Tenaris SA (TS) 2005 Q1 法說會逐字稿

Great pleasure to have you with us today here in Houston. Houston is an important city for us, our operations. We’ve been participating -- we’ve been here for 19 years, participating in the OTC conference, and last night, we -- some of you may have been able to visit us at our traditional 19th edition of our OTC cocktail in Houston. A warm welcome for all of you who have come from far away, and we are also very pleased to see friends from among the Houston community here, too.

Okay. Today, we are going to start off with a presentation by Paolo Rocca, our Chairman and CEO, followed briefly by our CFO, Carlos Condorelli. Then we are going to have a break. And after the break, we are going to join with our first-quarter conference call, so that people will be able to telephone in and ask questions, as well as receiving questions from here in the audience. So that’s what the format of today is, and with that, I will pass you over to Paolo Rocca.

Thank you very much to all of you and especially to the people that came from New York. I hope everybody has a seat and nobody remains (indiscernible).

The objective of this presentation is on one side to give a view of what Tenaris is to someone that is joining us for the first time, but also at the same time, the second objective is to indicate where we stand, which is our outlook for the future, and which is also our view of the market in which we stand. So that's what we are doing.

For some of you, the first slide will be a repetition of the last investor day, but I think it is useful for the new people to have an idea of what Tenaris is.

We are a leading global supplier of seamless pipe, leading supplier of welded pipe in South America, but what does this mean? I want to convey this idea to you that the perception that Tenaris is an absolute leader in what it is doing. I mean, Tenaris, for its global reach, for the share of the market in oil country tubular goods, for the product development program, is an absolute leader in its sector, and I think this is something that since the moment in which we created it, we established Tenaris two years ago. Also the market increasing beyond sud (ph), the strength of the position in S&L (ph).

My method is Tenaris is something unique, is a combination of very strong manufacturing. We span all around the world with a low cost structure, high product development and a very good product development position, service and loyalty created in different markets in which people apply us. And this combination of a global manufacturing and service company with a strong product development component is the difference of Tenaris; Tenaris is different in this way. When we say what are the point of this diversity? Well, for sure, the position in term of market share is important and is one known factor.

In which areas is Tenaris concentrated? Seamless, seamless pipe is the main segment of our production. This seamless means large investment. One plant for a single site costs $400 million and requires special infrastructure of certain conditions to be built. You need to have a harbor; you need to bring in, I don't know, ore to process drop in the flow-through way (ph). I mean, seamless means barrier to entry for many investors.

This is not welded. Welded is a different story. You can build a welded line with limited amount of money. Seamless is a different industry. We had one -- 8% of our revenue that is driven by welded pipe for compositional hydrocarbon. We are the leader -- regional player based in Brazil and Argentina, and we serve all of Latin America.

It is very difficult, so we are not very competitive when we go out of Latin America because we transport big pipe. We do not hold a lot of share (ph) -- you stay a lot longer in place and increasing rate is limited our welded operations to Latin America. But this is more than enough to support a very strong season (ph) with good margins in an area that is investing in energy and in the integration of gas and oil on a regional base.

Energy. We enter into this by chance, because in the end, we were looking for a way of reducing the cost of energy in Italy. We started a trading company on this and we ended up trading oil, energy -- electric energy and gas authority -- the energy of gas on a much larger scale. Today, we have revenue in the range of more than $400 million and limited margin. So the margin is a margin of a trader, but we have a very successful, innovative marketing approach, which is more industry through the international, the management of the contract. We introduced the concept of industrial management into the way we supply energy. It is an interesting business, but is not something that you could see really the core of Tenaris.

The revenue. Consolidated revenue of $4 billion, but you are seeing the results in this quarter in the moment in which demand is going after our supplies; power is very strong. We are running at a pace in the range of 6 billion revenue per year. This is the figure of the first quarter, so increased volume, price and power, more value-added products are driving our revenues into the range of the 6 billion corner.

Luxembourg and operating subsidiaries all over the world. Now, in this you see a comparison of market cap and net profit of four [inaudible] Schlumberger, Baker Hughes, Weatherford and Tenaris. Now, in the first quarter, the net profit of Schlumberger has been in the range of 400 million, Baker Hughes in the range of 180, 200 maybe (ph), Weatherford in the range of 70 and Tenaris in the range of 280. This is a fact and is responding to the competitive position of the different companies.

Obviously, Schlumberger has a very strong business based on technology. If you look at the market cap, however, Schlumberger is the strongest with a capitalization in the range of 40 billion; Baker Hughes, 416; Weatherford is a range of 8 (ph). There is something interesting here. I am not saying we should have a decent market cap, but what I am saying is as we were discussing this morning at breakfast with some of your colleagues, where is the best place to put Tenaris' liquidity? Today, it would be in our off-shore, because frankly, the positioning of the market of the industrial and service position of Tenaris is very strong and is not entirely reflected today in our market cap.

You know, the capital structure of Tenaris, the ownership of Tenaris is -– in the structure you'll see that the King Group (ph) has a 60% position in Tenaris. The logic of the Company is a logic for long term. I mean, the major shareholder does not intend to sell or to buy. We are here for the long run. We started in this business more than 50 years ago, and the majority shareholder has a stable position and a long-term view. So it is not driven by market cap or what has happened to the shares. But this is a fact, or the point, let's say the relation between the market shares and the earning power of the Company.

Leader in the OCTG oil countries -- we were a good factor. We consolidated the industry during the '90s. We had five plants from Brazil, Mexico, Canada, Japan, Italy and recently last year is Romania. We are consolidating these. This is an industry that you see here from world seamless OCTG production in 2004. These are the market shares.

You had China with 22% -- many different companies, many owned by government or municipal government or local government with some public participation. But China in this market is kind of self-contained. Exports are limited, and the Chinese producers are still far away in terms of technology and product development from the need of the oil industry in OCTG. They are producing a lot of pipe for industrial use, for line pipe, but still China is mainly producing for its own growing market. Exports are very limited from here.

Eastern Europe and CIS also, a large part of this 20% of the market is devoted to the need of the oil industry in Russia, in the former Soviet Union area, and the reason, it's growing by limited interaction with the OCTG market worldwide.

What is left is around 60%. This 60% of the market is shared potentially among Tenaris, U.S. Steel, the main producer in North America -- there are not so many producers in U.S. -- V&M, 14%, and Other. Japan -- Sumitomo and GSE, but Japan is mainly through Sumitomo, with a share in the range of 8%.

So it is a concentrated market in oil countries, and this is the result of the consolidation done by Tenaris. Even then, the success I think of Tenaris was originally in the 90’s. We have been able to do something that has not been done in the flat product, even today after nickel and ore expansions, the flat product market is still many times less concentrated than oil concept (ph) tubular goods.

Now if you look at the entire worldwide apparent consumption, we are talking about 22 million tons, of which OCTG represents around 7 million. This is a much larger world in which we have pipes for industrial use, pipes for hydrocarbon consultation is more -- many low-end products are in this.

If you consider Tenaris, we stay focused in on the high-end products. Over time we concentrated on the more demanding segment of the market and we are doing this because there is less competition. We are trying to increase our marketing power. Our positioning is more concentrated on this, and it took a lot of time, developing technology, the relation of our clients, R&D in support of this position.

In the last two years, we have been very successful in getting to the market with financial connections gauntlet (ph). We are turning out core products that are very effective in supporting this process. Premium connections, as I was saying. The Blue line of products is introducing a new technology and is getting very good market with it.

Integrating a few supply chains from the mill to the well, this is a part of the strategy which we launched in the middle of the '90s and by the end of the '90s. The oil industry is risk-averse. They want the cost of the pipe; the pipe is not the spending issue. It may be very important for the oil-producing sector that is drilling 1000-meter or 3000-feet wells in the oil patch. The important thing is to reduce cost. The hydrocarbon reach, the geological reach is not really important for it.

In the rest of the world, in the world in which the major oil company operates or the big nation operates, the geological risk is the extent of the business. They spent $20 million or $15 million or $10 million for a well. If they're successful and the well has no problem plaguing it, a huge return is not calculated in terms of 20, 30 or 40%, it's hundreds of percentage volume to refer (ph).

So, the importance of this avoids risk, because nobody could justify an operation in which canceled sales and the opportunities lost because of canceled sales. It is a different way of reasoning, and we try to see which driver were important for these wells. One of the important things is for sure profit and reliability, they have to trust the growth (ph).

The second driver that is also important is supply chain, the product to reach there. In a platform in Nigeria, the oil company deals are moving to get the pipes there six months ahead. They cannot afford to keep a platform that costs $300,000 a day without pipes. So the supply chain is extremely relevant today. So we established our base in Nigeria, Caspian (ph), and different areas of the world with this in mind. We should assure and design our distribution in a way that would review the riskier section (ph) of our plant.

This is a never-ending task, based on systems, tracking, all of the information technology of plants. It could allow risk management on the net and service interplay (ph).

Service also goes into the service advent (ph) of the cost, accessories, preparation of the slides -- all of these activities that are relatively easy to solve in which we can build the differentiation and trust of the power plant.

Low-cost operations. This is also, as I was saying at the beginning, very strong manufacturing, progress-oriented product development and global reach. Manufacturing execution is essential, because this is a market in which you build a margin or you could find (ph) manufacturing margins seen in Mexico, Canada and Romania. We are looking for integrated manufacturing that goes from, I don't know, through the pipes that could rely on energy at a competitive cost. And so we try to build a manufacturing system that is really superior in basic cost and also in the transformation process, in a high-value added cost that has no weakness. The point is to avoid and to limit the weak point in our system.

Recently, we acquired, for instance, a hot briquetted iron facility in Venezuela, 1.5 tons of capacity in Venezuela. The Posven deal was an important move in lowering our costs. It will be reflected in our number in over time. It is really something that will help to assure the supply of metal through this deal.

This is what we have also in our report. Global reach. The red line as a manufacturing facility in Argentina, Brazil, Venezuela, Mexico, Canada, Italy, Romania, Japan. The left are our network of offers (ph) and also a finishing facility, an important core finishing facility in Aktau in the Caspian Sea. We will expand this network because we realize that finishing facility close to the markets are a very effective factor for this initiation of network loyalty and long-term commitment.

The seamless business global, what does it mean? We are producing in different regions -- North America, 31%; Europe, 34%; Far East, Japan mainly, 8%; South America, 27. Our production is spread around the world. This is a very important point for our customers. They know that we can supply the product from different facilities. This is important in reducing risks. Sumitomo has one facility and it's producing pipes, 1 million tons, but one place. Any big disruption of operations in this part of Japan could lead to interruptions of the ability to put them out. I think the distribution production system is something that we have and value rate (ph) has on a much lower case. Otherwise, it's concentrated in Europe and Brazil and at present is one plant in North America.

For sure, when we say North America, we are considering NAFTA -- Mexico, Canada and U.S. For us, the U.S. is a challenge because the incident (ph) is preventing us for getting into the United States at present we should have. It is important for the development of the product and the time and technology. So, this is a pending assignment for us -- to find the right entrance into the markets in which we are prevented to operate from regulatory and trade restriction rules.

Trade volume. First on North America, Mexico, Canada, 20%; Europe 26; Middle East and Africa, 16; Far East, 16; South America. This is a truly global company. We are expanding our business all around the world. Now, one word about our markets. What I am saying is our positioning is very strong, our pricing power is very strong, and our cost line is also very strong. Now when these become effective, when the market goes up. Until this moment we are starting a wave. Now, I am afraid that this is a small wave, will not last for long. I’m thinking as well, this is a very long-term wave. The world is lacking energy. The energy systems of the world is getting under stress, lots of stress, and the reaction and the adjustment in the energy sector will take years -- years of investment, years of development of hydrocarbon in existing and new operations, years of work all around the world. This is not a short term.

You see here the sale capacity. Sale capacity is going down. The capacity -- well, it's sustained and supported mainly in Saudi Arabia. It has been an important factor in facing prices and adjusting them and assuring some stability in the oil side. Today their capacity is being reduced and the demand for oil is growing. And China's expanded manufacturing and consumption is pushing this (indiscernible) expansion up.

Someone is saying this a demand-driven charge. I’m saying this is a supply-driven charge. In the end, the demand is the demand of the world that is growing at 5% worldwide. Now, this year the world will slow down 4%. But in the end, energy consumption, gas and oil will go on, will increase over time, 2.1, 2.5. It will depend, and will make a difference, but on the supply side will be the problem.

In the last 20 years consistently, consumption of oil has been on top of discovery of new reserves. To look at the Duserve (ph) line, you see that the big discoveries are the '70s -- and the '60s and the '70s, and then in 1985 discovery of newer service went down below the consumption. The replacement rate is going to be below 100. And this has been consistent for 20 years.

Now, oil depletion is strong wherever in the world, and the problem affecting this sector are political. The problem are lack of investment in the national oil company. There are problems of geology. This is alluded to as new relevant time.

Political problem important. The major oil companies have the money, but they do not have the resource. They have the money, but they only control 18% of the worldwide reserves. The reserves are in the end of the national oil company, 66%. National oil company in Saudi Arabia means Souhaite (ph), it means oil for Panex or Seleveza (ph). Panex or Seleveza are not investing up to the demand, the need. The government are backing the resources for these companies.

So, a number of issues are reducing the level of investment from there to what should be needed. In spite of this, we are seeing in markets that we can see the boom in, in spite of the fact that investment is below what it should be, so this is the reason why I think that we are looking at the long-term trend in this.

We are talking of constraints to supply growth, the point I was making. At least (ph) 85 production is the key to the discovery of new reserves. The client rate for all the reservoirs is abating (ph). We are living in a country, Argentina, in which this is happening. Argentina last year, investments increased 25% and production of oil decreased 5. This is definitely a different area of the world that are mature. Investment is going up and the results are very much long lead times.

The companies, nationals, and majors are planning on the long run. It covers the people in Aramco. They have pending (ph) program. They have to -- refineries infrastructure, harbor, geological started already. This is a long-term project and that substantially that you see in the program -- for instance, we are supplying in the Northern Sea the Norwegian products, the Hammerfest, across the polar surface. You go there, you see a 7 billion facility on the bar and steel, supported by 17 wells on the sea. This is in a place that is frozen most time of the year. These are not the projects that goes out (indiscernible) that we will realize in 10 years.

Now, many of the projects are underway, and this is long term. Now, in the U.S., our guys living in the oil patch, 1,000 wells with reactors, but the big project in which the marriage (ph) is reentered are medium and long term on this.

New exploration areas. Think about Russia. Russia is important, Russia has 8% of the worldwide reserve. What is it going to (indiscernible)? Which will be the case of increase of reserve production of oil in Russia. This is uncertain. It's also (indiscernible), not politically unrest is important work for Nigeria or others.

Downstream infrastructure, also the refinery capacity spread and the spread between heavy oil and light oils -- it came historically high. This will also last because the world needs to invest in infrastructure.

So, our view is that -- well, our view. The National Energy Agency, which was in this is not our focus, but this is something that we support because we see the reasons in fact of what we are seeing. You can choose. This is from Falden (ph) and Algoawai (ph), up operation production standing (ph). It went up to 4% in 2004. We can see that in this year, it will stay in the range of pace (ph), going to 11 in 2006 and staying at pace of around 8%. This is higher than in the past. Now, if this happens, someone should supply all of the infrastructure of the expansion.

Where the investments will occur. We think that investment will occur mostly in difficult operating in the environment, so in non-conventional environment. In 2003, oil and gas production was coming 80% of conventional wells, conventional drilling. At least by 2010, from actual remaining stores to be reduced to 57.

Where the action is? Well, the action is in deepwater. The action is in heavy oil, arctic energy, acid sour, tight gas, to some extent. Now here, the rate of growth is higher than investment -- the demand of these products to growth.

Which products of demand are needed here? Well, high corrosion resistance, high cost (ph), panial joins (ph), specialty speeds, also complex intelligence and also complex products, by metallogy, by joints. So in OCTG, this is the market that we target as our market. I think we have the skill, we have the technology, we have the people and we have the R&D in place to go over these, and we are doing it now.

Just to have an idea, that is the reason why I think when you see the pricing of Tenali, the price of flex steel producers is in the range of $650 or $700. The price of tubular of U.S. Steel is in the range of $1050 or $1100, let’s say, the average price. Tenali is in the range of 1600, is a different story. The service and product for all of our production are creating a difference. And this is a sign of difference.

What are we doing to respond to the need? Our proven performance is that we have lead times for the more special progress in March 2004 (ph). If we do not react, and we are reacting, but this is our program today, we may force the industry to find another way. So we are investing in our facilities, to add ability to produce high value-added products. This is our challenge -- it's nearing an ability to realize this in a short period of time, in the next two years.

Next line (ph), heat treatment facilities. A world-class heat treatment facility requires two years from the moment in which you start launching the product to the one in which you have it in place. And this is something that we are not -- depends on the lead time of producer of main equipment. It depends on engineering expense on construction solutions. So the time is not reacted lightly. It takes time, and in this moment, it is our challenge to adapt the industrial structure to increase the need, but which is still underway and in the future for these products.

R&D. (indiscernible) R&D in all of the operations all of the time. We are now investing some 1% of our revenue; this is not enough. Our revenue are going up. We are pushing on many -- on some of the projects in which we are spending too low. We perceive that we decide it (ph) and we should improve it in the next two years.

Finishing facility and service worldwide -- to our plans also on the chain, on the supply chain, net (ph). Just to give you an idea of what value-added means, this is the share of high-end tubes as a percentage of total sold. We can see that 38% is concentrated entirely in the problems that had a very differential price, maybe $5000 in some case, or $3000 in another. But problems that have a differential pricing, in which competition is very much reduced, in which we have a different pricing power when the market goes up, this is increasing. And we would like to be able to increase it even more.

This is the share of tubes with value-added service. When we discuss about service, our service is always related to the supply chain and the product. Service is not our business as a separately. Service is just complementing the structure of what Tenaris does, in the sense the share of products that has aspects of service, mainly regional in closed tube appliance (ph) in the just in time agreement (indiscernible). This is going to go after in the future.

Which are the main areas in which our product development is concentrated? Premium connector. Premium connection is very important for us. The Dopeless is one of the breakthroughs. Usually, they make half of the churns (ph) that require dopes. In many cases, dopes, we tend to buy carbon ale (ph) with one dope that in the field. The dope has to be cleaned and then has to change to the dope that is operated for the rounding of the (indiscernible). Very environmentally unsound operation. The dope goes around and the companies are forced to clean the processor (ph), to clean the dope engine.

They also have trouble in the formations. Some gas formations simply do not want to have dope around just to maintain and preserve the fluency of the hydrocarbon formation. We have been able to develop a system of allowing the mech half (ph) of the joints without dope. But I am not confident that today to add these on the market and we also adding to this slowly because we need to adopt this adaptability to increase our share. But it is a good product and we are getting a very differential position on this.

In the case of Katoi (ph), this is just the factor. We are the only producer that will be allowed to operate in the Barents Sea for this; this solution there turns out in higher price. This has been developed in the last two years, but is today on the market. TenarisBlue is the new line of connections. Tenaris started by acquiring connection and building a different portfolio to offer (inaudible) from Japan and Tenaris from Italy and others.

Now we develop over the last, I would say we started developing propietary joints in 10 years and we are introducing a new generation of joints –- the Blue joints. These joints are getting acceptance because they are superior in their performance to what is existing in the market. We are taking advantage of the fact that many suppliers did not invest the last set (ph).

The Near Flush is a special product. It's a product that does not -– it's an integral joint that allow small-bore wells and very matching use (ph) in deepwater well. When you have to start with very large diameter, with using high performance integral joints like the Near Flush, you can reduce the overall costs of the well without losing in safety. We are launching this in the OTC and I hope this will be an essential part of our portfolio.

We are developing specialty products for special programs. SAGD is a way of exploiting the heavy oil in Canada and Venezuela, that is one pipe injecting steam and the other pipe collecting oil heated by the steam. This pipe will require resistance to high pressure, but more than this, to high temperature on a continuous use. These pipes need special joints. So we are trying to focus on areas in which good perspective of flow and to develop products for it.

The sales of premium connection have increased to 50% in two years to 450,000 tons. This is a trend that will go on also in the future. Premium thread will be a higher and higher share of our production.

Areas in which we are very much committed -- Caspian -- Karachaganak, Kashagan, Tengizchevroil. In all of these, innovation enterprise are leading in use. We are betting on the development of Caspian and some program, like Kashagan, will demand substantial volume of pipe -- pipes with high corrosion resistant requirements that is also stainless gold that is supplied in our lines of pipes (ph).

LNG and regional grid -- Qatar is very impressed with what Exxon and the other companies are doing in developing source for LNG, and Qatar is one example of this; gulf would be other. These are other areas in which we are really expanding our supply chain, product development and commercial activities. Egypt, Nigeria, Australia.

Saudi Aramco -- Saudi Aramco is a very giant program and this program is responding to the need of the world, and they will increase production from 9 to 12 billion barrel a day in the next three years. This is -- Aramco is a very important client for us, and is a client that has many program underway.

West African deepwater -- Angola, Nigeria, Gabon, Algeria. There is an area in which deepwater will supply LNG oil and gas to the world and is one of the area that we see as developing fast. Norwegian offshore is also important for us because of the environment requirement and the product that we are testing for this.

Our market like Mexico and Venezuela are also very high-tech (ph). I do not know if Mexico will be able to invest all the money that they will need because of the financial situation, but for sure, the potential of the reserves they have and the tarmac (ph) should increase over the next year by year in the coming time to increase, is done by our corporation (ph) and the drilling performed by contractors, like Converge (ph) or Precision Drilling and the others that are operating in the border area.

Venezuela -- very important research and very important program for development. Canadian oil sands, as it was mentioned, this is in effect in Venezuela and in Canada.

Other area of development are product line pipe for the border operations. We are leader in the top tension riser and steel catenary risers. These are very complex products, very heavy wall products that link the field with the platform. They move, they have the need to resist fatigue, corrosion, temperature in the case of the field that have this side of it (ph), but also to assure environmentally sound operation in the very long, long run. They are designing pipes for 15, 50 years use. This is an area in which we are specialized since more than 10 years.

Heavy wall pipes -- pipes that could solve problems for welding. In the case of lined pipes, there are conflicting needs of the product. You need a product that could be welded, but at the same time that has requirement of sustenance in the very extremes, and so you need a compromise between different need that has to be developed and has to be tested by the technology on the design of the metallurgy and the geometry of the product.

Double jointing -- bandings, coatings, also very important. We are working with Techint (ph) in supplying to the market coating for most of the main they use, in the Gulf, in Brazil, in different areas of the world. I think we are the supplier of the main projects worldwide.

We expect the world operation to grow very much. This also world (indiscernible) data, but our specialization in deepwater should be tested by the thread, and we should be able to take advantage of this and to we think work at this.

Canadian oil sands, this is something that I mentioned before, is expected to take a growing share of supply of oil in Canada. Conventional oil is going down. Oil sand requirements are high temperature -- 210, 350 degrees, pressure in the range of 285 to 500 psi high compression. These are fields that require special technology, and I think we are prepared for the expansion of this sector.

Integration of the fuel supply chain, which oftentimes come (ph), I mentioned it before, we are doing this in Canada. We are supplying the type exactly when is the integration (indiscernible). This is the area in which we feel the seasonality (ph) is particularly good.

As far as the cost factor of Dalmine (ph), I mentioned before the investment of 60 million in Matesi. We are -- this is the HBI product, we are integrating into Venezuela, so for instance, we are able to get iron ore, a very competitive position in gas, a very competitive position, and put together this into PRI. The plants produce 1 million per ton (ph) -- is an adventure between Tenaris and Tedor (ph), local steel manufacturer (indiscernible). This plant will supply Tavsa (ph) and Tedor with materials. It is very competitive to us.

It would have been a very good investment. We had technological challenge because the plant was still by Cosco (ph) and Cosco is up operating the plant. But the difficulty of the contract situation in Venezuela and the technological problem, and the plant is being taken and is operating at close to capacity now.

We are advancing in the power plant installation (indiscernible) to reduce the cost of energy. We acquired a new rolling mill in Romania, Silcotub. We are moving some activities, high-valued activities, from Europe, from Italy to Romania to be better prepared to serve the European and the American market. This is in addition, and we’re in the process of acquisitions of the new steel shop in Romania that could integrate Silcotub with our own steel. So we are building in Romania substantial industrial capability.

Auto component, this is the other segment in which our product development is getting very into success. We are leader in the supply of airbag and component for the automotive industry. It's a very special product, and we will have production facility for this in Veracruz. We have it once at work, more than tripling the capacity by the end of the year, because the demand for this has increased. We are planning to do this in Romania, in Mexico, and hopefully in China in the future and to serve the automotive industry worldwide from there.

And this is where we stand. I think this is explaining the results of this quarter. It's our margin evolution. This is our margin -- the red line is our margin for costs. The green one is our price. The blue one is our overall costs. This is a break perceived there. In my understanding, the reason by the separation of the trend in the steel industry and the trend of oil. The oil is going on, the flows are going on, our price and power in this division is increasing. Steel is in a cycle at the beginning of the negative cycle, and the cost structure of Tenaris is also in my understanding peeling (ph), and we will also perceive in the future the effect of reduced demand from steel on the (indiscernible).

I am talking about scrap. For instance, last quarter we reduced the cost of scrap in Italy. In Italy, the scrap trend went down. In some of other imports for the steel industry will also follow the declining price of the off-coiled roll (ph) -- coil. To some extent, we think we will be able to control our costs or at best to have a slight increase, much below what we have been doing in price.

In term of price also, the story needs an end. The orders went on, investment went on, the closures are going on. Our concentration in high-end products is increased, even if some of the products we cannot (inaudible). Some of our investments have long lead time, not short. And our investments are increased. Something we cannot see, neither of (indiscernible) end of 2005, 2006. And some of this (indiscernible) today we cannot bring later on in 2005, the beginning of (indiscernible).

So, we are positioning ourselves to increase the share in our high value-added product. Prices will probably go up slightly, not this is a very deep trend. Costs may stay or increase slightly. We will reflect iron ore, for instance. Iron ore increase is essential, but in our structure, iron ore is only raw material for metallic. I would say that we divide our metallics between iron ore at constant price, iron ore in Venezuela are different long term contract price. Scrap in all of the different countries, we will put it, and also steel, because for instance, we buy steel in Romania or in Japan or in Canada, and some of these metallics will follow the trend of the steel cycle. And others will just reflect the agreed increase.

So, what I see in the future, as we say in the press release, our margins should be maintained, and depending on the overall dynamics of the world economy and the pressure on the products, the impact may increase. And also the steel pipe will be bought for the cost side of our business.

In the price side, however, the decrease in the cost of steel will only affect an area in which we are competing with welders. But this is a very today -- is a very limited area. Also because in the U.S., we are not really selling in the low end of this market.

When you look at the operating results, these results reflect the evolution of the EBITDA. The EBITDA in this way, it's standard at '04, at 899 (ph). And it went up to this quarter 458. It's a big change. The EBITDA margin showing again our (indiscernible) are showing how Tenaris has a unique structure, is reacting to an increase in the demand in the market.

Net income is also reflecting a reduction in our tax rate. I think Carlos will deamortize and give you some hints on how also this part of our balance sheet and our income statement is changing depending on the improved tax efficiency of ours. This quarter, net income margin is in the 18% -- is a very good result for Tenaris.

So this is the story. Where is this going? Then later we may have in the question and answer, we may expand on these, but I hope I have been able to translate to you where I perceive are the strengths of Tenaris and the difference of Tenaris in a situation in the short term and medium term outlook that is stable at this point.

One more point on liquidity. It is the average daily trading. Tenaris is a quite new story. We started two years ago. The liquidity was very limited in 2003. It is increasing. In the first quarter, we are trading in the range of $24 million. This is a daily trade -- average daily trade in million of U.S. Mainly in the New York Stock Exchange, but in Milan, had a very high increased liquidity, and this is important -- this was in the energy applications world (indiscernible). This liquidity is very important for us because for the reason making this share more attractive for investors getting in and out is one of the aspects that we want to preserve and enhance also in the future.

This is the summary -- global leader in an industry that is much more consolidated, especially in the segment of product in which we are; well-positioned to get benefits on the energy cycle. That is also the reason why this year we are having this meeting in Houston -- to show our positioning in the energy cycles. R&D and infrastructure is a challenge for us. It is the area in which we should really focus. And a substantial strong operating result. Thank you very much.

Okay, good morning. I want to spend a few seconds -- a few minutes to tell you something about our financial situation, so we have the opportunity having the big work here to go directly to the question-and-answer session. Okay. It's the other way.

Okay. Most of you know us very well and we benefit from a very strong balance sheet. And even though we start and given the success in the oil markets, this is still based on getting better. And we are going -- are coming back to our level of indebtedness. So -- but I think can be seen -- see here very quickly, we have really a very strong -- a very low level of debt, which is nothing out of place.

Then, we can see the evolution, as I said before, these are -- the EBITDA margins are increasing slightly for the reasons stated by Paolo originally. The market capitalization, you know much better than I what the market capitalization is. But both online, we have again a very low level of indebtedness, which allow us to keep our possibility of keeping going, keeping paying dividends, and we keep the strong balance sheet at the same time. This is more or less a story helping a story and we can see we can keep it in this way.

So, this is the structure of the corporate structure. You know very well that we have started and we grew by acquisition, and we had very little complexity in our corporate structure. But, now, we have a very better position, and it has to do as well with our tax rates and how we coordinate or how we attach all these operations.

Paolo mentioned before many different points in the world where we have operation. But we have more operations in other countries where we keep our, for instance, R&D and technology operations, our investment and financial operation within our land.

We have not shown because there, we don't sell pipes or leasing these companies, but simply we have a group of companies which are local companies, which are the producing companies. Then we have a very strong operation -- service and trading. These company mainly sells the total export of the season. This is a very good advantage for us, not only from the commercial side, but also for the operation itself and how we approach the market. This -- made by this company; we see that TGS is service and trading.

We have many companies here. We have the commercial network, shown by Paolo before. Then we have a strong operation, investment and financial operation in Ireland. We've started operating there in 2002 -- I'm sorry, 2003. But today, we are erasing -- I mean, today we're operating from here; we're doing the cash pooling; we're doing the financing for the whole system from these subsidiaries based mainly in Ireland and with other subsidiaries in other countries.

Then we have our R&D technology based in Netherlands, and then we have a very complex and very important and very powerful procurement system, which is offshore as well, which provide the procurement for the whole system.

So, what we tried to show here is that we have in the countries where we operate, we are -- we have in that kind of operations, the means, but there, we have almost the rest of the operation offshore. We deduct a lot of flexibilities, based on actions to the financial markets, better assets to the -- how the money flows in our assets. And of course, reduce the risks to which we are exposed in countries where we operate like Nigeria, Argentina, Romania, these kinds of countries. As I always say, we operate in these difficult countries; it's where we make money. So, we have to set up this system in order to make this money flow to our Company (indiscernible).

So, this is the cost of our debt -- how we will finance our operation, and which is a strength we have been selling here. This doesn't come because we -- when we set up the -- when we have a system and with BHP, we pay one installment, but we kept the debt. The debt was paid and the case was closed this first-quarter 2005. But finally, this is -- the adjusted interest expense is what we accounted for in the different period.

Compared to the average total debt, it shows that the cost of financing for Tenaris, given the corporate structure we've been talking before, we consider this competitive, to say something. And this year, given the trend that we have in the markets, we are extending a little bit the average maturity of our debt. But, really, we can benefit from having this corporate structure from this low cost of indebtedness at the system of Tenaris.

Then I would like to tell you something about our exposure management, which is an issue for us, because we have many different companies operating in different countries. And the way we report these operations follows the International Accounting Standards that we follow. So it is a little bit complex, because we have a operations in -- say, in Nigeria; we have costs in Nigeria, we have costs in different countries in the world which are different. But the way we deal with the currency exposure is -- the policy is to hedge consolidated exposure -- not every single subsidiary, but a consolidated exposure to currencies other than the U.S. dollar. So our currency is the U.S. dollar.

We maintain a short position in emerging markets' currency -- for instance, I am talking about Argentina or Venezuela or even Mexico, where we have operations. Given that we are strong exporters from these countries, and also we supply our local market in U.S. dollar, so we keep these natural short positions in weak currencies, because we consider that these are weak currencies, and this is part of our policy.

So when we have -- especially in the welded business, and in some cases in the seamless business, we lock in the expected margin in U.S. dollars on major projects. Many time, it takes time to supply the pipes to an important project. And once we close the deal, we hedge in order to keep the margin in U.S. dollars.

As I said before, mainly just to give a rough idea, the functional currencies -- the currencies where our main subsidiaries reported are the local currencies, except for Siderica (ph), because when Tenaris started, it had happened the devaluation, and we used the U.S. dollar. But mainly, when you look at our operation and you try to figure out how much money we make in Venezuela or Mexico, we account for that in Mexican pesos and bolivars, and then we convert it into U.S. dollar.

We do not enter into the relative instrument for speculation. So it has been our strategy, and it continues to be, and we consider our business is to make pipes, to provide services, and to make the more money we can.

And I consider this important to say that -- but most of you know, because I read what you write. But many times, the use of the International Accounting Standards can have a reporting (ph) result for intercompany hedges. For instance, I was saying that consolidated exposure is the one we hedge. But many times, suppose that we finance our operation at Canada from Mexico. And the Canadian U.S. dollar (sic) revaluates against the U.S. dollar. So we account for a gain at our operation at Canada, but not necessarily -- we had the loss in our Mexican subsidiary -- given that our Mexican subsidiary is reporting in Mexican pesos, and suppose that Mexican peso did not devaluate or revaluate against the U.S. dollar, it doesn't account for anything. So these kinds of issues -- and any time it happens, it is significant. And we disclose, and we write a full note or something or a financial statement just to let the market know that it is happening. That it happened this quarter in around 12 to $13 million with operations in Venezuela, given that the bolivar was devaluated.

So let's talk a little bit about working capital, because I know that some of you get nervous sometimes when we talk. We consider it a very good investment, and we are very happy of having this level of working capital, because it means that the business is doing very well, and we have there this working capital increasing. It means higher prices, higher volumes, and better results.

So the reason why in this quarter we have an increase is inventory, because it is reflecting in this case a little bit higher cost, and in turn we will (ph) receive for sure higher prices as well as in the higher volumes in some time. But what I want to stress -- that we are not worried about this working capital. We have been able to collect all the money from the third receiver (ph) in the past, and we are collecting very well -- our customer, a world-class customer, and we keep a very conservative approach in accounting for this. We have prohibitions (ph) just in case something happens. But fortunately, we have not had this case.

Finally, let's talk a little bit about our tax rate. You know very well that we operate in different countries. But our main operation are industrial operation, and we have to talk about Argentina, Mexico, Brazil, Italy, Canada, these countries (ph). But with this corporate structure, we were able to set up in the system -- I could say that we have reached an average tax rate which -- perhaps it's not going to be 31%, but around -- between 30, 31 to 35% is going to be our tax rate.

It is not good to look at the distant (ph) rate, looking at just one quarter, because suppose, like happened in any time, one quarter, our operation in Mexico went fantastically well. And we have some at the end of the quarter a problem in our operation in Argentina, suppose, where the tax rate is lower. So those kinds of issues in a quarter can affect our tax rate. But if you look at our tax rate in a one-year period or in a longer period, it is going to be around 32 to 35%.

Our operations are in Mexico -- the tax rate, considering we account the profit-share in the income -- in the line of the income tax. So they have a tax basis around 37%, something like this. In Argentina, it is around 35%. In Italy, it is higher. In Canada, it is 33%. In Brazil, it is 34%. So this is the -- in Japan, it is 43%. And now, we are making money in Japan. So it is affecting our bottom line (ph) tax rate. The volume is increasing. The margins are increasing in Japan. So it is affecting our tax rate negatively, but we are very happy to have this.

So this is what I wanted to present to you and give you the opportunity of having Pablo here to make the question you might have. Thank you very much.

(technical difficulty) have a break now, and we are going to reconvene just a few minutes before 10.45, when we will be joining up with the conference call.

In this part of the session, we are combining with our usual conference call. So, there will be callers from the audience. We would like to ask the callers from the audience to state -- to have their questions after we've had the questions from the floor here in Houston.

I would like to remind everyone that as usual in these presentations, we are making some forward-looking statements. Actual results can differ from those expressed or implied, and therefore, our results can differ from some of the expectations that occur. Now, due to factors which -- normal operating factors in the industry, conditions can turn out differently.

Before starting, I just wanted to say yesterday we reported our first-quarter results. These results were in some ways a relief. For the first time, we are reporting results without any exceptionals from this long-running BHP case and Fintecna arbitrations. Last year there were -- the exceptionals were positive, but these results are straightforward results. There was no exceptionals in them. And we've completed -- we received the money from Fintecna during the quarter, and we prepaid the last installment on the amount owed to the BHP-led consortium.

We saw in the results that the margins, the operating EBITDA margin, increased. This was a reflection of increase in prices. We have been talking about the prices of our products have been increasing for many quarters, but they have been accompanied by increases in costs. We heard earlier today -- Paolo has explained that some of our costs have started to go down in terms of scrap costs in Italy, for example.

But there are still costs which are increasing. The iron ore price increased, which was agreed between the major steel producers and the major iron ore producers earlier this year, will start to affect our results in the -- from the next quarter onward.

The price of ferro alloys, which is an important component in our steelmaking mix, some of these products have increased prices, like ferromanganese -- sorry, ferromolybdenum. And so it's a slight mix of -- so we expect that there will still be some cost increases coming through in the year, but we are also expecting to have a little more price increase, as indicated, mainly due to the mix of our products. We have been concentrating, as was explained today, how we have been increasing our production of the high-end products in the mix and the value-added services.

Also, our welding businesses is coming on quite strongly. The regional project for the gas pipeline infrastructure in Brazil and also for expanding the pipeline infrastructure capacity in Argentina, with the situation of the gas in Argentina. Probably the margins show in the world of type (ph) business, this time the gross margin will not necessarily be as strong, but the volume-related efficiencies are very good in this bit.

Okay, so I think we would like to open up for your questions. We have Paolo Rocca, our Chairman and CEO; we have Carlos Condorelli, our CFO; Guillermo Vogel, Vice President of Finance, he is a member of our Board of Directors; and German Cura, our Commercial Director.

It's Daniel Altman from Bear Stearns. It's very difficult to find any negatives -- our concern's in the story right now. But I wonder if you can just talk about the industrial tube business in Italy or in Europe in general? We've seen a lot of economic indicators that that's a weak spot right now in the European economy. Can you tell us what percentage of your seamless business today is industrial, particularly in Europe, and can you talk about what you're seeing in terms of the market today?

Well, I think the situation of our business in Europe is resending (ph) from a lower rate of grow in all of the area, and especially (indiscernible). No doubt we perceive and that during 2005 but even in the last quarter, the demand for industrial products in Italy is very -- I would say is remaining at the same level. I wouldn't say that there is a clear slowdown in demand. Now, this is affecting our activity, and we are operating the rolling mill that are more -- that is devoted to the mechanical market, at 15 (ph) shifts per week. So we're not really working the capacity in the machines that is really devoted to the industrial product. At the same time, a segment of the industrial demand that (indiscernible) with the energy, like line sites -- that goes into the refiner reparation (ph) or into the production of accessories for the oil industry -- are supporting the demand. So I would expect that the operation would remain stable. I do not expect a sudden drop or change that could affect our operation or (indiscernible).

My hope that is that later in the year, European growth will resume, and we may count on some rebound of demand also in the automotive. Probably it may happen or not. But, in the last couple of years, also our industrial production have changed pocket (ph). We are now producing more in the high value-added segment even within (indiscernible). For instance, some of the products with more complex requirements is showing very good (indiscernible). We are applying against that (ph).

Now, in terms of the overall (indiscernible). I would say that $0.25 of our overall Tenaris sales are driven by the dynamics of the industry in the States (ph) and of this, I would say some 10% -- 10 to 12% is driven by the industrial dynamic. I don't know -- here's (ph) the results or Nigel didn't mention (indiscernible) Alberto Valsecchi, that is Chief Operating Officer of Tenaris, is the one that's coming from the operation in Italy really knows better what we can expect. I don't know, Alberto, if you want to have something on the outlook of industrial demand.

Paolo, I think you've already said everything. We don't see special prices in (indiscernible). The market is stable and our strategy of going to a more sophisticated product or (ph) services keep us from -- safe from (ph) (indiscernible) prices, I would say. We don't see particular problem there (ph).

Frank McGann, Merrill Lynch. Two questions, one financial. Just in terms of the financial expense in the quarter, perhaps you could provide a little bit more detail on the foreign exchange and derivative losses that were included there. And then secondly, in terms of investments in your system, you've highlighted how you are investing throughout the system to try to reduce bottlenecks to increase capacity. How much capacity do you think can be added over the next year or two -- 2005, 2006 and beyond -- that will enable you to continue to increase your sales on the oil side?

Well, first a general statement concerning derivative and what we do our financial management. We are very keen in avoiding any security move in the position we seek, in the exchange rate or in any other hedge position. But we try to use hedging as a way of limiting this. I mean if you take a contract (ph) and you have a margin, we try if we can to cover the Company in dollar against losses relative to specific costs. This is a very general statement. You could do it on a three-year basis, two-year basis, short-term basis -- it may change. But in fact, the point we are following is to avoid to take any position that (indiscernible). In currency or in even in commodities sense, what we're trying to do is to protect the Company from sudden shifts that are not depending from (ph). In this sense, we are using financial (indiscernible).

And now, I will let Carlos to explain a little better why we have some gain, some earning in the net income and some loss (indiscernible) that goes directly to the equity of the business, without being reflected in the income statement because of our contract ratio (ph).

Yes, but I think Frank asked us about the 30 million (ph) that we recorded this quarter in foreign. As you know, we explained there are around 30 million which come from our operation at Matesi. Matesi, when we capitalized Matesi, we did it in the form of convertible debt, given that we are hoping to take the money back from Venezuela, either in U.S. dollars or in material, and we are doing so as long as the Company started operating. But happened a devaluation in Venezuela, and so it affected this subsidiary, and we recorded this $30 million loss. But, the lender with -- we are the lender. But we did not record for a gain there, given that the Company who lend the money to Matesi reports in U.S. dollars. So, this is one important issue here.

The rest comes from Dalmine, where we hedge the debt that Dalmine has in euros -- we decrease the value as well as we gain a lot of money last period (ph). Now, we kept this hedge in Dalmine, and a little bit from Japan, where we keep the debt and again it's in Japanese yen. (Indiscernible).

Now, as far as the investments are concerned, we're competing (ph) in the premium markets for the increase (ph) on the rates in the range of 12 to 15% real increase (indiscernible) in the last four years has been in this way. We've been investing and increasing our capacity on stock, obviously, and we will go on investing on top of increasing our capacity, on the top of this expected rate of growth.

The same is true for heat treatment; treatment is a key component of our systems. We are heat treating around 50% of our production and more. And we have increased these components on top of the expected rate of growth of the market for this product. To some extent, we think that the inefficient capacity in (indiscernible) Russia or in China that you can substitute (indiscernible) our market share by expanding our strategy on top of the (indiscernible). We should do -- we'll try to do this and to displace some of the inefficient capacity, especially in China and Russia -- that is the way to products that are more controlled, from the point of view of quality (ph). What you can get from a state-of-the-art heat treatment today is very different from what you could get from a heat treatment established in 1953 in a facility in Russia. So, gradually, we want to step in these markets. We have to have the capacity to support the strategy and to replace some of the inefficient capacity.

Building on that, Frank, I think something we have expressed over the course of a prior round, the level of enrichment on the (indiscernible) is mixed when it comes down to (indiscernible) in connection (ph). It is also being truly reflected in the price strain that we see. (Indiscernible) substantially (ph) and we believe this is perhaps one of the key (indiscernible).

(Indiscernible). My question is on the strategy for the U.S. expansion, in terms of manufacturing, distribution, threading and casing running. Where do you guys currently stand?

Well, this is a -- as I was saying, this is a pending issue for us. Our strategy back in the '90s was to -- in the present U.S. market from abroad, integrating (ph) from Mexico, some from Argentina, from Canada -- try to use to leverage on our efficient manufacturing to the present, now. The (indiscernible) round (ph) and the very aggressive trading restrictions that we got in '95 and in the subsequent years, so in that effect are still (ph) -- have limiting our ability to be a factor in this. So, for instance, in the States, you have some one-third of the premium joints used in the world, because the States are a big market. And our share of that is insignificant -- very low.

So, in the next five years, we have to come to terms with the situation, and either redesign a strategy of getting to the niche in which we want to stay. We don't want to stay in the Texas (ph) distributor set, drilling activity of low-end products in a market in which there is no end-user/supplier relation, a marketing in which it is very difficult to differentiate, in a market that is very much competed by the wealth (ph) -- the markets (indiscernible) because this is a (ph) very efficient producer. There are shipping products through distributor (indiscernible). But, there are areas like (indiscernible) opening or Gulf of Mexico in which we think that our premiums -- this new generation of premiums could be very tremendous (ph) for supporting our entry, could have a good leeway to make a difference.

But, this is something I would say is really expanding (ph). Today, were coming from Canada and we will strengthen our ability to supply premium joints from Canada, from Romania, from the country in which we have no restrictions, but on a small scales. For a big player like Tenaris, let's say in the long run, I would not imagine Tenaris being a marginal player in the space. It should not be. If this is so in ten years, it means that we did something wrong, by the end of that (indiscernible). I don't know if (multiple speakers).

Maybe in terms of what we're doing in the trade side, as you know, we have cases against Argentina and we have cases against Mexico. We passed the five years, so we reached the sunset review where theoretically the case is dropped automatically, but the U.S. industry asked for an extension and got an extension. And we went to the (indiscernible) in the case of Argentina and to go to (ph) a NAFTA in the case of Mexico and we (indiscernible). In the case of Argentina, we got a positive recrimination in relation to the Department of Commerce. And we are in the process where the WTO has requested the U.S. to the review the case and to implement a revision of the case. And we are right now in that process where the U.S. authorities are kind of delaying, but there are certain times (ph) and there are certain states (ph).

In the case of Mexico, we went for both panels because there is a big difference in terms of how both panels operate and we thought it would give us more (indiscernible). When you go to the WTO, you have to demonstrate that what the U.S. has done, both against their requirements and their obligations under the arrangement they have with the WTO. But then on the implementation, if you are weak, you're in a weak case for implementing the situation. When you go in a NAFTA panel, what you demonstrate is that actually you are working within the U.S. flow (ph) and that within the U.S. flow -- the determination of what's outside of that reach, and so you have a much stronger case in terms of implementation.

The Mexican case is a little bit behind the U.S. case, but we are also, I think, in a very -- in the right mood. But because of the times, this might take still a couple of years to work in that direction, but we are strongly appealing the cases. We think we have a very good case and we think that gradually, we're going to be able to open some spaces (ph) there in terms of them following a much stronger strategy to be in that market.

One last comment on -- this is on the OCP 3 (ph) case. On the Linepiper (ph), as you know, the case against Linepiper did not prosper for the products, the complex products used in the Gulf of Mexico, so we are really a leader in supplying lines to (ph) the Gulf of Mexico. We have no risk of getting in and making the difference there. Our point is we should be able either to -- one way or the other, to satisfy the demand of our clients in the more complex products in the U.S. and within the period of time. Otherwise (ph), this will be a weak point for us (indiscernible).

Jason Selch, Wanger Asset Management. Can you update the status of the pipeline project in South America and its implications for the welded business, and also comment on the status of natural gas in Argentina? I remember about this time last year, you were warning us that there could be a gas shortage in Argentina and the southern hemisphere, winter, and that you might have to be building up inventories. Has that gas situation solved itself in Argentina?

As far as the projects in Brazil, if you noticed, the projects in Brazil are picking up, and some fabs (ph) is shipping more products for small (indiscernible) in Brazil. And also, we shipped products for the expansion of the Argentinean pipeline in the south and in the north. This is increasing the actual sales and the backlog. There is one big project, and they call it Gazine (ph) (indiscernible) in the northeast of Brazil. There's a long line of projects that involve more than 250,000 tons. This project is underway; this would be (indiscernible) should be the supplier of the pipe. I hope this will not be delayed very much farther, and this could be an important project (indiscernible) substantial. You can get it (ph) by considering (indiscernible) prices against the size of this project, and this is very good basis (ph) for capability of the fab (ph).

In the long run, there will be the gas situation of Argentina -- and I'm touching on the second point. In the long run, it will depend on the -- how the South America area of Brazil, Peru, Bolivia, Argentina and Chile will reintegrate their gas resources and procurement (indiscernible). For service in (ph) Bolivia, sooner or later, it should be possible to get to an agreement that allows the transportation of gas from Bolivia to Argentina. This would involve a very important pipeline (indiscernible). It's a very substantial line that may -- 2007 or 2006 could be a factor and could also contribute one, to our sale in the region; two, to our availability of gas in Argentina (ph).

This is so important that we may be even investing something in equity. This is something very, very important to us assuring our energy supply on the long run, and at the same time is supplied by us from Brazil and Argentina. The situation of gas in Argentina -- the expansion of the south and north line will increase availability of gas starting from July this year (ph). July, the addition will be very (indiscernible) benefits then (ph) will increase. We are talking about 4 or 5 million cubic meters of gas per day, (indiscernible) using 115 (ph), so the 5% decrease (ph), changing the (indiscernible).

For the time being, we didn't have substantial reduction in our supply. We will probably have some limitations, given the worse (ph) of the wintertime. It depends on temperatures from water in the (indiscernible). This could supply energy instead of (indiscernible). I really don't think that this is -- even if we may lose some production of CRI (ph) of metallics, we still could compensate with (indiscernible), with the main goal of increasing costs (ph). But hopefully with this addition of (indiscernible) line (ph) this winter, beginning July, August, September, we may have some days of shortage but I hope (indiscernible). In the future, the substance of the program (ph) had to be closed (ph) with a new pipeline from Bolivia. It will be a strong conclusion (ph) and better and strengthening of the line from the south. Argentina is rich of gas in the southern part of the country, which is very far away. There are projects (indiscernible) line and this one could also be faster (ph). We will be paying the energy more in this next year compared with what we are paying now or in the last two years. But, this could surely grow.

Christian Audi, Morgan Stanley. Could you expand a little bit, Mr. Rocca, in terms of your acquisition strategy, both in terms of size and regional expectations? In other words, in terms of size, given that you have such a strong balance sheet, if the right opportunity comes, would you contemplate leveraging up the balance sheets to take advantage of a bigger acquisition, compared to the ones you have more recently?

And secondly, in terms of the regional preferences, if you think back to the investor day a year ago, can you tell us what regions of the world to you have become more and less attractive?

Well, for sure, we will -- we are all the time considering our acquisitioning in every region, and we review from time to time what we could do. I mentioned and I stated that we are in the process, for instance, of acquisition of a steel shop in Romania to integrate our rolling mill facility. This is also something that should come (indiscernible) and we have a contract but I don't know how far we are from closing of it. And we will inform properly when this should occur.

This is a way of strengthening our position in an area that is very close in integration (ph) to Europe. Romania will be part of Europe in 2007, and will improve our positioning in Europe. We will have the chance to shift some value-added for the production that requires intensive manpower to Romania if the area (ph) remain very, very strong and limit our margin in the operation in Italy.

We are also considering -- let's say the area that we review (indiscernible) obviously the U.S. is an important (indiscernible). In the former Soviet Union is also an area that we are monitoring. It's probably less interesting today, because of the political condition. We feel that it would be not so easy to get positioning in Russia, for instance. It is easier -- things have changed in Ukrania now, but it's not an easy -- we don't want to get into a situation in which we have not full control (indiscernible).

China is important for us. It's a very important market; it's a very important producing (ph) country. As I was saying, it's kind of self-contained. China is using a very low percentage of premium product. There are not such big reserves in China, so for us, it's very important to get to the niche of bringing product to China, to find the best way to get there.

Then there are areas like Latin America, in which we think we may complete our position and be more (indiscernible). These are the issues that are in discussion within our group, because they are very much focused and related to our strategy. Premium, we have the vision that in (indiscernible) energy and specialty products will be very, very important and very, very clear. And the human resources that could support that (indiscernible) service and resource and (ph) development and knowledge in this area will be cut (ph). They are cut today (indiscernible). We think that we can prepare for this (ph) and we've got the knowledge to get there. And also we've got the positioning to produce knowledge into the market.

A question for Carlos, to get him into the discussion. The tax rate -- you gave us very good detail in terms of the tax rate that each subsidiary has within the group, and all of them seem to be above the corporate tax rate, and I guess without giving away any top secrets, I wonder if you can give us a little bit more color, how you've been able to take your corporate rate below the rates of your subsidiary?

OK, thank you for that question. But first, I mentioned (indiscernible) important in that subsidiary. We have other subsidiaries, and we make money in these (indiscernible) in the world where the tax rates are not so high. So (indiscernible), we get to the corporate tax structure, which -- it's around 32 to 35, 36%.

The way to do that is to -- we look at before we have a corporate structure, which allows us to do business in places where the tax rates are lower. For instance, we do consider our procurement system -- for our (ph) procurement system, they say that given that we don't have the need of (indiscernible) in Mexico. We do have some offices there, but we can acquire some somewhere, not (indiscernible). Argentina happened (ph) with our commercial network -- Argentina with our deal, our technology, how we deal with these assets. We can go offshore, or -- participate (ph) in companies which -- such as mentioned before.

But also, the pure tax rate does not entirely reflect all the subsidiary sales. For instance, in the case of Italy (ph), the system has very high tax rates, that allows for use of depreciation that (indiscernible) that allow you to reduce the effective tax rate. And this is true also for Argentina, to some extent, for new projects and innovations. So every country has its own specific tax rate that allow you, as an investment company, to take advantage of it. In the case of Venezuela (indiscernible) of Venezuela, we receive, for instance, (indiscernible). It is not really staying the same, the standard tax rate.

It is also important, okay, together we restructure (ph) of the Company, so it's not better today (ph). The thing that we should really avoid is double taxation, to have a dividend that is pay taxes, to pay taxes twice. I can give you the issue, that we are -- we should really strive for, to pay taxes in the country but not to pay twice, because of length of agreement, or because of (indiscernible) because of the delivery of limit (ph).

(Indiscernible) from JP Morgan. Quickly, on the demand side, which has been very strong, you've been mentioning that you're adding capacity of more value-added products. Are you close to making a formal announcement of more meaningful capacity expansion, and if so, what are the areas that you are considering, what are the plus and the minuses, and when perhaps you might be going out and making a formal announcement?

Well, as I mentioned before, I think that we'd -- we are in the process of acquisitions, of this integration. We did (indiscernible) in Romania, but I think I -- we responded to the question previously, mentioning our interest in Eurasia and the former Soviet Union, in China, but this limitation, and the (indiscernible) next step (ph). (Indiscernible) regional leader, and so should look for opportunity at the regional level, let's say, while Tenaris is a global leader and has a different ride (ph). This is where we stand and what we are analyzing. I don't think that we have any important additional capacity in the main (indiscernible). Because in the end, the core of our system is the rolled (ph) mill. The rolling mills are the one that cost 400 million (indiscernible) for every single unit, the big investment and the real barrier to entry. Then, in the value-added chain, the investments are reduced and the units are smaller. So we can adjust this part of our business and get improved margins, with a higher return on our investment, when the demand is there. It is what we are doing.

Yeah, just in terms of CapEx, what are your current expectations for level of CapEx for this year and next year? And in looking at the equity income line, the equity income line remained strong again this quarter. If industry conditions remain the same, would your level of equity income stay more or less at the level it was in the first quarter, or was there something unusual that was included in there, either positive or negative?

Well, starting from the last, we really wouldn't say much. On the position of the investment (ph), one (ph) investment in the range of 50 million per quarter. This is our investment. This should increase, obviously (ph), because of the plan that I (indiscernible) to you. There will not be substantial change, but this could increase over time, because we have a program and we are realizing them, so the overall investment could get (multiple speakers). We are paying -- you know (indiscernible) we are moving from the range of 150, that we had in the past, to 250, maybe commencing the second half of this year, even as we have started our construction of the power generation plant in Italy. And it's going to be more or less the same level as 2005. So we move to 150 to 250 (indiscernible).

I think that in my presentation, I gave you a view of the strength of the Company. Frankly, I feel the position in which Tenaris is in is very strong, and sometimes it's not entirely appreciated in its pricing power. When I say (indiscernible) products, $700. (Indiscernible) tubular (ph), 150 -- the price per ton. Tenaris 1,600, and I don't know. You have, I think, in one indicator, something that is marking a difference. This difference, and on a good market, you've seen the pricing power that is here to stay. (Indiscernible) the point I was making in my presentation.

OK, pull up the questions from the unseen audience.

(OPERATOR INSTRUCTIONS).

So (indiscernible) the debate has been sufficiently clear for everybody. If there are no questions, I would cordially ask how many people are hearing the conference? Well, if there are no issues or no other questions, I will thank you very much and also thanks to the people that are listening to us over the phone. Thank you for coming, thank you for being here with us, and see you on the next occasion. Thank you very much.