Nov 6, 2014
Executives
Giovanni Sardagna – Investor Relations Director Paolo Rocca – Chairman and CEO Guillermo Vogel – Vice President of Finance and Member of our Board of Directors Edgardo Carlos – Chief Financial Officer German Cura – Head of our North American Operations Gabriel Podskubka – Head of our Eastern Hemisphere Operations
Analysts
Igor Levi – Morgan Stanley Bill Sanchez – Howard Weil Michael LaMotte – Guggenheim Paula Kovarsky – Itau BBA Amy Wong – UBS Scauri Andrea – Mediobanca Luigi De Bellis – Equita SIM
Operator
Good day, ladies and gentlemen. And welcome to the Third Quarter 2014 Tenaris SA Earnings Conference Call.
My name is Jackie, and I will be your operator for today. At this time, all participants are in a listen-only mode.
We will be facilitating a question-and-answer towards the end of the presentation. (Operator Instructions) I would now like to turn the conference over to Mr.
Giovanni Sardagna, Investor Relations Director. Please proceed.
Giovanni Sardagna
Thank you, Jackie. And welcome to Tenaris 2014 third quarter results conference call.
Before we start, I would like to remind you as usual 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, Head of our North American Operations and Gabriel Podskubka, Head of our Eastern Hemisphere Operations.
Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our result. As anticipated during our last conference call and at our investor presentation in New York last month, third quarter sales decreased 9% sequentially to $2.4 billion mainly due to the usual seasonal impact of Northern hemisphere plant stoppages in addition to lower sales in Saudi Arabia and a slowdown in shipments to deepwater projects in sub-Saharan Africa as well as lower sales across Europe.
Our EBITDA reached $587 million which was down 16% sequentially and 6% compared to the third quarter of last year as margin were affected by unfavorable product and logistics mix. Our EBITDA margin was down at 24%.
Average selling prices were down 5% compared to the corresponding quarter of last year and down 7% sequentially. During the quarter our sales of high-end seamless product were at 57% over total seamless one.
During the quarter, free cash flow remained strong at $357 million despite a substantial increase in capital expenditure related to the advances in the construction of a new mill in Bay City. Our net cash position at the end of the quarter increased to $1.6 billion.
The board of directors approved the payment of an interim dividend of $0.50 per share or $0.30 per ADR to be paid at the end of this month. This is a 15% increase compared to the interim dividend we paid last year.
Now I will ask Paolo to say a few words before opening the call to questions.
Paolo Rocca
Thank you, Giovanni, and good morning to all of you. As anticipated our result this quarter were impacted by the -- investment inventory adjustment in Saudi Arabia and the slowdown in sales of sub-Saharan deepwater project which in the second quarter had reached a record level.
Our product mix was less favorable than we have seen in previous quarters and this together with the seasonal effect of plant stoppages in the Northern hemisphere resulted in a lower operating margin for the quarter. On the other hand, we generated a further $659 million in operating cash flow which now amounts to $1.8 billion in the year-to-date.
Our cash flow is funding an increasing capital expenditure which this quarter amounted to $302 million and reflects in part the progress of construction at our new Bay City mill. And our net cash position has grown to $1.6 billion at the close of the quarter.
In North America, our sales continue to grow and were up 25% year-on-year. This was the fifth consecutive quarter in which we increased shipment in the region.
In the coming quarters, we expect our North American sales to benefit from a more balanced pricing environment. And the opportunity to increase market share following the recent U.S.
trade ruling on OCTG imports. With the recent fall in oil and gas prices, the near term outlook for our industry has changed.
Also, our customers have not yet defined their capital expenditure budget for 2015, from our conversation with them it is clear that they are working on programs to increase cash flow by reducing inventories and working capital just as we are doing. It is also clear that our customer will be more selective about the project they undertake and more demanding in assessing the cost of this project and their operation.
Notwithstanding the uncertainty in near term outlook for the oil prices we are progressing in the transformation of Tenaris into a premium company, clearly differentiated from its competitor. As we said in our Investor Day in New York last month, we are investing in our global industrial system in product development, in human resources and in safety and the environment to meet increased demand for reliable high quality premium products and cost effective solution for complex offshore and [HPHT] product as well as for integrated supply solution for shale drilling programs.
By 2017, we expect that 70% of our OCTG revenues will come from premium products compared to 55% in 2012 and most of these will come together with associated services from the design of the well string to the just in time delivery to the rigs. As a further step in this direction, we were awarded in the last month with a second major contract to supply pipes with Wedge 623 Dopeless connection for the Hess Stampede project in the Gulf of Mexico.
And in Argentina we are enhancing our logistic and service deployment to support the increase in drilling activity in Vaca Muerta. During 2014, we expect 230 wells to be drilled up from 150 last year in this play.
In the near term, we are confident that the global deployment of Tenaris, our position in North America, the recovery of our pipeline business in South America and our positioning in Mexico and Argentina will provide solid support for our sale and earnings growth.
Giovanni Sardagna
We can open the call to question now.
Operator
(Operator Instructions) And your first question comes from line of Igor Levi with Morgan Stanley. Please proceed.
Igor Levi - Morgan Stanley
Hi good morning or afternoon where you are. You've mentioned that you expect higher prices to start feeding through your P&L over the coming quarters.
However, the imports from Korea remain quite high. I think they're still above 100,000 tonnes per month.
So, I was hoping you could reconcile the recent increase in prices with the continued high level of imports, and if you expect these imports to decrease.
Paolo Rocca
Thank you, Igor for the questions. Well on our side you see the increasing prices in North America is weather collected in biologic increase in the range of 5%.
Now this is a quite a logical after the decision as the ruling of the anti dumping. Korean imports are still flowing in, but at a different price.
Still at this prices even with this price increase, we think that the import from Korea are coming in on unfair trade terms because the increasing prices more than have to justify the increase in the duty that goes from 10% to 15% and some of the change in the cost and foreign exchange changes that we have seen. This is the reason why we think that overtime even in an environment of higher price the Korean producer will gradually come to terms with the need of trading fairly into the American market.
And this will lead to a gradual reduction of this without affecting the prices, but maybe German I don’t know if you can have some additional point on this that could make our consideration more clear and understandable.
German Cura
Thank you Paolo, good morning Ivor. Very briefly just to add is we continue to monitor the behavior of the importers.
Out of the three we’ve seen one that is moving away from OCTG be more into line pipe. And I think it’s important to highlight, we together with the rest of the industry by mid-October and anti-dumping and countervailing case against imports from Korea and Turkey on line pipe.
We are expecting the ITC preliminary injury analysis by the end of November. And also as we have indicated that while we monitor the situation, we are preparing for a potential review petition that could take place in July next year.
Paolo Rocca
Okay, thank you German.
Igor Levi - Morgan Stanley
Great. And just the very quick follow up.
Regarding the review of -- I know you mentioned in your analyst day that you may be able to have these duties increased due to the strengthening dollar, so would you be able to just walk us through what the timeline for that is?
Paolo Rocca
Yes, German.
German Cura
Formerly Igor we would as an industry be in a position to file the review petition as of July. It doesn’t need to happen in July but we could only do it as from July.
At that point the period of analysis would be established and typically the review petition is a process that takes on average about nine months. And remember Igor that, any determination that for instance, [intervision] decide there are additional dumping duty should be established will have – will be valid actively to the point or the starting point of this, so there is a big risk.
More time pass, higher the risk that’s the reason why we think that gradually the import on unfair terms should be more restrained in the united…
Igor Levi - Morgan Stanley
Okay, so retroactively to July 2014?
Paolo Rocca
July, no, no actually the date exactly when the order was first established. This is July 14, sorry yes.
Igor Levi - Morgan Stanley
Perfect. Thank you very much.
I’ll turn it back.
Paolo Rocca
Thank you.
Operator
And your next question comes from the line of Bill Sanchez with Howard Weil. Please proceed.
Bill Sanchez - Howard Weil
Thank you. My first question with regards to seamless volumes in 3Q, they were actually a bit more resilient than I would have thought given as you guys mentioned in the prepared remarks the lower sales to Saudi and SSA and then the seasonal mill downtime, perhaps you’ll can discuss a little bit of the trends which you are seeing there and how do we think about 4Q volumes?
I think on the last call we talked about SSA really just being kind of a one quarter dip here in terms of sales to that region, maybe just talk about expectations for 4Q. Do we see us getting back to kind of the 700,000 tonnes we saw in 2Q?
And I guess could you just remind us to on the Saudi restocking, when do we think that perhaps takes place during 2015?
Paolo Rocca
Well want to first comment on the seamless volume. As we mentioned in the opening remark, we are increasing our shipment to North America and I think this is an area that is supporting our volume, even if we do not see steel price increases reflected fully into the margin and the price is for this.
I think as far as the second question is concerned, the situation in the 4Q our volumes would increase in the [4Q] there will be a recovery also in sub-Saharan. Sub-Saharan was very strong in the last quarter and particularly low in the quarter.
There will be a recovery in the next. Coming to the third question when I see you how where is the de-stocking in Saudi, I would say that Saudi started a de-stocking in this quarter with a substantial reduction in the shipment to the region.
They will continue to purchase volumes below the level of their consumption and we think for the entire 2015, I mean for well into next year. But, let’s say the difference between consumption and the shipment; the upper end consumption the real consumption, the upper end consumption will decrease in the course of 2015.
So starting in the first quarter of 2015, we may expect higher volume compared to what we have today.
Bill Sanchez - Howard Weil
.
Edgardo Carlos
So in terms of SG&A, we do expect some reduction in the coming quarter. Remember that 65% of the total cost of SG&A are very much fixed.
So with lower sale the percentage wise is increased in this quarter. So we are aiming to reach probably to 18.5% next year back through 2013.
In terms of the tax rate, as you correctly mentioned, I mean the tax rate has been coming down and we are expecting to finish the year with a tax rate around the 28% that we anticipated two quarters ago.
Bill Sanchez - Howard Weil
Great. I’ll turn it back, thank you for the time.
Operator
And your next question comes from the line of Michael LaMotte with Guggenheim. Please proceed.
Michael LaMotte - Guggenheim
Thanks and good morning. My first question is for German.
There's been a lot of talk on the service company conference calls this quarter about superfracs and use of more sand and higher-density stage count. And I was just wondering if that -- a trend in that direction was impacting the casing market at all.
I've been hearing talk that some of the operators are use -- are actually casing lateral sections in order to improve wellbore stability.
German Cura
Good morning, Mike. Well, to an extent we’ve seen some of that as well.
And you see that reflected in the grades [B-10] that we increasingly shipping. To an extent we’ve seen also string designs that are coming with higher wall thickness than initially.
And also the more use of semi-premiums and to the margin also some premium connections. Rationally, more they push, the more they extend, the laterals, torque resistance and compressor resistance becomes more critical, and this is introduced in a margins, some string design change.
Michael LaMotte - Guggenheim
As -- if we see a continuation of this trend over the course of the next year or so, do you think the impact would be measurable in your U.S. volumes?
Paolo Rocca
Well, this is correct, and particularly true in the use of semi-premium connections up from standard API. And so far it’s been all constraint around low pressure oil.
If gas were to pickup I think it would come together with a need to use premium connections overall.
Michael LaMotte – Guggenheim
Okay. And then, following up on the connections, looking at the North America results, I'm assuming that most of the welded pipe volumes are North America at this point, with Brazil still down.
North America sales were up 9% versus the welded volume growth 3.5% quarter-on-quarter. I'm wondering if that was the -- an influence of premium connections, or whether that was just a function of the growth in seamless sales -- I'm sorry, some mix as it pertains to Mexico.
Paolo Rocca
Well, it is say three-fold that naturally Canada will coming out of the seasonal consequences we’ve seen a rebounder affect positively both seamless and welded. In the states, we’ve seen some increased seamless quantities and to an extent welded and welded capital where semi-premium connections such as for the reasons I just explained.
Mexico overall remained fairly stable quarter-to-quarter.
Michael LaMotte – Guggenheim
Okay. That’s helpful.
Thank you. Coupe of questions for [Edgardo] if I may.
Could you remind me why the cash flow from the working capital changes is generally so seasonally strong in the third quarter?
Edgardo Carlos
Yes. Basically we’re curious, I mean, as you say, the production that will stay, while we maintain the DSO perhaps [further] flat, brings down reduction in working capital.
Together with some additional measures that we have taken in terms of reduction of our inventory. Coming forward in the fourth quarter, we had expected with the ramp up of the sales that we partially compensate this positive effect of this quarter.
Michael LaMotte – Guggenheim
Okay. And then, on the balance sheet, carrying over $1 billion in short-term debt and effectively no long-term debt, have you given any consideration to terming out some of that debt, or is the cash flow strong enough that we could actually see those debt levels come down over the next year or two?
Edgardo Carlos
We have been reducing our total debt and basically try to compensate the different spread compared to what we have in terms of the ease that we have on our portfolio and we will continue to do so. I mean, as long as we maintaining our strong free cash flow, but remember to keep in mind that we are now getting in the pace in which we have been investing very heavily starting this quarter very much in our facility in Bay City.
So, we are expecting probably for the next two or three quarters our net cash position will remain practically unchanged.
Michael LaMotte – Guggenheim
Okay. Very good.
Thank you.
Operator
And you next question comes from the line of Paula Kovarsky with Itau BBA. Please proceed.
Paula Kovarsky - Itau BBA
Hi, good afternoon. I was just wondering if you could possibly give us a little bit more color on your expectations regarding the downside potential caused by weaker oil prices.
In the release you mention more on the marginal developments; but, to which extent do you think lower oil could for instance affect the shale developments in the U.S. and in Canada, and whether -- do you see this level of oil prices as being an issue for Middle East and other and also to deepwater developments around the world?
Paolo Rocca
Thank you, Paula. I would say that what we perceive from our client is that at this level of price in the range from WTE between 80, 85 what we’re seeing is a leveling of the level of the rigs operating in the fields.
Some of the operator may delay or suspend program to increase rigs. This is what we can see at this price.
I imagine that the price of oil that the WTE goes in the 70, 70, 75, and at that point we may see actual reduction in the rigs that operate in the more marginal operation in this state. This is not what we see at the moment.
But I imagine that after the meeting of OPEC in November, in the process of defining the final budget, the operator will factor in the different aspect of the operation, look at their cash flow and we will have a more clear picture of the program. If we look around the world, what we perceive is that all the projects underway continue to proceed especially the complex products that are using a reference that is the oil price in the long run.
And we see some reduction in the start up of product -- for the time being do not have a very high cash flow spending at the moment. If they could be delayed, we see some delay – some of these related to L&G project in areas that has relatively high cost.
For the rest, there could be some decision or some delay also in product in critical areas, Iraq could be one of the case, areas in which you compound different risk and now you’re reading also an additional risk on the price point. But we are not seeing yet a substantial change in the decision apart from what I mentioned now.
Paula Kovarsky - Itau BBA
Okay. With -- in particular for the sales in the U.S.
what’s the view? Where do you think production may eventually start to stop or investments could down?
Paolo Rocca
Well, two different things. As I was saying, the comment about the leveling of the program I mean, postponing of addition rigs I was referring to the United States, Canada.
As I said before, if the price goes down to $70 this will turn into some reduction of rigs in some area. This is also referred to U.S.
and Canada. Production is the different story.
There are wells that need to be connected. There is an inertia in production that will go – the level of production will go on for a long period of time.
I mean, even if you have this process or some reduction in rigs, you can expect production in United States to continue at the present level for a very large part of 2015.
Paula Kovarsky - Itau BBA
Okay. Thank you.
Operator
And you next question comes from the line Amy Wong with UBS. Please proceed.
Amy Wong - UBS
Hi. Question from me is related to Brazil.
Can you remind us when you will be making shipments on your line pipe to the projects in Brazil? And secondly, outside of the line pipe shipments to Brazil how are you seeing the OCTG markets there, please?
Paolo Rocca
Well, in this one Brazil as you know, our shipments in the quarter has been extremely low, this is one of the short-term factor really affecting the quarter. Now we expected to – we have the order in hand and we will start to deliver the Rota3, few tons in the next quarter and then in the first quarter of 2015 and the second quarter of 2015 these will get up very strongly.
This is not only Brazil. Our line pipe project in South America, we have other line pipe project in Argentina that has the same dynamics.
We are starting production in the fourth quarter. We are actually purchasing the steel now and we will be shipping in the first quarter of 2015 much of the larger quantity.
This will be one of the factors that will turn – we’ll contribute to strong recovery in our numbers. As far as the OCTG demand in Brazil is concerned, recovery will start in the first quarter of 2015, but will be very, very limited in our view.
Still the new government, Dilma will have to take a number of decisions on the macro picture and how to set up the economy in the second turn, and I think we will understand something better about the dynamics investment in Petrobras in the coming quarters. For the time being even if Brazil and Argentina also for instance are not directly affected -- immediately affected by the price of oil still this is something that should be kept into consideration in the signing and designing of the policy and the investment in Petrobras.
So, some recovery in the first quarter of 2015, but we will not get back to the level of the path until well into second half or more of 2015.
Amy Wong - UBS
Great. Thank you very much.
Operator
(Operator Instructions) And your next question comes from the line of Scauri Andrea with Mediobanca. Please proceed.
Scauri Andrea - Mediobanca
Yes. Hi.
Good morning, all. I have a question on raw materials.
Do you expect the current level of raw materials to benefit your profitability over the next couple of quarters? Thank you.
Paolo Rocca
Yes. I think that gradually, the change in the prices of iron ore, in some case of energy obstruct, some positive impact from change in the country in which we operate.
These will get into our cost of sale, into our inventory. But this is usually getting gradually because of the accounting norm and how they get into our inventory.
But for sure, yes, we will have some benefit also. We think that the -- when you look at 2015, I don’t know of prices – the prices of raw material will remain in our view at present level.
There will be no substantial change. And we should also be able to get some cost reduction in the cost of our steel for our welded system in some moment.
But we will see it in our results in 2015.
Scauri Andrea - Mediobanca
Okay. Many thanks.
Operator
And you next question comes from the line of Luigi De Bellis with Equita SIM. Please proceed.
Luigi De Bellis – Equita SIM
Yes. Good afternoon to everybody.
Two quick questions for me, the first one on Argentina. Could you quantify the impact of the new pipeline project's business in Argentina that you mentioned before?
And the second question -- on the North America, how much is in our view the percentage of current U.S. oil production on the marginal North America onshore plays, in your view?
Thank you
Paolo Rocca
Well, on the first question in Argentina, the first stage of the project of [indiscernible] represent around 95,000 tons that we’re shipping -- we’ll be shipping the first part of 35,000 in the beginning of 2015. And then we will see coming in the rest of volume.
There are other projects underway, but some of these will depend from the availability of finance and the situation of Argentina. The first one, the one that I mentioned, we have been able to purchase the steel within the advance payment, so it’s something that is in our hand.
Second question, German maybe you can.
German Cura
Well, thank you, Paolo. Luigi, I think it’s difficult to perhaps be awfully specific on marginal areas.
I think that it would on operator by operator. But to provide you a sense and what we discuss with them.
To provide you a sense as to what we’re looking at. Two think probably true.
There are some areas of the three-inch of the backend but we know oil production could be marginal relative to the existing breakeven points. To an extent also some particular areas of Cline maybe also fall within that category and to a lesser extent a component of Cana-Woodford.
With that said, our users had also indicated when and if any activity reduction were to take place, overall oil production short term may not be affected as a result of production today being the result of the investment that have taken place in the last year, couple of years at this point. So whatever ultimately activity drilling reduction that could take place would affect potentially production not during 2015 probably not even the early part of ’16 as well.
Hopefully that helps to provide you some information.
Luigi De Bellis – Equita SIM
Thank you very much.
Operator
Ladies and gentlemen, that concludes our Q&A session. I will now like to turn the conference back to Mr.
Giovanni Sardagna for closing remarks.
Giovanni Sardagna
Well if there are no additional questions, we would like to thank you all for participating in the call and we hope to see you soon. Thanks.
Operator
Ladies and gentlemen that concludes today’s conference. Thank you for your participation.
You may now disconnect and have a great day.