Tenaris SA (TS) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2012 Tenaris S.A.

Earnings Conference Call.

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

(Operator Instructions).

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

I'd like to turn the call over to Giovanni Sardagna, the Investor Relations Director.

Please, proceed, sir.

Thank you, Karen, and welcome to Tenaris' 2012 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 that our actual results may vary from those expressed or implied herein.

Factors that could affect those results include those mentioned in the Company 20-F and other documents filed with the SEC.

With me on the call today are Paolo Rocca, our Chairman and CEO; Guillermo Vogel, Vice President of Finance and Member of our Board of Directors; Ricardo Soler, our Chief Financial Officer; Alejandro Lammertyn, the Managing Director of our Eastern Hemisphere operation; and, joining us from Houston, German Cura, the Managing Director of our North American operation.

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

During the first quarter of 2012, sales increased 13% to $2.6 billion, compared to $2.3 billion recorded in the first quarter of last year.

However, as anticipated last quarter, they decreased 5% sequentially, as sales were impacted by lower line pipe shipments for HPI and pipeline projects in addition to lower OCTG shipments in Colombia and Saudi Arabia.

Our EBITDA for the quarter reached $704 million, which was 26% higher than the corresponding quarter of 2011 and 2% higher sequentially.

Our EBITDA margin continued to improve, reaching 27% due to lower raw material costs and plant allocation efficiencies.

Average selling prices in our Tube operating segment were up 8% compared to the corresponding quarter of last year but flat sequentially.

During the quarter, our sales of high-end seamless product remained stable, at 54% of our total seamless volumes, but are expected to be higher during the coming quarters of the year.

During the quarter, cash provided by operating activities was over $600 million, allowing our net cash position to decrease by just $65 million to almost $260 million after investing more than $500 million in Usiminas and almost $200 million in capital expenditure.

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

Thank you very much, Giovanni, and good morning to all of you.

This quarter, although our sales and shipments came in lower sequentially, we were able to increase our operating income and margin thanks to a more efficient cost performance.

In the coming quarter, we are confident that we can maintain this level of operating margin on a higher level of sales.

Our sales in North America rose 10% sequentially during the quarter and accounted for 56% of our Tubes operating segment sales and 52% of our total sales.

We have been improving our performance in North America at all levels.

This quarter, our Hickman mill in Arkansas produced a record level of heat-treated products.

Our McCarty premium facility in Houston threaded a record level of premium joints and our AlgomaTubes mill in Canada produced a record level of seamless products.

These production records were accompanied by a substantial reduction in the injury frequency rate in our US mills and reflect the investments we have made in the plants.

The increase in our North American sales also reflects product mix improvements.

With the recovery in the Gulf of Mexico and the expansion of shale activity, we are selling more premium products, and most of our welded OCTG products today are heat treated.

Our new Wedge 625 premium connection, designed specifically for complex shale applications, has had further success in the Eagle Ford.

In Canada, also, with the expansion of thermal projects, sales of premium products have increased.

This year the spring break up was earlier than last year but our sales during this quarter were significantly higher than the corresponding quarter of last year.

In South America, our sales were affected by the temporary renegotiation of rig contracts by Ecopetrol in Colombia.

Demand in Colombia has grown rapidly in the past few years, and we are confident that, with favorable conditions for investment and more than 80 companies involved in exploration and production activities, the market will continue to grow.

In Cartagena, we announced a $200 million investment program to expand the capacity of our mill to produce higher value products and better serve the Colombian market for welded and seamless products.

In the Eastern Hemisphere, our sales this quarter were affected by a low level of shipments of line pipe for offshore and HPI projects.

In addition, sales of OCTG to Saudi Arabia were lower following Aramco's restrocking of premium products last year.

However, in the coming quarter, we are seeing a good level of activity in the Eastern Hemisphere, and we expect higher sales during the year.

Our customers in North Sea are increasingly recognizing the benefit of using our Dopeless technology.

Over 80% of new orders for the North Sea are for Dopeless product.

The use of this technology is also advancing in other offshore regions such as sub-Saharan Africa.

Additionally, we received our first order in the Eastern Hemisphere for the new Wedge 625 connection to be used in Pakistan.

These products will account for an increasing proportion of our sales going forward.

Two days ago, we announced the successful results of our offer to buy out the minority interest and delist our Brazilian subsidiary, Confab.

This transaction, together with the investment in Usiminas, will strengthen our position to develop and supply the complex products required for the development of the Brazilian offshore industry.

In the whole, it has been a solid quarter based on strong, competitive positioning and good performance in our operation.

We can open now the floor for questions.

(Operator Instructions).

Bill Sanchez, Howard Weil.

My question revolves around the operating margin guidance here as we look through the balance of 2012.

Clearly, you guys had a nice pick-up here, better than we were anticipating for the first quarter.

And I'm just curious.

Given what appears to us to continue to be a much better product mix, which would help overall average selling prices -- I know you benefited from a lower raw material cost in the quarter.

What are we anticipating on the raw material cost side?

Is there an expectation that we see a build there, certainly, that, at least, matches the better mix that we expect from a pricing standpoint?

Could, perhaps, you just talk a little bit about your outlook from that perspective?

On the raw material cost, we do not see major change.

We assume some -- a level more or less in line with what we have today.

Maybe we will have some increase in the cost of hot-rolled coils that is reflected today in our inventory that will come in our cost of sales in the next quarter.

But this will not be, let's say, anything too relevant.

If we look in the rest of the year, also, my perception is that we will have an environment more or less in line with what we see today.

Now, the performance of our mill is improving.

And, also, the allocation of material, taking into consideration the new mill in Mexico that is a very efficient mill is improving in our cost of goods -- driving some improvement in our cost of goods sold.

And this is here to stay.

And, hopefully, also, it could improve over time, while investment -- we are taking full advantage of the investment realized.

Thanks for that color.

My follow-up would be just around kind of the geo-markets here, if you will.

You noted that you saw revenue up 10% in North America during the quarter.

I know Saudi OCTG shipments were down.

I'm assuming some of that perhaps was due to Siderca downtime that you saw in the first quarter.

But, as we think about the growing rig count expectations, international versus a more flat rig count outlook here in North America, should we start to see better contribution in terms of top line growth coming from the international markets as we move through 2012 relative to North America?

I would say that we are expecting a gradual shift into a more complex mix, even in North America, because the investment realized in premium, in heat treatment, in Hickman, will result in some improvement in our mix over time.

So we can expect this also in North America.

In terms of outlook, as you were saying, we expect some reduction in gas rigs be compensated by consistent increase in rigs devoted to oil.

And, during 2012, rig outlook could be stable.

But, in the medium term, we should consider even a gradual increase if the condition of prices for oil remain the same and if there is some recovery later in the year or in 2013 of the price of gas.

Internationally, we consider a gradual increase in the range of between 6% and 8% and also a continuous drive towards more premium product and environment.

As you know, we consider that the increase in deepwater drilling will also drive some increase in our mix.

So this is what we have, let's say, gradually getting into our number during the rest of 2012.

Okay.

And, just so I'm clear, is my assumption that the Saudi Arabia OCTG shipments being down -- ?

Was that a function of the downtime in the Siderca mill during the first quarter, or is there something else at

No.

I think the slowdown is a follow up of the strong stocking of Saudi Aramco.

But I will ask Alejandro to comment on the perspective of demand of activity and apparent demand in Saudi Aramco for the 2012 and 2013.

Yes, Bill.

As we have seen, Aramco has been purchasing-- tendering last year, and we have delivered all their requirements of deep gas during the last two quarters of 2011.

This has come into a stock buildup in Aramco.

We are going to receive and we are going to deliver during the next quarter but not at the same rate that we have been delivering in 2011.

We are also seeing activities in the new exploration areas, like deepwater Red Sea, where we have also been awarded.

So, in general terms, we are not going to see the Aramco that we saw in the last two quarters.

We are going to see Aramco at a lower level during 2012 because of this stock situation.

The rigs also have been stabilizing at the 130 rigs, considering also the workovers.

And we maintain this level.

We think that we are going to maintain this level in the future.

You are going to see also an increase in our sales in the Eastern Hemisphere and, particularly, in the Middle East due to Iraq, where we have -- the activity has been picking up and, particularly, ENI has restarted heavily in their survey operations.

We are going to deliver all their requirements through -- directed to ENI and through their service company.

Thanks again for the time.

I'm going to turn it back.

Ian MacPherson, Simmons.

I wonder if you could talk a little bit about your visibility for the volume growth that you see from Q1 into Q2 for seamless versus welded OCTG or even the projects, as well, and any comments you might have with regard to the relative growth trajectory for each of those, seamless versus welded, over the course of this year, if you can look out that far.

Thanks.

Well, as I was saying at the beginning, we expect a gradual increase in volume, basically in seamless.

During the next quarter, there will be an increase.

In this quarter, the mix between welded and seamless has been driven, let's say, more in favor of welded.

This will probably change in the next quarter in favor of seamless.

Then, if we look at, let's say, the rest of the year, we should be quite stable at that point.

But this is what we are expecting.

The exploration and production investment of the companies will increase during 2012 in the range of 15% as a whole.

And, even considering inflation in the cost of different materials, this will drive and should drive a relative increase also on our sales.

Thank you.

My phone is cracking up, so I'm going to pass it over.

I'll follow up offline.

Thank you.

Raphael Veverka, Exane BNP Paribas.

The first one I had was on pricing.

Could you update us on how successful you've been in the renegotiation of your contract structure and de-connection of the pricing from the Pipe-Logix index?

Well, if you ask me how I see the pricing environment, we mentioned this during the last conference call.

This is a very different market, in the low-end area or in the more differentiated area.

I would say that, in terms of price, we do not expect major change during 2012.

Some advantage will come for us for the mix.

But we do not expect major change.

Basically, we expect an environment in which costs will be substantially stable, and pricing will stay there, apart from niche of specialty products, in which there could be strong demand.

But these are niches relatively small in size and will not have such a big influence on our overall prices.

As far as the decoupling with Pipe-Logix is concerned, Pipe-Logix has adjusted its mix.

But I will ask German to comment on how we see, let's say, the dynamic of Pipe-Logix and the dynamic of our prices because this is especially true concerning for North America.

In fact, this is the way we're looking at it.

I think Pipe-Logix, despite some mix changes that they've done in the last quarter, still reflects fairly well the dynamics or the pricing dynamics of the low end segment in the States, which, as we all have discussed in the past, is heavily influenced also by big import numbers, particularly from Korea, whereas, at the high-end level, premium connection levels, Gulf of Mexico premium connection pricing, the situation is probably a lot more driven by a demand situation than not.

So I wouldn't really align the pricing strategy that we do on the high-end levels in North America anywhere near to how Pipe-Logix evolves.

I hope that answers the question.

Okay.

Thank you very much.

That's very clear.

The other question I had was regarding your strategy in Brazil after the recent announcement.

As of today, could you tell us how much OCTG sales you currently have with Petrobras and whether you see room for significant market share gains over the medium term?

Thanks.

Well, as we mentioned, we consider the development offshore in Brazil as one of the key developments worldwide.

And we participate in this development; first of all, through the project pipeline production in Confab and also in OCTG in all of the large-diameter and, to some extent, also, in premium connection on our welded pipe with our technology, the technology of Tenaris Blue and the technology that we are using in deepwater applications.

The action we have taken is, on one side, the investment in Usiminas is allowing us to consolidate with a strong supplier of plates and coils and, so, to integrate it to some extent and to strengthen the position of Confab in terms of lead time, in terms of product development for the more demanding applications.

And this will, let's say, close a gap that we perceive in our position in Brazil.

The second action has been divestment for the delisting of Confab.

We successfully -- we have been successful in our offer, so the company will be delisted within these months and will be fully integrated into Tenaris.

This will allow us a much closer integration on every front, from supply chain, research and development, product, and human resources and all other aspects that could prepare Confab as the fully operational Tenaris in the development of the offshore.

The share of OCTG is shifting.

We have a market share that is important, in the range of 20%.

This has been also historically so.

We plan to be able to maintain this, even in an environment in which the volume could be increasing.

Every quarter, this could change because Projects are ups and downs.

For instance, in this quarter, Projects have been relatively weak.

But, in the rest of the year, we expect the Project business in Brazil also to recover.

So this is where we stand.

Okay.

Thank you very much.

That's very clear.

Thanks.

Marcus Sequeira, Deutsche Bank.

I have, actually, two questions.

One, if you could comment about the dynamics of the new, upcoming supply of seamless products, new plants globally, and if you think that the Chinese or the other producers, Korean -- they could at some point be a threat in the high-end market as well.

And, also, if you could, comment on more on the situation in Latin America or, specifically, in Argentina, given the current or the recent developments there -- if you think there is any risk to your business in Argentina.

Thank you.

Well, in the first question, let's say, the overall worldwide market for seamless and OCTG pipes -- this is a market that is growing over time.

You can see this growing differentially between the premium products and the more standard products.

You can expect the less demanding applications to grow at a compound annual growth rate in the range of 4% and the premium market to grow in the range of around 9%.

So, gradually, the share of more differentiated market is increasing, depending -- driven by the nature of the investment of the oil company.

China is also expanding capacity.

There is a clear overcapacity in China in the low-end market, and this is, for sure, affecting and competing with some of our business, especially in southeast Asia but also in other parts.

Korea, as you were mentioning, is clearly competing strongly in welded pipes, for instance in the States but in the low-end part of the market.

Most of the materials they're moving is non-heat-treated material into the United States.

Clearly, we have no pricing power there.

We perceive the excess capacity.

But this is only part of the story.

If we look at the overall positioning of Tenaris, really, Tenaris is made up of a substantial position in high-end product and of niches in which we can differentiate ourselves on product, on service, on industrial excellence, and in value added on this.

Will this scenario change?

I don't think so.

I think that the excess capacity in the low-end business will be accompanying us for the coming year.

Will Chinese and Korean be able to be very consistent in entering into the high-end part of the market?

From my point of view, the answer up to now is no.

There is -- they have a long way to go in many of the segments of high end before they can face the demand and the complexity that, today, projects are requiring and accommodate or, let's say, respond to the requirements of consistency and risk management that the oil companies are asking from the industry today, especially in an environment like deepwater or premium or high-pressure or high-temperature, complex applications.

As far as the situation in Argentina, the situation in Argentina is not affecting our activity.

We are operating absolutely normally.

Our plants are -- we are realizing the investment that we were planning for the upgrading of the plant in Argentina.

We have plans of investment in Siderca that we are carrying on actually.

And, from Argentina, we are supplying our operations all around the world.

For the time being, we have no -- nothing is affecting us.

And we do not think that there will be any changes in the present situation.

As far as the dynamics of the Argentina market and the exploration and production activity in Argentina is concerned, independently from every change that could be happening in the industry, what we see is that Argentina has a very strong resource base in shale for gas and for oil.

Gradually, everybody is coming to, let's say, understanding the size of the resources.

And what I think is that, sooner or later, these resources will be developed.

So we perceive this as an opportunity.

Thank you very much.

Ole Slorer, Morgan Stanley.

On the expansion in the premium as a percentage of the mix from 54% towards 60%, this sounds like it's going to be the biggest driver of the growth outlook.

So I wonder whether you could just share a little bit more with us the mix of this expansion.

Is it driven by offshore?

Is it driven by sour services?

Are there any shale-directed, maybe, changes?

How would you kind of help us build a roadmap from 54% to towards, let's say, something higher?

I think it's really something that we see going on in every segment.

It's clearly a strong driver in North America.

It is so in offshore worldwide.

We see this from the North Sea to West Africa to Southeast Asia.

It also depends on the fact that maybe we're retracting from some of the low-end applications, and so the share of premium is increasing in our mix because, in the end, in a market that is growing, we are concentrating on this.

It's also driven by increasing in premium demand in Mexico and the other countries of Latin America.

So I would say it's something that is spread across all of our region.

We are today, as you were saying, in the range of 54%, but, thanks to investment realized and the increased capability and the penetration of our technology in the different segments, this will increase.

We hope to arrive soon at 60%, and we are continuously planning on how to bring this percentage higher and to increase in absolute terms our sales in this segment and also percentage-wise.

Could you talk a little bit about how the industry is responding with respect to capacity?

You're building out in Mexico.

Vallourec is adding in Brazil and in the US.

What else is going on, and how do you see the capacity of -- ?

How do you see that your market share of the premium markets is developing over the

As you are saying, there is a capacity addition.

But capacity, as I mentioned in the last conference call, is different when you talk about capacity of rolling or heat treatment of the premium.

If we really think of the capacity that is competing with us in the high-end part of the market, the additions are relatively limited to the one that you mentioned and a few others.

Today, in China, there is additional capacity, and plants will be commissioned during 2012 and 2013.

China has impressive overcapacity even today, and this will get even more dramatic in 2013.

And you will see these reflected in the results, not only the pipe-related companies.

But the steel companies in China in the fourth quarter of last year had an overall EBITDA ratio that is incredibly low and registering losses because of this.

They're competing, however, into a space that is a space of low end, most of this in continental -- within China.

And this excess capacity is not spreading out into high-end products even in the region.

Think that we, for instance, have a good business in China, supplying offshore, complex applications, risky applications.

And we continue, in spite of the excess capacity in China in selling to China with important-margin, specialty products or products that are, let's say, premium, some of them finished in our plant in China, some of them finished abroad.

So this is what we see.

I think there is a long way to go because -- before this excess capacity in low end may translate into additional pressure in the premium segment.

So you see your market share in the premium increasing, being maintained, or decreasing over the next, say, 12 or 18 months?

We are increasing our market share because, in a market that is increasing by 9%, in this moment, we are capturing, let's say, a higher share of the new market compared to our competitors.

This is thanks to the technology, thanks to the capacity, and the reliability and the consistency and the lead time, the ability to react.

In this moment, we are increasing our share, and this will go on during 2012.

Thank you very much, Paolo, for helping us on that.

Thank you.

Goodbye.

Stephen Gengaro, Sterne Agee.

I was on the call a little late, so I apologize if you addressed this.

But can you talk a little bit about the corporate -- the SG&A line this quarter and kind of how we should think about that going forward?

It was fairly low versus our expectations.

Yes.

I would ask Ricardo to comment because, no, we were anticipating some reduction in this.

Where do we stand now, and where do you think we can stand in SG&A in the future?

Yes.

For different reasons, this quarter was 17%, but it's in line, I would say, with our forecast for the rest of the year.

I would say we will finish the year in this level in relation to SG&A at 17%, around that.

This is what we expect from SG&A, around 17%.

Last quarter was a little bit higher because we have some one-shot, higher amortization, but this is in line with expectations.

Okay.

That's helpful.

And, then, it's always been -- I know you can't go into all this detail on the call, per se, but it's always been a little bit of a shot in the dark to try to figure out what your financial expense line is going to look like in any one quarter on the other financial results.

But, now that you've made this sort of shift in functional currency, will that make that more predictable?

Can you help us understand that a little bit?

Well, it should make it more predictable, because one of the main factors of variance in the financial result has been, specifically, the variation in the currency in Mexico and in the other countries.

But, Ricardo, can you comment if you see this as something that will stabilize, make more predictable our financial result?

Yes.

Having only, I would say, functional currencies different to the dollar in Brazil and Europe, I would say that, in this way, we are limiting the changes or the big changes in the foreign exchange result.

And, remind me.

Most of that other financial line -- I believe it's the foreign currency exchanges but, also, some cross-currency loans, etcetera.

Is that right?

I would say that, in the exchange transactions, exchange rate transaction line, and in the derivatives, results are all related to exchange rates.

And I would say that we are going to have some differences because, in Brazil, we are having results because of the devaluation or revaluation of some investments that we have in US dollars.

And this is compensated, of course, in the equity side of the balance.

But I say, overall, the financial interest income or the interest income and the interest payments line should be more -- with lower movements during the year.

That's helpful.

Thank you.

Felipe Santos, JPMorgan.

I have a question about the strategy.

I'm wondering how you're going to proceed to revert the sales in East Africa, China, and Europe over the next quarters, since you saw the decrease in this quarter.

What is the long-term strategy for the Company for recovering sales there, since we are seeing like increase in South American and North American -- how you're going to see to -- what is the Company strategy to increase the sales levels again?

Thank you.

If I understand you well, you are saying sales in southeast Asia and China.

Is this correct?

I didn't get exactly the area that you were mentioning.

The idea is to have a view on the long-term strategy for the Company's sales and to have a view on how to proceed to have an increase in sales in east Africa, Far Eastern Oceania, and Saudi Arabia, all the places that we saw kind of decrease this quarter.

What is the Company strategy in the long run to have an increase of the sales in these markets?

Well, I think, from our Eastern Hemisphere area, we have action in all of the countries, in each of them.

In every country, we have, let's say, a defined strategy that combines product development, service, positioning in the face of our competitors.

And, in many of the regions, we are adding local value added to be able to fulfill the demand of this.

This is true for all of Africa North, sub-Saharan Africa, East Africa, West Africa, the Middle East, in Russia, Caspian, continental Europe, and Northern Sea, and all the regions of Malaysia, Indonesia, Australia, China, and Japan.

Tenaris is a large company with a very global projection.

We manage this from Dubai.

I think, Alejandro, you can give some indication of the priority and the target that we have in some of the regions, an example of the initiatives that you are taking.

Yes.

Our overall picture, as we mentioned before -- the effect on the shipments the first quarter or the stoppage in some mills made also less shipments to this region.

As an overall picture, we see a growth in 2012.

The areas where we see the growth?

Clearly, in west Africa, we see Nigeria recovering, Angola having also new area for development.

We see the new areas of Ghana and Equatorial Guinea also growing.

In the North Sea, we also see a very active Norway and Denmark, where we have an important market share there.

We are also having HP projects in UK, like Jasmine with ConocoPhillips.

In the Middle East, as I mentioned before, we have our growth in Iraq.

Iraq will be a very important market.

We'll also recover in Kuwait.

Kuwait has not been buying in the last two years, and, this year, we see some growth.

In the case of Iraq, we also have our base started delivering pipes in Basra and north Rumailah.

And we also are working in the Indonesia plant, where we are more and more developing new projects.

We have just received a new agreement with Chevron for Indonesia.

And, in Australia, we are also looking at growth opportunity not only in the OCTG but also in the line pipe.

So, in the overall picture, we see growth.

Clearly, we had a very strong fourth quarter.

And, in relative terms, with a reduction of shipments in first quarter, there is a big difference, but we see 2012 at a higher rate than 2011.

Wonderful.

Thank you very much.

We've no further questions at this time.

(Operator Instructions).

If there are no additional questions, we would like to thank you all for participating.

And this will -- we will end the call now.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a good day.