Tenaris SA (TS) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2006 Tenaris earnings conference call. My name is Enrique and I'll be your coordinator for today. [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, thank you. And welcome to Tenaris' 2006 third quarter conference call. With me today is Carlos Condorelli, our CFO and German Cura, the Managing Director of our US and Canadian operations. And since we are actually in Vera Cruz today, we have with us also, Guillermo Vogel, Member of the Board and Vice President of Finance.

Before mentioning, I would remind you as usual that we will be discussing forward looking information in the call and that our actual results may vary from those expressed or implied herein. Factors that could affect those results include those mentioned in the Company's 20F registration statement and other documents filed with the SEC. I will start by saying a few words about the quarter before asking German to run through some of the commercial highlights.

These were our last quarterly results before we consolidate the operations of Maverick, following the acquisition, which we completed on October the 5. They clearly demonstrated the strength of demand for Tenaris' products and services and its unique global positioning remain as strong as ever. Earnings per share were up 50% year on year and matched those of the second quarter in spite of this being a seasonally weak quarter in terms of volumes as we carried out plant maintenance shutdowns in Europe and Canada.

In the Middle East and Africa region in particular, we continued to see growing demand for our OCTG products, especially our TenarisBlue premium connections, which we sell as an integrated part of our pipes. And we believe that demand in Mexico, which has been slower throughout the year so far, will begin to recover moderately.

As we have said before, we are investing heavily and working hard to increase our capacity to produce high-end products in order to meet the increased requirements that our customers have for these types of products. Although our mills are already fully modernized and very efficient in terms of productivity and quality compared to the rest of the industry, our capital expenditures amounted to well over $100m this quarter and we have spent $300m in the year to date to further upgrade our facilities and make them even more competitive.

For example, yesterday in Vera Cruz, together with the local State Governor, we inaugurated our new R&D facility we've been building at our Tamsa plant. With this new facility, we are increasing, among other things, our premium connection testing capacity, and thus our ability to have our new TenarisBlue products qualify for the most complex operations of our customers.

This will be one of very few facilities in the world equipped with full-scale testing for large diameter OCTG products, and will be critical to our efforts to meet the requirements of deeper, more complex offshore and onshore drilling activities in the Gulf of Mexico and elsewhere.

Our power plant in Italy, with which we expect to further improve the competitiveness of our operations [in Germany] is also in the final phases of construction. The first electricity was produced this month, though the commissioning phase for this type of plant takes some three or four months.

The results of this quarter and in the year to date have been achieved in spite of a weak performance from our Brazilian and Argentine welded-pipe operations. Unlike our seamless pipe operations where demand is more constant and global, demand for these welded-pipe products is very much regional and project-specific.

We have recently been awarded the orders for the delayed third and largest tranch of the [Gaseni] project as well as the Argentine Lutz project, which between them amount to 400,000 tons of welded pipes for delivery throughout 2007. These two projects will keep our longitudinal SAW mills in Brazil and Argentina working at full capacity throughout 2007, which will thus be a very good year for this business.

The recovery in volumes will begin in the fourth quarter of 2006 with delivery scheduled for a regional project in Peru and non-regional projects in USA and Africa. Now I will ask German to run you through some of the commercial highlights of the quarter.

Thank you, Nigel, and I will start with North America because there has been a lot of discussion recently about the status of the market and a possible slowdown due to the falling gas prices and high gas storage levels.

Let us start reviewing the facts. First, we have seen very little evidence of reduced activity in the US field in contact with our end-users. The recount in US gas remained firm, though in Canada, as you all know, there's been a reduction in shallow gas really in the south and in CVM.

Second, the gas price, which at one point went down to 4.20 has now recovered to 7 and therefore, there is no indication that there will be a slowdown in drilling during the winter season.

However, in North America it is not just about drilling activity that affects the level of demand of pipes. When the gas price went down, the distributors reacted predictably by reducing their stocks and thus leading to a reduction in apparent consumption. Moreover, we have also seen an increase in imports from China and, consequently, we will have to see how these trends play out. But now that the gas price is going up, it is not certain that a destocking process will continue.

I will now turn to China and our new operation there. Our new premium connection facility in Qingdao is in the startup phase. Actually, the first trials are taking place as we speak. The plant construction is almost complete and we are hard at work with training our new Chinese employees. We're very pleased with the reception that we have received from our Chinese customers and have recently booked out first order for [Chan Chin] gas field, the biggest gas field in China.

In an effort to maintain and create oil and gas production, the Chinese oil and gas companies have stepped up their exploration activities in new and more complex operating environments this year. Therefore, we think that we have made a correct decision to build this facility when we did.

We have also made significant investments in our Algoma tubes mill in Canada. We will be able to produce 9 5/8 inches casing in addition to the size range up to 7 inches that we offer today. This will allow us to offer a more complete range of seamless products to our US and Canadian customers.

During the third quarter, we cement our leadership in the growing [Sag B] market by winning an order to supply TenarisBlue and custom-designed TenarisBlue [Sag B] products for the 24 well [Lassimer] project for the North American Oil sands. We also won an important order for the second phase of Meg energy, which consolidates our important market share in this growing market needs.

I will now take up Nigel's point about Mexico. We think that this third quarter will mark a low in the Mexican activity, although ultimately much will depend on the budget that is approved for Pemex for next year. We know that they have requested a 30% increase over this year and only very early this week it has been stated that they expect to spend $16b next year, which will represent a substantial increase over the budget allocated for 2006.

We expect that the recount will show a rebound towards the beginning of '07. We have also note that Pemex has issued tenders to drill 180 wells in the north region, 60 wells in the south and further 24 new wells in the central region.

Turning to the overall OCTG market, we continue to see a strong growth in activity in the Middle East and Africa. The Middle East recount has risen 20% year to year and we see a similar level of growth for next year.

Clearly, Saudi Aramco is very important here. We have talked previously about our strong position with this company. They are on the course of purchase around 370,000 metric tons of OCTG this year, of which our market share is around 50%, slightly higher when it comes to premium connections OCTG. They will begin running our TenarisBlue dopeless connections by the end of the year, and in addition to Saudi Aramco we are supplying three of the four joint ventures operating in Saudi Arabia. They're starting to drill exploratory deep gas wells already.

Elsewhere in the Middle East, [Admar Co] began running TenarisBlue and TenarisBlue dopeless in October for the first time. Over the last few weeks they have awarded us a substantial component of their 2007 requirements. In Oman, we are beginning deliveries for auxiliary requirements for the first 155 wells of the [Mujaris Nab] development, which will take place, for the most part, during 2007.

In North Africa, we continue to grow in Algeria. We are very well positioned in Egypt and preparing for further activity in Libya.

In the Far East, we won an important order for carbon and chrome with TenarisBlue from Talisman in Malaysia.

In the high-end pipeline segment, we're seeing better activity in the Gulf of Mexico with projects such as [Marlina Braslit].

We won our first orders in the Far East and Oceania for origin cube and petroleum. We have also seen high-end projects in North Africa with Sonartrack and Repsol, and particularly for the [Gas Itau].

West Africa remains very important with total Block 17 in Angola, Exxon Mobil both in Nigeria and also in Angola we're working with Chevron on their [Tana Landana] project, [Tambura Landana] project. This will be the first occasion when we put into operation our extended alliance with Chevron, which now includes deep water line pipe in addition to the existing global OCTG.

In our power and process plant segment, we continue to be well-positioned to supply many gas processing projects under development in the Middle East and to make progress in the power generation market segment as well. Ongoing projects include the sixth and seventh train for Ruhrgas LNG complex in Qatar. [Inaudible] gas processing plant in Saudi Arabia and the [Dam] Refinery in Vietnam.

I will end up by saying a few words about the Maverick integration process. It is known we closed the acquisition one month ago on October 5. The new organization is in place. We have formed an integrated commercial team, which is marketing the full range of products, both seamless and welded covering the full range of applications from onshore shallow wells to complex deep water environments.

We are repositioning the full product line under the unique Tenaris brand and we're hard at work in the plants at [inaudible] and Cairns, unifying quality systems as well as introducing specific operating practices. We are looking at debottlenecking opportunities with the objective of improved efficiency.

This month we have also concluded a five year agreement with a new quarter, which will cover a substantial quantity of our steel requirements going forward, and naturally we'll secure a stable supply of steel for our operations. But we're still only at the very beginning of the process and we have a lot of work to do. And as always, with our acquisitions we are looking at this as a long term investment. Meanwhile we remain very confident that the market fundamentals will remain.

Okay. Thank you, German and now we'll turn it over for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Sir, your first question comes from the line of Rodolfo De Angele from JP Morgan.

Hello. Hi. I would like to ask you a little bit more to get more details on the integration with Maverick. You commented that you're already working on the commercial side. But I wonder if you could give us some more color on what type of improvements we could expect to see at the Maverick assets and if you could give us a better guidance in terms of expected value of the synergies in working -- just putting the companies to work together. Thanks.

Well let me very briefly recap it from a commercial approach perspective, market positioning and asset improvement. Number one, we have taken up the, I think, natural decision of integrating both commercial teams. Tenaris will have a unique approach to the US and Canadian market and ultimately, our intent is to cover all of the potential tubular requirements of our customers.

Now from an asset improvement perspective, naturally we're in our fourth week on the job and we see tremendous opportunities of debottlenecking some of the production components. In particular, the finishing parts of the Hickman plant and Conro plant, both of whom, for the most part devoted to the OCTG production.

And so with regard to the synergies, we haven't given any numbers for synergies but we believe that we will gain the synergies from the natural integration of the operations through the product, the industrial positioning with the know-how of the industrial practices, marketing under the Tenaris brand with the combined approach, with an integrated approach to the commercial sector. And that we will be able to add value to this acquisition over the longer term, maybe not in the next month.

But there is, though, an additional element which I view as important and we have talked about it, and that is our ability to extend the existing agreements that we have with companies like Chevron into the US operating environment. So we're still at the very early stages but we're confident that we're going to be able to realize some of those actions in the very near future.

Okay. Good morning everybody. I would add some other synergies that we are looking at [because Maverick] for instance, our integration with our purchasing power we have in the mill as well as many other given that we have some operations in Canada and some operations in the US. We are considering putting it all together and getting some synergy as well as from the financial viewpoint where we have different contacts.

So combining both operations, we get some synergy as well as from the [inaudible]. Even though we do not provide a specific number, we are working hard in achieving all the synergies that we are looking today. But as German said, that's four weeks where we took over and so maybe in the future we can be more precise.

Okay. Thank you very much.

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

Thank you very much. Just to follow up a little bit on what you said there. You mentioned your goal is to supply the full range of products to your customers in the US market. When it comes to sourcing seamless OCTG for the US market, do you think you have all the capacity that it would take in order to do that given your export constraints from certain key areas?

Well Ole, good morning. I said that we probably are not talking about capacity and volume in terms of we're repositioning substantially our so-called seamless sales in the States. Having said that, however, we have already completed the expansion program in Canada and Algoma will then be a very natural and also very near source of seamless supply to the States.

Same is true for Silcotube and with that I believe it would be fair to say that we will have the ability to service everything from the tubing, small diameter sizes up to 9 5/8 inch. We, of course, have the ability to bring some 13 chrome material from Japan. And I think it is also important to mention that as part of the Maverick transaction we have an existing agreement with Rocky Mountain Steel that also provides a good component of seamless casing for the US market as well. So we believe that we will have enough seamless material to service our targeted accounts.

Okay. That's a good overview. When it comes to Mexico, you mentioned Pemex looking for a big increase in CapEx. Have they requested bids but do you think they will get the rigs, particularly in the off-shore markets? How are your conversation with Pemex going when it comes to the drilling plans for next year? I see they're tendering for four deep-water rigs? Do you think -- When do you think this could start up?

Well, Pemex is confident that they will get the rigs and while naturally discussing the specifics, they're already talking about some rigs which are mobilizing out of the US component. The market talks about 20, Some other actors would talk about probably 22. Some instances also 25.

And we have learned that there's a good chance that a number of those rigs may end up in Mexico. Naturally, these conversations that we have, discussions, negotiations that they're having, they are fairly confident that they are going to get the rigs and naturally that has been, I believe, a really important element for them to obtain not the initial 30% budget increase that they've requested, but ultimately a 20% increase, which I view as very important as well.

Thank you. Just one final question. If you look at volumes, they came down quite substantially, both in North America and in Europe, particularly North America. Was all of that because of plant shutdowns or were there issues with the soft Canadian drilling markets that led to less demand?

No, naturally we had a Canadian impact. A shallow gas CBM in Canada has naturally affected the volumes now. September was particularly bad because of weather conditions as well. So there has been a volume component associated to a Canadian slowdown, and also the Mexican slowdown that we were referring to.

I think that I would also add that there is -- that most of the slowdown, particularly was in line pipe, not OCTG.

But when you look at the pickup in sales in West Africa, Middle East, it looks like if your mix is improving quite a bit, as if the margins are expanding quite a bit. Is this because TenarisBlue more higher degree of well complexity, achieving higher prices now in the Middle East and what you would be over similar sales in Mexico and the US?

Well, it's difficult, Ole, for me to talk on the call on, say, pricing region specific for competitive reasons. But I think it would be fair to say that the results you're looking at that are no doubt associated to a mixed improvement and also the fact that we are renegotiating some of our old long term agreements and that is also providing us a regional opportunity. That's probably the way the situation would reflect.

Okay, I understand. Just finally, on TenarisBlue, could you just -- you walked through every region in the world last time and highlighted where you were getting great penetration and where it was sort of starting to get some penetration and you highlighted Middle East and Canada say, as a great penetration. Could you give us an update on the regions where you are now starting to see penetration? Just for example, the US where I think you had at least two sales that I could trace and also what's going on there, in Mexico, Venezuela, and other areas? We have good market share but so far maybe not at the same penetration of TenarisBlue.

Well, let me really rapidly walk you through where we are and probably the relevant parts. TenarisBlue, of course, is extremely well positioned in the Middle East, North Africa, and overall, Latin America region. Now they account today by about 29% of our overall sales of premium connections. That was probably half last year.

So the level of receptivity has been very important, not only in terms of selling it with cargo and products but also with 13 chrome and stainless material.

Now, as far as relevant news, I think I'd like to share with the audience that after the initial booking in the States with Newfield, one of the big, independent operators, this last quarter we managed to get our first TenarisBlue order with Anadarko in the States, whom as you may know, is perhaps the biggest consumer of premium connection in the US market.

We have also informed, and I'd like to take the opportunity to emphasize it that we have gained access both in Gazprom and Lukoil with the TenarisBlue and these are very specific market niches where not only the Blue was in there, but Tenaris had a limited presence in the past.

Okay, thank you. Thank you very much. I'm going to let somebody else ask some questions.

Thank you.

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

Hi, it's Daniel from Bear Stearns. A couple questions. Firstly, on Maverick, can you quantify how much CapEx you plan to spend in turning around those operations over the next year or two?

Yes, we are thinking a range of $50 to $70m in the near future.

And the $50 to $70m will be enough to transform the assets to a level where you're comfortable with them?

Daniel, this is the first step. As with before, we have just took over -- taken over and maybe in the future we can increase. You ask me, I would say that maybe in the long term we should be investing more than this $50 to $70m. These are the, as German explained before, it identifies CapEx that we are starting to make in engineering to start with.

Okay. Second question is on TMK, the recent IPO in Russia. They have a pretty aggressive timetable in terms of increasing seamless capacity in OCTG. Do you see them as a competitive threat over the next few years?

We've seen the announcements and, of course, I think it will be fair to say that they're participating in a market that is growing. Now, at the same time we're looking at the plans of replacing the Siemens Martin steel shops and these are things which take a long time before you really see a market impact based on our natural industrial experience. So, yes, we're following the announcements. We believe that it will probably take a substantial amount of time to see those plans reflected in the market place.

Okay, great. Then the third and last question is once again in the third quarter you were able to get price increases, as you say in your press release, from most of your products in a seamless area. I guess the environment for energy prices has changed a little bit over the last couple of months. I'm just wondering if you're still seeing increased prices for seamless, lets say, in the fourth quarter or the first quarter of next year?

I just want to clarify something. The price increases compared to the same quarter of last year across all our product lines, as you know, we have already achieved it. It's not necessarily quarter on quarter.

And then going forward I think the outlook is -- we really believe the prices are stable and what we’ve seen in our numbers is the reflection of us continuing to improve our mix and naturally confronting the need of renegotiating old the long term agreements. That trend, I think, will continue.

Okay, thanks very much.

Sir, your next question from Michael LaMotte from JP Morgan.

Good Morning.

Good Morning.

I want to follow up on a couple of questions on Blue if I may. First is, with Blue now 29%, if I heard that correctly of the connection sales, how, is that product continues to grow overall, how is that going to affect your relationships with other connection providers around the world?

Well, there is probably a two part question, two part answer, sorry, to the question. One, this growing acceptance of Blue are the result of better performance characteristics. Now, this is translating in two different dimensions. We are naturally and very rapidly replacing our own whole family of premium connection sales. Just for reference, let me mention a couple. The 3SB, Antares connections, so premium connections that are part of our portfolio, which are in the process of being replaced by the higher performing Blue. This is one dimension. The second one is, that naturally that on new projects on much more complicated environments on newer sales then we are without a doubt using Blue as fundamentally the channel for us to access new market segments, new portions of the market.

So you're actually getting two pull-through with the, sort of, Blue in the lead then and--

Yes indeed.

--[inaudible] works.

Yes indeed.

And then the new facility in Qingdao, is that going to be -- is any of that capacity for export or is that just all for domestic consumption in the China market?

Well, in principle we're looking at servicing the Chinese oil fields. As you know [Shishwan], [Tarin], [Shan Shuin], the three biggest gas fields in China are in the process of very impressive development plans. So, I think we are ready to, out of China, service them, their growing needs.

Okay. And then, with that facility is there room for expansion over the next few years?

The option is absolutely not closed. We are convinced that the Chinese market will continue to grow. Their need for energy is enormous and their decision to do the utmost to replace some of the coal fired by gas fired power plants is real. So we believe that that will be a growing area of business and consequently we'll be ready to respond in the future if needed.

Right. If I can follow up on the pricing question, too. Maybe if I can ask the pricing momentum a different way within the context of what was realized an average price in the third quarter versus what's being quoted today? Maybe the quote price isn't moving much higher. But as you roll some of the long term agreements off etc. roll through some of the lower priced backlog, was the third quarter at say 80% of current quote or can you give us some sense of--?

Well, it is very difficult for us over the call to naturally disclose the pricing strategy for competitive reasons but I think over all you could probably say that we are seeing a stable pricing environment at the levels which we've seen probably the last few quarters.

Okay. And then lastly, just on margin. If you could comment on the raw material and the energy costs and those expected changes going into '07?

No. We are not expecting significant changes. In general terms we expect the costs of raw materials, of the different mills to remain stable in general terms. Then we have the different situation. Some of them going down a little bit, some of them going up, but in general terms we can predict something stable for the next quarter.

Okay. Thanks gentlemen.

Thank you.

Sir, the next question from Lucrecia Tam from Deutsche Bank.

Hi. Good morning. I have two questions. My first question continues on TenarisBlue. You mentioned the 29% penetration and I was just hoping to get an indication of how much penetration do you expect to achieve?

Well, we are of course, you know, putting up in place our new premium connection lines as well. We suspect that that 29% will grow and I think it will be fair to say that we are looking at a number that would reach a 40% level probably we think next year. Don't forget that we, looking back, it's a fairly newly introduced product that accounted by 5% of our premium connections in 2004, about 12% during 2005. We're running at 29 already. That's more or less the trend we're in.

Okay. And then my next question comes to, we always are hearing about dangers of energy in Argentina, especially for 2007. If you can just shed a little bit of light on that, on how you feel the gas situation is evolving in the country.

Yes. For sure, yes we are prepared to face with some minor problems. We don't think it's going to be significant, at least in the foreseeable future. I'm talking about the six-month. In summertime it may be that something goes wrong with the electricity. But we are not expecting something important or maybe given that on one hand we do we perform maintenance during the summertime. But going forward, you know, there are a lot of -- there are some projects on the table, based on the loops that we already talked about.

We started the program and maybe in the near future we start supplying the pipes. So it means that the construction of the capacity of transportation is going to [affect]. But in any case, of course we have some constraints. We have faced some minor problems and we expect nothing significantly worse in the coming future. But we are looking very cautiously at the situation and we do our job as well, like creating inventory and preparing for the critical periods.

Okay. All right. Thank you.

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

Yes, good morning. I actually wanted to follow up on the premium connection question. I wanted to understand a bit about the other premium connection businesses. You talk about Blue a lot, but I wanted to understand how the other premium connections are going in terms of penetrating the different regions.

And also, just to understand a bit how you're changing your strategy especially, you know, when you talk about the US market. I think the strategy for selling connections there is different due to the distribution network. So I wanted to understand how you're going about solving that issue. And finally, just to understand how you see yourself in the global rankings right now, with premium connection in terms of where your market share is right now and what you hope it's going to go to in the near future. Thanks.

Okay. Let's see if we could take one at a time. From a premium connection perspective, say, other than Blue, Tenaris today markets two very important families of products. One is the Japanese 3SB, a premium connection technology that was part of NKK and consequently part of Tenaris once we complete the joint venture around NKK.

The second family of products is the Antares. The Antares technology was developed by Dalmine and of course made part of our premium connections group -- Tenaris connections once the company was formed. And in addition to that, back in the mid-90s to be precise '96, we purchased the international rights for Atlas Bradford, the premium connection family of Atlas Bradford, which is widely used in the States. And it is, to some extent, also used internationally under exclusive rights which we own.

So there are four, if you will, product families are the ones that are conforming the premium connections portfolio of Tenaris with whom we serve our customers. Now from a market share perspective, we could probably say that Tenaris, in very generic terms, today account by something close to 20% of the world premium connections market.

Now one thing important, very important thing, is that the US today represents a substantial -- a very, very, important part of the overall global premium connection space. In numbers, you should probably look at 550,000 metric tons of consumption in a year in a market-size -- global market size of about 2m. Now, from a US perspective, naturally the Maverick acquisition provide us an excellent opportunity, not really knowing, not having been to the US, a traditional market of Tenaris.

It provides us an excellent opportunity to get to the end-users, get the market access that we need to accelerate the introduction. And I think the [Anadar] core there is a reflection of that. This I think is particularly important because, not only we go with premium connections, but we go with entire range of products, which goes again, from less, already low demand in pipe applications all the way up to the higher chromes. And I believe that would be a key driver of US market approach, which just to sum up, would contemplate the distributors as part of, if you will, the supply chain.

Okay, so you said -- thank you for that answer, that was good. Just to understand, you said your market share right now is about 20% for the premium connections business globally. Do you have a sense of where you want that to go? I mean, you definitely are focusing on this business and this is a, you know, one important area of growth for you. So just wondering if you're targeting significant market share gains there.

It -- this goes very much with the OCTG space. We have, as you know, around 20% of the global market, so 20% of the premium connections is very appropriate. Naturally it's a very important business segment for us. It's one where we have devoted a tremendous amount of work and energy and one we would, of course work to grow. It's very difficult over the call for me to share more specifics than that.

Okay, thanks. Then one more question on the welded side, please. We saw this quarter that volumes were actually relatively weak, but surprisingly, prices were up and I just wanted to understand what was the main driver of the increase in welded prices this quarter?

Well remember that we include within the welded pipe segment, the sales of equipment from our confab subsidiary and the sales this quarter were a little higher than normal, which may be affecting the calculation there. The actual price itself was not very much different.

But in this business, the products are very different depending upon which project you are supplying. So it's not as easy to say something by in the seamless segment that to follow all the prices because many times you have to supply coated or cemented or a different product, which in terms of prices, well in terms of cost different -- are very different products -- would be very different.

Okay. And actually, just one more follow up question on the premium connection side. Just wondering, since you just started your sales into the US market with this first order of Premium Blue, what -- do you think that your target for the US market is to get the same 20% market share there as well for the premium connection business that you have globally or do you think that it will have to be slightly less, slightly more?

No, I think rationally it would be less and the reason being -- structural reason being is that the international premium connection market is, in very rough numbers, but I think it would provide a good sense or at least a good color for understanding some of the specifics. The international premium connection market is split in about 80% of the consumption with thread and couple type of premium connections and those are the ones where we, for the most part, concentrated.

Blue is a thread and couple premium connection, the same way as Tenaris – Antares, AMS and 3SB and about 20%, maybe slightly less than 20% are integral premium connections. Now the US is exactly the reverse scenario. 80% of the US consumption is integral. About 20% is thread and couple.

Okay, great. Thank you for your answers.

Sir, your next question comes from the line of Daniel Lopez from [Bannis].

Okay. Good afternoon. Coming back to China's new operations, could you give us your view on demand in that market and in particular, be more specific about volumes and type of products you are expecting to supply there, and also, if you have a time horizon for us to put in develop that market.

Well, let me share with you some of China market sizes and, of course, products. In generic terms, we see China as an OCTG market of about 1.6m tons of consumption. And based on what I was referring to, we view this as a growing space, given that all of the Chinese domestic operators are striving at increasing there about 3.5m barrels per day of oil production.

They, today, import more or less the same amount and naturally, they need a huge increment of energy to sustain their level of growth. Of course there is domestic production of OCTG done by a good number of companies. For the most part concentrated on the big three, as they call themselves. This is [TNG], [Pao Steel] and Qingdao. And they're both in most of the domestic production to service the domestic needs.

Having said that, however, I think it's also fair to mention that Chinese producers have become major exporters into the US. There is about 600,000 -- 650,000 metric tons of Chinese OCTG, both seamless and welded being exported to the United States during 2006 and that is a very relevant element that not only us, but the rest of the industry is watching.

Okay. Thank you very much.

Sir, your next question comes from the line of Tereza Mello from Citigroup.

Hi. Good morning; just two very brief questions. I had -- most of them have already been answered. But first, what is the current sales mix in terms of premium and low-end products and the backlog for seamless pipe production, if you can give us an idea by plant?

Well, very difficult to provide that level of specifics, but let me tell you that Tenaris is today at a level of 38% of our sales are high-end products and again, by that, the important element is the high-end products are not only premium connections, but they also deal with specific line pipe applications for deep water. They also contain some specific industrial applications like [Arrivax] and naturally, some specific piping applications of boilers and heat exchangers which we sell.

So overall, I think the important number or the important message that we like to leave is that we were at around 30% during '04. That number grew to about 35 during '05. It's a lot closer to 38, 39, 40, as the high-end component on a volume that in absolute terms has also grown significantly over the last three years.

Great. And average backlog?

Well, very, very difficult to get into specifics. If you were to really insist, I would probably say that the high-end number is today, more or less consistent with the last indication I provided and we're hoping that it will grow consistent within production of our new threaded lines and heat-treatment lines which are part of existing CapEx plans to which we have referred before.

Okay, great. And the other only question. What's your current budget for the CapEx in 2006 and 2007? Do you have a number?

Yes, we are running in the range of almost 400m for this year.

Okay.

Maybe something around 360 and we have planned a similar one to 2007.

Including Maverick?

Oh, no, no, no. With Maverick we include another 50m to 60m, maybe, during 2007.

Okay, great. Thank you very much.

You're welcome.

Sir, your next question comes from the line of Ephrem Ravi from Credit Suisse.

Hello, gentlemen. Most of my questions are answered. Just a couple of quick high level questions. One is on your new facility in China. [Valorek] has also announced a similar OCTG facility in China. What do you think are the risks of the intellectual property production by actually manufacturing stuff in China as opposed to exporting it, especially since that China is becoming a huge net exporter to the US? Do you fear for your intellectual property there?

Secondly, also on kind of the whole issue of capacity, you mentioned the growth that is happening in Saudi Arabia and elsewhere in the world. Given the fact that the industry is pretty much at 100% capacity utilization and especially you guys have -- are at the top end of the range, how will the excess demand going to be serviced? Something has to give and are there customers that you are actually turning away these days because you just don't have the capacity to actually produce and what are the options for those people in terms of, are you creating a new set of competition by that kind of strategy?

Well, on the China IP comment I'd just like to reconfirm that we have evaluated the point at length and we, today, feel pretty confident as to the measures that we've taken would allow us to produce the premium connections in China, making sure that our IP rights are duly protected. There are some product specifics which are also important -- are being contemplated, but from that perspective, it is our plant, it is our people, it is us running the facility as a whole.

Now, from a capacity perspective, this is an issue which we have discussed in the past and yes, the world is demanding more OCTG but at the same time, I think it's fair to recognize that the market has had some specific -- it's an also relevant numbers over this last year, year and a half and some announced plans as well, particularly referring to what we call the China additions. During '06 we have seen about 1.5m tons of aggregated seamless capacity in China, a new rolling mill of TNG, another one of [Hinyan] and a new rolling mill at Qingdao.

Going forward, there's been, I think, a good number of announcements in terms of capacity utilization. We are naturally looking at them from a perspective that it takes time to turn them around. We know that the Chinese producers are announcing plans. Naturally I need to believe that they're looking at their own internal and maybe some regional demand and designing the capacity additions based on that. Out of all of the Chinese producers, we believe that TNG and Qingdao are perhaps the most active on this radar.

If I can just ask a quick follow up question on just the capacity that you have. How flexible is your capacity in terms of OCTG/non-OCTG split. If the demand for OCTG grows faster than you anticipate, is there a possibility of shifting some non-OCTG seamless to OCTG seamless, or is that technically not feasible?

No, well let's look at it. This is a very good point which we'll review also in the past because it's perfectly consistent with a main decision driver of our CapEx plan, which in fact, aims at converting rolling seamless capacity of Tenaris into OCTG production capacity.

We are in a good number of key treatment facilities across the industrial system, also a good number of new finishing facilities, threading facilities, couplings facilities, to precisely reconvert some of our existing rolling plain end pipes into OCTG. We have shared with, well, the public that today Tenaris produces something in the range of 50% of OCTG, the balance 50% is not. That represents the opportunity.

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

Okay. Thank you, everyone, and thank you for participating in the conference call and we'll see you next time.