Tenaris SA (TS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Tenaris 2006 fourth quarter end-year results conference call. My name is Henrique and I will be your audio Operator for today. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would now like to hand this presentation over to your host for today's call, Mr. Nigel Worsnop, Director, Investor Relations. Please proceed, sir.

Thank you, Henrique. And thank you and welcome to Tenaris' 2006 fourth quarter conference call. With me today is Carlos Condorelli, our CFO, and German Cura, the Managing Director of our North American operation. In addition, I would like to introduce Guillermo Moreno, the Director of our Oilfields Services business unit, who has joined us today for this call.

Before starting 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 in the slides herein. Actions that could affect those results include those mentioned in the Company's 20-F registration statement and other documents filed with the SEC.

I will start by saying a few words about the changes in our reporting of segments as you saw in the press release we released yesterday, and which are reflected in the audited financial statements we posted yesterday on our website. Not only in the consolidation of Maverick which was acquired on October 5, and the deconsolidation of Dalmine Energie which we sold at 75 participation on December 1, we will report on the three segments, Tubes, Projects and Others.

Tubes, or tubular products and services comprises our seamless pipes business, the energy product division of Maverick and the operations of the Villa Constitucion welded by-plant in Argentina that we acquired at the beginning of 2006.

Projects, or pipes for pipeline projects, comprises our South American welded pipe business where we are the leading producers of large lengths of pipe for pipeline projects in the region.

Others, or other products and services, comprises principally conduits, the electrical product division of Maverick. They will take the iron from our plant in Venezuela, our sucker rod business where we are one of the leading producers of sucker rods used in oil extraction for mature fields, and our Brazilian equipment business.

For each segment we will now report operating income. We will continue to report sales volumes of seamless and welded pipes separately. Geographically we will focus on revenue trends in the same regions as before.

The fourth quarter was another record quarter. Earnings per ADS rose to $0.97, a 20% increase over the third quarter which, in turn, was a record. Earnings per ADS for the full year were $3.30, a 52% increase over 2005 which, in turn, goes up 65% over 2004. A record year ending on a record quarter. And we expect to do even better this year.

The $0.97 in the fourth quarter included $0.06 attributable to the sale of majority participation in Dalmine Energie, our Dalmine Energie trading business. This is the business that has helped us to contain the rise in energy costs in our Italian operations. Now that we are commissioning an in-house power plant at Dalmine, from which we will also provide district heating to the local community, the Dalmine Energie business is no longer essential to our operations.

This excellent result was due primarily to the success of our TenarisBlue premium connection and other specialized products, particularly in the key Middle East and Africa region. And synergy in the region continues to increase. And we are very well positioned with our unique range of products and services. Not only have Saudi Arabia and other countries invested in increased oil production capacity, but they are also investing to produce gas to fuel and industrial growth in the region. Much of the drilling is in technically complex fields which requires specialized power service and premium connection products.

The contribution of Maverick to these results is not so good. This is due to three factors. First, the slowdown in drilling activity in Canada, where the rig count was 23% lower than the corresponding quarter of last year. Second, the startup of the newly built conduit facility is delayed. And third, the startup of the heat treatment plant in Tubos del Caribe is also delayed.

We expect these startup issues will be resolved by the middle of the year and the performance of Maverick will improve noticeably.

Overall, we are pleased with the facilities we have acquired from Maverick. We are upgrading them to align them with Tenaris' standards, with a CapEx investment of $70m. By the end of June we will have integrated our new U.S. management structure based in our office in [inaudible].

The acquisition of Hydril, with its 38% share of the North American premium connection market, would further consolidate our presence in this key region for the future of Tenaris. We will have products to cover the full range of applications and wells in mature fields, with complex drilling applications in the Gulf of Mexico.

Globally we will consolidate our leadership in premium connections and our R&D in technical assistance capabilities for the development of products and new applications will be unmatched. Hydril pressure control business is an outstanding business in its own right and we think that with our global presence and experience we can help to expand it globally.

Now I will run through some key numbers for the new scenario. In this fourth quarter tubular products and services accounted for 87% of our sales and 94% of our operating income. Within tubular products and services, North America was the largest region with 36% of sales. 17% of sales were in Europe, 29% in the Middle East and Africa, 11% in South America and 7% in the Far East.

In terms of end-user market, more than 75% of our sales of tubular products and services were OCTG, a lines by-product for oil and gas upstream operations. In addition, 33% by volume of sales of tubes were high-end products with specialized market applications where few other producers are making today. This percentage will rise -- would rise further with the acquisition of Hydril.

The outlook for Tenaris remains very favorable. Depletion rates are increasing as fields mature. Our oil and gas supplement continue to increase their spending to maintain production and develop new reserves. Demand in international markets for our specialized products continues to increase as drilling takes place in ever-more complex environments, both offshore and onshore.

Demand in North America will recover. Our project segment will benefit from the massive pipeline investments being made in Brazil and Argentina. We are investing to meet market demand and lay stronger foundations for further growth. Our positioning as the leading supplier of tubular products and services to the world oil and gas industry is as good as it has ever been.

And with that, I would like to turn it over to questions, please, Operator.

[OPERATOR INSTRUCTIONS]. Sir, your first question will come from the line of Paul Rosenberg from Bear Stearns. Please proceed.

Hi, good morning and congratulations on the strong results. I have a couple of questions. The first is are you able to strip out revenues from tubes seamless and tubes welded?

The second question is about the outlook for Mexico. The rigs in the Gulf have been declining. Are you still looking for a rebound in 2007?

And then last question is what are your intentions for the Maverick electrical segment? Are you exploring divesting this business?

Paul, with the first question I would say we are now reporting our Tube segment which, as we explained, includes the seamless business and the Maverick energy product business.

Okay, with regard to Mexico, I should know being [inaudible] for 2007, the $2m project that will be targeted mainly to recovered oil production in other parts that [rising] where it's in the country. And we're mainly [inaudible] and other fields.

As you know Pemex is today operating the largest offshore fleet of rigs and is successfully extending contracts. And they have secured and indeed have a number of rigs [inaudible] during the last quarter and we would expect another 20 rigs for the main. I would like also to share with you that we have extended our current agreement with Pemex to supply the OCTG needs for the next two years.

Now with respect to the electrical business, I like to say that the business that we intend to keep, we not only are exploiting the opportunities the market confronts in the immediate delays from the startup of the new [inaudible] plant. But we're confident that we are going to pull it through during the first six months of the year and consequently it's something that we intend to give.

Okay, thank you.

Sir, your next question comes from the line of Cindy Du from Jefferies & Company.

Good morning, I have three questions. The first in terms of your outlook, talking about growing at a slower pace for OCTG consumption on the global basis. Could you elaborate on that specifically? Are you assuming moderation across all regions? Or will there be some regions that will continue to outpace while others will slow down?

Second, can you comment on the North American environment today and how it compares to, let's say, two months ago? And are distributors in the U.S. continuing to de-stock inventories, or are they starting to pick up on shipments?

And then the third, in terms of the acquisition strategy. Given the latest acquisition of Hydril, are you looking at more potential opportunities in North America or are you now shifting back your focus to Russia and China?

Now let me first say the North America outlook, and then pass it on to Guillermo to share with you our international OCTG outlook by region. Let's say, in every sense it has been a soft quarter. The Canadian slowdown with numbers means 25% less operating rigs as compared to December '05. That naturally affected the shallow gas and [TDM] type of development.

Having said that, however, we see that the oil components of Canada remains very strong. It really remains very strong, whereas you would remember Tenaris enjoyed a very important market presence.

Now as far as the U.S. component is concerned, it remains, I said, flaccid over the course of the fourth quarter. We actually indicated [confronted] with restocking the process, triggered by both the end of the year taxes as well as -- well, concerns about the gas price.

We feel that the process is somehow coming to an end. All of the -- or most of the program [inaudible] by end-users and distributors has been completed. The recount has rebound, particularly the gas component has rebound. So, going forward, we want to be very cautious about the U.S., but going forward we see an increased level of activity.

With that said, I'll turn it over to Guillermo for an international outlook. And I come back with you on the Hydril point at the end.

Thank you, German. The international market, we still see a strong activity in the energy sector. In January the worldwide returns reached their highest level in 20 years and [ended like the] international one. All the regions are growing, probably some of them are the slowest paced in the past, but we feel the growth in all parts, in particular in the Middle East and North Africa.

With regard to the Middle East, Saudi Arabia still really is the main driver. And in 2007 we expect an additional 20 rigs, but add on the 25 that they added in 2006. This 20 new rigs will be mainly purchased from the government of Kuwait and that's the collection and exploration of gas, which is an important trend that we have seen in the Middle East because we have seen more and more activity in the building up this wealth of gas so that in all requires high-end materials for our premium connections and other materials as required.

Turning towards some projects and that analysis of [inaudible] like [Karan], offshore Saudi Arabia, like restoration campaign by Saudi Arabia, it's an international company [here in the] quarter. [The traffic only passes] [inaudible] we get some more in the development of the [inaudible] project. Kuwait continues [inaudible] campaign. And, at any rate, it's today I like to [bid on] Tenaris to develop a giant [inaudible] gas field that is the giant barometer.

In the case of [more practical], we see an additional growth -- decent growth for 2007. Offshore South Africa will see -- still see very important level of activity. And with respect to benefits from this, especially through our long-term agreements that we have signed with most [metal] companies operating there. And the presence of our finishing plant in Nigeria, where the local government is giving preference for [in-country] [inaudible].

In the Caspian Sea, the offshore Caspian Sea, I would like to mention that we have just signed a five-year long-term agreement with [KTO] for the supply of all their [carbon OCTG] for the next five years. As you know, [Kazakhstan] is today the largest crude oil development process in the world and requires very, very demanding specification pipes.

In the North Sea, where the activity is, let's say, more stable in the last quarter, [inaudible], with whom we have renewed our long-term -- long-term agreement, drills with the first offshore cases taking direction and drilling well [in the world] and for which they require our TenarisBlue premium connection into a different sized, which is our category. Also for the [facility plant] in the last quarter, for the first time our TenarisBlue Near Flush. And that commission wasn't certified with the [inaudible] qualification that I [have seen for] profitability. I think that is more or less the company [inaudible].

Now let me take on the third component very quickly. With respect to the Hydril acquisition. I like to again repeat what we have said, we believe that Hydril is an extraordinary track-record company, with not only an outstanding know-how, but it really is very respected group of people. And we are very happy with the transaction so far and we believe it has become a very, very important step for Tenaris going forward.

Naturally, after the Maverick and now the Caribe acquisition, we are devoting a tremendous amount of management focus on the integration process of the States and again the States being North America in general, a market of about 5m tons of OCTG consumption and about 0.5m tons of premium connection consumption.

So that would be, no doubt, the area of attention of a good number of us going forward. But, having said that, I'd like to repeat what we have said as well in terms of Tenaris always being active, exploring opportunities and not being closed to potential options.

Sir, your next question will come from the line of Rodolfo De Angele. Please proceed.

Hi, I have two questions. One, I'd like to ask you if you could detail the effect of a better mix in pricing compared to this quarter to the previous quarter. I just want to understand better how much we had actually price increases for a product and how much was an effect of improvement in mix.

And the second question is related to Hydril. I wonder if you could just talk about the JV that Hydro has with TMK. And if the outlook outwards, the status for that JV now that Tenaris is shareholder of Hydril.

Okay, I'll take on the first point with respect to pricing. I guess you'll understand that for competitive reasons it's very difficult for us to share over the call specifics. But following what we have done over the prior quarter, I think it is important to mention that Tenaris has concluded the year with close to 40% of high-end component of our [seamless] sale which, in fact, translates into a fourth quarter high-end component of about 43%. I would say pretty much in line with what we had anticipated in prior calls and consistent with the way our CapEx plan is being developed.

With respect to the existing JVs of Hydril, naturally there is not much we could comment at this point in time. We are [on a need] to transition, and the process gets close in. And only then will we be in a position to expand.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]. Sir, your next question will come from the line of Paul Rosenberg from Bear, Stearns. Please proceed.

Hi, a couple more questions. One is I'm wondering if you can comment on the situation on the Far East and Oceania which has been declining year over year.

And the second is just about new capacity. We keep reading about companies who are trying to build seamless capacity, recently, for example, Mittal Steel announced they're going to build -- or they're going to partner with a Saudi company to build a mill in Saudi Arabia. I'm wondering if any of these new capacities are a threat to your high-end products.

Okay, with regard to the Far East and Oceania, we are, particularly in Australia, we are increasing our activities, particularly with companies like Chevron, ConocoPhillips, ENI, some of them, particularly the exploration companies, some of them development. And we are also ready to take over their [inaudible] for which we have a ultimate agreement shared with [inaudible]. So we see the [inaudible] position to be an important player in Australia.

With regard to the rest of the region, you know we have a very good position in Indonesia through our alliance with a local company there, [Mulia Jaya]. And for the rest I don't see any important points [inaudible] in this region.

Now, with respect to capacity additions in the Middle East, of course we are following the announcement. And naturally, given the importance of the market we were very close to the situation.

Now, by and large I think it would be fair to say that the timing to deploy this project is a substantial one. And even based on our own experience, develop the premium, for instance, the premium connection technology or the [inaudible] is still great which are used on the gas fields, for instance in Saudi, it's something that takes a long time. It typically -- it's not an area or a product segment where you would be able to get in a short period of time. So from that perspective we are at this point not confirmed.

Okay, thank you.

Sir, your next question comes from the line of [David Rollings] from [CM Pension Fund]. Please proceed.

Hi, good morning. Just have a couple of questions. Could you talk a little bit more about the future rationale for the Hydril acquisition? And do you see it being -- do you see your margins improving as a result?

The second question would be in terms of competition from Chinese imports, do you see it more as a threat to your seamless or your welded differential?

Let me take on the Hydril statistic rationale. As we have indicated, Hydril is an extremely well-positioned and outstanding know-how company which we view as an enormous complement to Tenaris.

When you look at the specifics, you don't see that our two companies, both very important participants of the premium connection settlement, have over the years specialized. As we have said, Tenaris has developed the Blue premium connection product line which it has [inaudible] premium connection. And Hydril over the years has put an enormous effort on developing their integral premium connections. Both, again, types of products which usually are used on the different operating conditions. So that's an enormous complement from the product dimension perspective.

In addition, there is, in our view, an important element of geographic or geographical complement. Today Hydril has a very strong, very important position in the United States, whereas, as we have announced on prior rounds, Tenaris was always starting to build its procedure and which, today, is very small, very, very small.

By the same token, we believe that we could use the existing Tenaris presence in the international market to take some of the Hydril technology overseas. So those are some of the dimensions which, over time, and once this transaction is concluded we'll be very happy to expand on. But I believe that these two are the two major drivers.

Now with respect to the Chinese capacity, I'd like to say that over the year of '06, we have confirmed the startup of at least three new mills, one by [inaudible]. Second one by [inaudible], the third one by [inaudible]. These are [NBA] mills, seamless mills, which were initially designed to naturally sustain or cover the increased Chinese domestic requirement. We also remember that China, during '06, has become an OCTG market of the size of 1.6m tons or so.

Now, having said that we thought it true that China has become an important exporter of OCTG. Typically we say in OCTG aims are low-demanding applications. The state has become both -- United States and Canada have become, I said, target markets for the Chinese exporters. And, as we have indicated, we don't have an answer to problems with competition, notwithstanding that, we want to be very careful or very carefully whether those imports into North America or Canada are the fair trade conditions or not.

As you would know, even in U.S. administration, it's starting immediately within the WTO which is associated to the notion of Chinese exporters are being subsidized. And it is something that we, as an important North American producer, are watching very carefully.

So the short answer to your question is Chinese exporters, they are reality, are targeting the U.S. and Canada and naturally competing in the low-end or less demanding type of pipe, consequently a lot, a lot over to win [well their case in] product line. And here in that equation and even the impression they have developed in the United States, today they account for about 36% of the total imports, we are watching the conditions very closely.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]. Sir, your next question comes from the line of Christian Audi from Santander.

Thanks, good morning. I have three questions. First, in terms of the product mix. In the past you've guided us that you would gear for around 60% over volumes, particularly towards the high end. My question is, as you look at your capacity upgrades to seamless that will lead you to that number? Are these taking place evenly in '07 or '08, or are they more '08 backed up?

The second question is if you could just give us an update in terms of your CapEx expectation for '07.

And lastly, you've talked a lot about new contracts, long-term contracts having been signed. Is it possible for you to give us a sense on a similar business today what percentage of your business is long-term versus short-term contracts?

Okay. With regard to the mix up of high-end products, [of 50%], to ensure we maintain our position with partners, with the higher position to enforce that trend. The second question was CapEx, right?

CapEx, okay, regarding CapEx we are estimating for 2007 something around $400m, $450m, included Maverick $20m we have already talked [same amount].

With respect to the long-term agreement component of our OCTG sales, again, for competitive reasons, we don't provide the detailed specifics. But all we could say at this point is that they do represent a major component of our OCTG team that they are at this point.

Thanks. Just going back to the product mix for a second. Do you expect an improvement in mix to take place either way in '07 or '08 or even the schedule of capacity upgrades that you have in place? Would they be more -- would they be taking place more in the '08 timeframe of the posisble?

Let me first of all plan [inaudible] on the [OCTG program] coming down. Naturally Maverick gas is substantial volume of OCTG that would not be categorized as high end. So if we see in the coming quarter that that percentage-wise would naturally be lower.

Now, if we go back to what we have said before, I think that while our CapEx problems have been deployed, we'll be in a position to reach this target level of about 50% by '08. But as we generally indicated, once we conclude the Hydril transaction, I think we will naturally need to explain once again the mix and the components because high level being a substantial component to the high end to the product mix of Tenaris overall.

Great. And just a follow-up in terms of pricing and similars. Are you saying it's similar environment as you mentioned last time of high-end that you're seeing the potential upside while the commoditized type of product being more flattish in terms of outlook for the first quarter?

Okay, we see prices stable or we have a little bit in the mix there.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. Sir, your next question comes from the line of John Dawson from Dawson Herman Capital Management. Please proceed.

I'm sorry, could you repeat what you just said on prices?

Let me say that we see prices even of the high-end product line stable. Naturally we are going to see two effects. One is the mix improvement which we just referred to. And then naturally we are going to be seeing that as long as we keep renegotiating our long-term agreement, that poses an opportunity for us to agree or update the pricing level. So that is what we, I think, would translate into a slight profit trend.

Thank you.

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

Yes, hi. I would like to ask if you could expand a little bit on your outlook for the Latin America for the pipe business.

Latin America, as we indicated, it is fairly [poor]. Our Brazilian company, Confab, is [fairly] dedicated to the [gasimi] project. This is something close to 240,000 metric tons which will keep that facility fairly [taut] through the rest of the year and even into a portion of '08.

In addition to that, we are, as we speak, delivering the initial basis of deluxe, as we call them in Argentina. This is orders for about 120,000 metric tons which we are expecting again to deliver through '07.

Now, with that said, there is an important participant in our welding Group in Latin America which is Tubos del Caribe. And we made some initial remarks about us bringing up to date some [facility] capacity which would be, I think, fully operational over the course of the end of first quarter into the second quarter '07.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]. Sir, at this time we have no additional questions. I would like to hand the call back to Mr. Nigel Worsnop for closing remarks.

Okay, well thank you everyone. And I would like to just remind you that we will be having our annual investor day in New York next week, on March 8. And I look forward -- we look forward to welcoming you there and to seeing you there. Thank you.

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