Tenaris SA (TS) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2005 Tenaris earnings conference call. My name is Enrique and I will be your audio coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of this conference. (Operator Instructions). I would now like to turn this presentation over to your host for today's call, Mr. Nigel Worsnop, Director of Investor Relations. Please proceed, sir.

Okay, hello everyone. With me today on this conference call, we will have Carlos Condorelli, our Chief Financial Officer and German Cura, our Commercial Director.

Before starting, we would like to remind you that the conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect the results include those mentioned in the Company's 20-F s registration statement and other documents filed with the U.S. Securities and Exchange Commission.

I would also like to mention that we will be holding an investor and analyst day in New York at the Guggenheim Museum on Thursday, April 6. Invitations will be going out shortly and we hope that many of you will be able to attend.

Yesterday we published our fourth quarter and 2005 annual results. Before going into the quarter, I think it's worth pointing out just how good a year 2005 was for Tenaris. Net sales were up 63%, led by our sales of seamless pipes, which were up 57%. Our EBITDA was up 140% and our EBITDA margin increased by 10 percentage points, reflecting a similar increase in the gross margin on our seamless business.

Our earnings per share once the nonrecurring items are stripped out of the 2004 results, were also up 140%, reaching 1082 for [ADS]. Our return on equity was 43%. We think these numbers compare favorably with any of our peers. Just as importantly, they are a reflection of the strength of our global positioning and how we managed during the year to take advantage of developments in the energy industry with the increase in oil and gas drilling activity, particularly in more complex operating environments.

The industry is facing a tremendous challenge to keep up with increasing demand for oil and gas in the face of declining production from the larger fields, most of which have been in operation for 20 years or more at a time when spare capacity, both upstream and downstream, remains at a very low level. E&P spending is rising but may be constrained by oil service capacity issues as well as problems of gaining access to new reserves.

We kept pace with increased demand for high-end seamless pipe products with sales volume of high-end products rising by 25% compared to 2004. So they accounted for 37% of our total sales by volume. We also kept pace with increased demand for seamless OCTG products with sales by volume rising again by 25% compared to 2004, so that OCTG sales accounted for 53% of our total seamless sales by volume. Our product repositioning efforts and pricing power and a favorable demand environment were the primary reasons for the 57% growth in seamless pipes sales and improvement in margins.

The fourth quarter confirmed the overall trend as shown throughout the year. Seamless sales volumes returned to the levels shown in the first half following the seasonally weaker third quarter. Strong demand from the Middle East and Africa region as in the previous quarter was led by increased drilling activity in Saudi Arabia, North Africa and Qatar and higher demand for flow lines and risers for deepwater projects in West Africa.

Increased demand in the Far East and Oceania region was led by higher demand for our OCTG products in China and Indonesia. Increased demand in Europe was led by higher sales to the Process and Powerplant sector. The upward trend in our EBITDA resumed as cost for our seamless operations remained steady and the average selling price increased. The increase in the consolidated EBITDA margin was slightly lower than the increase in the seamless gross margin because of higher sales in the lower-margin Energy segment.

Global demand for seamless OCTG and particularly high-end OCTG products, like premium connections, should continue to show good growth by increased drilling activity and increased well complexity. We are in investing to increase our capacity to provide such products and be in position to meet our customer requirements with a flexible and efficient supply chain management system, even in the most remote areas.

With these favorable market conditions, we expect continued sales growth in our seamless pipe business difference for the year, although we may -- from our welded supply business, we are expecting a weaker year than last year because of the delay of projects in that business.

Now I would like to turn the call over for questions.

(Operator Instructions). Ole Slorer, Morgan Stanley.

Thank you very much and congratulations with a certainly very good quarter. And by the way, I agree with your policy of not providing any financial guidance. But I wondered whether you could just discuss a little bit some of the key drivers in more detail for your business?

And German, maybe the first question to you and centering in on your OCTG component to get a little bit more sort of a gauge on the visibility of the growth. I'm [going to] assume that we have something like 40 deepwater rigs coming into the market between 2007 and 2009 on top of the current fleet of 158, (indiscernible) trans-ocean and global center (indiscernible) two more sort of $650 million drilling rigs. And we you look to the jackup market, we now have something like 60 new rigs that are under construction, maybe 50 of those will [go for] the international. [I know in] the U.S. markets on top of a fleet of 453 rigs international, or a total of 256 international, it looks as if the offshore drilling activity and a lot of these rigs will drill deeper formation wells designed for deeper water, so really playing into the premium product part of your business. It looks to be sort of 25, 30% visible demand growth driven by the drilling fleet. And looking at the land rigs, it's a little bit more difficult to gauge capacity, but it's is a record amount of 2000 and 3000 horsepower rigs being built at the moment looking like well over 10% volume growth there from drilling.

So to us, it looks as if you're coming in for a period with sort of unprecedented visibility with respect to the demand drivers. Could you talk a little bit how you see the business develop longer-term? I'm talking sort of into 2008, 2009, assuming that the macroenvironment stays intact?

Yes, thank you now, Ole. Now we pretty much agree with your view. Maybe on top of what you said, I would probably add that it's public knowledge that a good number of the new rigs buildups are fifth-generation equipment which for the most part has deepwater capabilities, and we're talking about depths of 15,00 feet, 20,000 feet. Now this is all aligned to all our notion of drilling moving into much more complicated environments and much more complex wells. And on that, we fully agree with your view.

In pragmatic terms in translating to say a premium connection market that is growing at a faster pace than the OCTG market growth, we have said in our press release that we see the OCTG market with a 17% growth between '04 and '05. That would be the premium connections segment, something equal to probably 23, 24%. And it deals precisely with the knowledge [its] intention reposition itself in what we have defined as the high-end portion of the market, which going forward we see it growing at no doubt a higher pace than the regular OCTG market space.

This growth, and 2005 was not a particularly big year in terms of adding new rigs. I mean [they're really coming] going forward, so you expect this kind of volume growth trend to -- it should visibly be continuing throughout 2009, something like that? Would you agree with that?

I would, Ole, working under the assumption that industry is capable of sustaining the level of activities and absorb the level of aggregated equipment, then I believe that we're going to be seeing high-end growth in the areas that -- or in the levels that I just described.

So if that continues, what does to take to grow capacity for the industry (indiscernible)? You're talking then about 50% almost, or 50% in aggregate over the next three years for the amount. And can the industry handle that kind of a supply growth? Of course it can't, but what will it take? And in new [plants], do you see any competitors coming in?

The industries of course are reacting, I think we are reacting. We have made a substantial part of our CapEx aiming at precisely our own ability to reconvert our rolling capacity into ultimately high-end production by increasing our premium connection's capacity globally. We just announced the initiation of construction of a plant in China. Ultimately we're all preparing; not only us in particular, but I would say the entire industry is prepaid.

In terms of aggregating a rolling capacity, I would also like to state something which we had anticipated, and that is we have seen a new seamless [mill] buildups, particularly in China, I said only in China this last year. We know that the Chinese producers have increased about half a million tons of production capacity and I'm specifically referring to [Tiangen]. [Zhen Dou] is about to complete their program as well and this new mill would probably also be, at [regime], it would be able to produce half a million tons.

[Genyan] is a little bit more delayed. They announced plans they have not yet started construction, but I think the relevant point there is that, in spite of aggregated capacity, aggregated Chinese capacity, all this is aiming at the low end portion of the business, the segment that as we have indicated, Tenaris is trying to the extent that it's possible leave.

Just one related follow-up question to German. If you're looking at your premiums connections business and you look at about one-third of that if I remember correctly -- sorry, one-third out of the OCTG business overall is premium connections. Can you talk about a little bit about how your proprietary solutions are coming along compared to how the (indiscernible), the solutions are coming where you share the patent with Grant Prideco? The reason why I'm asking is that I heard from one of your customers had been running the TS Blue [Nautilus] that they had saved some rig time in running the product and I wonder where the -- this must be an important factor in today's rig -- rate environment. So could you give a little bit of a view of how much -- or how that proportion of your business is changing?

Yes, Ole. Let me tell you first of all address the Blue, the Nautilus' Blue Premium connection family has been widely received by our customers as being qualified by most of the majors, in the process of being qualified by all. Today we have among the existing Blue users big companies like Exxonmobil, Shell, Conoco Phillips, Chevron, Saudi ARAMCO, (indiscernible) last year which was our introduction year in material terms once the qualification terms almost completed, we had about 5%, 6% of our premium sales were Blue. This last year, this number is probably about closer to 14, 15. We see that going forward into 2006, that number would be substantially higher than 20% -- 22, 25%. So it has been widely accepted. We believe that it has been a major product introduction.

On top of that, we have Dopeless. Dopeless of course is a product that aims at specific market niches where either we have environmental restrictions or somehow also logistics operational restrictions. It's of course not a product that we're going to massively sell, but it has for instance become a major product in Norway where the existing environmental restrictions have demonstrated that Dopeless became a solution. Today it's used by Statoil and Conoco Phillips. Recently, it has been adopted by [any] (MULTIPLE SPEAKERS).

-- it's quicker to run the Nautilus than to run conventional? Do you save rig time?

Yes. To the extent that we are of course measuring this continuously, we work to typically explain this in two dimensions. Rig time savings we have measured that the speed of running increases by 10, 15%. And this is case (indiscernible). It has another important element, Ole, in the deals, particularly on [completion] fueling. And this is the ability to mitigate what the industry calls lost time. And that is usually -- wells do not need to be flushed or washed before you run the variety of different completion tool as a result of course of not -- the no need of dealing with the dope.

Carlos, just one final question for you. Is it possible to -- could a stock split and the ADR split be on the cards here? You're getting a very, very heavy stock price.

Yes. We have not made any decisions as well, but we're looking at that.

Okay, I think you would do very well. But thank you very much, and I will hand it back to you.

Daniel Altman, Bear Stearns.

Hi, congratulations once again. A couple of questions. Firstly on your cash flow generation for the quarter, I was having a hard time reconciling from the reported EBITDA of 634 to net debt which was pretty much stable. I know some of the big-ticket items, but I was wondering if you could walk us through from the 634 where the cash outflows for to get to kind of a rollover of your net debt position in the quarter, if possible.

The second question is for German. In the fourth quarter, it looks like he got about another 7% increase on your revenue per ton on new seamless business. I wonder if you can explain how much of that was mixed versus actual price increases. And how bullish are you about a continuation of this trend into 2006? And lastly, just a quick one, whether your plant, the [Thompson] plant, is being affected by labor actions in Mexico? Thank you.

Okay. Firstly, to the cash flow. So if you look at the net debt, the financial debt list of our cash and cash equivalents, remember that we have to take into account what we call [an investment] in the current assets with the say liquidity. So our net debt decreased by $132 million for the fourth quarter, Daniel. Mainly just to give you a rough idea, [it's out of the] 363 cash flow by generation, and then you have to deduct the $90 million for capital expenditures and mainly the 150 payment of dividend we made last November. So by doing so, you get to more or less $130 million which was a reduction of net debt. And as I defined before, financial debt, less cash and cash equivalents [concerning] these other investments in the current assets.

Is that the -- like on a quarter-over-quarter, so versus the third quarter, it looks like the net debt was almost the same. Am I doing the calculation wrong?

Daniel, the item of other investments in the current section of the balance sheet is effectively cash. So we count that as cash for the net debt calculation (MULTIPLE SPEAKERS) there is no change, Daniel, so it's (indiscernible). So we can go through and I can send you an e-mail, but with the figures we publish and just to go through. But mainly this, the amounts I mentioned before, we reported -- okay.

Maybe we can finish that offline, sure.

Okay. Now on the pricing question, let me say that the pricing results of the fourth quarter have a major mix component on it. We have talked about the percentage of high-end sales of the (indiscernible) on prior rounds and we said we were aiming at a level of 38, 40% towards the end of this last year. But this last quarter, we had a very favorable mix. We reached the mark of about 42% of high-end. And this has had obviously a very important ingredient in our average price.

Now going into 2006, we believe that prices have reached levels that I would define going forward as probably stable. And I believe that there is yet some space for probably high-end prices to appreciate, given the competitive environment. Low end items, however, I believe have leveled off and I think the most open information on that will be the way biologics has leveled off. Of course, that is a segment that going forward Tenaris is trying to leave as much as we can. And overall then we believe that during '06, the price trend may continue.

On your last point, Daniel, of (indiscernible) labor issues, I said no, we have not had anything at all in Mexico. Maybe the question was a bit more linked to what happened down South in Argentina with oil and gas union. But if that was the point, then I would also like to also emphasize that we've not had any problems in [Campana] either.

I guess the question would be, whether [Tamsa] is -- most of the mining and steel companies in Mexico are on a strike right now. I did not think that Tamsa would be affected by that. I just wanted to confirm.

It was not affected.

It was not affected at all.

And the 42% high-end, is that -- are you increasing your objective then for '06, or do you think you can -- what do you think that a good target number would be to use for this year?

What we believe that as long -- while our CapEx plan, which dealt with our repositioning objective materializes, Tenaris will be able to probably get to the 50% mark within the next couple of years.

Thank you very much.

Enrico Bartoli, Intermonte.

Good morning, gentlemen, and congratulations again for your results. I have three questions if I may. The first one is on visibility on the backlog. You gave an indication in the last quarter during the first half of 2006, if you can say which visibility you have so far.

The second is about your CapEx. From the quarterly results, it's evident that your repositioning to the high end is very successful. Are you considering to increase further the CapEx in order to reach some percentage higher than the 50% you talked about in the medium long-term? And the third one is about your financial position. Your gearing is almost 0 at the end of 2005. Are you considering how to solve this nice problem, if [you are] increasing dividends through some buybacks or you have some acquisitions in your mind? Thank you.

On the visibility, Enrico, we have talked on prior rounds about Tenaris of course running a different scenario, depending upon our product line. Perhaps the sensitive one would be premium connections line, and there we could probably say that we have a backlog stretching down to, say, five to seven months. One thing that is important to probably highlight is that a good component of our OCTG sales as we have indicated in the past as well is linked to existing long-term agreements, which in material terms means translating drilling programs into production programs, which of course Tenaris is committed to sustain.

On the CapEx, we are of course deploying the announced CapEx plan, and for now we don't think of changing it in any substantial way. We are going ahead with the deployment of premium connections lines, heat treatment lines in (indiscernible). The China mill is -- finishing plant is also coming onstream. So we are concentrating our resources and efforts on deploying the already announced planned. On the financial question, I'll turn now to Carlos.

Okay. You said you're feeling we have a nice problem, but we are working hard in trying to get the opportunity to have a percent (indiscernible) percent to us. So we have nothing to announce, but we keep working hard on trying to (indiscernible).

Okay, thank you.

[Tim Everett], [Arun Bound] Capital.

Hi, just one question. The Company's obviously generating a lot of cash. How do you think about going to use the cash? I know you're expanding in a small way in China. Are there more possible acquisitions? And what would be the criteria there? And I know you raised the dividend, but is there more greenfield expansion that you will do? Thanks.

Well, of course, investment in China is small. We don't believe it's strategically very important. The premium connection consumption in China linked to the gas development has grown in a I would say substantially significant way, more than 50% when you compare premium connection consumption between '04 and '05, particularly driven by two oil fields -- [Jian Jin] and [Tarin], both of whom have been historic customers of Tenaris.

Now as far as what lies ahead, we would like to say that Tenaris as the last [seven] years is exploring options. We are of course evaluating different alternatives. As Carlos indicated, we don't have a formal announcement, but as we have done in the past, we are actively in evaluating different options, opportunities.

And if I could just ask a little more detail, is there -- I know the [Sokla] II in Romania was seamless. Are there other seamless assets that may be potential -- is welded at all interesting? Is there a lot of connection parts that might make sense, or is a more standard oil service company what would make the most sense in terms of your criteria?

We will keep our strategy in the sense that we will be considering different alternatives. So as we did in the past, we look at the long-term and how any possible acquisitions fit in our whole strategy and how we can create more value and we can keep [differentiation] from our competitors. So this is the kind of thought that we had when working (indiscernible) with (indiscernible) opportunity, which you take into account.

Okay, thanks.

William (indiscernible), Kepler.

Yes, hi, good afternoon. I have two questions, first on Mexico. In your view, because the U.S. was down about 15% in terms of volume in Q4, do you think this is temporary, or is there some major new rate activity in the planning? And secondly, because you did so well in welded, so it's going to go down, but temporarily because of delays. But what kind of percentage do we have to think of; is it something like 10, 15%, or should we think about a higher percentage?

Well, on Mexico first, I think [without transitioning] an election year in Mexico, and I think [with all] industry is familiar with the notion that during election transition years, usually budgets don't flow, plans typically come to a revision, so on and so forth. Now it is of course clear for all of us that Mexico has lost a number of rigs. It is today at a level of 115, and we also know that during '06, some of their existing rig contracts would come to an end. They will need to be renegotiated. And doing that, this industry moment in a year of transition in Mexico would pose I think an additional challenge. We are confident that they're going to be able to follow through. I think everybody in Mexico has indicated a high importance of expanding and maintaining the level of production and they have a tremendous amount of work to do to, for instance, cope with existing declining rates at [Cantarel].

That is what I thought, so I already -- so I in a sense do expect some (indiscernible) some major new drilling activity.

True. Now of course, they have announced a budget increase for '06 which, given how the industry pricing (indiscernible), one tends to believe that it would probably be just enough to sustain the level of activity. On the other hand, I think it will be important to highlight the notion that the multiple services contracts re progressing, that the oil field services companies are working for Pemex and also progressing as planned. So it's a transition here and we're all watching it carefully. And as I said before, the state of what the industry is poses a particular challenge for the operating component of Pemex.

On the welded side, we agree with your view. I think '05 was very good year for our welded growth. We have talked on prior rounds about the impact or potential impact of [Garcene], something close to 220,000 tons, the [loops] in Argentina something close to 80,000 tons. We believe that these projects not only are [delayed], but if they come, they would come towards the later, very late part of '06. I would perhaps argue that the adjustment that we'll see at our welded growth will be higher than the 10% you indicated.

Okay, great. Thank you very much.

Lucrecia Tam, Deutsche Bank.

Good morning. My question follows pretty much on the welded question that was just posed, and I was wondering if beyond (indiscernible), do you see any other projects? There's a lot of talks of pipelines clearly in the region, but do you see any other projects that may become apparent, maybe not this year, but in the next couple of years?

Well, yes. [Garcaneo is in itself] a very important element, 220,000 tons. There's a very I think compelling argument as to the need to build Garcaneo timing wise and some collateral projects which are (indiscernible) associated to Garcaneo. I think the key fundamental element is gas availability, Bolivia in particular, Bolivian availability. It's not so much operational capacity and not so much the way Brazil is performing, but fundamentally whether the gas will be available or not.

But in [general terms], I would like add something. In general terms there's need for gas, there's need for transportation and gas, so (indiscernible).

Okay, thank you.

Christian Audi, Morgan Stanley.

This is Christian Audi with Morgan Stanley. I have three questions. The first, go back to the topic of Mexico given the dip in volumes. Is it realistic in your view to take [that this 21]% increase in Pemex's CapEx will really materialize in 2006?

This is what they announced I think initially, yes, the transition here, we need to see how it evolves.

Because that would have a very positive impact for you, given how important a client that is, correct?

Sure it will.

On the press release, it talked about your ability to maintain margins during '06 at levels seen in '05. Can you discuss a little bit what that implies in terms of your outlook for raw material prices for '06?

Yes. We're looking in [general terms] and considering our facilities placed in different parts of the well, we (indiscernible) that the course will remain stable, considering the rest of the [issue stable]. I mean, if we keep working the way we are doing, so [for sure] the [SME] should (indiscernible) our operation (indiscernible) will increase its costs, but it's going to be offset for some servicing (indiscernible). So [bottom-line], we're looking our cost as stable.

Can you just add a little color in terms of your specific expectations for iron ore scrap and alloys in terms of them reaching higher levels in '06 versus in '05, or what are your expectations on those three items?

Yes. Our expectation considering the -- for instance this difference, if we go to the scrap for instance, we look at some relief in the price of scrap, but today it's stable. And if you follow the steel industry, which is mainly -- (indiscernible) [tracks] the prices of scrap, this is fairly stable. Prices for the coming year (indiscernible) 2006 from now and then.

Then you have to consider, we have some special issues for instance in the case of our operation in Argentina, [we will reposition] an important part of our [steel]. So we consider that even though it's lower prices, we (indiscernible) it can be maintained in the coming year. So going through iron ore, you know, the iron ore increases price heavily in 2005. We are not expecting important increases in iron ore price for our operations.

Going to the (indiscernible) again, in general terms, even though we consider some decline in Europe for the supply of (indiscernible), but in general terms, it shouldn't affect very much the total cost of our operations.

Thank you. And the last question, going back to the discussion about capacity. Can you give us an update as of the end of '05 where your capacity utilization was? And on the topic of capacity additions, I just wanted to clarify that you are seeing capacity additions on the commodity side, but not at all on the high end side of the market. Is that correct?

On the capacity issue, we have indicated that [Enaris] is running at capacity. During '05, we have managed to extract, if you will, a potential component of both a plant in Canada and Romania. On capacity additions, I said substantial, relevant capacity additions. You're right. Our view is that, for the most part, it is coming from China. Pretty concentrated on these three companies we mentioned -- [Qingdao], [Henjan] and [Dianjin] and it is for the most part aiming at the lower end side of our business, which is by the way, consistent with increased Chinese domestic OCTG requirements. The Chinese market on itself has grown from about 1 million tons in 2002 into about 1.5 million in 2005.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). [Aracelli Stromberger], UBS.

Yes good afternoon gentlemen. I'm sorry, I jumped in the call a little bit late, but there's something I'm missing in terms of outlook for 2006. So you're saying that [surge] should grow in 2006 and that costs should probably remain flat. So why are you not guiding towards an improvement in EBITDA margins for 2006? And just coming back to this increase in revenues, can you give us an idea of how much would be volume and how much would be price and how much would be mix, of course? Thank you.

Okay. Well on the EBITDA guidance, we are forecasting that -- we're saying that we should be able to maintain that or to at least maintain the EBITDA levels at these higher levels we reached last year. And remember that we -- in the fourth quarter, we got to 33%. Perhaps there may be some slight improvement on that, but a lot will depend on how strong the seamless business is and the offsetting nature of the welded pipe, which we can't foresee precisely at this moment.

Okay. So you're saying that you could achieve 33% over the full year, which is what you've just realized in Q4?

Yes.

Okay. And in terms of (indiscernible) between mix and price increases for '06, what are you seeing?

We, Aracelli, don't provide any specific price guidance as a matter of policy, but that ability to sustain, maybe slightly improve the EBITDA margins that Nigel was so referring to is perhaps the combination of our successfully repositioning over the high-end segment. This is of course to some extent also sustained by the stable cost evolution that Carlos was referring to in a prior question. And of course, this is going to be offset by the results we're expecting from the welded group.

Okay, thank you. I have a follow-up question regarding the use of the cash and potential M&A. I'm calling from Europe and there have been some rumors that in a few months (indiscernible) that you could be interested in buying one of your main competitors, which is [Valrake]. So that's my first question, so can you comment on that? And my second question is more regarding valuations that you are seeing today in M&A. Do you believe that targets are becoming too expensive to spend you cash, or do you still find some attractive valuations to do acquisitions?

Okay. Going to your other question, we have no comment on that. These are rumors and we have nothing to say about. Following to the second one, so we're looking at the [pricing wars] very carefully. And as I said before, we look for different alternatives, even though the prices of the assets are high enough, but our value is as well and we have a cash flow and we have money. So we keep working very hard. But (indiscernible) in trying to get alternatives (indiscernible) and we look at the different alternatives that are on the table. But as I said before, we're looking at the long-term and we're following on a strategy. So we're not looking asset just because we have money and there are (indiscernible).

Okay, thank you.

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

Okay. Thank you very much everyone. And just another reminder about our investor day on the 6th of April. I hope to see some of you there and thank you very much for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the presentation and you may now disconnect. Have a good day.