Tenaris SA (TS) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Tenaris Q2 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, Investor Relations Director.

Sir, the podium is yours.

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

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

With me on the call today are Paolo Rocca, our Chairman and CEO; Guillermo Vogel, Vice President of Finance and member of our Board of Directors; Edgardo Carlos, our Chief Financial Officer; German Cura, Managing Director of our North American Operation; and Gabriel Podskubka, our Managing Director of our Eastern Hemisphere Operation.

I would like to start by mentioning that we will host an investor presentation in London on September 22, and we hope to see you -- many of you there.

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

Our second quarter sales at $1.2 billion were up 18% compared to last year and 8% sequentially.

Sales were up sequentially, mainly thanks to the improvements in the U.S. and in Argentina.

Our EBITDA margin at 16.1% showed a slight sequential decline and included additional costs associated with the start-up of our Bay City mill in the U.S. and the reopening of our Prudential mill in Calgary.

During the quarter, we recorded $13 million of severance charges.

Our EBITDA margin without these severance charges would have been 17%.

Average selling prices were down 10% compared to the corresponding quarter of last year, but up 1% sequentially as the improvement in pricing condition in North America have been mostly offset by a different regional mix.

During the quarter, cash flow used in operations were $33 million, mainly due to an increase in working capital of $260 million.

Our net cash position at the end of the quarter declined to $1.1 billion after the payment of $331 million in dividends that we paid in May and capital expenditures of $155 million during the quarter.

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

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

Throughout Tenaris, we have been ramping up our operation in response to a recovery that so far has been concentrated in North America but is extending to some parts of South America and specific developments such as East Mediterranean gas.

Our Bay City mill is processing and threading pipes in anticipation of the start-up of the rolling mill in September.

In Canada, we have restarted our Prudential mill and Algoma it's operating also at a good level.

This third quarter, we are having maintenance shutdowns in our Tamsa small-diameter and Dalmine mills, but we expect them to be producing close to capacity thereafter.

In Argentina and Romania, we have increased production levels and, in Brazil, we are preparing the mill for the production of the Zohr pipeline.

Since the beginning of the year, we have effectively brought back to work 2,000 employee worldwide.

Our Rig Direct program continues to expand its range of customers.

We now serve over 270 rigs and 120 customers worldwide.

In North America, major customers such as BP, Shell and Statoil are converting to Rig Direct, while in the Middle East, we will soon start our first Rig Direct operation in the Emirates.

In Europe, we have extended our long-term agreement with OMV for 7 years with enhanced Rig Direct services for their Romanian operation.

In North America, our sales are up 58% in the year -- in the year-to-date compared to last year, and we expect them to increase further in the second half.

The start-up of our Bay City mill will strengthen our Rig Direct operation, shortening the supply chain, reducing lead time and increasing the flexibility to respond to well design changes from our customer.

Bay City will also improve the competitiveness of our industrial systems, increasing productivity and reducing costs and the overall environment impact.

Pricing conditions in North America have improved, but Korean imports continue to damage the industry.

We are confident that in due time, the U.S. administration will undertake additional measures to ensure a level playing field.

In Mexico, where oil and gas production continues to decline, the government is accelerating the energy reform process.

In the past months, there have been successful exploration results from wells drilled by ENI and Talos in the first round concessions and further interest has been shown in the new bidding rounds.

Last month, I visited Colombia, where in less than a year, we have installed a new facility, which will provide couplings for our worldwide operations.

This has been an example of Tenaris' execution capabilities and will contribute to our long-term competitiveness.

Our sale in Argentina are increasing as investments in Vaca Muerta drilling and infrastructure move forward.

We expect that by next year, over 50% of our sales of OCTG in the country will be for unconventional operation with a focus on gas.

This is driving changes in the product mix towards increased use of premium products.

In the east hemisphere, sales will recover in the fourth quarter with shipments for East Mediterranean gas pipelines.

This is the most substantial ongoing offshore region worldwide and where we will be delivering over 400,000 tons in the next 2 years.

A very good achievement even if the margins will be lower than what we had in the past.

In the very competitive environment, we were able to establish differentiation based on reliability of our products and our project management skills.

In an industry which is experiencing a gradual recovery after a severe downturn, Tenaris is strengthening its competitive position for the future while continuing to improve its results quarter-by-quarter.

We are open now for any question that you may have.

(Operator Instructions) Our first question comes from the line of Michael LaMotte from Guggenheim.

Thanks, good morning.

Maybe as first question I could post to German, Pioneer mentioned on their earnings call yesterday that they're finding higher-than-expected pressures in shallower zones, which they're addressing by setting an extra casing point.

And I'm curious to know if your thoughts on how pervasive this issue might be and what the increase in tonnage per well would look like for a 4-string casing design versus the, I guess, more conventional 3-string.

Thank you, Michael.

German, you can make consideration on this.

We evaluated this trend since many months because this isn't something that's recent, it's not new, the increased pressure at this point.

And we know that the operator are reacting by changing the design of the column.

But I would ask German to give a comment of the impact on the volume and on the mix of product that is maintained and also how relevant it could be toward the evolution of demand in U.S. and in Permian.

Thank you, Paolo.

Good morning Michael.

Very briefly, this is something, Michael, that we've been looking at for the last almost 6 months.

It's not only affecting Pioneer but many other players.

In our account, it could be in a way touching, give or take, 15% of the existing rigs in the Permian.

Now what is happening is that operators are finding overpressure just below the shoe of the 9 5/8s and replacing that by running a component of 7 5/8s.

That is for casing string.

The importance or relevance is that back to mix that the clearance is affected.

And therefore, the 5 1/2 can now be threaded and coupled, as it has been for so many years.

And that is directly allowing the introduction of semi-flush connections, premium connections, in our case, the 625, which has proved to be very successful in the shales.

Long story short, we've seen wells which have actually used 0 premium turning into about 40% of the string into premium connections.

Thank you, German.

14% up from -- what had it been before sort of moving to this design?

Well, it was very little.

This is a relatively new phenomenon in terms of overpressure.

And it's now, as I was saying, affecting quote and quote "nearly 15%" of the existing Permian rigs.

OK.

Yes.

Let me, by the way, considering that it takes longer to complete a well, you should take into consideration that the overall expected consumption of pipes for one rig over 1 year in this condition is probably be lower than in previous condition because they are adding days to complete the wells with the 4-string.

So consumption of pipe per rigs per annum may be likely lower than before.

Okay.

So tonnage down but a positive impact on mix?

Tonnage per well, up; tonnage per rig annum slightly down; more premium in the column.

From our point of view, it's something that we are very well prepared to face.

We have the range of product for facing this.

And it's a positive development because allow us to deploy differentiation.

And also, I think that on a technical side, our support is appreciated in this.

For sure.

So I can see both mix benefit as well as a share benefit, market share benefit from this trend.

Okay.

And then my -- for my second question, you noted that steel prices were moving up again in the press release.

And iron ore has been moving up a lot actually just in the last 4 to 6 weeks or so.

What's behind the moves?

And what type of impact do you see it having on your cost per ton over the next couple of quarters?

Well, you are perfectly right that there is an upward trend in the price and cost of the main inputs from the industry.

There are many factors acting on this.

The level of consumption and production in China is higher than was anticipated.

And then also, we anticipated, this has traction.

There is demand in Turkey for scrap.

It's also a factor that may be temporary but, for the time being, is affecting the price of scrap.

There is a perception that the market is recovering in Europe, but also, there is a perception that in the United States, actions would be taken in the steel sector that could have an impact on prices.

So this is also -- all of this is raising different -- raising the price of different inputs.

On top of this, we had some disruption in the supply chain for coking coal that is also driving the price of coking coal slightly higher.

All in all, we are seeing the cost increasing a little beyond what we expected, for instance, last quarter.

This is part of something that is affecting our expectation of margin in the third Q. And you have seen reflected this view in our press release.

These costs will be reflected in our cost of goods sold, gradually in the third and the fourth Q, not in the one we just reported.

If you tell me, is this something that will affect the sector in the coming 6 months?

I think yes.

One side or the other, there is the sense that demand for steel input -- for inputs plus some disruption, all in all, will drive some of these costs higher.

I may refer to Edgardo how fast this will be reflected in our cost of goods sales and how we think this could affect that.

Sure.

Thank you, Paolo.

Good morning Michael.

In this quarter, the one that we just finished, it was very marginal, the impact.

Coming into the third quarters, we are expecting probably a range of $30 per ton, which translate in $25 million to $30 million in the quarter.

And also, we are having some effect probably in the increasing price of hot rolled coil.

The iron ore is less impact because several of our facility are very much loaded with scrap, but the scrap prices went up very importantly as well.

Yes.

By the way, we are reacting.

We are reacting by changing the mix of load in the steel shop, by adjusting regionally as much as we can to minimize this impact.

That's very helpful, thanks Paolo, thanks Edgardo.

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

Thanks, good afternoon.

Edgardo, a question for you or I guess, Paolo, you can answer as well.

I guess I was a bit surprised at the announcement in the release to reactivate the mill, the Prudential mill up in Calgary.

Maybe you could talk about the rationale for that, what specifically you're seeing, and that's a welded mill up there, number one.

And I guess, Edgardo, from a margin dampening perspective, can you maybe shape for us how much that cost in EBITDA margin during 2Q?

And will there be 3Q effects of that start-up as well?

Well, first of all, on the rationale of the decision, well, this is basically based on the increasing volume in the Canada market.

The market in Canada is increasing substantially, one.

Second, our share of the Rig Direct in Canada is getting closer to 70% in the coming months.

So we need to have a real just-in-time, short-lead time chain of supply.

And we thought that in this frame, Prudential mill could give us a strong support in all of the development that's in Canada, especially in the Southwest where these material are extensively used.

Would be very difficult to support Canada from other mill worldwide to this level of volume.

Remember the -- we imagine that year-on-year, the volume of shipment will more than double to Canada in this quarter and the next quarter.

So the increase in volume is substantial, and we need a shortened and lean chain of supply.

This is something that -- the tendency that we see also elsewhere.

When the market is increasing, there is a demand -- the need to offer shortened supply chain, local domestic production.

And this is also supporting the investment in the start-up of the mill in the United States.

United States is a similar situation.

The present situation in United States, in which almost 70% of the need of the energy industry are imported, will not be sustainable long term.

That's the reason why we are investing and we are raising local production.

The same is happening in Canada.

Now Edgardo, if there is a comment on the impact in term of margin on this.

Good morning Bill.

Yes.

Basically, the start-up of this facility was very quick.

We expended almost $2.5 million in the training and to put it fully in operation, and it's up and running already.

So I do not expect any additional extraordinary expenses taking place in the third quarter.

Yes.

And remember also, Bill, that in Canada, the market for line pipe is increasing, and this mill is very much focused on line pipe.

So this will be the main product that will be produced in Prudential in the coming months.

Thank you for that.

Okay.

If I could just circle back, German, to you just maybe more broadly speaking on the U.S. onshore market, you addressed it a little bit in the first question.

But can you just update us, I guess, how you -- what's your latest thoughts right now in terms of the prospects there?

I mean, we've had a huge move in Pipe- Logix, which we look at Tenaris' overall price per ton, it's still been relatively flat.

And North America is now getting close to 50% of revenue for you guys.

I'm just trying to understand days of inventory on the ground are quite low.

I know there's the commentary about slowing demand from some of your customers but with Rig Direct market gains.

So what should we be expecting here?

I mean, what are you guys doing in terms of pricing in the market right now, just volume expectations?

Have we seen some seamless versus welded mix taking place in the U.S. market?

Just I'll leave it there, German.

Any answers on that would be helpful.

Well, German, you can maybe answer on this.

But in general, let me tell you that, we feel that talking to our client, my perception is that -- the impression we have is that in general, the level of rigs may level off or, let's say, increase for sure at the lower pace than what had been registered in the last quarter.

It could level off, but we are not pessimistic in the view for the medium term.

Some of our clients are in favor, some are reducing, but there are also other clients that are stepping in, and mobilizing rigs, in the Permian but not only in the Permian.

So in term of volume, the market may level off a little compared to our expectation, but we do not see a change of time in this.

In term of price and demand, German, maybe you can add level of inventories, level of inports and pressure that you have on the -- in this segment.

Thank you Paolo, good morning Bill.

A few additions, Bill, to the view.

Number one, level of inventories at the end of the quarter, according to our estimate, reached about 5 months' worth of inventory, which I think it's a balanced level.

We don't tend to agree with the view that there is steep tightness, although 5 months is a healthy level.

Now we have also seen, as discussed, an important level of imports during the quarter, which is, in a way, in our view, associated to a variety of aspects.

And some of them, Paolo commented in his opening remarks.

Now going forward, we believe that a few things are happening.

Stabilization of rig count levels, I think, are a very healthy level.

960 rigs -- operating rigs translate in a very important, what we call, operated consumption level.

Number two, the absolute need to work on improved efficiency and, consequently, the need for us to continue on deploying Rig Direct in a way of introducing operational efficiencies for our customers that translate on cost savings.

Finally, the point of seamless, welded, I think the trend at this point is clear.

We've seen a bigger, higher use of seamless associated to, for instance, one of the issues that we discussed about, the change of string design, together with long and lateral, together with increased gas development.

And I don't believe that trend will change anytime soon.

Yes.

Also, you know, when you look at the price, it's very important to understand the role that imports could play.

We mentioned in the last conference and this very present that after the definition or the revision on -- of the case for antidumping against Korea, Korea is still importing and moving material into the States.

But some of the mill received duty in the range of 29%; some other, in the level of 16% after the adjustment of the calculation.

These are very relevant tariffs that are adding cost.

I think considering, continue to think that these imports from these sources will not be really competitive in this market.

Also, we see, by the way, imports from different sources.

And as we mentioned before, in this moment, imports are taking important share, around 70% of the overall need.

But I don't think this is sustainable in the long run for the U.S. energy system.

One additional comment on the mix of products between API, premium and semi-premium.

The share of semi-premium and premium is increasing.

You can, we estimate the semi-premium as we're serving in the range of 20% on the unconventional shale, 20%, and premium should be an additional 15%.

So this means that there is some 35%, 40% of the shale demand that is differentiated, in which it should be possible to maintain pricing power.

And this is the area in which I think we are also focusing part of our deployment.

The more demanding utilization of product, the more demanding project and product are, let's say, something positive for us.

But in general, I think the question of overall level of import is something important for pricing power.

Thanks for your time, I'll turn it back.

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

Hello and good day, thank you.

Two things if I might.

One, just you mentioned in the release that you expect the fourth quarter to be quite strong as a result of some supplies that you see in Mediterranean.

I was just wondering if you could perhaps elaborate on that a little bit more in terms of what kind of volumes you're expecting and the impact that could potentially have on EBITDA generation.

Then secondly, in terms of a couple of the markets that you mentioned in Latin America, Mexico and Argentina, where you're looking for some pickup or -- and are seeing some pickup, I was wondering if you could talk about how material those are likely to be over the next 6 to 12 months in each of those markets, Mexico and Argentina.

Well, you're right that, we are thinking that the volume of our sales should increase in the coming quarter.

And in the fourth quarter of 2017, the volume should be clearly higher compared to what we are doing today.

We are talking here of an increase that could be in the range of 20-plus percent as a whole in quarter-by-quarter.

We expect this, because we have a portfolio that is, let's say, loaded also with some of the pipeline projects that we will be delivering and we will continue to deliver in 2018.

So we are confident that our margin will improve because also, absorption will be better.

And some of the increase in price on the Pipe-Logix is turning into the formulas and turning into our revenues in the coming quarter.

What we are seeing in the Third Q is increased pressure of cost.

That's the reason why we expect, as we are announced in the last quarter, we think that we should be able to reach a margin in the range of 20% EBITDA ratio in the fourth quarter, even considering by that time the impact of some additional cost.

As far as demand, you mentioned this concern for Latin America.

Mexico, we start to see some positive sign.

There is a more optimistic view depending on the success in some of the discovery.

But maybe, Guillermo, you can comment on the more positive sense that we are perceiving in Mexico, at least for the advance of the reform.

Sure, sure, Paolo.

Hello Frank.

I think I agree with what Paolo is saying.

What we're seeing in Mexico is a gradual but continuous improvement moving into the future.

And this is based on several factors.

One, I would say that we're seeing that Pemex has put in order their finances, and they start to have a little bit more cash for their own direct investments.

And in the second quarter, we saw them increasing 5 rigs of activity versus the first quarter.

And I think we're going to continue to see a little bit more of an investment -effort on the Pemex side, on the direct side.

Then we are starting to see already also the results of the energy reform.

As you remember, Round 1 was totally finished, and we start to have activity from terms of what's assigned in Round 1 where Talos make a very significant discovery; also Round 1.2 with ENI; within that, also having a very successful operation.

And so we start to see the reform moving forward.

On Round 2, it has been assigned, the first 3 rounds are under the 2, also successfully.

And Pemex also is getting very much more active on the farmouts.

They are assigned the Trion area already with BHP.

And there's other 3 areas that are being, are in the process of being assigned.

So we see the reform moving.

And we start to see, we have already 4 rigs operating today on the second quarter under this effort.

And we see that this is going to continue to increase.

We see the 4 rigs going up to 6 rigs on the fourth quarter.

So the effects of the reform are being seen.

And on the side of Pemex, if you remember, we had 22 fields that had been frozen under a migration process.

And we see that probably 3 of those 22 are going to be reactivated this year.

So what we're seeing in Pemex is a successful reform, a gradual effect but continually increasing moving forward.

Thank you, Guillermo.

When we look at the rest of Latin America, even Colombia and Ecuador are picking up slowly in the activity, but we see some positive sign in some rig, additional rig at least in Colombia, and we are expecting this to happen also in the future in Ecuador.

Argentina is finally reacting, and we see the rigs in unconventional, decrease.

This is happening.

We have around 33 rigs here today operating in tight gas and unconventional shales, oil and gas.

This is important development.

Rigs are increasing.

Hopefully, some other operator will also contribute and add to the increase.

Pipelines is also a segment that is growing because there is additional demand that is coming for pipelines that will support the development of Vaca Muerta, this is important and will affect, it will be positive for us in the coming quarter.

So a positive outlook for Latin America, Mexico, in Colombia, in Ecuador, in Argentina.

Brazil, the situation is very stable.

There has been investment in Petrobras in developing the deepwater in Libra, and so.

But still the activity is very subdued, in our view, in Brazil, will remain so in the coming quarter.

Venezuela, for the time being, is -- let's say is not representing anything relevant for us.

We are following the situation.

We have support of some of the product line that are abating.

But really, we do not expect this to be adding and giving positive news in the near future.

OK,thank you very much.

And our next question comes from the line of Ian MacPherson with Simmons.

Thank you.

Paolo, when you referenced a few moments ago volume increases on the order of 20% per quarter, I just wanted to clarify that comment.

Was that both for third quarter and fourth quarter?

Are we speaking more of fourth quarter?

No, I'm referring more to the fourth quarter.

Will be gradual, but I'm comparing the fourth quarter compared to second quarter in 2017.

Okay.

And you -- so fourth quarter over second quarter would be 20-plus percent.

And then you said 20% EBITDA margins is still a goal for the fourth quarter.

For the third quarter, should we expect some improvement towards that goal or more of a flat margin with what you had in the second quarter?

I'm mentioning the 20% in the fourth quarter because I think that still, we will transition in the third quarter.

We will have to absorb some increased cost.

Most of the start-up of Bay City is the factor.

But I would say that the increase in the cost of scrap will enter into our cost of goods sold in the third quarter.

The fourth quarter, this will be offset by the increase in price and expansion in volume and improved absorption.

So we will move a little bit slowly, but we will move in the same direction we mentioned before.

And may I add, Paolo, also, I mean, on the third quarter, seasonally speaking, we always concentrate a significant shutdown for storage and maintenance.

Therefore, I mean, it's lower production capability.

And therefore, we have some inefficiency.

And that's why we are -- even though the volume will increase a little bit, EBITDA-wise, we're going to be very much in line with the second quarter.

Got it.

And then lastly, Edgardo, on the working capital, do you have any visibility on unwinding some of that in the second half?

Sure.

I mean, we -- I mean, you see -- I mean, we've been building up inventory from the very low level after the crisis, going along basically with increase in volume.

I mean, moving forward, what we are expecting is -- in fact, we have been building up also inventory in front of these extraordinary shutdowns and, at the same time, building up steel for the big line pipe project that are going to be invoiced in the fourth quarter and starting next year as well.

Therefore, we do see some additional increase in working capital probably in the third quarter and in the fourth quarter, with the increase in receivables basically coming from the increase in volume and revenues that Paolo was mentioning.

So we end up probably targeting, roughly speaking, $700 million total increase in working capital for the whole year.

Got it, thank you very much.

Our next question comes from the line of Stephen Gengaro from Loop Capital.

Thank you, good morning.

You've answered a lot.

The one thing I wanted to focus in on was, as Bay City ramps, when do you see the sort of the full impact of that on margins?

Is it by the middle of next year?

How should we think about the progression on the margin front based on that facility?

And then as a second question, I was just curious about this, historically, I know there's been a gap.

How do the margins compare on a relative basis between what you're doing now in North America -- and maybe comment on once Bay City is ramped versus the rest of the world, just in general terms.

Yes.

Thank you, Stephen.

I feel we will see the impact on Bay City during 2018, gradually during 2018.

The next -- the last quarter, the fourth quarter of 2017 will be basically a start-up quarter for the mill.

I imagine we will have some additional cost, and the volume of production will not be very high.

Gradually, during 2018, the volume will increase, absorption will improve.

And what we see, is that the variable cost of production in Bay City should grow, be very much in line with our cost in Mexico when we're considering the delivery at our yards in Midland or in Oklahoma.

So, this is what we expect.

Now the increase in volume of our shipment in -- from Bay City will have a positive effect in our margin during 2018.

This is what we expect if the prevailing condition of the market remain in line with our expectation.

I mean, if volume and demand, are not very far from where we are today and a containment of import, that is something that we really expect, from different side, from antidumping, from 232 Resolution or from any other adoption of measure that the administration may adopt.

But we really think that the energy sector is very key for this administration, is very key for the U.S. And we think the administration will do whatever they can to support a supply chain that has a very strong domestic component.

This logic is reasonable and should be helpful in also supporting the start-up and the entry into the market of our Bay City mill.

This, I think, was basically the question.

Okay.

Thank you.

And then, one other just quick clarification.

The -- you suggested EBITDA, I believe, margins about flat in 3Q versus 2Q.

Not dollars, right?

You were talking -- that was a margin comment?

We expect today that the margin will not be very different, for the one.

And second, it's difficult to say.

We have -- in this quarter, we had some impact that we call -- I would call it a little extraordinary in the -- in SG&A.

We should be able to improve, but basically not be very far from the second.

While in the fourth Q, we clearly see the increase in volume, the increase in margin.

And we will overcome the stoppages and the lower market in Europe during the summer.

So this is what we are guiding expectation now.

Very good, thank you.

And our next question comes from the line of Maria-Laura Adurno from Goldman Sachs.

Hi, thank you for taking my question.

Most of my questions have actually been answered, but I do have a few follow-ups.

Given you've provided some comments around working capital for this year, I was just wondering if maybe you could comment, if anything, with respect to 2018, how you expect that trend to unfold, particularly with Bay City being -- also being started?

Well, let me tell you.

I -- in our plan, we're working for, overtime, a reduction in the working capital once Bay City start up.

Also, as you can imagine, we are ramping up very fast our Rig Direct program.

And we want to be on the safe side from the point of view of the security of supply to our clients.

So to some extent, we are taking some extra degree of security in our stocks today in the United States.

Now as much as we give consistency to our Rig Direct program, the -- I think we may operate with less days in our inventory.

You know, in Rig Direct, we really have a very big responsibility to our client because we are delivering just in time.

So we are probably today working with some safety consideration.

I plan in 2018 to work very hard for a reduction of the working capital in our system based on reliability of all of the process of demand planning and the supply chain.

Bay City will have a key role here.

And then shorten the time, more reduced logistics, easier, faster ability to change from -- to respond, let's say, to the changing demand of the market.

That's very clear.

And the other question that I wanted to ask you, you focused on raw materials impacting the 3Q performance.

But I was just wondering, in Q2, you also mentioned some additional costs linked to Bay City start-up that impacted 2Q.

I was just wondering whether this is something that we could see also unfolding in the second half of this year.

Well, this is the standard for start-up of the plant.

There is nothing extraordinary to this.

These are -- we are expecting that our fixed cost will be affected, but this is not changing consider, -- the comparing to our expectation of 1 year ago.

I mean, just in line with our expectation.

Still, there will be some additional fixed cost when you start up a mill of this size of Bay City.

It's included in our consideration margin.

Okay.

And just one last question, can you just provide us with a very brief update on global capacity utilization within Tenaris Group?

Well, we do not give a precise estimate of this -- of the capacity utilization.

But for sure, we are raising the level of production and sales.

You see this because we are also starting up the facility in Prudential, in Algoma and later on, on Bay City.

We are increasing the rate of utilization.

In some of the mill, the rate of utilization is pretty high in this moment.

And our next question comes from the line of David Farrell of Macquarie.

Hi, thanks.

I've got 2 questions, please.

Firstly, in terms of kind of rounding off geographically, can you talk about what you're seeing in the Middle East in terms of tendering activity and how that's likely to unfold maybe the second half of this year?

And especially, perhaps what you're seeing on the ability to pull through pricing?

Then the second question I've got is regarding kind of your Mexico facility.

I think if I look at the import data into the U.S. in June and July time, it's down from where you were -- where it was at the end of 1Q.

Is the increased value of the Mexican peso against the dollar impacting where you are allocating production into the U.S. from?, thanks.

Thank you, David.

On the first question on Middle East, Gabriel, you can give a picture of what we expect -there, thank you, Gabriel.

Thank you, Paolo.

In the Middle East, the activity -- drilling activity remains solid, I would say, and stable at higher historical levels.

Saudi progressing stable, UAE as well, even some increases in Kuwait and Iraq and some softening on Oman.

But overall, the region remains at good activity level.

And tender progress -- tendering activity progress, in line with this.

We are focusing there a lot of execution and transformation, in an area that have been active during the crisis.

For example, Paolo mentioned about the Rig Direct.

This is, I think, an important achievement that we are going to start and bring the Rig Direct concept for the first time into the Emirates and the Middle East.

We're going to be serving 14 rigs on a direct basis for the next 2.5 years.

And we are mobilizing resources to have our new service center in Abu Dhabi, being able to set a new milestone in our Rig Direct global strategy.

But -- so overall, we see a positive trend, solid in terms of activity in the Middle East.

Going to pricing, remains the -- given the lower level of activity on the rest of the eastern hemisphere, the situation remains challenging.

And there, we are pushing price increases in those pockets where we believe that there is less competition where we can see better margins and higher differentiation.

But overall, pricing situation in the Middle East remains challenging.

Now on the other question, on the question on the impact of exchange rate, let me tell you, I do not see the impact exchange rate from the Mexican pesos.

This is more or less in line with our long-term forecast.

There will be no sudden change, let's say.

Probably since we're in touch with, say, subject about foreign exchange, what is impacting a little more in our costs is the euro appreciation.

This is one of the factor of cost that are -- let's say, has some impact, not big but some impact on our third Q results and our third Q margin because in the end, the euro moved quite substantially and not exactly in line with our medium-term forecast.

But not in the case of the Mexican peso.

This has not -- is not changing anything in our location.

The high level of production in our Hickman facility in United States, in our coiled tubing facility in Houston, and probably in the plant in the United States.

And also, we are integrating with some of the production coming from there.

OK, thanks been very comprehensive.

And our next question comes from the line of Alessandro Pozzi from Mediobanca.

Just wanted to go back to a comment on South Korea.

I guess in the previous call, you said that potentially, their market share could fall by 50%, I believe.

Just wondering, just in this, the input duties are not sufficient to see that?

Or maybe it's still too early.

And then maybe a follow-up from that, I'm just wondering, maybe your thoughts on the Section 232.

I guess with Bay City coming onstream, it shouldn't be a big issue.

But if you can give us any color on that, that would be helpful, thank you

Thank you, Alessandro.

Well, it appears that Korea, you are probably right.

We expect the import from Korea to react in face of 29% duty or 16% duty even if one of the company in the end, ended up with lower duty, something in the range of 2%.

We know there is some inertia.

And hopefully, this will happen but more slowly than we anticipated.

But it looks to me pretty difficult in this environment of prices that is not so dynamic in the States, to maintain operation in -- with this -- with such a high duty.

But as you mentioned, we were more -- we were thinking that this could happen faster.

And in fact, it didn't take place yet, but we still think that Korea needs to slow down to some extent later on.

Now as far as the 232 Resolution, well, we all know that the administration is considering different option to defend the American industry for unfair competition from different reason and from different point of view.

We do not know which will be the final decision.

But as I mentioned before, I think that the energy complex, is very important to the United States.

And as I mentioned before, the relevance of imports in supply is a key component in the pipes, as I was mentioning several of them.

It looks very high.

And to some extent, we expect the administration to analyze all the option and to act in the due time through the 232 or through other means to contain these imports and to give space for the domestic input.

We are moving exactly in this direction when we invested $1.8 billion in the United States, and the plant in Bay City that will start up from September is exactly aimed at a more integrated supply chain for the industry.

Could you say how much of your U.S. sales can be supplied by your plants in the U.S. once Bay City is up and running?

Well, if you consider, if you look at this in the long run, our plants in the States would be able to supply a very high share of our sales.

It could be higher than 80%, in the long run when the plant will be, let's say, running at full capacity.

But there will always be some complementation because of the product sizes and ranges and type of product with the facilities within the NAFTA region.

This is Canada and -- Canadian facility (inaudible), supplying some of this, and some Mexico -- from Mexico to complete part of the range for the Gulf of Mexico.

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

Just one question on my side, please, regarding the pricing environment in the U.S. because I was wondering how your pricing has evolved over the quarter.

Because when we look at the data from the U.S. (inaudible) and the imports coming from Mexico into the U.S., we have a decline in the average pricing of almost $100 per ton in May and June in total.

So I was wondering if you could comment on your pricing in Q2 in the U.S., please.

Well, the reason for pricing is only due to mix.

Remember, in this moment, we are processing green pipes in Bay City.

Green pipes are pipes, unfinished pipes that are entering into the States at a lower price.

They will be finished in Bay City.

They're not finished in Bay City today.

So this is a component that is also impacting the level of price of material coming from Mexico.

The part of the value added is given in Bay City.

This, I think, is the main reason.

The rest could depend from the mix between high premium product and, let's say, API or low-end product.

Okay, I understand.

And could it be possible for you to give us the average price per ton in Q2 compared to Q1 in terms of percentage in the U.S.?

No.

It's increasing, but let's say affected by different component.

The prices are increasing.

Maybe, German you can add something on the evolution of this.

Thank you, Paolo.

Kevin, I don't believe we're in a position to give an average price quarter compared to another one.

But I think it will be fair to say that Tenaris is gradually, in North America, in the States in particular, incorporating price increases, which are not that far off from what we have seen as far as how Pipe Logix has recovered in the last so many months.

And I am currently showing no further questions, and I would now like to turn the call back to Giovanni Sardagna for any closing remarks.

Well, thank you, Brian.

And well, thank you, everybody, for joining us in the call.

And we hope to see you at the end of September in London for our event.

Thank you.

Thanks, everyone.

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

This does conclude the program, and you may all disconnect.

Everyone, have a great day.