Ternium SA (TX) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Ternium S.A. Third Quarter 2006 Earnings Conference Call. My name is Omika and I'll be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes.

At this time, I'd now like to turn the call over to Mr. Sebastian Marti, Investor Relations Director. Please proceed, sir.

Good afternoon, and thank you for joining us today for Ternium's Third Quarter 2006 Results Conference Call. We appreciate your interest in our Company. I am Sebastian Marti and I am serving as Director of Investor Relations.

Joining me today is Roberto Philipps, Ternium's Chief Financial Officer and Oscar Montero, the Company's Planning Operations General Director.

We released our earnings press release last evening so we can give you highlights from the first quarter. We'll also discuss macro-economical steel construction trends in each of our core markets, [inaudible-highly accented] that we are having and expected to have in our business. At the conclusion of our prepared remarks, we'll open up the call to your questions.

I would like to remind you that this conference call contains forward-looking information and that actual results may arise from those expressed or implied. Factors that could affect results are contained in filings with the Securities and Exchange Commission and in our third quarter results press release.

The forecast for the year 2007 have recently been back downward particularly for the U.S. economy due to the drop in [inaudible-highly accented] that has had an impact on market sentiments especially in the U.S. and consumer markets.

Turning to Latin America we expect a slight acceleration in the economy for next year as the main economies are likely to go back to more normal long term growth trends. This moderation in growth will eventually be reflected in the mainstream consuming factors of the recent economy.

The key to the [inaudible-highly accented] market [inaudible-highly accented] steel use is expected to grow at the rate of 11% in 2006 largely on account of the good performance of steel consuming factors in the country and its construction which grew at a rate of 9% year-over-year in the first half of 2006 to manufacturing which grew at a rate of 3% year-over-year in the same period.

During the first quarter 2006, demand for steel softened maybe as a result of slow economic growth and [inaudible-highly accented] profits at the distribution level which lead to an increase in steel shipments in steel material.

Prices in Mexico reached a peak this past August that have since come down. Impact that is similar to what we have observed in the U.S. We expect softer prices in the North American regions during the fourth quarter compared to the third quarter 2006.

We believe that the production caps have been already been implemented in the U.S. steel industry together with the amount maintenance coverages that we see coming into affect in the months ahead should help reduce the inventory overhang excess in the U.S. distribution sector. [inaudible-highly accented] we believe that the steel price on activity in this cycle should be relatively low.

In the Argentine market [inaudible-highly accented] steel use is expected to grow this year at the rate of about 20% because of the outstanding performance of the domestic construction sector. This has been growing at the rate of 20% year-over-year during the first nine months of 2006 and the good performance of the domestic manufacturing sector which has been growing at a rate of 7% in the same period.

In the third quarter of 2006, [inaudible-highly accented] in Argentine market achieved a new all time high. In the immediate future we expect the demand for our products dealing in rubbers in this market due to the slow activity and weakness in the construction and manufacturing sectors. Consequently, we expect steel prices in Argentina to remain relatively stable.

In the Venezuelan market [inaudible-highly accented] expects to grow this year at a rate of about 30%, also due to the outstanding performance of the [inaudible-highly accented] construction sector. This has been growing at a rate of 28% in the first half of 2006 and a good performance of Venezuelan [inaudible-highly accented] industry which has been growing at a rate of 8% during the first nine months of 2006.

In the immediate future we expect that demand for our products in dealing rubber particularly in Venezuela's construction sector which we expect will continue to be aided by a significant public spending factor. We also believe that steel prices in Venezuela will remain relatively stable.

Let me now provide you with the highlights of Ternium's third quarter performance.

During the third quarter we posted net sales of 1.7 billion which was relatively stable compared to the second quarter. Shipments of flat and long steel products total 2.2 million tons, a slight decrease from [inaudible-highly accented] of shipments in the second quarter.

EBITDA of $615 million or 35% of net sales compared with $592 million in the second quarter totaling 34% of net sales.

Net income to our equity holders in the third quarter was $257 million compared with $293 million in the second quarter. We also recorded earnings per American Depositary Share of $1.28 in the third quarter compared with $1.16 for ADS in the second quarter. As a reminder, each ADS represents 10 shares of our common stock.

[Inaudible-highly accented] our third quarter results was driven by the continued demand for our products in the South and Central American Regions. It was offset by the softening demand in the North American Region where the second [inaudible-highly accented] profits at the distribution levels in Mexico and the U.S. took place. Pricing was good in all of our markets. We also continue to manage our business conservatively with a [inaudible-highly accented] concerning costs at the [inaudible-highly accented] labor steel and energy.

In the South and Central American regions our third quarter flat and long product sales totaled $966 million, an increase of a net price of $903 million in the second quarter. Shipments of our flat and long products here in the third quarter totaled approximately 1.4 million tons which was relatively unchanged from second quarter.

Our revenue per ton in the region for flat products here in the quarter was $730 and increased from $665 per ton in the second quarter. Revenue per ton in the region for long products during the third quarter was $597 compared to $551 in the second quarter.

In the North American Region our third quarter flat and long product sales total $676 million an increase of $732 million in the second quarter.

Shipments of our flat and long products in the region during the third quarter totaled 843,000 tons compared with shipments of 998,000 tons in the second quarter.

Our revenue per ton in the North American Region for flat products during the third quarter was $871 and increased from $792 in the second quarter.

Earnings per ton in the region for long products during the third quarter was $670 versus 672 the second quarter.

Ternium's overall financial position remains strong. Our financial debt decreased by 287 million quarter-over-quarter to 1.3 billion while cash at the end of the third quarter were $876 million. This quarter we paid $475 million for the outstanding debt, 100 million [inaudible-highly accented] and 75 million [inaudible-highly accented]. Our ratio of net debt to third quarter [inaudible-highly accented] EBITDA is [inaudible-highly accented].

Before we take your questions, let me offer some perspective on the current situation at [inaudible-highly accented] in Venezuela. We are having experiencing some distractions from the production output at Sidor after the start of a dispute with the union over certain employee benefits regarding [inaudible-highly accented] work on Sundays and vacations. [inaudible-highly accented] Sidor's output after yesterday by an estimated 170,000 tons of crude steel with production of flat and long hot rolled steel also has decreased by an estimated 340,000 tons. So [inaudible-highly accented] at the plant continues.

Our machinery there has not been damaged in any way. We have been engaged in negotiations with the union over the last few days and the Sidor labor authorities offered a solution to the situation [inaudible-highly accented] in work stoppage. [inaudible-highly accented] accept the solution but the union has yet to make up its mind. We expect that our negotiations with the union will continue this week.

With that, we will be happy to take any questions you might have.

Thank you. [OPERATOR INSTRUCTIONS]

Your first question comes from the line of Daniel Altman with Bear Stearns. Please proceed, sir.

Hi. Thanks and congratulations on the quarter. I just want to focus in again on Venezuela. So I wonder if you can talk about the difference in terms of the impact on crude steel versus raw products? Why such a large difference between the two? Is it they're affecting more the world products line than steelmaking? I believe that's the correct explanation if you can confirm that.

Secondly, is the entire impact going to be felt in the fourth quarter? In other words, will your volumes be off by the 340,000 tons in the fourth quarter and then the third question is just maybe explain to us intuitively why labor who own 20% of the company why would they be striking against Sidor? It seems like they as shareholders would want to not affect production or profits from the company. So maybe explain a little bit the mindset of the workers who are on strike.

Okay. Well on the first part of your question, yes. They have two ways that they impose strikes. One is what they call a [mallacori] or a [inaudible-highly accented] which means a slowdown in the way they work and they have expected more the downstream operations, the loading operations in the plant and the upstream steelmaking. So that explains the difference in volumes affected in rolling [inaudible-highly accented] than what affected the flat production.

The other way they are strike and this true in these last days is that the whole plant stops. That affects all of the lines at the plant and also are of benefit to [certain] products. The second question was - would you repeat the second part of your question Daniel?

Right. It's - I can't remember if it was the second or third. But maybe just to explain û yes. The second question is to explain whether this entire impact will be felt in the fourth quarter.

It will spread over time. During the second quarter the affect was very small because we were able to - the third quarter was very small because we were able to shift products from inventory and this will slowly transpire into lower sales and as more mix in sales because we will have more products like slab and less products like high value products in the plant. So we will see some of that affect in the fourth quarter and even maybe later as we sell these products over the market.

And your last question is difficult to answer for me. We ask ourselves that question. Of course, the workers are taking a hit on their distribution of excess cash as shareholders so that they're going to pay a high price for the strike as we are all so it's hard to understand what they're doing this. The discussion at this point is on how we pay Sundays and vacations. There's not a lot of money involved but they keep postponing to accept the concept that was put forward by the authorities in Venezuela which made an interpretation of how these payments should be made and we are very willing to accept that proposal. So I think we still need to negotiate with the union to see if we can get an agreement soon.

Okay. Thanks very much.

Your next question comes from the line of Rodolfo [Angele] with J.P. Morgan. Please proceed, sir.

Hi. Just have a û- I was intrigued by the declining in volumes while still seeing very good pricing especially for flat steel in North America. I was just wondering if there's an impact in terms of a better mix and also if you could comment on looking forward in terms of volumes what should we expect for the fourth quarter to be. Do you expect something similar to what happened in the third quarter but with weaker pricing. You know, just an overall picture of how sales are doing in the fourth quarter.

Okay, yes. In the third quarter as you say we had a combination of higher prices in our [steel] markets and this was partially due to mix but also due to price increases in the three markets - the main markets where we operate which reflected in a better than average price for this quarter versus the previous one and at the same time we suffered the decline in demand in some of our markets especially in the northern area in Mexico and the U.S. was a slowdown in the U.S. economy affected also the Mexican market. So that combination resulted in higher income because slowdown and the lower volumes were more than offset by the higher prices. Looking into the fourth quarter where volume we think will be similar to the third quarter but of course it will depend also on the resolution of a strike in Venezuela.

Okay. Thanks.

Your next question comes from the line of Jonathan Goldberg with Highline Capital Management. Please proceed.

Hi guys. Good afternoon. I had two questions. As you look out at 2007 kind of beyond the destocking phase it seems like there's a few moving pieces as far as production. You've got some de-bottlenecking and some [relons] et cetera so I'm wondering as you look out at 2007 what is kind of an appropriate expectation as far as a shipment number and then my second question has to do with just your cash flow. I mean it looks like you're net debt free within a couple of quarters and what are your thoughts on deploying some of your cash and when would you anticipate paying your first dividend? Thank you.

Okay. On volumes looking forward, although we are making investments and right now we just have stopped the blast furnace in Argentina for relining which will take about 100 days to finish and that should give us some more capacity in the blast furnace. We will not see more product production capacity yet coming on stream. So total volumes would be similar in 2007. We won't have a lot of additional capacity in 2007.

In terms of use of cash we have been repaying debt. As you know, we repaid $100 million in [inaudible-highly accented]. Prepaid debt plus a payment of the normal installments due and we also made a voluntary prepayment in Mexico of $70 million. So we are using part of the cash to prepay debt and dividends is a decision that needs to be made by the shareholders at the shareholder meeting so I cannot comment on that now.

As a reminder--

Let me add just on the dividend question that if you look at other companies that are controlled by [inaudible-highly accented] you will notice that they all have a [background] of paying dividends to the shareholders. You might want to look at Ternium or [Seadel] for that matter and you will see a pattern which we expect will be a similar pattern that we were using in Ternium.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of [Ballo Lopez Zabco] with [Benesit]. Please proceed.

Okay. Good afternoon. Just I'd like to know what about your acquisitions policy going forward. In particular, I'd like to know your interest in Acerias Paz del Rio in Columbia.

Regarding Acerias Paz del Rio which we received a negotiation to participate in the process and you know that in Columbia is an important market for Ternium so we are only taking a look at the company at this time. We are not allowed in the company so we don't have any base of interest but we want to know about the company and after reviewing the information they have to show us where we have a nice - if it makes sense on those to Ternium to do anything in that respect.

Your next question comes from the line of Daniel Altman with Bear Stearns. Please proceed.

Thanks. When you're looking at acquisition opportunities in the region, I'm just wondering where you would rank buying up the minority shareholders at Sidor. Is that something that you are thinking of doing if you're unable to find acquisition target or is it far down the list in terms of priorities? Thanks.

I would say far down the list. We're not looking at that [inaudible-highly accented] right now.

Okay. Any reasoning behind that?

Not really. We feel comfortable the way it is now and we consult the company and we don't see now any reason to make an exchange or to buy the sales of the minorities in Sidor.

Okay. Thanks.

Your next question is a follow-up question from the line of Rodolfo Angele with J.P. Morgan. Please proceed.

Hi. Just a question on taxes. You had another very low tax rate this quarter. I understand there was an issue related to defer the taxes liabilities in Sidor. I just wanted to know if that's - you know what to expect in the next quarter should we see income taxes going up or just maintained at the levels that it has been shown in the last two quarters?

We were [inaudible-highly accented] that in the fourth quarter we wouldl see a similar tax rate and just let me explain why I say that and it depends a lot on inflation in Venezuela so there is an assumption in what I've just said. That inflation in Venezuela will continue at the rate similar to the third quarter. The reason why the tax rate in Venezuela is affected by inflation is because we have inflation accounted for tax [surfaces] and fixed assets are indexed according to inflation. That indexing of fixed assets when you compare it to the book value of fixed assets reduces the amount of deferred tax liability and therefore results in a tax income. That is was has affected the overall tax rate on Ternium and depending on the evolution of inflation that will repeat again in the fourth quarter.

Okay. Thanks.

At this time, there are no questions in queue. I would now like to turn the call back over to Roberto Philipps for closing remarks.

Okay. If no further questions, thank you very much for your participation. We will continue keeping you posted of any news and especially on anything that might evolve in Venezuela. Thank you for being at this conference call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you and have a good day.