Tenaris SA (TS) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2014 Tenaris S.A. earnings conference call. My name is Jackie and I will 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 presentation over to Mr. Giovanni Sardagna, Investor Relations Director. Please proceed, sir.

Thank you, Jackie, and welcome to Tenaris's 2014 first-quarter conference call. Before we start, I would like to remind you that during this conference call we will be discussing forward-looking information, and that our actual results may vary from those expressed or implied by during this event.

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; German Cura, Managing Director of our North American operations; and Gabriel Podskubka, Managing Director of our Eastern Hemisphere Operations. Our CFO, Edgardo Carlos, could not join us for this conference call but he will be joining us for the coming ones.

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

During the first quarter of 2014, sales decreased 4% to $2.6 billion compared to $2.7 billion recorded in the first quarter of last year as higher sales in the Middle East and Africa were more than offset by lower sales in Brazil. Sequentially, sales also decreased by 4% as higher sales in the US and Canada were more than offset by lower sales in the Middle East, following the exceptional level of sales we had in the fourth quarter of last year in this region, as well as lower sales in Mexico, Colombia, and Venezuela.

Our EBITDA for the quarter reached $718 million, which was 3% higher than the EBITDA we recorded during the corresponding quarter of the previous year. Our EBITDA margin at almost 28% is one of the highest in the oil services industry.

Average selling prices in our Tubes operating segments were up 1% compared to the corresponding quarter of last year but down 2% sequentially. During the quarter our sales of high-end seamless products were at 60% of our total seamless volumes. During the quarter cash provided by operating activities was $612 million, allowing us to reach a net cash position of $1.3 billion at the end of this quarter.

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

Thank you, Giovanni, and good morning to all of you. With our first-quarter results we made a good start to the year maintaining our margins at the high level we reached in the fourth quarter. I am particularly pleased with the level of industrial efficiency achieved in the recent months. This, along with a good mix of products, has been a key contributor to the level of margins recorded in the last two quarters.

I will start with the Middle East, which has been very strong for us in the past few quarters. Here, the rig count and consumption of premium products are at record levels driven by the complex requirements of deep and sour gas wells. Although consumption of our products is increasing, the current high inventory levels mean that our sales in the region in the coming quarters will adjust downwards.

Deepwater is an area where we are seeing strong growth and the opportunity for us to deploy our strengths in product technology, technical and logistical support and local presence to support the major players worldwide. Last year, our sales in Sub-Saharan Africa rose by 74% year on year and will continue to increase during this year. During the first quarter, we delivered pipes to various customers conducting exploration and development campaigns in West and East Africa. In the Gulf of Mexico, we began deliveries of our Wedge 623 connections to the Mars B project and in the coming quarters we will deliver deepwater line pipe for the Big Bend and the Gunflint development. In Brazil, however, project delays continue and drilling activity has slowed down. As a result, our sales in Brazil this year will be some 45% lower year on year but they should recover next year when we begin deliveries for the Rota 3 offshore pipeline.

Last month, we inaugurated our new R&D center in the technological park of the Federal University of Rio de Janeiro. This is our fifth R&D center worldwide, where we will focus on the development and qualification of products, such as our BlueDock connector for complex offshore applications.

In Argentina, where YPF is steadily ramping up activity in the Vaca Muerta shale, they already have 19 rigs operating there and plan to reach 30 rigs by the end of the year. We are supporting them under a just-in-time service contract, helping them to reduce operational costs through delivery of pipes in rig-ready condition.

In Mexico the reform process is advancing steadily. However, the number of rigs operated by Pemex had decreased while the Company awaits the final definition on the areas that will be assigned to it. For the time being, Pemex is concentrating on its most productive operations, but we expect a gradual recovery in the level of activity in the second half of the year.

In the United States onshore market, activity is increasing, particularly in the Permian Basin, where some of our alliance customers are very active. With the increase in horizontal drilling in the shale oil plays, we are seeing particularly strong growth in demand for our TXP and the Wedge 625 connection, which were developed especially for this market.

The final resolution of the Department of Commerce in the anti-dumping trade case will come in July. We are confident that the elements now being considered by the commissioners will show evidence of unfair trading practices from all of the (inaudible) countries.

Our investment plan is proceeding on track on many fronts, the most important of which is our new plant in Bay City. Our plan also includes investments in Colombia, Saudi Arabia, Argentina and Mexico to support the higher demand we expect for premium products from our customer in the coming years.

We can now take any questions you may have.

(Operator Instructions) Bill Sanchez, Howard Weil.

Thank you. German, a question for you I guess as it relates to North America. I guess first, and maybe I missed in Giovanni's prepared comments, but welded volumes were flat sequentially here in 1Q versus 4Q. I think we probably would've expected them up a bit on Canada.

Is that where the weather dislocations really impact your business during the quarter I guess there? And how do we expect 2Q welded volumes perhaps to look? Should they be maybe up sequentially offsetting Canada? I guess would be my first question.

I guess my follow-up I will just give you now is can you talk a little bit about the pricing trends, German, maybe you're seeing in the US onshore market? One of your competitors mentioned earlier this week that volumes certainly will be up 2Q for them and that pricing will be relatively flat just given still a concern over the import levels. Perhaps you could talk a little bit about your US land outlook.

Thank you, Bill. German, could you pick up this?

Sure. Good morning, Bill. Thank you, Paolo. I'll talk a little bit about the welded volumes as they have been flat and Canada has naturally done a bit better. The States have done overall slightly better, but they were offset by an important, if you will, reduction of welded pipes associated to some pipeline projects in Argentina primarily. So that's ultimately why we saw fairly flattish volumes.

Going forward, I think we will see naturally the adjustment, expected adjustment in Canada as a result of the seasonality, usual seasonality aspect. And we view this state as fairly stable volumes of welded in the coming quarters.

Now with respect to pricing, I think we've seen some Pipe Logix movements up and down and is perhaps the reflection of steel, very important volumes of imports primarily from Korea. An example, Korea growing about 900,000 metric tonnes during the entire 2013 and our latest numbers show something in the area of 340,000 only for the first quarter. So this is continuing to push pressure in prices at the lower and.

At the high end, though, deepwater in the Gulf of Mexico we continue to see an important different dynamics associated to the characteristics of the product. But given the level of imports I think we're going to now continue to see some erratic behavior between now and I think July.

I guess there's just one follow-up. I know the commentary I guess has stayed consistent from the last call with regard to Brazil and the deferral of these line pipe shipments. I guess I was just curious is the resumption of that still expected first quarter of 2015 or has that pushed to the right during 2015? Do you all expect that to be a little bit later than maybe what you thought on the call during 4Q?

Well, Bill, on this we are confident that we will be -- start producing the Rota 3 line pipe and resume our activity on line pipe in Brazil by the first quarter of 2015. Hopefully we may start producing it before, but invoicing will happen in the first quarter. So we are confirming our estimate of the timing of the operation for Petrobras.

Great, I appreciate the time. I will turn it back.

Ole Slorer, Morgan Stanley.

Thank you very much. My first question goes to Guillermo Vogel on Mexico.

If you could give us an update, because Mexico is a very important market for Tenaris. Your latest thoughts just on the energy reforms in Mexico.

There was meant to be I think some announcements on the secondary amendments to the constitution, getting the details around -- the finer details around some of this -- house some of these changes will be implemented by the end of April. They are now in May. Just your thoughts on what's going on there and also -- well, we can start with that.

Yes, to tell a little bit where we are, the secondary laws have already been presented by the executive branch to Congress. And the last news we had is that Congress has -- the Senate specifically has set up an extraordinary session that will go from June 15 to June 30 in order to approve them. So the times right now in terms of the approval of the secondary laws are going to be set by the end of June.

The secondary laws have been presented; we are reviewing them. There is nothing specific. I think that what they are establishing is laws that are very flexible in terms of the energy secretary to be able to present or to structure the bids in a very flexible way.

Up to now there have been no surprises. There is national content, minimum national content that has been included there which is said to be growing gradually from 2015 to 2025 to go up to a minimum of 25% by 2025.

In the meantime, in terms of the Ronda Cero for Pemex, Pemex has presented it in terms of what they are requesting. For example, for Deepwater, they have requested to keep like 30% of the perspective resources or shales. The number that we have is that they have requested to keep 15% of their prospective resources in shale, so there's going to be plenty of opportunity in deepwater and in shales in order to move in.

And according to the original subject, the Secretary of Energy has up to September in order to approve what is going to happen. So the process continues; continues as expected, maybe a little bit of a delay in terms of the secondary law.

Okay, so we're still on track you are saying for a September approval of what Mexico will be able to -- Pemex will be able to keep and what will then be outsourced. I think on the last call you mentioned that you were hopeful that activity could accelerate a little bit once the amendments were approved. (inaudible) to have Pemex have the right to the farm-outs and farm-ins. Could you update us on whether you've changed your view on any of this?

No, no. I think we are going to -- we saw a slow first quarter for Pemex. I think that was expected; we were expecting it.

Maybe it's a little bit slower because there were some problems with some suppliers that affected somewhat the operation in the first quarter, especially in the sea region. But today that is working. Operations are back to normal and so we expect to have a better remaining of the year with Pemex.

I think that once the assignment to Pemex, the Ronda Cero is finished, we're going to start to see a lot of activity Pemex with alliances with some of outside investors that we should see the effects of that by 2015.

Interesting. My second follow-up question goes just on deepwater in general. You mentioned, if I heard correctly, that Sub-Saharan Africa up 74% year over year. It's a bit of a surprise seeing a really strong number in context of what we are hearing on ongoing delays, particularly in Nigeria in what appears to be a little bit of a standoff at the moment between international oil companies and the local governments on terms.

So could you talk a little bit about what you are seeing in general in deepwater and specifically what's going on in West Africa?

Yes, Ole. In spite of some of the political issue in part of Sub-Saharan Africa, we have seen several [facilities in exploration] and development here. I think, Gabriel, you can even view some of the major countries that are operating there.

Thank you, Paolo. In fact Sub-Saharan Africa has been and continues to be for us an area of growth and the 74% refers to sales of 2013 versus the previous year. This is driven by exploration of development activity and this is OCTG and also deepwater pipelines that we should be in there in 2013.

We continue this trend upwards in 2014 as well. Today, as a matter of fact, we have 44 rigs operating in deepwater areas across Sub-Saharan Africa. These are development campaigns in Nigeria, in Angola, and in Ghana. It's also exploration in new frontiers -- East Africa, Angola, and pre-salt, and some other areas that are opening up looking for new reserves.

So this has been a very important space for us where we have been introducing differentiated technologies to capture and to increase our market share and position there. As a matter of fact, we recently signed a new long-term agreement with a British independent, Tullow, which is very active in Africa. They have a particular aggressive campaign in -- development campaigns in Ghana that we will serve.

So for us, we will continue to have a growth in 2014 for Sub-Saharan Africa.

And then the 74% is the increase in our sales.

No, I understand.

The market has been lower, but have been particularly affected in getting contracts on demanding projects. There is a pre-salt exploration in Angola, the development in Angola. There are the exploration on the east coast of Africa.

We have a portfolio of products that is very complete and effective. We are focused on products that increase rig efficiency. In general, Dopeless is a tool that we can put on market and this have been effective.

Thank you very much, I think you clarified it. I was just afraid that there was a big build in inventories given your high sales volumes and that this high-margin product would therefore slow down. But it sounds like it's still growing, so thanks for that (technical difficulty).

Michael LaMotte, Guggenheim.

Thank you and good morning, gentlemen. German, if I can ask the first question of you coming back to North America and in particular the technology penetration rates and the success that you've had with TXP and Wedge 625. Can you perhaps give us an idea of what the penetration looks like and what the pricing power related to technology is at this point?

German.

Sure. Good morning, Mike. Thank you, Paolo.

Well, Mike, let me probably touch on perhaps three aspects. Number one, what we call the semi-premium space for which we developed not long ago the TXP as we call it. This is a product that has been primarily directed to the shale oil development where compression and torque were the characteristics, enhanced characteristics to meet.

In fact, it has proved to be a very important component of our portfolio in terms of both volume and penetration given also the market dynamics. Now 625, it's a product more designed for the shale gas there we have not only compression and torque but also pressure.

Now given the nature of shale gas, gas development in generic terms, we've seen some. Not as much as ultimately we would have in the event pricing would have translated in a higher degree of activity.

Then the final one is 623, the one we discussed about also in our prior call. This is deepwater connection that is ultimately needing the external -- new external testing requirements, which we understand is met by this product and currently no other product in the industry yet.

Can you share with us, German, and idea of how much of your US volumes are sold with these premium connections versus the commodity connections? What type of price premium that might be giving you over and above a spot or I should say a lack of indexation in your price direction?

Well, Mike, this is probably a difficult answer for me to provide. It is at the core of, in fact, our competitiveness position, but let me just try to guide you at least with some indications.

We have said it before, our premium share in the States, pure premium let's call it share in the States has been about 35% and we see that gradually growing. We have experienced a growing component of the semi-premium associated with XP.

Naturally, and I know you will understand, I can't get into the pricing specifics. But these are fairly differentiated products which, frankly, in some instances we will realize that very few options to a broad portfolio offering.

Basically Michael -- the three segments -- the API, the semi-premium, and pure premium -- are differentiated and there are marginal differences in the three segments. In this environment, any increase in the drilling for gas in shale [doubly] supporting our sales or the higher-margin segments, both semi-premium and premium.

I realize the difficulty of the question, perhaps the way I was asking it. I was looking at the year-over-year change in North America revenue relative to the year-over-year change in the welded pipe volumes. And so really trying to get a gauge as to whether there was more growth to come through penetration, because it does suggest that your margins in North America are up year on year. Is that an accurate statement?

Well, when we look at the States, Mike, we could probably argue that at -- our existing alliance customers, particularly the ones that are very active both in the Eagle Ford and Permian, are perhaps from at activity, therefore, volume perspective outperforming the average of the market.

We have seen these ultimately in the way the participation on the rig count has evolved in the last few quarters. That explains the volume component in the states which, seasonality aside in Canada, will not potentially translate on overall higher volumes year over year.

Okay, that makes sense. Thank you. Last one for me if I could ask a question to Edgardo. The working capital in the first quarter being quite positive it strikes me as counter seasonal. Can you explain what happened there and why the cash flow looked so good?

I couldn't give an indication. I think nothing extraordinary happens here, but we are, I think, managing efficiently our working capital. Basically this is what I perceive.

And we should also do this -- I would like to be able to show more results even in the future for this efficient management work. But Raul there is some specifics that help explaining the figure here.

Thank you, Paolo. Yes, there is one seasonality effect that is in the first quarter of the year we paid a lot of taxes in some countries, so it's reducing our liabilities. That's liabilities that it's affecting positively in our working capital.

Okay. Thank you, gentlemen.

James Hanford, Credit Suisse.

Thanks a lot. We haven't really talked too much about Middle East. Clearly, the sales were quite significantly lower quarter on quarter.

You have obviously talked anecdotally about what you are expecting for sales now throughout the next few quarters, but it would be great to have maybe your thoughts on quantifying A) what you are expecting for the next quarter. Obviously in the Q4 call you said that it would be in H2 where they really start slowing down their pace of consumption.

Then also in 2015 and beyond what you are realistically expecting, from Aramco in particular, but your client base across the Middle East. It would be great to have your thoughts, thank you.

Well, I think basically Middle East to a large extent is driven by Saudi Aramco, the season investment and purchasing programs. What we see is that the level of activity is very high and the field in which Aramco is investing are fields that requires very complex products.

At the same time, what we see is that the purchasing that has been realized the last three quarters has been very high and there are inventory on the ground. So we expect that starting for the next quarter the apparent demand, so the purchasing from Aramco will go down. I expect it soon, though.

Relative --?

To the present level, relative to the present level. Now the --.

Relative to present level?

Yes. As far as 2015 and the medium term, this concern, Gabriel, maybe which is your sense of how the program is going?

Thank you, Paolo. Good morning, James. Just to complement on what Paolo was sharing, we see that drilling activity in Saudi to continue to increase. Aramco operated in the first quarter of this year with 175 rigs, 8 rigs more than in the previous quarter. So pretty much in line with our target of reaching 200 rigs by the end of the year.

But it's another further step of increasing our drilling activity in 2015 that is planned as well and this is what we are perceiving in our talks in Saudi. So on that regard, we are quite optimistic on the level of consumption.

As Paolo was referring -- and this is not the first time that we've seen this purchasing behavior from Aramco when they are in front of an important ramp up drilling activity -- they typically frontload their purchasing. These are sophisticated products with longer-than-average lead times and Saudi Aramco is a conservative company, so they typically tend to buy at the higher level of their initial consumption.

But we see that we will have an impact on 2014, especially on the second half, and might have a translation also in the first quarters of 2015. But, overall, we are in the midterm pretty confident on the activity in the Middle East.

We are strengthening our finishing capacity because we expect Saudi to be a very important market independently from the ups and downs of inventory driven, let's say, of the demand.

Okay, okay. So in terms of -- because obviously the last quarter was a record quarter and Q2 was obviously extremely good as well, it looks like you are more optimistic for 2015. What would you sense to be a normal kind of sales rate per quarter? For example, versus -- is this the new levels which we should be getting used to or should we look to be surpassing where we were in Q4?

Well, if Aramco maintains 200 rigs, you can figure out the level of consumption will be very important in the long run.

Okay, okay, okay, so that's the sort of level which we are talking about. Okay, that's clear. Thanks very much.

Felipe Santos, JPMorgan.

This is actually Caio Carvalhal. Thank you very much.

I think most of my questions were already answered, so I will (inaudible) topic that I think is secondary to what we discussed in the US and Mexico. But I would like to get a better color on South America. We saw a steep decline on the sales level, not only to last quarter but mainly for the first part of last year.

I understand that -- you comment on the release that this is basically driven by Mexico, Colombia -- sorry, not Mexico, but Colombia and Venezuela. As Brazil has already been -- we know that the delays in Brazil is impairing the growth, but is not necessarily causing the decline on a quarter over quarter situation because these delays have been there for a couple of quarters already.

So if you could discuss a little bit especially what is going on in Venezuela and what is your expectation for the remaining of the year in South America, I would really appreciate it. Thank you very much.

Thank you. As you are saying, we have seen in this quarter the lower level of sales to South America but, frankly, I am quite optimistic in the medium brand for South America. Argentina is growing, is increasing the number of rigs, and it is gradually developing the resources of Vaca Muerta. This will have an impact, no doubt. I also think Brazil will resume probably in 2015, but for us the line pipe will be important in the first part of 2015.

Colombia has been at the lower level of demand there are also inventories issues here, but we expect activity in Colombia to resume and the level of demand for the development of many operators that are committed to development of resources in different fields. We think that Colombia will gradually grow.

Venezuela is an issue of from our point of view. We have difficulty in being paid in Venezuela. So we are, even the activity in some of the projects and is gradually ramping up, we have to find a way to stabilize our relation with PDVSA and the other operators in a way that ensure us that collection and payment [will happen].

We are on the way. I think we can improve during 2014, but for the time being our sales went down compare to last year because of a problem of collection. Hopefully, we will be able to reach an agreement, a stability for our collection in the future. This will allow us to resume and to retake participation and share in the demand of Venezuela. Because the demand in Venezuela will probably gradually pick up during 2014 and the future.

Julien Laurent, Natixis.

Good morning. I have two questions, first one about Brazil. You've commented mainly the line pipe business, but could you give any color about the OCTG? Do you expect any pickup on the second half of the year?

And also about Japan, there you have a joint venture on NKK and you have to renew it. Are you happy with this facility and is it called for you to remain involved in NKK? Thank you.

On the first point, Brazil is delaying projects but this is affecting not only line pipe but it has also affected OCTG. We perceive this in the sales of our OCTG products for onshore and for the offshore projects, shallow and deepwater.

You know, we are selling to all this segment. The onshore segment that probably slowed down the most, but also the offshore is affected by the delayed projects.

When Petrobras will resume its program, well, this is an election year in Brazil. I think this will be important. We need to understand after the election also how -- if there will be any change of policy as far as Petrobras investment and development of resources is concerned. So I don't think we have the visibility on 2014. In our case on the line pipe we have the contract on Rota 3 we will start producing, but really the dynamics of OCTG is something that we will understand better after the election.

As far as NKKT and our operation in Japan, we are very satisfied. We reached an agreement for extent of our agreement with JFE. The facility is very important to supply the high chromium contents material that is profitable; it is a unit that is contributing substantially to the positioning of Tenaris worldwide, but it is also supporting our position in the Far East effectively. Because in the end it is supplying pipes to Indonesia, to China where we have finishing facilities, and has contributed to the Middle East that (inaudible) products.

We have an R&D center in Japan that is also contributing to the development of our portfolio, so we will continue and expand also the reach of our cooperation with JFE to find areas of opportunity.

Thank you.

Geoffrey Stern, Kepler Cheuvreux.

Thanks for taking my questions. Actually two questions on the US market. Since last year, we have seen the shifts from premium to semi-premium connection. Do you believe that this can go further or do you think that now it does kind of stabilize? So that's my first question.

The second question related to pricing. I was wondering if you are seeing that a kind of also kind of trust has been reached there whatever the outcome of the trade case next July, given --. We've seen the recent uptick in rig count, which has been quite supportive I guess for the OCTG market. So we all hope this year will be helpful, thanks.

Thank you, Geoffrey. One general comment before passing to German on our policy and our strategy in the United States.

In the United States we are really focusing on developing products and serving the group that contribute to increase the efficiency of the rigs operating in all of the different plays, but especially in the shales. And the semi-premium important that the expansion has been substantial up to now and will continue at probably a slower pace.

But our push for promoting our semi-premium will go on and we will increase our sales of the future. Because this is product that could contribute to the reduction of costs and improve efficiency of the rigs (inaudible). German, some more comment on this or now on the price.

Only briefly on first the product. I think we've seen them going forward at a stable pace of growth, both premium and semi-premium. I think operators have, in fact, pretty much stabilized the string designs by moving API connections to semi-premium in the spaces where our extender reach calls for new requirements of torque resistance and compression resistance.

Now as far as pricing is concerned, I will probably repeat what I said at the beginning. We continue to see important volumes of imports despite the growing operational demand associated to both, an increased rig count but also drilling efficiencies which were I said that somehow affected during the last few months given the weather. But we're expecting this to go back to normal ones if this long winter finally comes to an end.

So overall demand associated with efficiency and rig count continues to grow. Despite that, prices are behaving the way we described at the beginning and this is, in our opinion, almost strictly associated to the unfairly trade imports that we continue to see.

Do you believe that if the final ruling is negative, meaning that you don't have any anti-dumping duties against Koreans, do you believe that some pipe makers in the US could decide to cancel their new build program in the US?

Well, difficult to speculate on that at this point. We as industry, as part of our existing case that made very clear the production and investment and also employment implications of what we continue to consider unfairly trade imports. But as we stated at the beginning, we remain confident that while the Department of Commerce reviewed the elements, what they find is the facts are going to show themselves.

Remember, there are welded producers and seamless, the impact of the imports is probably higher on the welded producers. So in projects like our project in Bay City, frankly, I think that even in the case of negative determination, our positioning in premium seamless, heat-treated and in semi-premium heat-treated products with our capacity to contribute to the effective operations of our clients will not be so much affected. Our operations in welded could be probably more exposed to this, especially in the non-heat treated operations.

All right. Thanks for this.

At this time we have no further questions.

Okay. Thank you, Jackie. If we don't have any other questions, we will end the call here and thank you all for participating.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.