Tenaris SA (TS) 2005 Q3 法說會逐字稿

On behalf of Tenaris I would like to welcome you to the Company's third quarter earnings results. Representing Tenaris will be Carlos Condorelli, Chief Financial Officer and Germán Curá, Commercial Director and Nigel Worsnop, Investor Relations Director.

I would now like to turn this call over to your host, Mr. Nigel Worsnop. Please proceed, sir.

Okay, thank you and welcome everybody to this third quarter conference call of Tenaris. Before starting we would like to remind you that the conference call contains forward looking information and that actual results may vary from those expressed or implied. Factors that could effect the results are include those mentioned in Company's registration statement in the 20-F filed with the U.S. SEC.

Yesterday we published our third quarter results, and although this is seasonally our weakest quarter in terms of seamless pipe volumes, we were pleased to report an EBITDA for the quarter which is $528m almost matched that of the previous quarter and was more than double that of the third quarter of 2004.

Our earnings per share slightly exceeded our earnings per share in the second quarter. We believe that this result confirms the continuing strengths and improving trend of the market as well as our leading position as the supplier of seamless pipes to the global energy industry, well placed to meet the demands of a growing and demanding market.

We also announced that we would be paying an interim dividend, which reflects the strength of our cash flow position. Our net debt during the third quarter went down by some $400m and now stands at $314m.

Thirdly, we announced the terms of the exchange of our participation in Sidor for one in Ternium a more geographically diversified company albeit one with a higher level indebtedness.

Demand for seamless pipe from our energy sector customers is increasing more rapidly than from our industrial customers, and demand for seamless pipes for operations in the more demanding environments, that is for premium connections, sour service, high collapse grades used in deeper more corrosive drilling environments, special deepwater line pipes for rises and flowlines, etc., is increasing more rapidly still.

In this environment we have been working at repositioning our products to take advantage of those with the most attractive margins. Today, some 80% of our seamless pipes are sold to energy sector customers, up from 75% last year, with most of the increase coming in the form of OCTG.

This year OCTG will account for over 50% of our total seamless pipe sales volume compared to 46% in 2004 and 43% in 2003. This trend is reflected in increased sales to the Middle East and Africa region where we have won important contracts to supply pipes for Saudi Aramco's growing activity and for Qatar's gas development, and where we are supplying much of the deepwater line pipe used in the leading West African deepwater projects.

It is also reflected in higher sales in Canada where rig count growth has been particularly strong and where we have been increasing the production at our seamless pipe mill in Sault Ste. Marieand meeting increased demand from oil sands projects.

It is important to note that the success that we are enjoying today is the result of a long term project with which we have built up over the past 15 years our production capacity and industrial structure, our product capabilities and comprehensive product range and our extensive commercial positioning which allows us to offer integrated supply chain management and just-in-time delivery solutions globally. This industry-leading position has been recognized by the world's leading oil services company: Schlumberger, with whom we have recently concluded an agreement to provide tubular products and services for their IPM concept.

Through initiatives such as IPM or integrated project management, the leading oil service companies are able to offer the national oil companies access to the technological resources that they used to acquire predominantly from the oil majors.

We have been, and will continue to, work hard in expanding and strengthening the position that we have established. In our last conference call, we spoke about how we are increasing our investment in CapEx to augment our capacity to produce high-end products. We will be building new heat treatment, premium connection threading and coupling, new testing facilities, even a new R&D center in Veracruz, and expect to spend some $400m over the next year on these and other projects. These investments will help us to meet rapidly increasing demand for premium connections and other high value products. Following previous investments, the proportion of what we term high-end products in our sales mix should be in the range of 35% to 40% by the end of the year. This is been reflected in the increase in average selling price for our seamless pipe products.

We expect to complete the necessary modifications to the Romanian steel mill that we acquired earlier in the year so that we can integrate this steelmaking operation into our European operations from the beginning of next year giving us a further boost in productions from this area. We continue to be alert for new opportunities as and when they might arise in the market. Moreover, we continue to expand our global network of service and distribution centers with the recent start-up of a new repair shop at our service base in Kazakhstan and the opening of a commercial office in Angola.

The favorable market conditions that we have enjoyed this year combined with our strong positioning in the market have allowed us to increase sales by 69% in the year-to-date. Our overall EBITDA margin has risen to above 30% as increases in selling prices for our seamless pipe products have outstripped increases in raw material, energy and labor costs.

We expect market conditions to remain favorable in the fourth quarter and through the first half of 2006. This, together with our focus on reinforcing our competitive position and improving our product and market mix, should result in further sales and earning growth in the coming quarters.

A few words about our financial management. With U.S. dollar interest rates rising, it is important to note that the pre-tax interest costs on our total debt remain below 5% and that on our net debt some way below this. The majority of our remaining debt is now long-term in contrast to a year ago, and we are using interest rate swaps to fix rates on the long term dollar denominated portion of the debt.

The significant mainly non-cash losses that we recorded on our net foreign exchange transactions and the fair value of the derivatives instruments in the first two quarters of the year were mainly the result of significant exchange rate movements between the dollar on the one hand and the Euro, the Japanese Yen and the Brazilian Real on the other. In the third quarter, exchange rate variations were significantly lower and consequently we did not record any significant result on this item.

With those words I would like to pass the call over for questions.

[OPERATOR INSTRUCTIONS].

The first question comes from Alberto Brioschi, UBM.

Good afternoon. I have actually five questions, very quick. You have created very high visibility of the business. Could you provide us with more numerical guidances since we tend to suppose that you are global company and you should provide that for giving the investors and analysts at least a year or two of visibility.

The second question is on the volume growth. What are you expecting in terms of growth for the next year in particular in the seamless and welded products?

My third question is on the potential impact on Matesi for the iron ore prices under negotiation with President Chavez in Venezuela.

The question on the cash flow in the third quarter was very strong, are you expecting such improvement in the following quarters?

And my last question is, we've seen that the Group is now very much under leveraged. Are you forecasting, are you planning for next dividend this year or next year based on this assumption? Thank you very much.

Okay, taking the first question, I would like to stress that we do not give specific numerical guidance, we haven't done in the past, and we do not plan to do so in the future. However, we are giving clear guidance on the trends, on the main trends which are affecting our business and we'll continue to do so.

Germán Curá: I think I will tackle the second part of the question related to volume growth prospective. We have indicated that a good portion of our CapEx plan is aimed at reconverting some of our existing low end production into high end production, and, of course, in the process we are de-bottlenecking a good number of production points in our industrial infrastructure. In addition, we bring in Donasid the steel shop that we bought in Romania but in operations and that would bring quantities of steel, which would allow steel Silcotub in Romania to, of course, increase production.

At the same time, AlgomaTubes in Canada is also transitioning relatively [indiscernible] volume or production increase. As a result we anticipate that for next year we are going to be seeing a seamless capacity increase in the range of 5%.

Now related to welded volume. As we have indicated the welded business of ours is a regional one. There is a strong logistic component which typically prevents us and others from competing globally. Now, as we have said, a good portion of our welded capacity is today linked to the infrastructure development in Brazil and Argentina. Perhaps the two main important projects are the Gasene gas line development and the construction of the new [loops] in Argentina. Now, these two projects as we have indicated in our press release are being delayed and consequently we see going forward an adjustment on the volume of welded production.

Okay I take the iron ore impact on Matesi. First we are expecting that the renegotiation of the iron ore contract between Sidor and the government of Venezuela is going well and should be quickly finished. The impact on our operation on Matesi is going to be not very important, we estimate the impact in something below $10m per year.

Below $10, from next year?

Yes.

From next year?

Commencing next year, yes. Then regarding the cash flow, this quarter we had lower volumes so it impacted favorably in the cash flow especially in the account receivables. And also we collected an important advance payment from a customer in Brazil. So these two issues shouldn't be repeated in the next quarter. Next quarter also we have a dividend payment.

You asked about the dividend, yes. Regarding dividend for sure not this year, we decided when we announced it the last one of the year and we expect for the next year that's usually the next dividend payment.

You have now very much high return with earnings it's more than $537m of returned earnings which is very high.

Yes, it's very high but remember that we are using our cash flow in keeping growing, increasing our capacity, as Nigel pointed out before, and so we keep track on paying dividends and we are maintaining our policy even though it's not explicit policy we are adjusting our dividend payment to the result on the cash flow.

If I may have a comment on the guidance side. It's really a big hit that you can't give us some guidance because it would improve the coverage and the perception of Tenaris with the investors and analysts but it's a personal comment.

The last question is about the agreement on Schlumberger if I may have a follow-up question? If you can have more colors on this agreement which is excellent, it seems.

Germán Curá: Let me take that just to make sure that the level of information that was very briefly described of the IPM concept is just to make sure that everybody in the audience has that component clear. Then the fundamental behind and ultimately what see going forward as potential impact. IPM is the concept developed by the services companies, it stands for Integrated Project Management and ultimately aims at confronting operators with global solutions.

This is been highly promoted by the global oil service companies, they typically band of services such as streaming, cementing, logging, just to mention a few. Now, what we have seen in the industry and it is usually linked to the major oil companies' difficulty to access reserves, concepts that we have discussed at length in the past, is that the 30 day national oil companies are today standing infront of necessary financing means to unlike in the past to be able to ultimately carry out their own growth projects. We have seen this in places like Mexico, Saudi Arabia, Venezuela just to, again, to mention a few. What is happening is that in the past, usually the development came as a result of production sharing agreements made by major oil companies and national oil companies. These production sharing agreements were aiming at expanding the production base of the majors that in return brought technology, resources, people and everything else. And from a national oil company perspective was the vehicle for them to develop their own fields.

Now as a result of what is the transformation that is taking place in the industry we have seen that today the big national oil companies are not really longer requiring the formula production sharing agreements as such, but are fundamentally contracting out something that the industry has defined as the operating engine. This is the requirements of technology again, resources in terms of human resources or even operating resources.

Now, both Schlumberger and Halliburton have been very successful at that. And we view sometime ago the ability to complement this concept as a result of us, Tenaris, being the pipe supplier and consequently complementor of what they do. Now in short, the alliance aims at extending the scope integrating into the traditional services, the pipe supply and the tubular associated services which we will provide. We are now working on some specific contracts, one of them that I would just mention reference is the multiple services for Petrobras here in Mexico which was contracted under the IPM form to Schlumberger and which we’re supplying the pipes, of course, all of the tubular associated aspects, pipe management and running service. I'll be happy to expand but hopefully this was more or less enough to address your question.

Yes. Did you run a sensitivity or -- to give us some idea of what economical impact you expect from an agreement such as this one, just to have an idea in terms of sales or anything more quantitative.

Germán Curá: The unique contemplate the fact that while we are repositioning the product mix, and this was reflected in the opening remarks, that we are doing more energy than before, and as we are doing more OCTG than before we will ultimately have the means the ultimately the capacity to respond. Now we are working on a variety of projects but I wouldn't really, at this point, speculate on what of these various projects are going to be successful, what not. All I can say at this point is that we are working the alliance is fairly new, has been recently announced the teams are in place, we're confident that these would be going forward an important business help.

Thank you very much for your answers.

Your next question comes from the line of Daniel Altman of Bear Stearns.

Hi, the last caller took quite a few of my questions, I guess that my remaining ones, just curious, I guess on the Schlumberger again if you can talk a little bit about, maybe again, trying to quantify what type of business you're doing right now with Schlumberger and how that may change in the future, again, if you could try and quantify that?

The other issue is on your CapEx program and the plans to go from more low end production to more high end production, is there a -- when we're trying to figure out the quantitative benefit of that, the qualitative is easy but the quantitative benefit, are you able to say on a per ton basis what the impact maybe from switching from a low end to a high end pipe in terms of this particular CapEx program? Thanks.

Germán Curá; Let me take on the Schlumberger point. As I was indicating the alliance is fairly new, we're presently working in Mexico, I could probably anticipate that we are the alliance today supplying something close to 300,000 tons of OCTG but then this is not only OCTG but all of the tubular associated services including running services, we're installing the columns.

We're working on various fronts, I said, North Africa, the major area's activities. The team is in place. We will see hopefully some positive results going forward.

Now on the impact on CapEx. As we have indicated we are simply switching low end production into high end. We are indicating an increased high end component of our mix. We are transitioning from a 35 into a 40 as we have indicated, we're confident that we are going to ultimately be able to get that. I usually use a very good, I think, industry example, which is that Tenaris's average price which contains a high end component of 35%, 40% versus a domestic producer in the States which from our perspective produces what we define as low end production in the product mix and you would see that there is around $350, $420 per ton price difference and ultimately you can argue that this is a major component of these two public prices that the industry sees.

Okay, thanks a lot.

Your next question comes from the line of Christian Audi from Morgan Stanley.

Yes. A couple of questions. First, when you talk about your outlook for fourth quarter and the first half of '06 can you comment about what assumptions in terms of raw materials prices specifically scrap and iron ore you're using to get to those estimates?

Second question, when we look at your capacity in '06, I don't know if it's possible, what percentage of your CapEx is specifically focused on de-bottlenecking as opposed to the percentage of it that's specifically focused on upgrading capacity from low to high end.

OK, I'll take the first question about the guidance, I mean, the outlook. We have seen, first of all, you have to take into account that as we are changing the mix of production more high end products obviously this implies also more costs so it's not just a question of following the raw materials. In terms of the specific raw materials we have seen now that scrap prices have risen again but they can be -- probably remain more flat from here on. Iron ore is now -- this year's increase in the iron ore price is now reflected fully in the cost, the ferroalloy costs remain very high and energy costs have still continued to rise. Now, with labor costs maybe we'll be more stable going forward. So, these are figured into our predictions as we go forward.

Germán Curá: With respect to CapEx and impact on capacity and product mix improvement, I think I could, again, reiterate that we see no [indiscernible] of production increase above 5%, just capturing some of the information that we have shared, I would say that -- when we talked about premium connections and these deals with product mix improvement, we have said that premium connections sales during '04 were 400,000 plus, we're expecting during '05 that our premium connections sales would be in the range of 500,000 metric tons plus. And this deals not only with our CapEx but also with a much idealization of our R&D efforts which have talked about the blue in production in prior rounds and this is a fairly new product which we believe during '05 is going to account by close to 23% of our premium connections sales, so that means it's been very well received by the market.

Just a quick follow-up, can you specify in which locations the upgrade is taking place, and which of your operating plants most of the upgrades in terms of changing the capacity from low to high end is occurring?

Yes, it's going to happen in Mexico and Argentina mainly.

And last follow-up going back to first question in terms of given the outlook for cost that you elaborated on, what is your guidance or outlook in terms of margins? Can you maintain EBITDA margins at the levels seen in the first three quarters of the year?

Yes. I think that the outlook is looking very positive, we can continue to… maybe even slightly improve the margin as we did in the third quarter, but generally we should be able to maintain our margins at this 30% plus level going forward.

Thank you very much.

Your next question is from Ricardo Cavanagh from Raymond James Argentina.

I have two questions. The first one is again related to CapEx, you mentioned that you are going to invest $400m next year and increasing capacity by 5%, I'm curious about the outlook for 2007/08. My questions would be related to what is going to be a normal CapEx going forward and if this capacity increase could again be seen in 2007 and 2008?

And then my second question would be related to activity levels in Mexico. I have noticed that the latest Baker Hughes rig count information, informed that activity levels in Mexico were down on a year-by-year basis, and I was curious if it's something very punctual and how do you see it going forward?

CapEx, we can say we already said the planning in the industry is not easy and we first look at this plan in increasing our capacity in terms of high end products as well as saying as in cold drawn maybe we have some expansion there.

Looking forward we have a master plan but it depends on different [indiscernible] we can not anticipate what is going to happen of this master plan. Now our target is to complete the master plan which is sophisticated and as soon as we can perform it is better for us.

Germán Curá: Now with respect to Mexico, yes it is true that rig count was somehow affected by the Stan hurricane that affected a good portion of what Pemex calls the south region. It wasn't that well publicized but also Wilma affected some of what in Mexico we called the marine region as well. So, yes, the Baker Hughes rig count account to some extent shows an adjustment. Now we also need to consider that usually Baker Hughes, takes out the rig, if that rig was shut down for three days, which is not even the case when you look at the done Mexican activity. So ultimately we could say it was effected probably not to the extent that is referred at the Baker Hughes rig count analysis.

Now with respect to what we see in Mexico, I think it will be very important to share that we know the new fiscal regimes was approved yesterday for Pemex and as part of that it was announced that a $2b increase was contemplated. So, bottom-line we see a Pemex recovering from the problems originated by the hurricane and no doubt recovering the activity levels that we’ve seen and maybe improving it.

Okay, thank you very much for that and if I may, again with the CapEx, assuming that -- I know is difficult, but the $400m in 2007 should tend to be the same or might be in the range of $250m somehow lower?

From the information we have today maybe some lower, somehow lower.

Okay, thank you very much.

Your next question comes from the line of Luca Arena from Mediobanca.

Hi, I've a couple of questions. Tenaris report a tax rate ranging from 29% to 29.7% in the first three quarters of the year. What kind of tax burden do you expect for the whole year?

Second one, is on the working capital, in the third quarter it decreed a substantial increase in the same period 2004, are there any specific reasons or seasonal effects, or we can assume this trend was physiologic?

The last question, you say that the favorable market conditions will likely to continue in Q4 and the first half of 2006, what are your expectations and what are your general, your qualitative expectations for the second half of 2006? Thank you very much.

Just briefly on the tax rate, I think that the tax rate we reported is actually more like the 32% we have been guiding, to get to the 32% you have to take out the income from equity income which is already taxed you have to subtract and that will give you the 32% rate that we have.

Germán Curá: With respect to the outlook for '06, we believe that the industry is going to continue to show strong levels of activity that we have seen, in particular that a majors oil company level / remote areas, high end product requirements. I like just to share with you we were not attune with, if you will, clear image reflective by Mr. Van de Veer the CEO of Shell indicating publicly that he understood that Shell needs to move into what he describes “elephant projects”. So these are long term project developments, we're talking about Sahalim we're talking about a Caspian development, both in Kashagan and Karachaganak, we're talking about Gorgon in Australia. These are projects that are already in motion and projects that typically take a while to develop so we believe that if the market conditions remain we are going to see a very active '06.

OK, I think your question on the working capital I think it will increase in the next quarter because we should have stronger sales, it's not been the seasonal weak quarter, that means more trade receivables outstanding, the working capital requirement should increase slightly next quarter.

Okay, thanks.

The next question comes from [Owen Predit] from [Caplas].

Yes, good morning gentlemen. I've got two questions not in particular on the Q3 numbers but first, you mentioned partly why Q3 was strong, Canada doing very well, you also mentioned the word oil sense, for myself I was wondering at what stage are we, I know you want to get away Suncor is there already volumes coming out of steam assisted gravity drainage projects, the reason why I ask. Then in combination with Total intends to spend quite a lot of money on that technology, will you also be involved working together with Total going forward? That's one question.

And secondly, in one of your latest newsletters there was a piece on what you wrote on special connections for drilling with casings, you did some research and you successfully evaluated that. For myself I am curious how does it now going to work. Does it implied you need a lot of connections together at the same time the drillings also the casings are already present. I was really wondering how that works.

Germán Curá: Alright, I will take on the first one. Oil sands is a major area of activity, of course, we're not only involved with Suncor as you stressed but also very closely working with for Encana, and Conoco Phillips. So, of course, Total is coming on stream and we're confident that we’re going to leverage our existing position in the area to ultimately then be able to service the total requirements as well.

What kind of volumes do we talk about at the moment roughly on Canada oil sense in terms of tonnage?

Germán Curá: We are probably talking today something in the area of 25,000 to 30,000 metric tons per year.

Now you mentioned drilling with casing and the news that we published with respect to our premium connection development. And we are working on that, ultimately the industry is trying to bring the technology pieces that will make the whole process more efficient.

As you may know, usually drilling pipe is used to drill the well, this is a pipe with a very, very solid and robust connection that ultimately obligates the operators once the well is drilled to take the string out and then run the casing in. Now in some wells we believe that we may be able to develop a premium connection that will allow operators to drill directly with the casing, then obviously avoiding the need of pulling the drill pipe column out and running the string of casing down. Of course, this is not going to apply to all of the wells and this is not going to apply to very complicated working environments.

We're working on that, we don't yet have the solution in place. We will, of course, keep the market informed.

Okay, thanks very much.

Your next question is comes from the line of Frank McGann from Merrill Lynch.

Good day, just have three questions if I could. First related to the investment in Ternium the release mentions $39.9m option to increase your stake in Ternium which I believe was related to excess cash distributions that I understand for the release you did not receive so you have the chance to convert that into Ternium stake. Perhaps you can just expand a little bit on the nature of the transaction? And secondly, what level of equity income do you think we're going to be seeing, how much lower will it be as a result of, perhaps, not receiving these equity -- these excess cash distributions?

Secondly, from a broad viewpoint, what is your view of the level of industry capacity utilization, you're pretty close to capacity at every one of your plants and as you've mentioned you're moving to expand that somewhat going forward with your CapEx. But just from an industry standpoint, how tight do you see things are and how tight do you think things are going to stay, do you think the industry needs more, significantly more capacity which would mean that you or somebody else would move to expand significantly? And what does that mean, just in general from a pricing standpoint, how tight will things be over the next 12 months and what kind of pricing increases on average do you think you'll see over the next 12 months?

Going to your Ternium questions, yes the $39.9m comes from the excess cash declared by Sidor in the previous two quarters. And going forward we are going to be reporting using the equity method for Ternium and we see the market for flat products good, prices have stabilized and little bit higher of what I expected, volumes are good so we have a good outlook for this investment. But it is very important for us to point out that we consider the exchange by Sidor for Ternim a very positive one, given that now we have a participation in a bigger company, more solid and with a good company, they complement very well each other.

Germán Curá: Now with respect to the capacity pricing outlook perspective, I would say that we see the same price trend going forward. We assume that the market conditions will remain and that we can build the wheel. We see that the market mix repositioning that Tenaris is transitioning that is replacing some of our low end market. Like the low end segments in Japan. For instance we closed our cold drawn facility in Japan, which was publicly announced, we are leaving some of the low-end segments in Eastern and Western Europe. And [indiscernible] capacity and transforming it into high-end products. To some extent then allowing us to project the pricing that we've seen and, as I said, in Italy we see this trend being sustainable going forward.

Now capacity utilization, it is true we have said that we were running pretty close to capacity. We see during '06 this 5% capacity increase. When you look at the industry I would argue that the industry is fairly involved as well. This is true in the U.S. where U.S. Steel has seen levels of utilization that we haven't seen as an industry in many years. Same thing is true for North Star. The exact same thing happens for both the Japanese Sumitomo and JFE producers and the European producers. The Chinese are actually running fairly booked.

Having said this, however, we also know that there are three or four projects in China that would bring some additional capacity. And I am specifically referring to Baotou, Chengdu, Hengyang and Valin. They are… the four of them are at different levels of development. We believe that some capacity may be added during '06. If these projects go forward we will see more capacity probably added during '07, '08. But I have to say that this aims at covering the growing Chinese requirement and in particular the growing low-end Chinese requirements.

Okay. Thank you.

Your next question comes from the line of Jennifer Corrou from Citigroup.

A couple of -- just to clarify, the 5% increase for next year in terms of capacity, is that off of 3.3m tons of seamless or 3m tons of seamless?

Just to clarify that Jennifer, the 3.3m headline capacity that we have will remain the same. What we are really doing is increasing the capability in the system to produce more. This year we have been running at around of 2.8m 2.9m tons, and the idea is to be able to produce more next year.

Okay. I just wanted to clarify that. The other thing is, can you talk about welded pipe demand and what your outlook is for welded pipes demand, because the trend obviously turns negative in this quarter. Can you just give us an idea of your thought process there?

Germán Curá: Yes. We anticipated a good portion of our welded businesses related to the infrastructure development both in Brazil and Argentina. In Brazil, if you will, the most important project is Gasene and the associated minor projects around Gasene. Now we have indicated that for the Bolivian in Brazil gas availability the problem, Gasene was delayed, a portion was booked and I am referring to the announced 75,000 metric tons out of which we have already supplied about half. And the remaining 220,000 metric tons, which, we were expecting to probably, re-start the re-negotiation by the second-half of '06, being delayed. And we now see the re-negotiations starting probably first quarter '06.

Now in Argentina we have announced that the loops the required loops to bring more gas were planned for both '05 and '06. Now there was a delay on the start up of the '05 loops and as a result we now see the development of the '06 loops will be also delayed. In short we believe that although we are trying to cover that with additional export business, and we are presently discussing projects in the U.S. and in Congo for start for instance, this potential volume will obviously come at a lower margin, as the result of the logistic component that as I indicated affect in a big way the welded business.

Okay. And then can you just confirm exactly what the stake that Tenaris had prior to this exchange was in Sidor? What was the ownership position that Tenaris had in Sidor?

Actually it was 12.6% we had a -- they gave us a 21% stake in Amazonia and a 24% stake in a company called Ylopa. And together all that has been exchanged for this stake in Ternium. So the stake in Sidor before was 12.6%.

So a 12.6% stake in Sidor translated into a 15% stake in Ternium?

No it was the 24% stake in Ylopa plus 21% in Amazonia which means its 12.6% might be referred to Sidor was converted into, or was changed by this 15% on Ternium. That's today. As you know this loans convertible from the shareholders, which came from the cash in of the in-flow cash for the shareholders who acquired Hylsamex, so it came from Techint, from Usiminas and we converted it 39.9m we converted it into convertible loan. So how much is going be in terms of take, is difficult to predict, because its going to be exchanged by share if Ternium makes an IPO, or in other circumstances, but today in few words we converted it, 24% in Ylopa plus its 21% in Amazonia for 15% in Ternium.

Right, so it's not actually -- the 24% of Ylopa is in addition to the 21% in Amazonia.

Yes.

Which means that it's not really a 12.6% stake it's higher?

No, no. The 12.6% is the 21% in Amazonia which given that Amazonia owns 60% of Sidor is converting into this 12.6% in Sidor.

Okay.

Additionally we have the 24% in Amazonia. Ylopa, I’m sorry.

Okay. I got it now. And then recently we've been reading about the Venezuelan government wanting to build a seamless pipe tube mill. Would -- and obviously they are looking for partners to do that. Would that be of any interest to Tenaris?

Germán Curá: Well as you know Tenaris in Tavsa is a partner of CVG the government, the Venezuelan government company that looks after the investments in the country. So there we have an established former relation, and, of course, a daily relationship, which is allowing us to keep a very close contact. It's allowing us to, of course, discuss alternatives and evaluate it for an options. If I were to summarize a reply I would say that if that project goes forward it will be, of course, of the interest of Tenaris.

But one of the articles mentioned a plant in boxes.

Germán Curá: Yes this is a plant that was actually acquired by the CVG the Venezuelan government many years ago. And it's, of course, been kept in workhouses in its original boxes which, by the way, Tavsa today have control supervisors to some extent, keep [indiscernible]. Of course, the mill and the project and everything that we read is linked to the installation of that rolling mill that is being kept in boxes for a good number of years.

Okay. Thank you.

Your next question comes from the line of Ole Slorer from Morgan Stanley.

Thank you very much. I just wonder whether you could help us thinking about the business, in terms of the key drivers. For example the rig count you mentioned the big issue is rig count. But, of course, you have a big split between the consumption of an off-shore rig versus a land rig. And I just wondered whether you can give us some kind of a metric illustrating the revenue or the ton that you typically generate from an off-shore rig versus a land rig?

Germán Curá: Well let me address this point from a very general market outlook, off-shore, on-shore usually deals with product mix fluctuation and, of course high-end low-end. And ultimately an element of whether you have the technology element to compete in one segment or the other.

In very broad terms, and I will share some numbers with you, the OCTG global market today lets think of four numbers, its something or was something close to 6.4m tons. Out of which about 1.6m tons were premium connections.

We are expecting in '05 which is going to be substantially higher, both in terms of general OCTG market, and premium connections market. Now premium connections are usually linked on-shore or off-shore to a very difficult working environment. And are usually associated to technology which is not available across the industry. Now prices and ultimately margins are related to the ability to play in this different, very different product segment. And if we were to go to the drivers then, I said the bottom line would be, how do we see this high-end portion of the market growing and we have indicated that we saw a growth space of premium substantially higher than the OCTG. And we see Tenaris participating very actively in that product segment.

I was thinking in context of the rig count because you have about 168 semi's rocking at the moment and 335 jack ups and it looks as this is maybe going to stall a little bit going into next year. But then from 07 to '09 it looks as if you are looking at a 40 in your semis and about 40 new jack up's per year and 40 new semis in total. And that would imply a 25% expansion in the off-shore rig fleet between '07 and say '09. I was just thinking a little bit what Hydril and Grant Prideco was saying about it? They are still very excited about the growth in the off-shore market and then there is no question how that place into you in context there with that land rig count that should faster over the near-term but then the off-shore rig count would start to grow faster again?

Germán Curá: Off-shore jack up's and semi's are usually associated with deep water, deviated wells, complicated working environment. And yes we are seeing this thing growth trend in terms of the additional jack up's and semi's that we, or the industry is talking about. Now it would be a matter of where they are located as you would remember, a good chunk of those are probably going to be in the Gulf of Mexico, and this is an area where we can not yet play. I think West Africa, the Far East are also going to be recipients of those. And there will be absolutely playing. The important thing is that although we agreed with the notion that deep water translation semi's and to some extent jack-up's is a growing segment globally. In pragmatic terms the way it affects a company like Tenaris is in its ability to supply high-end products. That's why we are doing everything that we are trying to do in terms of both market repositioning and product repositioning.

If you looked at the U.S. Gulf, if you are successful in drilling ultra deep gas wells, do you think that that could be a market that could allow you into the U.S. given the constraint of the existing players that deliver [systal] products?

Germán Curá: I think we will probably put the market in a very tight position. We know that the domestic premium threaders you mentioned a couple, are fairly booked today. And, yes, gas deep water will be associated with high-end products that, companies like the ones you mentioned are in a position to supply. I must admit that they have also announced some expansion processes we will see how that develops vis a vis their actual field requirements.

Are there any other product lines that you see the company developing into? For example premium, tubular for example you announced something with Sandvik. Is there any new kind of product line, premium product line that you could be launching, that could add to the percentage of the total?

Germán Curá: Well we recently announced our near flash blue which is premium, it is our premium connection typically aiming at this new design well. Fairly popular in the Gulf of Mexico. But also in Mexico as such, Venezuela, Nigeria just to mention some of the very important operating fields of Tenaris. Risers is another growing segment where we are working and we are hoping to bring the risers connection which, would as you can imagine replace their welding needs which today are a major constraint. Deep water development is associated to right search installation, I am talking about the top tension riser, where we today play a major role, which we are trying to compliment with introduction of the blue riser as we would call it.

What about running services, are you taking more and more responsibility of installing your own casing at the moment? And what are you doing in terms of taking the company forward, competing with the likes of Weatherford for example?

Germán Curá: We usually associate our services to our existing supply contract. So our strategy has been to compliment our tubular supply with what we call the tubular associated services. So unlike the players you mentioned, we would highly unlikely go after say a running services contract as such. But rather like in the case I just mentioned here in Mexico, we would establish a sourcing agreement, under which we would supply pipe by management and running services like the ones we are doing for Petrobras here in Mexico, Schlumberger here in Mexico, Argentina and a few others. Canada is another place and so on and so forth.

Would you consider entering into the drill pipe market, the premium drill pipe market?

Germán Curá: Well not really, it's a market segment which we have view at. We decided not to pursue it. There are fundamental reasons, we view the drill pipe market a tool a rig tool as opposed to both tube and casing which are industry consumable items. So by nature they are different and we are not contemplating that now.

Okay. Thank you very much.

Your next question comes from the line of [Bowson Conners] from Capital Equity.

Good morning. Bowson Conners from Capital Equity, regarding your volume shipment in the third quarter they were seasonally down. Has there been any run of effect related to unexpected plant shut downs or the hurricane effect?

On your pricing side has there been in the quarter, any contract related effects on your pricing? And you faced significant growth in the quarter from your Middle East, African region had there been any large contract effects, or do you expect these kind of levels to move forward?

Your capacity increase you mentioned for next year by 5% is this only related to the two areas you mentioned, Romania and Canada? And maybe can you give us a rough idea about the difference on your margins between the standardized products and your premium connection technology?

Germán Curá: Okay. Let me go one by one, first hurricane impact the answer is no. We have not been affected by that by any means. Market positioning, what is happening in the Middle East and North Africa, I will take the Middle East. Just for reference purposes, we have indicated that the Middle East has become a major area of activity. And this has been a very important, historically, a very important Tenaris’s operating base. It's no only major level of activity in terms of demand, major area of activity in terms of events changing the way they have approached the sourcing issue.

An example, Aramco has not only duplicated a number of rigs, has not only expanded substantially the level of consumption of OCTG. But for once is evaluating the possibility of establishing a long term agreement, a five year long-term agreement. Which would contemplate not only the OCTG supply but also the addition of the tubular services that I was describing, or some of the tubular services that I was describing. We are presently negotiating that. We are hoping that we are going to get to a conclusion by the end of the year, first quarter next year. And we anticipate that Tenaris will play a major role in that.

Capacity, yes a good portion of this 5% is going to come out of Silcotub and Algoma these are two rolling mills that are not operating at full. In the case of Silcotub was one steel availability which we are now resolving with the inclusion of Donasid. In the case of Algoma was also some steel availability which was running on covering with some steel excess that the system would provide, hopefully with the supply of the inclusion of the Canadian steel supplier as well.

Having said this there is also a component of the debottlenecking of our existing facilities. In particular I would mention Tamsa which would bring some important component of this 5% increase.

With respect to margins I would probably go back to the point that I made earlier, there is $350, $400 per ton on the average price, between what we do and what a typical low end supplier would do. And this coupled with the 40% component will probably give you a fairly good indication of what the margin prices differences.

Okay. Can I ask a further question, I think on the back of the hurricanes in the last month there have been some capacity effects for some of your competitors? Did you see any impact from that on general inventory levels in the U.S.? Maybe on your activities in Romania, what is, according to your experience typically the lead time to upgrade this kind of lower-end facility to be able to produce high-end products?

Germán Curá: Let me take the first one, we really don't know the exact details. We know that Katrina might have probably affect an important seamless producer based in [indiscernible] Alabama. We don't really know the extent of that. We haven't though seen a major impact in the level of inventories which as you know do contain a component of imports which have managed, if you will, to contain that potential impact.

Now with respect to, how long do you take to turn it around, I would say that our CapEx plan for the year our growth of premium connection sales will probably give you a fairly good indication as to how long it will take to take it around. I would argue that in concrete terms you would probably say six months to a year if you timed that, you would probably require to install a premium connection there.

Alright. Fantastic. Thanks a lot.

Your next question comes from the line of Alberto Brioschi from UBM.

Thanks a lot. At the end of October Argentine pension funds decrease their holding up to 55.3m shares. Do you think that this will enable to change the wrong perception of Tenaris as an emerging market company, or a steel company? Since the overhang risk is now reduced up to 5m shares only?

This is a very interesting point is that we now have a situation where there has been a considerable change in the competition of our shareholding base during this year. And in fact the percentage of the shares of our free float we have a 60% held by the controlling group and 40% of our shares are in the free float. And the majority has always been in the U.S. with the ADRs, so what we have seen is that the rest of the free float has been migrating from Argentina to the Italian listing. So that today I reckon that probably the Italian listing in terms of the number of shares is at least as great as the Argentine. So the Argentine -- the shares held in Argentina have reduced substantially and those held in Italy have increased substantially at the same time.

Okay. Another question regarding margins, more in the longer run. Which is your long-term sustainable EBITDA or EBIT margin? If this scenario regarding price is an capacity utilization remains unchanged.

As Nigel pointed out before today with the conditions that we are facing today for sure, we are going to keep the margin, the high margins we already have. If you took the different business in our company you now, seamless pipe is one different from welded pipes, in seamless pipe we enjoy better margins and we consider with the situation and with the way that we behave, we consider we can keep the margin up perhaps slight improving our margin in the coming quarters.

Okay. Thanks.

Your next question comes from the line of Serge Escude from UBM.

You've answered my questions were just answered. Thanks very much.

Your next question comes from the line of Mark Hibbert from Fortis.

It's Mark Hibbert. A question just on Q4 ASP you had 5% sequential increase in ASP in Q3. Do you see a similar trend in Q4 now that you should now have good visibility on that? Or do you see a further slow down in sequential ASP rises? And a second question just on Aramco you spoke about thecontract that you are now negotiating. Is Aramco already a substantial OCTG client for you? Or would that be a new relationship? Thank you.

Germán Curá: Well I will pick on the Aramco one, first Aramco has been a traditional customer of Tenaris. We have established a Middle East based office back in 1990. And since then and even a little before that we have been a major supplier of Aramco.

Now with respect to the Q4, I think the pricing question, as I indicated before we believe that the trend that we have shown will be the same. It is fundamentally the result of the changes on a market mix and improvements of product mix. There is, if you will, a very contained price improvement on high-end items still. But I would say that the Tenaris’s numbers today would reflect a lot more the result of a market repositioning and product improvement in the trend of prices that we've seen.

Thank you.

Your next question comes from the line of Craig Shaw from HLM.

Hi two questions, the percentage of value added in terms of your seamless volumes is moving towards 40% by the end of this year. Given your $400m in CapEx that is going to come on line over the next six to 12 moths, what percentage do you see that being at the end of 2006? That's my first question.

And my second question is, could you give us a little color as to -- you are going to equity account for your stake in Ternium. I don't know if you have the figures but what would 15, I believe your stake is 15% right now. What would you 15% stake in the third quarter net profits amount to? Thank you.

Germán Curá: With respect to the high-end component of our sales I would argue that once our CapEx plan is in place and assuming that market conditions will remain we will see a growing component. Everything is going well we from a market perspective, from a plant perspective, we anticipate that our number may be a more closer to 45 - 47%. Now with respect to the second question.

Regarding Ternium we do not provide forward looking and especially in this case because we don't have the figures of Ternium. The only thing we can provide is an outlook for the flat steel products which is good enough. The volumes are good and the prices are good.

Okay.

I would like to clarify one thing the question you had on the margin. The gross margin on seamless, as we increase the proportion of the high-end other things being equal the gross margin should improve. But everything depends on the other things being equal.

I thought that 35% to 40% that was the percentage of your seamless volume that was deemed to be value added.

Correct.

Right. So not the gross margin.

Germán Curá: Correct.

Okay. Good. We are on the same page. Thank you very much.

You have a follow up question from the line of [Chris Boren] Kepler Equities.

Just one follow up question. I had one question on your pricing in the third quarter, which was up some 5%. Has there been any contract delayed effects, or was that just the continuous flow of improving pricing in the markets?

And maybe secondly can you explain a bit the mechanism between the seamless and welded in the sense that some of your competitors have recently raised substantially their price per ton? How does that impact the seamless pricing behavior? Is that just translating into increases there? Or is there any way that if that's not following at the same amount that you can grab market share against welded because of your higher added value and you're relatively improving pricing environment?

Germán Curá: With respect to the first question, of pricing in the third quarter. I would say the improvements are, of course, related to not only this increased component of high-end. The notion that some of our existing contracts are being re-negotiated as well. And consequently everything adds up. I would again emphasize the fact that the 5% increase today is probably a lot more related to the product mix improvement and market reposition. Now with respect to the mechanism and the relation between seamless and welded, I would like to make a distinction of what we do as far as welded pipe production[indiscernible] is concerned and maybe the aim of your question.

What we fundamentally produce is big OD conduction line pipe usually used on big either oil or gas [indiscernible - lines]. Now yes we are aware that some of the domestic producers have recently announced a price increase. And if you look at the ways both OCTG welded and seamless welded correlate in the US, there has been a historic component of about 11% to 13% price difference. I must admit that this was certainly modified last year as a result of the steel dynamics that we saw. But as far as we know today both product lines have more or less stabilized pricing wise at the same historic differential. Going forward I see given the demand component in the US, no reason why that difference is going to change. So ultimately I believe welded OCTG will follow.

I hope we are talking about the same things. The price increases I've seen I thought they were related to welded OCTG tubes in the U.S. And I think that's partly you reflected by raising flat steel prices. So if you are on the seamless side a more integrated player, so you have a cost advantage to them. And has that any impact on market shares?

Germán Curá: I said in theory yes in practice not so much because as you know the U.S. dynamics are not affecting us directly given that we are not a major player in the US in the OCTG business in the U.S. given the existing trade restrictions. Now this reflects a little bit globally but I would probably argue that today the demand situation is a lot more of the driving force as opposed to these price increases given cost adjustments that we've seen lately in the U.S. industry.

Alright. Thank you.

You have a follow up question from the line of Jennifer Corrou.

Hi. Just one follow up on the Ternium stake. In the past obviously Sidor has paid out dividends and Tenaris has benefited from that. Does that, do you think that Tenaris will benefit from potential dividends to be paid out by Ternium? And the other thing is, is it your view that Tenaris will -- should Ternium go public will Tenaris mantain a stake in Ternium?

Regarding the dividends you know that Sidor was paying excess cash which was a mechanism set when the restructure of the debt of Sidor happened some years ago. So going forward we consider that by holding Ternium we have a holding of a bigger company, more diversified risk. By holding Ternium we hold part of Siderar, part of Hylsamex and part of Sidor. And so regarding the dividends, Ternium has its own -- I mean [indiscernible] in the sense that [indiscernible] to acquire Hylsamex but if Ternium goes public maybe that in the future we can consider to sell out our holding in Ternium. But not necessary because in fact it's a good complement, it's a good investment for our company.

Okay. Thank you.

Sir your last question comes from the line of Craig Shaw from HLM.

Just one last question on your seamless business. I don't know if this is an easy thing to answer or not, but what percentage of your seamless volume is straight curve and steel? And what percentages is some sort of alloy mix?

Germán Curá: This is relatively saying is easy question to answer because we've seen these debated in some other forums. And usually when we refer to high-end we don't actually refer to the distinction of alloys and [indiscernible] carbon. When we talked about high-end we talked about sour service high collapse 13 chrome, stainless premium connections, deep water pipeline applications, risers, boilers applications or air bags. This is what made the Tenaris’s high-end account, not so much the typical alloy material, say regular casing that requires heat treatment. And this is we understand something that is usually discussed in other forums. If I were to answer specifically your question I would probably today say that, one dimention would be this 35% 40% of high-end products. Second dimention would be that up more than 50% of our production today is heat treated.

Okay. Okay. Thank you.

Ladies and gentlemen this ends the Q&A session. I will turn the call back to management for closing remarks.

Okay. Thank you everyone. And I think we are pleased with the results of this quarter. And we look forward to -- we see a very strong market situation continuing. And we look forward to reporting on the next one. Thank you.

Ladies and gentlemen this concludes the presentation. You may now disconnect. Have a good day.