Tenaris SA (TS) 2004 Q1 法說會逐字稿

[Poor quality call – indiscernibles in transcript. This is best product.]

Good morning, ladies and gentlemen, and welcome to Tenaris First Quarter 2004 Earnings Conference Call. My name is Alicia and I will be your Operator. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of this conference. If at any time during the call you require assistance, please press star followed by zero and an operator will assist you. As a reminder, this conference is being recorded. Your hosts for today’s call are Carlos Condorelli; Chief Financial Officer, Mr. German Cura, Commercial Director; and Mr. Nigel Worsnop, Investor Relations Director. And now, I would like to introduce Mr. Nigel Worsnop. Please go ahead, sir.

Okay. Thank you, everyone. Welcome to this first quarter conference call. Before starting we would like to remind you that the conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect the results include those mentioned in the Company’s 20S (ph) registration statement and other documents filed with the U.S. SEC.

Okay. Before we move into questions concerning the results we published yesterday, I would like to address a few points. Firstly, our Seamless business is performing strongly and looks set for a good year this year. Sales volume for the quarter was higher than for any quarter in the past two years and our (indiscernible) cost mills are operating at more or less full capacity. Volumes were up in all regions except North America, over the levels reported in the fourth quarter of 2003 and current conditions suggest that this strength will continue during the year. We continued to benefit from strong demand in our key local markets, as well as our ability to serve our customers worldwide.

We also continued to have good margins on our Seamless pipe products. The average gross margin per ton was $353 during the quarter. And almost all of our total EBITDA for the quarter of $156 million came from the Seamless segment.

Although the average price per ton recorded for the quarter showed only a marginal increase over the fourth quarter of 2003, it was up from 10 (phonetic) percent from the first quarter of last year on higher volumes. Prices are currently rising. But the full impact of the price increases we are negotiating today will not be reflected in our results until the third and fourth quarters. We do, however, anticipate that some of the increase will be seen in the second quarter, but that some of the affects of this is going to be offset by the impact of the higher raw material costs following the latest increase in these costs seen in the first three months of this year. In addition, our mix of products varies widely, and changes in mix will have an affect on the average selling price recorded over any period.

Our net interest expenses are low and reflects synergies following our corporate reorganization. Our net interest expenses for the quarter came in at $5.6 million, very similar to that in the first (ph) quarter of last year, notwithstanding a substantially higher net debt position. While we have benefited from slightly lower market rates, our corporate reorganization following the 2002 exchange offer has enabled us to reduce our financing costs and we’re comfortable with our current financial position. Future rises in market interest rates are likely to have a minimal impact on our results and financial condition.

Our inventories have increased substantially in the past two quarters due to a number of factors that (indiscernible) stabilize before declining later in the year. I would like to give you some examples of reasons why our increases – our inventories are increasing.

Firstly, there is stronger demand in Canada where we use a lot of inventory because our mill uses steel bars produced in Argentina and there is seasonal factors affecting the transport. For example, in the winter the Great Lakes’ seaway is iced over. Also, in Mexico where we supply (indiscernible) on a just-in-time basis, and therefore manage all the necessary inventory. Also, today, we are operating several of our mills at almost full capacity and freight costs are high, therefore we are trying to optimize mill production and freight capacity. Inventory levels can also vary substantially in our welded pipe business where production is often made in advance of delivery for large projects.

Trade receivables have also increased significantly over the quarter, but the increases mainly connected with high shipments in March, where we shipped 230,000 tons of Seamless compared to 175,000 tons in December.

Our tax provisions for the quarter were high. The tax provisions that we recorded for the first quarter included a non-recurring item of some $7m recorded in connection with final adjustments we made in the finding of tax returns for the 2003 year. In addition, they reflect a high proportion of sales in local markets where tax rates are relatively high and where we do not benefit from our tax planning strategy.

After these opening remarks, I’d like to turn the conference over for questions, please.

(CALLER INSTRUCTIONS). Hello, Mr. Ortiz, you may ask your question, sir.

Yes, good morning. Quick question. In terms of your initiative in increasing prices, is there a rate for the implementation of price increases to the extent that some of the raw material costs are trending down as we’ve been seeing over the past few months, and to the extent that customers start saying, you know, prices should not increase because your raw material costs are starting to decrease?

No. We believe that the entire industry is moving to a different structure level. We, as we have anticipated, have applied the concept of a surcharge to a very, very limited amount of our sales. And, consequently, we talking about complete price increase given that we all knew that the structure – changes are not something short term effect, but a fundamental is here to stay.

(Indiscernible).

Your next question is from Felipe Leal with Merrill Lynch. Please go ahead.

Yeah, this is Frank McGann from Merrill Lynch. Two questions. If you could just give us an update on the gas situation and how you think it will affect your relations in Argentina and your cost structure, particularly, in the third quarter? And then, perhaps, if you could give us an update on the status of the Bolivian – Bolivia-Buenos Aires pipeline?

Okay. I will give you an idea of what’s going on in Argentina regarding gas. As you know, we have a (indiscernible) facility in Milas, Campana and it’s the one who is going to be more affected if we have a problem in the supply of gas.

In this aspect, we are increasing our inventory in our mill and in fact we anticipated maintenance stoppage we make once a year to July, we are – it’s wintertime in Buenos Aires and where we expect more (indiscernible) gas. And then there are other ways in which could affect and we have some contacts in place that if the gas is not there, we are not going to have gas. But we have more inventory for about 45 days in our mill (phonetic), but in any case, it will have to lose some capacity. Today it’s going to be something around 15,000 or 20,000 tons of steel (indiscernible), which impact for something around $6-7 million. I’m talking in a say normal situation – I’m talking about 45 to 50 (indiscernible) during wintertime. If something more critical happens, due to weather conditions or other factors, we cannot expect that in any case, we have possibility of shifting production or replacing our production (indiscernible).

Regarding the pipeline from Bolivia, today the (indiscernible) is still in place there. We now – the Bolivian government has to go to the – and has to make the decision if they are ready to sell the gas to Argentina. Not -- for the time being they have already announced that they approved to sell gas to Argentina, but for the short-term. For this process they have not yet made a decision and we are expecting for this and the government of Argentina is making efforts in order to get from the Bolivian government this approval selling gas (indiscernible). Then if it happens, the pipeline is going to be built and we expect and we expect it might be starting at the end of this year.

Thank you.

The next question is from Ricardo Cavanagh with Raymond James Argentina. Please go ahead, sir.

Yes, good morning, everybody. I have two questions. The first one is regarding selling prices. You mentioned about structural changes taking place that allows you to become positive on the outlook for prices. If you could please expand a little bit on that front if you’re abasing the structural change on the – for oil prices or capacity (indiscernible) for the OCTG producers in the world, or U.S. prices or if you could expand a little bit on that front? And the second question is you recently announced that you had signed an agreement with Posven controlled by Posco to acquire a (indiscernible) facility in Venezuela, which is the situation now with that transaction, and if you could also expand on the potential benefits for Tenaris?

Okay. I think the prices’ question. And part of what you said is precisely our view. We believe that the oil demand will remain the same and that a barrage of reasons (indiscernible) U.S. and China behind the big demand push. Oil price, in our view, would also stay at the levels which we’ve seen and will remain strong. We know the inventory situation is deteriorating. Gas prices would also remain strong. As you all know, the recount in the U.S. has increased substantially (indiscernible) fundamentally (indiscernible) to gas drilling and (indiscernible) I would say (indiscernible) level of activity we see that the production is declining.

So as a result, we’re looking at an industry which we view as not only stable but really strong, the fundamentals are strong and are going to continue to be that way.

The (indiscernible) as we announced are pretty booked. We have both (indiscernible) full capacity. And we see that our competitors are also pretty book. So as a result of all this, we see this new structural change which given the both U.S./China economic situation, the demand for oil situation, the gas price, et cetera, et cetera… we truly anticipate that prices are going to sustain and the increase of prices is going be sustainable going forward.

Okay.

Regarding the Posven acquisition we announced some days ago, we sign agreement with (indiscernible) and so now we are in the process of trying to (indiscernible). There are some closing conditions like for after complete the supply contract of PEMEX, (indiscernible) and other condition of like the (indiscernible) supply contract with (indiscernible) Venezuela or with CBG (phonetic) Venezuela. These are the main closing conditions we have to set before we complete the transaction which is expected to be closed before or after June 15 of this year.

The rationale of this acquisition is more or less clear in the sense that we been announced which are our (indiscernible) acquisition. This is another low cost supply of our of imports which makes sense for us and also for us having Sidor as a partner of ourself in this new venture. (Indiscernible) a good opportunity of dealing at Venezuela, which is not easy as you know very well.

And so, the rationale is to have, especially for (iindiscernible) and also for (indiscernible) in Italy, we – to have a have a lower cost supplier of raw material. The price we are paying is $120m, which at Tenaris will hold 55% and the remaining 45% is going to be held by Sidor.

Okay. Thank you very much for that and I will have one last question on the (indiscernible) side. Should we expect, in the coming quarters, that the negative cash flow variation would be reverted (indiscernible) inventories are (indiscernible) and your receivables are collected?

Yes. I don’t know if in the following quarter or the next two because the next quarter we have paid the working capital to remain stable, but on the other hand we have to pay taxes, we are paying taxes in May or already paid, and perhaps we are going to this acquisition which is going to be Posven as well as Sidor too. But we expect to close the (indiscernible) perhaps we are not going to be closed by this quarter, but the following one. So we are not expecting a substantial improvement, but we are making a decision on financial – the short term financial because we expect for the rest of the year the money coming in.

Okay. Thank you very much.

I’d like to add that we are paying out dividends in the next quarter. That’s a big amount of money.

Okay. Thank you.

Your next question is from Daniel Altman with Bear Stearns. Please go ahead.

(Indiscernible).

I’m sorry, Mr. Altman, you’re not audible, sir. Is there any way you could pick up your handset?

Can you hear me now?

Mr. Altman?

Yes.

It’s just very low, sir.

All right. Now can you hear me?

Mr. Worsnop, are you able to hear him?

Yes, we can.

Okay, great. Thank you.

All right. I’ll try to stand on this chair and (indiscernible). Two questions. One is regarding the BHP (phonetic) statement that you made in the first quarter. I believe the target was to start (phonetic) perhaps finish, come to a closure with (indiscernible) by the middle of this year. I guess we’re getting pretty close to that date. I wonder if that’s still your expectations? The second question is, the – we heard some pretty negative comments from (indiscernible) regarding the state of (indiscernible) and I’m wondering if that’s a situation that Tenaris is seeing as well and how concerned are you about that?

Okay. This is Carlos. Regarding BHP, (indiscernible) in terms of covering some money, but it’s going to take a couple of months longer than the timing we were expecting and talking about July, August or something like this. But we keep more or less the same approach – we keep optimistic.

Now as far as Venezuela is concerned, Daniel, we don’t share Mr Andergoals’ (phonetic) view. We, of course -- and we have talked about it in previous grounds and have acknowledged the notion that (indiscernible) has gone through a (indiscernible) structuring process that has to (indiscernible) operational issues. But we are I would say, optimists as to how is that they have control (indiscernible) managed the overall change.

If we look at what the overall situation was a year ago, a little over a year ago, say first quarter ’03, the Venezuelan (indiscernible) already have nine operating rigs counting both the drilling rigs as well as the (indiscernible) rigs. And today they are a level of 83. They are producing a level very close to their OPEC quota and I have to say that in spite of some, I would say, operation hurdles, which we have commented on, we are still very surprised at the way they have controlled the situation and eventually managed to turn it around.

Okay, thank you.

The next question is from Jason Selch with Wainger Asset Management. Please go ahead.

Yes. You commented on your view of the sustainability of higher energy prices. What about in your raw material prices, such as iron, ore and BRI (phonetic) and scrap? Are those prices sustainable or do you see that they’re a function of some freight issues that may go away over the next year and a slow down in China what’s going to do – is that going to do to those material prices?

Yes, this is Guillermo (indiscernible). You know, the way we’re looking at the raw material right now is that we’re seeing a limited reduction, a limited softening of the market and we’re seeing the same thing in the raw materials and we’re experiencing the same thing on the freight – on the freight side. Obviously, if China reduces their activity, or if there is a slow down in China, that’s going to have a major effect in terms of their raw material situation because the main driver in terms of they increase (indiscernible) China. But we’re seeing at the same time that the rest of the world is coming strong. We see activity in the economies of the rest of the world coming so, this is – this is why our perception is that we’re going to have a slight softening of the raw materials, but we cannot come to believe that there’s a structure or change and the prices are going to remain higher than the way they were in the past.

Okay. And that’s one of the reasons why you’re buying the HBI mill?

Yes.

That is because of the sustainability of those places?

Absolutely. And we believe that Venezuela is one of the few places where we’re going to have a sustainable position of raw material energy costs and reasonable raw material cost. So we believe that that should give us a competitive advantage to our Mexico and to our Italy – Italian mills. And also (indiscernible) support the (indiscernible) of the mills where we don’t have skill making capacity.

The Chinese have built and are building a number of steel mills. Are they building Seamless pipe mills in conjunction with those mills?

Yes, they are. They’re about to complete a small (indiscernible) mill up in Kangin (phonetic) which we believe is going to be fully operational by the last quarter of this year. And they have in the books two more other projects which have not materialized as yet. And it will be associated to the way the Chinese do run their own project development and project financing process as we are now – they are truly concerned at the way the economy (indiscernible) and they seem to exercising some measures to, perhaps, delay some of their existing projects. We frankly at this point don’t know weather the pipe projects are going to be affected by this decision or not, but as rest of the industry, we’re carefully watching.

(Indiscernible) comment on what German was saying. One also, one of the visions to do the operation in Venezuela is because we see in the medium term that energy costs are going to be much more advantageous in Venezuela than in China. China does not have low energy costs and does not have a surplus energy position – it’s an importer (phonetic) of energy, have high energy costs and we believe that any growth in capacity in China we’re going to be much stronger and much better off by having this raw material supply in Venezuela.

Okay, thank you very much.

And the next question is from Jennifer Corrou with Smith Barney, please go ahead.

Hello. Regarding this payment for BHP, can you – I guess talk about the timing of when you expect to make these next payments? Effectively, I think – well the original cost is $108 million, but now we’ve seen some additional costs because the currency fluctuations relative to the British pound. Can you give us an idea of the $15 million that you recorded – reported this quarter, how much was related to that fluctuation in the British pound?

Okay, first the next payments are scheduled by December this year and December next year as we announced. Then regarding the costs we are recording now, we are talking – let me try to explain to you the accountability of this. (Indiscernible) is a company who has (indiscernible) recording in its books and is reporting in Euros. And then they – the British pound (indiscernible) against the Euro and (indiscernible) recorded a loss of about $6 million this quarter for the devaluation of the (indiscernible). But, let me tell you that also, we accounted for about another $2 million given that we (indiscernible) against the U.S. dollar in a different subsidiary (indiscernible) but another subsidiary in (indiscernible). So, I would say that the real cost was zero given that we have the intention of keeping this (indiscernible), but given that we have to account for (indiscernible) and we have to record the fair value of the (indiscernible), so we had to record this loss in our financial statement this quarter. So, bottom line there, the devaluation was $6 million and another $2 million were due to the difference in the value of the – of our (indiscernible) in another subsidiary which (indiscernible). Finally, to them we have the best (indiscernible) against the U.S. dollar.

Okay.

[CALLER INSTRUCTIONS] Mr. Worsnop, it appears you have no more questions in the queue, sir.

Okay. Well, thank you, everyone, for attending the conference call and we look forward to having you with us for the next one. Thank you.

Ladies and gentlemen, this concludes the conference call, you may now disconnect. Good day.

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