Tenaris SA (TS) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Tenaris First Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

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

Sir, you may begin.

Thank you, Brian, and welcome to Tenaris 2017 First Quarter Conference Call.

Before we start, I would like to remind you that during this conference call we will be discussing forward-looking information 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; Edgardo Carlos, our Chief Financial Officer; German Cura, Managing Director of our North American Operation; and Gabriel Podskubka, Managing Director of our Eastern Hemisphere Operation.

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

During the first quarter of '17, sales declined 4% compared to the corresponding quarter of last year, but rose 10% sequentially, mainly reflecting a strong increase in demand in USA and Canada, which was partially offset by lower sales in the Middle East and Africa.

Our quarterly EBITDA at $198 million continue to recover and was 4% higher than the corresponding quarter of last year, and 15% higher sequentially.

Our EBITDA margin at over 17%, also continue to improve both sequentially and compared to a year ago, mainly due to a better absorption of fixed cost on higher volumes.

Our net income benefited from an after tax gain of $92 million from the sale of Republic from within January and a positive income tax charge, mainly reflecting the effect of the Mexican, Argentine peso reevaluation on the tax base used to calculate deferred taxes in Mexico and Argentina.

Average selling prices in our Tubes operating segments were down 16% compared to the corresponding quarter of last year, but were flat sequentially.

During the quarter, net cash provided by the operation was $26 million, with an increase in working capital of $105 million, reflecting higher inventories and receivables.

Capital expenditures amounted to $139 million and our net cash position rose to $1.6 billion, mainly due to the sale of Republic Conduit for $323 million in January.

Now I will ask Paolo to say a few words before we open the call for questions.

Thank you, Giovanni, and good morning to all of you.

This week we are in Houston where we have been reviewing the progress of our North American operation.

All the pieces of our North American strategy are now falling into place and this quarter our North American sales rose 42% quarter-on-quarter.

We visited our Bay City mill, where the heat treatment, the casing threading line started up last month.

We received the API certification in record time and the first finished pipe from the mill are now being delivered to a Rig Direct customer in the Permian.

We had the opportunity to welcome President Macri of Argentina to the mill.

An acknowledgment to all the people who have been working in the design and construction of these major engineering achievement.

The installation of the hot rolling mill is advancing firmly and it should start up in the fourth quarter.

Our Rig Direct service model continue to gain acceptance and we are now serving close to 50 customers and 150 rigs in U.S. and Canada.

We are integrating systems with selective customers.

With our PipeTracer application, providing precise data for each individual pipe, we will be able to streamline supply chain processes for the handling and reception of pipes from the mill to the rig.

As the market recovery unfolds, our customers increasingly appreciate the commitment to the industry that our investment in Bay City represents.

With the increasing demand, we are reopening our mills in Canada and increasing shift in Hickman, which we kept open throughout the downturn.

AlgomaTubes started operation last November and would reach 20 shales per week in April, while our Prudential mill in Calgary will start in July.

We are enhancing our Rig Direct model through differentiated product technology.

Following successful customer trials and the first sales, we will present our new TenarisHydril Wedge XP connection at the OTC conference next week.

This is a product with exceptional over torque performance required for longer laterals as well as the excellent running characteristics associated with TenarisHydril Wedge product.

On April 12, the U.S. Department of Commerce published its decision on its first revision of the antidumping case against Korean OCTG producers, covering the period from July, 2014 through August, 2015.

Also the sanctions fell short of what the domestic industry had argued for, the application of the Particular Market Situation provision of the 2015 Trade Preferences Extension Act is an important precedent for future reviews, including the ongoing second review covering the period September 2015 to August 2016.

We believe that it will be difficult for the Korean pipe producer to maintain their current level of unfairly traded imports following this ruling.

In line with what we said previously, and after the Trade case decision, we are recovering pricing power in North America.

In other regions, prices will recover more slowly.

In Argentina, the conditions are being set for increased investment in the Vaca Muerta shales.

The oil worker union has agreed to productivity improvement, which will reduce high labor costs and the government is offering a 5-year of fixed declining gas tariff to kick-start investment.

Several major operators have announced a significant investment plan, this has been the lowest quarter for our sale in Argentina in many years, but we expect our sales to rise throughout the year in this important market for Tenaris.

In the Eastern Hemisphere, we continue to position ourselves in promising markets.

In the Caspian, we are supplying complex line pipe for the expansion of the Tengiz field and have signed a new long-term contract into Turkmenistan.

In the Gulf, we signed a contact in Kuwait for the supply of 130,000 tons over the 3 years for deep gas drilling operation.

And for the Zohr project in the Eastern Mediterranean we are preparing the production in Brazil of 160,000 tons of offshore line pipe with deliveries from the fourth quarter of this year.

If we look at Tenaris from a midterm perspective, during the downturn we have strengthened our industrial system, improved our commercial positioning and advanced our product and service deployment.

This has not been matched by any of our competitors.

The investment we have made in our people, in our industrial facilities, and in our products and services is the base of our long-term differentiation.

Thank you.

We are open now for your questions.

(Operator Instructions) Our first question comes from the line of Ole Slorer from Morgan Stanley.

Thank you very much and nice to see that the North American market is rebalancing again, with or without the current imports.

It looks to be quite a good momentum.

So could you tell us a little bit about how the ramp up of Bay City is unfolding?

You said you shipped the first tubes now?

And also in context of that, the Rig Direct model and the penetration that you are targeting, relative to your current sales and future sales, in North America?

Yes.

Thank you, Ole.

As I mentioned in the opening remarks, we are very pleased in the visit to see how the different section of the plant are being completed and to see production from heat treatment and the casing line.

We really are at the start up, so you can expect that the volume of production will increase slowly, transforming pipes that in this moment are coming from other mills in our system.

When the rolling mill will start producing -- we have a reference in the fourth quarter of 2017, we say September, the first pipes will be produced.

We continue to expect a ramp up that may lead us to a production in the range of 10,000 tons in the last month of this year.

This is what we consider a reasonable start up.

From that point on, volume should increase gradually.

Okay.

Sorry I misheard you, I thought that -- yes, I thought September would be the first pipes made, I didn't hear that you were importing from Mexico and heat treating them, that was your reference point.

But can you talk a little bit about the penetration of Rig Direct and also give us some kind of guidance on -- to what extent are you expecting to build up working capital in the process of expanding Rig Direct.

And for example, in Mexico you have a really fast time from when you manufacture the mill to when you deliver to your customer under a similar model.

What is the cycle time that you're targeting in the U.S?

I mean, if you -- just help us understand that the inventory situation, at the moment, is coming down, but 5 months, 6 months, 7 months of inventory is still a very large number, presently compared to what you can deliver under the Rig Direct model?

Yes.

Just to complete on the first point, we expect to start rolling the first pipe in September, but in the moment, we are heat treating and threading pipes that are coming as green pipes from the other mills, to test the finishing part of the mill.

Then in September, we will restart rolling.

And we expect to ramp up by December, arriving in the level of -- that I mentioned before, the 10,000 tons.

Now as far as the inventory and the lead time that will be required in this supply chain, the new supply chain,.

I will ask German to give a review of how we expect our working capital requirement to be.

Thank you, Paolo.

Ole, very briefly, only just to recap a little bit.

Rig Direct continues to gain traction.

We continue to be on increased sales at a level of just north of 50% of our OCTG sales as Rig Direct in the States.

The number is higher in Canada, and naturally the startup of our North American facilities, in Canada, increased shift in Hickman and of course, Bay City, should allow us to create a Rig Direct system where lead times will not be any different than what we've seen in Tamsa, once everything is at a, say, steady level.

Today, as a matter of reference, our lead time when -- from we get the rig request to the point where the pipe is delivered at the rig, is in the area of about, say, 70 to 90 days.

Thank you, German.

Okay, 70 to 90 days.

So you're talking about less than 3 months.

Are you able to reduce that when you get up and running in Bay City?

We will, naturally, because Bay City will shorten the time in a considerable way and the same is true in Canada.

Algoma is back to work, Prudential will be so, very early in the summer.

And obviously, their ability to be closer to with domestic manufacturing would be structurally important as in other markets.

Yes.

Let me add, Ole.

The way the system will work in 2018, with a large number of rig served directly.

And facility -- important in a facility like Bay City operating in North America, will be very different from today.

Because in the end, it is not that we receive an order for the rig.

We just coordinate with the clients their need.

So to the extent to which we feel comfortable on the precision of these demand planning, we will be able to advance production of steel, to advance rolling and maybe to define the product on the course.

So the concept of lead time change, this will not be an exercise of shortening lead times.

Will be an exercise of coordinating precisely the expected demand and the operation of every rigs.

If we are good in doing this and the system will support this, we can arise with an extremely low level of inventory.

In the case of Mexico, when Mexico was operating, let's say, in the range of 200,000, 250,000 tons, we were managing at that time with less than 40,000 tons.

So we reduce the need to 45 days.

Now let me tell you that, we will gain confidence over time in the mill, in the demand planning, in the expected performance of the rig.

And we will aim for lower and lower level of inventory in our supply chain as far as we proceed in the application of the model.

Very interesting.

So you'd be radically changing the way the -- or you'll be aiming, at least, to radically change the way the U.S. business is managed today.

And with so much of the activity centered around the Permian area, what is your position, in terms of distribution and real-time delivery capability, like in the Permian?

Well, if you look at the map and see the deployment of production facility, finishing facility, and the yards for service, we are very much focused in the southern part of the country, around the Eagle Ford, the Permian and Haynesville.

The deployment is unique.

You can look at the map and see.

I think, we will have a lot to learn in during '18, '19, on how to complete the transformation in the way the industry works.

This is really our target.

The industry needs to lower the cost and improve performance.

We want to be the response, not because we had lowered our price, but we will reduce the overall cost in the supply chain.

Thank you very much, very interesting call, I'll hand it back.

And our next question comes from the line of Bill Sanchez from Howard Weil.

Thanks, good morning.

Paolo, my question -- my first question surrounds your demand growth outlook for the OCTG industry at large.

35% to 40%, 2017 versus 2016.

Just curious, should that be a proxy as we think about sales growth for Tenaris this year?

Just your thoughts on that, please.

Well, the -- in my expectation, I mean, the increase in the market, as I mentioned before, will be driven by the North American space.

We expect to be able to follow with some delay.

We expect that the increase in our sales will follow this, will accompany this.

We expect that we may increase, gradually, market share also over in North America, but I don't think this will happen exactly on the same time, on one side.

The other side, remember there is a pricing issue.

When you look at our sales, we have to consider that in our sales some of our backlog has prices that are relatively -- peaks over time.

So even if we are pick up in volume in line with the increase in the market, we will still see a delay in turning this into our overall sale, because of the relative inertia in the price.

I understand.

I guess, a better way to have asked, it would be, does your volume growth, for Tenaris this year, is that going to be in line with global OCTG demand growth.

It sounds like perhaps, not quite?

Well, but we'll not be -- let's say, we will be below but not substantially below.

We expect if our Rig Direct model gets wide acceptance as it looks like.

I think we should be able to support a rate of increase in volume not very far from the increase we expected.

Okay, great, thanks.

My follow up, Edgardo, might be for you.

And it goes back to Bay City.

I think one of the things that people have tried to understand and quantify is what potentially the margin accretion that Tenaris may see from producing seamless in the United States to service that market, as opposed to having to bring product in from Veracruz.

How should we think about that in terms of what the margin uplift may be, kind of everything else being equal, away from just that transfer from those volumes being made here in country versus coming in from Mexico, so we think about margin uplifts as a whole for the company?

Yes.

Good morning, Bill.

We basically try to match very much the cost structure that we are getting from Tamsa, I mean because -- I mean, remember we will bring the steel from different sources and we will basically roll it here.

And we will reduce a part of the logistic cost associated with moving the pipes from Mexico to the U.S. So overall, we are aiming to reach the very competitive cost like the ones that we have in Tamsa.

The key, Bill, I think will be the speed of ramp up, because in the end, the absorption in Bay City is very important.

I mean, to the extent to which we may increase volume substantially in Bay City, we will be able to improve absorption.

And at that point, the very high productivity of the new -- the Bay City automated mill will start to compete very effectively with production from other way.

And so it will depend from our ability to ramp up production and debug the mill in the startup.

How good we will be in matching the cost that we can have from other mills.

My final question, I guess, Edgardo, would be around the mill startups in Canada.

I know you've mentioned that you would -- that you guys have maintained a presence on the welded side in the U.S. in terms of manufacturing here even during the downturn.

But anything we should think about that as you're trying to respond to a growing market that changes -- your cost get incurred that changed the outlook in terms of margins in the second half of the year.

I believe last call, that was kind of above 20% put out there, in terms of opportunity for the company.

Is that still fair?

Yes, yes.

We maintain our guidance that we commented in the last conference call.

That in the second half, we're going to be around the 20% EBITDA ratio.

Let me add something about the relevance of local production.

Our company is betting on the transformation based on product innovation and the service introduction.

But at the same time, also the world is moving in a direction in which the demand for local content is important in Canada, in the United States.

You cannot serve a large market, unless you can operate a substantial level of production and supply chain within these countries.

So that's the reason why we need to start and support this market from local operation, and if we have higher cost, some of them, we need to compensate on the price side by differentiate ourselves in terms of service and being able to capture higher price, and in some cases, may compensate for the relatively higher cost of the operation.

Great, I appreciate the time, I'll turn in back.

Our next question comes from the line of Michael LaMotte from Guggenheim.

Thanks, good morning.

Paolo, you mentioned in your prepared remarks that you thought the Trade case review would lead to a reduction in Korean imports.

I'm curious as to if you have thoughts by how much?

I understand that next deal was about 25% to 30% of the volume and that see us probably more tubing than casing.

So could we see up to half of the Korean imports essentially closed off as a result of the most recent decision?

We share your opinion, Mike.

50%, I mean, this is what we expect could be the reduction.

There are many factors you should consider in trying to anticipate decision by the different actors.

I will ask German to also add his comments on this.

No?

Thank you, Paolo, good morning Michael We share your review, Michael.

I think there are 2 important elements to highlight.

Number one, the existing ruling is creating on one of the major Korean importers a very important contingency which we understand will be in the area of about $60 million of retroactively paid import duties.

Number two, this is the first time that the Department of Commerce has used the Particular Market Situation provision, which is a component of the law -- an important component of the law, that we have advocated for, for a long time, that deals precisely with the notion of understanding a true component of the cost structure, and is the reason, in the end, I think the determinant factor that led to the margins to increase from the appeal levels of 5% to 8% to about in the majority of the cases, 14% to 25%.

Now the second review is in place.

We started it back in September and the process continues on.

So we believe that we will see a net important reduction of Korean imports going forward.

That's very helpful.

Thanks German.

Second question I have is related to the spread between international OCTG pricing and what's happening in the U.S. with the rapid escalation.

I see some of the input costs, iron ore in particular, starting to pull back and with a lack of real momentum in drilling activity overseas.

Is there a risk that the lack of pricing improvement in the international markets could put a cap on the momentum that we currently see in the U.S. market?

Well, Michael, it's a good question.

As I mentioned before, just before passing to Gabriel for a comment on the price of -- on the international price.

In general, what I perceive is that the world is moving into pricing more differentiated by region.

If you look at, for instance, in steel, on the price of hot rolled coil between U.S., Europe, China, or so, you perceive how the logic of price definition in the different region is different, and the differences are probably bigger today than any time in the past.

So this is not, let's say, international prices, but there are many local prices defined and determined by different conditions and different factors.

USA in particular, because in the end, the new administration is stating willingness to intervene in some of the case of unfair trade detected by the administration and this will definitely have a role and a weight on this.

International price, in my view will be tractioned by the level of price that is prevailing in the largest market in the world.

But maybe, Gabriel you can tell us what you see in the rest of the region?

Sure.

Thank you, Paolo, good morning Michael.

Indeed, the activity on the rig count in the Eastern hemisphere and international market is not having the traction that we're seeing in the U.S. Nevertheless, when we separate into different segments, we see that, for example, with the major IOCs, in which we have long-term agreements, we are seeing some of the cost increases and some of the Pipe Logix increases reflected in the differential pricing and increases in pricing in our long-term agreements.

So that space is gradually, with some inertia that we typically have in the international market, getting the impact of the better dynamics that we're seeing in the U.S. It is also true to mention that in the Eastern Hemisphere, we focus a lot on differentiated markets, in areas where the products and services allow us to differentiate in a meaningful way and obtain higher average pricing.

In this regards, there are segments like Aramco in Saudi Arabia, where we are pushing price increases.

Paolo mentioned in the opening remarks about the contract in KOC.

This is a very differentiated segment of the drilling, gas, about 23 rigs that we serve for the next 3 years in which pricing is also at, I would say, at a high relative value.

So we have been partially successful on focusing on areas where we can differentiate, areas that have been resilient and which we can maintain high level of pricing differentiation.

But there is a segment of the market that is not so differentiated, that is highly disputed.

In which there is no question about, there is still pricing pressure today.

Thank you Gabriel

Very helpful, thank you

And our next question comes from the line of Marc Bianchi from Cowen.

Thank you.

I'd like to focus back on the Rig Direct conversation earlier about ramping up there.

We're hearing some concerns about supply chain challenges, be it tracking cost inflation and other bottlenecks that are increasing as activity ramps up.

Just curious, how that might affect the Rig Direct model?

What kind of contingencies you have in place?

And maybe if you could offer some more color there?

Well, thank you, Marc.

I think we are taking a rational approach to this.

We are conservative in this period of ramp up, in term of security factor, additional inventory, reserves on plant capacity.

So to be able to react fast to change of programs, to adjustments in the sudden demand, and so.

I think this is a process that will take time to develop into a well-defined model, because, before we've been able to reduce the inherent cost.

Especially in a moment in which the ramp up in volumes is so strong.

We are probably incurring an additional cost just to assure to our client, the, let's say, the security of supply of a model that is deploying gradually.

Additional comment on disruption on the supply chain that could come in a period of fast growth.

German?

Thank you, Paolo.

Well, Marc, really we have not seen that, and I think I attribute that to a variety of reasons.

Number one, we started our deployment in the south and we naturally are leveraging, for instance, on your point, logistics, transportation requirements.

We're leveraging our existing contracts and alliances with people that are supplying Tenaris, not only to move our pipes from the Midland service center to the rig, but all around the country.

Now obviously, as indicated, we are taking the appropriate measures.

We understand how critical this is and we are committed not to ultimately fail.

We have not in short, shut down a rig for a lack of pipes since we started, and this is ultimately the objective which drives our decisions.

Okay, thanks for that German.

Just one more, as it relates to the outlook for second quarter.

The guidance discusses flat revenue and EBITDA.

Curious, first, is that the reported EBITDA number or the adjusted EBITDA number of 2017 that we're referring to there?

Edgardo?

Yes, it's very much the same because we are basically not anticipating significant differences between the reported and adjusted EBITDA for the next quarter.

Okay.

Then the change from first to second, I would think that with the pricing improvement that you're seeing, appreciating that it's really just in the U.S, would offer some margin expansion.

Is it possible that the outlook's conservative there?

Or is there enough of an offset internationally that really -- that's enough of a headwind to keep it flat?

Well, you know there are always this -- I mean, difference between one quarter and the other.

For instance, in the last conference we were guiding growth quarter-by-quarter during the year.

Probably this quarter comes out a little stronger because of some anticipation on Brazil.

In the next quarter, the second quarter of this year, we will have the full impact of the Canada season, the breakout in Canada.

There may be some shift in this case, Brazil could have a relevance, and when you look at the second part of the year, I think this could be influenced by the dynamics of the number of rigs and the Pipe Logix, because in the end, if the rigs continue to grow at high pace like what we have seen in the last 6 months, it will be different.

We expect some slowdown in the pace of rigs increase.

These things could have an impact in the second part of the year and maybe, and in q third and fourth quarter too.

Because in the end will impact on the Pipe Logix, will impact on the overall formula.

Gradually, we may have some impact there.

Ok, thank you very much, I'll turn it back.

Our next question comes from the line of Ian MacPherson from Simmons.

Thank you, I wanted to go back and revisit the question that Michael was asking on the difference between your current realized price per ton and the spot market price, because there are a couple significant differences that I observe in your mix.

I mean for one thing, right, you're down to less than 15% of your mix from welded, it was 25% to 30% of your mix last cycle.

North America now looks like it's approaching or eclipsing 50% of your total volume, so there's big pricing momentum in the U.S. and North America should have a bigger weighting as in the past.

So just want to -- I want to ask the question one more time, I want to confirm that there is a material gap between your current realized price per ton and where your global basket of products could reprice today.

And should that gap -- maybe not the second quarter, but by the end of this year, should that gap converge?

Well, in general, I think the, let's say, the mix, our mix is moving into a higher share of American -- sales in North America and the average price, because of the nature of the product we are selling, in North America is lower than our average price internationally.

Because basically, the mix of product condition in the market.

So the increase in North America is keeping our average price more stable, let's say, that what we see in the increase, for instance, in the Pipe Logix.

This is what we can expect.

Now -- then on the long run it will depend from the increase in overall price in North America and the increase internationally.

But this is part of the mix that is affecting our price.

Thanks Paolo.

My follow up question, just regards to really the unpredictable nature of the Trump administration as they review trade policy internationally.

It's my understanding that the Korean case that came down, that was more probably the handiwork of the prior administration.

And going forward, I think we could all expect a more hawkish position from the administration.

And I wonder how you think about that when you juxtapose the inflationary risks with regard to maybe Asian imports on the one hand.

And then on the other hand, the potential uncertainties regarding NAFTA and how that could impact your competitiveness coming out of TAMSA.

I guess which is bigger plus or minus with regard to all that in your perspectives?

Well, this is a very big issue, a complex.

But let me tell you, three points of this.

On our side, I think we are very well positioned to face any of the possible approach that the U.S. administration could take.

We have production capacity and service capacity in the country and we can follow and respond to any different approach better than anybody else.

Especially, once Bay City will be fully operational.

As I said, if you look at 2018, you will see a company that has the ability to support its clients from different sources and moving at the global level.

Second point about the risk of NAFTA.

Really, in my view, NAFTA has been important for integrating the NAFTA manufacturing in North America to an extent that, that will be almost impossible to drive back substantially.

I expect that there will be some renegotiation and every party will sit at the table to introduce changes or improvement in this, but we did not expect really a breakdown of this.

Even, having said that, even in the case of complete breakdown, remember that Mexico will continue to be very relevant in the trade relations with the U.S. even without any of the prevision of the NAFTA, just because of the structure of the industry, the geographical position, and the relatively low level of tariff that are following the general -- the seasonal preference in the United States for our product.

Remember also that Mexico has a deficit in steel against United States.

Unites States is exporting to Mexico more products in steel than Mexico is exporting to the United States.

So in our case, especially, we wouldn't be disrupted even by cancellation of NAFTA.

We will be able to respond with no major disruption.

The third point is that, and my most general point, it's not only the American administration, but also in other parts of the world, there is a trend to slow down the process of, of course, the globalization to try to increase local or regional integration.

And to, let's say, maybe deglobalize, to some extent, some of the supply chain for some of the manufacturing.

This trend, my view is there, will we continue.

And if we look at our investment decision, our investment decision are taking into consideration this, in a long-term view.

Very good points, thanks Paolo.

And our next question comes from the line of Alessandro Abate from Berenberg Bank.

Good morning gentlemen.

Most of my questions have been already answered, but I just have 3 left.

The first one, whether the start-up in North America will help you to capture a little bit more in terms of market share.

In other words, whether your ramp up is going to be faster than the growth of supply that response is going to be now until the end of 2017.

The second one, if you can clarify a little bit the outlook for South America, considering the importance of this market, I mean you spoke basically Paolo about Brazil and the line pipe, also Vaca Muerta, but shipping out, I mean, for the rest of South America.

What kind of impact this can have on your utilization rates in the region?

And the third one is related to the Middle East.

I was wondering, whether there is something that is not visible yet taking a look at the rig counts, seems to be quite visible.

But is there any kind of increase of activity there that can actually shape up a much better future in terms of outlook than the one we're seeing at the moment, which is like in the U.S.?

Thank you, Alessandro.

Well, concerning the first point, the capture of, let's say, an increase in market share, well, it also will be related to the decline or reduction on the Korean imports.

It's clear that we are prepared to capture part of this market.

And hopefully, we will be successful in aggregate to our Rig Direct model.

Some of the products that today are supplied by import.

Remember that Korean, the last quarter, were reaching very high market share, at the level of 27%.

I mean, very substantial market share.

If we assume that this could go down gradually reduce by half, there is room for expansion in our market share, and we have the capacity to capture this.

This may happen gradually when the inventory fade out during 2017, because we have inventory in the ground, and so we will see this process over time.

The second on South America is a very good point.

I mean in South America, this moment is one of the lowest point, historically lowest point.

We're are at the lowest quarter in Argentina since many years, but we are very confident that this will increase quarter-by-quarter in the future.

We are at the very low level of sales in Mexico, I mean extremely low, because in the end Pemex went down and the new companies, the private companies should capture the results of the energy reform are just starting to move, but they will move.

So definitely, when we look at 2018, 2019, you will see that new comers will do something that Pemex is no longer doing, investing more heavily in the development of Mexican resources which is very important.

Venezuela, we all know it will take time.

But to some extent, in the coming years, Venezuela will have to get back to the development of oil resources.

Colombia is moving.

Remember, Colombia last year was arriving at a level of 6 rigs.

Today, there are 30-plus rigs.

And for instance, this also is moving.

In Latin America, with this prices of oil and gas, we'll be able to -- will increase level of activity over time.

The third point concerning the Middle East, beyond the rig count, I mean, if there is something in the plans of the players that could affect, let's say, 2018, 2019.

Maybe, Gabriel, you can add some color here.

Yes.

I mean, in general, in Middle East, we see a strong level of activity, as mentioned before, Saudi continuing a level of activity in drilling, no slowdown at all, and big plans about gas production, which will gradually translate into an increase of drilling for gas.

They are purchasing in line with their needs.

So there's not restocking or destocking.

That is what we see.

KOC, stable as we mentioned before related to that contract.

And UAE is also a solid base of activity.

But we don't expect major jumps from a historical high level of activity from these main countries.

Egypt is the only one that with Zohr development has had a big momentum.

As Paolo mentioned, we are ramping up the production over the big welded line pipe in our mill in Brazil, which we will start seeing shipments towards the end of this year and in 2018.

So probably in the Middle East space, Zohr and the gas development area in Egypt is the most active are, the rest remains resilient.

Yes.

Let me add one point.

There is something that everybody is looking at and is concerning the level of new reserves added to the system.

Now in this year, you'll see a level of additional reserves that is extremely low, much lower than any time before.

Where this is leading?

I mean, we expect that over time exploration activity needs to start back again and even complex project, not only Middle East but I mean in the Eastern hemisphere, will need to be launched and there would be activity.

But it can go otherwise, and the world would remain with a decline level of reserves in place.

I think this year, we are in the range of 35% or even lower.

This is not sustainable over time.

So we perceive that companies are looking at projects, that they may need to be put on stream in 4, 5, 6 years.

And maybe during 2018, we will see FIDs of some of these projects and some of the exploration activity will be needed.

Thank you.

Just a couple of follow-up question.

The first is for you, Paolo.

My first question related to the possibility for you to gain market share was probably -- I'll just try to rephrase the question.

Considering your quite agile supply chain and very fast time to market, I mean, considering also the possibility that your peers have to ramp up capacity to feed this level of demand and putting together the possibility that there is a decline in import obviously, from South Korea, are you going to get the most of the potential increase in the market share relative to the other peers, like compete excluding the imports?

And the second one is related to always the Middle East.

What is really the trigger that might let numbers of activities skyrocket, let's say, the level of confidence that the oil price is going to remain between $50 and $55 now we're going to see whether there's going to be an expansion of the production cut.

But do you think that there might be the possibility -that if there is a perception that the oil price might be sitting at that range, $50, $55, we might be seeing a strong recovery that we're not seeing yet in the Middle East?

On the first point, which is market share, remember, there are also our competitor are not operating now at an extremely high level of utilization.

So there is, if you look at how the market was supplied in 2013 and '14, you see that there is an opportunity for increasing level of utilization also on part of some of our competitors.

I mean, it's not automatic.

We are not the only one that could recover and increase our capacity of production, and that's the reason why I expect that our increase in market share could be there, but it will be slow.

On the second point, I think that today, the market is expecting a renewal of the agreement of the OPEC, but the increase in shale compensate the increase in the demand worldwide.

And so the landscape is relatively stable and the future for oil is in the range of what you see today.

$50 to $55 is where we expect this to be.

Now over time, I expect there will be more concern for the low level of reserve replenishment and in 1, 2 years, there will be, this landscape that could change and allow operation also.

You will see this in Africa, in offshore.

These are areas in which you can add the resource when the perspective of price in the long run gets higher in the range of $60 to $70 instead of $50 today.

Ok, thank you very much, thank you.

And our next question comes from the line of Frank McGann from Bank of America.

Ok, thank you very much.

Just a couple of things, if I could.

One, in terms of the U.S. plants, you indicated that you would be ending the year about 10,000 tons per month.

I was just wondering what -- how you see that ramping up in 2018, where you think you might be by the end of the year the average of 2018?

Also just wondering, with the U.S. ramping up, what your expectation is for utilization in the Mexican plants, which is I believe your most efficient plant right now globally, and how you see that perhaps declining given the still soft market in Mexico?

And then, in Argentina you indicated that you're expecting a nice pick up to the rest of this year.

Do you expect that overall sales in Argentina will be flat year-over-year?

Or will they still be down because they're starting from a low base?

How do see the overall trends in Argentina?

Well, on the ramp up of Bay City, I think it's too early to see how successful we will be.

We are giving you a number.

There is a reference number for December 2017 is the target that we'll have internally.

We will see.

In 2018, it will depend on factor also from the dynamics of the market.

What I can tell you is that, if the need comes, I think we will be able to increase, obviously, these numbers in the course of 2017.

As far as the operation in Mexico or Argentina are concerned, we are very confident we can maintain a high level of utilization in these plants.

The level of activity is driven by many markets, not only by the Mexican markets, and we expect the overall market, as you have seen in our overall view, to expand by 35%, 40%, and this will support the level of activity in our plant.

In the case of Argentina, I expect the ramp up to start and to continue quarter-by-quarter.

When we look at the stage through that, this quarter has been, let's say, extremely low, but we hopefully and probably, during the recovery during '17, will lead us to a level of sales, let's say, in the range of what we have done in 2016 and maybe for sure increasing in 2018.

Ok, thank you very much.

And our next question comes from the line of Amy Wong from UBS.

Hello, I just have 2 questions: one short term and one a little bit longer term.

Just first question is on the short term is just to think about into third quarter as I know you mentioned on the second half results should actually be improving, but there's always like a bit of seasonal down take especially in Europe in the third quarter.

So how -- at this point what you're looking as you're looking out, do you feel that the growth in the U.S. will all be able to offset some of that weakness elsewhere in your -- in the third quarter, please?

And then on -- my second question is just thinking out to the Middle East, maybe this is a question for Gabriel.

I think about Iran and what other opportunities are there for Tenaris?, please, thanks

Well, on the first point, I think that the trend of increase in volume and prices will be enough to give us quarter-by-quarter progression.

When we say around 20% will be the ratio for the second half, we are considering this, the impact of some weak, seasonally weak quarter and the impact of the increase more first and the last quarter.

But anyway, I would stick to my view for the semester, more than quarter-by-quarter because this is -- sometimes is changed by few order or by limited volume in specific countries.

Sorry, the second part of concern is Iran.

Gabriel, you may comment where we are.

Thank you, Paolo, good morning Amy Just to mention on Iran is a watch and see situation.

We are closely monitoring the situation there.

As you know, we have in a few weeks elections in Iran.

We'll see about the outcome on the policy about that.

So far the majority of the IOCs have the clear intention, memorandum of understanding, but not concrete plans of investments.

So we are in a watch and see.

Nothing has materialized in the short term.

So we are closely monitoring opportunities.

Not so much to report on that from me.

Thank you very much for that, I'll turn it over.

And our next question comes from the line of Kevin Roger from Kepler Cheuvreux.

Yes, good afternoon.

It's Kevin Roger from Kepler Cheuvreux.

I have 2 questions, if I may -- 3 if I may.

The first one is on the current trade case.

I would like -- is it possible for you to please a little bit elaborate more on why do you think that the current imports will decrease?

Because at the exception of next year, basically the utility margin are rather the same, and current players are manufacturing API products.

So it's quite easy for a client to switch from a current player to another one.

So I was wondering why do you think that clients will not switch from next year to Hyundai for example.

The second question is on the Rig Direct strategy.

The penetration rate of the strategy remain at 50% since one year.

So I was wondering is there any reason, in your view, for clients to not move under this model.

Is there any holding back reason?

And the last question is Vallourec your competitor announcing at the end of last year more than $400 price increase per ton on the tubes.

So I was wondering if you can comment as what has been the evolution of your pricing since the end of 2016.

Well, just to recap the second one, the share of Rig Direct in our sale is around 50%, but remember that our sales are increasing very much.

Now the increase in the U.S. has been around 40%-plus just in this quarter.

So we are increasing strongly.

The penetration of Rig Direct is very strong.

But we are, at the same time, preserving the client that we had in which we have some contributor playing the role of logistics support for our client.

Now in the first page -- first question, Kevin, was trade case and the impact on Korean import.

German, maybe, you can comment on this.

Thank you, Paolo.

Well, let me just without getting into too many details, Kevin, the view we have is that the consideration of, I think, 3 very important aspects.

Number 1, with even lower margins, prior to the first administrative review petition, the combination of the other producers, Hysco included, accounted by just 30% of the total Korean imports.

So in other words Next Steel and CR were the major participants with about 70% -- combined 70% of the Korean prices.

In other words, we have noticed that the rest have already pulled down, well ahead of this new higher levels of margins.

We believe that fundamentally, the reason behind is.

because there is a concrete risk of retroactively applied duties, which in the case of one of the two major players, as we indicated, today creates a contingency of about $60 million or so.

Now the third, I think, critical important element is the very first time the Particular Market Situation is applied.

This introduces a new angle to the trade discussions, costs structure analysis and the fact that we us industry, have always presented, and that is that the price of steel at which the Korean pipe producers are serviced, by both China and some Korean domestic producers, is completely out of reasonable market levels.

Thank you, German.

In the end, by the way, our view is not so easy to estimate, the risk appetite because, for instance, in the case of Next Steel, they are now paying a very substantial amount of money for the application of the duties retroactively.

Now risk -- appetite for risk is difficult to judge.

But in our view, it's a reasonable to estimate a reduction in the range of 50% or something like this over time.

In the last question, pricing.

Well, you have seen the evolution of Pipe Logix.

Pipe Logix increase after the first 2 months the year of the 10%.

Now it's increasing another 11%, probably we are around 25-plus, 28, compared to the bottom of this.

This is the very significant signal to the company, to everybody in our sector.

And this signal is supported by the increase in some of the costs, like hot-rolled coils.

If you look at the price of hot-rolled coils, it's also reflecting a trend.

This is it.

Now how this gets into the -- our prices, internationally and in the U.S. depends on many factor.

You see what our expectation is in the end, that this will get in gradually.

The mix effect of U.S. increasing in our mix will clearly have a negative effect on the average selling price of the entire company.

And the competition of this is driving our forecast of 20% EBITDA margin in the second half, all considering.

Ok, thanks a lot for that.

This concludes our Q&A session.

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

Well, thank you, Brian, and thank you all for joining us in the call.

I hope to see you soon around and goodbye.

Thanks.

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

This concludes today's program, and you may all disconnect.

Everyone, have a great day.