Tenaris SA (TS) 2004 Q2 法說會逐字稿

On behalf of Tenaris, we would like to welcome you to the Second Quarter 2004 Earnings Conference Call. Today's call is being recorded for replay purposes. Representing Tenaris are Mr. Carlos Condorelli, Chief Financial Officer, Mr. German Cura, Commercial Director, and Mr. Nigel Worsnop, Director of Investor Relations. I would now like to turn the call over to Mr. Nigel Worsnop. Please go ahead sir.

Welcome, everybody, to the second quarter 2004 conference call for Tenaris. First, 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 these results include those mentioned in the Company's 20-F registration statement and other documents, which are filed with the US Securities and Exchange Commission.

Before moving to questions concerning the results we published yesterday, I would like to go over a few points.

Our Seamless business is well positioned to take advantage of the favorable global demand situation. Our results for the second quarter and the first half of 2004 show that the current global demand situation is favorable for seamless pipe producers such as Tenaris, and just as significantly, we are well placed to take advantage of the new panorama and to convert it into positive results.

We are the leading supplier of seamless OCTG products to the oil and gas industry worldwide, supplying around 20% of global demand. We are able to offer a comprehensive range of products from our global manufacturing network incorporating advanced product technology, particularly in the area of premium connections and for deepwater applications.

Through our proprietary global distribution network, we provide valuable pipe management and just-in-time delivery services, which differentiate us from our pipe manufacturing competitors and allow us to reduce the inventory and logistics costs on the long-term contracts with our major customers.

Global energy demand is rising, but there is limited spare oil production capacity worldwide, as production declines in the mature fields in the US and the North Sea and the large projects undertaken by the majors take time to bring online. As well as continuing political and security issues, which are hindering production increases in countries such as Iraq, Nigeria and Venezuela.

However, exploration/production expenditure has been increasing in our key local markets in North and South America. In Mexico, for example, the number of exploration development wells drilled by Pemex rose more than 40%, from 260 to 370 in the first half compared to the same last year. And in Canada the number of wells using seamless pipes is expected to show a strong increase this year over last year.

Moreover, we are well positioned in West and North Africa, the Caspian and the Middle East, where much of the longer-term increase in production is expected to occur. We're increasingly confident that we're seeing a secular change that could keep demand for our seamless pipe products at high levels for some time to come.

Seamless sales volume is up 10% over last year's levels in the year to date. However, volume in the second half will be affected by seasonal factors and the plant maintenance shutdowns we have programmed for our Mexican and Italian operations in the next quarter.

Selling prices have risen for our seamless products, a rise of 7% quarter-on-quarter. But as we mentioned in our last conference call, the full effect of these price increases should be more clearly reflected in our results for the next quarter. Depending on what happens with raw material and energy costs, our margin should continue to improve.

Our 2 new acquisitions will increase our production capacity, improve our access to low-cost raw materials and strengthen our cost competitive industrial profile. Following the end of the second quarter, we completed 2 important acquisitions.

The acquisition of Silcotub, which is currently operating at close to its capacity, will add valuable capacity to the Tenaris system at a moment when we are operating at close to full capacity at many of our mills. The size range of the Silcotub mill complements perfectly with that of our Dalmine mill, and will allow us to free up capacity at Siderca for small diameter OCTG products as well as allowing us to participate in the Eastern European market for OCTG products.

The facility includes a labor-intensive cold-drawing mill and will expand our capacity to supply tubes for automotive applications in the European market.

We managed to complete this acquisition against strong competition from TMK, a Russian competitor.

The acquisition of the Posven HBI plant in Venezuela will provide us access to a source of low-cost raw materials which we can process using low-cost natural gas. This should help us to reduce our overall production costs, especially to supply situations where steel-making raw materials remain tight in coming years. We view our raw material profile as a key source of competitive advantage, which will become increasingly important in the years ahead.

Because the plant has never operated at capacity and has been shut down for the last 3 years, it will take a number of months to start up and stabilize operations, which means that it is unlikely to have much impact on our cost profile before the end of this year.

Last year's investment in the restructuring of Sidor has already proved its worth. In June last year we invested $33 million in the restructuring of the debt of Sidor and Amazonia, under terms which have allowed us, those putting in new investment, to have access to part of Sidor's excess cash.

The result of $40 million recorded in the second quarter includes Tenaris' share of Sidor's excess cash for the first semester, of $22 million, which adds to the $17 million we've received in respect of last year.

Our net debt has increased but remains lows, as do our interest costs. Our net debt has increased by some $250 million over the first half of this year. So it remains low at $700 million after taking into account our cash deposits in trust funds whose term expires this year.

Our negative cash flow for the period is due to increased working capital needs associated with higher sales and higher inventory costs, due to production cost increases, as well as the payment of a dividend of $135 million and the first installment due in respect of the BHP litigation settlement.

The increase in volume of inventories that occurred in the first quarter has been reversed and with the uncertain environment surrounding steel-making raw material costs, we are making efforts to reduce inventory levels further.

Our net interest expenses for the first half amounted to $12.3 million, and the average interest paid on our financial debt was about 4% annualized. A reduction over last year's equivalent and certainly to the benefit of our increased flexibility in financing options.

Finally, our tax rate for the first half was affected by adjustments made to the provision recorded in respect of last year's results. Our tax rate for the first half remained at 40%, but was affected by the recording of adjustments made to last year's provisions when filing the definitive tax returns. Without those adjustments, the effective tax rate would have been lower, and thus we expect the tax rate going forward to reduce to being around, be below 40%, as we previously indicated.

Okay. And now we would like to turn the call over to questions.

[Operator Instructions].

The first question is from Frank McGann with Merrill Lynch. Please go ahead sir.

Yes, good morning, good afternoon. Just one question, basically. In terms of the Welded business, I was wondering if you could comment on the infrastructure projects that you have pending in Brazil and Argentina, and what you think the prospects are for those and the potential startup dates and business that you would get from them.

And then maybe, as a second question, perhaps you could comment just on the Middle Eastern business. Is the strength that we've seen in Q2, is that likely to be sustainable in future quarters?

Okay. Good morning, Frank, and good morning to everybody. First, you address on the Welded business. I will probably tackle first the Brazilian situation, then the Argentinean one.

As we have anticipated, we've seen a number of projects in Brazil, which for a variety of reasons have been delayed. For the most part, they've been subject to financing structure issues. Having said that, however - and I'm sure you've seen the press release that we published - this last week, the [Cantooker] monopolies project has been formally awarded to us. This is a very important one; it contains about 83,000 metric tons, which we're hoping to start supplying by the end of the year, first quarter next year.

Now as far as Brazil is concerned, though, there are some existing bookings, which have not yet managed to be completed. In specific terms I'm referring to the BEP project. This is a very, very large one. We're talking about, roughly speaking, 200,000 metric tons, which is as we have informed been delayed as a result of a operational disagreement between both Petrobras and [Rio], the [Canada] province government. Again, we're hoping that that will be cleared up by, say, the last quarter of this year and potentially we'll be in a position to restart work linked to this specific project by some time next year.

Now, as far as Argentina is concerned, well, we have 2 fundamental [item news]. One is the Lux construction for both TGS and TGN. On that, we're talking about 120,000, 115,000 metric tons, which is a relevant quantity. And we're hoping that those 2 projects will materialize again last quarter this year, first quarter next.

And then we have, Frank, a subject which we have discussed, which is the [Gasolupo el Noretio], North Eastern Pipe Gas Line. Whereas you all know, the Group has put up a firm proposal, the government is evaluating it and we're hoping the government will structure the international bidding process within the coming months.

Again, overall I think '04 is going to be a shy year as far as the way of the business is concerned. We've seen something close to 150,000 metric tons the first half, and we anticipate that during the second half of the year we're not going to see a dramatic increase. But we're confident that the situation is going to rebound during 2005 as a result of some of the examples that I just provided.

The second question, with respect to the Middle East. Yes, we share the views strongly, Frank, I would say. The oil world demand is clearly up and in spite of the major company efforts, the oil is going to come out from the Middle East. We've seen already Aramco reacting to that, and you will see in the coming quarters that our sales to the area are going to probably continue the trend that we've seen in this last quarter.

Okay. Great, thanks.

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

Yes, good morning. I have questions related to the new appreciation in Romania and in Venezuela. The first one would be if there is any particular amount of capital expenditure that you'll have to allocate to those places.

Secondly is - which is the kind of saving that we should expect from the acquisition of Posven?

And the last question would be - which is the sales volumes we should assume from Romania? I know that that has an 180,000 tons capacity and you mentioned that it was working at full. Is that what you should be assuming going forward too?

Well, I'll take part of the Romanian one, then turn on to Carlos for him to probably expand on the impact of the Posven and also the Romanian acquisition.

Number one, the nominal capacity of the mill is exactly 180,000 metric tons but it is not what it is producing. It is not at full and we are contemplating that initially the mill is going to be producing slightly lower quantities. You all need to remember that Silcotub is not an integrated facility. So far the steel comes from a Russian steel supplier. We are of course contemplating that existing steel supply agreements are going to continue, but I think we all know what the steel market dynamics are. Consequently we are contemplating that the facility is probably going to operate at the existing level, which is, I would say, something close to 140,000 metric tones when you analyze the overall production.

In very specific terms, and Nigel has anticipated something in his opening remarks, this facility would produce a good portion of OCTGs, small diameter OCTGs, which fundamentally will be aimed to the regional market. That is Romanian, Polish, so on and so forth, regional OCTG market, which we intend to serve. And then of course complement a good part of what we do internationally out of the Romanian mill.

The most part would obviously be directed to reinforce our European position, in both industrial and automotive segments. As you know, Silcotub has a very solid cold-drawing facility, which would fit perfectly well our industrial development in the European region.

Carlos, do you want to take on Posven?

Regarding the Posven acquisition we made at Venezuela, there's no significant capital expenditure ahead to start operating at Venezuela. That's where we have to start operating and we expect to do so around the end of this year.

Regarding the saving, it should be significant compared to the market price we have today, the HBI has. And by significant I mean it should be in, the cost is about $115, $120, $125 per ton HBI, is what we are expecting to complete depending upon how the raw material prices will go on in the future.

So regarding the Romanian production, there is no significant uplift for this year for capital expenditure. Then we have different plans. We are very happy of having completed this acquisition, because it fits very well for our operations and to have completed the transaction was a very good piece of news for us.

Okay. Thank you very much, and if I may I would like to add another follow-up question. It's regarding selling prices, well, the price increase was very strong. Is it a question of that you're selling higher value-added products? Is it a question that the prices are increasing across the board? If you can clarify on that?

Well, I'd say prices wise we should probably look at it from 2 dimensions. Number one, this is something that we have discussed and presented in the prior rounds, we are up against, clearly up against, a structural change in the overall market. So it's not only high-end, it's not only a mix per se, if you will, impact. But clearly the notion that we're for, I think, the first time up against a dual cycle, we call it. It's a positive cycle in the overall steel industry, that is pushing prices of everything up. Not only raw materials, but ultimately finished products. And then a positive cycle as well at the oil, if you will, industry level. And that has created a demand pool that has ultimately then concluded in a structural, clear structural, change.

Now, as far as the detail specific of premium items, or high-end items, as we have defined them on prior rounds. We have clearly specified that Tenaris is determined to establish a leadership position in the high-end side of the market. There are a variety of reasons. Major companies are striving for access. They of course want to capture this market opportunity and the fundamental limitation is reserve access. If you will, areas that today have available - deep waters, Gulf of Mexico, West Africa, Angola, Caspian Sea, Sakhalin - these are all very tough operating environments, where only high-end products, premium connections, deepwater pipelines, are going to be able to meet the specific working requirements.

Now, as you know, Tenaris is the leader in the deepwater pipeline segment. We're today co-designing with some of our customers the next generation of deepwater pipelines. At the same time, we have introduced a new premium connection with a dopeless version we just have presented in a prior occasion, has surpassed the market expectations. I was really happy to see what, for instance, Statoil is saying on their own website about this premium connection solution which has allowed them to develop the Snohvit field, which is a very, very important reservoir.

So at the end of the day, you have a little bit of both. Prices, appreciation as a result of a structural market change and yes, the Tenaris determination to occupy, if you will, the leadership position within the high-end product side.

Okay. Thank you very much.

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

Hi, it's Daniel from Bear Stearns. A couple of questions today. First of all, on the price increases. I wonder if you can try to quantify, I guess it was 7.5% in the second quarter. Are you thinking of similar magnitude or more in the third quarter? If you can give us a ballpark range.

Also, if you can talk about the seasonality in the business. Is that the, looking at the European summer or are there other, what are the other seasonal factors that you notice, that you'd point out for us in the second half of this year? Thanks.

Okay, Daniel. Good morning and hope you're doing well. Price wise, we've seen this price increase which you have noticed. I could say that we'll see over the coming quarters a price appreciation, which would be at least around the magnitude that you have indicated. It is very difficult to probably get into the specifics, because ultimately we were debating this in preparation for the conference call. [Inaudible] at the end of the quarter may create a difference and that typically has an impact, an operational impact, which is something that we want to be very cautious about.

But you could fairly say that we're expecting prices to appreciate at least in the coming quarters, more or less at the pace that we've seen so far.

Now, as far as the seasonality. We have 2 elements, Daniel. One, the market side that you mentioned. Of course Europe is typically warm during the summertime. So is Canada. I guess you would remember that the Canadian activity during the summer typically slows down dramatically. And then what we call the internal operational side, which is linked to the shutdown for maintenance of both of our facilities in Mexico and Italy, which obviously would reduce substantially our production output and consequently our ability to ship.

Okay. And just one other question. I wonder if you can try to break out for the third quarter your sales to OCTG and generally oil service customers versus industrial, amongst the Seamless business?

Well, let me go through the projected detail figures which we have. It has been very difficult to probably get into specific details, Danny, this is something which we typically try to avoid in terms of providing detailed information as far as the coming months. But in general terms, very broad terms, you could fairly say that the seasonality effects are going to be heavily impacted by the European component, which you know has a large portion of industrial pipe applications as opposed to OCTG.

Just isolating the second quarter results, are you able to say how much of Seamless was industrial versus oil?

You could probably say that, very roughly speaking, it will be something close to 65/35. 65 OCTG, 35 non-OCTG, and always Seamless, of course.

Right, right. Okay. Thank you very much.

The next question is from Jennifer Corrou with Smith Barney. Go ahead.

All my questions have been answered, thanks.

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

Hello. I have 3 questions. The first one is - you said that in the second half, that you didn't, you would expect to reverse some of the increase in working capital. I think that there's $311 million in increased working capital, and I was wondering are you going to be able to reverse the entire amount or a substantial amount? I think you said some of it's from inventory. Are you building inventories before the shutdown in Mexico and Italy? And I think you were doing some precautionary inventory build in Argentina as well, in case there was a shutdown because of the energy situation there. But I think that there's been a very large increase in accounts receivable, and are you going to be able to reverse that accounts receivable? So anyway, can you detail what's going to happen with the working capital?

And where's the $40 million in equity income coming from?

And the third thing is, are we going to see you at the Lehman Conference in September, Energy Conference?

Okay. Regarding working capital. First of all, in general terms we should say that given that we are operating at capacity and the demand is very strong, perhaps we can see something in the third quarter but at the end of the year we should be recovering the level of working capital we have today, given that we expect to continue producing at [Estanquera].

Regarding, many times we build inventory but, for instance, now we are having the stoppage for maintenance and the other direct reduction facility in Argentina, that should be consumed with this July/August operation.

So in general terms, I would say that we will maintain the working capital maybe at the end of the year. And another factor is the prices of the raw material, which is another factor that may affect us.

Yes, we will be there. We're anticipating that Paolo Rocca, our CEO, would have a detailed presentation. Of course they're working around the detailed agenda. We anticipate that that's going to happen September 9 and well, some of us are going to be there as well.

Okay, great. And where's the $40 million in equity income coming from in the quarter?

Okay. It's come from Sidor. As Nigel said before, $22 million is the excess cash that we are collecting from Ylopa, which is the company that is participating in restructuring Sidor. And the remaining result comes from a re-evaluation, given the strong situation that Sidor is facing today, the re-evaluation following the increase in the value of the Sidor as well.

Okay. So those, both of those items, are a very non-recurring kind of situation, right?

Excess cash is the situation at Venezuela Sidor. It's the same level, I mean it keeps growing good in some point of time. You know that this cash comes every 6 months. So we expect if the operations continue going okay at Sidor, we expect something at the end of the year, as well as increasing the value of Sidor.

Okay. Thank you very much. We'll see you in New York.

Okay. Thank you.

We have no more questions in the queue at this time, sir.

Okay. If there are no more questions, perhaps we can close the conference call. Thank you very much for joining us.

Ladies and gentlemen, this concludes your conference call. You may now disconnect. Good day.