Tenaris SA (NYSE:TS ) Q1 2022 Earnings Conference Call April 28, 2022 9:00 AM ET

Giovanni Sardagna - IR Director

Paolo Rocca - Chairman & CEO

Gabriel Podskubka - President, Eastern Hemisphere

Luca Zanotti - President, United States Operations

Connor Lynagh - Morgan Stanley

Frank McGann - Bank of America Merrill Lynch

Arun Jayaram - JPMorgan Chase & Co.

Marc Bianchi - Cowen and Company

Carsten Riek - Crédit Suisse

Good day. Thank you for standing by. Welcome to the Q1 2022 Tenaris S.A. Earnings Conference Call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Giovanni Sardagna. Please go ahead.

Thank you, Gigi, and welcome to Tenaris 2022 first quarter conference call. Before we start, I would like to remind you that we will be discussing forward-looking information in this call and that our actual results may vary from those expressed or implied during this call. With me on the call today are Paolo Rocca, our Chairman and CEO; Alicia Mondolo, our Chief Financial Officer; Guillermo Vogel, Vice Chairman and Member of our Board of Directors; German Cura, Vice Chairman and Member of our Board of Directors; Gabriel Podskubka, President of our Eastern Hemisphere Operations; and Luca Zanotti, President of our U.S. Operations.

Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our quarterly results. Our sales in the first quarter of 2022 reached $2.4 billion, doubling those of the previous year and up 15% sequentially, mainly driven by higher prices in the Americas and higher shipments of line pipe in Europe and South America. Average selling prices in our Tubes operating segment increased 41% compared to the corresponding quarter of 2021 and 12% sequentially.

Our EBITDA for the quarter, which included $12 million of severance charges related to the discontinuation of our industrial equipment business in Brazil and the closure of NKKTubes in Japan was up 30% sequentially to $627 million. Our EBITDA margin reached 26.5% as higher prices more than offset increases in energy and raw material costs.

During the quarter, working capital increased by $609 million, mainly reflecting higher trade receivables following the increase in sales and higher inventories, partially offset by an increase in trade payables. With the negative operating cash flow of $27 million and capital expenditure of $67 million, our free cash flow for the quarter was negative for $94 million, but at the end of the quarter, our net cash position was $562 million.

Now I will ask Paolo to say a few words before we open the call to questions.

Thank you very much, Giovanni. Good morning to all of you. We are pleased to have our team here in Luxembourg for this conference call after more than two years of pandemic-induced travel restriction. We are visiting customer again. And all around Tenaris, our teams are meeting up, while we maintain the benefit of flexible working routine.

Since our last conference call, the world has changed. The Russian invasion of Crimea, deeply affecting the global politics and markets. Energy markets are being disrupted as government, particularly in Europe and the United States, look to replace Russians export and imposed financial sanction on individuals, companies and institutions. Security of supply has become a prime concern as prices rise along with concern about supply shortfalls. At the same time, inflation has increased all around the world casting doubts on future global growth.

Tenaris, with the unique positioning it has developed around the world, has an important role to play in supporting oil and gas companies in their commitment to develop regional energy independence and local value chains in a time of supply chain disruption and economic uncertainty. In North America, we have been quick to accompany the recovery in drilling activity following the pandemic-induced collapse in 2020. Since the recovery began, we have been steadily ramping up production in our U.S. in data system, adding 1,400 new employees over the last 18 months. Today, we have 3,100 employees in the United States and expect to add a further 700 in the rest of the year.

Our modern Bay City mill has been operating at full capacity since March, and we already opened many of the facility we had to shut down following the outbreak, the pandemic. We have gained a head start over our competitors. And this puts us in a good position to respond to the requirement of our customers as they expand their operation in the region. Latin America is an important producer of oil and gas for the Western Hemisphere as it developed its prolific deepwater and shale reserves. Tenaris, with the extensive local manufacturing and service capabilities it has built over the years in Argentina, Brazil, Colombia and Mexico [Technical Difficulty].

Please remain on the line. Your conference will resume shortly. Pardon me, speakers. You may continue.

Sorry for the interruption. I understand that I was commenting about Europe. As Europe seeks additional supplies of natural gas to replace imports from Russia, new pipelines will have to be developed in the Mediterranean and Black Seas. Tenaris has extensive expertise in supplying complex, fast-track pipeline project from its plant in Italy and Brazil. We are already supplying the Sakarya pipeline project, the Turkish part of the Black Sea, and expect to supply the Cassiopeia pipeline project in the trades of Sicily later this year.

The Middle East will be an important supplier of oil and gas to other region in any global scenario. Canary has developed their strong presence in the region with local manufacturing content and service capabilities. Our sales to this region will increase significantly in the rest of the year as the region activity increases and destocking activity comes to an end. Aramco is switching from its previous practice of awarding quarterly tenders to awarding long-term contract to local pipe providers, including our recently awarded 10-year contract for the supply of premium products.

Now I will say a few words about our first quarter results, in which we passed a number of long-standing performance milestone. Sales were up 100% year-on-year. And our EBITDA margin above 26%, reached a level last seen in 2014. Our quarterly net income came in strongly at $500 million, a level we have not reached since 2008. In addition, we had a record volume of seamless pipe shipment, which reflected the good performance of our industrial system to ramping up production in a short time.

Working capital increased during the quarter, supporting our growth in sales. For the next quarter, we expect to return to positive free cash flow and to reduce our days of operating working capital. At the end of March, we published our 2021 Sustainability Report, which comments on the actions we are taking to improve our sustainability, including our progress on reducing our carbon emission intensity. For the first time, the main numbers in this report, including our Scope 3 carbon emission were audited. The current market environment is one which plays to Tenaris' strength and the exceptional positioning that we have built up over the many years. We are performing well and expect to exceed these results in the quarter ahead.

I will stop here and pass the call for any questions you may have. And sorry again for the disruption in the communication.

[Operator Instructions]. Our first question comes from the line of Connor Lynagh from Morgan Stanley.

In the release, you alluded to some of the concerns that we've been hearing, which is the increase in raws input prices. And it certainly seems like you have confidence you're going to be able to offset that with pricing. I guess, I'd just love some additional color in terms of what's driving that confidence? And then what are you seeing in the market that's giving you that conviction?

Well, first of all, I think that there are two different environments. One for the Americas, United States, Canada and South America, in which the imbalance between supply and demand is driving prices up. We have seen the Pipe Logix moving even today very strongly. And the international pricing, there is also rising, but in which the imbalance, let's say, is moving and allowing us to raise prices, but probably at a different pace.

Now what is driving our, let's say, our confidence in pricing. The data we perceive -- the imbalance between an oil industry there is aggressively addressing the need to substitute the dependency from Russia and our ability and the ability of our competitor in raising level of production. We are moving up more slowly. It's not easy to hire and incorporate people and, let's say, ramp-up operation. We're doing this I think pretty effectively, but still, we perceive that there is a tension and prices are sustained by this.

The increase in cost is strong, also due to the disruption in the supply chain for our input, but we are able to transfer the increasing cost to our client in this environment and we think that we can continue to do so for the coming quarters.

That's helpful. You were alluding to the troubles ramping capacity. Can you just speak to what you're seeing in terms of competitor behavior, certainly, we're aware that you're ramping some of your mills in the U.S.? Are competitors responding as well? And what do you see as the likely, if you can put a number to it, growth in competitive capacity? I'm particularly interested in the U.S. given the shortfall there, but if you have any comments globally that would be appreciated as well.

Well, globally, the conflict deriving from Russian invasion is creating disruption in the supply chain. Ukranian supplier and Russian supplier, to some extent, are losing access to international market. On the other side, the disruption caused by COVID in China is also, to some extent, affecting the global supply. Now in the United States, the ramp-up depends very much from our ability to incorporate additional headcount, to train them and to prepare them. I think our competitor is basically doing a similar effort and are also raising their capacity. But we have, let's say, limitation and our competitor will also. In the case of United States, there is room for increasing capacity on the welded side, but also this is, to some extent, conditioned by the high price of hot-rolled coils and some of the uncertainty on the future price of hot rolled coils. So it's not easy today to lock in supply and price for this producer.

Luca, maybe you can add on the difficulty in perceiving our [indiscernible] and in the movement in our competitor in the moment, specifically in North America.

Connor, to get the production back again, you need first to bring up plants that have been idle, and this is not as easy as it would look like. Second, you need to recruit people and then you need to train people. This is an effort that in this environment is very complicated and there is no difference for anybody that is trying to execute this ramp-up. The good news for us is that we started off back in October 2020 this process.

And so we have already been able to bring in more than 1,300 employees that at this stage are trained and are the core on which we're going to base our expansion on the following 700 that are coming in. Just to give you a number, for us to be able to get 1,300 employees in our facilities, we have run through 25,000 prospects. So this is the size of the endeavor that we have been in. And I believe that whoever is trying to do this now is going to be facing more difficulties than the ones that the first that started, and certainly, we are among those.

As far as U.S. is concerned, we are according to plan. All our plants are already up and running, which is already good at this stage. And now it's a matter of manning the additional crew that we need to bring everything to the maximum capacity.

Our next question comes from the line of Alan Spence from Jefferies.

I've got two questions, I'll take them one at a time. The first one is on guidance, and you've been very helpful around the revenue and margins for the second quarter and the second half, but only a free cash flow comment on Q2. I'm just wondering what's preventing you from guiding more confidently around what you see free cash flow going in the second half?

Well, as we explained in our press release, we are -- we will be reducing the days of operative working capital in the coming quarters. At the same time, the level of invoicing and revenues will continue to grow. So we are on one side for increasing prices, raising and also to some extent volume, we will increase our sales. On the other side, we need to build up the inventories and some of the route that are entering to operation today requires a shipment from one plant to the other for finishing of heat treatment. And these are route that has relatively longer lead time and require relatively higher level of inventory. In spite of this, in number of days of operative consumption in the coming quarter, we expect the days to go down. And as I say, we will be able to have a healthy free cash flow coming from our sales.

And second one is just on the seamless market share gains. I think last quarter, you talked about them being potentially more sticky than in past, and we've seen that will well be declining again. Where do you think welded could be in terms of your shipment mix in, say, 6 to 12 months once you got those facilities back to full capacity?

Well, basically, we will see welded production in the United States to increase slowly while we ramp up some operations. This will not be very fast. But the fourth quarter of the year, the welded component driven by the pipeline, South America will kick in and will be very relevant. In Argentina, we are supposed to supply the price for the pipelines connecting Vaca Muerta to center of the countries. This is a relevant 180,000 tons of pipes that will be welded and supply to the market starting for the fourth quarter. So welded pipes will increase for the two reasons. Even considering that today in the United States there is a scope for welded pipe is not unlimited. It's more focused on the surface casing that is required mostly and could be supplied by welded.

Our next question comes from the line of Frank McGann from Bank of America.

I have two questions. The first one would be in terms of the antidumping case. What are you seeing right now or how are you thinking of that as you get initial ruling is negative? How that will affect your business? The second question would be -- longer term oriented. With the changes that we've seen, I mean, 12 months ago or 18 months ago, the oil industry looked extraordinarily different than it does right now. Now there seems to be a new grist of life. I'm wondering, how you're seeing that changing the longer term competitive landscape as well as the energy transition pace that -- and how that might affect your strategy over the medium and long term?

On the first point, well, basically, antidumping requires a definition of our determination of margin and determination of the injury to the industry. Frankly, I think that in this condition, in today's condition, there is no way that could be -- the injury could be determined for an industry that is showing record results in the last quarter and in the coming quarters. So I mean, this is not in our view something possible. But maybe independently from the margin that could be determined, I think we can -- and we will continue to maintain a ramp-up of our operation in the United States, which is #1 because in the end, we need to operate on the shorter supply line that we can have, but to some extent, also to continue to supply some of the products that we could produce or import from other countries. This is how we see the, let's say, the evolution of the situation for the antidumping. Our #1 priority is the ramp-up of the operation in the United States. We are focused on this. But we are very confident that we can continue to import the product that are needed or that are required and in which we have been present for many, many years from imports.

Now on the second point, well, I think it's very clear that the conflict and the disruption in all the markets, but mainly energy market first, and not only energy, but also agriculture and steel and the geopolitical impact on inflation and on, let's say, the possible impact on GDP growth is changing all the variable that we were considering 12 or 18 months ago and also it is a shifting priority. In this moment, Europe needs to focus on how to substitute or reduce dependence from gas from Russia and oil from Russia. And there is a clear drive to strengthen sourcing from different countries, but also from renewable and maybe even accelerating energy transition, but this is not the same in other region. In other regions, the need to permanent independency could be achieved by maintaining high level of investment in the gas and oil industry. Could it be for LNG or for directly production of oil and gas.

There is the consideration that some of the reserves will remain strengthened in Russia for a different reason of gas and oil. And the world needs to make up for this loss in the short, medium, and to some extent, like in gas long-term, this requires investment in the oil industry. So the priority are moving. This doesn't means that energy transition is out of the agenda, but it means that we need to consider also the transition that is the only way to allow for the energy transition to guess in, in a smooth way.

I'm wondering perhaps if you could have an update on your project in the Italian plant and the hydrogen project, how that's going?

Well, we are advancing as a pilot project. I mean, we are checking and testing the use of hydrogen. We have different projects in which we are testing technology. We are testing technology for supplying our furnaces with hydrogen and this project is going on. The furnace is in fabrication. And we will continue to this with the burner that could operate with gas or with hydrogen and we are also proceeding in the project for production of hydrogen that could supply these. But the size of this project today is still, let's say, the size of a pilot project, it will not change the metrics.

What is changing the metrics are the big investments we are doing in the wind farm at the moment in Argentina. These are the projects that will, let's say, make us move towards our target of CO2 emission reduction, as you know, 30% by 2030. The wind farm today is a project in Argentina, but we are analyzing in our portfolio, what we can do in our -- in the different regions in which we operate that could drive us to our target.

Our net question comes from the line of Arun Jayaram from JPMorgan Chase.

I was wondering if you could go through kind of your thoughts on the supply-demand balance in the U.S.? We think that demand could approach 2019 levels of 5 million tons per annum. And we think effective productive capacity is around 3.7 million tons per annum, but would love to get your thoughts on that? And again, how you think that the impact of the Russian-Ukraine conflict could impact the market here in the U.S. as well as internationally because we did -- TMK has been an important supplier to the global OCTG market?

I will ask Luca to comment on how we see the supply-demand balance in the states, and the old -- I think, frankly, for TMK, there is no scope basically for any operation in the United States at this time. But Luca, you can comment on the overall balance.

No, I believe that your numbers in terms of consumption is pretty in line with what we're going to see. We may see something even slightly higher if the rigs are continuing operating at this level of efficiency. Let's remember, now according to Baker Hughes, we see slightly less than 700, but these 700 are all high specs rigs. And so the consumption or the pipe intensity is pretty high. But overall, bottom line, I believe that you are in the ballpark.

In terms of supply, well, it is difficult to come up with an exact number. And why is that difficult? Because you don't only need to look at what is the rolling capacity, but also what is the heat treatment and finishing capacity. So on that one, I cannot help too much given the difficulties that you would have to put together a number. But the results of the supply -- demand-supply by us is certainly tight. And this is what we are seeing. And this is also exacerbating, as I was trying to say before, by the difficulties to ramp all these facilities up to maximum capacity.

And to conclude on TMK, TMK is zero role today in the United States. Historically, they were covering the space between 2.5% to 3% of the market. Now they are not importing any pipe in the United States. And personally, I don't see this changing in the short-term. And so this is an additional supply disruption element that needs to be taken in consideration in all the evaluation that we are doing here also related to the antidumping.

We also have to take into consideration the Russian. As you know, the RPI withdraw any certification, RPI certification to the Russian mills. And for the Russian mills is today very difficult, not impossible, to operate not only in the United States, but worldwide because of the difficulties to overcome the financial restriction, the logistics restriction, the insurance and movement of vessels in and out Russia. So part of the disruption is for sure the disruption that is hitting on the Russian producer. That's one of the reasons also that the price are solid also outside the United States.

And just my follow-up is, I was wondering if you could comment on what you're seeing kind of internationally and your expectations as we start to see a bit more of a recovery in international? What this could mean for volumes as we come into 2023 and the margin profile that you expect from the international parts of the business? You did basically anticipate EBITDA margins in this 27% range in the back half, but I wanted to get some thoughts on what you're seeing internationally?

As you're seeing, we are saying now we consider we should be able to manage and to maintain this margin -- margin in this range for this year. Thanks also to the strength and the increase in shipments from the Eastern Hemisphere from the international business. But I would ask to Gabriel to give an overview of what can we expect from that side of our business.

Yes, indeed, the drilling in the Middle East continues on a solid recovery path. This is something that we have anticipated. We are seeing our customers increasing demand. This is something that we will see starting in the second quarter throughout the rest of the year and into 2023. We have very good visibility with our long-term agreements in the core countries of the Middle East that give us this confidence. We'll have a first jump starting this second quarter and probably later in the year at the pipelines as well in Qatar. We joined on an improved pricing environment, we'll also contribute to a further increase into revenues into the next year.

Also, given the geopolitics and the things about energy security that Paolo was commenting before, we are starting to see in the last few weeks also an increase of new projects related especially to gas given the new conditions. We are expecting the projects in the Black Sea, in the Eastern Mediterranean that are still in their study phase that those can come on stream in the next few months. We're also starting to see in the Sub-Saharan-Africa new short-cycle gas projects in Congo and in Mozambique. Also within renewed price of oil and goal expected activity to increase, also fast-track projects in Ivory Coast.

So there is a lot of movement and increase in demand. And also, we are engaging with our customers given the increase in raw materials, logistics and energy into the revision of our pricing structure. We have formulas, but given the pace of the increases that we have suffered in the last few months, in some cases, we are accelerating the impact of those formulas or even claiming surcharges to offset some of the cost increases that might not be fully reflected in the formulas as well.

And certainly, new offers are already considering new expectations on pricing and margins, given that the market for our products is increasing strongly and we are perceiving a tighter market conditions. So this will take some time as usual in the second year, the pace and the inertia on these price improvements are going to be seeing later, but towards the end of the year into 2023, we expect both volume and pricing improvement.

Our next question comes from the line of Marc Bianchi from Cowen.

I was hopeful that you could provide a little more precision on the outlook for second quarter. You talked about growth in sales, higher volumes, maybe if you could help quantify that and what the mix of price and volume looks like?

Well, I think we will continue to increase our revenues in the range of the mid-teens for the next quarter. And, let's say, margin will be solid. We see stable margin. There are -- in our portfolio we have still some order with previous price, previous to this ramp-up of prices that are phasing out gradually and the new orders are coming in at a higher price. So we expect also to be able to increase prices over this.

We don't know exactly -- I mean, how the impact that cost will have because we don't know if there could be some disruption in the gas supply, especially in Europe. So we are cautious from this point of view. There could be some disruption in this gas flow, which could be, let's say, something that we may take into consideration. But all in all, we expect increasing revenue, as I say, and increasing price and margin in line with the margin we are having today.

And so that would put you at another really nice positive revision to where consensus is for second quarter. And we've seen a really nice improvement in your business over the last several quarters, but it doesn't seem like the stock gets a lot of credit for that. I think it goes back to maybe some of the questions that Connor was asking about sort of the durability of margins, and I think investors fear that you're kind of at peak margins and things could roll over. I understand the next couple of quarters that looks very strong. But maybe I wanted to give you the opportunity to talk about maybe anything that's structurally changed in the business that gives you confidence and the durability of margins maybe through cycle?

Well, I think the conflict is changing the world and the energy industry has to react. This is a structural change. Tenaris is very well positioned to respond to this change and to support the energy industry in this repositioning that will imply substitution of oil and gas coming from Russia. I think Tenaris is very well positioned. And the present course of things, we should also be able to increase our margin to some extent.

The point is that we have uncertainty. Uncertainty on the cost side depending mostly from the cost of energy in Europe, which is a factor that we cannot really control and it could lead to disruption that could be a factor. And the second point is if increasing inflation and reaction by Central Bank may drive down the growth, this could be also something that could be, let's say, a factor over time. So on one side, the fundamentals are driving us in -- at a higher margin level, but we have to keep in mind, let's say, the uncertainty and I imagine that the market also is taking this into consideration when they look at situation all of the oil and service companies.

Our next question comes from the line of Carsten Riek from Credit Suisse.

A few questions left from my side. I will also take them one by one. The first one is again on the global uncertainties, as you already highlighted. We talked about -- a lot about the supply side, which is the easier part of the equation here. Have you actually run few recessionary scenarios and what could that actually mean for the implication for the OCTG demand? Is there any risk in your opinion on the demand side? That's the first one.

Well, I can tell you, this is more speculative, because, I mean, nobody knows. But I imagine that the inflation is driving reaction by Central Bank. This will drive some slowdown of GDP growth in Europe for sure and in the rest of the world also. The disruption of the COVID in China is unpredictable to today, but still will contribute to this. In spite of this, I think that the conflict and the change of circumstances that is affecting the world is a long-term trend and the energy industry had to react. So in my scenario, price of energy will remain strong even in an environment in which the world entered into a mild recession.

Perfect. The second question, and sorry for coming back on this, this is on the second half '22 guidance, which was very strong. Do you already have something in your order backlog which gives you the confidence? Is the order backlog already filling quite nicely in the second half or is it just because of your anticipation of rising steel prices and the supply-demand shifts you actually anticipate in the second half that you give that guidance?

No, no, we are really very much booked till the end of the year and to 2023. As I was saying, we're ramping up our operation, and I mean, demand is there, no doubt on this. On the side of the cost, as I said before, it could come from uncertainty, because for instance, the cost of energy in Europe is a question mark. If there is, let's say, any disruption in the supply from -- of gas, well, this will have an impact on the entire supply chain. Demand is there.

The other question I have is pretty much on Hickman. In January, you announced boosting the production in your welded mill here in Hickman, but we have not seen that in the numbers yet. Instead, the welded shipments actually dropped to the lowest number recorded more than a decade. Did the expansion of volumes already start or has the process been postponed by the reversal of the HSE prices in North America market?

I will ask Luca to comment on this. Remember that our welded component is always driven by two sides of the business; the big line pipe, mainly from Argentina and from Brazil and the ERW line mainly in the States. So this is sometimes is -- I mean, influencing this trend. But Luca, how are we picking up ramping up on the welded?

As I was saying before, the Hickman is nicely ramping up. We actually have all the lines operating over there. Now we are trying to bring up shifts, but we produced already ERW pipes in March, we are producing even more in April and the production is going to come up according to plans. The plant is operating well. We have done a good job in maintaining while it was high-low and bringing it back up.

As I was already commenting today, the main bottleneck over there, but this is not a Tenaris concern, it's worldwide or it is a U.S. concern. Here the capability of hiring and training people that can safely and effectively operate the plant. But no, the ramp-up is not being hold back by the HFC. HFC today is at moment in which there is enough space for a welded to come in.

Sorry, one last question. In your fourth quarter presentation, you highlighted a significant improvement in the Middle East and Africa volumes, but revenues in the first quarter at least dropped another 13% quarter-on-quarter. Is the recovery postponed or are other factors hindering currently a recovery?

Again, on this Carsten, I will ask Gabriel to give you an answer. It's correct that in the first quarter we were pretty short, but I understand that we will be increasing faster now.

Yes, Carsten. Indeed, we were anticipating already in the previous quarters that the recovery on the volumes in the Middle East and Africa will start in the second quarter. This is what we are expecting will be an important first jump; second quarter and third and then further on the fourth quarter into 2023, a further increase. So this was already as planned, and we confirm the increasing guidance starting in the second quarter.

Our next question comes from the line of Alessandro Pozzi from Mediobanca.

I just have a couple of questions. The first one, I think in your opening remarks, you mentioned a couple of times potential opportunities when it comes to new pipeline contracts, you mentioned Cassiopeia and Vaca Muerta. Can you maybe just give us again the numbers in terms of volumes that you expect from those opportunities? And you mentioned 180,000 whether is that like a Q4 number or is it a number for a project? So if you can give us a bit more color there. And also on the Vaca Muerta pipeline, I was wondering, is that project going ahead or is still requiring financing from the government?

I mentioned pipeline because we have some pipeline that is seamless. They will come -- will be delivered in the coming quarter. This is Sakarya to some extent. The Qatar gas expansion is important. Some of these Qatar is partly welded also. And then we have the South America. With the situation and the prices of LNG, Argentina that has huge resources in Vaca Muerta, is moving on with investment in infrastructure to reduce the cost of buying LNG in winter and to start developing the opportunity for export gradually. I mean, it will take time, over time from Vaca Muerta.

I think that the pipeline, the first one, is only one first part, first step in a much larger infrastructural investment. I think Argentina that in this moment, as you know, is a high-inflation country with an agreement with Monetary Fund. It's not a situation that I would call stable in macroeconomic terms, but still, I think the first step is financed. And there are other investments in pipelines in increasing capacity effects first of all from the region, increasing capacity on moving gas from one to the other from the field to the treatment plant that are underway, and we are very well positioned in all of these.

Now there will be a second stage, second steps over time, for sure. Argentina needs to develop entire infrastructure for this. So this is part of something that will move on. So seamless number of projects that we mentioned, pipeline in Argentina important and then there are something that is more, let's say, not so close, but that will come, there is development of East Mediterranean and Black Sea and the lines that connect Mediterranean source of gas outside Russia with Europe. These are essential. Europe will have to substitute the gas from Russia in a period of one, two, three, four, five years is something that will go on over time.

This in some case are complex pipeline undersea, offshore, like in the case of the Eastern Mediterranean, but are a high potential and are areas and projects in where we are highly specialized from our plant in Europe and Brazil. So opportunity is short-term, large volume in the second half of '22 and I think important opportunity going on '23.

I believe you mentioned 180,000 before. Was that related to a specific project?

Yes. This is just the first stage of the big -- the pipeline connecting Vaca Muerta with the second area of the country. Then there should be a second stage of this that is also of a similar size important, but there are other projects under discussion. Now the question of financing will also depend from, let's say, the evolution of the macroeconomic situation in Argentina. I think there is financing for the first stage. And the second, we require that the government recover access to the financial system to be able to support expansion of this infrastructure. But it should be possible considering that the cost of gas in Argentina is very low and it's very competitive. So in the end, there are many reasons to build this infrastructure and the connection from Vaca Muerta to the international market.

And a second one quickly. You mentioned stable margin in Q2. I guess, that's because you have a lot of uncertainties, you have potential disruption of gas from Russia, you have the potential antidumping case. But if those uncertainties were to be moved, would it be -- should we assume a further increase in margins maybe towards the 30% if you don't have the antidumping or if you don't have any disruption in the supply from Russia since it looks like that you're still increasing cost, are you still increasing prices for your clients?

Well, we're aiming for this, and I think should be possible, but which you have to take into consideration a situation that is presenting many challenges. So that's the reason why we are saying -- and this is how we are guiding the market in this environment, which apparently situation could be more positive, but we have to take into consideration that there are uncertainty on different fronts.

At this time, I am showing no further questions. I would like to turn the call back over to Giovanni Sardagna for closing remarks.

Well, sorry again for the technical problems we had during our opening remarks, and thank you all for joining us.

This concludes today's conference call. Thank you for participating. You may now disconnect.