Tenaris SA (TS) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 Tenaris earnings conference call.

My name is Jackie, and I will be your coordinator today.

(Operator Instructions).

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

I will now like to turn the presentation over to Mr. Giovanni Sardagna, Investor Relations Director.

Please proceed.

Thank you, and welcome to Tenaris's 2013 third-quarter results conference call.

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

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; Edgardo Carlos, our CFO; German Cura, our Managing Director of our North American Operations; and Gabriel Podskubka, 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 our results.

As anticipated during our last conference call, and at our Investor Presentation in London last month, third quarter's sales decreased to $2.4 billion, or 9% year-on-year, and 15% sequentially, principally due to the impact of project delays on line pipe shipments in Brazil; weather issues in Mexico; lower sales in the Middle East and Africa; stock adjustments in Argentina, following the renewal of our long-term contract with YPF on a just-in-time basis; and the seasonal impact of maintenance stoppages in our plants in Northern Hemisphere.

Our EBITDA reached $622 million, which was down, in line with our sales.

Our EBITDA margin was stable at 26%.

Our earnings per ADR were down 31% year-on-year, as net income was negatively affected by a $45 million deferred income tax provision following the introduction of a new 10% withholding tax in Argentina.

Average selling prices in our tubes operating segment were up 2% compared to the corresponding quarter of last year, and down 2% sequentially.

During the quarter, our sales of high-end seamless products were at 58% of our total seamless volumes.

During the quarter, cash flow from operations remained strong, at $753 million, enabling us to end the quarter with a net cash position of $785 million.

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

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.

As anticipated this quarter, our results were affected by line pipe project delays in Brazil and lower sales of high-end products, due in part to the seasonal effect of our plants shutdown.

Whereas seamless line pipe in Brazil will continue at low levels in the coming quarter, sales of premium connection products should recover strongly in the fourth quarter, and going into 2014.

Our order backlog for premium products is as high as it ever been in the past, and fully supported the investment we have been making to expand the capacity of our industrial system to deliver heat-treated and premium connection products.

Our new premium threaded line in Silcotub in Romania, is in full operation following the summer shutdown.

And our Tamsa plant is increasing production of premium and other high-quality products.

Demand in the Middle East and for offshore deepwater projects worldwide is strong, and supported by industry fundamentals.

We are strengthening our competitive position in this area with new products.

As you know, we are focusing our premium connection development effort on two product lines.

On one side, the Wedge for lean profile, high-torque, high-clearance applications.

And on the other side, on the Blue series for the more demanding HP/HT well design.

In October, we successfully delivered our new Wedge 623 Dopeless connection to Shell in the Gulf of Mexico, who recognized our performance with its first-ever global well installed equipment quality award.

And, generally, we will deliver our new Blue Max Dopeless connection to Maersk for a very demanding high-pressure, high-temperature applications requiring heavier wall pipe in the North Sea.

We are investing a substantial proportion of our R&D expenditure in these two lines of products, and on Dopeless.

In recent days, we have confirmed important orders for high-specification line pipes for use in deepwater projects in the Gulf of Mexico like Gunflint and Big Bend; and in sub-Saharan Africa.

In the Middle East, Saudi Arabia and other countries in the region are intensifying efforts to increase production of natural gas.

This has been a major driver for increased demand for Sour Service products, where our steel grade technologies are well-established.

This year, sales of our Sour Service products have risen strongly, and we expect that demand will continue to grow in the coming years.

In North America, our sales have declined over the first few quarters, due to changes in product mix and the declining prices represented by the widely used Pipe Logix Index.

The market continues to be affected by aggressive import of less differentiated products, but this should eventually slow down over time.

Meanwhile, we are making progress with our new mill at Bay City, for which we began site preparation and earthwork in September, and recently concluded negotiations for the supply of the main equipment.

We continue to regard 2013 as a transition year for Tenaris.

Beyond the results of this particular quarter, we continue to think that in 2014, positive development in markets where we are well-positioned will be reflected in renewed growth in sales and sustained margins.

Well, thank you, and we can start taking any questions you may have.

(Operator Instructions).

Bill Sanchez, Howard Weil.

Yes, thank you.

I wanted to ask about the EBITDA margin outlook here going forward.

I think you guys did a commendable job of keeping margins essentially flat, 3Q versus 2Q.

I guess I would have expected some improvement in 4Q, just given the mill uptime and the absorption you would get from that in 4Q.

But could you spend a little bit of time talking about the outlook on the EBITDA margin front; and why, given what has been discussed as a pretty robust topline opportunity for you in some very core growth markets in 2014 versus 2013, there's not more conviction to see EBITDA margins expanding from these levels next year?

Well, thank you, Bill.

You are right; I think the Company has done a good job in third quarter in maintaining EBITDA margin at this level.

And effectively looking ahead, we see that the sales of high-end products will increase.

At the same time, we should consider, also, the increase in sales of low-end products, especially North America.

This is something that we are considering, looking ahead in the future.

So, if we combined the two things, we expect our EBITDA to increase in absolute terms, and our EBITDA margin to be marginally higher.

But we are guiding on what we say a stable level of margin.

We expect probably something higher, but this will depend from how fast we can also increase some sales of low-end products in North America over time.

And as my follow-up on the North America low-end side, it maybe dovetails with expectations around the trade case.

And maybe, German, for you, could you perhaps update us?

I know when we look at just the imports from these countries as a percentage of OCTG consumption in the US, it's pretty significant.

Maybe it's close to 30%.

How do we think about 2014, the opportunities for share gains for Tenaris?

And how do we think about that in terms of topline and mix-type issues?

Do we -- at some point, we start seeing some pricing stabilization here on the lower end, as maybe imports slow down to some extent?

Thank you, Bill.

I will pass this question to German.

I think that we should expect an increase in our sales of low-end products, gradually, from now on.

Also following the expectation of concerning the case.

But, German, can you pick up this question?

Sure.

Good morning, everybody.

Good morning, Bill.

Thank you, Paolo.

A few highlights, Bill, which hopefully will help us guide the way we see.

Number one, the timing of the trade case has been postponed as a result of the government shutdown.

Initially, we were expecting a preliminary determination from the DOC on potential anti-dumping margins by mid-December, and that date has been pushed into mid-February.

So that's a little bit of an update on how the process goes.

Now, from a volume perspective, we continue to see the market showing a very solid space of demand.

Drilling efficiencies, in fact, translating in an aggregated level of operational consumption.

And we believe this is going to continue to be so, because the view is we don't really believe that drilling efficiency has topped off.

There's still a lot of work to do.

Now we remain, I said, cautiously optimistic.

We don't really want to expand much about potentially what the implications of the trade may mean, or may not.

Naturally, we're looking at a case which is -- give or take accounting, by about 25% of the size of the apparent demand.

So it is a substantial quantity.

And when and if the case were to go our industry way, it is our expectation to do the appropriate, to perhaps capture an important piece of that.

Thank you.

I will turn it back.

Michael LaMotte, Guggenheim.

Okay, thanks, and good morning, guys.

German, if I could just follow up with Bill's line of questioning, on next year in North America.

Could you give us a sense, excluding the trade case impact, of what you think the activity growth and drilling efficiency benefits mean, just in terms of overall volumes for Tenaris in North America next year?

German?

What kind of growth we could really be looking at.

Okay, good morning, Mike.

Well, excluding the potential impact of the trade case, I think our view is that we've seen drilling efficiency at levels of about, on average, 10%, 11%.

This is substantially higher on the shales -- north of 25%.

And this is naturally translating on aggregated demand.

We'll see that in the coming quarters.

Now also, very importantly -- and Paolo mentioned some of that in the opening remarks -- Gulf of Mexico is back to pre-Macondo levels, and we are expecting that to continue on.

And our new Dopeless 623 is gaining very important traction.

We are expecting this to be a major factor during 2014.

There is where we are also expecting an important growth going forward.

So it seems reasonable -- mid-teens is a reasonable starting point for volumes -- mid-teens growth?

Mike, we're not disclosing specifics for competitive reasons, but we've seen a gradual growth of volumes in the US during 2014.

Okay.

Paolo, if I can ask a question, following up on a comment you made in your prepared remarks concerning the backlog of premium now being at the highest level ever for Tenaris.

I'm curious to know what the delivery schedule looks like.

We've seen a lot of orders and a lot of different components of the oilfield services industry.

But delivery timetables are anywhere from next year, 2015, 2016; stretched out.

Can you give us a sense as to how much of that backlog is for 2014 delivery, and if delivery timetables are actually longer than, say, they were 12 or 24 months ago?

As I say, Michael, in the opening remarks, we are now working at capacity, and it's clear that we are recovering pricing power in the premium world.

Our backlog is high.

Our, let's say, opening between 4 to 6 months, depending on the different range of products; and, to some extent, also region of the world.

So, gradually, there is a buildup of demand here in the premium world.

This is driven, as I was saying, by different factors.

For sure, the offshore is one point, but also there are premium and different applications for gas drilling.

Middle East is one of the areas that is strong.

But there are also other countries which we have demand, and the demand for shales.

This is what we see now.

Okay.

And, again, just in terms of percentage of backlog to ship next year, is that number 65%, 70%?

Is that with a 4- to 6-month order to delivery cycle?

Or, essentially, will all the backlog that you have now ship next year?

No, I think you are -- isn't, and we should be in the range that you have seen.

The point is that the trade case is putting some uncertainty, on which will be the final mix, let's say, looking ahead for our sales.

Because we should be very well prepared to serve our clients.

Remember that in our production lines, we are mentioning high load on our premium line.

There is also high load on some of the heat-treated material.

We need to attend our clients, and be prepared to attend on our clients in North America, as well keeping in mind whatever could happen.

So this is where we stand, and is influencing what we can expect the share of our backlog in the future.

Okay.

Paolo, last question for me -- if I could get you to comment on what's happening in Argentina at the macro level, and what you see as risks there.

Whether it get to currency crisis and default levels, and what Tenaris -- what the implications might be for Tenaris if we reach that kind of threat level.

Well, you have seen in our results part of the impact of the increased tax pressure and fiscal pressure that we are feeling in Argentina.

And this is something that is there to stay.

We register the impact on increased taxes on dividends in our earnings, and this will clearly be affecting our position in Argentina also for the future.

The government is enclosing deficits by increasing taxes on these.

Now, on the other side, frankly, in the development of the energy resources of Argentina, I'm quite optimistic.

Because in the end, Argentina, one, has a very strong need to reduce the energy deficit looking ahead; and, two, has very important reserves and resources for doing this.

It's a long-term process.

But now companies are moving in doing exploration, and in developing the technology that will be needed to develop to a much higher rate and a much higher pace, the resources that are in place.

So, we are seeing increasing rigs; increasing drilling.

Drilling in Argentina is more costly than in North America.

So this process is proceeding at the pace that is not the pace of the US, but is moving on.

And YPF, the association of YPF with our Company, our position themselves, we see increasing volumes.

Even if in this quarter, this startup of our long-term relation with YPF -- long-term contract, that imply a just-in-time supply to the rigs -- has had a very substantial impact in reducing our revenue, because we take control of the inventory, and we are reducing our shipments [inaudible].

But this is what I see.

There will be strong development, for sure.

The pace, not as fast.

And I think that this will happen independently for political complexity of the situation in Argentina.

That's helpful.

Thank you, Paolo.

Fernando Valle, Citi.

Hello, guys.

Congratulations on the results today.

Just two quick questions for me.

First, just wanted to see if you guys could give a little bit more color on what happened on the welded sales that dropped substantially quarter-over-quarter.

And also what happened in the Middle East in the third quarter, and why you believe it's going to have a substantial pickup in activity during Q4?

Thank you.

Thank you, Fernando.

On the first question, well, the situation in Brazil, the postponement of project, especially the Rota 3, has been really affecting us substantially.

This is what affected our welded sales to a very large extent.

Today we went down substantially from last quarter into this quarter; and we will be down in the next quarter, at least -- we expect until June, September.

So, at the beginning, we were thinking of a recovery of this maybe earlier on.

But what we see that for different regions, Petrobras is postponing final definition of this project.

And this had an impact, and will have an impact on our revenues, on our sales.

I think this is the main effect on the welded side; because, German, I don't think that the effect in North America has been so dramatic.

No.

I mean, there is nothing very particular.

As far as the Middle East, what we could expect from the entire region of the Gulf, I would ask Gabriel to give you a view of this.

Thank you, Paolo.

Good morning, Fernando.

Yes, in fact, to explain the drop-off of sales in the Middle East in Q3, I think there's a simple explanation.

I think it's the reduction of production volumes, given the mill stoppages that we have in the Northern Hemisphere.

I think what we expect in the Q4 is a recovery, aligned with increasing production in our industrial system.

We see that the rigs of Aramco are increasing, as planned.

Today Aramco is drilling with 160 rigs, and there is a solid plan to take this number to 230 rigs by the end of 2014.

As we discussed, there is a big drive of Aramco to increase their production of gas, driven by local consumption.

And this is pushing the drilling activity in the country.

So, we're seeing this; this is happening; and we expect this to be shown in the Q4 and thereafter.

Great.

Thank you, Gabriel.

Let's go on.

Julien Laurent, Natixis.

Yes, good morning.

Just about the Middle East market of Saudi Arabia, could you give us any kind of indication on the volumes and the share of premium -- between premium and standard volume in this part of the world?

Is it a 1 million ton market?

Or, I guess it's much more narrow than that.

And also could you give us any guidance forward on the tax rate?

Thank you.

For the first part of the question, Gabriel, I will ask you to give an idea of how we see the mix evolution in the region.

Well, yes.

Julien, for competitive reasons, we cannot disclose precise numbers about the size of the market and our market share.

But what I can tell you that this is a very important market with a very much premium component, given the complexity of the drilling environment and the corrosive fluids that are given in Saudi.

And we are carrying a leading market share of premium in the country.

Is it fair to assume that it's a market, that it's much less than 500,000 tons per year?

Yes.

I understand that you don't want to be too clear.

Yes.

Yes.

This is a smaller market of 500,000 tons per year.

Okay.

On the question of tax rate -- Edgardo, you can give a view.

You have seen that our tax rate has been particularly high in this quarter.

But this, I think, has been --.

One shot.

In one shot, because we are producing a specific one-time provision for this.

But, Edgardo, you can comment on what we see in the future for taxes.

Sure.

Okay, even though it was a one-time shot in this quarter; looking forward in 2014, not only the tax law in Argentina, but also the reform in Mexico will affect our tax rate, basically 250, 300 basis points, on the rate that we were basically going into 2013.

So, overall, our tax rate for the next year will be in the range of 27.5% to 28%.

Okay, clear.

Thank you.

Felipe Santos, JPMorgan.

Hello.

Good morning, all.

The main question we have is -- we are trying to better understand the defects of the changes in OCTG, and sales of welded in our margins.

We saw higher volumes sales of seamless products.

However, you mentioned that they have a -- of margins impacted by your OCTG sales.

So this, following our view, the way we are seeing, the sales of seamless have been higher.

Shouldn't this drive the margins and everything higher?

Can you put this in context for us?

If I understand well, Felipe, the question is how we look at the margin on this.

Very briefly, I would say that the lowest -- the component with lowest margin in our portfolio are line pipe and OCTG welded products, especially in some of the regions like North America.

It's very much exposed to heavy competition.

These are the areas where we have a lower value-added chain and a lower margin.

Now, the highest margin are the most demanding and risk-prone applications, like the deep offshore of the HP/HT.

On this, let's say continuum, there are all the other products, depending from the complexity.

This is, let's say, what we can see.

In the case of the coming quarter, it will depend -- our mix of high-end and low-end products will really depend on how the case against unfairly traded imports in the United States will proceed; and how, also, the operators will react; and we'll anticipate the impact of this.

Now, these are, let's say, something that affects, as far as the margin of specific products is concerned.

But remember there is a general, let's say, impact that depends from an overall level of price.

The Pipe Logix went down by 14% in one year.

So, when we are looking into our margin, you should consider that we have a headwind, that is this general reduction of price of Pipe Logix, that our Company is compensating by mix that is continually changing to more demanding products.

This is what basically has driven our margin in the last one year.

Yes, okay.

Got it, got it.

But with the result from the anti-dumping process, do you expect the Pipe Logix prices to go up, right?

But your margins should be pretty much intact.

What we expect is that our mix, as I was mentioning, will change very slightly because of the increase in low-end product in the US, if the case was considered will go on well.

Now, as far as the general level of price, I think this is a more difficult issue.

It's difficult to forecast where the price -- how the price will react - there are different segments, any way there is capacity in the United States installed.

So, is not easy to understand, also, how the determination will be in the case, if every country will be considered violating trade laws, or only some of the countries will be considered in violation of the trade laws.

I would make any forecasts on this.

Okay.

Okay, got it.

Thank you very much.

Luigi de Bellis, Equita.

Yes, good morning.

Luigi de Bellis, Equita SIM.

Two quick questions; the first one is on the cash flow profile.

Could you give us an indication of the net financial position expected by year-end; and in particular on the working capital progression in Q4?

And, second question, how much is in terms of volumes had the seasonal impact of plant stoppages in Q3?

Thank you.

So, as far as the cash generation is proceeding, I will ask Edgardo to give us his comment.

Then, this quarter, we generated a substantial amount of cash.

How will we be doing in the fourth quarter?

Yes, you're right.

In the third quarter, due to the fact we have a very significant collection of [RCOs], and today with a reduction on the shipments in the third quarter, we are having a very positive working capital.

That basically will reverse on how in the fourth quarter because we are expected to ramp up in shipments; and of course consequently, in accounts receivable.

So, we are estimating that probably our net cash position for the end of the year will be a little bit lower than the ones that we have currently at the end of September.

Yes, and on the second question, which has been the impact of these seasonal stoppages.

This year, the stoppage has been more extended -- unusually extended, let's say.

We had stoppages from Mexico, to Canada, to Romania, to Italy, to US.

We needed to -- either for maintenance, revamping, capacity expansion -- we had to intervene heavily on the plant.

So the impact has been, let's say, unusual on our system.

That's part of the reason why we have lost some $400 million of invoicing, if you compare with the previous quarter.

But of this, just to give you an idea of this reduction in our invoicing, some $50 million or $60 million could be associated with the stock absorption in Argentina for our passing from a normal selling to in just in time.

Some $150 million are associated with the lower line pipe sales in Brazil.

And the rest you can say is depending for the additional constrain on capacity that we reduced` during this quarter.

Very clear, thank you.

Raphael Veverka, Exane.

Yes, good morning.

Thank you for taking my questions.

Two questions, if I may.

First, again, on Brazil -- so, you discussed about the weakness in welded pipe and in line pipes.

One of your competitors recently referred also to their order from Petrobras in OCTG.

So is it also something you perceive?

Is it the same magnitude as what you see in line pipes?

And do you expect the same impact in the first half next year, or maybe in next year?

And my second question is -- if you could comment on the pricing outlook and competitive outlook in your main international markets today.

Thank you very much.

On the first question, yes, we see a reduction in OCTG demand, from our point of view, in Brazil.

But these are not comparable to a reduction in the line pipe.

In the case of line pipe, basically, the postponement of a large project that was supposed to bring gas and oil from offshore to the coast.

So it's more, let's say, severe as a reduction.

This project did appear, and we went out substantially in our delivery of this.

In the case of OCTG, the reduction is of a much lower, in a percentage-wise.

So, there will be lower activity, but will not be so dramatic as the reduction in the postponement of the line pipe.

The second question is pricing, if I understand correct -- the pricing on the international market.

I make some, in general statement, that I think we are recovering pricing power for products with high-end, premium, and heat-treated complex products.

I would ask Gabriel to articulate, within this general situation, some additional comment on API, or let's say, specific situation that you can see.

One of these that I think is interesting is also the Indonesian safeguard that could have an impact on this.

But, anyway, Gabriel?

Yes, thank you, Paolo.

Good morning, Raphael.

In fact, what we are seeing in the major markets of the Eastern Hemisphere is a consistent demand growth driven by offshore markets and the gas markets, as commented, in the Middle East.

I think the Saudi has been explained already, but there are also some important increasing in premium demand in Kuwait, in the UAE; in Iraq, as well.

So we see Middle East, very strong.

When we go to sub-Saharan Africa, I think this is another important engine of growth.

We see the deepwater rigs increasing.

We already have today around 40 deepwater rigs in sub-Saharan Africa for development and exploration programs.

This is happening in Angola; also in the frontier markets of East Africa.

So we see a very strong demand for the offshore tubulars in sub-Saharan Africa.

In Asia, we also see areas of growth.

You've mentioned part about Indonesia.

I think we have a very positive note in the last few weeks, as safeguard has been established in Indonesia.

This would be valid for 40 years.

Basically for imported OCTG in Indonesia, there's going to be an imposition of a very important tariff, which, in a way, strengthens the position of the domestic producers like Tenaris.

This, in a way, shows the strength that we have in our domestic market, which will be seen in our books, 2014 and thereafter.

In North Sea, also we see projects for deepwater.

We see some frontiers as well.

We see HP projects progressing, so we see a constant and fair demand there as well.

China is also offering some opportunities.

We are present there in many, as our quarterly results show.

We have an important presence in several onshore and offshore oilfields in China.

For example, we are supplying Tarim, which is a very important oilfield in the matrix in China.

These are very deep wells at high pressure that require very sophisticated tubulars that we are producing.

in a combination of an outside production and local finishing in China, we have people there as well in the field.

So, overall, I think the premium demand in the Eastern Hemisphere is strong.

This is reflected in our high backlog, and I think it's giving us pricing power looking ahead.

Yes.

We have pricing power there.

On the API there is a lot of competition out there in the Eastern Hemisphere area also.

So our competitors from China, from Russia, are putting pressure there.

So I would say that we do not expect to have so much pricing power in the low end of the spectrum.

Thank you very much.

Giacomo Romeo, Macquarie.

Good morning, and thank you for taking my question.

If possible, I would like to have a bit more clarity on your expectations for revenue growth in 2014.

And now that you start having a little bit more visibility, and looking at what consensus is for revenue, how comfortable are you to achieve a double-digit growth implied in the market at the moment for next year?

When we talk about our revenue, I think the Street -- still we do not have a visibility on the entire 2014.

We see some uncertainty in the US, in the way the case could go over.

And still it's a little too early to confirm, or to give a view.

What we can tell that we are confident, we are able to at least to maintain the level of margin that we have over the future.

I wouldn't say that we have all the visibility needed to have a clear forecast of the level of revenues in 2014.

Thank you.

Ladies and gentlemen, at this time, we have no further questions.

(Operator Instructions).

Well, if there are no further questions, we would like to thank you for taking part in this call, and we will end the call here.

Thank you.

Thank you very much to everybody.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.