Good day ladies and gentlemen and welcome to Tenaris SA Third 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 on and the instructions will follow at that time. [Operator Instructions]. Now I would like to welcome our host for today's conference, Mr. Giovanni Sardagna, Director of Investor Relations. Please go ahead sir.

Thank you and welcome to Tenaris 2015 third quarter results conference call. Before we start, I would like to remind you that, during this call, we will be discussing forward-looking information and that the actual results may vary from those expressed or implied during the 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 on our results. Our third quarter sales of $1.6 billion were down 36% compared to last year and 17% sequentially. Sales were affected by continuing activity reductions, customer inventory adjustments in the U.S. and the Middle East, and declining prices for our products. Our EBITDA margin at 15% declined significantly compared to last year but was marginally higher sequentially, mainly due to lower restructuring charges. During the quarter, recorded $38 million of severance charges to adjust the workforce to current market conditions. Our EBITDA margin without these severance charges would have been at 18%. During the quarter, our operating and net income were affected by goodwill impairment charges for $400 million on our North American business. Average selling prices were down 8% compared to the corresponding quarter of last year and 12% sequentially, reflecting the trend of reduction in the market and the less favorable product mix. During the quarter, cash flow from operations remained strong at $586 million, and we ended the quarter with a net cash position of $2.1 billion. The Board of Directors approved the payment of an interim dividend of $0.15 per share, or $0.30. per ADR, to be paid at the end of this month in line with the interim dividend we paid last year. Now I will ask Paolo to say a few words before open the call to questions.

Thank you Giovanni, and good morning to all of you. In our last call, we were considering the rig count in the United States could stabilize in the range of 850 or 900 rigs. But oil price has remained at levels that have prompted oil and gas producers to cut back further on their operating activities and their investment. As we enter the final months of the year, the U.S. rig count continued to fall and most North American independents and the major oil companies are anticipating a lower level of capital expenditure for the coming year. The impact of lower drilling activity has affected oil production, which is now declining in the United States, and this further activity reduction will inevitably accelerate the ongoing production declines in many regions of the world during 2016. These lower investment levels are not compatible with the long-term demand supply equilibrium, and we expect a recovery in 2017. After peaking in the first quarter at 3.4 million metric tons, OCTG inventory levels in United States are coming down and were at 2.8 million metric tons at the end of the third quarter. We expect that inventory level will continue to come down, but the pace of decline will diminish through 2016. We continue to make progress in deploying our direct rig service model in the United States and Canada. We expect that, by the end of the year, 30% of our OCTG sales in this market will be made with rig services. This service model provides us more visibility on the operation of our customer as well as relative stability in an environment of inventory reduction. However, excess inventories and the continuing flows on unfairly traded import are affecting selling price, which continue to decline. In the rest of the world, conventional onshore…

Thank you [Operator Instructions]. And our first question is from the line of Frank McGann from Bank of America. Your line is now open.

Hello, good day. Just two questions, if I could. One is what possibilities you have for additional cost cutting that potentially could provide some cushion for what continues to be a very difficult environment. And then secondly, looking at the three countries in Latin America, Mexico, Colombia and Argentina, I was wondering, if you could go into a bit more detail on how you see those markets responding to the current environment?

Thank you Frank. On the first question, we have a lot of work to do on reducing our cost, and still a lot needs to be done. On one side, the prices of raw material are continually going down. The results that you see here in our IFRS accounting are not fully reflecting obviously the real price of our input. This will kick in gradually into our account. But on top of this, we expect that some of our input will continue to be with a weak price in the coming quarters. We can work on this, then we can reduce and improve our productivity in many of our facilities. The programs for doing this are underway. This effect will gradually get into our profit and loss because of the negotiation and the timing for implementing this cost-cutting reduction based on productivity. We can also work on the allocation, creating the weight of the most efficient facility in which we have underway investment for debottlenecking and for improvement in capability and production. We are also working on our fixed cost. The structure of Tenaris is still to having some of the process that are essential for us even if we want to preserve all the capabilities that Tenaris has to make a difference in the long run, and so the reserves in development and the key components of our differentiation we will not reduce much further. But still there is room to go on this. I think we will see the full effect of this in the second quarter of 2016. On the second question, let's say the situation of the country, we will start with Mexico. It's true that Mexico has been to some extent disappointing for us during 2016. We were originally expecting a higher budget for drilling and a little more dynamic activity. But I will ask Guillermo to give a view of what we can expect from Mexico looking ahead in 2016 and 2017.

Good morning Frank. As Paolo said, we were disappointing this year. We see Pemex suffering from cash flow restraints. We see the recount coming down. This quarter, the recount came down versus last quarter. We see next quarter coming down also the rig count. When you see the budget that has been proposed or Pemex for next year, what we're seeing is at 12%, which should be approved by the end of -- by the month of November, we see a part of the reduction next year from this year in dollar terms of around 10% to 12%. So in the short-term, we are not optimistic about what we will see for Mexico. Moving more ahead of that, on the other side, we see that energy reform continues to work out in good terms. We see that around $1.1 billion was not very good, was not very successful. But around $1.2 billion was much better. There were three blocks assigned from five blocks. We should start to see some effects of that by the fourth quarter of next year. And then around $1.3 billion which is mainly 25 fields on the onshore, we see interest. There are 60 companies that have bought access, that have gained access to that room and should be assigned by the middle of December, by December 15. And then what we see also as a result of this restraint in terms of the cash flow of Pemex is a much more interesting activity in terms of farm out from Pemex. And around $1.4 billion, which should be -- the terms and conditions should be known also by the middle of this, by next week. We see that there is going to be some farm out of Pemex there. There should be basically deepwater and heavy oil. And so we see the energy reform continue to work on a positive trend. And I think that that will give us various support in terms of what Mexico will provide to us by – starting in 2017. And that's more like the outlook we have today in terms of Mexico.

Thank you Guillermo. When you talk about the other two markets you mentioned, Colombia, what we see in Colombia, that the number of rigs went down compared to the beginning of the year. Some of the projected Colombian [indiscernible] are not entirely profitable today with the present level of government taking agreement. So the Company has been discussing and negotiating. We're going to see how this condition could be changed and activity could be restarted. So we do not expect – we expect reduction in the activity in the first part of 2016, and hopefully, according to some of the changes of the condition of operation there, recovery from that point on provided there is no substantial change in the price for oil. In the case of Argentina, Argentina the drill activity has been supported up to now, but the policy of the government of maintaining a price for oil for the domestic producer that is relatively high compared to an international price, it is not clear what could happen in 2016. What we would expect is that profitability of drilling reduced during 2016, but there is a good perspective of 2015 gas. Today, Argentina imports gas. The current price in the range of $7.5 for the gas in Argentina. So domestic producer in an environment that could be predictable in terms of condition and in a solid policy framework may invest on gas development. And the potential is huge considering the resources in Vaca Muerta. The price of $7.5 that it is today, the importing price for Argentina, Argentina importing around 30% of its need is attractive. So we expect there could be some reduction in oil, but we expect increased drilling for gas.

Okay. Thank you very much.

And our next question comes from the line of Stephen Gengaro from Sterne, Agee. Your line is open.

Thank you. Good morning gentlemen. A couple of things. I guess I would start with when you look at your sort of adjusted EBITDA margin for the third quarter down a little bit from the second quarter, given what you are seeing from a price perspective offset by cost cutting, how should we think about how it unfolds in the fourth quarter?

I feel that what we can expect is basically in line with what we see in the third quarter. Condition, I mean there should be some improvement on the cost, and some deterioration on the price. It will depend also from our capability to continue our cost reduction in an area like fixed costs. But in general, if I look at this, this should be what we can expect. But I would ask Edgardo maybe to add some comment on the factors that will influence EBITDA, just EBITDA getting into the fourth quarter.

Thank you. Good morning. Probably, I mean you basically commented the most two important factors today. We are trying to keep catching up with the reduction in prices that we are facing in many regions, primarily also following the pipe lodging last month that we continue a very downward trend. It has been almost 29% from October last year. It was big. So our – in this quarter, we see in the third quarter and probably in the fourth quarter, we will continue to see some benefits of the plan that we have implemented with the reduction of personnel in fixed and variable costs. So the plans, even though we're operating at a low level because of the shutdown in the third quarter, really we will be able to maintain a very good cost structure. So together with the location of the most efficient facilities for the cost, we're trying to defend basically the operating margins and the EBITDA margins that we have been reaching in the third quarter.

Thank you. And on the seamless side, do you think you get a normal or a muted increase in volumes off of the sort of typical third-quarter slowdown, or do you think the market won't allow for that?

We expect volume to be more or less in the same level than in 2015 – In the third quarter of this year. There will be no substantial change.

Okay. Thank you.

And our next question comes from the line of Igor Levi from Morgan Stanley. Your line is now open.

Hi, Good day. We have seen OCTG prices in the U.S. now decline over 20% from the peak. And we have very limited visibility into international pricing. So I was hoping you could talk about to the extent this has so far impacted the prices you're selling into the international market. And what percentage roughly of your revenues do you still expect to be repriced lower as large contracts are marked to market?

You correctly say that the reduction in the price in U.S. is reflected in pipe logic. It's not entirely translated in terms of the contract but for sure is affecting pricing, international pricing. The international pricing is also affected by some change of mix. Some of the most demanding projects in exploration that use a very complex product that has usually higher price are postponed or slowed down, in some cases postponed in some cases slowed down. So we see some mix deterioration that is affecting our international pricing, and some influence of the general decrease of price for material and for pipe lodging. In some of the formulas that we have on long-time agreement, we have also raw material reflecting of our costs and these are also having an impact on this. But I will ask Gabriel, he is in charge of international Eastern Hemisphere, to come to add some comment on how is our struggle for pricing at this moment.

Thank you, Paolo, and good morning Igor. Interesting question that you point out on the pricing international market. On one hand, we have the majors operating in the offshore environment. In these, in the majority of those cases, we have our long-term agreements, formulas, with public indexes, raw materials, pipe lodgings, and some others, all different. So there has been given price concessions along those lines. I think we have transcended those price discussions with our customers operating in those environments and engaging in which way Tenaris with technologies and services could review of total cost of ownership, and help them reach the RFIDs and the better economics of their projects. So this is on one hand how we are adjusting the discussions with our customers on the majors side. When we go to the Middle East, there's a different pricing environment. This is spot tendering. So on one hand, there is competitions that is important for volume in this environment. On the other hand, we are seeking in the Middle East the most differentiated segment. In Saudi for example, we are targeting the two that are acquiring our service. So there is only a limited number of producers that could be a factor in Saudi's needs. Kuwait, the drilling as well of very deep wells require in particular technology. You go across also in the UAE, the other third country with positive dynamic in the Middle East, also deviated with offshore in which we have differentiated technologies to different pricing. So it's competitive pricing in the Middle East, but we are targeting the most differentiated segment.

Thank you Gabriel. That's very helpful. And just as a quick follow-up, in early 2015, you started a push to reduce dependence on distributors in the US and increase your share of services. I was hoping you could talk a bit about how successful you have been there, and where do you think you will be, say, six to 12 months from now?

Thank you. I will ask German to comment on this.

Thank you Paolo, good morning Igor. And what -- we provided an indication, about 30% of our OCTG sales in North America today channel through what we call our rig direct model. This has been added delivering pipes on the rig site and performing most of the pipe management activities, say, between our plant and a rig. That was fairly low only a year ago when we announced the initiative and deployed in that way so far despite the market conditions. I won't probably tell you exactly what our target is, but ultimately the aim is to leverage our industrial system in North America to create a sourcing system that allows us to not only replace the existing intermediaries, but create in the end a scheme where cost efficiencies, important material cost efficiencies in the form of lack of double inspections and obsolescence and maintenance are introduced. Hopefully that answers the question.

Thank you, I'll turn it back.

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

Thank you. Paolo, I was hoping you could spend a moment talking about, if we look back at the slide at the analyst day where you saw the global OCTG market this year, 12 million tons back in late September, yesterday you talked about 11.3 million in the press release. What really drove that decline and that change in what is a fairly short particular time? Maybe we could talk just geographically a bit. And I guess my follow-up would be is the 5% growth for 2016 that you outlined at the analyst day versus 2015 still a good percentage growth number, just coming off of a lower base for 2015?

Thank you Bill. Well, we are – it's true we are reducing our overall estimation on the OCTG upper in demand in 2015. It is mainly due to the dynamic of consumption and inventory reduction in the United States. This is the main factor that is affecting this change in our forecast. Inventory is going down as supplying part of the consumption, and this is the reason why we see an upper demand below what we expected. At the time, we are estimating stronger activity, and also we are having an estimate of the impact of inventory reductions that is slightly different from what we see today. I think this is the main factor for the change. As far as the division into the future, basically we expect is more increase, not marginal increase in overall demand. This market went down because of a reduction in inventory. The upper in demand went down by almost 36%, 35in one year from 2015 into – from 2014 into 2015. Now, we expect a marginal recovery, not something substantial because the reduction in inventory is gone in the first part of 2016. So, I would consider the same level of increased marginal but from a different base. This should reflect what we can see today in the reality of 2000 – in the future of 2016.

Great, if I could ask one follow-up just because it's important for 2016, and that's just Saudi. Have the tenders I guess formally been launched at this point and bids being taken in at this time?

Yes, I will ask Gabriel to tell us how Gabriel you will see the destocking processing in the Middle East, and if we arrive to the point in which there is a change in the direction of this.

Thanks Paolo. Good morning Bill. We see a positive pattern in the Mid East, in Saudi, UAE and Kuwait. The three countries are very distinctive from the rest of the Middle East. That offers a different outlook. In Saudi, the level of rigs continues to be high, above 200, with even some positive shift towards gas. Going to regulatory to your point about tendering, tendering restarted at the lower levels. That is still the level of operatic consumption, but they have restarted. Some of the first orders are being placed, so we, for at least I think 50 months, we didn't have an Aramco purchase order. This year, we are starting to receive those, so this shows a different trend compared to the past. And we are going to see a gradual rebalancing of purchases and an operative consumption in Aramco during 2016. A similar pattern is happening in Kuwait and UAE. Both countries are increasing drilling activity. Both countries are increasing drilling activity. Both countries have bought in 2015 less OCTG that they are consuming today, so we also see that there in 2016 we're going to have a positive trend from these two countries.

One other comment, in other words, we were looking at rig, operational rig in operational U.S. in the range of 800 rigs. Today we are looking to 770, could be 750. The decline of rigs that we expected to extend into 2016 is also explaining part of our change of view as far as the size overall of the market is concerned, and also the size of the market in 2016 in spite of good news that could come and that are coming from the Middle East.

I appreciate the time. I'll turn it back.

And our next question comes from the line of Amy Wong from USB. Your line is now open.

Good afternoon. I have two questions please. The first one is related to your commentary on OCTG shipment and sales to recover. And Gabby just covers the Middle East but you also mentioned in other regions during the year. So could you please elaborate on which regions you expect to see recovering OCTG, what it's driven by, whether it's volumes restocking, destocking or give us an idea of what's going on in the other regions? My second question is could you please also give us an update on the anti-dumping case in the US? Last time, we understand that the domestic producers were intending to file a case to review the dumping rates on the Koreans. And also on the other end if you also had heard anything on what the Department of Commerce is actually going to do on their review of the rates on the Koreans as well. Thank you.

On the first question, let me tell you, in general, I would think that during 2016 we will have some improved operating demand in North America, some reduction in Latin America and hopefully some improvement driven by Middle East and international. But I will ask Gabriel to elaborate a little bit on international.

Good afternoon Amy. In addition to the Middle East, I think the areas where we have a positive level of achievement and revenue in 2016, I would mention on the two if we were not seen. I think we commented in previous calls about our success on Colleen for example compared to in the UK or Marina as well. There are a very limited number of new projects or new RFIDs going on in the international market but we have been successful on some of those. So we expect that on relative terms this plays in our benefit. Another area where we are targeting and hopefully we will have some positive news in the future calls is College Station. This is an area that also has been severely challenged, but I think our portfolio of products and service offering will allow us to increase our position during 2016.

As far as I mentioned, Latin America, I think Latin America because of the situation in Mexico, the lack of visibility in Argentina, the impact on Ecuador, are countries that are very much stressed by the level of price of foil and may slow down their operation. This is an area in which we will see some decline of the demand. When we look at our sales, however, you have to keep in mind that, for instance, in the United States, even in an environment in which the rig count is going down, the clients we that we’re serving directly are more stable, I think, than overall in the market. So we hope to be able to do a little better because of the quality of our portfolio of clients there. Coming to the point of anti- dumping, German, could you comment on where are we there?

Sure, thank you Paolo. Good morning Amy. We have in fact together with the rest of the industry filed the administrative review petitions September 03. Now, from that point on, the Department of Commerce has about 40 to 45 days to confirm their definition as to whether they are going to proceed or not. We will expect an answer in the coming, say, 10 days or so. We have at this point no indication to the contrary, and then the process goes on, should be completed in about 12 months to 14 months.

Yes. Thank you German.

All right. Thanks for that. So that's from the domestic producers' perspective. Have you heard any news from the Department of Commerce regarding their review of the basis of the profit calculations for the Koreans? We haven't seen much news flow on that actually.

Well, say, two separate subjects and move on the review petition is only starting and the Department of Commerce has to perform ultimately the calculation based upon not only new input but, most importantly, the new law, which provides the Department of Commerce I think a higher degree of flexibility in terms of the type of questions, the way cost is structured, Et cetera, Et cetera. Hopefully, that answers your question. I was also referring to the question, the discussion about the managing on the Korean import after presentation injustice. I don't think this will affect, German, the overall determination, overall redetermination by the DOJ on the Korean dumping that has been encountered in investigation.

No, there is – yes this is looking backwards, if you will. There was a question to the Department of Commerce done by the CIT, and it is our understanding that the Department of Commerce has answered back to the court with the explanations, the justification, as to whether this 16%, into 15% margin on Korea was evaluated. And at this point, we understand that there's no reason for us to assume that that will change.

All right, that’s very kind. Thank you very much. I'll turn it over.

Thanks.

[Operator Instructions] And our next question is from Nicholas Green from Bernstein. Your line is now open.

Good morning. Three questions please from me. First of all, you mentioned in your prepared remarks further restructuring of operations would be undertaken. Apologies if you already mentioned this to some extent. But could you give a few more specific details on that please, maybe with regard to which plants you're looking at or the type of actions you are thinking about? Secondly, welded steel volumes, achievable volumes, obviously increased 14% or so over the quarter, seamless declined 11%. To what extent is there a substitution effect happening? Are you able to explain how the drilling engineers and how your customers are viewing the use of the two products in the current downturn? And then the third point, again, particularly with regard to the U.S. market, as regard to market share, potential for market share gain next year in the U.S., you clearly have a slightly different supply model, direct supply model, for some of your sales versus distributors. What I would be interested in is do you feel that distributors are likely to gain market share next year because of their predatory pricing and their need to get through their own inventories, or do you believe that your direct sales model is more likely to gain market share as you are able to pass some of the industrial margin across? Or I guess thirdly, do you believe there will be no market share changes? Thank you very much.

Thank you very much, Nicholas. When I was talking about further restructuring, we had programs that increased productivity almost everywhere. We recently renewed a suspension agreement in Argentina that is very important to give flexibility to the management of the plant. We have flexibility in Mexico in many operations. We are restructuring and reducing cost in the operation in Canada. Where you're doing this through temporary stoppages to agreement to have – transform part of the work into variable even when in the area they are a more fixed cost area for the company. This is what we are doing, for instance, in Italy. We are implementing an agreement that will allow us to have more flexibility. And this agenda should – is turning out into reduced cost of labor worldwide month after month. No major closure or change of perimeter in our operation. We really think that we will need all our strength for all of our facility, for plants and transformation and finishing worldwide, so we have no major change. On the contrary, as you know, the United States, we are continuing our investment in the new Bay City plant, which should be started in 2017. And it is a very key component of our deployment in the United States to give confidence reliability, supply, and security to all our clients in the United States. And we are proceeding with our investment in Kazakhstan to support all the clients operating in the Caspian Sea. And we are doing similar deployment of small scale with Koufos, the euro capital, but at the same time focusing on assuring presence and service to our client. As far as second point, whether they are increasing just because we are delivering important project for line pipe in Argentina, in Brazil, and this is increasing the volume of other projects, we expect this to be much lower getting into 2016 when we will complete the delivery of some of the major pipelines that we are delivering now. As far as the third question is concerned about market share, we are deploying our model. Our model is based on rig direct, a full range of services. We are a company trying to change the way the industry works, and considering that this is the best way to make efficient the shale specialty, the shale operation in the United States, the change of the way of working this, and I think is a model that is receiving increased acceptance of that on our client. During 2016, it's difficult to predict how will be the level of rig count and the demand, but I think that this model should be more stable and should be feasible for us to defend our level of enlargement in our market share against the distribution and even make some inroad in some application even before the start up of the new plant in Bay City.

Okay. That's very helpful. Thank you. Just to follow up on the substitution question please, I follow the answer, the line pipe is absolutely fine. Just more generally then, is there – do you feel there is substitution taking place between seamless and welded? Or inversely, perhaps as you find seamless products are more – you saw more – a high proportion seamless products in this market, because that's precisely the type of tube that can't be compromised, can't be sacrificed, or do you think substitution is a threat? Thank you.

I'll ask German to expand on the extent of this overlapping between product.

Thank you Paolo, good morning Nicholas. Short answer is probably not. Maybe at the margin and operator but put it self in a position where both seamless welded may fulfill the formation requirement. That's three designs for particular the sales will define rationally with the industry. We're working on optimizing them. And we've seen in fact switches from premium to semi premium, seamless to welded. But in generic terms, the designs are well-established. We have not seen many cases of substitution. And I think the supply pattern we have is a good proxy for ultimately what formations are calling for.

Yes, there is a I would say a difference in product, and the product design for a column may include welded and seamless. To some extent to my understanding, there is a substitution at the level of the lower grade on these in the design of the column. But any company and maybe you should be able to have the entire portfolio project to fulfill the demand of their company. Today in the shale, companies are operating in different environments. They want to have a supplier that is able to supply the entire portfolio of products from the welded to the seamless. That is why I am insisting that an increased capability for seamless in the United States is also helpful for Tenaris to strengthen our model of supply. We will really be in a position to supply the entire portfolio and in some applications the trend really require welded because also the time to market for some of these products is different. And this will allow us to design our supply proposal and our service proposal really to fit the need of every application everywhere from the Gulf of Mexico to Bataan to Eagle Ford to Marcellus to every place in the United States and Canada.

Okay. Thank you very much for your time. I'll turn it over.

And our next question is from the line of James West from Evercore. Your line is now open.

This is Mike in for James. Sorry if this has been answered. On the Saudi contracts for OCTG, have those tenders been issued?

Saudi contracts for OCTG, which tenders have been issued? I'll ask Gabriel to.

Yes James. Tenders have been issued and the first POs regarding those tenders have been placed. We have received them as well. So yes.

Okay, thanks very much.

And our next question comes from the line of Stephen Gengaro from Sterne, Agee. Your line is open.

Thank you gentlemen. Two quick follow-ups if you don't mind. The first, I was surprised on the positive side by the gross margins in the quarter. They were actually up a little bit sequentially from the second quarter. Is that raw material costs? Is it mix? What drove that?

Good morning to Gengaro. Yes, I mean remember Good morning. Remember that in the second quarter, we have also the extraordinary impact of the [indiscernible] in the cost. So the reduction quarter by quarter is $54 million in this particular comment. Together with the fact that we do have some efficiency, additional efficiencies, achieved in this quarter but a very important one-shot impact in the fourth quarter, in the third quarter, sorry, compared to the second quarter, it was much higher.

Okay, thank you. And then my second question, and I'm going to try to ask this correctly, but when you think about your direct sales model and when we look at the US market in general, we tend to look at inventories and we tend to look at months of supply on the ground as kind of a proxy for when pricing maybe can get better. Do you think that the direct sales model changes that dynamic at all, where the inventories are less significant as we are trying to figure out where pricing can go because you are selling direct to customers? Do you think that dynamic changes as far as when we would see a price inflection?

Well, that is a question of scale. First, from our point of view, it's clear that to have $2.8 million tons of inventory on the ground is really a very inefficient way of working into the oil sector. Because in the end, you are tying a huge amount of capital into inventory. In the future, if I should imagine in the long run, this chain of supply should change. Now, we are pushing in this direction. We are doing our part, but still when you say that 30% of our sales are today done directly to the rig with a planning protocol, with the plan, with the company, the rig, our plant, the service associated with it, the transformation, additional accessory and additional input needed, you're talking about a new order, but the scale of relevance of this into the overall system is still I think too small to influence the pricing dynamic in the market. Now, over time, probably there will be – reducing this inventory will give more relevance to the changes in the operation of consumption and induce a little the big influence of exit inventory in driving the pricing indicator down for more product.

Okay. That's helpful commentary. Thank you.

And our next question comes from the line of Kevin Roger from Kepler Cheuvreux. Your line is now open.

Hi, good morning everyone. It's Kevin Roger from Kepler Cheuvreux. Thanks for taking my question. If I may, if I well understood, you are expecting of the end of destocking in the US in the second part of next year. Can we have a little bit more color on the potential impact in terms of for Tenaris? Regarding the EBITDA margin then, you has published an EBITDA margin below 20% for the first time this year. Regarding 2016, can we expect an EBITDA margin above 20%? And third question please regarding the cash flow generation. Once again, we have a strong positive impact from the working capital. What kind of impact can we expect for Q4 please? Thanks.

On the first point, we are hinting at the end of destocking in the middle of 2016 because basically we also expect that gradually the level of rig count will start to move by the time of by the end of 2016. One second, the continuous reduction in the stock will find its limit. In a couple of quarters or three quarters more, we expect that the stock will be adjusted to the need, one. And second, the range of products that are in the stock are limiting now because, in the because, in the end, you ended up with a stock that is imbalanced between product that probably will still have a longer – will be long in terms of days, but other they will be running out. So they will be running out of some of the items, some of the applications. The gradual will reduce the scope of possible reduction. This is our assumption. Now, in the case of looking at EBITDA, at this point in time, we basically expect to be able to stay at the present level during 2016, plus or minus what it could be. But I will remain in my assumption that we are in the middle between 16% and 17%, depending from the ups and downs of every quarter. As far as the cash flow is concerned, well, you should keep in mind that we are generating cash flow also from the reduction, especially from the reduction of working capital, and the strong cash generation from the operation. In the 2016, we will gradually slow down the generation cash from the stock, and we will continue to invest in Bay City, so we will have application in Bay City. And we plan to maintain our dividend. So in this condition, it is likely that we will reduce the level of net cash that we have in our hand during 2016.

Okay. Thanks for that.

And our next question is from the line of Pedro Medeiros from Citigroup. Your line is now open.

Thanks for taking the question. It's actually two questions instead of one, looking at the short-term and medium-term for working capital structure. If you can give a little bit more color on how you are seeing your working capital in the short-term. I understand that inventory then should be seasonally higher in third quarter, and you're maybe a bit higher than usually given the significant decline in the US for the third quarter. So how are you expecting inventory should work out through the end of the year? And are you looking to – are you looking at any potential changes to your receivable structure or have you seen any growth in provisions on your receivable on that basis? The medium-term part of working capital is basically to understand how a higher sale of your direct sales model or higher penetration of your direct sales model in the US. How would that change your working capital in the medium-term? Is there any structural change on that basis as well?

Thank you, Pedro. I will ask Edgardo to elaborate a little more specifically on the evolution of the working capital receivable [indiscernible].

Thank you for the question. Yes, you have noticed, I mean, so far in the last nine months of the year, we have been basically transforming working capital into cash for more than $1.3 billion. That means almost half of this coming from the inventory, reacting very quickly. And at the same time, it has been also follow-up the reduction in sales, and therefore that transformation in lower receivables. So far DSO remains in the historical level, 72, 73 days. However, as Paolo was mentioning in the opening remarks, we do our monitoring very closely, especially in some areas which overdue has been more going beyond basically the normal delay impairments. Taking into account your question in terms of how we are moving now in the US probably going out from the distributors, clearly – and this condition is part of the discussion that we have in investor day, that we are closely monitoring the financial health of our customers, but we are, with many of the big customers that we are servicing, providing to some extent some of the extended payment conditions that really are helping in this very complicated environment in which part of the credit line has been to some extent reduced by the banks.

Yes, in other words, we will use part of our cash to support our client, for supporting some of their plans. So during 2016, we would see some use of capital for this support of plans. I don't know if Guillermo wants to add something on.

Yes, just to give you a little bit more color in terms of what's happened, the change in the system, in Mexico, when we established the just-in-time delivery system for Pemex, actually what happened is they were having from eight to nine months inventory, and we reduced inventory in the system to 20 days. So what we were reduced the cost overall cost of the structure and we benefited both. We took some of the savings in Pemex to some of the savings. The other thing which is very important for the system is that it reduces the volatility of our results. And for us it's very important in the long-term to reduce them. When we are in a cyclical industry and then you have large numbers of inventories on the ground that increases the volatility of the results or of the cycle. As much as we can reduce inventory in the system, we're going to reduce our volatility, and that will improve long-term the long-term effect and the present value of the company. So it had different elements. And the third element, which is very important, is the reliability of the delivery for the customers. When you are basically working with low inventories, it's very important the reliability, and it also reduces your exposure to imports because you need much more time to establish a system like this when you're importing for long importing for long distances. So it has differing effects on the ground, but in the meantime, it changes the value of the business money.

Okay. Thank you, Guillermo.

Thank you so much, just one follow-up to that. So thinking about an increased penetration on direct sales into the U.S., we would expect, at least for that part of the business, a slightly higher receivable, but one that would be compensated potentially even on a net positive basis by lower inventory as well on your side.

This is our expectation. To rule out and implement this main inquiry in the initial stage, some safety stock on our side, and some measure to assure our client of the reliability of our supply. But this over time, we would be able also to kind of excess working capital that probably at the beginning will be in place.

Okay.

Pedro, I think it would be fair to say that the model calls for a structural change relative to the average five and a half, six months which the industry in the States have historically referred to us the standard level.

Okay. Thank you.

And our final question comes from the line of Felipe dos Santos from JP Morgan. Your line is now open.

Hi gentlemen. Good afternoon. Just I have some questions. The first one, what is the main difficulty that you are facing so far to change the way the chain works in the U.S.? And how the other players are going against or in favor of this change? And the second, could you give a perspective on what you can expect in terms of the bottom of this stuff moving forward for U.S. in Middle East, or the timing of this happening first quarter next year, second quarter next year.

Thank you, Felipe. On the first part, it's understandable that every industry that is managing high risk project is conservative in changing its supply chain. They need to be very confident on the reliability of supply. This is one important component in the supply. Any proposal of change is necessary it will be tested. There are pilot. There are ways of getting a customer confidence on this. Also, to deploy fully this model, you need to support it with information technology, redesign of supply chain, and also to be available the tools that are needed to keep this sensible reliability. This is a gradual process, not immediate. I would say that these are mainly the difficulties that will make this process gradual. But we are very confident that, in the end, this will be a model that will prevail in [indiscernible]. We hope to be the first mover into. We also suspect that sooner or later some of our competitors may follow on it. But I think it is the model for operating in the industry in the future. On the second point, I think we discussed it over the call, we expect that by the second –in the third quarter of 2016 in the United States, the impact of inventory will fade away and re-consumption, import production will be the main factors determined in the equilibrium mind. In fact, in the Middle East, this will happen for – I mean, the stocking is going down, and we will see tendering starting from now on and driving the upper end of demand up during 2016.

One first question if I may. What kind of capacity, utilization capacity, are you running in U.S. in your [indiscernible] right now?

German. How the.

Thank you, Paolo. As you know, Pedro, we rationally under these market conditions have to adjust down our production output in the States given how operating demand is evolving. We have made specific announcements with respect to our Quando plant and Oswego plant. Shipment in McCarty plant continues to operate, and given the circumstances, the way the destocking is evolving, et cetera, I believe that the two plants are going to remain, give or take, at the level they are today. We are not disclosing specifically the capacity utilization for competitive reasons, but the two existing plants will continue on through 2016 as far as we obviously – availability we have.

Thank you. Thanks so much.

Thank you, Felipe. With this question I think we’re running out of time and we can close our question and answer session. Thank you everybody.