Tenaris SA (TS) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2006 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 the conference. [OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your host for today's call, Mr. Nigel Worsnop, Investor Relations Director. Please proceed sir.

Thank you and welcome everyone to the first quarter 2006 conference call. Before starting we would like to remind you that the conference call contains forward-looking information, that actual results may vary from those expressed or implied. Factors that could affect these results include those mentioned in our Company's 20-F Registration Statement and others documents filed with the U.S. Securities & Exchange Commission.

Well, our first quarter 2006 results show that we've made a solid start to the year. Although net sales were lower compared to the fourth quarter last year, due to a weak quarter where our pipeline-driven Welded Pipe business, our earnings per share, operating income and margin all increased relative to the results of the previous quarter. And earnings per share were up 59% year-on-year.

Our industrial system is operating well and production of seamless pipes increased 4% year-on-year though this increase was not fully reflected in our sales volume. This was affected by the later arrival of a vessel for a shipment to the Persian Gulf, but should be recuperated in the second quarter. And the additional production is reflected in an increase in our inventory position.

We continue to reposition our production and sales towards higher margin energy products from lower margin industrial products. This was reflected in the continued improvement in our Seamless Pipe margin. It was also reflected in the 19% year-on-year decline in Far East and Oceania sales volume as exports of OCTG products from our Japanese mill have increased significantly since we shut down our coal drawing mill last year, to meet demand from our global oil and gas customers.

Sales volume in the Middle East and Africa region, on the other hand, showed a 48% year-on-year increase. There has been impressive increase in activity in Saudi Arabia where the rig count has doubled in the past 15 months, and we hold an important market share.

Aramco, with whom we have had a solid relationship over many years, is now our second-largest customer. We also began selling our TenarisBlue, near flushed premium connection to one of our operators in Saudi Arabia.

In Kazakhstan, where we opened our threading repair shop and service bays last year, we completed the supply of high-end products for the final 13 out of 23 development wells in the giant Kashagan field.

In Egypt we opened a new service base in Alexandria to provide pipe management services to Petrobel and other customers in the region.

We are preparing to meet growing Chinese demand for premium OCTG products through the construction of threading and coupling finishing facilities in Qingdao. With these new facilities which should be ready by the end of the year we will be adding 40,000 tons a year of additional threading capacity to our industrial system and positioning ourselves to build on our solid position in this strategic market.

In another strategic market we recorded our first significant sale of TenarisBlue connections in the U.S. And with Chevron, one of our key customers, we expanded the long-term agreement we made for OCTG products in 2002 to include deep water line pipe products.

Now I would like to ask German to expand a little bit on these points regarding what we have been doing in the market before going on to the questions.

Well thank you Nigel and good morning to everybody. Building on what Nigel just introduced I think that I would touch on the market outlook, the way we see the industry going from our perspective, from the pipe perspective. And then maybe review some of the major relevant information news on key market.

In generic terms, as we presented in New York, where we see the industry is transitioning in solid pipe and given the generic position, there is nothing that we believe may potentially change in the near future.

Going to the specific regions, Middle East in particular, Saudi Aramco continues to be a very important market for Tenaris.

Saudi Aramco, during 2005, has almost bought 200,000 metric tons of seamless OCTG and Tenaris continues to have the largest share position in the market. There we're not only selling a lot of pipe, but also are introducing our, say, top new products. So Aramco is a Blue user. It has also tested, or is in the process of testing on an exploration well, our Dopeless application. And as Nigel anticipated ENIREPSA, the joint-venture between Eni and Repsol who is operating in Saudi, has just purchased our first Near Flush Blue product, which we are expecting to deliver within the next weeks.

West Africa continues to be a very important market for Tenaris as well. Not only we still have four out of the five Nigeria operators, but in the quarter we have also booked a very important line pipe -- deep water line pipe project for Total. This is the [APA] project. It deals with about 40,000 metric tons of deep water pipeline which contains 7,000 tons of risers and this is perhaps given co-size in another technical specifications, one of the most complicated deep water pipelines that we have supplied.

The Caspian Sea remains another very important market place for Tenaris. There we are still present in Karachaganak up in the North, and [Greece], both onshore operations, but also Kashagan with KCO. There we are about to complete the 23 initial well programs and we are now in the process of discussing Phase II which contains about 15 wells, which may end up being 21. Again KCO and Kashagan, a Blue user and a very important business area for us.

We mentioned also some news about the U.S. and in particular our first relevant order of Blue premium connections in the States. This is, as you know, the U.S. is the individual, biggest premium connection market in the world with a size of about 500,000 or a bit over 500,000 tons of consumption a year. And over this last quarter we booked our first, I think, relevant order there for an independent operator, something in the area of 8,500 tons which we are expecting to produce in our Canadian facility and deliver during the second half of the year.

Additionally, the ITC in one of our trade cases, in particular the big or the large OD trade case against Mexico, reviewed its position and the order was withdrawn. As you may recall in our prior discussions we expressed that Mexico had a 15.05% dumping quota, which was again reviewed as part of the Sunset review processes and eliminated. And this obviously then opens up the possibility for Tenaris to participate, not only in the deep water portion - this is deeper than 1,500 feet - but today we could then participate with no restrictions, on the large OD.

Mexico, another very important area of business for us, continues to transition the election year. Where we anticipate the budget increase is probably not going to be enough to sustain the level of operation and we see now this translated into a reduced number of rigs and consequently a contained level of activity.

Finally, Venezuela, another very important market for us that during the quarter transitioned what, in Venezuela is called, a reorganization of the role play by the international operators. And we have to say that despite the associated slowdown, as a result of the reorganization process, Venezuela in general is sustaining 94 rigs and the rigs are, I think, operating at an appropriate level.

With that I'll turn it over to Nigel and I think we will be ready for a Q&A session.

Thank you German and I think that we can now open the call up to questions.

Thank you sir. [OPERATOR INSTRUCTIONS]. Your first question comes from the Ole Slorer from Morgan Stanley.

Thank you very much. Nigel, I wondered whether you could help us a little bit with getting some more color on the seamless sales volume in the first quarter? I understand, sequentially there is the holidays in Latin America and therefore plant shutdowns. But still the volumes seem to come through a little bit slower than what we are looking for in the quarter. Was there any other plants that were shut down for maintenance or anything like that? Can you quantify that a little bit as well as maybe part of it is due to this delayed sales, the booking will fall into the second quarter? Could you just elaborate a little bit about the magnitude of what we are talking about?

I think German will respond, Ole.

Good morning Ole, how are you?

Very well thank you.

Let me address the volume together with the plant situation. The volume was somehow affected as a result of a shipment delay. In complete terms, a vessel directed to the Persian Gulf showed up later than when it was supposed to. And consequently will be well compensated during the current quarter.

Now during the quarter, no, we didn't have any maintenance stop on any facility other than [Sederca], but overall that maintenance stop hasn't effect us in terms of production. Which as we expressed, it increased during the quarter as well.

So yes, we had a shipment delay and also it will be compensated during the quarter and I think going forward we will see marginal increments of volume as a result of the bottleneck in process that we are in, along with the start-up of a new a launch which is part of our CapEx program.

Okay, so going into the second quarter -- but what kind of affect would this shipment have? I understand it's a big volume. Did you take the costs in the first quarter and you're booking the profit in the second quarter, is that the way to think about it or how should we think about it from a financial standpoint?

Well, you know that from a volume perspective, Ole, they sell to a place like the Middle East could mean 10, 15,000 tons. We're talking about the loaded vessel. So it's a relevant quantity and I think this is an important point because one may be led to think that the delay on a shipment may mean pipes that are going to a well or two, and this is not the case.

Now, as far as of course, the sale, it was not recorded during the quarter and consequently the cost is not, the margin is not. It would all be reflected during the second quarter.

Okay. If I can follow-up with the comments you made on the Asian industrial sales were weak. Is this because of end user, kind of net volume loss or is it because you are finishing industrial products more for oil field application?

Well it is much more aligned to the second point, Ole. We have informed that we are taking low-end rolling production and as a result of our CapEx program, the bottleneck in process transforming this low-end rolling into high-end roll in to service, to service the energy segments. So it is from a low-end finished product to a high-end finished product to service two different market segments.

Would it be possible to give some kind of an indication of the change in your end user mix from the fourth quarter to the first quarter? And maybe a little on what to expect going into the next quarter, the breakdown between OCTG and line pipe price, deep water, and then mid-stream refinery L&G and the rest industrial?

Yes, let me for instance compare quarter-to-quarter Ole. That would provide I think a good color. Our industrial, automotive services sales were 24% during the first quarter '05. They came down to 16% during this quarter. And that deals with the strategy of repositioning the company towards the energy sector, and in particular the high-end component, which as we have presented in the past have grown from 37% during '05 into a 40, 41% recurring quarters, prior quarter, this quarter and we are expecting this to grow maybe to a level of 50% once we have all our CapEx components in place.

Okay. If we think about other markets than upstream oil and gas we think about things like for example the U.S. pipeline infrastructure demand. We have a report out concluding that there is about a $20b of pipeline, infrastructure pipelines, needed in the U.S. main market to support domestic, largely land trunk line. And also a refinery on L&G we're hearing a lot about increased demand for $12b refinery in Saudi Arabia and other places. How does that -- this is not exactly necessarily all of it high-end seamless, but how does that affect both the industry and your position with it?

Well let's divide that in two as far as pipeline infrastructure, in particular deep water pipeline, infrastructure that is taking place in the Gulf of Mexico. I think overall I could say Tenaris is today, without a doubt, the market leader of that segment. We have perhaps a 50% share of the worldwide, deep water pipeline market segment, which accounts for something close to, say 250 to 280,000 tons.

Now I think an important component from a U.S.-specific perspective is that as a result of the ITC resolution Tenaris will now be in a position to address the chain, either end users or EPC contractors, with the ability to provide the complete packages, which so far were limited only to requirements, pipe requirements, which was going to be used in areas deeper than 1,500 feet. That's very important because as you know they are mostly serviced by our either Italian mill or Mexican mill. Therefore, from a logistical perspective, that would put us in a very favorable position.

Now the downstream markets, projects market is also as you said developing rapidly, that heavy construction in the Far East and in the Middle East as well. There we are of course talking about more of a low-end mix because it's conduction pipe for the most part. But there are some boiler applications and big diameter seamless applications which we categorize that high-end because of specific technical requirements.

Now, there we are planning on also having a major presence. That maybe a market segment of about, roughly speaking, 500,000 tons per year.

Okay, so if we look at the pricing in the quarter, I've heard from other seamless providers, that the standard pipe prices have been flat sequentially. And if we assume that that is the case for you and a 60/40 split then we kind of get an indication of a 5 to 6% price increase within the premium segment. Would that be the right way to think about it?

Well Ole, we have said, in New York, we see prices stabilizing, but of course the low-end part it's pretty stable. And you can see that reflected on, not only what some of our competitors are saying, but perhaps the pipe logics is representing that very clearly. Now as long as we continue to improve our mix to high-end products then of course this is reflected in our price improvements.

We are very carefully looking at our relationship with our customers when it comes down to price. I have to say though that at the high-end there are some areas where we may still see some improvement.

Okay, well --.

Now, given the industry situation in general, I think it would be important to also say that we anticipate that we will have no problems on passing on toward the industry, potential cost increase -- or increases that we may confront in the coming months.

Yes. Thank you very much for that clarification. I'll pass the call back to you guys.

Sir, your next question comes from the line of Daniel Altman from Bear Stearns.

Hello, good morning. I guess two questions. Firstly the increase that you had in your seamless margins, you know pretty impressive. It seemed to be more than just price increases. It seemed like there was also a reduction in some of your costs. I wonder if you could share with us which of the cost components were down in the first quarter and whether you're seeing renewed cost pressures going forward?

And then the second question is, you kind of touched on this in New York as well, that you know your balance sheet is now very firmly in the net cash position. How do you plan to deal with that? Is it a -- could we expect to see higher dividends? Are you setting up the balance sheet for an acquisition? What would be the best way to look at now a net cash position on your balance sheet?

Okay Daniel, good morning. Yes regarding the cost, yes in fact we had a decrease in our costs for the first quarter, but as you said we are expecting some increase in our costs. The main issue, for looking at the reduction in the first quarter comes, from the ferroalloys. But for the second quarter we are expecting some increase in our metallic and scrap mainly and also maybe some increase in iron ore. But in this case it's going to be affecting partially given that if the price goes up it's going to happen May or something like this.

So second, going to the net cash position or a strong financial position, as we say every time people ask us, we are working hard, in looking our positioning and the best use of our cash. But frankly, we have nothing to announce today.

And I would just like to add something on the EBITA margin because in terms of the seamless, the gross margin went up by two percentage points, but the EBITA margin increased more than that. And that was related more to the mix between the welded and seamless, with the lower welded meant that the overall EBITA margin increased.

Okay. And just lastly, the volumes in your welded segment, it does tend to be very volatile from one quarter to the next. Are you able to give us an estimate for the full year?

Well Daniel, we have said in fact volumes have been adjusting rapidly as a result of, for the most part, the delays on the [Gastana] Project up in Brazil, which we now see maybe a resolution towards the end of the year. But we don't believe that it's going to impact the '06 results. Also the [looks] in Argentina have been delayed. They're now renovated discussions, but we believe that nothing would probably materialize before the last quarter of this year.

And we're of course compensating that with exports. We have recently booked an important project with Enbridge here in the United States, and also in Africa. Of course margins, given the logistics component, are nowhere near what we've seen and this is affecting the overall welded component of our results. Volume wise we'll see some reduction, I think between now and the end of the year.

Okay. Thanks very much.

Sir, your next question comes from the line of Enrico Bartoli from Intermonte.

Hello, good morning gentlemen. Just a question about if you can elaborate a bit more about the costs for seamless pipes in the quarter because it seems that your gross margin for seamless pipes went up much more than the 2% increase in the price?

And second question is about increase in capacity. If you'll see some further development in the industry? Some additional plants expected to become operational soon? Thank you.

Yes. First when we compare the EBITDA margin we have further gross margin where, as I said, we have a reduction in cost. The reduction in costs, our reduction in our seamless pipes around 18 to $20 per ton. So this is a -- the reduce goes with that. But we also have some reduction in SG&A, which better off our total margin. So regarding the components of lower cost, we have different components. One is the ferroalloys went up and then we have some other minor changes. For instance there are always some de-evaluation in Argentina because we are comparing areas versus areas in terms of exchange rate. So it'll help us a little bit in terms of U.S. dollar, but bottom line the main issue the ferroalloys and some reduction in other SG&A.

And also if you are looking at the EBITDA margin, take into account that compared to the last quarter last year we had an increment in our other profit and losses, mainly due to an extraordinary success with -- we disposed our investment in one of the companies, we didn't want, but we had to acquire when we acquired Silcotub in Romania, and it means something around $7m. And also we didn't repeat some other extraordinary issues we accounted for last quarter to 2005 which was with an investment with bank for -- in Italy, for environmental reasons. This is bottom line what's happening this quarter regarding the margins we have. And --

Sorry, just to clarify. So your indication of an EBITDA margin in -- for the whole year in line with the one in this quarter. Takes into account that this cost reduction will be probably partially compensated by other cost increase, but will keep being in profit and loss?

Yes. We are looking at some increase in cost, as I said before, but it should be offset by higher pricing. We should be able to -- to pass through and to get higher price.

Okay.

Now I'll take on the capacity question and, as we have indicated, we know that the Chinese industry is adding capacity. We know that during early part of '05 D&G Pipe has start-up a new mill with a phenomenal capacity of about 0.5m tons. Towards the later part of '05, both Changdo and [Kinyan] are also two seamless mills that have started up or are in the process of starting up in one case. And MPM, a rolling mill, each one of them again with phenomenal capacity of 0.5 million tons.

Now from a capacity perspective we believe that the industry dynamics are some in China are bringing in new low-end capacity and some others like Dinelli's are transforming low-end capacity into high-end capacity. And with that we believe, ultimately, the pipe industry will be able to meet the increased market demand.

Okay. Thanks a lot.

Your next question comes from the line of [Anarosis Brunther] from Capital Equity.

Yes hello, good morning gentlemen, a few minor follow-up questions if I may. First of all, if I look at your shipment pattern in the quarter, there was also some slowdown in the Far East region. Can you maybe elaborate a bit whether there had been some special effects apart from seasonalities?

Secondly in the slowdown in South America, was it only due to Venezuela or Bolivia? Or has there been also some slowdown on the Argentinean business?

On the price trend, you were mentioning cost increases and potential price increases on the back of that. Is it easier to push through price increases when your costs going up? And does that imply that we could see acceleration on the margin side during the course of the year, once cost increases occur?

Okay. Let me go back to the questions, maybe I'm going to need to help -- need to ask you to help me on follow-up the specifics because they were all very many. But I'll take on the seasonality component first. As we have always said, typically our third quarter is the weakest one volume wise because well not only Canada confronts the typical summer adjustment, but also Europe. And those are then that third quarter is usually one where we confront a fairly strong seasonality effect.

Now as far as South America is concerned, I said Argentina is stable. It's doing well. We have not seen any adjustment other than an oilfield services strike, which we had in the prior quarter that was luckily now overturned. So no major things.

Bolivia, I think we all are confronting the new nationalization drive that the new government is of course pushing through. It's an important market, not a huge one, very important from positioning and historic reasons. Two very important operators in Bolivia have been our traditional customers. We're still there. We have an office, a yard. We believe that it may probably have some adjustments going forward until this situation settles down, but overall in terms of overall volume is, I would say, not that relevant.

Venezuela, I talked a little bit, in spite of the reorganization of the company's, equity participation, reorganization, we've seen that the country is sustaining a level of rates equal to about 94. And that translates in stable 150 or more thousand tons, which we're servicing with no major problem. So, well overall we see that in spite of the news and volatility, the consumption part and the way industry is behaving is overall pretty stable. Mexico though is from a Latin American -- with a Latin American view, the one that's adjusted. We talked about it and we'll see during the year.

As far as the prices are concerned, again this -- the view, the given the industry dynamics, going forward we will be able to pass on potential cost increases if they come down to it.

Can I follow-up here? I think you missed my first part of the question. In terms of the regionalities I was seeing that the Far East this year was down quarter-on-quarter, while last year Far East was somewhat up. Has there been any special situation there?

Well if -- I'm sorry then, but no it's -- the situation is that last year we were facing, in Indonesia, that was performing a lot better than the prior one and consequently with an increased volume. Now this quarter we've seen much more the effect of the repositioning of Tenaris in the Far East than anything else. We are to some extent leaving some historic industrial segment in the Far East, both Japan and to some extent Korea, and of course repositioning that volume towards the energy segment elsewhere.

In order to understand you correctly here, this repositioning thing, does that actually mean that during this kind of transition period, you're lacking some capacity because you have to readjust on your downstream facilities? And once that transition is done you're probably able to ship more?

Well no, not really. What we're simply doing is leaving some of the industrial mechanical, seamless pipe segment and increase our participation in our traditional energy segment. Of course the addition of finishing capacity, both in the form of heat treatment and trailing, will allow us to confront the energy segment, or space, with finish OCTG. The first repositioning talks about, for instance, line pipe. We're no longer servicing so much the mechanical line pipe segment in the Far East and we are diverting that line pipe production towards the energy segment to services -- to service, sorry, spaces in the downstream segment or even the pipeline segment.

Okay. Got you. Thank you.

Sir, your next question comes from [Marie Grupner] from [Sternwer] Bank.

Yes hello, good morning. I just have one -- actually a couple of questions. First of all, I'd like to know the extent or the magnitude of price increases in your high-end premium segment, because you commented I think quite broadly on your ability to pass on potential cost inflation. I just wanted to know if above and beyond that, in your premium segment, in light of structural supply/demand imbalances, you are able actually to increase prices above and beyond that?

The second question is whether you're finding yourself frankly competing with [Valureck] on certain deals?

And the third question is, where would you be -- I mean strategically, where is that you're looking to acquire? Are you looking to acquire capacity? Or are you looking to diversify into connects businesses so to speak?

Well let me take on the prices point and I guess you would appreciate that, for competitive reasons, it's very difficult for me to get into Premium price in detail. I hope you understand that.

Absolutely.

But rationally you could say that the premium high end makes demand have increase and then naturally prices have appreciated to the extent of not only covering the cost. In some instances it's been above that and that's being reflected in the way our margin has evolved.

Now your second question, are we competing against [Valureck]? Of course we are. Not only [Valureck], but some other Japanese players that are important participants of this high-end seamless space. The third question --

Sorry, does this competition mean that you're actually finding yourself in a position where you have to cut prices to win the deal, or not? Is it that bad?

Well competition means that we have of course our position in strategy -- our pricing strategy and we, like everybody else compete. Sometimes we win, sometimes we don't. I guess you would appreciate that it would be very difficult for competitive reasons to get into some specifics. It's a space populated by a number of players and we all, if you will, confront the same for the most part customer base that we all compete in.

Now on the third question, I'll turn over to Carlos who would comment on that.

Thank you.

Okay. By in general terms we do our best and we look for repositioning ourselves as we announced, and that's why we are shifting production and going to more high-end. But in making an acquisition first we look at the markets where we want to be and also how much capacity we can add by doing so. Also as we did in the past, we think about how to keep reducing the cost and being more cost effective as far as quality and developing new products and new services to our customers. This is in general terms the lines we follow by.

Let me, Carlos, build on what you're saying and going back to the prior point with respect to competition environment. I'd like to bring back one point that we have presented previously, which is the way Tenaris is confronting its customer base. It's not only products we're talking about in competition with some of the existing players, but also it's fuel services, which in the form of pipe management, in the form of inspection services, in the form in some instance of planning services, which not everybody does in the industry.

Alright thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Frank McGann from Merrill Lynch.

Hello good morning, just some -- two questions on the cash flow statement. There was a $29.8m amount for acquisition of subsidiaries. I was just wondering if you could clarify exactly what that was related to? And then there was income from disposal investments $6.9m. I was wondering if you could just also clarify what that was?

The acquisition was Acindar, the welder pipe of Acindar. And the income from the disposal was the Germanian subsidiary which we acquired when we acquired Silcotub, which we managed to dispose of, which we weren't interested in this business.

Okay great. Thanks a lot.

Sir, you have a follow-up question from Ole Slorer from Morgan Stanley.

Thank you very much. German, I was wondering whether you could just walk us through the regular -- the regulatory changes with respect to the U.S. market once more? Just remind us where exactly you've been able to sell historically, whatever products? In other words the line pipes the flow lines have been exempt. And also the pipelines to land, if I understand correctly have been exempt from the anti-dumping. And this rule with respect -- it seems like something significant changed and I'm not sure if I fully understand how it's going to impact your business. I mean I understand that you can sell to the U.S. market today from your Canada plant and from your Romanian plant and you're expanding up to 11 inch in Canada. But how does -- how does the Mexican situation or the Italian situation change with this change in ruling, if you could just sort of slowly walk us through the details there?

Sure Ole. Let me first of all probably review what we're doing and the way we believe this ruling may impact. Today we're servicing the portion of the energy industry in the States in the form of OCTG, given the sizes for the most part coming from both Canada and Romania. These are tubing and medium-range casing sizes that we're providing from these two mills. Now the restriction that we had and consequently the impact on the ruling prevent us from selling large OD line pipe in the United States from our Mexican mill. Of course we were servicing from Italy and of course we were servicing even from Tanza, the deep water portion and that came, going back two years ago, to the conclusion of an exclusion agreement that we negotiated once industry in the States confronted the fact the dumping restrictions of large OD were imposed, and they ran the risk of not being fully serviced, in particular in the development of the deep water infrastructure.

So over the last years we have supplied large OD line pipe for deep water pipeline projects from our facility in Italy and Mexico.

Sorry but it was -- to clarify I mean more than 1,500 feet, is that the cut off?

Yes exactly.

Okay.

That is the cut off and maybe more importantly the way the ruling was structured. So over these last few weeks, again as part of the Sunset review process you know that every five years the trade cases are -- need to be reviewed. And as a result of the review the ITC determined that the case against Mexico was to be reviewed and eliminated. Now in material terms, this allows us today, or once it is fully implemented, to confront EPC contractors or end users that are developing the offshore infrastructure and propose complete packages. That is not only pipe that is used deeper than 1,500 feet, but pipes that would get to the platforms and potentially floor lines and make it to land.

Did that -- the pipelines that have been less than 1,500 feet, were those also for the most part the seamless? Or was that for the most part the welded?

No a good component of that, Ole, is seamless, in particular when you talk to -- or when you talked about high pressure high temperature flow line and no doubt when you talked about both steel cutting ATI risers or top tension risers.

Yes but then in less than -- yes I suppose it could use those in less than 1,500 feet as well. So really that allows you then to compete more freely with some of the U.S. providers there, I suppose it would be [Valureck], the AV&M plant and the [Norsta] plant and then also compete more freely against U.S. Steel, will those be the three main suppliers today into that market segment?

Well there are of course -- those are the technical participants and it opens up a new opportunity for Tenaris in particular from Tanza and Mexico that is extremely well located when it comes to servicing the Gulf of Mexico.

So far there's no change on the OCTG component, that ruling is still in tact?

Yes, sir.

Okay. Thank you very much for clarifying that.

Sir, your next question comes from the line of Ricardo Cavanagh from Raymond James Argentina.

Yes hello, my apologies, I jumped in a little bit late. I don't know if you had already this question, but you addressed that there were some capacity expansion projects at the low end of the OCTG pipes in China. And my question would be if you foresee any capacity expansion at the high end from your main competitors? And I understand that over the next few quarters you expect to be able to pass through to prices an increasing cost without problem. But my question would be how do you see over the medium term -- how strong do you see the sustenance of demand growth for high end pipes out pacing supply?

Okay on the capacity question, yes we are informed about the Chinese projects, which as you know we're present in China we're building a facility in China. And as such we've been able to develop I said a pretty accurate China pipe industry understanding. Now we are of course not perfectly informed about potential high-end capacity increase, but we need to assume that like ourselves, our competitors are of course doing this.

Now with respect to the pricing question and the ability to pass on cost, well we believe that given the industry dynamics we will be able to, if costs are appreciated or if we confront inflation -- cost inflation, we will absolutely be able to pass on this to the industry.

Okay. Thank you very much.

Sir, at this time we have no additional questions. I would like to turn the call back to your host for today's call, Mr. Nigel Worsnop, for closing remarks.

Okay thank you and I just want to mention something -- to clarify something that -- with respect to the welded pipe, we are expecting year-on-year declines in volumes, but in the coming quarters the volume is likely to be higher than the volume we recorded in this particular quarter. So thank you very much, everyone, and we look forward to the next one.

Ladies and gentlemen, thanks for your participation in today's conference. This concludes the presentation. You may now disconnect.