Ternium SA (TX) 2007 Q2 法說會逐字稿

Good ladies and gentlemen and welcome to the Second Quarter 2007 Ternium Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

I would like to turn the presentation over to your host for today's call, Mr. Sebastian Marti. You may proceed.

Good morning and thank you for joining us today for Ternium's second quarter 2007 results conference call. My name is Sebastian Marti and I am Ternium's Director of Investor Relations. Joining me today is Daniel Novegil, Ternium's Chief Executive Officer and Roberto Philipps, the Company's Chief Financial Officer.

We issued our second quarter earnings press release yesterday afternoon. Last week we issued a press release announcing that Ternium obtained full ownership of Grupa Imsa. On today's call Mr. Novegil will address the Imsa transaction, after which Mr. Philipps will provide some commentary on our second quarter results.

At the conclusion of our prepared remarks we will 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 vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and in our second quarter results press release.

With that I'll turn the call over to Mr. Novegil.

Thank you Sebastian and good morning to everyone and as Sebastian said I would take this opportunity as we did in the last conference to talk about some so to speak relevant issues before entering into the Q&A session. I will comment on the closing and current state of IMSA acquisition together with the implications for Ternium and afterwards I will give you an update on what is going on in Venezuela.

But before doing that I would like to give you some result highlights on the second quarter year 2007. I believe that Ternium had a very good second quarter. We show net revenues of $2 billion on deliveries of 2.6 million tons and these numbers are an indication of the strength in the steel markets during the second quarter especially in South and Central America.

The EBITDA was $580 million or 30% on sales and we were able to have to have a net cash position of $164 million at the end of the quarter right before the acquisition of Imsa. Having said that let me enter now into Sidor and Venezuela. On our last conference call, we talked about some statements made by President Chavez regarding the way Sidor was performing in the domestic market in Venezuela.

As you know Sidor as well as Ternium as a whole has always had an approach to the domestic market given the domestic market is the very first priority when allocating the production and this is something I believe has been clarified during the meetings we held with the government officials of Venezuela after President Chavez's statements.

So since then we held weekly meetings in Venezuela for a month and a half. By the way, let me mention that I travel to Venezuela every Thursday to have meetings with the Vice President Jorge Rodriguez, Mr. Khan, Mrs. Iglesias, Ministers of Basic and Light Industry respectively. After all these meetings we reached an agreement in the majority of the issues under discussions. I would say that maybe 10 out of 11 points that were on the table that we were discussing over this Thursdas that I mentioned before, although we still remain without agreement on the domestic pricing of Sidor in Venezuela. But all and all, even when we have a (inaudible - highly accented language) we consider that the process is not mature yet, to be close and I am not able yet to tell you at this time how long it will take and how long it will take us to finish the discussions and what changes we could have in our pricing policy for the Venezuelan market in the future or what impact would these changes have on Sidor profitability?

Anyway, ad an imperative fact after the acquisition of Imsa is that it if we take a look to the numbers of EBITDA of year 2006 we have that from the side of the Ternium shareholders the EBITDA of the majority stake turned from 32% to 24%. That means Sidor EBITDA again -- Ternium EBITDA numbers of year 2006 again. The EBITDA, the weight of Sidor in the total Ternium EBITDA in year 2006 numbers consolidating the information coming from Imsa and taking into consideration only the majority stake these numbers turn from 32% to 24%. That is the weight of Sidor in our creation of value in Ternium.

Over the year as I mentioned in the last conference call we have a very good relationship with the government in Venezuela and our lines of communication remain totally open. We were able to reach reasonable negotiation over the years and we expect to do so in this occasion. So we will continue working on these matters as soon as they call us and we will continue analyzing the agreement and the movements that we have to make regarding our pricing policies.

Let us now into some details on the Imsa position before going into some numbers and before entering into the Q&A. What is Imsa? Imsa is a producer of high quality and customized flat steel products both non-covered and coated products, first. Second, it is a certified supplier in [high spec] demanded in the (inaudible) including the automobile and the home appliance sectors. With headquarter in Monterey right across the street from Hylsa and with operations also in the U.S. and Guatemala.

Imsa has a broad marketing and commercial network covering Mexico, many consumer areas and geographical areas, with a state-of-the-art manufacturing facility and a skilled labor force of around 6,700 employees from which around 43% -- 43% are white collar workers.

Revenues of $3.4 billion in the year 2006 over deliveries of 3.1 million tons and an EBITDA of $493 million in the same year 2006. So after the acquisition we will be able to expand our business in North America and significantly in Mexico and we will have now where in Mexico we will have now a 40% market share in the second largest market in the Americas. So we will have a very strong position regarding market share in domestic markets. We will have a very strong position in the Americas market after this important acquisition and after the integration of Imsa.

So in summary, we are under an important change in the Ternium business profile being North America the lion part of our net sales around 62%. And as I said in [Sicas] part of the business in the United States. As you know we can split the business of Imsa between the business of Imsa in Mexico and the business of Imsa in the U.S. There are several plants located in different states and mainly for the production of coated products in the U.S., panels and pre-engineer and metal buildings.

What we will do is that we will analyze the possible synergies in each case of the assets located in the U.S. and we will access the fit of each one of these activities with the Ternium strategy. Afterwards we will be able to weight which is the contribution of the U.S. business of Imsa in terms of value creation for the whole Ternium entity in order to proceed afterwards either to integrate the U.S. business into the operation of Ternium or even we will consider to sell some of the assets if we prove or we can see that or we wait that these assets are not contributing to creating value in Ternium.

Regarding the details of the transaction. As you may know the price paid for each share of Imsa was $6.40, which makes a total amount paid of $1.7 billion. If you add Imsa net debt of around $1.4 billion we will reach an enterprise value of around $3.1 billion, $3.2 million. Now after the conclusion of the tender offering in Mexico and the redemption of the shares in cash Ternium owns 100% of the Imsa shares.

We financed the transaction through a syndicated loan facility. We were able to raise a total of $3.8 billion mainly to fund the payments to the former shareholders of Imsa and to refinance debt at Ternium, Hylsa and Imsa.

This increase in EBITDA drives the Ternium net debt to an EBITDA range of around 1.3 times meaning a net debt of $2.9 billion against the last 12 months EBITDA. That means in other words we reach a level where we feel pretty comfortable at 1.3 times.

We will be waiting now for the Mexican tax authorities and the fulfillment of the compliance of this arrangement, this application to proceed to the merger of Hylsamex and Imsa and we expect to do so maybe in the first quarter of the coming year, in the first quarter of year 2008. We consider that because of taxation issues and because of Sarbanes-Oxley we will be in a position where we will be able to merge both entities, Hylsamex and Imsa.

In the time being both entities will perform as legal entities with transactions between them being made on market pricing, that means, arms length. But because we want to capture all the synergies that we found in our analysis before the acquisition we will put in practice from the managerial standpoint we will merge both entities right from the very beginning. As a matter of fact this coming week I will announce the new organizational structure of both companies working together as a sole entity from a managerial standpoint in order to get all the synergies and all the value creation that we expect to get after analyzing very carefully the activity of both companies, the complementations and all the synergies that are in the middle that we consider that we'll be able to capture as soon as possible and a very fast kind of a deal.

Regarding branding in order to avoid cannibalization and brand [degradation] because as you know Hylsa and Imsa both have a very strong brand. So will use the Ternium brand as our brand in Mexico. So we have to work afterwards in advertisement, communication, brand recognition and so on and so forth.

So again we will finish branding the company in order to avoid cannibalization between both names that are very strong. We will go ahead with a new brand name for the products in Mexico and the brand name of Ternium there.

On the Imsa integration let me mention some and maybe share with you the way we are facing this integration and the way we are going ahead with this challenge of integrating Imsa in our operation. On April the 29th we delivered an offer that was finally accepted by the Canales family and then right after that we started on May the 2nd a process of working on 100-days plan for each one of the areas in which we divided the company.

Let me mention and maybe comment and let me share with you that we divided the company in 17 areas -- accounting, finance, commercial, industrial, compliance, supply chain, planning, information technology, information systems and so on and so forth -- and we formed focus groups that are starting to work right after the acquisition, May the 2nd. As you remember the offer was accepted on April the 29th. And on top of the information that we have gathered before submitting the offer that allowed us to present the offer and to have an indication of the value of the company, we started to go very deep in details in all the numbers and all the facts and all the features so to speak of Imsa and we formed this focus group with a target of delivering the 100-days plans for each one of the areas.

On July the 18th, these groups ended all the process and I received the 100-days plans with a great consensus coming from the mixed focus groups because these mixed focus groups were formed with people from Ternium as well as from Imsa. So we gathered all the information and we had 17 groups working together and delivering the 100-days plans that we already have in our case.

On July the 26th we closed the deal and this week, this coming week, this week that we are now on we are adjusting all the organization in order to release a new organizational chart the coming week. So after which we will start the transfer of all the (inaudible - highly accented language) and all the experienced [curves] so even when we will continue having two legal entities, from now on, from the coming week on, we will set up a unique and sole managerial structure in order to be ready as I said before to exploit all the synergies from the very, very beginning.

I was appointed President of Imsa on July the 27th and I will be the Mexico area manager on top of my position as CEO of Ternium for a while in the moment when we consider that the integration is fulfilled and we continue that integration is in place and we are able to get all the value from Imsa in the Ternium system.

We expect to obtain an increasing productivity from mill specialization. I would say that maybe this is the main source of synergies coming from the process. We will put in place a stronger commercial network and marketing focus that will allow us to further penetrate the customer value chain in order to get the advantage of a stronger sales force in order to increase the market share of the combined entity.

So in summary -- in summary, we will increase production through increasing capacity utilization and specialization while at the same time gaining economies of scale in order to reduce costs and strengthening the marketing side in order to make market share gains.

No doubt that we will also go ahead with some reductions in terms of labor especially in white collar which have already identified duplications and externalities in that system, and we will put in place some reduction cost plans in order to reduce the labor force. As I said before mainly and especially in white collared workers. I cannot mention yet a precise number but no doubt that they will have a pretty good impact in our bottom line.

But you know we prefer to talk about synergies after we realize the synergies than make an indication that afterwards could mislead the market in terms of evaluation of the Company performance. So in the meetings that we will have from now on we will be entering into discussing the synergies that we were able to get, the synergies that we closed, the synergies that we have in our hands.

So regarding future organic expansions of the total system we are working in Ternium now in a project for a new continuous casting in Argentina with an additional capacity of 1.2 million tons of slabs and as you know we also have an excess capacity of slabs in Sidor of around 0.5 million tons in order to source the system. That means that we will be producing more slabs in our system coming from Argentina and from Venezuela in order to be able to source the needs of Hylsa and (inaudible) then in source Imsa.

On the [figure] of the synergies and let me mention again the main ones. Lines of production and specialization, supply chain integration, procurement, that means by gaining power through using our structure and experience, economies of scale, economies of scope, value chain penetration to gain market share and meaning entry barriers with customers through information technology and information systems, building switching costs with the customers in order to build loyalty in the customer base and white collar reductions.

Wrapping up I could say that this transaction confirms the Ternium position as one of the leading steel companies in the Americas in terms of scale, in terms of scope and in terms of a growth product portfolio in our core markets.

To finalize I truly believe that this transaction creates a very important phase, a very important opportunity, a very important challenge for our company and shareholders in terms of creating value, in terms of increasing the value of Ternium in the marketplace.

On the outlook side we will mention, we will prefer to mention the outlook side during the Q&A and the indication that will be delivered by Roberto Philipps. In general terms we will have more volume in Imsa because of the integration. We have some maintenance in the blast furnace of Siderar that maybe could impact, and we will afterwards talk about that, the results in the second and third quarter and afterwards we had a revamping in the hot rolling mill in Hylsa that will double capacity of this mill, this hot-rolling mill in Hylsa in the medium term.

We have the issue of the labor collective agreement as you know the way in Sidor with the elections in the labor side in October. And demand and price has been a little bit weak in North America driven by the housing market but the inventories in the service center sector being low though we don't expect any important impacts in the pricing so to speak. And we still have the present issues in regarding prices in the Venezuelan market.

So now let me turn into and hand it over to Roberto Philipps, our CFO, for a review of our second results and to afterwards be open to the Q&A session. Thanks for the attention.

Okay. Thank you, Daniel. Let me start with a comment on the second quarter 2007 performance. As Daniel already mentioned we had a good quarter, the EBITDA reached $581 million. That is similar to the second quarter of 2006 and about $50 million higher than the first quarter immediately before the second quarter 2007.

The main drivers of the sequential improvement were a better price environment in most of our markets and also slightly higher shipments that were however partially offset by higher costs in most of our operations mainly related to maintenance cost, labor cost increases and freight expenses in many of our markets.

In the last couple of months demand and prices in the North America market have been softening as a result in part of the slowdown of the construction sector in the U.S., which also affected Mexico. However, we have lately seen inventory levels and the distributors normalizing and we expect prices to stabilize close to current levels in the north region.

Looking at the south and central region prices should remain relatively stable although, as you know, and Daniel mentioned that prices in the Venezuelan local market could change as a result of Ternium's ongoing negotiations with the Venezuelan government.

Ternium's sales volume will increase in the third quarter as a result of the consolidation of Grupo Imsa. We will consolidate Grupo Imsa starting July 26th so in the third quarter we will show two months of operations of Imsa as a consolidated company and Ternium's financials. Excluding this effect, we expect slightly lower shipments in the near term for various reasons. One is maintenance work that were carried out in one of our blast furnaces in Argentina during July, and the revamping of the hot-stripped mill in Mexico, which once it is concluded will allow us to increase production.

This will also result in higher costs due to this maintenance in the near term compared to the second quarter 2007. At the same time, labor costs in Sidor could also increase as the result of the negotiations, which are currently underway to conclude a new two-year collective contract.

Regarding Grupo Imsa's performance, Imsa reported an EBITDA of about $100 million in the second quarter and about 10% of sales. As I said the next quarter we're going to begin consolidating Imsa and we expect that costs will increase in Imsa as usually happens when integrating a new company. These will be one-time costs that we expect to have in the second quarter -- in the third quarter, sorry.

Going back to the second quarter results Ternium recorded net sales of $2 billion, which was 15% higher than the company net sales during the same period in 2006. Shipments of flat and long steel products were 2.6 million tons, also increasing 6% compared to the same period of 2006.This was the result of higher prices across most of our markets, and higher shipments in south and central regions partially offset by lower shipments in the North American regions. Sales in both Argentina and Venezuela continue to be very strong. The market is very strong and we do not expect to have changes in that sense.

Looking by region, sales in the long and flat products in south and central regions totaled $1.2 billion, an increase of 28% versus a same period in 2006. And shipments approximately totaled 1.6 million tons, an increase of 12% compared to the same period 2006.

Revenue was [$738], an increase of 14% over last year. Sales of flat and long products in the North America region looks like a little different. They totaled $669 million, a decrease of 9% versus the same period in 2006 mostly affected but what we already mentioned the market, which was affected by the construction sector, and shipments approximately of 884,000 tons were 11% lower as compared to one year ago. Revenue was $757 million, an increase of 3% over the same period of last year.

After the transaction of the purchase of Grupo Imsa, Ternium's overall financial position remains comfortable. Our net position increased to $164 million at the end of June. We secured a line of up to $3.8 billion to finance the transaction and to refinance existing debt. Today our net debt stands at about $2.9 billion.

Those are the comments I expect to cover. Let me now turn it over to you for Q&A.

(OPERATOR INSTRUCTIONS) And your first question from the line of Marcos Assumpcao with Merrill Lynch. You may proceed.

Hi. Good morning, gentlemen. My first question is regarding negotiations with the government in Sidor. I just would like to know how do you think that the negotiations should evolve going forward? We just mentioned that in the previous month and a half you were having weekly meetings with the government and I would like to know if this will continue going forward?

Well, as I said before we were negotiating for a month and a half around (inaudible - highly accented language). We had six, seven meetings every Thursday. I travel to Venezuela to have these meetings with the officials that I mentioned before. And all the negotiations were well. I mentioned in the conference call as wells as in the Investor's Day we over the years we started our venture in Venezuela early in year 1998 and from then on we always had open communication channels with the government.

We still have the same open communication channels and we were able to sit down to come down and to negotiate on a rational basis, and we are in the process of negotiating. As I said there are 11 topics, 11 points on the table. I wouldn't like to enter into this the details of the topic because these topics were not released by the government and though I would prefer to be very cautious in commenting, in talking, in opening what were the discussions. But I would say that the main discussion regarding the impact on the activity of the Company is the one that is related with the pricing in our domestic market.

And in that respect we were negotiating. We didn't get final agreement yet. The reason why we are not negotiating is because we are not in the government agenda now. Is not because with a no solution kind of situation in anyway. We are negotiating -- we are open to listen. We are open to find a reasonable, a sensible solution. The impact of this solution will be appreciated afterwards.

But the reason why we are not in the table now is because the government asked us to make a break and to wait a little bit because they are busy with other political things and other things that are in first priority in their agenda. That's why we're not interchanging. Maybe this negotiation will start again but we continue -- we resume in the coming week or in the weeks to come. And I'm pretty confident, I'm pretty optimistic that we will reach an agreement on reasonable terms.

We found people that are talking sensible matters and though I would say that we will be able to go ahead and to continue having a good relationship on the agreement that maybe will impact our pricing, but we'll see what to do.

(inaudible)

Just to mention, because your question is you would like to say what the exact impact of the price negotiation that I expect, this or the other. I'm not in a position where I could mention that or could quote on that. But we have open lines and we have a good relationship and we will be able to find a reasonable solution.

Okay. And when you said probably finding a solution in a reasonable time period, could we expect -- is it fair to assume that this process could have an end by the next time we're talking here in the third quarter results?

I would say that maybe the -- we are in August. there is not going to be an impact of the negotiation in July or August because we have negotiated from the negotiation of and with no any kind of relating of the pricing though, I don't expect an important impact in this quarter. This quarter that we are on. Afterwards, it depends on the end of the negotiations and it depends on the results of the negotiations.

But as I said before, I'm optimistic, I'm pretty confident that we will reach a reasonable kind of solution. As you know, from a political standpoint, Argentina remains one of the main partners, one of the main friends of the Venezuelan government. And we continuing having support from the Argentine government. So I am also having both countries interest of integrating, the interest of working together, the interest of developing ideas in energy and other issues in actual development. I really guess, I really believe that we will be, in the coming weeks, in the weeks to come, going back to the table and finalizing the negotiations that we started almost two months and a half ago.

Okay. And do you have like a -- ?

We have in any given -- in any event, we have to expect them to call us and we expect Sidor -- we have to expect them to consider and to resume the negotiations.

Okay. And regarding -- you said that -- ?

Sorry for not being precise in the numbers that you are expecting, but I would prefer not to be precise.

Okay. No problem. And you said that 10 out of 11 issues that you're negotiating with the government was -- were already finalized and you reached an agreement in these 10 issues. Do you have an expectation of how these 10 issues could affect the profitability of Sidor?

Well, we feel the negotiations are the other [trading] points. There are some points that are really related to special plans of the company in order to strengthen the social network in Venezuela, plans to deliver products to -- on a direct basis without intermediation or distributor or service centers to the final end of the customer, especially in those customers that are in the low end of the income of Venezuela, though we are also in -- talking about forming a commission together with Federal (inaudible - highly accented language) that is our main supplier of iron ore in order to talk about volumes, quality, prices and issues in the delivery of iron ore to our company.

We are talking about committing a new investment plan of Sidor in the coming five years that we've allowed us on the other hand to be more efficient in Venezuela, to be more productive and to develop the mix of our facilities and we'll enter into a commitment to this investment plan for the coming five years. That is something that we can commit because it's something that we will do anyway. We will do because we need to do that and because it's good for the company. It's good for Ternium. And things like that.

Okay.

And your next question comes from the line of Rodolfo Angele. You may proceed.

Hi. Good morning everyone. I just would like to follow-up on the previous question. You mentioned that you're -- part of the agreement includes investments in Sidor. Could you expand on whether those investments, there are capacity increases there, new plants and if you have details as to the amount of money that we're talking about? Anything that you could comment?

The plans are the same that I was commenting with you during the Investor Day and during the last conference call. I mean the bottlenecking, the environmental issues, working on processes in the main lines, i.e. information technology in order to increase productivity and to decrease the production ramps. There are plans in order to increase productivity, increasing efficiency. We are doing all our plans, it's a kind of organic work. Organic work in order to better off the production facilities, in order to increase the capacity in the margin, in order to debottleneck some of the facilities, in order to facilitate the process of integrating each one of the parts of the production mill with the following one and so on and so forth. It is a plan that is well spread. So also as I said before, environmental issues related with the film houses and things like that.

Okay. Thank you.

It always takes time in order to know special plans in order to make a difference and the things that we are doing in our business in order to better off the production facility and to better off the way they are working.

Okay. And my other question is on costs. I have two concerns or just wanted to understand a little bit better two things. The first one, the pressure on the gas side, could you please comment as to what is the current situation in Venezuela, what's the level of prices that you're paying in Venezuela for the gas? And also, just the follow-up is in terms of labor, you're negotiating with the workers in Venezuela, just wondering if you have witnessed any type of strike or things that -- like we saw last year?

Well, you are touching two important issues, two important topics in the operation of Sidor. First, in the case of the gas, we are paying the gas at the same price of other industrial consumers. No doubt that the price of gas in Venezuela is pretty much cheaper than the price of gas in the U.S. or in Mexico. No doubt, everyone knows that. We are paying the gas below $1 per million of BTU in Venezuela. But that does not mean that we are having any subsidy coming from the government side. We are paying the same price that all other industries located in the same.

We are also paying the price of the gas in reasonable terms in terms of opportunity costs for the government, because this is gas that's being produced because of the oil production and it's gas that is not being sold to Sidor, it's going to be [vented]. So the opportunity costs of this gas is zero.

In that respect, we consider that the pricing that we have for the gas is cheap, is efficient, is good, it's better than what we are paying in other parts of the world, but at the same time, we are not having any preference, any subsidy, any discounts over the price that is being paid in the same market by other industries and also in the households on one hand.

On the other hand, you are talking the topic of the collective agreement negotiations. And there we have a topic because the labor force is split, they are divided in the leadership of the union in eight parts. And this is not good for the company. I mean, I would prefer to have one union leader, even a strong or weak or whatever, but we -- it's always better to have one leader instead of having eight leaders, eight people struggling against each other in order to be more aggressive than the previous one.

In any event, it is what we have in Venezuela. We are in the process of negotiating this agreement. This agreement, this collective agreement, was due in the month of December, November, December in the year 2007 and from then on we have a table where we negotiate. There are 111 articles in the collective agreement. We were able to close up to now around 42, 43 articles and we are working in the other ones.

We also have elections in the union in October and from this election could appear a new leadership in the union side and this is good for the company because it is going to be able to negotiate with only one instead of negotiating with eight people that we are doing now. So one hand we have a problem because we didn't close the collective agreement. On the other hand, we are expecting these elections to happen in the union labor side and we expect to have the new leadership in October.

It's sensible -- it's a sensitive kind of situation because the labor agreement was not closed yet. And in order to calm down the workers, what we are doing is that we paid a bonus in the May of -- in the month of May in order to compensate the workers for the timing of the agreement being due. And this was received very good by the workers. They appreciated the effort of the company to understand that because of the fact that they don't have this leadership in the union, they couldn't close the agreement and the company compensated the workers because of the timing of not closing this agreement.

So I can say that in general terms, the workers, the blue collar workers of Sidor are kind, are expecting the results of the negotiation and expecting also the elections in the union side and I would say that for the time being, and I couldn't quote on how long it's going to be, this timing, we are in a good situation. In a good situation of dialogue, in a good situation of working with the eight union leaders, trying to reach an agreement and waiting the leadership to consolidate.

Okay. Thank you.

Your next question is from the line of Jorge Beristain with Deutsche Bank. Please go ahead.

Yes, good morning. My question I guess is for Daniel. One if you could just comment specifically on what the average selling prices are today of Venezuelan domestic steel compared to Venezuelan export steel and what the respective volume totals are of each?

Yes. We are selling the domestic market around 65, 67% of the output and we are exporting 33 to 35% of the output that we are producing in Venezuela. The exports are being allocated mainly in the high-impact countries, that means main market being Colombia, Ecuador and Peru. The prices in the domestic market are being fixed in relationship with the opportunity costs of our customers when importing are similar to the prices that we have in other markets.

And the different -- we are exporting at lower prices because as you know, after exporting, you have to add in the pricing of the steel industry, you have to add freight, in-land freights, ocean freights, duties and all the expenses in order to fix the price at the end of the cycle, of the final user, with the value this is pretty similar to the one that we are selling the domestic market in other countries. In other words, we are selling in the domestic market at let's say 100, we are exporting at 90. These 10 points are the difference between freight rates, in-land as I said before, and ocean freight and also the new [systems], so on and so forth.

And so what we are talking with the government is this precise issue, okay? Of how we price in the international price, in international markets as opposed to price in the domestic market. And we are discussing and talking about these matters.

Yes. Could you be more specific about what this -- the price spread is? It's typically $100 a ton in say Brazil? Would it be similar in Venezuela?

Well it depends. What happened, Jorge, is that it depends -- it's very difficult to quote on your question in general terms. Because for example, we are selling different products. We are selling different portfolios. We are selling to places that are far from the location in Venezuela. We are paying, in some cases, we are selling products with different specifications. We are selling the slabs or we are selling coatings or we are selling cold-roll as opposed to selling on somebody's [modest] scales in the domestic market in Venezuela.

So when comparing, we are selling a full ship when we are selling in Columbia. We are selling very small quantities when we sell in Venezuela. So in order to compare, you have to equalize all these factors. You have to compare the same quality segment specifications, the same scale, the same other items and this is difficult to make this general comparison and it -- mainly we can mislead the -- you pick up -- we have to make the analysis when making these general quotations. But no doubt that there is a difference and if you take a look to the numbers being released by analysts on domestic and export pricing, you will have a general quotation on these matters.

Okay. My second question was on --

(inaudible) If we take for example, average price of sales in Venezuela, in one precise -- let's talk about some general numbers to give you -- to be even a bit more precise on trying to answer more properly your question. If we take the average price of -- in the domestic market in Venezuela of all products, all customers, it is around $710, $715, taking all together. Okay? All the totals together. And we are exporting to (inaudible) and Central America, Central America in the same period, at around $620, $630. But as I said before, it isn't a comparison because you have different products, different quantities, different shipments, different sales conditions, but you have there a rough quotation.

Sure. That's useful. Thank you. And your selling terms in Venezuela, you sell in the official Venezuelan exchange rate? Or do you sell in dollars?

We -- well, on practical matters we sell in dollars because even when we sell in bolivars, we quote a bolivars price taking into consideration the price that we want to have in dollar terms. That means that while our price is accounted in dollars, we change this account for dollars to bolivars, we price the bolivars to the customers, the customers deliver based in bolivars, we collect the bolivars and afterwards we go to the exchange control commission, (inaudible), and we change our bolivars for dollars at the official exchange rate. That's the circle.

So in practical matters, we are -- I could say that up to this moment we are selling in dollar terms. No doubt.

Okay. And so my second question was just related to Imsa. Given that a large part of this company's product mix is quite different from your typical steel production in that they built structures in the U.S. market and buildings, how does this fit in with your overall business strategy and is this something that you would try to grow this business arm of Imsa in the United States further or this a potential divestiture opportunity?

No, no. I would say that we have to be very cautious in that. We are in the process of understanding better, which is a contribution of each one of the different parts that Imsa has in the U.S. market in terms of value creation for Ternium. We are going to be studying this for the coming 3, 4 months and afterward we'll end in saying, okay, we will either integrate everything or we will send some of the parts of this business. Because we want to understand very, very carefully, which is a contribution of each segment, each part of this business that they have in the U.S. and which is a contribution of each one of these into our overall strategy and to our overall value creation so to speak.

Example, they have panels, they have construction business, they have plants that are located in Washington, close to Seattle, like the [Colama] plant. They have plants that are located in the middle of the [rush] belt, in Fairfield. They have plants that are located like the one in Shreveport, in the [bowlay] of Texas and Luciana that has no doubt a good fit with our location in Monterrey. So we have to be very cautious. We are starting that. We formed a group, a task force and in 3, 4 months, we will end up with a solution, no more a solution than an answer in what to do with the business in Imsa in the U.S..

We will in [af were], we will be able to generate everything, we generate parts to sell, some business assets whole or in part. And we are in this process of analyzing this very, very carefully because we want to make a very cautious, a very well think kind of movement there.

Okay. Thank you very much.

Thanks.

Your next question is from the line of Victoria Santaella with Santander. Go right ahead.

Thank you. Good afternoon, Daniel and Roberto. If you can be a little bit more specific on the cost increases that affected your -- this quarter? Obviously one of the big surprises was to see a significant rebound in volumes and prices and a deterioration in your margins. So if you can tell us a little bit more details, where were the areas in which costs increased far beyond your prices of the metals?

Okay, Roberto.

Okay. Victoria, this is Roberto. We had decreases in all the three markets where we produced. Basically they're related to raw material costs. We had some increases that affected this quarter, mainly in input [shots] such as I think, and other products that we consume.

We also had some increases in labor costs related to costs in Venezuela and also in Mexico. And finally, we had some increases in costs due to better mix of production in some markets. So the higher value of the products also increased the cost of production. And those are the main cost issues compared to the previous quarter.

Do you see a lot of cost pressure going forward? Because you have the advantages of owning a mine in Mexico for iron ore supply. You have advantages of energy prices and things like that. So what can we expect regardless of the maintenance and revamping of your facilities?

Going forward, there are some cost increases that we also mentioned in our press release and our comments today. On one side, just because of the accounting, we will see some increases in iron ore costs for example in Argentina and in Venezuela because we are now consuming part of the material that we bought after the increase in the price, which started happening in the second quarter, but we will see a bigger effect of that in the third quarter.

The other factor that we have is, as Daniel mentioned, we might have some effect of increase in labor costs in Venezuela, but that will depend on the closing of the negotiations. So we have mentioned that, but we don't know exactly if that will affect the third quarter or after the third quarter.

Finally we have some costs associated to maintenance and repairs. We had to make some unexpected repairs at one of the blast furnaces in Argentina. That already happened, it was during this July. We had to make some repairs there. We also lost some volume during the time of the repair, so that again will have some impact both on revenue and on increased costs in Argentina. So overall, nothing significant, but we will see some increase in costs going forward.

Thank you. Now moving into Imsa, can you tell me how many tons are you going to be sending up slab from Sidor and Argentina to Imsa in 2007 and 2008? And if you can put a number in terms of the synergies that Daniel mentioned, related to reduction of employees and economies of scale and purchases and things like that?

Yes. Well as you know, Victoria, we -- as I said in -- when I was talking at the very beginning, we [said we're signed], we prefer to quote on productions of course and achievements after we get achievements. So when we have the -- our meeting and investor day this coming March, no doubt that we will have a precise estimation of the numbers that we are getting.

You can make some estimations if you take the premiums that we were able to work out in Hylsa. We will, as I said, before we will have important cost reductions coming from a specialization of the product lines that will allow us to increase production because of using the lines specialized in the production runs. Second, we will make a white collar reduction. They are taxed, they are organizations that are totally identical and duplicated. We are going to be strengthening the commercial network. We are going to be reducing also the procurement of Imsa using the networking of [exiras]. So we expect -- I expect, I am totally confident that we are going to be able to put in practice management -- managerial practices in -- within 100 days of each of one of the 17 groups that work really very hard. And we are going to be able, in 3 months, in 6 months, to get important synergies. Not only in the production side, but also in the marketing side as well as in reducing the direct costs coming especially from the reduction of white collars.

We know the company pretty well. As you know, the company is right across the street from our facility in Hylsa. We know all the people that are working in Imsa. Let me share with you that we found a pretty skilled management structure and we are going to be working easily and swiftly to gain these synergies embedded within. I can tell you we are expecting to be -- to work in impact in all these premium curves, effects and all these learning curve effects weaker than the way we did it in Hylsa. But I don't -- I cannot give you an exact number and I would prefer not to quote on that. But no doubt that it -- the numbers will be [border] numbers and impressive numbers.

We will talk in more detail when having our meeting and investor day in March in New York right after the call, whether [season]

Perfect. And the last question, Hylsa makes revamping of its rolling mill. When are you expecting this to conclude?

Excuse me, the -- I couldn't get the question (inaudible).

The revamping of the rolling mill of Hylsa mix, when do you think it's going to be concluded?

You mean the merge between both companies?

No, no, the revamping of one of your mills, rolling mills.

Yes, yes, yes. The revamping. Well we -- the revamping was already made. We are now in the process of putting in all the operation in writing. This was an up tick of the hot rolling mill in Hylsa that will allow us to almost double capacity. That does not mean that we are going to be using the total capacity because it depends on the market situation and as I said, we are seeing in the very short run the weak kind of demand in the U.S. and the health of the U.S. and the Mexican market. But we are going to be having a facility that will be -- allow us to double production in the hot rolling mill.

In the line will stopped for this revamping in September. In September, we are going to be starting operations and we will produce this in place. But to answer your question, in exact terms, we are going to be able to start operations again of this revamped line in September. Mid-September.

Thank you.

Alright. Thanks Victoria.

And your next question is from the line of -- a follow-up from Marcos Assumpcao. Go ahead.

Okay. Maybe Roberto could answer this one. It's regarding the potential energy crisis in Argentina. If you see that there is any risk of a decrease of production, due to energy crisis or -- ?

Okay. In Argentina, as you know, there are some restrictions on the use of both gas and electricity for industrial operations. In the case of our company in Argentina, Sidor, which operates with two blast furnaces, most of the energy is generated by the process of coking the coal. So we buy coal, we process it in our coking ovens. As a consequence of that process, we generate gas. That gas is then used to generate electricity and also to inject into some of the operating furnaces.

We do buy some energy in other plants, rolling plants and galvanizing plants. And we have had some effects, but minor effects, in terms of the ability to run at normal levels. So we do not expect to have a big impact on our production in Argentina coming from the restrictions on energy supply basically because of the type of process that we're running, as I said, we do not depend so much on the availability of purchased gas and electricity.

However, when we have restrictions on the use of gas, we have used other fuels, such as fuel oil, to replace it and that does have an effect marginally on costs. So more than seeing a reduction in production, we might see some effect on higher costs of energy going forward.

Okay. Great. Thank you very much.

And there are no further questions.

Well, ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.