Tenaris SA (TS) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2006 Tenaris earnings conference call. My name’s Enrique and I’ll be your audio coordinator for today.

At this time all participants are in a listen-only mode. We’ll be conducting a question and answer session towards the end of the conference. [OPERATOR INSTRUCTIONS]. I would now like to hand the presentation over to your host for today’s call, Mr. Nigel Worsnop, Director Investor Relations. Please proceed sir.

Thank you very much, and welcome to our second quarter 2006 conference call.

We would like to remind you that the conference call contains forward-looking information and that our actual results may vary from those expressed or implied. The factors that could affect those results include those mentioned in the Company’s 20-F registration statement and other documents, which we’ve filed with the U.S. SEC.

Well, thank you and welcome everybody. With us today we have Carlos Condorelli, our CFO and German Cura, our Commercial Director.

And our second quarter results reflect the strength of our global position as a supplier of highly competitive products to the Energy industry, as well as our constant efforts to improve our industrial logistics performance, at 765,000 tons of Seamless shipment, this represented a new quarterly record and this was matched at the production level.

Lower sales in North America was reflected by the constraints that Pemex is having in its operations this year and the constant slow down in drilling activity in Mexico, were more than compensated by record sales in the Middle East and Africa.

The average selling price for our Seamless pipes rose by 6% compared to the first quarter. This increase mainly reflects changes in the product mix towards more Energy products within which we had more sales of premium connections, including TenarisBlue, and other products in a very demanding environment, as well as the actualization of prices under longer term contracts.

Costs, however, remained relative stable as lower [ferro alloy] costs offset higher scrap and metallic costs, and lower energy costs in Mexico offset higher energy costs in Argentina.

Net sales, EBITDA and operating income were all at record quarterly highs and earnings per share were up 12% sequentially, and 51% year-on-year. The outlook remains very favorable for our Seamless pipes, and we should continue to see good results in the second half.

Seamless pipe volumes in the next quarter will, however, be affected by annual maintenance shutdowns at our Italian and Canadian plants. Welded pipe volumes, which benefited this quarter from higher export volumes will, likely, be weak in the next quarter, but may benefit in the fourth quarter from the delayed projects for the gas pipeline loop expansions in Argentina.

A quick update on the Maverick acquisition. We learned on Wednesday that the Canadian Competition Bureau had cleared the acquisition. The U.S. Competition Authorities have also cleared the transaction. We’re waiting approval by the SEC for the proxy statement, clearance from the Columbian Competition Authorities and the approval of Maverick’s shareholders. And we -- to complete the transaction around the beginning of the fourth quarter with the possibility that it could even be a little earlier.

Now, I would like to ask German to run us through some of the commercial highlights of what was a very productive quarter for us and, perhaps, to add something more on the Maverick deal.

Thanks Nigel and good morning everyone. I will start our OCTG products. Saudi, as you all know, is investing heavily in increasing production capacity. OCTG demand for the year should be around 350,000 metric tons in this market, some of -- around 40% to 45% will be premium connections out of which we have about a share of 50%. So, this is a very important market for us.

Looking forward, in addition to Saudi, we also see Kuwait very active. We are already in the process of bidding to supply OCTG for the new deep drilling campaign. This is a tender of about 100,000 metric tons, of which 50% will be sour, service and premium.

In North Africa we have built a pretty good position in Algeria with both Sonatrach and the rest of the international companies operating in the country, to whom we have now introduced Tenaris low premium connections.

In Egypt we open a new service base at Alexandria from which we are providing pipe management services to companies like Petrobel, IEOC and other operators. Following on from our first sale of our new TenarisBlue Near Flush integral connection to [Ena] Repsa in Saudi Arabia, which we announced last quarter, we made our first sale in Egypt of this product to Centurion.

In Latin America we concluded a five year agreement with Repsol, expanding our current alliance in Argentina to cover all of Repsol operations in Latin America.

In Russia we made our first significant breakthrough in the high end market. Lukoil awarded us with an important order of pipes for six exploratory wells for the [Enyara Mara] project. And Gazprom booked with us a first order of about 9,000 tons of TenarisBlue with sour service rates.

In the Far East we are working with our long term partners, Chevron, as they continue their appraisal of the Gorgon project on Barrow Island, Australia and they’re using our TenarisBlue Dopeless connections for this environmentally sensitive project.

In our Process and Power Plant Services we concluded an alliance with [Alstrom] to provide pipes including a T91 grade for HRSG, used in the 12 combined cycle power plants project.

We also won important orders for Dung Quat refinery that Technip is constructing for PetroVietnam, the PetroVic petrochemical complex in Saudi Arabia and [Gamaga] refinery that Reliance and [Pecta] are constructing in India. These are large contracts -- projects and we’re working closely with our customers to ensure timely availability and secure delivery of the tubular material.

The outlook for this sector remains highly promising and we’ll be competing to supply Shell Pearl GTL project in Qatar going forward, and new LNG plants for Algeria, Nigeria, Angola and [Monadas].

In Pipeline Services we achieved a significant breakthrough in Azerbaijan as well. There we’ve been an operator that has an established alliance with one of our competitors, awarded us an order to supply 15,000 tons for an injection line, so for the injection line of their ACG project.

In West Africa we were awarded 15,000 tons of high end line pipe for Shell [Gibaran] project in Nigeria and about 6,000 tons of Exon [molecisonbasee] Project in Angola.

Now with respect to the West African region, we believe that with gas [waiting] to be forbidden in Nigeria from next year and in Angola from 2008, significant opportunities aligned to the infrastructure development will appear.

Now I would like to just return for the moment to our proposed acquisition of Maverick. We remain absolutely convinced of the strategic importance for Tenaris of this deal, in a world where we see global consumption of oil and gas continuing to grow and continuing supply constraints cost by the depletion of natural fields, the lack of discoveries of substantial new reserves and the restricted access of the majors to new reserves.

We have been positioning Tenaris to respond to the challenge of meeting the growing need of our customers for products which perform in ever more technologically challenging environments, such as the West African deep water, the Norwegian Artic, extremely sour and high pressure environments, the Canadian oil sands, just to mention some.

However, the demand for OCTG use in less demanding applications in mature fields is also growing rapidly. And this growth is likely to accelerate as improvements in completion technology speed up the rate of depletion of these fields.

If we take a look at the U.S. market, where most of the production comes from mature fields, we can see that, over the past three years, there has been a 10 -- around 10% decline in the production of oil, and about a 4% decline in the production of natural gas. But during the same period OCTG, both Seamless and Welded, have increased from 1.8m tons to 3.7m tons and the rig counts a similar increase from 830 operating rigs to 1,380 active fields. And the picture is very similar in Canada too.

We have also clearly indicated in the past that one of our major strategic objectives was to gain a more substantial position in the North American market. This is both in U.S. and Canada.

In a total global market of OCTG last year of some 11m tons and I’m, again, counting both the sum of Seamless and Welded, North America accounted for around 5m tons, about 45% of the total. With Maverick, our OCTG market share will rise to 20% in this market, which would be commensurate with our leading position in the rest of the world.

When we look more closely, and given the extensive use of less demand in OCTG products in North America, our account shows 2.5m tons in 2005, we concluded that Maverick was a good complement to Tenaris. And we believe that this acquisition would help us to provide our global customers with the most complete and optimum range of products suitable for the use in all applications required by the market, from less demanding shallow wells to very demanding sour service deep water applications that use high [chrome] premium connections.

So with that said, Carlos, I don’t know if you would like to add anything else.

Yes, German, thank you. Good morning everybody. I just want to confirm that we are very convinced of -- that it’s very important for Tenaris from a viewpoint of position in our strategy, but also from the financial perspective, this acquisition for us makes a lot of sense. It should be nearly accretive, even before considering the synergy that we could achieve at entry on Maverick.

As you know, we’ll be paying the acquisition principally with debt. And regarding the debt, we have secured financing for 2.7b, the cost that on -- after taxation we’ll have a cost of consumption less than 5%. Considering the -- today’s LIBOR and our credit rating from Fitch has been maintained, even though this level [of impairment].

So, bottom line, we are very convinced that, financially, the financial sum of the acquisition is guaranteed.

Okay operator, I think we’re ready for questions now.

Thank you sir. [OPERATOR INSTRUCTIONS]. Questions will be taken in the order that they are received. Also, management has requested that you please limit your questions to two questions during the Q&A. [OPERATOR INSTRUCTIONS]. Your first question comes from the line of Daniel Altman from Bear Stearns.

Hello, congratulations on a great quarter.

Thank you.

Yes, just a few questions, firstly if you could explain on the taxes payable, or at least the tax cash payment you made in the quarter, is this related to prior tax liabilities, or are you in some way prepaying your 2006 taxes?

And the second question is on the financing for Maverick, if you’ve considered selling your stake in Ternium to help finance that?

And the third question is, we’re seeing obviously, significant, imports of Chinese OCTG into the U.S. Has -- is that something that you factored into the Maverick acquisition? Is it something that concerns you? Thank you.

Okay, Daniel, going to the first question, yes, we have, in May in this quarter, we paid a final tax regarding 2005 income in our main operation like Argentina, Mexico and Italy.

And also, we have to prepay taxes. But the tax -- every year during this second quarter is when we have to pay the taxes accrued for the period last year. And during the year we continue paying taxes because, in Mexico, in Argentina mainly, we have to pay that [final down payment] for taxes. But the main payment comes in May approximately every year.

Going to the financing the acquisition, no, we are not selling our participation in Ternium. And we have secured the financing. We had the money to do so and we are very happy with our participation in Ternium.

And I go to German for the Chinese OCTG.

Thank you Carlos. With respect to the Chinese imports we’re, of course, monitoring the evolution of those. We know that China has brought to the States something in the range of 400,000 metric tons during ’05, and I think we have also talked about China increasing some of the Seamless capacity.

Now, from a U.S. perspective, our view is that with the level of 40% imports I think there’s, in pragmatic terms, not really a lot of room for those level of imports to continue to grow. Only last week we saw the Russians were confronting new and [renew] and they’re ramping cases in Europe as a result of, not only increased level of exports, but also given some pricing considerations, which were considered and fair.

So we, ultimately, are monitoring the situation very closely. We believe that China is aware of the position that it’s taking and, ultimately, it’s aware that the market could resist a level of imports but a threshold that, historically, cannot be surpassed.

Okay, thanks very much and thanks for the early reporting yesterday.

Thank you.

Sir, your next question comes from the line of Ole Slorer from Morgan Stanley.

Yes, thank you very much. First of all, the pricing improvement, sequentially, was a little bit ahead of what we were looking for. And I just wonder whether you could elaborate a little bit more -- give us a little bit more breakdown on what triggered that 6% increase in average selling price? What -- to what extent was [it] mix you highlighted more on Energy? And to what extent was there a general pricing component? If you could just flesh it out a little bit more.

Yes, Ole, good morning. With respect to prices I think our position continues to be that we see prices in the market stable. Now, with respect to these last quarter results we continue to see our efforts to move towards high -- a higher component of high end mix as our CapEx program continues to kick in.

Now we, in all fairness, have also seen some improvements associated to the re-negotiation of some of our existing long term agreements. When -- I think it would be fair to recognize, and I know industry has talked about it as well, that there is a premium associated to reliability of supply. Projects are being developed. Big commitments are being made and, consequently, reliability of supply has become an element on pricing discussions.

So, how much would you say was the function of, if you say, out of the 10% improvement? Was it -- would half of it, be a function of re-negotiation or older agreements and half a function of mix change? How much did the mix change in the quarter? You said oil -- the Energy component went up. What was it the previous quarter and what did it go up to this quarter?

Ole, the majority of our price increase is linked to a higher -- high end component, a richer mix without a doubt.

Okay. Okay. Just a little bit more on that, you mentioned more tube finished with the TenarisBlue. Could you give, specifically, an overview of where you think that the TenarisBlue premium connection has reached the most successful penetration?

I understand that you’ve been very successful in Canada, for example. Could you give a little overview of what’s happened in the Canadian market with respect to the penetration of the TenarisBlue, and where you stand in other key markets?

You’ve highlighted in the previous quarter conference call that you had made your first sale into the U.S. and your first sale into Mexico. Could you give a little bit more on where you feel that this is now becoming an established and accepted solution, and where you still feel that you’re at the early stages?

Yes, Ole, let me probably share some macro numbers with you and then probably tackle on some of the, if you will, country specifics. But our sales for TenarisBlue during this first semester of ’06 were higher than what we sold the complete ’05. So, it is a product that is being absolutely well received by the market. This is particularly true and maybe in order of importance of Saudi Aramco, where the combination of Blue and sour service for the gas development has proved to be very effective, very successful.

Also, on the SAGD development of Canada, to mention your example, there as we have indicated, we have a big share probably 75% of the SAGD development is today covered by Tenaris Seamless applications and a good portion of that, or the premium portion of that today, is Blue.

We are particularly satisfied also with the way that the Near Flush Blue is being received by the market. We announced the introduction of this connection in Saudi. This last quarter we, I think, booked an important order in Egypt, which would be, for the most part, dedicated to the exploratory project of Centurion. And --

So, on a Near Flush with -- have you had any success in breaking into the U.S. market yet with the Near Flush?

Not yet. Not yet, we’re working on completing all of qualification stages, which we’re confident to complete in the near future. But without a doubt, as you know, the U.S. is the single biggest premium connection market in the world, accounts for about 0.5m tons. And a good portion of that, about 40%, is used in applications, which our Near Flush product maybe a very strong solution.

Exactly. And on -- just finally on Mexico, the finish on the Blue, you made your first sale to what I understand in the first quarter. How has that progressed in the second quarter?

No, that’s moving along well. The problem in Mexico, Ole, is that I think we are confronting the overall Mexican situation. [Recount] is reduced. Mexico is transitioning the -- well, political situation we know of, and this is affecting, to some extent, [Pramex].

We’re very confident that once this situation is resolved, which shouldn’t be later than August 31, then, of course, Mexico should be able to pick up back again.

But let’s -- if we assume that the Mexican market stays flat for another 12 months and starts to pick up in the middle of 2007, do you think you will have any problem, whatsoever, in exporting all potential excess Mexican production into Saudi or West Africa, or other areas over the world?

No, absolutely not, Ole. We believe that, as it’s happening today, the adjustment of Mexico is being well covered by the increase on some of our global markets. And I think these results just show that.

Yes, exactly, but just one final question. This is the first time I’ve heard you mention Russia, and you have mentioned it in two separate instances. Should we read anything more into that? Is there -- is this a new market where you’re going to try to focus?

Well, it’s always been a very important market. We know that OCTG consumption in Russia accounts by something close to 1m tons. Having said that, we also know -- the market knows that there are very important established domestic Russian producers, which today are servicing the majority of the requirements.

Okay, well --

And from our perspective the important piece is that we manage to breakthrough in the super high end part of the Russian market, again a niche, or a market niche, where very few players are able to participate.

Yes, well, I had a [two] more questions, but I think we’ll take those off line and I’ll hand it back to you. It sounds as if you’ve got things on track. Thank you very much.

Thank you.

Sir, your next question comes from the line of Lucrecia Tam from Deutsche Bank.

Hello, yes, good morning, great results. Just a --

Thank you.

Okay. A question on the maintenance stoppages. I know that Italy closes down every year in the third quarter. I was referring to the Mexican facilities that will be closed. How do you think that volumes will be impacted, then, in the second half?

And then my second question was related to the Welded, I do hear from [Confabi] that they expect to get some contracts in the second half. I also know from Petrobras that they are close to finalizing on the [gazan], etc., if you have a little bit more color on that?

Okay, thank you Lucrecia. No, we said -- we didn’t Mexico. We said more the Canadian plant.

Okay.

And so this is a small stoppage, together with the -- in the Italian operation which coincides with the summer shutdowns of many of the customers that we have, the industrial customers that we have in Europe. So, traditionally, our third quarter in terms of volumes has always been weaker, but it’s limited to that.

Okay, so no departing from that normal discipline?

That’s right.

Okay.

Now -- thank you Nigel. With respect to the Welded projects, Lucrecia we, yes, like to confirm that we still discuss in both -- in Brazil and in Argentina the GASENE project which accounts for something close to 200,000 metric tons and the loops, which would account for something close to 170,000 or 160,000 metric tons.

We’ve been discussing -- negotiating those contracts for some time. We announce, I think in a prior conference call, that we were expecting the conclusion of those towards the end of the year and it appears that that may happen. Financing is being arranged and, at this point, we are confident that we may be able to conclude those before the end of ’06.

Okay, thank you.

Sir, you have a question from Rodolfo R. De Angele from JP Morgan.

Hi, good morning. Congratulations on the results.

Thanks.

Just -- my question's very specific on Confab, do you -- could you explain a little bit on the plant there now that Maverick deal is going through, do you have any plans to buy out minorities in Confab?

No, we don't have any plans, right now.

Okay, so basically, the [deal] just maintains minorities at Confab and leave it as it is?

No, no, yes. We are -- at this moment we are thinking in leaving the situation like this. You know that we control 99% of the voting power in Confab. So given that with this publics are preferred stop. So [Coma estolga] [is heard by us] by 100%, 99.9% and we control 99% of the votes.

Okay and then, any plans on, still on Confab, to move into lower diameter tubes?

Well no, not for now Rodolofo, we have said and emphasized that Confab is a plan that is designed to service the [trunk lined] big diameter lines which are being developed in Brazil and other region.

Okay, thank you.

Sir, your next question comes from the line of [Marie Theresa Gru] from [Burnberg Bank].

Yes, good evening, forgive me, I'm in Europe. A couple of questions if you don't mind. Again, I would like to understand really better what -- I appreciate you've been able to make up the volume by growth in Middle East and Africa etc., but why are your volumes down 21% in North America and how much of it is you shutting down capacities and what are the reasons? I'm not sure I followed what you said earlier.

Good evening, Marie. The North American volume has been impacted by the Mexican adjustment -- is, for the most part, driven by Pemex, as we explained a little bit earlier. If you want to look at specifics, Mexico was, up until fairly recently, operating 115 rigs and it has come down to 80 as we speak.

Yes, and the reason we cut the rigs is what?

Well the fundamental reason is budget restrictions allocated to Pemex and, given the way Pemex works, you know that their expenses are typically contained and approved in budget allocations which, under the existing circumstances, has been very difficult for them to extend, to re-negotiate, to expand.

Understood and so this is the essential reason why your volumes are down in North America?

Yes.

Okay. I have a second question regarding, basically, where you stand on capacity utilization in Seamless pipes now and where -- how much of this capacity you have today you can gear to produce premium connections and, as a corollary to that question, in light of the CapEx plan you've engaged where will you be in terms of premium capacities, say, by the end of the year or by the end of 2007?

Well, Marie, I think I'm not going to be able to share all of the details for competitive reasons over the call and I hope you understand that. However, I will say that Tenaris, at a rolling, Seamless level is working at capacity. We have some additions, potential additions, to be introduced both in our Canadian facility and Romanian facility.

With respect to your second part of the question, I'd like to answer it by saying that Tenaris is today selling about 40% of its mix as high end products which contain, among others, premium connections and along with our CapEx plan incorporations, as we have indicated, we believe that the number may go higher [at] one point close to 50%.

What, by year end?

No. I can't tell you.

Of 2007.

Okay, I see. And one more question maybe on the 25% increase in your Seamless pipes in the second quarter, how much of it is just volumes and how much of it is, call it, mix pricing, just for me to be able to put this in context?

As we indicated, Marie, I said that more, much more than half, is driven by a mix change.

Mix change, okay. So the other half is volumes?

No, no, no, no. You're comparing against the second quarter of last year. The main reason is price.

Yes, yes. Is price, okay.

Price, because there's only a 2% increase in volume.

I see, okay. Okay.

Against the first quarter is the comparison.

Okay, alright and finally, your order books, how long are they on your Seamless business currently?

Well we're fairly booked. I say it depends upon, of course, the production line but I would probably argue that we have good visibility, I said towards the end of '06.

Okay, great, thank you very much.

You're welcome.

Sir, your next question comes from the line of [Jeffrey Newman] from Chicago Capital Management.

Can you give us an update on the status of the CFIUS approval in the U.S. with regard to the Maverick purchase and if there are any issues with this approval that you anticipate might hold up the closing of the Maverick deal? Thank you.

Yes, as we said in our opening remarks, as you know the FTC has formally approved the transaction. We know that Maverick has filed the SEC proxy and it was indicated to us that they'd got some comments, minor clarifications, which we understand are already -- already have been processed so we don't really expect major problems there.

How about the CFIUS approval specifically though, the committee for foreign investment in the U.S.? Have you had any discussions with them or do you anticipate any problems with that approval specifically?

Oh yes, we have and we don't expect any problems there whatsoever. We don't formally believe that the sensitivities are such and consequently that, we understand, it’s absolutely not a problem.

Thank you.

Sir, your next question is a follow up from the line of Ole Slorer from Morgan Stanley.

Oh, thank you, I think I mentioned to get back in the queue again. I have another question, it's a follow up question. You mentioned 50%, that's the first time I think I've heard you mention 50%. Is that an increase in your target now from 40% at the end of '07 to 50%?

Ole no, the 50% was -- is a target that we're aiming at the end of the CapEx, full CapEx line incorporation which we announced for two years. So it would, I think, be probably a lot closer to 40% towards the end of '06, growing into 50% once our heat treatment lines and some new premium connection lines are up and running, which we believe are going to be fully operational during '08.

Yes, that's great, that's great, my mistake. The second question that you made was one I didn't quite appreciate the significance of. Is there more of the drilling is going on in the [SUR] and that has implications on the OCTG demand? Is this the sort of initiatives like the Saudi MRC drilling, maximum reservoir contact drilling that you mean drilling more horizontal offsets in the reserve and that this changes the profile of the OCTG consumption in some way, is that what you mean?

Well, it's changing the profile, yes, with from a product usage perspective that is what we seen, if you will, incremental requirements of high end material, in particular, premium connections material.

So if you start drilling [along] offset directional wells, does that mean that you will need more integral connections rather than coupled connections?

Well yes, it depends a bit on the type of ultimately metal you use. You know that usage usually drive, ultimately, well designed decisions. I think your point is fairly valid when you look at the directional drilling developments that are taking in the States. As we also know, the international market is probably a lot more geared towards a thread and couple premium connections designs.

Out of your current Blue sales in the quarter, how much -- what percentage would be coupled and what percentage will be Finish Near Flush or integral?

The majority of our Blue sales, Ole, are thread and couple.

90%?

Yes, something around that.

No the vast majority, Ole, because we've only just started introducing the Near Flush.

Yes, indeed. In the case of VAM, VAM has also just launched an integral connection solution in terms of what I can see. Any idea on how their penetration is going, relative to how your penetration is going?

I'm afraid, Ole, there you're going to need to ask them.

I was asking you from a competitive stance, what you think?

It's very difficult for us to comment on that. I would probably only say that VAM is a big competitor of ours and we are, of course, trying to position ourselves in a marketplace the best way we can.

Yes, just finally, one question, Venezuela, what's going on in Venezuela? Activity seems to be picking up a little bit. Are you having -- you had your [Totel] sale with the Blue. Are you having success there with an integral solution as well? I think you're a distributor for [Highdrill] in that market, aren't you?

Well we have very important market share in the premium segment of Venezuela which, by the way, is doing very well in spite of some industry concerns, particularly, towards the end of the first quarter where most of the production sharing agreements with international operators were re-structured. Venezuela today has, in our account, 95 operating rigs. With respect to premium, I said the market is fairly split between integral and thread and couple, and we like to believe that we have a very strong presence in the thread and couple component, naturally, not so much on the integral one.

Have you had any success there yet in selling an integral connection?

Not yet. We are completing the [homologation] process as it is called in Venezuela and we're confident that eventually we're going to break through.

And the same thing with Mexico?

Yes.

Okay. Thank you.

Sir, your next question's a follow up from the line of Daniel Altman from Bear Stearns.

Hi, thanks again. Can you quantify for us the amount of substrate steel -- substrate that you'll need on an annual basis at Maverick?

And, secondly, if there are any plans to, perhaps, buy some upstream steel capacity to support Maverick and the Ontario plant? Thanks.

Well, from our information, Daniel, Maverick produced something close to 1.5m offshore tons of Welded pipe and, naturally, from there you can easily conclude what will be the amount of steel that will be required in going forward. Now, from a Tenaris perspective, I would say that we don't have any plans to integrate the Welded component upstream by incorporating a flat or steel supply.

Okay. Thanks again.

Sir, your next question comes from the line of Debbie Bobovnikova from JP Morgan.

Good morning, gentlemen. We were pleasantly surprised on the cost front this quarter and I was just wondering what your outlook is for the upcoming quarters.

Regarding the cost, what we are seeing is that, probably we were going to see a little bit more pressure in terms of the scrap and metallic costs, but that the federal alloy costs remain fairly stable. And really there is not much more in terms of costs, maybe a little bit in terms of the Energy in Argentina, maybe a little bit in terms of labor but really nothing very significant.

And also, can you help us understand what happens to your margins when you sell the higher premium connection, other high premium products, in terms of the actual cost required to produce them versus the extra price you are able to gain on that?

The cost of the premium is very much a cost in terms of the facility. We have to invest in the finishing line, the threading line, and this is a principal cost and then we also have to make the coupling.

[The regulator] has, of course, a cost of producing the high end products are higher than producing lower products but the markets are better as well so this is bottom line what happen.

Is there a rough idea of a, per ton, how much you’re at in costs when you produce these?

Of course, we do have the rough idea but we do not provide this information, sorry.

Okay. So then another question then. On your Seamless capacity, you mentioned earlier that your operating at near capacity so my question is do you have any intention of increasing your Seamless capacity in the near future and, if not, why not?

[Inaudible] that's very open question. Right now we don't have any planning -- concrete plans to increase capacity in [rolling mill]. As you know, we announced our CapEx program regarding the finishing line for treatment and threading and not rolling mill.

Right, so, given the tightness of the industry, why not invest in higher Seamless capacity considering that's a premium product or value added?

Yes, we have just acquired a company which is impacting very heavily in our volumes and we still consider consolidating the interest is a good way to [get growth]. Finally, we don't have a concrete plan to [their] increasing capacity.

Okay. Thank you.

Sir, your next question comes from the line of [Rene Austnitch] from [T World Price].

Hi, good morning. I have a few questions. The first one is regarding commodity Seamless price, for low end Seamless pipe prices, are you seeing any downward pressure there, especially in Asia?

Well no, the answer is no. If you look at probably pipe logics in the States provides a fairly accurate representation as to how the less demanding application pipes prices are evolving, and you would see them fairly stable. We have not -- although they're stable, we have not really seen in Asia a downwards pressure of prices.

Okay, thank you. And then the second question is regarding your EBITDA margin. It has been very strong in this quarter. I'm wondering whether this is a level that you can sustain considering that you are still improving the mix, and that might be compensating for slightly higher costs.

And also I was wondering if you could give us a sense of what your margin would have been if the Welded -- the consolidated margin would have been if the Welded segment hadn't been that weak in the quarter, because that probably diluted some of the margin improvement? Thank you.

Okay, first of all, you know that one of the reason why we get this EBITDA margin is because we're reducing [forecast] of the Welded on total sales so the Seamless path this quarter was higher than in the past so it is reflected in the margin where, as you know, our Seamless margin are higher than in Welded. So, as long as the Welded business -- if we increase our sales of Welded so the total margin should be lower than the one we are reporting today. But if we go business by business, yes, we consider the margin will remain stable and the prices, given the reasons mentioned by German, should be offset in the increase of this -- increase on costs as Nigel was referring to.

Okay, thank you and just very quickly, of the total Seamless pipes, what percentage was OCTG in the quarter, can you disclose that number?

What percent was what?

OCTG.

OCTG.

Well, about 54%, 55% of our quarterly sales were OCTG.

Okay, thank you very much.

You're most welcome.

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

Yes, hi, good morning. I have a question -- and congratulations on the results that were excellent.

Thank you.

Now I want to ask, regarding demand conditions, how do you -- how are you perceiving demand conditions in South America, what you briefly touch now on Venezuela and also on Far East -- on the Far East, on Oceania, well you say volumes have increased on a consistent basis on the Middle East, but how are you perceiving these other regions in terms of opportunities?

Well, let's pick Latin America. I said this, in generic terms, good news. I said that, other than Mexico, for the reasons that we talked about, Venezuela we talked, Argentina is also doing fairly well, so is Columbia. So we see, if you will, an up cycle of demand/activity in Latin American over the rest of the year which, by the way, is fairly price sensitive. We have seen that happening before and so, consequently, going forward, we view a fairly level of activity -- a fairly good level of activity going forward.

On Oceania, perhaps, the big or biggest opportunity would be the development of the Gorgon base in Australia. This is a huge gas field operated by Chevron Texaco, our global partner, that is now being appraised and, at one point, will hit the development stages. We are fairly well positioned there. We're working with them. It's going to be quite a challenge from a product perspective, given the corrosion environment. So that would be, from our perspective, the biggest opportunity, perhaps, going forward. Indonesia, in generic terms, is doing very well. It’s a very important market for us, so is Malaysia as well.

Okay, thank you for the answer and, then, just on, you mentioned that you signed a five year agreement with Repsol. I was wondering if that agreement contemplates the inclusion of high end products, if that represents -- and, especially, if it does -- if it represents an increase from your usual sales mix to Repsol in the past.

Well, yes, the five year long term agreement ultimately covers all of the pipe applications, including high end. It has Latin American coverage and I would say that, going forward, probably the component of high end, given the characteristics of the Repsol developments, will remain stable.

Okay, thank you very much.

You're welcome.

Ladies and gentlemen, this ends our Q&A session. I'd like to hand the call back to Nigel Worsnop for closing remarks.

Okay, thank you very much, everyone and we look forward to seeing you on the next one and, hopefully, we will have news of a completed Maverick acquisition.

Ladies and gentlemen, this ends the conference call, you may now disconnect. Have a good day.