Tenaris SA (TS) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 Tenaris S.A. Earnings Conference Call.

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

(Operator Instructions).

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

I would now like to turn the call over to Giovanni Sardagna, Investor Relations Director.

Please, proceed.

Thank you, Claire, and welcome to Tenaris' 2012 second quarter results conference call.

Before we start, I would like to remind you, as usual, that we will be discussing forward-looking information in the call and that our actual results may vary from those expressed or implied herein.

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

With me on the call today are Paolo Rocca, our Chairman and CEO; Guillermo Voguel, 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.

I would like to start by mentioning that we will host an investor presentation in New York on October 18, and we look forward to seeing many of you there.

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

During the quarter, sales increased sequentially in each of our operating segments, but sales growth in our Tubes segment was held back by seasonal lower sales in Canada.

During the second quarter of 2012, sales increased 17% to $2.8 billion, compared to $2.4 billion recorded in the second quarter of last year and 7% sequentially.

Our EBITDA reached $760 million, which was 39% higher than the corresponding quarter of 2011 and 8% higher sequentially.

Our EBITDA margin of 27% was 4 percentage points higher than the corresponding quarter of last year and in line with the first quarter.

Average selling prices were up 7% compared to the corresponding quarter of last year and 3% sequentially, supported by good, seamless/welded product mix.

During the quarter, cash flow from operations remained strong at $450 million, and we ended the quarter with a net debt position of $540 million after the acquisition of Confab non-controlling interest for close to $760 million and the payment of $295 million in dividends and capital expenditure of $205 million.

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

Good morning to all of you.

This quarter, our results reflect a trend that we have anticipated of increasing demand for premium OCTG product.

To date, 60% of our seamless OCTG shipments are of premium product, which compares with 45% two years ago.

We are confident of maintaining this level in the future.

Demand and consumption of premium product is growing, reflecting greater drilling complexity, led by growth in deepwater wells, horizontal drilling in unconventional applications, and sour and high-pressure, gas wells.

The investments we have made in the past few years are already paying their way.

The introduction of new products such as the TXP and the Wedge 625, the increasing penetration of our principal, premium technologies, particularly the Wedge series, Blue series, and Dopeless, and the global deployment of technical support for our products are all contributing to strengthen our position in the premium sector.

This quarter, we benefited from higher sales to oil and gas customers in Iraq and the eastern hemisphere as a whole.

For the future, activity will continue to increase in this region.

Our North American operations continued to perform well.

Sales for deepwater applications in the Gulf of Mexico were particularly strong during the quarter, as our Wedge series 500 is well established in the market.

Six strings of our new Wedge 625 connection were successfully run in the Eagle Ford.

In the coming quarter, we expect the rig count in the US to decline, but we are confident on the long-term perspective of this market.

In June, we announced our strategic decision to invest in a new seamless production and logistics center in the United States.

We are currently finalizing the selection of the site and expect to start up the new mill at the beginning of 2016.

This decision, as I say, reflects our confidence in the long-term growth prospect for the North American market and the impact of changes in drilling technology on product requirement and supply chain efficiency resulting from the development of the shale reserves.

Since the acquisitions of Maverick and Hydril five years ago, we have grown and consolidated a strong, competitive position in North America, which we plan to complement with this new investment.

In Brazil, in addition to our sales of conductor and surface casing, we are concluding a five-year agreement under which we will supply Blue connection for casing strings which will be used offshore.

Our welded pipe business in Brazil has changed with the development of the Brazilian offshore (inaudible) complex.

Previously, most of our sales were in online -- were offline pipe product for onshore pipelines.

But, today, a large part of our sales and operating margins comes from the sale of premium OCTG product and offshore line pipe, very similar to the rest of our Tubes business.

Following our acquisition of the minority interest in Confab, we have reorganized the management of our operation in Brazil, bringing them more fully into our Tubes operating structure.

And, from the third quarter, we'll reflect this change in our reporting.

Henceforth, we'll combine Tubes and Projects in one single segment.

Looking ahead, in spite of the macroeconomic uncertainty, we perceive that our customers in the oil and gas sector all around the world are maintaining their investment program, while, in the industrial sector, especially in Europe, we expect to see lower sales.

In the second half as a whole, we expect revenues to increase compared to the first half, even if, in the third quarter, our sales will be affected by the investment in maintenance, plant stoppages that we have programmed in different plants all around the world, and lower shipments to the Middle East for this quarter.

Our focus, therefore, will be on execution and meeting the demands of a challenging market.

We expect to maintain our operating margin close to the level -- at the level at which -- that we have reached in the past two quarters.

In this respect, talking about the execution, I will mention a special recognition that we have received on our performance recently, in this quarter.

RasGas, which is a joint venture between Exxon and Qatar Gas, selected us out of more than 300 business partners for their 15 years' quality and safety award.

We are proud of this award.

We consider it an honor and a recognition to our consistent capability of execution.

This is something that we plan to maintain and enhance in the future.

We will open now the conference for your questions.

(Operator Instructions).

Bill Sanchez, Howard Weil

German, my first question is for you.

Interesting, I guess, in the press release that you noted we expect drilling count, certainly, to be down in the back half of the year in North America.

I'm assuming that was an onshore comment.

But it's also interesting that, when you guys talk about your second half of the year sales, you don't note, I guess, an expected decline in North America as a whole relative to the first half of the year.

I'm just wondering if you could talk a little bit about some of the mix impact perhaps that we're seeing as it relates to higher Gulf of Mexico shipments and possibly impacting your tonnage volumes, the shift that we have seen from gas rig count to oil.

And maybe you could talk a little bit about just the pricing trends.

Clearly there's a lot of concern continuing on the low end side of the market.

If you could, just share your thoughts with us on that as well.

I'll let German to get in from Houston on this question.

Well, I'll try, Bill, to be as short as possible.

But, well, let's say, we, as I think everybody else in the industry, do expect a mild rig count reduction between now and the end of the year.

We've seen some 50 rigs already gone, and we're expecting some more between now and December.

Of course, this is partially offset as far as North America is concerned by some increased demand in the Gulf of Mexico.

But, in overall tons, I think it is important to distinguish the fact that Gulf of Mexico represents only a small portion of the (inaudible) demand in the States.

Now, we've seen, I believe, stable volumes into the third quarter.

They may come down into the fourth as far as the US is concerned.

But it's important to probably highlight that this is fundamentally driven by the business model of Tenaris in the US, which is aiming more at direct end user rig requirements as opposed to inventories, and, therefore, we're not so exposed to inventory overhangs in the event of rig reductions.

Hopefully, that answers the question.

Right.

And, German, just on the low-end side of the business as we think about the Korean imports that have come in and people's concerns about seeing pricing deterioration there, can you maybe just kind of size for us a little there?

Just give us a feel how you see Tenaris competing in that environment right now, kind of relative exposure there for you, as well, because my sense is that there's a belief there's a lot more exposure for you on that more low-end side of the market in general than what there probably actually is for the Company in reality.

Well, there's no doubt that the low-end segments in the States are under equal pressures, where supply continues to exercise a fairly important element of, I would say, just price pressure overall.

We've seen that reflected in Pipe-Logix in the last three months.

We don't expect that to change in the remaining part of the year.

And, as we have said, the strategy for us in North America is try to reposition the Company at the higher-end spaces, where we continue to see demand growing, where we continue to see demand pull.

And this is somehow allowing us to sustain prices between now and the end of the year.

Okay.

One other question, and I'll turn it back.

Regards to the seasonal factors noted in third quarter, it sounded like that's clearly more of a mill issue in terms of some maintenance.

I know that the second quarter of last year we talked about an expectation in 3Q for lower sales of line pipe and, I think, in the Other Projects section as it relates to European distributors.

I'm just wondering if that's an impact, as well, on 3Q.

Should we take the prepared comments as meaning that seamless volumes are going to absolutely be down 3Q versus 2Q?

Yes.

We mentioned this because, this year, we have intervention, I would call it, maintenance investment and brownfield investment in very key plants.

We have intervention in Dalmine in Italy, in Mexico, in Algoma in Canada, and, in the US, Hickman and (inaudible) plants.

We are intervening, strengthening our capability to produce high-end, value-added line, premium line, heat treatment and finishing line.

These interventions are different than in the past years.

So we have to consider this in looking at the shipment of seamless for the third quarter.

Are you able to size, maybe just on a percentage basis, what the volume decline might be sequentially in seamless second to third quarter?

No, because, in the end, it will depend also from the shipments.

You know we have stocks in process and finished stock.

In the end, this will cushion, let's say, in the intervention.

So I wouldn't say, let's say, the size of this.

As I say, we look at the second semester as a whole.

Part of this will be compensated in the fourth quarter.

So, as a whole, for the next semester, we'll be, as I say, slightly higher in revenue and more in line with the present level [of March].

Okay.

Thank you, all, for the time.

I'll turn it back.

Ole Slorer, Morgan Stanley.

A quick question on Mexico.

It seems to be an area that's picking up.

Could you give a little color, exactly on what's going on there?

This was (inaudible) into the election, or is it offshore, or is it unconventional?

What is it that's driving the Mexican recovery?

Ole, I think Mexico has been growing in 2012 compared to 2011.

But I would like to Guillermo Voguel to comment on what would we expect in this transition time as far as at Pemex and private driller activity is concerned.

Actually, Ole, we are not seeing right now any effects of the election still on Pemex activity.

What we are seeing is that, from where we are in the second quarter of this year -- we are seeing a solid but stable situation.

Second quarter, we had around 145 rigs operating.

And I think this is very much the level that we are expecting for the second half of the year.

And, as you know, at the election-- and Mr. Pena Nieto has expressed on several times that he sees higher involvement of foreign investments on the energy side and, specifically, on Pemex.

But he hasn't said, and I think it's still very early to try to see, the hows -- the tools and how this is going to be implemented.

So what we are seeing at this point in time is for higher Pemex activity in 2013, especially on the second half of the year.

We had some activity for E&P contracts (inaudible) in the northern region.

So those are going to start to have an effect next year.

There were some rigs that were hired also for the second half of 2013.

So, at this point in time, we have a good perspective in terms of the intention of the new government to increase the activity in the energy sector in Mexico.

And we are seeing some actions that have been taken that are going to have a positive effect in 2013.

Okay.

Thanks, Guillermo.

So it picked up in the second quarter and stable throughout the rest of the year.

But, based on contracts that you're already seeing, you should have a good growth in 2013.

Right?

Right, especially, I would say, in the second half of the year.

We're going to see something in the first half.

Perfect.

And one quick question, German, on North America.

The rig count going down, I think, is something most agree on right now.

But what we're hearing from a number of the E&P companies is that they are drilling faster and reducing the cycle time and can therefore do what they were planning with fewer rigs than originally budgeted.

So, it's not obvious that it is terribly negative for the tubular demand.

Could you give your color on that?

German, you can pick up this question on intensity in terms of pipes for (inaudible).

You're correct, Ole.

We've seen cases like, for instance, in Canada is only now developing the shales, where rig count comes down.

And, despite that, the number of meters drilled are in the area of 10% higher.

So it is true that industry is somehow offsetting as far as operational consumption is concerned with these new efficiencies, with the new ability to horizontal drill and what not.

But it is also true to contemplate the notion that inventories today in the States are at a level of, give or take, five months projected on rig count closer to 2000.

The situation we've seen is we may between now and the end of the year see overall the inventories going up in terms of months associated to the fact that the rig count would come down.

Okay.

But you agree with the fact, for example, Marathon stated very publicly -- I think, three or four other companies did too -- that they can actually reduce the rig count and maintain their number of footage drilled or meters drilled.

What does that mean from a mix standpoint?

Is this mostly benefiting the higher end, or is it mostly benefiting the lower end?

Well, this is something which is characteristic of the shale development, where drilling has become more of an industrial operation than not.

Therefore, drilling efficiencies have -- are sitting at the core of what operators are doing, and they continue to push the bar in terms of improving that mode of what we call industrial aspect than not.

From a mix perspective, it's more associated to the shales mix, which we know is a lot richer on alloy and, to some extent, also on premium connections.

Thanks, German.

Paulo, just finally, in the first quarter, I think you did 54% in premium.

You're now saying you did 56%.

Should this sort of be the steadily quarterly progress going forward, do you think?

If I understand the question, it's if we can -- what we expect in terms of share of the high-end.

Yes.

It went up 200 basis points.

I think you did 54% in first quarter.

I think we should -- in terms of share of premium on total seamless OCTG, I think we should be able to maintain the level that we are today.

Consider that there is also some growth of our market in Latin America, even in HPI business.

So, when our market -- our overall sales are growing in areas like Colombia and other parts of Latin America, like Argentina, these growing sales are growing HPI.

So this will enlarge the base.

On this enlarged base, I think that premium should remain in the level of 60%.

If we look at the rest of the market, there could be some, let's say, in the mechanical area, some reduction because the macroeconomic situation and the industrial situation in Europe may affect some of the high-end components of our industrial.

So maybe, in high-end, we'll be in the second half of the year more or less at the same level than in the first half of the year, around-- between 55% and 60%, this range moving quarter by quarter.

This is what you expect.

Obviously, in the long run, gradually, we'll continue to push this line through investment, brownfield investment in new line, and in our commercial activity.

So, over time, these lines will be moved to a higher level.

Okay.

Sounds like you're on track, Paolo.

Thank you very much.

Michael LaMotte, Guggenheim.

Paolo, the first question for you.

If I look at volumes in the -- for seamless in the first half of this year, they're essentially flat with the second half of last year.

Obviously, the fourth quarter last year was a very strong quarter.

What I'm trying to get at is what could we expect in the second half relative to the first half in seamless?

Year over year, I guess, the numbers are up about 9%.

Could we be up 8%, 9%, 10% year over year looking at the second half of 2012 versus the second half 2011?

We expect the volume of seamless in the second half to increase compared to the second half of 2011.

You know the plant in Mexico, the new plant, is ramping up.

It's stepping up its level of production.

So, gradually, in spite of what we could expect in the industrial segment and possibly on the low-end side in the US as the rigs go down, we expect that we should be able to increase level of seamless shipment as a whole in the semester.

This will not be the case in the third quarter because of the stoppages in the plant that I mentioned before.

Understood.

I think looking at it in the semester basis is a good way to do it, given the seasonality of both maintenance and shipments.

German, a question for you.

The reduction in ERW volumes in the second quarter from the first -- how much of that was just Canada versus inventory management in lower 48?

It's almost, I guess, a 20,000- or 15,000-ton reduction?

It's, I would say, mostly Canada and the Canadian breakup that this year was particularly -- given the wet characteristics of a breakup made it particularly longer than initially anticipated.

Okay.

So there really was no response, I guess, to the commodity price in terms of managed inventories on the -- from your alliance partners in the second quarter?

We could say that we've seen no effects through the second quarter of, say, the rig count reductions in the States, notwithstanding the fact, Mike, that I think it's fair to recognize that the adjustment that's only now taking place in the last very few weeks anyway.

Okay.

Fair enough.

Ricardo, I've got a couple of questions for you, if I may.

First, the translation adjustment on the cash flow statement, $62 million, was pretty significant.

Can you address what is behind that number?

Yes.

I will ask Ricardo to comment on the CTA adjustment this quarter.

Yes.

Basically, the CTA adjustment in this quarter related to our operations in Brazil and in Italy.

In relation to the -- because, you remember, the depreciation of the real that developed in Brazil was close to 11% during the quarter, so it's quite significant.

So the number that you are reading there is just an effect that we have on our working capital as we are showing in the cash flow the working capital variation as a whole, figured in dollar terms.

And this is here an effect the real is not -- it's not positive cash flow coming from the reduction of inventory, for example.

It's just a monetary adjustment of our inventories in Brazil, and we are adjusting there.

Okay.

Very good.

Thank you.

And then, on the tax rate, Ricardo, can you address what to expect in the second half of this year?

For the second half of the year, we expect the tax rate, I would say, flat, similar to the first half of the year, around 25%, 25.5%, 26%, in this range.

Okay.

That is, I think, down from, certainly, what I was expecting, closer to 30%.

Is that a function of the geographic mix of sales?

Two comments in relation to that.

The first one was, as already said, the mix of companies performing during the whole year.

And, secondly, we have a reduction of close to 2% -- less than 2% that is in relation to our statutory profit sharing plan that we have in Mexico.

In previous years, we've had that -- we had considered that something similar to an income tax.

And, now, following the IFRS rules in Mexico that they started one year ago, the government standard is this is no longer an income tax.

It's just part of the labor costs.

So we have an advantage in that line close to 2%.

And we have -- this is also reflected in comparatively higher cost of sales because of the cost of labor in Mexico.

That is incorporating this component of our cost.

Okay.

So, if I'm understanding correctly, structurally, there's 200 basis points of reduction that's, effectively, permanent as a consequence of this change?

Perfect.

Yes.

And the rest is geographical structure in terms of production and sales.

Okay.

Great.

Thank you so much, gentlemen.

Stephen Gengaro, Sterne Agee.

Two questions.

I'll start with the deepwater side.

And I sort of look back, and some of the data you've given in the past suggests that, I think, deepwater was 8% or 9% of your revenue base.

And you made some comments around the deepwater Gulf after Macondo.

Can you give us a sense for the significance in current business mix of deepwater and how you see that evolving?

Well, deepwater is a very key segment for our sales, especially because it's an area in which we have been able to differentiate very much.

And, after Macondo, the requirement for quality, consistency, and reliability by the oil companies has really helped us differentiating even more.

And, also, this is important.

It's not so much in terms of volume.

It's more important in terms of margin and differentiation than in terms of volume.

You can expect the overall market for deepwater maybe in the range of 15% of the overall premium market.

But it is very important for the opportunity that it offers for us.

Where we see this to the most -- Gulf of Mexico, Brazil, sub-Saharan Africa, today, western Africa, tomorrow, also eastern Africa, and in the Far East.

Where we are more active -- for instance, our presence is very strong in the Gulf of Mexico and in west Africa.

These are the areas in which we are very focused -- and Brazil.

We participate in these.

And we have some very interesting presence in the southeast Asian projects.

Some of these projects are very demanding if you talk about deepwater.

But, also, if you talk about offshore in general, we recently -- for instance, we've been awarded one project that is very demanding in terms of product and condition, which is the Wheatstone project in Australia.

These are the kind of projects in which Tenaris really has the production, commercial, technical sales, logistics, and R&D activity that fit for this.

But I will ask to Alejandro maybe to add some color on how important deepwater is or could be even in the future for us.

In terms of offshore, and as Paolo mentioned specifically, sub-Saharan Africa, we seeing very solid activity in our traditional markets.

That is Angola and Nigeria, where we have been present for many years establishing our presence with our long-term agreements.

Today we are even at a very good level.

We are also seeing good activity in the North Sea, where we have established a strong presence with our Dopeless connections, mainly in Norway and Denmark.

We are looking also at the new opportunities that are coming from the east coast Angola that is being developed and the new opportunities in the east coast, like Mozambique, where [E&I] has a strong presence.

In terms of the rest of the areas, we are also looking in the offshore opportunities in the Mediterranean Sea and the Black Sea, where there are new explorations coming on.

And in solid state and more looking also at the shallow water, we are having the contract now with Indonesia with two long-term agreements confirmed, one with Total and the other one with Chevron.

So the offshore operations in general are very solid with (inaudible).

One other comment on deepwater.

We still see in 2012 an increase in the range of 50% of demand of pipe for deep offshore between 2011 and 2012.

You said 50%?

50% increase between -- of 2012 demand of deepwater compared to 2011.

And is that a Tenaris-specific comment or an industry comment?

This is the situation of the market, industry.

Okay.

Thank you.

And, just as a follow-on, you said the deepwater was about 15% of the premium market, and you mean for the global OCTG market, not for you?

Yes.

It's also a comment -- it is our estimate of the share of deepwater compared to the share of premium worldwide.

Do you have a comment on the share of Tenaris' premium?

No.

We usually do not comment on this.

As a whole, our market share in premium, as you know, is in the range higher than 30% -- between 30% and 35%.

This is the overall share on premium.

But we do not get more specific than this.

Right.

Thank you.

And then, just as a second question, when we look at your expansion in the US market, is -- ? You obviously have a pretty optimistic outlook, as do we, on sort of the long-term North American business.

Is it going to be -- ? Is all the product going to be driven for the US market specifically, or you expect to move product out of the US?

Well, I think, basically, we are confident of the long-term perspective on the US market already.

But we are also confident in the ability to operate industrially from the US, and that could be opportunity from the US and the regional growth.

The price of energy is increasing opportunity for industry getting back into the US in some segments.

Some of this could be increase our client base in energy and outside the segment.

But, also, we consider that the location of the plant, the logistics of our operation, will allow us to fully integrate our logistics and production operation in the US into our overall system of Tenaris worldwide.

Very good.

Thank you.

Frank McGann, Bank of America.

Just two things, if I could.

One, in terms of the portfolio of products that you're selling as you look at prices going through the third and fourth quarters based on the pressures you're seeing in commodity-oriented product plus better situation for the premium side, how do you see average prices trending over the next couple of quarters?

And then I was wondering if you could provide a little bit more color on the developments in Brazil because Brazil seems to be, happily, an increasing focus of your business now and one where you seem to be gaining some increased traction.

And you mentioned the five-year agreement that you're close to concluding.

Perhaps you could provide just a little bit more visibility on, beyond that agreement, what else you're seeing for the next 12 to 24 months in the Brazilian market.

Well, first on price.

As we mentioned in the press release, we expect prices on some of the less differentiated segments to decline slightly.

But, from our point of view and in our profit and loss and our revenue side, we think that this could be -- in our case, could be compensated by a continuing change of mix on different access, on (inaudible), on geographical access, and on the mix between welded and seamless more in general.

So we think we can compensate this.

And, to some extent, the containment of our raw material could help us in containing also the cost of a more complex mix, and that's how we come to our margin forecast.

Now, we are making this assumption assuming that the macroeconomic environment in which we move will remain substantially the same, with the price of oil more or less in the broad range at which it is today.

Obviously, if there are major change of crisis or the situation in Europe from a financial point of view and, then, from a macroeconomic point of view should deteriorate more, we will have to face -- we would be facing a different scenario.

But, basically, this would be affecting us more in the -- maybe, to some extent, in the fourth quarter but, especially, in the coming year, in 2013.

So this is what we see in prices.

Let me comment something also on prices.

I see that, if you look at the Chinese mills -- really, Chinese mills, if you pick up a group of them and you look at the results in 2011, in spite of having a 13% rebate that supports all their exports of OCTG, they're showing net losses all together.

So, also, competition in the low end, I don't think, could continue to be so aggressive worldwide even in the future.

Costs are rising to some extent in China.

These mills are showing, consistently, losses.

This is hampering their ability to invest in research and development in premium, in commercial action.

So this also has an impact.

It is reducing their aggressive dynamic to some extent.

And this is affecting the low-end part of the market.

As far as Brazil is concerned, we are signing now the long-term agreement for casing that will be used offshore.

But it is important for us because we are establishing our technology, the Blue technology.

The product will be Blue.

So we'll participate in a market in which we have a lower market share than our competitor.

But Brazil is moving also on different accounts.

For instance, in the Projects business, we expect in the coming quarter the Projects business to get up.

We will be delivering some of the line pipe.

The investment plan in (inaudible) is huge and could really be very interesting for us, especially in our new alliance with Usiminas.

Our integration upstream allows us to develop the steel that we will need to serve the complex segment, complex market, and demanding market in pipeline and in OCTG.

So, in this environment, we will depend on ability of Petrobras to execute, avoiding delays and execute.

This has been an issue in the past.

But we expect this to be accelerating in the future.

One segment of our business that is not doing well and will not do well in the next quarter is the equipment business.

This, as you know, is managed by (inaudible).

But the delays in some of the investment in refineries by Petrobras are reducing our market in that segment that, this year, was contributing nicely to our line but, for the next two quarters, will probably have less contribution.

Okay.

Thank you very much.

Geoffrey Stern, Cheuvreux.

I was wondering if you could share with us your expectation with regard the US OCTG market growth for the upcoming five to ten years, given your investment decision you made recently.

And I was wondering, as well, to what extent -- it also shows that it's hard for you to really increase the utilization rate of your welded mills in the US, which are running, I guess, at around 60%.

So it sounds like the real issue for you was to gain market share in the high-end part of the market in the US.

And investing in a seamless mill was key for you.

So I was wondering if you could comment on this.

And the second question is a housekeeping question.

I was wondering if you could give us some estimates for your depreciation charges in 2012, because, despite the ramp-up of the mill in Mexico, we have not really seen the impact on the depreciation line.

Thank you.

We are -- as I said in my opening remarks, we are confident of the long-term trend in the US market.

The reserves (inaudible) the opportunity are there for oil and gas.

And, as I said in the past, energy independence for the US is a very strategic, long-term target for any administration.

Now they have the material resources that could lead to this target.

This, as I say, will also -- today, is driving increase in drilling for oil in the future.

Today, gas is probably declining because of the price of gas.

But, if we look at three, five years from now, we expect also the market and the demand for gas to get in a different balance between supply and demand.

Demand will increase, and supply will have to start again increasing.

And drilling will start back into the gas fields.

So we are positive on this.

We see today a market that is -- in which imports are representing more or less 50% of the market.

I don't think this could be sustainable in the long run.

The industry needs short reaction.

It needs a much faster, reduced lead time and faster reaction by us in the high end and also in the low end.

So I think there will be opportunity for our investment and to transform the structure of the market if you look at five, six, seven years from now.

In this frame of mind and with this -- let's say, with this concept in mind, we are now taking our major expansion [program].

You can imagine we will complement welded, seamless, premium -- very sophisticated product in all the range, ability to support all the unconventional and the conventional drilling, offshore, onshore, in shales and to do this with the lead time required and with the most efficient logistical and industrial structure.

Now, on the second question, depreciation, Ricardo, maybe you can comment how our investments are getting, let's' say, in our depreciation over time.

Yes.

Regarding depreciation and amortization, I would say that, for the whole year, we expect a value close to $550 million.

Regarding, specifically, depreciation, the value will be around $350 million.

And, here, we have two effects, one effect related to the new capital expenditure in Mexico that we are fully depreciating now during this year.

But, of course, the values on depreciation, especially in some countries that we don't have yet the (inaudible) currency the dollar, we are reducing in some way for (inaudible).

For instance, the depreciations in Brazil, the depreciations in Italy are going lower because we have now a lower property, plant, and equipment in US terms because of the depreciation of the euro and the depreciation of the Brazilian real.

I would add also that, for instance, in Argentina, we are not allowed to adjust the value of our fixed investment before inflation, so, in the end, we are paying a relatively low level.

We have a relatively low level of depreciation on our balance sheet, which has a negative impact of our tax rate in this sense.

Our tax rate --

For tax purposes, the fact (inaudible) important.

We are suffering this for tax purposes.

All right.

So you say overall, for this year, $550 million is a good estimate?

Yes.

Paula Kovarsky, Itau BBA.

I have a couple of follow-up questions, the first one regarding the operations in Brazil.

You mentioned some sort of reorganization, changing management, or perhaps adjusting more to the Tenaris style, and also a little shift in the mix of products with more focus on premium OCTG line pipe to offshore.

Could you perhaps give us a bit of a sense of how much does that represent in terms of potential margin improvements in the Brazilian operations?

So that's question number one.

The other one relates, actually, to the operations in Argentina.

What we've seen from YPS' presentation last week is more and more government intervention in the company, a lot of uncertainty on how the developments of the shales will go ahead.

Of course, they want to grow production, but no one knows exactly how they're going to do it and who's going to fund it.

So the question is -- what exactly is your reading for Tenaris' operations in Argentina and if to any extent you see the risk of some sort of intervention going up for your part of the business -- higher labor costs, perhaps, restrictions, or what have you.

So, if you could share with us a little bit of your views on what happens to the operations in Argentina, it will be great.

On the first question, well, it's clear that we consolidated our operation in Brazil by acquiring 100% of Confab.

Now we can integrate fully Confab into Tenaris' operation, and we have no issue with minority interest in the company.

So it will allow us to reorganize the company and insert the company into our organization.

This is driving investments, for instance, in research and development that will be performed in Brazil in the new (inaudible) that we're building in (inaudible) but will work for all of our system worldwide.

And the system of (inaudible) will also work for Brazil.

So we are integrating areas like R&D.

We are integrating, actually, also premium joint development in a much more efficient way.

We are also, thanks to investment in Usiminas, establishing strong ties in the product development together with Usiminas.

This has the potential not only for Brazilian market, which means developing product specific for offshore demand in equipment, pipes, transportation pipeline or drilling but will also be connectors, for instance, but will also be important for strengthening competitiveness of our welded operation in Brazil abroad in Latin America, in the surrounding countries.

So I see the potential there.

I wouldn't quantify it yet in terms of margin or in terms of volume.

But I see that we feel that now we are much more integrated upstream and downstream.

And the pace of our growth will be dictated by the ability of Petrobras and the other clients, including Vale do Rio Doce and the industrial clients in Brazil, to execute their investment.

By the way, just recently, for instance, we are offering to Vale do Rio Doce drilling material for the project of potassium in (inaudible).

Opportunities are there.

It will depend on the ability of our clients to proceed fast in time.

The second question, about Argentina -- one question -- the first question concerned the costs.

No doubt, in this moment, we feel pressure on our costs, especially on labor costs.

Inflation is higher than devaluation.

So we had cost pressure in our Argentine operation, especially due to labor.

But we are operating normally from every other account in our operation.

Now, future development.

It's clear that Argentina has a great potential for developing the Vaca Muerta resources for oil and for gas.

The country needs gas and oil to strengthen its balance [of payment].

It needs to export more oil.

It needs to reduce the import of gas.

This is a clear need.

Now, they have to define the regulatory framework that allows investment to be realized in the area.

There is a willingness to do it.

I think that we will start seeing growing investment realized directly by Petrobras -- by YPS -- I'm sorry -- in the beginning.

But, over time, I think the country will find a way to develop the resources and satisfy the need of reducing import and increasing export in (inaudible) sector.

At the moment, in the next quarters, we will have higher demand because YPS is reacting on their own within their financial capability.

During 2013 and beyond, we expect that this level of operation could be increased if the government could take the policies able to attract more capital into the sector.

Just another quick follow-up.

You mentioned in the beginning of your presentation that volume shipments to the Middle East are likely to go down in the second half compared to the first.

Is there any specific reason for that?

No.

We are saying that shipments to the Middle East will go up during the semester, the next semester.

But, in the next quarter -- you know, in the Middle East we have ups and downs.

And it depends on some projects and shipments.

This we expect to be relatively lower in this -- in the next quarter.

But, as a whole, it will be higher on the semester compared to where we're coming from in this semester.

Okay.

And a very last question, on Mexico.

You comment on potential developments under the new government.

But what's you guys' view on Mexico effectively developing their part of the Gulf of Mexico in the deepwater operations?

Do you think the Mexican -- ? How much an Mexico move ahead on its own, or not?

Do they desperately need foreign investments?

And, then, would you bet on a timeframe for that to be possible?

Well, I will ask again, Guillermo to give a comment on this.

Well, Pemex is actually working in deepwater in the Gulf of Mexico.

There is always one well that is being drilled there in the Perdido area.

And, in the second half, we're going to see another well.

So we see some activity.

And I think that, moving into the future, Mexico is going to do -- to get some foreign involvement there -- trying to develop contracts similar to the ones we are seeing in the mature fields.

But it's not something that we're going to be seeing, probably, in 2013.

I think it's something that we're going to start to see the effects -- we're going to see a slow increase, increasing there by Pemex.

And probably by 2014, we're going to have a clear picture of having more involvement of foreign companies operating there.

One comment on Latin America, Paula.

From my point of view, Latin America is a very strong area from the point of view of Tenaris.

First, we are very much present in every country in which there is drilling, exploration, transportation, hydrocarbon-related activity.

Second, the countries need to develop the resources.

And they will do this independently from whatever macroeconomic scenario the (inaudible).

I would expect all of the countries of South America and including Mexico that we have in North America but is part of this world will go on and expand compared to what we have seen in the last two or three years.

So this would apply, I think, to all of the countries, including Argentina, Brazil, Colombia, Ecuador, Peru, and Venezuela also and Mexico over time.

Okay.

Amy Wong, UBS.

I just want to follow up on a couple of questions on your investment in the US.

Are you able to quantify, give us some of the qualitative assumptions behind your decision to invest, such as the growth in the rig count and also perhaps the percentage increase in the OCTG consumption both for the OCTG market and, specifically, for the premium market?

And, secondly, could you give us the timing for the cash -- I know it's very early stages right now.

You're still selecting the site.

But can we get an idea of what the cash outflow profile is going to be over for the next few years?

I will ask German to give some comments.

I don't know if answer is the right name.

Yes.

I will not be in a position, Amy, to share with you some of our projected specifics for competitive reasons that I'd hope you'd understand.

But, going back to what we were saying during the call, we continue to see North America, US in particular, as -- in three, say, different dimensions.

Oil, US has become one of the fastest-growing oil provinces in our industry.

And, structurally, I think that's there to stay.

Gas, we don't really believe that a $2.50 or $3.00 price band is sustainable, and, therefore, we are working under the assumption that we will see a gas rig count turnaround.

And, therefore, that will be associated to, again, OCTG demand growth.

And, finally, the notion of services/import.

We believe that there is a clear opportunity for us to expand the domestic footprint and, therefore, be able to work to replace this component of this 50% import level that we see today.

I hope that answers, at least at a qualitative level, part of the issues -- questions you had.

Great.

I would now like to turn the call over to Giovanni Sardagna for closing remarks.

Yes.

Thank you, Claire.

And thank you, all, for taking part in this conference call.

And this ends the conference call today.

Thanks.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.