Tenaris SA (TS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2014 Tenaris S.A. earnings conference call. My name is Jackie and I will be your operator for today. (Operator Instructions).

I would now like to turn the conference over to Mr. Giovanni Sardagna, Investor Relations Director. Please proceed.

Thank you, Jackie, and welcome to Tenaris' 2014 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 this call.

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 Chief Financial Officer; German Cura, head of our North American Operations; and Gabriel Podskubka, head 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 New York last month, third quarter sales decreased 9% sequentially to $2.4 billion, mainly due to the usual seasonal impact of Northern Hemisphere plant stoppages, in addition to lower sales in Saudi Arabia and a slowdown in shipments to deepwater projects in Sub-Saharan Africa, as well as lower sales across Europe.

Our EBITDA reached $587 million, which was down 16% sequentially and 6% compared to the third quarter of last year, as margins were affected by an unfavorable product and logistic mix. Our EBITDA margin was down at 24%.

Average selling prices were down 5% compared to the corresponding quarter of last year and down 7% sequentially. During the quarter, our sales of high-end seamless product were at 57% over total seamless volumes.

During the quarter, free cash flow remained strong at $357 million despite a substantial increase in capital expenditure related to the advances in the construction of our new mill in Bay City. Our net cash position at the end of the quarter increased to $1.6 billion.

The Board of Directors approved the payment of an interim dividend of $0.15 per share, or $0.30 per ADR, to be paid at the end of this month. This is a 15% increase compared to the interim dividend we 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, our results this quarter were impacted by the onset of a period of investment -- inventory adjustment in Saudi Arabia and the slowdown in sales to Sub-Saharan deepwater project, which in the second quarter had reached a record level.

Our product mix was less favorable than we have seen in previous quarters, and this, together with the seasonal effect of plant stoppages in the Northern Hemisphere, resulted in a lower operating margin for the quarter.

On the other hand, we generated a further $659 million in operating cash flow, which now amounts to $1.8 billion in the year to date. Our cash flow is funding an increasing capital expenditure, which this quarter amounted to $302 million, and reflect in part the progress of construction at our new Bay City mill. And our net cash position has grown to $1.6 billion at the close of the quarter.

In North America our sales continue to grow, and were up 25% year on year. This was the fifth consecutive quarter in which we increased shipment in the region. In the coming quarters, we expect our North American sales to benefit from a more balanced pricing environment, and an opportunity to increase market share following the recent US trade ruling on OCTG imports.

With the recent fall in oil and gas prices, the near-term outlook for our industry has changed. Also, our customers have not yet defined their capital expenditure budget for 2015.

From our conversation with them, it is clear that they are working on programs to increase cash flow by reducing inventories and working capital, just as we are doing. It is also clearer that our customer will be more selective about the projects they undertake, and more demanding in assessing the cost of these projects and their operation.

Notwithstanding the uncertain near-term outlook for the oil prices, we are progressing in the transformation of Tenaris into a premium company, clearly differentiated from its competitors.

As we said in our Investor Day in New York last month, we are investing in our global industrial system, in product development, in human resources, and in safety and the environment, to meet increased demand for reliable, high-quality, premium product and cost-effective solutions for complex offshore and HP/HT project, as well as for integrated supply solution for shale drilling programs.

By 2017, we expect that 70% of our OCTG revenues will come from premium product, compared to 55% in 2012, and most of these will come together with associated services, from the design of the well string to the just-in-time delivery to the rig.

As a further step in this direction, we were awarded last month with a second major contract to supply pipes with Wedge 623 Dopeless connection for the Hess Stampede project in the Gulf of Mexico.

And in Argentina, we are enhancing our logistic and service deployment to support the increase in drilling activity in Vaca Muerta. During 2014, we expect 230 wells to be drilled, up from 150 last year, in this play.

In the near term, we are confident that the global deployment of Tenaris, our position in North America, the recovery of our pipeline business in South America, and our positioning in Mexico and Argentina, will provide solid support for our sales and earnings growth.

We can open the call to questions now.

(Operator Instructions). Igor Levi, Morgan Stanley.

You've mentioned that you expect higher prices to start feeding through your P&L over the coming quarters. However, the imports from Korea remain quite high. I think they're still above 100,000 tons per month. So, I was hoping you could reconcile the recent increase in prices with the continued high level of imports, and if you expect these imports to decrease.

Thank you, Igor, for your question. Well, on our side you see the increase in prices in North America is well reflected in the -- [by the logical] increase, in the range of 8%. Now, this is quite logical after the decision -- the ruling of the anti-dumping. Korean imports are still flowing in, but at a different price.

Still, at these prices, even with this price increase, we think that the imports from Korea are coming in on unfair trade terms, because the increase in prices is not enough to justify the increase in the duty, no, that goes from 10% to 15%, and some of the change in the cost and foreign exchange changes that we have seen.

This is the reason why we think that, over time, even in environment of higher price, the Korean producers will gradually come to terms with the need of trading fairly into the American market. And this will lead to a gradual reduction of this, without affecting the prices.

But maybe, German, I don't know if you can have some additional point on this, that could make our consideration more clear and understandable?

Thank you, Paolo. Good morning, Igor. Very briefly, just to add is, we continue to monitor the behavior of the importers. Out of the three, we've seen one that is moving away from OCTG, a bit more into line pipe.

And I think it's important to highlight, we, together with the rest of the industry, filed mid-October an anti-dumping and countervailing case against imports from Korea and Turkey on line pipe. We're expecting the ITC preliminary injury analysis by the end of November.

And also, as we have indicated -- that -- while we monitor this situation, we're preparing for a potential review petition that could take place July next year.

Okay. Thank you, German.

Great. And just a very quick followup -- regarding the review petition, I know you mentioned in your Analyst Day that you may be able to have these duties increased due to the strengthening dollar. So, would you be able to just walk us through what the timeline for that is?

Yes. German -- ?

Well, formally, Igor, we would as industry be in a position to file the review petition as of July. It doesn't need to happen in July, but we could only do it as from July. At that point, a period of analysis would be established, and typically the review petition is a process that takes on average about 9 months.

Yes. And remember, Igor, that any determination that -- for instance, in the revision, decide that there are -- additional dumping duties should be established, will have -- will be valid retroactively to the point -- or, the starting point of this.

So, there is a big risk. The more time passes, the higher the risk. That's the reason why we think that gradually the imports on unfair terms should be more restrained into the United States.

Okay. So, retroactively to July 2014?

July -- no, no. Actually, the date exactly when the order was first established. This is July 2014 -- sorry, yes.

Perfect. Thank you very much. I'll turn it back.

Will Sanchez, Howard Weil.

My first question's with regards to seamless volumes in 3Q. They were actually a bit more resilient than I would have thought, given, as you guys mentioned in the prepared remarks, the lower sales to Saudi and SSA, and in the seasonal mill downtime.

Perhaps you all can discuss a little bit of the trends -- what you're seeing there; and how do we think about 4Q volumes? I think on the last call we talked about SSA really just being kind of a one-quarter dip here, in terms of sales to that region. Maybe just talk about expectations for 4Q. Do we see us getting back to kind of the 700,000 tons we saw in 2Q?

And could you just remind us, too, on the Saudi restocking -- when do we think that perhaps takes place during 2015?

Well, I want to first comment on the seamless volume. As we mentioned in the opening remarks, we are increasing our shipments to North America. And I think this is an area that is supporting our volume, even if we do not see, still, price increases reflected fully into this -- into the margin and the prices for this.

I think as far as the second question, which concerned the situation in the fourth Q, our volume should increase in the fourth Q. There will be recovery also in Sub-Saharan. Sub-Saharan was very strong in the last Q -- in the last quarter, and particularly low in this quarter. There will be a recovery in the next.

Coming to the third question, when I see -- how the -- where is the destocking in Saudi -- I would say that Saudi started the destocking in this quarter. We have substantial reduction in the shipment to the region. They will continue to purchase volumes below the level of their consumption, and we think for the entire 2015 -- I mean, for well into next year.

But let's say the difference between consumption and the shipment -- the upper-end consumption -- the real consumption, the upper end consumption -- will decrease in the course of 2015. So, starting in first quarter of 2015, we may expect higher volume compared to what we have today.

Okay. And then my followup is for Edgardo. Just looking at SG&A as a percentage of revenue, that continues to trend higher here. I just was hoping you could give some thoughts on that, going forward.

And then could you just give us your outlook with regard to tax rate for 4Q and for 2015? Looks like you were able to get that down a little bit lower here in third quarter than what maybe you all had expected. Just any thoughts there around tax rate would be helpful.

Sure. In terms of SG&A, we do expect some reduction in the coming quarter. Remember that a very -- 65% of the total cost of SG&A are very much fixed. So, with lower sales, the percentage wise is increasing this quarter. So, we are aiming to reach probably to 18.5% next year, back to the 2013.

In terms of the tax rate, as you correctly mention, I mean, the tax rate has been coming down and we are expecting to finish the with a tax rate around the 28% that we anticipated 2 quarters ago.

Great. I'll turn it back. Thank you for the time.

Michael LaMotte, Guggenheim.

My first question is for German. There's been a lot of talk on the service company conference calls this quarter about superfracs, and use of more sand, and higher-density stage count. And I was just wondering if that -- a trend in that direction was impacting the casing market at all. I've been hearing talk that some of the operators are use -- are actually casing lateral sections in order to improve wellbore stability.

Well, to an extent, we've seen some of that as well, and you see that reflected in the grades -- the [110s] -- we -- increasingly shipping. To an extent we've seen also string designs that are coming with higher wall thicknesses than initially.

And also, the more use of semi-premiums and to -- at the margin, also, some premium connections. Rationally, the more they push, the more they extend the laterals, torque resistance and compression resistance becomes more critical, and this is introducing at the margin some string design change.

As -- if we see a continuation of this trend over the course of the next year or so, do you think the impact would be measurable in your US volumes?

Well, this is correct, and particularly true in the use of semi-premium connections, up from standard API. And so far it's been all constrained around low-pressure oil. If gas were to pick up, I think it would come together with a need to use premium connections overall.

Okay. And then, following up on the connections, looking at the North America results, I'm assuming that most of the welded pipe volumes are North America at this point, with Brazil still down. North America sales were up 9% versus the welded volume growth 3.5% quarter on quarter. I'm wondering if that was the -- an influence of premium connections, or whether that was just a function of the growth in seamless sales -- or, I'm sorry, some mix as it pertains to Mexico.

Well, it is, say, threefold that naturally, Canada, we're coming out of the season and consequently we've seen a rebound that affects positively both seamless and welded. In the States we've seen some increased seamless quantities, and to an extent welded and welded coupled with semi-premium connections as just -- for the reasons that I just explained. Mexico overall remained fairly stable quarter to quarter.

Okay. That's helpful. Thank you. A couple of questions for [Ricardo], if I may. Could you remind me why the cash flow from the working capital changes is generally so seasonally strong in the third quarter?

Yes. Basically because, I mean, as you say -- you see, the reduction in [our] sales, while we maintain the DSO practically flat brings some reduction in working capital, together with some additional measures that we are taking in terms of the reduction of our inventory.

Coming forward in the fourth quarter, we are expected, with the ramp-up of the sales, that we partially compensate this positive effect of this quarter.

Okay. And then, on the balance sheet, carrying over $1 billion in short-term debt and effectively no long-term debt, have you given any consideration to terming out some of that debt, or is the cash flow strong enough that we could actually see those debt levels come down over the next year or two?

I mean, we are -- we have been reducing our total debt and basically tried to compensate the difference in the spread compared to what we have in terms of the (inaudible) that we have on our portfolio, and we will continue to do so. I mean, as long as we -- maintaining our strong free cash flow.

But remember that -- keep in mind that we are now getting in the phase in which invested very heavily, starting this quarter, very much in our facility in Bay City. So, we are expecting probably that for the next 2 or 3 quarters, our net cash position will remain practically unchanged.

Okay. Very good. Thank you.

Paula Kovarsky, Itau BBA.

I was just wondering if you could possibly give us a little bit more color on your expectations regarding the downside potential caused by weaker oil prices. In the release, you mention more on the marginal developments; but, to which extent do you think lower oil could, for instance, affect the shale developments in the US and in Canada, and whether -- do you see this level of oil prices as being an issue for Middle East and other -- and also to deepwater developments around the world?

I would say that what we would perceive from our client that -- is that, at this level of price, in the range from [WTI] $80 -- between $80, $85 -- what we've seen is a leveling of the level of the -- level of rigs operating in the field. Some of the operators may delay or suspend programs to increase the rigs. This is what we can see at this price.

I imagine that if the price of oil -- the [WTI] goes in the $70, $75 -- at that point we may see actual reduction in the rigs that operate in the more marginal operations in the States.

This is not what we see at the moment, but I imagine that after the meeting of OPEC in November, in the process of defining the final budget, the operators will factor in the different aspects of the operation, look at their cash flow, and we will have a more clear picture of the (inaudible).

If we look around the world, what we perceive is that all the projects underway continue to proceed, especially the complex projects that are using a reference that is the oil price in the long run. We see some reduction in the startup of projects that are in -- for the time being, do not have a very high cash flow spending at the moment. This -- if they could be delayed, we see some delay. Some of these related to LNG projects in areas that have relatively high cost.

For the rest, there could be some decision or some delay, also, in projects in critical areas. Iraq could be one of the case -- areas in which you compound different risks, and now you're adding also an additional risk on the price of oil. But we are not seeing yet a substantial change in the decision apart from what I have mentioned.

Okay. With the -- in particular for the shales in the US, what's the view? Where do you think production may eventually start to stop, or investments could go down?

Well, two different things. As I was saying, the comment about the leveling off of the programs and, I mean, the postponing of additional rigs -- I was referring to the United States and Canada.

(Inaudible) as I said before, if the price goes down to $70, this will turn into some reduction of rigs in some areas. This is also referred to US and Canada.

Production is the different story. There are wells that need to be connected. There is an inertia in production that will go -- the level of production will go on for a long period of time. I mean, even if you have this process or some reduction in rigs, you can expect production in the United States to continue at the present level for a very large part of 2015.

Okay. Thank you.

Amy Wong, UBS.

Question from me is related to Brazil. Can you remind us when you will be making shipments on your line pipe to the projects in Brazil?

And secondly, outside of the line pipe shipments to Brazil, how are you seeing the OCTG market there please?

Well, in this one, Brazil -- our shipment in Brazil in this quarter has been extremely low. This is one of the short-term factors really affecting this quarter. Now, we expect to -- we have the order in hand, and we will start to deliver the Rota 3 -- few tons in the next quarter, and then in the first quarter of 2015 and the second quarter of 2015, this will get up very strongly.

This is not only Brazil. Our line pipe project in South America -- we have other line pipe project in Argentina that has the same dynamics. We are starting production in the fourth quarter -- we are actually purchasing the steel now -- and we will be shipping in the first quarter of 2015, much the larger quantity. This will be one of the factors that will turn -- that will contribute to strong recovery, I think, in our numbers.

As far as the OCTG demand in Brazil is concerned, there will -- recovery will start in the first Q of 2015 but will be very, very limited in our view. Still, the new government, Dilma, will have to take a number of decisions on the macro picture, and how to set up the economy in this second turn. And I think we will understand something better about the dynamic of investment in Petrobras in the coming quarters.

Because for the time being, even if Brazil and Argentina also, for instance, are not directly affected -- immediately affected by the price of oil, this is something that should be kept into consideration in designing the policy and the investment in Petrobras.

So, some recovery in the first Q of 2015, but we will not get back to the level of the past until well into the second half or more of 2015.

Great. Thank you very much.

(Operator Instructions). Andrea Scauri, Mediobanca.

I have a question on raw materials. Do you expect the current level of raw materials to benefit your profitability over the next couple of quarters? Thank you.

Yes. We -- I think that gradually the change in the prices of iron ore, in some cases of energy, of scrap -- some positive impact from foreign exchange in the countries in which we operate -- this will get into our cost of sale; into our inventory.

But this is -- usually gets in gradually because of the accounting, no, and how they get into our inventory. But, for sure, yes, we will have some benefit.

Also, we think that the -- when you look at 2015, I don't know if prices, and the prices of raw materials, will remain in our view at the present level. I mean, there will be no substantial change. And we should also be able to get some cost reduction in the cost of our steel for our welded seams during -- in some moment. But we will see it in our results in 2015.

Okay. Many thanks.

Luigi de Bellis, Equita SIM.

Two quick questions for me, the first one on Argentina. Could you quantify the impact of the new pipeline project's business in Argentina that you mentioned before?

And the second question -- on the North America, how much is in our view the percentage of current US oil production on the marginal North America onshore plays, in your view? Thank you.

Well, on the first question, in Argentina, the first stage of the [project] (inaudible) represents around 95,000 tons, we are shipping -- will be shipping the first part of 35,000 in the beginning of 2015. And then we will see, coming in, the rest of the volume.

There are other projects underway, but some of these will depend from the availability of financing in the situation of Argentina. The first one, the one that I mentioned -- we have been able to purchase the steel and we have seen the advance payment. So, it's something that is in our hands.

Second question -- German, maybe you can --

Well, thank you, Paolo. Luigi, I think it's difficult to perhaps be awfully specific on marginal areas. I sense that it would depend on operator by operator.

But, to provide you a sense on what we discussed with them -- to provide you a sense as to what we're looking at, two things are probably true. There's some areas of the fringe of the Bakken where we know oil production could be marginal relative to the existing breakeven points. To an extent, also, some particular areas of Cline may also fall within that category, and to a lesser extent a component of Cana-Woodford.

With that said, though, our users are also indicating that, when and if any activity reduction were to take place, overall oil production short-term may not be affected, as a result of production today being the result of the investments that have taken place in the last year -- couple of years, at this point.

So, wherever ultimately activity -- drilling reduction that could take place, would affect potentially production not during 2015; probably not even the early part of 2016 as well. Hopefully that helps to provide you some information.

Thank you very much.

Ladies and gentlemen, that concludes our Q&A session. I would now like to turn the conference back to Mr. Giovanni Sardagna for closing remarks.

Well, if there are no additional questions, we would like to thank you all for participating in the call, and we hope to see you soon. Thanks.

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