
Which is also affecting selling prices in the Americas.
And as slow down overseas in Europe , which were also impacted my season on.
Alright, well, Italy, a beat the a 322 million was down 13% sequentially and up EBITDA margin <unk>, 18% was affected by a decline in average selling prices and the impact of major maintenance stoppages in the north that name is fair principally in Mexico.
Average selling prices were down 1% compared to the corresponding fourth of last year and 3% sequentially.
The decline was mainly in North America, where prices have come down you to softer demand and lower steel cost.
During the quarter, we generated a free cash flow of $1.90 7 million for 16% of revenues, which included a father declining working capital, although I understand 57 media and we ended the quarter. We then net cash position of 960 for me.
The board of directors approved the female Onethree bbten inline with last year or 13 cents per share.
[noise] Sainsbury idea that we will abate in November .
But right now.
Now I will Oh look to say a few awards before we open the call to questions.
Thank you Giovanni and good morning to all of you.
This quarter, we continued to generate a strong free cash flow amounted to 16% of revenues.
As we work on reducing our working capital.
Year to date that we have reduced the working capital by 500 million and we expect to reduce these father in the first half for the next year.
Well the other hand this school do well in this quarter, we incurred higher cost and operational inefficiencies.
Then we had to regionally estimate.
Well the extensive program of major maintenance and investment of the do we get it out.
These last month.
During this stuff is just so we made important investment focus on reducing particulate emissions.
Starting new non destructive controls and expanding our product them by tracking capabilities seen several brands.
Did investment that will improve their competitiveness and working condition of our in death of system as well the the Eva either more stringent quality and accuracy requirement of our customer.
Did you sort of close to affected the results of the quota and we'd also affect our fourth quarter results.
Did you with the drop in operating rigs is being greater than we had anticipated driving down the pipe logic price index by 8% into last three months.
This is affecting our prices throughout the Americas.
Most oil and gas operates or focusing on capital discipline and free cash flow generation looking for a high return on assets.
In the short to medium term and preparing for the next cycle.
It is more noticeable into small and medium operator, why the major have been more consistent in mandating the level of data over the issue.
Maybe you provided that the price of oil does not fall from current levels.
The company's it should begin to generated positive free cash flow and the number for what do you think rigs should begin to still be dives into county, Matt.
In this environment.
The Netease with these folks you some serving the majors in large independent.
And with our rig direct business modem that a quiet, let's talk on the ground than the rest of the market should be able to mitigate the relative you better than our competitors.
<unk>.
Our second request for the tidy free both those thiede about four hour they see the meal was granted.
That's helping them to consolidate the competitiveness of our operation there.
Meanwhile, we continue to expect positive outcome from our own going on to try to process the relating to the EPS good position before the end of the.
I didn't Tina.
With the recent detection oil and gas companies have putting their investment plan on hold them pending more clarity on the policy measures that will be adopted by the incoming golar.
Given the importance of the development of Vaca muerta potential for detergent dine economy over the coming years, we're confident that the new government. We created the condition for father development of these exceptional resource.
In the middle East that we want to long term contract value that the 1.9 billion to supply a large part of the knocks it all CTG required away over the next five years.
This award is the first in the region to introduce rig the recommendation that reflected the export to for what team to promote our services and product and no one could technologies such as Dopeless connection.
Also reflect our commitment to support I'd look the goal of increasing local content and providing training and development opportunities for the nation.
[noise], we're seeing a graduate to be cool ready you know for that evening around the world, which is confirmed by the spending for me to into that are being made the during the year an important proportion of these increasing that eating that David is happening in Latin America.
We are participating in project such as a any idea I'm OK development in Mexico and next on Mobilisa development a in Louisiana.
As we move right into the first household 2020, we expect that he covering sales and margins well see didn't go what current backlog and ongoing cost reduction programs. We should also be able to continue generating a gold freakish.
Thank you and we can now Oh receive your question.
[noise], ladies and gentlemen, as a reminder to ask the question you would need to press Star then one or your telephone to withdraw your question. Please press the pound cake.
Please standby we've compiled the company roster.
Our first question or comment comes from a line of Frank Mcgann from Bank of America. Your line is open.
Good. Thank you good good good day, just in terms of the its go acquisition. You you indicated that you expect approval by the ended the year wondering how you're feeling about it now in terms of with the further deterioration in the markets in terms of the potential for synergies is there any potential for our.
Renegotiation of the price being paid or or any other thoughts you have now versus when you initially announced the acquisition.
Thank you no Frank.
I would and discussion or we have them for up to getting the approval at all from the anti trust that proceeding well we expect the two floor. These the live by the end of the era.
David This is been a you then investment that is aimed at for the long run a this strategic move the on our side. It gave us a access to steelmaking in the U.S. So is something that we view as a is it move for the long run huh.
On one side and then element that suggested these investments are so as a as Steve there demo synergies as we.
Yeah.
We also say that in the last a conference Cola.
We estimate that the synergies that we estimated for the dealer or.
If I didn't place and will be it isn't the same over a the in over the future. So we see no changes from the cell phone they say point of view.
We have a contract signed up we have a condition for it that way. We respect. It then go on that so that when we do not expect any.
Changes in the condition no study.
Okay. Thank you if I could just follow up in terms of EBITDA looking forward typically you have a nice pick up in the fourth quarter. A I was just wondering if you're yeah, you still expect to see that this year or the you know weaker conditions could go to reduce the impact that usually have season seasonally.
Other than any thoughts on you know a level of profitability as you go into 2020.
And well I am on these account a you know a the and.
We have seen that a reduction in the level of rigs.
That a exceeded our expectation on demand, but in the last conference call. We were more optimistic on the fourth Q, because we were considering that the level of rigs that we go down but not so much as it happens so today as we say in the right in the you know a press release We act.
Spec that we'll be able to maintain the messaging that we have in a in the pool also in the fourth Q, the facteau that out affecting the for fuel.
All right.
Firstly say 11 of rigs.
Yeah that is as I say below what we estimated the three months ago.
The second important factories, Argentina in Argentina mm due to the expectation of the change of government.
They could do you always companies or both.
Many of their investment and the they don't TBT on all the waiting for they finish on a on the economic <unk> and the energy.
Policy. This is affecting the level of drilling innovation in Argentina.
In a in the fourth Q.
Oh I also.
The the D. The you extra cost.
In the and if he should they do we head into maintenance stoppages in the third Q. These it's been a very major intervention. Many mean less head and know that costing completing all of these Andy said, we'd be distribute it amounted to 32 and the fourth Q. So this is also.
Shifting to some extent band or the D. these off into Fourq. So.
40, NOLA as I see at the beginning in <unk>, we expect the fourth Q2, we more or less in line with a the third Q.
In the beginning of 2020, we we expect a elite Kuwaiti a you know a in our margins that.
HM.
For <unk>.
Construct and see if they do pay we have in our backlog.
And for Us.
Some rebound in some of the.
The activity related to a offshore and to the <unk> Eastern time, you see it so.
Stability for the fortune and semi increases.
In the in the first Q2 thousand and plant.
Okay. Thank you very much.
Thank you My next question or comment comes on line of IGRA Levy from BTI G. Your line is open.
Hey, guys.
My first questions on a U.S. pricing and margins are you will see TG prices from the start of the year until today are down about 15%, but costs at the same time, a hot rolled coils down over 30% scraps down over 40%, which suggests a 200 dollar I talked dropping.
Cost and the 200 dollar talk dropping prices.
So this would suggest similar EBITDA up.
Margins EBITDA per ton started the year, but this appears not to be the case and commentary around margins. It's been quite negative. So I was hoping you guys can help me reconcile the the discrepancy here.
Yes.
Thank you I you go well BZ Kelly if they I think the basic impact is due to the fact that the reduction in that number of active rigs Hayes of reducing the size.
Oh the metric at the end so the last seen volley on my it'd be goes off a mm.
Okay, showing the impact of fixed cost and so is that having a name for land site and reducing slightly out of managing Stefano you should also consider that.
The hot rolled coil is that you were saying to wind down.
Hey, pretty substantially in the last quarter I say this had an influence on our cost, but we would see D.C. influence more in the coming in a quarter because of the accounting.
Andy Andy faithful <unk> the way we account for the.
The cost of our imports.
Into the cost of season, so we see the price down it we will see the cost down later on but this decline in the whole turquoise as also increased competitiveness at all the way the type and to some extent that so.
He is he's also factor that affected the overhead old a price level.
To some extent the shaved off where did the depriving deal that America to increase lightly. So these also reduce a.
Lightly the volume Oh, a sale and that's it.
These out of the element that led to.
Managing that you see.
In our you know what adult slightly lower compared to.
Previous quarters.
Great. Thank you that's very helpful. And then to what extent has the drop in a pipe logics affected prices in the rest of the Western Hemisphere, and then secondly has there been any price weakness in the eastern hemisphere, where activity is actually improving.
And on DC show, a I will ask a gabriela to give an overview on the pricing situation any impact of pipe Logix <unk> on the pricing in that each on okay. Thank you bought all good morning Youre a in fact, there are no no major variations in international markets in terms.
Pricing, even though the pricing there remains.
Competitive in general that he said positive momentum in our bug have gone from that allow us to decouple really from the present price trend that you on part of where commenting before from from the pipe logics in the U.S.
As a matter of fact demand.
Well for offshore and complex Roger projects is increasing so we also continue to.
To serve these markets. We thought were said it was great quarter always want to see some noise, which we are experiencing on on a unseen in a market the tightness of supply. So in some of those niches. We're also seeing prices going up I was another huh.
Yeah and is you'll notice that we mentioned name brands of pipe Logix prices on the Americas, because some of the contract in the Americas and I have a component of pipe logic into formulas.
Great. Thank you very much I'll turn it back.
Thank you. Our next question or comment comes from the line or Sean Meakim from JP Morgan Your line is open.
Thank you.
Ah first I was hoping we could maybe just kind of on tax on the margin components little bit further so pricing is a challenge in North America and in some parts of international other parts are still relatively stable, whereas you're seeing less revenue in North America, perhaps more offshore as you're going to 2020, we talk about how you'd expect the mix.
The shift between welded versus seamless and and larger diameter tubes versus maybe what you see in North America, how some of that could influence a the margins that you'd see a next year.
Okay. Thank you Sean.
I would see that.
The d. the pipe logic is being a influenced by the declining the rigs I mean, the reduction in the size of the market is driven down.
Prices.
It does he see what do you realize and now when we look at a 2020.
I think that overall in the mix. The there that is because as you were saying deal sure and eastern Hemisphere Bowman that we'd have a positive effect.
On the said.
But.
When you look at the margin and we look at our cost.
The size of the volume of them a is important.
In defining up source, Sean this is important factor or so.
What do we.
[noise] should also conceded afford the margins in the quarters in 2020 isn't the plan for cost reduction and streamlining of out of Asia did we have a underway now but forecast we expect that that's all you know the margin into <unk>.
First quarter on 2012, it shouldn't be two points higher than a the margin we have in DC cool does go see during the combined effect Oh off a better makes sense.
And then the other factor that we can see as of today.
Thank you Brad that's very helpful.
And I was hoping we could follow up a bit more on the rig direct award in the way so.
Can you give a sense of how that contract ramps is it fairly level load or just started slower next year and just how does that influence your expectations for the middle East region and 2020.
Yeah, Gabrielle that you can you kind of comment I mean, the I didn't know could that he would tell you addressed that is being at a very great achieve them and we're getting more than a 50 plus percent oh that contract.
And the Ism is a massive operation in <unk>, a leading counter they say they made it easy so there's been a very relevant for the entire organization about the cabinet who can.
And on these into perspective.
Yeah, I think your Barlow are good morning, junk Indeed, a very big achievement of our TV in the middle East to finally found that there.
<unk> work hard to.
ER to win has been a very good collaboration with I'd note that really show the willingness to more they're not until the former <unk> best practices into into the middle East It would be the first one driver of besides what these might need is another <unk> directing the middle East.
The content of 1.9 billion I follow worth mentioning will cover five years without a couple see really for an extension on too.
We're working on the transition we are working through that.
So the information of the stocks drilling programs about unaware of in that process as we speak mobilizing resources on preparing for full that.
It would take some time until the full ER.
Volumes and shipments.
Utilizing our books, we expect.
The contract to start with some impact on the second half of 2022 really started 2021 on thereafter with a full impact.
We're also working on upgrading our whereas service center.
We have committed to.
To have a state of the out it's also freemium manufacturing facility in Abu Dhabi, What's also part of our distinctive ER and winning proposal the fact that the to invest.
Look I going to into manufacturing in India, Immigrates to train and to help them. It is diversify that are going on we dealt with arc.
Oh the of the success story there.
Coupled with the local and global track record that we have one rig direct this as you can imagine what I've known them for the country. The revenues oil and gas is a major part of economy onto rely on a company to be.
Handling and managing 50% of this has led to another dollars is a must it is a massive or both of trust.
Commitment on our site.
So we are more reluctant resources once it's important to note that our range abroad recover really on the drilling environments. We are the only company that would be covering before the onshore on the offshore. So this is goes from carbon so I would say movies.
Grown dopeless or the spectrum, so we're really satisfied.
On a mobileiron resources to deliver value because we expect that these to be the first in the muni.
Our expectation is that these to become a showroom for the rest of the region as well.
Got it makes a lot sense gentlemen, thank you very much.
[noise] [noise]. Thank you. Our next question or comment comes from a line of David Anderson from Barclays. Your line is open.
Hi, good morning, <unk> generics, obviously as it's quite a bit exposure to Argentina I was just wonder if you could just kinda talk through some of the scenarios or that you're thinking about.
Yeah. The timeline when do we expect him to hear something from the Argentine government and could you just kind of tell us what would be good and what would be bad in terms of the industry. So basically cut towards a what we're looking for no price controls its really been.
Something even talked about it but maybe just talk with the different scenarios to your own visioning.
Thank you David well.
I think the D. in Argentina, we will see the changes in the government.
It's important.
<unk>.
But the new go into these deals I think needs to evaluate.
The circumstances in the different in factor that at affecting the economy does it make up yet to.
All of <unk>.
His views for the future.
Maybe you didn't work through yet Lana.
For Uh Huh.
Leading the economy into a growing by saying to coming here the data.
Several issues that high inflation.
The need to a face a.
Deb to the tease it relatively high for Argentina.
Need to redefine the agreement or at least that validate the agreement.
Monetary fund.
And a number of the seasonally meter none.
On the internal market.
And last but not the least how to manage the energy policy for the country and how to support the development of luck on what that I would view is that.
The governor will assume a and on the 10th of December we'll take his time too.
Three P. era.
Plan and the build the team today this is not.
Clear I expect in the coming mindset that we will understand a much more about these now development off a vaca muerta ease acentia is run off Uh huh.
The key.
Component for recall worrying to.
So stay never rule thing in the economy.
So there's really a key component Oh the.
Oh the program of the future.
Goal that we hope that okay.
They go into it the way less.
<unk>.
Setting place and energy policy.
It will.
Promote a investment.
Local and foreign companies. These he's a very important.
But the at the moment, we have no indication, which would be to date action.
That they go in May the.
You are saying what is go that was bad.
You may do it is very important.
Okay.
The government has an understanding we have to monetary fund and leave the extent of trade. It though that that'd be lies extend a sector and also the me.
Preserve the rules in place set up till now for the energy sector.
This is a.
It's something that we will understand and see in the coming weeks before the 10th of a December .
Okay. Thank you on a separate subject you talked about your mix is improving can be improving next year were sold at more offshore work. It you'd mentioned Latin America could you just perhaps just give us some indication or kind of where some of the pockets of strength or on your offshore a business right now and maybe what your.
Hoping to to see or maybe.
Some areas that they have been quite a merger that maybe you might think happened later in 2020.
Well in Latin America is important in the future it off for sure we consider that <unk> the <unk>.
Production Uh huh.
Is that a make him for the future project at the additional production for future programs you know for sure.
The two largest 10 will be the Latin America.
Between 40, and 50% or these are the shopper good production should come from Mexico from China from Venezuela generated from offshore letting them.
So we think we have a very strong position in Mexico.
Mention.
One brought one of the Roger.
Any I development. These the first.
[noise] Anthony to production stage.
But there are many either.
That are coming right, yeah, and is not only Liza our number of project around they said.
We.
Continue growing during 2020 and in Brazil.
<unk>.
The the activity with ER.
Move more aggressive really.
Probably in the second half of 2000, and Plenti gradually really will expand.
Maybe do it because it will put us right.
Maybe for Mexico, how we see Pemex and a private is generally you can add some specific common these huh.
Well, Jim and I think Mexico, although.
Yeah, we have good news in terms of the dynamics of the market.
Drilling activity continues to increase driven by both Pemex Andy.
Summing up all the different rounds.
Just to mention a number we have a on the third quarter that doubled over the number of rigs we said in a the first quarter of last year.
We expect another job being the fourth quarter in the number of rigs are gonna be seeing an increase of another 2020, 5% increasing the number of reaching their fourth quarter and then we.
We continue to see a an improvement on the conditions that mix in Mexico, which is very good very good mix. We have also the deepwater projects. We have the any we have the farm out would shale.
So I I would say that a in terms of the market activity and in terms of the of the product mix, Mexico is going to continue to be prudent.
Yeah.
I think these out of the major to drive out an offer TV it in South America.
Outside the.
South America and in the in the Eastern Hemisphere <unk> government. Some comment on on the main project that it did in which you see them more dynamic.
Yes, following the end into international markets will be second viewed also the offshore.
Taking a positive that dynamic gradually recovering.
The area that has been most active has been the north sea, we see there to a number of midsized projects coming on stream.
So a lot of a number of tiebacks and smaller scale projects as well. We're also seeing a comeback of exploration, especially Norway. So we're very well positioned there with our technology Center services platform to take advantage of the positive momentum.
[laughter] Africa, you saw us on the move below what extent that then obviously, but it's also.
Moving into right direction.
We're seeing a good amount of advanced work on a Greenfield project deepwater projects in Angola, Mozambique, and some other basins the as well Nigeria is also moving only on the onshore and the shallow waters steel we don't see major projects on the deepwater in Nigeria. So overall.
So as to how to an African starting to to move as well.
Well go to Asia was China has a big dry for I guess, both onshore and offshore as one so that's another well get where we are participating I don't know, we're seeing better prospects going ahead.
And southeast Asia has being a quite a stable I want something we have some positive dynamics associated with a deepwater drilling the LNG in Australia like we had in there I.
I think what's in the second quarter, Louisiana, we have at the beginning of 2020 err on the weakness there has been the Gulf of Thailand. There are changes in conversations are going away going ahead.
There has been some softening of the drilling activity, but only known.
Across eastern Hemisphere, we see a continues to run on offshore I'm not going to cover.
It's good to hear thank you very much gentlemen.
Thank you our next question or comment attention a lot of Marc Bianchi from Cowen Your line is open.
Thank you.
Pollo, if I heard you correctly talking about two percentage points of margin improvement for the first quarter might put your EBITDA, maybe a little over $350 million in the first quarter of 20, I'm curious how you see that developing over the course of the year. It sounds like you anticipating.
Creases from there is it reasonable to think that we could be looking at EBITDA number above the bill wanted a half billion for the year just kind of based on the outlook that you guys have today.
I I don't think we have a visibility beyond that and also well see than in the previous experience in the last quarter and we actually were overly optimistic on the recounted in the U.S.A. or we wouldn't want to make any forecast oh for the evolution.
After the first quarter do where we see that weekend that we have contract in our backlog that we have Uh huh.
And let's say.
Predictable.
Lesion also of where the pricing going to end. The action. We are taking in our cost that should allow us to gave that these are two other busy spine to in addition, I leave it there.
For the first quarter or would it be.
Very difficult to have a view you know the world today.
Hey, it's a very volatile Diane will a wall the data.
Manny I'm predictable.
Issue going on right and so I don't think it's easy to heavy and medium term forecast to be on the water with what we.
The the with the first quarter.
No Sir certainly understand.
I I guess.
In terms of the cost the cost progression beyond first quarter, which maybe you do have some more visibility to yes.
Our all the cost actions, you're taking going to be completed and benefit the first quarter or is there additional benefit to be realized beyond and you know what's the impact that you anticipate from that and then also you talked earlier about HRC and the effect on your margins could you talk a little bit about scrap.
And how that how you see that developing.
Well the you know that out of HM two component a one is dependent war occur on cost reduction that isn't that away we.
Let's say, we have a number of programs that are gradually bring benefit I location amount planes.
A improving efficiency within the plant and also.
The return that we get from the investment we are maintaining.
A level of investment every year in the range of 350 million that as that impact on now a efficiency on our cost and easy savvy that he's on that away any in all over the past five year. We got every year some improvement in our cost due to these paramount in Texas continues improve.
And the actual then that either.
Cost of imports a basically.
Scrap is very important for us as you know tenaris.
He is oh close to a.
90% to scrap they did he is very good from Iowa and by them and position and see it to me. Sean is also a something that is let's say.
Making our operation depending on scrap into deferred into into the from a good thing.
What are you can see I mean, you as a you are aware, though the price off or hot rolled coil scrap it went down.
And that easy ended last quarter, the Hell sort of course went down pretty abruptly.
This has an influence in the cost to FFO and whether the product, but also is driving down pricey cellphone welded pipe sat and do something that is.
Part of the price decline in North America. So this.
Our the moving parts that affecting about cost.
It's difficult to they had before it because the medium term for focused on scrap price you know these depends too large extent from.
Issue like the sensor on against Turkey, Labor Interfyl put a little operation in Turkey, and so this had a difficult to forecast for the medium for the medium range, what we know that our continuous improvement.
We'll give as permanent cost reduction overtime.
In the provider, we are able to maintain a level of volume volume up production Moralising line it wasn't wins.
Okay very good thank you for the comments.
Thank you. Our next question or comment comes from the line of Amy Wong from your yes. Your line is open.
Hi, guys I'm a couple of questions from me please.
One relates to your international tenders could you comment on how the competition I'm is shaping up is it getting more or less competitive ours is still a pretty much. The same players that are tendering Oh for these projects and my second question relates to a Youre North America business.
And it's just a bit more qualitative but could you help us understand that now that you've got a bit more penetration in your rig direct how how the <unk> your experience with a slow down you're seeing right now how how do you think rig direct gets actually helping you out in the current float <unk> lower environment. Please thank you.
Thank you and me on the international 10 that a I will ask a gabrielle there to give us an overview of how is in the competitive environment there yeah.
Yes.
How do I mean in terms of and then there's Uh huh.
Yeah.
International markets in the competitive environment has been not changing the dramatically.
As I was saying higher the Muslim their complex project.
Of being a mainly play by the the same television on tier one competitors and that's where that the tightness on to strengthen the pricing. These so not much change there Steve we don't see.
Deepwater projects or complex projects, where new players are being introduced thing that still our industry's.
He's a very conscious of what they show the issues.
Regarding tool to failure of a over.
Carlson I think both of them quality.
In our space then if you go to the lower end of the company's on really where a if you want the low spec.
Commodity type of pipe, that's not the market where we're in.
There has been oh by the largest spend with the.
Hi, Jay Neese or lower than players is not the article the marketing. These things here. We're in the majority of the cases, we would take part and then there is a medium spectrum, where we are only participate where do we are able to differentiate brozak services local content and these are the means.
I guess is over 50 countries that we wanted during the other movies released any fear, where we would see a chance to to have a generating a sustainable competitive advantage. So all in all that is not a massive change in the landscape of Oh the competitors.
Thank you have in North America, and big data to the.
They say.
Look I will ask you to comment on these thank you Paul good morning, Yeah.
Well there are number at all.
Benefits on the wasn't mash shine youre in your intellectual ball that which is a very direct allow us to be more close to the real consumption. So we work with only the red with much less inventory. So while the benefits is that that has he was speaking that we should we better position now.
To waive through these found.
The second that that will make sure is a that that cutting out all the intermediation are we create benefits and synergies that we tend to share with our customer hasn't by this in time.
Okay, I'm, a a two hour a benefit as well.
The for profit.
Is that that being very close to our cast a massive we can't really develop a walt a isn't needed by the custom and he I wouldn't want to won't into many days for competitive reasons, but that we recently developed a specific product for a big operates all and this certainly we give wise.
In the long Thunder possibility to establish a tighter bonds and a better relationship with this with this ER. This cast a in a relationship in which we did I efficiency and cost down on their side and a gain that.
Ah relationship.
Do you own outside Israel I believe that these will be there for that I will mention of course, we can't talk one item about this.
Do you see it I mean, it because the by the way they the penetration of this we are now 75% hasn't lost seven if I've got a on that at Eagle direct Ross. This is being a very relevant a penetration in a relatively small period of.
Time, though.
Do you see them.
The main comment to now.
You know these are the kinetic comes together with many.
Features one of these he's a the rest of eat it in tracking.
Of didn't die at a five day five after all the by product I mean, we are managing our inventory.
Over time, I think we should also be able to reduce the level of working capital. Thanks to the way, we manage or would it be entering the end the in the market to that either more than five to six months of a eventually we are managing today with much less over these years arranger offer.
Two month or less I think we could do even better in introducing they.
Yeah, Hi integration with the client including.
I'd information technology integration decline, we should be able to reduce inventory to a much lower level. This is it.
What we can see that a strong competitive advantage.
All right, but that's all right. Thank you I hope the a higher penetration is not just because of the number allregs I dropping off but I'm very very good there Brad good progress I calculated over.
Yeah.
This either.
Yeah, you're right that the write down the through but let me tell you that most of our clients that are major or independent.
Hey, Adam more stable than.
They they the entire America remember a handful of the market in that in the U.S.
They didn't get the you had a very very small companies mom and pop reeling a in field.
So in this sense I would have a nation at most stable even in a situation also.
A copy that these people in a extreme I would see capital D.C. Blaine and ER.
Though.
Most of the operator this is.
A more aggressive carry that more aggressively but it is more.
Great. During this morning dependent than by the large in Argentina.
Thank you.
Thank you. Our next question or comment comes from the line of Ian Macpherson from Simmons. Your line is open.
Hi, Thanks, I wanted to just sort of follow the bouncing ball from the third quarter fourth quarter first quarter EBITDA progression.
And I know that we were expecting about 50 million of nonrecurring maintenance impact as we go from Q3 Q4, and I just want to see if that's still the case if it is it obviously you know implies an otherwise significant [noise].
Decrease from Q3 into Q4 and that to me just makes it a little bit harder to reconcile fully to the higher EBITDA in Q1, So I just wanted to sort of.
Three audit that progression of the maintenance impacts with regard to how we get from.
320 in Q3, or 322, and then to a better number in Q1 that would be helpful. Thanks.
Okay. Thank you a yen it well basically a as I mentioned in the beginning in <unk> we have.
For the way we account for the major maintenance that we have a program a maintenance for the entirety it and we distribute the <unk>.
The quarter by quarter.
We have one on rather we distribute 20 520 525, when we realized the quote the investment in there you know those things and we have over run there I mean was so so big and so relevant.
We had over Iran or overall in the range offer it close to 20 million off but know that old put all that I'm Matt.
Then if we can see that not only maintenance that's a minute.
The entire liquidation wasn't very substantially we distributed these 20 into a this third Q and the fourth Q because we have to address all of it all year, we the real investment that 11 Maintenances families will indeed, all that idea. This is the reason why diesel the overanalyzing.
I think also in the fourth Q now when we get into the first Q.
The judicial on changing because the the maintenance play an expanded your that we plan for 2020 is substantially lower than the one that we plan even without the the.
Well they run for the 2019, so the the expand issue it for a man tenants will go down one quarter to the either by around the 20 million dollar.
These will be the reduction in DC accountant.
When we complete the plan I hope, we can be driving down by $30 million anymore. I mean consolidated between so 20 or 30 million, we'd be the shift from who for into who won.
That's really helpful. Thanks, Palo I would just like to say kudos on the free cash flow here. There's a lot of discussion are about free cash flow in energy. These days the evidence of that interferences is.
Well very unique unappreciated, so thanks I'll pass it over.
Thank you very much yeah, well by the way we plan to continue to generate cash flow in all four electrons.
Thank you next question question or comment comes from the line of Stephen Gengaro from Stifel. Your line is open.
Hi, Thanks, Hello, everybody.
So.
Actually following up on your your your comment you just made on free cash flow.
Going forward I mean, obviously you have the acquisition on the horizon here, but.
How do you think about uses of cash I mean do you are there are there areas.
That you want to expand geographically that you may be working at from an acquisition perspective or.
Is it or do you think there'll be potentially more cash coming back to shareholders. As you continue to generate cash going forward here.
Thank you well.
As you say.
Were very much folks you said on a cash generation or they are reshaping of the supply chain.
And the and focus on reduction on a stocking processa is why I know the driver in our management controls in our action. So we're focused on the site.
Hey, all day on the receivable of on the rest of a working capital.
We also.
Try to.
Improve permanently do on DC and they said we had been pretty successful D.C. It you by the end of the year viewing and then we will ended up weve. If he gets rolling that Angel.
More than 1 billion 1.1, some number in these ranges by the end of the era in cashing free cash generation now.
The.
When we entered into next quarter when do we expect higher level of sees as I was mentioning that so to some extent in less than the in December we may need to have some higher inventory in there just to prepare for sales in the first.
Water, but diesel that or.
I mean, it we should not to have it too much of any impact on our it kishore generation as far as application of DC.
As you. So we are maintaining a very consistent a D.V. then policy, we fit brains irrelevant to pay out there and they see savvy that we plan to continue.
To propose a.
To our board or even in the future.
The other side I thought if on the acquisition and the deal I mentioned and we haven't number it off initiative or is there are consolidating our position in the different study Jonah and that way and we will continue with the SEC DVT say in 2020 is we announced that we are participating in a prototype.
In in Siberia.
He is part of these program for.
Establishing gets stronger rules that in <unk>.
He region and came out because a we think that he is very important.
The two to have resources for pursuing these action.
Of strengthening our position in the regional scenarios Abad from investing.
In April pad money to improving in our plant.
And also the other issue and the other point on we show our we we have an extensive investment program ease and vitamin C and D cannibalization of our processes, So India and regional.
Sets up improvement team took an old Union novation fidelity and often a supply chain facility information technology for relation with client and did utilization of the chain, but to a environment and decarbonisation.
He is a [noise] the other point on which we have a constant flow of the investment.
We plan to continue to do these doesn't swing.
Thank you and if I could just ask one other question and I'm not sure how much you want to comment on this at this point, but when you. When you think about the potential integration of NIPSCO did how well does that hold into the rig direct model in the U.S. and is there are there are there any sort of threshold of I'm sure.
Size, where where rig direct can go and I'm just trying to figure out if there's any kinda conflicts are creating the supply chain with distributors or can you start to push a lot of this through the rig direct system.
Well I I do anything that I think that actually isn't the is it mm hour.
Way off.
Building the relation with the client.
And with that I will transform a our supply chain that action.
If we will continue to do these but.
Luca.
Maybe you can add that [noise].
Oh, My God over the American North American a situation and the possible integration would it be yes, Pablo good morning, Steven <unk> [noise].
Each school, a fits perfectly with our read the red Modelled because it gave us the possibility to expand very efficiently also to the northern region of the United States. As you know we are very stronger geographically in a in the south and the each school [noise] without facilities and services and then also perfectly fittings.
With Oh.
Our our strategy and going back to a point that you.
You mentioned already Paulo before.
The modelo as they must ready to be pleased successful because today, 75% dollar sales.
China also these.
So this oh, hey, direct model and we don't see these changing that with the acquisition off.
Of if school.
Very good thank you gentlemen.
Thank you our next question or comment comes from the line Lillian Starke from Morgan Stanley . Your line is open.
Hi, good morning to Internet and thank you for taking my questions and again, a quick follow up on the free cash flow. If we look into 2020 . NDS initiative, then you have on going more or less and the level of Capex I know you're anticipating enter into can teach supported that free cash flow more or less should we expect it to me.
And excluding the investments in intent Marianne <unk> scores and around the 250 million level or are there any other initiatives, we shouldn't be taking into account and then just the second question. They had once more and the timing of the recovery in International markets, you mentioned, and Mexico, and Brazil, and not being more of a contributor.
Turning to second half and just wondering if there's anything in the first stuff that could support and revenues from the international market.
During the first half I mean on.
On the first question.
All right.
We expect a level of investment.
To remain in the range of EUR, 350, again and 6 million.
It does is being the level of investment that we expect for.
2000, and Nineteena and D. These wells, we plan to have in 2000 and put in.
And.
This is not including the.
Obviously, the <unk> acquisition or.
That either case any other me.
Acquisition or.
Good.
A.
Let's move on from DC DC also.
At least here.
Is the number that we have a in our and our plan. Yes, yes, we are planning and about 35, and I sat see foundries $55 million yeah.
Oh it for 20 to 2020, yeah, yeah. So this isn't a but then I will just second.
The second question and I'm not sure I understand this to deal with it could you tell me exactly which is defined dimension.
Yeah, then you mentioned the contribution from predicting in Brazil, the middle East and even makes it go having more of an impact in the second half of 2020 I was just wondering outside of the U.S. and.
What contribution are you expecting from at least how they might get Oh, sure et cetera, and yeah, but do you provide a good color where things are improving but is it something we can anticipate indifferent to start having an impact in the first off let me sit still most de second half 20 effect.
Yeah, and there was that you all have then the elements that I mentioned on a that were affecting our forecast for the for Q.
The one that we made two months ago, one was Argentina, Argentina in the end that turned out to be much lower than expected. This is one area in which the government routine place.
A consistent predictable.
And as solid the energy plan.
I expect that Argentina could get it back to a level of investment operational maybe during 2020, but this is that something subject to with the kids on Mexico as each of them are saying, we're very confident on not a increase it from a pemex activity if at all.
Private offshore and onshore the vitamin these would be important that for us in the case off Brazil I was mentioning the second part of 2020 and probably.
I mean gradually the program for floating but again we've gone.
We hope that we would have opportunity in Brazil in the second part of 2020, not so much.
ER before indicator of or the economy theater governance.
Yes. Thank you Bob Good morning, William a in fact with a positive dynamic that were mentioning on the middle East.
Also in the different regions of the obvious rotary international markets, we are being able to create a strong backlog into 2020 . So we expect second half over 2019 with higher sales in leasing feared than in the first half of 2019, I'm and I am also really confident that the for their revenue.
For the first half 2020 would be higher than the second half of 2019.
Okay. Thank you very much for any additional color.
Well thank you.
Our next question or comment comes from the line of Edward von from Redburn. Your line is open.
Hi, Thanks.
Taking my question and the clarity on the the its cage accretion I was just when he came to give guidance.
Got it sounds as if the as tight integration I think last but not 100 days will say if that's still thinking thank you.
Yes, let me I understand if I understand the well the timing of the closing of the acquisition or is this correct Uh huh.
You didn't see them.
The city, either telling me for the integration for the synergies as the yeah, I don't think they're gonna it I'm not when in the we plan to close a they set by the end of the year and then we expect a Iran. We haven't program for a 100 they sent for.
Hey, the first degree of.
Integration that he's a basic integration of the business and then that continues improvement would take a.
On a overtime, but let's say after three months.
We assume that were not able to having place all the major process is something that is into the company.
Okay. Thank you.
Thank you I'm showing no additional excuse any questions in the queue. At this time I'd like to turn the conference back over to management for any closing remarks.
Okay. Thanks, a lot for joining us and I see you soon around thanks.
Thank you Vincent.
Ladies and gentlemen, this concludes todays conference call. Thank you for your participation you may now disconnect.
Oh.