Ternium SA (TX) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the First Quarter 2006 Ternium Earnings Conference Call. My name is Enrique and I'll be your audio coordinator for today. At this time, all participants are in a listen-only mode. We'll be facilitating question answer session towards the end of this presentation.

[OPERATOR INSTRUCTIONS]

I'd now like to present your speakers for today's call, Mr. Sebastian Marti, Investor Relations Director, Roberto Philipps, Chief Financial Officer and Oscar Montero, Funding and Operations Director.

I'd like to turn the call over to your host for today's call, Mr. Sebastian Marti.

Good morning. Thank you for joining us for Ternium's First Quarter 2006 Results Conference Call. We appreciate your interest in our company. Before starting, we would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expected or implied. Factors that could affect the results include those mentioned in the company's registration statement and the press release.

Ternium's first quarter results reflect a solid performance. Sales, shipments and EBITDA increased versus the previous quarter. Sales reached 1.5 billion and shipments of 2.2 million pounds representing a 5% sales increase over the fourth quarter. EBITDA reached $0.5 billion and EBITDA margin remains stable at 33% of net sales, as we were able to offset higher cost of sales with lower SG&A expenses.

In the first quarter of 2006, our increased sales was supported by higher production and better utilization rates in our Mexico subsidiary Hylsamex and also by strong shipments on increased demand, all of which was supported by good pricing trends. Cash provided by operating activities was solid totaling $294 million. Overall, the global economic environment remained strong. Our core markets continued to grow at rates above the 4% rate of global GDP.

Importantly, we have continued to strengthen our positions to capture more opportunities in our core markets. And in particular in the North America region. We are seeing global steel demand growing at a very nice pace, and current work [in action] maintaining a reasonable supply-demand balance. This combined trend creates a good environment for steel pricing which continues to improve in the current quarter.

Let's now take a closer look at our core markets and the performance and outlook [trends] starting with the Southern Central American region. Overall, first quarter sales in the Southern Central American region were 830 million, a 15% increase over the first quarter of 2005. Sales were both flat and [long] products in the region were up double digits, with flat products sales grew a 14% and long product sales grew 10%. Steel pricing remained relatively stable at very healthy levels.

Overall profitability in the region was good, but was low slightly due to the previously announced price increase for iron ore in Venezuela. Electricity, gas and labor costs however remained stable at favorable rates. Our 2006 outlook for the Central South America region remains positive. GDP growth in 2006 is expected to be lower than the very strong leverage we saw in 2005, but still robust and supportive for growth.

We expect to see continued high activity in the area that most benefits earnings over growth and profitability including the construction, machine and equipment, oil and gas, agriculture and consumer products industries. Turning to the North American region, our performance here was also good. Sales and shipments remained relatively stable. Overall sales were primarily driven by price increases for both flat and long products.

Profitability remained strong and increased compared to the first quarter. With labor costs decreasing as result of headcount reductions and gas and electricity costs declining versus the previous quarter. With the aim of providing creditability to our costs in the region at reasonable levels, we continued executing our hedging strategy in natural gas having approximately 74% of the requirement for the remainder of 2006, hedged with [swaps] averaging $7.36 per million Btu.

We also expanded the hedging strategy for the first quarter of 2007 covering 44% of the requirement, using swaps at $7.38 per million Btu. We remain well positioned to benefit from the expected continued growth in North American markets. Economic conditions remain strong and are being underpinned by positive overall production and capital spending. Furthermore, pricing environment in Asia improved during the quarter contributing to a more positive picture. This is driving increasing price opportunities that we're continuing to capture with both our flat and long products.

As I mentioned before, while we are continuing to enhance our position to capture more opportunities in the North American markets with value added offerings, we completed last week the acquisition from Worthington Steel of the remaining stake within owning Acerex. Acerex enhances our capability to deliver to the North America region value added steel products. In our standard production capacity of 0.5 million tons, primarily processing steel to produce short length and [inaudible].

[Terms of] our financial position remain strong. Net debt was 849 million as at the end of March. It decreased $1.3 billion mainly as a result of the repayment of borrowings with the net proceeds from the IPO, and the capitalization of the subordinated convertible loans. The ratio of net debt to first quarter 2006, annualized debt EBITDA is 2.4 times.

Our expectations of CapEx in 2006 remains unchanged at approximately $350 million, including $120 million of maintenance CapEx. In sum, our strategy is working and continues to generate profitable growth and actual cash flow. We are also well positioned to capture the outside opportunities we are seeing in all of our core markets and are strengthening our hand to benefit even further from those dynamics.

At this time, we'll take any questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Sir, your first question comes from the line of Daniel Altman from Bear Stearns. Please proceed.

Hi, good morning. Couple of questions. First of all the -- in terms of your guidance, you talked about higher prices and stronger demands offsetting increases in energy costs and in iron ore. I just wanted to if you could try to quantify that. It seems to me like you may see more pricing momentum in the export market on a per ton basis [when] you could -- if I just give you a simple calculation of iron ore and energy.

So I'm wondering, am I missing -- is there a larger increase in energy prior to or maybe you could tell us what kind of an assumption you are using for energy and iron ore to make that assessment? And then, the second question is, in terms of dividends, if the company has a timetable for when you're going to announce your first dividend or when you plan to pay your first dividend?

Okay, on your first question Daniel, in iron ore we had one increase that you already see this quarter, which is, based on the renegotiation of the contract in Venezuela which we discussed last time [was] being around $30 per ton of iron ore [obtained] in Venezuela.

On top of that, once the negotiations that are taking place right now finalize, we will have additional price increase in iron ore, which will affect all of our markets. In Venezuela, as you know prices are now indexed to Brazilian export prices and we pay market prices in Argentina. In Mexico, we use our own iron ore. So, that market would not be affected.

For our iron ore purchases, we yet don't know what the increase will be, but just take a number, maybe 15% would be reasonable assumption. But, discussions are right now underway and we don't know the outcome. In cases of energy, as we mentioned in our opening remarks, we are hedging our costs of energy of gas in Mexico of values of about $7.36, $7.38 per million Btu. So, that gives us some certainty on the cost of energy there.

In Venezuela, we don't foresee any changes in the cost of natural gas. We're now paying $0.45 -- per million Btu. In Argentina, we might see some changes, which will not have significant impact on the Argentina operations, as most of our energy in Argentina comes from coal, and we don't foresee any increases in coal costs -- maybe even some reductions, 10% maybe a reduction in the cost of coal. So, that's more or less the impact that you see on iron ore and energy.

And in terms of prices, we follow what's going on in the market. We are seeing some increases based on strong demand in the U.S, European and in our markets in Latin America. But, we haven't quantified exactly the impact that may have because we are not absolutely certain how those prices would evolve. Like you know, we started out the year with the assumption of flat prices. Now, we see some increases, but we don't have an exact idea of how this will impact our net income.

On the second question, on dividends, we yet haven't finalized any decision on dividends. We will have our shareholders meeting shortly. But, we don't expect yet to have a dividend policy.

Okay, just one follow up question in terms of pricing dynamics. I'm pretty familiar with Mexican and Argentine domestic markets, and not as familiar with the Venezuelan domestic market. Is it challenging now to try to raise prices -- I guess this would apply to Argentina as well, is it challenging to raise prices, domestic prices for steel given in a populous government? Are you focusing your price -- when you see pricing -- [in reference] to pricing you are referring primarily to the export market?

Export market and our Mexican markets are very -- Mexican markets are very related to international prices. You're right about Argentina and Venezuela although, we have been able to increase prices in both markets. We have to be careful in terms of the policies that are spelled out by the government in terms of trying to contain inflation. However, we don't have price controls in any of the two markets. So, we might have -- be careful, but still, we're able to transfer prices to our markets when that is the result of international price increases.

Okay, thanks very much.

[OPERATOR INSTRUCTIONS]

Sir, your next question comes from the line of Jonathan Goldberg from Highline Capital Management.

Hi, good morning. I just had a question on the revenues per ton from South and Central America it looked like that fell sequentially between the fourth quarter and the first quarter. I was wondering is that driven by mix or maybe you could comment on that, and just talk about how you see that changing going forward?

Okay, sure. Revenue per ton in South and Central America went down mainly because of a slightly lower value added mix. You're right on that. Prices are more or less stable there. And so, also in the long products, we had a -- revenue per ton went up 1%. That's Venezuela, because in Argentina we don't sell long products. And in the two markets, we -- in the flat products line, we had a somewhat lower value added mix, especially in Venezuela where the domestic market was very strong, but especially for [inaudible].

Okay, thank you.

[OPERATOR INSTRUCTIONS]

Sir, you next question comes from the line of [inaudible] from T. Rowe Price.

Hi, good morning. My question is relating SG&A expenses. I was wondering if your current level from the first quarter is sustainable going forward. Are there still other reduction in expenses that you're planning on carrying out in Mexico? And we still see another, maybe a oneoff charge over the next quarter?

I would say that well, the level of expenses that you see in the first quarter are pretty much representative of the going rates now. We have already incorporated many of the synergies that we spelled out earlier. And we continue to look for opportunities to reduce costs. These will come over time, and they will require new systems to be put in place and other things that need to happen before we can have a significant additional reduction. However, we do feel that we have opportunities for reducing costs on top of the reduction we already made. But for the time being, we'll see costs more or less at the level that you saw in the first quarter.

Thank you.

[OPERATOR INSTRUCTIONS]

At this time we have no additional questions. I'll turn the call back to our host for closing remarks.

Okay, I guess that our opening remarks and our press release were pretty clear. We didn't get too many questions this time. But if you have additional questions please direct them to Sebastian Marti. We'll be glad to try to help you. Thank you very much for your participation, and again we'll see you next quarter. Thank you, very much.

Ladies and gentlemen, thanks for your participation on today's conference. This concludes the presentation. You may now disconnect. Have a good day.