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Tenaris S.A. (NYSE:TS)

Q2 2011 Earnings Call

August 4, 2011 10:00 a.m. ET

Executives

Giovanni Sardagna – Director, IR

Paolo Rocca – Chairman and CEO

Guillermo Voguel – VP of Finance and member of our Board of Directors

Ricardo Soler – CFO

Germán Curá – North American Area Manager

Alejandro Lammertyn – Eastern Hemisphere Area Manager

Analysts

Michael LaMotte – Guggenheim

Paula Kovarsky – Itau Securities

Blake Hutchinson – Howard Weil

Amy Wong – UBS

Raphael Veverka - Exane BNP Paribas

Marcus Sequeira - Deutsche Bank

Christian Audi – Santander

Andrea Scauri – Mediobanca

Roger Basnia – Kepler Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2011 Tenaris S.A. Earnings Conference Call. My name is Veronica, and I will be your operator for today. At this time, all participants are in a listen-only mode. The duration for today’s conference call will last an hour. Later we will conduct a question-and-answer session. (Operator instructions).

I would now like to turn the conference over to your host for today’s call, Mr. Giovanni Sardagna, Investor Relations Director. Please proceed.

Giovanni Sardagna

Thank you Veronica, and welcome to Tenaris 2011 second quarter result 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 herein. Factors that could affect those results include those mentioned in the company’s 20-F and other documents filed with the SEC.

With me on the call today are Paolo Rocca, our Chairman and CEO; Guillermo Voguel, Vice President of Finance and member of our Board of Directors; Ricardo Soler, our Chief Finance Officer; Germán Curá, the Managing Director of our North American operation; and Alejandro Lammertyn, the Managing Director of our Eastern Hemisphere operation.

I would like to start by mentioning that we will host an investor plan visit in Veracruz on September 20th, and we look forward to seeing many of you there.

The event will give us the opportunity to walk you through our new rolling and meet with Paolo Rocca and other members of our senior management. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our results.

During the quarter, sales increased sequentially in each of our operating segments, but sales growth in our tubes operating segment was held back by lower sales in Canada and lower shipments of deepwater line pipe projects in the Middle East and Oceania.

During the second quarter of 2011 sales increased 21% to 2.4 billion compared to 2 billion recorded in the second quarter of last year, and 3% sequentially. Our EBITDA reached 548 million, which was 3% higher than the corresponding quarter of 2010, but 4% lower sequentially. Our EBITDA was affected by some unexpected delays in shipments, mainly in Mexico, and some one-off events coupled with the continued cost increases that exceeded increases in average selling prices.

Average selling prices were up 9% compared to the corresponding quarter of last year and 4% sequentially.

During the quarter, our sales of high-end seamless products were 50% of our total seamless volumes compared to 46% posted during the second quarter of last year, and 47% recorded in the first quarter of 2011.

Results of our project segments have also recorded significant year-on-year and sequential increase. However, this quarter the mix in our projects segment has been particularly favorable and may not be repeatable in the remaining two quarters of the 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. Our results for the quarter came in below where we were expecting due to some invoicing and cost affect, which we did not anticipate. However, the market outlook remains good and we look forward to better results in the second half.

First, let me turn to North America, where we had seasonable impact from Canada this quarter. Sales in the US market have increased and we are successfully introducing our new premium connection and sour service product developed for shale application. We are also seeing sourcing activity for the Gulf of Mexico deepwater starting to pick up. In Canada, activity is also stronger this year, and the increase in thermal oil projects is driving a higher demand for our premium product. This somewhat mitigated that the seasonal effect. But sales in Canada still fell 38% compared with previous quarter.

In Mexico, our invoicing was temporarily impacted by some changes that were implemented in our contract with Pemex. We now invoice when the pipe has been run in the well, and this is introducing some delay in our shipment.

Additionally, tropical storm Arlene affected our operation and delayed some export shipments. Mexican drilling activity in the second half will be higher, as Pemex is increasing its investment.

In the Eastern hemisphere, we will see the impact of higher activity in Saudi Arabia and Middle East in general with a rich mix of premium and sour product. This will flow into our results in the second half. In that region North Africa accepted, we’re seeing a gradual increase in sales and order, reflecting higher exploration activity in general and in deepwater and European shale plays in particular. This bodes well for demand in the medium term, particularly for more complex products as and when projects progress from the exploration to the development phase.

In South America, activity continue to increase and in Colombia, and in the Brazil offshore sector, while, in Argentina exploration activities starting in shale plays. YPF has announced discoveries, including a liquid-rich deposit. In this second quarter, the results of our project operating segment were particularly strong reflecting sales of high margin products in Brazil.

Operating and fixed cost increased more than we had anticipated and we’re not fully offset by increases in our average selling prices. Our operations are mainly in countries, whose currencies are appreciating in real terms against the US dollar. To some extent sales in local markets act as a hedge against these affect on our cost. But such cost increases in Argentina and in other exporting countries for our system are impacting our margin.

Additionally, in the past two months, our people in operations has been engaged on many fronts with the start up of investments in the new plant in Mexico, in Italy, and in other areas of the world in addition to their normal tasks. This has had an impact on the role efficiency of our industrial segment.

In the second quarter, we expect an improvement in our sales and our product mix, driven principally by higher activity in Middle East and North America. This improvement will be more visible in the fourth quarter as for the third quarter, we would have the seasonal impact of lower sales of line pack and mechanical product with (inaudible).

In terms of margins, we expect an increase in average selling price to translate in increase margin. However, given the result of the first half, our operating margin for this year may fall short of last year.

Thank you, Veronica. We can now open the conference for everybody and for the question and answer.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from the line of Michael LaMotte. Please proceed.

Michael LaMotte – Guggenheim

Thank you and good morning. First question has to do with Mexico and Pemex's plans. I guess the shipment – can you address specifically what the delay was and perhaps the volume impacted and then speak a little bit more specifically about what the growth might look like over the next 12 months versus the last 12 months in Mexico as a result of the ramp-up in offshore activity?

Paolo Rocca

Well, thank you Mike for your question. Let me tell you we are – in our plant, we are not really very much behind our original schedule. Now, we rolled the first pipe in November last year and then we started, the start up of all the operation in the cold area of the plant. Today, we are probably running these plants in the range of 60% of it’s capacity. So, we’re ramping up, this is, I’m talking about July and this is improving. We expect by the end of the year to be running the plant maybe around 70% if all goes well. When I mentioned in my opening statements the stress in our system, I would say that the start up of the plant has really absorbed the attention and the capability of all the people and many of our people, and this has left some inefficiencies or some delay in production in some of the other area of the Mexican plant and this could also be, as I mentioned happened in some of the other area which we have imported in that.

As far as Mexican market is concerned, what we really see is Pemex increasing its activity, the number of the rigs is going up and I think this is one of the positive element for us and the domestic market is moving on. We expect Pemex to renew the contract that are expiring in the beginning of the first half of the next year and this also with a contract for the remaining rigs, this also will sustain at the time. I may ask on this question maybe Guillermo Voguel to elaborate a little on Pemex perspective.

Guillermo Voguel

Thank you very much Paulo, Hi Michael. Yes, as Paulo mentioned in his opening remarks, we had a loss during the quarter because we changed the way we invoiced to Pemex, we used to invoice to Pemex at the time we delivered the pipe to the well and then we credited whatever pipe was not used in the run of the well. Now, in order to reduce the bureaucracy, what we have done is that we are invoicing at the time the pipe is run into the well, but at the same time, we reduced the days for collections. So, in terms of cash flow, we’re almost on the breakeven situation and in terms of following the operation and complete operation we improve this system. But these on an invoice terms, we lost almost 10 days, 10 to 12 days of invoicing to Pemex and this obviously affected a little bit the EBITDA for the quarter.

In terms of how we see these moving forward, if you remember we started the year with around 100 rigs in operation. In the first quarter we were already, if I recall correctly, we were operating around 115 -- on average 115 rigs, now we are at 130 rigs and if you see the tendering process for the rigs especially for the offshore operation, I think for the end of the year we’re going to be seeing going another 10 or 11 rigs.

So, when you compare, let’s say first half with the second half, we’re seeing an improvement in the second half and then we’re seeing an improvement of next year. So we’re little bit more optimistic in terms of Pemex moving forward.

Michael LaMotte – Guggenheim

Thank you. That’s very helpful, that’s good clarification. Thank you.

Operator

Your next question comes from the line of Paula Kovarsky. Please proceed.

Paula Kovarsky – Itau Securities

Hi, good morning everyone. Two questions, first question on – you mentioned prospects of higher activity out of the US. So, if you could, give us a little bit more color on when do you expect the volume to catch up and in which countries and which regions. And the second question is, you mentioned that it's very hard to believe that the average operating margin will be similar to last year's and probably lower. Could you give us a sense of order of magnitude of how much do you expect it to be worse? Or where exactly do you see margins going in the second half of the year?

Paolo Rocca

Yes, thank you Paula. On this question the demand outside the North America in terms. In general, we see a gradual increase in rig activity. We feel we’re convinced that what we said in the last conference I mean, we are at the beginning of the energy cycle. We see demand picking up unless worldwide economy gets into a double deep and you have let’s say recession that may change the – some of the decision of the oil – of the oil companies worldwide. But except of North Africa, we see as a whole this new cycle gets in beginning. But, I will ask Alejandro Lammertyn, who is in-charge of these in hemisphere operation to give us some more information or indication about this.

Alejandro Lammertyn

Yes Paula, I would say that the factual change that we are seeing in the market and next method will be related to our position in new lease, as we were expecting in the last conference calls, the activities has increased. We see Saudi Arabia growing from 70 rigs last year to 130-140 in 2012 and this is making a build up of inventory and more tendering. There we will have the effect in next semester, we are also seeing a increase activity in the Emirates that will be reflected during next year.

In Sub Saharan Africa, the activity of exploration continues in the new ideas like Ivory Coast in Ghana and we are seeing also an increased activity in Angola that was delayed from that year. So, these are the main areas that we figure out, we are not seeing a growth in the Caspian Sea where the major projects are still being delayed. We are seeing also increased activity in South East Asia in the areas that are mainly in Australia and Indonesia and we are seeing in North Sea also increased activities in Norway and Denmark and not UK due to the tax effect.

Paula Kovarsky – Itau Securities

How would you place competition, I mean do you think in terms of your main competitors, do you think whose better position to capture this growth or is it room for everybody?

Alejandro Lammertyn

I would say that in the case of Middle East, we have captured good portion of the growth share in some other areas, we are competing in the areas of exploration is where we find the biggest competition.

Paulo Rocco

Thank you, Alejandro. On this issue our own competitive environment. What we perceive is – core competition in the low end segment of the market, that is capacity, many players and this is something that we perceive is there since a long period of time. I mean it is not something new. Then on the premium segment that is one in which we are focused, the increase in this market is there.

We consider that this market is increasing in premium by around 20% between last year and this year and will continue to increase next year. But, in this market, the issue is to install technologies in the project that are transition from the seismic stage, the exploration before the development. And in these developments we sometimes find ourselves competing with the first year, qualified companies trying to establish position and then be prepared for the development.

This is something that happened in the past, for instance in Iraq, I mean there is some case competition in some areas for taking position. But, in general the market is increasing and we think that we can, we should be able to raise and increase our prices on this. This also has a relation as an impact on the question of our margin.

I think we closed last year with around 26% EBITDA margin in the first half of this year, we’re considering the EBITDA of the second quarter, is likely below 24 percentage point. In the next semester, this will increase in our expectation, but will be difficult to have for the entire year to reach the 26 that we had last year.

We were confident of these and we said so in the last conference. But, the results of this quarter and some of the non-anticipated factors of this quarter will drive us slightly below the figure of last year.

Paula Kovarsky – Itau Securities

Yes. Just quickly back on the competition argument in exploration moving into development in countries where apparently – the three main players are indeed competing among themselves, which is somewhat different than what we’ve seen in the past where each of the companies were stronger in a specific region. Just, do you see this dynamic changing, I mean, increasing competition among the first-tier players?

Paolo Rocca

I wouldn’t say changing but the point is that, the reason you cycle in energy development. And there – for instance consider areas like West Africa, from Liberia, Ghana, Equatorial Guinea, Ivory Coast, I mean, this areas offshore, this are area that could be very promising, very important in the future that the areas in which the operations are conducted on a smaller scale and shifting from seismic into exploration and start to develop. It is a positioning going on here and that could more – and some of these we have competition to install the technology. Today beginning to participate in a project and install technology in our case, is then at a hybrid is the design of the well, is the really of the lean well, lean design and it’s important because if a project start with this trend then you can maybe possibly count on and provided that the service and quality of the product is supporting your point to count on let’s say, soil development in the future. This is the area, and this could also apply to other region of the world, It could be Australia, it could be some of the southeast Asian offshore business. These are the areas in which I perceive increased competition, not only established – in the area in which the development stage is ongoing.

Paula Kovarsky – Itau Securities

Okay. Thank you. Thank you very much.

Operator

(Operator instructions) Your next question comes from the line of Blake Hutchinson from Howard Weil. Please proceed.

Blake Hutchinson – Howard Weil

Good morning gentlemen. Hi, looking at the numbers, it would appear that gross margins were fairly well behaved, meaning that material costs and input labor costs were fairly stable. What’s noticeable is that there was about a – as adjusted for some charges in the first quarter about a 10% ramp in G&A. Can you help us understand, what part of that ramp up is either, you know, labor or currency related and therefore permanent versus what portion of it might have been kind of one-time troubleshooting? And then, from there, should we consider that 19.5% of revenues is simply a level we need to be assuming or can the G&A line kind of flatten out as we grow revenue in the back half of the year?

Paolo Rocca

Well, thank you Blake for the statement. We were maybe probably more optimistic on this quarter, so we appreciate your comment. But let me comment on some of the effect that is affecting this quarter from the point of your G&A. Basically, the account in which we operate are having some reevaluation of the exchange rate in real term, which means considering also local inflation to translate usually in salary increase and cost of labor. This is true – it is affecting us especially for the country in which – from which we export but it’s also impacting on the general and the administrative costs. To think about the Europe based operation, think about Brazilian operation, Japan that is also having a strong appreciation against the dollar, Mexico and Argentina because of Argentina the currency is not reevaluating but inflation is very high, and this is turning out in the cost of labor that is increasing in dollar terms. We estimate that this effect – we were anticipating part of this because we were leading to this. But around $10 million impact was clearly beyond of what we foresee in the big first part of the year. These has affected, let’s say our EBITDA and as Guillermo was saying compounded on the question of lower volume for Mexico and for the tropical storm that could also have an impact in the rage of $15 million on our EBITDA. I think, this is the main impact that is also included let’s say in the, in our fixed cost component, not in the general and administrative, I mean, on the fixed cost, we have impact from the R&D.

Now, well, R&D is from general and administrative, this quarters our R&D investment has been a record around close to $30 million, this is higher than in the past and to some extent also is due to contract for R&D, research and development that comes in during the quarter, slightly beyond what we expected. This is also affecting general and administrative. I don’t know if this is, let’s say, the main issue or maybe, Ricardo, you can clarify better that there are other components that are on these topics.

Ricardo Soler

Regarding the specific SG&A, I would say that they are close to $15 million that because of what Paolo explained, exchange rate and inflation in salaries in Argentina, will be a permanent effect for the future and we expect to maintain the same level of exchange rate pesos, pesos, Mexican pesos. One shot for this quarter, we’ve an effect $10 million the settlement with DOJ, so this is only for this quarter. So, I would say, for the future close to 15, today is $15 plus $10 million as an average today our forecast is that we’re going to final out the year with an 18.5 SG&A sales in there.

Paolo Rocca

Thank you, Ricardo.

Blake Hutchinson – Howard Weil

Thanks, guys. That’s an extremely helpful description of what’s going on. I’ll leave the floor open to somebody else.

Ricardo Soler

Thank you.

Operator

(Operator Instruction) Your next question comes from the line of Amy Wong from UBS. Please proceed.

Amy Wong – UBS

Hi, good afternoon. My question is on what you kind of see for your average sales price going forward. How much of that is going to be due to kind of observable, actual pricing increases in the market of your premium and commodity product, and how much of it is going to be improvement is going to be due to your price mix? Thanks.

Paolo Rocca

Thank you, Amy. I think looking forward that we will have some of both, we will have some price increase, but mainly the price increase that we expect should be driven by the change in the mix and higher share of premium product because of the low end of the market, as you can see in the pipe logic evolution is quite stable and then we cannot expect so much price increase even if in the areas like the US, this depends very much from the import into the US and maybe this may change overtime. Because the level of import is significant in the continent.

But, we should expect is really price deriving from a change of mix and some increase on the specific price for premium of product.

Amy Wong – UBS

Great, thank you very much.

Operator

Your next question is a follow up question from the line of Michael LaMotte from Guggenheim. Please proceed.

Michael LaMotte – Guggenheim

Thank you. Alejandro, I wanted to follow up on volumes in Australia. I know that market is – I guess has some commodity products at the – in Queensland in the CBM side and, obviously, very high premium with the northwest shelf offshore. Can you share with us sort of what the growth looks like over the next 12 months in that market and what the mix is likely to be based on project timing in those two areas?

Alejandro Lammertyn

Yes. Clearly, Australia is an area that has been positively affected by what happened in Japan, the LNG has revived and some of the LNGs where we are seeing an increase volume coming in the high end.

We are seeing in the development phase, an increase mainly in the pipeline infrastructure that will come, I would say, during next year in 2012 and 2013 and we will see also more premium related to development of offshore. But, in the premium side, the volume will not be substantial, will be in total, but will not be substantial.

Michael LaMotte – Guggenheim

Okay. And, on the pipeline side, is that going to flow through Projects, or is that more line pipe and field pipe that we'll see in Tubes?

Alejandro Lammertyn

Its more related to our pipelines in seamless.

Michael LaMotte – Guggenheim

Okay.

Alejandro Lammertyn

Not in the project side.

Michael LaMotte – Guggenheim

Great, thank you.

Operator

Your next question comes the line of Raphael Veverka from Exane BNP Paribas. Please proceed.

Raphael Veverka - Exane BNP Paribas

Hi, good morning. I just had another question on costs actually. Are you expecting an incremental impact on raw material costs in the second half? In other words, will we see a bit more or another increase in your cost per ton because of that effect? Thanks.

Paolo Rocca

Thank you, Raphael. I would separate the seamless from the welded, in the case of seamless, I think that our inventory are basically inline with our rate position cost. The reposition cost should not increase further from now on. There could be some reduction in the cost metallic of iron ore and metallic load, and maybe compensation increase as I was mentioning in some of the labor or other component of services in the country in which we have an inflation in dollar terms. But, this should basically compensate in the cost of saving.

As far as welded is concerned, there could be some cost increase because of the prices that we acquired material in last quarter may get in our cost of sales in the next quarter for the typo approach. But then, what we're, the cost of material that we're purchasing today is clearly should be below, is below the average that we have in stock today. So, it may increase next quarter but should then improve on the fourth quarter.

Raphael Veverka - Exane BNP Paribas

Okay. Thank you very much, it is very clear.

Operator

Your next question comes from the line of Marcus Sequeira from Deutsche Bank. Please proceed.

Marcus Sequeira - Deutsche Bank

Yes, hello good morning everyone, good afternoon. Just have two quick questions. One, if you could, comment on inventories – OCTG inventories globally. And, second, if you could, comment on the new capacity coming on stream over the next 12 months and that impact on prices? Thank you.

Paolo Rocca

Thank you. I think the inventories, its important to look at North America that is there, in which very large part of inventory is concentrated and then to the Middle East. So, German first, a comment on the situation of inventory as you feel it in North America.

Germán Curá

Thank you Paolo. Marc, the view we have is that inventories for OCTG in the States primarily more or less align to 5.5 months worth of consumption and in absolute terms it is just north of about 2 million tons which is fairly aligned with what the industry has seen in generic terms. Alejandro, may be you want to comment on the Middle East.

Alejandro Lammertyn

Yeah. On the Middle East, I would say that the inventory level is today below what is needed for the ramp up of Australia that I mentioned before. That’s why there is increase procurement and we will finish that during next semester.

Paolo Rocca

Sure. As a whole, I mean, we have in all our situations consider an increase in volumes that we expect in premium in the next year, inventory should be inline what is forecasted for next year.

On the second question about capacity, you're right, there is capacity coming in but it will take time in our view for this capacity to translate You're right, there is capacity coming in, but it will take time in our view. For this capacity to translate into capacity on premium and specialty product segment. It will take time, this is timing that we will change probably in 2013, there will be increase – increased pressure on it. Now, the market is growing and so, there should be room for additional capacity including our capacity in Mexico. And we have also to consider that some of our competitor are based in Japan. Japan today with the yen at 77, 78 against the dollar is a – not so much competitive in term of cost. So there could be some shift, some reduction in production, some closure in other area, just to leave room for the capacity that is coming on stream. Unless, the price increase will allow this, driven by the volume, will allow the entire facility, even higher cost facility to stay on the market.

Marcus Sequeira - Deutsche Bank

Thank you. On your mix, if you could, comment on what was the mix in this quarter and how much you expect to reach in the second half, as you said, that sales of high-end products should increase.

Paolo Rocca

Well, in this quarter we are in the range of 50% in the high-end and this will increase in the coming quarter and in future. Some of this increase will be particularly important, will be tower service for the Middle East, that is I would say, super high-end from our point of view. And this will be part of this change in mix that we expect for the next semester.

Marcus Sequeira - Deutsche Bank

Thank you very much.

Operator

(Operator Instructions) Your next comes from the line Christian Audi from Santander. Please proceed.

Christian Audi – Santander

Mr. Rocca, this is a follow-up on the mix question, just to clarify it. You mentioned that maybe this quarter the mix in seamless was around 50% high-end. And you expect that number in the second half of the year to increase to what level? And how about 2012?

Paolo Rocca

Well, let's say it will increase, I wouldn’t the number of – because in the end it will depends also from shipment. We have the order in our backlog, but sometimes the shipment may be anticipated or delayed, and let’s say, the final number, it will increase, and this is, let’s say, the method that we can anticipate, at least from what we see today.

If we look at 2012, well, we are aiming for a further increase in our mix and the investments we realized, our CapEx during the last three years have been focused on increasing our capacity and our ability to serve the most demanding market to improve our mix.

I think that’s, we are aiming for a further increase of our mix in seamless during 2012. And I think we have the capacity to do it.

Christian Audi – Santander

And what was the level mix in the first quarter and last year? What would you say that the seamless, high-end mix looked like, please?

Paolo Rocca

Well, we were in the range of 45% to 47% in the first quarter it was about 47, something less than in 2000 and 2010 this is continuously increasing overtime.

Christian Audi – Santander

And so, just to finalize, Mr. Rocca, given that we are in an environment. I’m just trying to understand big picture. Given that we’re in an environment where we’ve seen higher oil prices in the first half of this year, right. And as you pointed out, I mean, improving our mix, which hopefully will continue to improve, please, help me understand how do we get an EBITDA margin deterioration in the first half of this year. I’m trying to understand. Has that been a mix-driven issue, or has that been a lack of pricing-power issue that, although your mix improved, you were not able to get as much pricing power on the high end as you would have expected, because I’m just trying to deal with this situation of you being a high-end-focused company with a lot of success in a high-oil-price environment yet generating an EBITDA margin that is among the lowest we’ve seen in years. So can you help me understand what's driving that margin deterioration, please?

Paolo Rocca

Well, first of all let me tell you, it took a moment about, let’s say, the increase and demand for premium product. Our, what we see an increase and expansion of this segment. This is possibly not comparable now to what the service company is seeing. So there is service intensity in this energy cycle that is driven by the increase level of service to every where in terms of fracing, in term of pumping needs and so on. And so the service company really seeing for every well, for every lines and increasing multiplying demand for the service.

In our case, the pipe intensity of the cycle is lower than a service company and even if we add lot of service to what we do, but still we do it on the basis of the weather agreement.

So, our dynamic is lower on one side. In term of pricing power, I think that we are continuously gaining nice market, pricing power on the premium segment. And this is extended to most of the market with some limitation in the areas in which, as I mentioned at the beginning of the conference call. There is a positioning competition among the top high, top-tier companies for establishing position there. So, our pricing power is there. But, also in some cases, we are competing for positioning and this turns out into stable or let say not improving pricing for this. The reason why we are showing reduction in EBITDA, I think are more related to costs and efficiency oversees. This quarter, on one side, the cost effects because of the currency on one side, the appreciation as I mentioned before, has impacted on us.

The second point is inefficiency in the plant. We estimate this in the range of $16 million of inefficiency that we had during these quarter that add up into our cost. This has been a factor. Some lower volume, some increasing cost of labor for real currency appreciation at real term and inefficiencies in the plant related to the different startup. These I think are the factor, but we consider that overtime, we maintain our outlook, we see the market growing, demand expanding. And hopefully, we’ll be also be able to reduce and improve the efficiency of our system in the coming months. We are all in this moment, this is very important challenge for our organization, to recover efficiency operation and also pursue cost reductions in the area that are affected by increasing costs of labor, we have several program around the system to focus on the G&A and on the fixed costs that are in the cost of sales without reducing our focus on key issue for differentiation, R&D differentiation commercial action and service related.

Operator

Your next question comes from the line of Andrea Scauri from Mediobanca. Please proceed.

Andrea Scauri – Mediobanca

Yes, good afternoon, gentlemen. And I have a question related to your investments. I’m sorry. I don’t know if my question has already been answered because I joined later the conference call. But I see that you made $461 million in the first semester, and I was wondering if you can provide a figure of total investments for this year. And a second question related to this one what is the level of cash that you expect by year end. I mean, I think you’re supposed to generate cash in the second half of the year. Thank you.

Paolo Rocca

Thank you, Andrea. We’re continuing our CapEx program, but at a reducing pace, we expect to invest around $360 million in the second part of the year against the $460 million that we did in the first. So, we should reduce our CapEx because we’re completing our projects in Mexico that has been the major absorption of CapEx this year.

Andrea Scauri – Mediobanca

Okay. You’re supposed to generate cash in the second half of the year to increase your cash level back to, let’s say, if I’m not wrong, $200 million?

Ricardo Soler

We estimate that positive level of operating cash flow and after the CapEx, as Paolo explained, we are going to generate cash in order to increase our final net cash position.

Andrea Scauri – Mediobanca

Okay. Thank you.

Paolo Rocca

By the way, in this quarter, the operating cash flow has been quite strong. If you notice, operating cash flow for the second quarter has been $350 million, which has been applied to CapEx and dividend, mainly to CapEx and dividend.

Operator

Your next question comes from the line of Roger Basnia from Kepler Capital Markets. Please proceed.

Roger Basnia – Kepler Capital Markets

Yes, hi, good morning. And good afternoon everybody. As I jumped on the call a bit late, so I didn't follow the presentation. So forgive me if I'm just asking things which have been answered. I would like to get a little bit of a better sense on the real pricing environment in the US market. I think there has been some uncertainty recently about whether the nominal price increase announcement fully went through. There was this more price increase announcement for the first of April and a similar magnitude for July and now, obviously, a similar thing for October. Is this just what has been announced, and how does that compare with the price increases which effectively went through? When we look at the pipe logic figures, obviously, year to date, the seamless side was only up 150 welded even less.

The second question relates to the welded side of OCTG in the second quarter, where volumes were down against the positive market trend in the US. Maybe, can you give us a sense what happened there that volumes were down? And can you also comment how the EBITDA per ton performed on the seamless side in the second quarter versus the first quarter? And, I think, Mr. Rocca, you mentioned some competition amongst the top-tier players in the US market. Who are the top-tier players, in your view, which are competing for the premium shale business in the US at the moment?

Paolo Rocca

Well, let’s start with the pricing and welded volume. German, you may answer on this.

Germán Curá

Sure. Well Roger, let say that pipe logics has evolved just short of 1% during June and July.

Roger Basnia – Kepler Capital Markets

Yeah.

Germán Curá

Despite the announcements that we made, and I think it's fair to recognize that is a reflection of the influx that we've seen that particularly affecting the low end component of the US market. This is particularly worrisome when we look at imports from Korea. The Koreans have brought to the US market in the first half of 2011, something close to 300,000 tons which is an unprecedented number. Which is well above what they even brought in 2008. Now as far as the high end pricing in particularly premium as you mentioned, for competitive reasons. Obviously I’ll not be able to disclose specifics. But we have seen, particularly in the last few months, some positive trends. In other words, the price announcements that we have made are in fact somehow being absorbed by the high-end component of what we do with that debt.

Roger Basnia – Kepler Capital Markets

Yes maybe, German, you can comment on the question of competitiveness in the US market. The competition among the major three players that was mentioned by me more referred to the situation outside of the United States, in new places like Africa, Australia, or areas in which the projects are shifting from seismic to exploration and development. These are areas in which we perceive, anyway, some competition positioning. But, German, concerning the US?

Germán Curá

Now volumes Roger, when we look at North America in general, I should say that, why the volumes in the US have in fact grown quarter to quarter, sequentially. The big reduction, in fact, comes as a result of the Canadian spring break, which, by the way, this last one has been a fairly severe one, weather related and what not. So, overall, you should probably leave with a view that sales in the US have grown sequentially, and this has been well more than offset by the Canadian spring break.

Paolo Rocca

On the other question, I answered before on the question of – the reason why our EBITDA in the second quarter is below the first quarter and also below our expectation. We were expecting maybe EBITDA in the range of – probably around $50 million more than what we really get. Very briefly, I can tell you, with lower volume for Mexico change of the contract and bad weather for the storm that impacted us, we consider in the range of $50 million, the currency effect, the cost of labor, and real exchange rates impacted that in the range of $10 million, cost inefficiency because of the inefficiency in the plant around $50 million. And some special contracts in R&D that enter into specific contract into this quarter raising our level of expenditure in R&D in this quarter slightly beyond what, we expected are the cause of, let's say, the difference on the EBITDA from what we expected and where we stand. And I think Ricardo gave indication before the impact on G&A.

Roger Basnia – Kepler Capital Markets

Okay. Maybe a final, briefly, what was the based on the seamless shipments, your utilization rate in the quarter? Was that about 80%? Is that correct?

Paolo Rocca

Well, in this moment, we have capacity in the rolling mill. We are stretched in the capacity utilization in the sophisticated product line and in this area new investment and expansion of capacity that are coming in are in the process of startup. So, utilization for this area is high, but is changing because of capacity additions and demand. So, but anyway, it's in the high range.

Roger Basnia – Kepler Capital Markets

Okay. Thanks a lot

Operator

At this time, there are no further questions on the line. I would now like to turn the conference back over to Mr. Giovanni Sardagna for closing remarks.

Giovanni Sardagna

Well, if there are no other questions we would like to thank you for our participants in the call. Thanks.

Paolo Rocca

Thank you very much, everybody. We expect you in Tamsa for the investor day. Thank you

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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