Ternium SA (TX) 2012 Q3 法說會逐字稿

Good day everyone and welcome to Ternium's third-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.

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 yesterday detailing its results for the third-quarter and nine-months 2012. This call is complimentary to that presentation. Joining me today are Ternium's CEO, Mr. Daniel Novegil and 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 yesterday. With that, I'll turn the call over to Mr. Novegil.

Thank you, Sebastian, and good morning to everyone. Thank you very much for your interest in our Company. Sorry for the voice. I am not in my best day, maybe because I am speaking too much. But anyway, I will try to do my best and I hope you will understand.

So let me start by saying that I am very pleased with Ternium's performance during the year. Our operating results, EBITDA margin of 16% of revenues, profitability and key indicators compare quite well against most of our peers and competitors in the industry. I am especially proud that we were able to achieve these results in a very complex and volatile global environment, and now we are ready to capture profitability through market access, growth and gains in market share from imports in a region, Latin America, that is growing in a healthy fashion.

With a net debt of $1.8 billion, we continue to have a sound financial position equivalent to around 1.3 times EBITDA at the end of September 2012. We believe this performance is a direct result of our management process. Our Company model is focused on always dedicating our efforts to process management and follow-up of key indicators of performance through end marketing, safety, efficiency rate, workforce, streamlining logistics, energy consumption, market share, value adding, just to mention some example of this -- examples of these key indicators.

Also, it is important to mention, as we did in our latest Investor Day, that production flexibility is proving to be a key competitive edge for Ternium. For instance, right now we are enjoying low gas prices in our Guerrero reduction facility in Mexico as well as a good gap between slabs and hot rolled coil prices in our rolling works in formerly IMSA in Mexico as well.

I know that our involvement with the turnaround underway in Usiminas is of interest of some of you, so I will explain a few minutes now, updating you on some news on Usiminas. We are very satisfied with the governance in the controlling group and with the performance of the new management team of Usiminas, although the financial results of the company are not yet reflecting the many positive changes that Usiminas is undergoing. We started productive work in relationship with our control group partner Nippon Steel and the improvement in Usiminas [group controls] will impact company results in the medium run.

Usiminas management is making good progress across the company to break through, and, as I said before, we are already having important improvements in steel production volume, efficiency in the use of industrial assets through increased coordination of production facilities analytics; optimization of raw material consumption, iron ore, coal; rationalization of steel grades offering in the product portfolio; improvements in quality; improvements in customer compliance and order-entry ratios; reduction of working capital; rationalization of CapEx; rationalization of third-party services contracts and subcontractors; and streamlining of white and blue collar workers, just to name a few of these indicators.

In addition, procurement and distribution agreements between Usiminas and Ternium have recently been signed. So both companies now have the tools to begin to profit from their joint efforts in these fields, procurement and distribution, and are beginning to do so by having economies of scale and scope, bargaining power and better and more sophisticated product portfolios, what will bring value to Usiminas and Ternium as well.

We will keep looking for ways to continue adding value to our investment in Usiminas by offering them management tools from Ternium that we have developed through the years and could be of interest of Usiminas, services like IT, IS, subcontractors' management, logistics and supply chain optimization, and so on and so forth.

I firmly believe that Ternium and Usiminas are on the right track to achieve a new level of profitability, and I am confident even when the company faces now a challenging environment, that Usiminas will do it.

I will move now from Usiminas to a discussion of Ternium main markets in Latin America. We continued investment process in Mexico, our biggest market, which accounts for more than half of Ternium's sales. I see Mexico as a very attractive market and being the leader in this market, Ternium is very well positioned to take advantage of this opportunity of growth that we have in this particular market.

The auto industry is one of the most dynamic examples of the attractiveness of the Mexican market. With several announcements of new facilities from the world's leading automakers, this facility then attracts many more related industries to built capacity around them. Because of this activity, we are building in Mexico a greenfield facility for the production of cold rolled steel and high-specification galvanized products, specifically targeting the auto industry and high-end products.

As you know, we are doing this in a partnership with Nippon Steel. The mill should begin operation next year in the third quarter. Everything is doing exactly right in time and in budgeting in this project.

In Argentina, we continue work in several initiatives. This includes, the project to expand slab capacity by 0.5 million tons scheduled to begin operating in the second half of year 2013, a new vacuum degassing station to be able to produce interstitial-free steel grades in Argentina and the expansion of the hot strip and galvanizing mills carried out during the year.

These projects will enable us to better serve demand in the country, and, at the same time, to export slabs that could be used in the region and in the Ternium system.

I would like now to update you on an issue discussed at Ternium Investor Day. This is our mining project in Mexico. As you are probably aware, a lot of things has happened in the commodities markets in March, especially in the iron ore market. Uncertainty regarding the future of the global economy has brought uncertainty about iron ore supply and demand dynamics and balance. Consequently, intermediate and long-term prices -- long-term iron ore prices are volatile and uncertain.

Under this situation, many iron ore expansion projects are being reanalyzed, and so is the development of our mining project in Mexico. In the future, we will release it -- this project on a regular basis, as we could have an opportunity to develop the mining project together with the steel making capacity in Mexico in order to integrate the excess rolling capacity in this country, up-streaming. That means that we will concentrate the mining project for the time being on our own needs instead of locating in the export business.

In the future, as I said before, we will follow-up the situation in order to give you updated information in this development.

Finally, it is very important to mention the fact that last month we received from Venezuela the remaining payment of the compensation for Sidor nationalization. This was $137 million payment that added to a total collected of almost $2 billion. I am very glad to say that with this last payment, the issue is now over.

We had to show a lot of perseverance and we had to put a lot of effort to achieve this outcome. So we are very proud of finally having been able to receive this clear compensation. And there are other companies that unfortunately have not been able to reach a positive resolution for the expropriation -- from the expropriation process.

Well, at this time I will go right -- they were the main issues I wanted to comment on and I will ask Pablo Brizzio to take over and give you a brief description on our performance in the third quarter. Please, Pablo, go ahead and then we will enter into the Q&A session. Thank you.

Okay. Thanks, Daniel. I would like now to provide a brief comment on our performance in the third-quarter 2012 and the outlook for the following quarter.

EBITDA generation during the third quarter was $340 million, slightly lower than EBITDA in the second quarter as lower revenues per ton offset the positive impact of higher volume and there was slight reaction of (inaudible).

Shipments of slab products were 4% higher in the quarter compared to the second-quarter 2012, with a 5% increase in South and Central America region and a 4% increase in the North America region. Slab product revenue per ton decreased 3% during the quarter, mainly due to a 5% reduction in the North American region.

Shipments of long products across all regions also increased compared to the second quarter, in this case 3%, and revenue per ton was stable. Prices in the North American region seem to have found a bottom, with steel prices increases recently announced by major US producers, that, if maintained, could translate in better average prices for Ternium in the following quarter, although mostly impacting towards the first quarter of 2013 considering we are already in the middle of the fourth quarter.

In the South and Central American region, Argentina steel market has been doing relatively well with slightly weakening of local demand compared to the last year third quarter. Despite this, we are still selling about 90% of our total production in the local market, and, as we look ahead to the next quarter, we are not anticipating any new change in demand in Argentina.

Summarizing, total shipments were 4% higher and flat and long products EBITDA per ton decreased slightly from $160 in the second quarter to $149 in the third quarter. We had $21 reduction in revenue per ton partly offset by a 91,000 ton increase in shipments and slightly lower operating cost per ton.

Net income in the third-quarter 2012 was $147 million, a $21 million increase compared to the net income in the second quarter and earnings per ADS was $0.62.

Turning now to our financial position, at the end of the third-quarter 2012 Ternium continued enjoying a strong balance sheet, with a $1.8 billion net debt position, down from $1.9 billion at the end of the second quarter. As Daniel mentioned, in October we collected $137 million from Venezuela. Taking this payment into consideration, net debt will be below $1.7 billion and the net debt-to-EBITDA ratio will be below 1.2 times.

Net cash provided by operation activities in the third quarter was $336 million, including an increase in working capital of $90 million. In addition, capital expenditures were $304 million for the quarter.

I will finalize the remarks with our outlook for the last quarter of 2012. As we stated in yesterday's press release, we are expecting steel demand in the Americas to increase in 2013 as a result of gradually improving market conditions in North America and Brazil. In the fourth quarter, we are anticipating shipments to remain relatively stable compared to the third-quarter 2012.

We will lower steel production level in Argentina as a result of the outage for repairs of the blast furnace.

Finally, we expect reduced operating income in the last quarter of 2012 compared to the third mainly due to lower average prices in the North American region and high operating cost. Although I mentioned prices in North America have recently bottomed out and some increases would be seen during the rest of the fourth quarter, we expect the delay in the spot price realization coming from the portion of sales that are under the quarterly contracts and a lower spot price today than the average price prevailing in the third quarter will have a negative effect in the fourth quarter average realized price.

This concludes our prepared remarks. We are happy to take any questions you may have. Thank you.

(Operator Instructions).

Carlos de Alba, Morgan Stanley.

The first question will be on -- if you can quantify for us please the potential impact of the disruption that you suffered in the Blast Furnace number 2 in Argentina. I think you are going to have to make additional repairs and you probably also -- or you will have to buy slabs and hot rolled coils to make sure that you supply your customers. Is there any number that you can guide us to in terms of these impacts?

Well, I don't want to get too technical about what happened in Argentina in our blast furnace. Just to mention that after proceeding with the replacement of staves -- there are refrigeration devices -- in the second blast furnace of Siderar, we had some problems during the blow-in, and then we decided to stop the operation and to replace refractories and afterwards to extend the useful life of the blast furnace from 6 years to 10 years, 12 years.

So we will compensate the lost steel production during the repairs of the furnace -- that will take 90 days to 110 days -- with third-party steel purchases of slabs and some hot rolled coils as well. So that we will be servicing the market needs of Argentina and neighbor [accounted] with no disruptions and this will not be a problem.

So because of the current oversupply of slabs and the fact that we have an insurance that covers both remediation and opportunity cost, we do not consider the loss being significant. If you ask me an estimation, I would say that maybe we will be losing around $20 million, $21 million, not more than that.

Okay, thank you. And then the -- my other question was regarding volumes for next year. You have the Tenigal project being completed in the third quarter or in the second quarter and then the start up in the third quarter of next year, and the vacuum degassing station in Argentina is also being completed. The cold rolled coil as well in Mexico. So could you give us an indication of how many incremental volumes do you expect from these projects?

Yes. I cannot give you an exact indication, but many things are going on and are happening on our marketing side and on our commercial side. First of all, as I mentioned in my very short speech at the beginning, we signed with Usiminas this distribution agreement that is quite important for both companies, for Ternium as well as for Usiminas, because it broadens the product portfolio and the bargaining power vis-a-vis competitors and customers on one side.

On the other side, we will be producing this vacuum degassing that will be giving Siderar a chance of supplying and gaining market share against imports of steel in Argentina, mainly in the automotive and in the home appliance industry. And then we have the Tenigal project that will enter into operation in the third quarter of year 2013.

We do not have an exact estimation of the impact of all this volume, but no doubt that at the end of year 2013 we will have a new Ternium with a new different -- and different commercial approach, more dedicated to high-end products, more dedicated to serve the needs of global customers with some important changes in our commercial approach vis-a-vis customers.

Maybe we can enter into more detail on this numbers and ideas -- we are having the Investor Day in New York in the coming June.

All right. Thank you, Daniel. A final question if I may. Any comments, any thoughts about a listing in one of the local market in Latin America?

Well, Carlos, as you know we have discussed this issue in the past. We are always keeping interest on analyzing this actually. We are not in the moment or currently analyzing it right now. But if some opportunity appear that make us doing this, of course we will keep an eye and we will look at this in the future. But we -- your question is, do we have a plan right now to do it? No, we don't have a plan at the moment to do it, but we are still looking at this as an opportunity because we know it's something that not only you but other people related to the Company is asking the same question.

And we know that you are an advocate of this idea, so we'll analyze in-depth.

Thank you very much, Pablo and Daniel.

All right.

Leonardo Correa, Barclays.

My first question is, Daniel, going back to your initial points regarding Usiminas, we read recently that you inked to deal with Usiminas on distribution, where basically you would pay a 1.5% fee to Usiminas on all the volumes transact -- that would be sold in Brazil, right? And Usiminas would also pay you the same 1.5% fee from volumes sold in Argentina and Uruguay and other markets.

So I just wanted to understand if you can help us better understand the logic and the opportunity, right, and if you can potentially quantify a magnitude of what type of impact we can expect going forward? And also, was interested if this is something that will apply also to Mexico. So if you could potentially be also striking a deal on distribution for Mexico? Okay? So that's my first question.

The second question is on CapEx and leverage ratios. I mean, if you can give us a bit of guidance on CapEx for 2013 and also what level of net debt-to-EBITDA you think is comfortable? I mean, you guys are running clearly on a very solid balance sheet and you now have the receivable from Venezuela. So I wanted to have your thoughts on that side.

And also if you can comment finally on CSA, any potential interest on how that transaction is evolving and how it could potentially fit your interest of integrating? So those are my questions. Thank you very much.

Okay. So let me pass to -- first to Pablo Brizzio to answer your second question about CapEx and then I will go back to Usiminas and CSA.

Okay, Leonardo, the -- as you mentioned, the financial position of the Company is quite solid and as we discussed in the past, we are still under the same budget to have a CapEx for the year 2012 of $1 billion. As you know, up to September, we invested $700 million and so we are on budget. And going or moving to next year, we are expecting if there is no project other than the one we have right now, to have a CapEx expenditure of around $800 million.

After Sidor, you know that with the generation of EBITDA that we have this year, we mainly utilize the funds generated by the Company for CapEx interest and taxes. So if next year we're able to reduce, as I mentioned, the level of CapEx are sustained, the level of EBITDA generation or, of course, if we can increase it much more, we will be able reduce a little bit the net debt and consequently the EBTIDA to -- net-debt-to-EBTIDA ratios. We are still -- we are now after the collection of a payment of Sidor with a level of below 1.2, which is extremely solid and we understand is among the best in the steel industry.

So we are expecting to sustain this good level of EBITDA ratio and the strongness of our financials. So basically, this answered your second question and now I will turn to -- back to Daniel to answer the other two parts of your questions.

Well, regarding the first of your questions, the one about Usiminas and the distribution agreement, no doubt that the distribution agreement is going to be a very important tool for both companies, for Ternium as well as for Usiminas, because it broadens the product portfolio, first. The distribution agreement will allow us to gain market share against imports in all the relevant markets where we are operating.

We are going to be through this distribution agreement ready to serve needs of global customers from a global supply base. We will have a new and cross commercial network with a legal framework, and so I think that both companies will be able to create and to share value. We are in the process of assess -- or making an assessment and addressing all the implication of this agreement in terms of volume, in terms of market share, in terms of high-end products portfolio base and so on and so forth.

So I am not yet in a position where I can put a value on that. Maybe, as I said before, when we share the Investor Day, we will be in position where we'll share some ideas or some numbers with you. No doubt that this distribution agreement, that you were asking, includes Mexico as well. So it includes the most relevant markets in Latin America; Mexico, Brazil, Argentina, Colombia, Central America. So we are going to be having, as I said in the very beginning, the kind of new marketing approach and more sophisticated commercial network in order to serve our customers need.

Regarding your third question on CSA, as you know CSA is a slab producer and we are a big buyer of slabs in the market, maybe the largest worldwide. So it makes sense for us to check if there is an integration opportunity for Ternium there. In this respect, we will follow the process. At the same token, we are not looking at decent rolling facilities in the US. I'm talking about Alabama works. So as for now is all I can say; we are following up, we are checking.

Marcelo Aguiar, Goldman Sachs.

Daniel, just exploring a little bit more on your last answer. Is this analysis you are doing -- I mean, you are doing by yourself or you are considering partnering with any potential client or any company in anyway. And also, on this topic, I mean do you have a view on how long this process could take based on what you already saw happening on the whole issue? That's the first question.

Okay. As Daniel mentioned, we are very early in the process. We are analyzing this issue by ourselves. We are not looking at anything else at the moment. So this is the situation that you are -- this has been a very public issue and very recently. So we are in the early stage of this and we will continue seeing, as Daniel put it, the process and we'll follow the process. We are at the moment doing this by ourselves.

Yes, we are standing alone. We are in a very early stage of the whole process, and it's always impossible for us to avoid to pay a look to this given that could be a good supplier for us in any event and we are a very important slab buyer. So we are checking and following the process.

Second question -- I mean, you mentioned about the Mexican and the opportunity of demand growth in Mexico with the auto. I mean, can you guys share with us what you see as a potential demand increase, let's say, in million times in the next three to five year in Mexico of auto sheet?

Well, as you know, we do have a very relevant opportunities for import substitution in the auto steel market in Mexico, and -- because we were talking about that in different occasions, especially during our Investor Day.

As you know, now the imports in Mexico are around 1.2 million tons of coated products and 1.3 million tons of hot and cold rolled products. So we are going to be targeting this market. We are going to be producing sophisticated and high-end products. We are in the -- now in the process of working on the specification of the products and specification in wide -- in width-ness, in thickness, in specs and so on in order to optimize the capacity used of this facility.

And also, as you know, we're doing this in a partnership, 49%-51% with Nippon Steel. We are going to be controlling the serial line, the galvanizing facility with a 51% ownership. And we are building the cold roll, I mean, on our base. I mean, 100% from Ternium.

So I guess that I'm not in a position where I can share these numbers, but no doubt that we will have an accelerated ramp-up in this plant and we will go as fast as possible in the learning curve. Also, we have to take into consideration that because of having the partnership with Nippon Steel, we will be servicing the market that Nippon Steel is servicing now from Japan from this facility located in Mexico.

So at the very beginning, we will be with a quite high level of capacity utilization, given by the fact that we will be taking this part that is going to be supplied from Mexico as supposed to being supplied from Japan through the partnership with Nippon Steel.

So I guess that -- and even when I do not have precise number, looking at the capacity of the line and looking at the quite fast learning curve and quite fast ramp-up of this capacity utilization, we will be -- I hope we will be going very fast to run the facility at very high capacity utilization rates, 80%, 90%.

Okay. And the last question if I can. Looking ahead given the bullishness on Mexico steel consumption and your given -- your capacity utilization may be at full very, very closely, are you guys considering already getting back to that project or to build a new DRI in Mexico in rolling mills and so forth? So is this something that you guys consider it to be analyzed and maybe approved in the course of 2013, because we're going to take two, three years to fill the build-up?

And how would this fit in analysis of CSA? Is it something that if you do one you cannot do the others? So, looking at the leverage side.

All right. We're not analyzing this project right now. We are not analyzing this project. Maybe if we continue developing our iron ore reserves in Mexico some time down the road, it could make sense to integrate our iron ore up-streaming with a new rolling facility and DRI in Mexico. But it is something that we are not considering right now and we will not be considering this in 2013. For the time being, we are going to be concentrated in finishing our investment in Pesqueria, the galvanizing line, as well as the cold rolling mill, and also finishing the intensive CapEx plan in Argentina. And that's it. I mean --

Very much, gentlemen.

Also -- and going back to your first question, when you analyze the opportunity to gain market share that we have given the tremendous market that is being served from abroad in Mexico, you will understand that our purpose and our idea, our mission, our vision and everything is going to fill the capacity as soon as possible and to take over a market share from imports servicing with logistics, with speed, with service, with adjusting time delivery and so on and so forth. So we will be having a tremendous competitive advantage vis-a-vis the imports, and that's why I'm very confident that we will be able to fill the capacity in a very accelerated span of time.

Thiago Lofiego, Merrill Lynch.

I have two questions. The first one -- I'm sorry if you have already answered this. I just got in for technical issues. But how should we think about you're slab shortage in the long term? So what's your strategy behind this, also do you intend to grow this gap at any point in time? And if you could also put into perspective the potential (inaudible) project and the (inaudible) plant? That's the first question.

The second question is more on volume growth for 2013. You mentioned in the press release you expect a stronger demand environment both in North America and Brazil, especially so Brazil. How does that impact your demand expectation considering that you don't have any facilities there? I mean, what's the driver behind you citing Brazil in your release? That's -- those are my questions.

Okay. oh, yes, we have answered, I understand, both of your questions in previous ones, but let me summarize what we said. First of all, we -- as you know, we are buying around 2.5 million tons of slabs per year, and in respect to CSA, Daniel mentioned that we are following the process but this is a very early stage in the situation.

Of course, as you know, being one big buyer in the market makes sense for us to follow the process. We are not in the moment analyzing the possibility of increasing our steel capacity in Mexico. We are concentrated right now in finishing the CapEx plan that we have right now, the galvanizing line and the cold rolling line in Mexico and all the CapEx plans that we have in Argentina.

We mentioned that we are positive in Mexico, in the region in fact, but due to the fact that we're expecting growth in -- as a whole in Mexico and also in some particular industries or industrial sector like the auto industries make us to be bullish on possible increases in demand in that market and being asked the one that serves us.

In the case of [Serincon], knowing the relevance that Brazil has in this region, we have expectation for Brazil to increase growth, GDP growth coming into next year and this will pull demand in the whole region. That's why it makes us feel comfortable that what we are estimating for next year is on the right direction.

Okay. And could you just update your number for the CapEx for 2013 and '14?

Okay. We are finalizing this year with $1 billion and next year we're estimated around $800 million, without taking into consideration any new projects. This is just finalizing what we have right now.

As you know the project in Mexico or consequently in Argentina too are entering the third quarter next year. So that's why we're having the remaining CapEx basically in the whole 2013.

So 2012 $1 billion and 2013 $800 million?

Exactly. Correct.

Okay. Thank you.

You're welcome.

Marcos Assumpcao, Itau.

My first question is related to profitability in 2013. We have seen EBITDA per ton dropping in the third quarter a little bit. Probably in the fourth quarter maybe a bit lower. What are you -- what is the Company's expectations for profitability in 2013? If you could comment a little bit on the drivers on the cost side and the revenue side as well.

And my second question is related to the US steel market. If you could comment about the potential price increase that the companies are announcing right now, if you think this will stick and the reasons why? Thank you very much.

One moment, please. All right, so regarding the fourth quarter of the current year, as you know, prices have been weak even when we do have right now in the marketplace a rebound of around $50 to $60 in the US market. That no doubt will impact favorably our pricing system in Mexico.

Also, we have that the slab cost will still impact our cost base because of having a first-in, first-out accounting. Then we have the impact of the blast furnace in Siderar that will have some impact in our cost base; maintenance expenses will go to the cost and we will recover afterwards through the insurance payment. But in the fourth quarter we will not be able to avoid this charge. Also we are going to be buying slabs and cold roll coils from third-parties, and this will increase the opportunity cost of taking over own production. So putting all these factors together, we understand that maybe we will have a weaker kind of fourth quarter 2012.

Then, for 2013, we are doing very well in long steel in volume and in prices. The North American flat market is rebounding nowadays and we believe that this price will be able to pass to the market, that will stay in the market for a while. So we are going to be having a better portfolio and product mix in Ternium in the coming year. So we feel that 2013 looks well and promising for us. Afterwards, we can comment on some drivers.

Looking forward, first, the market recovering in North America and also prices bottoming up; second, Latin America is doing well. I am just coming from the meeting in New Delhi from World Steel Association and steel consumption in 2013 is expected to grow at 3.2%, with China continuing growing at 3.1% and Latin America at almost 6%. That's not bad for our region and we are outperforming China and outperforming the rest of the world.

Then we're also going to be -- we are going to be enjoying our production flexibility, as I said at the very beginning of my very short speech. As you know, we have blast furnaces in Argentina. We have direct-reduction with [Gigas] in Mexico, and we have the rolling, formerly IMSA, facility in Monterrey that nowadays is enjoying a quite favorable gap between slab and hot rolled coil prices. Then we have the synergies of our operation with Usiminas, commercial synergies as well as procurement synergies. And you know, we also were able to bag a procurement agreement with [Excerous] in Usiminas and this will bring economies of scale in purchasing refractories, fuel oils and so on.

So we are also thinking new investments that will come sometime down the road during 2013, like the continuous caster in Argentina, the vacuum degassing, the hot rolled coil re-roller, the galvanizing line improvement in productivity and in capacity. We have the Tenigal projects and the new cold rolling mills. So -- and all these factors together, I believe, I think, I guess, that we are going to be having a promising 2013.

And, Pablo, you want to add on that?

I believe you summarized pretty well all the issues coming into the next year. The only thing that I may add is that from a technical input, we are moving into realization now. We know that during the last month, coal and iron ore and (inaudible) has reduced its pricing. Of course, we are not still seeing that, but coming in 2013 this will be an issue.

All right. Thank you very much. Very clear.

John Brandt, HSBC.

The first question is-- I just decided to hop on this, but just on CSA, if you are successful in winning this asset. You are currently buying about 2.5 million tons of slab in the market. My understanding is CSA is producing a little bit less than its nominal capacity of 5 million tons. So I guess question is what -- assuming that you ship that 2.5 million into Mexico, what do you do with the excess capacity? And then secondly -- I mean, Thyssen is having a tough time with this asset, what gives you the confidence that you can turn this around and run it profitability?

And then, secondly, just on Usiminas. You mentioned before that there were some management tools available that you are offering them such as the IT and then some contracting, et cetera. Would that go hand in hand with the management fee and sort of where are you with those negotiations? Has Usiminas taken you up on any of those offers? Thank you.

Let me start by the second question, the one on the management fee. Probably management fee is not the best way to call it and it's not the right word or the right phrase to talk about our relationship, the Ternium relationship with Usiminas. At Ternium, we have been paying fees to Usiminas in the past when we require specific services from them, and also from Nippon Steel.

So if this is the other way around and Usiminas feels that they need some of the tools that we were using in Ternium, like, for example, streamlining white collar bases; streamlining and optimization of administration [tech] like the administration of subcontractors; like supply chain and production planning devices and IDIS and so, maybe we're going to be passing all these tools and all these ideas on a fee basis or an agreement basis. And we will work on that provided that they ask us, because they consider that they can use and could profit from these ideas first.

Regarding the CSA, as I said before and we were mentioning with Pablo, we are talking about an idea that is in a very early stage. The only thing we did there, we are checking, following up because we are an important slab buyer and they are an important slab supplier.

And talking about volumes, Ternium is buying for our Mexican operation, is buying around $3.2 million of slabs per year. Also (inaudible) we will continue buying $3 million to $2.8 million, depending on the level of utilization of capacity. And CSA will still be there. Also we could have some needs of slab steel. If these needs are required in the medium-term in Argentina, in the short run and medium-term in Brazil, Usiminas is the one.

So I guess that there is some kind of fit between the supply and the need of slab. But in any event, I wouldn't be aggressive on saying that we are going to be participating. We don't know. We are just checking, following the process, analyzing. Not more than that.

Okay. Thank you.

Alex Hacking, Citi.

Congratulations again on your strong performance in difficult steel markets. I have a quick question on the decision to sideline the iron ore expansion opportunity. Is this being driven by the economics of the project and your view on the long-term iron ore price, or is this being driven by the need to preserve balance sheet flexibility to explore the CSA opportunity? Thanks.

It's not related to the CSA opportunity -- related to the same -- the very same project. We are looking at the volatility in the market, the different drivers in demand and supply in the iron ore market that are you seeing worldwide today. We are not the only one that is reviewing projects in iron ore development -- so is driven only by that. And as Daniel put it, we will release with this project if we believe there is an internal need within Ternium for our Mexican operation thinking in the future if we took a decision to expand capacity. But it's just related to the very same project.

Very clear. Thank you.

You're welcome.

[John Greene, LCB].

Just two things; first on -- if I understand, you guys are guiding to operating cost being higher in 4Q versus 3Q. But when I look at how flat prices have evolved during the year as well as other input cost, I would have expected your P&L to show lower slabs in iron ore and coal and so on prices flowing through. So I just wanted to understand what I might be missing on that front just given you guys should have some visibility on 4Q or pretty good visibility, I should say, on 4Q materials costs given the history of those? That's my first question.

Okay, John. You are right, we are seeing prices not only of slabs but also prices of coal and iron ore and scrap going down. But due to the way that we reflect our financials following first-in, first-out we are not yet seeing these price reaction in our financials. And we are not expecting to see this or the significant portion of this during the fourth quarter. Specifically in the case of slab, we are still -- or you will be seeing during the fourth quarter slabs that will go out four or five months prior to that. So that's the reason why we are seeing that. Of course, moving ahead, the situations will be different. But this together with the issue that Daniel mentioned on the situation on Siderar was making at saying that we will increase a little bit the cost on the Company.

So Siderar is kind of -- sounds like a meaningful factor there. And then the other question is just wanted to get your sense on how often you guys revisit and review the dividend payout policy and capital return policy at the Company. I mean, you guys are doing very well on a deleveraging basis. It sounds like you freed up a little bit of room in your CapEx budget by putting the iron ore project into a holding pattern I guess. And obviously, you have had the successful resolution with Venezuela, recovering quite a lot of money there. And so, just wondering how often do you guys revisit the dividend policy for the Company given that it would suggest there is capacity to raise the dividend at some point?

John, first of all, let me clarify one thing. We did not say that the issue on Siderar is relevant. We believe it's not material. Going to your second question, as you know, the Company does not have a dividend policy. So the dividend payment strategy is resolved once a year in the shareholder's meeting; that is of course every year is taking place for the Company.

And when --

Yes. Sorry.

Go ahead, sorry.

Go ahead.

Sorry. Well, I guess, expect a lot of phone calls and e-mails going into that meeting then, I guess.

Okay.

Thanks, guys.

You're welcome.

Showing no further questions in the queue at this time, I'll hand the call back to Mr. Brizzio for closing remarks.

Okay. Thank you again for your interest in Ternium and for your time today. We look forward to remain in touch with you. As always, please contact us if you have any additional questions. Thank you very much. Bye, bye.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.