Tenaris SA (TS) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the Tenaris fourth quarter 2015 earnings conference call.

(Operator Instructions)

And ladies and gentlemen, as a reminder, this conference is being recorded and is scheduled for 60 minutes.

And now, I would like to welcome Giovanni Sardagna, Director of Investor Relations.

Please go ahead, sir.

Thank you, and welcome to Tenaris' 2015 fourth quarter and annual results conference call.

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

During the fourth quarter of 2015, sales reached $1.4 billion, down 47% compared to those of the corresponding quarter of the previous year and 9% sequentially, as they continued to be negatively affected by the ongoing decline in drilling activity, inventory adjustments in the US, and declining selling prices.

Our quarterly EBITDA, at $223 million, was significantly lower than the corresponding quarter of 2014 and 7% lower sequentially.

However, our EBITDA margin at almost 16% increased slightly sequentially, as costs reduction continued.

During the quarter, we recorded $34 million of severance charges to further adjust the workforce to the current adverse market conditions.

Our EBITDA margin without these severance charges would have been at 18%.

During the quarter, we recorded a net loss due to non-cash deferred income tax charges resulting from currency depreciation in Argentina and losses on our share of investment in non-consolidated companies, including an additional impairment charge of $29 million related to our investment in Usiminas in Brazil.

Average selling prices in our tube operating segments were down 13% compared to the corresponding quarter of last year and 5% sequentially.

During the quarter, our net cash position declined by $268 million to $1.8 billion at the end of the quarter, following the payment of an interim dividend of $177 million that we paid in November last year.

The Board of Directors has decided to propose for the approval of the annual general shareholders meeting to be held in May the payment of an annual dividend of $0.45 per share, or $0.90 per ADR, which includes the interim dividend that we paid at the end of November.

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.

I will say a few words about our performance in 2015 before touching on our priorities for the year ahead.

Starting with safety, our main safety indicators improved through the year, as we implemented a zero-tolerance program alongside our Safe Hour and Safe Start programs.

Our average injury frequency rate declined 15% in 2015 compared to 2014, and has declined 46% over the past four years.

We will continue to focus on our safety performance, which is an essential element of our competitive differentiation in the eyes of our customers and the communities in which we operate.

Our operating and financial results for the year were, of course, impacted by the profound changes we are seeing in our markets as a result of the collapse in the price of oil and the decline in oil and gas drilling activity worldwide.

In a market where we saw demand for OCTG product fall from 17.7 million tons in 2014 to close to 11 million tons in 2015, affected by inventory adjustments as well as sharply lower drilling activity, particularly in the US and in Canada, our sales for the year declined 31%, to $7.1 billion.

Our EBITDA, net of restructuring costs, declined to $1.4 billion, or 20% of sales, but we recorded a net loss for the shareholders of $80 million after impairment and other charges.

These results reflect our ongoing efforts to adjust Tenaris to the market environment we are facing.

We have focused strongly on reducing costs, using the flexibility of our industrial structure; maintaining high levels of efficiency in our mills, despite lower volumes; improving the efficiency of our purchasing processes; and reducing our fixed cost structure.

In the final quarter of the year, our fixed costs were 27% lower than in the final quarter of 2014.

We have also focused on cash flow management, generating $2.2 billion from operations during this year, including a $1.4 billion reduction in working capital, and we have maintained our investment in our strategic projects, including the Bay City mill and service deployment for our customers.

Our financial position is very solid, with a net cash position of $1.8 billion at year-end.

In this context, we are proposing to maintain our dividend for the 2015 fiscal year at the same level as for 2014.

A key part of our efforts during the year has been directed towards strengthening our market position in different geographical and product segments.

Each of our 50 business units are managing the downturn according to the distinct reality of every particular market.

They are all positioning to take advantage of the eventual recovery, leveraging on our competitive advantage on financial strength, products, technology, service on the ground, and customer relations.

In a low-price environment, customers are looking for ways to transform the costs in their supply chain on a sustainable basis, and we stand out as a supplier that can guarantee continuity, commitment, quality, and innovation in every operational situation.

We are in the final stage of negotiation of a global agreement with Chevron, which supports the long-term supply of OCTG and associated services to a number of operations in different regions, improving our position in this key customer for Tenaris.

As part of the process, this month we concluded the agreement for Chevron operations in Thailand and in Permian.

In Thailand, we have a team in place who are preparing two local service centers to supply pipes and accessories ready for running offshore on a just-in-time basis using innovative pipe-by-pipe tracking solution to optimize material and quality management.

In the Permian, Chevron's operation is being served by our Rig Direct program, which will include a new service center in Midland and will soon be supplied from our Bay City mill.

This way of operating the tubular supply chain where we synchronize deliveries from our mill and manage the supply of pipes and accessories direct to the rig contributes to a more sustainable, cost-efficient operation, reducing working capital and inventory obsolescence and simplifying operating procedures.

Our Rig Direct program, which we started last year, is supplying 50 rigs in the United States and much more worldwide.

The program is gaining many adherents and will be strengthened when our Bay City mill starts operation later in the year.

Through the year, we have consolidated our position in the offshore line pipe segment, supplying major projects in the Gulf of Mexico and sub-Saharan Africa, and our coating facility in Nigeria is making important contribution to our results.

More recently, we were awarded a contract for Johan Svedrup exports pipeline in Norway based on the quality and reliability of our offer.

In the difficult environment for the energy sector, other segments of our business are also receiving more visibility.

In the automotive sector, for example, we [have built] the leading position in tubular components for airbags, where we have a 40% global market share and in 2015 we delivered a record 70 million pieces.

This year, we have been awarded a long-term contract for the supply of tubes for the [ring gears] in the new 10-speed gearbox transmission developed for Ford and GM.

This is a sector which requires constant effort and focus on the long term to develop products, service, quality, and reliability for demanding customers.

As we enter in 2016, oil and gas prices have declined further, and oil and gas companies are making further substantial cutbacks on their investment programs.

Demand for OCTG is also declining, particularly in the United States where drilling activity is falling rapidly and inventory levels remain high in relation to consumption.

In this difficult context, we are organizing the Company and defining our strategy to be prepared for an extended period of low oil prices.

At the same time, we are concentrating on preparing for an inevitable recovery in each of our business units.

Thus, we are maintaining our strategic investment in the Bay City mill, in product development, in service development, and human resources.

At the same time, we are managing our cost and cash flow very carefully to maintain our strong financial position, which is a key competitive advantage in this current environment.

Our customers need to develop transformational change to their supply structure with partners having the global reach and financial strength to support them in their operations worldwide.

We think we are well positioned to help them deliver in the [tubular area].

Ours is a cyclical industry, and however long this downturn lasts we are confident that we will emerge from it with a stronger market position.

We can take now any questions you may have.

(Operator Instructions) Ole Slorer, Morgan Stanley.

Yes, thank you very much and congrats on a solid performance.

I wonder whether you could help us a little bit understand the resilience of your business into the fourth quarter in terms of the realized prices that you have and how we should think about that in context of the renewals, particularly on international contracts, and some of the weakness that we have seen in pipe logics lately?

There seems to be a tremendous resilience in your business, and how should we think about that, going forward for this quarter and next?

Thank you Ole for your question.

Well, you are saying we are resilient, but also our overall sales are slowly going down and the results also in absolute terms are slowly going down, reflecting the strong changes and down trend in the market.

This is also affecting price.

If you consider that in the last three weeks we lost in the States something like 100 rigs, this is having an impact, and we have seen in the pipelogix a continuous deterioration month after month.

We are also suffering from this in different markets.

But as I say in my opening remarks, you should look at Tenaris as a combination of many different business units.

I mentioned what we manage, which are 50 segment and geographical business units.

And the story is different in each of them.

In common, many contracts we are renewing, there are formulas that include pipelogix, and this is something that is shared by affecting many of them.

But in other situations, we still can benefit from a very strong differentiation.

So, we are able to defend better our price.

But we are planning for a gradual deterioration of price, and we need to compensate working on our costs.

We know this, and this has been the story of 2015.

It will be the story of 2016.

If the trends that we have seen in the last two months will continue or even if this will stabilize, we'll have to face a substantially slow decline of price, or anyway a situation in which we may see this weakness in price, and we need to permanently work on our costs so we can able to defend our margin.

Having put all of this together, we are saying that we should be able to defend our margin even in this environment and facing a slight reduction in our overall sales.

One follow-up question on the Rig Direct.

What is it that has made this initiative so successful right now?

Because I remember back a few years ago you bought Maverick and you rolled out a pretty pronounced effort to sell directly to the end users.

And then, you rolled back a bit to distributors.

Now, you seem to have regained momentum here.

What is it that's changed?

Well, before passing to German for more comment on this, you also -- we are, I think, more credible today than six or seven years ago.

We are doing this all around the world.

We learnt a lot.

We improve our performance.

We know how to track what we do to evaluate quality on what we do and to prove to our clients that we can be fully compliant with their demands.

So, this is one thing.

Also, the Bay City plant is very important and the new deployment in the United States are very important to project to the client that this way of operating is really working solid for the future.

Now, I would say that also we are helping them reducing their working capital substantially.

To some extent, this is benefiting them.

It's creating stress also on us, for instance, in this moment in which the rigs are going down so fast.

Obviously, we're feeling directly the impact of reduction of rigs, because there is no shock absorber by the distributor.

But for our clients, it's also a big advantage.

If they are facing sudden drops, they can react and not remain stuck with inventories.

So, this is gaining ground in a time of high volatility.

And you're also restructuring the way the supply chain works, because the industry today is looking for a way of being profitable with this price point.

And they need to restructure everything, from the way they design their project to the way they manage the supply and the supply chain.

I think we arrived at the right time of our offer for addressing this need to a substantial transformation.

Maybe, German, you can have some concrete examples, like in the Permian, how we can support -- how the clients react to this?

Thank you Paolo, good morning Ole.

Very briefly, I think the traction, Ole, is based on the combination of a full range of domestic products -- that's again Bay City; the need to transform the way industry works.

And $30 oil is creating the absolute incentives for our users to explore new ways of doing things.

And then, also, I would probably argue credibility.

Our users are convinced that Tenaris has the financial capability to credibly deployed a new way of doing things for many years.

Examples, particularly centered around the Permiam, we have become the pipe and services supplier, for instance, of Pioneer.

Initially, we were the pipe supplier, and over the course of the last few years we explored opportunities and whatnot, and that has translated on the extension of our existing supply agreement, and which this time around includes all of the associated pipe management services.

It's gaining traction.

The incentives are in place.

I think we're going to continue on.

Thanks for that.

There's one silver lining of $30 oil, then.

Sure.

Thanks.

I'll hand it back.

Hopefully.

But I think, Ole, it's also important to highlight that this transformation is here to stay.

The incentives are the appropriate ones, but once and if we're capable of deploying, I think there's no going back.

Thank you.

Bill Sanchez, Howard Weil.

Thank you, good afternoon.

Paolo, I just wanted to circle back and just think a little more about 2016 expected financial performance versus your comments you've made broadly on the industry and Tenaris in general.

On the fourth quarter call of 2014, you had outlined an expectation that OCTG demand would be down 30%, and we kind of talked then about it being a proxy for maybe Tenaris' tube revenue performance for 2015.

You actually outperformed, by my math, the decline in overall OCTG demand for the industry this year.

You've talked about a 20% decline in 2016.

Help us think about, is that a good proxy for how you see Tenaris' top line performing this year -- or better or worse -- given what it sounds like to me average selling price is going to be under a bit more pressure this year than perhaps last?

Thank you Bill, I mean you are right.

In the last conference call -- I think was the beginning, 5th of November last year -- we were living at that time in an environment of WTI around $45, if I remember well.

We were saying at that time: Well, the first part of 2016 will be tough, but we expect some recovery in the second part of 2016.

Now, today, we are in an environment of WTI much lower than that, between $30-$32 per barrel.

Clearly, in the last two months -- three months, I would say, but two months especially in the last -- things have turned in a relevant way.

So, what we see today is what we have included in our market outlook.

We see today a reduction in the market in the range of 20% due to this.

This is a global concept.

It's worldwide.

It's including the effect on the United States and everywhere.

But clearly, the United States are the most dynamic, fast-reacting area, as we saw from the 100 rigs reduced in three weeks.

We expect that our sales will be more or less in line with this decline during 2016.

There will be probably some recovery in market share, but there will be, as you are saying, some impact on prices.

So, when you look at our sales, you probably will be looking at something in line with 20%-25%.

This is what we can see today, but this is a market that is moving fast, and we are today in direct contact with the market through the rig service worldwide.

So, in the moment in which the rigs go down, we immediately see our sales reduced.

But in the moment which the rig goes up, we will also immediately see a benefit in our sales, because basically we are supplying just in time -- not everywhere, but to a growing extent.

In our estimation, there is also a strong backlog in Middle East.

Last year, we were into this with lower sales in Middle East.

In the second part of the year probably we will have a stronger -- we have today a stronger backlog.

So, we will also see some recovery in our sales in that region during 2016.

Thanks for that.

Edgardo, a question for you as we think about free cash flow for 2016 given the commitment to the dividend or, at least, a proposal for the dividend.

It sounds like just from the comments around Bay City that you guys are going to continue to probably spend at the same clip that maybe you were three months ago.

And I guess, just curious if we could talk a little bit about what the CapEx assumption is for 2016 for Tenaris?

I think the number had been shaking out somewhere around $1 billion.

I thought perhaps that number might be coming down as you guys maybe would think about slow-playing Bay City a little bit here, just given the softer market.

Do you need to have Bay City really up and running partially by the start of 2017?

I guess, could we be thinking about lower CapEx for 2016?

Number one.

Number two, Edgardo, could you help us on maybe thinking about additional working capital drawdowns here during 2016 as we think about our free cash flow model?

Thank you, good morning Bill.

Regarding the CapEx, we are expecting that for this year it will be a reduction compared to 2015.

The bulk of our CapEx will be very much concentrated on Bay City and that will continue into 2017, in which we are expecting a much significant reduction going further.

So, we are probably in the range of $900 million estimated for 2016.

Very much of this will be partially covered with our operating cash flow.

Coming back to your question for the working capital, after a significant reduction of working capital that we have been achieving in this year, we are expecting probably not to have many help in this aspect while we maintain this level and we are trying to -combine our customers with inventory and some payment terms in terms of the receivables.

So, we are not expecting significant improvement from there, but not increasing the working capital for the whole year.

Okay.

Thank you, I'll turn it back.

Michael LaMotte, Guggenheim.

Thank you.

Edgardo, if I could follow up on the $900 million in CapEx for this year, how much of that is expected to be maintenance?

Is it --?

Are you running about $75 million-$100 million per quarter in maintenance?

I would say that probably overall in the year, roughly $250 million.

Okay.

Less than $250 million?

Yes.

Okay.

Great.

And then, for D&A in the fourth quarter, it did jump up from Q3.

Is there anything non-recurring in that?

Or, is the Q4 number the right number as a run rate for this year?

That will be the number for this year, and it's basically a consequence of the acceleration of the customer relationship in our Canadian welded operation, as we commented in our press release, that we accelerated in this quarter and it will be the same for 2016.

Okay.

Great.

And then, in terms of your realized steel costs, what's flowing through the P&L, what would you characterize as roughly the variance or the spread between realized and spot prices?

It depends very much of the raw material.

I would say that scraps, we are still probably $30 above the current level.

In terms of steel, hot-rolled coils, we are roughly $50 above still.

Okay.

And then, how much forward buying are you doing in the raw steel markets?

Is that --?

Is the market loose enough that you're not having to do 90-day or even full-year types of supply agreements with suppliers?

No.

We are basically buying on a spot basis, and we are always probably having mostly one quarter of our inventory [on hands].

Okay.

Great.

All right.

That does it for me.

Nick Green, Bernstein.

Nick Green, from Bernstein.

Could I return to the question of dividends and free cash flow, please?

By some very basic maths, if you're $1.2 billion EBITDA this year, or 2015, 20% lower volume plus pricing pressure, even if we said generously EBITDA was $1 billion next year, once you've taken off the CapEx, there's a good chance you'll be free cash flow something like $0.5 billion negative next year, or in 2016.

Given as a Company you've only been free cash flow negative once in the past, in 2004, and even in 2009 which was a tough year you were sort of free cash flow zero-ish -- or, in 2010, I should say -- could you talk about how sustainable you feel the dividend is at these levels for both 2016 and for 2017?

And whether you think it would be prudent in view of the other commitments to be paring that back a bit?

Well, up to now, what we are saying is that we will confirm the dividend related to 2015.

Looking forward, we have to take into consideration [these] different factors.

On one side, the policy that we follow in the past and we want to maintain also in the future is to have continuity and to limit the swing in the dividend payment of the Company; so, to contain when the market is going up but also when the market is going down.

We have done this in the past, in 2009, and you have a reference of the swing that we can take in this situation, even when we may have for a short period of time free cash flow that is going down, like in this case, pretty much.

We will look at this, which is what we have done in the past, to maintain continuity with what we have done.

And we would look also at the level of cash in hand.

The Company is entering into 2016 with $1.8 billion cash -- or securities, but it's basically cash -- in our hand.

We will look at the perspective for 2017 and taking a long-term view in defining this.

We're looking at our margin ratio, our dividend payout ratio, perspective of 2017, the cash in hand.

And considering all this, we will propose next year what we want to do for the dividend relating to 2016.

I think we need to take a long-term view.

It's clear that 2016 will be -- there will be very harsh conditions.

But from our point of view, it's also -- we plan for an extended period of time of relatively low oil and investment by the oil companies.

But we will have to see how this evolves during 2016, in defining the level of dividend we can have in the coming year.

Okay.

I understand.

But in 2010, you took the dividend down by about 20%.

So, you kept it, but you reduced it.

Maybe rather than answering "Would you do that this time?" -- I appreciate you can't answer that -- can you talk through a little bit why you decided to cut the dividend last time?

What circumstances prompted that measure of caution in 2010 and therefore why that isn't going to be the case this time around, or if it is the case?

Well, as I say before, we are taking into consideration the factors that I mentioned and also the opportunity for major investment.

This is also something important.

I mean for instance, by the end of next year, we will be very almost through our big investment in Bay City, and at the time we need to evaluate if there are important commitments that could be enhancing of our strategy of deployment.

This is possible.

I don't imagine organic growing to continue after Bay City, but there could be opportunities of repositioning and use of cash.

This could be a consideration that also enters into our evaluation.

I don't think we can be much more -- go much more deeper into what we can do next year.

But anyway, our financial position today is much better than the financial position that we had in 2010.

The level of cash in hand is much higher.

Yes.

Okay.

I understand.

Okay.

Just a final one, then, on a different topic.

Clearly, Bay City is a major investment.

It will bring on substantial additional capacity for Tenaris.

In the context of a tough market which will take a number of years to come back again, can you talk about which existing capacity you would consider closing or you are already considering closing to compensate for the new capacity that Bay City is bringing on?

Well frankly, up to now we have done temporary closures in different facilities of our system, basically to adjust our level of capacity to the market that we see today.

Now, Bay City will come on stream by the middle of 2017.

As you know, we slowed down a little just for this reason, because we expected the recovery in the market will slow down over time.

Imagine that we were two weeks ago, one year ago, one year and a half, let's say, with rigs of 1,900.

Now, we are heading for 500, or even less, level of rigs.

US is very dynamics.

Any recovery today will occur in an environment of low inventories, more restrictions to import.

So, frankly, I still think that by the time Bay City will gets on stream, we will not need to close other additional capacity.

On the contrary, we may be in the situation in which we may reactivate some of the capacity that we had to close temporary up to now.

We will consider this by the end of 2016, and by that time we will define our production profile for the total 2017 with much more clear elements for the season.

That's very helpful.

Raphael Veverka, Exane.

Good morning, thank you for taking my questions.

Three questions on my side.

First, on your guidance, whether you could just be a little bit more precise?

When you say you expect your margin to stay comparable to the Q4 levels, more or less, are you talking reported EBITDA margin or adjusted EBITDA margin?

My second one is on pricing.

Do you think you will --?

How far do you think we are from the bottom on spot?

And how long you think it would take before this is really reflected in your P&L?

And lastly, on M&A, whether you see any opportunities happening this year as the cycle continues to get tougher?

And if you think there is scope for more consideration in the OCTG industry?

Thank you.

On the first question, we are talking about the reported EBITDA.

We think that -- today we think we should be on line with the fourth quarter in terms of reported EBITDA.

On the second, spot prices.

If I understand well, how fast they are going into our bottom line?

Well, this is very variable.

In some cases, this area is getting into it because of the formula almost immediately.

Any change in pipelogix may affect our prices.

In some of the cases, we have fixed prices for 2016.

So, we get from one side or to the other, there are changes.

Remember also that in our formulas, in some cases they are including the hot-rolled coils or the scrap, and for instance the hot rolled coils is one of the things that -- one of the products that has moved up recently.

So, there are a combination of factors.

I wouldn't say that the spots are going into our profit and loss entirely in a short period of time.

As far as the last point, as well we did in the past, we are continually considering investment or acquisition that may strengthen our position in the long run.

In this moment, the Company is concentrated in imagining and planning for a recovery in the market and how to be better positioned for the moment in which the equilibrium in the oil market will be reached, price will change sign, and investment also will start to recover.

If we perceive that there are acquisitions or investments that may strengthen our position for that moment, we may decide to invest.

For the time being, we have nothing concrete.

Okay.

Thank you very much.

Frank McGann, Bank of America Merrill Lynch.

(technical difficulty) I just wanted to (technical difficulty), just following up a little bit on the (technical difficulty).

What is the current (technical difficulty) on average (technical difficulty) that you have in your (technical difficulty)?

I'm sorry, Frank.

The line is breaking up.

Your line is breaking up.

Repeat the question, please.

I apologize.

Just in terms of capacity utilization, what is the level of capacity utilization currently and perhaps the range maybe that you see in different plants?

How quickly you think inventories can come into line so you could get better capacity utilization?

And then, the second question is just in terms of demand levels in Mexico and Argentina, two markets that have slightly different dynamics perhaps than some of the other global markets?

Well, in terms of capacity across utilization, as I said before, we are doing temporary closures in some of the plants.

I wouldn't give a number for capacity utilization of the overall system in this condition.

Some of the facilities working pretty close to capacity.

Some others is at a reduced rate.

What is our base [focus] is to achieve efficiency at facilities that are working at the reduced capacity utilization so we can really variabilize all our costs.

And we are being pretty successful in doing this during 2015, and this is reflected in our [match].

As far as the inventory reduction, I would say that clearly the trend that is underway in the United States with a reduction of rigs so fast in such a short period of time is not really contributing to a reduction in days of inventory on the ground.

Because in the end, when you reduce rigs by 20% in four weeks, clearly the level of inventory in terms of days inventory are going up, even if in absolute terms they may stay relatively stable.

During 2016, there will be definitely a reduction in the level of stocks, particularly in the United States, but it would be difficult to tell you where we will be.

It will depend from the level of rigs that we can have all along the year.

The third point is Mexico.

Maybe, here, Guillermo, that is on the call, may give us a view of what we can expect from Mexico in these difficult times during 2016 and maybe looking beyond that.

Yes Paolo, good morning Frank and good morning everybody.

Well, in terms of Mexico, let me make two comments.

One in relation to Pemex.

As I mentioned in the last conference call, we were expecting Pemex activity to reduce on the fourth quarter, mainly derived from a budget cut that was defined of MXN60 billion last year.

Then, the new budget for Pemex was approved by Congress, and our expectation at that time was that the level of activity we were seeing coming from Pemex in the fourth quarter was going to be maintained level for 2016, which was going to be the main driver of the market for us in 2016.

Unfortunately, due to the reduction in the price that we have experienced at the beginning of the year, last week there was another announcement by the Treasury that they were going to cut the budget of Pemex by another MXN100 billion from what was approved.

The information we have received from Pemex is that they're going to try to affect as less as possible the E&P program, but we still don't know exactly how it's going to be affected.

And due to the magnitude of this cut, we see difficult that is not going to be affected.

So, probably we're going to see some down activity in Pemex in next year.

But at this point in time, we still don't know exactly what is going to be happening, or how strong is it going to be.

As you know, there was a change in the CEO of Pemex.

We got a new CEO.

So, he's working hard.

He's mainly a person with very high management skills.

I'm sure he's going to be working hard to cut costs.

He's going to aim the reduction to reducing the people of Pemex and trying to improve the efficiencies.

But we still have to wait a couple of weeks to have a full understanding of what his full program is going to be.

In the second part, I would say that, walking through the energy reform, the energy reform has been advancing in good rhythm in Mexico.

We have had the three rounds of bidding already, the first three rounds.

The first one was not very successful, but I would say that the second one was successful and the third one was very successful.

They're putting together now the fourth round, which is going to be the one for deep water.

We still don't have a date for the bidding, but the data rooms are open and there's subscriptions and there is a fair amount of interest in that.

So, that's moving.

And then, also, in terms of the migrations, which have been delayed because of internal discussions between the Treasury and Pemex, I think that the new CEO of Pemex that has a very close relationship with the Treasury, I think that's going to facilitate and we're going to start to see some of the migrations moving ahead.

And also, the farm-outs.

There are seven fields that are being worked out by SENER now in order to define the conditions.

So, I would say that we see the activity in Mexico improving in 2017.

I think that for 2016 maybe we're going to have some effect of this on the fourth quarter.

But we're going to have really -- we're going to start to see the effects in 2017.

So, going short term, we have a negative view.

Medium term, we have a positive view.

Now, getting into the Argentina, a brief comment [in general] on Argentina.

In Argentina, the new government is moving in the right direction in reducing distortion in the energy sector, and I'm sure that this will gradually bring back confidence and trust and interest of the oil companies into Argentina.

For a smooth transition in Argentina, the government at the moment is preserving a relatively high price of oil for the production and the refinery.

So, the producers in Argentina are seeing a level of price that is not the international price.

The price that they see goes between $55 or $65 per barrel, depending from the region.

In these conditions, they are maintaining their drilling operations to a large extent.

Only some of the marginal export capacity is being reduced.

So, in this sense, Argentina is more stable in terms of rig count than many other areas.

In the medium term, eliminating the distortion in the markets will allow the price of gas also to get closer to the price of imports of gas in Argentina, and this will stimulate development of the gas reserves in Vaca Muerta.

I'm very confident that over time the level of drilling for gas in Vaca Muerta will increase.

During the coming months, the rules of the game will be defined better, and I think in 2017 this will be an interesting area and an area in which Tenaris is particularly strong.

The level of drilling for gas in Argentina could increase, and by that time it would be very logical for this to happen.

And so, this is the situation we see today.

On the side of pipeline --.

Okay.

Thank you very much.

On the side of pipeline, that could be in the second part of the year some pipeline to improve on the infrastructure for gas, and this could also be relevant for Tenaris.

This is [pipes for] pipeline.

We do not know exactly when, but we know that the infrastructure needs to be expanded if development should arrive.

Okay.

Thank you very much.

Alessandro Pozzi, Mediobanca.

I just want to follow up on the selling price for next year, and I was wondering if you foresee a more favorable product mix?

I've noticed that your selling price has come down in the second half of 2015, also because I think there was these products went up in terms of percentage of sales.

But I wondering if you can maybe talk about that a little bit and give us a bit more color?

Thank you Alessandro.

In terms of mix between welded and seamless, probably we will see a smaller share of welded in the coming quarter, because we are shipping pipelines -- we are concluding shipment of pipes in Argentina and Brazil.

So, for some quarters, we will have less welded product in our product mix.

If you look into the mix between premium products, semi-premium or API, in this moment with this price of oil it's clear that the more complex projects have been delayed.

So, there could be, let's say, in terms of volume a lower level of demand for complex products.

But on the other side, it's also true that a big part of the adjustment that is done in the United States has been affecting the API, low-end products that are in inventory and are used in part of the shales.

So, as a whole, I do not see as a compensation factor a big change in our mix between 2015 and 2016.

Maybe, Gabriel, you can add a comment on your region, on eastern hemisphere, is what we can have from the contract that we signed with Chevron?

And the other contracts that are in the process that we signed for the backlog in Middle East will drive a change in mix.

Yes, thank you Paolo, good morning Alessandro.

Indeed, we have been, as you anticipated a few moments ago, we were able in the last few months to build a sizable backlog in the Middle East.

This has been in a tough competitive pricing environment, but we have been particularly successful.

I would mention large contract that we secured in Kuwait for the drilling segment.

This is a flagship project for the country to become self-sufficient in gas.

These are complex wells -- [HPHD], with H2S component as well -- that requires sophisticated, [proper high-grade] and premium connections that our products address.

So, this is going to be something that will be impacting on a higher mix in the Middle East in 2016.

Also, in UAE, we have been particularly successful covering the requirements for the most complex drilling environments in Abu Dhabi for extended-reach wells.

These are deviated wells that require high torque, in which our Wedge and Dopeless technology provides solution for the customer.

So, this will be also a three-year agreement, and this will be impacting our sales and market share gains in the Middle East.

And also, as we anticipated in the last call and we can fully confirm, Saudi Aramco is back into the purchasing cycle.

We see tenders, quarterly tenders, small project tenders.

But they're fully back, aligning the level of consumption and demand.

So, this will be a positive driving factor for the mix in 2016.

You mentioned also the contract in Thailand.

I think this is relevant, as well, to mention.

This is a seven-year agreement that we're entering in the largest premium operator in southeast Asia.

This is an operation of several hundred wells per year that we see very resilient, different from the rest of southeast Asia.

That is one of the areas that has been particularly affected with the price of the commodity.

So, rigs are coming down.

But in this particular operation, we see a level of stability.

We are deploying, as you mentioned, two state-of-the-art service centers.

We will cover all services, from the mill to the well.

This will be important.

We are covering casing premium and also the completion in premium.

So, this will be transitioning during the second half of 2016, with a full impact in our share and mix component in 2017.

Yes, thank you.

This is a very good example of development of our strategy and how we are preparing for recovery worldwide.

In this case, we deployed all of our technology, including the pipe-by-pipe tracking, identification and traceability, two bases in Thailand.

It's a very interesting deployment, the one we are doing for the long run in Chevron.

That's very helpful.

I don't know if there's time?

I have a second quick one.

I was wondering how we should think about the impacts of the devaluation of the pesos in Argentina on your accounts next year?

If there is any impact either positive or negative?

Well, the devaluation, we are more competitive in Argentina because we are reducing also some of our labor costs in Argentina.

This is helpful.

On the other side, you see in the deferred taxes that we have numbers that are growing.

This is not a cash component.

It's just deferred taxes that goes up because of the devaluation in Mexico and in Argentina.

Basically, the devaluation in Argentina is supporting our competitiveness worldwide.

Do you see any wage inflation as a potential risk?

I don't know, Edgardo, if you want to add something on this?

We need to see probably the expectation of inflation in Argentina after the big devaluation at the end of the year.

That will be partially compensating our savings in terms of cost efficiencies for the labor costs and local costs related.

But as Paolo was saying, unfortunately in our P&L the effect of the devaluation on the taxable base for the deferred tax is affecting very much the net income, even though it is not a cash outflow.

Okay.

Thank you very much.

That's all for me.

Pedro Medeiros, Citigroup.

Ok, thank you very much for taking the questions.

I have two quick questions.

First one is a follow-up to the previous question on the breakdown between welded and seamless or premium products and how the mix should change in 2016.

You comment a bit on the improvements taking place in the Middle East and in southeast Asia in terms of new orders, but do you mind commenting a bit on the backlog for welded pipes?

They're maturing this year.

And is there any visibility of replacing that backlog?

Or, how is the Company going to deal with that?

I understand that a part of this backlog is actually maturing in South America.

So, anything or any color you can share on that, I would appreciate.

The second question is if you can elaborate a bit on how the Company is dealing with its receivables management this year?

Has there been any change following the deterioration in the credit quality of your clients, be it because you're more concerned or because some of your customers are demanding more time?

Should we expect any change on that side of the business for 2016?

Thank you Pedro.

Well, in terms of welded, I would say that our welded component will probably be lower in the coming quarters because we are, as I was saying, shipping pipelines.

And then, we will have much less backlog of welded pipeline going ahead.

We think that there could be projects that we may supply, but still we have to get the orders, get the projects done.

These are not, let's say, in our backlog yet.

As far as Middle East, I didn't understand -- we have no welded sales of any relevance for Middle East.

This for us is all seamless area.

As far as receivables, Edgardo, you can comment on how sound is our portfolio.

Thank you Paolo.

As we commented in the last conference call, we are still [flying] at 74 DSO, and not major -- no significant delays, even though we still have in our financials 8.6% of the total receivables as a provision for doubtful accounts very much concentrated today, I would say, in Venezuela with the lack of collection from PDVSA.

Okay.

Ladies and gentlemen, this concludes our Q&A session for today.

I will turn it back to Giovanni Sardagna for final remarks.

Well, thank you all for taking part in [today's] call, and see you next time, thank you very much.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program, and you may all disconnect.

Have a wonderful day, everyone.