Tenaris SA (TS) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2009 Tenaris Earnings Conference Call.

My name is Marisol, and I'll be your operator for today.

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

We will be facilitating question-and-answer sessions at the end of the program.

(Operator Instructions).

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

Giovanni Sardagna, Investor Relations Director.

Please proceed, sir.

Thank you, Marisol, and welcome to Tenaris' 2009 Third 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 these results include those mentioned in the Company's 20-F and other documents filed with the SEC.

With me on the call today are Guillermo Vogel, Vice President of Finance and Member of our Board, Ricardo Soler, our Chief Financial Officer, German Cura, the Managing Director of our North American Operation, and Alejandro Lammertyn, our Commercial Director.

During the quarter, third quarter of 2009, sales decreased to $1.8 billion, or 42%, compared to the third quarter of last year and 15% sequentially.

Our EBITDA reached $488 million, which was 54% lower than the corresponding quarter of 2008 and 13% lower than the second quarter of this year.

Our EBITDA margin, at 28%, was down 7 percentage points from the one posted in the third quarter of last year, however, has stabilized on a sequential basis, as input cost reduction offset lower selling prices.

During the quarter, our cash flow generation from operations remained strong, and we reduced our investment in working capital by a further $360 million.

The strong cash flow generation during the first nine months of the year resulted in a net debt reduction of about $2 billion, to a net cash position of over $550 million at the end of September.

The Board of Directors approved the payment of an interim dividend of $0.13 per share, or $0.26 per ADR, to be paid at the end of this month.

During the third quarter, seamless sales volumes were 18% lower sequentially, while welded volume sales, excluding projects, were 3% higher.

In the international markets, demand for our pipes this year has been negatively affected by the decline in oil and gas drilling activity and the actions taken by our customers to adjust to reduce cash flow and less favorable market outlook.

However, in the third quarter, our level of incoming orders by volume has started to recover.

In the US and Canadian markets, inventory levels, although they remain high, have been coming down to around 10 months from the extraordinarily high level they reached in the first quarter of this year.

During the quarter, our average price per ton decreased by 6% as a gradual adjustment to the lower prices currently in the market has started.

During the quarter, we have been able to maintain our sales mix in line with that of the previous quarter.

Our high-end seamless products were 52% of our total seamless volumes compared to 45% in the corresponding quarter of last year.

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

Thank you, Giovanni, and welcome to all of you and thanks for participating in this call.

I would like to say a few words about the outlook for the coming quarters.

As anticipated in our last conference call, we have finally reached an inflection point in terms of demand for our pipe in this third quarter.

After several quarters of falling volumes, we expect the trend to change with a modest increase in the next quarter and further improvement going into 2010.

This improvement will not apply in our project segment, where the backlog has diminished and we have seen a slowdown in the implementation of new pipeline projects in Brazil and the rest of South America.

This trend reversal is a reflection of a number of positive signs in the markets.

Oil prices have climbed steadily throughout the year in spite of OPEC spare production capacity amounting to around 7% of global production.

US natural gas prices have risen from the lows reached in the summer, despite high levels of gas in storage.

The recount in the US has been driven by increased oil and gas shales drilling activity.

In terms of demand for pipes, the pace of OCTG inventory reduction in the US market rose to around 440,000 short tons during the quarter.

Inventory levels for low-end products remain at high levels, and we expect further strong inventory adjustments in the coming two quarters.

However, demand for many product grades is increasing, as inventories have declined to more normal levels for certain products.

If activity levels remain stable in the coming months, apparent demand for our products will increase.

In the Middle East and North Africa, as we anticipated in our last call, we have seen higher tender activity by national oil companies, such as Aramco, KOC and Sonatrach, for deliveries to be made in the first half of 2010.

In the case of Aramco and KOC, the demand is increasingly concentrated on premium products to be used in complex deep gas drilling environments.

The international oil companies are also starting to move forward on complex new project developments.

Following Chevron's final investment decision on the Gorgon project, we have been awarded a package for offshore flowlines.

We are seeing a trend toward fewer, but larger and more complex project developments, of which Gorgon is but one example.

In terms of prices, after the market falls over the past months, we expect prices to stabilize.

However, our reported prices do not yet fully reflect the prices we are taking on new orders.

Consequently, in the coming quarters, our average selling prices will continue to decline and will be further affected by higher sales of welded pipes.

Steelmaking raw material costs stabilized earlier in the year and are now showing a slight upward tendency.

However, our production costs should decline over the coming quarters.

They will benefit from efficiencies associated with an increase in production levels and the actions we are undertaking to reduce structural costs.

Consequently, we expect our EBITDA margin to remain stable over the coming quarters.

We continue to position the Company for the next cycle.

The actions we have taken to reduce our working capital and structural costs over the past three quarters have given us a strong financial position with which to make investments to strengthen our competitive position, as well as play our role in any industry consolidation.

With that, I would like to pass the call over to questions.

Thank you.

Thank you.

(Operator Instructions).

And our first question comes from the line of Dan Boyd from Goldman Sachs.

Please proceed.

Hi, good morning.

Good morning.

Good morning.

Shipments were down in the quarter, maybe a little bit disappointing.

But at the same time, as you mentioned, you're starting to see orders picking up, so things are moving in the right direction.

Can you help us understand a little bit better about what happened in 3Q?

For example, how much of the decline was due to the seasonal shutdown at the downline facility?

And then, secondly, recognizing that August was pretty much a horrible month, September was then much better, has that positive momentum carried into October and November?

Yes, Dan.

I think we can probably break it down and talk a little bit how we see the North America and US and Canadian market, and then the rest of the market.

So, I will ask German if he can give us some light in terms of how he sees this in the US and the Canadian markets.

Thank you, Guillermo, good morning, Dan.

Brief comments about what we've seen during Q3 and then you asked what is it we can expect in the coming quarters.

In fact, the level of bookings that we had during the quarter are not reflecting somehow the shipments that we achieved during the quarter for a variety of reasons.

Number one, despite the apparent demand in the US reached during the quarter, is historic low.

We're talking about probably 270,000 tons of apparent demand during the quarter.

Inventory absorption was more or less in line with what we anticipated on the prior calls, 440,000 tons, and despite that we're still up against about 10 months' worth of inventory, over 2 million tons overall, inventory that was built up as a result of massive imports from unfairly traded imports from China.

Now, Dan, this is particularly affecting the low-end segment, and therefore our welded component in North America.

Together with that, and it's also a fact that we're starting to see some holes of what we call high-end items.

This is primarily seamless, alloy, premium connections, which are somehow driven by increased oil rigs and to some extent also gas shales drilling.

So, bottom line, I think we reached the bottom point during the third Q.

We've started to see in the backlog some increased quantities, by and large of high-end nature, and that is more or less consistent with the inventory position that we still confront, both in the US and Canada.

With that, I'll turn it over to Alejandro to broadly review the international space.

Thank you.

Yes, hello, Dan.

On the international, it's again the same concept of the inflection point.

As you well mentioned, there is a seasonality because of the shutdown in August in Italy and in Canada, but as a fact we were seeing that we were eating the backlog in this month and we were projecting a lower volume in the third quarter and the fourth quarter, but we were seeing a positive reaction coming.

Fortunately, what we were seeing and we were expecting and we commented in the last quarter is being realized, and taking into account the lead times of the process of tendering and the orders coming, we are expecting the improvement slightly in the next quarter and a much important recovery for the first semester of 2010.

Okay, that's helpful.

And then, when I just looked at cost, you made the comment that costs should come down as you work through some of the lower-priced inventory or raw materials, but also as your utilization improves.

It just seems to -- correct?

Yes, correct.

It just seems to me, given that dynamic, you would actually see margin expansion from here, especially given the reduction in SG&A that you've seen.

I'm just trying to -- are you just being conservative here with your margin guidance?

Well, no.

I think that the message that I tried to convey a little bit earlier is that we still are going to see some downsizing in our pricing, in our average pricing, because of actual pricing being included in our revenue stream in terms of past orders.

And then, also we're going to be seeing a little bit of a change in the mix with an increase in the welded pipe from what we are seeing, so that that's going to offset to some extent the reduction in the cost that we are seeing and that we mentioned also.

And so, actually for the following quarters, what we are seeing is more or less a stable margin, percentage wise.

In terms of absolute EBITDA, should we expect that to increase from here, as well?

I think you should follow a little bit what we were saying.

We are seeing a little bit of higher margins -- I'm sorry, of higher volumes, coming into the process, and we are seeing stable percentage margins.

I think that EBITDA in absolute terms have to follow that trend, no?

Okay.

One last one, just on the SG&A, which came down considerably in the quarter and recognizing as a percentage of revenue it's still at that sort of 18% range.

But, in the past, we've seen that number all the way down in the high 12s or 13%.

Is that something we can expect going forward?

Well, I'm going to ask Ricardo here if he can put some light in terms of how we're seeing that item.

Ricardo.

Okay, yes.

Thank you, Guillermo.

Talking about SG&A, I would say that the pro formas as a percentage base, 18.5%, is a number that takes into account some of the measures that we are taking in order to reduce our restructuring cost.

But due to the new level of sales and activity for the Company, I think that next quarter the percent base, the number will be more similar to this number, 18%, 19%, and not the 13%, 14% that you had mentioned.

I was just more expecting it to get down there over time, maybe as we move through 2010, as revenues start to increase.

But you -- can you -- basically, can you hold the SG&A at a similar level on an absolute term?

No, no, no, I don't think we can expect that on absolute terms in terms of the volume.

When we see volumes increases, it's because we have a variable component in that.

We have freights, for example, that are associated there, and so that we're going to start to see increase.

Now, we're talking about really trying to put a light in terms of the next quarters, what we are not seeing a huge volume increase.

No?

Okay, I'll turn it back over.

Thank you.

Thank you very much, Dan.

And our next question comes from the line of Ole Slorer from Morgan Stanley.

Please proceed.

Thank you.

Thank you very much.

Yes, so, German, I wonder whether you could just talk a little bit about what your welded capacity is in the US market?

Its volumes are down 75% compared with a year ago, but you've done a lot to your facilities.

So, can you just discuss what you see maximum throughput as potentially being in the plant if we should come into a situation where that would be needed?

Good morning, Ole.

Well, let me say that for competitive reasons I will probably not disclose the exact capacity number of welded that we have, but I would like to say, though, as a matter of guidance that we have continued our investment plan through the down cycle.

We're expecting to start a new tubing line in the coming weeks, as we speak, up in Hickman.

We are in the process of completing investment plans that are forming lines in Hickman, also some heat treatment lines in Conroe, so short answer to the question, Ole, is Tenaris is prepared to respond to domestic capacity, to the market needs that we may be confronting going forward.

And just a follow-up on that, the efficiency measures that you've taken I think in the old best quarter Maverick achieved on the standalone basis -- maybe an EBIT margin, EBITDA margins are in the low 20s.

How much more efficient do you think that this facility is now that you've done, completed all of these investments?

Well, we believe, Ole, that going forward there might be a volume effect when we compare what we project in the coming months as opposed to what we did in the past couple of quarters.

This should allow our welded operations to naturally be able to absorb costs in a much more efficient way.

That together with in fact our ability to put up to work the new production lines which we are anticipating would also translate in an efficiency gain.

So, for obvious reasons, I'm not in a position to disclose how much would that mean in terms of cost savings, but we're expecting an important step there.

But you're feeling you're in good shape to produce whatever might be needed in the absence of Chinese imports.

We are ready to respond to the future market needs with our installed domestic capacity, yes.

Sounds good.

Next question, Guillermo, nice to have you on the call again and congratulations with everything you have achieved here.

Thank you very much, Ole.

With you on the line, I have to ask you something about Mexico, and there is a lot of debate at the moment about what's going on with your main client in Mexico and the drilling programs, whether it's the Burgos for gas, which is looking vulnerable because of the very weak, very weak North America gas prices, or whether it's what's going on offshore, whether it's south Villahermosa or Chicontepec.

I just wondered whether you could give us your overview of how we should be thinking about drilling activity in Mexico in the key regions for next year.

Well, sure, Ole.

I think in a couple of weeks, we're going to have much more light on this because right now the budget for the country is being discussed in Congress, and they should have a decision in two weeks.

Having said this, as you know, Pemex activity this year was good news for us.

Rig count went from 130 last year to a little bit below 180 this year, and what we expect is that we don't expect a reduction in the budget for this year.

I think that the country and Congress are going to make the effort either to maintain or maybe to slightly reduce, but we don't see a reduction in the activity in terms of the actual activity because also in the reduction in the cost structure is -- the industry has encountered.

What we see is a change in the way these resources are being used.

I think that for 2010 we're going to see a reduction in the activity in the Chicontepec area, and this is more than anything because Pemex really wants to spend a little bit more time in analyzing how to better access these reservoirs.

And so, I think that we're going to see a drop in the number of wells that we saw or that we're going to be having for 2009 and 2010.

And these resources are going to be sent probably more than to gas to the southeast regions, probably more too we're going to see more drilling around Ku-Maloob-Zaap, where Pemex today sees that they're going to have better effects in terms of increasing the production than in Chicontepec, and we probably are going to see a return to Chicontepec by 2011, 2012.

This might be good news for us in terms of our product mix.

This may improve actually our product mix.

And in terms of gas I think we're going to -- on the Burgos area, with the prices of gas that we are seeing today, I think we won't see a reduction in the third-party drilling that is happening there.

So I think Pemex, this is more or less what we are seeing today.

I hope that we don't change our outlook after Congress approves, because, as you know, the country is a little bit under pressure on the fiscal side here, no?

Absolutely, absolutely.

So you see a slight meaningful or a slight reduction in Chicontepec?

Well, I might -- if you want to -- this year I think Chicontepec, we're going to close around 900 wells, maybe a little bit above that.

And I think next year, if you ask me today my estimate, I think next year Pemex is going to aim towards a little bit over 600 wells.

600 wells for next year, okay.

Yes.

Sounds reasonable.

If I just -- finally on Mexico, could you explain, remind us of the pricing structure again?

To what extent is Mexican tube prices a function of Pipe Logix?

I would say 100%.

So, you benefit indirectly from a tighter US market by removing the Chinese?

As you know, well, you know the effects of the US pricing and the unfairly traded pipe and the effect that it has in the US market affects not only the US market.

It really affects the rest of the world, international word, at different degrees.

In Mexico, it has a direct effect.

Okay, well, thank you very much.

I'm going to let somebody else ask you about consolidation, but I think I have an idea.

Thank you very much, Ole.

Thanks.

Bye.

Our next question comes from the line of Stephen Gengaro from Jefferies.

Please proceed.

Thank you.

Good afternoon, good morning, gentlemen.

Good morning.

I guess two questions for you.

The first, you talked about volumes going forward and you talked a little bit about the well pickup.

Is your comment on volumes a general comment globally, and you would expect domestic US welded volumes to pick up at a more rapid pace?

Is that where you see the mix shift?

German, you want to comment on this?

Yes, I think in generic terms the comment of volume was applying to probably the global level, consistent with what Alejandro in fact was referring to was a much more vibrant Middle East and so on.

Now, back to the US specifically welded that probably no, we don't see these as recovering as fast, and the reason behind that is precisely the low-end nature of -- by and large, the low-end nature of the existing inventory that we have in the States, which is in fact affecting our low-end welded sales in the States.

So, the average price decline that you would expect is a function of a flow through of sort of pricing from prior periods rolling through, not -- but on the leading edge, what are you seeing for leading-edge prices?

Is it stabilizing like we're seeing in a lot of the publications, or is going up a little or going down a little, still?

No.

I think that the perception that we have today is that they are stabilizing.

I think we are at a situation where in terms of pricing on today's orders or on today's contracts, we see a stable environment.

And I as I mentioned before, what we're going to see in terms of our actual revenues is the effect of these prices flowing through the system.

That's helpful.

And then, as a final question, you mentioned the impact of sort of the Chinese imports and that whole US inventory/pricing complex sort of affecting the rest of the world.

I mean, is there any discussions between you and customers as far as how you price some of the international jobs and making it sort of somewhat less reliant on Price Logix and the dynamics of the US market, as the world evolves?

Do you see any of that?

Well, as I mentioned, these are different degrees, and sometimes we have price based on Pipe Logix.

Sometimes, we have prices which are based in terms of the costs?

Let's say some of the main factors in the cost.

It's a different mix, let's say, in the whole range of contracts that we're seeing.

But I would like Alex, here, if he can give us his views in terms of this type of discussion you are mentioning.

Yes.

On regards to Pipe Logix, as we mentioned in previous conference calls, it's clearly a reference, because of the high volume that is embedded in the North American market, it's a reference for the international, but it's not, as Guillermo said, considered 100%, as in Pemex.

It's one of the indicators used and it's much more relevant in cost impact than the Pipe Logix in our point.

Thank you, Alex.

That's very helpful coverage.

Thank you.

Thank you very much, Stephen.

Yes?

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

Please proceed.

Yes.

Good morning.

I have actually two questions.

The first one is related to China and the question will be if you expect increased competition in other areas of the world that could be receiving the production that was destined to the US.

And the second one is, you mentioned earlier on the call potential consolidation opportunities and not expecting a very specific answer, I was wondering if you could give us an idea regarding potential segments or geographic areas that you could be thinking about.

Thank you.

Well, in terms of China, Ricardo, in terms of spare competition, I think that what we have seen is a model in China that they have increased, let's say, their capacity.

They have invested in increasing their capacity.

They have increased in the low end.

They have gone to the markets, to the international markets, and they have gone to the international markets, let's say, with no market principles.

We see that they play with an undervalued currency.

We see that they are highly subsidized.

We see that they have a 13% tax rebate on their exports, and actually I think that we believe this is not going to be a sustainable level, and what we're experiencing today is trade cases from the industry against them in many regions.

So, we are not talking only about trade cases in the US.

We have seen trade cases with final determinations in Europe.

We have seen trade cases here with final determinations are underway in Canada.

We have them in Mexico.

We have them in Argentina.

We even have some in Russia, so I think that is pushing the Chinese maybe a little bit backwards in terms of their export capacity and in terms of playing the way that they are playing.

We don't believe that they have a cost competitive advantage versus where we are today, and we are basically -- we are a lot taking actions in order to continue to differentiate our products.

Now, having said that, when we hear the rest of the world, the international world, up to today we have not seen an increased activity above what we have seen in the past.

We are not seeing a level of increased activity.

Let me see if Alex has a little bit of more of a perspective on this.

I fully agree with what you've said, Guillermo.

On the international, we see them still very active in the low-end side at the same level that we have seen them in the past, and we have also to consider that with a stimulus plan of China, the economy has required a lot of production for the domestic market, not only in terms of OCTG, but mainly in the structural pipes, so this is also keeping a lot of the capacity of China for China.

Thank you, Alex.

In terms of your second question, Ricardo, which is consolidation, as you know, as you are aware, we have been a consolidator in the market.

We have played the consolidation.

We believe in the consolidation of the market and we continue to try to see opportunities.

And the way that today the market is structured and the supply is structured, I think we cannot go into terms of discussing regions, etcetera, because when we define a region, we define basically a player, so to speak.

So I think that at this point in time we're not in a position, as you can understand, to say that.

We also have a perception, and I would like to express this, that we're going to see consolidation internally in China.

I think that China, which is very fragmented, we're going to start to see a restructuring of the industry and a consolidation in there.

Okay, thank you very much for all of your answers.

Thank you, Ricardo.

And our next question comes from the line of Stephen Williams from Simmons.

Please proceed.

Yes, thank you.

Just quickly coming back to the pricing lag, assuming that pricing stays stable from here on in the market, in which quarter roughly do you expect that to be finally fully reflected in your reported results?

I think that probably by the half of 2010.

Okay, thank you.

And just following on from that, if or when the market tightens further and we start to see leading-edge pricing increasing again, do you get the same lag effect, or can your pricing be more responsive on the way up, given that I guess your backlog is a lot thinner now than it was when you were selling things at peak pricing and waiting for it to come down?

I think that we are going to see the same lag effect, and I think you have experienced that.

Maybe, as you say, we can have a shorter time, but in terms of the way we sell and in terms of the structure, for example, as Alex was saying, in terms of Aramco, the tenders we're going to be seeing today we're going to be shipping in the first half of next year.

So, it's a process that depending on that you can take six months, you can even take 12 months in terms of seeing, so we're going to see a gradual.

Let me see what German thinks in terms of how he sees in the US market?

Well, correct, Guillermo, and this is also consistent with our alliance model of multiproducts, multi-year sourcing schemes which in fact are aiming at synchronizing drilling programs to production programs, reducing to a maximum level inventory in between, and therefore extending the lags slightly longer than usual, given that we're all aiming at avoiding inefficiency components in the supply chain, in the form of inventory.

Thank you, German.

Okay, thank you.

And our next question comes from the line of Alessandro Abate.

Please proceed.

Good afternoon and good morning to everybody.

Just a few question.

The first one is that referring to your record this morning that basically states that there is the risk of the high US gas working as in storage, basically [inaudible] sustainability to the gas price momentum.

Is it true?

And, basically, what magnitude of risk do you see going forward?

The second one, just trying to ask you to quantify the inventory level in June of OCTG in the US, as of October, if you can?

And, basically, if you see -- which area you see more at risk from the fact that countervailing duty and probably anti-dumping measures will be implemented in November as far as Chinese OCTG exports are concerned in areas outside the US?

Thank you.

Well, thank you, Alessandro, for your question.

I think since we're touching mainly the US market here, I will ask German to give us a little bit his opinion in terms of the gas situation and the inventory levels?

Number one, the gas price and relation to drilling activity.

I think we're saying something that is widely known.

Gas rig count in the States has only increased by about 10%, even, or not even 10%, from the pick that we saw late last year.

And then I think it's also fair to recognize that a big piece of that increase in rig count, or level of activity, is driven by gas shale drilling, which is somehow associated to the need to keep the permits in place.

So, we've seen that here's some drilling going on, but in some instances, no completion takes effect, and this is nothing else but the associated to the pricing environment that we see for gas, the level of inventories that we are seeing in storage and naturally the consumption dimension, in particular, the industrial consumption of natural gas.

We don't expect a major recovery anytime soon.

I think it is all a condition as to how the economy evolves in the States and I think even the unemployment numbers today suggest that we are going to be in this path for probably longer than what we initially as industry anticipated.

Now, with respect to inventory, I can tell you that we -- as I was saying, had about 2.2 million tons at the end of September, and, as we indicated before, we would notice an absorption of about 450,000 tons, roughly speaking, during the quarter, so rough numbers we were probably looking at about 2.6 or so million tons at the end of June.

Now, it is important to highlight that that inventory is by and large made of Chinese imports of low-end material.

Now, with respect to the last question of effects on results of our anti-dumping and countervailing, we want to take a cautious approach, because the case is not yet resolved.

And, yes, yesterday we have a positive news associated to the anti-dumping preliminary determinations, which went from about 35.6% up to 99%, but this is all at the preliminary level and we would not have a final determination before the end of December.

Now, the view -- and I will probably repeat something that Alejandro indicated earlier, but the view of ours is that if the case were to be successful, well, most likely than not, the Chinese would try to find a home for the low-end production in the typical low-end fields, and we see some portions of the Middle East, some portions of Southeast Asia, to some extent also some spaces in Russia, but then it is also true that the Chinese domestic demand has increased in a very considerable way.

Thank you.

Just a follow-up question, if I may.

Relative to the shale drilling and basically the mix of high quality and -- that you actually announced coming to the market from your seamless pipe production that it seems to be averaging around 53% out of the total seamless pipe you're selling, do you think you're going to keep the same rate going forward in 2010?

Thank you.

I think that when -- going forward, and with volume increases, we probably are going to see some reduction in terms of the mix, in terms of the high-end mix versus total mix.

We are going to see an increase in the overall, and we're going to see an increase probably in low and high end, and probably we expect to see a bit more of an increase in the high end, but percentage wise think we're going to see a reduction, moving in terms of filling up our capacity.

Okay, thank you very much.

Thank you very much, Alessandro.

Our next question comes from the line of Filippo Prini, from Banca Leonardo.

Please proceed.

Good morning, everybody.

I've got one brief question.

Could you give us an update about timing and complexity of your restructuring plan in your Italian facility, maybe talking about personnel situation?

Thank you.

Okay, thank you for the question.

I think here I will ask Ricardo to give us a little bit of an overview in this situation.

Ricardo?

Okay, thank you, Guillermo.

As you probably know, we have been under negotiation with the unions and the Italian government in order to implement a very important restructuring plan for our Italian facility.

Regarding the timing for this, we are under discussions with the government and the unions, and we at this time that we can finalize or define our plan by the end of this year, first months of next year.

Of course, the implementation of the plan will take a longer time.

That will go through 2010, 2011.

The plan means a restructuring of the production facility, means a reduction of the workforce.

There, we will have the support of the Italian government with different plans that will have a big reduction.

And, of course, the plan means also a new capital expenditures for the Italian facility, that for about $170 million.

That will take place during 2010, 2011.

Yes, thank you, Ricardo.

This is a plan in order to improve the competitiveness of our line of products in Italy, to improve the high-end percentage we can produce there.

And it's a full package that is being presented to the government, so it's a package that includes investments, it's a package that includes restructuring.

It's an important restructuring.

We're talking about one-third, probably, of our personnel there, which we believe is going to strengthen our position in Europe, no?

Okay, thank you.

Very helpful.

Thank you very much, Filippo.

And our next question comes from the line of Rochus Brauneiser from Kepler Capital Markets.

Please proceed.

Yes, hi, good morning and good afternoon.

Just a quick follow-up question on the order situation.

You were mentioning that you started to see some improvements on the order side, on the volume side, in the third quarter.

Could you give us kind of magnitude of the increase, how much it went up, or a book to bill number to see how things are progressing there?

And maybe can you give us some of your rather deep volume situation, more than volume situation you're now facing for the fourth quarter, if it's now better than you had expected a quarter ago and on the inventory levels you expect to see to decline further over the next two quarters, I think if I remember correctly previously you expected to see in this first quarter, so how does that fit together, and at what kind of volume levels you expect the market to end up in terms of inventories at the low point?

Well, in terms of the -- in terms of the order side, I think that if you remember during the last conference call, we were expecting the inflection point to be really on the fourth quarter, more than on the third quarter.

So I would have to say that it's a little bit of good news in terms of what we're seeing today.

We were expecting at that time maybe still to see a little bit more of reduction in the fourth quarter.

Now, we're expecting to see an increase in our volumes for the fourth quarter.

We're not talking about substantial.

We're talking about a limited, but we see an inflection, and especially I think more important is that w start to see strengthening of our order backlog for the first half of next year.

So this is what I would mention in terms of the order situation, no?

In terms of the inventory, I will ask German here again to tackle that, because that's very much in terms of how we see the situation in the US, and inventory in the US?

Thank you, Guillermo, and this is important to probably highlight, because the inventory, as such, is a US and Canada phenomenon, by and large.

As we indicated at the end of September, we saw roughly 10 months, slightly over 2 million tons, and we're expecting in the coming quarters the absorption to continue, probably at a slightly lower pace than the one we saw, 440,000 in the quarter.

Going forward we'll expect in a relevant number slightly below that.

The reason behind is clearly the inventory is by and large made of low-end applications, and this is consistent with something that we have described before, in terms of holes in the inventory of high-end material, which is in fact allowing us, all of us as an industry, who maybe (inaudible) compared to what it was six months ago.

Okay, so at the end of the day what you're saying here is that it means when you look at the US market as a whole, then obviously in terms of the demand and the volume shipped in the market, the percentage of higher-end product must have gone up significantly in relative terms?

Well, not really so, because what's happening is in absolute terms, apparent demand is hitting historic lows and the inventory absorption is in fact another reason for that.

Now, we typically get to say that we need to see about five months' worth of inventory on the ground to reach what we would define as restabilization level.

This is more or less the historic number that the US industry can work for, or would work with in the last many years.

But probably you're right in terms of what we see is the holes that we're experiencing in the inventory in the States are mainly much more oriented to high end than to low end.

So when we start to see apparent demand moving closer to real demand, we start to see it happening much more on the high end than the low end, and it's going to take a little bit more months of cleanup for the low end to follow that, so I think that's a situation we're going to be seeing.

So, next year we probably are going to start to see a better performance in terms of apparent demand moving closer to real demand.

Today, there has been a huge inventory because there are huge differences because of the inventory reductions and the inventory levels that we're placing in that market.

Okay, that makes sense.

Maybe a final one is can you give us an update in terms of the utilization rates you're facing in your welded business in North America and internationally on the seamless side?

Let's say October, November now.

Utilization rates in welded went really down.

I think they went down almost to below 15%.

Today, we have been going up a little bit above 30%, I think, in terms of the welded situation.

In terms of the seamless, I would say that we are today operating at around a little bit higher than 50%, 50% something, and that's more or less the level.

Okay, perfect, and then just a final one.

In your third-quarter results, I guess you mentioned that your seamless business was benefiting from product mix improvements in the quarter?

Can you maybe give us a little bit of light where that was coming from?

Well, no, actually what we have seen is that I think the high-end side of the business has been much more resilient than the low end.

And so actually what we have experienced is that the reduction in the market or the decrease in the demand has been higher in the low end than the high end, and that has meant that our mix has improved.

Okay.

Okay, fair enough.

Thank you.

Thank you.

Thank you.

And our last question is a follow-up from the line of Ole Slorer from Morgan Stanley.

Yes, thank you very much.

Just one question back to Latin America again.

Could you give us a little bit of an update of what's happening in Venezuela and Colombia, Ecuador, that region?

We're getting some more positive signals there from some of the other big oilfield services companies that had have reported.

Maybe particularly on Colombia.

Could it be that if there is some disruption in drilling in Mexico next year that you get an opportunity to instead ship to those markets?

Or how do you see that region play out?

It's a good question, Ole.

Thank you very much.

I think we can go and go a little bit through the different regions, or the different countries in Latin America, and have a little bit of a [slide], and I would ask Alex to work us through, maybe starting with Venezuela, Alex.

Okay, yes.

Regarding Venezuela, we have seen that they have also bottomed out in terms of apparent demand.

They were not ordering, mainly because of financial constraints.

Now we see them that they are starting to pay, mainly to the international requirements.

And we are seeing that they are also with very low inventories, so we are expecting a recovery in activity, although not in number of rigs, yes on procurement.

In terms of activity in Colombia, we are also seeing the activity picking up, and what we in fact have extended our long-term agreement with Ecopetrol through 2013, so we are very optimistic on Colombia.

In terms of Argentina, although the situation is not as good as we expect, there has been a slight recovery in the rig count, due to the oil flats and gas flats incentives.

Regarding Brazil, we are seeing a delay in the decision-making process for the big project.

That's why we think that there is going to be an impact in our project segment.

But we are still working very hard in the high-end welded pipelines with the Tupi.

Now we are executing the contract of 22,000 tons.

We are moving ahead with increased volume in the OCTG agreement in the welded, heat treated and non-heat treated portion, and we are discussing in increasing technology, increasing news of our Hydril connections for the most demanding applications and we are having very good technical meetings with the Petrobras team to explore new opportunities.

Hydril, you say Hydril with Petrobras.

Does that mean that you're breaking into the Brazilian OCTG market in seamless, or you're threading vamp -- Vallourec pipe?

Yes.

In terms of technology, you know that Petrobras knows very well Hydril technology.

They have been using this in West Africa and in US, and they will be interested in using our technology, cutting our connections there.

On Vallourec pipe?

Could be, and we are talking about technology.

Remember, we are cutting Vallourec threads here in our pipe in Mexico.

Well, I know how you feel about that, so I'm just happy to hear that you can do the same thing down there.

Thank you very much, Ole.

Thank you.

Bye-bye.

Thank you.

Thank you very much to everybody.

This concludes the question-and-answer session for today's program.

I would now like to turn the presentation over to management for any closing remarks.

Well, thank you everybody for participating, and see you next quarter.

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.