Tenaris SA (TS) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen. On behalf of Tenaris SA, we would like to welcome you to the company’s fourth quarter and 2003 results. Representing Tenaris will be Carlos Condorelli, Chief Financial Officer, German Cura, Commercial Director, and Nigel Worsnop, Investor Relations Officer. At this time, I’d like to turn the call over to Carlos Condorelli. Sir, you may proceed.

Carlos Condorelli - Tenaris - CFO

Hello, everybody. Welcome to the Tenaris fourth quarter conference call. Before starting the conference call I have some news for now concerning our colleague and Head of Investor Relations and I would say our friend Gerardo Varela passed away following a long and valiant struggle against cancer.

Many of you will have known Gerardo over a number of years, first as CFO and Investor Relations in Tamsa and following the exchange in December 2002 as Head of Investor Relations for the new Tenaris. Gerardo, he was a dear friend and colleague, and for those of you who knew him over these years, I have no doubt that you will have felt similarly. We marvel at the dedication which drove him to continue working right to the very end despite struggling with his illness for the past two or three years.

Just one month ago, he led a full three day at Santander’s Conference with investors, and last week he was in New York making preparations for our investor day which will be held on March 25. Above all, Gerardo was a very family man. He loved his wife and two daughters with a passion and devotion that encompassed his life, and never missed an opportunity to talk about his daughters .

His warm, joyful life and willingness to give thanks for others, that astounded people wherever he [indiscernible] to him. Besides his family, he leaves many friends who will forever remember his generosity and bonhomie. As well as you have already put it, he was a very, very nice person. We will miss him very much, and I would like to say another goodbye. He was an honest, open person, and a very good friend of all of us, and I just wish--.

Okay, well, we are all missing him, but let’s get on with the conference call. We would like to remind you 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 20F Registration Statement and other documents filed with the US Securities and Exchange Commission.

First of all, I would like to take this opportunity to invite all of you to the investor day we will have on March 25 at the Guggenheim in New York, where our CEO, Paolo Rocca, will present a more detailed overview of the company and asset activity.

Now, before taking questions about our results for the 2003 year, and the fourth quarter that we published yesterday, there are a few points that I would like to address. Firstly, our seamless business had a good year despite a weaker fourth quarter.

Over the year, the contribution of our seamless business to our results remains similar to that of last year, and net sales of seamless pipes increased by 6%. Seamless contributed about 75% of our revenues, and some 90% of our operating pre-VAT income. The decline in operating income seen in the year was due to the weaker performance of the Welded pipe business, which as a profiting business has lower margins than Seamless, and had lower sales this year, following an excellent year in 2002.

During the year, we experienced strong cost pressures in our Seamless business, with the cost of raw materials increasing by 12% to 100% from the end of 2002 to the end of 2003, and costs such as energy and labor were also increasing. Nevertheless, due to the favorable positioning of our business, with strong performance of our local market from Mexico and Argentina, and our flexible global operating structure, including synergies that we were able to have from the allocation of orders following the exchange offer which we completed in 2002, our margins remained stable until the fourth quarter, when the gross margin declined 2%. Though remained a very healthy 36%.

In respect of the declining sales shown in the Middle East and Africa region, it is important to point out that despite the seemingly stable breakdown, apparent assumption of Seamless OCTG declined more than 30% in the Middle East during the year, led by Iraq. There were serious political and security factors which affected our main African market of Nigeria.

Secondly, we expect that the spike in inventory levels that was in the fourth quarter is mostly temporary. Due to the way we sell our products with the emphasis on selling direct to our customers, with pipe management and other services around the world, our inventories would tend to rise with increasing sales. However, in the fourth quarter, inventories for finished goods and goods in progress rose by some $100m, reflecting higher production than sales, equivalent to 55,000 tons in Seamless, and 29,000 tons in Welded.

We expect that much of this rise in inventory is temporary, and will be reflected in higher sales in 2004.

Third, our 2003 cash flow was affected by high tax payments corresponding to the 2002 tax year, with the large devaluation of the Argentine peso being the main factor in this. Due to higher tax payments, an increase in working capital due to the higher inventory levels we just mentioned, use of cash for acquisitions and dividend payments, net debt increased during 2003. Net debt was also affected because of the appreciation of the euro, since a large part of our financial debt is held at Dalmine and effectively hedged against Dalmine’s euro sales.

Our tax provision for 2003 was substantially lower, and reflects the partial revaluation of the Argentine peso during the period. We expect our tax provisions, without considering currency effects, to be around 35% going forward, as we have started to implement tax planning measures.

Also, I would like to point out that Tenaris has low financial costs, with interest costs of $16m in 2003, on around $750m average debt, equivalent to around 2.2%.

Our continuing strong financial position has led us to propose a 15% increase in the dividend.

The outlook for 2004 is interesting. We can expect higher demand for our seamless pipes in 2004. Demand in 2002 and 2003 was some 15% down on 2001, which was a record year for us. We do not expect to repeat our record of 2001, but we do expect a limited increase in volume. Our local markets are doing very well, although Canada did not increase during 2003 in line with the recount, because most of the drilling, the increase in drilling activity was made at shallow wells using welded pipes.

For 2004, sales should rise because of increased activity in the McKenzie Basin where seamless pipes are used. In anticipation of this, inventories of steel bars for our Canadian mill, produced at our Argentine/Mexican mills increased.

Venezuela continues to recover. The recount in Mexico continues to increase, and Argentina has been improving in all sectors. At some point, Iraq should come back into the market, and Nigeria recover.

Sales to the industrial sector could also improve if the strength of the euro does not abort a limited recovery in Europe. However, the main issue is prices. In the past two months, the cost of steel making raw materials has increased substantially, and steel prices for flat products used in welded pipes have also risen dramatically. This is in addition to the strong increase shown in 2002.

Freight costs have also been rising. This is driven by the increase in consumption of steel products in China which has been rising at the rate of 40 million tons a year. Although this rate of increase will slow down at some point, and Chinese steel production could catch up with consumption, the increase in demand for steel making raw materials will remain.

Tenaris will increase prices to compensate for these cost increases, and the extent to which we are able to do so will remain the main variable for our results for 2004.

Now, Carlos, would you like to add something?

Yes, I am sorry that I didn’t do it before, but I want to announce that Nigel will be appointed a new Investor Relations Director for Tenaris. Thanks, Nigel.

Okay, so with that, can we open the floor to questions, please?

Thank you, sir. Ladies and gentlemen, at this time, if you’d like to ask a question, please key *1 on your touchtone phone. If you’d like to withdraw your question, please key *2. The questions will be taken in the order they are received by us. Your first question of the day comes from Frank McGann of Merrill Lynch. Please proceed.

Hi, good morning. Just to follow up on the comments you made on pricing, perhaps you could go into a little bit more detail, exactly how you think you can implement this year? I assume this will be done as contracts mature. What percentage of your contracts will mature this year, and what kind of discussions are you undertaking with your customers to begin this process, and do you think you can fully offset the raw material cost increases that you’ve seen?

Well, let me first of all address the reason why we believe prices are going to increase in spite of the fact that it’s a component that we don’t see a cost across the entire oil field servicing sector. The fundamental argument is that we are convinced, as well as the rest of the industry, that we are in front of the structural change, which is pretty much driven by the raw material components.

Together with that, we have seen unbelievable increases on flat steel products, which are obviously driving prices up on the wells that both OCTG and [indiscernible] then the seamless pipes prices are appreciating based on the notion that we simply follow in the market trend.

Ultimately, we are talking to our various customers, and we could today say that this is already a reality within this core market. Our core market prices have increased. Now, as we have said in a number of locations, yes, Tenaris’s strategy was full momentum, and driven around the notion of structuring long-term agreements with the major companies. But maybe I mentioned this before, the large amounts on price adjustment do always carry a component linking the final price to the basic raw material costs, and even that they’re increasing, were triggering the increase in adjustment prices mechanisms within the existing contract which is compensating a good portion of the cost increase.

As far as how do we see this translating into our planned [load] and eventual shipments, I would probably state the same, that we are reacting already to both cost and price increases fundamentally on our incoming orders. We are negotiating existing contracts. We are hoping to materialize this price increase within the next quarter.

Could you say how much of your sales are spot sales?

I would say that the large majority of that are fundamentally spot sales. Just as an example, if you take the Oilfield Service, which as you know, is a big component of that sale, about 35% of our OCTG sales are channeled through long-term agreements. But then again, and I’d like to emphasis this, the existing long-term agreements do carry a price adjustment mechanism that do contain scrap for instance as are one of the important adjustment areas.

Thank you very much.

And your next question comes from Wilfredo Ortiz of JP Morgan.

Yes, good morning, I’ve got various questions. Just to follow up on the previous question first. Could you give us then, an idea, in terms of how the margins should be looking for 2004, given that you’re hoping to partially offset an increasing raw material cost with higher prices?

Secondly, could you give us maybe some visibility in terms of the outlook? A lot of it depends on projects that might be still more fluid, but obviously we saw another big decline from the third quarter to the fourth quarter in terms of for expectations and outlook for 2004, what should we be assuming for the Welded business?

Okay, margins. I think we should probably go industry by industry. But overall, and we have stated that in our press release, we have the vision that prices are going to substantially increase to fundamentally offset, if you will, cost pressure that we are perceiving, as well as the rest of the industry. Remember that, and we have mentioned that in our prior round, although we are negotiating our existing contracts, though we are happy that we have entered this bull market already, we’re still trying to sustain our existing shipping agreements which have allowed us, if you will, to contain important and relevant cost items, which is the shipping component of our exports.

So, with all this, it will probably be very difficult to determine at this point the proportion vis-à-vis the different industries or market segments that we’re playing, but ultimately Tenaris’s strategy and view is that the price increase is going to allow us to contemplate or sustain or cover the cost increase component that we’re looking at.

As far as the Welded business is concerned, we have announced this in a prior round, and unfortunately we are still looking at more or less the same scenario. A good number of the existing Brazilian projects have been postponed by Petrobras for a variety of reasons. Fundamentally to, number one, yes, an inability to structure the finance around the project, and lately, coupled with a little bit of a political discussion between Petrobras and the state of Rio de Janeiro who has not yet agreed on a number of different variables that would allow us to structure the pipelines as planned.

We are still confident that Petrobras will be able to clear the existing cargo. We are convinced that Brazil in general is doing as well as it requires to structure the financing, and we are going to eventually be able to obtain the final clearance. This would cover an important impact on our Welded business, and yet again, I would still like to be slightly cautious in light with respect to comparisons to 2002, where fundamentally, given the export component, we confronted an exceptional year.

So if I was to summarize this, I think 2004 looks a little better than what eventually 2003 ended up being, but yet again, I think we need to look at 2002, which was an exceptional one.

Right, thank you.

Again, ladies and gentlemen, if you’d like to ask a question, please key star 1 on your touchtone phone. And we’ll take our next question from Daniel Altman of Bear Stearns. Please proceed.

Hi, good morning, it’s Daniel from Bear, and I just wanted to express my condolences to the company, and to the Varela family. I share your view. Gerardo was a great guy, and we all miss him.

In terms of a couple of questions, regarding the prices, is the increase that you’re talking about, did I understand correctly that you’re talking about, maybe in the second quarter we would see the benefit of a price hike?

The other question is are the price increases in the form of surcharges, or are they actual official price hikes?

Sorry, I couldn’t get the last part of your question. Would you be able to repeat it, please?

Yeah, I’m wondering if the way you structure your price increase, is it a surcharge, or is it an official change in price?

Well, let me first of all answer the first part. Definitely by the second quarter 2004, we are going to see prices at a different level. I anticipate that we may be able to see some even in the first quarter as well.

Now, as far as the pricing implementation, I would say that depending upon the market segment Danny, we’re doing fundamentally all. We shall practically modify the pricing structure in the spot market. We are negotiating with major companies our existing long-term agreements given the components, the price adjustment mechanisms that were part of our existing agreements. And to some market segments as well, we are applying surcharges as well. I have to say that we are not the biggest component, and for obvious reasons, perhaps not the most strategic one, but we are trying to do some of that as well.

Okay, and then in some of your budgets that are being opened to tender, so you’re competing with other bidders, are you seeing signs that your competitors are also wanting to get a higher price?

Indeed. What we are looking at is that we are all under cost pressure, and we, like many others do have a level of integration that allows us to, if you will, cap that pressure a lot more. But there are a number of companies, competitors of ours, that are buying, you know, big grounds in the open market today, and I’m sure, Daniel, you’re familiar with what, for instance, is not product [indiscernible], so from that perspective we see competitors are not only moving prices up, to some extent some of them have just announced that they are cutting down sales exports, so on and so forth.

Okay, thank you very much.

Again, as a reminder, star 1 for questions, and we’ll take our next question from Frank McGann of Merrill Lynch.

Yes, I was just wondering if you could talk about cash tax payments that you might expect in 2004 and 2005. Are those likely to be similar to your accrued taxes? What issues, essentially, will affect the level of tax payments in 2004 and 2005 relative to accrued?

And then, perhaps you could just give us an update of the status of your joint venture in China?

Okay, regarding tax issues, cash payments should be lower, given that mainly in Argentina, given the devaluation of 2002 and the impact of 2002, you know payments are made in 2003, and also you have to pay advances to make [indiscernible]. So this 2003, we did both, advance payment of tax accrual, [indiscernible] in 2002.

And in fact, we have in our balance sheet a credit of about $90m for having paid in advance taxes. So we are expecting much lower tax cash payments for 2004.

Going to the joint venture with China, I will pass to German.

Well, three things about China, just really, if you will, [indiscernible] we have launched so far. As you know, we have entered into preliminary agreement with CNG Pipe Corporation to establish a huge new facility in NG where we are going to fundamentally take on some PPCO [indiscernible] and finish it with premium connections to fundamentally go up with the regional market.

Because it also calls for [indiscernible] factories to establish its [indiscernible] facility in China. As you may know, China has the biggest sucker rod of markets in the world with a consumption of about 3.5 million units a year. We are at this moment negotiating the joint venture constitution BK contract and we are, I think, moving ahead pretty well. I’m confident that we’re going to get to the agreement, ultimately, which should potentially happen within the first semester 2004.

Okay, thank you.

As a last reminder for the day, it is star 1 if you’d like to ask a question. I have a follow-up question from Enrico Bartoli of Intermonte Securities.

Good morning, gentlemen, [indiscernible] from Intermont Securities. I have a couple of questions. One is about the dividends, if you think that the current dividend can be a floor for the coming years?

The second question is if you can give us an update about the decision on Fintecna.

Okay, regarding the dividend, as you know, we don’t have a policy of announcing dividend policies. But we have our own background and we are able to keep paying dividends in the level we return today.

Going to Fintecna, we said in our press release and we got to the section there with BHP. We are very confident in recovering a significant part of the charge we have for the BHP settlement.

So, that is the answer.

You have a follow-up question from Daniel Altman of Bear Stearns.

Hi, regarding the Energy business in Italy, the margin went up quite a bit in the fourth quarter. Is that a sustainable margin for 2004?

It should be similar. Now we gain volume, and we have a larger customer base. But you know, there is some seasonality in the business of Energy, but it should be more or less the same level this quarter.

Okay, thanks.

Again, it’s star 1 for questions. You have a question from [indiscernible] of [indiscernible] Securities.

Yes again, a couple of questions, one is if you can give us a rough idea of the cost of the scrap included in 2003 costs? Secondly, if you can say something to us about the dissipation in Venezuela particularly, about the [indiscernible] if you suspect an effect on the asset results in 2004?

Okay, taking the first question, the deposit of raw materials which is basically scrap, or whole bits of ferrous raw materials, is around 40% of our costs in the Seamless business. Now, I’ll pass you to German for Venezuela.

Well, let’s try to speak, the Venezuelan market vis-à-vis what’s going on in the country these days. That’s part of the question, and then our Tube activities and what we’ve seen of the [indiscernible] so far, say, this last few months.

Taking a very macro perspective it is frankly difficult to anticipate how this political process is going to end up. We’ve seen what turmoil costs in the Venezuelan oil industry a year or a year and a half ago. The notion of the regulatory called yes, no and how the profits may end us is frankly difficult to predict at this point, but knowing what has happened before, I think it would be wise and cautious to expect that we may potentially have a little bit of an impact in the oil industry, in the way [indiscernible], in the way that the industry functions.

Having said all that, we’ve seen the last few months what I call an operating recovery. There are 45 operating rigs in the country as we speak. Another 40 will be [indiscernible]. Our plant at Tavsa is fully loaded. We are supplying the pipes then in spite of the operating difficulties after the restructuring. We have to find a way to operate for pipes, and these documents get paid, and so on and so forth.

We are being really cautious as to how the political reality may develop. I also have to say that on operating level, we have an opportunity that is fully loaded, that is, to some extent producing at a production that we haven’t seen in two years. We’ve always been booked and fundamentally, profits, profits that are the factory profits and through the administration channels in and out of Tenaris, so that’s very good. As I said, 45 rigs operating, so as I said before, at an operating level, we are optimistic about the notion that we need to have a function where we can potentially be stronger than what the political turmoil may cost.

Okay, thank you.

Again, that’s star 1 for questions. Gentlemen, I see no questions at this time. I’d like to turn it over to you for closing remarks.

Okay, well thank you everyone, and I hope to have you on our next call. Thank you.

Ladies and gentlemen, thank you for joining us on today’s call. You may now disconnect.