Tenaris SA (TS) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tenaris 2007 second quarter earnings conference call.

My name is Camille and it will be my pleasure to be your coordinator today.

At this time, all participants are in a listen-only mode.

We will be conducting a question and answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to the Director of Investor Relations, Mr.

Nigel Worsnop.

Please proceed, sir.

Thank you and welcome to Tenaris' second quarter 2007 conference 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 or implied herein.

Factors that could affect our results include those mentioned in the Company's 20-F registration statement and other documents filed with the SEC.

With me on the call today are Carlos Condorelli, our CFO, German Cura, the Managing Director of our North American operations, and Alejandro Lammertyn, who used to be our Supply Chain Director and is now our Commercial Director.

Our second quarter results show solid year-on-year growth, with net sales up 41% and operating income up 13%.

Earnings per share were up 5% after higher financial expenses on the debt we took out to finance the Maverick and Hydril acquisitions.

In these results, Hydril, which has been consolidated since May, contributed $104m in revenues and $13m in operating income.

We are making good progress in integrating our North American operations.

The former Maverick offices in St.

Louis have now been closed and our offices in Houston have expanded.

The integration of Hydril is also proceeding apace.

The focus groups have completed their work and, from August 1, we have put in place a substantial reorganization of our worldwide operations, affecting many positions and extending our global presence.

We are pleased that many former Hydril employees are taking on key roles, both in the commercial and technical areas, all over the world.

One of our key objectives with this reorganization is to incorporate Hydril's technical service capabilities throughout the Company.

We are also pleased that Chris Seaver has agreed to chair our new North American Advisory Board.

We have begun to see some positive results from our commercial strategy of offering a full range of welded seamless premium connection and coiled tubing products in North America.

We have concluded multi-year deals to supply the U.S.

and Canadian operations of ConocoPhillips and Apache.

The reaction from our international customers to the incorporation of Hydril's products has also been positive.

In West Africa, we will be supplying Canadian National Resources with our TenarisBlue and Hydril connections for their Olowi project in Gabon.

And in the North Sea, Statoil and Norsk Hydro have agreed to use our tubular products with Hydril connections.

In Canada, the industry had a rough quarter.

The rig count in this seasonally weak quarter was down 51% compared to last year, at a level last seen in 2002.

The downturn was concentrated in shallow gas drilling in Western Canada.

Exports of gas from Canada to the U.S.

fell 16%, but were compensated by an increase in LNG imports, following lower than usual LNG demand in Japan and Europe.

This, together with expectations for summer temperatures less high than last year in the U.S., has resulted in a recent fall in North American gas prices.

LNG demand in Japan and Europe are now picking up again, so we expect that the North American gas price will pick up before the end of the year.

Additionally, in Canada, we expect to see a strong increase in thermal project activity over the next few years and we remain very well-positioned to serve this sector of the market.

Pipe prices in North America, as measured by Pipe Logix, continued to adjust downwards during the quarter and were down 2.3% on average for standard grade.

Although U.S.

drilling activity and operator consumption of pipe remained stable, Chinese seamless imports, which benefit from a 13% export rebate and other government subsidies, continued to increase.

In the rest of the world, demand for our specialized high-end product continues to grow, but demand for our API products has not been so strong following stock build-ups last year in anticipation of this year's increased activity in some markets.

This has resulted in an improvement in our overall product mix.

We are well-placed to meet further increases in demand for high-end products, as we've completed the construction of new heat treatment plants in Mexico and Argentina and we have additional premium connection capacity through Hydril.

Two of Hydril's plants have already begun to cut our TenarisBlue threads.

In Mexico, drilling activity has been increasing as Pemex seeks to offset the decline of production at the Cantarell field.

Schlumberger was recently awarded a contract to drill 500 wells in the Chicontepec field and we are working with them to service their pipe requirements.

In Russia, Gazprom awarded us their high-end requirements for the Astrakhan and Orenburg fields for next year, following the successful performance of TenarisBlue this year, and have agreed to do some trials using our TenarisBlue dopeless connection.

Demand for our deepwater riser and flowline products has also been increasing.

Highlights for the quarter include awards for the Helix Noonan project in the Gulf of Mexico, our first award in India with ONGC's Heera project, orders for the Karachaganak development in Kazakhstan, and for the heavy wall requirements of Sonatrach in Algeria.

I would like to close these introductory remarks by reminding everyone that, as in previous years, we expect to have lower sales of our seamless pipe products in the third quarter, coinciding with the month-long summer shutdown of our Dalmine plant in Italy.

In addition, the costs of our raw materials and energy have been increasing, and these higher costs will be more fully reflected under FIFO accounting in the third quarter.

The energy situation in Argentina, with gas demand at its weaker -- winter peak, while not affecting our overall production levels and ability to serve our customers, is resulting in higher metallic costs.

Having said that, we remain well-placed to benefit from any increase in demand for our specialized high-end products in international markets, as well as any recovery in North America.

Well, thank you and I would like to turn the call over to questions now.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Cindy Du with Jefferies and Company.

Please proceed.

Thank you.

Congratulations on the quarter.

I just have a few questions, primarily on North America.

It seems in your second quarter comments that Canada will be weaker in the second half than had previously expected.

And so what I want to know is what have you done in the region to minimize the costs and are the mills still shut down at this point?

And then, in terms of the U.S.

outlook in light of inventories coming down a bit and a stable rig count, do you anticipate some price stabilization over the near term?

And in terms of the traction with the distributors in the U.S., what's the progress on that?

Thank you.

Okay.

Sorry.

Yes.

Regarding the costs, number one, we have not suffered any shutdown in the mills during the quarter.

Number two, in terms of what we do to mitigate increasing costs, you know we have different alternatives in (technical difficulty) pipes and, of course, how we load our mills has to do also with the different costs.

But in fact, we can do nothing when the costs of raw materials go up, because we have to supply our mills.

On the other hand, just to mitigate the impact of, for instance, the situation in Argentina with the energy, etc., in the summertime we build inventory just to mitigate what's happened in this quarter and we benefited in this quarter by the decision made in the first quarter this year.

Yes.

With respect to pricing in the U.S.

and U.S.

outlook in general - this is German Cura, Cindy, by the way - what I'd like to say is that it is true.

We've seen industry -- or in generic terms the de-stocking process phase has, over the last few months, has slowed down.

Inventories in the U.S.

today have leveled off at about 5.2, 5.4 months, which is substantially less than what we saw in the last few quarters.

As far as the pricing impact is concerned, well, we believe that the demand remains pretty stable.

Rig count is increasing.

We see that the U.S.

is recovering.

However, I believe that it would be fair to say that what we've seen reflected in Pipe Logix as far as pricing is concerned is a little bit more driven by the import levels which, over this last quarter, have surpassed the 45% level.

Within the import context, I think China has played a very important effect over the pricing behavior in the United States, and this is somehow addressed in our opening remarks with respect to the China position in the North American market in general.

And then, with regard to the distributors in the U.S., earlier last month there was a merger between two distributors.

Has the consolidation made it harder to get them to work closely with you?

Well, no, no, not really.

I said, and we said it in the past, we see some distribution consolidation as naturally the outcome, if you will, of the consolidation at all levels - suppliers, producers, somehow also operators.

As far as our relationship with the distributors, we continue to enjoy a very good relationship with an established network of distributors, with whom we have established supply agreements to fundamentally source them on their existing customer base, remembering that the U.S.

is a very atomized market.

And of course, they are playing a key role in providing all of the logistics services in the long-term agreements that we just established and announced.

Okay.

And then, lastly, following on your comments about the Chinese imports, I know there's a preliminary ruling with the ITC on some welded standard pipe coming up at the end of the year.

Have there been any efforts by the domestic mills to also file a trade case for OCTG at this point?

Well, we're evaluating the different options.

I'd like to say that, of course, the ITC has accepted to go ahead with the investigation on the standard pipe case, but there is a case there in Mexico that has been filed some time ago.

We're expecting a determination within the next few months.

The same is true also for Canada, where an OCTG case has been filed.

And as far as the U.S., I think it'd be fair to comment at this point that the industry is evaluating the various different options.

Okay.

Thank you very much.

Thank you.

And your next question comes from the line of Frank McGann with Merrill Lynch.

Please proceed.

Hi.

Good morning.

Just two quick questions.

One, as you look forward over the next couple of quarters, I'm just wondering what you think in terms of continued mix improvements and the effect that that could have on prices.

Can we expect a little bit more pricing upside as we go forward over the next couple of quarters, based on what you're saying today?

And then, secondly, to follow up on the comments that Nigel made in the introductory remarks, in Argentina, in terms of possible disruptions of production, the understanding I have from those comments was that there's really no real interruption expected, that the main effect is on costs as you use liquid fuels to replace natural gas.

Okay.

Yes.

This is Alejandro Lammertyn speaking.

Thanks, Frank, for the questions.

Related to mix, as Nigel mentioned, all the principles on going to high-end products are still valid and we still see some improvement in mix in the near future.

Related to pricing, we think that prices will remain firm, but we don't see expectations of higher prices.

Okay.

This is Carlos Condorelli.

Regarding our situation in our mill in Argentina, [for the year] we have not suffered any disruption and we are not expecting a disruption.

The costs are increasing, given that we have to use more pig iron and we cannot operate fully our DRI mill.

But you know, Frank, this is wintertime in Argentina, so probably in a couple of months it should be better off.

Okay.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Anindya Mohinta with JP Morgan.

Please proceed.

Hi.

Good morning.

It's Anindya Mohinta from JP Morgan [CTB] in London.

I have two questions.

Firstly, on the Chinese exports that you're seeing, have -- in recent months, have you seen a change in the composition of these exports in terms of the grade?

Do you see a lot of the Chinese producers moving up the value chain, more and more towards heat-treated casings?

And secondly, what is your expectation for the scrap price and how does this affect your future cost outlook?

So if you say that you don't expect a very severe deterioration in pricing, how much of margin erosion do you think you'll see from the scrap price?

Well, let me -- this is German Cura again.

Let me take the first part of the question with respect to the Chinese imports within North America.

And I think the short answer is no, we have not seen major changes on the mix composition.

I'd like to emphasize that, by and large, the Chinese are aiming the less-demanding pipe applications market which, as you would remember, in the U.S.

today accounts by and large by about 60% to 65% of the overall North American OCTG market.

Okay.

Regarding the scrap price, here we are expecting a higher price.

The scrap has already increased its price.

But the impact in our financial statement, as Nigel expressed, it does not have a full impact yet because of the FIFO methodology we are using, especially in our operation in Mexico.

But the scrap price went up and it's not fully reflected this quarter, but we expect coming quarter the impact of this increase in scrap prices.

However, I'd just like to add that the margins may not be affected, because we are also expecting an improvement in the average selling price as a result of the mix, improvements in mix.

Okay.

Thank you.

Your next question comes from the line of Rochus Brauneiser with Kepler Equities.

Please proceed.

Yes, hi.

Good morning.

It's Rochus Brauneiser from Kepler in Frankfurt.

Just a few follow-up questions.

On the U.S.

inventory situation, what is your expectation today from the inventory levels of 5.2 to 5.4 months, as you said?

Do you think this is continuing to move further down?

And when do you expect a trough in this current inventory cycle?

And based on that, are you expecting shipments out of the U.S.

to be stable, or what is your assumption for your second half?

Could you also comment a bit on the current profitability situation at Maverick, how this has changed from Q1 into Q2?

And finally, could you explain a bit the movements behind the increase in your Far East and Asian business, where you have shown some 30% sequential sales increase?

Well, let me take on the inventory question.

I must say that the line wasn't perfectly clear, so I'm going to try to, if you will, repeat your question for the benefit of everybody and of course I'll be very glad to address any specifics if it's necessary at the end.

But in generic terms, what we said was the inventory, so the de-stocking process that we've seen over the last quarters, has decelerated.

We have reached the level of 5.4, 5.5 and the different analyses in the end are showing more or less the same.

We're expecting that consistent with the activity increase in the U.S., where there's no reason to assume that the inventory levels will decrease drastically from the level that we've seen today but in fact stay around more or less the same levels.

And if I understood well, no, typically there are no exports out of the U.S.

and out of the U.S.

inventory to the export market.

And I said this is particularly important today, once we have reached this five, five and a half months' worth of inventory on the ground.

Now, the second point with respect to Maverick profitability in generic terms.

I could say that, number one, prices.

We've seen an impact on price.

I think the Pipe Logix reflects very well the pricing behavior in the U.S.

market, which somehow it's been particularly growing into the second half of the year, partially compensated by some steel price adjustment, which is, I think, a lot more of the result of the steel industry dynamics, the construction industry in the States, the automotive industry in the States.

So, in generic terms, we believe that the profitability will stay stable going forward, maybe increasing slightly into the second quarter, again, as a result of the steel -- sorry, second half, as a result of the steel adjustment that I just commented.

Sorry, you referred also to the activity in the Far East.

As you mentioned, activity has increased slightly in the last quarters, basically moved by the activity in Korea in power generation projects, but we feel that we'll maintain an increase.

And we also see that for the second half of the year an increased activity in tendering in China.

So, we will see in 2008 a recovery there.

Can I ask a follow-up question on your inventory situation?

In your outlook, what kind of assumptions have you taken regarding further imports from China?

Do you assume that these levels are remaining stable for the rest of the year, or what kind of flexibility do you have to maintain that kind of outlook?

Well, with respect to the inventory, we've seen them stable again.

Now, as far as the Chinese participation in the market, it's something that as an industry we are all collectively evaluating.

Naturally, as an industry, we are not, in a way, happy seeing export rebates, other government subsidies, and the Chinese industry then taking an important participation of the U.S.

market in that way.

As it was mentioned at the beginning, a trade case against standard pipe is being filed and we are all, as an industry, evaluating options as far as the OCTG is concerned.

Okay.

That's clear.

Okay.

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

Please proceed.

Yes.

Hi.

Good morning.

My question is related to the Middle East and Africa, where you refer that demand for API products has weakened in some markets following a buildup of stocks.

My question would be how do you see that for the coming quarters?

Okay.

As Nigel mentioned, a reduction in the API segment was, basically, in the Middle East.

And, basically, due to the extraordinary procurement done by Aramco last year, considering the ramp-up buildup of activity in the coming months, we feel that this will have an impact in the remaining of 2007.

We see coming back to the normal procurement by 2008.

Okay.

Thank you.

And if I may, I would also like to ask which is your outlook for the prospect for GASENE project that -- well, in the quarter it has shown some increased volumes?

Well, as you know, we have been supplying the GASENE project in this quarter and will remain in the coming quarter.

Okay.

Thank you very much.

Your next question, gentlemen, comes from the line of Ephrem Ravi with Credit Suisse.

Please proceed.

Good afternoon.

Just a couple of questions, one on the amount of pipes that have a price linkage with the Pipe Logix index price.

Is there a number you can give in terms of a certain percentage of your pipes that have a relation with the Pipe Logix and the other one which does not?

And secondly, on the outlook for the welded pipe business, is it -- in terms of the pressure that's being felt in the North American market, is there a welded versus seamless split, or is it across both the product categories?

Thank you.

Well, let me take on the pricing and the Pipe Logix reference first.

I think it will be fair to say that the Pipe Logix do represent a very fair behavior of pricing on what we call the low-end segment of the pipe applications, being by and large, in the U.S., a very important, perhaps the single biggest market in the world, for less-demanding pipe applications.

Now, with respect to Tenaris, I think it will be fair to bring back a concept of percentages of high end in our pipe sales, which, this last quarter, has been around 45%.

And consequently, I think, putting the two concepts together, you have a very good representation as to how much is represented, how much is not.

Now, I would truly appreciate if you repeat the second part of your question, because, again, the line is not perfectly clear and I think we missed the important elements.

Sure.

I was just wondering if there was a split between welded and seamless, or are you finding import competition and price competition from Chinese in both product categories or only in one of them?

No, fair enough.

Now, I said Chinese are participating on both segments, seamless and welded.

By and large, their participation today is seamless.

Having said that, however, what we need to bring back is the concept that the seamless imports from China are aiming at the less-demanding pipe application requirements.

So, to some extent, you could say that seamless Chinese OCTG in the U.S.

is directly competing against the welded OCTG that is domestically produced.

Yes.

Can I just ask for clarification on the first answer in terms of the 45% of your product portfolio that's premium, and also predominantly the Pipe Logix as applicable in the U.S.?

Is it fair to say that 45% of the North American volume is essentially what is linked to Pipe Logix?

Would that be the correct way to look at it?

No, no, no.

The 45% refers to the seamless and it's our definition of high end, it's not premium per se.

It's a mix of products which are, in relation to the competitive environment, they need special technologies, special facilities, etc.

And there are few players around the world who are today producing those types of products.

They are not the -- those are not the prices which are generally measured by PipeLogix, for obvious reasons.

Okay.

Thank you.

Your next question comes from the line of [Christopher Kwiatkowski] with Schroders.

Please proceed.

Hi.

Just a question on import duties.

The U.S.

ITC dropped import duties on tubular goods from Argentina, Mexico, Japan, etc., obviously countries in which you produce.

Did -- was there any impact of that?

Do you see any impact of that in the second quarter?

And will that impact be felt going forward?

Well, I think I'd probably go back to the initial remarks which were very important pieces of information.

The ConocoPhillips alliance that we concluded during the quarter calls for both welded and seamless requirements.

And it's, I think, the first time that an alliance -- multi-year alliance is established between a supplier and an end user that calls for a good number of distributors to play the logistics role or the pipe management service logistics role.

Naturally, we'll be able to service the seamless portion of that as a result of our existing seamless presence which came from Romania, our production facility in Romania, and our production facility in Canada.

That will be, of course, complemented with some that we'll bring from other sources.

In generic terms, we've said this -- the ITC ruling was the fair resolution of a long dispute.

But from a Tenaris perspective, we believe that we are going to use some seamless production to complement our welded presence in the States.

But we don't anticipate, by any means, to modify our existing seamless export behavior by redirecting major exports into the States -- major seamless exports to the States, quite the opposite.

Okay.

Thank you.

And your next question comes from the line of Christian Audi with Santander.

Please proceed.

Thanks.

I have three questions.

The first, in terms of volumes, we saw an uptick in Mexican and Venezuelan numbers.

My question is do you think that's a sustainable trend?

Should we expect continued improvement in those two markets in the second half of the year?

The second, going back to U.S.

pricing, I just wanted to clarify, did you see during the quarter an uptick in prices for high-end seamless products and a downtick in your welded products?

Or was it basically flattish?

And, thirdly, with respect to the new heat-treatment capacity in Argentina and Mexico, are you able to give us an idea of exactly by how much has capacity expanded on the back of these new facilities?

Christian, I'm afraid we -- the line was breaking up, so we only got bits of your questions.

Now, as I understood it, the first question was whether the pickup in volumes in Mexico and Venezuela is sustainable?

Correct.

Is that correct?

Yes.

And then we were -- then you -- I think you'd better repeat (multiple speakers).

Sure.

I'll repeat it.

In the U.S., Nigel, I was just wondering if you could give us a sense, when we look at the pricing of your products in the U.S.

during the quarter, did we see seamless -- high-end seamless or premium prices actually go up?

And did we see the welded product pricing actually go down?

Did we actually see those movements or was it more of a flattish environment for both?

And then the third and last question had to do with, can you add any color in terms of the heat-treatment capacity expansions in Argentina and Mexico that you mentioned, in terms of giving us a sense of how much high-end product capacity does that actually translate into on the back of the startup of these facilities?

Okay.

Okay.

Related to Mexico and Venezuela, first Mexico, we believe that Mexico is coming back to the levels that they were planning.

You know, as we said in our conference calls, the situation in the past, due to the change of government, there was limitation in budget.

Today, these limitations don't exist, so we believe that Mexico will sustain the levels they have today.

Related to Venezuela, in fact we are seeing more tendering process and we will see the activities to remain at the higher pace.

With respect to U.S.

pricing, I think the very short answer is we'll see them stable.

[Our own] levels, Christian, we've seen some adjustment, 2.3%, on the low end, over the quarter and a fairly stable behavior of high-end premium connection prices.

Related to the new capacities of heat treatment in Siderca and Tamsa, the -- we are in the ramp-up period of starting the heat treatment and they are running very well.

And we are already capturing new orders based on those new capacities.

Okay.

I'd just like to add something on the heat treatment.

This was part of a two-year program which is not only heat-treatment facilities but also included threading facilities, inspection facilities and other facilities, all of which, as we've talked in the past, was geared at increasing our ability to supply high-end products from around -- previously we had around 40% of our seamless, now it's around 50% of our seamless.

And, as German mentioned, we already have around 45% today, so we're seeing some impact of that, although there -- we are in a position to be able to supply more in the future.

Great.

And, German, just to clarify, the 2.3% you mentioned, was it a 2.3% reduction in low-end prices or an increase?

Sorry, can you repeat that question?

Yes.

When German commented on -- when he was responding to the pricing question, 2.3% or so, was that an increase or a decrease in prices, 2.3% decrease or increase in prices, for your low-end products in the U.S.?

That was, Christian, the Pipe Logix --

Okay.

The Pipe Logix.

Okay.

Price, of which we could categorize as the one corresponding to the low-end segment.

Okay.

Thank you.

Ladies and gentlemen, this concludes our Q&A session for today's call.

I would like to turn the call back over to Mr.

Worsnop for closing remarks.

Okay.

Thank you, everyone.

And I think that Tenaris continues to proceed with the integration of its North American platform.

And we are very well-positioned for what develops in the market in terms of an eventual upturn in North America and increased activity in the high end in international markets.

Thank you.

Ladies and gentlemen, thank you for attending today's conference.

This concludes the presentation.

You may now disconnect and have a great day.