Ternium SA (TX) 2012 Q2 法說會逐字稿

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

Thank you. Good morning and 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 yesterday detailing its results for the second quarter and first half 2012. This call is complimentary to that presentation. Joining me today is Ternium 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 on the slide. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and in our press release issued yesterday. With that, I'll turn the call over to Mr. Brizzio.

Thanks, Sebastian. Good morning to everybody. I would like to provide you some comments on our performance in the second quarter 2012 together with the outlook for the following quarter. And then we will be able to go to the Q&A session. EBITDA during the second quarter 2012 was $348 million, slightly lower than the EBITDA in the first quarter this year, as lower revenue per ton was not completely offset by lower operating cost per ton. Three months ago we estimated that shipments were going to increase and margins would remain relatively stable in the second quarter. At the end, shipments were marginally higher, but not as much as we expected.

In addition, EBITDA margin was somewhat lower instead of remaining stable, mainly as a result of a stronger decrease in prices than the one we were expecting and of course per ton a little higher than anticipated with some impact from unexpected maintenance works in our facilities in Argentina. SG&A increase in the second quarter 2012 compared to a first quarter was high -- with a higher level of -- a higher level of export from Argentina and Mexico to other markets in the region prompt an increase in [rate] costs as well as higher export taxes in Argentina as a result of a higher tax per volume.

Finally, labor costs in Argentina increased due to a renovation of annual contracts with wages increases effective since April this year. In addition, in the second quarter 2012, we decided to permanently reclassify certain expenses from costs -- from cost of sites to SG&A. These will perform during the second quarter and adjusted regressively in the first quarter and 2011 numbers issuing as per our release.

Let's review shipment performance now. Shipments of flat products were relatively stable in the quarter compared to the first quarter 2012. A 5% increase in the South and Central American region mainly due to higher export to the regional market in South America was mostly upset by slightly reduction of shipments in the North American region influenced by a perception in customers of a continuity of decreases in steel prices here in the second quarter 2012, something that began to change only recently with price increasing being announced in the last few weeks.

Flat product revenue per ton decreased 3% in the South and Central American region, but was stable in the North American region. Shipment of long products across all our regions were also stable compared to the first quarter, just a 1% increase and revenue per ton was 6% lower. Summarizing, total shipments were just marginally higher and flat and long products EBITDA per ton decreased slightly, from $172 in the third quarter to $160 in the second quarter. We had an $18 reduction of revenue per ton offset by a $7 decrease in operating cost per ton mainly as a result of lower raw material costs. Net income in the second quarter 2012 was $125 million, a $65 million decrease compared to net income in the third quarter 2012 mainly due to $38 million higher net financial expenses and $26 million lower operating income.

This $38 million increase in net financial expenses was primarily related to a $23 million lower result from the change in fair value of financial instruments and a $10 million higher net interest expenses due to higher net indebtedness.

We'll now review the impact of our investment in Usiminas in the previous statement. Ternium's investment in Usiminas, which is accounted for under the equity method contributed a loss of $7 million in the second quarter 2012. In addition a 10.9% depreciation Brazilian real to the US dollar during the period prompt a negative adjustment in the currency translational adjustment lines in Ternium's statement of change in equity in accordance with applicable IFRS.

That leads to a $216 million reduction in the value of Ternium's equity. Consequently, the book value of Usiminas as reflected in Ternium's financial statement decreased from $2.2 billion at the end of March 2012 to $2 billion at the end of June.

Coming now to our financial position; at the end of the second quarter 2012 Ternium continued showing a strong balance with $1.9 billion net debt position up from $1.7 billion at the end of the first quarter 2012. Of note in the second quarter was a dividend payment to Ternium shareholder of $147 million or $0.75 per [EDS] and dividend payment to shareholders -- to Sidebar minority shareholders of $16 million.

Net cash provided by operational activities was $156 million including an increase in working capital of $129 million mainly as a result of an increase in inventories due to higher volume of wood in process and raw materials as well as purged steel. In addition, capital expenditure was $230 million in the second quarter 2012. I will finalize these remarks with our outlook for the third quarter 2012 as we stated in yesterday's press release. We expect Ternium shipment level will remain steady in the third quarter 2012 compared to the second quarter 2012 as global economy uncertainty continues to adversely affect steel market growth perspective.

We also anticipate that declining prices in the region during the recent months will result in lower average price in the third quarter 2012 compared to the second quarter 2012, and will consequently review third quarter operating income.

Although, prices in North America have recently bottomed out and some increases could be seen during the rest of the third quarter, we expect the delay in (inaudible) price privatization coming from the portion of sales [that are in the quarterly contracts]. And a lower export price today than the average price prevailing in the second quarter will have a negative effect in the third quarter average realized price. This concludes our prepared remarks. We are happy to take any questions you may have. Thanks.

(Operator Instructions). Carlos De Alba, Morgan Stanley.

Yes, good morning, Pablo and Sebastian. First question if I may is could you quantify the impact of the unexpected maintenance that I think you mentioned the Company had in Siderar during this quarter, the second quarter? And second, if you can just explain us briefly what economics for Ternium can we expect on the material that the Company is buying from Usiminas and perhaps selling in Central America, in Columbia, in Venezuela and perhaps also in Argentina? Thank you.

Okay, Carlos, with respect to the maintenance issues in Argentina we're around $15 million, the impact of this during the quarter. Of course it was already done and performed during the quarter and we expect to see this repeated in the following quarter.

But Pablo, was that $15 million?

$15 million.

Thank you.

In respect to your second question, which is the sales of products from Usiminas in the market in which we are -- this is something that we comment on length in the last -- in the [call] and during our calls during the quarter. It's something that of course we understand and really is important to generate value for both Companies, both for Usiminas and for us because we have a very well diversified pool of distribution in the different countries.

Basically the ones that you mentioned, Argentina, Colombia, Central America, Mexico, so this is one of the ways in which we understand the value we generate in working together in this case with products produced in Usiminas and distributed throughout our market.

The benefit for Usiminas is quite clear because they are able to increase their production, which we saw already in the second quarter and that reduces their average unit cost. But for Ternium, is there explicit benefit in dollar per ton of these products beyond just servicing the clients better perhaps and offering a wider portfolio of products?

We see a lot of benefit in that. I know what you mean in the case we haven't yet finalized the negotiations among the companies to see how will we be -- the service in [Siderar] we will be offering to Usiminas. So, at the point I believe it was already clear during Usiminas conference call. There is nothing in place and this is something that will be still -- is under negotiation. And we believe that we will increase the possibility of this but in respect to the benefit for Ternium, it's not only that we will offer product to our customers, is that we were -- as you know, that we are working at quite full capacity these days so the availability of products to serve current customers is limited by the level of production that we have at the moment.

So, being able to provide new products to our customer is something that we consider important to complete the value range of products that we can offer and to be able to source all the different range of products to -- as a single provider to different customers is something that we consider quite important.

One final question. Traditionally, the fourth quarter is the weakest quarter for the Company or the second weakest quarter for the Company, but given the increases in steel prices that we're starting to see in North America particularly and there's recent declines in iron ore prices. Is it possible that after decline in the third quarter relative to the second quarter we can see an improvement in operating income in the fourth quarter because of these two factors that I just mentioned?

Well, of course the possibility exists, always depending on the way that prices will move. We usually mention that the fourth quarter is the lowest of the year due to seasonal effects. Traditionally, in Mexico, price during the fourth quarter are lower in comparison to the rest of the quarter due to the holidays, Christmas and these days that are happening during the fourth quarter, but if the direction of price and cost move in the way that you are mentioning probably you'll have a better result than traditionally expected.

Thank you very much, Pablo.

You are welcome.

Thiago Lofiego, Merrill Lynch.

Good morning. I have two questions. First, could you give us an update on your CapEx plan for the next couple of years, if you could also give us the CapEx budget and which are the projects you are going ahead with? That's the first question.

Okay. Let me summarize the projects that we have and the total number of CapEx. We are still working on a budget of $1 billion CapEx plan for this year. The main project there is the one that we are moving ahead at the moment in Mexico with the new cold rolling mill in Pesqueria, and the development of Tenigal together with Nippon Steel for the galvanizing lines. These are the two main projects that we have at the moment together with the plans that we have in Argentina for the new slab caster machine.

So, these are the three projects or main projects that we are under performance in the moment. And of course none of them will be finalized during this year. So, we will move in the following year and if no new projects are approved we'd also take into review the number of CapEx from $1 billion during 2012 to a level of around $800 million in 2013.

Okay, Pablo, just to confirm. So, you are going ahead with the Argentinean project. Could you give us some color on what your perception is in terms of the political environment in the country? So, are you facing challenges in terms of your investments there? And also perhaps in terms of the pricing dynamics in the country, could you elaborate a little bit on that?

Yes, as you know as we described in the press release we were able to increase shipments to the local markets in Argentina but were able to ship to regional markets. So, the total level of production in Siderar was sustained basically at [single] level. So, for us the production in Argentina continues to be good not only to provide to the local market in which, as we comment, we are expecting to see further reduction in volumes in shipment to the Argentinean market. We will continue to ship products to regional market.

The project that we are discussing basically is to increase the slab production in Argentina at the end of coming year and most part of these new slabs will be to ship or to export these from Argentina to Mexico. We are still under the same plan. We have no issue related to our CapEx plan from any -- as you put it -- from any political issues in Argentina. We are moving ahead with this plan as scheduled.

Okay. Thank you, and a final question. We've recently seen some price increase attempts in the U.S. for steels. What's your perception on that? Do you think that that's sustainable or maybe steel prices won't gain momentum, so what's your thought on that?

Well, we of course are seeing these price increases, they were some around $30 per ton increase in the last couple of weeks or three weeks, which is important. This is movement from especially the mills in the US to sustain pricing in the coming months. Hopefully, we will -- these will stand and we -- as we mentioned the bottom price that we saw a couple of weeks ago is the one stop there and now we could see better pricing. We are not utilizing in our projection at the moment, increased pricing from this level.

So, we have an opportunity to see as Carlos De Alba put it at the beginning of his questions that there is better result from price increases in the market. Of course we will be benefiting. The uncertainty in the market is important so it's very difficult to predict what will be the movement in pricing, which is related to dynamics of the economy. You have uncertainty in Europe especially, news coming from China, news coming from the US. So, though our region is doing quite well in this environment, it's very difficult to put all things together and to come up with numbers but we saw the price increase.

The price increase was fast. The price increases is already reflecting in the pricing in the region, of course in our pricing also in Mexico so that's a positive sign. Hopefully, there are not that many bad news in economic terms. This will be sustained.

Okay. Thank you, Pablo.

You are welcome.

Marcos Assumpcao, Itau BBA.

Good morning everyone. First question is regarding your project in Mexico. Recently, I saw that the shear steel capacity was increased from 1 to 1.5 million tons. Can you comment a little bit on that? And my second question would be on CSA, the potential sale of Thyssenkrupp assets here in Brazil. If you could comment a little bit if Ternium was interested in this asset here in Brazil or in both assets in Brazil or in the U.S, or like, if Ternium is really participating in the due diligence project process of the sale? Thank you.

Okay, Marcos let me first answer your question, related to equipment in Mexico. In fact, the only change that you have seen is that the capacity of equipment that we will be installing in Mexico in fact is, as I said, 1.5 million tones of sales of one -- the number that we all -- usually I know was mentioned, which is the level that we are expecting to produce in the facility. But, the actual equipment will have the capacity to produce up to 1.5 million tons. I don't know if this Marcos is clear.

Okay. And then we go to your second question, which is CSA, the development that we are seeing from Thyssen in Brazil. As you know, they have announced the intention to sell their assets in Brazil. Brazil is one country within our region and as you know we are always looking for the recent situation of (inaudible) within our region. So, of course, we were invited to participate in the process.

And we will analyze the situation to see if there is anything that could suit the strategy and the needs of Ternium. But you know this is a slab producer company in Brazil. And we need slab, but we need to fully analyze the situation. I understand that the process has not yet been well developed, meaning that there is not yet a release process in place. But I understand that this will be, in a very short period of time, this will be available.

Leonardo Correa, Barclays.

So, Pablo, the first question is regarding SG&A. During the quarter we saw the SG&A perhaps a bit higher than what we are expecting as a market, which includes a 10% of sales. So, I just wanted to get a view if there was anything specific on the quarter to generate that increase and if we think this number is sustainable, this type of level of SG&A versus sale -- that's my first question.

And the second question is regarding a couple of themes. The first thing is Acu, that's the Brazilian potential project you are -- you have been analyzing for the past couple of years. You had previously disclosed the deadline of September to come up with a final decision, green light or no on that project. So, I just wanted to see how that is evolving and the second -- let's say second part of the question is also regarding the iron ore assets in Mexico, if anything has evolved on that side in terms of CapEx and production increase, potential monetization or anything has been evolving differently on that side. So, anyways those are the questions. Thank you very much.

Okay, Leonardo, let me first tackle your question regarding SG&A, which we try to convey the message at start of the opening remark. There are things that are specific for this quarter and there are issues that are explained in the remarks, reclassification that we did and of course will remain there. In relationship to the specific situation of this quarter what we have is a higher level of export coming from Argentina and Mexico, and of course, this has a higher freight cost related to export in comparison to sales in the domestic market. In the case of Argentina, the export are -- together with the export you have to include export taxes that are charged in Argentina.

So these two things increase the number of SG&A for the quarter. And if we continue to see this level of export from -- especially from Argentina this will continue during the quarter. In relationship to the -- we did some permanent reclassification of several expenses moving them from cost of goods to SG&A because we understood on review that are better reflected as part of SG&A and not in cost. And this is per monthly. So, this, of course, we reclassified that in all the numbers that we presented in the financials and this will be seen there from now on.

So this is why you are seeing this movement in SG&A. In fact, the growth of SG&A was not that big if we take out this per monthly reclassification and it's only related to the issues I mentioned at the very beginning, which are the increase in export from Argentina, Mexico and tax related issues, together with some wage increases in Argentina due to the, of course, increase in pesos in comparison to the dollar -- the difference between increase in pesos and the dollar. So, these are the issues in relationship to the SG&A.

Let me comment in respect to your second question, which are the different projects that we have. You are right we already mentioned with respect to the Acu project that we have a deadline in September. As you know, and it's probably -- there were some delays in issues related to that project like the mining activity related to Port Acu, which is the possibility of getting iron ore into this port has been delayed so, most probably will lead to a delay in the possibility of us taking a decision on that project. So, this will be what we are expecting to see in the coming months. In respect to, the other project that we mentioned, which is iron ore in Mexico, we have nothing new from our weaker sales in the previous quarter as new development in relationship to that.

Thank you, Pablo.

You are welcome.

Rodrigo Barros, Deutsche Bank.

Thank you very much for taking my question. I have two questions. The first one is regarding the increase in iron ore -- sorry, inventories in the second quarter if you could explain if that's a trend or if it's -- that's likely to reverse in the coming quarter? And my second question is more, let's say, theoretical. In the last 8 out of the 9 quarters, you had EBITDA per ton above $106, just like we reported now. So, I wonder if you could comment to us how you see EBITDA per ton in the coming quarters, in the third and fourth quarter, and going forward. Thanks very much.

Okay Rodrigo, let me answer your first question on inventory. Yes we have an increased inventory mostly related to products that we need to stock in relationship to the new investment that we are doing mainly in Argentina and revamping of different facilities. So, we are not expecting to see these increases moving forward in the following quarter.

So going to your second question, of course, it has been at least our target. We located in the range of EBITDA per ton between $150-$180-$190 per ton. We were able to sustain that in the last 5 quarters. Of course, we had lower number prior to that. We are due to a situation on pricing we do not see any further surprise in the pricing environment within specifically the steel products. We are aiming to see somewhat a reduction in margins in the third quarter that leads to a quarter reduction in these EBITDA per ton number.

But the objective of the Company is to work always to sustain this level. After the reduction we will be moving close or at the lower end of this range. And if there is no news in the price, of course, there will be a situation for the following quarter and the third quarter. If we move with the theory of Carlos as he commented in the very first question, if there is further increase in prices, further reductions in the price of the iron ore, well, we can get out of this bottom part of the range or the lower range to higher numbers. So, as you said this is theoretical. So, we need to wait until -- to see, which is the reality on pricing in the coming months.

Okay, thanks very much.

You are welcome.

Ivano Westin with Credit Suisse.

Good day, gentlemen, thanks very much for the call and for the question. Just wonder whether you have any intention to change overall strategy in terms of physical sales, whether you can expect higher exports to overcome weaker demand in some markets especially in South America? And the second point more on [perspective]. You already anticipated to expect weaker price and demand in the short-term. But on a longer-term perspective if you have more positive especially in terms of 2013 demand and price? Thank you.

Okay, Ivano. We have already started as we did in the past when we have different strategic issues in different markets to increase shipments to what we call extra market or neighbor markets. So, we already did that in the second quarter when we see or we saw a reduction of shipments coming out of Argentina. So, we were able to sustain the level of production by shipping our products into different markets. Of course, we will do -- continue to do that, but we are still optimistic in our region that demand in domestic markets, especially in Mexico will be -- will be there and we will be able to sustain the level of shipments to this specific domestic market.

As you know, in the case of Mexico the general macroeconomic situation is positive and we're expecting to continue to see that. In respect to shipments in the next year, we still believe that as we commented before the dynamics of our region, the Latin American region are positive. And we are -- we believe that we will continue to sustain this level of shipments. And I already mentioned it's very difficult to make projections in the pricing environment in the middle of this macroeconomic environment. But if you look at different buyers, if you look at different future pricing there is an expectation of higher pricing in coming year. So, we'll see if this is effective or not. But if the macro situation evolved positively for sure there will be some recovery in the level of pricing.

Okay, thank you.

You're welcome.

(Operator instructions) John Brett, HSBC.

Hi, good morning, Pablo and Sebastian. Thank you for taking my question. I just wanted to ask you about net debt. I mean, still certainly comfortable but it's a bit high by your historical standards. I'm wondering if you're comfortable at these levels or if the goal is to pay down some of this debt or if it's dependent on the projects -- the potential projects in 2013 and beyond? I also wanted to ask you about Usiminas.

We saw the currency adjustment, the $200 million adjustment. I'm wondering if that's just FX related or if there is something a bit more and do you think you'll need to write down this asset given what's happened with the share price? And then lastly, I just wanted to ask you about the slabs that you bought in Mexico. Sort of the spread between the HRC and the slab price and what percentage of the slabs; were bought from Usiminas? Thank you.

Okay, John, let me go directly to the net debt situation. We understand that the level of debt of the Company is low, is manageable. We can see that our financial situation is quite solid. If you take last 12 months EBITDA generation and compare it to the net debt we are in low 1's in relationship to a ratio. So, we believe that the financial situation is one of the best in our sector.

And of course as you know, if we have the possibility to further reduce it we will do it. It has been our tradition in order to be ready to take advantage of opportunities of -- our CapEx plan that we have. At the moment since we are in the middle of different CapEx plan as the one that I mentioned before it is difficult to believe that we can further reduce that. But in any case we really believe that the level of debt is very good and very low in comparison with our peers and comparison with our own standards, in the low 1 ratio we are quite comfortable. With respect to the issue of -- in the issue of Usiminas, the adjustment that we need to make was clearly accounting, if you want, [it was just] only related to revaluation of the currency. You know the [transactional] currency of Brazil is the real and the currency that we are reporting is dollar.

So, we need to adjust the value of the investment by that. As you know, the revaluation was 10.9% and this has -- this was the impact that we saw during the quarter. So, this is -- was mainly that, not more than that. In the case of -- your last question was related to the spread between the slab and the copper coil. We are basically in the -- within the range, probably in the upper part of the range, as you know we usually say that traditionally the range or the gap between the two prices is $150 per ton.

Okay, thank you. And the slabs that you bought in Mexico, were you able to take advantage of the Usiminas relationship and source slabs from Usiminas? I mean, did they account for the majority of your slab purchases in Mexico?

We were able to source some slabs from Usiminas. You know, this is not -- we usually source slabs from Usiminas and we did that in the past, of course, we continue to do that. And, yes, we were able to source around 80,000 tons of slabs during this quarter coming out from Usiminas. But of course this is just part of the fraction of the total need of slabs that we are having in Mexico (inaudible).

Thank you.

You're welcome.

Umberto Morales, Goldman Sachs.

Hi, good morning. In fact it's [Marcelo Aguiar]. Thank you for the opportunity. Let me insist a little bit more, Pablo, on the John's question on the potential impairment of Usiminas. You bought the stock at BRL36, the voting share, and now it's below BRL10 for a long time. So, can you elaborate a little bit on your discussion with auditors what will make you not impair a portion of investment of Usiminas by year end 2012?

Okay, Marcelo. As you know, we have bought the shares very, very recently, in fact less than five months ago. So, the Company has not completed any impairment test over our investment in Usiminas. Of course, we will need to do it prior to year end. And if there is a need to do that we'll need to reflect this basically in our annual statements. So, this is the situation, but right now, we need to move further on the analysis of the situation of the Company to see if there is a need to make an impairment on the investment that we made. But as I said, we haven't, at the moment performed or complete an impairment test.

I'm sorry, just to understand. So, when do you expect to finalize this analysis? I mean, it's required to be at the fourth quarter, right?

Yes, that's required. And this -- if there is something that makes us believe that there is a need to do it earlier of course we will need to do it.

Okay.

You're right, you're absolutely right.

Okay, thank you. On the Acu, I didn't understand properly your comments about -- you said -- can you elaborate a little bit about the timing of the decision?

Yes, the timing of the decision, the original timing of the decision is supposed to be September. As you know in our prior call we said that we have different alternatives. One is to try to get a -- or to delay the need to take a decision on this project. Due to new developments during the quarter, especially in relationship to the mining activity that was supposed to supply the fourth facility in Acu, that is probably the most -- (inaudible) our situation is also to get some delay in the need for the Company, that's Ternium, to take a decision on that project. So, that was what I wanted to say in the prior quarter. I know this has been clear for you.

So, to understand properly, so (inaudible) right to ask you for final decision September, so when is going to be this new deadline, do you know?

No, this is actually that needs to be negotiated. But due to different delays in different things it's very difficult for us to be in a situation to be nice; they wanted to take the decision if all the things related to the project was on delay.

Okay, okay. Thank you. Last question is on the mining. I mean, you guys have been analyzing for a while the expansion of the mine activity in Mexico. Can you say where are you in the process? Should we expect something soon, do you have any visibility on capacity, CapEx? This has been a possibility -- has been a goal for a long time already.

Well, we have, I believe, commented (inaudible) the situation of the project during the last call. And we are -- we said they are -- we were not -- we have not finalized and we will not finalize the analysis of the situation during basically this year. The decision if there is any should be taken at the beginning of next year. The numbers of the project were still the same. The project, the basic project is to double capacity of production of iron ore in the mine sites that we have there, you know that we produce 4 million tons, so that was the idea, big CapEx plan is basically to do exactly that.

So, we are still in the process of call we need to take into consideration there in the reality of the sector, the reality of the pricing, the reality of the macroeconomic environment and put all these together in order to see if you have (inaudible). But we, from last quarter to this one, there is basically besides the news that we have in the market no further news from our side.

Thank you, gentlemen.

Okay.

Thank you. I would now like to turn the conference back over to the CFO for closing remarks.

Okay. Thanks here again for your interest in Ternium 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. Thank you very much, bye-bye.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.