Tenaris SA (TS) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 Tenaris SA earnings conference call.

My name is Tahitia and I will be your operator for today.

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

Later, we will conduct a question-and-answer session, but (Operator Instructions).

This call is scheduled for an hour.

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

I would now like to turn the conference over to your host for today, Mr. Giovanni Sardagna, Investor Relations Director.

Please proceed.

Thank you very much, and welcome to Tenaris' third-quarter results conference call.

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

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

With me on the call today are Paolo Rocca, our Chairman and CEO; 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 Operations; and Alejandro Lammertyn, the Managing Director of our Eastern Hemisphere Operations.

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

Third-quarter sales increased 7% year-on-year, led by higher demand in North and South America, but sequentially, they were affected by lower shipments to the Middle East and lower demand for industrial products in Europe; in addition, to seasonal factors.

Our EBITDA, excluding extraordinary items, reached $679 million, which was up 12% year-on-year, but declined 10% sequentially.

Our EBITDA margin of 26% was up 2 percentage points versus last year, but was down 1 percentage points sequentially, as it has been affected by a poorer seamless/welded mix, and efficiency losses related to operational issues at Tamsa's steel shop, and plant maintenance shutdowns.

Our earnings per share were up 34% year-on-year, as we started to benefit from the acquisition of all the non-controlling interest in our Brazilian subsidiary Confab during the second quarter of this year, in addition to a nonrecurring after-tax gain of (technical difficulty), corresponding to a tax lawsuit collected in Brazil.

Average selling prices in our Tubes operating segments were up 5% compared to the corresponding quarter of last year, but they were flat sequentially.

During the quarter, our sales of high-end seamless product were up 55% of our total seamless volume.

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

During the quarter, cash flow from operations remained strong at $491 million, enabling us to strongly reduce our net debt position from $541 million at the end of the previous quarter to $266 million at the end of this quarter.

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

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

In our third-quarter results, we posted an EBITDA of $679 million, with a margin of around 26%, which was up 12% year-on-year.

This quarter has been affected by efficiency losses resulting from investment and maintenance stoppages in several of our industrial facilities, a lower than normal level of shipments to the Middle East and a low level of demand from our industrial customers in Europe.

In addition to the normal annual shutdown of our Italian facilities, we had investment in maintenance stoppages this summer at our Canadian, US, Colombian, and Mexican facilities.

In the case of Mexico, it was three years since the previous major shutdown.

Here, we performed a major revamp of the steel shop, replacing the electric arc furnace system and installing a new secondary treatment facility.

We experienced some delays and operational issues during the revamp, with steel production being affected.

This investment in maintenance activity resulted in a higher level of efficiency losses than we had foreseen in the third quarter, which will also spill over into the current quarter to a lesser level.

If we look at our performance in the first nine months of the year compared to the last year, sales have increased 12%; EBITDA, 25%; and earnings per share, 44%.

Our accumulated EBITDA ratio has reached 26.5 and we expect to finish the year around the same level.

We had a low level of shipments to the Middle East this quarter, but they will recover in the fourth quarter, and we are seeing a good level of demand for our product and service in the region.

In Iraq, where our performance, in terms of technical and commercial execution, is widely recognized, we are consolidating our market position.

And in Saudi Arabia, demand is increasing as Aramco ramp-up is operational.

Our sales in the US remained strong in the third quarter; but in the fourth quarter, we are seeing a weakening of demand associated with activity and inventory adjustment.

Additionally, the continued high level of import is putting pressure on the prices of the less differentiated product.

Looking ahead, we remain confident about the prospect of the oil and gas industry in the States.

In the rest of the world, demand for our premium OCTG products remains strong, as our customers move forward with their complex projects.

In this quarter, we had important success in China in the high-end segment devoted to high-pressure high temperature wells and in shales.

Our Wedge technology was sold in Tarim Basin and for the shale gas program, one of the first to start in China on this segment.

During the quarter, we also introduced our first connector product for use on a large diameter conductor and surface casing in offshore application in Brazil.

In the coming months, we will remain focused on execution, concentrating on bringing our industrial system to full operational efficiency, and on improving the level of service to our customers.

Thank you very much.

We can start our conference now.

(Operator Instructions) Ole Slorer, Morgan Stanley.

And Paolo, I wonder whether you could walk us through the biggest debate right now?

It doesn't seem to be the near-term softness in North America.

That's sort of well understood, I think, in the medium-term outlook as well.

But really around the supply side, both in North America but with respect to total supply and the premium components that's coming on globally.

To me, it seems like there is a lot of apples and pears.

Some people are throwing numbers out there, and also including changes in other plans, that doesn't seem like they are likely to come onstream in the US.

I wonder whether you could just give us a quick overview on how you see the supply side by region and by segment.

Thank you, Ole.

I think concerning the first issue you are saying, forecasts on our view, let's say, on the North American market evolution.

What we see is a weakening in the market, there is a clear reduction in rigs operating.

To some extent, this is clearly affecting the real of consumption.

This is offset to some extent by improved efficiency, but we do not expect this to change the main course.

In the fourth quarter, we expect overall demand apparent consumption to be lower than in the third quarter for all range of products.

I will like to ask German to elaborate a little bit on this how we see the combination of lower level of rigs and efficiency.

Thank you, Paolo.

Very rapidly, Ole, and then I take on the supply question to add a few comments on that as well.

But fundamentally there, the view we have is that drilling efficiency are not well deliveries, but drilling efficiency footage is improving.

It has particularly improved in places like the Bakken, Eagle Ford, where we've seen wells drilled in 20 days as opposed to 28 days only months ago.

But overall, it's not really capable of offsetting the rig count productions that we've seen so far, and therefore, we are expecting apparent demand to come down.

Now with respect to supply, Ole, we insist on what we have said many times, the US market is today serviced by imports at a level that grow up north of 50%.

And going forward, we believe that there is a clear opportunity to substitute a big component of those imports by domestic production, in the form of access, in the form of even associated services that we could do with domestic manufacturing.

I don't know, Paolo, if you want to expand on that.

Well, I would also like to also add one comment on the reason why the outlook has some answer to any on the number of rigs and the operation of our clients.

The price of WTI went down since the beginning of the year by around $10 or something less.

This is affecting the cash flow.

And I would say that there is today some more concern on the downward risk on this.

And this is containing the number of rigs and the investment in the number of rigs operating in the oil sector.

As far as gas is concerned, the price of gas increased.

And personally I think that the imbalance between increasing demand as a whole year-on-year, we can have something in the range of 12% increase in demand, while the supply of gas in North America has been much lower at the rate of 5%.

I think that if there is a cold winter, or depending on the weather condition, we may see some somewhat higher price of gas.

And we could see a little more stability on the number of rigs in gas, and even maybe some increase in the coming quarter during 2013.

Now if we look at, let's say, the supply side, but in the short term, what we see is a strong pressure from imports on the lower -- on the low end part of the market imports coming from different countries, but especially welded pipes coming from Korea, are exerting pressure in some of the low end applications.

And this is reflected in the Pipe Logix that is moving down, as you have seen.

I think this is a trend that could go on in the next future.

Now, if we look at the medium-term and consider how the supply demand balance could be in three, four years from now, the situation will be, from my point of view, totally different.

On the demand side, I think US will expand drilling and look for a more solid energy independence, and in more environment friendly energy matrix.

And this will mean that the expanded development of gas and increased drilling.

The market, in my view, will expand at a fast pace in the coming three, four, five years.

In this environment, it will be, I think, also more difficult for import to maintain the present 50% share.

Some of this imports is coming into the States on -- not respecting, in our view, the unfair trade rules that should be applied in the future.

And I think that over time, the share of imports should be lower than the present 50%.

In this environment, we know that there will be additional capacity; Vallourec plant in Ohio will increase in production.

There will be new plant from TPCO in Texas and that could also expand.

But I think that, for instance, in the case of Benteler, the plant will be more focused on probably different from - OCTG, Benteler doesn't have a strong premium OCTG background.

And so, I don't think they will be competing falling into our space.

So I do not consider that the recent announcement has changed the overall picture.

We are confirming and going along and going on with our project, and we consider that supporting welded with seamless production in the United States is a way of combining product with service short-term delivery, faster reduced lead-time.

And this is the key to combining product excellence and supply and logistics in the US.

This is our strategy.

And I think it is unchanged by the short-term doubts and uncertainty on the price oil or on the perspective of the sector in the short-term.

Okay.

Very clear.

Just on one specific example, the change in plants has been talked about for a while, meant to come on I think in Corpus Christi with 0.5 million tons.

What is the status on that specific project at the moment?

Are you seeing that starting to market its tubes or what's going on there?

Well, we -- for the time being, we do not know, and let's say which is the stage or the timing of this investment, I don't know if German -- we could use an expectation or your view because I remember the plant is a rolling plant.

There is no steel capacity for the time being.

So, there will be some limitation in ramp-up and time to markets with these.

(multiple speakers) But German have they even started breaking ground?

I think, Ole, it's fair to recognize that from what we know, the public statements are TPCO, the project upside down and decided to start with the finishing part, threading and heat treatment.

And it is our understanding that they initiated a construction of that and decided to postpone delays for now the installation of the rolling mill and ultimately the steel shop.

So, I think it's fair to recognize that the work has started but they are mostly concentrating on the finishing part.

We don't really know their plans as to how fast and when they are going to potentially integrate it.

But this is all we know for now and this is what they have communicated.

Yes, I would make one additional comment.

I wouldn't focus so much on the question of full production capability.

There are many mills here today seamless mills in the United States.

But the point is, how strong and how intense is the competition in our space?

Our space is a space of product service premium, support to our clients in the more complex projects and in the shales.

I think you need much more than a plant to support a strong competing position here.

I couldn't agree more.

But there's just a fair amount of confusion out there.

But so I just wanted to highlight this point.

But thank you very much for helping us out here.

Michael LaMotte, [Tenaris -- sic].

It's Michael LaMotte from Guggenheim.

Good morning, everybody.

My first question has to do with the cost side, and I was hoping you could provide some thoughts on what you're seeing in terms of labor inflation, steel cost, deflation, particularly as you go into the ore price negotiations for 2013 here in the fourth quarter.

There are a lot of moving pieces in, but not all in the same direction.

So I'd like to try to get a sense as to how we should think about that over the next several quarters.

Yes.

Yes, thank you, Michael.

Well, I would say that, in general, we have an environment of lower cost of raw material.

This is turning into our cost of sale over time.

It will not be this quarter.

It will be slightly next quarter, but it will be more reflected in 2013.

We are getting scrap, iron ore, and they are getting into our cost of sales, also the cost of hot rolled coiled will fully transfer into -- get into our cost of sale over time.

We negotiate iron ore on a quarterly basis, basically we are following very closely the spot price.

So, the price variation is getting into our purchasing price but then it gets into our cost of sales with some delay.

The problem for us this quarter has been that having stoppages for maintenance in many of our facilities in seamless and welded, we had higher costs because of limited absorption of fixed costs.

And we had also higher costs because of the inefficiency that has been caused by the delay in the ramp-up and the startup of the new installation.

Why I'm saying that this will also affect to some extent our fourth quarter because we are, for instance -- we are being forced to acquire some of the steel bar during this quarter, but we will see this in our cost of sale during the next quarter.

To give you an idea, we estimate that the impact on our cost will be in the range of $30 million in the present in the third quarter, and there will be an impact average of $10 million in the quarter -- in the fourth quarter.

So, it is going down.

Hopefully, after the new facility which should show their potential and we should be able to recover, and reduce costs for two reasons -- the lower cost of inputs and the improved efficiency.

Now, the question of inflation and labor, it depends on the exchange rate.

If for sure we had some of this impact in Argentina, Brazil, affecting our cost of labor, but there is some volatility here.

It's difficult to predict how this will affect the beginning of 2013.

These are the factors that are affecting our cost of sales.

Anything on the energy cost side, particularly in Mexico?

Or are things pretty stable there?

I would say nothing significant.

In this moment, Mexico is reflecting in its cost of energy the competitive advantage of North America, the lower -- a low cost of gas.

This is getting into our cost of energy.

We are -- this year, we have been also able to contain cost of energy in the other -- in other countries, in Argentina, in Europe, thanks to the full integration.

Now you know in Europe we produce our own power, our own electric energy, and we acquire gas.

So in the end, I wouldn't say that this has introduced significant -- has been a significant factor in our cost.

That's great.

Thank you, Paolo.

German, if I could ask a quick one of you on the inventory adjustment factor for the fourth quarter.

Obviously, not being a big supplier to the distributor network, we generally don't think of inventory adjustments as being as significant for Tenaris as for some of your competitors.

But is it fair to assume that when you talk about the inventory adjustments, is it a function of the E&P customers shutting down programs a significant clip here in the fourth quarter, and having enough inventory to sort of carry into year-end?

And that's what's driving the slowdown in purchases?

And if so, wouldn't that necessarily correspond to a pretty meaningful uptick in the first quarter?

Well, there's a couple of moving parts, I think, Mike, with respect to inventory.

One is the impact of activity on the current level of inventories.

We've seen apparent demand coming down, when you look at third quarter compared to Q2.

And despite that, that has translated, and despite the notion that, as you just indicated, distributors will tend to reduce during Q4, given tax exposures and will not -- we're still seeing some increase in the overall level of inventories that have surpassed the 2.5 million tons mark; something north of five months' worth of potential consumption.

So, this is where we are.

Apparent demand coming down consistent with activity coming down.

Inventories in terms of months likely up.

We see these probably moving into Q1, and then consistent with potential activity pickup, we believe that this would align a bit better.

Okay.

Thanks, German.

Thanks, gentlemen.

I'll turn it back now.

Bill Sanchez, Howard Weil.

You've given a lot of kind of high-level detail here with regard to how you see the business.

I just wanted to drill down a little bit as to how we think about our modeling here, especially for fourth quarter.

And probably, if we look at just overall volume expectations 3Q to 4Q, you can have Middle East shipments up, as I understand it; less intervention at the plants, which is a net positive, I would think, to volumes; and then onshore North America down.

How do we think about overall volumes, if you want to break it up between seamless and welded, how do we think about how 4Q looks relative to 3Q there?

Well, you know, in this quarter, in the third quarter, the stoppages has affected both seamless and welded, but probably in our production, there is more seamless than welded.

So, the mix also for sales in the third quarter has contained a higher share of welded compared to seamless.

This should get back to normal relation in the fourth quarter.

So we expect, for the fourth quarter, that the volume will recover.

No?

Because our production system is recovering.

And even North America will reflect the weakness we mentioned, but Middle East, and particularly the sales in Iraq and Saudi, will recover.

The third quarter has been particularly weak, as we anticipated.

In the fourth quarter, we were -- we think we will fully recover this.

So, we expect for the fourth quarter, higher volume than in the third.

Okay, great, that's helpful.

And as, I guess, as we just stick with thinking about price per ton here, which I guess under the new reporting that you all rolled out, it was relatively flat 3Q to 2Q, and you've addressed that from a mix perspective.

I guess as we think about pricing here on average going forward, maybe into the first half of next year, how does the impact of the US onshore market weakening here -- how do we think about the mix potentially if international is continuing to grow next year?

Are we going to start seeing price per ton actually decline here as we think about the first half of next year?

Well, we will -- we're feeling the pressure of supply and import on the low end less differentiated product.

This is getting into the Pipe Logix, and through the Pipe Logix is also trickling into some of the formulas of the long-term agreement.

This may affect, to some extent, our price.

On the other side, the mix with higher level of seamless, and the continuous work we are doing in pushing our high-end product and component will offset some of these down effect.

So, you may expect -- we think we can defend the prices at a level close to the present level as a whole.

Okay, great.

And I have one other question just as it relates to the EBITDA margin guidance, which is now anticipated to be flat, I guess -- or you haven't given fourth quarter before.

But fourth-quarter EBITDA margin guidance flat with 3Q.

I guess just given the mix, as you mentioned earlier, with seamless volumes being up sequentially, I would have expected perhaps -- and clearly some of the cost issues abating a bit on the intervention side in the plants -- that perhaps margin guidance would have been up 4Q versus 3Q.

Can we talk a little bit about that?

And then has there just been basically a margin recovery deferral into the first half of next year?

Well, as you know, in the last conference call, we were guiding the margin level in the range of 27% EBITDA ratio for the entire year.

Today, we are guiding in the range of 26.5%.

So, as a whole, let's say, is a small difference is reflecting the weakness we perceive now more than before in North America.

Looking ahead, I really think that we have a period of two, three months in which the oil company will look into the macroeconomic risk, the fiscal cliff, China dynamics, Europe, I mean -- and with this in mind, and considering the message that could come from the new US -- the continued US administration, they will define better the program for next year.

This will have for sure an influence on our view in 2013.

In principle, what I see is that this quarter and in the fourth, we still have a lot to improve in terms of efficiency and recovering from the stoppages, and the inefficiency of the third quarter.

So, we have room for improvement on our side, on execution side.

And we will be able to have a better understanding of the investment decision of the oil companies, especially in North America, maybe during first quarter of 2013.

Today, there is still a lot of uncertainty.

Okay, well, thank you for the time.

I'll turn it back.

Stephen Gengaro, Sterne, Agee.

Really two quick questions.

The first, in the third quarter, and then as we sort of look into the fourth quarter, can you at all -- can you give us any kind of quantification of the impact of the inefficiencies on margin?

Just so it can kind of help us think about the underlying business going forward?

Well, in the fourth quarter, I told you we estimate $10 million effect on the fourth quarter.

Following a $30 million effect on the third quarter.

Now, hopefully, in the first quarter of 2013, there will be no effect or even some improvement, I hope.

We could get from the investment we have realized and we should expect even an improved performance.

But for the time being, let's say, this is what I can tell you.

Thank you.

And then as you look at the Gulf of Mexico Deepwater market, and I guess also your position in Brazil, can you give us a sense for what you're seeing in those two markets, both in the fourth quarter but then into next year?

From our point of view, this is a dynamic segment that we continue to grow worldwide.

But then, in the different regions, that would be different dynamics.

In the case of Brazil, we expect Petrobras to slow down to some extent at the pace of development of the offshore Deepwater resources.

And this will affect, during 2013, the expectation of increase, let's say, in the level of drilling operations of Petrobras, for instance.

In Gulf of Mexico, I would turn the question to German.

But from my point of view, there is a clear medium/long-term strategy of expanding operation by the oil company in the Gulf of Mexico.

German, a comment --?

I think -- thank you, Paolo.

Thanks, Stephen.

This is exactly so, particularly for the Deepwater part.

We've seen an important recovery and an important restocking process to service the new requirements of Deepwater Gulf of Mexico.

And I think we're going to continue to be seeing the same going forward.

The shelf or the shallow part is probably going to confront the opposite trend.

It's something that we also know.

So, overall, this space will grow, driven by Deepwater requirements -- growing Deepwater requirements.

This is important.

The deepwater represents around 15% of the premium joints space and so it's an important segment for us.

West Africa is for sure growing with strong dynamic.

I don't know, Alejandro, if on this segment you can comment.

But what we see looks positive to me.

Yes, thank you, Paolo.

As we mentioned in last conference, West Africa is very solid and East Africa also is very solid.

In terms of development in the deep offshore, the new blocks in Angola are coming during 2013, and now there is announcements of Nigeria coming back to the Deepwater segment.

They are also very strong in the shallow water and onshore.

So we're seeing in general in West Africa and the whole sub-Saharan Africa good movement in the offshore business and deep offshore.

Very good.

That's helpful.

And then just one quick housekeeping item.

The $49 million nonrecurring gain, would you tax that at the corporate tax rate to get to sort of an EPS impact?

The $49 million is before tax, and we expect this to turn out into -- this is turning into $32 million after-tax in our account.

Very good.

Thank you, gentlemen.

Frank McGann, Bank of America.

Just to follow up a little bit on the cost question and just broaden it a bit, in terms of what you're seeing in terms of trends of costs globally, and costs versus specific competitors in specific locations of plants, you've had plants that historically have been quite competitive; perhaps because of foreign currency movements lately, they've been a little bit less competitive.

But I'm just wondering how you see your plants and the location of your plants, and the cost structure that you have, playing out over the next three to five years relative to other locations globally, and other key competitors, particularly China or Korea?

Well, you know, Frank, the -- Tenaris is the most profitable company in this segment.

The EBITDA ratio of Tenaris is 26.5%.

This is built on differentiation on product on presence in different markets.

It is deeper roots in many different markets.

And also, on a very stronger supply base, between the entire system from Argentina to Mexico to Colombia to Brazil, to Romania, and also you can say US or Canada or Japan, are building a group of companies of production facilities that, in our view, are complementing themselves in a very efficient way.

I really think that this will remain a competitive advantage for us in the very long run.

And we are designing and thinking of the plant in the US in a way that compounds this strength and combines effectively with the rest of our system.

Mexico is a very efficient facility, independent, different and efficient that then we can have in one startup or in the operation on one quarter.

Argentina is a very efficient facility and independently from turbulence or any concern we may have.

But in the long run, no doubt Siderca, the facility in Argentina that is exporting more than 70% of its production, is one of the most competitive facilities, and also has very well position, I would say, from the point of view the full integration from iron ore to the finished product.

Romania, the same area.

And so when you look at the entire system, I think in all of the different stages of value-added in our chain, I think this will remain the most competitive system worldwide.

At the same time, we hope to continue to enhance our differentiation.

Consideration like Dopeless, the perspective of product of Dopeless product today, is gaining ground in environment-sensitive areas.

But also in all of the offshore and operation we expect from this, and from the development of new design on premium and product enhanced differentiation that could leverage on the competitiveness of our system.

On that, Frank, only small remark.

This past quarter, we started up a Dopeless facility in the States, which is already under production, and has already supplied the Dopeless order for one of our alliance customer's Deepwater Gulf of Mexico.

Okay, thank you very much.

Julien Laurent, Natixis.

I was wondering if, in your guidance for flat margin in the coming quarters, if you can elaborate a bit on what do you expect in terms of pricing pressure on the low-end which would be in effect?

Could you quantify this pricing pressure?

Is it 5%, 10%?

And mentioning three of the capabilities of your production scheme today, do you see room for further acquisition of low-end assets in this kind of market and upgrade this kind of assets for moving to higher?

Thank you.

Yes.

If I understand well, your question is on how strong is the pressure on the low-end marketing internal pricing?

No doubt in the US, in a moment in which rigs are going down and, to some extent, apparent demand is contained, we feel for the welded products and the low end seamless, the pressure of imports is there.

I think it's reflected fairly into the price evolution of the Pipe Logix.

Pipe logix is not reflecting the evolution of prices in the premium segment, but reflected quite fairly what is happening in the very lower end of part of the spectrum.

But as I told before, I do not expect that in an environment of increasing demand, this pressure coming in large part from import could maintain -- could remain as strong as we see it today.

Over time, increasingly in the expansion in the market, should allow to absorb some of this pressure from import.

You mentioned acquisition of low-end assets.

We have no plan for acquisition in the field in the moment.

You know, we are very -- we have deep roots in some of the markets of Latin America -- important markets in which we need to supply the entire range of products, because we gave full service to our client.

So in that case, we combine all the range of products and support this with the just-in-time service and service to our clients.

We do this in Romania.

We do this in Argentina in other places and in Colombia also.

When we get into this market, we only get into this one we need to strengthen our industrial operations, and to combine any way to have the full range of supply for our clients.

Thank you.

Geoffroy Stern, Cheuvreux.

Geoffroy Stern from Cheuvreux speaking.

Before asking a couple of housekeeping questions, I will start with the US.

I was wondering if you could share your view on the penetration of the welded pipe in the shale market in the US?

And what is your market share, in your view, in the shale markets in the US?

That's my first question.

And then, quick housekeeping question, could you update us on the depreciation charges for 2012 and 2013?

Same question for CapEx to type of tax rate going forward?

On the first point, before passing to German, for sure, shale is a key driver.

As you know, shale has supplied today 10% of the oil produced in the United States, and is supplying 25% of the gas produced in the US, and are representing around 50% of the overall demand of pipes in the US.

So the issue of having a very strong package of products for shale is a key target for us.

And in doing this, we combine all the range of products.

In this last part of the market, we need to combine welded and seamless.

Let me tell you that the ability to combine welded and seamless, and to fully serve the needs of such an important part of the market is one of our important competitive advantages.

This is in our view, German?

Yes, thank you, Paolo.

Simply I will not be able to, for competitive reasons, to provide you a number of specifics, but so you know, just short of 50% of our OCTG sales in the States are going to the shales.

So we have a very important presence and I think this is going to continue to be so.

And out of that, about 38%, 40% is ERW material.

There is a component of the shales that do require ERW pipe, given the string design.

And we also believe that this is going to continue to be so going forward.

Second point is depreciation and CapEx.

Here I will ask Ricardo to make a comment on the -- if we will expect changes in depreciation, the level of depreciation, and then we get back on CapEx.

Yes, for this year are all article (technical difficulty) through the year, with $550 million of depreciation and amortization.

Out of that, $350 million will be depreciation.

For next year, the figure will be something similar and a level will increase around $600 million for the whole year.

Regarding the level of CapEx, we planned today to finish the year talking only about CapEx, capital expenditure close to $800 million, we shall take into account any expenses in R&D.

For next year we're planning to reduce a little bit that number.

Around $750 million -- in that range without taking into consideration any big capital expenditure related to the whole project in the United States.

To the project in the United States.

Yes.

All right.

Can you just repeat what you just said on the --?

Regarding G&A, you have another question regarding the tax rate.

The tax rate -- we expect to have this year tax rate around 25% and for next year in a similar level.

Okay, thank you.

Raphael Veverka, Exane.

Just one question.

You mentioned again the pressure you are seeing from imports on especially on the low-end products.

I was wondering if you see room for another dumping case as the one you boosted against Chinese price in 2009.

Yes, this, German, could you comment on this?

Sure.

Well, look, we've seen Korean imports which have reached a level of about 45% of the overall welded imports into the States.

The Korean imports have become a major market share participant.

When we look at the prices of imports, we compare it to the international price of hot rolled coiled, we frankly believe that these are unfairly traded imports.

Now as the industry, we probably I could say today are evaluating the specifics as to understand the potential case.

It's not really much more I can say at this point other than this is an industry effort.

We don't work on these and we are convinced that these are unfairly traded on into our market.

Okay, thank you very much.

Stephen Gengaro.

Gentlemen, I just wanted to clarify one comment.

On the EBITDA margin guidance, we had, I think, 25.6% in the quarter for the third quarter.

And you suggested flat but then you said 26.5% versus 27%.

I just wanted to get just clarity on where you were targeting for the fourth quarter.

What I was saying is, for that -- remember in the last quarter, I would say for the second half of 2012, we were expecting to be able to maintain 27%.

Then, in the first quarter, saying that in the first quarter we would be slightly lower and in the fourth quarter, slightly higher.

What we see today is that we should be able to keep for the entire year a level of 26.5%, relatively flat in this sense.

It means that we expect the EBITDA ratio to increase in the full quarter, but not to the extent to compensate for what we have reduced our number in the third quarter.

Okay, that's helpful, thank you.

And ladies and gentlemen, that concludes the Q&A process.

I would now like to turn the conference back over to Mr. Giovanni Sardegna for any closing remarks.

So, just to thank all of you that have been participating in the call and we hope to hear from you very soon.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.