Tenaris S.A. announced its results for the quarter ended March 31, 2009 with comparison to its results for the quarter ended March 31, 2008.
Summary of 2009 First Quarter Results
Our operating results in the first quarter partially reflect the change in the market environment that has occurred since the third quarter of last year. Shipments, particularly in the U.S. market, were sharply lower. However, selling prices during the period still reflect the effect of price increases set in different market conditions. Our operating income declined 5% year on year but our earnings per share declined further as in the first quarter of 2008 we benefited from a strong result on our equity investment in Ternium (NYSE:TX) which was not repeated this year. Our net financial debt (total financial debt less cash and other current investments) decreased by US$610.7 million to US$781.7 million during the quarter as we focused on reducing inventories in our production system.
Market Background and Outlook
Following their collapse in the second half of 2008 to a low of around US$30 per barrel at the end of the year, global oil prices have recovered slightly and begun to stabilize around a level of US$50 per barrel. Expectations have risen that declining non-OPEC production and OPEC production cuts can offset the decline in global consumption in the ongoing economic contraction. North American gas prices, however, have continued to fall during the first part of 2009 to current levels of around US$3.50 per million BTU as the carry over of 2008 US production increases combined with reduced demand has resulted in high levels of gas in storage.
The international count of active drilling rigs, as published by Baker Hughes, has shown a moderate decline so far this year. It averaged 1,025 during the first quarter of 2009, 6% lower than the fourth quarter of 2008 and 2% lower than the same quarter of the previous year. The corresponding rig count in USA, which is more sensitive to North American gas prices, has plummeted in the year to date and is now down 53% from its high in September 2008. It averaged 1,326 during the first quarter,30% lower than the fourth quarter of 2008 and 25% lower than the first quarter of 2008 and as of May 1, 2009 had fallen to 945. In Canada, the corresponding rig count, which is affected by seasonal drilling patterns, averaged 329 during the quarter, a decrease of 35% compared to first quarter of 2008.
Demand for our pipes from the global energy industry is being affected by the decline in oil and gas drilling activity and the actions taken by customers to adjust to current conditions, including procurement delays and cancellations and the postponement of new project activity. Demand in the US and Canada has been further affected by a continuing surge of Chinese OCTG imports which has resulted in extraordinarily high levels of inventories. Demand from other customers has been affected by the decline in activity in the industrial and power generation segments, particularly in Europe.
Following the high level of shipments for our large-diameter pipes for pipeline projects in South America during 2008, demand is expected to be lower this year reflecting delays and postponments in the implementation of new projects.
Considering the decrease in apparent demand and declining prices we expect lower level of sales and EBITDA into the coming quarters.
Net sales of tubular products and services decreased 3% to US$2,105.8 million in the first quarter of 2009, compared to US$2,170.7 million in the first quarter of 2008, as a 29% decrease in sales volume was largely offset by higher average selling prices. In North America, although shipments in Mexico remained stable, in the USA and Canada they were affected by the decline in drilling activity and the extraordinarily high levels of inventories mainly driven by Chinese OCTG imports. Sales in South America increased as higher average selling prices more than offset a decline in volumes sold. In Europe, sales were affected by continuing imports from China which are causing injury to the European pipe industry, a sharp decline in industrial activity, lower demand from distributors serving the process plant sector and lower sales of OCTG products. Sales in the Middle East and Africa declined as sales of OCTG products were lower throughout the region.
Net sales of pipes for pipeline projects decreased 18% to US$222.2 million in the first quarter of 2009, compared to US$271.7 million in the first quarter of 2008, reflecting a lower level of shipments to gas and other pipeline projects in Brazil and Argentina.
Operating income from other products and services resulted in a loss of US$10.7 million in the first quarter of 2009, compared to a gain of US$22.2 million in the first quarter of 2008, as we recorded losses on our electric conduits operations in the USA and our HBI operations in Venezuela.
Selling, general and administrative expenses, or SG&A, increased as a percentage of net sales to 16.0% in the quarter ended March 31, 2009 compared to 15.7% in the corresponding quarter of 2008.
Net interest expense decreased to US$36.2 million in the first quarter of 2009 compared to a net interest expense of US$54.8 million in the same period of 2008, mainly reflecting a lower level of net debt.
Other financial results generated a loss of US$37.2 million during the first quarter of 2009, compared to a loss of US$14.3 million during the first quarter of 2008. These results largely reflect gains and losses on net foreign exchange transactions and the fair value of derivative instruments and are partially offset by changes to our net equity position. These gains and losses are mainly attributable to variations in the exchange rates between our subsidiaries' functional currencies (other than the US dollar) and the US dollar in accordance with IFRS.
Equity in earnings of associated companies generated a loss of US$8.5 million in the first quarter of 2009, compared to a gain of US$50.0 million in the first quarter of 2008. These results were derived mainly from our equity investment in Ternium (NYSE:TX).
Income tax charges totalled US$203.1 million in the first quarter of 2009, equivalent to 34% of income from continuing operations before equity in earnings of associated companies and income tax, compared to US$208.6 million, or 33% of income before equity in earnings of associated companies and income tax, in the first quarter of 2008.
Income attributable to minority interest was US$27.0 million in the first quarter of 2009, compared to
Cash Flow and Liquidity
Net cash provided by operations during the first quarter of 2009 was US$763.4 million, compared to US$568.9 million in the first quarter of 2008. Working capital decreased by US$387.9 million during the quarter, as we reduced our inventories by US$527.7 million and our receivables by US$87.9 million, which was partially offset by a decrease in trade payables of US$254.8 million.
Capital expenditures amounted to US$119.8 million for the first quarter of 2009, compared to US$88.5 million in the first quarter of 2008. The increase in investments mainly reflect the progress in our new rolling mill in Mexico.
During the first quarter of 2009, total financial debt decreased by US$151.7 million to US$2,825.4 million at March 31, 2009 from US$2,977.0 million at December 31, 2008, and net financial debt decreased by US$610.7 million to US$781.7 million at March 31, 2009.
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