Tenaris SA (TS) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Tenaris 2007 first quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to the director of investor relations, Mr. Nigel Worsnop. Please proceed, sir.

Thank you and welcome to Tenaris' 2007 first quarter conference call. Before starting, I would remind you, as usual, that we'll 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.

Our conference call today coincides with a very special day for Tenaris. Today, Hydril becomes part of Tenaris. For this reason, we're here today in Houston, together with Paolo Rocca, our chairman and CEO, and Guillermo Vogel, member of our board of directors and Vice President, Finance. So, we've asked them to join us on the call. As usual, we also have Carlos Condorelli, our CFO, German Cura, the managing director of our North American operations, and Guillermo Moreno, the director of our oilfield services business unit, as previously announced.

First, a few words about our results. The results show continuing year on year growth with net sales up 50% and operating income up 27%. Sequentially, net sales declined 1% and operating income was down 7% from the fourth quarter of 2006. The average selling price for our tubular products and services remained stable in spite of an increase in seamless volumes, as the product mix was not as rich as it was in the fourth quarter when we had record shipments of premium OCTG products.

Our costs during the quarter were affected by higher SG&A and depreciation costs. Looking forward, we are expecting some increases in the costs of ferroalloys and metallics following the 9% increase in iron ore prices as well as in labor costs and in energy costs in Argentina. Since we consolidated Maverick last quarter, there's been a marked slowdown in Canada, as the larger E&P companies reduced investments in shallow gas drilling, responding to lower gas prices last fall and higher production costs.

The number of gas wells drilled during the first quarter of 2007 was down 35% compared to the level of the year before. This, combined with distributor inventory adjustments, has led to a sharp drop in demand for OCTG products in Canada, with apparent consumption down more than 50% compared to the first quarter of 2006. Demand in the next quarter will be further affected by the usual seasonal factors. However, North American gas prices have recovered from their lows last year and we are confident an investment in gas-drilling activity will also recover in the next winter drilling season.

The U.S. market has not been affected in the same way as Canada, but growth in activity has slowed. The growth in OCTG imports, particularly from China, is having an impact on this market as can be seen in the decline in published prices for standard OCTG grades. In the first two months of this year, imports from China accounted for 59% of total seamless OCTG imports into the U.S. and they account for more than 20% of the total U.S. OCTG market.

In the rest of the world, we are looking at an essentially stable market overall this year. In Mexico, we are unlikely to see a significant increase in activity in the short term, but activity could increase later in the year. In Venezuela, activity levels remain stable, but PDVSA has continued to run down its stock of OCTG pipes, which have now reached very low levels. In Argentina, we are still experiencing delays on deliveries for the loops projects as the financing for these projects is taking longer than expected to put in place.

In the Middle East and Africa, where we have seen the most significant growth over the past two years, we continued to see good demand for our TenarisBlue premium connections and sour services products. One area where we are seeing increased activities in the development of gas reserves, which are mainly sour gas requiring complex products in the Gulf countries, to fuel growth in industrial activity and LNG exports. During the year, we won during the quarter, we won an important order from KOC for OCTG products to be used for the development of a recent gas field.

The market for our deepwater riser and flowline products remains firm, with deepwater projects not only in West Africa and the Gulf of Mexico, but also in the Far East. In the process plan sector, we continue to build alliances with leading engineering companies and the recently included agreement with Bechtel, under which we'll be working with them on the Shell/Aramco Motiva refinery project in the U.S.

Now, Paolo would like to say a few words about Hydril.

Well, thank you, Nigel. Today Hydril will become part of Tenaris. We are actually in the process of closing the acquisition. We will have the opportunity to integrate Hydril premium connection business with our tubular product and service business. We will run Hydril pressure control business as a standalone business, essentially under this current management, but with the support of Tenaris global reach and resources as it expands worldwide.

Integration of Hydril premium connection business will allow us to offer product for a full range of obligation in the North American market and to introduce Hydril products to our national oil companies and international oil companies customer in international markets. With Hydril, we will be able to offer a full range of market leading solution for the most complex tubular columns, being able to combine the Hydril Wedge Thread and the TenarisBlue connections, backed by our technical support worldwide.

Tomorrow we will kick off the integration process. We are setting up joint teams with member from Tenaris and Hydril to look in depth at main issues. This is indeed an important moment for Tenaris and we are convinced that this integration with Hydril will provide substantial opportunities for both Tenaris and Hydril. Thank you, Nigel.

Okay. Annette, could we have the questions, please?

Thank you. (Operator Instructions) And your first question comes from the line of Ole Slorer with Morgan Stanley. Please proceed.

Well, thank you very much. I have a question, first of all, on price realization in the seamless business or seamless part of your business in North America. It just strikes me that just looking at the Pipe Logix welded the pricing trends and Maverick's product line always tracked those quite closely that they were down about 2% in price sequentially. And if you use that and back it into your seamless, you kind of get that you had a slight drop in pricing realization on your seamless products sequentially. Could you quantify or could you comment on that? Is that the case?

Well, our price this quarter has been affected by, basically, by two things. On one side, even if the price remains stable internationally, we had a mix less rich during this quarter in previous. Last quarter was a record in our premium sales. On the other side, within the North America, we are reflecting a more competitive environment due to imports from China and, as you see reflected in the Pipe Logix, the prices for welded and seamless are going down a little as you were mentioned. But I would ask, as far as the North America situation is concerned, to German to add something more specific on this.

Thank you, Paolo, and I think it is important for us to make a distinction as to how Pipe Logix is behaving versus the price seamless price we're reflecting. I think it is fair to say that North America reflects the fact that during '06, we've seen imports in the range of over 700,000 metric tons coming in from China, both seamless and welded. And this is having a direct impact on the pricing behavior. And this is somehow linked to both increased Chinese aggressiveness, which is somehow fueled by, I said, specific advantages that they have.

Perhaps the one I'd like to highlight is the 13% tax rebate, or export tax rebate that pipes are still having out of China as opposed to other steel products.

Yes. As far as the international price is concerned, as I was saying, specific prices are substantially stable, but the mix effect in this specific quarter is playing slightly against us . Maybe Guillermo Moreno could add something on price level internationally.

Yes. Thank you, Paolo. Yes, price international markets are stable, particularly in the high-end and we see prices stable for the next quarter. In this particular quarter, our shipments of premium connection were slightly lower than the previous one, but was more related to the way the shipment occur. We expect the mix to improve in the next one.

Okay. So, I have just a slight follow-up question. If you look into the trends for the second quarter, there appears to be a continued negative pricing in the U.S., both on the welded and on seamless, according to Pipe Logix, while activity in Canada, I mean, the breakup in Canada has been brutal. So, the rig count is very, very low at the moment. So, taking these facts into consideration, do you see the earnings or the outlook for Tenaris as overall basically stable from flat from these levels going into the second quarter or should we expect further sequential deterioration in price realizations and margins?

Well, in general, I expect stable results. I think also there may be some deterioration in North America, but overall there should be a recovery in our mix and the mix international will make up for this. But I will ask German to add something on how he sees prices in North America.

I said, going forward, I would agree with the notion that Canada would face a very steep breakup. We've seen it already. And consequently, it is to be expected that it's going to be a very weak second quarter from a pure Canadian perspective. I think, as far as the U.S. is concerned, we've seen the de-stocking process somehow mitigated. We, today, while at the end of the quarter, had a reduced level of inventories, rig count is stable coming up somehow, I think gas prices are firm at these existing levels. And overall, we see that the activity in North America either would remain stable, probably recovering somehow.

The big influence on prices, and I'd like to emphasize that, are, by and large, the extreme level of imports. We concluded 2006 with imports that have reached the level of about 46% of the overall offer and demand. This is having a direct impact on how pricing is behaving.

Okay. Well, you set me up for my final question that was just on the upcoming sunset review at the very end of May. And you've been optimistic with respect to getting some a more fair import tariff system from your perspective. But then again, we've also heard that of some of your big domestic competitors in a similar side that seem to be very adamant that there will be no change. So, can you give us your latest thoughts there?

Ole, this is Guillermo Vogel. Well, as you know, the termination of the ITC is coming on May 31. So, we are three weeks from knowing what the outcome is will remain with the thought that we have our first chance at this termination, so let's wait three weeks and we will know where we are.

Okay, Guillermo. Thank you very much.

Thank you.

Your next question comes from the line of Frank McGann with Merrill Lynch. Please proceed.

Yes, good morning, everyone. Just a quick question. In terms of to follow up on the last question, as you're moving forward to the second quarter at the level of destocking, could you just talk as to where you think we are in that process and is, from your standpoint, is that pretty much over at this point? Secondly, in terms of the acquisitions and where we are in terms of trying to determine what types of synergies and potentially cost reduction opportunities we might have going forward.

This is German, Frank. I'll take on the inventory position in the States first. Let's say that, by the end of the quarter, we've seen the real first time inventory decline in the marketplace. Our estimate today indicates that we have about 5.3 months worth of inventory coming out from 5.7 months. And this, I think, is particularly true for some specific items. I would say tubing, by and large, has been, during the quarter, a much require a lot much require type of item as opposed to what we've seen the fourth quarter, the beginning of the first.

So, it will be, of course, all conditional to how rig count behaves the, if you will, imbedded perceptions as to what the gas price will do. But overall, we remain confident as to the existing levels in the U.S. market and the notion that where our customers, distributors and users are today pursuing more acquisitions of pipe than what we've seen in the last couple of months.

Thank you, German. On the acquisition side, well, I think the, in the last year, completing the acquisition of Maverick and Hydril, basically, at Tenaris, we position ourselves first in the United States and second on the premium joints market worldwide. Really, we expect the full benefit from this acquisition to come when there is a market recovery, clearly in North America. In Canada, the market has behaved below our expectation in this quarter and probably will do so in the next quarter.

But if we look at the fundamentals, in the U.S. especially the gas price, based on our contact with the oil company and the perception we have, I would think that in Canada, as in the U.S., in the medium term, gas price will drive interesting level of activity in the oilfield. So, we are fully comfortable with this. This is the moment in which I think we will see the full synergies between our business in seamless, in welded, in premium and in service to the final client.

When we look at Hydril, we also I also think the Hydril acquisition will show its full potential in the moment in which the demand worldwide for high-end product increase even more compared to the present level. In order to.... in an environment, more complex field have to be developed and explored, in this environment, the synergy is coming from a joint offer of integral joints, couple joints on a much wider geographical reach will be very significant from our point of view. I don't see so many cost synergies in Hydril. I see a very strong commercial product synergies and customer reach in this.

Okay. Great. If I could follow up, maybe, just with a question on Venezuela. The issues that have affected Ternium, in which you have an equity interest. I'm just wondering is there some potential that Tenaris itself could be or maybe is being encouraged to invest in an increase in seamless capacity in Venezuela?

Well, we always keep our option open. But in the moment, the we are serving the Venezuelan market from Tamsa with seamless and welded coming from Colombia or from the rest of the world. We think that Venezuela is a very essential market, very important in the long run, even if maybe today because of the destocking of PDVSA, we don't see it working in the full potential. But let's say we consider we keep our option open on future investment. What we are doing we are strengthening our production capacity or complementing our finishing capacity in Venezuela. We did it last year and we are combining the market.

Okay. Thank you very much.

Gentlemen, your next question comes from the line of Cindy Du with Jefferies & Co. Please proceed.

Thank you. Just wanted a follow-up on the Canadian market. What steps have you taken, if any, in that market to address the lower demand? Are you exporting more pipe into the U.S. or doing something with the pipe?

Yes. I will let German to pick up on this question.

Thank you, Paolo. So, specifically, Cindy, what we have decided to do is naturally adjust production. We are not, by and large, exporting any additional quantities out of Canada to the States. We believe that the exchange in Canada was structural enough for us to adjust the level of production, reduce and complete the level of production. Considering that Canada, almost by design position, logistics, et cetera our production facilities, are devoted to the Canadian market.

Okay. I just have two more follow-ups. In terms of the Maverick integration, with two quarters, basically, behind you, how has that been progressing? And were there additional expenses in SG&A other than the $38 million of amortization expense that was incurred that you guys had not expected? And then also, on the Hydril acquisition, could you quantify or give us some guidance on the impact for the next three quarters?

Well, as far as the Maverick acquisition, as I was saying, the full potential of Maverick will be seen when the market pick up and also possibly when import in the United States could be somewhat reduce. But on the other side, I would say that we have found a very good and motivated group of people, which is essential for Tenaris to establish its position in the United States. We are in the process of investing in the facility, in establishing the quality standard and performance standard that we would like to have for the performance here in the States. But the integration is proceeding fine.

On the question of SG&A, I would ask to Carlos Condorelli maybe to add something of this. Carlos?

Yes, sure. Thank you, Paolo. Yes, regarding the increase in SG&A, we are looking today, we have a few considerations to make. But just to summarize, we have two specific items this quarter, which are the following ones. Number one, as we disclosed in our financial statement, we increased the provision we had for litigation related asbestos in our subsidiary at Dalmine, which account for something around 11 million this quarter.

And also, we have for the first time as we disclosed in our financial statements as well, the long-term incentive to some of our senior executive, which accounted for something around 5.6 million. Of course, we expect the second one is going to be made every year because this general compensation and is very well explained in our financial statement. These are two specific issues which increase our SG&A this quarter.

Yes. As far as the Hydril, I would separate the impact of Hydril results in the near future between the two side of the bid. As far as pressure control is concerned, I understand the business is very solid and the outlook is also encouraging. So, you may expect contribution to our statement, to our results in line with what Hydril is presenting in the last quarter. As far as the premium is concerned, well, we expect the synergy and the benefit coming from complementation of this to come out in the medium run.

But the potential for the, let's say, associating Hydril and Tenaris for serving our client worldwide in this environment in which the company are facing increasingly complex challenges I'm thinking of Kazakhstan. I'm thinking of complex field in West Africa. I think the opportunity for complementation are very, very interesting and should appear in the medium run in our result. Maybe Guillermo, you could add on our expectation for working together with Hydril in the international market.

Okay. Thank you, Paolo. Yes, the expectations are very high from our side, but also from our customers. First reactions in the market have been very, very good in terms of our ability to complement our portfolio in combining the two technologies. And also, the complementation, for instance, in the case of adding our Dopeless technology to the wedge technology. Some major companies have indicated that they are very, very interested in this possibility and it's something that we will start working, I would say, today, when we are finalizing the acquisition of Hydril. In terms of product range, we see a high potential and we expect to start seeing the results in the next month.

Okay.

Your next question comes from the line of Santiago Petri with Templeton. Please proceed.

Yes, hello. I would like to know the structure of the OCTG market in Venezuela. What market share are imports in that market or what we consider imports?

Well, on this issue, maybeGuillermo, you can add something. In general, the Venezuelan market is mostly a welded OCTG market. PDVSA is using seamless and welded and also the private operator are using welded and seamless. This is supplied domestically by local producer of OCTG welded and, from Tavsa, our Tenaris company in Venezuela. Import is really marginal. We are talking about Guillermo, you can help me, but I think something in the range of 10% of the market.

Yes. In the case of OCTG, the market share of imported, I would say, is yes, it's less than 20%.

Yes, less than between 10% and 20% for some special product, but in general, the market is served by local producer.

Would you consider imports the goods that Tenaris is sourcing from Mexico, Colombia or other countries?

What we are doing we are complementing our line and our sale in Venezuela with imports coming, to some extent from but the lower extent from Colombia and to some extent from Argentina. But I would say that this share was higher in the past. Today, the level of production of the local producer is satisfying most of the demand. German, maybe you can add something on this.

I think it is important to clarify the way PDVSA works for us to understand the dynamics of domestic versus imports. By and large over the last few years, we've seen PDVSA buying locally in Venezuela, by and large to the domestic suppliers. And channeling their import requirements through PDVSA Services, a subsidiary of theirs, which typically tenders out among various qualified suppliers their requirements. Of course, Tenaris is participating on those tenders and, again, there we are, by and large, competing against pretty much all of the tubular players.

Okay. Thank you very much.

Your next question, gentlemen, comes from the line of Tereza Mello with Citigroup. Please proceed.

Hi, good morning. I have a couple of questions. First, could you just as a follow up, could you quantify the mix of high end and low end your tubes operations in the first quarter and in the fourth quarter of last year?

Okay. The last quarter the percentage of high end products for Tenaris was above 40%, while the first quarter of last year was slightly below that number.

This is all- is refer to seamless. Within the seamless sales, this is the share of what we consider high end product. Last quarter, sequentially, last quarter was particularly ...

High.

Particularly high and this quarter, the first quarter has been slightly low. But this is not due to the change in the market. It's just a question of shipment and the mix between region, project and product.

Okay. Thank you. Another thing on Mexico. You mentioned that you don't expect to have a recovery in Mexico in the short term, but you could see a recovery in the medium to long term. Do you expect a deterioration in Mexico in the near term? We have seen a significant decline in rig count from a peak in February down to 85 recounts in April from 95 in February. Do you see a deterioration in the near term?

Well, no. No. We don't see a deterioration. But we would have expected the rig count to pick up much faster because of Chicontepec and Burgos works and the development of KuMaloob-Zap. This is happening, in fact, but more slowly than anticipated. I expect that, by the end of the year, or maybe even in the first quarter of 2008, we will see the more activity going on in Mexico. I think Pemex and the government are deciding, analyzing their priority and they will design increasing activity for in the coming months.

Okay. Thank you. And my final question is about the project operations in South America. We saw a significant decline in sales, but we did see, for instance, a significant increase in Confab inventories. Are you expecting already a recovery in sales, a significant recovery in sales in the second quarter or does delays should push any significant improvement until the second half of the year?

Well, we expect to start delivering increased delivery in the next quarter and we are very important backlog of the project in Brazil, in Argentina, in Latin America. So, starting from next quarter, we expect the project business to pick up nicely. Maybe, Guillermo, some more specific on this.

Yes, the impact in the first quarter was what Nigel said, that his opening was that it was some financial issue that had been. So now, it's also important to mention that the last week, Confab booked a very important project with Plangas that is for more than one countries and $170 million. So, Plangas is very strong and we see shipments start picking up on the next quarter.

Okay. Thank you very much.

Thank you.

(Operator Instructions) Your next question comes from the line of Debbie Bobovnikova with JPMorgan. Please proceed.

Hi. Good morning. Just wanted to ask a question on the trends you're seeing in the different regions. We say a decline in the Middle East segment. Can you just explain how much of that was due to shipments versus price versus mix and what you expect going forward?

Yes, on this question, Guillermo may give an outlook of the Middle East from now on, let's say.

Yes. Well, one thing regarding the first quarter is, yes, our shipments to the Middle East decline a little bit because of the way, you know, the vessels were contracting. And that had an impact a little bit also in our product mix for the first quarter. Regarding the coming quarters, we still see the Middle East with a very strong activity, with a number of rigs increasing in the total year of close to 20%. All the countries are increasing activities. Probably, Aramco, who has been leading the growth, will be reaching its peak by the end of 2007.

But I would say that the most important thing is that we are seeing many rigs going from oil to gas. What at the end is going to require more high end products, more premium connections, more sour service material. What this, at the end, will imply a substantial growth in this particular market. Regarding North Africa, North Africa is also growing at a lower rate than the last two years, but we are still very optimistic with North Africa in all the countries, particularly Algeria, Libya and Egypt.

So, the price, on an apples to apples basis remained flat in Middle East, is that what we're to assume?

Yes, we see prices in the Middle East stable.

And can you ......sorry, go ahead.

The activity in the Middle East is really strong. So, when you say the in the eight country the main country, we see the rigs there are today in the range of 370 rigs should go up by the end of the year. Then maybe there could be a plateau by the end of this year. But still, this year they should be increased. Part of this is stock for this reason, the stock underground, but still demand is strong. Now, price you can consider stable for the high end product. We reach a level at which I think that is, in the present condition, the price has stabilized. But I would say that our mix will reflect a larger share of high end compared to low end in the coming within the, let's say, this year. I'm not saying quarter by quarter, but in the medium term, our high end will increase.

Yes. And this will be a result of a combination of a market that is growing to more high end products and part of the Tenaris' tradition to focus more of its sales in this special market.

Okay. And so, can you just explain a little bit on this vessel issue, was there just a shipping delay? And if that's the case, does that mean that second quarter should see the reversal of that, i.e. higher volumes and better mix in the Middle East?

In the case of the Middle East, yes. We will see more shipments to the Middle East in the second quarter than in the first.

Okay. So, it will get reversed. It's just a timing issue?

Yes, especially, yes Saudi Aramco.

Okay. And then, a question on the sales to Europe. Those actually increased quarter over quarter and that's I just wanted to understand a little bit more of the trends you're seeing there because, in a way, it's a little counter to your goal of increasing OCTG mix, since that's mostly industrial pipes. So, just want to get an understanding in terms of what the trends are in Europe for demand for industrial price and if you're seeing a better opportunity there now versus an OTCG?

Well, Europe, is doing well, from an industrial point of view. The rate of growth of the industrial product is sustained. Probably is one of the higheest is higher than in the United States. So, we have a strategy of focusing in on niche. But this niche are growing and so we are supplying more volume. We have to keep the client in Europe in this niche. Now, we are getting higher margin in this segment, just because of the increased demand in the region. Also, last year, there has been trade measures against Russia in the Eastern countries. And so, the competitive environment is allowing us to to raise our price and our margin.

Your next question comes from the line of Verena Wachnitz with T. Rowe Price. Please proceed.

Hi. Good morning. My question was on production costs, especially on tubes division, what are your expectations for production costs over the coming quarters and what do you expect your growth margin to be? Thank you.

Well, we are seeing some pressure on our cost. On one side, the increasing iron ore is driving also increase in the metallics, scrap and pig iron. And so, we have some pressure on that part of our cost. Some ferroalloys like the ferromolybdenum alloy are also at historically high level and this is also having an impact in our cost. Labor the new contract in Argentina, in Mexico, is also putting some pressure on us, even if we compensate in efficiency and so, but still we feel some pressure in this.

Energy prices, especially in Argentina are also putting somewhere. So, it's not something dramatical, but we see an upward pressure on our cost. Also, the high valuation of the euro is increasing the cost our cost in Europe. And this is reflected in our statement in dollars as an increase. I expect this to go on, at a very, very low rate, let's say, but to go on during this year because also we expect the euro to remain strong and we will see some impact of our labor agreement in the rest of the year.

So, what you're saying is that we saw a lot of this already in the first quarter, but there will still be some margin of increase over the next quarter?

Yes, there will be a margin of increase because we are probably not seeing the full impact of labor contract, euro appreciation and energy cost in our results.

Thank you.

Your next question comes from the line of Ricardo Cavanagh with Raymond James. Please proceed.

Yes, hi. Good morning. You mentioned on the press release that you expect worldwide sales of high end products later in the year to increase as you bring on stream new heat treatment and finishing facilities. The question would be how important would be that new facilities? If you can detail on it.

Well, there won't be any dramatic change, but we will increase our offer to the market. The Hydril integration will allow us also to expand our reach. The heat treatment capacity is coming the same with supply also support this strategy internationally. And we have, I think, the market for a gradual increase. I don't expect a dramatic change, but there will be a slight increase in our high end sale in the rest of the year.

Okay. Thank you.

Your next question comes from the line of Serge Escude with Banca MB. Please proceed.

Yes. Hello, everybody. I have two quick questions. The first one is about if you can give us an update on the recent evolution of the duties from Mexico to the U.S. I think that there was a change and if you can explain us what is the implication for you. And the second question is about if you expect some changes in duties from imports from China. If you think the situation may change in the near future. Thank you.

Well, one issue concerning I think you're referring to the elimination of restriction for import of line pipe.

Exactly.

United States from Argentina in a small diameter.

Exactly.

A very important measure for us. It will not change substantially our presence into the United States, but it will allow us to cover the full range to some of our client specific project or specification, which we can accompany our offer of when the pipe and the line pipe in high diameter range with some sale of lower diameter range. It is not changing so much because this development because today we are importing from other sources and there will be no substantial change, but is an important measure.

Is it in terms of dollar? Can you give us an idea a rough idea what could be the change in terms of dollar for you?

No, I wouldn't say if this but this will not have an impact ...

Okay.

Only have a marginal impact on our overall policy.

Okay.

Your second question is concerning duty into the States from you say, from China?

Yes. Yes.

Okay. Maybe German, you can add something on this.

Well, let me just say that we and I believe the domestic industry is evaluating the Chinese participation in the market and, in particular, some Chinese latest measures and I mentioned some of that at the beginning of the call with respect to the sustainability of the export tax rebates for pipes in part of China, which accounts by, I think, 13%. A measure that was eliminated to the Chinese exports of some other steel products. Now, we believe that China is seriously affecting the U.S. market. We are evaluating different options.

Can you elaborate on this? Maybe if you have some ideas your thoughts about the evolution?

No, but the issue in China is basically that, well, Chinese are getting a tax rebate of around 13% of the sale of pipes coming into the U.S. and there are subsidies in the way the investment in seamless capacity has been financed. There are subsidy in the chain there is, in the production chain in China. And these signs that we are studying. I mean, it's not that we are, let's say, concerning general about the trade. What we are concern is about the condition in which this trade is performed and the situation of the Chinese companies in term of subsidy. This is something that we are studying jointly with the rest of the American industry because, in the end, we have no problem to compete, provided there is a level field on which to compete.

Okay. Thank you very much.

Your next question is a follow up question from the line of Ole Slorer with Morgan Stanley.

Yes, thank you very much. Just a follow up there again. I mean, it's very difficult to forecast any political decision like tariffs. So, if you assume that there is no change in tariff structure, what do you think the implication will be on continued weakness in U.S. welded and U.S. standard seamless tubes?

Well, first of all, as I saying, I think here we are looking at something that comes in very fast. For instance, the reduction in operating consumption in Canada, due to the reduction in activity in destocking, has been very sudden. 50% reduction in offer and demand is very strong. This will not last. I'm sure the next drilling season will be a very different story and probably the also stocks may be capitalized in Canada by the end of 2007. Now, we are reacting.

This we reduced, in Canada, we're reducing the last one more than 300 people. We have layoff. We adjust our production level to reflect this sudden contraction in the market. But I think the nothing has changed as far as the depletion of the gas field in Canada is concerned. The system in Canada and North America still has a very high depletion rate and to support the present level of production and consumption. The industry will be back drilling before the end of the year. So, this is my view.

So, you don't think that the Chinese imports will continue to grow as a percentage of the total consumption if there is no change in tariffs ?

No, well, judging from the experience in the flat product also, I think the Chinese are not interested in disrupting markets in the sense of increasing, let's say, imports when the market are also in a moment of slowdown. I don't expect this to happen. A sign of this has been the reduction of the rebate on export for all of the products. This type were not included, but the fact that China took action is an indication that also Chinese industry is caring about over capacity.

Okay. On the Middle East, this is a slight different area, but has there been any changes there in terms of the competitive situation? It strikes me that some of the Russian players, for example have been prioritizing the U.S. market for export and a shift instead shifting their focus to compete in the Middle East in more the standard seamless and also maybe a higher component of Chinese standard seamless into Saudi Arabia, for example? Are you seeing any changes in the competitive landscape in the Middle East?

Well, being the Middle East and, in particular, Saudi Arabia is so important and growing market, of course, our competitors and, in particular, Chinese and Russians are focusing more on that region. They are trying to increase their participation in the low end market. And we have seen more competition there. In the high end, they are not a player because they don't have the products to serve the high demand in requirements of the fields in the there.

Okay. Thank you very much.

Your next question is a follow up question from the line of Frank McGann with Merrill Lynch. Please proceed.

Yes, if I could just follow up with the SG&A comments. The long-term incentives for executives, the $5.6 million that you said was in the quarter, this is an annual number according to my understanding. And you book it just once a year. You don't accrue it over the year, so there would be an equal amount every quarter?

No, Frank, this we account just when we issue the letter, which has the long-term incentive for the executives and it happens every January. So, and also, it's a small amount of money. You look at our notes in our financial statement, it's only it's something below $6 million for the total.

Okay. For ...

The reason here is keep in mind we are introducing changes because of our position in the United States. We have to adapt .....to also to the culture of the business in the United States.

Okay. Perfect. Thank you very much.

And at this time, there are no more questions in queue. I would now like to turn the call back over to Mr. Worsnop for closing remarks.

Okay. Well, thank you very much, everyone, and I look forward to seeing you all again on the second quarter call.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.