Earnings Call: Q3 2020

Nov 5, 2020

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Tenaris Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Giovanni Sardagna. Thank you. Please go ahead, sir. Thank you, Gigi, and welcome to Tenaris 2020 third quarter results conference call. Before we start, I would like to remind you that we will be discussing forward-looking information in the call, and that our actual results may vary from those expressed or implied during this call. With me on the call today are Paolo Rocca, our Chairman and CEO, Alicia Mondolo, our Chief Financial Officer, Guillermo Vogel, Vice Chairman and member of our Board of Directors, Germán Curá, Vice Chairman and member of our Board of Directors, Gabriel Podskubka, President of our Eastern Hemisphere Operations, and Luca Zanotti, President of our U.S. Operations. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment on results. Our third quarter sales at $1 billion were down 33% compared to the corresponding quarter of last year, and 18% sequentially as drilling activity in the U.S. and the rest of the world continued to decline. Our sales were also affected by a 9% decline in our tubes average selling prices, as we did not repeat the exceptional mix of products sold during the second quarter. Despite this further reduction in sales, our EBITDA for the quarter, which includes $28 million of severance charges, was up 83% sequentially to $107 million, reflecting an excellent industrial performance and the progress we are making with our structural cost reduction plan. Our EBITDA margin recovered to around 11%. Excluding severance charges, our EBITDA for the quarter would have been $135 million, with a margin of 13%. During the quarter, we generated a free cash flow of $376 million, or 37% of our revenues. The free cash flow included a further decline in working capital of $333 million, and we ended up the quarter with a net cash position of $1.1 billion. The board of director has decided to approve an interim dividend payment of $0.07 per share or $0.14 per ADR to be paid on November 25th. Now, I will ask Paolo to say a few words before we open the call to questions. Thank you, Giovanni, and good morning to all of you. In this third quarter, we achieved good results considering the circumstances. The decline in our volume and sales was less than expected in several regions, and we were able to comply fully with customer requirements despite the ongoing impact of the pandemia and government measure to contain it. We have been able to operate effectively and our customer maintain continuity in their operation. We have been very efficient in our industrial operations during the quarter, despite the low level of production, and we made good progress on our programs to reduce structural costs and inventories. This has been, and continue to be, a very difficult time for our employees. They are showing great resilience, and it is thanks to their commitment and effort that we were able to obtain these results. Our communities have also been affected but gave us an outstanding support all along this period. During this time, we have deployed a $6 million fund, which has been helpful in supporting local health and educational system that has been under severe stress. We continue to advance with our strategic agenda. In China, we have established a joint venture with state-owned Baogang Baotou Steel, a large integrated steel maker in Inner Mongolia, with modern seamless pipe-making facilities, supplying casing and tubing to China's onshore oil and gas field. The joint venture, in which we have a 60% shareholding, will install a premium threading facility with an initial annual capacity of 40,000 tons to thread the TenarisHydril premium connection on Baogang pipes. The new facility is expected to start operation at the end of 2021. Through this joint venture, we expect to expand our presence in China onshore oil and gas industry as it increases investment in gas drilling, complementing our existing operation at Qingdao. In Canada, we closed down our Prudential mill in Calgary, and we will consolidate production of seamless, welded, and premium products in Sault Ste. Marie with an investment of $72 million. This repositioning of our industrial activities, which will be completed by November 2021, will strengthen our competitiveness and increase our domestic production capabilities for the Canadian market. Facing the challenges of the energy transition, the oil and gas industry is consolidating. Starting in North America, many of our long-term customers are leading these consolidations. We see this as a positive trend, which will strengthen the scope of our relation with these customer and augment the value we bring through digital integration, technical service, and close attention to health and safety and environment through the tubular supply chain. We are positioning ourself in the new energy segment associated with the energy transition. Also, our sale for green energy application are marginal today. They will increase over time. We are actively participating in many of the larger projects for building the new infrastructure for hydrogen mobility, a supplier of large high pressure vessel for hydrogen fueling stations, particularly in Europe and California. Among these, we are supplying gas cylinders as part of the project to decarbonize the Port of Los Angeles by increasing the use of hydrogen zero emission fuel cell trucks. In Europe, we are supporting pilot deployment in Germany, Netherlands, Denmark, France, and Austria as a partner to the main players involved in setting up the infrastructure of hydrogen refueling stations. We are advancing with systematic effort worldwide to reduce inventories and lead time to support our Rig Direct operation. To achieve this, we are increasing the use of digital technology throughout our supply chain operation. This is contributing to a more efficient use of working capital and has strengthened our free cash flow generation over the past quarters. In the year to date, our free cash flow has amounted to $1.2 billion or 31% of invoicing. Looking forward, we expect to continue reducing our level of inventories, also not to the same extent as the past two quarters, and maintain a positive free cash flow. Given these results, our board of directors decided that the company will make an interim dividend payment later this month. Over the past week, a second wave of pandemia infection has struck Europe and the U.S., which is likely to slow down the recovery in the global economy and oil consumption, as well as in investment in oil and gas drilling activity. We do, however, think that this third quarter represent the bottom in term of our volume and sales, and then we will see a gradual improvement in our sales and margin in the fourth quarter and going into 2021 as we continue to implement our plan for structural cost reduction. As we prepare for a gradual market recovery, Tenaris remains focused on improving its competitiveness and strengthening its market position all around the world. We are prepared now to take any question you may have in the call. Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sean Meakim from JPMorgan. Your line is now open. Thank you. Hey, good morning. Good morning, Sean. Just want to spend more time on the margin improvement. Last quarter, we were coming into 3Q thinking that would be the bottom. Instead, you are able to improve margins over 400 basis points. Considering what the activity world looks like, very impressive. As we think about the change from 2Q to 3Q, could we unpack some of the moving parts, maybe some drags in the second quarter, that did not recur in the third quarter? Maybe just to reaffirm your expectation that this is still a bottom for margins, as you said, fourth quarter and 2021 should be higher off of this point. Would love just maybe understand those moving pieces, including the cost out program that you are undertaking. Thank you. Thank you, Sean. As you were saying, in fact, our margin improved, even beyond what was our original expectation. I would say there are three points here. On one side, we were anticipating some more relevant impact on COVID contagious, in the country in which we operate and with our client. We anticipate some disruption in our ability to manage an industrial facility and some disruption also in the activity of our client. But in fact, this did not happen to the extent to which that we were considering for our original projection. The second point is, the execution of our cost reduction plan, and the efficiency with which our industrial operation works. We achieve target in improving efficiency almost in all of our facility. At the same time, we executed pretty well our plans for cost reduction and containment of cost of our idle people, because in the end, even today, we continue to have part of our workforce that is either suspended or out of the plant for reason related to the COVID. So the containment of cost and the efficiency of our operation has been probably the key for the increase in margin that we saw in the third quarter. The last point has been demand. We've been having some additional demand, not in the U.S., which behaved more or less in line with our forecast, but in some other market, in Latin American market and in other markets, in which we had some additional volume compared to our original expectation. There has been no extraordinary charges or benefit in this period between the second and the third Q. This is business as usual, no particular extraordinary expenditure, apart from the cost of indemnization and reducing our people. As you can see in the impairment of the Prudential facility that we decided to close. These are what I would say, the extraordinary element in our results. That's very helpful. Again, just a really impressive result in terms of execution. One other piece to maybe get your feedback on as we think about other influences on margins would be the impact of input costs versus pricing for your products. Maybe you could just give us a little more insight into what's happening with your raw input costs on steel, et cetera, versus what's happening with PipeLogix pricing, still pretty challenged, and how you've been able to overcome some of those impacts on your margin progression. Well, on this, we are seeing an increase in prices for iron ore, hot rolled coils, and other input in our system. But during these months, we streamlined very much our inventories and our supplies chain. So in the end, we are using to large extent, the inventory that we had inside. So the new pricing is getting into our cost of sale very slowly and will continue to do so for a while. We are reducing purchasing, and we are streamlining all of the inventory in the chain, from inventory of raw material to the inventory of work in process to the inventory already for delivery material. So, we are not seeing this as a main factor in this quarter, and we shouldn't see this in the coming two quarter. Probably, this will have an impact later on if the volume increase and our production level goes up gradually. It will increase in this quarter, it will do so also in the coming quarter. As far as pricing is concerned, you have seen that the PipeLogix start to move up because the industry is reflecting the cost of raw material into the pricing, and this, in our view, should continue. The increase in the value of hot rolled coils in the U.S. has been very substantial, and so this should gradually translate into overall increase in pricing starting in North America, and we will see for the rest of the world. Right. That makes a lot of sense. Again, very well done. Thank you. Thank you, Sean. Thank you. Our next question comes from the line of Ian MacPherson from Simmons. Your line is now open. Thank you, Paolo. Also, congratulations, much better than we had expected on the quarter and the outlook. I thought that we were maybe expecting third quarter revenues to be down as much as 30%. They obviously fell by less than 20%. Do you think that there was obviously, you spoke the economic impact in the quarter from COVID disruption, et cetera, was a little bit less bad than you had expected. But when we look at what rig count did and the headline decline in pricing, it looks like you either grew your market share or maybe benefited from restocking. I wonder if you have a view on those two elements as they fed into Q3. My other question, I just wanted to see if you might give us a little more specifics on the fourth quarter trajectory with regards to how much improvement you expect for revenue as well as EBITDA on the fourth quarter. Thank you. Thank you, Ian. Thank you for your appreciation. You are perfectly right. We were expecting a reduction in our sale in the range of 30%. In the end, we ended up with something even lower than 20%. This is the point that I made in the first question. There has been much less disruption in operation due to COVID than we were anticipating. But in some market, we had some reaction, for instance, Argentina. In spite of the difficulties in the economic situation of Argentina, rig count in Argentina went up to 25 rigs. We were close to zero before. So there has been some positive sign there, and also some increase in market share. Our Rig Direct model gave us some advantage, I think, especially in the United States, and we have been able probably to increase to some extent our market share. The combined effect of this resulted in higher sales. For the 4Q, we expect to be able to increase sales again, marginally, not something substantial, because the industry is recovering very slowly. But if you look at the rig count in the United States, rig count went up from the 246. It went up close to 300. So there has been a reaction. There is a reaction in the market, and we should be able, in the 4Q, to have an increase in our sales. Accordingly, also to preserve our cost efficiency. Hopefully, we have no drawback on this. So we should be able to increase also gradually our margin. Okay. So no specifics, but what you are saying is very moderate increases on both points. Yes. There is no, let us say, relevant single market action in the fourth quarter that are changing the landscape. Also, there is some uncertainty deriving from the different issue, including the U.S. election, so that could have an impact on some decision of stocking or not stocking by the companies. Understood. Thank you. Thank you. Our next question comes from the line of Marc Bianchi from Cowen. Your line is now open. Thank you. Again, impressive results. I guess the question that a lot of people have, with the cost reductions that you were able to achieve, is how much of that is truly structural? It sounds like there isn't much cost coming back in the fourth quarter. But as we talk about increasing activity throughout 2021, I'd be curious to hear how much you think of the cost savings that you've been able to achieve are truly permanent. Thank you, Marc Bianchi. I think we implemented a number of action to reduce cost that will stay for the future. We will not be getting back on this cost reduction. There has been a reduction of headcount in some region, concentration of operation in the more efficient facility in some other. There is one factor that is the absorption that should play in our favor, because the level of operation, the level of production will be higher in the fourth quarter compared to the third quarter. So this will result in a better absorption in the lower cost. It is a factor that will help us and may help us also in the beginning of 2021. So I think the cost saving that we achieve are there, and there will be some additional cost reduction due to the better absorption. On top of this, our plan, we advanced on our plan, we implemented a large part of it, but we still consider there is a 20% of our reduction plan and streamlining plan that needs to be implemented. There are medium term action, like the concentration in Canada, the operation in one mill. These are action that are relevant in the medium term, will have an impact on the long term. But there are also action that we are taking that will have an impact in the coming three quarter, that in our view, will contribute to further reduction in cost. Paolo Rocca, the target previously was $220 million by the end of the year, and it would appear that you're over and above that here in the third quarter. Maybe I've got that wrong, but it appears the target is above the $220 million now. Can you comment on what that new target might be? As you mentioned, there's maybe 20% remaining. What would that be in dollar terms? Well, the target was the direct target in our fixed structure. But then there are savings that we have been able to achieve in the reduction of third party contract, in reduction in the variable cost through the better absorption. So on top of what we are reducing in our structure, that is more or less in line with what you are saying. I think we achieve maybe something more than the number you are saying, because there are also factor like the exchange rate in the region in which we operate, that is adding to the reduction we were planning at the beginning. But on top of this, there is, I think, the reduction that we are getting from other sources, including the better absorption. And so we ended up with close to the number that you are mentioning. Yep. Okay, thanks very much. I will turn it back. Thank you. Our next question comes from the line of Tom Zhang from Credit Suisse. Your line is now open. Yes. Hi, gents. Thanks very much for taking my questions. I have got two, and I will take them one by one, if that is okay. First, just on product mix. You guys mentioned in Q2 there would be a negative mix effect into Q3, and at that point, you had said it would extend into Q4. Is that still the case? Do you see a weaker mix going into the next quarter? And, yeah, I will start there. Yes, we confirm all that we are saying. There has been a change in pricing due to a mix, and we expect this to remain. When we talk about the product mix, we are also considering the different region, different product and so on. The mix is a combination of many different factors, and we expect that in the fourth quarter, we will maintain the mix of region and product that were similar to what we have in the third Q. There is no major change. It is not that we had some specific change of region. There is a smooth change between region and between product, and this is driving the pricing. Okay. Very clear. Just a second question on the containment of the costs. Could you remind us if any of that is linked to government aid schemes, for example, in Italy or in Europe? What the outlook is on how long those are kept for. Any government aid for the cost savings? Well, I would say there is no specific program besides the Cassa Integrazione in Italy, the COVID Cassa Integrazione. There has been a scheme to support idle people in Italy during the difficult months. This will go on. Now the last decree, I think, is announcing that the Cassa Integrazione will be extended until March in Italy. This is a factor that helps us to support the cost of idle people. It is not reducing to zero, but it is helping. In the other region, there are some actions to reduce the cost, but for instance, we have none of this in Argentina. What we have done, we negotiated with the union a suspension agreement that allows us to operate and keep the other people with some reduction in cost for the company, and no specific major program in other countries. Just with Italy, would you be able to share roughly what percentage of staff would be on that Cassa Integrazione? Well, I can tell you, I give you a figure as a whole. In this moment, we have roughly 20% of our overall workforce idle under different scheme. Part of this population, not only in Italy, overall in the country. In Italy, in this moment, in this month, production is relatively high because we have some pipeline underway in this moment. So the use of Cassa Integrazione is reduced to a minimum in this period. Okay. It's been more important in the third Q, but not now. Okay, that's very helpful. Thank you. I'll turn it back. Thank you. Our next question comes from the line of J. David Anderson from Barclays. Your line is now open. Hi, good morning. I was wondering if we could just talk a little bit about the inventory levels in the broader U.S. I think the last we talked, last quarter, I think it was something in the neighborhood of about 14 months or so. I was wondering if you could give us an update there. I know the lower 48 rig count has picked up a bit, but looks like it's mostly private operators. I'm just wondering, in your mind, do you need to see the bigger E&Ps and the majors really start to resume drilling before this can start to work down? Thank you. Thank you, David. I think the inventory, to some extent, the inventory on the ground start to go down. I will ask Luca Zanotti to comment on this. Yes. Thank you, Paolo. Good morning, Dave. Good morning, everybody. Yes. As far as your first question, Dave, on the inventory, we see inventory coming down. Now we are in the range of 11 months as we speak, and we see some item being in a relative scarcity. In terms of our mix of operators that are improving, yes, you're right. What we see now are the relatively smaller private operators that are adding rigs. Then we need to see if the bigger guy will start to play in the future, and will maintain the growth that we are seeing today. Okay. Thank you very much. Paolo, you had talked about an opportunity in China with the JV, the threading mill. China has been not really an area where you've looked at very closely in the past. I think you've tried to stay with the more commoditized Asian markets. Can you just talk about this? Are you sort of dipping your toe in the market to sort of see if this is an area you want to get bigger in? I'm just curious what your kind of broader strategic views are on that Asian market. Yes. Well, our strategy for China has been, since long, to supply the more demanding segment in the market. So the more complex project that require complex product. So to focus on this segment. We were operating there from Qingdao, is not only oil and gas. In Qingdao, we are also manufacturing pieces for the automotive business. It is an industrial center that is producing specialty products for the oil industry, for the more complex project, but also for automotive. Now, we proceed in this strategy because in the agreement with Baogang, we will establish a premium facility in Inner Mongolia that will have access to complex projects for CNOOC and CNPC in China. We invest in China for China, and for the segment on which we can have margins that are interesting and differentiation for this. We feel that we need also to combine supply of our pipes coming from different facility in the world, with a component of pipes produced locally. This will position ourself where we want to be in China. We will not planning to be a massive producer in China or to produce in China for export. We are planning to focus on the complex product niche. Makes sense. Thank you for the clarification. Thank you. Our next question comes from the line of Igor Levi from BTIG. Your line is now open. Hi, guys. Could you provide an update on the IPSCO integration? Have you started to regain market share that IPSCO lost during the process of the transaction? Yeah. Thank you, Igor. I will pass this to Luca. Let me comment, just one general comment. There is a consolidation underway in the U.S., and you have seen this. Oil company are consolidating. As I was saying in the opening remark, this is a very important transformation that, in our view, it favor our positioning in the States. Luca, you can comment on, let's say, the setup of Tenaris plus IPSCO in this market. Yes. Thank you, Paolo. Morning, Igor. As I get the opportunity to say over the last conference call as well, our integration with IPSCO is completed. We are managing everything as a system, and at this stage, there is no more IPSCO for us. The only piece that still needs to be completed is the investment in our steel shop facilities up in Koppel. That's going to come online in April, May 2021. This is, let's say, the last piece. It's underway. We're going to get it done according to plans. Of course, as Paolo was saying, there is a consolidation, and second, we are start seeing the benefits expected from the IPSCO integration, coming in into our revenues as well. Again, we are managing this as a system, and we are heading where we were supposed to go. Yeah. Great. Thank you. Thank you, Luca. The point that I think is relevant is, in the U.S., the operators that are consolidating, the Conoco, the Pioneer, that are moving on, the Chevron, are clients with whom we work very well. They are demanding for product, for quality, for delivery, for service, for technical sales. They like long-term relation. So, in this consolidation, our proposal for the Rig Direct, our long-term relation also on a much wider scale, because our old client, that we also serve everywhere in the world, in our view, is giving us a competitive advantage. We feel that we will be well-positioned in the IPSCO acquisition, giving us also the steel shop capability in Koppel, plus expanding our product range with some technology that is relevant for the shares. Should be a good fit. Great. Thank you for that. Another question I had is on your entry into the hydrogen space and how your experience with technology related to your existing business will give you an advantage to secure market share, as hydrogen gains traction as a transportation fuel. Well, this is just at the beginning. Hydrogen, carbon capture and storage technology, geothermal. There is a number of application that requires large infrastructure. Imagine that if the world move, for instance, in fuel cells for truck transportation into a more extended use of hydrogen, then there will be an infrastructure that needs to be built, an infrastructure that require pipes, that require vessels. Hydrogen has a relatively low energy content by volume. So in the end, needs extreme pressure. So we will need to operate vessels with very high pressure exposed to risk of brittle fracture in the steel. So these are technology that we develop for the oil and gas industry, it could be applied to the deployment of product that are aimed for this infrastructure. Today, this is still very limited, but to the extent to which the world move on this energy transition in a much more active way, the world needs to set up the infrastructure for this. We will have, let's say, a segment that will be growing fast, and is growing fast. This segment, year-on-year, we are continuously growing. Still, this technology is transforming the governments who take the decision on the infrastructure support and so on. But we will see. We need to be present to develop the product, to assure the client that they can solve technical problem of our product, and CO2 transportation pressure and so is demanding. Hydrogen pressure are high. So the steel we are developing for this, may be useful for expanding our share in that segment. Great. Thank you very much. I'll turn it back. Thank you. Our next question comes from the line of Nick Konstantakis from Exane. Your line is now open. Hi, guys, and thank you for taking my question. I'm asking you to look in your crystal ball, and I appreciate there's a lot of uncertainties given COVID, but some of the U.S. services companies are talking, and the industry is talking about a more meaningful recovery in the rig count in the U.S., potentially in the second half. You touched a bit on the inventory overhang situation at the moment, but how do we think at the point in 2021 that your sales start picking up meaningfully as well? Could they potentially lag the rig count? Are we going to see it slightly ahead of that? What are your thoughts around the potential timing on that? Well, what we know is that this level of rig operational will not be enough to assure continuity of oil production in the States at the level of 11 million barrel a day. What we know is that in some moment, the inventory of drilled uncompleted wells, will go down. The level of rigs should come up, just to support level of operation in the States that allow level of production in the range of 10-11 million barrel a day. Rigs will go up, in my view. Now, the question of timing is influenced by COVID, and could be also influenced by political decision. Let me ask Luca if, in his view, the scenario of a gradual increase is the one that we see for during 2021. Yes, Paolo. Thank you. I believe I don't have much to add to your explanation. Of course, there are uncertainties, but, as we saw, there is a number of DUCs that are coming down and are able to sustain a little bit production into 2021, but longer term, according to all the analysis that we see, we should have a rig pick up in order to sustain the production level in the levels that you said. I'm fully aligned with what you said. Now, the timing will depend on how the market caps more than whether or not is going to happen. So in our opinion, it's a matter of time, but we're going to see a recovery in rig count in the U.S. Thank you, Luca. Okay. Thank you. Thank you. Our next question comes from the line of Connor Lynagh from Morgan Stanley. Your line is now open. Yeah, thanks. I was wondering if we could discuss the capacity closure in Canada. I am aware that much of your capacity is idled at the moment. But what drove the decision to permanently close capacity there? If we remain in a relatively similar, I think, improving somewhat, but not going substantially higher environment, should we think about more capacity closures from you, or do you feel good with where your capacity is right now? Well, thank you, Connor. The decision in Canada is driven by the need to streamline our industrial operation. We had in Canada, basically three facility and an extensive network of yards and service point. But to keep two facility, one in Sault Ste. Marie, the other one in Calgary, in this condition, is adding to our fixed cost. By moving, because what we are doing, basically, we are moving production of welded product also to Sault Ste. Marie, revamping the equipment, so to transform it into a very high state-of-the-art performance facility. Streamlining the layout in a way that we have high productivity. Installing into a space that we have in Algoma Tubes, distributing the fixed cost, maintenance cost, and so in one facility. Keeping this queue for our other facility for accessory and sometimes other production in Alberta, still operative. We should be able to reduce our cost. At the same time, we are bringing the facility closer to the major source of hot rolled coils. Algoma Tubes, Dofasco, the plant that are operating in the eastern part of Canada. So, in our view, we are saving from a production point of view, we are saving on structural point, we are updating on technology, and we are improving on logistic. That makes sense for a market in which our share is increasing. Our Rig Direct is very high, it is above 93%-95%. We are very keen in strengthening our position in Canada. So more than a closure of capacity, is a repositioning of capacity in a different setup that we expect to be more efficient, more aggressive, more competitive. Okay, got it. That's helpful. I guess, we discussed this briefly earlier in just regards to China, but it seems like you guys have had some niche opportunities in Russia, Saudi Arabia, now China. Are there any other markets that you feel you can sort of take advantage of current market conditions and increase your foothold or otherwise expand your capacity? Is there anything we should be watching out for on that front over the next couple of years here? Well, you know, you mentioned some of these, but I would ask Gabriel to give a brief view of the move from an industrial and commercial point of view and our deployment in the Eastern Hemisphere, because it's pretty large. Our footprint is pretty impressive in all of the region. Gabriel. Yeah. Thank you, Paolo, and Connor, for your question. Indeed, our footprint in the Eastern Hemisphere is pretty large. We mentioned today the announcement of the new JV in China that would complement our positioning built over our facility in Qingdao. We talked in the past about Russia. Right now, slowing down a bit the deployment of that project on Siberia, but pretty much committed to go ahead and create some inroads complementing the niche strategy that we have had so far in Russia. The Middle East is one of the most resilient areas. Clearly, we see that the rig count in general in this hemisphere, a lot of markets involved, but have gone down about 30% versus pre-COVID levels. The core Middle East, like U.A.E., Saudi Arabia, Kuwait, Qatar, their activity has reduced much less, I would say in the range of 15%-20%. These are areas where we have position. We have manufacturing in Saudi Arabia. We have recently completed in this quarter the new service center in U.A.E., as we prepare for the increase of the Rig Direct deployment that we will have here in Abu Dhabi. Later next year, we are also going to be deploying our new threading facility for premium connections in U.A.E. So these are some of the areas that we are seeing. Some other areas have been impacted much more, that have been important for us in the past. Iraq, for example, is an area where the rig count has plummeted about 60%. This has been a supportive engine for Tenaris during 2020, but unfortunately, the pace of shipments will go down into 2021. Also, Kazakhstan is an area that we mentioned before. We had an extraordinary first half of 2020, but due to the shipping policies and reductions of rigs as well, our facility that we have in Aktau, in Kazakhstan, where local content is very important, will be operating at low level of activity for the next two months. We are looking at opportunities. Clearly, with a downturn, opportunities appear. We are pretty much present in every basin, in NRC, in Sub-Saharan Africa. We have service centers in Ghana. We have operating coating facilities in Nigeria, threading in Nigeria as well. We are pretty much having a global and much presence, and ready to take on opportunities. I will not disclose much further. The only thing that I am going to say that the cycles in this part of the world are a bit slower than what we have seen, for example, in the faster pace of North America, either up or down. For now, we have been having some resilience on the shipments. We expect that to continue in the fourth quarter, especially for the Middle East. But naturally, as the new rig count levels and the backlog adjust to the new activity levels, we will see a slowdown into the early 2021. Yeah. Thank you, Gabriel. You were asking if we are moving in with our footprint down the chain. Well, in some markets, like for instance, in Argentina, we are now performing coiled tubing service. We look for opportunity to enhance our service component. In some cases, we have pilot in understanding how this could be done or could be included in our supply chain in a very effective way. Thank you very much. Thank you. Our next question comes from the line of Alessandro Pozzi from Mediobanca. Your line is now open. Hi there. Thank you for taking my questions. I have two. The first one is on cash flow. I think for me, the surprising fact was that probably the free cash flow was positive even before the working capital, putting the acquisition aside. I think that was possible also because the CapEx had come down quite a lot. I was wondering, as we go into 2021, what sort of CapEx do you see? Is it just bare minimum maintenance CapEx, or do you expect to make a few more investments? As a result, any view on what the free cash flow may be in 2021, also because I think we're going to see a working capital build next year. Well, thank you, Alessandro. The cash flow, as you were seeing, has been very positive in these quarters because of the reduction in inventory. We will continue to reduce inventory, because we are introducing changes in the way we program, in the digitalization of our chain. So there is a structural change in the lead time and the level of inventory that we think we need for a defined level of operations. So the digitalization of the chain should give us a reduction of lead time over time. So we will continue on stock reduction at a lower pace, because when the production increases, we inevitably have to increase to some extent. In term of CapEx, this year, we will be spending around $200 million as a whole in 2020. We think that still in 2021, the overall expenditure will stay in the range of $160 million-$170 million. So slightly lower than in 2020, without considering special project or something that could cut, but including the Canada reposition, and in Canada and in China. But without any other, let's say, move outside. Obviously, this is the cash flow before dividend. Yes. We shouldn't expect any build in working capital, say, in Q1 or Q2 next year. Yes. If, let's say, to a lower level, but we will have some additional cash flow coming from the working capital. Okay, perfect. My second question is on Q4. What sort of level of severance charges do you expect, if any, in Q4? What could be the improvement in EBITDA margin going to Q4? Well, in Q4, we will have still severance expenses in the range of $30 million. It will be charge for severance experience in 4Q. Without this, on the term of adjusted EBITDA, we will be in the middle teens. This is what we expect for the fourth quarter. Okay. That's very helpful. Thank you. Thank you, Alexander. Thank you. Thank you. Our next question comes on the line of Frank McGann from Bank of America. Your line is now open. Yes, sir. Typically, in periods like this, you have been able to augment your portfolio. I know you've just announced the Mongolia plant, but looking at acquisitions, I was just wondering, obviously, you've just incorporated IPSCO as well, but, are there other assets that you would look at in this kind of environment, given the strength of your balance sheet and perhaps some distressed assets that might be available at attractive prices? Well, we are always considering strategic option that we can. What we know here is that the industry is in the midst of a long-term energy transition. Our client will consolidate, will redefine the way they operate. They will react to this, and you know this very well. Also, the service industry is doing this. You see the movement that different company are taking. We feel that we also have to look around, keep full financial strength. I think we can leverage on our financial strength to understand how to position the company strategically for the long run. In this process of energy transition, we have to consider different option, and we will be. Our financial position gives us a degree of freedom to consider strategic deployment through acquisition or expansion that will position us as a clear leader in our industry for the future. Okay. If I could follow up also, just in terms of EBITDA margins, following up on the last question or caller. If you're in the mid-teens in the fourth quarter, and as you're looking out towards 2021, I think there's been some expectation that 2021 would remain challenging, given that you're starting from a lower base in the second half than the higher base that you had in the first half of 2020, particularly the first quarter. Are you thinking now that 2021 could be a stronger year potentially than 2020, given the pickup you expect in some markets? Well, as I was mentioning, we expect our margin to increase slowly. We will preserve our cost reduction action on this. It will depend from the dynamics of the market, but this is our view, that this will be recovering slowly, even during the first half of 2021. Okay. Thank you very much. Thank you. Our next question comes from the line of Kevin Roger from Kepler Cheuvreux. Your line is now open. Yes. Good evening, everyone. Thanks for taking the question. Just one for me is related to basically your cash pile. So you have $1.1 billion of cash in hands right now. You expect to be free cash flow positive in the coming quarter. So I was wondering, what is your mindset in the use of this cash pile? How do you consider this cash? Do you want to keep a minimum level of cash? Do you want to increase the return to shareholders, or what is your mindset around this cash pile, please? Well, we have a long-term view for Tenaris. We are always considering the relation with our shareholder, the strategic positioning of the company on the long run in the energy transition. The net, the financial position of Tenaris is a very strong competitive advantage in this long-term vision and planning for the company. There could be opportunity that comes out. There is a chance, and we can maintain a stable, predictable relation with our shareholder. We can also face, let us say, address opportunity or face risk, if any. This is the criteria that I think the board and shareholder is adopting in defining priorities for the long-term development of the company. Okay. I understand. Thanks. Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Giovanni Sardagna for closing remarks. Well, thank you, Gigi, and it is all for today. Thank you all for joining us, and we speak soon. Thanks. Okay. Thank you very much to everybody. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.