Tenaris SA (TS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to First Quarter 2010 Tenaris Earnings Conference Call.

My name is Marisol.

And I will be your operator for today.

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

We will conduct a question and answer session towards the end of the conference (Operator Instructions).

As a reminder, today's conference is being recorded.

I would now like to hand the presentation over to Mr.

Giovanni Sardagna, Director of Investor Relations.

Please proceed.

Thank you, Marisol.

And welcome to Tenaris 2010 First Quarter 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 the 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 Chief Executive Officer, Guillermo Vogel, Vice President of Finance and member of our Board of Directors, Ricardo Soler, our Chief Financial Officer, German Cura, Managing Director of our North American operation, and Alejandro Lammertyn, our Commercial Director.

During the first quarter of 2010, sales decreased 33% to US$1.6 billion compared to US$2.4 billion recorded in the first quarter of last year and 11% sequentially.

Our EBITDA reached US$435 million, which was 46% lower than the corresponding quarter of 2009 and 5% lower sequentially.

Our EBITDA margin at 27% was down six percentage points from the one posted in the first quarter of last year, however, has increased two percentage points from the one posted on a sequential basis, as lower costs resulting from operational efficiency offset lower selling prices.

Sequentially, our seamless sales volumes decreased 4%.

But our welded sales volumes, excluding projects, increased 34%.

In North America, we continued to benefit from the improvement in terms of apparent demand as activity levels are recovering and pipe inventory levels are at more normalized levels, around five months.

In the international markets, we were affected by some shipment delays, as anticipated in the previous conference call.

However, we will start to see stronger shipments, particularly to the Middle East and Africa, starting from the coming quarter.

Average selling prices continue to decrease.

They were down 23% compared to last year and 8% sequentially.

During the quarter, our sales of high-end seamless products were 45% over total seamless volumes compared to 48% recorded during the first quarter of last year and 46% recorded in the fourth quarter of 2009.

Our first quarter results were negatively affected by a significant decline in the results of our projects operating segment, where quarterly sales were lower than at any time in the last three years and are not expected to recover before last quarter of this year.

During the quarter, our cash flow from operations remained strong.

And we reduced our working capital by a further US$120 million.

The cash flow generation during the quarter resulted in increase in our net cash position of over US$270 million to US$950 million.

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

Thank you, Giovanni.

And welcome, everybody, for participating in our conference call.

As we mentioned in our recent Investor Day, we are seeing a recovering activity in our sector.

Our incoming orders continue to be higher than our shipments.

And our industrial system is getting close to 70% utilization rate in our tubes segment.

Shipments in our project segment on the contrary are at very low levels and will remain there until the fourth quarter.

In the US, thanks to this recovery and the action taken against an unfairly trade of imports, I'm pleased to say that we have hired back more than 1,000 people since the beginning of the year.

We perceive that thanks to the progress in the recovery in the global economy, the oil companies today are confident that oil prices will remain in near present levels.

And this is leading to a gradual increase in oil drilling activity worldwide.

Natural gas prices have been declining in North America.

But in my view, over the medium term, the shift in the energy metrics to natural gas is inevitable.

And demand will increase over time.

In the worldwide recovery in drilling activity, we see a shift towards more demanding applications that require more complex product.

The name of the game for this application will be quality, reliability, and environment.

We think that Tenaris has a competitive advantage on these grounds.

For example, the increase in demand in the Middle East has been driven by sour and deep gas drilling.

In North America, drilling in the shales compared to more conventional drilling involves deeper and longer horizontal wells able to withstand higher pressure.

This will require more reliable products.

In the coming months, we will face further cost increase in our main inputs.

We expect pipe prices to react to this cost increase over time.

Our cost will also benefit from efficiencies associated with the continuing recovery in production level.

Accordingly, as we stated in our Investor Day last month, we expect that we will maintain our operating margin throughout the year.

The coming months, we will put into operation several investments, a new premium threading facility in Saudi Arabia, new finishing lines in the United States, a major upgrade at our Dalmine mill in Italy, and a new rolling mill in Tamsa in Mexico.

And in July, we will move our east hemisphere headquarters to Dubai.

As a whole, I feel that Tenaris is well positioned to catch the opportunities offered in the post-crisis environment.

Thank you.

We're now ready to take questions.

Thank you.

(Operator Instructions).

And our first question comes from the line of Paulo Loureiro from Morgan Stanley.

Please proceed.

Good morning, gentlemen.

Couple of questions here.

First, Middle East and Asia sales are down about 40% sequentially.

And I think they reached a record low of about US$250 million.

Can you explain exactly why?

I know you've talked in the past about shipment delays to Kuwait and other places.

And can we expect a spike in shipments going forward and go back to more normalized levels, about US$300 million to US$400 million?

Thank you, Paulo.

We will -- I will ask Alejandro Lammertyn to answer this question.

Yes, Paulo, as we have been anticipating, we have the backlog of Middle East in our plans.

But the shipments were delayed.

And we are expecting higher shipments that will compensate this reduction in this quarter in the coming quarters.

The activity in tendering and orders of the Middle East have improved.

We have talked about Saudi deep gas, sour gas, where we are actively present.

And we will be prepared to supply in the future from our facility that we are starting in May.

We have talked also about Kuwait, where we have been -- taken a substantial share of the segment of the deep drilling.

And we will participate in the coming tender that we are expecting.

And also, we are very active in Iraq.

Iraq is coming.

We have been successful in the BP tendering process through the IPM contractors.

And we have taken a substantial share there.

So we are very confident that in the next couple of quarters you will see a big reaction reactivity in the Middle East.

Okay.

Thank you.

A follow up on something else actually -- your mix between welded and seamless deteriorated during the quarter.

However, your margin improved by about 200 basis points, as you mentioned.

How shall we reconcile those two things?

Is it better pricing, lower cost or just the absence of slow inventory adjustments this quarter versus the US$25 million that you reported in Q4?

Can you help us understand?

Yes.

Thank you, again, for the question.

I think we -- you correctly stated we had a larger proportion of welded pipe during this quarter.

But the margin increases in both seamless and welded and as a result, you see this increase in our margin in the EBITDA margin.

Now as far as the -- our prices went down.

Also, our costs were down.

But our costs in this quarter were down a little more.

I will ask Guillermo to comment on the evolution of cost during this quarter.

Yes, thank you, Paolo.

Yes, I think that when you see our improvement in margins this quarter, they were mainly driven by the fact that our average cost per ton decreased higher percentage wise than the effect we have in our decrease in the average prices.

This happened mainly in both sectors, in the seamless and in the welded sector.

And there were three main factors behind this evolution.

First, we had more -- we gained some operating efficiencies because we are starting to have a higher production level in terms of that we're seeing this increase in demand that was mentioned before.

And that's having a positive effect.

Another effect that we had in difference to the previous quarter is the allowance for obsolescence.

We had a negative effect last quarter.

And this quarter, we had a positive effect since we used some of the products that had been in that sector before.

And the third effect is the FIFO effect.

We were using materials that had a positive cost, were not affected by the price increases that we're experiencing today.

So these three effects had a very positive final effect in our results.

If we see moving forward, I would say that in terms of the efficiencies and in terms of the FIFO, we continue to see these affecting our results for this coming quarter.

And probably, we will see an inflection point in terms of the higher cost of the inputs starting on the second half of this year, where we expect that the dynamics on the prices should offset this increase in the costs.

Thank you.

That was very clear.

I'll hand it over now.

Before we continue with our question and answer session, we would like to address that today's call is for analysts and investors.

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

Please proceed.

Hi.

Thanks.

Can you just talk about what you're seeing in your orders and in your backlog to help us better understand how mix should progress as we move through the next three quarters?

I would assume this is the low point of your mix or potentially 2Q being the low point of the mix as welded is probably still doing pretty well.

Well, thank you, Dan.

I think that when you look ahead, first of all, you see an increase in our shipments due to the increase in demand.

Now this increase in shipments is affecting all the segments of our business.

On one side, the main factor probably is the United States.

We see here increase in demand for welded and also associated seamless.

But I'll say that increase in the shipments of welded is something that we clearly anticipate for the rest of the year.

Internationally also, we are seeing increasing in the demand, the volume increase.

And this will be driven by high-end product but also by what we call low-end product API.

So I wouldn't say that will be a dramatic shift or dramatic change in our mix in the balance between let's say the low-end and high-end products.

But there will be an increase in volumes in North America but also elsewhere.

Okay.

Thanks.

And then on the margin question, I understand there's some moving parts in the quarter.

But margins at least from us came in a little bit better than we were expecting for the first quarter, likely due to the things you addressed of maybe fixed cost absorption here in the US and the FIFO impact.

But going forward, I'm a little surprised that you are now more bullish on margins going forward and that I would think that there would be an expectation of further improvements from here?

Are you just being cautious in your guidance?

Or are you seeing -- is the -- the one thing we have a tough time gauging is the impact of the raw material cost inflation.

Is that something you've seen it just has been much greater than you expected since the last conference call?

Well, in last conference call, I would say that we were -- at that point, we had an EBITDA margin that was in the range of 25%.

We say, well, still for the 2010, we expect as a whole our margin to be in line with the margin we had in the entire year in 2009.

So we were saying there will be some recovery in our margin.

And this is what has happened.

In this quarter, we are up to 27%, first quarter.

We are not anticipating a dramatic increase.

What we are saying is we expect the entire year to stay more or less in line with what we have seen in 2009.

And if you look at this, it doesn't mean a dramatic change.

Why?

Well, because, on one side, volume is increasing.

But on the side of the cost, we will feel the impact of the increase in the iron ore and scrap and ferro-alloys that we know will affect our purchases.

On the side of the price, we think that we should be able to transfer this increase in the cost to -- in our prices.

And this is what we expect.

We expect prices to increase.

It's not so easy to see how prices will be, especially in the second part of the year.

In my view is -- pipe logix is increasing.

You see every month it's reflecting increase in the cost and increase in demand.

But I would say again, which was my forecast, we can expect as a whole our margin to remain more or less in line with for the entire year with last year.

Okay.

And then just so I can follow up on the moving parts, just so I completely understand, you expect cost increases at least in the second half of the year to be fully offset by price increases.

And any upside to margin would likely come from an improvement in mix.

But at this point, you see overall volumes improving but not necessarily an improvement in mix, correct?

Not necessarily, you're right.

Now increase in volumes implies increased efficiency for us.

I mean, a higher level of production should allow us to reduce cost.

And it's more difficult to see if we look in the second part of the year.

There are factors affecting the economy, the oil industry.

And also the natural -- the price of natural gas in the United States may drive some reduction in rigs in the second part of the quarter.

So it's more difficult to have a precise forecast on our margin.

Got you.

That's helped, and then just one follow-up clarification is, can you just tell us what the positive effect of the inventory adjustment was this quarter?

We know what the negative impact was last quarter.

But what was the positive this time?

The positive that you see now in our balance sheet is net US$20 million, I think.

Thank you.

I'll turn it over.

Is correct Ricardo?.

Yes.

It's correct.

Yes.

Thank you.

Our next question comes from the line of Frank McGann from Bank of America Merrill Lynch.

Please proceed.

Yes, good day.

Just two quick questions if I could, one is just in terms of iron ore pricing and how that affects your contracts now that there'll be more frequent adjustments in iron ore prices.

Are you changing the way you set prices in your contracts so that you will get adjustments more frequently?

And then the second question would be just in terms of what you're seeing from the Chinese.

Given more limited access to the US and Europe, are you seeing more competition in other markets?

And how do you expect that to play out over the next couple of years?

Well, you are right that the change after fourty years of the way of setting the prices for iron ore will introduce volatility in our industry and in other industries.

The prices will be fixed every quarter based on the previous quarter spot prices.

This means that trends could be stronger movements one quarter to the other.

We are aware of this.

We explained this to our client.

And we are driving our contracts, taking into consideration the more volatile -- the volatility introduced in our cost.

I think we can shelter, let's say, and defend our margin, even in this environment.

But obviously, this will imply some more difficulties for forecast of cost, and so on the part of the industry as a whole will affect to some extent.

The second question is exports from China.

You're right.

The exports from China is severely affected by the action against unfair trade pipes in the United States, in Canada, in Europe, and in other countries in the rest of the world.

But this doesn't mean automatically that this volume of export is going into other markets.

For instance, if you look at the exports from China, the volumes went down from the 3 million I'm talking about, oil country tubular goods, in 2008 to 1.5 million in 2009, almost half.

And in the first months of this year, we see additional reduction in the range of almost 40%.

They find it difficult to have access because of product qualification.

The complexity of some of the market, because the US market is mainly also low end to a large (inaudible).

But when you go to Middle East, you're talking about high-end market.

And access is limited by this.

I don't know, German, if you want to add something on the US.

But I think --

No, not as much, Paolo.

I think you precisely made a point that I was going to go forward.

And that is that the whole nature of the bulk of the Chinese exports were of low end characteristics.

And yes, Canada, US are now viable markets.

And therefore, they're reducing their exports in a substantive way.

Thank you.

Okay.

Great.

Thank you very much.

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

Please proceed.

Good afternoon to everyone.

Paolo, just two questions, you spoke about capacity utilization rates expected for the tube segment at around 70%.

You think you can give us a split between welded and seamless.

And the second one about the possible correction in the rigs count for gas drilling, is it possible that actually the high-quality grade required by shale gas in terms of margin will offset any kind of likely correction in the rigs count?

Thank you.

Thank you, Alessandro.

As I'm saying, the utilization is rising around 30%.

In welded, we're probably in the range of 50%.

This is also due to some stoppage that we are undertaking now for commissioning, finishing line, and in our plant.

It will be in this range, slightly going from 50% to 60%.

In seamless, we are probably getting closer to 80% between now and the coming months.

I'm using utilization -- the level of production of 2008 as our capacity, let's say.

I will ask German to enter into the question of what could we expect from the evolution of gas rigs in the second part of the year.

Well, a few comments on that, Alessandro, naturally, gas rig count is one that we're looking very closely and we're very cautious about.

I think in generic terms, more than shales, oil rig count is offsetting a substantial part of that potential adjustment.

We've seen today record levels of oil rig count when compared to the past.

The US has become almost a 65% gas, 35% oil, substantially different from where we were only a couple of years ago.

Now within the gas rig count, we typically split this in three dimensions, simplify maybe say two.

Shales are driven by -- exposed to price for sure but then again driven by the need to drill associated to the permit and then also the notion of accessing the liquids together with the gas that improves the overall economics.

We're naturally looking very closely the conventional gas.

This is the area where we believe if it's an adjustment it would deploy very rapidly.

And as we advised or guided in our conference call, we sense that we're going to need to get to be 100 before we see any material impact at the demand level.

Thank you very much.

Thank you.

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

Please proceed.

Yes, hello, everybody.

Thanks for the call.

I have two questions.

The first one is surrounding the projects building business.

Which are the trends that you foresee beyond weakness than you anticipate in the next few quarters?

How do you see that prospectus evolving in 2011 and driven by what?

And my second question is regarding your cash position.

You have a significant net cash position that possibly likely to remain engrossing itself.

And over the next two years, basically in spite of the large investments that you're forecasting, so basically which is your idea regarding the levels of cash that you would like to maintain from a midterm standpoint?

Thank you very much.

Thank you, Ricardo.

On the project business, our project business is mainly based in the southern cone and in Argentina and Brazil, driven mainly by the activity of Petrobras.

And that's the reason why in these months we -- there's been delay in some of the projects.

And we are at a record low in terms of shipments and also in terms of order intake.

Now the situation has changed.

In the second part of the year, we will start getting important orders.

One order for the Camisea project should be in our book very soon, is quite important in the second part of the year, is for exports from Brazil to Peru.

Petrobras -- after this is an electoral year for Brazil.

But we expect Petrobras to speed up some of the projects in 2011.

And this will drive our demand for pipelines that for sure are in the range of our projects division.

This is the first question.

The second question concerning cash, it's true that during 2009 we have been able to produce substantial cash flow.

And we're continuing to do so.

Now this year, there will be a higher level of CapEx because we are undertaking a comprehensive investment plant.

The substantial component will be the Veracruz plant that is scheduled to be commissioned in November this year.

But also, in the other industrial facility, we are realizing investments that are positioning Tenaris for this -- for what we see ahead, an environment driven by quality, by reliability, by environment compliance on our product.

And so we're investing to prepare and to position us there.

Also, we will distribute dividends.

And then we will keep all of our options open.

Okay.

Thank you very much.

And if I may ask a follow up on the -- if you can refresh us on the estimated amount of CapEx for this year and next one.

For -- this is Ricardo Soler.

For the remaining of the year, we understand that we're going to spend around US$850 million.

Okay.

US$150 million?

Excuse me, US$850 million.

No, the number is US$850 million from now on, let's say, in the coming three quarters.

Okay.

Thank you very much.

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

Please proceed.

Good afternoon to everybody.

I've got two brief questions if I may.

First one, is it reasonable assuming that tube prices could start to increase sequentially since the third quarter of this year so they have a bottom of price of tube could be found in the next quarter?

And the second one, forgive me if I got back too early the answer of the question.

But just to be clear, is it correct that your operating margin on average in 2010 will be roughly in line with the level achieved in 2009?

Thank you.

Yes, thank you, Filippo.

The -- in fact, we expect our prices and our costs to have an inflection point by the end of the second quarter.

And so in the third quarter, we should see an increase in average price of our tubes segment.

The second question, you're correct.

It's what we stated in the Investor Day.

And we are confirming now in our remarks, in our prepared remarks, we expect the margins to stay more or less in line as a whole in 2010 compared to 2009.

Okay.

Thank you very much.

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

Please proceed.

Yes, hi.

Good morning.

Just a brief follow-up question on the pricing, maybe could you give us a more specific update how the pricing environment is currently evolving in the US and elsewhere.

Are the international markets now catching up?

And by when do you expect that the price increases are able to match the cost increase we are currently seeing in the market?

And secondly, related to that, if you take the current spot cost for raw materials as a baseline, by when will be those cost increases fully affected in your P&L?

And maybe finally, could you also comment a little bit on the sequential decline in sales of the South American tube business?

Yes, thank you for the question.

First, on the question of prices in North America and our ability to recover in prices, the anticipated increase in our cost for hot rolled coils and for the other the inputs, I will ask German to comment on this.

Very briefly, we've seen prices in North America evolving.

We made public announcements of price adjustments to compensate for the cost increases that we had and we anticipated in the past few months.

Pipe logix is also reflecting that.

We've seen in last four months pipe logix adjusting up every month, overall reaching a level of -- accumulated level of about 8.5%.

We do believe that as a result of this picture, of course, push as well as increased demand, we will see or we're going to continue to see prices appreciating in the coming months.

This is particularly true for a portion of the items that are in fact not available in the inventories, so on and so forth, more than the others.

But overall, I think it is fair to say that we will see prices moving up at more or less the trend that we've seen in the past few months going forward.

Thank you, German.

As far as international pricing, this is a different environment because international pricing is driven by, sometimes by products that are more sophisticated.

But I will ask Alejandro to comment on how you see pricing in the next -- in the future.

Well, yes, Paolo, on terms of international, we can say that we have gone through the round of renegotiation of prices that we do with our long-term agreement.

And we are already reflecting the increase of cost in those agreements.

In terms of the spot business for the tendering process, of course, with the demand picking up, an increased utilization of the high-end plants, we see room for improvement also in pricing in the spot business.

We see this activity going well but will be reflected as Paolo mentioned during the third quarter.

You have a second question on when the cost will be reflected in our P&L.

As we said in Investor Day, our costs will start to go up from the third quarter, gradually.

It will not be because we still have inventories.

And so the prices of the new inputs are getting in gradually into our FIFO accounting for cost.

But it will start in the third quarter.

This was -- you had a third question?

Yes, maybe just for clarification reasons on the pricing trend again, if I remember correctly for the contract price for OCTG products in the US, the price increase was about US$100 in the second quarter.

And when I look at the rise in raw mats, it will be about US$300 into the third quarter when the new third quarter coal and iron ore contracts are becoming effective.

So there's still a significant gap.

So is that something I can -- is this gap being closed already in the third quarter?

Or do we have to wait for the fourth quarter to see the full compensation for this cost surge?

This is more difficult to forecast because I don't think we have a clear idea.

But I will ask German if he has an idea of how fast, let's say, this process could be.

I imagine it will take -- it will get slowly.

But --

Well, there's usually a lag.

And we've seen it in the last pricing cycle as well as to when in fact the cost of raw materials is announced and when we in fact are able to realize the price increases to compensate for that.

Now you also need to contemplate the notion that our sales had a mixture of both mix -- sorry, mixture of spot pricing, where we have I think more than compensated the cost increases that were announced, and pipe logix, which still is lagging slightly behind.

Going forward, I believe those numbers are going to be more or less aligned -- consistent with the time that we've seen in the past.

Generic terms, we may be looking at a period of three to six months.

The last question was concerning South America.

South America we would expect Mexico to be very quiet and go down slowly because of the repositioning of the -- and the redefinition of the investment plan in Chicontepec.

So Mexico will probably, let's say, go down or be slightly below what we have seen in the past.

The rest of Latin America, I would expect positive trends because in the end Colombia is growing and is increasing the number of rigs.

Venezuela is increasing number of rigs.

Argentina is also recovering.

Brazil should maintain a good level of activity.

So in the end, I would expect some recovery in -- during along the year apart from Mexico.

I don't know.

In the case of Mexico, there is very important for us.

If, Guillermo, you want to add something what we can expect for 2010?

Sure, Paolo.

Well, Mexico, I think is happening what we mentioned a couple of conference calls behind.

Chicontepec is already -- we have already seen what we are expecting, which is a sharp reduction in the number of rigs.

I think we are around -- rigs, we're up to 75 rigs.

Now we're in the order of 35 or 37 rigs.

I think we have reached the bottom there.

I think that's where it's going to stay from our own information we have.

We are seeing some recovery in the rest of the activity.

I think overall Mexico is going to be operating around 120, 125 rigs.

I think that the result for us is that we might lose maybe 2,500, 3,000 tons per month from today to year end.

And we expect that to be -- to recover in next year when the source searching process that is happening right now in terms of Chicontepec is finalized and we might -- and we see some increase in activity.

Pemex is sending us messages that we might see some increase in activity in the second half.

But we see it more really happening effectively beginning in 2011.

Yes.

Now just to clarify, by the way, we consider Mexico as part of North America.

So it's not, let's say, strictly related to your question on South America.

If you look at South America as a whole, we expect I think some improvement during the year.

Okay.

That's very helpful.

Thank you.

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

Please proceed.

Hi.

Thanks for allowing a follow up.

I just wanted to try and get some guidance on tax rate to take a step off.

You'd touched on it in the press release.

But just how should we think about that going forward?

Yes, Ricardo, could you take it?

Yes, Ricardo Soler speaking.

Well, regarding income taxes, during this quarter, we have a very high tax rate.

We reached close to 34%, 34.7%.

This high rate is mainly due to the increase of the participation in our revenues and profit of our legal entity Tamsa in Mexico.

You know Tenaris being a consolidation of different legal entities, we are affected by the tax rate at each of our subsidiaries.

In Mexico, the government increased two percentage points the income tax rate for this year.

Therefore, Tenaris or Tamsa is paying a tax rate close to 37% for Mexico if we are to 30% the almost 7%, 8% that we pay for profit sharing, is statutory profit sharing that we pay to our employees in Mexico.

Therefore, the high income tax rate for Mexico, 37%, the high participation of Mexico in the profit of Tenaris for the quarter produced this increase in the income tax rate.

For the rest of the year, we expect to have a tax rate around 31%, 32%.

Okay.

Thank you Ricardo.

Thank you.

Our next question comes from the line of Frank McGann from Bank of America Merrill Lynch.

Please proceed.

Okay.

Thank you.

Just two quick questions again, one on Colombia, just in terms of infrastructure spending, I was wondering what you think the outlook is there for your participation and potentially building what could be some pretty important expansions of oil pipelines going forward.

And then labor costs, which were higher in this quarter than they've been in any quarter in 2009, and I thought maybe actually they would stay somewhat lower, given the headcount cuts that you had.

I was wondering what you think the outlook is for overall labor cost expenses during the rest of this year.

Well, one -- first, about Colombia, Colombia is committed to around of exploratory activity in different leases.

And we expect the activity to go up over time.

Ecuador is also planning for expanding the pipeline network to be able to transport the crude from the Llanos and from the center of the country to the coast.

So these, let's say, are the positive elements that we see during 2010 and in the coming, let's say, 2010 and 2011.

We are quite optimistic about the activity in Colombia.

As far as the labor cost, labor cost is high but is reflecting the appreciation of the currency in some of the countries in which we operate.

There's been appreciation in Argentina in an environment in which inflation is quite high.

And there has been salary increase in different countries.

There has been appreciation in Brazil and to some extent also in Mexico.

Guillermo, maybe you can comment on this, if -- how we see the perspective also of exchange rates for Mexico, what we can expect?

Well, I think the perception and the expectation in Mexico is that we're going to see a strong peso moving forward to the end of the year.

So I think we might see still some appreciation.

We had a small depreciation in this stage because of Greece.

But the perception is that we're going to see strong peso.

Okay.

Thank you very much.

Our next question comes from the line of Veverka Raphael from Exane.

Please proceed.

Good evening.

I've got one quick question.

You look overall quite confident that prices will increase from the second half to just compensate for the surging raw material cost.

I was wondering.

Does that also apply to the project division?

Or do you have some sort of multi-year fixed-price contracts on which the risk of the margins increase could be greater?

Thank you very much.

I think this will apply also to the project division.

In the project, the logic of pricing is different because basically we associate, we negotiate the cost of the plates or of the coils in line with the negotiation we have on the project.

So there is, let's say, an automatic hedge.

And we can -- we're more in control of the margin in the project business.

Yes, okay.

Thank you very much.

At this time, I would like to conclude the question and answer session.

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

Well, if there are no other questions, I would like to -- we would like to thank you very much for joining us in the call.

And see you in the next conference call.

Thanks.

Thank you for your participation in today's conference.

This concludes today's presentation.

And you may now disconnect.

Have a great day.