Tenaris S.A.
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Tenaris Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will have a question-and-answer session later. [Operator Instructions] And ladies and gentlemen, as a reminder this conference is being recorded and is scheduled for 60 minutes. Now I would like to welcome Giovanni Sardagna, Director of Investor Relations. Please go ahead, sir.

[Giovanni Sardagna:]

Thank you and welcome to Tenaris 2015 fourth quarter and annual results conference call. Before we start, I would like to remind you that, we will be discussing forward-looking information in the call and that our actual results may vary from those expressed or implied during this call. With me on the call today are Paolo Rocca, our Chairman and CEO; Guillermo Vogel, Vice President of Finance and Member of our Board of Directors; Edgardo Carlos, our Chief Financial Officer; German Cura, Managing Director of our North American operations; and Gabriel Podskubka, our Managing Director of our Eastern Hemisphere Operations. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our quarterly results. During the fourth quarter of 2015 sales reached 1.4 billion down 47% compared to those of the corresponding quarter of the previous year and 9% sequentially as they continue to be negatively affected by the ongoing decline in drilling activity, inventory adjustments in the U.S. and decline in selling prices. Our quarterly EBITDA of 226 million were significantly lower than the corresponding quarter of 2014 and 7% lower sequentially. However, our EBITDA margin of almost 16% increased slightly sequentially as cost reductions continue. During the quarter, we recorded a 34 million of severance charges to further adjust the workforce to the current adverse market conditions. Our EBITDA margin without these severance charges would have been at 18%. During the quarter we recorded a net loss due to non-cash deferred income tax charges resulting from currency depreciation in Argentina, and losses on our share of investment in non-consolidated companies including an additional impaired charge of 29 million related to our bad investment in Usiminas in Brazil. Average selling price in our tube operating segments were down 13% compared to the corresponding quarter of last year and 5% sequentially. During the quarter our net cash position declined by 268 million to 1.8 billion at the end of the quarter, following the payment of an interim dividend of 177 million that we paid in November last year. The Board of Directors had decided to propose for the approval of the Annual General Shareholders' Meeting to be held in May, the payment of an annual dividend of $0.45 per share or $0.90 per ADS, which includes the interim dividend that we paid at the end of November. 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. I will say a few words about our performance in 2015 before touching on our priorities for the year ahead. Starting with safety, our main safety indicators improved through the year, as implemented the zero tolerance program alongside our safe power and safe starts programs. Our average injury preference rate has declined 15% in 2015 compared to 2014 and has declined 46 over the past four years. We will continue to focus on our safety performance which is an essential element of our competitive differentiation in the eyes of our customer and the communities in which we operate. Our operating and financial results for the year were of course impacted by the profound changes we are seeing in our market, as a result of the collapse in the price of oil and the decline in oil and gas drilling activity work line. In the markets where we saw demand for OCTG product fall from 17.7 million tonnes 2014, to close to 11 million tonnes in 2015 affected by inventory adjustment as well as sharply lower drilling activity particularly in the U.S. and in Canada. Our sales for the year declined 31% to 7.1 billion, our EBITDA net of restructuring cost declined to 1.4 billion or 20% of sales but we recorded a net loss for the shareholder of 80 million after impairment and other charges. These results reflect our ongoing effort to project Tenaris to the market environment we are facing. We are focused strongly on reducing cost, using the flexibility of our industrial structure, maintaining high levels of efficiency in our mill despite lower volumes, improving the efficiency of our purchasing processes and reducing our fixed cost structure. In the final quarter of the year, our fixed costs were 27% lower than in the final quarter of 2014. We had also focused on cash flow management, generating 2.2 billion from operations during this year, including a 1.4 billion reduction in working capital and we have maintained our investments in our strategic projects including the Bay City mill and service deployment for our cost. Our financial position is very solid and we have a net cash position of 1.8 billion at yearend. In this context we are proposing to maintain our dividend for the 2015 fiscal year at the same level as for 2014. A key part of our quarter during the year has been directed towards strengthening our market position in different geographical and product segments. Each of our capacity business units are managing the downturn according to the distinct reality of every particular market. They are all positioning to take advantage of the eventual recovery, leveraging on our competitive advantage on financial strength, product technology, service on the ground and customer relationship. In a low price environment, customers are looking for ways to transform the cost in the supply chain on a sustainable basis and we stand out as a supplier that can guarantee continuity, commitment, quality and innovation in every operational situation. We are in the final stage of negotiation of a global agreement with have Chevron which support the long term supply of OCTG and associated services to a number of operations in different region, improving our position in the key customer for Tenaris. As part of the process this month we concluded the agreement for Chevron operation in Thailand and in Permian. In Thailand, we have a team in place who are preparing two local service center to supply pipes and accessory, ready for running offshore on adjusting time basis, using an innovative pipe by pipe tracking solution to optimize material and quality management. In the Permian, Chevron’s operation is being served by our rig direct program which will include a new service center in Midland and will soon be supplied from our base utility. This way of operating the tubular supply chain where we synchronize deliveries from our mill and manage the supply of pipes and accessory direct to the rig contributes to a more sustainable cost efficient operation, reducing working capital and inventory of solutions and simplifying operating procedure. Our rig direct program, which was started last year is supplying 50 rigs in the United States and much more worldwide. The program is gaining many endurance and will be strengthened when our basic D&E start operation later in the year. Through the year we have consolidated our position in the offshore line pipe segment supplying major product in the Gulf of Mexico and Sub-Saharan in Africa. And our coaching facility in Nigeria is making important contribution to our results. More recently we were awarded a contract for exports pipeline in Norway based on the quality and ability of our offer. In the digital environment for the energy sector other segment of our business are also receiving more visibility. In the automotive sector for example we have build the leading position in tubular components for airbags where we have a 40% global market share and in 2015 we delivered a record 70 million pieces. This year we have been awarded a long term contract for the supply of tubes for the ring gears in the new trans-speed gearbox transmission developing for the GS. These are sector which requires constant efforts and focus on the long-term to develop cloud service quality and reliability for demanding cost. As we are entering 2016, oil and gas prices have declined further. And oil and gas companies are making further substantial cut backs on their investment programs. Demand for our strategy is also declining particularly in the United States where drilling activity is falling rapidly and inventory levels remain high in relation to consumption. In this difficult context we are organizing the company and defining our strategy to be prepared for an extended period for of lower oil prices. At the same time we are concentrating on preparing for a negative recovery in each of our business unit thus we are maintaining our strategic investment in the basic need and proud of development in service development and human resource. At the same time we are managing to our cost and cash flow very carefully to maintain our strong financial position which is a key competitive advantage in this current environment. Our customers need to develop transformational change to their supply structure with partner having the global reach and the financial strength to support them in their operation worldwide. We think we are well positioned to help them deliver in the difficult area, ours is a difficult industry. And however long this downturn lasts we are confident that we will emerge from it with stronger market position. We can take now any question you may have.

[Operator:]

Thank you. [Operator Instructions] And our first question is from the line of Ole Slorer from Morgan Stanley. Please go ahead.

[Ole Slorer:]

I wonder whether you could help us a little bit understand the resilience of your business into the fourth quarter in terms of the realized prices that you have and how we should think about that in the context of the renewals, particularly on international contracts, and some of the weakness that we have seen in pipe logics lately, there seems to be a tremendous resilience in your business. And how should we think about that, going forward, for this quarter and next?

[Paolo Rocca:]

Well you are saying we are resilient but also our overall sales are lower and going down and they resulted also in absolute terms are slowly going down reflecting the strong changes and down trend in the market and this is also effecting price and if you consider then in the last three weeks we lost in the state something like 100 rigs and this is having an impact and we have seen in the pipe logic continues deterioration on customers. We are also suffering from this in different market but as I said in my opening remarks you should look at Tenaris as a combination on many different business units I mentioned what we manage which are 50 segment and geographical business units and the story is different in each of them in common in many contract we are renewing there is reason there are formulas that includes pipe logic and this is a something that is held by affecting many of them but in other situation we still can benefit from a very strong differentiation so we are able to defend better our price but we are planning for a gradual deterioration of price and we need to compensate working on our cost we know this and this has been the story of 2015 and will be story of 2016. The trend that we are seeing in the last two months will continue or even will stabilize and we will have to face a substantially low decline of price or anyway situation in which we may see these weakness in price and then we need to fair amount of work on our cost so we can able to defend our margin. Having put all of this together we are saying that we should we able to defend our margin even in this environment and facing a slight reduction in our overall sales.

[Ole Slorer:]

One follow-up question on the Rig Direct, what is it that has made this initiative so successful right now? Because I remember back a few years ago you bought Maverick and you rolled out a pretty pronounced effort to sell directly to the end users and then you rolled back a bit to distributors. Now, you seem to have regained momentum here. What is it that's changed?

[Paolo Rocca:]

Well, before pressing to German for more comment on this. You also have -- we are I think more credible today than six or seven years ago, we are doing this all around the world, we learn a lot, we improve our performance we know how to track what we do to evaluate quality of what we do and to prove to our client that we can be fully compliant with their demand. So this is one thing also the Bay City plant is very important as the new deployment in the United States are very important to project to constitute to project to the client that this way of operating is really working solid for the future. Now, I’ll say that also we are a help in terms of using their working capital substantially. This kind of trend is benefiting them is creating stress also on us but for instance in this moment in which the rates are going down so fast. Overly we are feeling directly the impact of production of rigs because there is no shock absorbent by the distributor. So -- but for our client it is also a big advantage if they are facing sudden drops they can be react and not remain stuck with inventories. So this is gaining ground in a time of high volatility and it is also restructuring the way the supply chain works because the industry today is looking for way of being profitable in this -- with this tri-support. And they need to restructure everything from the way they design the project to the way they manage their supply and the supply chain. I think we arrived at the right time for our offer for addressing this need to a substantial transformation. But the Americans have some concrete example like the Permian how we can support how the clients react to this.

[German Cura:]

Thank you Paolo good morning, Ole. And very briefly I have seen the traction all this based on the combination of full range of domestic products that’s again Bay City, they need to transform their way industry works and heavy dollar oil is creating the absolute incentives for our users to explore new ways of things. And then also I would probably argue credibility, our users are convinced that Tenaris has the financial capability to credibly deployed a new way of doing things for many years. Examples, particularly center around the Permian which have become the pipe and services suppliers for instance of Pioneer initially we were the pipe supplier and over the course of the last few years we explore opportunities and were not -- and that’s has translated on the extension of our excessive supply agreement that which this time around includes all of the associated by management services. It is gaining traction, incentives had in place, I think we are going to continue.

[Ole Slorer:]

Well thanks for that, there's one silver lining of $30 oil, then.

[German Cura:]

Sure.

[Ole Slorer:]

Thanks. I’ll hand it back.

[German Cura:]

Hopefully, but I think Ole, it's also important to highlight that this transformation is here to stay the incentives the appropriate one, once and if we are capable of deploying, I think there is no going back.

[Operator:]

And our next question is from the line of Bill Sanchez from Howard Weil. Your line is now open.

[Bill Sanchez:]

Paolo I just wanted to circle back and just think a little more about 2016 expected financial performance versus your comments you have made broadly on the industry and Tenaris in general? On the fourth quarter call of 2014, you had outlined an expectation that OCTG demand will be down 30% and we kind of talked in about it being a proxy for maybe Tenaris’ tube revenue performance for 2015. You actually outperformed by my math, the decline in overall OCTG demand for the industry this year, you have talked about a 20% decline in 2016, help us think about is that a good proxy for how you see to Tenaris top line performing this year or better worse given what -- it sounds like to me your average selling price is going to be in a bit more pressure this year than perhaps last?

[Paolo Rocca:]

I mean you are right, in the last conference call, I think it was a beginning since November last year we were leaving the time in an environment of WTI around $45 if I remember well. We were saying at that time well the first part of 2016 will be tough but we expect some recovery in the second part of 2016. Now today we are in an environment of WTI much lower than that between $30 to $32 per barrel and clearly in the last two months three months I will say that at two months especially in the last things have turned in a relevant way so what we see today is what we have explained -- is what we have included in our market outlook. We see today a reduction in the market in the range of 20% due to this. This is a global concept it is worldwide it's including the effect on the United States and everywhere but clearly the United States that are most dynamic spot reacting area as we saw from the 100 rigs reduced in three weeks. We expect that our sale will be more or less in line with this decline during 2016 and there will be probably some recovery in market share but there will be as you are saying some impact on prices so when you look at our sales you probably will be looking at something in line with 20%-25% this is what we can see today. But this is a market that is moving faster and we are today in direct contact with the market through the rig service worldwide so in the moment in which the rig go down we immediately see our sales reduce, but in the moment which the rig goes up we would also immediately see a benefit in our sales because basically we are supplying just in time. Not everywhere but to -- in growing expense. In our estimation there is also strong backlog in Middle East we are last year we were into this lower sales in Middle East in the second part there probably we will have a stronger -- we have today a stronger backlog so we will also see some recovery in our sales in that region during 2016.

[Bill Sanchez:]

Thanks for that. Edgardo a question for you as we think about free cash flow for 2016, given the commitment to the dividend or its proposal for the dividend it sounds like just from the comments around Bay City that you guys are going to continue to publish spend at the same clip that maybe you were three months ago and I guess just curious if we could talk a little bit about what the CapEx assumption is for 2016 for Tenaris. I think the number have been shaking us more around $1 billion dollars I thought perhaps that number might be coming down as you guys maybe would think about slow point Bay City a little bit here just given the softer market do you need to have Bay City really up and running partially by the start of 2017 because could we thinking about lower CapEx for 2016 number one number two Edgardo could you help us on maybe thinking about additional working capital draw downs here during 2016 as we think about our free cash flow model? Thank you.

[Edgardo Carlos:]

Yes regarding the CapEx we are expecting that for this year there will be a reduction compared to 2015 the bulk of our CapEx will be very much concentrated on Bay City and that will continue into 2017 in which we are expecting to march through that it is much significant reduction going forward and so we are probably in the range of $900 million to maybe for 2016. Very much of this will be partially covered with our operating cash flow coming back to your question for the working capital, after a significant reduction of working capital that we have been achieving this year we are expecting probably not to have many help in this aspect while we maintain this level and we are trying to accommodate our customer with inventory and some payment terms in terms of the receivable so we are not expecting significant improvement from there but not increasing the working capital for the whole year.

[Operator:]

And our next question is from Michael LaMotte from Guggenheim. Please go ahead.

[Michael LaMotte:]

Edgardo, if I could follow up on the $900 million in CapEx for this year, how much of that is expected to be maintenance? Is it --? Are you running about $75 million-$100 million per quarter in maintenance?

[Edgardo Carlos:]

I would say that firmly although during the year roughly 250.

[Michael LaMotte:]

Okay, less than 250?

[Edgardo Carlos:]

Yes.

[Michael LaMotte:]

And then, for D&A in the fourth quarter, it did jump up from Q3. Is there anything non-recurring in that? Or, is the Q4 number the right number as a run rate for this year?

[Edgardo Carlos:]

That would be the number for this year and it's basically a consequence of the acceleration of the customer relationship in our Canadian valid operation as we comment in our press release that we are select in this quarter and it will be the same for 2016.

[Michael LaMotte:]

And then, in terms of your realized steel costs, what's flowing through the P&L, what would you characterize as roughly the variance or the spread between realized and spot prices?

[Edgardo Carlos:]

It depends very much of the raw material, I would say there is crops we had to see probably $30 above the current level internals of steel however of course we are $50 above steel.

[Michael LaMotte:]

And then how much forward buying are you doing in the rest of your markets, is that -- is the market loose enough that you are not having to do 90 day or even full year types of supply agreements with the suppliers?

[Edgardo Carlos:]

No we are basically buying on a spot basis and we are always trying having mostly one quarter of our inventory in.

[Operator:]

And our next question is from the line of Nick Green from Bernstein. Your line is open.

[Nick Green:]

Could I return to the question of dividends and free cash flow, please? By some very basic maths, if you're $1.2 billion EBITDA this year, or 2015. 20% lower volume plus pricing pressure, even if we said generously EBITDA was $1 billion next year, once you've taken off the CapEx, there's a good chance you'll be free cash flow something like $500 million negative next year, or in 2016. given as a Company you've only been free cash flow negative once in the past, in 2004, and even in 2009 which was a tough year you were sort of free cash flow zero-ish -- or, in 2010, I should say. Could you talk about how sustainable you feel the dividend is at these levels for both 2016 and for 2017? and whether you think it would be prudent in view of the other commitments to be paring that back a bit? Thank you.

[Edgardo Carlos:]

Well, up to now what we are saying is that we will confirm the dividend related to 2015. Looking forward we have to take into consideration this on different factor, on the one side the policy that we followed in past and we like -- want to maintain also in the future is to have continuity and to limit the swing in the dividend payment of the company so to contain when the market is going up but also when the market is going down. We have done this in the past in 2009 and you have a reference of this wing and we can take in this situation even when we may have for a short period of time, free cash flow that is going down like in this case pretty much. We would look at this which is basically what we have done in the past and to maintain continuity with what we have done and we would look also at the level of cash in hand, the company is entering into 2016 with 1.8 billion cash or securities I mean but it is basically cash in our hand. We will look at the perspective for 2017 and taking a long term view in defining this, we are looking at our imagine ratio, our dividend payout ratio perspective '17 the cash in hand. And considering all this we would propose next year and what we want to do for the dividend relating to 2016. I think we need to take long term view, it's clear that 2016 will be there will be very harsh condition but is also -- from our point of view is also we plan on a expanded period of time of relatively low oil and investment by the oil company, but we will have to see how this evolve during 2016 in defining the level of dividend we can have in the coming year.

[Nick Green:]

Okay, I understand, but during 2010, you took the dividend down by about 20% so kept it but you reduced it maybe rather than answering that would you that this time I appreciate you can’t answer that. Can you talk a little bit why it was decided to cut the dividend last time? And what circumstances prompted that measure of caution in 2010 and therefore why that isn’t going to be the case this time around or if it is the case? Thank you.

[Edgardo Carlos:]

Well as I say before we are taking into the duration the factor that we mentioned and also the opportunity for major investment. This is also something important I mean for instance by the end of next year we will be very almost through our big investment in Bay City and at the time we will we need to evaluate if there are important commitment that could be enhancing our strategy of deployment this is possible I don’t imagine organic grow in -- to continue this past Bay City but there could be opportunities of repositioning and use of cash this could be a consideration but also enter into our evolution. I don’t think we can be much more go much deeper into what we can do by -- anyway our financial position today is much better than the financial position that we had in 2010 and the level of cash in hand is much higher.

[Nick Green:]

Okay, just a final one then on different topic clearly Bay City is a major investment it will bring on substantial additional capacity for Tenaris in the context of a tough market which will take a number of years to come back again can you talk about which existing capacity you would consider closing or you are already considering closing to compensate for the new capacity that Bay City is bringing on?

[Edgardo Carlos:]

Well frankly up to now we have done temporary closure in different facility for our system and basically to adjust our level of capacity to the market that we see today now basically we will come on stream by the middle of 2017 as you know we slowed down and it is just for this reason because we expect that the recovery in the market will slowdown overtime and imagine that we were two years ago, with one year ago one year and a half I would say with rigs of 1,900 now we are heading for 500 or even less level of rigs. U.S. is very dynamic any recovery today we will occur in an environment of low inventories more restriction to import so frankly I still think that by the time Bay City will get some strength will not be needed we would not we need to close our additional capacity on the contrary we may be in the vision which we may deactivate some of the capacity that we had to close temporary up till now. We will consider this by the end of 2016 and by that time we will define our production profile for the total ’17 with much more clear element for the season.

[Operator:]

Thank you. And the next question is from the line of Raphaël Veverka from Exane. Please go ahead.

[Raphael Veverka:]

And three question on my side. First on your guidance I know you could just give even more pre-color when say you expect your margins to say comparable to the Q4 levels more or less are you taking reported EBITDA margin or adjusted EBITDA margin. My second one is on pricing did you think we will -- how far do you think we are from the bottom on spot and then how long do you think it would take before it will be reflected in your P&L. And lastly on M&A whether you see any opportunities happening this year as the cycle continues to get deferred and if you think there is scope more consideration in the OCTG industry? Thank you.

[Edgardo Carlos:]

On the first question we are talking about the reported EBITDA we think that today we think we should be online with the first quarter in terms of the quarter we project. And on the second spot prices if I understand well how fast are going into our bottom line well this is very valuable in some cases Tenaris is getting into it because of the formula almost immediately any change in pipe logic may affect our prices and in some of the cases we would have fixed prices for 2016 so we get from one side to the other there are changes, remember also that in our formulas in some cases that are including the hot rolled coils or the strap and hot roll coils is one of the things that -- one of the deal it's been the product that has more rapt recently so there are combination of factor. I wouldn’t say that the spot are going into our profit and loss entirely in the initial period of time. As far as the last point everywhere we did in the past we are continually considering through investment or position that may strengthen our position in the long run in this moment the company is concentrated in imagining and the planning for a recovery in the market and how to be better positioned for the moment in which the equilibrium in the market will be reached, price would change sign and investments also will start to recover. If we perceive that there are acquisitions or investment that may strengthen our position for that moment, we may decide on that. For the same thing we have nothing concrete.

[Operator:]

And our next question is from the line of Frank McGann from Bank of America/Merrill Lynch. Please go ahead.

[Frank McGann:]

I just wanted to follow up a little bit on the -- what is the current utilization on average that you have in your...

[Edgardo Carlos:]

Sorry Frank, the line is breaking up.

[Paolo Rocca:]

Your line is breaking up, repeat the question please.

[Frank McGann:]

Okay I apologize. Can you hear me now?

[Paolo Rocca:]

Yes, we can now hear.

[Frank McGann:]

Okay, in just in terms of capacity utilization, what is the level of capacity utilization, currently and perhaps the range maybe that you see in different plants, how you quickly you think inventories could come into line that you could get better capacity utilization? And then the second question is just in terms of demand levels in Mexico and in Argentina, two market that have -- that slightly different dynamic perhaps than some of the other global markets?

[Paolo Rocca:]

Yes, thank you Frank. Well in term of capacity, the capacity utilization as I say before we are doing temporary closure in some of the plants, I wouldn’t give the number for capacity utilization of the overall system in this condition. Some of the facilities working pretty close to capacity, some other is at the reduced rate. What is our base structure set is to achieve efficiency facilities that are working at the reduced capacity utilization, so we can really variablize all our cost and we have been pretty successful in doing this during 2015 and this is reflected in our margin. As far as the inventory reduction, I would say that clearly the trend that is underway in the United States with the reduction of rigs and so far in such a short period of time, is not really contributing to a reduction in days on inventory on the ground. Because in the end when you reduce the rigs by 20% in four weeks clearly the level of inventory and some of the base inventory is going up, even if in absolute terms they may stay relatively stable. During 2015, there will be defiantly a reduction in the level of stocks particularly in the United States. But would be difficult to tell you where we will be it will depend from the level of rigs that we have in all along the year. The third point is Mexico, the -- here Guillermo Vogel is here on the call may give a review of what we can expect from Mexico in this difficult times during 2016 and be looking beyond that.

[Guillermo Vogel:]

Well in terms of Mexico let me make two comments, one in relation to Pemex, as I mentioned in the last conference call we were expecting Pemex activity to reduce on the second -- on the fourth quarter. Mainly derived from a budget cut that was defined of about MXN60 billion last year. Then the new budget for Pemex was approved by Congress and our expectation at that time was that the level of activity we were seeing coming from Pemex in the fourth quarter was going to be maintained 19 level for 2016, which was going to be the main driver of the market for us in 2016. Unfortunately due to the reduction in the price that we have experienced at the beginning of the year, last week there was another announcement by the treasury that they were going to cut the budget of Pemex by another MXN100 billion from what was approved. The information we have received from Pemex is that they are going to try to operate as less as possible the E&P program but we still don’t know exactly how it's going to be affected and due to the magnitude of this cut, we see difficult that is not going to be affected. So probably we are going to see some down activity in Pemex in next year but at this point in time we still don’t know exactly what is going to be happening or how strong this is going to be. As you know there was a change in the CEO of Pemex, we got a new CEO so she is working hard she is mainly a person with very high management skills I'm sure she is going to be working hard to cut costs and she is going to aim the reduction to reducing the people of Pemex and trying to improve the efficiency but we still have to wait a couple of weeks to have a full understanding of she is still programming is going to be. In the second part I would say that working through the energy report there it has been advancing in good rhythm in Mexico we have had three rounds of bidding already the first few rounds the first one was not very successful but I would say that the second one was successful and the third one was very successful they are putting together now the four round which is going to be one for deepwater. We still don’t have a dating for the bidding but the data rooms are open and the subscriptions and there is a fair amount of interest in that so that's moving. And then also in terms of the migrations which have been delayed because of internal discussions between the treasury and Pemex I think that the new CEO of Pemex that has a very close relationship with the treasury I think that's going to facilitate and we are going to start to see some of these migration moving ahead and also the Paramount the seven fields that have been worked out by now in order to refine the conditions. So I would say that we see the activity in Mexico improving in 2017 I think that for 2016 maybe we are going to have some effect of this on the fourth quarter but we are going to have really we are going to start to see the effect in 2017 so going short term we have a negative view medium term we have a positive view. Now addressing into the Argentina, a brief comment on Argentina, Argentina the new government is moving in the right direction in reducing distortion in the energy sector and I am sure that this will gradually bring back confidence and trust and interest of the oil company into Argentina. To -- for us there is more transition in Argentina the government at the moment is preserving a relatively high price of oil for the producer and the refinery so producing Argentina are seeing the level of price that is not the inflammation of price the price that they see goes between $55 or $65 per barrel depending on the region in this condition they are maintaining their drilling operation to a large extent. Only some of the marginal export capacity is being reduced so in this sense Argentina is more stable in term of rig count then many other areas. In the medium term eliminating the distortion in the market will allow the price of gas also to get closer to the price of imports of gas in Argentina and this will be stimulate development of the gas the reserves in Vaca Muerta. I'm very confident that overtime the level of drilling for gas in Vaca Muerta will increase. During the coming months the rule of the game will be to size better and I think in 2017 this will be an interesting area and an area in which Tenaris is particularly strong the level of drilling for gas in Argentina could increase and by that time it would be a very logical for this to happen and so this is the situation we see today, on the side of pipeline…

[Frank McGann:]

Okay, thank you very much.

[Guillermo Vogel:]

On the side of pipeline it could be in the second part of the year some pipeline to improve on the infrastructure for gas and this could also be relevant for Tenaris. So now this is pipes pipeline we do not know exactly when but we know that the infrastructure needs to be expanded if development should arise.

[Operator:]

And our next question is from the line of Alessandro Pozzi from Mediobanca. Please go ahead.

[Alessandro Pozzi:]

I just want to follow up on the selling price for next year, and I was wondering if you foresee a more favourable mix? I've noticed that your selling price has come down in the second half of 2015, also because I think there was this product went up in terms of percentage of sales. But I was wondering if you can maybe talk about that a little bit and give us a bit more color?

[Guillermo Vogel:]

In term of mix between welded and seamless probably we will see as more a share of welded in the coming quarter because we are shipping pipelines, we are concluding shipments of pipe within Argentina, Brazil so for some quarter we would have less welded product in our product mix. If you look into the mix between premium product semi premium or API in this moment and with this price of or with this price of oil it is clear that the more complex product has been delayed. So that could be let's say in term of volume a lower level of demand of complex product. But on the other side it is also true that the big part of the adjustment that is done in the United States have been affecting the API low end product that are inventory and that use in part of the shale. So as a whole I do not see as a compensation of factor a big change in our mix between 2015 and 2016. Maybe Gabriel you have -- you can add a comment on your region is what can have from the contract with Chevron in the process that we signed for the backlog in Middle East will drive the change in mix.

[Gabriel Podskubka:]

Yes, indeed we have been -- we anticipated a few moments ago we are able in next few months to be in the sizable backlog in the Middle East. This has been in a tough competitive pricing environment. But we have been particularly successful that it would mention large contract that we secured in Kuwait for the drilling segment. These are flagship project for the country to become self sufficient in gas. These are complex wells HNST with H2S component as well that requires sophisticated propitiate rate and premium connections that our product has derived. So this is going to be something that will be impacting on a higher mix in the Middle East in '16. Also in UAE, we have been particularly successful. Covering the requirements for the most complex drilling environments in Abu Dhabi products have been reached wells this are deviated wells that require high talk in which our and doublex technology provides solutions for the customers so these will be also three year agreement and this will be impacting our sales and market share gains in the Middle East. And also as we anticipate in the last call and we can fully confirm so the Ramco is back into the purchasing cycle you see tenders, quarterly tenders, small project tenders but we are fully back aligning the level of consumption and demands so this would be a positive driving factor for the mix in 2016. You mention also the contract in Thailand I think this is relevant as well. To mention, this is a seven year agreement, there we’re entering in the largest premium operator in Southeast Asia. These are operations of a several 100s of wells per year that we see very resilient different from the rest of Southeast Asia that is one of the area that has been particularly affected with the price of a commodities so rigs are coming down, well in this particular operation we see a level of stability. We are deploying as you mentioned to stake-away our service center, we will cover all services from the mill to the well. This will be important we are covering days in premium and also the completion in premium so this will be transitioning during the second half 2016. We are fully impacting share and mix component in 2017.

[Guillermo Vogel:]

Yes, thanks and this is a very example of relevant of the element of our strategy and how we are preparing for recovery worldwide. And in this case we deployed all of our technology including the pipe-by-pipe tracking, it's very interesting deployment the one we are doing for the long running share.

[Alessandro Pozzi:]

That's very helpful. I don't know if there's time? I have a second quick one. I was wondering how we should think about the impacts of the devaluation of the pesos in Argentina on your accounts next year? If there is any impact either positive or negative?

[Guillermo Vogel:]

Well, the devaluation there is -- we are more competitive in Argentina because we are reducing also some of our labor cost in Argentina this is helpful. On the side, that you see in the deferred taxes that we have a numbers that are growing this is not a cash component through our deferred taxes and then it grows up because of the devaluation in Mexico and in Argentina. Basically the devaluation in Argentina is supporting our competitive and it is worldwide.

[Alessandro Pozzi:]

You don’t any wage installation as a potential risk?

[Guillermo Vogel:]

I don’t know Gabriel if you want to add something on this.

[Gabriel Podskubka:]

Yes probably, I mean we need to see I mean the expectation of inflation in Argentina after the big devaluation of the end of the year that will be partially compensated in our saving in terms of cost efficiencies for the labor cost and local cost related, as Paolo was saying unfortunately in our P&L the effect of the devaluation on the taxable base for deferred tax is affected very much the net income even though it is not a cash outflow.

[Operator:]

And our next question is from the line of Pedro Medeiros from Citigroup. Please go ahead.

[Pedro Medeiros:]

I have two quick questions. First one is a follow-up to the previous question on the breakdown between welded and seamless or premium products and how the mix should change in 2016. You comment a bit on the improvements taking place in the Middle East and in Southeast Asia in terms of new orders, but do you mind commenting a bit on the backlog for welded pipes? They're maturing this year. And is there any visibility of replacing that backlog? Or, how is the Company going to deal with that? I understand that a part of this backlog is actually maturing in South America. So, anything or any color you can share on that, I would appreciate. The second question is if you can elaborate a bit on how the Company is dealing with its receivables management this year? Has there been any change following the deterioration in the credit quality of your clients, be it because you're more concerned or because some of your customers are demanding more time? Should we expect any change on that side of the business for 2016?

[Paolo Rocca:]

Well. Thank you, Pedro. On the term of welded I would say that the -- our welded component would probably be lower in the coming quarter because we are as I was saying shipping pipelines and then we will have a much less backlog of welded pipeline exploring it ahead. And we think that there could be project that we may supply but still we have to get the order get the project done and these are not let's say in our backlog yet. As far as in Middle East I don’t understand that we have no welded sales of any relevance in Middle East these were added all seamless area as far as receivable Edgardo you can comment on how sound is our portfolio.

[Edgardo Carlos:]

Thank you, Paolo. Yes as we comment in the last conference call we are still flying our 74 DSO and not major, not significant delays I mean even though we still have in our financials 8.6% of the total receivables as a provision for doubtful accounts very much concentrated today I will say in Venezuela with the lack of collection from PVSA.

[Operator:]

And ladies and gentlemen this concludes our Q&A session for today. I will turn it back to Giovanni Sardagna for final remarks.

[Giovanni Sardagna:]

Well, thank you all for taking part into this call and see you [indiscernible].

[Paolo Rocca:]

Thank you very much.

[Edgardo Carlos:]

Thank you everybody.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day everyone.