TENARIS S.A. CERTAIN DEFINED TERMS
Unless otherwise specified or if the context so requires:
| · | References in this half-year report to "the Company" are exclusively to Tenaris S.A., a Luxembourg société anonyme. |
| · | References in this half-year report to "Tenaris", "we", "us" or "our" are to Tenaris S.A. and its consolidated subsidiaries. |
| · | References in this half-year report to "San Faustin" are to San Faustin S.A., a Luxembourg société anonyme and the Company's controlling shareholder. |
| · | "shares" refers to ordinary shares, par value $1.00, of the Company. |
| · | "ADSs" refers to the American Depositary Shares, which are evidenced by American Depositary Receipts, and represent two shares each. |
| · | "OCTG" refers to oil country tubular goods. |
| · | "tons" refers to metric tons; one metric ton is equal to 1,000 kilograms, 2,204.62 pounds, or 1.102 U.S. (short) tons. |
| · | "billion" refers to one thousand million, or 1,000,000,000. |
| · | "U.S. dollars", "US$", "USD" or "$" each refers to the United States dollar. |
| · | "BRL" refers to the Brazilian real. |
| · | "EUR" refers to the Euro. |
PURPOSE
This half-year report for the six-month period ended June 30, 2023, has been prepared in compliance with Article 4 of the Luxembourg Transparency Law of 11 January 2008 (as amended), and should be read in conjunction with the annual report for the year ended December 31, 2022 (including the financial statements contained therein) and the unaudited consolidated condensed interim financial statements included in this half-year report.
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION
Accounting Principles
We prepare our consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and in accordance with IFRS as adopted by the European Union ("EU"). Additionally, this half-year report includes certain non-IFRS alternative performance measures such as EBITDA, Net cash/debt position and Free Cash Flow. See Exhibit I for more details on these alternative performance measures.
We publish consolidated financial statements expressed in U.S. dollars. The unaudited consolidated condensed interim financial statements included in this half-year report have been prepared in accordance with IAS 34, "Interim Financial Reporting" as issued by the IASB and as adopted by the EU. These unaudited consolidated condensed interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2022, which have been prepared in accordance with IFRS. See note 2 "Accounting Policies and Basis of Presentation" to our unaudited consolidated condensed interim financial statements included in this half-year report.
The unaudited consolidated condensed interim financial statements included in this half-year report have been reviewed by PricewaterhouseCoopers Société Coopérative, Cabinet de révision agréé, for purposes of complying with the requirements of the jurisdictions where the Company's securities are traded.
Whenever necessary, certain comparative amounts have been reclassified to conform to changes in presentation in the current period.
Rounding
Certain monetary amounts, percentages and other figures included in this half-year report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
Our Internet Website is Not Part of this Half-Year Report
We maintain an Internet website at www.tenaris.com. Information contained in or otherwise accessible through our Internet website is not a part of this half-year report. All references in this half-year report to this Internet site are inactive textual references to these URLs, or "uniform resource locators" and are for informational reference only. We assume no responsibility for the information contained on our Internet website.
This version of the half-year report is the only authoritative version and is available on the Luxembourg Stock Exchange website: https://my.luxse.com/FIRST
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This half-year report and any other oral or written statements made by us to the public may contain "forward-looking statements" under applicable securities laws. Forward-looking statements are based on management's current views and assumptions and are provided to allow potential investors the opportunity to understand management's beliefs and opinions in respect of the future so that they may use such beliefs and opinions as one factor in evaluating an investment. Forward-looking statements involve known and unknown risks that could cause actual results, performance or events to differ materially from those expressed or implied by those statements.
We use words and terms such as "aim", "will likely result", "will continue", "contemplate", "seek to", "future", "objective", "goal", "should", "will pursue", "anticipate", "estimate", "expect", "project", "intend", "plan", "believe" and words and terms of similar substance to identify forward-looking statements, but they are not the only way we identify such statements. This half-year report contains forward-looking statements, including with respect to certain of our plans and current goals and expectations relating to Tenaris's future financial condition and performance.
Sections of this half-year report that by their nature contain forward-looking statements include, but are not limited to, "Principal Risks and Uncertainties" and "Business Overview". In addition to the risks related to our business discussed under "Principal Risks and Uncertainties", other factors could cause actual results to differ materially from those described in the forward-looking statements. These factors include but are not limited to:
| · | our ability to implement our business strategy and to adapt it adequately to the energy transition or to grow through acquisitions, joint ventures and other investments; |
| · | our ability to price our products and services in accordance with our strategy; |
| · | trends in the levels of investment in oil and gas exploration and drilling worldwide; |
| · | the competitive environment in our business and our industry; |
| · | the impact of climate change legislations, including increasing regulatory requirements and extensive technology and market changes aimed at transitioning to a lower-carbon economy and reducing greenhouse gas ("GHG") emissions; |
| · | the physical risks resulting from climate change, including natural disasters, increased severity of extreme weather events, chronic climate changes and long-term shifts in weather patterns; |
| · | our ability to absorb cost increases and to secure supplies of essential raw materials and energy; |
| · | our ability to adjust fixed and semi-fixed costs to fluctuations in product demand; |
| · | the impact of the world's economy on the energy sector in general, or our business and operations; |
| · | general macroeconomic changes, including high inflation rates and central banks' measures to address inflation, as well as, international conflicts, public health epidemics (such as the COVID-19 pandemic) and other political, social, or economic conditions and developments in the countries in which we operate or distribute pipes, including developments in connection with the Russia-Ukraine armed conflict; and |
| · | changes to applicable laws and regulations, including the imposition of tariffs or quotas or other trade barriers. |
By their nature, certain disclosures relating to these and other risks are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses or other occurrences or developments that may affect our financial condition and results of operations could differ materially from those that have been estimated. You should not place undue reliance on forward-looking statements, which speak only as of the date of this annual report. Except as required by law, we are not under any obligation, and expressly disclaim any obligation to, update or alter any forward-looking statements, whether as a result of new information, future events or otherwise
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TABLE OF CONTENTS
| INTERIM MANAGEMENT REPORT | 4 |
| Company Overview | 4 |
| Principal Risks and Uncertainties | 5 |
| Outstanding Legal Proceedings | 10 |
| Business Overview | 11 |
| Other significant events of the period | 16 |
| Related Party Transactions | 18 |
| MANAGEMENT CERTIFICATION | 19 |
| FINANCIAL INFORMATION | 20 |
| Consolidated Condensed Interim Financial Statement | 20 |
| EXHIBIT I - ALTERNATIVE PERFORMANCE MEASURES | 50 |
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INTERIM MANAGEMENT REPORT
Company Overview
Tenaris is a leading global manufacturer and supplier of steel pipe products and related services for the world's energy industry and other industrial applications. Our customers include most of the world's leading oil & gas companies, and we operate an integrated network of steel pipe manufacturing, research, finishing and service facilities with industrial operations in the Americas, Europe, the Middle East, Asia and Africa.
Although our operations are focused on serving the oil & gas industry, we also supply pipes and tubular components for non-energy applications. We develop and supply products and services for low-carbon energy applications such as geothermal wells, waste-to-energy (bio-energy) power plants, hydrogen storage and transportation, and carbon capture and storage.
Through an integrated global network of R&D, manufacturing, and service facilities, and a team of 26,000 people worldwide, we work with our customers to meet their needs in a timely manner, observing the highest levels of product performance and reliability.
For more information on the Company, including its competitive strengths, business segments and products see our annual report for the year ended December 31, 2022, and for a discussion and analysis of our financial condition and results of operations see "Business overview - Operating and Financial Review and Prospects" in this half-year report.
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Principal Risks and Uncertainties
We face certain risks associated to our business and the industry in which we operate. We are a global steel pipe manufacturer with a strong focus on manufacturing products and related services for the oil and gas industry.
Demand for steel pipe products from the oil and gas industry has historically been volatile and depends primarily upon the number of oil and natural gas wells being drilled, completed and reworked, and the depth and drilling conditions of these wells. The level of exploration, development and production activities of, and the corresponding capital spending by, oil and gas companies, including national oil companies, depends primarily on current and expected future prices of oil and natural gas and is sensitive to the industry's view of future economic growth and the resulting impact on demand for oil and natural gas. Several factors, such as the supply and demand for oil and gas, the development and availability of new drilling technology, political and global economic conditions, and government regulations, affect these prices. When the price of oil and gas falls, oil and gas companies generally reduce spending on production and exploration activities and, accordingly, make fewer purchases of steel pipe products.
There is an increased attention on GHG emissions and climate change from different sectors of society. The Paris Agreement, adopted at the 2015 United Nations Climate Conference, sets out the global framework to limit the rising temperature of the planet and to strengthen the countries' ability to deal with the effects of climate change. The EU Emissions Trading System signaled a major EU energy policy to combat global warming based on a "cap & trade" program, and the European Green Deal, launched in 2019, focuses on adopting the required policies and measures aimed at reaching zero GHG emissions in Europe by 2050. The EU taxonomy classification system, which establishes a list of environmentally sustainable economic activities, is designed to help the EU scale up sustainable investment and implement the European Green Deal. Similarly, the U.S. Inflation Reduction Act of 2022 calls for a reduction of carbon emissions by roughly 40% by 2030. Other countries are introducing or considering similar measures or regulations which would lower emissions. If there is no meaningful progress in lowering emissions in the years ahead, there is an increased likelihood of abrupt policy interventions as governments attempt to meet their environmental goals by adopting policy, legal, technology and market changes in the transition to a low-carbon global economy. We provide products and services to the oil and gas industry, which accounts, directly and indirectly for a significant portion of GHG emissions. Existing and future legislation and regulations related to GHG emissions (such as increased pricing of GHG emissions and enhanced emissions-reporting obligations) and climate change, as well as government initiatives to promote the use of alternative energy sources and substitute existing products and services with lower emissions options (with many jurisdictions implementing tax advantages and other subsidies to promote the development of renewable energy sources, or even requiring minimum thresholds for power generation from renewable sources) may significantly curtail demand for and production of fossil fuels, such as oil and natural gas. These initiatives, together with the growing social awareness regarding climate change and other environmental matters, have resulted in increased investor and consumer demand for renewable energy and additional compliance requirements for fossil energy projects, which are likely to become more stringent over time and to result in substantial increases in costs for the oil and natural gas industry, potentially leading to write-offs and early retirement of existing assets. Furthermore, ongoing technological developments in the renewable energy industry are making renewable energy increasingly competitive with fossil-fuels. If this trend continues, energy demand could shift increasingly towards more environmentally sustainable sources such as hydroelectrical, solar, wind and other renewable energies, which would, in turn, reduce demand for oil and natural gas, thus negatively affecting demand for our products and services and, ultimately, our future results of operations. In addition, adoption of new climate change legislation in the countries in which Tenaris operates could result in incremental operating costs (such as incremental compliance costs and increased insurance premiums) and unexpected capital expenditures and, eventually, affect our competitiveness and reduce our market share. In addition, shifts in customer preferences and failure to respond to shareholders' demand for climate-related measures and environmental standards could harm our reputation, adversely affect the ability or willingness of our customers or suppliers to do business with us, negatively impact workforce management and planning, erode stakeholder support and restrict or reduce access to financial resources.
Our business has been, and in the future could be, affected by severe weather in areas where we operate, which could materially affect our operations and financial results. Extreme weather conditions and natural disasters such as hurricanes, flooding or coastal storm surges have in the past resulted in, and may in the future result in, the shutdown of our facilities, evacuation of our employees or activity disruptions at our client's well-sites or in our supply chain. For example, the severe freeze in the United States and Mexico in early 2021 caused gas and power shortages in Texas, resulting in additional costs and production disruptions and losses. Additionally, chronic climate changes, such as changes in precipitation patterns and, rising of average temperatures and sea levels may result in increased operating or capital costs due to supply shortages or damage to facilities, increased insurance premiums or reduced availability of insurance, decreases in revenue derived from lower sales, lower production capacity or negative impacts on workforce and write-offs and/or early retirement of assets, all of which could adversely affect our financial condition, results of operations and cash flows.
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We are subject to a wide range of local, state, provincial and national laws, local and international regulations, permit requirements and decrees relating to the protection of human health and the environment, including laws and regulations relating to hazardous materials and radioactive materials and environmental protection governing air emissions, water discharges and waste management. Laws and regulations protecting the environment have become increasingly complex and more stringent and expensive to implement in recent years. Additionally, international environmental requirements vary. Environmental laws and regulations may, in some cases, impose strict liability rendering a person liable for damages to natural resources or threats to public health and safety without regard to negligence or fault. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances. These laws and regulations may expose us to liability for the conduct of or conditions caused by others or for acts made in compliance with all applicable laws at the time they were performed. Compliance with applicable requirements and the adoption of new requirements could have a material adverse effect on our consolidated financial condition, results of operations or cash flows. The costs and ultimate impact of complying with environmental laws and regulations are not always clearly known or determinable since regulations under some of these laws have not yet been promulgated or are undergoing revision. The expenditures necessary to remain in compliance with these laws and regulations, including site or other remediation costs, or costs incurred as a result of potential violations of environmental laws could have a material adverse effect on our financial condition and profitability. While we incur and will continue to incur expenditures to comply with applicable laws and regulations, there always remains a risk that environmental incidents or accidents may occur that may negatively affect our reputation or our operations. In addition, our oil and gas casing, tubing and line pipe products are sold primarily for use in oil and gas drilling, gathering, transportation, processing and power generation facilities, which are subject to inherent risks, including well failures, line pipe leaks, blowouts, bursts and fires, that could result in death, personal injury, property damage, environmental pollution or loss of production. Any of these hazards and risks can result in environmental liabilities, personal injury claims and property damage from the release of hydrocarbons. Defects in specialty tubing products could result in death, personal injury, property damage, environmental pollution, damage to equipment and facilities or loss of production.
Competition in the global market for steel pipe products may cause us to lose market share and hurt our sales and profitability. In addition, there is an increased risk that unfairly-traded steel pipe imports in markets in which Tenaris produces and sells its products may affect Tenaris's market share, deteriorate the pricing environment and hurt sales and profitability.
Because of the global nature of our operations, we export and import products from several countries and, in many jurisdictions, we supplement domestic production with imported products. We import OCTG from Argentina and Mexico to complement our significant and growing production in the United States. From time to time, local producers seek the imposition of import restrictions or the initiation of antidumping or countervailing duty proceedings. For example, in October 2021, the U.S. Department of Commerce ("DOC") initiated antidumping duty investigations of OCTG imports from Argentina, Mexico, and Russia and countervailing duty investigations of OCTG imports from Russia and South Korea, which resulted in a determination by the International Trade Commission ("ITC"), issued in October 2022, that the imports under investigation caused injury to the U.S. OCTG industry, bringing the investigation phase to a conclusion. Although Tenaris and other parties have appealed the agencies' determinations from the investigation to the Court of International Trade, Tenaris is required to pay antidumping duty deposits until such time the imports are reviewed by the DOC to determine whether final duties are necessary for the specific period under review. In addition, several jurisdictions have begun to impose or expand local content requirements.
If countries impose or expand local content requirements or put in place regulations limiting our ability to import certain products, our competitive position could be negatively affected. Therefore, if any of these risks materialize, we may not continue to compete effectively against existing or potential producers and preserve our current shares of geographic or product markets, and increased competition may have a material impact on the pricing of our products and services, which could in turn adversely affect our revenues, profitability and financial condition.
Our sales may also be affected as a result of other international trade regulations. The shipment of goods and services across international borders exposes us to extensive trade laws and regulations. Our import and export activities are governed by customs laws and regulations in each of the countries where we operate. Moreover, the European Union, the United States and other countries control the import and export of certain goods and services and impose related import and export recordkeeping and reporting obligations. Those governments have also imposed economic sanctions against certain countries, persons and other entities, such as sanctions that restrict or prohibit transactions involving Iran, Syria, Venezuela and Russia or their citizens or companies. Similarly, we are subject to the U.S. anti-boycott laws. Trade laws and regulations are complex and frequently changing, and they may be enacted, amended, enforced or interpreted in a manner that could materially impact our operations.
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Profitability may also be hurt if increases in the cost of raw materials, energy and other costs and limitations or disruptions to the supply of raw materials and energy, result in higher costs of production that cannot be offset by higher selling prices or if the limited availability of such resources forces us to curtail production. Disruptions to our manufacturing processes could adversely affect our operations, customer service levels and financial results. Low levels of capacity utilization or failure to retain qualified workforce could also affect our results of operations and financial conditions. A recession in developed countries, a cooling of emerging market economies or an extended period of below-trend growth in the economies that are major consumers of steel pipe products would likely result in reduced demand of our products, adversely affecting our revenues, profitability and financial condition.
Regarding the impact of variations in product demand, we have fixed and semi-fixed costs (e.g., labor and other operating and maintenance costs) that cannot adjust rapidly in product demand for several reasons, including operational constraints and regulatory restrictions. If demand of our products falls significantly, or if we are unable to operate due to, for example, governmental measures or unavailability of workforce, these costs may adversely affect our profitability and financial condition. In addition, if demand continues on high levels, we may not be able to retain qualified workforce or hire additional employees soon enough. Moreover, certain consequences of climate change, such as shifts in customer preferences, stigmatization of our industry or failure to respond to shareholders' demand for climate-related measures could negatively impact workforce management and planning, adversely affecting employee attraction and retention.
Any adverse economic, political or social developments in the countries in which we operate may negatively affect our revenues, profitability and financial condition. We have significant operations in various countries, including Argentina, Brazil, Canada, China, Colombia, Indonesia, Italy, Mexico, Nigeria, Romania, Saudi Arabia and the United States, and we sell our products and services throughout the world. Therefore, like other companies with worldwide operations, our business and operations have been, and in the future could be, affected from time to time to varying degrees by political, economic, social and public health developments and changes in laws and regulations. These developments and changes may include, among others, nationalization, expropriation or forced divestiture of assets; restrictions on production, imports and exports, antidumping or countervailing duties, travel, transportation or trade bans; interruptions in the supply of essential energy inputs; exchange and/or transfer restrictions, inability or increasing difficulties to repatriate income or capital or to make contract payments; inflation; devaluation; war or other armed conflicts (including the recent Ukraine-Russia armed conflict and regional conflicts in the Middle East and Africa); civil unrest and local security concerns, including high incidences of crime and violence involving drug trafficking organizations that threaten the safe operation of our facilities and operations; direct and indirect price controls; tax increases and changes (including retroactive) in the interpretation, application or enforcement of tax laws and other claims or challenges; cancellation of contract or property rights; and delays or denials of governmental approvals.
The Russia-Ukraine armed conflict may adversely affect our operations. On February 24, 2022, Russia launched a military attack on Ukraine. In response, several jurisdictions, including the United States, the European Union and the United Kingdom, imposed a wave of sanctions against certain Russian institutions, companies and citizens. The Russian Government has retaliated by ordering several economic counter measures, including restrictions on residents transferring foreign currency abroad. Russia is a major supplier of oil and gas in Europe and worldwide, and Russia and Ukraine are both major global suppliers of internationally traded steelmaking raw materials and semi-finished steel products. As a result of the armed conflict and related sanctions, energy and commodity prices have spiked upwards and foreign trade transactions involving Russian and Ukrainian counterparties have been severely affected. Although it is hard to predict how energy and commodity prices will behave as the conflict continues, higher prices and possible shortages of energy and raw materials used in our steelmaking operations (including natural gas and electric energy, particularly in Europe, steel scrap, pig iron, direct reduced irons, hot briquetted iron, ferroalloys, steel bars, coils and plates) would result in higher production costs and potential plant stoppages, affecting our profitability and results of operations. As a result of the economic sanctions imposed on Russia, we or our contractors (including shipping companies) may not be able to continue purchasing products from, or making payments to, Ukrainian or Russian suppliers or counterparties; and we may not be able to promptly procure such raw materials from other suppliers, or we may be required to purchase raw materials at increased prices.
In addition, we have suspended any sales to Russian customers or purchases from Russian suppliers that would breach applicable sanctions, and we are exploring alternatives with respect to potential relocation or closure of our representative office in Moscow, which is currently not operative. Furthermore, in March 2022, we recorded an impairment in the amount of approximately $14.9 million, fully impairing our investment in our joint venture in Russia with Severstal.
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We plan to continue implementing our business strategy of consolidating our position as a leading global supplier of integrated product and service solutions to the energy and other industries and adapting to the energy transition through reducing the carbon emissions in our operations and developing and supplying products and services for low-carbon energy applications, as well as continuing to pursue strategic investment opportunities. Any of the components of our overall business strategy could cost more than anticipated (including as a result of increasing regulatory requirements aimed at transitioning to a lower-carbon economy), may not be successfully implemented or could be delayed or abandoned. Even if we successfully implement our business strategy, it may not yield the expected results, or decisions by our joint venture partners may frustrate our initiatives. In addition, one element of our business strategy is to identify and pursue growth-enhancing strategic opportunities by making significant capital investments and acquiring interests in, or businesses of, various companies. We must necessarily base any assessment of potential acquisitions, joint ventures and capital investments, on assumptions with respect to timing, profitability, market and customer behavior, and other matters that may subsequently prove to be incorrect. Our past or future acquisitions, significant investments and alliances may not perform in accordance with our expectations and could adversely affect our operations and profitability. In addition, new demands on our existing organization and personnel resulting from the integration of new acquisitions could disrupt our operations and adversely affect our operations and profitability. Moreover, as part of future acquisitions, we may acquire assets that are unrelated to our business, and we may not be able to integrate these assets or sell them under favorable terms and conditions.
We are subject to tax laws in numerous foreign jurisdictions where we operate. The integrated nature of our worldwide operations can produce conflicting claims from revenue authorities in different countries as to the profits to be taxed in the individual countries, including disputes regarding transfer pricing. Most of the jurisdictions where we operate have double tax treaties with foreign jurisdictions, which provide a framework for mitigating the impact of double taxation on our results. However, mechanisms developed to resolve such conflicting claims are largely untried and can be expected to be very lengthy. In recent years, tax authorities around the world have increased their scrutiny of company tax filings and have become more rigid in exercising any discretion they may have. Our interpretation and application of the tax laws could differ from that of the relevant governmental taxing authority, which could result in the payment of additional taxes, penalties or interest, negatively affecting our profitability and financial condition. Significant uncertainties remain in relation to the potential adoption of new regulations that may result from evolving initiatives like those launched by the Organization for Economic Co-operation and Development ("OECD") and the EU regarding international taxation that could negatively impact our financial condition, results of operations and cash flows.
We may be required to record a significant charge to earnings if we must reassess our goodwill or other assets as a result of changes in assumptions underlying the carrying value of certain assets, particularly as a consequence of deteriorating market conditions. At June 30, 2023 we had $1,085.1 million in goodwill corresponding mainly to the acquisition of Hydril Company in 2007.
As a global company, a portion of our business is carried out in currencies other than the U.S. dollar, which is the Company's functional and presentation currency. As a result, we are exposed to foreign exchange rate risk, which could adversely affect our financial position and results of operations. For more information on foreign exchange rate risk and restrictions, and in particular for the current situation in Argentina, see note 19 "Foreign exchange control measures in Argentina" to our unaudited consolidated condensed interim financial statements included in this half-year report.
We operate and conduct business globally, including in certain countries known to experience high levels of corruption. Although we are committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to our business, there is a risk that our employees, representatives, associates, affiliates, or other persons may take actions that violate applicable laws and regulations that generally prohibit offering or making of improper payments to any individual, including to government officials, for the purpose of obtaining a benefit or undue advantage or keeping business, as stated by the U.S. Foreign Corrupt Practices Act ("FCPA"). Investigations by government authorities may occupy considerable management time and attention, weaken company compliance culture and result in significant expenditures, fines, penalties or other sanctions, as well as private lawsuits.
In addition, limitations on our ability to protect our intellectual property rights, including our trade secrets, could cause a loss in revenue and any competitive advantage we hold.
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Cyberattacks could have a material adverse impact on our business and results of operations. We rely heavily on information systems to conduct our operations and digital technologies have an increasingly significant role across our business. Although we devote significant resources to protect our systems and data and we continually monitor external developments and available information on threats and security incidents, we have experienced and will continue to experience varying degrees of cyber incidents in the normal conduct of our business, which may occasionally include sophisticated cybersecurity threats such as unauthorized access to data and systems, loss or destruction of data, computer viruses or other malicious code, phishing, spoofing and/or cyberattacks. These threats often arise from numerous sources, not all of which are within our control, such as fraud or malice from third parties, including fraud involving business email compromises, failures of computer servers or other accidental technological failures, electrical or telecommunication outages or other damage to our property or assets. Cybersecurity threats represent one of the most significant risks for most businesses. Cyberattack attempts continued to increase throughout 2022 in the post-pandemic context, primarily due to widespread adoption of remote work practices among our employees, customers and suppliers and the increasing digitalization of work. Given the rapidly evolving nature of cyber threats, there can be no assurance that the systems we have designed to prevent or limit the effects of cyber incidents or attacks will be adequate, and such incidents or attacks could have a material adverse impact on our systems. While we attempt to mitigate these risks, we remain vulnerable to additional known or unknown threats, including theft, misplacement or loss of data, programming errors, employee errors and/or dishonest behavior that could potentially lead to the compromising of sensitive information, improper use of our systems or networks, as well as unauthorized access, use, disclosure, modification or destruction of such information, systems and/or networks. If our systems for protecting against cybersecurity risks are circumvented or breached, this could also result in disruptions to our business operations (including but not limited to, defective products, production downtimes or loss of productivity), access to our financial reporting systems, the loss of access to critical data or systems, misuse or corruption of critical data and proprietary information (including our intellectual property and customer data), as well as damage to our reputation with our customers and the market, failure to meet customer requirements, customer dissatisfaction and/or regulatory fines and penalties (including for inadequate protection of personal data and/or failure to notify the competent authorities for such breach), damages and harm to the environment and people, or other financial costs and losses. In addition, given that cybersecurity threats continue to evolve, we will be required to devote additional resources in the future to enhance our protective measures or to investigate and/or remediate any cybersecurity vulnerabilities. Moreover, any investigation of a cyberattack would take time before completion, during which we would not necessarily know the extent of the actual or potential harm or how best to remediate it, and certain errors or actions could be repeated or compounded before duly discovered and remediated (all or any of which could further increase the costs and consequences arising out of such cyberattack). In addition, failure to adequately and timely monitor our hardware and software systems and applications to prevent or manage technology obsolescence risks may result in increased costs, increased operational risk of service failure, loss of technology competitiveness and reputational risk.
As a holding company, our ability to pay cash dividends and make other payments to us depends on the results of operations and financial condition of our subsidiaries, which could be restricted by legal, contractual or other limitations, including exchange controls or transfer restrictions, and other agreements and commitments of our subsidiaries.
The Company's controlling shareholder may be able to take actions that do not reflect the will or best interests of other shareholders.
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Outstanding Legal Proceedings
Tenaris is from time to time subject to various claims, lawsuits and other legal proceedings, including customer, employee, tax and environmental-related claims, in which third parties are seeking payment for alleged damages, reimbursement for losses, or indemnity. Management with the assistance of legal counsel periodically reviews the status of each significant matter and assesses potential financial exposure.
Some of these claims, lawsuits and other legal proceedings involve highly complex issues, and often these issues are subject to substantial uncertainties and, therefore, the probability of loss and an estimation of damages are difficult to ascertain. Accordingly, with respect to a large portion of such claims, lawsuits and other legal proceedings, the Company is unable to make a reliable estimate of the expected financial effect that will result from ultimate resolution of the proceeding. In those cases, the Company has not accrued a provision for the potential outcome of these cases.
If a potential loss from a claim, lawsuit or other proceeding is considered probable and the amount can be reasonably estimated, a provision is recorded. Accruals for loss contingencies reflect a reasonable estimate of the losses to be incurred based on information available to management as of the date of preparation of the financial statements and take into consideration litigation and settlement strategies. In a limited number of ongoing cases, the Company was able to make a reliable estimate of the expected loss or range of probable loss and, depending on the likelihood of occurrence, in some of such cases has accrued a provision for such loss but believes that publication of this information on a case-by-case basis would seriously prejudice the Company's position in the ongoing legal proceedings or in any related settlement discussions. Accordingly, in these cases, the Company has disclosed information with respect to the nature of the contingency but has not disclosed its estimate of the range of potential loss.
The Company believes that the aggregate provisions recorded for potential losses in the unaudited consolidated condensed interim financial statements included in this half-year report are adequate based upon currently available information. However, if management's estimates prove incorrect, current reserves could be inadequate and the Company could incur a charge to earnings which could have a material adverse effect on its results of operations, financial condition, net worth and cash flows.
See note 17 "Contingencies, commitments and restrictions to the distribution of profits" to our unaudited consolidated condensed interim financial statements included in this half-year report for a summary description of Tenaris's material outstanding legal proceedings as of the date of such financial statements.
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Business Overview
Operating and Financial Review and Prospects
The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and the related notes included in our annual report for the year ended December 31, 2022, and is based on, and should be read in conjunction with, the unaudited consolidated condensed interim financial statements for the six-month period ended June 30, 2023, included in this half-year report.
Certain information contained in this discussion and analysis and presented elsewhere in this half-year report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See "Cautionary Statement Concerning Forward-Looking Statements" in this half-year report. In evaluating this discussion and analysis, you should specifically consider the various risk factors identified in "Principal Risks and Uncertainties", other risk factors identified elsewhere in this half-year report and other factors that could cause results to differ materially from those expressed in such forward-looking statements.
Market Background and Outlook
In the past month, oil prices have recovered above $80 per barrel as the prospects for the US economy brighten and Saudi Arabia confirms its commitment to production cuts. North American natural gas prices, however, remain at low levels, while LNG and European natural gas prices have fallen back to more normal levels.
In the United States, the decline in oil and gas drilling activity seen in the first half should bottom out before the end of the year. This decline together with the accumulation of excess OCTG inventories, following a surge in imports in the first part of the year, is being reflected in pipe prices, which will affect our results through the rest of the year. In Canada, while drilling activity has held up so far this year, some of the operators we serve are reducing activity as they face cash flow restrictions. In Latin America, offshore drilling in Brazil and Guyana is expected to remain at a high level, but onshore drilling is being affected by political uncertainty in Colombia, Ecuador and Argentina. In the Eastern Hemisphere, activity continues to increase particularly in the Middle East and offshore.
Following record results in the first half, we expect that our sales and margins will be significantly lower in the second half. Although we expect our sales in the Middle East, led by Saudi Arabia, and to offshore projects to increase further, this will not compensate for a decline in sales in North and South America, which will reflect onshore pricing and activity declines as well as lower pipeline shipments. Our free cash flow will remain at a good level with a further reduction in working capital.
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Half-year report 2023 - Interim management report | |
Results of Operations
Unaudited consolidated condensed interim income statement
| (all amounts in thousands of U.S. dollars, unless otherwise stated) | Six-month period ended June 30, | |||||||||||||||
| 2023 | 2022 | |||||||||||||||
| % | % | |||||||||||||||
| Net sales | 8,216,094 | 100.0 | 5,167,515 | 100.0 | ||||||||||||
| Cost of sales | (4,574,943 | ) | (55.7 | ) | (3,257,284 | ) | (63.0 | ) | ||||||||
| Gross profit | 3,641,151 | 44.3 | 1,910,231 | 37.0 | ||||||||||||
| Selling, general and administrative expenses | (1,016,083 | ) | (12.4 | ) | (776,662 | ) | (15.0 | ) | ||||||||
| Other operating income (expense), net | 4,476 | 0.1 | 13,530 | 0.3 | ||||||||||||
| Operating income | 2,629,544 | 32.0 | 1,147,099 | 22.2 | ||||||||||||
| Finance Income | 93,753 | 1.1 | 15,266 | 0.3 | ||||||||||||
| Finance Cost | (67,924 | ) | (0.8 | ) | (7,962 | ) | (0.2 | ) | ||||||||
| Other financial results, net | 34,551 | 0.4 | (19,879 | ) | (0.4 | ) | ||||||||||
| Income before equity in earnings of non-consolidated companies and income tax | 2,689,924 | 32.7 | 1,134,524 | 22.0 | ||||||||||||
| Equity in earnings of non-consolidated companies | 148,927 | 1.8 | 190,706 | 3.7 | ||||||||||||
| Income before income tax | 2,838,851 | 34.6 | 1,325,230 | 25.6 | ||||||||||||
| Income tax | (573,604 | ) | (7.0 | ) | (187,771 | ) | (3.6 | ) | ||||||||
| Income for the period | 2,265,247 | 27.6 | 1,137,459 | 22.0 | ||||||||||||
| Attributable to: | ||||||||||||||||
| Shareholders' equity | 2,251,656 | 27.4 | 1,139,492 | 22.1 | ||||||||||||
| Non-controlling interests | 13,591 | 0.2 | (2,033 | ) | - | |||||||||||
| 2,265,247 | 1,137,459 |
Selected consolidated financial position data
| Thousands of U.S. dollars (except number of shares) | June 30, | December 31, | ||||||
| 2023 | 2022 | |||||||
| Current assets | 9,625,501 | 8,468,596 | ||||||
| Property, plant and equipment, net | 5,779,137 | 5,556,263 | ||||||
| Other non-current assets | 3,854,688 | 3,525,387 | ||||||
| Total assets | 19,259,326 | 17,550,246 | ||||||
| Current liabilities | 2,595,532 | 2,788,423 | ||||||
| Non-current borrowings | 50,997 | 46,433 | ||||||
| Deferred tax liabilities | 376,676 | 269,069 | ||||||
| Other non-current liabilities | 449,642 | 411,884 | ||||||
| Total liabilities | 3,472,847 | 3,515,809 | ||||||
| Shareholders' equity | 15,625,585 | 13,905,709 | ||||||
| Non-controlling interests | 160,894 | 128,728 | ||||||
| Equity | 15,786,479 | 14,034,437 | ||||||
| Total liabilities and equity | 19,259,326 | 17,550,246 | ||||||
| Number of shares outstanding | 1,180,537 | 1,180,537 |
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Half-year report 2023 - Interim management report | |
Six-month period ended June 30, 2023, compared to six-month period ended June 30, 2022
Summary
Our sales in the first half of 2023 increased 59% compared to the first half of 2022 as volumes of tubular products shipped increased 30% and average selling prices increased 26% while sales in the Others segment decreased 2%. Following the increase in sales, EBITDA doubled thanks to the increase in margins, as the increase in prices of tubular products more than offset a 12% increase in unit cost of sales, year on year.
Cash flow provided by operating activities amounted to $2.3 billion during the first half of 2023, net of an increase in working capital of $167 million, which reflects the recovery in activity levels. After capital expenditures of $282 million, our free cash flow amounted to $2.0 billion. Following a dividend payment of $401 million in May 2023, our net cash position amounted to $2.3 billion at the end of June 2023.
The following table shows our net sales by business segment for the periods indicated below:
| Millions of U.S. dollars | For the six-month period ended June 30, | |||||||||||||||||||
| 2023 | 2022 | Increase / Decrease | ||||||||||||||||||
| Tubes | 7,892 | 96 | % | 4,836 | 94 | % | 63 | % | ||||||||||||
| Others | 324 | 4 | % | 332 | 6 | % | (2 | %) | ||||||||||||
| Total | 8,216 | 100 | % | 5,168 | 100 | % | 59 | % |
Tubes
The following table indicates for our Tubes business segment, sales volumes of seamless and welded pipes for the
periods indicated below:
| Thousands of tons | For the six-month period ended June 30, | |||||||||||
| 2023 | 2022 | Increase / Decrease | ||||||||||
| Seamless | 1,684 | 1,587 | 6 | % | ||||||||
| Welded | 538 | 125 | 329 | % | ||||||||
| Total | 2,222 | 1,712 | 30 | % |
The following table indicates, for our Tubes business segment, net sales by geographic region, operating income and operating income as a percentage of net sales for the periods indicated below:
| Millions of U.S. dollars | For the six-month period ended June 30, | |||||||||||
| Net sales | 2023 | 2022 | Increase / Decrease | |||||||||
| - North America | 4,371 | 2,930 | 49 | % | ||||||||
| - South America | 1,868 | 810 | 131 | % | ||||||||
| - Europe | 522 | 491 | 6 | % | ||||||||
| - Asia Pacific, Middle East and Africa | 1,131 | 603 | 87 | % | ||||||||
| Total net sales | 7,892 | 4,836 | 63 | % | ||||||||
| Operating income | 2,563 | 1,107 | 131 | % | ||||||||
| Operating income (% of sales) | 32.5 | % | 22.9 | % |
Net sales of tubular products and services increased 63% to $7,892 million in the first half of 2023, compared to $4,836 million in the first half of 2022 due to an increase of 30% in volumes and a 26% increase in average selling prices. Prices increased in all regions, while volumes increased in all regions except in Europe. Average drilling activity in the first half of 2023 increased 10% in the United States and Canada and 14% internationally compared to the first half of 2022.
Operating results from tubular products and services amounted to a gain of $2,563 million in the first half of 2023 compared to $1,107 million in the first half of 2022. The improvement in operating results was driven by the recovery in sales and margins. Following the increase in sales, operating income more than doubled thanks to the increase in margins, as the increase in prices more than offset a 12% increase in unit cost of sales, year on year.
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Half-year report 2023 - Interim management report | |
Others
The following table indicates, for our Others business segment, net sales, operating income and operating income as a percentage of net sales for the periods indicated below:
| Millions of U.S. dollars | For the six-month period ended June 30, | |||||||||||
| 2023 | 2022 | Increase / Decrease | ||||||||||
| Net sales | 324 | 332 | (2 | %) | ||||||||
| Operating income | 67 | 40 | 68 | % | ||||||||
| Operating income (% of sales) | 20.6 | % | 12.0 | % |
Net sales of other products and services decreased 2% to $324 million in the first half of 2023, compared to $332 million in the first half of 2022, mainly due to lower sales of excess raw materials and pipes for civil and industrial installations in Europe, partially offset by higher sales of products and services for energy applications: oilfield services in Argentina, sucker rods and coiled tubing.
Operating results from other products and services amounted to a gain of $67 million in the first half of 2023, compared to $40 million in the first half of 2022. Results were mainly derived from our sucker rods business and our oilfield services business in Argentina.
Selling, general and administrative expenses, or SG&A, amounted to $1,016 million in the first half of 2023, representing 12.4% of sales, and $777 million in the first half of 2022, representing 15.0% of sales. SG&A expenses increased mainly due to higher selling expenses (in particular commissions and freights) associated with higher sales and higher labor costs. However, they decreased as a percentage of sales due to the better absorption of fixed and semi-fixed components of SG&A expenses on higher sales.
Financial results amounted to a gain of $60 million in the first half of 2023, compared to a loss of $13 million in the first half of 2022. Due to the increase in our financial position and in interest rates, net finance income amounted to $26 million in the first six months of 2023, compared to $7 million in the first half of 2022. The result for the first half of 2022 was also negatively impacted by the decline in the fair value of certain financial instruments obtained in an operation of settlement of trade receivables. Additionally, other financial results amounted to a gain of $35 million in the first six months of 2023 compared to a $20 million loss in the first six months of 2022, these results being mainly related to foreign exchange results.
Equity in earnings of non-consolidated companies generated a gain of $149 million in the first half of 2023, compared to a gain of $191 million in the first half of 2022. These results were mainly derived from our equity investment in Ternium (NYSE:TX).
Income tax amounted to a charge of $574 million in the first half of 2023, compared to $188 million in the first half of 2022. The increase in income tax reflects better results at several subsidiaries following the improvement in activity.
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Half-year report 2023 - Interim management report | |
Liquidity and Capital Resources
The following table provides certain information related to our cash generation and changes in our cash and cash
equivalents position for the periods indicated below:
| Millions of U.S. dollars | For the six-month period ended June 30, | |||||||
| 2023 | 2022 | |||||||
| Net cash provided by operating activities | 2,262 | 401 | ||||||
| Net cash used in investing activities | (2,021 | ) | (117 | ) | ||||
| Net cash (used in) provided by financing activities | (552 | ) | 53 | |||||
| (Decrease) increase in cash and cash equivalents | (311 | ) | 337 | |||||
| Cash and cash equivalents at the beginning of the period | 1,091 | 318 | ||||||
| Effect of exchange rate changes | (26 | ) | (19 | ) | ||||
| (Decrease) increase in cash and cash equivalents | (311 | ) | 337 | |||||
| Cash and cash equivalents at period end (net of overdrafts) | 755 | 636 | ||||||
| Cash and cash equivalents at period end (net of overdrafts) | 755 | 636 | ||||||
| Bank overdrafts | 0 | 1 | ||||||
| Other current investments | 1,850 | 560 | ||||||
| Non-current investments | 367 | 178 | ||||||
| Current Borrowings | (642 | ) | (727 | ) | ||||
| Non-current borrowings | (51 | ) | (17 | ) | ||||
| Derivatives hedging borrowings and investments | 8 | 6 | ||||||
| Net cash | 2,287 | 635 |
Net cash provided by operating activities during the first half of 2023 amounted to $2.3 billion (net of an increase in working capital of $167 million), compared to cash provided by operations of $401 million (net of an increase in working capital of $824 million) in the first half of 2022.
Capital expenditures amounted to $282 million in the first half of 2023, compared to $141 million in the first half of 2022. Free cash flow amounted to $2.0 billion in the first half of 2023, compared to $260 million in the first half of 2022.
After a dividend payment of $401 million in May 2023, our net cash position increased to $2.3 billion at June 30, 2023, from $0.9 billion at December 31, 2022.
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Half-year report 2023 - Interim management report | |
Other significant events of the period
Annual General Meeting of Shareholders
On May 3, 2023, the Company's annual general meeting of shareholders approved all resolutions on its agenda.
Among other resolutions adopted at the meeting, shareholders acknowledged the Company's 2022 annual report, containing the consolidated management report and the related management certifications and external auditors' reports; and the Company's 2022 annual sustainability report, containing the non-financial statement required by Luxembourg law. The annual general meeting also approved the consolidated financial statements as of and for the year ended December 31, 2022, and the annual accounts as at December 31, 2022.
The shareholders meeting also approved an annual dividend of $0.51 per share (or $1.02 per ADR), which represents an aggregate sum of approximately $602 million, and which includes the interim dividend of $0.17 per share (US$0.34 per ADR), or approximately $201 million, paid in November 2022. Tenaris will pay the balance of the annual dividend in the amount of $0.34 per share (or $0.68 per ADR), in U.S. dollars, on May 24, 2023, with an ex-dividend date of May 22, 2023, and record date of May 23, 2023.
The annual general meeting resolved to set the number of directors to ten and approved the re-election of Mr. Simon Ayat, Mr. Roberto Bonatti, Mr. Carlos Condorelli, Mr. Germán Curá, Ms. Maria Novales-Flamarique, Mr. Gianfelice Mario Rocca, Mr. Paolo Rocca, Mr. Jaime Serra Puche, Ms. Monica Tiuba and Mr. Guillermo Vogel. All board members will hold office until the meeting that will be convened to decide on the 2023 annual accounts.
The board of directors subsequently re-elected Mr. Simon Ayat, Mr. Jaime Serra Puche and Ms. Monica Tiuba as audit committee members, with Ms. Tiuba to continue to serve as the committee's chair. All members of the audit committee qualify as independent directors for purposes of the U.S. Securities Exchange Act Rule 10A-3(b)(1) and under the Company's articles of association.
In addition, the annual general meeting approved the compensation payable to the members of the Board of Directors for the year ending December 31, 2023, and the Compensation Report for the year ended December 31, 2022. The shareholders appointed PricewaterhouseCoopers S.C., Réviseurs d'entreprises agréé, as Tenaris's external auditors for the fiscal year ending December 31, 2023 and Ernst & Young (EY), as Tenaris's external auditors for the fiscal year ending December 31, 2024.
The minutes of the annual general shareholders meeting and other meeting materials are available at the Company's website at ir.tenaris.com/corporate-governance/annual-general-meeting.
Acquisition of additional participation in Usiminas
Usinas Siderúrgicas de Minas Gerais S.A. ("Usiminas") is a Brazilian producer of high-quality flat steel products used in the energy, automotive and other industries.
On March 30, 2023, Tenaris' subsidiary, Confab, together with Tenaris's affiliates Ternium Investments and Ternium Argentina, all of which compose the T/T Group within Usiminas control group, entered into a share purchase agreement to acquire from the NSC Group, pro rata to their current participations in the T/T Group, 68.7 million ordinary shares of Usiminas at a price of BRL10 (approximately $1.9) per ordinary share. The transaction closed on July 3, 2023 and was financed with cash on hand. Tenaris paid BRL110 million (approximately $23 million) in cash for 11 million ordinary shares, increasing its participation in the Usiminas control group to 9.8%. The T/T Group now holds an aggregate participation of 61.3% in the control group, with the NSC Group and Previdência Usiminas (Usiminas employees' pension fund) holding 31.7% and 7%, respectively.
See notes 16 "Investments in non-consolidated companies" and 24 "Events after the reporting period" to our unaudited consolidated condensed interim financial statements included in this half-year report for further information on this transaction.
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Half-year report 2023 - Interim management report | |
Acquisition of additional participation in Global Pipe Company
Global Pipe Company ("GPC") is a joint venture, established in 2010 and located in Jubail, Saudi Arabia, which manufactures LSAW pipes. Until May 16, 2023, Tenaris, through its subsidiary SSPC, owned 35% of the share capital of GPC. On May 17, 2023 SSPC acquired an additional 22.3% participation in GPC, and entered into additional exposure under certain corporate guarantees issued in connection of loan agreements entered into by GPC.
For more information on this matter please see notes 16 "Investments in non-consolidated companies" and 21 "Business Combinations" to our unaudited consolidated condensed interim financial statements included in this half-year report for further information on this transaction.
Acquisition of anticorrosion coating assets
On April 21, 2023, one of the Company's subsidiaries entered into a preliminary agreement with Isoplus Mediterranean S.r.l. to acquire all of the assets and related rights, duties, liabilities and contracts of Isoplus' anticorrosion coating division, as a going concern, for EUR9.3 million (approximately $10 million). On July 1, 2023, the previously announced acquisition of all of the assets and related rights, duties, liabilities and contracts of Isoplus Mediterranean S.r.l.'s anticorrosion coating division was completed.
Termination of NKKTubes joint venture
NKKTubes, a company owned 51% by Tenaris and 49% by JFE Holdings Inc. ("JFE"), used to operate a seamless pipe manufacturing facility in Japan, located in the Keihin steel complex owned by JFE. On March 27, 2020, JFE informed Tenaris of its decision to permanently cease as from JFE's fiscal year ending March 2024 the operations of its steel manufacturing facilities located at the Keihin complex; on November 2, 2021, Tenaris and JFE agreed to terminate amicably their joint venture and liquidate NKKTubes; and on November 2, 2022, Tenaris and JFE entered into a definitive wrap-up agreement.
NKKTubes was liquidated on April 28, 2023.
For more information on this matter please see notes 22 "Termination of NKK joint venture" to our unaudited consolidated condensed interim financial statements included in this half-year report for further information on this transaction.
Nationalization of Venezuelan Subsidiaries
Following the nationalization by the Venezuelan government of the Company's interests in its majority-owned subsidiaries TAVSA - Tubos de Acero de Venezuela S.A. ("Tavsa") and Matesi Materiales Siderúrgicos S.A ("Matesi") and in Complejo Siderúrgico de Guayana, C.A ("Comsigua"), the Company and its wholly-owned subsidiary Talta - Trading e Marketing Sociedad Unipessoal Lda ("Talta") initiated arbitration proceedings against Venezuela before the ICSID in Washington D.C. in connection with these nationalizations and obtained favorable awards, which are final and not subject to further appeals. Both the Matesi and Tavsa judgments, however, may not be enforced in the U.S. to the extent prohibited by the Venezuelan sanctions regulations issued by the U.S. Treasury Department's Office of Foreign Assets Control currently in effect.
On January 25, 2023, Tenaris and Talta entered into an awards purchase agreement with an unaffiliated purchaser pursuant to which Tenaris and Talta agreed to sell all of their rights, title and interests in the above-referenced claims, awards and judgements, including all post-award or post-judgement interest accruing on the awards and judgements, for a purchase price of $81 million, plus a non-refundable signing payment of $1 million as reimbursement of expenses. The transfer of the awards and judgements is subject to the Office of Foreign Assets Control ("OFAC") approval, and according to the agreement must be obtained by February 25, 2024. The uncertainty associated with the OFAC approval is factored into the fair value determination of the related receivable.
For more information on this matter please see note 23 "Nationalization of Venezuelan Subsidiaries" to our unaudited consolidated condensed interim financial statements included in this half-year report for further information on this transaction.
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Half-year report 2023 - Interim management report | |
Related Party Transactions
Tenaris is a party to several related party transactions which include, among others, purchases and sales of goods (including steel pipes, flat steel products, steel bars, raw materials, gas and electricity) and services (including engineering services and related services) from or to entities controlled by San Faustin S.A., the controlling shareholder of Tenaris, ("San Faustin"), or in which San Faustin holds significant interests. Material related party transactions are subject to the review of the audit committee of the Company's board of directors and the requirements of the Company's articles of association and Luxembourg law. For further detail on Tenaris's related party transactions, see note 20 "Related party transactions" to our unaudited consolidated condensed interim financial statements included in this half-year report.
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Half-year report 2023 - Interim management report | |
MANAGEMENT CERTIFICATION
We confirm, to the best of our knowledge, that:
| 1. | the unaudited consolidated condensed interim financial statements prepared in conformity with International Financial Reporting Standards included in this half year report give a true and fair view of the assets, liabilities, financial position and profit or loss of Tenaris S.A. and its consolidated subsidiaries, taken as a whole; and |
| 2. | the interim management report included in this half year report includes a fair review of the important events that have occurred during the six-month period ended June 30, 2023, and their impact on the unaudited consolidated condensed interim financial statements for such period, material related party transactions and a description of the principal risks and uncertainties they face. |
Chief Executive Officer
Paolo Rocca
August 2, 2023
Chief Financial Officer
Alicia Móndolo
August 2, 2023
| 19 |
Consolidated Condensed Interim Financial Statements | |
| For the six-month period ended June 30, 2023 - all amounts in thousands of U.S. dollars, unless otherwise stated |
CONSOLIDATED CONDENSED INTERIM INCOME STATEMENT
| Three-month period ended June 30, | Six-month period ended June 30, | ||||
| 2023 | 2022 | 2023 | 2022 | ||
| Notes | (Unaudited) | (Unaudited) | |||
| Net sales | 3 | 4,074,913 | 2,800,474 | 8,216,094 | 5,167,515 |
| Cost of sales | 4 | (2,267,164) | (1,735,342) | (4,574,943) | (3,257,284) |
| Gross profit | 1,807,749 | 1,065,132 | 3,641,151 | 1,910,231 | |
| Selling, general and administrative expenses | 5 | (528,736) | (411,740) | (1,016,083) | (776,662) |
| Other operating income (expense), net | 6 | (823) | 9,453 | 4,476 | 13,530 |
| Operating income | 1,278,190 | 662,845 | 2,629,544 | 1,147,099 | |
| Finance Income | 7 | 45,866 | 6,441 | 93,753 | 15,266 |
| Finance Cost | 7 | (36,379) | (6,127) | (67,924) | (7,962) |
| Other financial results, net | 7 | 30,074 | (11,771) | 34,551 | (19,879) |
| Income before equity in earnings of non-consolidated companies and income tax | 1,317,751 | 651,388 | 2,689,924 | 1,134,524 | |
| Equity in earnings of non-consolidated companies (*) | 8 | 95,921 | 103,102 | 148,927 | 190,706 |
| Income before income tax | 1,413,672 | 754,490 | 2,838,851 | 1,325,230 | |
| Income tax | (277,632) | (120,464) | (573,604) | (187,771) | |
| Income for the period | 1,136,040 | 634,026 | 2,265,247 | 1,137,459 | |
| Attributable to: | |||||
| Shareholders' equity | 1,123,029 | 636,718 | 2,251,656 | 1,139,492 | |
| Non-controlling interests | 13,011 | (2,692) | 13,591 | (2,033) | |
| 1,136,040 | 634,026 | 2,265,247 | 1,137,459 | ||
| Earnings per share attributable to shareholders' equity during the period: | |||||
| Weighted average number of ordinary shares (thousands) | 1,180,537 | 1,180,537 | 1,180,537 | 1,180,537 | |
| Basic and diluted earnings per share (U.S. dollars per share) | 0.95 | 0.54 | 1.91 | 0.97 | |
| Basic and diluted earnings per ADS (U.S. dollars per ADS) (**) | 1.90 | 1.08 | 3.81 | 1.93 |
(*) Includes approximately $16.0 million related to Global Pipe Company ("GPC") acquisition. For more information see notes 8 and 21.
(**) Each ADS equals two shares.
The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements.
These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2022.
| 21 |
Consolidated Condensed Interim Financial Statements | |
| For the six-month period ended June 30, 2023 - all amounts in thousands of U.S. dollars, unless otherwise stated |
CONSOLIDATED CONDENSED INTERIM STATEMENT OF COMPREHENSIVE INCOME
| Three-month period ended June 30, | Six-month period ended June 30, | |||
| 2023 | 2022 | 2023 | 2022 | |
| (Unaudited) | (Unaudited) | |||
| Income for the period | 1,136,040 | 634,026 | 2,265,247 | 1,137,459 |
| Items that may be subsequently reclassified to profit or loss: | ||||
| Currency translation adjustment | 699 | (75,098) | 18,161 | (47,013) |
| Reclassification of currency translation adjustment reserve (*) | - | (71,252) | - | (71,252) |
| Change in value of cash flow hedges and instruments at fair value (**) | (151,668) | 4,917 | (142,036) | (7,320) |
| From participation in non-consolidated companies: | ||||
| - Currency translation adjustment | 10,607 | (22,380) | 15,539 | 8,481 |
| - Changes in the value of cash flow hedges, instruments at fair value and others | (17,526) | (519) | (18,701) | (2,095) |
| (157,888) | (164,332) | (127,037) | (119,199) | |
| Items that will not be reclassified to profit or loss: | ||||
| Remeasurements of post-employment benefit obligations | (2,695) | 25 | (2,695) | (301) |
| Income tax on items that will not be reclassified | 945 | (139) | 944 | (139) |
| Remeasurements of post-employment benefit obligations of non-consolidated companies | (2,043) | (486) | (2,010) | (512) |
| (3,793) | (600) | (3,761) | (952) | |
| Other comprehensive (loss) for the period | (161,681) | (164,932) | (130,798) | (120,151) |
| Total comprehensive income for the period | 974,359 | 469,094 | 2,134,449 | 1,017,308 |
| Attributable to: | ||||
| Shareholders' equity | 961,355 | 472,140 | 2,120,719 | 1,019,683 |
| Non-controlling interests | 13,004 | (3,046) | 13,730 | (2,375) |
| 974,359 | 469,094 | 2,134,449 | 1,017,308 |
(*) As of June 30, 2022 as result of NKKTubes' definitive cease of operations, the currency translation adjustment reserve belonging to the shareholders has been reclassified with impact in the income statement. For more information see note 22.
(**) Mainly related to change in the fair value of U.S. dollar-denominated Argentine bonds. For more information see note 19.
The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements.
These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2022.
| 22 |
Consolidated Condensed Interim Financial Statements | |
| For the six-month period ended June 30, 2023 - all amounts in thousands of U.S. dollars, unless otherwise stated |
CONSOLIDATED CONDENSED INTERIM STATEMENT OF FINANCIAL POSITION
| At June 30, 2023 | At December 31, 2022 | |||||
| Notes | (Unaudited) | |||||
| ASSETS | ||||||
| Non-current assets | ||||||
| Property, plant and equipment, net | 10 | 5,779,137 | 5,556,263 | |||
| Intangible assets, net | 11 | 1,334,036 | 1,332,508 | |||
| Right-of-use assets, net | 12 | 115,550 | 111,741 | |||
| Investments in non-consolidated companies | 16 | 1,603,609 | 1,540,646 | |||
| Other investments NC | 13 | 373,309 | 119,902 | |||
| Deferred tax assets | 219,704 | 208,870 | ||||
| Receivables, net | 208,480 | 9,633,825 | 211,720 | 9,081,650 | ||
| Current assets | ||||||
| Inventories, net | 3,884,364 | 3,986,929 | ||||
| Receivables and prepayments, net | 195,711 | 183,811 | ||||
| Current tax assets | 321,152 | 243,136 | ||||
| Trade receivables, net | 2,597,353 | 2,493,940 | ||||
| Derivative financial instruments CA | 14 | 21,638 | 30,805 | |||
| Other investments C | 13 | 1,849,978 | 438,448 | |||
| Cash and cash equivalents | 13 | 755,305 | 9,625,501 | 1,091,527 | 8,468,596 | |
| Total assets | 19,259,326 | 17,550,246 | ||||
| EQUITY | ||||||
| Shareholders' equity | 15,625,585 | 13,905,709 | ||||
| Non-controlling interests | 160,894 | 128,728 | ||||
| Total equity | 15,786,479 | 14,034,437 | ||||
| LIABILITIES | ||||||
| Non-current liabilities | ||||||
| Borrowings | 50,997 | 46,433 | ||||
| Lease liabilities | 12 | 88,313 | 83,616 | |||
| Deferred tax liabilities | 376,676 | 269,069 | ||||
| Other liabilities | 253,021 | 230,142 | ||||
| Provisions | 108,308 | 877,315 | 98,126 | 727,386 | ||
| Current liabilities | ||||||
| Borrowings | 642,294 | 682,329 | ||||
| Lease liabilities | 12 | 29,725 | 28,561 | |||
| Derivative financial instruments CL | 14 | 6,702 | 7,127 | |||
| Current tax liabilities | 382,147 | 376,240 | ||||
| Other liabilities | 372,976 | 260,614 | ||||
| Provisions | 40,936 | 11,185 | ||||
| Customer advances | 100,596 | 242,910 | ||||
| Trade payables | 1,020,156 | 2,595,532 | 1,179,457 | 2,788,423 | ||
| Total liabilities | 3,472,847 | 3,515,809 | ||||
| Total equity and liabilities | 19,259,326 | 17,550,246 | ||||
The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements.
These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2022.
| 23 |
Consolidated Condensed Interim Financial Statements | |
| For the six-month period ended June 30, 2023 - all amounts in thousands of U.S. dollars, unless otherwise stated |
CONSOLIDATED CONDENSED INTERIM STATEMENT OF CHANGES IN EQUITY
| Shareholders' equity | |||||||||||||||||||||||||||||||||||
| Share Capital (1) | Legal Reserves | Share Premium | Currency Translation Adjustment | Other Reserves (2) | Retained Earnings (3) | Total | Non-controlling interests | Total | |||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 1,180,537 | 118,054 | 609,733 | (1,138,681 | ) | (325,572 | ) | 13,461,638 | 13,905,709 | 128,728 | 14,034,437 | ||||||||||||||||||||||||
| Income for the period | - | - | - | - | - | 2,251,656 | 2,251,656 | 13,591 | 2,265,247 | ||||||||||||||||||||||||||
| Currency translation adjustment | - | - | - | 18,022 | - | - | 18,022 | 139 | 18,161 | ||||||||||||||||||||||||||
| Remeasurements of post-employment benefit obligations, net of taxes | - | - | - | - | (555 | ) | (1,196 | ) | (1,751 | ) | - | (1,751 | ) | ||||||||||||||||||||||
| Change in value of instruments at fair value through other comprehensive income and cash flow hedges, net of taxes (4) | - | - | - | - | (142,036 | ) | - | (142,036 | ) | - | (142,036 | ) | |||||||||||||||||||||||
| From other comprehensive income of non-consolidated companies | - | - | - | 15,539 | (20,711 | ) | - | (5,172 | ) | - | (5,172 | ) | |||||||||||||||||||||||
| Other comprehensive (loss) income for the period | - | - | - | 33,561 | (163,302 | ) | (1,196 | ) | (130,937 | ) | 139 | (130,798 | ) | ||||||||||||||||||||||
| Total comprehensive income (loss) for the period | - | - | - | 33,561 | (163,302 | ) | 2,250,460 | 2,120,719 | 13,730 | 2,134,449 | |||||||||||||||||||||||||
| Acquisition and other changes in non-controlling interests (5) | - | - | - | - | - | 540 | 540 | 35,873 | 36,413 | ||||||||||||||||||||||||||
| Dividends paid | - | - | - | - | - | (401,383 | ) | (401,383 | ) | (17,437 | ) | (418,820 | ) | ||||||||||||||||||||||
| Balance at June 30, 2023 | 1,180,537 | 118,054 | 609,733 | (1,105,120 | ) | (488,874 | ) | 15,311,255 | 15,625,585 | 160,894 | 15,786,479 |
(1) The Company has an authorized share capital of a single class of 2.5 billion shares having a nominal value of USD1.00 per share. As of June 30, 2023 there were 1,180,536,830 shares issued. All issued shares are fully paid.
(2) Other reserves includes mainly the result of transactions with non-controlling interest that do not result in a loss of control, the remeasurement of post-employment benefit obligations and the changes in value of cash flow hedges and in financial instruments measured at fair value through other comprehensive income.
(3) The restrictions to the distribution of profits and payment of dividends according to Luxembourg Law are disclosed in note 17.
(4) Mainly related to change in the fair value of U.S. dollar-denominated Argentine bonds. For more information see note 19.
(5) Mainly related to GPC acquisition. For more information see note 21.
The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements.
These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2022.
| 24 |
Consolidated Condensed Interim Financial Statements | |
| For the six-month period ended June 30, 2023 - all amounts in thousands of U.S. dollars, unless otherwise stated |
| Shareholders' equity | |||||||||||||||||||||||||||||||||||
| Share Capital (1) | Legal Reserves | Share Premium | Currency Translation Adjustment | Other Reserves (2) | Retained Earnings (3) | Total | Non-controlling interests | Total | |||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 1,180,537 | 118,054 | 609,733 | (1,051,133 | ) | (336,200 | ) | 11,439,587 | 11,960,578 | 145,124 | 12,105,702 | ||||||||||||||||||||||||
| Income (loss) for the period | - | - | - | - | - | 1,139,492 | 1,139,492 | (2,033 | ) | 1,137,459 | |||||||||||||||||||||||||
| Currency translation adjustment | - | - | - | (46,688 | ) | - | - | (46,688 | ) | (325 | ) | (47,013 | ) | ||||||||||||||||||||||
| Reclassification of currency translation adjustment reserve (4) | - | - | - | (71,252 | ) | - | - | (71,252 | ) | - | (71,252 | ) | |||||||||||||||||||||||
| Remeasurements of post-employment benefit obligations, net of taxes | - | - | - | - | (470 | ) | - | (470 | ) | 30 | (440 | ) | |||||||||||||||||||||||
| Change in value of instruments at fair value through other comprehensive income and cash flow hedges, net of taxes | - | - | - | - | (7,273 | ) | - | (7,273 | ) | (47 | ) | (7,320 | ) | ||||||||||||||||||||||
| From other comprehensive income of non-consolidated companies | - | - | - | 8,481 | (2,607 | ) | - | 5,874 | - | 5,874 | |||||||||||||||||||||||||
| Other comprehensive (loss) for the period | - | - | - | (109,459 | ) | (10,350 | ) | - | (119,809 | ) | (342 | ) | (120,151 | ) | |||||||||||||||||||||
| Total comprehensive income (loss) for the period | - | - | - | (109,459 | ) | (10,350 | ) | 1,139,492 | 1,019,683 | (2,375 | ) | 1,017,308 | |||||||||||||||||||||||
| Acquisition and other changes in non-controlling interests | - | - | - | - | - | - | - | 1,622 | 1,622 | ||||||||||||||||||||||||||
| Dividends paid | - | - | - | - | - | (330,584 | ) | (330,584 | ) | - | (330,584 | ) | |||||||||||||||||||||||
| Balance at June 30, 2022 | 1,180,537 | 118,054 | 609,733 | (1,160,592 | ) | (346,550 | ) | 12,248,495 | 12,649,677 | 144,371 | 12,794,048 |
(1) The Company has an authorized share capital of a single class of 2.5 billion shares having a nominal value of USD1.00 per share. As of June 30, 2022 there were 1,180,536,830 shares issued. All issued shares are fully paid.
(2) Other reserves includes mainly the result of transactions with non-controlling interest that do not result in a loss of control, the remeasurement of post-employment benefit obligations and the changes in value of cash flow hedges and in financial instruments measured at fair value through other comprehensive income.
(3) The restrictions to the distribution of profits and payment of dividends according to Luxembourg Law are disclosed in note 17.
(4) Related to NKKTubes' cease of operations. For more information see note 22.
The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements.
These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2022.
| 25 |
Consolidated Condensed Interim Financial Statements | |
| For the six-month period ended June 30, 2023 - all amounts in thousands of U.S. dollars, unless otherwise stated |
CONSOLIDATED CONDENSED INTERIM STATEMENT OF CASH FLOWS
| Six-month period ended June 30, | |||
| Notes | 2023 | 2022 | |
| (Unaudited) | |||
| Cash flows from operating activities | |||
| Income for the period | 2,265,247 | 1,137,459 | |
| Adjustments for: | |||
| Depreciation and amortization | 10, 11 & 12 | 256,034 | 286,100 |
| Income tax accruals less payments | 57,174 | 45,951 | |
| Equity in earnings of non-consolidated companies | 8 | (148,927) | (190,706) |
| Interest accruals less payments, net | (21,940) | (1,611) | |
| Changes in provisions | 39,933 | 10,479 | |
| Reclassification of currency translation adjustment reserve (*) | 6 & 22 | - | (71,252) |
| Changes in working capital (**) | (166,762) | (823,824) | |
| Others, including currency translation adjustment | (18,355) | 8,552 | |
| Net cash provided by operating activities | 2,262,404 | 401,148 | |
| Cash flows from investing activities | |||
| Capital expenditures | 10 & 11 | (282,249) | (141,343) |
| Changes in advance to suppliers of property, plant and equipment | 2,244 | (19,855) | |
| Acquisition of subsidiaries, net of cash acquired (***) | 21 | (4,108) | (4,082) |
| Loan to non-consolidated companies | (1,235) | - | |
| Proceeds from disposal of property, plant and equipment and intangible assets | 8,375 | 45,996 | |
| Dividends received from non-consolidated companies | 16 | 43,513 | 45,488 |
| Changes in investments in securities | (1,787,629) | (43,571) | |
| Net cash used in investing activities | (2,021,089) | (117,367) | |
| Cash flows from financing activities | |||
| Dividends paid | 9 | (401,383) | (330,584) |
| Dividends paid to non-controlling interest in subsidiaries | (17,437) | - | |
| Changes in non-controlling interests | 1,739 | 1,622 | |
| Payments of lease liabilities | (23,769) | (28,405) | |
| Proceeds from borrowings | 1,032,038 | 851,736 | |
| Repayments of borrowings | (1,143,087) | (441,176) | |
| Net cash (used in) provided by financing activities | (551,899) | 53,193 | |
| (Decrease) increase in cash and cash equivalents | (310,584) | 336,974 | |
| Movement in cash and cash equivalents | |||
| At the beginning of the period | 1,091,433 | 318,067 | |
| Effect of exchange rate changes | (25,578) | (19,113) | |
| (Decrease) increase in cash and cash equivalents | (310,584) | 336,974 | |
| At June 30, | 755,271 | 635,928 | |
| At June 30, | |||
| Cash and cash equivalents | 2023 | 2022 | |
| Cash and bank deposits | 755,305 | 636,571 | |
| Bank overdrafts | (34) | (643) | |
| 755,271 | 635,928 |
(*) Related to NKKTubes' cease of operations. For more information see note 22.
(**) Changes in working capital do not include non-cash movements due to the variations in the exchange rates used by subsidiaries with functional currencies different from the U.S. dollar for an amount of $9.1 million for the six-month period ended June 30, 2023 and $(16.7) million for the six-month period ended June 30, 2022.
(***) For the six-month period ended June 30, 2023, related to GPC acquisition. For more information see note 21.
For the six-month period ended June 2022, related to Parques Eólicos de la Buena Ventura S.A. acquisition.
The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements.
These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2022.
| 26 |
Consolidated Condensed Interim Financial Statements | |
| For the six-month period ended June 30, 2023 - all amounts in thousands of U.S. dollars, unless otherwise stated |
NOTES TO THE CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
| 1 | General information |
| 2 | Accounting policies and basis of presentation |
| 3 | Segment information |
| 4 | Cost of sales |
| 5 | Selling, general and administrative expenses |
| 6 | Other operating income (expense), net |
| 7 | Financial results |
| 8 | Equity in earnings of non-consolidated companies |
| 9 | Dividend distribution |
| 10 | Property, plant and equipment, net |
| 11 | Intangible assets, net |
| 12 | Right-of-use assets, net and lease liabilities |
| 13 | Cash and cash equivalents and other investments |
| 14 | Derivative financial instruments |
| 15 | Category of financial instruments and classification within the fair value hierarchy |
| 16 | Investments in non-consolidated companies |
| 17 | Contingencies, commitments and restrictions to the distribution of profits |
| 18 | Cancellation of title deed in Saudi Steel Pipe Company |
| 19 | Foreign exchange control measures in Argentina |
| 20 | Related party transactions |
| 21 | Business Combinations |
| 22 | Termination of NKKTubes joint venture |
| 23 | Nationalization of Venezuelan Subsidiaries |
| 24 | Events after the reporting period |
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Tenaris SA published this content on 04 August 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 August 2023 12:36:45 UTC.
