Ternium SA (TX) 2012 Q1 法說會逐字稿

Good day everyone and welcome to the Ternium first-quarter 2012 earnings results conference call. At this time I would like to turn the conference over to Mr. Sebastian Marti. Please go ahead, sir.

Good morning, thank you for joining us today. My name is Sebastian Marti and I am Ternium's Director of Investor Relations.

Ternium issued a press release today detailing its results for the first-quarter 2012. This call is complimentary to that presentation. Joining me today is Ternium's CFO, Mr. Pablo Brizzio, who will discuss our performance. At the conclusion of our prepared remarks, we will open up the call to your questions.

Before we begin, 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 press release issued earlier today.

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

Thanks, Sebastian. Good morning. I would like to provide some comments on our performance in the first-quarter 2012 and the outlook for the following quarter. And then we will be able to go to the Q&A session.

But firstly, I would like to point out a change in accounting that was introduced from the first quarter of the year. Due to changes in the primary economic environment in which Ternium's Mexico subsidiary operates and accordance with International Financial Reporting Standard, we perform a functional currency review and concluded that the functional currency of Ternium's Mexican subsidiaries will change prospectively to the US dollar effectively as of January 1, 2012.

As a result, the operations of the Mexican subsidiaries have been and will be measured in US dollars as opposed to be measured in Mexican pesos prior to the first-quarter 2012. The difference mostly affects the financial income/expense line and consequently the income tax line of Ternium's consolidated income statement.

Now, moving to EBITDA, during the first-quarter 2012, the EBITDA was $372 million, slightly higher than the EBITDA in the fourth-quarter 2011. Shipment, revenue per ton and cost per ton remained relatively stable.

Shipments of flat products decreased 28,000 tons in the quarter compared to the fourth-quarter 2011 with 6% higher shipment in the North American region and 10% lower shipment in the South and Central American region mainly due to seasonality. At the same time, flat products revenue per ton increased 2% in the North American region and decreased 1% in the South and Central American region.

Shipments of long products across all our regions were 10% higher compared to the fourth quarter last year and revenue per ton was 2% higher. Summarizing, total shipments were relatively stable and flat and long products EBITDA per ton increased from $164 in the fourth quarter to $172 in the first quarter this year with small variation in revenue per ton and operating cost per ton.

Net income in the first-quarter 2012 was $190 million, a $54 million increase compared to the net income in the fourth-quarter 2011, mainly as a result of $52 million lower net financial expenses. While there were no net financial exchange result related to Ternium Mexico US dollar denominated net debt recorded in the first-quarter 2012 as a result of the change in Ternium Mexico subsidiary, the fourth-quarter 2011 had a net cash -- excuse me -- had a non-cash net foreign exchange loss of $72 million primarily due to the impact of the Mexican Peso 4.1% depreciation that was offset by changes in Ternium's net equity position.

Turning now to our financial position, at the end of the first quarter 2012, Ternium had a net debt of $1.7 billion down from a net cash position of $500 million at the end of the fourth quarter last year. The change was mainly the result of the acquisition of the equity stake in Usiminas control group for $2.2 billion. Ternium continues to enjoy a strong balance sheet with net debt to last 12 months EBITDA ratio of a little over one time.

Net cash provided by operations activities was $287 million including an increase in working capital of $41 million and capital expenditures were $176 million. I will finalize these remarks with our outlook for the first-quarter 2012 -- excuse me, for the second-quarter 2012 as we stated in today's press release.

We are expecting a slightly higher operating income in the second-quarter 2012 relatively to Ternium operating income in the first-quarter 2012 mainly due to an increase in shipments reflecting a gradual recovery of economic activities in the America, particularly in North America. This concludes our prepared remarks. We are happy to take any questions you may have. Thanks.

(Operator Instructions). Rodolfo Angele, JPMorgan.

I had two questions. First of all, on Usiminas conference call yesterday, the company mentioned that there are basically looking to increase exports using the TX network. Could you give us some more details on how you see this going on? Do you have any idea of synergies and any type of -- where should we expect to see the bulk of this coming in?

And the second question is just I want to follow up on an issue that was discussed yesterday, which was the charge of management fees, the possibility of charging management fees at Usiminas there, anything on those lines; any developments in that front? That's it, thanks.

Okay, well, let me put your two questions together and give you a complete answer. First of all there is no management fee in place at the moment. And as you know, as we discussed at length during the Investor Day, Ternium together with Nippon Steel and Usiminas are always looking for ways to maximize value in different ways. One way, the one that you mentioned, which is utilizing fully the capabilities of the different companies, as you know, Usiminas has a very well developed and very strong commercial network throughout Brazil and Ternium has a very strong commercial network distributed throughout Latin America, but of course, not in Brazil.

So this could help. And as you mentioned that already Usiminas mentioned this in the conference call, the idea they have is to increase export utilizing the capabilities of Ternium. So this is something that we have commented a lot. This is something that we expected to happen from the very beginning because this is extremely good for both parties to develop this and to increase the availability of products in the different market in which we are, and if there is possibilities to utilize, of course, the network of Usiminas to do something in Brazil. So this underway and we are always looking for ways to increase value for the different companies and this is an example.

Another example if you want that I can give you is that as we also mentioned in the Investor Day, Usiminas has already joined the platform of Exiros to take advantage of the possibilities that this platform gives and, of course, we believe that Ternium also will benefit from having an increased pool of purchases that the different companies will need to look through these instruments.

So as I said at the very beginning, we are working and we will continue to work in order to find different ways of increasing value both for Usiminas and for the shareholders of the Company.

Okay, thank you very much.

You're welcome.

Marcos Assumpcao, Itau BBA.

Congratulations on the results. My first question is, if you could comment a little bit about your cost performance in the first quarter. Basically the raw materials I think it surprised a little bit to the upside and also how do you see the cost evolving in the second quarter? And the second one would be also on the market, but on the price outlook for the second quarter as well, and how do you see [this land] at the difference between (inaudible) and slab prices going forward? Thank you.

Okay, Marcos, let me first go through the issue of cost. Yes, we are expecting a somewhat higher cost per ton during this quarter, especially in Argentina. But at the very end, the cost was sustained basically at similar levels as what we see or what we saw last quarter. We are not expecting much movement either on pricing or in cost structure in the next quarter though we are seeing some decreases in raw material inputs, especially slabs or in some cases coal or iron ore. And as you know, in our financials it will have some delay to be reflected.

We are not seeing much differences in the price or the difference between the price of the hot-rolled coil and slab. It is around what typically used to be in the last couple of quarters or traditionally these are the level which is $150 per ton.

In relationship to our expectation for prices, we already mentioned that we are not expecting to see much movement in prices in the next quarter. You know that we have been seeing some movements, slight movements, in prices in the U.S., which is for us the main reference. Some upward and downward movements, but in both cases were not that significant. So minor movements. And our expectation is to continue to see these at least during this second quarter.

All right, Pablo. Just a follow-up here. Do you believe that the visibility on US demand and North America demand has improved recently or it seems to be kind of the same as in the last quarter?

Well, what we are seeing is especially in North America relatively good situation in respect to the economic situation and demand and especially Mexico. As we say already in our outlook, we are expecting somewhat increase in demand for our product. Again, not mention movements, but we are somewhat positive in North America and, of course, especially in Mexico.

All right, thank you very much.

You're welcome.

Felipe Hirai, Bank of America.

I have two questions. The first one is related to the fact that you mentioned that you expect to see some better improvement in your operations in the second quarter. You mentioned about cost and about dryness. Could you quantify a little bit of what you expect to see in terms of margins in the second quarter and also in 2012? And my second question is related to the political environment in Argentina. We saw that what happened in YPF. Just wanted to get your thoughts and how do you think that what could be the implications to your operations in the country? Thank you.

Hi Felipe, no problem. First of all, we are not expecting to see much movement in our cost line in the next quarter as we said because we are not seeing much differences in the different raw material cost that are reflected in our financials. Probably moving into the rest of the year, it seems we, as I mentioned, we have seen some reduction in some cost. This should be reflected in the following quarter.

In any event, we are not seeing any major movement, nor in price, nor in cost. That's why what we are saying is that we are expecting to have a relatively stable level of operating income and in the core region. But in Mexico probably due to some specific cost reductions like the reduction that we mentioned in the slab, we could see some small reduction in total cost and that's why we are saying that we are seeing a slightly higher operating income during the second quarter.

Moving to Argentina, what we -- we, first of all, have no indication that something that's similar to what happened in Argentina to YPF could be -- could happen to Sierro. Furthermore as you know, probably last week, on Thursday Sierro had the annual shareholders meeting in which unanimously approved dividend payment of $40 million. So we are working as usual in Argentina. And as we said in the different public communication that we had, we are expecting to see similar level of activity in total coming out from Sierro, especially in the export market.

Carlos De Alba, Morgan Stanley.

I wanted to ask you, if you can give us an update on the CapEx for the year. It did not accelerate much in the first quarter and, I guess, considering what you are doing in Mexico particularly would you see a ramp up in the coming quarters. And also if you can comment about the level of slabs that you are buying from third parties and re-rolling in Mexico.

And finally, any comments on the Sidor situation? I mean, in the last press release, you mentioned that there was -- they had not paid the last installment and there were a total principle amount of around $130 million outstanding. Any update on that? Thank you.

Okay, Carlos, regarding the issue of CapEx, you are right, but we are still having the same expectation for CapEx that we commented in the last conference call or even the Investor Day. We are expecting to have a total CapEx for the year close to $1 billion and we are -- as we always said, we are advancing extremely well with our project in Mexico. So probably you will see some ramp up in CapEx coming in the next couple of quarters.

We are not only developing this CapEx plans in Mexico. As we also already commented in different opportunities, we are expecting to have also investment coming out of Sierro in Argentina. So in total we are expecting to have close to $750 million from North America and $250 million coming from South America -- South and Central American region. So, yes, we are still moving with these numbers.

In relationship to slab, the latest acquisition of slabs from third parties is at prices which are a level of close of $600 per ton. So that's the reason why we are mentioning that in the following quarters this should be reflecting in our numbers and cost should reflect this decrease from prices that we have seen in the prior quarters.

In relationship to your question of Sidor, we haven't yet been paid. We are still in negotiations to solve this issue.

Leonardo Correa, Barclays.

I have two questions on the housing project. Well, starting out, Usiminas yesterday during the call they specifically stated they were not analyzing any potential [housing] projects. So I just wanted to understand if there are any conversations with potential partners for the housing project underway. That's my first question.

And the second one is regarding the availability of natural gas in the region for the project. I mean how -- just wanted to understand if you have any recent developments on natural gas in the region and how confident you are that you can secure cheap natural gas for the project? Those are the two questions please. Thank you.

Okay, Leonardo, as we also always said we are still analyzing the feasibility of this project. You know that we have advanced quite a lot in these analysis and we have presented in the last Investor Day, which are the outcome of all the analysis that we have made and which is the situation right now.

So we mention that we could consider if this project --- if this project move ahead to include partners to develop it. This is not to say that we have already formal conversations with any interested party in order to do that. What we know is that there should be interest in being part of this project. Well, we are not having any formal type of discussion with any party at this point of time.

In relationship to your question of natural gas, you know that now for us it's key the availability of natural gas in order to develop it since we have moved from original idea of blast furnace type of technology project to DRI plus electrical furnaces type of technology. So as you know, as you pointed out, this needs availability of natural gas, which is not yet there in Porto do Acu.

We understand and we believe and this is what we are analyzing and discussing that in the future there will be the availability of natural gas and you know that not only Petrogas, but also some other companies are working to develop especially offshore research of natural gas. So this is something that we need and we will continue to analyze in the near future. But this is a key point for this project.

Yes, thank you very much. Just want to follow up, a very quick one. During the Ternium Investor Day, you mentioned that you are guiding for September to decide whether the project will move ahead. Do you still confirm that date as a key date?

Yes, that's a key date. That's the date in which we need to decide what to do. Of course, you can always request for an extension, but up to today, the date is September this year.

Thank you very much.

You are very welcome.

Rodrigo Barros, Deutsche Bank.

Congratulations on the great results. My first question is regarding listing in Brazil, which in my opinion makes a lot of sense to you because in our calculations your stock trades at 4.4 times the EDITDA and the other (inaudible) are trading above 7 when you adjust for the mining stakes. So would you see a huge opportunity to list in Brazil to get a better evaluation. I wonder if you ever analyzed this and if you think this would make sense.

And the second question is also in terms of Usiminas, if you can give us any call on the synergies after the [termed day] if you were able to get any further color on this for us. Thank you.

Okay, Rodrigo, regarding your first question, which is listing in some other market, you are not the first one to mention this and we understand that this is a possibility and alternative. And we will and we are analyzing the possibility of having a listing in some other place. We've nothing new to comment regarding to this point.

In relationship to your second question, which was I believe I already commented during the question of role, for the very first question on this call what we are doing at the moment and all the things that were commented yesterday in the conference call of Usiminas are the key issues to be commented. I have nothing else to add to that. If you want I can briefly summarize what I said at the very beginning, but this is what we are working at the moment.

Pablo?

Yes.

Yes. Maybe just one thing that I remember to go through with Ternium in the past is how long in your opinion it would take to get Usiminas to full capacity? I think we discussed in the past maybe two or three years, but maybe that point specifically if you could add some color to us?

Well, I believe that this question was asked or should be asked to Usiminas directly. We already said and we still believe that Usiminas should work a lot in order to reach the level of production or the level of output that you are mentioning. We believe that this will take sometime. Already Usiminas is showing some increase in shipments and the expectation that they have is to keep working on that plan.

We always said that the transformation of Usiminas will require some time and we keep saying exactly the same and the expectation for us is the same one, around -- you mentioned two or three years, but this is something that we continue to estimate.

But here looking at the result of yesterday's conference call, Usiminas is already working and commenting what they are doing in order to have a better performance at the level of Usiminas.

That's great. Thank you very much.

You're welcome.

Humberto Morales, Goldman Sachs.

Just one follow-up question on the cost side. I was wondering if you could provide how this slab, the average slab cost purchase is in the first-quarter 2012 compares with the fourth-quarter 2011 and what was the variation of the average cost of slab purchase?

Okay. As we mentioned, we are seeing some reduction in the value of purchase slab. We are -- if you compare the first quarter this year, we were buying slab at prices that were over $600, between $600 and $2,600 -- between $600 and $620. And we're expecting to see a reduction on these prices for slab coming in during the second quarter of this year.

Okay. And in the fourth-quarter 2011, what was the average purchase cost?

The average purchase cost during the fourth quarter was over $650 per ton.

$650. Thank you very much.

You're welcome.

Verena Wachnitz, T. Rowe Price.

A quick question. Your other revenues were unusually low in this quarter. Any reason for that and should we expect them to recover going forward? Thank you.

Excuse me, could you repeat because I couldn't hear you very well, Verena?

Yes. I'm sorry. The other revenues from other products were quite low in this quarter --?

Yes, yes, sorry. Sorry, you're right. Yes, we --- yes, in fact we have no sales during this first quarter due to --- of iron ore due to some issue that we've in our --- in the site in which we operate. That has been already sold. So we're expecting to pickup these sales from second quarter on.

Great, thank you.

You're welcome.

[Santiago Perez Teuffer, GPM].

Thanks for your time but my question has been answered. Thank you.

Okay, thanks a lot, Santiago.

Marcos Assumpcao, Itau BBA.

One question on the Acu project, on the steel expansion. What would be the level of financial gas price that is a breakeven for you to do the project? So what is the maximum level of natural gas price that would allow you to build a profitable project in Brazil?

Well, we've not yet at this point to discuss the issues of relatively price to -- for those projects. First of all, we need to figure out if the availability and the quantity are there and then to analyze the full project. You know that we have already mentioned that we are changing technology. So we are going through this process of full analysis.

Okay. And the second question is regarding the potential synergies between Usiminas and Ternium, the use of Exiros, the use of the distribution (inaudible). When do you expect to negotiate that with Usiminas? Would it be in the next Board meeting, which will be appointing all of the new directors?

Well, in respect to Exiros, Usiminas already approved the entrance on the platform of Exiros to work if it is convenient for them to work with Exiros. In respect to the other one that you mentioned, as I already said at the very beginning, yes, we are working and should be working and expecting to have these analyzed and discussed in the near future.

All right, thank you very much, Pablo.

You're welcome.

Rodolfo Angele, JPMorgan.

I just wanted to explore a little bit more and confirm that I understood it right the question from my colleague on listing, potential listing elsewhere in Brazil. Can you comment a little bit more on this, if something you're considering Brazil or Mexico, how serious it is at this point, just wanted to confirm and get more color please.

Okay, thanks for the question because I believe it is important to clarify this issue. We are not at the moment moving to list our Company in the near exchange. What I said is that we are analyzing this possibility, which was already commented by you and by different persons within the investor community that it's an alternative for Ternium. So we are analyzing, but we are not working at the moment to do any listing. So this is a possibility and an alternative that the Company has and we need to go through the process of internal analysis to see if this a right move for the Company.

Okay, thank you very much.

Thank you.

Carlos De Alba, Morgan Stanley.

Just to clarify a little bit the outlook. It is mentioned that you expect an increase in shipment, particularly in North America. But could you give us a bit more detail on this? Is it more on the flat business or on the long business? In Q1 it was very strong numbers in terms of shipments in the long division. Is this where you expect to see the majority of the improvement recorded in the outlook or it's going to pick up in the flat business as well? Thank you.

You're right that the shipments during the first quarter in long products was important, a significant number. We are not expecting to see increase in shipment coming from long products, but what we are expecting to see is shipment increases coming from flat products.

Thank you. I show no further questions in the queue and I would like to turn the conference back to Mr. Pablo Brizzio for closing remarks.

Thanks, and thank you again for your interest in Ternium and for your time today. We look forward to remain in touch with you. And as always, please contact us if you have any additional questions. Thanks a lot, bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.