Tenaris - Earnings Call - Q4 2024
February 20, 2025
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to Q4 and full year 2024 Tenaris Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Giovanni Sardagna, Investor Relations Officer. Please go ahead.
Giovanni Sardagna (Director of Investor Relation)
Thank you, Gigi, and welcome to Tenaris 2024 Q4 and Annual Results Conference Call. Before we start, I would like to remind you that we will be discussing forward-looking information in the call and that our actual results may vary from those expressed or implied during this call. With me on the call today are Paolo Rocca, our Chairman and CEO, Alicia Mondolo, our Chief Financial Officer, Gabriel Podskubka, our Chief Operating Officer, and Luca Zanotti, President of our US Operations. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment on our quarterly results.
During the Q4 of 2024, sales reached $2.8 billion, down 17% compared with those of the corresponding quarter of the previous year, and 2% sequentially, mainly driven by lower volumes and lower average selling prices as price declines in North America were partially offset by a favorable product mix. Our EBITDA for the quarter was up 6% sequentially to $726 million, and our EBITDA margin increased to 25.5%, mainly reflecting the partial reversal of a provision for ongoing litigation relating to the acquisition of a participation in Usiminas. Without taking into account this one-off effect, our EBITDA declined 4% sequentially to $659 million, with a margin of 23%. Average selling prices in our two operating segments decreased by 7% compared to the corresponding quarter of the previous year and 1% sequentially. During the quarter, cash flow from operations was $492 million.
Our net cash position at the end of the quarter decreased to $3.6 billion, following the payment of an interim dividend of $299 million in November of last year, $454 million spent on share buybacks, and capital expenditures of $182 million during the quarter. The board of directors has decided to propose for approval of the annual general shareholders' meeting to be held at the beginning of May, the payment of an annual dividend of $0.83 per share or $1.66 per ADR, which includes the interim dividend of $0.27 per share or $0.54 per ADR that we paid at the end of November last year. If approved, a dividend of $0.56 per share or $1.12 per ADR will be paid on May 21st. Now, I will ask Paolo to say a few words before we open the call to questions.
Paolo Rocca (Chairman and CEO)
Thank you, Giovanni, and good morning to all of you. 2024 was a good year for Tenaris in many aspects. We consolidated our leading industry position with a number of major achievements. We delivered solid financial results, accompanied by higher returns for shareholders, and completed a number of investments which are improving our industrial efficiency and reducing our environmental footprint. It was, however, marred by an accident that took place at the end of the year, which claimed the lives of two of our employees. The accident occurred in the heavy equipment maintenance shop of our main plant in Argentina. This is a major setback for Tenaris, which has an absolute commitment to safety with its employees and its communities. We deeply regret the loss of life, and are reinforcing all our actions on preventive activities with a focus on critical risk.
We ended 2024 with an EBITDA of $3.1 billion and net income of $2.1 billion, or net sales of $12.5 billion. Free cash flow amounted to $2.2 billion, all of which was distributed to shareholders through dividends and share buybacks. We are proposing to increase the annual dividend per share by 38% over that for the previous year. At the same time, we maintain our net cash position of $3.6 billion. In North America, consolidation among major shale operators has continued, and we have strengthened our service differentiation with these operators, who prize the operational efficiency, the reliability, and the quality that we provide through our Rig Direct service. We have extended our range of Wedge Series 400 connections and now provide 24/7 digital well integrity solutions supported by technical specialists and remote monitoring capabilities, in addition to our more established RunReady service.
ExxonMobil has honored us with their 2024 Supplier of the Year award for our extensive efforts in supply chain integration worldwide. We have served their operations in various parts of the world over many years, and since 2024, we have been serving all their US shale operations, as well as their offshore operations in Guyana, under long-term agreement. We were recently awarded the casing supply for the first wells in Shell Sparta 20K project in the US deepwater, following many months of extensive work on product development and testing, and the development of 3D mapping technology that enhances pipe collapse resistance using ultra-high collapse steel grades. This complements an award to supply BP's Kaskida 20K project and consolidates our leading position in the latest frontier in deepwater development.
We also consolidated our leading position in the Guyana Suriname deep water basin with an award to supply line pipe and insulation coating for Total GranMorgu development. This achievement was possible thanks to our successful integration of Shawcor and its pipe coating technologies and project management capabilities. For other deep water development, we are delivering line pipe and coating for Equinor Raia project in Brazil and have recently completed deliveries for an offshore pipeline for TPAO Sakarya project in the Black Sea. In the Middle East, our contributions to the development of local industrial capability are being recognized. In Saudi Arabia, we recently won a tender for a major CCS pipeline after Aramco had distinguished our GPC facility with a special quality award.
In Abu Dhabi, we extended our long-term agreement with ADNOC, while our premium threading facility was certified as an Industry 4.0 digital leader by the Minister of Industry and Advanced Technology. In Mexico, our sales have been affected by a steep decline in drilling activity, amidst the financial difficulties of Pemex. We have, however, taken the opportunity to reduce our credit exposure. In Argentina, drilling activity on oil and gas production in Vaca Muerta is ramping up as pipeline and energy infrastructure investments move forward. Over the next month, we will be supplying the oil pipeline that will connect Vaca Muerta to a new deep water port in Puerto Rosales in Chubut and expect further pipeline investment during the year.
During the year, we completed a series of investments in our industrial system aimed at improving the efficiency of our operation, as well as contributing to our decarbonization and environmental objectives. These include the installation of a new electric arc furnace with modern continuous charging technology in Argentina, the modernization of our Koppel steel making facility in the United States, increasing its effective capacity, and the installation of a new heat treatment furnace and finishing line at our Dalmine mill in Italy. At the same time, we are advancing with our second wind farm in Argentina and other investments aimed at increasing the share of renewable energy used in our operation. We have also been investing to increase the level of automation and digital systems in our industrial and supply chain system and extend pipe-by-pipe traceability.
As we will show in our annual report that will be published on April 1, April 1st, we continue to make progress towards our target to reduce the carbon emissions of our operation. As the perimeter of our operation has expanded with recent acquisitions, we have decided to reset the baseline for our target to cover this expanded perimeter, as well as to include intermill transportation and other changes aimed at improving reporting transparency. Looking ahead with the change in the administration in the United States, we are heading into uncharted territories when it comes to geopolitics and the global trading system. Changes in tariffs and other events could significantly alter the established market environment. Tenaris, with its unique positioning both globally and in North America, the competitive differentiation and financial strength is well placed to navigate the uncertainties ahead.
Before closing, I would like to thank Alicia Mondolo ahead of her well-earned retirement for her contribution to Tenaris and the Techint Group over more than 40 years. I'm very pleased that we will still be able to benefit from her wise advice in the time ahead. I would also like to thank all of our employees for their constant commitment and engagement, without which the results and achievements of the past year would not have been possible, as well as also our customers, our suppliers, and all the communities in which we operate for their ongoing support. I'm open now for any questions you may have.
Operator (participant)
Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Arun Jayaram from JPMorgan Securities LLC.
Arun Jayaram (Research Analyst)
Good morning, Paolo and team. My first question is on tariffs. Paolo, if the 25% tariffs on imported steel tubulars are implemented by the US Commerce Department, would you still expect Section 232 quotas to remain in place? And I guess the follow-up is, if Section 232 quotas are removed but tariffs are implemented, how do you see the impact on OCTG pricing and import trends if that were to occur?
Paolo Rocca (Chairman and CEO)
Thank you, Arun. As we say in the opening remark, I mean, we are entering into uncharted territories because we have different layers of tariffs that have been announced by the American administration, one of which is the 25% tariff in the frame of the 232. But I would expect that, in general, the introduction of the 25% in the 232 will have an impact on different aspects. On one side, it's very likely that the level of price in the United States will gradually increase because, in the end, the market, import and relevance, has a relevant share of the US OCTG, particularly OCTG product. So the impact of the 25% tariff will reflect, in our view, into an increase in prices. As far as the quotas are concerned, we have no indication which is the intention of the US administration.
But overall, the 232 overall orientation has been in the past and today to support the domestic industry and to allow to raise the level of utilization within the United States. So we expect that the administration will monitor carefully the volume coming from the different sources with the overall aim of defending the interests of the domestic industry. In this sense, Tenaris is well positioned. We are producing almost all of our need of pipes in the United States, and so we think we are well positioned to manage what is coming. It is true that we are producing a large part, but not all, of our steel need, and we may be paying tariff on some of the steel that we may be importing. But still, this will not, let's say, affect substantially our overall position in the States.
This is what we can expect, in our view, from the introduction of the tariff on the 232. As you know, we will understand better in March when this will be announced, the details of what will be the approach, and at the same time, in the coming weeks, we will also understand the extent of other tariffs that may be introduced that could have an impact on our business in the US or worldwide.
Arun Jayaram (Research Analyst)
That's helpful. That's helpful to understand your view on that. So expect maybe pricing to get better and then perhaps that the policies are supportive of domestic manufacturing and you manufacture the bulk of your North America support your North America sales through domestic manufacturing. That's clear. Maybe a follow-up, Paolo. Tenaris has a unique lens into what is going on in Argentina. So I was wondering if you could help us think about some of the potential growth prospects for Tenaris between just OCTG, long-haul pipe, and some of the services that you provide in Argentina between coil tubing as well as in frac. I think you have some pressure pumping capacity in-country.
Paolo Rocca (Chairman and CEO)
Yes. Well, we are very positive on the development and the investment in the energy sector in Argentina. We commented also in the last quarter that we expect a substantial increase of the rigs operating in Vaca Muerta. Now, this is happening in preparation of the expansion of the capacity of evacuation of oil from Vaca Muerta. The big pipeline that is called VMOS is under construction. We have the order for the pipes, and the order for the construction has also been negotiated and signed. So this pipeline will go on, and the oil company is preparing the wells and the upstream to supply the volume, the additional volume that will be exported from Argentina. At the same time, there are some additional pipelines that need to connect different parts of Vaca Muerta to the main pipeline.
So we see this network of pipelines going on with contract, and part of which is also for us, and we see the company mobilizing rigs for this. We were saying that the rigs in Vaca Muerta could increase for the 31-32 that were operating last year to a level of 42 or plus by the end of the year. Things are moving. Some companies are taking decisions now. Maybe we may have an important increase in the rig. We are preparing for this, so we are also expanding our capability in the fracking. We are adding a set for responding to something that we expect an increase in the demand for fracking. In January, in Argentina, we reached in the market the record for fracking during one month. And also, we see that our sets are fully booked for the coming months.
We are adding one that will come during the course of 2025 and accompanying this, the base in Neuquén and coil tubing for satisfying this need. So we are positive in this, and hopefully, this trend will go on during 2026 just to increase the production of oil that will be able to evacuate from Vaca Muerta. The capacity of the VMOS is large, and we require investment to be filled up.
Arun Jayaram (Research Analyst)
Great. Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes in the line of Alessandro Pozzi from Mediobanca.
Alessandro Pozzi (Equity Analyst)
Thank you, Gigi. I have two questions, and they are related, I guess, to the reaction of the share price today, and I'm still trying to figure out if it's maybe the outlook that's been perceived to be a little bit less constructive compared to what you mentioned in the last call, or maybe whether it's just expectations around the announcement of share buybacks. And that leads to the first question. I was wondering if you can maybe give us your thoughts about what could be sales and margins evolution in Q1 and maybe in the H1 of 2025 because we've seen the recovery in Pipe Logix. So maybe it's natural to expect a progression in top line and margins in the coming quarters, and the second question is on the share buyback.
Of course, the program is ongoing still, and you probably cannot say much about the new one. But I was wondering, shall we assume the new buyback to be in line with the $1.2 billion that you announced initially, or perhaps maybe you want to allocate some of the capital to potential acquisitions in the US that could expand your capacity given the new, let's say, geopolitical outlook? And yeah, those are my two questions.
Paolo Rocca (Chairman and CEO)
Thank you, Alessandro. On the first one, we say in the outlook in our press release, we expect the Q1 to have a margin more or less in line with the margin of the Q4. This is the result, I would say, of two drivers. On one side, we will have in the Q1 of 2025 less volume to Europe. In reality, the big pipelines and OCTG that we sold in Turkey that are considered in our lines as part of the lines of Europe, in the Q4, we did a substantial shipment to that region that will not be repeated in the Q1. On the other side, there is a positive impact of the increase in price and some increase in volume in some of the regions, including the United States.
The results of this is our expectation of margin that will be more or less on line or hopefully a little better if the Pipe Logix continue to drive up in February, March. Now, as far as the H1 and so the second semester, we expect improvement, but an increase in our margin, a slight increase in our margin. But this will be influenced by the tariff decision on the beginning of March because if tariffs are announced and the administration is making clear the approach to the quota for different countries, then the market will anticipate a reaction and will move on, and we may see a change in, let's say, the recovery in prices.
We see, let's say, positive trend, frankly, because in the end, we expect the administration is acting exactly in the direction of strengthening the domestic industry, and we are a domestic industry for the American market. So we are positive in the results of this, and we are prepared to absorb the marginal cost that will derive from the supply of steel and eventually the payment of some tariff on it. This is where we are, and this is what we can see. We must admit that our visibility for, let's say, the Q2 and even beyond this is pretty limited considering the number of moving parts that are affecting our market and our sectors today.
Alessandro Pozzi (Equity Analyst)
Okay. So do you expect maybe a marginal improvement in Q2 in margins? I was wondering, should we expect maybe margins to recover to 25% at some point during 2025?
Paolo Rocca (Chairman and CEO)
We will expect it to increase from where we are to now. In the range that you're mentioning, this is what we can expect for the Q2 and going beyond.
Alessandro Pozzi (Equity Analyst)
Okay. Thank you.
Paolo Rocca (Chairman and CEO)
And there is a second question, the buyback. On this, let's say, on the buyback, this decision will be taken, first of all, by the board of directors on the 1st of April in evaluating the situation and in deciding how to include or if to include this item in the agenda of the general assembly that will meet in May. So this will be up to the board and then up to the assembly of the company to decide if we give to the board of directors the authority to enter into a new program of buyback after May. For the time being, we are advancing in our buyback. The present program is almost completed.
Alessandro Pozzi (Equity Analyst)
Okay. And I mean, it will be influenced by whether you can do acquisitions in the US. I mean, there was an attempt to acquire Benteler some time ago, but the Trump administration just the other day confirmed the new merger review guidelines of the previous administration. So maybe in the US, it may not be as likely as we thought maybe before.
Paolo Rocca (Chairman and CEO)
But the board will consider all the elements, the situation, the dynamic of the market, the opportunity that we have to allocate our capital. We have a large cash in our book. So the decision will be taken taking into consideration opportunity for investment, perspective of the business, and the long-term view for the company.
Alessandro Pozzi (Equity Analyst)
Thank you very much.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Marc Bianchi from TD Cowen.
Marc Bianchi (Managing Director)
Hi, thank you. First, to follow up if we could on the buyback discussion, just quickly, there were some comments at your September analyst event in London that sort of talked about plans around the buyback. Is it fair to conclude that those comments from September are still sort of in place and you're thinking about it the same way, or has there been a change in the board's view of how the buyback should be positioned?
Paolo Rocca (Chairman and CEO)
I don't think there has been a change in the overall view for this, but for sure, since the meeting that we had, many things happened in the world, and the position and the policy of the new American administration is for sure a factor that will need to be considered by the board in deciding the strategy for the future, many things concerning the opportunity for investment, the dynamic of the energy sector. I personally think that the new administration has a strong drive in supporting the energy industry. They are launching a program for, let's say, they organize the energy sector in the frame of energy emergency. They are speeding up all the process of permitting and so on and so forth, so something will be moving in my view in the energy sector.
Maybe that in this environment, also the opportunity for acquisition in area or in part of the world that could be interesting for Tenaris may be more open, and we will have to reconsider this and analyze this and the perspective of the company as a basis for deciding what to do and suggesting to the board what to do.
Marc Bianchi (Managing Director)
Yep. Wonderful. Makes clear sense. Thank you. The other question I had was on Mexico. So you talked about the sharp decline in activity. I think the market has been uncertain as to how Mexico unfolds from here, but it seems like maybe there's some incremental plan in place from them. We're just not sure exactly what it is. So kind of curious on one, what are you hearing in terms of the pace of activity recovery in Mexico, and what is reflected in this H1 outlook that you've shared with the market?
Paolo Rocca (Chairman and CEO)
What happened to the activity in oil and gas in Mexico is something, let's say, unexpected to some extent and, in my view, unsustainable. Pemex reduced the investment and is reducing its production from a little more than 1.8 million barrels a day to the present 1.6 million barrels a day. In the recent months, they are losing production at a rate of around 50,000 barrels a day per month. They are reducing rigs from something like 65 rigs to around 23. Rigs are basically idle on the field for lack of inputs and lack of resources. This is an unsustainable situation in my view in the frame of the policy of the new administration. I expect this could be, let's say, going on for a while, but could not be, let's say, the long-term perspective of Pemex.
I would expect that in the H2 of this year, the Mexican government will have to decide a policy and an approach to refinancing Pemex in a way that the country could, let's say, make develop the huge resources in the oil and gas sector. So today, what we see really is an unprecedented reduction in their activity. What we expect in the H2 of 2025, in my view, is a new policy, and then it will take time to recover. That's for sure. I mean, there will be a reset in the policy in Mexico, in my view, and there will be a recovery that could be at a pace that will be inevitably not too fast considering the financial constraints. Now, this is an overall observation.
In the case of Mexico, the negotiation around the future of the USMCA, the tariff that is supposed to be implemented by the new American administration, all of this may have an impact on the economy of Mexico on the long-term development of it. We will see. We don't have now the element to evaluate, let's say, which will be the impact in the overall relation between Mexico, United States, and Canada, and which will be the future of the USMCA. This will be important also for the development of the energy sector.
Marc Bianchi (Managing Director)
Wonderful. Thank you very much, Paolo. I'll turn it back.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Derek Podhaizer from Piper Sandler.
Derek Podhaizer (Director and Senior Research Analyst)
Hey, good morning. Just maybe if we could spend some time on the supply-demand picture in North America. Maybe you could just walk us through, give us an idea of how much pipe is on the ground today, maybe the health of the distributors out there and kind of what they're importing, any sort of impact on Section 232 when it comes to quota reductions, primarily out of South Korea, maybe other places where a new quota has been put on. Just some help around that as we can kind of frame up the supportive nature of OCTG pricing when we think about the remainder of 2025. So just more of the supply-demand dynamics that you're seeing. With the demand side, we've seen the rig count recover kind of off the Q4 seasonality.
What are you expecting as we move forward in 2025, just considering the outlook there? Just some help around the supply-demand would be great.
Paolo Rocca (Chairman and CEO)
Yeah. Well, thank you, Derek. I would ask Luca Zanotti to comment on the supply-demand balance, the level of inventory, what we can expect in our view for the USmarket.
Luca Zanotti (President of Operations)
Yeah. Thank you, Paolo. Good morning, Derek. So many questions here, but one by one. Supply-demand. What we see is that recently, the level of imports came down significantly. In the Q4, it was slightly more than 30%, which helped to ease the inventory that is sitting on the ground today, including our inventory is in the range of, as we calculate, in the range of slightly less than six months. So from the inventory standpoint, we believe that the situation is somewhat normalized. We see less imports, or we have seen less imports during the last quarters. There are structural measures that have been taken by the US domestic industry against some countries like Thailand, where the preliminary determination of Commerce is that they were circumventing the OCTG anti-dumping. So we expect this not to come back again. This is seamless.
And so overall, if you look at the import side, we have seen something that is a decreasing trend. Now, we may be that at the beginning of 2025, we may see a rebound as they reset their budget, but the situation in terms of supply-demand is much more balanced than what we saw last quarter and two quarters ago. Now, the second question was, if I'm not mistaken, sorry.
Derek Podhaizer (Director and Senior Research Analyst)
Yeah, sorry. You're about to, yeah. Yep.
Luca Zanotti (President of Operations)
Yeah. So the second concerning the quota, the way the Section 232, which is one of the tariffs that the administration is putting forward, there are many others that they are studying. So as Paolo was saying before, we are in uncertain territory here because we actually don't know. But the way the Section 232 quotas are structured is that the quotas are going to go away. So everybody is going to be paying 25%. Now, how this will evolve in the future, we don't know. But as Paolo was mentioning before, we do know that the spirit of the Section 232 was to create a strong domestic supply chain. And so we are sure that the administration will be carefully monitoring the imports' evolution because they need to stick to increasing the domestic capacity utilization.
We are confident that the overall effect is going to be positive for the domestic industry.
Derek Podhaizer (Director and Senior Research Analyst)
No, that's helpful.
Luca Zanotti (President of Operations)
Thank you.
Derek Podhaizer (Director and Senior Research Analyst)
And then maybe just on the demand side, just seeing the US rig count recovery here. I mean, just off the seasonality bottom, what's your expectation when you talk to your customers? Just kind of the outlook for the rest of the year, just from where you see it today.
Luca Zanotti (President of Operations)
If I may, yeah, we need to split a little bit the situation because what we do see is a different behavior. If we take the majors and the large independents, we still see that they are very, very disciplined, and the ongoing consolidation process is typically leading to rationalization of operations, more efficiency, so we don't see this increasing a lot in these circumstances. Obviously, this may change going forward, but at this stage, we see a pretty constant level in this segment. What we do see coming in are some smaller independents or private operators, and certainly, we have seen much more interest in terms of gas, gas linked to the new LNG that are being approved, so we see this happening.
So we see, let's say, constant activity on the major large independent, some smaller player getting in with new rigs, and we see interesting developments as far as gas is concerned, and I believe that this will consolidate even further going through 2025.
Derek Podhaizer (Director and Senior Research Analyst)
Okay. That's helpful. And then just to follow up, maybe moving over to Saudi Arabia, maybe just kind of walk through the puts and takes there with conventional versus the unconventional fields, oil versus gas, onshore versus onshore. I mean, where is Tenaris's position? Where are you seeing the pockets of strength? And also, where are you seeing some of the activity softness that we kind of hear out there?
Paolo Rocca (Chairman and CEO)
For this, I would ask Gabriel to give an overview of how we see the evolution of the business in Saudi Arabia.
Gabriel Podskubka (COO)
Yeah. Thank you, Paolo. Thank you, Derek, for the question on Saudi Arabia. And probably take the opportunity to talk about the whole Middle East, where we see a drilling activity that is fairly stable at a very strong level. On the drilling that is associated with gas, we see areas that are very resilient, even growing. This is the case of unconventional gas in Saudi Arabia, targeting increase of gas for power generation in the kingdom. But this is not only the case for Saudi. We see expansion of LNG in Qatar and UAE and targets of self-sufficiency in other GCC countries. So we expect also ADNOC to increase its gas plants. We expect Kuwait in deep drilling areas to drill and increase rigs related to gas. So gas is a very resilient and growing area in the Middle East.
Then when we go to the oil side of the business, the dynamic is a bit more uneven. There is evident idle capacity of crude production in the Middle East, and different countries and companies are taking different decisions. We see on one side UAE expanding capacity of crude in an area where Tenaris is very well positioned. And we see, for example, Saudi Arabia softening some of the drilling associated to oil, especially in the offshore oil, stopping that quest for an increase in ulterior capacity of crude production. So this is what we see in the kingdom. It's also to mention something that Paolo noted on the opening remarks, that Saudi Arabia is also going forward with projects related to energy transition. We mentioned the CCS project. This is an initiative that Saudi Aramco is leading to capture, transport, and store CO2, 9 million tons per year.
And this requires a pipeline of more than 300 km. This is an important order of $250 million, approximately, that we will start delivering during the Q3 of 2025 and complete before the end of 2026. So we see overall that the Middle East has been, in 2024, a point of strength for Tenaris, and will continue to be the case for 2025. And even though we had a slight decrease of our revenues in the Q4 of 2024, we expect a rebound as early as the Q1 of 2025.
Derek Podhaizer (Director and Senior Research Analyst)
Great. Very helpful, Paolo.
Paolo Rocca (Chairman and CEO)
I appreciate it.
Derek Podhaizer (Director and Senior Research Analyst)
Thank you. I'll turn it back. Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Kévin Roger from Kepler Cheuvreux.
Kévin Roger (Equity Research Analyst)
Yes, good afternoon. Would you like, if I may, please going back on the US tariff and the potential impact? The first one would be on your production cost. Can you give us some color currently on what percentage of the pellets that you currently use locally are outsourced from Europe or somewhere else? Just to understand exactly what percentage of raw material costs could be impacted by any 25% tariff, and the second one, just to be sure that I well understood what you just said, if we have the 25% tariff and that in the meantime, all the quotas are removed from the 232, don't you fear that the Korean guys that are currently under quota with 400,000 tons, something like that, will potentially be able to massively increase their imports? Because I guess that with just a 25% tariff, they will remain very, very competitive.
That will be the two points on the tariff, please, and the last one, outside those topics, if you can give us some colors on currently Pemex, what are the level of receivables that you have currently with Pemex, please?
Paolo Rocca (Chairman and CEO)
Thank you, Kévin. In the first point, let's say we have a steel shop full operation that is the Koppel steel shop, in which we are being invested and are preparing for eventually expansion of our operation that is feasible. It's a question of expanding the baghouse and exhaust fumes system just to achieve increased production. So we have the possibility of increasing our, let's say, local production of steel. And then we are importing or complementing steel from different sources. We are also buying locally from different suppliers in the States to complement the steel that we can supply from Mexico, from Argentina, from Italy, or from Romania. So we have very many different sources for supplying what is missing of this.
All the steel shop, and you can imagine the size, will be devoted to the US operation, plus local supply, and plus many different sources, some of which we don't know if we will be affected by tariff or not, because in the end, there will be a negotiation starting, but we do not know how this negotiation will end up with Europe or with Mexico or with Argentina, especially. So this is where we are in terms of steel supply. We feel comfortable that in the end, whatever scenario, we will come out with a fully integrated line, pretty efficient compared to any other competitor. As far as Korea is concerned, I have no doubt that the American administration will be very careful in not allowing anybody to even play in quota, flooding the market, and reducing utilization of the domestic producer.
I mean, this is what they said, this is what they did, and this is what they are going to do to contain this one way or the other by agreement or by other things. So I'm not really concerned that this would be a credible scenario for the future, considering where we are today. And this is not only valid for Korea, it's valid also for other players that may see more room for increase, but I frankly don't think that there will be open season for them. Now, as far as Pemex, we are reducing our exposure. I think that you will see this in the working capital cash flow. We are generating important cash flow there. We are doing agreements that allow us to reduce this in the range of, let's say, close to this quarter, around $140 million.
Our program will allow us to continue, but at a different pace.
Kévin Roger (Equity Research Analyst)
Okay. Okay. Understood. Thanks a lot for the color.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Daniel Thomson from BNP Paribas Exane.
Daniel Thomson (VP Equity Research)
Hi. Good afternoon. Just one question, please. I'm just trying to think about the impact of the price rises in Pipe Logix outside of the US. I was wondering if you could remind us sort of what proportion of your ex-US contracts have an element of Pipe Logix in them, and what's the sort of timeframe for feed-through there. And if we did have US pricing increasing, considering the various lags, when could we expect that to feed through to those contracts and then feed through to your P&L beyond that? Thank you.
Paolo Rocca (Chairman and CEO)
Thank you, Daniel. Well, the Pipe Logix is important in the formulas for the long-term agreement in the States, obviously, then in Mexico, in Canada, in the rest of South America, including Argentina or Colombia, and in some specific contract. But basically, I mean, you say in the Americas, but not so much used outside the Americas, where the formulas are more related to the cost structure of our pipes. This is where they are. The Pipe Logix increased 9% from August to today in January, and we expect this to continue to increase even before the application of tariff, and it will get into our contract with a delay between one quarter and two quarters. Gradually, this will get into it, and we will see it.
So then, in the moment in which tariff will be introduced, expectation will step in, and we don't know what may happen in the months of March or April. But this is what we can estimate and consider today.
Daniel Thomson (VP Equity Research)
Okay. Very clear. Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Mick Pickup from Barclays.
Mick Pickup (Managing Director)
Good afternoon, everybody. Sorry to ask again about the US, but can I just disaggregate the US market into seamless and welded? If my math is correct, you're importing some seamless tubes into the US from outside the US, and obviously, that's part of this uncertain territories. Can you just talk about your ability to ramp up some welded production should the need arise?
Paolo Rocca (Chairman and CEO)
We have capacity on the ground for doing it, but also, price will be moving, and also the price of hot-rolled coil will be moving. But I will ask to look to expand on this relation welded-seamless and the situation for the import of the pipe that are complementing our sales to the States.
Luca Zanotti (President of Operations)
Yes. To summarize, Mick, today, our sales in the United States is, for the great majority, seamless. You know that our strategy and Rig Direct is to provide the whole well, and so you can think of what is the portion of weld that goes into the surface and intermediate and think that this is more or less our proportion in our sales between seamless and welded. Now, as far as your second question, which is capacity in welded, obviously, we are super well positioned in terms of capacity because we could easily ramp up even further our capacity in our Hickman plants, and because we do believe that we're going to see some line pipe also coming through, we have a nice plant in Wilder, Kentucky, that can step in if needed.
As Paolo was saying, this will depend on the relative positioning of the market prices and the cost of HRC, which are the two main inputs for the welded production. But in terms of capacity, we're probably the best placed in the United States. But we're not probably. We are the best place in the United States.
Mick Pickup (Managing Director)
Okay.
Paolo Rocca (Chairman and CEO)
Thank you, Luca. In the case of welded, we depend entirely from domestic industry for the supply of hot-rolled coils. So we are really depending on the equilibrium between price, Pipe Logix, and the local hot-rolled coils. I think that in the US, maybe not immediately, but over time, the policy of the new government and the Trump administration will be to speed up all the permits process. And we may see additional line pipe and additional connection and evacuation. And also, to some extent, this may, let's say, open the way for some development that maybe we do not see exactly now, but we may see in six months' time.
Mick Pickup (Managing Director)
Thank you.
Operator (participant)
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. At this time, I am showing no further questions. I would now like to turn the conference back to Giovanni Sardagna for closing remarks.
Giovanni Sardagna (Director of Investor Relation)
Thank you, Gigi, and thank you all for joining us, and hope to see you soon. Thank you. Bye.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.