Tenaris SA (TS) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tenaris first quarter 2008 earnings conference call.

My name is Sylvana.

I will be your coordinator for today.

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

We will be facilitating 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.

You may proceed, sir.

Thank you and welcome to Tenaris's first quarter 2008 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 our 20-F registration statement and other documents filed with the SEC.

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

We also have Guillermo Vogel, Member of our Board and Vice President Finance with us today.

Our results for the first quarter registered a 6% sequential decline in operating income and a similar decline compared to the first quarter of 2007.

Sequentially, our shipments of seamless pipe products were lower in Columbia, where we are transitioning our supply agreement with Ecopetrol to a just in time alliance, and in Venezuela, where production at our local mill was affected at the beginning of the quarter by labor issues.

We also had some shipments that we were expecting for this quarter slip into the second.

Shipments of welded pipes in our Project segment were also down sequentially, following the high level of shipments recorded in the fourth quarter.

We expect our sales to pick up in the second quarter and to remain stronger for the remainder of the year.

Global demand for OCTG is expected to resume its growth this year following last year's decline due to inventory adjustments.

This effect is most pronounced in the United States, where demand has increased in the year to date following last year's destocking on the part of distributors.

Despite higher sequential sales during the quarter and a flat rig count, OCTG -- inventory levels continued to decline and represented a five year low of around 3.9 months of consumption at the end of the quarter.

Our sales in North America, which includes Mexico, rose 10% sequentially and represented 38% of total sales in our Tubes segment.

The North American gas price has risen from -- $7 per million BTU at the beginning of the year and currently stands around $11.

Even so, it remains significantly below the price for LNG in other parts of the world.

And LNG imports into North America are below those of last year.

Gas in storage has dipped below the five year average for this time of year.

Even in Canada, where drilling activity and sales remained below last year's levels, there are signs that demand will improve in the next drilling season, though drilling activity in the second quarter will be affected by the usual seasonal factors.

As demand for our products has increased in North America, we are hiring again in Sault Ste.

Marie and increasing the number of shifts that are worked in our mill there.

Pipe prices are beginning to rise in response to cost increases.

So far, this is most evident in the United States, where the average basket of seamless and ERW OCTG prices, tracked by Pipe Logix, rose 3.5% sequentially during the first quarter and a further 15% in April.

In the four months of the year to date, this index, which represents spot prices, has risen some 22%.

Costs are also rising and at a velocity that was hard to predict at the beginning of the year.

Metallic costs, scrap and pig iron, for our seamless pipe products, have risen around $250 per ton so far this year and are still rising.

U.S.

hot rolled costs for our ERW pipes are now over $1,000 a ton.

Under FIFO accounting, these costs are not yet reflected in our first quarter numbers, but will be over the next two quarters.

We remain confident that with stronger demand this year for OCTG and for our high end products used in the most demanding applications, and with these costs affecting all our industry, we will be able to maintain our margins over time, but with a lag.

The costs that we have seen today will be fully reflected in the third quarter, but prices are responding at a slower pace.

For example, in the second quarter we are expecting increased volumes and a good mix of products, including deliveries of specialized self-service premium products to the Middle East and the Caspian, but the majority of these deliveries will be made of prices contracted before the most recent cost increases.

Further out, the demand outlook for our specialized high end products remains good.

Global oil prices continue to edge upwards and a more favorable scenario is emerging for North American gas.

New complex projects, both offshore and onshore, are gradually being developed.

Although the offshore active rig count remains below last year's level, the number of new and deepwater capable rigs under construction continues to mount and will sooner or later enter into service.

Major deepwater projects are underway and during the quarter, we received an important order for specialized line pipe products and services from Total for the Pazflor project, one of the largest new deepwater developments in West Africa.

And with that, I would like to turn over the call for questions.

(OPERATOR INSTRUCTIONS) And the first question comes from the line of Ole Slorer from Morgan Stanley.

You may proceed.

Thank you very much.

You did a little better than what we expected this quarter and I just wonder whether this could be down to North America.

We saw another tubular company announced results just recently and the numbers were down at the EBIT level, pretty sharply.

So I wonder whether you can describe in a little bit more detail how you managed North America from the fourth quarter into the first quarter.

Good morning, Ole.

This is German speaking.

Let me say that, as we kind of anticipated, we were reaching the end of the year with a very steep destocking process.

And at the same time, we naturally confronted a steep rebound of gas prices.

As a result, we are now confronting both dimensions.

So with the higher level of activity that is today fitting something close to 1,850 operating rigs in the U.S., in particular.

And an inventory situation that, at the end of March, was below four months, this is something that we haven't seen in the last five years.

So bottom line is, North America, and particularly the U.S., is, during the quarter and on to the second quarter, transitioning a higher operative consumption -- more rigs operating and naturally, also a higher operating demand, driven by the need to rebuild the inventory positions that we have talked about.

Anything to do with the FIFO accounting helping you there on the welded side?

Ole, this is Ricardo Soler.

Yes, of course, at this time, all the recent new prices increases for the hot coils are not reflected in this quarter financial statement.

Now we are expecting those to probably reach our P&L by the third quarter, Ole.

And naturally, you've seen the pricing actions or initiatives that we have deployed, in particular in the U.S.

market, to precisely cover for them.

Just having met a couple of your competitors and distributors down at the OTC this week, it strikes me that everybody is sort of pretty excited about leading edge prices at the moment.

Premium prices seems to be, in the U.S.

market, suggested to be up $500 to $700 a ton since late last year.

Is that a number that you would agree with?

Well I said that over the year, say, starting November, we have announced prices -- increases of the range of $700 per short ton.

In some instances, depending upon the specific product, that may be even a bit higher.

But the short answer is yes, this is what we're striving for.

We're aiming at recovering costs.

And it's already been reflected somehow, also in the Pipe Logix, as initially said.

And with the metallics, etc, what you highlighted there, based on your input costs, that should suggest what, costs up about $150, $200 maximum per ton?

We mentioned that the metallics on the seamless side are up so far this year, some $250 a ton.

Okay.

So the margin should expand a little bit as we go into the second half of the year?

Well I think that on the -- in the international markets, the level of the price increases is not so immediate as in the U.S.

market.

Okay.

Sorry, one final question on Chinese imports.

It strikes -- looks like Chinese imports into the U.S.

market -- we've already seen it in Canada, but that the Chinese imports are kind of rolling over a little bit or reducing a little bit.

Can you talk a little bit about what you're seeing on the Chinese front?

Well OCTG wise, in fact, in the U.S., we have not seen an adjustment or a decrease.

The Chinese exporters continue to have something north of a 20% market share of the OCTG market.

And we've seen this over the last of '07 with imports in the area of about 900,000 metric tons.

And that level has rolling to -- at the same level, rolling into the first quarter, as well.

Okay.

Thank you very much.

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

You may proceed.

Thanks.

Hello gentlemen.

I had three questions.

The first one, as Ole was mentioning, gaining momentum in North America for accounts sale quarter over quarter, but your sales grew quite strongly.

My question was on the other side of the coin, on the international side where, although the rig count grew by 3% sequentially, your sales fell 4%.

Could you give us a little bit of color on what's happening there on the international front?

The second question, you said your inventory adjustments continue to affect the market.

Can you elaborate a little bit more, aside from the U.S., where else could we see inventory adjustment pressures?

And then the last question, you touch on competition increase in some areas reflecting higher capacity availability.

Could you give us, again, a little bit of color as to what areas, what regions you're seeing a pickup on the competitive pressures lately?

Okay, Christian.

This is Alejandro Lammertyn speaking.

Regarding the volumes in international market, that as we mentioned in the last conference call, we see a strong semester.

As we -- as Nigel mentioned, we have a kind of a delay in last shipments in March that are moving to the second quarter.

We expect a good second quarter that will be a line -- in line with a good semester for the international market.

And we see no reduction.

But is that a Middle East focus or is that a little broader than the Middle East?

Yes.

Actually, the shipments that were delayed were basically to the Middle East and to the Caspian region.

That's why we will have a second quarter better mix and higher volumes for the international.

Regarding the inventory adjustments, this was something we mentioned in the last conference call that the -- principally in Saudi Arabia, those inventory adjustments are continuing this year, expected to be completed by the end of the year.

Still we are making deliveries to Saudi Aramco, but the demand -- the apparent demand will be a little bit lower than the operative consumption.

I think it would be also fair to add, with respect to the inventory dynamics, Canada also being a market known for carrying substantial inventory pieces to sustain drilling activity.

And I believe that it would be fair to say that Canada has bottomed as well.

Naturally, we're in the middle of a spring break and only in the summer we start determining the specifics of the next drilling season.

But it is our view that Canada has bottomed.

That has been a fairly important absorption of inventory during the last drilling season.

And we're expecting a slightly better level of activity and in the end operating demand for the end of the year.

And you'll start seeing that, German, in the third quarter you were saying -- a little bit of it?

Typically, Christian, over, I think, the fourth quarter, very late the third, most likely the fourth is when traditionally Canada builds the inventory positions for the active drilling season that takes place during the wintertime.

Regarding your third question on competitive environment, in the international we don't see a major change.

Demand is strong, but not as bullish as North America.

And we still face high competition from China for the low end market.

And we are driving the price increase in the OCTG international.

So we will face some volume pressure, but we will sustain the price increase.

Great.

And a quick follow up.

Any updates on Tavsa?

What's the latest there?

Okay.

On Tavsa and the Venezuela situation in general, we don't have a major impact in Tenaris.

Tavsa still has no change of ownership.

And the market conditions and the relationship of Pdvsa with Tenaris is as strong as it historically has been.

So we don't see any major change regarding pipes.

But are you still producing there, because I remember there were some strike issues.

Has production returned or is it still --

Yes.

There has been a strike in the last quarter and -- but now we are in full production.

Great, thank you.

And your next question comes from the line of Anindya Mohinta from JP Morgan.

Please proceed.

Hi.

Good afternoon.

It's Anindya Mohinta from JP Morgan.

I just have one question.

Given the sort of spike we've seen in natural gas prices since the beginning of the year, are you seeing any structural uplift in the volumes, as far as demand is concerned?

I'm saying beyond, obviously, the seasonal ups and downs.

Are you seeing a sudden pickup in the volumes demanded by the North American drilling industry?

This is German speaking.

I think the short answer is yes.

And as I was trying to say at the beginning of the call, it is, in fact, driven by both a renewed level of activity has driven the new gas levels.

That's translated on higher recount.

But also, very important in our part of the industry, by the decision of rebuilding the inventory positions, which have reached fairly low levels.

Okay, thank you.

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

You may proceed.

Yes.

Just quickly on the demand levels you're seeing in South America.

Could you perhaps comment on the trends coming out of Mexico and what you're expecting as you move forward over the next 3 to 6 to 12 months?

Same for Venezuela, Argentina and Ecuador.

Do you expect to see any improvement in Ecuador, from what you saw in the first quarter?

This is Guillermo and I'm going to talk and I'm going to mention briefly on Mexico.

As you know, there is the energy reform going on in Mexico.

And actually, what we see coming out of these reforms -- and it's something we sense coming from every party, is there's going to be more money allocated to PEMEX for increased drilling activity in Mexico.

I think that today there is a general consensus that PEMEX has to increase operation and has to increase drilling in order to maintain its 3 million to 3.1 million barrels per day production levels.

And as basically you're substituting a very high yielding field, which is Cantarell with other type of fields not with the same type of activity.

The drilling intensity, in order to compensate one with the other, we think is going to increase.

Having said that, we don't see a major change in the short term.

We see this more -- much more affecting 2009 and maybe the fourth quarter.

But we don't see, in the next three to six months, a major change in the drilling activity that is -- we are experiencing in PEMEX right now.

Yes.

Regarding the rest of Latin America, basically we are seeing in Venezuela very strong -- strong shipments and a good level of tendering process.

So we see Venezuela as strong.

Regarding Columbia, it's just a repositioning on our commercial supply, an agreement with the Ecopetrol.

We are supplying now, starting the agreement on just in time.

But the market is solid and stable.

And in Argentina, the situation, it's basically stable.

We have the Repsol a little bit going down in the drilling activity, but compensated by the other private companies.

And Ecuador?

Ecuador remains stable, as well.

Okay.

Thank you very much.

And your next question comes from the line of Ricardo Cavanagh from Raymond James.

You may proceed.

Yes, hi.

Hello everybody.

My apologies, because you have expanded a little bit on these issues.

But you are still going -- we are still going to see prices and costs evolving over the next two quarters.

My question is, is over the next quarter, you expect to have a mark -- a deterioration of margins and an improvement in the third one.

How would margins look in the second and third quarter, compared to what we have seen now?

That is one.

And then you also mentioned, on the international front, that it's going to be quite competitive and you could have some impact on volumes.

Do you expect that over the next few quarters we can see overall year over year reductions in volumes?

Okay.

Ricardo, this is Ricardo speaking.

Regarding to the deterioration of margins for this quarter, we forecast that we are going to have a very good volume and mix.

This better volume and mix will allow, in some way, to generally, I would say, offset the increases in raw materials that we are having during this quarter.

So I would say that overall, in this quarter, we are going to keep the margin.

Regarding next half of the year, today it's very hard to predict the behavior of the raw materials.

But we understand, of course, that at the beginning of the quarter -- next quarter, or at the next half of the year, we are going to have, I would say, the full impact of the cost that we have been having today in the purchases of raw materials.

This is because, of course, the FIFO accounting.

As Nigel said at the beginning of this conference, we understand that price increases will offset, finally, these costs.

Regarding, Ricardo, your question of the international market, we see -- as we said, we see a strong demand and we will keep the prices recovering the cost.

We will keep increasing prices and recovering the cost.

We feel strong because combining a strong North America we will not have issues of volume in seamless.

And so we will make sure that our customers get the volume that the need, internationally and in North America, and for sure it will not go down.

Okay.

Thank you very much.

And the next question comes from the line of Stephan Williams from Simmons.

You may proceed.

Yes, hi.

Just a little bit of clarification around them.

You already talked quite a bit about it, but just so I'm clear.

You've talked about over time, that the margin on a dollar term basis staying stable.

Am I right in thinking -- implying from what you've said that perhaps in the U.S., you'll get a bit of an improvement with a very strong North America from the very strong North American market?

And maybe internationally, it will be offset by a slight decrease.

Is that fair enough?

Well this is German speaking.

Let me say, more or less, a couple of these will help.

The volatility and the way the costs are evolving I think are known.

We and the rest of the industry are talking about it.

I think it will be fair, building on what you just said, it would be fair to say that the U.S.

is a lot more dynamic.

It's responding, if you will, a lot better to our ability as an industry to pass on the increased cost through pricing.

And again, this is perfectly well reflected in the Pipe Logix.

The timing helps.

The notion of having a relevant piece of the spot market helps, and so on.

In international market, I think it would be also fair to say that the lock time is typically higher.

Commitments are higher.

Shipments are established with naturally long delivery times.

And some of our frame agreements would -- and our frame agreements will have the adjusting formulas reflecting the evolution of these indexes over time.

So we'll see that.

And as we have expressed, we believe that over time we will be able to recover.

Okay.

That was great.

Thanks.

And just one more.

You've also talked about the prospect for increased volumes in the North American market.

Can you perhaps give an indication as to how you expect that to split between your seamless and welded products?

Well I think our welded piece would gain a very important dynamic given that, as we all know, welded applications are, by and large, used on gas wells.

And this is today reflected in a much more dynamic sector, so I think it would be fair to say that we'd expect in a welded piece moving at a faster pace.

Okay, thank you.

(OPERATOR INSTRUCTIONS) And at this time, we don't have any further questions in the queue.

I will turn the call over to management.

Okay.

Thank you.

And well, I'd just like to end up by saying that as we anticipated last time, we're expecting to round out next quarter a strong semester, which as we indicated, would be loaded more towards the second quarter where we're seeing a good mix of product.

And we look forward to talking to you in August about it.

Thank you, ladies and gentlemen.

This concludes the presentation.