Ladies and gentlemen, thank you for standing by, and welcome to the Tenaris Third Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Mr.
Giovanni Sardagna, Investor Relations Officer. Sir, please begin.
Thank you, Howard, and welcome to Tenaris twenty nineteen third quarter results conference call. Before we start, I would like to remind you that during this call, we will be discussing forward looking information and that our actual results may vary from those expressed or implied during the call. With me on the call today are Paulo Rocca, Chairman and CEO Alicia Mondolo, our Chief Financial Officer Guillermo Fogel, Vice Chairman and Member of our Board of Directors Herman Cura, Vice Chairman and Member of our Board of Directors Cabriel Potcusca, President of our Eastern Hemisphere operation 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 our results. Our third quarter sales at $1,800,000,000 were down 7% compared to the corresponding quarter of last year and 8% sequentially, mainly reflecting ongoing activity reduction in The U. S. And Argentina, which is also affecting selling prices in The Americas and a slowdown of our sales in Europe, which were also impacted by seasonality. Our quarterly EBITDA at $322,000,000 was down 13% sequentially and our EBITDA margin at 18% was affected by a decline in average selling prices and the impact of major maintenance stoppages in the Northern Hemisphere, principally in Mexico.
Average selling prices were down 1% compared to the corresponding quarter of last year and 3% sequentially. The decline was mainly in North America where prices have come down due to softer demand and lower steel cost. During the quarter, we generated a free cash flow of $287,000,000 or 16% of revenues, which included a further decline in working capital of $157,000,000 and we ended the quarter with a net cash position of $964,000,000 The Board of Directors approved the payment of an interim dividend in line with last year or $0.13 per share, $0.02 6 per ADR that we will pay in November on November 20. 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 quarter, we continue to generate a strong free cash flow amounting to 16% of revenues as we work on reducing our working capital. In the year to date, we have reduced working capital by $500,000,000 and we expect to reduce this further in the first half of the next year. On the other hand, this quarter in this quarter, we incurred higher cost and operational inefficiencies than we had originally estimated for the extensive program of major maintenance and investment that we carried out these past months. During these stoppages, we made important investment focused on reducing particulate emission, installing new nondestructive controls and in expanding our product and pipe tracking capabilities in several plants.
This investment will improve the competitiveness and working condition of our Endata system as well as the even ever more stringent quality and HSE requirement of our customer. The additional costs affected the results of the quarter and will also affect our fourth quarter results. In The U. S, the drop in operating rigs has been greater than we had anticipated, driving down the Pipe Logix price index by eight percent in the last three months. And this is affecting our prices throughout The Americas.
Most oil and gas operators are focusing on capital discipline and free cash flow generation, looking for a high return on asset in the short and medium term and preparing for the next cycle. This is more noticeable in the small and medium operator, while the major have been more consistent in maintaining the level of their operation. In my view, provided that the price of oil does not fall from current levels, the companies should begin to generate a positive free cash flow, and the number of operating rigs should begin to stabilize in the coming months. In this environment, Tenaris, with its focus on serving the majors and large independent and with our Rig Direct business model that requires less stock on the ground than the rest of market should be able to navigate relatively better than our competitors. At the August, our second request for the tariff free import of steel bar for our Bay City mill was granted, thus helping to consolidate the competitiveness of our operation there.
Meanwhile, we continue to expect a positive outcome from our ongoing antitrust process relating to the IPSCO acquisition before the end of the year. In Argentina, with the recent election, oil and gas companies are putting their investment plan on hold, pending more clarity on the policy measure that will be adopted by the incoming government. Given the importance of the development of Vaca Muerta's potential for the Argentine economy over the coming years, we are confident that the new government will create the condition for further development of this exceptional resource. In The Middle East, won a long term contract valued at $1,900,000,000 to supply a large part of ADNOC's OCTG requirement over the next five years. This award is the first in the region to introduce Rig Direct condition and reflect the effort of our team to promote our services and product technologies such as Doppler's connection.
It also reflects our commitment to support ADNOC's goal of increasing local content and providing training and development opportunities for their nationals. We are seeing a gradual recovery in offshore drilling around the world, which is confirmed by the spending commitment that are being made during the year. An important proportion of this increase in drilling activity is happening in Latin America. We are participating in projects such as NEI AMOCA development in Mexico and ExxonMobil Liza development in Guyana. As we move into the 2020, we expect a recovery in sales and margins, considering our current backlog and ongoing cost reduction programs.
We should also be able to continue generating a good free cash flow. Thank you. And we can now receive your question.
Our first question or comment comes from the line of Frank McGann from Bank of America. Your line is open.
Thank you. Good day. Just in terms of the IPSCO acquisition, you indicated that you expect approval by the end
of the year. I'm just
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 a renegotiation of the price being paid or any other thoughts you have now versus when you initially announced the acquisition?
Thank you, Frank. Our discussion with the for getting the approval of the antitrust are proceeding well. We expect to close this deal by the end of the year. This has been is an investment that is aimed for the long run. It is a strategic move on our side.
It gave us access to steelmaking in The U. S. So it's something that we view as a move for the long run on one side. And the element that suggested this investment to us are still there. In terms of synergies, as we also said in the last conference call, we estimate that the synergies that we estimated for the deal are in place and will be the same over the future.
So we see no changes from this point of view. We have a contract signed. We have a condition for it. Respect it and go on. So that we do not expect any changes in the condition of the deal.
Okay. Thank you. If I could just follow-up. In terms of EBITDA looking forward, typically, you have a nice pickup in the fourth quarter. I was just wondering if you're you still expect to see that this year or if the weaker conditions could reduce the impact that usually have seasonally.
And then any thoughts level of profitability as you go into 2020?
Well, on this account, the we have seen a reduction in the level of rigs that exceeded our expectation. Remember, in the last conference call, we were more optimistic on the fourth Q because we were considering that the level of rigs will go down, but not so much as it happens. So today, as we say in our press release, we expect to be able to maintain the margin that we have in the third quarter also in the fourth Q. The factors that are affecting the fourth Q are in first place, a level of rigs that is, let's say, below what we estimated three months ago. Second important factor is Argentina.
In Argentina, due to the expectation of the change of government, the oil companies put many of their investment and their activity on hold, waiting for definition on the economic and energy policy. This is affecting the level of drilling and operation in Argentina in the fourth Q.
Also,
extra cost and the inefficiency that we had in the maintenance stoppages in the third Q. This has been a very major intervention in many mill. We had an overcost completing all of this. And this will be distributed among the third Q and the fourth Q. So this is also affecting to some extent the result in the fourth Q.
So all in all, as I said at the beginning, we expect the 4Q to be more or less in line with the third Q. In the 2020, we expect a recovery in our margins
for
contract and sales that we have in our backlog and for some rebound in some of the activity related to offshore and to the Eastern Hemisphere. So stability for the 4Q and some increase in the 2020.
Okay. Thank you very much.
Thank you. Our next question or comment comes from the line of Igor Levi from BTIG. Your line is open.
Hey guys. My first question is on U. S. Pricing and margins. U.
S. OCTG prices from the start of the year till today are down about 15, but costs at the same time, hot rolled coil is down over 30%, scraps down over 40%, which suggests a $200 a ton drop in cost and the $200 a ton drop in prices. So this would suggest similar EBITDA margins, EBITDA per ton since the start of the year, but this appears not to be the case and commentary around margins has been quite negative. So I was hoping you guys can help me reconcile the discrepancy here.
Yes. Thank you, Igor. Well, basically, I think the basic impact is due to the fact that the reduction in the number of active rigs has reduced the size of the market. And so the loss in volume because of the allocation and the impact of fixed cost and so is having an influence in reducing slightly our margins up to now. You should also consider that the hot rolled coils, as you were saying, went down pretty substantially in the last quarter.
This had an influence on our cost, but we will see this influence more in the coming quarter because of the accounting and the way we account for the cost of our inputs into the cost of sales. So we see the price down, and we will see the cost down later on. But this decline in the hot rolled coils has also increased competitiveness of the welded pipe to some extent. So this is also a factor that affected overall price level. To some extent, the share of welded pipe in the overall market increased slightly.
So this also reduced slightly the volume of our sale. And that's these are the element that led to the margin that you see in our result, slightly lower compared to previous quarters.
Great. Thank you. That's very helpful. And then to what extent has the drop in Pipe Logix 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?
On this issue, I will ask Gabriel to give us a view on the pricing situation and impact of Pipe Logix on the pricing in the region.
Okay. Thank you, Paolo. Good morning, Igor. In fact, there are no major variations in international markets in terms of pricing. Even though the pricing there remains competitive in general, there is a positive momentum in our backlog of contracts that allow us to decouple really from the present price trend that you and Paulo were commenting before from the Pipe Logics in The U.
S. As a matter of fact, the demand of offshore and complex projects is increasing. So we also continue to serve this market with our service grades, corrosion resistant alloys, which we are experiencing and seeing in the market a tightness of supply. So in some of those niches, we are also seeing prices going up as a matter of fact.
Yes. And as you noticed that we mentioned influence of Pipe Logix prices on The Americas because some of the contract in The Americas have a component of Pipe Login in the formulas.
Great. Thank you very much. I'll turn it back.
Thank you. Our next question or comment comes from the line of Sean Meakim from JPMorgan. Your line is open.
Thank you. First, I was hoping we could maybe just try to unpack some of the margin components a little bit further. So pricing is a challenge in North America and in some parts of international. Other parts are still relatively stable. But as you're seeing less revenue in North America and perhaps more offshore as you go into 2020, can we talk about how you'd expect the mix to shift between welded versus seamless and larger diameter tubes versus maybe what you see in North America and how some of that could influence the margins that you'd see next year?
Thank you, Sean. I would see that pipe logic is being influenced by the decline in the rigs. I mean, the reduction in the size of the market has driven down the prices. This is what you realize now. When we look at 2020, I think that overall in the mix, as you were saying, the offshore and the Eastern Hemisphere component will have a positive effect on this.
But when you look at the margin and we look at our cost, the size, the volume of the is important in defining absorption. This is an important factor also. What we should also consider for the margins in the quarters in 2020 is the plan for cost reduction and streamlining of our operation that we have underway. In our forecast, we expect that all in all, the margin in the 2012 should be two points higher than the margin we have in these quarters, considering the combined effect of a better mix and the other factor that we can see as of today.
Thank you for that. That's very helpful. And I was hoping we could follow-up a bit more on the Rig Direct award in The UAE. So can you give a sense of how that contract ramps? Is it fairly level load or does it start slower next year?
And just how does that influence your expectations for the Middle East region in 2020?
Yes. Gabriel, you can comment. I mean, ADNOC, let me tell you, Josh, there has been a very great achievement. We are getting more than 50 plus percent of their contract and is a massive operation in the leading countries in The Middle East. So it's been very relevant for the entire Middle East.
But Gabriel, you can add on this and the perspective that this is opening.
Yes. Thank you, Paulo. Good morning, Jean. Indeed, a very big achievement of our team in The Middle East to finally land that contract that we have worked hard to win has been a very good collaboration with ADNOC that really showed the willingness to modernize and transform and bring best practices into The Middle East. It will be the first contract of the size of this magnitude on the rig direct in The Middle East.
The contract of $1,900,000,000 as Paolo was mentioning, will cover five years with a possibility for an extension on two. We are working on the transition. We are working through the information of the stocks and drilling programs of ADNO. We are in that process as we speak, mobilizing resources and preparing for that. It will take some time until the full volumes and shipments materialize in our books.
We expect the contract to start with some impact on the 2020, but to really start 2021 and thereafter with a full impact. We are also working on upgrading our service center. We are we have committed to have a state of the art also premium manufacturing facility in Abu Dhabi. This was also part of our distinctive and winning proposal. The fact that to invest in local content and manufacturing in The Emirates to train and to help The Emirates diversify their economy.
That was part of the success story there, coupled with the local and global track record that we have on Rig Direct. This, as you can imagine, for ADNOC and for the country, the revenues, oil and gas is a major part of the economy and to rely on a company to be handling and managing 50% of the supply chain of the tubulars is a massive vote of trust and commitment on our side. So we are mobilizing resources. Also, it's important to note that our range of products will cover really all the drilling environments. We are the only company that will be covering both the onshore and the offshore.
So this is, of from Carbon, Sourcery, Doppler's, all the spectrum. So we are really satisfied and mobilizing resources to deliver value because we expect that this to be the first in The Middle East. But our expectation is that this to become a showroom for the rest
of the region as well. Got it. That makes a lot of sense.
Gentlemen, thank you very much.
Thank you. Our next question or comment comes from the line of David Anderson from Barclays. Your line is open.
Hi, good morning. So Generis obviously has quite a bit exposure to Argentina. Was just wondering if you could just kind of talk through some of the scenarios that you're thinking about. The timeline, like when do we expecting to hear something from the Argentinean 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 in terms of what we're looking for, I know price controls has only been some have been talked about, but maybe just talk about the different scenarios that you're envisioning?
Thank you, David. Well, I think the in Argentina, we will see the change in the government is important. But the new government still, I think, needs to evaluate the circumstances and the different factors that are affecting the economy, didn't make up yet all of these views for the future, in my view, didn't work through yet a plan for leading the economy into a growing path in the coming year. There are several issues, high inflation, the need to face a debt that is relatively high for Argentina and need to redefine the agreement or at least to validate the agreement with the monetary fund and a number of decision in internal on the internal market. And last but not least, how to manage the energy policy for the country and how to support the development of Vaca Muerta.
Our view is that the government will assume on the December 10, he will take his time to prepare the plan and build the team. Today, this is not yet clear. I expect in the coming months that we will understand much more about this. Now development of Vaca Muerta is essential, is one of the key component for recovering sustainable growth in the economy. So this will a key component of the program of the future government.
We hope that the government will set in place an energy policy that will promote investment by local and foreign companies. This is very important. But at the moment, we have no indication of which will be the direction that the government may take. You are saying what is good and what is bad. In my view, it is very important that the government has an understanding with the monetary fund and with the external creditor that stabilize the external sector and also that may preserve the rules in place up to now for the energy sector.
This
is something that we will understand and see in the coming weeks before the December 10.
Okay. Thank you. On a separate subject, you had talked about your mix is improving going to be improving next year with a little bit more offshore work. You had mentioned Latin America. Could you just perhaps just give us some indication of kind of where some of the pockets of strength are on your offshore business right now and maybe what you're hoping to see maybe some areas that haven't quite emerged yet that maybe you might think happened later in 2020?
Well, Latin America is important in the future of offshore. We consider that the production that may come for the future project, the additional production for future projects in offshore to larger 10 will be based in Latin America between 4050% of this additional production should come from Mexico, from Guyana, from Brazil, general, from offshore in Latin America. We think we have a very strong position in Mexico. We mentioned one of the projects in NEI development is the first to enter into production stage, but there are many other that are coming. Guyana is not only Liza, a number of projects around this that will continue growing during 2020.
And in Brazil, the activity will move more aggressively probably in the 2020. Gradually, we'll expand activity by Petrobras to divide private. Maybe for Mexico, how we see Pemex and private. Guillermo, you can add some specific comments on this.
Well, I think Mexico, Paolo, we have good news in terms of the dynamics of the market. The drilling activity continues to increase, driven by both Pemex and the coming up of the different rounds. Just to mention a number, we have on the third quarter, double of the number of rigs we had in the first quarter of last year. We expect another jump in the fourth quarter in the number of rigs, probably we're going to be seeing an increase of another 20%, 25% increase in the number of rigs in the fourth quarter. And then we continue to see an improvement of the conditions.
The mix in Mexico is very good it's a very good mix. We have also the deepwater projects. We have the Eni. We have the farm out with Shell. So I would say that in terms of the market activity and in terms of the product mix, Mexico is
going to continue to be good news.
Yes. I think these are the major driver of activity in South America. Outside South America and in the Eastern Hemisphere, Gabriel, some comment on the main project at the area in which you see them more dynamic.
Yes, Paolo. In the international markets of the Eastern field, also the offshore is showing a positive dynamic, is gradually recovering. The area that has been most active has been the North Sea. We see there a number of midsized projects coming on stream, also a lot of number of tiebacks and smaller scale projects as well. We're also seeing a comeback of exploration, especially Norway.
So we are very well positioned there with our technologies and services platform to take advantage of that positive momentum. Sub Saharan Africa is also on the move to a lower extent than the North Sea, but it's also moving in the right direction. We are seeing a good amount of advanced work on greenfield projects, deepwater projects in Angola, Mozambique and some other basins there as well. Nigeria is also moving only on the onshore and the shallow waters. Still, we don't see major projects on the deepwater in Nigeria.
So overall, Sub Sahara and Africa is starting to move as well. When we go to Asia, well, China has a big drive for our gas, both onshore and offshore as well. So that's another pocket where we are participating and we are seeing better prospects going ahead. And Southeast Asia has been quite stable. On one hand, we have some positive dynamics associated with the deepwater drilling in the LNGs in Australia like we had in the I think it was in the second quarter of this year and we'll have at the 2020.
And the weakness there has been the Gulf Of Thailand as there are changes in concessions going ahead. There has been some softening of the drilling activity. But all in all, across the Eastern Hemisphere, we see a continuous trend on offshore gradual recovery.
That's good to hear. Thank you very much, gentlemen.
Thank you. Our next question or comment comes from the line of Marc Bianchi from Cowen. Your line is open.
Thank you. Paulo, 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 three fifty million dollars in the 2020. I'm curious how you see that developing over the course of the year. It sounds like you anticipate increases from there. Is it reasonable to think that we could be looking at an EBITDA number above $1,500,000,000 for the year, just kind of based on the outlook that you guys have today?
I don't think we have visibility beyond that. And also, considering the previous experience in the last quarter, in which we were overly optimistic on the rig count, in The U. S, we will not make any forecast of the evolution after the first quarter. This is where we see that we can we have contract in our backlog. We have, let's say, predictable vision also of where the prices are going and the action we are taking in our cost that should allow us to give this 200 basis point in additional EBITDA for the first quarter.
But it would be very difficult to have a view. The world today is a very volatile world. There are many unpredictable issue going on. And so I don't think it's easy to have a medium term forecast beyond what we did with the first quarter, no?
No, certainly understand. I guess in terms of the cost progression beyond first quarter, which maybe you do have some more visibility to, are 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 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, there are two components. One is the permanent work on cost reduction that is underway. We let's say, we have a number of programs that gradually bring benefit allocation among plants, improve 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 $350,000,000 that has an impact on our efficiency, on our cost. This is something that is underway.
And in all of the past five years, we got every year some improvement in our cost due to this permanent action, continuous improvement action. Then there is a cost of inputs. Basically, scrap is very important for us. As you know, Tenaris is close to 90% scrap base. This is very good from our environment position in CO2 emission.
It's also something that is, let's say, making our operation depending on scrap in the different market. What I can see, I mean, you are aware of the price of hot rolled coils and scrap went down in the recent in the last quarter, the hot rolled coils went down pretty abruptly. This has an influence in the cost of our welded product, but also is driving down prices of welded pipes. And this is something that is part of the price decline in North America. So these are the moving parts that are affecting our cost.
It's difficult to have a forecast, medium term forecast This depends to a large extent from issue like the sanction against Turkey, the level of operation in Turkey. And so these are difficult to forecast for the medium range. What we know is that our continuous improvement will give us a permanent cost reduction over time in the provided we are able to maintain a level of volume a volume of production more or less in line with what we are doing today.
Okay, very good. Thank you for the comments.
Thank you. Our next question or comment comes from the line of Amy Wong from UBS. Your line is open.
Hi, guys. A couple of questions from me, please. The first one relates to your international tender. Could you comment on how the competition is shaping up? Is it getting more or less competitive?
Or is it still pretty much the same players that are tendering for these projects? And my second question relates to your 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 the your experience with the slowdown you're seeing right now, how do you think Rig Direct is actually helping you out in the current slowdown slower environment, please? Thank you.
Thank you, Amy. On the international tender, I will ask Gabriela to give us an overview how is the competitive environment there.
Hello, Amy. In terms of tenders, the international markets, in the competitive environment has been not changing dramatically. As I was saying, higher demand on the complex projects has been mainly played by the same traditional Tier one competitors, and that's where the tightness and the strength in the prices is. So not much change. There's still we don't see deepwater projects or complex projects where new players are being introduced.
I think that still our industry is very conscious of potential issues regarding to failure of products and importance on quality in our space. Then if you go to the lower end of the competition, really, where if you want the low spec or commodity type of pipes, that's not the market where we're in. That has been occupied to a large extent to the by Chinese or lower end players. This is not a part of the market in the Eastern Hemisphere, where in the majority of the cases, take part. And then there is a medium spectrum, where we only participate, where we are able to differentiate products, services, local content.
And these are the intricacies of the 50 countries that we monitor in the we do business in the Eastern Hemisphere, where we see a chance to have a genuine and sustainable competitive advantage. So all in all, there is not a massive change in the landscape of the competitors.
Thank you, Gabriel. North America and Rig Direct, this Luca, I will ask you to
Thank comment on you, Paulo. Good morning, Eni. Well, there are a number of benefits. One was mentioned in your introduction, Paulo, which is that the redirect allow us to be more close to the real consumption. So we work with redirect with much less inventory.
So one of the benefits is that relatively speaking, we should be better positioned to wave through this downturn. The second that I would mention is that carrying out all the intermediation, we create benefits and synergies that we tend to share with our customers, but at same time, come to our benefit as well. And the third one that I will mention is that being very close to our customers, we can really develop what is needed by the customer. And yes, don't want to go into many details for competitive reasons, but we recently developed a specific product for a vehicle operator. And this certainly will give us in the long term the possibility to establish tighter bonds and a better relationship with this customer in a relationship in which we drive efficiency and cost down on their side and gain relationship and value on our side as well.
I believe that these will be the three that I will mention. Of course, we can talk one hour about this.
Is I mean by the way, the penetration of this, we are now 75% Yes, of our are 755% of of And the Rig Direct process. This has been very relevant penetration in a relatively small period of time. This is the main comment. Now this Rig Direct comes together with many features. One of these is traceability and tracking tracking of the entire 5x5 product 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 our inventory. In the end, in the market, there is more than five six months of inventory. We are managing indirect with much less of this in the range of two months or less. I think we could do even better in introducing very high integration with the client, including IT, information technology integration of the client.
We should be able to reduce inventory to a much lower level. This is what we consider a strong competitive advantage.
All right. That's very clear. Thank you. I hope the higher penetration is not just because of the number of rigs are dropping off, but very, very good there, very good progress there. Thank you.
I'll turn it over.
Yes. This is you're right that the rigs are coming down. This is true. But let me tell you that most of our clients that are major or independent are more stable than entire market. Remember, half of the market in The U.
S. Is being driven by very small companies, MEM and PAP drilling in field. So in this sense, our operations are more stable even in a situation of capital discipline extreme, I would say, discipline part of most of the operator. This is more aggressive is carried out more aggressively by the small operator and small independent than by the large and large independent.
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 $50,000,000 of non recurring maintenance impact as we go from Q3 to Q4. And I just want to see if that's still the case. If it is, it obviously implies an otherwise significant 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 reaudit that progression of the maintenance impacts with regard to how we get from $320,000,000 in Q3 or $322,000,000 and then to a better number in Q1. That would be helpful. Thanks.
Thank you, Ian. Well, basically, as I mentioned in the beginning, have for the way we account for the major maintenance, we have a program maintenance for the entire year, and we distributed in quarter by quarter. If we have 100, we distribute 25, 25, 25. When we realized the investment in August, and we have overrun there. I mean, it was so big and so relevant.
We had overrun overall in the range of close to $20,000,000 of an overall program. Then if we consider, not only maintenance, but I mean, the entire operation was very substantial. We distributed this 20,000,000 into the third Q and the fourth Q because we have to adjust overall year with the real investment the real maintenance expenditure in the overall year. This is the reason why this overrun is impacting also in the fourth Q. Now when we get into the first Q, the situation change because the maintenance plan expenditure that we plan for 2020 is substantially lower than the one that we plan even without the overrun for the 2019.
So the expenditure for maintenance will go down one quarter to the other by around $20,000,000 This will be the reduction in this account. When we complete the plan, I hope we can drive it down by $30,000,000 something more. Conservative between 20,000,000 and $30,000,000 will be the shift from Q4 into Q1.
That's really helpful. Thanks, Paolo. I would just like to say, kudos on the free cash flow here. There's a lot of discussion about free cash flow and energy these days. The evidence of it in Tenaris is, well, very unique and appreciated.
So thanks. I'll pass it over.
Thank you very much. By the way, we plan to continue to generate cash flow now for production.
You. Our next question or comment comes from the line of Stephen Gengard from Stifel. Your line is open.
Thanks. Hello, everybody. So actually following up on 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 areas that you want to expand geographically that you may be looking 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, we are very much focused on cash generation, the reshaping of the supply chain And the focus on reduction on stocking process is one of the driver in our management controls in our action. So we are focused on this. On the receivable, on the rest of our working capital, we also try to improve permanently on this. And this will be pretty successful this year. By the end of the year, you will and we will end up with a free cash flow in the range of more than $1,000,000,000 $1.1 number in this range by the end of the year in cash in free cash generation.
Now when we enter in the next quarter, we expect higher level of sales, as I was mentioning. So to some extent, in the last in December, we may need to have some higher inventory in just to prepare for sales in the first quarter. But this overall, I mean, it should not have too much of an impact on our cash flow generation. As far as application of this, as you saw, we are maintaining a very consistent dividend policy a pretty relevant payout. And this is something that we plan to continue to propose to our Board or even in the future.
On the other side, apart from the acquisition that you mentioned, we have a number of initiative that are consolidating our position in the different region underway, and we will continue with these activities in 2020. As we announced, we are participating in a project in Siberia. It is part of this program for establishing stronger routes in key region and key market. We think that it's very important to have resources for pursuing this action of strengthening our position in regional scenarios, apart from investing in permanent improving in our plant. And also, the other issue and the other point on which our we have an extensive investment program is environment and decarbonization of our processes.
So in the end, regional setup, improvement in technology and innovation for our inductance supply chain facility, information technology for relation with client and digitalization of the chain. But environment and decarbonization is the other point on which we have a constant flows of investment. And we plan to continue to do this in 2020.
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 think about the potential integration of IPSCO, does it how well does that fold into the Rig Direct model in The U. S? And is there are any sort of thresholds of sort of size where Rig Direct can go?
And I'm just trying to figure out if there's any kind of conflicts it creates in the supply chain with distributors? Or can you start to push a lot of this through the Rig Direct system?
Well, I really think that Rig Direct is our way of building relation with the client, and we will transform our supply chain in that direction. We will continue to do this. But Luca, maybe you can add on the regard of the American, North American situation and the possible integration with IPSCO?
Yes, Paolo. Good morning, Stephen. IPSCO fits perfectly with our Rig the Rem model because it gives us the possibility to expand very efficiently also to the Northern Region of The United States. As you know, we are very strong geographically in the South and IPSCO with their facilities and services in the North are perfectly fitting with our strategy. And going back to a point that you mentioned already, Paolo, before, the model has demonstrated to be pretty successful because today 75% of our sales are channeled this redirect model.
And we don't see this changing with the acquisition of IPSCO.
Very good. Thank you, gentlemen.
Thank you. Our next question or comment comes from the line of Lillian Stark from Morgan Stanley. Your line is open.
Hi, good morning, and thank you for taking my questions. I just had a quick follow-up as well on the free cash flow. If we look into 2020 and these initiatives that you have ongoing, more or less the level of CapEx that you're anticipating in order to continue to support that free cash flow, more or less should we expect it
to be
around excluding the investments in Siberia and IPSCO, of course, around the EUR $350,000,000 level? Or are there any other initiatives we should be taking into account? And then just the second question I had was more on the timing of the recovery in the international markets. You mentioned Mexico and Brazil and ADNOC being more of a contribution in the second half. Just wondering if there's anything in the first half that could support revenues from the international market during the first half, I mean?
On the first question, I mean, we expect the level of investment to remain in the range of $5,000,000,360,000,000 dollars This has been the level of investment that we expect for 2019, and this is what we plan to have in 2020. This is not including obviously the IPSCO acquisition or if there is a case, any other acquisition or could. Let me confirm this also Alicia is the number that we have in our plan, no?
Yes, yes. We are planning about $355,000,000 a year is for 2020.
Yes. So this is the number. Then on the second question, I'm not sure I understand it to you well. Could you tell me exactly which is the point that you mentioned?
Yes. You mentioned the contribution from projects in Brazil, The Middle East, even a bit of Mexico having more of an impact in the 2020. I was just wondering outside of The U. S, what contribution are you expecting from these other markets, offshore, etcetera? You already provided good color of where things are improving, but is this something we can anticipate in the first to start having an impact in the first half?
Or is it still mostly second half twenty twenty effect?
Yes. Let me tell you, all of the elements that I mentioned that were affecting our forecast for the 4Q, the one that we made three months ago. One was Argentina. Argentina, in the end, turned out to be much lower than expected. This is one area in which if the government put in place consistent, predictable and solid energy plan, I expect that Argentina could get back to a level of investment operation maybe during 2020, but this is something subject to what is.
In the case of Mexico, as Guillermo was saying, we are very confident on increase from Pemex activity and from private offshore and onshore development. This will be important for us. In the case of Brazil, I was mentioning the second part of twenty twenty and probably I mean, gradually, the program for offshore in Brazil will go on. We hope that we will have opportunity in Brazil in the 2020, not so much before. In the case of the Eastern Hemisphere, Gabriel?
Yes. Thank you, Paolo. Good morning, Lillian. In fact, with the positive dynamic that we're mentioning on The Middle East and also in the different regions of the offshore in international markets, we have been able to create a strong backlog into 2020. So we expect 2019 with higher sales in the Eastern Hemisphere than in the 2019.
And I'm also confident that the revenues for the 2020 would be higher than the 2019.
Okay, perfect. Thank you very much for the additional color.
Thank you. Our next question or comment comes from the line of Edward Vaughan from Redburn. Your line is open.
Hi, thanks for taking my question and the clarity on the IPSCO acquisition. I was just wondering if you could give a bit more guidance in terms of the timing of integration. I think you last spoke about around one hundred days or so. Is that still what you're thinking? Thank you.
Let me understand if I understand you well. The timing of the closing of the acquisition, is this correct? The timing for the integration for the synergies of Yes. The No, for the integration. Well, we plan to close this by the end of the year.
And then we expect I mean, we have a program for one hundred days for, let's say, the first degree of integration, that is a basic integration of the business, and then the continuous improvement will take on over time. But let's say, three months, we assume that we are able to have in place all the major processes of Tenaris into the company. Okay. Thank you.
Thank you. I'm showing no additional 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 very
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.