Tenaris SA (TS) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2016 Tenaris SA earnings conference call.

(Operator Instructions).

And as a reminder, this conference call is being recorded.

I would like to introduce your host Mr. Giovanni Sardagna, IR Director.

Sir, you may begin.

Thank you, Brian, and welcome to Tenaris 2016 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; Gabriel Podskubka, Managing Director of our Eastern Hemisphere operations; and Luca Zanotti, our Managing Director in the US, this time replacing German Cura, as he could not join us for this conference call.

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 2016, sales reached $1 billion, down 24% compared with those of the corresponding quarter of the previous year, but up 6% sequentially as we started to benefit from the recovery in drilling activity in the US and Canada and higher sales in the Middle East, where we had good level of shipment in the quarter.

Our quarterly EBITDA at $172 million was 19% lower than the corresponding quarter of 2015, but 29% higher sequentially.

Our EBITDA margin at 16.5% was higher than the one of the corresponding quarter of the previous year and also sequentially, reflecting better absorption of fixed cost, lower level of inefficiency in our industrial operation, and a partial recovery of allowances for bad debts, in spite of a further decline in average selling prices.

Our average selling prices in our tube operating segments were down 16% compared to the corresponding quarter of last year and 3% sequentially.

However, spot prices in the US have finally started to rise.

During the quarter, our net cash position declined by almost $400 million to $1.4 billion, following the payment of an interim dividend of $153 million in November last year and capital expenditure of $158 million.

The Board of Directors has decided to propose for the annual -- for the approval for the annual general shareholders' meeting to be held in May the payment of an annual dividend of $0.41 per share or $0.82 per ADR, which includes the interim dividend of $0.13 per share or $0.26 per ADR that we paid at the end of November.

If approved, a dividend of $0.28 per share or $0.56 per ADR will be paid at the end of May.

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.

We have successfully brought to a close a very difficult year for Tenaris.

And I am pleased to say that the prospect for the year ahead are much more promising.

Tenaris has weathered this industry-changing downturn exceptionally well, and I'm proud of the way our employees have responded to the changes in market condition and the circumstances of the Company.

This is reflected in our financial results.

Over the past two years during this unprecedented downturn in our sector, our sales has fallen 57% from $10.1 billion to $4.3 billion.

But, for 2016, we were still able to post a positive net income of $59 million.

Our cash flow performance and our management of working capital has been very effective.

In the two years of the downturn, we generated $3.1 billion in cash flow from operations.

We spent $1.9 billion on investment, strengthening in particular our regional deployment, especially in the US market.

We paid $1 billion in dividends to our shareholder.

And we increased our net cash by $200 million to finish 2016 with a net cash position of $1.4 billion.

This has now been strengthened with the successful sale of our Republic Conduit business to Nucor in January for $332 million, a price which reflect its excellent performance over the past three years.

In this hemisphere, at a time when new project development have been limited, we have been particularly successful in complex projects and have become clear leaders in Eastern Mediterranean.

Here, the development of offshore sour gas reserves is proceeding at pace.

In January, we completed deliveries of 72,000 tons for two pipelines connecting the deep-water Zohr reserve to processing facility in Egypt.

Based on our successful performance in meeting the tight delivery schedule and demanding specification required for this fast-track project, we are winning further large order in the region.

This includes a complex welded pipeline, which will be fabricated in our Confab mill in Brazil, and the OCTG requirement, including corrosion-resistant alloys for the first 15 development well at Zohr.

Our success in these and similar developments in the region are supporting our plant load through 2017 and into 2018 and will reinforce our track record for future complex projects.

In North America, our mill in Bay City is scheduled to begin heat treatment and pipe threading operation by the end of March and roll its first seamless pipe during September.

It will be the most modern, the most automated, productive, and environmentally efficient mill in our industrial system and in North America.

The Bay City mill is located close to the main shale plays that are leading the rapid expansion we are seeing unfold in the North American market.

It will become the heart of our Rig Direct program, which has been expanding rapidly in a market where rigs have been increasing at a rate of 12 rigs per week over the past three months.

In an industry looking for sustainable cost reduction, we offer a differentiated solution, based on a shorter and more efficient supply chain, a comprehensive product range.

This together with technical assistance and field support is helping our customer to reduce overall drilling cost, streamlining processes, and lowering environmental footprint.

With the improvement in market condition and the growth of our Rig Direct program worldwide, our agenda has changed substantially from that of the past two years.

We currently serve over 100 customer and around 300 rigs with our Rig Direct service worldwide.

We are focused on compliance in meeting customer commitment and managing a rapidly increasing plant load in our industrial system.

We are bringing back employees and hiring new ones as our operations ramp up.

We talked in our last call about price level being at unsustainable levels and that we should start to see price rising with the increasing demand in North America and following the impact of higher raw material cost.

This can now be seen in the increase in the pipe logic index, which has risen over 10% in the first two months of the year and is now up 15% from its low last September.

Finally, we are recovering pricing power.

Price increases will be reflected in our average revenue per ton only over time, considering the delay in the indexation in our programs and our strong order backlog.

We are working with our Rig Direct customer to minimize the impact of higher material cost with innovative product and services that improve operational efficiencies.

This year, we expect the market recovery to be concentrated on shale drilling in the United States and Canada.

Looking further ahead, we see signs that various projects will move forward in the offshore regions of the Eastern Hemisphere, and some recovery can be expected in this important market for 2018.

In Argentina, currently, drilling activity is being affected by stoppages in the southern region.

But, we expect that, during the year, there will be a recovery led by investment in the Vaca Muerta shale.

In Mexico, Pemex has cut back activity to a very low level.

And we expect to see a recovery only in 2018, consequent to the energy reform process.

Finally, a word on our safety performance.

We have focused for many years on improving our safety performance, introducing and strengthening safety management team and tools, challenging attitudes and behavior, and installing an agenda of continuous improvement.

Our safety indicator have improved over this year, and 2016 was no exception.

However, despite the growing dedication and commitment, in the first months of 2017, we registered three fatal accidents in different locations.

All our team deeply regret the pain and suffering caused by these accidents to the families and the communities affected.

Safety is and always will be an absolute priority in every aspect of our activities.

What has occurred will strengthen our commitment.

Thank you very much.

We can proceed with any question you may have.

(Operator Instructions).

Ole Slorer, Morgan Stanley.

Yes, thank you very much.

And yes, very impressive performance, Paolo, from the prior peak to the current trough in terms of earnings and cash flow and the flexibility of your system.

But, hopefully, this is the trough.

On the pricing, we started to see quite a lot of demand now for complex grades, particularly in the Permian with well construction designs becoming very complex in some cases.

So, could you talk a little bit about the price dynamic because all we see is the OCTG situation report and pipe logics that might not fully reflect what's going on for the different grades of pipe, and also talk a little bit about when you see this -- based on the accounting -- translate into realized pricing by Tenaris?

Well, thank you, Ole.

I would ask to Luca Zanotti to make a comment on what we see in the design of the wells in Permian, if we can expect some changes looking ahead.

And then I will comment on the pricing.

Okay.

Thank you, Paolo.

Good morning, good afternoon, everybody.

What we are seeing is, in general, and not only in Permian, we see our customers continuously increasing lateral length and frack stages.

And so, this implies more sophisticated string design and well construction.

Plus, in some cases, this is even more exacerbated by the fact that they're going to more difficult situation.

And so, for contingency reason, they need more complicated, more sophisticated string.

In general, what we see, Paolo, is that all customers are now focusing on efficiency.

And the efficiency gains are more than offsetting higher costs.

And I believe that we are well tuned in this with our product portfolio, for example, with our new wedge XP.

I believe that we can be very instrumental to efficiency gains, given the fact that we can provide torque which can allow to reach longer lateral depth and rotating by cementing.

But, to cut a long story short, we are seeing string design getting more sophisticated.

We are prepared to help our customers in gaining efficiency in this.

And I believe that this is good news for us.

Thank you, Luca.

Looking into the dynamics of -- the dynamic of pricing, well, the first comment, it's clear that, in North America, the increase in the number of rigs and demand is changing the pricing environment.

In my opening remark, I said we are recovering pricing power, and this is absolutely true.

We -- the inventories are probably at normal level in the range of six months on the ground, if we exclude some obsolete material.

So, the increase in rigs is transforming to an increase in the apparent demand.

Pipe logic in January increased 5%, in February is increasing 4.7%.

This is an indicator that demand is ramping up.

This is clearly the trend.

We do not know if the rig trend will continue at this pace.

But, we expect that, by the end of the year, rigs will increase in the range of 850 or 900 rigs.

This will be a reasonable number.

Now, in this environment, also, price for the spot market will raise.

Now, when we look at the -- how this increase in prices is getting and turning into our revenues, we have to consider basically two facts.

One is the delay that is inevitable.

We have a longer backlog in some products.

For instance, there are product, the long -- the line pipes that are -- in which we have a large part of 2017 in our portfolio on prices that will be difficult to raise.

In some extent, we have clause of indexation, but not in every one.

So, this aspect, the backlog and the price that we have in the backlog is clearly one component affecting our price.

Second one is the mix.

In the US, even with price increase, the average price is probably lower than our average worldwide price.

So, the fact that the market is increasing in US and in some other niche in which the average price is in product that are not so sophisticated is also contributing to, let's say, putting some pressure on us.

So, what we expect all in all, is that our price in our revenue will remain substantially stable as a whole in the first part of the year and probably increase marginally in the second part compared to the average price that we had in the fourth quarter of 2016.

Okay.

And at the same time -- so, this is basically North America prices you say going up a little bit, realized higher from the second quarter, international offsetting that a little bit net flat.

So, at the same time, how are the raw material -- changes in raw material costs and plant utilization impacting your realized margins you think?

First of all, on rate of utilization is getting higher.

We are increasing fast our production level.

And we expect that, by quarter after quarter, this will increase getting into 2017, considering also the startup of the new plant in Bay City that will be started up and running in the final months of the year.

This is helping and improving our absorption.

Increasing cost in raw materials, there we are perceiving an increase in the cost of scrap, but -- and iron ore.

We are buying scrap in different region, in European, in the American, Mexican, Argentinian, Romanian markets.

So, in the end, we are I think containing this increase to some extent.

But, we will register increase in our scrap cost.

It will -- turns out into the cost of -- our cost of sales.

Gradually probably, we will see this increase starting in the third quarter or end of second quarter or third quarter of 2017.

As a whole, our expectation is that our margin will continue to improve.

And in the second semester of 2017, we should be around 20% margin -- EBITDA margin in -- on our sales.

That is very good color, Paolo.

Thank you very much.

And I'll hand it back.

Bill Sanchez, Howard Weil.

Thank you.

A lot of good detail there.

But, I guess one follow up as it just relates to thinking about 1Q here, Paolo.

What's the expectation around seamless volumes 4Q versus 1Q?

I mean, are we expecting those to be up?

I guess, on the one hand, you've got US seamless demand I would think higher 1Q versus 4Q, yet lower sales in Eastern Hemisphere, primarily Middle East.

Talk to us about volumes there, if you can.

And I guess, just trying to figure out, with ASP being flat 4Q to 1Q, if we're getting higher volumes and perhaps better absorption, would we not think to maybe do a little bit better EBITDA 1Q versus 4Q versus flat?

Well, maybe, Edgardo, you can comment on the impact of absorption as you can see in 1Q, no?

Sure.

Yes, good morning, Bill.

Thank you for the question.

I mean, related to volume, yes, we confirm that the first quarter 2017, we're going to be a little bit higher compared to the last quarter.

However, we remain in the concept that the EBITDA will remain basically the same level because, at the end of the year 2016, we have some projects, specially some quarterly projects that bring some additional volume and margins that are not going to be present in the first quarter.

That's why, even though we're going to be probably increasing our utilization in the plants, we're going to be very much even in terms of EBITDA ratio and in -- basically in absolute value as well.

Edgardo, are you all building in any kind of margin drag from the activation of Bay City into the 1Q expectations as well?

No, not much.

I mean, basically, the only part that we are not basically capitalizing in Bay City are the training that we are providing to our employees, the blue collar employees primarily.

And it's not the relevant numbers in terms of millions of dollars.

Okay.

My follow up on Bay City, it sounds like we're going to start delivering our first seamless pipe in September.

Maybe, Luca, could you give us idea of what kind of initial volumes do we think we're going to be kind of outfitted to produce come late September of the 600,000 tons?

How quickly do we think, given the market dynamics here and the increase in seamless consumption in the US, that we can get to that 600,000 tons being fully manufactured?

And I guess just as a comment, it just seems like to me, given the demand growth you'll project in 2017 and in -- certainly in 2018 that Bay City is not going to be able to fulfill by itself the ultimate seamless demand that you're going to see from your customers.

Maybe you could just talk about that a little bit as well because it seems like Veracruz is still going to be an important component to meet the US seamless demand.

Yes, I mean, we will -- our system -- global system, every mill can contribute to support the increase in demand, including Italy that in this moment is very active on the line pipe in this Mediterranean, including Argentina, Romania, and obviously, Mexico that is also important.

But, also, in this condition, mills like Japan are contributing to the overall equation.

Now, it's difficult to predict the ramp up of a mill that still is in construction.

My expectation is that Bay City will start producing in September.

Hopefully, by December, we will be at a rate of around 10,000 tons per month.

10,000 tons per month.

Okay.

And then just I guess real quick, do you know when you can get the full 600,000 tons per year, kind of per annum?

I think it will take time to get there because, in the end, I mean, a new mill, $1.7 billion investment, many technologies that are frontier, state-of-the-art technologies are in the plant.

Remember, this plant is the most automated plant worldwide, nothing similar, not only in North America, but in all.

This is designed to contain the cost and have a cost that is competitive with any other mill worldwide.

So, the debugging, the startup of a mill of such complexity will take time.

Thank you for the time.

I'll turn it back.

Frank McGann, BofA Merrill Lynch.

-- Very much.

Yes, I would -- maybe following up a little bit on that last question, in terms of integration of the mills that you have globally in light of what could be changes in taxation in the United States, I was wondering how you were seeing that affecting your ability to sell product from other markets into the United States and whether that would have any impact you think in pricing in the market or in your own margins.

Well, I think we have limited visibility on possible tax reform in the United States and how this may affect our Company.

But, what I would say is that, if there is one company that is very well positioned in face of any development of this is Tenaris.

I mean, we can push and strengthen production within the United States of welded and seamless product, integrating with Canada, again, with seamless or welded.

We can only also support this from global system.

I mean, we have several degree of freedom in adjusting not only the market conditions, also the tax policy that will be established, will be introduced by a possible reform.

I think the 2017, there will not be -- I mean, I imagine relevant changes.

Imagine that, in 2018, with Bay City fully in place, you can really appreciate how Tenaris could adjust to any scenario.

Okay.

Thank you.

If I could follow up just in terms of the trade dispute, what the expectations are now for the timing of a decision and any other comments you might have on that.

Yes, well, you're referring to the case that is against the Korean producer.

I would ask Luca Zanotti to comment on this.

Yes, thank you, Paolo.

Thank you, Frank.

No, we believe that we have solid arguments to have a positive determination.

Referring to your question about the timing, the latest date that the Department of Commerce can take to come out with a determination is April the 12th.

Okay.

Thank you very much.

Marc Bianchi, Cowen.

Thank you.

Just first, a housekeeping question.

The bad debt recovery that was part of the fourth quarter result, can you quantify how much that was?

Yes, it was basically $5 million.

Okay.

And is there any expectation for that in the first quarter as well, or too early to tell?

Yes, we are expecting probably an additional $5 million recovery in the first quarter coming from some customers that we have been basically finishing the settlement of some disputes.

Okay.

Thank you for that.

Following up on earlier commentary about the first quarter, and appreciate that you had some positive effects in the fourth quarter that go away, but it does sound that revenue would be higher in the first quarter.

So, presumably with your guidance, there would be some margin compression.

Is that the right way to think about it?

What we were commenting before is that, in the first quarter, we expect volume increase.

And this will be registered in our revenue, but we are marginally improving -- we will have a margin improvement in our margin.

But, as I said before, we expect some change to occur really during the year and basically in the second part of the year.

This is a question of mix, no?

In the end, the backlog of order that are getting shipped in 2000 -- in the first quarter, even if the volume is increasing, but some of these prices are relatively low.

Understood.

And the comment earlier about 20% margins in the second half, is that kind of where the entire second half would average, or is that more of an exit rate comment?

This is an average.

And I mean, it's guidance that you can take with caution because, in the end, we are still -- I mean, we are -- we have a visibility, but not entire -- the full visibility on what is happening.

What we perceive is that we are estimating today the increase in the market, in the volume, and how the price change will get into our revenue.

Sure.

Appreciate the visibility isn't always so great when you go a few quarters out.

Just wanted to switch to a question about premium connections.

And I understand, historically, most of the offshore work had some kind of a premium connection sale associated with it.

Can you talk to how that part of the market looks for North America onshore and maybe how that's evolving with all the growth in seamless and high technology that we're seeing implemented into some of these shale plays?

Yes, as you were mentioning, premium -- if you look at Tenaris as a whole, the fact that, in 2017, the offshore demand will be very subdued is one of the factors that are driving premium sales, and also this has an influence -- the premium sales down, and this has an influence on the mix and pricing during 2017.

The same is occurring with the Argentinian and Mexican market.

But, when we go to US premium component, the demand on the Gulf of Mexico is very subdued during 2017.

All of this I think will change gradually, but basically in 2018, this component.

As far as use of premium in shales is concerned, I will pass to Luca for a comment how we see the mix in that area.

Yes, thank you, Paolo.

Certainly, we see premium being more used in specific shale plays, like for example, the gas-rich Haynesville, where we are having a significant position.

But, there is -- I mean, there are needs that you can call it premium or semipremium, where given the fact that we need to reach longer laterals, there will be the need of higher torque.

And since this is what we're seeing, longer laterals, higher torque, and this requires a product which is certainly more sophisticated than what has historically been used in the shale plays.

Okay.

Thank you for the commentary.

I'll turn it back.

Nick Green, Bernstein.

Good morning, and thank you for taking my question.

I wanted to return to your comments on the Rig Direct business.

And you gave a number of customers worldwide who are using this now.

I asked a similar question last conference call.

But, can you talk again about the level of uptake that your acceptance of the model you're experiencing, whether certain customers are actually running away from the model because it's not for them?

Do you apply any size threshold to your customers?

And give us -- generally try and help us understand the degree of uptake and acceptance that this model is generating and the time frames around that.

Thank you.

Thank you.

Well, I think we are receiving very positive feedback from customer in the States and outside.

But, we have a limitation in proposing this Rig Direct scheme to national oil companies that are basically working on tender for material.

On this, maybe, Gabriel, you can comment on where you think Rig Direct could progress outside the United States.

For sure, in the United States, we will continue to make inroads into this.

And for sure, in Latin America, we have a very high reception for the model.

In fact, we are applying model to almost the entire space there.

But, for the rest of the region, Gabriel, you may comment.

Yes, thank you, Paolo.

Yes, Nick, just to put some color on the Rig Direct inroads in the international market, we can say today that we see the model very strong and expanding even further in continental Europe and in the North Sea.

This is where the adoption is probably about 70% or 80%.

So, this model is very successful there.

With the contract that we have in Thailand, I think we are leading the industry there in Asia for a transformation.

So, we expect more Rig Direct to come and grow there as well.

And we are engaging in our discussions with NOCs and IOCs in Middle East and Africa, where today the model is not present at large.

But, we see a big opportunity.

And hopefully, we'll have in the next few months some successes to comment here.

But, we see a big opportunity to find further efficiencies.

Our customers understand that pricing has bottomed, that we have now cost pressures, and pricing are going to revert the trend.

But, there's still a need from their side to look for the next step of efficiency.

And we believe that there is an opportunity of Rig Direct like in the US or in Latin America to provide these step efficiencies in the Eastern Hemisphere.

So, it's something that we'll continue to push.

And we have a leading edge on experience and track record on it.

Thank you.

I guess, I'm sort of trying to think of it from the customer's point of view.

In some sense, you're asking quite a lot of them through Rig Direct.

You're asking them to basically adopt sole sourcing, to come directly through you, to lose some of the freedom of choice that they previously held through distributors.

And I guess I am referring to the US market more here.

Are you able to give us any more color on how you handle those discussions, whether -- yes, I guess, how -- with larger -- particularly with some of the larger E&P names in the US, the response and how that choice is being handled with them because it does seem to have significant adoption.

You're having quite a cultural change in the way tubes are purchased.

And it's just good to understand the latest feedback on that.

Well, I can tell you that it's clearly especially when in an environment in which prices are going up, there is a concern on part of the operator in containing inflation in the cost.

There will be inflation, no doubt, because the demand is increasing.

In some area, we can even have the need -- I mean, the operators feel the need to assure the security of supply of the material for expanding their operation.

This is a fact.

And to control the competitiveness of their operation, in some case, large operator are maintaining a part of their operation through tender or through distributor.

So, they try to have, let's say, visibility on the market while relying on Rig Direct.

Now, this is okay for us, is what we proposed to them, to have full visibility on price, and at the same time, to operate on the Rig Direct model.

They find this transparency by relying for part of the rig or a share of their need through distribution.

And I think that this model is giving them the transparency they need.

Maybe, Luca, you can add with specific experience --

Yes, but because --

-- On how they behave, our client in this situation.

Yes, thank you, Paolo.

I believe that transparency on price has been one of the, I would say, most important misconception about this.

But, let me tell you that, with just few exceptions, our customers are buying for a portion of their need Rig Direct and, for another portion, from the traditional supply chain.

But, on top of this, I believe that E&P's concern today is not that much the face price, but is competitiveness.

And I believe that, through Rig Direct, they are finding competitive reasons that make our approach very attractive.

Just to give you color, the more consolidated of our customers now, we are going to their supply chain, and we are trying to integrate -- actually integrating their supply chain with our supply chain through IT.

And this is a cost saving on both sides that can easily offset a difference in price.

So, I believe that, with the Rig Direct concept, we need to move from the concept of price to the concept of total cost of ownership, which is already well known in many other industries.

That's very helpful.

Thank you.

I'll turn it over.

Amy Wong, UBS.

Hi, good morning.

Couple of questions from me, please.

The first one is, could you talk a bit about your fixed cost base and how much cost you've managed to cut out of it since 2014?

And then to follow up on that, how should we think about your fixed cost base when Bay City starts to ramp up?

I appreciate you talk about that it's got a high degree of automation.

Really like to get some additional color on how the fixed cost base in Bay City compares to the rest of your industrial operations.

Thank you, Amy.

On the reduction in fixed cost that we've been able to achieve during this cycle, this downturn, I will pass to Edgardo for a view on this.

Sure, Paolo.

Thank you for the question, Amy.

We basically in terms of the accounts, basically what is in SG&A we reduced by 27% compared -- 2016 compared to 2015.

So, it's almost $200 million savings in the reduction, very much concentrated in labor cost and services.

Compared to 2015, the number is even higher because we came from a reduction of almost 10% to 12% in 2015 versus 2014.

So, overall, probably, we are nowadays 40% below our peak in 2014.

Yes, now, we will not be able to maintain the present level of fixed cost in the faces of fast expansion.

You need to understand that, when Rig Direct expand, it drives a number of costs that in the end are fixed cost.

And the addition of Bay City we'll say will also add to our fixed cost, but I wouldn't say this as something substantial.

In the end, we did a substantial deep structural transformation.

Now, we will have an increase, an expansion in area that are very important for our competitiveness and for our ability to support a much higher level of activity.

This will go -- will be the agenda of 2017 because, in the end, this will be a year in which, every quarter, we will see increased volume, and we will have to manage a more complex supply chain because of the entrance of volume from marginal mills and because of the expansion of Rig Direct.

Now, in 2018, hopefully, the agenda will get back to offshore.

Argentina, Mexico will be another, let's say, cycle of expansion and different probably.

But, this is what we see.

Could I just go a little bit further onto that question on fixed and variable?

I mean, in the cost of sales line, how should we think about the split between the two, please?

Say it again.

Is the split between variable and -- ?

And fixed in your cost of sales line.

-- In the cost of sale line.

Edgardo?

The cost of sale -- when it's fully fixed is depreciation, which is $400 million a year.

So, this is very much our fixed component that will increase probably in 2018 when we have Bay City coming in by probably $80 million a year.

So, the fixed-fixed component of the cost of goods sold going to be roughly $500 million.

All right.

Okay.

Thank you very much.

Maria-Laura Adurno, Goldman Sachs.

Yes, hi, I have three questions.

The first one is coming back to levels of plant utilization in the US, if you could give us a broad average and also, versus the rest of the business, how this is faring, so another average is possible.

Then the second question is, again, around your cost base.

So, you've talked about cost inflations in raw materials.

But, I was just wondering, particularly as we come from a period of -- where essentially, you've been bringing down headcount, in particular in the US, essentially what you're seeing from that standpoint in terms of rehiring.

And also, what are the labor conditions if you're already starting to see some level of inflations on that front?

And yes, those would be the main two questions.

Well, on the first question, we mention -- as I mentioned before, we are seeing increase in volume quarter by quarter.

But, we are increasing level of utilization in the plant that we have in the US, and then Bay City will start.

But, we are not giving precise number of rate of utilization.

In -- about the raw material cost, I comment before when this will get into our cost of goods sold.

But, maybe, Edgardo, you can add on some more specifics on this.

Sure.

Just to give some color in terms of raw material, primarily the scrap, that is one that we are seeing some increasing in the range of $40 to $45 per ton.

They're going to be probably fully reflected, but in the third quarter of this year because of the FIFO effect, but not 100%.

So, out of the $40 per ton increase, probably we will see hitting in our cost roughly speaking $20 per ton.

At the same time, as Paolo was mentioning, once we continue improving the utilization of our facility, we're going to be absorbing fixed cost that was very much dragging down our cost structure in the last two years.

So, that will probably end up to some extent compensating part of this increase.

Sorry, my question was around labor cost, so headcount and rehiring.

Yes, we are not facing, let's say, a very different hiring condition in what we are doing today compared with the cost of labor that we have in the different region in which we operate.

This is what we see today.

Okay.

And one final question.

Rig Direct penetration in terms of percentage of your sales being achieved in the US, where does it stand?

It stands more or less in the same level that we already stated in the past.

We are in the range of 50%.

Remember, we are around 50% in the States, 70% plus in Canada.

And worldwide, we are in the range of 50% also.

Okay.

Thank you very much.

Overall number, including North America and the rest.

Ian MacPherson, Simmons.

Thanks.

I had a question just regarding capital allocation.

I wonder if you could talk a little more about the rationale behind the sale of Republic Conduit.

Certainly not a bad price, maybe marginally dilutive multiple there.

You don't need the cash today.

What are you thinking with regard to cash deployment or cash hoarding as we go through this upcycle?

Well, first of all, you know, the decision to sell Conduit taken by a view that Conduit is not really in our core business.

We have been able to leverage on the excellent performance of the facility that we have reached in the last years.

I think it's been important operation to focus Tenaris on its core business.

As far as use of cash, in a stage of strong expansion, like the one that we see in the coming two years from now and 2018, we will require cash for completing our investment plan, feeding our working capital, because, in an expansion stage, we are clearly using working capital, and we will use it, and we will need it for expanding the Rig Direct worldwide to some extent.

But, also, the investment cycle, we will need to complement the investment in Bay City with other investments that prepare Tenaris for the next stage, as I mentioned before.

The world is different today from the world in 1914 and the deployment in an environment of plain use, full use of capacity, where there will be additional requirement and debottlenecking in some product line or regional deployment.

We are also keeping all our strength for eventual opportunity of M&A that could come that will be fully, let's say, in line with the core of our activity.

And so, these are the reason that we consider at the moment of defining, taking the main financial decision.

Understood.

Thanks, Paolo.

Yes, thanks, Ian.

Alessandro Abate, Berenberg.

Good morning, good morning.

I just have a few questions left.

In terms of Rig Direct, I mean, you clearly explained very -- in very good words, I mean, what the plant is aiming to achieve.

But, could you give a little bit an indication what the tradeoff is because, clearly, as you explained, you're going to need some cash to finance Rig Direct?

What's the balance between increasing working capital and generation of EBITDA and relative also to volume because one of the key points of Rig Direct I clearly think is going to be to cement the level of volume throughout the downturn?

The second one is related to the situation in Middle East, if you can give a kind of idea how basically the spread between API and premium prices is evolving, in the last few months what kind of outlook are you going to get?

The third one is related to the risk associated to potential recovered capacity in the US if, let's say, as you are highlighting, there might be an uptick in terms of OCTG prices.

The last question is related to Bay City.

I mean, clearly, you're not going to give any kind of indication in terms of cost per ton.

But, if you have to compare Bay City and the efficiency as the state-of-the-art plant relative to your current order -- your current material intake from Mexico to the US, what kind of savings per ton you're expecting on a steady state?

Thank you.

Thank you, Alessandro.

On the first point, let me tell you Rig Direct is not just a decision based on financials, level of working capital against price or return.

It's basically a way of transforming the way the industry works.

I mean, it's a substantial change in the supply chain.

From our point of view, it's creating loyalty.

We like that our clients are able to have price transparency.

But, at the same time, we see by the experience that we went through, that they appreciate very much the differential in their effectiveness and the cost of their operation as a whole through the Rig Direct.

So, Rig Direct is a transformational proposal in an environment that is North America, but is also valid everywhere.

And the test in Thailand, with Chevron, is an example of the strength of this model.

So, in this environment, the additional working capital is fully justified by the differentiation that it is giving to us.

Also, if we are good in managing our working capital, let me tell you, should be able to have a very marginal increase if we operate well.

And also, if you consider the working capital as a whole, consider the inefficiency that the oil company are having in the management of their inventory, the overall working capital in the industry should go down.

So, in the end, the overall cost for our clients for us should go down.

Our cost may increase slightly, but their cost should go down substantially.

So, in the end, we should be able to share the benefit of this process.

Now, the second on the question of pricing in Middle East, this is a very important point.

I would ask Gabriel to comment because, in the last year, there has been a deterioration of prices.

Yes, Alessandro, just to give you some color on the Middle East demand of premium, on API, the Middle East is big market, and it has both segments, premium and API.

More and more, we see complex projects and a general trend towards gas.

So, we see a trend of increasing the premium share within this market.

We are very present and leading the premium segment, where we see more space for differentiation.

And as we said before, competitive pricing in the last year to build a strong backlog in OCTG in the Middle East, will get for the most part of our books into 2017, but they will see this changing.

We see that the pricing that we have in some of the tenders, for example, in Saudi, are not sustainable anymore.

And we expect some of these pricing dynamics to increase going forward.

Regarding the API market in the Middle East, it's not something that we participate to a large extent.

It's clearly less differentiated.

But, even in that segment, we see price moving in an upward trend due to the raw material situation as well.

So, I think the whole market is working towards an upward trend.

And typically, we have an inertia in the Middle East of pricing typically about nine months.

So, it will take some time from -- to reflect the present new conditions into our P&L.

Yes, this is an example.

Many contracts in the Middle East are example of long-lead contract with no adjustment formula.

It's one of the drag when the moment comes in getting higher price has been also support in the downturn in the past.

Now, US use of capacity, I think that, considering the -- how demand is in the industry in the US and how demand it is today, the effective efficient capacity able to satisfy this demand is not what sometime appears in the theoretical capacity for this industry.

So, this -- for sure, capacity utilization will increase.

But, there are some mills that may not have the efficiency to -- and the condition, the quality and product range capability to get back into the market.

We need to consider also this aspect in evaluating which will be the supply side of this product in the States.

For sure, utilization will increase.

Other producer will step up production.

But, there are limitation in what could be -- in the capacity that could be effectively put into operation.

The last point, differential, well, Bay City is highly automated.

It requires high investment per tons, but very low requirement in term of manpower for its operation.

So, I would say that, when we discuss in term of variable cost, the cost will not be so far away from what we have from the most efficient plant of the Tenaris system.

Thank you, Paolo.

Michael Rae, Redburn.

Yes, hi there.

Thanks for taking my three questions.

The first one, just on Argentina, it looks like the news flow there continues to be quite supportive in terms of fostering a domestic shale industry.

Are you prepared at this stage to share some potential volume numbers around how large seamless demand in Argentina could be over the next few years?

And then two very quick ones.

So, the first one's CapEx.

It actually came in slightly lower than I expected in 2016.

Can you share a rough CapEx guidance for 2017?

And then finally, you've already mentioned a depreciation on Bay City.

But, when will that actually kick in on a quarterly basis?

Is that going to be as a technical startup in 2Q or the kind of commercial startup later this year?

Thanks.

Well, on the first, Argentina in this moment, the number of rigs are probably historical minimum, around rigs operating.

But, the government is advancing in defining the basic conditions that can make possible and effective the development of Vaca Muerta.

They have stricken an agreement with the union on one side.

They are in the process of issuing the price reference discussed in the coming three, four years for nonconventional sources.

It has not yet been done, but is really something that should be done very soon.

And once these condition are put in place, I think the activity will start to increase.

There are all the rationale in the world for developing Vaca Muerta in a country that is importing 30% of its gas at a very high price.

This will happen.

The point is to execute the program and to fix aspects of the policy for the hydrocarbon sector that will make it predictable, let's say, for the -- this will happen.

Today, we are in 62 rigs.

In nonconventional, the number must be in the range of 15 within this.

It's a very small number.

Any increase will immediately translate in increase in demand of pipes.

And we have a very high market share.

So, this will be volume that will get into our revenue in our production.

This is for sure something that will be important in 2018.

The second half of 2017, I'm sure there will be an increase.

We are not in a position today to estimate how fast the Company may react to an improved and reliable established design environment.

Okay.

(Inaudible).

The CapEx --

-- Follow up -- okay.

Sorry.

Let me answer on the question of CapEx.

Of course.

Edgardo, maybe you can give an indication what we have in our plan today.

Okay.

Yes, basically for 2017, we are expecting to spend almost $800 million -- $580 million, out of which probably $340 million, $380 million, this range will be Bay City, very much concentrated in the first half of 2017, where we are in the last stage of the commissioning of the plant.

And regarding to your question in terms of the depreciation, we will probably start with the first hit in -- for depreciation in the last quarter of 2017 going to be probably $20 million.

Yes.

The question of CapEx, let me add we need to understand the results of the antidumping decision, also to fine-tune the CapEx requirement in 2017 and 2018 because this is the scenario we're seeing today.

This scenario may change if the rate of increase in the rig remain close to what we have seen in the last three months.

If the rate of increase in rigs remains there, and we have decision on the side of the antidumping, we need to mobilize resources fast.

And this may require investment.

We are not talking about very substantial investment, but the number will be higher for 2017 if this happens.

Okay.

That's great.

I've got more questions on Argentina.

But, I'll follow up after the call.

Thank you.

This concludes our Q&A session.

I would like now to turn the call back to Mr. Giovanni Sardagna, IR Director, for any further remarks.

Well, thank you, all, for participating.

And well, I hope to see you soon around.

Thanks.

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

This concludes today's program.

You may all disconnect.

Everyone, have a great day.