Tenaris SA (TS) 2016 Q2 法說會逐字稿

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

Welcome to the Tenaris S.A. second quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

Now, I would like to welcome your host for today's conference, Mr. Giovanni Sardagna, Investor Relations Director.

Please go ahead.

Thank you, Carmen, and welcome to Tenaris' 2016 second quarter 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 from Luxembourg 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, our Managing Director of our Eastern Hemisphere operations.

I would like to start by mentioning that we will host an investor presentation in New York on October 19, and we hope to see many of you there.

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

Our second quarter sales, at $1.1 billion, were down 40% compared to last year and 11% sequentially.

Sales have been affected by lower sales throughout North America, the end of pipeline sales in Brazil and Argentina, and by lower average selling prices throughout the world.

Our EBITDA margin, at 11%, declined significantly, reflecting restructuring charges and the lower absorption of fixed costs driven by a lower utilization of production capacity.

During the quarter, we recorded $43 million of severance charges to further adjust the workforce to current market conditions.

Our EBITDA margin without these severance charges would have been 15%.

Average selling prices were down 22% compared to the corresponding quarter of last year and 6% sequentially, reflecting the trend of reductions in the market, lower sales of coating services for offshore line pipe projects, and the intense competition for orders of relevant volumes.

During the quarter, cash flow from operations remained strong, at $380 million, and we ended the quarter with a net cash position of $1.8 billion after the payment of $354 million in dividends that we paid in May.

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.

The extent of this oil and gas industry downturn is taking its toll on the results and financial condition of the industry and its suppliers.

Tenaris is, I believe, one of the stronger suppliers serving the industry.

But even so, we have not been immune to the combination of activity and pricing declines that we have seen across the industry.

In fact, the markets where we have a strong position have been the most affected in this downturn.

The results of this second quarter highlight the relative resilience of our performance in a moment when we are close to the bottom in global drilling activity levels.

Our EBITDA has declined substantially from the level we had two years ago but remains positive, with an adjusted margin of 15%.

We had a positive operating cash flow of $380 million, as we made good progress in reducing lead times and increasing efficiency in the supply chain.

At the same time, our strong balance sheet remains intact, with a net cash balance of $1.8 billion after paying out $354 million, the final installment of our annual dividend.

During the past month, we made good progress in the deployment of our Rig Direct program worldwide.

Last month, I was in Thailand to open our new service center at Songkhla.

From here, we have already begun to serve Chevron's operation with just-in-time delivery of carbon and chromium tubulars and accessories fully prepared for offshore running and each identified pipe by pipe with our unique Pipe Tracer system.

We threaded the first premium pipes at our new threading facility and service center in Aktau, Kazakhstan, to supply the Karachaganak and the Tengiz fields.

The facility, unique in the Caspian area, is fully equipped with Dopeless technology capability which provides significant operational benefits in the harsh environment of the Caspian Sea.

We also opened a fully automated Dopeless pipe and accessory threading line in Aberdeen, upgrading our North Sea service capabilities where we are currently supplying many field developments such as Culzean and Mariner.

In the United States, Bay City will be the heart of our US Rig Direct operations.

Currently, we have 1,500 persons working on the erection of the rolling mill.

We expect to start operating the finishing facilities in the first quarter of 2017, with the rolling mill entering into operation by the end of the second quarter.

Rig Direct and Bay City, together with the rest of our US industrial system, will transform our position in the United States market, offering our customers sustainable cost savings and environmental benefits through supply chain integration and the transformation of operational processes.

Today, we are supplying close to 50% of our worldwide OCTG sales with Rig Direct services.

This is our way of contributing to the cost reduction efforts of the industry through an effective integration of service and the supply chain.

In our last call, we stated that pricing had reached unsustainable levels.

Now, the Pipe Logix index for OCTG prices is starting to recover after falling 38% since November 2014.

We are negotiating price increases on renewals of existing agreements, which should start to be reflected in our results from next year.

We are now almost two years into this most severe of the downturns.

During this time, our key markets have weakened considerably.

We have reduced personnel, and we have made an extraordinary reduction in costs.

Despite a diminishing plant load, we have increased the efficiency of our operations.

And throughout, we have shown impressive resilience and improved our strategic positioning, which has only been possible thanks to the tremendous response of our people everywhere.

When the price of oil recovers and the industry increases its investment, the markets where we have established a strong position will be at the forefront in the recovery.

We are now receiving your questions.

(Operator Instructions) Michael LaMotte, Guggenheim.

Thanks, good morning gentlemen.

Paolo, if I can maybe start with you?

The seamless volumes were stronger in the quarter than I was expecting, and it looks like Middle East and Indonesia were the reasons for it.

Is that early evidence of the restocking that we've been talking about for a while?

Or, is this activity related?

Thank you Michael for your question.

No, in fact, the volume has been driven by the timing of deliveries, especially in the Middle East.

But we cannot say that there is a restocking in this moment in the cycle.

In fact, we expect volume to go down slightly also in the next quarter.

For the time being, we see that stock is going down in different parts of the world, but we cannot talk about really a restocking.

This will happen probably during 2017.

Okay.

Very good.

Thank you.

And a question for German, quickly.

It looks like 90%, or so, of US rig count growth into year-end is going to be in the Permian.

And I'm wondering what the trends in that market, what levers they could act for Tenaris?

Things like consumption per well, use of premium connections, your Rig Direct penetration in the Permian, specifically?

Can you talk to those things?

German?

Thank you Paolo, good morning Michael.

I would probably argue, Michael, that agreeing with the notion that Permian will be the first place where we'll see the recovery.

Our view is that Rig Direct will be the vehicle which will allow us to enhance our position in the area.

Our Midland service center is up and running.

We're servicing a good number of our users already out of our service center.

And naturally, the completion of Bay City scheduled for Q2 next year would add another very important element in our ability to enhance/expand our position in the Permian.

That's great.

And then, from a capacity standpoint, how much growth do you think you could generate from the facilities that you have currently in place?

Well, from a let's say pure capacity, remember that Bay City will start.

Naturally, it will go through a start-up curve.

We won't see, obviously, during the first semester, or so, the max the output coming out of Bay City.

But at the same time, Permian is a, relatively speaking, big welded OCTG user and we'll be ready to in the end expand our production out of Hickman when the time comes.

And on the Rig Direct side?

Same is true.

From a Rig Direct perspective, [with dimension] to not only cope with the existing rigs that we're servicing, but naturally preparing to absorb the additional level of activity when and if the price allows for a rebound.

Okay.

Great.

Thanks.

I'll turn it back.

Jordan Patel, Bernstein.

Good morning.

This is Jordan Patel, from Bernstein.

Two questions for me, please.

Firstly, could you please confirm the midyear Group headcount number?

And secondly, could we dig a little deeper into the second quarter SG&A charge?

Even after adjusting for the exceptional items highlighted -- this is the severance and the provision -- it appears to have increased by around 600 basis points versus Q1.

Could you just give us some color as to why this has happened and perhaps talk a little bit more about that?

Edgardo.

OK, in terms of the SG&A, well, we have in the first quarter that we have an extraordinary recovery from our bad debt provision, which is basically everything exceeding 180 days overdue.

There was $30 million collection from PDVSA.

Therefore, it was a very positive impact at that stage that really has not been recovered -- it's not repetitive in this quarter.

Therefore, taking aside this and taking aside the leaving indemnities that are much more important in this quarter, we are very much in line on dollar base compared to last quarter.

Thank you Edgardo.

Jordan, can you repeat your first question?

Because I'm not sure we understood it very well.

Sure.

The first question was simply whether you could confirm what the midyear Group headcount number was?

The headcount.

Well, we did a substantial reduction.

We are now in -- probably the reduction has been in the range of 9,000 people in our overall headcount.

Today, we are at a level of around 19,000 employees worldwide.

Many thanks.

Bill Sanchez, Howard Weil.

Thank you.

I wanted to just dig in a little bit as it relates to the guidance offered up in the press release with regard to 3Q being the trough, which I think is certainly consistent with past conference call commentary, and then a recovery in 4Q and just, I think, trying to understand a little bit better the puts and takes here for the quarter.

There was no mention in the press release about raw material cost inflation, and I know that's a topic that's on a lot of people's minds.

And maybe talk about the pricing increases?

I know we started a price increase here in Q2.

I think you said, Paolo, you don't expect any real impact of that until 2017.

But maybe help us a little bit thinking about raw material inflation as a negative; price increases, I guess, not really a second-half issue here?

And then 3Q typically we see seamless volumes drop right as you see additional under-absorption in the facilities due to holidays in August.

So, maybe just talk a little bit about seamless expectations and then just what kind of anchor margin do we think we're seeing here in 3Q relatively to 2Q on the EBITDA side?

Well, thank you Bill for your question.

In fact, we expect the 3rd Q to be lower in volume and invoicing compared to 2nd Q. For seasonal reasons this is impacting into this.

As far as -- then, there will be a recovery in the 4th Q.

When you talk about the cost, I think that we have been able to manage our purchasing of material in a way that in the end will minimize the impact from cost on the 3rd Q. In fact, I think we will be able to maintain this under control.

In terms of margin, we expect the EBITDA to be double-digit EBITDA -- in the lower teens, let's say -- during the 3rd Q and then recover in the 4th Q. On average, we continue to maintain our estimate of an EBITDA margin for the year slightly below 15%.

I'm talking about adjusted EBITDA.

Great.

That's helpful.

And I guess one for German.

German, as we think about North America right now and the recovery -- and, clearly, you're getting a lot of successes on the Rig Direct side -- talk to us about what you're seeing from a mix perspective as we start seeing rig count recovering here in terms of seamless versus welded content, the desirability by your customers?

And then, also, my second part to that question would be, I think there's a view that the tonnage consumption per well in these shales that are being drilled right now, with guys drilling their best rock in these longer laterals, that there's more consumption of OCTG needed on a per-well basis.

Can you maybe talk about that dynamic, as well, and the growth prospects that affords to Tenaris here as we think about the North America recovery?

Thank you

German?

Thank you Bill, good morning.

Well, first, Bill, on seamless/welded, we are naturally seeing a recovery that is starting in the south.

Only in the last couple of months, since late-May, we've seen give or take 60 more rigs.

Naturally, the pricing dynamics and volatility is not helping much, but we sense that these are give or take here to stay, and the south -- Eagle Ford, Haynesville, and Permian primarily -- are the areas where we see the rebound.

Now, other than the second point you made, which is in fact longer laterals, the use of, in relative terms, a bit more seamless than not and, most importantly, semi-premium connections, there's not a drastic change in terms of string designs.

This is somehow longer, but the typical design of 5 1/2, 9 5/8, or 4 1/2, 7 inches continues to be the one in place.

I think the important change we see is an increased requirement for torque and compression resistance, which is in a way challenging the existing semi-premium products that the market is offering.

And in my opinion, it will be without a doubt an area of near-future development.

Okay.

German, in terms of just if we thought about average tonnage consumption in a North America well for Tenaris at the peak -- let's say, in 2014 -- versus what you think it may be 2017, is that same?

Is it better, do you think?

Is it less?

On the sales, Bill, I think it will be slightly higher, very low teens or so.

But remember that when you look at the overall US, we're going to have the absence of Gulf of Mexico in relative terms, and that will have naturally an adjusting element on it.

Fair enough.

Thank you for the time.

I'll turn it back.

German Cura: Thank you Bill.

Frank McGann, Bank of America.

OK, good morning, thank you.

Two questions, if I could?

One is related to the recovery.

In your comments, you tend to sound -- at least to me -- quite cautious about how robust the recovery is.

And I was just wondering how you see the rest of 2016, 2017, 2018 in terms of what you think will be the most likely key drivers of that recovery?

And how you see pricing in light of the capacity adds that you're having and some other companies are having in the market?

And then, if you could briefly just comment a bit on the outlooks that you're seeing currently for Mexico, Colombia, and Argentina?

Thank you Frank.

Well, basically, the pace of the recovery will clearly depend from the dynamics of the price of oil.

Nobody knows.

In our view, supply and demand are getting balanced,, and we are quite positive on recovery for price of oil.

But when you look at how recovery will occur, I think that recovery will occur in some of the areas that are very important for Tenaris, because we are very strong in it.

This downturn has hit very strongly on some of the segments or the markets or the regions in which we have high market share and we have a very strong position.

You can mention -- you were mentioning Colombia.

Imagine in Colombia rigs went down from 40 rigs at the beginning of 2014 to five rigs today.

This is an area in which we are very present.

Another area is Ecuador.

Ecuador is 24 rigs in 2014, and now at the end of 2015 and now around three rigs operating.

Even an area like Argentina, there were 110 rigs at the end of 2014, and now we are down to around 69.

So, these areas in which we have a strong position have been affected very much during the crisis.

Now, in the recovery, I think that these areas will react, and this will be positive for Tenaris.

This is also true for the United States.

In the United States, the rigs -- United States and Canada -- went down from around 2,000 to today 470.

Reaction and recovery that we expect in 2017 we foresee will be very favorable for Tenaris because of the positioning, because of the Rig Direct, but also because of the enforcement of trade law.

You know that recently there has been good sign and good indication and good decision by the ITC and the Department of Commerce and also the enforcement of trade law by verification against elusion and circumvention.

And so, it may create a favorable condition for any recovery.

Okay.

Thank you.

Maybe, perhaps you could also perhaps comment a bit on capacity utilization and how you're seeing that developing?

Perhaps even if the market doesn't recover that strongly, could a higher utilization under a little bit reduced inventory environment potentially have a material contribution to results?

Well, today, capacity utilization is quite low almost in many of our facilities.

As you know, we have during this cycle, during this downturn, decided to temporarily shut down some of key facilities in this space.

But frankly, I think that if the recovery occurs in areas in which we have a strong commercial strategic position, we will be able to increase our capacity utilization in the key facilities that are very efficient and in which we may also reduce the overall cost because of the increased utilization.

Okay.

Thank you very much.

Felipe Dos Santos, J.P. Morgan.

Yes, good morning everyone, thank you for taking my question.

I just want to understand the outlook that you're seeing for 2017 and 2018.

It sounds like you're a little bit cautious in the recovery.

It will depend on price, et cetera.

But would you have an idea or could you share with us the most likely scenario or some scenarios in which you think it's most likely that we're going to see the demand in US activity, going forward?

Thank you.

Well, I think as I commented before the general trend will depend from the recovery in the price of oil, because in the end this is the driver for investment in the oil companies.

There may be delays because of the recovery in the balance sheet, but in the end this is a major driver.

Now, within this -- so, for any scenario of recovery; a more aggressive one or a more conservative one -- my message and my point is that Tenaris, I think, is very well positioned.

Now, the numbers are more difficult to anticipate, because it also depends on general trends.

But imagine that the United States, considering the destocking and the reduction in the rigs and the reduction in prices, the reduction in (inaudible) has been very, very substantial.

But the recovery could also be very important, because in the end the destocking will fade out, and at the beginning of 2017 we will be with a limited level of stock on the ground [that] is more in line with demand.

Any increase of the rigs at that point -- for us, operating on a Rig Direct concern -- will turns out into an increase shipment.

And hopefully, we should also be able to see an increase in the Pipe Logix during 2017.

So, the opportunity, the potential of recovery for a company like Tenaris, considering its positioning in Argentina, in Mexico, in Colombia and Latin America in the complex projects.

Now, when we look at the projects like offshore, probably the recovery will come a little later, because in the end the reduction in offshore rigs has been substantial, in areas like West Africa -- well, all of Africa, I would say.

In Gulf of Mexico, we are talking about a reduction in the range between 60% to 50% in the case of Gulf of Mexico.

But this will not come back very soon.

We expect this -- that is also an area in which Tenaris has a very high market share -- to occur probably starting in 2018: on the medium term, not on the short term.

But this also will contribute to sustain and support the medium-term recovery of our sales and of our margin in the medium term.

I see.

Thank you.

And just I remember you spoke last quarter conference call that you were seeing a situation that was in your view unsustainable, meaning that the cost side prices were moving much higher, much faster than your pricing.

And how this situation [is established] right now and how is it evolving?

And then, how do you see this, going forward?

Well, I think that what we said the last quarter is absolutely true, even if some of the key prices of our supplies level off a little -- I'm talking about scrap, for instance.

But there has been an increase in iron ore.

There has been an increase in coal.

There has been an increase in scrap also, in spite of the recent adjustment.

And I was saying that it is unsustainable to maintain the level of prices that is reflected in Pipe Logix.

I really think so.

I think that in this moment many of our competitors are not able to cover any depreciation.

Many has negative EBITDA, so are in no position to support any rebound, the rebound in the level of activity.

In some cases, they have financial difficulties.

Now, this is also affecting a bit even more the companies that are using hot-rolled coils for welded pipes, because the price of hot-rolled coils in the United States has really increased very strongly.

In our case, I think we have been able to manage our purchase and our stock in a way to minimize the impact on our costs.

We had stock of iron ore that we made in some moments.

So, we manage this in a way to minimize this impact.

But this level of price continues in my view to be absolutely unsustainable.

It has recovered something like 1% in the recent, in the last months.

I think recovery is underway and will be needed.

We will see this in the United States.

Remember, the impact of the price indicator in the United States will be felt in the rest of the world, because in the end there are many formulas for adjustment international contracts that takes, in part, the price indicator, the Pipe Logix, into the formula.

So, the dynamics of prices in United States will also be impacting the dynamic of price outside.

But we will see this, I think, during 2017 gradually getting into our invoicing.

Excellent.

Thanks so much.

Raphael Veverka, Exane.

Good morning, thank you for taking my questions.

I have three on my side.

First, as a follow-up on North America, you are commenting that operators are starting to add more rigs.

I'm just wondering with WTI back to the $40s level, how much [inaudible] do you see for a recovery?

And where do you think we could end by the end of this year?

My second question would be on working capital, where you delivered another strong performance this quarter.

Are you expecting more [raise] in the coming quarters?

Or shouldn't we assume that the positive impact we've seen so far should at least maybe partly revert as your volumes start to recover?

And my last point is on restructuring.

Are we expecting more charges in the second half of this year?

Thank you very much.

German, to comment on the rigs in the US?

Thank you Paolo, good morning Raphael.

Well, a few assumptions, Raphael, and briefly.

We've seen a rig count recovery when we passed -- hit and passed the $50 per barrel mark.

I think the market is understanding that we're going to live with volatility, and naturally the $40 of the last couple of weeks is not helping.

But [we're not yet] convinced that oil is going to stay there.

And as we indicated earlier, if it were to be there I think we're going to probably see a de-acceleration of what rig count evolution was in the last couple of months.

However, a good number of our users are also indicating that they need to enhance their balance sheet.

And consequently, before going back to work they're resolving that issue, as well.

But at the same time, we've seen that well productivity and new costs are in the end translating on very acceptable levels, margins, even at this pricing level.

So, overall, we're expecting rig count to stay at the levels that we see, and we're watching careful as to what the implications of a lower price of oil may bring.

By the end of the year, by the way, the level of rig count will increase.

We don't want to say which number.

You receive different indications from 600 to 550, or so.

Nobody knows.

What I feel is that the price of oil will recover after a period of volatility, and the rig count will continue to increase.

Now, it's difficult to predict if this will arrive to 550, 600, whatever, by the beginning of 2017.

On the second and third questions, could you, Edgardo, [give an answer]?

Sure Paolo, good morning Raphael.

In terms of working capital, you are right.

We were basically bringing a significant additional working capital recovery this quarter, very much in line what we have done basically in the last 18 months, very much concentrated in a very good collections in this quarter and some additional reduction in inventories.

Moving to the third quarter, we are still expecting some additional recovery, not at the level that we have in this quarter but it's still positive.

And I totally agree with your point.

By the time that we see the recovery in the last quarter of the year, we will start building up inventory modestly.

Overall, still for our full-year 2016, even though we are going to be investing almost $900 million in CapEx, we are going to be exceeding our operation cash flow.

So, we will have a positive free cash flow for the Company in this year.

I don't remember exactly the third question was?

Restructuring charges.

Restructuring charges.

Basically, very much of the restructuring process is behind us.

There are still some limited charges that are going to be going in the second half, but much less than the ones that we have in this quarter, in particular.

Okay.

That's great.

Thank you very much.

Alessandro Pozzi, Mediobanca.

Hi, and thank you for taking my questions.

I have two.

The first one is about recovery in rig count, drilling activities.

If that doesn't happen within the time frame that you expect, is the Company ready to sustain a prolonged downturn -- let's call it a lower-for-longer scenario?

Or, you have to take more action?

I think we adjusted the Company for the present level of operations.

If the level of rig count do not increase as fast as we think during the coming year, I think that we have maybe some scope of reduction in our variable costs, but we do not see that we need to do substantial adjustment.

Remember, the Company is now working with an EBITDA ratio short of 15%, in the range of 15%.

I think this is a satisfactory result in this environment.

We prepared the Company for sustaining an extended downturn, but we are also ready with the same structure to be able to satisfy additional demand.

Remember, we will have Bay City new mill facility entering into operation in the middle of 2017.

So, this will be giving us additional capacity in the right place to satisfy additional demand that we expect in the US.

You just mentioned the variable costs.

Can you give us an update on the ratio between fixed and variable costs at the moment?

Sure.

In terms of the fixed costs, let me try to show basically what we have done so far compared to 2014.

On an annual basis, we have been reducing the workforce and restructuring part of our services and other fixed costs affecting SG&A.

So, we are basically now running at $300 million less than we used to have, which represents almost 30% reduction in costs.

Coming into the second half of this year compared to the first half, we are expecting fully benefit of the reduction basically that has been finished in June to be reflected in the range of $40 million.

Okay.

Thanks.

And if I have time, a last question on dividends.

How should we think about the dividend for next year?

Because, clearly, the level of activity has dropped materially since 2014.

Should we expect a rebased dividend and more in line with the current level of activities?

Well, as we said in the past, the Company is very strong, has a very strong financial position and a strong free cash flow.

On the other side, we said that we are prepared to react to this condition.

We will evaluate over the course of the coming months.

But you can take as a guidance what we have done in the past.

We intend to avoid sharp changes in our policy but at the same time to take into consideration the change in circumstances.

You can see from the past what we may suggest to our Board for the future, to the General Assembly.

Okay.

That's very clear.

Thank you very much.

David Farrell, Macquarie.

Hi.

Thanks very much for taking my questions; I have two of those.

Firstly, in terms of looking at the fourth quarter recovery in Asia-Pacific and Middle East, how should we think about those areas recovering and overall pricing relative to the current mix?

And then, secondly, I just wanted to go back to the US and the recovery there which you also alluded to could come through on the fourth quarter.

Is that because you're seeing increased levels of tendering activities from your client base?

Or, is it just your read across from what you're seeing in Pipe Logix?

Thanks.

Well, first, in general on how the recovery could happen, well, in the case the price of oil gets stronger, we expect the recovery to be focused on the United States and, in particularly, in Permian, at the beginning but also in the mature fields in different parts of the world that will also react to this.

So, we expect that in an environment of higher price of oil, the first investment that a company will do will be the investment in Permian and the investment in US and the investment in mature fields.

The mix in this environment is not particularly favorable to us.

But the regions in which this could happen should be favorable to our position, because in the end we have a strong position, market share, and service component in countries that may start to react fast.

Then, concerning the Middle East, maybe, Gabriel, you may give us an indication on how you see an environment of higher price of oil, the reaction in your region, international region?

Yes, thanks Paolo.

Good morning David.

Regarding Middle East, we see a strong drilling activity, as I've mentioned before.

Saudi, Kuwait, UAE are the ones that I would highlight.

There are even some talks in Saudi of increasing about 20 rigs, about 10%, mid next year on the gas side.

So, we see that demand strong.

Other markets in the Middle East are starting to suffer.

Iraq, Egypt are starting to show some declines in drilling activity.

As we commented before, we have booked a strong backlog, as shown in this quarter.

We'll have a typical reduction of seasonality in Q3 in volumes in the Middle East that will go back up again in Q4.

Volumes are strong; backlog is strong.

But it's also worth to mention that the pricing environment in the Middle East has been quite competitive; intense competition given the low level of activity in the rest of the world.

You mentioned also Asia-Pacific.

We had a strong quarter in Indonesia.

Southeast Asia is another area that has been going down in terms of drilling activity.

Paolo mentioned about sub-Saharan Africa, 60% down.

Southeast Asia is another area that has gone down 60%.

Indonesia, Malaysia, and Vietnam has gone down in that range.

The exception is Thailand.

Thailand is an area that is very resilient.

Drilling activity there continues to be in the range of 500 wells.

This is wells that are targeting gas that is needed for 40% of the power generation of the country.

And as we mentioned before, we started this quarter to operate under a Rig Direct basis as a single supplier of those wells.

So, in that terms, for us, Asia-Pacific will start to kick in strongly this quarter, with a full impact in Q4 and going forward for the next seven years.

Okay.

Thanks for that.

Just as a follow-up, can I ask about the non-oil-and-gas-related activities, how you're seeing those markets?

Well, we are doing very well in the automotive business, even if this represents a minor share of our overall sales.

As you know, we are a major supplier of airbags worldwide.

We are opening a facility in China just in these days; we will inaugurate in September.

It's an example of our activity outside oil and gas.

This is an area in which we had sustained market during this year, and we hope to be following this.

Also in the area like conduit, pipes that are used in infrastructure buildings in the United States, we have done -- these areas are areas that have dynamics much stronger than oil and gas.

And these are niche, are not, let's say massive markets, and represent around 15% of our overall revenue.

I think we answered to your question.

There is something --?

Yes.

Thank you very much.

I'll turn it over.

Michael Rae, Redburn.

Yes, thank you for taking my three questions.

The first is just on your revenue per ton, which fell around 20% year over year, and that looks to be roughly in line with the benchmark Pipe Logix price.

And I can see historically you've usually managed to outperform that.

So, was there some kind of mix effect which was negative for you in the quarter?

And then, the second question is -- I might have missed this earlier on the call -- but could you give an update on where Rig Direct penetration is in the US currently?

And then, finally, just since all the other questions have been asked, can you give a bit of color on the magnitude of the contract to supply Tengiz and over what time period that will be delivered?

Thanks

Yes.

Well, the first one, on our revenue per tons, it's true that there is a mix effect.

As we said before, this downturn hit on areas in which we were very strong and in which we have a very differentiated offer.

On top of this, also in offshore.

These are the areas that went down the most.

So, we lost price per ton and sales because of the mix of sales in these regions.

Consider an area like Mexico.

Mexico is an area in which we have full-service contract.

The number of rigs in Mexico went down from 67 to 22.

So, a substantial reduction in an area in which we are used to supplying premium product in full-service and product packages, including accessories.

Inevitably, we are losing price per ton because of mix.

On the contrary, in terms of on a comparable ground, I think that we are losing price less than the Pipe Logix.

On the question of Rig Direct, where we are focused on this?

Well, we have Rig Direct everywhere in the world, from Thailand to Argentina to Mexico and different regions, Colombia.

But in the US, German, maybe you can indicate which are the key areas in which we are now serving in Rig Direct?

Well, thank you Paolo.

Michael, the US this past quarter, we reached the level of about 50%.

It was 40% the quarter before, and this time around it is almost in line with the worldwide Rig Direct deployment of Tenaris that was mentioned in our opening remarks.

I think the service continues to gain traction and is driven fundamentally by the industry need of finding new efficiencies, reducing ultimately cost in the supply chain, which I think still needs to improve quite a bit.

The last question on Tengiz, which is the size of the expected activity in the field?

Yes, today, Tengiz is working at about two rigs in activity.

This is what we have been serving for many years.

And Karachaganak, the other active field, about three rigs including drilling and workover.

With the recent announcement of Chevron and its partners to sanction the project and the expansion growth, we expect Tengiz to increase up to five rigs, between 1 1/2 and 2 years.

This is what it will take.

And this will give a substantial load for the timely investment that we are ramping up this quarter.

That's great.

Thank you very much.

Kevin Roger, Kepler Cheuvreux.

Hi, good afternoon and thank you for taking my questions.

First one are related to the US coming back on the Direct Rig supply strategy.

I was wondering if you could provide us a little bit more color on the success?

Meaning, you say that it's 50% of the number of rigs, but could you please give us the exact number of rigs in the US that you are now directly serving?

How can it be compared to the Q1?

And also, the number of final clients that are now directly served and how can it be compared to Q1?

And I was also wondering what's the reaction (inaudible) of the distributors in the US?

Because if right now you want to [squeeze] them in the Permian, especially, how did they reply?

Is there any distributors now saying that they don't want to distribute your product and move to competitors?

So, it would be great to have a little bit more color on the US Direct Rig supply, please?

Well, we will not get into the details of this, for competitive reasons, but Rig Direct is successful.

Remember, one year ago, in the first quarter of 2015, in the United States we had only 5% of Rig Direct.

Today, we have around 50%, close to 50%.

So, in one year and a few months we have been able to shift a very large share of our sales into this.

And we are doing this without even having the Bay City plant working and before completing the deployment of the service center in Midland and Freeport supporting our deployment.

So, I think it's successful.

It's well received.

The client likes to be invoiced at the moment they use the pipe.

It's very helpful in a recovery moment in which they want to increase their operation without spending capital and their cash on inventory.

I wouldn't get into the number of rigs or the number of clients, because this really is -- for competitive reasons we would like to maintain this internal information.

Okay.

Of course.

And in terms of reaction from the distributors, the impact on the competitive landscape?

Is there any distributors that you used to work with over the past years that now say they don't want to distribute your products and move to the competition?

German, maybe you can answer how is the relation [evolving] with distributors now?

Thank you Paolo, good morning Kevin.

We, Kevin, tend to say that Rig Direct ultimately is an innovative system.

It's something that the industry has not seen.

And fundamentally, because as discussed we tend to align -- some people say synchronize -- drilling programs to production programs of the plants, avoiding in the end or eliminating in the end the inventory, which as we know has been subject to a variety of problems.

Now, no distributor can do that, and this is a reason why we decided to engage and deploy and it's gaining traction, given the efficiencies that it brings.

Okay.

Thanks a lot.

Matteo Bertele, Fidentiis Equities.

Yes, good morning everybody.

I have just a very quick question on the price per ton, the average price per ton.

If I'm not wrong, you said at the beginning that you are seeing in the market a reaction of the price.

So, the price is going up in the recent months, and I think you said something like a few percentage points.

Then, my second question is with regards to the current average price per metric ton, which is around $2,000 per ton, we should see this level as a sort of breakeven?

Because now, if I'm looking at your numbers, taking out the one-off items, you are around the breakevens?

Or, this price could be also lower due to the movement you are doing on the inventories?

So, the breakeven price should be a little bit higher than the one we saw in the first six months of the year?

Well, when you look at the price you have to consider that there are tenders or contracts that we negotiated that we are delivering maybe six months, one year later after the tender.

This happened in the Middle East.

So, keep in mind that in our sales you will see, even in the coming months and in the coming quarter, some contracts that have been negotiated and signed the past six months.

These contracts in some cases have very aggressive price, and they are driving our price per ton probably lower from the point that you have now.

On the other side, we are now engaging in discussions, and in some cases we are getting increase in the renewal of long-term contracts that will enter into our revenues, again, six months or three, four months from now.

So, this is the relation between the price that we negotiate, the price that we see now in our revenue.

There are delays; it's not synchronic, but there is a time.

We think that really we have our -- I don't know if you say breakeven -- but we have today a 15% adjusted EBITDA ratio in this condition.

We think that we are working on the cost and efficiency on the allocation amount plans in different aspects of our costs.

We will get results, and we can reduce further from where we are.

And I wouldn't say that we are breakeven.

We are probably --.

Yes, I was meaning at EBITDA level.

(inaudible) At this point in this moment.

Thank you.

Michael LaMotte, Guggenheim.

If I can just follow up on a quick one, for Edgardo, on the working capital?

I know you've made real structural changes to the cost structure and management of working capital, as well.

I'm just trying to think, in recovery, particularly with the fact that Rig Direct implies more finished goods in inventory, how should we be thinking about working capital as a use of cash in recovery?

Maybe provide some guidance on days inventory or DSOs that you're targeting?

Well, first of all, Rig Direct doesn't imply necessarily an increase in our inventory when the recovery, when the number of rigs of our clients increase.

Because in the end, Rig Direct means ability to coordinate our production schedule and to rationalize and redefine our supply chain.

So, this is something that you should keep in mind.

It's not automatic and proportional: increase in the market, increase in working capital.

We think we should be able to engage in an upwards part of the cycle containing the days of stock in our working capital because of the way we developed our Rig Direct approach.

Obviously, if the volume goes up during 2017, we will see an increase in inventory.

But I think there has been a structural reduction in our DSO, and I would like to ask Edgardo if there is something also on receivables that may influence the capital in the case of -- in the moment of recovery?

Thank you Paolo, good morning Mike.

Yes, basically you cover very clearly the terms of the inventory.

In terms of the receivables, we are now running at a 78-80 days of receivables, which we do not expect to go very much beyond this level.

And it's very much affected to some extent with now coming the Middle East, which are the longer terms in terms of payment terms compared to the US markets and other markets in which we are serving with a shorter period of collections.

So, overall, I do not see except for the normal recovery on the volume base.

That's excellent.

Thank you.

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

I would like to turn the call back to Giovanni Sardagna for any final remarks.

Well, thank you, again, for joining the call, and we hope to see you in October in New York for our investor presentation.

Thank you very much to everybody.

Ladies and gentlemen, this concludes today's conference.

Please, you may disconnect and have a wonderful day.