Tenaris SA (TS) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Tenaris earnings conference call.

My name is Alicia and 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.

We ask that you limit your questions to one question and one follow-up, please.

(Operator Instructions).

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

I would now like to introduce your host for today's call, Mr.

Giovanni Sardagna, Director of Investor Relations.

Please proceed, sir.

Thank you, Alicia, and welcome to Tenaris' 2009 second quarter results conference call.

Before we start, I would like to 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 20-F and other documents filed with the SEC.

With me on the call today are Paolo Rocca, our Chairman and CEO, Ricardo Soler, our Chief Financial Officer, German Cura, the Managing Director of our North American Operation, and Alejandro Lammertyn, our Commercial Director.

I would like to start by mentioning that we will host an investor presentation in London on September 7 and we look forward to seeing many of you there.

A webcast and a recording of the event will be available for those of you who will not be able to come.

Before passing over the call to Paolo for his opening remarks, I would like to briefly comment on our results.

During the quarter of the second quarter 2009, sales decreased to $2.1b, or 33% compared to the second quarter of last year and 14% sequentially.

Our EBITDA reached $560m, which was 41% lower than the corresponding quarter of 2008 and 30% lower than the fourth quarter of this year.

Our EBITDA margin, at 27%, was down 3 percentage points from the one posted in the second quarter of last year.

The reduced level of production continued to affect our operating margin, measured as a percentage of sales, due to efficiency losses associated to lower production levels.

During the quarter we continued to focus on our cash flow generation, which was particularly strong as we reduced our investment in working capital by almost $800m.

This action resulted in a net debt reduction of $660m to $122m, after paying a dividend of over $350m in June.

During the second quarter, seamless sales volumes were 15% lower sequentially, while welded volume sales excluding projects were 41% lower.

Volumes in the USA and Canada were affected by the declining drilling activity and the still high level of inventory overhang.

In international markets, volumes have continued to be affected by the actions taken by customers to adjust to current conditions, including procurement delays, cancellation and the postponing of new projects.

However, there are signs of recovery in some areas, such as a resumption of tendering activity in the Middle East.

As most of the reductions in volumes were concentrated in our low-end products, we have been able to maintain our average prices per tonne flat sequentially, even in a scenario of progressively declining prices.

During the quarter, we continued to improve our sales mix with our high-end seamless product reaching a record high of 53% of our total seamless volumes, compared to 46% in the corresponding quarter of last year and 48% in the fourth quarter of this year.

Now I will ask Paolo to say a few words before opening the call to questions.

Thank you, Giovanni, and a warm welcome to all of you.

In spite of the crisis, we were able to achieve a strong level of operating cash flow, of $1.1b this quarter, which supports our long-term investment program, pay out our annual dividend and strengthen our financial position.

Today, our debt has declined from $1.4b at the start of the year to almost zero today.

We continue to manage the Company in a way that allows us to come out stronger from this crisis.

Sustaining the capabilities of our industrial system worldwide is a key component of the global deployment of Tenaris.

Structural costs associated with this deployment are reflected in our costs today that will enable us to respond flexibly and rapidly to market conditions when they improve.

We are acting to reduce structural costs and this action will become more apparent in the coming quarters.

We continue to develop strong ties with major international and national oil companies.

In this regard, as an example, we have recently concluded an alliance with OMV to serve their operation worldwide and an alliance with Shell to serve several of their operations in the United States.

In this concept, within one of our customer alliances, we will also introduce our Dopeless technology into the US part of the Gulf of Mexico and into the shales market for the first time later in this year.

The actions the industry is taking to protect its market against unfairly traded imports are showing some encouraging results.

Chinese Oil Country Tubular Goods' imports into the US were substantially lower in the second quarter and were also down in Europe in the same period.

However, in the US the inventory overhang remained at a very high level and will continue to affect the demand in the coming quarter and well into 2010.

We're making progress in our differentiation strategies, but in the coming quarters our continued low level of capacity utilization and the lagged effect of market price decline will affect our results and will drive down our EBITDA below the level of this quarter.

However, we are starting to perceive increasing interest by our national and international customers in resuming the development of their medium-term projects.

In some areas, like in the Middle East, we are seeing more tendering activities.

We expect, therefore, a gradual recovery in our shipments in the first half of 2010.

In all ways, we continue to work to differentiate the Tenaris position for the future.

Our focus remains on increasing the competitiveness and the flexibility of our industrial system and on anticipating our customer needs.

I will stop here and I will leave the floor open for any questions.

(Operator Instructions).

And the first question is coming from Stephen Gengaro with Jefferies.

Please proceed.

Thank you.

Good morning, gentlemen, or good afternoon.

I guess the primary question, if you wouldn't mind addressing it, is really surrounding what you're seeing as far as magnitude on pricing in the different markets.

And I guess the follow-on to that would be I wonder about the huge inventories in the US market and whether or not -- obviously, they're out there in their impact, but are they a less reliable source of price direction than they've been in the past, given your product mix?

Well, I think, before making some comment on how I see the overall pricing, let's look into the US situation.

I will ask German to make some comments on this because this is very important.

To some extent the US pricing is also driving pricing worldwide because of the impact of Pipe Logix and the agreement that we had there.

Thank you, Paolo, and good morning, everybody.

Let me briefly tackle, then, the inventory question and implications of pricing around it.

Inventory at the end of the quarter in the US remained at around 2.5m tonnes in absolute terms, based on our estimate, equal to about 12 months' worth of operative demand going forward.

This, in short terms, means that we've seen a reduction both in absolute terms and level of months, as compared to the information we provided in the prior quarter.

Having said that, however, I have to probably highlight the notion that inventory remains extremely high, 12 months.

And this is of course the result of imports coming in from China in a massive way and it is of course related to the way pricing pressure is set in the market.

We've seen Pipe Logix coming down 48% from the peak in September last year and we are continuing to see the notion of pricing pressure in the US market, particularly affecting the low-end segment of the market.

So, with that, Paolo, I'll turn it over back to you, probably, for the pricing piece.

Yes, because -- just to make an (inaudible), when you look at our price, I think our price reflects on one side the price of our alliance and the long-term contracts that are influenced by formulas that in many cases include Pipe Logix in part of the cost.

The impact of the formulas on our sale to this market is perceived into the revenues with a very limited delay, let's say, from the moment at which the price, for instance, went down.

But then we have a large part of our sales that are driven by projects.

Projects are -- in some cases, we agree on a price and then we deliver and we ship and we have this in our revenue, in many cases one year or eight months or 12 months after this.

In this moment, our revenues are still influenced by some of the projects we got last year, or the beginning of this year, and the same is also true for the future.

In the beginning of 2010, in the next quarter and in the beginning of 2010, our revenues will be influenced by the component of projects that we are negotiating and discussing today.

And I would say that the price that we are discussing actually reflects a decrease in the range of 20%, 25%, compared to what we have seen in international markets last year.

The last component of our pricing is the welded and the spot market for low end.

This also comes into our revenues with a very small, very limited delay.

I make this comment just to translate to you how our price level is reflecting different delays, that's all.

And the second thing, the market that we see today is being -- the negotiate -- the market that we negotiate today, international, is reflecting a price decrease of this amount.

If you look into the future, I think that the recent increase in commodities in some of the basic inputs, including energy and also coal, that is to some extent affecting the costs of our competitors and our costs, will contribute to stabilize prices.

We do not expect, let's say, the negotiation -- the price that we negotiate, to be much lower compared to where we are today, but with the qualification I made concerning the lag time for when they show up in our revenues.

That's very helpful color.

Thank you.

Thank you.

The next question comes from the line of Ole Slorer with Morgan Stanley.

Please proceed.

Thank you.

Thank you very much.

Paolo, first of all, I wonder whether you could compare your thoughts about the pricing and activity trough in this cycle now, compared to how you highlighted the things after the first quarter.

After the first quarter I think you were quite conservative.

You were highlighting a number of large projects that were slipping, and you were almost looking into 2010 before you saw the markets troughing.

Has anything at all changed with the commodity prices firming up and GDP trending higher, or is it still too early to make any difference of opinion?

No, I think we are still viewing the market in the same way.

There has been no big change.

I would say, if I compare with the view that we gave in previous moment, previous conference and in the -- in our Investor Day, we have been quite successful in our action to react to the unfair trade in different markets.

This is important.

And probably the export of Oil Country Tubular Goods from China went down faster than we anticipated.

Today, China is probably shipping less than a third of what it was doing before by month.

In 2008, they were shipping around 400,000 tonnes of Oil Country Tubular Goods to the international markets.

Now, they're shipping in the range of 100,000 tonnes of Tubular Goods.

This is an important change and could -- we are seeing the inventory in the US going down probably even a little more because of the reduction in imports that we expect.

The second point is that we are also reducing strongly our internal inventories and so our level of production went down.

But we're concentrating on high-end product.

The high-end product is probably more resilient than the low end.

So our mix is better, we are reaching record on high-end product.

This is influencing the price you see in our revenues, and probably this is slightly beyond what I would have expected before.

Maybe it's due to the -- to some reduction in low end.

But if we look beyond this, I think that by -- the price that we will start negotiating between September, October and November will reflect -- will be much more firm and will reflect the impact of improved pricing of commodities, a return to the market of some of the oil companies, startup of the demand by some of the projects.

Now, then it will take time to arrive to a shipment, but the price would be firmer, the price we're negotiating in the second part of the year.

So if we also look at the cost side for a moment, how have you chosen to maintain your capacity costs?

I think that Dalmine in Italy have been running at very low levels and the same for some of the US facilities.

Have you mothballed, or have you taken it down to very few shifts?

Or how have you balanced the need to reduce costs but [allow] still for the need to maintain, keep up capacity when the market comes back?

Well, we -- as I mentioned in my opening statement, we feel it's very important to preserve our operational capability in terms of facility and human resources in all of the different parts of the world, in Japan, in Europe, in Romania, in Canada, to some extent in the United States, all around the world, because we really think that we have to maintain local presence, local capability and to prepare -- be prepared for what could happen during 2010.

And to build again position and plant availability and capability would take a long time, and I think to get again the trust of our clients also would take time.

So we choose this strategy.

At the same time, we reduce as much as we can our structural costs.

In the case of Dalmine, for instance, we are operating a very low level of operation.

We are adopting the Italian Cassa Integrazione, as a way of reducing working time, reduce the cost of supporting the worker, by -- that is paid directly by the Company.

And we are using similar system in all the other areas.

But inevitably, the fixed costs are the gas needed to heat the furnace and so it is impacting, turning out as inefficiency on our cost side.

That's for this reason you are seeing in this period a higher level of cost or reduced margin, due to this reason.

The second reason is also the inventory.

We have been -- we choose a strategy of reducing the volume of production, even keeping open facilities, generate cash flow.

The cash flow has been substantial.

But we are using our inventory slowly.

And so we have still an overhang of inventory at high cost in our stocks, in our working process and also in our finished goods stock, because of the low level of production.

This effect will go on until the end of the year, I think, because the actual -- the present level of capacity utilization is low.

So you will see this reflected in our costs in the second part of the year.

Just finally, this effect on the third quarter.

Historically, you've had a Tenaris-specific slowdown because of the maintenance program in Dalmine, so I would at least assume that with Dalmine now running in the second quarter at such low levels it'll be a very limited additional slowdown from the usual repair and maintenance cycle.

Yes, yes.

There has been -- in the news they're all saying Dalmine is stopping for 13 weeks.

This is not correct.

In the moment, in our system, we are operating with the equivalent of manpower in the range of 20% below where we were in the second part -- in the last part of 2008.

In Dalmine, we will rotate suspension of our people, but we will not stop the facility apart from the annual maintenance.

Okay.

Thank you very much.

The next question comes from the line of Michael LaMotte with JP Morgan.

Please proceed.

Hi, guys.

This is actually Chase for Michael.

A couple of questions.

With welded production running so low, are you still seeing carrying costs from like six to 12 months ago?

And if so, when would you likely see some benefit from lower material costs coming through the system?

Well, I think this is mostly affecting United States, so I will ask German to comment on this.

Yes.

As we have indicated, our welded production system in the States is running at a level of about 10%, 15% overall at the present time.

Naturally, we are confronting again the drilling situation that we know of, inventory situation overall, the market, and of course our inventory position as well before the crisis started.

Now, we don't expect a substantial recovery before, I think, the last quarter of this year, well into next year, as far as production is concerned.

As in other facilities around the world, we have put our US facilities under what we call a work sharing scheme, and simply we retain employment of a substantial part of the people that still is devoted to some production activity, training activity and maintenance activity.

Okay.

That's helpful.

Thanks.

In terms of the projects, can you provide some guidance on how you think your recovery will shape up there?

In terms of projects, these are mainly, let's say, affected by the demand in Brazil.

We perceive Petrobras as maintaining its dynamics and so we see that the activity in Brazil could be -- could have some delay.

But as a whole, the activity of Petrobras for the development of these oil and gas resources will go on a very fast pace during 2010.

So we expect projects to come out, maybe not, let's say, in the next quarter, but we expect that there will be activity driven by oil and gas in Brazil during 2010.

Our backlog is now quite below the level of 2008, but I'm very positive about the program of Petrobras.

I really see Brazil very dynamic, not only in the energy sector, but I expect the program to be -- to proceed during 2010, maybe after some delay due to political and budgetary reasons in Petrobras.

Okay.

Great, guys.

That's all from me.

Thanks.

Thank you.

The next question comes from the line of Frank McGann with Banc of America-Merrill Lynch.

Please proceed.

Okay.

Good morning.

Just one question and one quick follow-up.

Just, in terms of demand, you mentioned that the Middle East is a little bit stronger and that the US, at least right now, is weak.

But I was just wondering, as you're looking out 12 months or so, how do you see the different regions that you're in developing?

And when do you think you might begin to see stronger demand coming out of the US?

And then, as a follow-up, if I could just ask about working capital and how much further you think you can drive down working capital over the next six to 12 months.

Well, let's start first on the region -- the view of the regional demand in a medium-term period.

I will ask Alejandro to give a view on how we see the regional activity in the medium term.

Okay.

Hello to everyone.

As we said in the last quarter, we were starting to see some activity increase in tendering process in Middle East.

Now we are reaffirming this.

We are in the middle of the process of the tendering.

We are receiving inquiries from Aramco after a long time not receiving inquiries.

We are seeing the big tenders coming for KOC as well.

We have already been awarded Qatar Petroleum in this process.

And we are also seeing some infrastructure projects that were delayed in taking decisions that are picking up, like SAS in the Emirates or Al Jubail in the case of Saudi Arabia.

In North Africa we are also seeing increasing activities, mainly in Eni in Egypt that were slowing down because of discussions with the government.

We are seeing that they are picking up.

And our alliance in Petrobel is starting to pick up.

And we are still seeing Algeria very active and we see a potential growth of activity for us there.

This is Middle East and North Africa is -- of course, the impact in our sales will be seen throughout 2010.

We are -- you know that there is a lag between the tendering process, the production and then the delivery of the material.

In the Far East, we are also seeing that the recession that we were expecting in Indonesia is picking up faster than expected and we are already getting some contracts with SPIJ.

We have got, for example, a contract with Marathon and a conglomerate of customers that is very important for us as a first activity under SPIJ new management.

In the CIS, particularly in the Caspian Sea, we are seeing that the big projects like KPO and KCO are starting again their activities or ramping up their activities.

We have received an important call-off from KCO after a period of time of no activity.

We are also continuing with Vankor with our Dopeless sales, a big contract there and our activities going well and they are planning to buy more material in the near future.

In the area West Africa, Angola and Nigeria are still slow in drilling and with talk of a (inaudible).

But we see some projects and infrastructure projects like in Kizomba or Clov in Angola that are starting now also to pick up.

And we are seeing, in the case of Congo, activity increasing from Eni.

In the North Sea, activity remains stable.

We have got the Maersk contract in Denmark, also won by our product differentiation in Dopeless.

And we are seeing interest -- increasing interest in the Goliath project with Eni, that they are resuming also the studies and the projects.

This is a general view from an international perspective.

I think, Paolo, if you want to add on Mexico and --

Well, one comment on Mexico.

Mexico is probably the most dynamic market at the moment.

PEMEX is completing the launching of its contracts for the development Chicontepec.

It's trying hard to substitute the declining in the Cantarell with additional production from Chicontepec.

It's focused on the -- also developing gas production from Burgos.

And in spite of the budgetary program that Mexico may have in 2010, I think that PEMEX will remain one of the programs that the government will preserve, even in a moment in which they may be forced to slow down or reduce the level of public expenditure.

The rig count in -- you see went up.

We are now close to 170 rigs in Mexico.

We were 130 during 2008.

So this is one of the bright spots.

Now, just one comment about the projects that you heard from Alejandro.

These are projects that -- for instance, even in the case of like Kashagan, it's a call-off of 11,000 tonnes.

That will be shipped probably in June 2010.

So the timing of this project is long, even for a call-off, not even a tender.

In some of the projects, we are in a stage of beginning of procurement for the complex projects, the ones that we like because they include complex products, sometimes chromium or Dopeless or complex premium joints.

These projects have a long lead time.

What we perceive is that with the price of oil stronger, the sense the China economy is recovering faster than expected, the sense that the recovery could maybe be faster in 2010 also in some other emerging markets, and maybe later on but also in industrial countries, the sense is that the price of oil and the need of oil in the medium term could be stronger.

I hope that in the gas -- if you look at the future, it's true that the price of gas is very low, but the future tends to be quite stable and they -- it tends to indicate that also the price of gas may rebound.

And this is justifying the decision by the oil companies to start again in motion -- putting in motion projects that will come on-stream in the second part of 2010 or even later.

One comment on -- German.

Very briefly, Frank, I think it is fair to say that demand in the US will remain weak the rest of the year.

There's no question about it.

And that's despite the notion that I think rig count has found a new floor at the levels that we've seen in the last, already three, four weeks.

Gas is the major reason behind.

And in our particular industry segment, the inventory position, a situation that we discussed about.

Same is true, I think, for Canada.

So we, in both the US and Canada, don't expect any demand rebound between now and early 2010.

Well, on the last question, the working capital reduction.

Well, I think we did better than expected on working capital up to now, because the slowdown, the coordination of this has been faster now.

We are still shipping more than we produce.

So we will continue to reduce our working capital, but at a much reduced pace.

So, in the next six months, we expect cash flow coming from working capital, but much less than we have been able to do in this quarter.

Okay.

Great.

Thank you very much.

The next question comes from the line of Dan Boyd with Goldman Sachs.

Please proceed.

Thanks.

Paolo, based on your comments in the press release and so far on the call, it sounds like you expect 4Q to be the trough in EBITDA.

One, I just want to confirm that.

And then also, as we move past there, what do you expect to drive the turnaround early on?

Is it going to be international, US, or is it more of a function of having the high-cost inventory flow through the income statement and now start to proceed with lower costs going forward?

I didn't catch it.

You say that the fourth quarter of this year, it's correct?

Yes.

It sounds like, from your comments of profitability being lower in the second half of the year, a pickup in the first half of next year, I feel like you're sending the message that you expect fourth quarter to be the trough in EBITDA, so I just wanted to confirm that my thought process was correct.

I think this is your -- our perception.

And your perception is correct.

We expect the volume to pick up, but later, probably in the beginning of 2010.

We expect pricing to affect increasingly our revenue from now on.

And also, we feel that on the cost side we still have some inventory overhang because of the low level of production.

So we still are consuming some of the costly -- and inefficiencies obviously are affecting this.

Okay.

The second thing is from what I expect, right.

Well, I think that United States, we haven't -- it's very difficult to predict which scenario we may be facing in the second half of 2010.

There are variables, depending on the dynamic of the economy.

We know that the declines in the shales and the production of gas is very strong, and this will definitely affect supply of gas.

Up to now, this didn't happen.

Supply of gas even increased slightly and consumption went down by 5% or 6%.

But in the -- during 2010, declination of the field hit this gas production and consumption resume, we might have a very, very different scenario.

I think it's difficult today to anticipate it.

But we are preparing for facing a 2010 in which the inventory overhang will be finished off and the economy could be picking up seriously, and we will have to get back fast into the oil and the oil industry will have to get back fast into the investment mood.

Okay.

And then, on the cost side, should we expect you to be through the high-cost inventory by the beginning of next year?

So should we expect margins to start expanding, even if prices are held steady in the beginning of next year?

Well, you will have a higher rate of production, lower cost for this reason.

But also, the pricing, you will see lower price in our revenues because of the impact of some of the prices we are negotiating now.

I would see that margins at the beginning of 2010 should remain stable.

Okay.

Thank you.

That's great, Paolo.

I'll turn it back over.

The next question comes from the line of Sunil Jagwani with Catapult.

Please proceed.

Yes, hi.

Good morning.

My question was on -- was regarding seamless tubes.

In the last 12 months, it seems like pricing for seamless tubes has held in very well.

And so if I wanted -- all I wanted to know is what's the lowest price you've sold seamless tubes at and what's the trough price we can expect?

Well, we are not prepared to say it directly in the conference call, but -- we are not prepared to (multiple speakers).

(Multiple speakers).

But let me tell you what you see.

The strong price for seamless to some extent is depending on the reduction in the sale of low-end product and the very high share of premium and -- and premium.

And this is one important thing.

The second thing is the lag.

These prices -- the prices this quarter are not yet affected, especially in the premium side, because when you talk about premium products there is a lag between the moment you negotiate the price and the moment this price appears in your revenues.

And this lag, as I was mentioning in the case of Kashagan, is one year sometimes, or in some cases when there are formulas could be longer.

But there is a large component that has a long lag.

So I would say that we adjusted -- reduced prices to support also the client demand for reducing the cost of exploration and production.

Every service company has done this.

We also have done this.

And this will show -- will appear also in our -- in the price -- or in part of the -- or part of our shipments later on the third, fourth quarter of this year.

So if you were -- on the premium products, then, you would expect the trough to be in the fourth quarter or is that going to be out in 2010, because you mentioned that there's sometimes a one-year lag?

It will be, from a pure price point of view, probably in the first part of 2010.

Okay.

And in terms of actual capacity around the world, we've seen Vallourec add some capacity and we've heard some other stories coming out of China.

What can you tell us about heat-treating capacity and general availability for premium products around the world?

Well, the premium products capability -- capacity utilization is much higher than the average capacity utilization for rolling capacity.

This really has been more stable in terms of volume demand.

And I think there is a limited overcapacity available, keeping in mind also that there is really -- this really is a market that is very demanding in terms of qualification and so is limited to few producers.

I think there is a limited overcapacity and there are no inventories.

Premium products are made on order, are specific, and so you have very limited inventories of this.

So --

But I'm sorry.

Where do you see the most capacity being added, or do you see any capacity being added?

Because we hear stories of capacity being added between Vallourec and some other parts, even in China, and I'm just wondering if you can validate whether those stories are right or wrong.

I don't think there is so much capacity in the premium segment of the market added.

And the capacity in China is not really available and accepted on the market.

Yes, there is overcapacity in the low-end component of the business, and most of the capacity in low-end has been added and probably will be added even this year in China.

But we have also to keep in mind that China, in this moment, has high cost of production.

The cost of iron ore, coal and energy, logistic is probably quite high compared to the cost of other producer.

In this moment, in these products, even in low-end, I don't think China is the low-cost producer.

Understood.

Thank you.

The next question comes from the line of Alessandro Abate with Credit Suisse.

Please proceed.

Good morning to everyone.

It's Alessandro Abate from Credit Suisse.

Quick question.

Just referring to the statement you made in the Q2 results release, actually, when you expect shipment going in 2010, slightly picking up, but revenues might not recover to same extent.

You partially, basically, answered this question that was asked beforehand.

But my question is related also to the lead time you have at the current moment.

Well, we have -- this is very different, depending on the product.

On very demanding product, we have some months, several months in the case -- some case of lead time.

In the more simple low-end product, our lead time is very short.

I mentioned this, for instance, in the welded product in United States.

I don't know, German, if you can add something on the lead time in your chain.

Yes, only a quick reference.

When you look at the utilizations which we have, in fact, informed, both for the seamless and welded, in particular, system, lead time in generic terms at this level of utilizations are not really a main restriction or a main consideration.

In other words, the industrial system -- welded industrial system is capable of responding fairly fast.

Having said that, it is also fair to recognize that on some premium segments lead time is a lot longer, as a result of the reasons that were explained by Paolo a moment ago, no inventories, pretty much custom made type of products, designs, etc.

Relative to this particular niche of products, actually, premium product where you have basically a longer lead time, in terms of percentage of your total overall seamless production, what this basically is representing?

Well, we typically don't disclose exactly what our premium component on our seamless sales is, for competitive reasons.

But we usually say that our high-end, which is made substantially of premium products, together with some others, deepwater lines of applications among many, this last quarter hit the 53% level of our seamless sales, which is a fairly important level when you look at what we have reported in the past.

It's a record level, no, in our -- it's a record share in our [budget].

Okay.

Just a quick follow-up question.

Just taking a look at the historical out (technical difficulty) 3 versus an average 2.5, do you think that actually this continuation, maybe slightly pick up, in drilling activity for gas can actually postpone an effect of stall of the activity, going forward in 2010, considering the high level of gas in storage and the relatively low demand for gas?

Thank you.

Yes.

We lost a piece of your question because of the line reason, but I think we understood the question is on gas.

Maybe, German, you can add some comments on this.

Yes.

I think in generic terms, gas, at this pricing level of gas, we don't really expect a major recovery as far as the demand is concerned, in the US specifically.

And it is in fact, in the end, one of the reasons why some specific items in the existing inventory are still hanging and will hang for the remaining of the year, well into 2010.

But just to make sure, we want to provide you also the opportunity of maybe going back to your question because, again, the line was not perfectly clear.

I want to make sure that in fact I'm addressing your point.

Yes, you're doing good.

Basically, the last part of the question was, considering the high level of gas in storage and the demand that is still lagging in the US, do you think that actually this excess of average storage of gas can anticipate a collapse in the drilling activity for gas in 2010?

No.

Short answer, no.

I think we've seen, yes, record levels of gas storage in the US, driven by incremental production, particularly in the first part of the year, and naturally a drastic reduction on both the industrial and power-generation gas.

However, in the last few months, we're starting to see a production decrease in the US as a result of drilling activities, a sharp decrease.

So, as I was saying, I think it is, from our perspective, fair to recognize that we're seeing a new floor for rig count in the States, which is probably sustainable going forward.

Okay.

Thank you very much.

Ladies and gentlemen, we have approached the final five minutes of today's conference call and at this time we have time for one additional question.

We have a question from the line of Rochus Brauneiser with Kepler Capital Management.

Please proceed.

Yes, hi.

Good morning, gentlemen.

Maybe a follow-up question on the pricing.

I'm not sure whether I got it right.

So I think you said that pricing in the international OCTG space was so far down, something like 20% to 25%.

Is this also kind of a magnitude you can apply for the higher end of your products, or how is this differentiating between the more high-end part of the business, which is half of your tubular sales?

And what do you see magnitude for the lower end of this?

And the second question is on your inventory.

How long -- for how many months are you sitting on inventories for input factors like scrap or flat steel?

And when do you start -- when exactly do you expect some support from lower material costs filtering through?

On the first question, you're right.

On average, we can say so.

But then there are segments in which the prices are more firm because there is limited offer around the world.

So some of components is more stable.

But yes, there are some premium segments that is 20%, 25%, for instance (inaudible) below.

I'm saying this because usually when -- in our formulas, the impact of Pipe Logix or of cost has been driving down, in some cases, and in our alliance, the cost by a similar amount.

Usually it's not 100% driven.

It's partially driven by cost or by price.

As far as the -- our inventories, we will -- I think we will -- the inventory overhang of some of the (inaudible) will have an impact in our cost at the present level of production.

Remember, we have a level of utilization that is quite low, very, very low in the welded, but quite low also in seamless.

So in this case, I would say that this will affect our prices until the end of the year.

And starting from here, you already see the scrap price to firm up again.

So, after you get some tailwind at the end of the year, where do you see the impact on your profitability in 2010 from the recovery of the scrap price which is coming through the channels right now?

Well, we -- after this recovery, I think the recovery will go on for a while, but then we expect the scrap price to stay basically stable.

We do not expect that production and the activity in the United States to come back so strong as to raise substantially the level of utilization of the steel industry and of -- consequentially, of the demand for scrap.

I expect that this may remain stable.

There won't be a big change from now on, maybe a marginal change, but I wouldn't expect changes on this.

Remember, when you consider the impact of inventory on our stock, you should consider that we have stock of work in process and finished goods.

There are -- that have embedded prices of scrap, iron ore, that were coming from November, December last year.

And this is, let's say -- when we say the impact of higher inventory in our -- our cost in our inventory where it is today is in work in process and finished goods.

And as I told you, we think we can -- gradually, in the next two quarters we will dispatch this.

Okay.

That's helpful.

There are no additional questions at this time.

I will now hand the call back over to management for closing remarks.

Well, thank you, everybody.

Thank you very much for taking part to this call.

And I hope to see you in London in a month's time for our investor presentation.

Thank you.

Thank you.

Thank you.

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

This does conclude your presentation and you may now disconnect.

Have a wonderful day.