Ternium SA (TX) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ternium first-quarter 2013 earnings conference call. At this time all participants in a listen-only mode. Later, we will connect the question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this call may be recorded.

I would now introduce your host for today's conference, Sebastian Marti, Investor Relations Director. You may begin.

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 earlier today detailing its results for the first-quarter 2013. 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 conclusions 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 today. With that, I'll turn the call over to Mr. Novegil.

Thank you, Sebastian, and good morning to everyone. Well, you know that we had did a total teleconference when reporting the 2012 early results at the end of February and at the same token, we will have our Investor Day at the Guggenheim Museum in New York in around 60 days. That means on June the 27th.

So I will let you, Pablo, to make a brief description of our result for the first-quarter 2013, in order to go afterwards directly to the Q&A session.

Thanks, Daniel. Good morning to everybody.

Before we go into the first quarter result, I would like to comment on a change we have made this quarter in our Mining segment. The Mining segment comprises the mining activity of Las Encinas, a company which we hold 100% equity interest and also comprises 50% of the operation of results performed by Pena Colorada, a company where we maintain a 50% equity interest.

Until the end of 2012, Pena Colorada was presented as an investment in non-consolidating companies. From the beginning of 2013, Ternium began to recognize Pena Colorada's assets, liabilities, revenue and expenses in relation to its interest in the joint operation. This is the reason you will see an increase in most of the Mining segment figures in the first-quarter 2013 compared to the previous quarters.

Let's go now to our operating performance in the quarter. EBITDA during the first-quarter 2013 was $368 million, $140 million higher than the EBITDA in the fourth-quarter 2012, mainly as a result of a 73,000 tons increase in steel shipments and a $64 decrease in steel operating cost per ton, partially offset by an $11 decrease in steel revenue per ton.

Steel shipments were 3% higher than in the fourth-quarter 2012, an increase in all our markets. Industrial customers continues to drive our sales growth with our constructions-related shipments still relatively weak. The steel revenue per ton was relatively stable, a sequential reduction of just 1% with no big changes in Mexico and slightly lower revenue per ton in the southern region.

The steel prices in Mexico has been relatively stable during the last month helped in part by the appreciation of the Mexican peso to the US dollar, although the pricing environment in the North American has not been yet -- has not been very strong as a result of an unbalanced supply-demand situation.

The Steel segment's operation cost per ton decreased mainly as a result of lower raw material and purchased slab cost and higher absorption of fixed costs following the restart in February of the blast furnace in Argentina.

A lowering raw material and purchasing slab cost during the last couple of quarters should continue to show gradually in our cost of sales line in the next quarter as a result of first-in, first-out methodology of accounting.

Due to all, I said consolidated EBITDA per ton of steel increased by 56% from $105 in the fourth quarter of 2012 to $164 in the first quarter this year.

Net income in the first-quarter 2013 was $151 million, equivalent to a gain of $0.66 per ADS. The result compared with the $233 million net loss in the fourth quarter last year, a quarter that has been affected by a $275 million loss related to Ternium investment in Usiminas.

Turning now to our financial position. At the end of the year, Ternium continued improving its already strong balance sheet with a $1.5 billion net debt position, down from $1.7 billion at the end of the fourth quarter and equivalent to approximately 1.2 times net debt to last 12 month's EBITDA.

Net cash provided by operation activities in the first quarter was $348 million, including the decrease in working capital of $51 million. In addition, capital expenditure were $218 million, lower than the $312 million that we record in the fourth quarter last year and in fact, with our estimate of around $800 million of total CapEx for 2013.

I will finalize these remarks with our outlook for the first quarter of 2013 as we stated in today's press release. Steel consumption is gradually recovering. However, the steel -- the North American steel industry capacity utilization in the region looks moderately high related to apparent consumption, a situation that could lead to a weaker steel pricing environment.

In our region, the strongest sectors continues to be manufacturing, especially within the automotive industry, while constructions remain at a low but improving level. Offsetting the softer pricing environment, the Company anticipates a sequential reduction in steel cost per ton mainly due to lower raw material and purchased slab cost. Consequently, Ternium expects to generate operating income in the second-quarter 2013 roughly in line with that of the first-quarter 2013.

Well, these were the main issues I wanted to comment on. Please, now we can go to the Q&A session. Thanks a lot.

(Operator Instructions). Rodolfo De Angele, JP Morgan.

I have a couple questions. First, I wanted to hear an update with a bit more detail on what's going on in the market, especially Mexico and also in Argentina.

And my second question is on the CSA potential acquisition. We spoke briefly about it in the last quarter and just wonder if you have any new thing to add on that. And that's it. Thank you.

All right. Thank you, Rodolfo. This is Daniel Novegil. Let me start by the second part of your question regarding the CSA project. Let me tell you that Ternium is no longer participating in the CSA sale process, given different value perception and also because of the industry situation, first.

Second, going into your -- the first part of your question, the market situation in Argentina as well as in Mexico, in Argentina I would say that the market is doing well. We are performing quite well without having any problems to access to raw materials and other resources given the exchange rate situation. So the Argentina operation is -- for the time being is doing very well.

Regarding the situation in Mexico, I would say that is following what is going on in the US market with a certain increase in consumption coming basically and especially from in the industrial sector being the construction business a little bit behind in growth in both public investment as well as residential housing.

So all-in-all, I would say that Mexico is following what is going on in the US and I would say that the --- I don't expect important changes in demand in the quarter to come. The numbers will be maybe a little bit lower than the ones that we are looking at in March and February, but nothing relevant.

Thank you very much.

Thank you, Rodolfo.

Thiago Lofiego, Merrill Lynch.

Hi, I have two questions. First one about your raw material costs. I understand you do have a lag between market prices that you pay for raw materials and costs -- cost of goods sold that you register in your income statement of around two quarters. So the outlook for costs in the third quarter of the year should be negative, given higher iron ore prices in the first quarter of the year. Is that assessment right? Could you give us some color on that? I'm just trying to grasp here the margin outlook for the remainder of the year.

The second question is regarding still the CSA or the --- your strategy going forward. So if you're no longer looking into buying CSA, what are your options in terms of growth and in terms of maybe closing your slab gap that you have today? So what are the options going forward?

Okay, Thiago, how are you? This is Pablo Brizzio.

Pablo.

Let's go first to the question on cost. You are right in your analysis in respect to slabs, not in all the cost structure of the Company. So in fact, in the case of iron ore which is impacting only in our operation in Argentina, the lag is lower than that, so you will start to see a reflection of the input cost already in the second quarter.

You are right that what we are acquiring at the moment in relationship to slabs will start to be reflected at the beginning of the third quarter. So in that respect this will follow the trend that you saw in pricing of steel products.

In respect to your second question, well, we as Daniel mentioned, already comment on the issue of CSA. So now we will reassess for the future the options that the Company has and basically that's it. But please let -- Daniel, if you have an additional comment on that, please go ahead.

Just adding to your comment, Pablo, I think we will have the chance of adding together during the -- our annual meeting in a little bit more than a month. So there we will have the chance of sitting together and discuss and to analyze and to look where are the options, what are the alternatives, where we have our prospective in growth and a strategy and so on. So maybe this is not the time on going in these numbers in detail.

Regarding the first part of your question, Thiago, let me tell you or let me comment something, that we have seen recently a softer pricing environment no doubt about that, maybe because of the consequence of excess capacity worldwide and also because of a very high level of capacity utilization in the US market.

So although lower prices are obviously not good news for Ternium, we do have some advantages vis-a-vis our competitors that turn into a relative -- a relatively better position for us in this kind of weak market. The partial integration of Ternium in terms of slab making, the fact that we buy in the market around 2.5 million to 3 million tons of slab per year, give us a production flexibility in our operation and at the same token a cost advantage when buying steel in a market with overcapacity than the --- like the one that we are having these days.

At the same time, the very deep and fully integration --- integrated value adding capacity that we have in our facilities in Argentina as well as in Mexico also helped us at time of low prices because this high level of customization and services give us a protection, so to speak, and defend our margins with our customers vis-a-vis competitors.

Going back to the Rodolfo question on what is going on in the Argentine market on top of what I quoted related to the situation in demand and different sectors of activity, I would say that the automotive industry is doing very well in Argentina as well as home appliances. Maybe the construction business is a little bit weaker than the one that we had a year before.

At the same time, you know that we have a very transparent company in relationship with the government as directors represent in the government have been participating in Siderar Board for the last two years. And we are getting along properly and properly well with them.

So in the exchange rate market, no doubt that maybe it is a little more bureaucratic than before. But we are not having problems to operate and we have not able --- we were --- the things that we had regarding this administrative cost and so on, we have been able to overcome.

So regarding dividend, Siderar has consistently pay a yearly dividend. The last one in May 2012 was $40 million. And in the last Siderar shareholder's meeting was approved a payment of dividend for year 2013 of $70 million. So regarding the pricing situation, we are not having government pressures or market pressures to reduce prices. So our prices as always are aligned with the international market, maybe with less volatility. And so we follow the international quotations with a lag to react to changes and also, as I said before, less volatility. That's it. Thanks.

Thank you, Daniel. If I may, just back on the CSA issue, just to make it clear. So you're basically out of the process because of valuation, divergences. Is that basically it or were there any other issues that are preventing you from not participating in the process?

No, no. As I said before, we are not longer participating in the sale process given the different value perception and also because of the industry situation and that's it.

Okay. That's clear. Thank you.

Thank you.

Ivano Westin, Credit Suisse.

Hi, Sebastian, Daniel and Pablo. Thank you for the call and for the question. Just like to talk based initially on your Pesqueria project, the 1.5 megaton [CRCN] and 0.4 magaton galvanizing capacity in Tenigal. If you could provide a guidance of the ramp-up from the second half until -- from second-half 2013 until 2015, that will be highly appreciated.

And the second question, if you could also provide the ramp-up due to volumes of Pena Colorada and Las Encinas. And on Las Encinas, if you also could comment on third-party purchase as you had higher costs on the back of these issues, specifically this quarter, so if you could comment on these throughout the year, that will be also highly appreciated. Thank you.

All right. Well, let me start with the Pesqueria project. Let me tell you that we are doing well. We are in a schedule. We are in budgeting which is something that is not common nowadays in the steel industry, but we are really doing very well regarding budgeting and regarding [import] and regarding scheduling of the process. We are planning to start operation of our galvanizing line in next August.

And afterward, we do have a ramp-up program in order to fill the capacity as soon as we can. We also are working very hard to finish all the work in our cold rolling facility also located as you know in Pesqueria. And we are making important changes that we will share with you in our Investor Day related with our marketing approach because as you know as a consequence of the growth of Ternium, as a consequence of Usiminas, as a consequence of the distribution agreement that we have with Usiminas and as a consequence of these new facilities that we are going to be operating in Mexico, we are making some important changes in our marketing approach and in our commercial approach because we are starting to be more a industrial-based kind of company with more orientation to high-end products, high quality important service requirements, important logistic requirements. So we are making some important changes in our marketing structure in order to serve this market more efficiently.

So hopefully, we will have this inauguration in this coming August. We hope to do well passing all the customers and all the requirements in the automotive industry, especially to this new facility. And so we have a very good expectations on value coming from this investment to our Company, to Ternium.

Okay, Ivano, let me take your second question. In fact, in our mining operation, we are -- basically, we're working at full capacity. We are not there in any ramp-up period. We are trying to produce in our mining operations in Mexico the most as we can. So there is no new processes or plans to increase capacities -- capacity in the near future.

In relationship to the structure of cost of the Company, it's important to mention that we -- from this quarter on, we are consolidating the 50% of the operation of Pena Colorada. So that's why it's probably generating a little distortion on the numbers, you compare it to last quarter -- quarter of last year.

So basically that's the main difference. Of course, pricing, as you see, they're reflecting the reduced price that you saw from last year to this year. Okay.

Okay. Thank you.

Welcome.

Carlos De Alba, Morgan Stanley.

First question is regarding your dividends. If you don't go for CSA and clearly you continue to do a good job in generating cash flows, is it possible that the Company pays out a higher dividend than the $145 million -- $130 million that have been paid in the last couple of years?

And the second question is, going forward then, is there possibility that you increase your slab capacity in Mexico or would you take another look, fresh look at the Porto do Acu project in Brazil?

Let me take the first question regarding dividend. As you know, Ternium does not have a dividend policy. We have -- even though that, we have been certainly been paying dividend ever year. This year we propose a dividend of $130 million and you know that we will have our shareholders meeting in a couple of days. In fact, so they will -- they want to decide if there is any different dividend. We are expecting that to happen.

So we are not expecting to see any different in our Company at the moment in relationship to any transactions. So the expectation from our side is to see this dividend approved and achieved.

But now for the second part of your question, let me ask Daniel to take it.

It's talking about -- Carlos, it's talking about vertical integration. You know that we have been discussing with some of you in the past about maybe adding some capacity in Mexico through the DRI route. We are always in the process of constantly reassessing all our options. Always have the light of the market situation and perspectives.

So we do have something more in detail to share with you, I will address this in the Investor Day, expanding, as you know our vertical integration in Mexico is always something that we have among our options and priorities. So we will continue analyzing that option and to look for a cost analysis base and a cost benefit base.

Talking about the project in Brazil, the project, the Acu project, as you know in the fourth quarter of 2012, we wrote down the PP&E, that means the property, plant and equipment related to the development of the Acu project. And this was done mainly as a result of lack of availability of natural gas in the area as you know. And as we have been discussing with many of you, this project was based upon the DRI route as opposed of being based upon the blast furnace route.

And also we had an important iron ore [slab line] delay and investments overruns in the Anglo-American Minas-Rio project. So taking all this into consideration and putting all these ideas and these perspectives together, we decided to write down the property, plant, and equipment, PP&E in the fourth quarter.

In relationship with the vertical integration, I will also take the opportunity of your question to comment that we are doing very well in Argentina with our investment plan. We are in the process of inaugurating our new vacuum degassing line in August, September that will allow us to go in Argentina for a more sophisticated market, high-end products, automotive industry, home appliances and so on and so forth. Though, together with the Usiminas project, together with expansion in Pesqueria and we are getting again as I mentioned before a more sophisticated profile and more industrial base supply.

On top of that, we also are planning to put in operation our new continuous caster in Siderar in Argentina that will add a capacity of slab production and this line will enter into operation next March. We will be making the testing probes and everything during summertime in Argentina, that means January and February.

And though, with all these projects together, I think that we are addressing and we are assessing properly the issue of the vertical integration of Ternium looking forward.

All right, thank you very much.

Marcelo Aguiar, Goldman Sachs.

Thank you for the opportunity and congratulation on a decision not to move forward with the CSA acquisition. Regarding your strategy, I mean some of my questions was already made, but I'd like just to understand, I mean to date, how would you view your slab purchased strategy if you know Lazaro Cardenas is not available to supply slab in Mexico? How this would change your cost base? Okay, given all the news that ArcelorMittal is one of the bidders for Alabama. So if you can comment in more detail, how much have the guys has been sourcing from Lazaro? And if this not available anymore from some read, I'm not sure if you guys have very long long-term contracts, how this would impact your profitability in Mexico? That's the first question. I'll make the second question later on.

Well, regarding this question, Marcelo, I could say that we don't see any problems in the options on supplier of slabs currently. As a matter of fact, we are being benefitted by the market situation because of the gap between the slab pricing and that means the supply of slabs at the end and our pricing at the high end and the demand side. So we see that the balance between supply-demand for our operation is now in a good moment.

I don't see any problems in the procurement of slabs for our operation in Mexico coming from the current sources, meaning the current source is Brazil, meaning the current sources Argentina from the expansion of Siderar, Lazaro Cardenas also. I don't see Lazaro Cardenas using the full capacity to supply other sources than different than Ternium. And also we also have the ability to develop in the last year very good Russian suppliers.

And so we -- I see that our supply base is strong now and I do not expect it to change in the short run. And I guess that we will be able to continue enjoying this supply in the medium and in the short run. Second question being?

Yes, sorry, just maybe I should have been more specific on my first question. I was more referring --- I mean, giving and Lazaro is closer to your mill, I guess that you would have much lower logistic costs when compare -- if you import from Russia. So that was the focus of my question on the first question.

Well, the issue there is that, Marcelo, you know the pricing is based upon opportunity cost though when we negotiate our slab supply, they -- our suppliers also know the sources that are competing against them. So in an event even when the logistic cost of Lazaro is better, no doubt, and also the speed of supply is better, the pricing is internationally based. So I don't see any important advantage not to be offset, but by this logistic factors and speed factors. At the same time, I see Lazaro Cardenas continue being a good supplier of our needs in the short run as well as in the medium run.

Okay, great. On the demand side, just if you can explore a little bit more the outlook performance of those other regions that you guys are selling, which has the potential in terms of growth of shipments to those regions; US, Columbia and Central America given the strong performance in the first quarter? Thank you very much.

Yes. Let me so expand a little bit the outlook that we deliver in our press release with some very short quotations and general quotations. As you know, the steel industry capacity utilization in North America looks high relative to apparent steel consumption. The mills are running using something like 78.5%, 79% of capacity utilization, and this very high level of capacity utilization vis-a-vis the market demand is putting downside pressures on pricing first.

The situation is leading to a weaker steel pricing environment in the region, despite the fact that we have a gradual recovery in steel consumption in North America as a whole in the USA as well as in Mexico.

The strongest sectors continues to be the industrial sector that means manufacturing, especially within the automotive industry. And at the same time -- or construction remains at low, but I consider improving levels with an interesting potential looking forward. But now, right now, the construction seems to be performing weaker than industrial sector in Mexico as well as in Argentina and as well as in the US.

Offsetting the soft pricing environment, we are expecting a reduction in steel cost per ton in the second-quarter 2013, mainly due to the fact of our lower raw material and purchased slab cost. As a consequence of this situation as I said, we expect to generate operating income in the second-quarter 2013 roughly and mainly in line with that of the first quarter. The market in Colombia and Central America even when the impact is lower in our operating income and in our commercial sites, these markets are doing I would say is stagnant, if not weak.

So going back to the first part of your question and talking about the US, the market is doing fairly well for the expectations, but the mills still remain a level of capacity utilization that in my view is very high --- is too much high. So maybe we will have to wait until the market reaches a better supply-demand balance in this region, in this part of the world.

Thank you very much gentlemen. Thank you, Daniel.

Thank you, Marcelo.

Andre Pinheiro, Itau BBA.

I just have two quick questions here. You were talking about steel prices in North America. I just want to get an idea if you see China as a risk for global steel prices this year. We've seen production levels pretty high. If we can see further price pressure in the second half of the year, that would be my first question.

And my second question actually would -- if you can give us a little update on your CapEx guidance for 2013. That would be basically it. Thank you.

Good. Okay. Let me quote your question in -- well, first. As you know the GDP growth in China in the first quarter was 7.5% that compares against 7.7% of the last quarter of 2012, first.

Second, as you said the level of production of China is quite high. We take our --- the weekly numbers and we analyze these numbers. They are running at the level of production of 767 million tons, 765 million tons per year, that is quite high. And what the impact and the consequence of this production level is an important level of exports coming out of China, the level of exports of China are around 55 million tons, 58 million tons on a yearly basis.

But I was participating in the last forecast of World Steel Association, as you know I was chairing the ECON committee, the Economic and Forecasting Analysis Committee of World Steel Association until last year. And so we had a chance of getting together and discussing about China and the demand in this part of the world for the rest of the year. And even when China is slowing down a little bit, there are dynamics in China that make me feel confident that China will continue being a driver in steel consumption and in steel demand.

The utilization is going very fast. There, the target is to reach a level of utilization of 60% in the coming five years. That means that we will be expecting an important improvement in consumption of steel using goods like home appliances and cars and so on. As you know, with the population of China, even when the automotive industry is increasing the level of production year by year, it's still very low, very, very low in relationship with the population and the urbanization rates of China.

So we had to take a very professional look on what is going on in China. Many changes; growth maybe is slowing now a little bit, changes from investment and infrastructure to consumption, urbanization dynamics, demographic pressures, maybe a lower elasticity of the steel demand relative to GDP.

As you know in the last 30 years of quick growth of China, the elasticity was -- of steel consumption against GDP was well above 1, it was 1.5, 1.8. Now, it's below 1. That means that when China grows at 7.5% in the GDP, the steel consumptions goes up at 4%, 3.5%, 5% that is lower than 1 in elasticity.

So I'm optimistic that in the --- at least in the short and in the medium run, China will continue be driving the steel demand and will continue being an important demanding of -- demand drive of steel products and steel finished goods.

Okay. Regarding your second question, we are still having the same number as a forecast for CapEx during 2013, which is $800 million. So we are sustaining to the same number that we have up to last year. $800 million in total to finish the different projects that we have in place at the moment.

Yes, we're running the investment plans at the pace of around $220 million, $200 million something per quarter.

Okay. Perfect. Thank you, Daniel. Thank you, Pablo.

You are welcome.

(Operator Instructions). Alex Hacking, Citibank.

I just have one quick follow-up regarding CSA. Let's say hypothetically that the seller comes back with a more realistic lower valuation on the asset, would you see yourselves open to reengaging in this process or you think the door is completely closed now? Thanks.

Alex, this is Pablo Brizzio. We already commented on what we think about this project. So we would like to stick to that and do not speculate in any additional possibilities.

Okay. Thank you.

You're welcome.

Marcelo Aguiar, Goldman Sachs.

So just a follow-up here, just to understand, it's a more detailed question on your financials, just on the -- I didn't see you guys have, I think which is the impact on the Pena Colorada and EBITDA line for the first quarter, just to make an apple-to-apples comparison with the previous results and forecast?

Yes, Pablo please.

Okay. As you see in our mining segment, the EBITDA for the quarter was $35 million. And if you compare that to the fourth quarter of last year which was $26 million, so the difference mostly because there was a reduction in average price is coming from the consolidation of Pena Colorada.

Okay. So now it's clear. And about the price in Argentina, I know you guys comment about that, but we are seeing a lot of currency depreciation you know and much stronger currency depreciation than the previous quarter. So I would just like to verify how fast you guys have been able to reflect those that currency depreciation -- at least the official rate, right, of Argentine pesos into your prices in Argentina? Definitely, it's a much different situation in terms of currency movement than we have been seeing in the previous quarters, so.

Okay. As you know, we already stated prices following international relationships and of course with lower ability, especially during this quarter we saw a worldwide spread reduction in pricing. So the prices that you saw reducing this quarter coming from previous quarter was around $11 per ton at an average, basically was well spread around all the markets in which we were. And so we're basically having the same pricing situation in different markets, so. And movement of prices in this quarter specifically were basically well spread around all our markets.

Okay. If I can, the last question, Daniel. Just given the recent move on natural gas prices and slab prices, so how you guys are seeing the competitiveness when comparing your three routes of steel production; slab purchase, DRI Mexico, in integrated in Argentina. Where -- can you elaborate a little bit about which one is the best route right now and what -- going forward, what you think is the opportunity here?

Yes, no doubt that our operation in Mexico using DRI is the most efficient one route that we have in the Ternium system. And I would say that maybe is the most efficient route worldwide when we comparing benchmark in against other steel producers.

Even when the gas price went up a little bit from $2.7, $2.8 to $4.2, $4.3 nowadays, including taxes we're paying a net price of $4.8 per million Btu in natural gas is still very competitive. And given the situation of shale gas in the US and also the developments that we're undergoing, that the government is undergoing in Mexico, we don't see important swings in the situation in the years to come. So I would say that looking forward, I see our operation in Mexico being really very competitive. In the Ternium landscape as well as in the world landscape, we compare with anybody our cost base in the Mexican operation is very, very good.

Thank you very much.

If we have the chance, Marcelo, maybe we have the chance of talking about that in Investor Day. If I prepared some numbers, I will share with you.

Will be great, yes.

Thank you.

And I'm not showing any further questions in the queue. I would like to turn the call back over to management for any further 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 usual. And please contact us if you have any additional questions. Thanks a lot. Bye, bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.