Tenaris SA (TS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2015 Tenaris S.A. earnings conference call.

My name is Alex, and I will be your Operator for today.

(Operator Instructions)

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

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

Please proceed.

Thank you, Alex, and welcome to Tenaris' 2015 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.

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, managing director of our North American operations; and Gabriel Podskubka, managing director of our Eastern Hemisphere operations.

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

During the first quarter of 2015, sales declined 13% compared to the corresponding quarter of last year and 16% sequentially, as they were affected by the rapid decline in the drilling activity in North America and the strong reductions in exploration and production spending that are taking place around the world.

Outside North America, sales declined significantly in Iraq, Ecuador, and Australia, while sales in South America were supported by shipments for pipeline projects in Argentina and Brazil.

Our EBITDA for the quarter reached $527 million, which was 27% lower year on year and 26% lower sequentially.

Our EBITDA margin of 23% has been affected by inefficiencies associated with low utilization of production capacity and will decline further in the coming quarters.

Average selling prices in our tubes operating segment were down 4% compared to the corresponding quarter of last year, but flat sequentially.

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

During the quarter, cash provided by operating activities was $878 million, allowing us to reach a net cash position of $1.9 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.

Our first quarter results [reflect] the first effects of the crisis in our industry.

However, from my point of view, they also show [a creditable] performance considering the severity of the challenge that we are facing.

Our shipments, particularly of seamless pipe, held up reasonably well.

Seamless shipments declined 12% quarter on quarter, but were down only 2% year on year.

We also reacted quickly to reduce working capital, and our free cash flow of more than $600 million further strengthened our financial position.

Over the next two quarters, however, we will confront the full impact of the [activity] reductions that have taken place in North America, together with [that of the project] delays and reduction in exploration activities that are taking place in the rest of the world.

These effects will be amplified by the steps our customers are taking to reduce inventories.

This will result in significant reduction in shipment volumes, particularly of seamless pipe and premium products, before the start of a gradual recovery by the end of the year.

Beyond the immediate impact on our results, this crisis represents an opportunity for Tenaris to deploy its differentiated customer value proposition.

Oil and gas companies are looking for sustainable cost reductions that do not compromise the security or reliability of their operations and allow them to confront an extended period of low commodity prices.

We are offering product and service solutions that combine reliable product technology, full technical support, and integrated material management services which reduce the total cost of their operations.

As an example, we were recently awarded a multi-year contract to supply the complex Culzean HPHT project, a major North Sea gas development which will supply 5% of the United Kingdom gas requirement starting from 2020.

The supply package of sour service casing includes our newly developed Blue Max and Blue Heavy Wall connections, fully tested under the API 5C5 CAL IV protocol; our Dopeless technology; and the full scope of pipe management services; and also supported by local training and repair capacity capability

Meanwhile, in the US and in Canada, our direct rig service [model] is winning over customers, and in the last few months we have been awarded significant contracts for operation in the Eagle Ford and the [Montney] shales.

Today, customers increasingly appreciate the financial strength that allows us to continue investing in our industrial system, in product development and testing, in extending our service capability and provide the assurance of continuing reliability.

This crisis will be longer and more severe than that of 2009 for our industry, but we are working hard to support our customers through the crisis and to be prepared for the recovery.

We can now take any questions you may have.

(Operator Instructions) Ole Slorer, Morgan Stanley.

Congratulations with some phenomenal cash generation this quarter.

I think you must be generating more than the rest of my sector combined by the looks of things.

My first question is on Middle East/Africa.

Why were the volumes so weak?

Because the rig count and, therefore implied, the drilling activity for that region appears to have been sequentially quite robust, I would say.

On the situation on Middle East and Africa, I would like Gabriel Podskubka to give us a view on which are the driving forces of the demand and why the demand is very weak in this moment in the period.

Regarding Middle East, as you say, there is an important drilling activity, but I think it's necessary to go to the main countries to give some color and some statistics.

In Saudi, for example, we have still today the 210 rigs that we had the previous quarter.

So, drilling activity there is very strong.

Some [marginal] movement from moving [some] rigs from oil to gas, which plays to our advantage, but there we see a very strong drilling activity.

On the other hand, as we commented before, there is an important stock of tubulars in Saudi.

There are not a lot of tenders going on.

We expect new tenders before the end of the year.

So, this will in [boost] our demand and shipment in 2016.

If you consider also Kuwait and Abu Dhabi, we also see there the ramping-up of rigs.

There are tenders ongoing.

This is long purchasing cycles, which [we have translated into] increased shipments, again in 2016.

And it's also necessary to comment on Iraq, because Iraq has been a soft spot in the Middle East.

Today, we have about 55 rigs operating in Iraq, while we had about 90 rigs less than a year ago in Iraq.

So, Iraq has been deeply impacted by the new situation of price, lower cash flow, security issues, and some bureaucracy.

So, Iraq is a soft area in the Middle East.

Overall, we expect to continue to have low level of shipments of OCTG in the Middle East until this bounce-back in 2016.

Okay.

Thank you for that clarification.

My second question is really more on the US markets.

I can see that the rig count is coming down another maybe 30%, or so, sequentially from the first quarter to the second quarter.

And I would imagine that that's going to have a disproportionate impact on the demand for welded products.

And therefore, how should we think about your average revenue per ton?

In one sense, you are losing a lot of low-priced products.

And on the other hand, you highlighted that overall prices are now going to be becoming lower for high-quality product maybe, as well.

Could you just help us a little bit how to think about that?

On this second question, well, in general, you are seeing the prices reflected also in Pipe Logix.

Prices are going down since the beginning of the year by around 13% and evenly distributed between welded and seamless.

The two components are going down.

You are right that the stock reduction is probably more skewed in the sense of reducing the welded component; that is, a lot of welded material coming from imports that has built up over time in inventories and now is getting to the rigs.

But the price went down for welded and for seamless, and this is also true for us.

And to some extent, also it will reflect into our revenues.

But I would like German to see if [we can imagine a differentiation that in the end will reduce the impact to some extent in the coming quarters on price and our revenues.

Well, only a few details to add.

I think volumes of welded would be perhaps at the margin more affected as a result of [what Paolo] just indicated.

An impressive amount of welded imports coming from Korea.

There were 450,000 tons [nearly] in the first quarter.

This is affecting Pipe Logix.

It's naturally affecting both seamless and welded.

Now, I think, going forward, the key is whether we could use the environment to innovate the way OCTG is servicing the rigs, and we're making good progress on that.

Okay.

Those are my two questions.

So, I'll go back in the queue again.

Bill Sanchez, Howard Weil.

I was hoping perhaps you could update us as you did in the 4Q call.

You had offered up an expectation of a 30% decline in OCTG consumption globally for the industry.

And I think, Paolo, your expectation at the time was is Tenaris would do a little bit better than that, in terms of the potential declines here, I guess on the revenue line.

And certainly, your first quarter looks like you're off to a good start.

Could you just maybe update us on how you're seeing the global market right now, in terms of consumption declines here and also just relative to Tenaris?

[Today], we see the market reduction more or less in the same terms that we indicated in the last conference call: an overall reduction in 2015 of around 30% for OCTG -- 20% of which is related to actual reduction in consumption and 10% is due to stock reduction.

Now, in this environment with a lot of stock on the ground and in a market that goes down, we are very active in different markets.

And I think that our proposal, the strength of the product portfolio, and the financial strength of the Company puts us in a very good position to gain market share in different environments -- in the US, in Latin America, or internationally.

But I think that this will be reflected more over time, not immediately, because this is not a market that moves by demand.

There are contracts in place, there are long-term agreements.

And in some cases, when our capabilities are recognized and selected by our customers, this will be reflected, I think, over time.

We will see an increase in market share in 2016, because we are reliable.

We have a solid package of products and services.

But we will not see this so much in the [through] of the crisis in the coming quarters.

We will see it a little more over time.

Fair enough.

My follow-up question would be, can you update us perhaps on the steps the industry and Tenaris can take from here to slow down the level of imports still coming into the US?

On this, we are acting on different directions.

But German, maybe you can summarize when we stand and which are the actions that we will take?

Well, a few updates, Bill, on that.

As we have indicated in the past, together with the rest of the industry we're preparing the administrative review petition, the case which will start somewhere around the third Q. And given the level of imports that we see, particularly from Korea, we, [the industry believe], have a strong case.

And also, I think important, in the last week the Senate has introduced a bill that aims at changing important components of existing trade laws, at least from our perspective.

These are issues that deal with circumvention aspects of some of the exporting countries, price distortions, cost distortions, aspects associated to the injury determinations made by the ITC.

Now, the bill would move to the House, and I believe we're going to have some outcome in the coming months, or so.

Also, additionally, in the last three weeks, we won an important trade case in Canada against nine countries, particularly Korea.

The Canadian authorities found that the dumping margins against Korea that ranged from about 10% to 37.5%.

And a good number of the aspects of facts would be naturally used in our upcoming review petition.

So, we continue to move.

It's an important element, and the coming months will prove to be very important.

And by the way, we are seeing a reduction not compared.

We expect a reduction in imports in the coming quarters compared to what we have seen the last one from the data.

(inaudible) They 're monitoring the Korean exports.

So, not waiting for the imports to get to the States, but (inaudible).

Monitoring while ahead of time and we've seen already in April a reduction relative to what the first quarter.

And also, there is not so much room for imports to continue to get in.

We have such a high stock, an environment of stock reduction like the one we see today.

I appreciate the time.

I'll turn it back.

Frank McGann, Bank of America Merrill Lynch.

Just two questions.

One on cost-cutting efforts.

I understand you're making significant efforts to cut costs to help to soften the impact on margins.

I was wondering if you could go into some details on that and how that would affect your margin outlook, going through this year and into the beginning of next year?

And then, secondly, in terms of inventories, just how do you see inventories trending over the next three to four quarters?

Will it be easier to get them to come back to normalized levels?

Or, is this something that's going to take a more extended period of time and potentially affect prices for an extended period also?

Well, on the costs, we are working very hard internally.

The first line is to renegotiate and discuss with our suppliers, because we are aware that the whole industry needs to adjust to a lower level of price point.

We have to adjust also to a lower level of price for our products, but we also need to translate these efforts to make this into viable, sustainable, [time], and profitable to our suppliers.

Clearly, there are areas like iron ore or scrap or coal in which circumstances are favorable and we are getting substantial reduction.

But we are also discussing with our suppliers on every account from the cost of investment to the cost of different supplies that make energy part of this, that make the core of our variable costs.

You will see these efforts gradually reflected into our balance sheet, into our net income.

Because of IFRS delays, we will probably see the full impact of some of these reductions in the third and fourth quarters, gradually getting to the numbers.

And the second part is personnel, human resources.

On this, we are acting with all the different tools and trying to minimize the impact on our people, but at the same time to reduce as much as we can and make variable the cost of our people in the organization.

In the United States, we had no alternative but to stop some of the plants.

In other areas of the world also, we are using the temporary or medium-term suspension agreements that allow us to get variable on the cost of labor.

Currency is also helping, because in the end you can see the currency in which we have our major industrial operations are devaluating against the dollar.

So, we are recovering competitive in this.

And also, a fourth line of action is allocation of production between the different plants and in a way that allows us to specialize a plant on products on which they have cost advantages.

All of this is getting gradually or, like in the case of currency, very fast into our numbers.

And that part, I think, of the containment of the damage coming [on the traction] that you see in our numbers in this first [call].

This is an ongoing effort.

In the case of inventories, if your question is in general for the industry, what we expect is that the reduction in inventories will go on to all of 2015 and also to extend in the first part of 2016.

So, not everywhere, but in some areas the excess inventories on the ground will only gradually go down because of the type of products that are there, because of the application they are for.

So, this will be a process that will be concentrated in 2015, but not only limited to 2015.

In some clients, we may have some products that will be still in the stock by the end of the year.

In our case, we are acting very fast on reduction of inventories and very successfully.

You see this in the cash flow generation that is coming in.

This will go on over time.

And maybe, Edgardo can comment on our work, what do you expect also up to now and for the next quarters.

In terms of -- you see a very good reduction in terms of our inventories, [and this year was brought about] basically the reduction of volume.

In the coming quarter, we are expecting to continue this trend.

We have been reacting very fast and with some reduction in our productions.

And we are expecting, as we anticipated during the last quarter of this year, to start building up inventory.

So, overall, we will continue probably for the next two quarters with a positive working capital getting into our [cash generation].

Okay.

Great.

Very helpful.

Michael LaMotte, Guggenheim.

If I could just follow up on Frank's question on costs and Ole's question on price, it seems like from a volume standpoint guidance really hasn't changed from 90 days ago, but perhaps the price outlook is a little weaker and your costs efforts are perhaps a little stronger.

I'm really wondering what that nets out to in terms of EBITDA margin expectations over the next couple of quarters?

I had been under the impression that we were going to bottom out Q2/Q3 time frame around 20%, and I was wondering if that number was still a reasonable baseline for this year?

Let me tell you, I think that as you say the prices are going down, especially in the United States, because of the pressure of imports, and this is getting into our numbers gradually [or will at least be going gradually].

And we think that this is something also that is inevitable.

To make the shipments profitable and sustainable in the United States and worldwide, there will be a change of the structure of costs and we're part of this.

We need to act not only on price, but on every aspect of the supply chain to change structurally this and to take advantage of seeing this as an opportunity, not only a threat.

But you are right.

There is a reduction in price.

Our record in costs is very effective.

So, I think from this point of view we are also, let's say, getting very important result in terms of cost reductions, in terms of variable costs.

The issue here is volume.

The volume of sales and production is going down and will go down in the next two quarters substantially.

And this volume is creating inefficiency.

In spite of our efforts to get a variable label everywhere, we still have a number of issues that are substantially difficult to [variabalize].

And the reduction in volume is affecting our managing to this inefficiency.

Also, in the coming quarter, we will have restructuring costs.

Restructuring costs will have to be considered, especially in the next quarter, and will influence our margin, our EBITDA.

We expect the lowest point to be in the third Q, and probably our EBITDA margin will go below 20% at that point, considering all the efforts that I mentioned.

Okay.

And then, just excluding the restructuring charges though, if I just look at the straight operating factors, 20% or modestly below 20% is a reasonable 2Q range?

18% to 20%, maybe?

I would say that our lowest point will be [already] in the third Q. Third Q is less affected by the restructuring costs.

But still, our EBITDA margin will be below 20%, is what we expect.

Okay.

That's --.

There is not much (multiple speakers).

There is not so much -- you were talking about a world that is changing fast, and you know this.

The price of oil is volatile, and indeed there is a lack of visibility on many factors.

So, when we talk about the third Q, we still have a wide range of what sort of things that could happen affecting, let's say, our margin.

Understood.

That's very helpful.

I know there are a lot of moving pieces, but it helps us to narrow it down like that.

So, thank you, Paolo.

German, if I could follow up as my second, very quickly, just on the services business in North America?

If you could walk through some of the efficiency and cost of pipe ownership benefits that the alliances provide and how Tenaris expects to get paid for adding that value?

Yes, we can give you a view of where we are working, but let me stress this one point: inventories.

The system and the way to work in the United States requires in this moment a very high level of inventories, [even independently from the excess inventory that's been generated by the reduction in rigs.

We have experience, like the experience we have in Mexico, in which we supply directly to the rig.

We manage the stock on the system.

And we are able to operate with a fraction of the inventories [there].

And so, two, three capitals is important, especially in this moment, [for the recovery].

On these grounds, the reduction of stock, there is a lot of possible savings for the industry.

But let me ask to German to give a view of where do you see the area of reduction on the total cost of ownership point.

Well, I think that this is exactly the key.

Our users are, we're looking at total cost of ownership of tubulars at the rig site.

And we think that the system of Tenaris we believe, will truly synchronize our production programs to drilling programs, minimizing therefore the inventory on the ground.

But it's not only that.

It's also second inspections which we believe are not required.

It's also rig [returns] management done in an effective way.

It's repair of tubular services or tubulars management that have been also performed.

Now, in the last quarter, we have established sourcing and [services] agreements with, for instance, Statoil in the Eagle Ford, Seven Generations in Montney, Canada.

And today, given the pricing environment, we believe operators are, in fact, providing [additional incentives] for us to explore better ways of working.

We are doing really a big effort in The United States associated to our investment in Bay City, in the repositioning costs, in our industrial, commercial, and service activity in the United States.

And we really think that independently from whatever point of view, let's say, you look at the situation in the United States and the opportunity of shales is there and will be very relevant in the coming three, four, five, ten years.

It's a fact.

It's very big.

It's an extraordinary opportunity, independently from the fact that today when we see a sudden drop of rigs.

But I believe no way the potential of shales will not be developed or reached to its full potential over time.

And on this assumption, we are organizing our industrial, commercial, and service operation.

Thank you, gentlemen.

It was very helpful.

Stephen Gengaro, Sterne Agee.

I guess, two things.

The first is, would you be able to give us a sense in the first quarter of 2015, or even as you look back at 2014 as an average, when you look at your cost of sales, the percentage of that which is fixed versus variable?

Well, Stephen, when I write, speak, and talk to my people, I tell them nothing is fixed.

(laughter) I might stick to my line.

I cannot change this.

Nothing is fixed.

We should be able to transform our business in a flexible and variable business.

And really, we are doing a big effort in this direction.

Obviously, there are contracts that in some cases are establishing a floor that [in the end] will be very dependent from the volume -- in steel making, the early installation in the finish shop, in the heat treatment, in the rolling mill -- that really could not --.

When you operate them at a very low level of volume, it cannot absorb, or [variabalize], all the costs.

Energy, particular, is one case, or other.

But as I said, I think we can act on many, many things.

It takes time, but we can act on this.

Usually, 20% to 30% of our costs are very difficult to transform in variable costs, but this is the stake.

The harder the position (inaudible), the more difficult is to deal with that part of our costs because it is difficult to get variable.

Thank you.

And then, maybe asked a little bit different way, when you look at, sort of, the pure input cost side of it, is there anything that's giving you any relief in the next couple of quarters, that's very short-term oriented, whether it's power costs or steel costs or anything along those lines, that's helping a bit?

I don't think there are -- in the raw material, you know the situation and the prices went down.

But Edgardo, how fast is this cost reduction getting into our cost of sales?

I would say that probably they should be divided in between welded and the [seamless].

In terms of the welded, we get a significant reduction in the steel, or the coil steel.

We are not going to see this probably in the next two quarters, because the inventory that we have in place as of December will cover our needs for probably the first two quarters of this year.

In terms of the seamless, scrap prices and the iron ore, particularly, has been heating up positively in the first quarter, but very marginally.

We will see that the full effect will take place in the last part of this quarter and coming in the next one.

However, all the exchange rates that has been associated with the labor costs in the facilities in which we operate, that has been depreciating against the dollar, has a more immediate reaction.

So, probably, less than one quarter lag for this.

Okay.

Great.

That's very good color.

Raphael Veverka, Exane.

Two questions.

First, a follow-up on your guidance.

When you talk about your margins returning to a more balanced level in Q4, could you be a little bit more specific about to the drivers which you are seeing to get to this kind of a gradual recovery?

Is it mostly about cost and ForEx, as you pointed before?

Or, do you see an improvement in your volumes for seasonal reasons, or anything else?

Well, we expected that over time there will be different factors that will have an impact of our margins and make them recover gradually.

On one side, increasing shipments.

The next two quarters will be the worst, because of the stock absorption, and we will recover volume starting for the fourth Q. And this has an impact on our margin (inaudible).

Second, the mix will change gradually in the recovery to a more value-added component, because some of the projects -- offshore, complex projects -- that has been postponed will start -- get back again.

And we expect this to drive our mix towards a more value-added structure over time, in the course of the recovery.

An example of this is Saudi Arabia.

Very complex projects for sour gas, a difficult application.

When the destocking will be finished gradually, we expect in 2016 a recovery of sales of [this].

And so, also changing our mix into a more complex and value-added, high-margin mix.

And this will happen everywhere -- in deep offshore, in high complexity HPHT, and to some extent this also will happen into the United States and for the Gulf of Mexico and other complex applications.

At the same time, the reduction of imports.

And we are very sure that we will be able to reduce the level of imports, especially in the United States, and over time will allow a gradual recovery of the price [and sales].

Okay.

And my second question was on CapEx.

It seems to me that you were maybe a little late in your spending in this quarter.

I were wondering if you could give us an update in the guidance for this year?

And in terms of your net cash balance sheet, whether you think the $1.9 billion which you showed this quarter can be a target for the end of this year?

On this question, as I was mentioning before, we are continuing on our projects in Bay City at a lower pace, but during the second half of 2016, we will get the plant and production introduction, gradually.

But in the second half of 2016.

So, we continue to invest in the area.

And this will drive our investment level in 2015 to a relatively high level.

We expect to invest around $1.2 billion.

This is the more or less in broad range.

The investment that we expect for this year is a high [value] level of investment -- probably one of the highest years -- because of the new industrial investments in the States.

So, we can expect something more in the coming quarters compared to what we have done in the first quarter.

Okay.

Felipe Santos, J.P. Morgan.

All the questions I had were already asked.

But let me [follow] one point here.

You made the shutdown and took two plants in the US throughout this year.

How are you looking forward for the next plants or to halt operations some other places in the world?

This would be my first question.

And do you think that the Canada decision on the anti-dumping process could have any extent to the US decision last year/beginning of this year?

And [then, to this,] how you think that this could strengthen your case to help to reduce the import level?

On your first question, we had to do a temporary shutdown of some of the plants.

We do not expect it to have to shut down or take similar decisions in other places.

But we are slowing down the level of production of the plants, as we were mentioning, especially, let's say, in the next two quarters.

But I do not envisage the need to close, because what we're seeing is a recovery and we want to be prepared for the moment in which the destocking process will stop and [the industry will be ready].

We increased level of investment and we need to be there, especially if we want to increase our market share in some of the markets.

So, we do not see additional closures.

Yes, we will see some reduction in the level of [operating].

On the other question, I don't know, German, if you want to add on the impact that this would have?

Just a few, perhaps, details (inaudible).

The Canadian trade case that provides us important elements of the way the costs was structured by building the [normal values].

We believe that we're going to use some of those findings in the upcoming administrative review petition, which we intend to file together with the rest of the industry during Q3.

And by the way, those aspects are being captured already by this bill that was introduced in the Senate last week.

Okay.

Amy Wong, UBS.

A couple of questions from me.

Firstly, I just want to understand a little bit more about your mix in the North America.

What is the mix between your premium, semi-premium, and commodity-grade there?

And how do you see that evolving, please?

Well, we do not give so much precision on how our mix is, but German --.

Well, Amy, we usually don't disclose the mix specifics, competitive reasons.

All I could probably say to help provide some color is that the Tenaris has the premium connections market participation in the States of about 35%, and we believe, going forward, this will be absolutely sustainable.

Hopefully, that helps.

Okay.

Then, my second question is on the Middle East region.

You mentioned in the last call -- we were expecting activity to slow down in 2015, but that you were seeing a very high tendering activity, and this could lead to a higher market in 2016.

How do you guys feel about that now, at this point in the year?

I think we have answered that in a previous question, with Ole.

But summarizing, yes, we have an important tender activity in Kuwait and UAE, not so much in Saudi Aramco that we expect later in the year.

And all of this will be translated into higher demand, higher shipments in 2016.

But we will not see any improvements until then [in the Middle East].

Luigi De Bellis, Equita SIM.

Two quick questions for me.

The first one, could you give us a guidance related to the tax rate for 2015 and clarification about the net financial position expected by 2015 year-end?

And the second question, do you believe that an M&A deal involving Tenaris could be accelerated in the current scenario?

And which should be characteristics of a potential target in terms of product and geographical area?

On the tax rate and the financial, Edgardo, you can [give an answer]?

The tax rate, as we commented in the press release, it has been affected basically this quarter because of the effects on certain deferred tax liabilities.

But the real tax for Tenaris, taking aside the deferred tax, is in the range of 25%.

Looking forward for the year, we are expecting to end up, depending very much of the fluctuation of the currencies, in a range of 28% to 30%, overall.

In terms of the financial position, as we commented, we are expecting to continue a recovery in the working capital, and we are aiming to end up the year with a free cash flow that will help us not only to cover our CapEx plan that Paolo was mentioning, but also to continue paying the dividend as we expected.

So, overall, the net cash position should remain in line with the one that we have at the end of 2014, a little bit higher.

On the question of M&A, clearly, we are considering and studying what is happening [to the industry, because] it is clear that the industry is facing a major transformation, the need to restructure [for a bit].

And you see this happening in the oil industry, in the oil services companies sector, and this will also happen in our segment of the industry.

There will be a change to make all of this more efficient, to consolidate parts of the industry, and also there could be a redesign of the chain of value within the industry to make it more efficient and prepared to compete for the next long-term challenges that we have.

So, we are monitoring, analyzing what is happening to the industry and keeping all of our options open.

I think our financial strength is, on one side, a big advantage in the marketplace, in building the solid and sustainable relations with our customers.

But on the other hand, it's also enabling us to play a role in any restructuring of the industry that could take place in the next two, three years.

Thank you very much.

Ole Slorer, Morgan Stanley.

It would be a shame to have you, have a chance to talk to you guys, and not ask about what's going on in some of your core markets of Mexico, Venezuela, and Argentina, given all the big specific events going on in all of those regions.

Could you give us your latest thoughts?

I don't know if Guillermo Vogel is on the call, or not?

But if not, could you give us your latest thoughts on exactly how the Mexican privatization is playing out relative to how you had planned it?

And when it will translate into possible increases in drilling?

And then, give us --.

One of the largest service companies was remarkably upbeat about Venezuela, which was a bit surprising, I thought.

And I wonder whether that's something specific to them, or whether you are seeing something similar?

And then, finally, just on the robustness, or not, of shale activity in Argentina in light of the local policy on oil prices?

Well, maybe I can make some comments on Venezuela first.

Really, our operation in Venezuela went down to a very -- almost to nothing, because of the [trade] issue.

You know that in the past we had to [reduce some losses], very limited losses compared to some of the major companies and oil service companies.

We were very cautious in not to build up a receivable that we could not collect.

So, we were limiting our operation in Venezuela.

I don't think the situation will change during this year.

The operations are going on, but the ability [to condition a] price for PVSA to fulfill a financial obligation is limited.

So, I do not expect to have a lot of work, a lot of business, in Venezuela.

As far as Argentina is concerned, Argentina is doing well, because the government is implementing policies in the area of oil that are supporting the revenues of the oil companies.

The price of gasoline more or less is stable, and this allows YPF and the other operators, other (inaudible) refining operations, to continue counting on a reasonable level of price for their oil.

This is important.

And so, the development of Vaca Muerta is proceeding at a reasonable pace.

In the case of gas, the fact that Argentina is importing gas at a relatively expensive $9, $10, $11 per million BTU from different sources -- from Bolivia or from energy -- is also supporting the price of gas for the additional gas exploration and operation in Vaca Muerta.

So, we see Vaca Muerta developing.

And there's the level of operation is reasonable.

On top of this, we have some pipeline, one pipe, important pipeline for gas, that we are producing now.

For Mexico, I will ask Guillermo to comment on how the perspective is for 2015 and 2016.

Talking about Mexico, I would say 2015 has been affected by two things.

One is the [migration] of the oil service contracts with Pemex, which was supposed to be done by the end of both last year and the beginning of this year, has been delayed, and that has brought the activity in this sector to very, very low levels.

And then, because of the reduction in prices, Pemex's budget was affected also.

And so, if you see the rig count from the fourth quarter to the first quarter, you see a reduction to 88 rigs, from 93 rigs, with more or less a consequential reduction in the demand.

Moving forward, I think that what we -- the volumes we are seeing coming from Pemex in the first quarter are going to stay there for the rest of the year.

Migrations are supposed -- Pemex has said that he wants to finish the migrations by the third quarter, so that we might we see an activity coming back in the fourth quarter and next year.

And in terms of Pemex herself, they just had their conference call and they announced for next year that they plan to increase the investment budget by around 30%.

So, we see Pemex coming stronger in 2016.

And at the same time, they are considering 11 fields for farm-out.

So, that should also be good news in terms of activity for 2016.

In terms of the energy reform, it's moving forward.

There is enough interest in the first stage of the first round.

There is 34 interested parties, and it's moving ahead.

The second stage, at today we know that there is 23 interested parties.

I think that the favorable geological conditions of the Mexican fields is bringing enough interest, even though prices are lower.

And so, I think that energy reform is going to move ahead, is going to be successful.

And I think that we're going to see that also coming in 2016.

So, we see a level of demand in this year, but we see a very good prospects for 2016 and later on.

Thank you very much for clarifying.

So, flat until the third quarter and watch the migration of contracts, and that would also be a time when you get better visibility on 2016 as the privatization becomes clearer, right?

[Right.]

Thank you very much.

I'll hand it back.

Frank McGann, Bank of America Merrill Lynch.

Just looking out into the end of this year/beginning of next year, you've mentioned key things that can lead to an improvement, both in terms of volumes as well as cost cutting.

But I was wondering just how you see the rebound in the market as you go into 2016?

Do you expect it to be fairly sharp?

Or, do you think it's going to be slow recovery, based on what you see today?

Well, we expect a gradual recovery, because our experience in 2009 has been that in the second year we recover on volume, but it takes time to recover on prices.

In the end, there is a -- the change in prices, what we are seeing and that you see in the Pipe Logix, but we see also in the new contracts that are coming, that we are signing in this period, this will kick in during 2016.

So, there will be a recovery in volumes.

There will be probably a lower price.

And so, the recovery margin will be gradual.

Also, there is a differential.

In 2009, the drop was sudden because of the build-up of stock in the last part of 2008, but it was a different environment.

The shales were not there.

The shales were supporting the recovery in 2010.

In our case, we see a similar, very steep drop because the next quarter and quarter number 3, the third quarter, will be very, very much affected in terms of volumes.

So, we will start the recovery from a very low basis, as I was mentioning before, in terms of volume and in terms also of margin.

Okay.

There are no additional questions in queue at this time.

Well, thank you, Alex.

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

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.