Tenaris SA (TS) 2007 Q3 法說會逐字稿

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

My name is Fab and I'll be your co-coordinator for today.

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

We will conduct a question and answer session towards 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 presentation over to your host for today's call, Mr.

Nigel Worsnop, Director of Investor Relations.

Please proceed.

Thank you, Fab, and welcome to Tenaris's 2007 third quarter 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 those results include those mentioned in the company's 20F registration statement and other documents filed with the SEC.

With me on the call today are Ricardo Soler, our new CFO, German Cura, the Managing Director of our North American operations and Alejandro Lammertyn, our Commercial Director.

We also have Guillermo Vogel, a member of our board, and Vice President, Finance, as we are here today in Veracruz.

In our results for the third quarter, we registered a decline in sales and margins compared to the second quarter.

This reflected lower sales volumes of seamless pipe products and continuing cost pressures.

Sales volume of seamless pipe products in the quarter were affected by lower sales in the Middle East, in addition to the usual factors of the summer shutdown of our plant in Italy.

Compared to the third quarter of last year, seamless sales volumes were affected by lower sales in the Middle East and by continued weakness in the Canadian market.

Last year, Saudi Aramco built up a considerable inventory of OCTG products, in advance of its planned increase in drilling activity.

We were significant beneficiaries of this program.

This year they've begun to purchase less OCTG products as they approach their planned level of rigs and drilling activities.

As a result, our sales volumes in the Middle East are lower this year compared to last year, and to the second quarter of this year, even though in the rest of the region demand remains firm.

As we face more competition in low end products in many of our markets worldwide, we have been increasing our capacity and sales of specialized high end products.

These are increasingly required by our customers in their more demanding operations worldwide.

At the same time we are consolidating our position operating -- offering a full product range with customized services in our traditional Latin American market, as well as opening up new markets in North America.

Sales of specialized, high end products have increased 14% by volume in the year to date compared to the same period last year and, based on the strength of our incoming order book, are set to grow again next year.

The integration with Hydril has strengthened the range of high-end OCTG products we can offer our customers worldwide, as well as helping to transform our position in the North American market.

It is already contributing positively to our results.

While the average selling price for our tubes has continued to increase, prices for some of our products are under pressure, as can be surmised by the 10% annual decline in OCTG prices for API grades published by Pipe Logix in the United States.

Meanwhile, cost for steel making, raw material and energy have been rising, and look set to rise further.

Labor costs have also risen as a result of dollar depreciation against the currencies of some of the countries where we have significant operations.

During the first half of the year, the twin effects of cost increases and price declines for some of our products were offset by an improving product mix.

This resulted in stable margins.

In the third quarter, our operating margins declined as our product mix was not so favorable, with a higher proportion of lower margin welded pipe products.

Our margins will remain under pressure in the fourth quarter, as we will have a less favorable product mix, particularly in seamless pipe products in this quarter.

Incoming orders for high end products started to pick up in September, following delays to some projects, which have been affecting incoming orders in recent months.

They continue to improve.

As a result, we expect to see a significant improvement in our product mix starting in December.

This improvement in product mix and higher sales of high end products should result in a recovery in margins as well as resumed growth in sales starting in the first quarter of 2008.

And with that I would like to pass -- open the call to questions.

Thank you.

(OPERATOR INSTRUCTIONS)First question comes from the line of Ole Slorer, from Morgan Stanley.

Thank you very much.

I wonder whether we could have some clarification on some of the pricing trends.

If you look at Pipe Logix, they were -- prices were down about 2% sequentially or something along those lines.

And yet your revenue per ton was up 1% against a backdrop of seamless volumes that were down 12% and welded volumes that were up 12%.

So, would this suggest either very strong pricing power in the very high end, or it indicates that you are doing a little bit better across the board?

So, could you help clarify a little bit what's going on there?

Yes, thank you, Ole.

This is Alejandro Lammertyn.

As you well said, there is different pricing for low end and high end.

And clearly it is not representing our high end products that have a differential in price that is substantial.

So, with prices going up, despite the mix going against you -- or not prices, sorry, but average revenue per ton, is it all high-end that's going up?

Are you doing better in the welded levels Pipe Logix might indicate sequentially, or what's going on there?

Well, I think we could fairly say that the welded price for low end in generic terms pricing has seen over the year a downward pace and which has decelerated lately.

But I think it's fair to say that the 10% that we saw over the year is there.

Now, going forward, we see prices stabilizing.

And, you as indicated, I think our overall pricing picture reflects a mixed component, without a doubt.

Okay, so I was a little surprised about the flattish guidance for the fourth quarter.

So, could you talk a little bit about the acquisition of Hydril, the opening up of the Gulf of Mexico?

That should drive, I would have imagined, some substantial scope for mix improvements.

So, could you talk about how your discussions are going with your alliance -- key alliance partners in terms of penetrating the high end of the Gulf of Mexico market?

Is the fourth quarter too early for that, or just bring us a little bit up to speed with what's going on there?

Well, from a U.S./Gulf of Mexico perspective, I would say that we continue to maintain the Hydril presence that we have.

Remember that Hydril was a very important player in the Gulf of Mexico.

That it is known, over the quarter suffered some operational delays due to the hurricane precautions that the industry overall has taken.

Now, with that said, I'd like to pass it on to Alejandro to comment on some of the actions that we have taken with Hydril in the international market.

Well, as you know, the Hydril presence in the international market has the highest potential, but is a process that will take time.

We have put an integrated commercial team in place, enhancing the technical sales group.

We are reaching the customers with the best combination of integral, and threaded, and coupled connections.

We are convinced that the value proposition we can provide it's aligned or even better than our original expectations.

We are promoting the -- [in design] wells for deep wells, reinforcing the development of expandable connection that was started by Hydril, and entering more and more into horizontal wells and drilling the casing.

So far, we have obtained some new contracts.

We have integrated our offer to KOC with our Tenaris traditional sales with integral connections by Hydril, with pipes coming from Tenaris.

We have also strengthened our position with Statoil, where we were already supplying dopeless, and now we are supplying also Hydril connections with our pipes.

And in particular, we have just got a project with Reliant in India, where we are combining the presence of our joint venture with Maharastra with cutting pipes in India, combining with our blue threaded and [uncoupled] coming from our traditional mill.

Okay, thanks for that.

But my -- and good to hear you're doing well internationally, but my question was actually about the Gulf of Mexico.

When can we expect Tenaris to penetrate deeper in the Gulf of Mexico with OCTG, on the back of extending the alliances that you're doing internationally into the Gulf.

Well, we're discussing this presently with our customers in the Gulf of Mexico.

And I said, and I'll also again emphasize that Hydril has a very solid position in the Gulf of Mexico already, as we have indicated in prior calls.

We intend to combine some of that with Tenaris OCTG as a way of only complementing our presence.

But we also intend to sustain our ability to cut our connections on third party pipe as well.

Yes.

But, in terms of the big fish, does it take your [time to] production into the deep water Gulf of Mexico.

So, is that a first half of next year event?

Or is it too early to assume that you're going to get the benefit of that in the fourth quarter?

Is that one of the reasons for your optimism on the first half next year?

I think we'll see some specific results towards the beginning of next year.

We don't anticipate any material changes in the remaining of '07.

Okay.

Thank you for that.

On the Middle East, your sales were down 14% sequentially, yet you indicated high end pricing was up.

So, could you quantify a little bit?

Does that suggest a 10% sequential decline in volumes?

Would that be the right way to think about it, of seamless volumes into the Middle East?

Well, what we have seen in this quarter, as said by Nigel, we have a softer market in Middle East, particularly in Saudi and particularly in the low end.

Companies like Aramco are starting to understand that high prices of oil are to stay, and that cost of material, particularly in low end materials are not as problematic as in the past.

Under these circumstances, they are trying to be more efficient in their supply chain management long term.

Here -- this is for the Middle East.

But at the same time we are seeing that the high price of oil are enhancing explorations in deep gas wells, like [Kuwait] money for (inaudible) or the deep gas wells in Kuwait.

So, what we are going to see is a softer 2007, the remaining quarter, and an improvement -- a substantial improvement in volume and in mix in 2008.

Yes, I would just add something, Ole.

I think your calculation is pretty much on the mark.

The decline in Saudi Arabia was a little bit more than that, but it was compensated by increased activity elsewhere.

And how confident do you feel that this is not about you losing market share, but this is about an inventory correction?

Well, it's a combination of the two factors.

We are losing, definitely, market share in the API segment, but we are increasing our presence in the high end and the exploration is increasing in the high end.

And you mentioned that Saudi is picking up, for example is going to be tendered next.

I mean, that's 27,000 to 30,000 foot deep wells.

Are there mix changes now going on in that region that should be -- is that a part of your prediction of a better --

Yes.

This is our target and we are -- we will have -- it's services material and URPRA is included in those works.

This is Guillermo complementing.

I think what you're going to see in the future is that you won't see us chasing so much the low grade business in the Middle East, because we are really working in terms of maintaining our low end capacity, so to speak, in order to be able to service our local markets and -- which take a fair amount.

And also, in order to be able to work within our long term agreements, where we are offering the full range of products and pushing really the rest of the capacity to the high end and to the high end market.

We don't want to commit too much of the capacity in terms of the low end and then have a problem.

In the fourth quarter again, one of the things that we were affected is in terms of following this strategy, because we were expecting a little bit more activity.

Some of the projects under our long term agreements they were going to use -- they go into the high end applications and -- which didn't come through.

So, we end up really at the end of the day having this empty space, so to speak, which we see.

Now, we are seeing that these projects are coming on stream and we see the incoming orders coming for the first quarter starting really a big effect or an effect on the first quarter.

So, this is why we're seeing the dynamics.

But I think you're going to see us losing, gradually, some market share in the low end, and giving this space, so to speak, to some other competitor.

But with Manif coming on, and Saudi Gas is tendering now in Qatar for drilling projects, do you think that you can remain?

Is -- what's the timing of these quite complicated projects?

Is it first half next year?

Is this partly -- or your prediction for a better start to the next year?

Yes, part is already in our backlog for 2008.

Part will come during 2008.

Okay.

So just finally, on cost versus pricing power, you're mentioning a lot of cost pressures, but if you transition to a more focused, high end offering, how do you view the outlook for your pricing power relative to cost?

Are there any new entrants that could penetrate the premium market that could prevent you from being opportunistic with pricing relative to your cost structure?

Well, in terms of our cost, we have managed and we have seen the results in this quarter to maintain contribution, despite of the increasing costs.

So, we are maintaining margins.

And we believe that this will be so in the future with our strategy to dedicate our resources to the high end.

Okay.

Thank you very much, gentlemen.

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

Hello, good morning.

I just want to continue the questions that Ole started on the Middle East.

I want to get a sense of how comfortable you are with the inventory situation there now?

How quickly do you think it's going to work off?

And also, what is the best way of tracking it?

Is it something that we're going to continue to be surprised by on a company by company basis?

Or is there some way to forecast what that is that inventory build is doing?

Well, it is something that we can more or less forecast, but it's not so easy to do it.

Aramco has reduced, as Nigel said, their procurement based on their inventory -- based on what they have purchased.

The last year was an exceptional year for Aramco, by all means.

They were worried of the lack of supply and the process that normally takes to get the material in their yard.

It's more or less one year in the tendering process till the moment the material arrives.

This process lead time was shortened in -- during last year and that's why they are facing this build-up.

Still they are reducing their procurement now, but still it will take a little bit of time to reduce their stock.

We are seeing Aramco coming stronger in the high end products, as we said in the big projects for the deep wells.

I'm a little bit more cautious on the API until mid next year.

Okay.

And just to get a sense of how the market operates.

I think the beauty of your international business is that usually it is very much a direct business to your customers and that one of the things that you offer is this just in time delivery.

Is it possible that the Middle East market moves towards more of this just in time delivery?

So, we eliminate future inventory build up problems?

Well, this is something that we are discussing -- we have been discussing.

And, as I said, as this process of high price of oil is for the long run, they are trying to improve their supply chain.

And one of the issues that may come up is coming -- going for long term agreements as other companies in the Middle East are trying to do.

Debbie, this is Guillermo also complementing.

I think that when you see, especially last year in terms of Saudi Arabia, it was an exceptional level of volume of purchases.

So, we won't -- we don't see it going back to those level of purchases in the future, because it was an exceptional year, so to speak.

So it's a special year to compare.

I think in terms of our business plan what we're looking forward, you know structurally, we're going to have a low level of purchases in terms of Saudi Arabia.

It is going to be complemented with higher volume.

And it's going to be in other parts of the Middle East.

And it's going to be -- from our perspective and from our vision it's going to be complemented with a much richer product mix internally in Saudi Arabia.

So, the business model doesn't -- or at least the expectation of [revision] doesn't -- we don't see it going back to the level that we had last year in Saudi Arabia.

We see a different mix worldwide in terms of how we are allocating our production.

We see higher sales to other places in the Middle East.

And we're seeing -- we're seeing then a richer product mix in Saudi Arabia.

This is more or less the vision we're seeing.

But I don't think we would like -- we want the break the expectation that last year was a stable year in terms of purchasing levels there, because it was an exceptional year to compare with.

Okay, great.

And then, moving on to the North American market and what we see with inventories there.

We're seeing continued weakness, because of both inventory levels and imports.

And we've heard the guidance and you feel that they're going to continue basically cutting back on their tubulars as a way to help the inventory cycle.

Just wanted to get a sense from you what your feel is on the inventory cycle in North America right now, and what your outlook is?

Well, from an inventory perspective, Debbie, this is German speaking, we've seen today, the end of the quarter, inventories are around five months -- slightly less than five months' worth of consumption.

Now, when you go back, I think it's one of the lowest levels we've seen over the last two years.

So, from that perspective, we believe that the inventory position -- or the de-stocking program that we have been, as industry, talking about, has somehow leveled off.

Now, the import situation continues to be a concern, and that OCTG level in the United States, we still have imports to a level of above 48% -- 47%.

And, well, our ability to substitute some of those is what, somehow, represents the opportunity.

We have also talked about some trade actions.

It will be important to highlight that yesterday the DOC has decided -- preliminary decided, to install a 16.5% countervailing duty on Chinese imports for standard line pipe.

That is not OCTG.

Yet it was a case file two months ago that somehow hints -- well, a sentiment as to how the behavior is.

We're expecting also a preliminary determination in Canada.

And that would, or should, happen within November, and also in Mexico.

So, I think between now and the end of the year, the imports dimension will probably transition, at least important news.

Good.

And also, another thing I mentioned -- that U.S.] Steel mentioned on their call, was this move in their distribution network, because as we know that the North American market heavily relies on intermediaries for distributing the tubulars between the suppliers and the consumers.

And that's something that obviously has gotten us to the problem that we've got this year of high inventory levels that were unexpected.

So, the move towards more of a direct distribution process from supply to consumer would be welcome.

And it seems that's your strategy worldwide, ex.

North America.

And now within North America, with the move of U.S.

Steel acquiring Lone Star, and the comments that they made on their conference call, they're basically saying that they are also trying to move towards this direct distribution network of trying to limit the number of distributors, and also trying to increase the made to order shipments for their clients.

So, I wanted to get a view from you if that's something that you're also -- is this just feeding in, if you're also starting to see increased purchases from direct consumers?

Or is that -- if there's something in the pipeline that you're working on in terms of changing that industry structure?

No, no, this is very important for us, and it's been a core strategy element of Tenaris globally.

I have to say, though, that in the last few months, we have structured direct alliances with companies like Conoco and Apache for North America.

And these were the two first examples that the North American market had created, in terms of multi year alliances between suppliers and operators.

Now, with that said though, I'd like to emphasize another piece, which for us, is important and that is the differences between the North American market vis-a-vis the international market, in terms of the number of operators.

The market is very atomized.

There are more than a thousand operators.

And it's conceptually fairly rationale to assume that companies like ourselves would be able to structure multi year alliances with the big consumers -- with the big operators.

At the same time, there are medium to small operators, which from a scale perspective, do count on the distribution system to resolve their needs.

And we believe that is a genuine function that we see stabilizing going forward.

Okay, I think that basically the idea is going forward we shouldn't expect to see, as big a risk [building] in inventories, because you will have -- you and U.S.

Steel will have a much better hold over the top customers than you've had this year.

: I think that the alliances, Debbie, would provide as supplier a lot more visibility in terms of operational needs.

And our international experience has been that when that is established the ability to optimize the supply chain becomes a real factor.

So, naturally, this is a new phenomenon.

We need to see how evolves over the year, but this is the course that is already taking place.

And a quick question on your seamless volumes and the product mix there.

I just wanted to understand better what you mean by a decline in the product mix, because on the one hand we did have a higher consolidation of Hydril in the quarter.

So, that would imply a better mix for seamless, because of the higher premium connections in the mix.

But on another hand, you said there were a few projects that you were expecting that didn't come through, and those were targeted to the high end.

So, I just want to see how those two things balance out and if those are things you're taking into account as part of your seamless mix.

And also, the outlook for fourth quarter why, in particular, are we still expecting a soft mix for seamless?

No, I think -- Debbie, this is Nigel.

In this particular quarter, it wasn't -- the seamless mix was a very good one.

And that -- you can see that in terms of the strength of the overall pricing that we had.

But the problem was the mix between seamless and welded.

When you reduce the amount of seamless and have more welded, then obviously that affects in percentage terms the margin, even if the margins on the seamless themselves were stable.

No, I understand that.

I was actually asking about seamless in particular.

I thought I read that there was a worsening in the mix within seamless.

I just wanted to understand if --

No, no, no.

In terms of it's a very -- in terms of the fourth quarter, the mix may not be quite as strong in the seamless in the fourth quarter, because of the fact we have been reserving capacity for some projects, which didn't materialize.

And so, therefore, the mix will not be -- but that's a very puntual problem and we're already seeing a very different mix coming into the first half of next year, much stronger mix.

That's great.

Now, one final question just on the welded volumes, we saw that the tubular welded volumes increased significantly quarter over quarter.

Is that your Latin American business picking up, the Mexico, Venezuela --

You mean the projects?

No, no, no, I mean the tubulars.

No, I think it is somehow consistent with a Canadian repositioning that is, in fact Debbie, coming out of a very, very strong low.

With that said, I want to be clear on the fact that Canada today -- or during the quarter had operational levels in the range of 25% to 30% lower than the same quarter last year.

So, by any means, Canada is not anywhere near I think the level of activity that the industry would have liked to see.

But quarter to quarter I think it's fair to say that we're coming out of a very, very strong low.

And this is what translates in a slightly higher volume of seamless sales.

[Welded], so what is your (inaudible) rate right now in your Canadian operation, utilization rates?

Sorry Debbie, could please repeat that?

The capacity utilization rates in your Canadian operations?

Well, we -- for competitive reasons, Debbie, don't actually comment on specific utilizations per plan.

Remember, that this is a very big system where pipes for specific markets are coming from naturally the domestic mills and some of the mills around our network.

What I could say though to provide you at least some guidance there is that during this season we have reduced the level and we have laid off something in the area of about 300 people in both of our Canadian facilities.

Okay, great.

Thank you.

Your next question comes from Cindy Du from Jefferies & Company.

Good morning.

Just following up on the Canadian (inaudible) was that 300 (inaudible) you laid off, was that year to date or in preparation for the winter season?

Hello, sorry, can you repeat because we are losing the line for some reason here.

Can you hear me now?

Yes.

Okay.

The 300 employees that were laid off, was -- is that year to date '07 or in preparation for the upcoming winter season?

No.

It's in the past, Cindy, and it's consistent with the heavy activity reduction that we've seen in Canada over the last year.

Okay.

And then in light of the weaker drilling activity, can you give us a sense of what mix is coming out of the Prudential mill at this point?

Prudential, as you know, is by and large concentrated on the production of non heat-treated OCTG, welded OCTG, that is typically used in the western part of Canada, particularly in Alberta, for by and large gas drilling.

Okay.

So, it's not like you can switch it to line pipes with the line pipes (inaudible)?

Yes, but remember that Prudential has a range that goes up to 8 inches line pipe wise.

There's been some infrastructure built out in Canada on bigger line pipe -- or pipe lines, sorry, (inaudible) pipe lines.

That is out of our range somehow.

And the overall flow lines construction in Canada is being naturally also affected by a drastic decrease in the level of drilling.

Okay.

And then can you give us an update on how the total Maverick installation is going?

How has the U.S.

operations fared against the Canadian operation?

I think from Tenaris U.S.

position in perspective, we have completed the integration of Maverick and Hydril.

We have a unique base -- operating base out of Houston today.

We -- as we have indicated we closed the old Maverick headquarters in St Louis.

And in generic terms the activity in the U.S.

is stable.

The market from an operational perspective continues to show a very decent level of activities.

Probably it hasn't grown at the levels the industry was expecting at one point, but we still have 70 to 80 operating rigs in the States.

And that is -- or translates in a very rational, reasonable level of activity.

Inventories we talked about.

We see them today at a low point compared to the last two years.

And imports continue to be a factor, which we are monitoring very closely.

Okay, but I have noticed the import levels actually coming down in the past few months.

And inventories have also improved.

And so, can you give us a sense of when do you think the inflection point will be for pricing?

Do you think it will come by the end of the year or is it more a few quarters down the line?

I think it will be probably too optimistic to assume that we will see changes between now and the end of the year, Cindy.

Imports have adjusted only slightly down the last couple of months.

We need to see how that develops.

There are elements, I think, as increase of freight rate and other issues that may be affecting it.

But, overall, I don't believe that in the next two months we are going to be seeing a drastic change.

Okay.

And then just two more, with respect to your expectations for higher raw material and labor costs, can you give us a sense of the magnitude of the expected raw material increase?

And also, in terms of the labor costs [to] the weak dollar, are there currency hedging strategies in place?

This is Ricardo.

I would like to comment that we -- the last quarter we suffered -- we have been under pressure with prices in ferroalloys, scrap, pig iron and freights, and also labor, basically in our mills in Italy and Canada and Japan.

For the future we understand that we are going to continue under pressure -- cost pressure, basically in pig iron, scrap, not -- slightly, not so important in ferroalloys.

And how much is the -- your expected increase of that -- what's left in inventory or what are you -- is it what you're seeing in the [stock] market right now?

We have a FIFO accounting, Cindy, which is basically it's three months' delay.

No, I think -- also I think I would like to add something it's that the perspectives -- people are talking about increases in iron ore and coal prices for next year.

So this, if they do materialize, will inevitably have an impact on overall costs of steel-making raw materials going forward.

To compliment a little bit, I think as was mentioned here before during the third quarter on the seamless side, for example, we didn't lose margins in terms of the increases in the cost, because we were able to recover them in terms of the product mix.

We obviously lost margin overall, because of the mix between seamless and welded.

But if you see seamless you are going to see that.

When you see this moving forward, at least to give some general guidance, we're going to continue to have this pressure in the fourth quarter.

But we see in terms of the first and second quarter of next year we're going to be able to offset those cost increases, in terms of the product mix gains that we see coming forward.

And we see the recovery of our margins in -- by then.

Okay.

And so, just to recap on your seamless products, the margins were maintained, it's just the situation with the welded?

Right.

And then lastly, can you just give us an update on the strategy of high grade in your seamless capacity?

Are you getting any traction in getting some of the customers to use welded pipe in place of some of the seamless pipes?

Well, no Cindy, I think we, from a welder perspective, are concentrating our supply by and large in the North American market, by definition the single biggest low end market in the industry.

From a seamless perspective in the North American market we have said that we intend to complement in our alliances, and so on and so forth, our ability to build both seamless and welded packages to, in the end, be able or be in a position to service our customers with our full of range of products.

But I think it is fair to say that there is from a usage perspective, a distinction between the two.

And again, North America being the single biggest low end consumption area and as a result being heavily serviced by welded OCTG.

So, there are no plans to export some of the Maverick pipe into Mexican or Latin American markets at this point?

Well, no, not at this point and it is in fact based on the reasons we explained.

We are devoted to service a very large North American market that consumes a substantial component of low end, and this is where we see the immediate opportunity.

Okay, thank you.

That's all from me, thanks.

And the next question comes from the line of Rochus Brauneiser from Landesbank Capital.

Hi, yes, hi, good morning, it is Rochus Brauneiser from Landsbanki Kepler, a few questions, if I may.

Coming back to your comments on OCTG, if I understand you correctly, the inventory levels have come down from -- I don't know, somewhere below 5.5 months now to closer to five months.

Is that really driven by lower levels in inventory?

Or has that been also related to a change in the shipment pattern?

And is your confidence in end of the destocking now higher than three months ago?

On your seamless revenue per ton is that number -- has that number remained stable quarter on quarter?

And coming back to your cost question, how much of your seamless -- how much of you production depends on millimeter [route]?

And within your outlook for next year costs, what is your assumption about the price trend for scrap?

Okay, this is German Cura.

I'll take the first question on inventories in the U.S.

Let me say that inventories in generic terms based on information have come down from about 5.7 months' worth of consumption down to slightly below five.

And I think this is a result of a destocking program pretty much deployed by the industry where -- or the result of I think uncertainty about what the gas price was going to be and the way this could have affected the drilling activity in the U.S.

market.

Now, we've seen the gas price has more or less stabilized at the levels of $7 to $7.5 band.

We also see that there is a slightly shift to oil drilling and then actually the price of oil is playing a big factor there.

It is perhaps difficult to say that we have reached to the end of the destocking spin.

Yet, it is important from our perspective to see that the levels today are probably the lower -- a low point in the last many quarters.

Okay, on the second question regarding the seamless prices, I would just like to say that, yes the -- our average price for seamless increased during the quarter and effectively offset the increase in cost.

So, the margins remained stable on our seamless pipe products during the quarter.

Then on the --

That was probably -- that was mix related, this improvement in average revenue not on quarter on quarter?

Yes, it was related to the mix.

Then regarding the nature of our mills, we are electric arc furnace based seamless pipe production.

And we are buying a mixture of metallics and everything.

We see a little bit the scrap prices have been increasing.

The pig iron prices have been increasing and -- going into the fourth quarter.

And on the outlook, what is your expectation for 2008 in terms of scrap?

Are you expecting further advances in the prices here?

I think it is too early to say a comment on that factor yet.

As you know, there are iron ore prices negotiations going on which could affect the situation there.

Okay.

Thank you.

Your next question comes from Juan Tavarez from Citi.

Hello, good morning, gentlemen.

Most of my questions have been answered.

But I just want to know more clearly, how much of your tube sales were high end?

And if you can share with us how much of an improvement you're expecting for next year within that mix?

Well, high end sales for the quarter were in the area of about 45 -- 44% to 45%.

And as we have expressed, we believe that during '08 that number could go up to 50%.

That's of the seamless pipe volumes.

Great, thank you.

(OPERATOR INSTRUCTIONS).

And your next question comes from the line of Mark Jason from AIM Investments.

Yes, good morning, just one question.

I've heard a lot about destocking and issues with mix, but what about competition?

Can you please discuss how competition has impacted the quarter and what it looks like going forward for next year?

Well, on competition, as we said, in the low end, there is a stronger competition.

New supply is coming.

On the high end we still see a good environment and nothing has changed and it's improving for the next year.

Can you break that down a little bit more by region?

By region.

Well, as you know our main areas of focus are -- on the high end are in Middle East and the North Sea where we are very strong.

We are now coming back strongly in Russia, where we are improving our presence in Lukoil and Gazprom.

And in the Caspian Sea we are very strong with our relationship with the ENI in Kashagan.

That has been -- we have the contract but it has been delayed, as you know.

On the Middle East, of course, that is the highest demand.

There is also a portion of low end that it's been under pressure.

But we will definitely substitute with our high end products in -- as I said, in our increased sales in Russia, in the Caspian and in the north of Africa where we have a very strong position.

So, the impact from competition this quarter was mainly on the low end and you didn't see much impact on the high end?

Correct.

And going forward you see much of the same?

Yes.

What we are seeing is one of the low end sectors that was still remaining in our backlog was Aramco on the API material that we are going to lose in the coming years.

But we will recover with a big amount of volume coming from the high end, so we'll see no impact in our backlog for the future.

Thank you very much.

And there are no further questions at this time.

I would now like to turn the call back over to Management for closing remarks.

Okay, thank you.

And thank you everyone for listening to this conference call.

We look forward to updating you further in the future.

Thank you.

Thank you for your participation in this conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.