Ternium SA (TX) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ternium Third Quarter 2013 Earnings 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, today's conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Sebastian Martin (sic). Mr. Martin, please begin.

Thank you. Good morning, and thank you for joining us today. My name is Sebastian Marti, and I am Ternium's Director of Investor Relations. Ternium issued a press release yesterday detailing its results for the third quarter 2013. This call is complementary to that presentation.

Joining me today is Ternium's CFO, Mr. Pablo Brizzio, who will discuss our performance. At the conclusion of our prepared remarks, we will open up the call to your questions.

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

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

Thanks, Sebastian, and good morning to everyone. EBITDA during the third quarter 2013 was $358 million, slightly lower than in the second quarter. Steel shipments increased to 2.3 million tons in the quarter. This was a result of higher shipments in Mexico and in the southern region, partially offset by lower shipments to other markets.

In Mexico, shipments to industrial customer remain at good levels, while our construction-related shipments are still relatively weak. In Argentina, steel demand remains at healthy levels, with the bulk of the production of our facilities in this country being sold at the local markets. As we anticipated in last quarter press release, steel revenue per ton was slightly lower in the third quarter compared to the second quarter, both in Mexico and Argentina.

After giving us a nicer price in the third quarter, the steel price, the scenario is looking good in the US and Mexico for the remaining of the year. At the same time, we are not expecting relevant changes in steel prices in Argentina in the current quarter.

Due to all these reasons, consolidated EBITDA per ton of steel was $156 in the third quarter, compared to $167 in the second quarter. And EBITDA margin remained at a healthy 17%. Net income in the third quarter 2013 was $136 million, or a gain of $0.50 per ADS. These results compare with $134 million gain in the second quarter, or $0.52 per ADS.

Net income in the third quarter 2013 included a deferred tax charge of $24 million related to the introduction of a new withholding tax on dividend distribution of Argentine companies to foreign beneficiaries. This charge is equivalent to a loss of $0.12 per ADS and represents the deferred tax impact of 10% withholding over the reserve for future dividends in Siderar balance sheet, at the end of September 2013, adjusted by Ternium's 61% ownership stake in the company.

Turning now to our financial position, at the end of September, Ternium continued to show a strong balance sheet, with a $1.6 billion net debt position, down from $1.7 billion during the end of the second quarter, equivalent to 1.2 times net debt to last 12 months' EBITDA.

Net cash provided by operations activities in the third quarter was $290 million. In addition, capital expenditures were $218 million, lower than the $290 million we recorded in the second quarter 2013. CapEx continues to decline, as we are in the final stages of our latest CapEx cycle.

Let me make a brief update on our facilities in Mexico. Tenigal, our joint venture with Nippon Steel for the production of high-end galvanized steel for the auto industry in Mexico, is in a ramp-up period, and we believe it will reach full capacity in the first half of next year.

At the same time, Ternium Mexico's new cold-rolling mill facility located at the same site than Tenigal in Monterrey is also now ramping up production. We are also very pleased with performance. These facilities were officially inaugurated in September with the presence of the President of Mexico, Mr. Enrique Pena Nieto.

Moving to Argentina, the newest slab caster at Siderar is on schedule to begin operations in the third quarter 2014. This de-bottlenecking investment will enable Siderar to achieve a higher capacity utilization in its blast furnaces, therefore producing more slabs to a roll in Argentina and also export it to Mexico.

Let me make a quick comment regarding Usiminas' performance. Usiminas showed in the third quarter results that the turnaround process continues to do well, with adjusted EBITDA margin of 17% in the quarter and [a 13 ratio] in the steel segment, a substantial improvement vis-a-vis the second quarter. This improvement at the operating level enables Usiminas to return to positive net income. As we commented in our last conference call three months ago, we are very happy with how Usiminas' management is working in the turnaround of the company.

I will finalize these remarks with our outlook for the fourth quarter 2013. As we stated in today's press release, we expect steel shipments to slightly decrease in the fourth quarter 2013 compared to the third quarter 2013, due to the end -- excuse me -- to the end-of-year seasonal effect. We also expect a relatively stable operating income in the fourth quarter compared to the third quarter, mainly as a result of slightly higher operating margin with higher revenue per ton offset by seasonally lower shipments.

Okay. With this, these are our main issues I wanted to comment. And now, please, let's start the Q&A session. Thanks.

(Operator Instructions). And the first question is from Leonardo Correa of HSBC. Please go ahead.

Hi, good morning everyone. Thank you. My first question, Pablo, as you mentioned on CapEx cycle, clearly, you have several projects which are being delivered and in process of ramping up in the next year. Just wanted to understand the next phase, if there is any next phase, on the CapEx cycle, or should we expect something closer to maintenance CapEx for the next period? So that would be my first question.

Second, on iron ore, we've been seeing clearly stronger-than-expected iron ore pricing; the outlook seems to be a bit better than what we were expecting as a market several months ago. So just wanted to get your views on how this could potentially change your decision of moving forward with an iron ore expansion.

So those are the two questions. Thank you.

Okay. Hi, Leonardo, how are you? Let me start with the issue on CapEx. As we commented before, you are right, we are in the late stage of our latest CapEx plan, but we are still working very hard on it.

As you know, we need to go through a ramp-up period in the case of the facilities in Mexico. We are still working in the facility in Argentina with the -- with the idea and the expectation to finalize and start working in the new -- in the new plant in Argentina during the first quarter next year. So we are still in that process.

As you know, we also launched a new project to be self-sufficient of energy needs in our operations in Mexico. So this is what we are doing at the moment, and we are not yet in a position to further develop our CapEx plan coming into the future. We need to take full advantage of all the facilities that we are putting into place at the moment.

So we are expecting to reduce the level of CapEx coming into -- into next year and the following. We -- as I mentioned, we will still be working during the first quarter next year in our operation or our expansion in Argentina. So a remainder of that will be during next year. So, no, it won't be only maintenance CapEx.

Our current estimate of CapEx for next year will be around $600 million. As you noted in the numbers that we issued for the third quarter, we started to reduce the level of CapEx, if you compare the third quarter against the second quarter.

In relationship to our iron ore project, we have no plans at the moment to change the formal situation in which we are, which is we are not at the moment with the idea of further developing our mining activities. We believe that this will need to be in conjunction with any other project, and this is not the moment to go ahead with this one, even, as you said, which is clear, that prices in iron ore gets better, if you want -- if you're a miner, and it will increase if you are a consumer, but it doesn't make us to change our mind in respect to the iron ore project.

Thank you.

You're welcome.

The next question is from Carlos de Alba of Morgan Stanley. Please go ahead.

Thank you very much, Pablo and Sebastian. Your first question is also on CapEx. I mean, year to date or year through September, the Company had spent $725.1 million, and I think the guidance was something around closer to -- close to $800 million for the year. What can we expect for the fourth quarter, given what you spent through September and the guidance of around $800 million?

And also, do you foresee any changes in the dividend policy of Siderar and, therefore, Ternium, after the 10% withholding tax on dividend distributions by Argentine companies to foreign beneficiaries?

Okay. Carlos, how are you? Yes, you're right that we -- we have invested up to now $725 million, and -- though we are reducing the level of CapEx entering into the third quarter and we are expecting to further reduce the level of CapEx getting into the fourth quarter, probably it will be on the higher range of the $800 million for the full year. So probably, instead of $800 million, we will be in the range of $850 million for the year.

In respect to Argentina, we are -- this should not change the -- as you know, Siderar does not have a policy, so there is no policy to change. But this should not change the tradition of Siderar to pay dividend every year. So we will probably continue with the same way we have been working up to now, which is paying additional dividend every year.

And then does this -- could this affect the amount of dividends paid out by Ternium to its shareholders?

This is also -- as you know, there is no dividend policy in Ternium. And we should discuss this in next shareholders meeting, but shouldn't prevent Ternium to continue to do what we have been doing up to now.

All right. And then just -- as you mentioned, your CapEx needs are going to start -- are going to start to come down dramatically, and obviously, as you ramp up your volumes in Mexico and Argentina, the cash from operations will start to go up. What do you plan on doing with the cash generation that the Company will have in the next few quarters?

Well, you're right that we will be reducing the level of CapEx, probably from this number that we are talking today of $850 million, probably to a number in the vicinity of $600 million. So this will be an extra cash flow generation.

We are -- as we discussed in the past, probably you discussed -- to a reduced level of debt and, of course, keep dividend payment at the Ternium level. We are not planning at the moment to utilize this cash for other -- other CapEx, as we have been commenting.

All right. And then just final question. Could you talk a little bit about the pricing outlook for steel? In North America, in particular, we have seen sort of some good momentum starting to kick in with price increases announced a few weeks ago, and at the beginning there was a lot of pushback against them, but lately, it seems that they are sticking and the spot prices are going up. Same situation in China. And could it be that we have a strong end of the year, with the stronger prices, in -- around the world, and particularly in North America?

Well, first of all, it has been a very nice surprise what we have been seeing in the -- in the pricing scenario, especially in the US. As you know that traditionally, or in the last couple of year at least, the fourth quarter has been seeing lower pricing than the rest of the year, so that is not the situation that we are seeing these days. We tend to be conservative on our projection on pricing, but what we are at least expecting is to see this level of pricing to remain though the end of the year.

So this will put us in a situation in which the results for the fourth quarter will be reflecting that. And as we are refreshing our outlook, we are expecting to see similar level of profitability for our business. So that's very good news that we are getting from the market.

All right. Thank you very much.

You're welcome, Carlos.

The next question is from Ivano Westin of Credit Suisse. Please go ahead.

Hi, Sebastian and Pablo. Thanks for the question. My first one refers to your Mexican operations and on your shortage of slabs. I just wonder, what's going to be your strategy moving forward, if you could comment on that, whether we could expect additional brownfield expansions or even some M&A activity?

You have previously mentioned that CSA is off the plate but the plant remains open for grabs. So I just wondered whether that remains an option or not? That will be the first point.

And on the second one, on your Mexican iron ore operations, we've been seeing some discussions on possible [ore] legislation change. Just wondered, what are your views on that? Thank you so much.

Well, you put it right that we will still be having a shortage on slabs. We aren't expecting to see significant variation from -- we have been buying in the open market next year compared to this year because probably we will need buying other products, not slabs, coming into next year. So we are always looking for different suppliers of slabs, and the market up to now has been working pretty recently for the situation that we have.

And as you know, we as a Company are analyzing and seeing, which is the best way the Company should take in order to see if the Company needs to cover the shortage of slabs. But this is a process that the Company will fully analyze and, of course, at some point, we need to take a decision. So we -- this is something that we analyze carefully, and you know that we have been looking in the past from different alternatives, from our own expansion or looking for alternatives in other places that you know that we saw in the past.

So this is something that the Company has always in mind, and we'll try to get the best alternative for the Company. At the moment, the Company decides as it is the way to go.

In relationship to the automotive -- the automotive -- excuse me. Sorry, sorry. I mixed with your iron ore question. The iron ore, yes, you -- the government in Mexico passed new legislation on new taxes on mining. Of course, we will need to pay this new tax, but we are a Company that only produces just for our own operation. Of course, it will have an impact, but we understand this is a limited impact. We are not a big iron ore producer or -- and we are not a big exporter of iron ore. So, though it would have an impact, we believe that it shouldn't be that significant.

Okay, thank you very much.

You're welcome, Ivano.

(Operator Instructions). The next question is from Marcos Assumpcao of Itau. Please go ahead.

Good morning, everyone. My first question is related to Argentina. If you could comment a little bit on the market outlook regarding demand, we have seen very strong demand in the country, if you think that this is sustainable.

And also, if you could comment a little bit on the potential benefits from the new investments that you're making in Argentina, if you could comment a little bit on the additional volumes for the continuous caster, also the benefits in terms of cost on the coking coal improvement, and also expansion of the hot strip mill. Thank you.

Okay. Marcos, how are you? In Argentina, you are right, we have been seeing strong volumes. We are entering to the fourth quarter and then the first quarter of the year in which, especially in December and January, we have seasonally a decrease on volumes. Up to now, we are expecting, of course, probably to have some impact of this seasonality effect, but we are seeing, at least in the very short run, strong demand in the -- in the domestic market.

Then, it's -- as usual in markets, it's difficult to foresee more, and we are not willing or traditionally trying to foresee for a longer period. So it has been very high volumes of sales to domestic markets during the past two quarters, and the taxation for the fourth quarter is still to see some degree of a strong market in Argentina, entering into the seasonally lower period of the year, and then, as usual, it needs to be -- which will be the scenario after that.

In relationship to the volume addition in Argentina, what we are adding is a new continuous caster machine that will allow us to produce 500,000 tons of slabs that will allow us to do two things, one, to utilize part of slabs to increase a little bit the production of steel products in Argentina, to keep serving the market in Argentina, and then a significant part of the slab will be dedicated to export to Mexico, which will allow us to reduce the third-party slab purchases.

So this is the main objective of this project. And as I mentioned, this should start ramping up during the first quarter next year. So, of course, you won't see the full impact of the project during 2014, but the full and complete ramp-up, and getting to maximum production should be seen after full year during 2014 -- '15, sorry.

Okay. Two quick questions now. If you could comment or provide us a little bit of an update on the investment in energy in Mexico, how much do you expect, when do you expect to start disbursing some cash on the project?

And regarding potential M&A, it seems you're starting to generate more cash and you have always more historically grown through acquisitions. What would be the -- like, if you would consider to enter in the US market, as well, given the proximity to the Mexican market, and potentially the improvement in the US market going forward?

Okay. In relationship to energy, as we have announced, we are fully working into developing this project that will allow us to be self-sufficient in energy needs for our operations in Mexico. So we have went through all the certification and the authorizations that we are required to have for this to be a reality. We are very, very advanced on that process.

And we should start putting money to buy equipment and to final the construction of the sites at the very beginning of this year or beginning of next year. And so we are very close to the moment in which these should start the construction of the facility. And as we already mentioned, this will take around three years to be finalized. So we are -- we are on track, and we will be working very hard in order to have this project develop us as much.

Regarding the question of M&A, as you know, this Company has grown very much through M&A, through acquisitions in Venezuela, in Mexico, in different markets. So this is something that we are always seeing or paying attention with what we know in the market. As any case, in M&A activities, we -- but they need to appear and you need to see the right way to go for the Company.

So this Company, as I said, has different ways of growing, if it believes that needs to grow. And through CapEx or M&A activity is the way this Company has grown in the past. And we probably will continue this trend in the future if there is the possibility of doing that.

Okay. Thank you very much, Pablo.

You're welcome.

I am showing no more questions in the queue and would like to turn the conference back to Mr. Pablo Brizzio.

Okay. Thank you for your interest in Ternium and for your time today. And as -- as usual, I look forward to remain in touch with you. And as always, please contact us, if you have any additional questions. Thanks a lot, and talk to you soon. Thanks. Bye-bye.

Ladies and gentlemen, thank you for participating in today's program. This does conclude the presentation, and you may all disconnect. Everyone, have a great day.