Ternium SA (TX) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Ternium's second quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the call over to Sebastian Marti. 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 second 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 conclusion of our prepared remarks we will open up the call to your questions.

Before we begin I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and in our press release issued earlier today. With that I'll turn the call over to Mr. Novegil.

Thank you, Sebastian, and good morning to everyone. Before we proceed to our prepared remarks about the second quarter I would like to start by quoting and addressing the very unfortunate incident we had at our Guerrero facility in Mexico one week ago. I regret to say that this incident has caused 10 fatalities as of today and that three other people continue to receive medical treatment for injuries they suffered during the incident. We are doing everything we can to attend the needs of the victims and their close relatives. Our thoughts are with them and we will continue to support them and their families.

The investigation we are conducting continues as we speak. In fact, indications are that the explosion may have resulted from an accumulation of gas at the DRI continuous loading area in the steel shop. As you know we take safety very seriously. We have a longstanding commitment to the highest safety standards at all our facilities and we will continue analyzing the cause of this very unfortunate event.

Well, having said that let me now give you some highlights from our results and other brief issues I would like to comment before Pablo proceeds with a more detailed kind of discussion on the second quarter and what we are expecting for the third quarter.

The second quarter 2013 continues showing an attractive steel shipment level with 2.2 million tons. As we anticipated last quarter EBITDA remained relatively stable with $370 million in the quarter with no big changes in net sales, neither in operating cost.

Let me also comment that we have been quite happy lately regarding denouncing unfair trade practices in Columbia, Central America, and Mexico, and we have obtained some good results on that respect. For example, the Mexican government enacted last month a preliminary resolution determining an import tariff up to 60% to imports of cold rolled steel from South Korea. In addition to that, the Mexican government began investigations regarding dilution of import tariff on imports of Russian cold rolled steel and plate. At the same token, in Columbia during this month there was a preliminary resolution regarding Chinese galvanized steel with a minimum price of $825 per ton FOB.

We will continue analyzing unfair trade practices in all our markets and relate it to all the products that we can include. And we'll present this information to the authorities in each market as appropriate.

Another field where we have been active is on organic growth. In the last -- our work over the last two to three years is beginning to bear fruit as we are proceeding to inaugurate different facilities that will enable Ternium to provide a distinctive and high value-added product range.

Tenigal has already produced their first hot dipped galvanized coil and is right now on final testing with the aim at starting commercial operation in next August. The new cold rolling mill facility in Mexico is now in hot run testing and the initial stages of cold rolled production are going to start commercial operation in October. It's starting with full hard. As I was commenting on the Investor Relation meeting we did all these commissioning right in budget in -- and in timing. So we are doing very well and we expect to enter into operation as I was depicting.

At the same token in Argentina the new vacuum degassing station has been inaugurated with the presence of the president of Argentina two weeks ago and will begin commercial production in September. On top of that, the new slab caster at Siderar will begin operations in the first quarter 2014 and will be inaugurated at the end of December 2013.

So having said that let me finish with a final word regarding Usiminas' performance. Also as we talk in the Investor Day, Usiminas is showing in the second quarter result that the turnaround process is doing very well with EBITDA margin of 13.6% in the quarter and 10% ratio in the steel segment. As we commented in our Investor Day a month ago we are very happy and confident that Usiminas' management is doing well and working properly in the turnaround of the company. And we expect to continue seeing more of these in the coming quarters.

So let me now finalize with this for the speech and in order to go ahead with our prepared remarks. So Pablo, please go ahead.

Thanks, Daniel. Let's go now to our operating performance in this quarter. As Daniel mentioned, EBITDA during the second quarter 2013 was $370 million, stable compared to the first quarter. The steel shipments remain at 2.2 million tons in the quarter, similar to that in the first one. This is a result of lower shipments in Mexico offset by higher shipments in our Southern regions. In Mexico shipments to industrial customer remained at good level while our construction-related shipments are still relatively weak.

Steel revenue per ton was also in line with the first quarter with slightly higher revenue per ton in Mexico partially offset by slightly lower revenue per ton in the Southern region.

Steel prices in Mexico remain stable during the first months of 2013, helped in part by the appreciation of the Mexico peso to the US dollar. During May prices in Mexico started to decrease as prices in the US has also done. This dynamic reverted by the end of the second quarter with steel prices recovery in the region led by a balance inventory level and some restrictions to steel supply related to maintenance of facilities or other unforeseen stoppages.

The steel segment operating cost per ton was also stable with low raw material and per slab cost offset by higher energy cost and other costs. Due to all these reasons consolidated EBITDA per ton of steel was $167 in the second quarter compared to $164 in the first quarter. And EBITDA margin remained at a healthy 17%.

Net income in the second quarter 2013 was $134 million for a gain of $0.52 per ADS. This result compares with $151 million gain in the first quarter of this year or $0.66 per ADS.

Net income was $70 million lower sequentially, mainly due to a $40 million non-recurring income tax charge in the second quarter in connection with a settlement of a claim from the tax Mexican authorities related to the Fiscal Year 2004. And the higher effective tax rate due to higher net income from Siderar, our subsidiary in Argentina, which has a higher income tax rate than in Mexico.

It is also important to mention that during this quarter we had a $10 million gain from a claim we have to the Mexican tax authority that was included in other operating income.

Turning now to our financial performance. At the end of June Ternium continued to show a strong balance sheet with $1.7 billion net debt position, up from $1.5 billion at the end of the first quarter. And equivalent to approximately 1.3 times net debt to last 12 months EBITDA. This reduction was mainly due to the dividend paid during this quarter.

Net cash provided by operational activities in the second quarter was $208 million, including the decrease in working capital of $71 million. In addition, capital expenditures were $290 million, higher than the $218 million we recorded in the first quarter of the year.

CapEx related to our new cold rolling facility, the galvanized steel facilities in Mexico and to the new continuous caster in Argentina are a big component of this increased CapEx level. All these projects are expected to conclude during the following quarters, as Daniel mentioned.

I will finalize these remarks with our outlook for the third quarter 2013 as we stated in our press release we issued this morning. Steel shipments in Ternium main markets remain healthy. In Mexico activity continues at a good pace in industrial sector while the country's commercial sector which is more closely tied to construction are yet to benefit from increased infrastructure investments. In the southern region the shipment level of the second quarter is expected to continue into the third one.

In the third quarter we are expecting a reduction in operating income compared to the second quarter 2013, mainly as a result of lower average prices in Argentina and Mexico. Average prices in Mexico are expected to decrease mainly due to lower contract prices which are set in accordance to prior quarter price levels.

All right. These were the main issues I wanted to comment. Please, operator, we can begin with the Q&A session now. Thanks.

(Operator Instructions) Marcos Assumpcao, Itau BBA.

First question is regarding shipments in Argentina, if you believe that shipments at current levels which are relatively healthy are sustainable over time? Also if you could comment on the volumes that you are seeing if you could see increasing volumes from the new investments in Mexico on the CRC and also on the galvanizing line already in 2013 or if we should -- how much should we consider for 2014? Thank you.

Well, the domestic market in Argentina has been doing very well and we foresee that we will continue doing very well in the quarter to come. So in the short run, meaning short run the next quarter, maybe the two next quarters, we will be selling in the domestic market around 210,000 tons per month domestic, that is a growth to a record level, all-time record level for Siderar. So the market in Argentina is doing well, as I said before, driven by good activity in the automotive sector as well as in home appliances and construction.

Regarding the second part of your question, we are starting operation of our Tenigal line right now. And we are in the process of starting up the operation of the cold rolling mill starting with full hard in September. And we expect to make a ramp up and to go, as I was commenting in the Investor Day, to go for a pretty high level of operation as soon as we could in the year to come.

So we have orders, we have been working with the automotive industry in certifying all the products, and so we are pretty confident that we will be doing very well. The demand is there, the production facility is there, the hot run have been doing very well. We are going to be visiting the plant again the same day together with the Board of Directors, and so we know, we expect to have a quite proper ramp up.

All right. Thank you very much.

Ivano Westin, Credit Suisse.

I just like to understand your expectation specifically for quarter three but also quarter four in terms of price for Argentina, South and Central America after your comments on the potential import tariff hikes.

And the second question, like to, you to comment please on your cash cost on slabs, on your own production compared to the purchase cost to get from third party in Mexico. And still on these, given the latest decision for the bidders if there is any possibility at all for you to rejoin the bid process of this year's sale or if it is already over as you mentioned before? Thank you.

All right. So let me start with the first part of your question on pricing. As you know in the case of Mexico we follow the pricing system of the US, that is recovering, the US is recovering based upon a strong demand and a recovery in the construction and retail business. So we expect to continue following up these recovery in the US domestic price in Mexico. And with respect to Argentina, as you also know, the price of Argentina is also following the international pricing system with less volatility. And you know with more kind of -- even a kind of evolution. So we see prices recovering in the quarters to come followed by recovery in the demand in the US as well as a strong demand in steel from China.

Regarding the second part of your question on slabs, we are still enjoying a quite good gap between finished products and against slab cost. And we are enjoying now a situation where we can supply -- we can supply the demands, the slabs that we need from different sources at quite convenient prices. So we expect this situation to continue in the short run. We don't see any important changes in that regard.

Regarding the CSA issue, we are not planning to review anything regarding CSA at this moment. The reason for (inaudible) negotiations as was explained in different occasions is because we had a different value perception and because of the industry situation and nothing changed. And so I wouldn't like to speculate on this respect because there are no changes and we are still in the same position as we were when having the Investor Day. There is no changes, we are not participating in CSA.

Okay, very clear. Thank you very much.

Thank you.

Carlos De Alba, Morgan Stanley.

So my first question is if you can just tell us do you expect any impact in terms of volumes or production from the sad accident in Mexico or you have enough inventories and that would allow you to keep supplying customers while you fix the -- or you repair the plant?

The second question is if you could comment about the CapEx expectations for the second half of 2013 and 2014, if there is any changes to your prior guidance. And then, finally, maybe Pablo I missed a little bit of comment that you mentioned on what is in the other operating income in this quarter. I think that was also sort of a non-recurrent item, but I would like to double -- to confirm with you, thank you.

All right. So let me start with the incident in our Guerrero facility in Monterrey with some quotes on what happened there. The main cost of this incident was the human loss which you know is invaluable, I mean it's impossible to recover easily from an impact like this in the human factor.

Second, damage to essential equipment was not important. There was no damage at all to core equipment. The incident happened in an area that is isolated from the reactors and so that's the way it was. We expect to be in a position to recover full production in the weeks to come. We are starting operation in the [Danieli] furnace in a couple of days, so maybe a week or less than that we expect to be working again back with the two furnaces together and to recover capacity at full.

We anticipate a production loss, all in all, of around $70,000, I would say, to be precise. We are replacing lost production in the steel shop with finished products coming from the Churubusco plant, I mean the non-integrated rolling mills where rolling is last. So we are not expecting material impact to customer shipment.

In the outlook that we are presenting for the -- presenting to the next quarter, it has been already considered some impact of this incident, obviously only to the extent of impact that we can currently anticipate that as I said before from a shipment standpoint, it's not significant. So that's the way it was regarding the incident.

On CapEx, I will pass this to Pablo Brizzio. Please, Pablo, could you quote on CapEx and the last part of the question as well?

Sure, no problem. Good morning, Carlos. The question regarding CapEx is as follows, up to the second quarter including the third semester we invested already $500 million. And, as you know, our expected CapEx for the year is $800 million. So as we are expecting after the conclusion of part of this investment, the CapEx level should reduce coming to the second semester. So we are expecting a reduction in the level from $500 million to $300 million.

In the year to come we should further reduce this level of CapEx and, as you know, without any new CapEx plan developed at the moment should -- this should be the situation. So a reduction in the second semester, a further reaction in the year 2014 if we are not developing any new additional plan.

Regarding to the other question that you make, we have two issues that I commented during my initial remark. The first one was a settlement that we had with the tax authority regarding a claim that the authorities made to an operation that was performed in 2004 prior to our entrance in the company, and at the very end we settled that, and the economic impact is $14 million, this is including the income tax plan.

The other one that I mentioned which is also related to tax issues is a recovery or a gain that we have in a different claim that we have with the tax authority that at the very end was recognized and we have an income of $10 million related to that.

All right. Thank you. Just a follow up, do you have already an estimate of how much it will cost to repair the equipment that was damaged in the incident. I know that Daniel mentioned non-core -- I mean core equipment wasn't effected but do you have already an estimate on how much money you need to spend to bring all the damaged equipment back on line?

We are in the process of assessing all the area. I could comment that will not be significant. I do not have a specific full estimation but I would say that it is below $3 million.

All right, thank you very much.

Thank you.

Karel Luketic, Merrill Lynch.

Most of my questions have been asked, but if we could just a quick follow up. You had mentioned you expected higher slab costs to impact the third quarter. Do you still expect that and how should we expect costs towards the end of the year. Thank you.

Hi Karel, how are you? This is Pablo speaking. Yes, you know that due to our way of our numbers, due to first in first out methodology we have a lag on the costs that we are reflecting on slabs. We are expecting an increase on the cost of slabs for the third quarter. And depending on how the price dynamic moves into a fourth quarter this could be sustained also for the fourth quarter.

As you know, this is something that will be impacted from the slab that we already revised so that we already know how this will evolve into a following quarter. That's why we are expecting that. So we are expecting an increase on the price slabs from very low level that we had in the prior quarters to this level that we are expecting to have in the third and the fourth quarter.

That's great. Thank you.

Welcome.

Leonardo Correa, HSBC.

So my first question, for you, Daniel and Pablo, just to get a little bit more visibility on the third quarter numbers, I mean you are guiding for declining EBITDA per ton, but just to try to reconcile, I mean the numbers and the outlook. I mean, if we think about the US steel pricing outlook, not for the third quarter, I mean as you mentioned steel prices have been rising. So I just wanted to understand exactly, I mean the proportion, if you can remind us the proportion between spots and contract sales that you have in Mexico and the US, so it will be very helpful just so we can understand why EBITDA per ton is not rising in the third quarter. So that's my first question.

The second one, if you can also help us out just to understand the level of EBITDA per ton going into 2014. The Company has been in a range for the past quarters of about, let's say, $150 to $170 per ton. You have several projects in cold rolled coil and Tenigal and some projects in Argentina which will definitely improve your rolled product mix and profitability. So just wanted to understand if we can expect something around $200 per ton into 2014 and '15, that numbers make sense to you? Thank you. Those are the two questions.

Okay, Leonardo, let me start by your question on the second one, the second one of your question. As you know, we always with a range in which we would like to move of about 15% EBITDA margin or $150 per ton EBITDA generation. We have been working very well at the level of 17% EBITDA and margin in the first two quarter or around $165 per ton in these two first quarter.

Of course, everything that we do is to try to improve this level. We are not expecting to arrive to a number as you have mentioned in the coming quarters or enter into 2014 since we have to do a ramp up work. And of course there are -- this is much dependent also in pricing.

So if you ask today if this is something that we are seeing in the coming or at the beginning of 2014, it's not the levels that we are working with. We are expected to sustain if it is possible to improve what we have today but you know that there is some volatility in numbers. So a range that we always work is about 15% EBITDA margin. We have been doing very well during these two quarters and this is something that we will try to keep.

Regarding your first question, it is very important to mention it, because probably it's not direct the analysis because we are seeing prices increase in the US during the last month especially, and this should be reflected in our numbers. The range of contract prices or contracts that we have with settled price in the Mexican market is between 30% and 40% of our total shipments.

Okay, perfect, Pablo, thank you.

You're welcome.

(Operator Instructions)

Alex Hacking, Citi.

In fact all of my questions have already been answered. But I guess while I am on the line let me express my sincere condolences for the loss of your colleagues. Thanks. Bye.

We do appreciate, thanks a lot (inaudible).

Marcos Assumpcao, Itau BBA.

Okay. Two follow-up questions quickly. We saw the operating income in the first half very similar to the first half of 2012. Can you comment a little -- and also the guidance for the third quarter is similar to the guidance that you had in the third quarter of 2012 as well lower steel prices in Mexico and North America. Can we expect given that you have a very similar second half EBITDA or operating income in the second half of '13 versus second half of 2012?

And the last question is if you still -- you mentioned the improving results from Usiminas. But last year in the fourth quarter there was a write-off on those Usiminas investment. Do you expect anything on that front as well in the fourth quarter of this year? Thank you.

Let me quote on the first part of your question. There is a combination of different factors that are impacting our EBITDA level. On one hand, the pricing system, we have the recovery in the US, and also some volatility in the market given the excess capacity that we do have in the steel landscape on one hand. On the other hand we are still working in the initiatives that I was commenting in the Investor Day regarding productivity, efficiency, cost reductions, white collars, streamlining and so on and so forth.

On top of that we are undertaking new initiatives in order to improve our EBITDA level and to compensate the volatility in the marketplace. Like, for example, we are drawing a new working capital draw in order to adjust the working capital as fast as we could. Second, we are drawing also a logistic map to save money in logistics. We are having in the system a logistic growth of around $100 million, and we have room there to work and to reduce this cost. We work hard and we continue pressing in this part of the cost. And also we are streamlining the subcontractor base with a new program that we are now undertaking on launching at the level of the whole Company.

So different factors impacting one, some factors pushing down the EBITDA, some factors improving the EBITDA level. As you know we are expecting a second part of the year, a little bit below but not that much. I mean, we expect that it's going to be pretty aligned with the first and second quarter.

Regarding Usiminas, as I was mentioning, we are working hard on the shareholder base together with our partners there that is you know is Nippon Steel. And we are getting along properly and we are working together, and we are pretty confident, both of us, that the management is doing well. And these -- this is reflected in some numbers like for example, the -- a 16% recovery in domestic shipments. The domestic shipments of the second quarter 2013 went up 16% in comparison with the first quarter, also the adjusted EBITDA went up 41% in the second quarter as compared with first quarter.

The EBITDA margin in the steel business is the highest in 33 months in two digits for the first time in a long period of time. The EBITDA margin of -- the total EBITDA margin is the best in Usiminas in the last 30 months. The debt, the net debt went down quarter to quarter in 9%. So the process is ongoing. It is a work in process kind of situation where the management we consider is doing well and getting results. And we expect that this turnaround and breakthrough processes will get the result that we -- had been expected.

All right. Thank you very much, Daniel.

Thank you.

Carlos De Alba, Morgan Stanley.

Just on the SG&A we saw a little bit of an increase to -- in the quarter numbers to almost $216 million. That is 10%, 10.1% of net sales, so a little bit higher than what you have been reporting lately. I know it is said in the report, it's mainly due to higher taxes and contributions that you had at least relative to the second quarter of last year. So my question is do you expect this higher tax evolutions to continue going forward. And if -- around $216 million -- or 10% of net sales is a number that we should work with in the future?

Okay, Carlos, yes, the number in SG&A was a little higher than expected, and we are expecting to reduce a little bit that number, was important increase compared to last quarter due to very specific issues, some of them that will be recurring, some of them that will not. But would you start to see some reduction on this number, also take into consideration what Daniel has just comment in the plans that we are implementing in order to keep working in cost reduction programs.

All right. And then just final --

All in all I would say that we can expect EBITDA levels that are quite high compared with peers. I mean, we are in the range of 15% to 17%, 16% is an average, and I would say that it compares, this number compares, no doubt, among the highest in the industry, and we expect to continue having thing range of EBITDA ranges. So, all in all, when you put all together in this cocktail of pricing, cost, slab, supply, new initiatives, cost reductions and streamlining and that, this, and the other, we will -- I expect that we will continue doing quite well, especially taking into consideration the comparison against peers and competitors.

Also we have to take into consideration that we are undertaking new initiatives in different fields. We are starting operations of very important facilities. We are going to new markets like the high-end market that will give us -- a payback to the investment that we were doing in our facilities. We are also, as I was mentioning in my initial remark, we are having good results in the institutional side in pushing to the market some unfair trade practices from some competitors.

So it's -- when you ask about performance in terms of EBITDA it is a quite -- it sometimes it is difficult to see all the effect, there are positive, there are negative. But I guess that we will continue doing very well especially when, as I said before, when we compare against competitors.

Fair enough, thank you very much gentlemen.

Thank you. There are no further questions at this time. I will turn the call back over to Pablo 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. And as always please contact us if you have any additional questions. Thanks a lot. Bye-bye.

Going back to my initial remarks, I would say that we are very sorry about the situation in the incident in Mexico. We expect to recover and to diminish as soon as we can the impact in our people, especially in those that had injuries or had fatalities. So we are clearly very sad with the situation and we expect to recover quick time, all right.

Thank you.

Thank you very much.

Bye-bye.

Thank you. Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.