Tenaris SA (TS) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tenaris third-quarter 2003 earnings conference call. My name is Alicia, and I will be your operator. At this time, all participants are in a listen-only mode; and we will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded for replay purposes.

I would now like to introduce your hosts for today's call, Mr. Carlos Condorelli, Chief Financial Officer; Mr. German Cura, Commercial Director; Mr. Gerardo Varela, Director of Investor Relations; and Mr. Nigel Worsnop, Executive Assistant to Investor Relations Director. Mr. Worsnop, you may now proceed, sir.

Thank you. Welcome to Tenaris's third-quarter 2003 conference call. We would like to remind you, as usual, that this conference call contains forward-looking information, that actual results may vary from those expressed or implied. Factors that could affect these results include those mentioned in the company's 20-F registration statement, and other documents which are filed with the U.S. Securities and Exchange Commission.

I would like to briefly review the year to date, the nine months. During this period, we had net income of $197 million; operating income of $320 million; on net sales of 2.4 billion. Net sales were up 2 percent over last year; operating income was down 11 percent; and net income up 84 percent on a comparable basis.

EBITDA for the nine months was 466 million or 19 percent of net sales, compared to 488 million or 21 percent of net sales in the previous year. Thus, our net income has increased primarily due to the nonrecurrence of the extraordinary tax charges that we saw in the last two years; but our operating income and margin are down a little, with consolidated net sales fairly stable.

I would like to highlight a few points. Our core seamless business is going well. The reduction in operating income and EBITDA has been due to a lower contribution from our welded pipe business this year. Last year, with its conjunction of major projects, was an exceptional year for welding.

This year, we have seen a small increase in the sales and contribution of our seamless business; and this is what is driving our results. Seamless accounted for some 75 percent of consolidated net sales in the year to date, compared to 70 percent last year; and it currently accounts for some 90 percent of our EBITDA. Net sales of seamless pipe have increased by 8 percent, and gross margins have been maintained.

Higher sales volumes in North America, especially Mexico, have compensated for lower sales in troubled areas such as the Middle East, Nigeria, and Venezuela. A more favorable market mix has helped to offset the rise in the cost of raw materials and energy. Here, it is interesting to note that we continue to maintain industry-leading margins; and if anything, we are increasing our leadership in this area.

Second, the full effect of the raw material prices that we have seen this year has not yet been fully reflected in the results. This is a note of caution. The raw material prices are continuing to rise; and due to our FIFO inventory accounting, the impact of cost rises is delayed by some two to three months.

The price of shredded scrap for export from the U.S. East Coast has recently increased further to over $160 a ton, which compares with around $105 a ton which we saw a year ago. Moreover, the market mix is unlikely to be as favorable in the fourth quarter, as European sales and Italian production levels will not be affected by the summer recess. Therefore, it will be extremely difficult to repeat the level of seamless margins that we recorded this quarter in the next.

Third, we are progressing in our efforts to realize synergies following last year's exchange offer. We continue to work on improving our operating efficiency, as well as implementing the synergies that we talked about when we made the exchange offer. We have begun to take advantage of our greater flexibility in allocating orders in the most efficient way among the mills. During this quarter, our steel shop in Argentina was working at full capacity, with 21 shifts per week. This has helped us to minimize the overall cost in raw materials notwithstanding the import price increases.

There has also been some reduction in selling expenses resulting from the full incorporation of Tenaris Global Services into Tenaris. But these have been outweighed by higher administrative costs, due to additional taxes in Argentina and higher dollar costs in Italy and Argentina.

Fourth, our cash flow remains strong and is being invested in the business. Cash flow from operations has been $250 million in the year to date. We have used around 125 million in CAPEX, and a further 100 million in acquisitions and in the restructuring of Sidor. After paying out 120 million in dividends, our net debt position has increased from $120 million to around 530 million; and that's without considering investments of 135 million in trust funds.

Fifth, the outlook remains promising. Oil and gas prices continue to remain at levels which should encourage further investment in drilling activity by the oil and gas industry. This year much (ph) activity has been dampened by events in Iraq, Venezuela, and Nigeria. However, as oilfields in the OECD countries continue to mature, most of the world's oil and gas reserves now lie in less developed countries with a higher political risk profile.

We are seeing signs that the majors are starting to invest some of their strong cash flows in new projects. And to the extent that happens, drilling activity and consumption of seamless OCTG should increase. This appears to be happening already in Latin America, and next year we can expect more activity in other areas, such as the Middle East and Africa.

On the industrial front, signs are also more promising for next year, as economic recovery start to take hold in the U.S., and there are more positive signs from Europe and Japan. Our global reach and market positioning, as well as our service-oriented strategy, give us confidence to think that we are extremely well placed to benefit from any growth in the market, as well as to maintain our industry-leading margins. We will keep looking to strengthen our competitive advantages, and to grow as a global company and leader in this industry.

Now I would like to turn the call over to questions. Operator, please.

(OPERATOR INSTRUCTIONS) Frank McGann for Merrill Lynch.

Just a couple of questions. One, I was wondering if you could talk a little bit further about the trends in the Middle East and Asia that you are seeing. Obviously those sectors have been a little bit weak. I was wondering if you think the weakness is broadly (ph) throughout the market? Is there any chance you're losing market share in those two markets?

And then, maybe you could discuss a little bit further what is driving the improvement in mix that led prices to be quite so strong in the quarter?

There's a two-part answer to that, say, system-wide, (ph) particularly in the Far East and the Middle East. Middle East, which has been to some extent affected by the Iraqi situation, I think you would recall that we discussed these in our prior round, where we, as well as the rest of the industry, anticipated that the administration in Iraq was going to rehabilitate a good number of contracts that were booked under the Oil For Food program that was administrated by the U.N.; which in fact happened. The fundamental reason on the delays, as is very well known, is linked to the safety issues, concerns, and the notion that Omakasi (ph) is not yet fully operational.

Now, the Far East, though, it is a little bit of a timing situation, linked particularly to Indonesia. In material terms, we have an existing program with Total (ph) Indonesia, which is one of the three biggest operators, who have fundamentally delayed the drilling program. But we are going to see a catch-up effect within the next quarter.

Now as far as the mix question, this is not anything else but I would say the reiteration what we have been presenting over the course of the various conferences rounds. Tenaris is devoting a substantial part of its CAPEX to in some extent our ability to produce higher added value products. In other words, we started growing capacity of premium connections; we started growing capacity of heat treatment pipes; and as a result, we are of course tackling higher, or richer if you will, market segment, that is obviously translated on the higher prices of margins.

As far as what are the ultimate destinations of this higher, if you will, or richer, mix, we have talked or indicated that there is a larger than expected activity in Mexico. The Caspian Sea in particular. Oilfields like Cassiagan (ph) as well as Dengues (ph) are operating environments which demand really high added value products.

West Africa, though it is an area that due to the political situation, in particular in Nigeria, has been low in demand, it is an area that demands, again, heat-treated, premium connections, so on and so forth.

Okay, thank you.

Sebastian Luparia from J.P. Morgan.

My question is related to PEMEX. Can you please elaborate a little bit on your views on the auctions for the natural gas contracts, both on timing and size for these options?

This is Guillermo Vogel. I just walked into the conference and maybe I can discuss. As you know, PEMEX has been in the process of operating the Contratos Servicios Multiples. The idea was to offer eight regions in Mexico, in the Quencale (ph) Burgos, of which three were assigned. It has been a process where the takers have taken a kind of limited view, in terms of the ability to generate profit from these contracts. I think they have been more active, or the driver has been more in terms of having a foot in Mexico, more than because of the structure of the contracts, which are not so benevolent.

But the three first ones have been assigned to Repsol, have been assigned to Petrobras and to Tecpetrol. The fourth one, although it was offered, there were no bidders there; so it has been declared a desert (ph). I think there might be a little bit of difficulty for PEMEX to try to continue with this type of operation under the present structure.

However, we believe that whatever is assigned is an added business, which is coming together with a higher activity of permits. What I would like to -- the message I would like to send is that PEMEX is increasing; the PEMEX budget has almost doubled from last year in terms of investment. And at the side of this, they are pushing for these Contratos de Servicio Multiples.

We are working already. We are working with the people that won these bids, in order to supply them the pipe. Although I think that it might be not a very fast -- or a slow process in terms of increasing the activity, it is something that is coming. The president has announced the position that he wants to take the production of raw oil from 3 to 4 million barrels per day by the end of this period, which is, as you know, in 2003, and the Gulf production level from a 4 trillion level to a 7 trillion level.

So the commitment to increase the activity and to increase the production levels in Mexico is there. In how to reach those, I think we are going to see different efforts in order to gradually try to increase this process.

Thank you. (technical difficulty) great to hear you. My second question is related to your cost structure. You mentioned that you are expecting some pressure on the cost line. Can you comment specifically on how much impact you are expecting from higher freight cost? And how you are going to renegotiate the contracts in the coming quarters?

I will take on the freight question, which has become, without a doubt, a key cost driver for us, as you all know, and fundamentally drive by the activity in China. Freight rates have, in very broad terms, appreciated to something close to 45, 50 percent.

Now, naturally Tenaris decided quite some time ago to fundamentally structure long-term agreements with the shipping companies, to fundamentally recover the usual groups (ph). About 80 percent of Tenaris's shipments are covered today by existing long-term agreements.

We are, of course, anticipating that in spite of the existing contracts or agreements, we may have to confront some, if you will, market forces, given the appreciation of the freight rates. But ultimately we are assuming that we would only see a fraction of this 45, 50 percent freight rate appreciation we are already looking at.

Thank you very much.

Ricardo Cavanagh, Raymond James Argentina.

I have two questions. The first one is regarding your pricing outlook, not just for Tenaris products in terms of introducing products with higher value added mix; but how are you perceiving the outlook for just more the commodity type of product?

The second question is related to the welder business. What should we expect in the coming quarters? Also related to the news that came out in Argentina last week, where apparently Techint is going to be building a gas pipeline in the north of the country?

I will take (technical difficulty) question. I would say that, number one, Tenaris is going to continue its drive to fundamentally push toward a higher mix. What we already are perceiving is that, not only us but the rest of the industry, not only pipe industry but also services industry, are obviously trying to transfer into our prices their cost increase components that we see, not only at a scrap or metallic level, but freight rate levels, as I just presented.

This would, I think, impact to some extent all of the product segments. To some extent, I would assume that the entire industry is sensible to the fact that there should be to some extent a price appreciation, fundamentally driven by the cost appreciation of key cost components of our pricing structure.

Now, welded, we have talked, in the prior round, that we were expecting this year a good number of projects in Brazil, fundamentally. We have released (ph) details as to what the projects are. We talked about Campinas Rio; we talked about Gasfor (ph), so on and so forth.

Now the situation today is that Confab cast orders, I would say relevant (ph) orders for existing projects, that delivery of these orders has been simply postponed by Petrobras. They have taken up, of course, a good chunk of what has been already produced. But a substantial amount of orders have been put to some extent on hold.

Now some other projects like Oroco Ricordia (ph) that were announced at the beginning of the year, that were subject to some extent to the structure of the financing, have also been delayed. There are a number of reasons, publicly known reasons. Perhaps the most important is the environmentalist. Different drives (ph) or presentations that are taking place; and consequently the inability to post (ph) these projects down.

Ultimately we believe this is a transition, that at one point the projects are going to be pushed forward. We believe Confab would then re-establish, if you will, a much more stronger position. However, and Nigel mentioned this in the opening remarks, we need to also contemplate that we are coming out of a year where Confab participated both in OCP in Equador and Camisea in Peru. And those were exceptional projects that we need to contemplate at the time of looking at the level of activity or level of operation.

You asked us about the project announced, or at least that it was in the newspaper last week. It was just announced. Many things have to be put altogether in order to go ahead with the project. But in any case, it would not affect our stream (ph) until 2005, or something like this.

Thank you very much.

Daniel Altman with Bear Stearns.

Two questions, one is on Sidor. On Sidor, the wording of your press release makes it sounds as if there was a $10.6 million amount that was excess cash flow from Sidor; and thus you're taking a gain. How does that work? 10.5 million just for yourselves would mean that Sidor is generating an enormous amount of cash flows. Am I reading this press release wrong?

No, Daniel. This is Guillermo. How are you?

Good, thanks.

When happened is that, as you know, when the restructuring was negotiated of Sidor, it was agreed that if there was excess cash In Sidor, this excess cash was going to be distributed, mainly a portion to early pay some of the debt that came out of the structuring; and another portion to the people that put the new money, the $130 million, and the government.

The total amount of excess cash that was attributed was bit. It was a large amount. It was 115 million. I would say that, at this point in time, the people that put the additional money, like Tenaris, got a smaller percentage than they will get in the future. Because from the first payment or the first cash distribution, a little bit of a larger amount was negotiated to go to the banks. So that is going to be a percentage that is going to be increasing for Tenaris and for the shareholders.

But Sidor is doing well. This quarter it was affected by some labor negotiation that caused some production disturbances there. So we are going to be losing some tons because of that. But that is behind us. The labor negotiation has also been finished. And by the way, this is cash, this $10 million that you saw in the press release is cash that is already in the banks of Tenaris.

What we expect is that the next cash distribution will be done on the December 31st closing numbers for Sidor. And we are expecting to get some cash back for us. Hopefully we can recover more than 50 percent of the $33 million that we put in the short term.

That doesn't affect your stake?

No, it does not affect our stake. It is basically a retribution for the investment. You can kind of say it is a type of dividend, so to speak. But it does not modify our participations in Sidor, or in Amazonia, more properly said.

That's great. Thanks for the details there. The other question is, you mentioned the 100 percent utilization in Argentina at the Siderca plant. Which are the plants that have reduced their capacity within the Tenaris Group, to allow Argentina to run at full capacity?

In fact, we reduced some capacity at Italy, compared to the last year. We have reduced some chiefly (ph) in Italy. This is mainly what happened. In some extent, we didn't grow in Tamsa, but Tamsa is working more or less at the same level that is was. I think Nigel mentioned the steel shop working at 100 percent capacity. But in any case the rolling mills as well are working in 21 shifts a week, which is almost full capacity.

Thanks very much.

Frank McGann with Merrill Lynch.

Just two follow-up questions, one is on the tax rate. What level you expect the tax rate to be going forward? Then I was wondering if you had any update on the Dalmine lawsuit? If there is any timetable that you're expecting now for a resolution of that?

Going to the tax rate, as we mentioned in other conference calls, our tax rate should be around 40 percent of our income. Why? Because we are getting our sales and our operation is mainly from Argentina, where we have an effective tax rate above 40 percent, given that it is not possible to adjust by inflation or by devaluation the cost of the fixed assets. The depreciation. So this ends up with a higher tax rate than the 35 percent which is a nominal tax rate.

In Tamsa, we have a tax rate of around 40 or something about 40 percent, given both income tax plus the PPO (ph), which is the profit-sharing for the workforce. You have to take into account that we are very much affected in terms of taxes, especially from our operation in Argentina, for how the currency is doing. It was very well shown the last few years, where we had an important movement in the tax rate. So it affected us either in the deferred tax or in the current tax. But this year, where the currency was more stable, we can look at the tax rate more stable. Finally, For Tenaris (ph) we should be running around 40 percent of our income as tax rate.

Regarding, BHP, we have no news. And we repeat what we said before, that we are expecting for mid next year, or something like between April and June next year, to finish the case. But this is a very complex case, where any time that something new appears because one of the past (ph) puts on the table different arguments, then happens something.

I do know very well that we have recorded the indemnification we should pay in case we have a provision. But on the other hand, we are trying to get from Synterna (ph), the government of Italy, to repay their part. And we have an arbitration. We say in our financial statements that for sure it is dependent upon the results of lawsuit. Right now we have no news to announce regarding this case.

Thank you.

Claudia Medina with Tenari.

Actually it is Accival. (multiple speakers) I have two questions. The first one is regarding CAPEX. What is the CAPEX budget for 2004?

And the second question is specifically for German. I remember that last quarter you had mentioned something about seasonality, and I was wondering how much of the decline, third versus second, is due to seasonal factors? Or just adverse market conditions which prevailed?

Regarding CAPEX, we do not make a forecast about how much. But we can say that we are going to be around the same number; between something around 130, $150 million per year for the whole season, regarding capital expenditures. Okay; German?

I think (indiscernible) introduces a seasonality component because it really deals with fundamentally two drives, which are very important for us. One is, as you know, the Canadian component. Typically, all of the drilling activity takes place in Canada during the wintertime. The reason being is the mobility, and the serious problems that the Canadian logistics confront during the spring and summer time.

The second element is Europe. As you all know, during the month of August, July, typically, the overall European industrial activity is either shutdown for maintenance or the holiday season. So there is an embedded seasonality effect during this quarter, which we anticipated, because it is something that we usually experience.

So, given that we have so few quarterly history, I was trying to figure out what to expect for next year. So in 2004, it will be reasonable to expect sales to drop from the second to the third quarter, based on what you just explained, right?

Indeed. Yes, these are things that typically happen every year during the third quarter, the summer.

One last question if I may. Have you increased your provisions for the BHP lawsuit?

We have not.

Okay; thank you very much. Can you tell us where they stand as of now?

44 million (multiple speakers) $76.5 million overall.

76.5; great. Thank you very much, gentlemen.

We have no more questions at this time. Would you like me to repeat the instructions? Mr. Worsnop, would you like me to repeat the questions on how to ask a question?

If there are no more questions, then I think we can conclude.

Yes, we have no more questions, sir.

Okay. Thank you very much, everyone, for coming to this conference call. We hope to see you next time. Thank you very much.

Ladies and gentlemen, thank you for joining today's conference call. This concludes the program. You may now disconnect. Good day.