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Tenaris SA (NYSE: TS) Third Quarter 2021 Earnings Conference Call, November 4, 2021, 11:00 AM Eastern Time
Good day, thank you for your support. Welcome to the Tenaris SA earnings conference call for the third quarter of 2021. 【Instructions】
I now want to hand over the meeting to today’s speaker, Giovanni Sardagna. please continue.
Giovanni Sardagna - Director of Investor Relations
Thank you Gigi, and welcome to the Tenaris 2021 third quarter results conference call. Before we begin, I would like to remind you that we will discuss forward-looking information in the conference call, and actual results may differ from the results expressed or implied in this conference call. The person speaking with me today is Paolo Rocca, our Chairman and CEO; Alicia Mondolo, our Chief Financial Officer; Guillermo Vogel, Vice Chairman and Board Member; German Cura, Vice Chairman and Board Member; Gabriel Podskubka, Our Eastern Hemisphere President of Operations; and Luca Zanotti, President of Our US Operations. Before asking Paul to make an opening speech, I would like to briefly comment on our quarterly results. Our sales in the third quarter were US$1.8 billion, an increase of 73% compared to the same period last year and an increase of 15% from the previous quarter, mainly due to the increase in sales in the Americas, which offset the continued destocking and decline in sales in the Middle East. The amount fell. In Europe, it is affected by seasonal factors. Our EBITDA for the quarter increased by 26% quarter-on-quarter to US$379 million, reflecting higher sales volume, better pricing, and good industrial performance.
Our EBITDA margin increased by more than 20% due to the increase in average selling prices, while the increase in sales costs was suppressed by improved industrial performance and increased fixed cost absorption. Compared with the same period last year, the average selling price of our Tube operating department has increased by 10%, and it has increased by 6% from the previous month. During the quarter, cash provided by operating activities was US$53 million, and capital expenditures were US$74 million. Our free cash flow is slightly negative. Due to the continuous increase in business in the United States and increased activity levels, working capital increased by US$276 million in the quarter. Our net cash position at the end of the quarter fell to US$830 million from US$854 million in the previous quarter. The board of directors approved the payment of an interim dividend of US$0.13 per share or US$0.26 per ADR, which will be paid on November 24.
Now, before we start asking questions, I will ask Paul to say a few words. Thank you.
Paolo Rocca - Chairman and CEO
Thank you, Giovanni. good morning everyone. In the past few months, we have seen the impact of the tightening of the energy market, as the pandemic last year led to a slowdown in the economy and a rebound in global demand. As inventories are lower than normal, and OPEC countries and U.S. public shale operators maintain supply discipline, oil prices have risen to pre-pandemic levels. Natural gas prices, especially LNG prices traded on the spot market, are responding to restrictions on available supply response, which has resulted in partially underfilled storage capacity in Europe before the winter. This happens when the industry is under intense scrutiny when the world leaders’ meeting leads to consideration of how to strengthen and accelerate the adjustment of the energy transition. Although the goal is clear, the pace and direction of travel will still be uncertain, and there are many moving parts around. This volatility in the energy sector, coupled with the lingering effects of supply chain disruptions and pandemics, is creating risks and opportunities for Tenaris. On the one hand, our raw material, energy, and logistics costs continue to rise, and there are some interruptions in production scheduling and customer drilling plans. On the other hand, as activities supporting the supply of oil and natural gas increase, so does the demand.
In this environment, with the recovery of quarterly sales and profit margins, our performance continues to show a good recovery. Due to volume increase, price increase and cost control, our EBITDA margin has now exceeded the 20% level. Looking ahead, we expect this trend to continue. Our sales in North America in the third quarter increased by 28% from the previous quarter and 155% year-on-year. As we meet growing customer demand and pass on market price increases, we expect further strong quarter-on-quarter growth in the next quarter. As we mentioned in the previous conference call, we have been increasing production in the United States and deploying our Rig Direct service to meet the growing demand and customer needs. In August, we reopened the Ambridge seamless pipe plant in Pennsylvania. In October, we reopened our heat treatment and training facility in Baytown, Texas. The output of our Bay City factory continues to increase. We are making this upgrade in a challenging labor market, and we have already joined it-since October last year, we have recruited 1,000 new employees, and the total is expected to reach 1,600 by June 2022. US Steel and several other welded pipe competitors have filed petitions to launch anti-dumping investigations against oil well pipe imports from Mexico, Argentina, and Russia, and anti-subsidy investigations against Russia and South Korea. The U.S. Department of Commerce has accepted the petition to initiate the investigation, and the U.S. International Trade Commission should make a preliminary ruling on the damage on November 19.
We believe that the petition has no basis, and we will severely question any claim that our imported products have been dumped or caused or threatened the local industry-sorry for causing harm to local producers. In the past 15 years, Tenaris has made substantial investments, more than any other company in acquisition and capacity expansion, to establish a competitive oil well tubular production system in the United States. Although we cannot predict the impact of this investigation, we believe that regardless of the final result, we can continue to provide services to our customers. This morning, we announced to our Japanese employees that, unfortunately, we and our partner JFE have decided to end our successful cooperation at NKKTubes and close the seamless tube factory by June 2022. This is after JFE’s previous announcement in June 2020 that it will close the Keihin Steel Plant where our plant is located, which provides steel and basic services for [unidentifiable]. In the past 20 years, NKKTubes has made significant contributions to Tenaris and even JFE, but its closure is inevitable. After the factory is closed, we will produce high-chromium alloy products that NKKTubes provides to customers around the world in our industrial facilities. JFE will support us with the usual cooperative spirit of the joint venture. Our employees in Japan showed great perseverance when we announced the news this morning, and we will support them in the coming months.
In October, our long-term relationship with Sandvik on the supply of CRA or stainless steel pipes was extended for another five years. Here, we use our expertise in high-quality connections and Dopeless technology to supplement Sandvik material technology and incorporate these high-special pipelines into our [quotation process]. This is a growing market segment. In Qatar, we won a large-scale pipeline contract valued at USD 330 million for welded pipes and seamless pipes for the supply of natural gas to LNG production contracts. Delivery is scheduled to begin in the second half of 2020. This complements our existing contract to supply OCTG in the region. This has increased our large order backlog in the Middle East, and we will begin to see its impact from the performance starting in the second quarter of 2022. In Argentina, we have agreed with YPF to extend our long-term agreement to strengthen our drilling rigs to provide direct service for another 5 years from April 22. We will continue to advance plans to reduce the carbon intensity of our operations. We are completing an investment to expand the size range of our medium-diameter rolling mill in Dalmine to 18 inches, which will save a lot of energy and carbon emissions for this larger diameter product. We are also actively looking for opportunities to invest or obtain renewable energy for many of our factories around the world, including Italy, Argentina, Romania and the United States. At the same time, we are expanding the sales of hydrogen storage tanks for refueling at hydrogen refueling stations in Europe and California. We have won a contract from Air Products to provide line pipes for hydrogen development in Saudi Arabia. In a challenging and rapidly changing environment, Tenaris is fulfilling its promise to improve its financial performance and maintain a good position to support its global customers.
Thank you, we can answer any questions you have now.
[Operator Instructions] Our first question comes from Ian MacPherson of Piper Sandler. Your line is now open.
Ian McPherson-Piper Sandler-Analyst
Hi. Thank you. Paul, I think you-we discussed last quarter, you can expect double-digit revenue growth in the third and fourth quarters. You broke this point at a rate of 15% in the third quarter. That-did you advance some income? Or do you still expect to achieve double-digit revenue growth in the fourth quarter?
Paolo Rocca - Chairman and CEO
Thank you, Ian. I think we should increase our income in this range again, in the range of teenagers. I mean the market is growing in different regions, especially in North America. So we think we can do this. And I think this trend may continue in the next quarter.
Ian McPherson-Piper Sandler-Analyst
OK. So-is this similar to the ASP growth of 6% or 7% in the third quarter, and then the rest is sales? Therefore, the growth in quantity and price is fairly even.
Paolo Rocca - Chairman and CEO
Basically, it will be - there may be more differences. But as you can see, the growth of Pipe Logix this month is very important. And gradually, as you said, this will also support revenue growth in the fourth quarter and the first quarter of next year.
Ian McPherson-Piper Sandler-Analyst
OK. This is very helpful. Then I also want to ask about the end of NKK. Can you talk about the importance of Japanese joint ventures relative to the performance of 2021, and how we should consider the split after the middle of next year?
Paolo Rocca - Chairman and CEO
Well, the joint venture company has made a very important contribution during its establishment in 2000. At that moment, it was very helpful for us to supplement our product range and enter the Japanese market. But in the last year, overall production has dropped a lot. The total output of the previous year was within the range of 50,000 tons/year. When JFE decided to close the site where our facility is located in 2020 and did not spend immediately, the current solution is relatively limited, but in 2023, the building supply of the facility, we face the inevitable-we have to do it inevitably Made this decision. I will not say that this impact will have a significant impact on our balance sheet, because we also have reserves, and most of the costs may be related to the closure. The challenge will be that we are ready to reposition production, especially for higher raw materials for the rest of our industrial system.
Ian McPherson-Piper Sandler-Analyst
understood. Thank you Paul.
Paolo Rocca - Chairman and CEO
Our next question comes from Connor Lynagh from Morgan Stanley. Your line is now open.
Connor Lynagh - Morgan Stanley - Analyst
Yes. thank you very much. I want to know, I'm not sure how much you can really say at this time, but it's just a comment on a potential trade case. Obviously, you have emphasized that you think this is about strengths. Are there any data points you can point to or just some kind of industry data that can suggest or support your position there?
Paolo Rocca - Chairman and CEO
Sorry, I did not hear the last part of your question about trading. Is there any problem?
Connor Lynagh - Morgan Stanley - Analyst
Yes. Basically, can you point out any kind of data points in your own operations or in the market to support your view that claims are worthless. Basically just want to know if you can expand how you support your position.
Paolo Rocca - Chairman and CEO
Oh yes. Thank you, Connor. Well, basically, we-in the past 15 years, we have invested a lot of money in the United States for acquisitions and inorganic growth. In addition to the acquisition, we also installed a new state-of-the-art factory in Texas. Our investment exceeds 1.8 billion U.S. dollars. We stepped in to expand the production capacity of the facilities previously acquired by Maverick and Hydril and IPSCO. Therefore, our production capacity in the United States is very strong. We are supplementing our local production through imports or products. In some cases, we are also solving shortages or parts of our market supply because there is no local production or local production. , Domestic production is still not enough, domestic production is not enough. Now this is our position in this situation, hurt, we did not cause harm to the domestic [unrecognizable] in the contract. We are an [undecipherable] part of the country.
We-this is basically what we think and what we are going to do-on the one hand, we will work with the DOC and the ITC to defend the argument against injury. We have a very powerful case. At the same time, we are ready to increase local production as needed-because the growing market still needs it-through growing market demand. As I mentioned in the opening speech, since October last year, we are now merging-we will merge more than 1,600 employees to support the expansion of our factory's production. This is a decision independent of any matter or trade case, and it will be strengthened to provide our customers with security of supply on our side in all contracts we have. The eight facilities we currently operate are - we basically operate eight facilities in the United States. This is the steel plants in Bay City, Hickman and McCarty, Baytown, Conroe, Koper, and possibly the pipeline facilities in Blytheville. So I mean, this is a very powerful and most powerful seamless and welding production system. So to this extent, we feel that the trade case is unfounded and we will vigorously defend it. Also in terms of price, you have already seen Pipe Logix increase by 98% in the past year. So in this case, the price rises by 100%, it is difficult to support the damage. In addition, as you know, American steel companies are demonstrating record-breaking performance at this moment. Therefore, we will defend with the DOC in injury cases.
Connor Lynagh - Morgan Stanley - Analyst
That is thank you very much for admiring the colors there. Therefore, by sticking to the US market, one of the many questions we get is what measures will be taken to motivate steel mills to restart there for hot rolled coils, falling prices, or rising welding prices. It's just an advanced framework that considers your welding capacity, what do you need to see in the market to really justify reactivating any of that capacity?
Paolo Rocca - Chairman and CEO
Well, you have seen the price when the price is rising strongly, which will drive the opening of the welded pipe factory, there is no doubt about that. We will-we plan to do this in Hickman. Hot rolled coil hits a point, there may be a limit, maybe we can imagine that if you look into the future, the price of hot rolled coil in 2022 may decline over time. But in my opinion, the price increase of OCTG will drive the launch of the facility. Nevertheless, if we assume that demand will increase-because we are considering the number of rigs in the next quarter will continue to increase, we expect the number of rigs to be the same as other analysts, we expect the number of rigs and our customers are confirming this view from now on By the second half of 2022, there will be an increase in the range of 100 drilling rigs. Therefore, in the OCTG market where the price of hot rolled coil is increasing, we-according to the future will gradually decline, we see that there will be welding types entering the market. However, the demand will still be that the supply will be tight. In my opinion, prices will continue to show a positive trend.
Connor Lynagh - Morgan Stanley - Analyst
All right. thank you very much. I will turn it back.
Our next question comes from Igor Levi of BTIG. Your line is now open.
Igor Levi - BTIG - Analyst
Good morning. So this is the first time in a long time that I remember your press release highlighting offshore improvements in multiple regions. If I remember correctly, a strong offshore business is a key factor in pushing EBITDA margins above 25% in the previous cycle. We have not seen this situation since 2014. So how much do you expect the offshore business to recover in 2022? If you have to guess, how often can we see the profit margin over 25%?
Paolo Rocca - Chairman and CEO
Well, we agree that what we are seeing is that the offshore market is beginning to recover. We may see the beginning of this recovery more-from the first quarter of next year. This will be the initial rebound, but-then the process will continue. We expect that some large-scale projects will make final investment decisions in 2022, which will gradually affect our position and sales or demand in the second half of 2022 and 23. It takes time. We saw more interest today. Offshore is entering-especially Latin America, Mexico, Brazil and Guyana. For example, these areas are beginning to show signs of recovery. But I think that by 23 years, other regions will also join—the Eastern Hemisphere and Africa will have new large-scale projects to look for investment decisions and execution. So this is true, it is recovering...
Igor Levi - BTIG - Analyst
great. As a follow-up to Conner’s trade case, can you talk about how many US sales are currently produced in the US? Suppose your American factory starts to operate at full capacity, the demand in the United States-can the demand in the United States that you sell can be produced locally? Are there certain grades of pipes that you simply cannot produce here and must be imported?
Giovanni Sardagna - Director of Investor Relations
Hello, Igor. Maybe the line in Buenos Aires is closed, I don't know, maybe Luca or German can answer this question.
German Cura - Vice Chairman of the Board
We are all together. Well, thank you, Igor, and we—this is German. When we resume the production line from Buenos Aires, I just want to say, first, we plan to call on us to be absolutely capable of serving our existing and growing customers. As we announced in the past few weeks, we currently have a factory in the United States and plan to hire 1,000 employees. We have roughly the same numbers to improve our domestic capabilities. We usually, Igor, will not disclose the origin, etc., but you need to treat Tenaris as a global industrial system, which naturally established a very important domestic production capacity, as we announced through more than 10 billion US dollars of investment Like that. This is also complementary to production from other parts of the global industrial system, and we intend to do it this way. Hope this solves your problem.
Igor Levi - BTIG - Analyst
great. Thank you. I will turn it back.
Thank you. Our next question comes from Alessandro Pozzi of Mediobanca. Your line is now open.
Alessandro Pozzi - Mediobanca - Analyst
Hello, thank you for answering my question. You mentioned that in the fourth quarter, you can see-growth in the teens' range. I want to know, maybe at this stage, you also know more about the growth in the first quarter, and I want to know whether this growth rate can be extended in the first quarter. Perhaps as a follow-up, I believe you mentioned that starting from the second quarter of next year, you can see the positive impact of the increase in sales in the Middle East. I wonder if you can give us more about the color of the recovery you see in the Middle East and next year.
Giovanni Sardagna - Director of Investor Relations
Gabriel, you want to discuss the Middle East, don't you?
Gabriel Podskubka-President of the Eastern Hemisphere
certainly. certainly. While we are waiting for Paolo, I will address the second question about the Middle East, and we believe that drilling activities in this area continue to be suppressed. So far, we have seen a mild recovery. The number of drilling rigs in the Middle East has only increased by 5% from the beginning of this year. We are still about 35% below pre-pandemic levels, but we are seeing this change. We see that drilling platforms are shrinking, and we expect drilling activities to accelerate from the end of this year to 2022, which is in line with the operating expenditure plan to increase and provide higher levels of production. Another important aspect that affects our revenue in the Middle East is the change in the UAE's supply model. You know that we are transitioning to Rig Direct, so some destocking is in progress. Moreover, there is also a gap between Kuwait’s new and old contracts. Therefore, this has also affected the apparent demand in the past few quarters and the next two quarters. In this case, as you mentioned, compared with recent quarters, we expect our sales in the Middle East to be basically the same in the next two quarters.
However, as we commented in the last conference call, as we begin to build a large backlog of contracts in the region, we expect the relevant jump to begin in the second quarter of 22 and beyond. In order to give you some colors, in Saudi Arabia, we have obtained unconventional development for Jafurah. We have seen Saudi Aramco restart some large-scale offshore expansion projects. In Kuwait, we have received the first cancellation, which creates uncertainty about the delivery of the second quarter of next year related to the multi-year rewards we reviewed a few quarters ago. In addition, the UAE’s activities have been promising, with plans to increase direct transportation of ADNOC rigs throughout 2022. And we have also seen some interesting natural gas explorations throughout the UAE, not only in Abu Dhabi, but also in Ras Al Khaimah and Sharjah. Very complex wells require rich mixing. Last but not least, Paolo mentioned in his opening speech on Qatar that he recently received huge rewards on Qatar’s pipeline, supplemented by our backlog of OCTG contracts. We still exist-this market will remain strong for us to move into the future. Therefore, I believe that starting from the second quarter of 2022, we will see related jumps and new baselines in the Middle East.
Alessandro Pozzi - Mediobanca - Analyst
When do we expect that the Middle East may return to pre-COVID levels? Is it 2022 or next year?
Gabriel Podskubka-President of the Eastern Hemisphere
Yes. By 2022, this jump should bring us back to the 2020 income line, and even hope that this will be the case in 2019, but back to those levels.
Alessandro Pozzi - Mediobanca - Analyst
OK. Going back to the first question about potential revenue growth in the first quarter, should we expect revenue in early 2022 to still achieve double-digit growth?
Giovanni Sardagna - Director of Investor Relations
Paolo Rocca - Chairman and CEO
can you hear me?
Giovanni Sardagna - Director of Investor Relations
Yes. Yes, we can hear your voice.
Paolo Rocca - Chairman and CEO
OK. No, this is the same as the comment I mentioned earlier. We estimate that also in the first quarter of 2022, our revenue will grow in the range of about 15 years old.
Alessandro Pozzi - Mediobanca - Analyst
Thank you for your clarification. I will turn it back.
Thank you. Our next question comes from Frank McGann of Bank of America. Your line is now open.
Frank McGann-Bank of America-Analyst
OK. thank you very much. If you can, just two questions. One, in terms of what you see. You mentioned in the press release that, as you mentioned in the past, private producers are the main driver of many growth. I want to know what is going on-what do you think of this progress? Is this beginning to change? Do you see more listed companies begin to open up their spending at least slightly? Then, in terms of the cost pressures you are seeing, prices have clearly risen so fast that it seems to be far offsetting this, which has resulted in very strong sales growth. But-do you see the cost is different, that is, the next two to three-quarters of the time will start to be worrying?
Paolo Rocca - Chairman and CEO
Thank you, Frank. Well, on the first point, I would like to ask Luca Zanotti to comment on the difference in the way private companies and public companies invest in this era.
Luca Sanotti-President of the United States
Yes. Thank you, Paul. I mean, look, the forecasts made by our customers are still based on commodity prices, and these prices are now fully affecting the more constructive environment we see at the moment. Therefore, this may change in the future. As far as the current situation is concerned, we see that the private sector is still playing the biggest role in this capacity growth. But also, if you read through large independent institutions and public large independent institutions, you will find that they suggest that the future may change according to the environment. As I said before, the environment seems more constructive than in the past. Then there is another factor that needs to be considered, the merger is still going on, which may also slightly change the future prospects. I hope this is useful to you. Yes. Thank you, Luca. As far as costs are concerned, you are well aware that we are going through a period of extreme volatility because of major changes in metal costs and energy costs, and what is happening in Europe today. But for metals, for example, iron ore has risen rapidly, and then China suddenly made such a big decision to cut production, causing the price of iron ore to drop sharply. Coal is now rising, due to restrictions and bottlenecks in the energy sector. Scrap has increased, but the net amount has recently decreased. So there is some decoupling between the variables we went together before, so it is not easy to predict. But for now, costs-proof of raw materials, energy and logistics costs are entering our inventory. By the fourth quarter, I think the full impact will be reflected in our cost of sales. As you said, it is offset by reduced production and better absorption. If I look to the future, I think some of these variables will become more normal. For example, we expect energy costs to gradually decrease, possibly after spring-after European spring, after winter. Therefore, even the cost will be-the supply system will respond, and we may be able to contain the extraordinary disruptions and fluctuations we have seen in the last month. In our accounting, I think this will be fully reflected in the fourth quarter and first quarter of 2022.
Frank McGann-Bank of America-Analyst
Thank you. Our next question comes from Stephen Gengaro of Stifel. Yuor line is now open.
Stephen Gengaro - Stifel - Analyst
thanks. good afternoon. Good morning, gentlemen. You have answered a lot. I'm just curious because it is related to trade cases when you consider your domestic or American production and products from other markets. And I know you don’t want to reveal the details of the volume. But when you consider the potential price advantage, I know that in previous cases over the years, if these cases are resolved, prices in the U.S. market tend to rise. What is the net impact on your profitability. Is there a way to consider the interaction between the benefits you get from U.S. production and the tariff offsets entering the country?
Paolo Rocca - Chairman and CEO
Well, you are right, as in the past, this may have an impact on prices. But as you know, prices in the United States have been rising in the past 13 months. Months and months, prices have continued to rise, and strong, because last month, the price of Pipe Logix increased by 12%. So there is a tendency to increase prices. Now-under this trend, any restrictions on supply or reduction in imports, especially niche products, may cause prices to soar. This is also possible. But in my opinion, the supply is really tight. Affected by inventories, the high inventory at the beginning of this year dragged down the price increase to a certain extent, because the inventory entered the demand for consumption. Now the inventory has dropped to four months, 4.5 months. Therefore, considering the expected consumption level, the inventory level is normal or low. So this is also something that has a positive impact on prices. So in my opinion, even if it is independent of the trade case, we will see price pressure. Then perhaps the trade case might justify some additional spikes in certain consumption segments.
Stephen Gengaro - Stifel - Analyst
OK. Thank you. This color is nice
Thank you. Our next question comes from Vaibhav Vaishnav of Coker Palmer. Your line is now open.
Vaibhav Vaishnav - Coker Palmer - Analyst
Good morning everyone, and thank you for asking my question. First of all, it is just a question of clarification. I think you guided the revenue growth in the fourth quarter, but did you also mention the revenue growth in the first quarter of 22?
Paolo Rocca - Chairman and CEO
Vaibhav Vaishnav - Coker Palmer - Analyst
Although the Middle East is flat. What is it driving? Is it more North America? Or what is driving this?
Paolo Rocca - Chairman and CEO
Well, North America must be a factor. But I mean, in Latin America, drilling is increasing. Compared with our situation last year, oil prices of around $80 are important. The US natural gas price (approximately US$5) and LNG also support some higher level activities. So this pushes-Canada is a factor. When I refer to income, I include price. So there is quantity and price. The combination of quantity and price, tight demand and supply has driven revenue growth.
Vaibhav Vaishnav - Coker Palmer - Analyst
This is very helpful. Therefore, if I consider your guidance for the fourth quarter, you might get an EBITDA of approximately $425 million. If even if you are talking about pricing, I assume that profit margins are flat, then our first quarter EBITDA can reach $475 million. If I calculate on an annual basis, this will bring your revenue to close to 2 billion U.S. dollars—EBITDA in 2022 is 2 billion U.S. dollars. Street is $1.4 billion. I just thought-it's like not trying to determine a number, but do we have reason to believe that despite higher profit margins in the Middle East, EBITDA has declined since the first quarter? Or am I missing something?
Paolo Rocca - Chairman and CEO
So, as you can see, the top line will increase-because of the visibility we have. The EBITDA ratio will remain more or less at its current level, at least for the next quarter. Maybe if the market remains prosperous and there are no unexpected cost changes, we can add something in the first quarter of next year.
Vaibhav Vaishnav - Coker Palmer - Analyst
understood. If I can squeeze in like the last question. This is like a common problem we encounter in working capital. So if you look at your inventory level, call it $2.5 billion. It's like this-if I had to go back to 2018, 2019, or 2013, 2014, when revenue was much higher than our $2.5 billion inventory. When we consider revenue improvement in 2022, at least in the first half of 2022, how should we consider working capital?
Paolo Rocca - Chairman and CEO
Well, in terms of working capital, as I mentioned in the last meeting, we are increasing - still increasing our working capital. As the price increase I mentioned is reflected in the evolution of Pipe Logix, we will get higher accounts receivable in the fourth quarter. Therefore, our working capital will increase in the fourth quarter because price increases are important and costs also increase. So to some extent, we will increase working capital in the fourth quarter to support the increased volume and price. Now please remember that today, our level of work at Rig Direct is very high, and our level of service to our customers means an important level of working capital anyway. Then when production increases, our routes in the industrial system require higher working capital because we are activating routes, for example, to transfer materials from a rolling mill to a heat treatment or trade line in a different place. Therefore, when we increase accounts receivable, prices, and to some extent, the working capital level of Rig Direct and the level of inventory we have in the chain will increase. I said at the last meeting that we will stabilize in the fourth quarter, not in the first quarter of 2022.
Vaibhav Vaishnav - Coker Palmer - Analyst
This is very helpful, thank you for answering my question.
Thank you. Our next question comes from Luigi De Bellis from Equita. Your line is now open.
Luigi De Bellis - Equita - Analyst
Yes, good afternoon, thank you for answering my question. Three questions asked me. The first is the generation of free cash flow. Can you elaborate on the capital expenditure for next year? Regarding the second question of the Middle East. Can you quantify your backlog of orders in the Middle East and how it compares to the previous quarter? The last question is the clarification of the outlook. Can you quantify how much of the quarterly sales growth in the first quarter of 22 was driven by price and how much was driven by sales? Can you elaborate on why, despite the strong growth by project, the profitability will remain flat on a month-on-month basis?
Paolo Rocca - Chairman and CEO
If I understand it well, regarding the first question of capital expenditures, we expect that the overall capital expenditures for next year will be in the range of US$260 million-for the whole year of 2022. As for the Middle East, maybe Gabriel, can you comment on this issue?
Gabriel Podskubka-President of the Eastern Hemisphere
If I understand it well, regarding the first question of capital expenditures, we expect that the overall capital expenditures for next year will be in the range of US$260 million-for the whole year of 2022. As for the Middle East, maybe Gabriel, can you comment on this issue?
Paolo Rocca - Chairman and CEO
Yes. Thank you, Gabriel. We expect the last issue in the growth of the first quarter of 2022, and I would say that it should be basically balanced between price and quantity. I mean these are driving the revenue growth we expect.
Luigi De Bellis - Equita - Analyst
OK. So just follow up. Why will the profitability percentage remain basically the same with price increases of 6% and 7%, and the absorption of fixed costs will be higher due to increased sales? Just to clarify this. thanks.
Paolo Rocca - Chairman and CEO
You are talking about why we are- um. I mentioned that gradually, cost increases are entering our cost of sales, in our good sales. So there is a certain cost pressure. Some of these cost pressures, such as the sudden rise in energy impact in Europe. This will count towards our cost of sales, and the level of absorbing this increase in volume will not be enough to fully compensate for the increase-the expected increase and the increase we see in costs today. This is why we basically expect profit margins to be slightly higher, but not far from where we are today.
Luigi De Bellis - Equita - Analyst
Thank you. Currently, I have no further questions. I want to turn the call back to Giovanni Sardagna's closing speech.
Giovanni Sardagna - Director of Investor Relations
Well, thank you, Gigi. Thank you everyone for participating in our third quarter conference call. We will see you soon. thanks.
Giovanni Sardagna - Director of Investor Relations
Paolo Rocca - Chairman and CEO
German Cura - Vice Chairman of the Board
Gabriel Podskubka-President of the Eastern Hemisphere
Luca Sanotti-President of the United States
Ian McPherson-Piper Sandler-Analyst
Connor Lynagh - Morgan Stanley - Analyst
Igor Levi - BTIG - Analyst
Alessandro Pozzi - Mediobanca - Analyst
Frank McGann-Bank of America-Analyst
Stephen Gengaro - Stifel - Analyst
Vaibhav Vaishnav - Coker Palmer - Analyst
Luigi De Bellis - Equita - Analyst
The discount offer is only applicable to new members. The stock adviser will renew the subscription at the then quoted price. The price of the stock advisor is $199 per year.
Stock Advisor was launched in February 2002. Return as of February 11, 2021.
The average return of all referrals since its inception. The cost basis and return are based on the closing price of the previous market day.
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