Ternium SA (TX) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2006 Ternium Earnings Conference Call. My name is [Nazik] and I'll be your Operator for today.

[OPERATOR INSTRUCTIONS]

I would like to introduce your speakers for today's call, Mr. Sebastian Marti, Director of Investor Relations, Roberto Philipps, Chief Financial Officer and Oscar Monero, Planning Director. I would now like to turn the presentation over to your host for today's call, Mr. Sebastian Marti. Please proceed, sir.

Good morning and thank you for joining us today on Ternium's Second Quarter 2006 Results Conference Call. We appreciate your interest in our company. As you all know, we shall [plan expressly our schedule]. We will review on this call the highlights from the second quarter. We'll also touch on the current global steel environment and Ternium's [positioning]. We'll then open the call up to your questions.

Before we do that I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed on slides. Factors that could affect the results [inaudible-highly accented language] in Ternium's filings with the Securities and Exchange Commission and our Second Quarter Results Press Release. I will not go over the highlights of Ternium's second quarter.

We posted another quarter of strong results in the strength of our low-cost value added business model. Our net income sales, shipments and EBITDA all increased compared to the first quarter. Net income [inaudible-highly accented language] equity holders in the second quarter was $233 million compared to $165 million in the first quarter.

Net sales reached $1.7 billion on shipments of 2.4 million tons in the second quarter, up 12% from $1.5 billion in net sales and shipments of 2.2 million tons in the first quarter. EBITDA for the second quarter was $582 million or 34% of net sales, an increase of 16% from EBITDA of $501 million or 33% of net sales in the first quarter. Our EBITDA figure benefited from the increase in shipments, improved prices and continued cost containment. Accordingly the EBITDA margin improvement is attributable to better steel prices and relatively stable costs.

Our [inaudible] were driven by the continued strong demand for our products in our core markets in the Central and South America Region where the main economies continue to perform well. We also benefited from a healthy [basil] environment across all of our regions, particularly in our North American markets. And we continue to manage our business conservatively with an [actual] concerning costs associated with labor, raw material and energy.

Moving forward, we expect to see demand for our products to remain healthy and for pricing to stabilize. We also do not believe that fluctuations in raw material prices and energy costs will have a sizeable impact in our business in the near term. Regarding the latter, our hedging program in Mexico mitigates natural gas price fluctuations until March 2007.

Let's now take a closer look at our core markets and the performance and outlook for each of them. In the South and Central America region our second quarter flat rolled product sales totaled $903 million, an 11% increase over the first quarter. Sales of our flat rolled products grew 12% and 8% respectively in the region. For the first six months of 2006 our total net sales in the region were $1.7 billion.

The [impact] in the South and Central America region during the second quarter remained relatively stable with higher prices and low products as the economy's lower main markets in the region continued to perform well. Our outlook for the balance of the year in the region remains positive. As we discussed in our previous conference call, the economic growth in South and Central America remains strong, particularly in the sectors that most benefit our business including the construction, machinery and equipment, oil and gas, agriculture and consumer products industries.

North America continues to be an important market for us. Our sales and shipments in the region during the second quarter trended upward compared to the first quarter, particularly with respect to our rolled products. This [inaudible] supply and demand [inaudible] for these kind of products in Mexico.

Last year the flat products in North America during the second quarter increased 6% over the first quarter to $520 million, while net sales of our long products in the second quarter went up 31% over the first quarter to $212 million. Overall the sales in the region for the first half of the year came in at just under $1.4 billion.

Our purchase from [worthington] industries of the state that we did not already own and operate was [supplied] by Mexican authorities in May. [Ascertan] is now part of Hylsamex, it's a steel processing center that produces short length and thin steel sheets to [vary and width]. Assets along with our ongoing relationships in the region will enable us to continue to increase our presence in the large and growing North American market.

[Turning to our] financial position remains strong and net debt at the end of June was $670 million, down from net debt of $849 million at the end of March. It is primarily because of the retainment of certain borrowings. Cash at the end of second quarter was $916 million. Our ratio of net debt to first [inaudible] EBITDA is 0.3 times. Our expectation for CapEx in 2006 starts at approximately $350 million including [$440] million of maintenance CapEx.

Before we take your questions, let me first offer some brief commentary on the global steel industry and Ternium's position in it. There continues to be a lot of discussion about consolidation in the steel industry, especially in light of the recent events surrounding Mittal and Arcelor.

Our deal is that consolidation is very positive for the industry as it produces pricing relativity and allows the industry to adjust for an actual base on the business side. We are also more open to growth through acquisition but as with everything we do at Ternium, we will take a measured approach to ensure that whatever we do enables us to continue to build shareholder value over the long term.

And with that we will take any questions you may have.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Paul Ruthenberg from Bear Stearns.

Hi, good morning, congratulations on the results. I was wondering if you had an update on your first dividend payment and the when you expect that to come?

Paul, we do not have as yet a dividend policy as you know. We mentioned in the previous calls that we expect to pay dividend during 2007, but we haven't established yet a date to do that. Anyway dividends need to be approved by shareholders' meeting, so that's when we shall expect the -- after the shareholders' meeting takes place to consider a dividend payment.

Okay thanks. And one more follow-up if I may, I noticed the cash distribution related to Sidor decreased quarter-over-quarter. Is that a sign that the profitability of Sidor was down?

No, it's not a matter of profitability. As you know this is distribution of available cash, which is not only dependent on profit it depends on changes in working capital and so on. So CapEx-- so that's mainly we had a fluctuation in this quarter, but it's no sign of a change in profitability.

Okay, thank you very much.

Sir, your next question comes from the line of [Alex Fundler] from [George Weiser] and Associates.

Good morning, gentlemen, again congratulations for the fantastic quarter. Just a little more -- if you could give us a little more detail towards [orbitains] for the company because there's been accumulated -- you know very low leverage and a lot of cash flow. I'm just wondering if there are any acquisitions in the pipeline, anything that the company might be looking at since there is no events anytime soon?

Yes you're right, we are accumulating cash and we repaid some debt. We will continue to repay debt in the next quarter. In terms of acquisitions, we don't have much to report at this time. As you know we are looking for possibilities of growing through acquisitions in our region, basically we are looking only at the Americas. At this time we have no specific acquisition that we're pursuing, but we think that there might be opportunities in the months to come. So if anything comes up we will -- of course we'll report that.

Thank you.

Sir, your next question comes from the line of [Diego Menders] from JP Morgan.

Actually this is Rodolfo De Angele from JP Morgan. Congratulations on the results. One question I have is on your income tax rates, they are relatively low compared to the first quarter and the numbers of last quarter of '05. Could you just comment on what is the trend there? Is it sustainable to maintain the 22% levels that you posted? And what's expected for the future?

Well, we had an extraordinary [inaudible-highly accented language] in this quarter, which has to do with Sidor and the tax deferred accounting and it's not something that we can expect to happen in the future. So we should look forward to rates more in the end of 25 to [inaudible-background noise] percent. The reason why this happened is the inflation adjustment on assets in Sidor and this had an effect on the accounting of tax deferral. This should not be the thing -- the same thing should not happen in future quarters, so basically the rate that we had before between 25 and 27% is more sustainable.

Okay thank you very much.

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

Hi good morning, I just had a question on shipments. Your shipments have picked up pretty nicely over the last two quarters in a row now and I'm just kind of wondering is this a decent run rate to think about as far as shipments per quarter? Or do you think production can go up further from here?

Shipment increases were very strong this month in long and flat products and also in other products. Let me start by the small -- very high percentage increase but small in volume on other products, which is related to the Pellet plant which had stopped in the previous quarter and was running normally this quarter. So we had a very good increase there. In flat and long products, both have basically are related to our Mexican operations. We had an increase in long products by more utilization of our plant. This is also related to extraordinary events in Mexico.

As you know one competitor produces long products as stock operations to a -- in this quarter due to strikes and there was a higher demand for our products which we could fill. In flat products we had also increases in Mexico and in Argentina. We have a very healthy market in all the regions where we operate. The domestic consumption of steel in Argentina and in Venezuela continues to be very strong and, as I said, in Mexico we had also an increase in volume.

Okay. And maybe just as a follow-up to that, do you anticipate any mix changes as far as higher end versus lower end steel going forward?

Well as I said, the only extraordinary issue here is the increase the long products in Mexico, which is probably a temporary situation and that effects the mix. Otherwise we don't see any changes in mix.

Okay thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of [Kay Blalock] from [Bane] Rivers Capital.

Hello. I just wondered if you could talk a little about the fall in pricing that you saw in the European market for flat steel in the quarter versus the first quarter of '06, whether that was simply a change in product mix or price weakness across-the-board? And how things are looking in the third quarter?

It's basically mix and as you may see from our numbers, our exports in Europe are very small. So it does not have an effect on overall profitability. In terms of prices in the markets where we are, we see pretty stable prices for the time being.

Okay. And then if I could just follow-up on the cash distribution to Sidor, can I just clarify, assuming there is no change in working capital or indeed no jump in CapEx at Sidor, then that expense line ought to move in accordance with the profitability of Sidor, is that correct?

That's correct. That's correct. It's basically -- what we distribute is available cash, so cash is a consequence of profitability and other working capital or CapEx. Assuming CapEx and working capital are stable, it's a reflection of profitability.

Okay thank you very much.

[OPERATOR INSTRUCTIONS]

Sir at this time you have no further questions, I'd like to turn the call back to Roberto Philipps for closing remarks.

Okay thank you for your participation and your remarks about our profit this year. Our results were very satisfactory. We will continue keeping you posted of any news that happens in the company and we look forward to having another call and your participation in the next quarter. Thank you very much again.

Ladies and gentlemen, thank you for participating in today's conference, this concludes the presentation. You may now disconnect. Have a good day.