Ternium SA (TX) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ternium first quarter 2014 Earnings Conference Call. (Operator instructions). As a reminder, this conference call is being recorded. I would now like 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'm Ternium's Director of Investor Relations. Ternium issued a press release this morning detailing its results for the first quarter 2014. This call is complimentary to that presentation. Joining me today is Ternium CFO, Mr. Pablo Brizzio, who will discuss our performance. At the conclusion of our prepared remarks, we will open up the call to your questions.

Before we begin, I would like to remind you that this conference call contains forward looking information, and that actual results may vary from those expressed 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. Brizzio.

Thanks, Sebastian, and good morning to everyone. Thank you very much for participating in this call and we really appreciate your interest in our company. I will begin with a very brief description of our performance in the first quarter of the year and then we will go directly to the Q&A.

EBITDA during the first quarter of 2014 was USD417 million, 7% higher than EBITDA in the fourth quarter 2013 as a result of an increase in steel shipments and slightly higher margins.

Steel shipments reached 2.3 million tons in the quarter, 5% higher than in the fourth quarter 2013. Shipments in Mexico increased 140,000 tons sequentially, following an increase in commercial efforts in the country in 2013 which began materializing in the first quarter and we expect will continue in the second quarter.

The ramp up of our new Pesqueria facility is progressing according to plan and we expect it to gradually contribute to shipments in the following quarters. We are very pleased with the results which have been gained from this new state of the art cold rolling mill. At the same time, Tenigal, our joint venture with Nippon to produce high specification galvanized steel for the auto industry in Mexico continues to advance with success in its certification processes needed to become suppliers of the different automakers in Mexico. The auto industry in Mexico has very good prospects in the country as a result of their plans for expansion of initial capacity in the following years.

Also important to mention regarding to Mexico, the Mexican steel market, are the reforms that have been carried out by the Mexican government and the recent announcement of an increase in the budget for government sponsored infrastructure investment planned in the country over the next 5 years.

Shipments in the Southern Region in the first quarter were 60,000 tons lower sequentially mainly due to seasonality in Argentina. We expect shipments to recover in the second quarter 2014 although steel consumption in this country could be affected in the following quarter by weakening expectations in some of the industries we serve.

Steel revenue per ton in the first quarter was 3% lower sequentially mainly as a result of revenue per ton decreasing 6% in the Southern Region and 2% in other markets. It remains relatively stable in Mexico. We are not expecting significant changes in revenue per ton in Mexico or the Southern Region in the second quarter of 2014. Prices in the US have been strong lately, in part as a result of extreme weather conditions in the north of the country and some unexpected outage of capacity that affected the supply of steel. We expect this trend to proceed in the second quarter as steel demand remains healthy. Although over the longer term, prevailing prices in Europe and Asia could have a negative impact on North American prices.

Consolidated EBITDA per ton of steel was USD179 in the first quarter, compared to USD175 in the fourth quarter, and EBITDA margin reached 19% from 18% in the fourth quarter. The reason for the slight margin increase were lower costs on SG&A, mainly Argentina, partially offset by the previously mentioned 3% decrease in revenue per ton.

Net income in the first quarter 2014 was USD188 million, or a gain of USD0.76 per ADS. The results compare with a USD171 million gain in the fourth quarter 2013, or USD0.64 per ADS.

Net cash used by operation activities in the first quarter was USD24 million, mainly as a result of an increasing working capital of USD369 million. This has been driven by an increase of USD274 million in the inventories, mainly reflecting the high inventories and better volumes of slabs as a result of an increase in the sales volumes, and higher cost of raw materials both in processed and unfinished goods. (Inaudible) in Mexico also increased as a result of our inventories level in the country.

The increasing working capital in the first quarter 2014 included a negative noncash effect of USD92 million, mainly reflecting a significant devaluation of the Argentine peso to US dollar exchange rate in the period. (Inaudible) uses the Argentine peso as its functional currency and as a result, the accounting of the devaluation had this noncash effect in the cash flow mainly in relations to inventory.

As most of our biggest CapEx projects are reaching an end, capital expenditure continues to decline, with USD104 million in the first quarter compared to USD158 million in the fourth quarter 2013. In relation to CapEx, we used USD44 million as investment and loan to Techgen, the joint venture we are using to develop a power plant in Mexico. This project, which is in the first stages of development, is progressing according to plan and will enable us to obtain substantial savings in energy costs in Mexico by the end of 2016 when it is expected to be ready.

Finally, our financial position remains strong as net debt stood at USD1.6 billion at the end of March 2014 which equated to around 1.1 times net debt to last 12 months' EBITDA, something that we think distinguishes us from most of the companies in our industry.

So before we go to the Q&A, let me just remind you that we are going to host our Investor Day in New York on May 29th. We hope to see you there as we are working hard to make an event that is informative that shows the current state of the company in terms of next steps. As usual, there are members of our top management who will be there including our CFO and myself. So now there are many issues I want to comment on. Please, Operator, we can begin the Q&A session now.

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

Yes, thank you very much. The first question would be regarding the working capital. It showed a negative reduction of almost USD370 million in the quarter. I wonder if you can comment on how you see this going forward and if this is just a temporary situation that your company experienced there?

Also, I think that the capital expenditures in the quarter were a little bit low related to the straight average of the guidance that you gave earlier in the year. Does this suggest that you may spend less than the guidance for the year? Or is just that the ramp up of the schedule that you have for different quarters?

And then finally, if I may ask about the potential impact that the FIFO accounting in your [CR] subsidiary could have or had in the first quarter that I think was a positive impact, and how that can reverse in the next few quarters? I don't know if there is a way to quantify this, but if you can give us any comments there, I would appreciate it. Thank you.

Okay, Carlos, let me start by the working capital question which in fact has some implication of the devaluation in Argentina. As I mentioned during my initial remarks, there were different issues affecting the working capital this quarter. The first one is an increase in inventories which is of course a real increase in inventories due to some commercial issues that make us to increase our inventory of slabs. So this is one issue that most likely will not repeat in the coming quarter, it was very specific to this quarter.

Second, there was increase in orders of the product that we produce due to the increased level of shipments. And this is something that we'll continue to reach in the level of shipments that we consider (inaudible). So should probably increase a little bit, but not that significantly.

Third point, there was an increase in inventory levels. And this was also having two reasons. One is, again, the increasing shipments. And the second one is that due to some very specific tax issues in Mexico at the end of 2013 with the production of the new reforms, most of our customers decided to prepay part of their receivables just at yearend. So we saw a nominal increase in receivables for the quarter and this one won't be repeated in the following one.

Together with that and due to some accounting issues and due to the devaluation in Argentina, we have a noncash effect of almost [USD90] million that are impacting over here. But of course we are not expecting to see a significant devaluation. The coming quarter will not be repeated in the coming quarter.

And moving to your CapEx question, we tend to see the CapEx with the two issues that I mentioned. The USD105 million and the USD44 million that we invested in the new venture of Techgen. So you put both together, we are feeling the same level of numbers as we forecasted last quarter. We are still working with the same assumption that the number of CapEx for this year will be around USD600 million or USD650 million for the year.

And the last question regarding the impact of accounting issues in [CR], yes, you are right, the impact of FIFO, the first in first out methodology has an impact during this quarter due to evaluations. Since we are revising the inventories at the lower level than the ones that you are looking at today, this has a positive impact during the quarter. Of course the evaluation has a positive impact in our cost structure related to all the costs that are based in pesos. Part of this benefit will continue in the following quarter, but most of that, especially the ones related to inventories, will stop after this year. This is one of the reasons why we are forecasting for some reduction, slight reduction in the margins of the company.

Paulo Valenti, Banco.

Good afternoon, gentlemen. Thank you for the question. My first question is about Argentina. I was wondering if you guys can speak to some price hike attempts in the country potentially coming up, especially in the context of some potential political pushback given the turbulent environment. And if you could also speak to how FX depreciation has impacted profitability in Argentina there, that would be very helpful.

Then my second question, if you'll allow me, is on what you think will be some potential impacts from the Mexican rebar market from the recent antidumping decision by the Department of Commerce in the US? If you could speak generally, that would be very helpful. Thank you.

Okay, let's start, Paulo, by Argentina. Pricing for us in Argentina is still related to the price, the international pricing. Of course when you have a significant devaluation like the one that you had in Argentina, probably you cannot recover everything at the same moment. Pricing continues to be in relationship to international market that we have very good prices now in Argentina. The FX situation in the country of course has some impact in the results that we have, especially the ones I mentioned during the prior Carlos question in the sense that since part of our cost structure in Argentina is related to pesos, when we look at the financials in dollar terms, this reduction in cost that is impacting us of course is real, around 35% or 30% of the cost structure of our Argentine subsidiary is related to pesos. So whenever you have a devaluation you have the possibility of that.

The foreign exchange market has been quiet lately, but depending on how the variables move in the future will depend how the foreign exchange rate will be seen in the coming quarters. We are not seeing much movement lately in the foreign exchange market.

Okay, regarding your second question, we are basically a local supplier of rebar, so we are not expecting to export significant volumes to the US. So in that sense we are not seeing any impact in that respect to impacting volumes and in relationship to antidumping measures.

Okay, I meant to ask in the general sense for the Mexican market as a whole, not just specifically for Ternium. But that's clear. Thank you.

Ivano Westin, Credit Suisse.

Hi, Pablo and Sebastian. Thanks for the question. The first one, I just want to go back to the demand side. You mentioned a positive outlook for Mexico, especially on the expansion of your project (inaudible). And you mentioned some let's say challenge for Argentina. I just wonder, what is your forecast you can disclose there in terms of total sales in the year compared to last year?

And the second question would be on your Techgen, your power plant in Mexico, if you have additional details to disclose. Thank you so much.

Okay, Ivano, let's start by the demand side. Yes, we are expecting possible demand or possible increase of demand coming out of Mexico, especially from the industrial sector. As I mentioned in my remarks we have been working very hard during the last year to have a position within the different sectors in Mexico. And the results of these are being captured by now. And this even before the two new plants that are being started to provide products into the market from now on. So in that respect, we tend to be quite positive on the industrial demand in Mexico. As you know, we have been quite limited in the number of tonnage that we could sell into a market. In fact in the last two years we have 9 million tons of total sales and prior to that was around 8.8 million so that was the limit. But with these new facilities, when they are fully ramped up, that is by 2015, the net increase in product should be around 1 million tons. So in total we should expect, after the full ramp up, 10 million tons of finished product.

Of course this will not be the case we see here because we are in the middle of process. So the number, if you start to see what we have sold du ring this quarter, should be midpoint between last year and full utilization after ramp up. So our target, which is very important and difficult to obtain target, is to be close to 9.5 million tons of product. That is our estimate just by taking into consideration the full ramp up of our facilities. With the shipments that we saw during the first quarter, we are on the right track.

Okay, thank you. And then on the second point, on your power plant in Mexico, if you could inform if you have additional details there, that would be highly appreciated as well.

Sure. We -- you know this is a venture that will allow to resource efficiently the needs of energy and we, the total investment is around USD1.1 billion of which we will have 48% of that exposure of turning into that. Techgen will be 48% which will be our percentage under the shareholder structure of the company. And we will have 78% of the output of that facility. The work already started, so we are working with the commissioning of the facility by the last quarter of 2016. As I said, with this facility working, we are expecting to be fully self-sufficient in the needs of energy and that of course will be very important for the company from operation standpoint but also from a cost standpoint.

Okay, that's good, Pablo, thank you so much. And just another point to ask is, this is the main project that you have upon your expansion to Mexico at this stage? You remain positive on your demand for finished products, finished products in Mexico. So looking ahead, you might still be able to generate additional cash. So the question is, what are you going to do with that additional cash surplus? And on a broader perspective, does it make sense for you to have the greater position you have overall in Brazil? Bottom line is, are you interested in discussing or in acquiring shares that (inaudible) owns in Usiminas? Thank you so much.

Well you are right that we are in the final stage of most of our big CapEx plans. Of course we will finish the one in Mexico, we finished already the one in Argentina. The only new one that we announced is the one in Techgen. So you are right that if the numbers that we're showing, as innovation continues we should generate more cash than last year. So the company, as always, we have answered this question in the past, especially last quarter as well we also answered this question, the company will continue to analyze the different opportunities discussed. As I said, if Mexico continues to show ways to grow, it's a market of course we will consider. But the company does not have at the moment any other projects from the ones that we mentioned. And we keep all our options open and we analyze all the CapEx plans possible. We are in the process of analysis, we don't have any at the moment.

Regarding your question on the shares of Usiminas, we already answered this question in the last conference call. I probably will repeat what I said in the last conference call. If it is also one of the different (inaudible) that the company has, we are probably not interested at this very moment, but it is something that the company has in the portfolio of investments.

That's very clear, Pablo. Thank you so much.

(Operator Instructions). Thiago Lofiego, Merrill Lynch.

Hi, good afternoon, everyone . I have two questions. First one is a follow up to a recent question. Could you please provide an update on what your dividend outlook should be in the coming years given this higher cash usage should you not proceed any further expansions? And lastly, could you provide an update also on your pricing scenario in Argentina? Should we expect the continued deterioration of the peso to impact US dollar pricing in the coming quarters continuously? Thank you.

Okay, Thiago, as you know during the last shareholders meeting the company announced, well in fact we will have the conference, the shareholders meeting next week, the company presented to its shareholders meeting a proposal of USD150 million dividend payment which is a little higher than what we had last year. We are as you know, this decision is made at this level. We are expecting to see significant variation from these numbers so from this point of time the dividend payment probably should stay at this level. But this is a decision that's taken every year at the shareholders meeting.

With respect to pricing scenario in Argentina, we are expecting to continue to have this level of pricing. We aren't expecting to see much movement from what we have at the moment which is a good level of pricing. Very in line with international pricing. So we aren't expecting to see significant changing from that. As we mentioned, really, we are not expecting to see, or we haven't seen much movement in the foreign exchange rates in Argentina and there is no sign that this could change in the very, very short term. So that will depend on the market situation of the country, but this is what we are seeing tonight, these days. So just to be very brief, we are not expecting to see much movement in pricing in this coming quarter which is very good news.

Renato Antunes, Brasil Plural.

Hi, good afternoon, everyone. Thanks for the question. Quick follow-up on Argentina. Do you guys expect any change to what currently Argentina has in sort of their steel trade? Meaning do you see steel imports through Argentina either declining or exports from Argentina at some point becoming an interesting option for you guys? That's the question. Thanks.

Okay, Renato, yes, we -- what we are seeing in Argentina on especially as the company, first of all we are not seeing an increase on imports. If there is an increase in demand, local demand, as for example we're seeing in the automotive sector affected by different issues like Russian demand from the field for local demand, of course the company would try to export this difference to other markets. So this is a very possible scenario in which we as a company would try to stack the level of shipments of the company, the level of production and supplying this product that are not able to be supplied in the local market to the export market. Mainly neighboring countries and regional markets.

Thanks.

Thank you. I'm not showing any further questions in the queue at this time. I'll turn the call back over to Pablo Brizzio for closing remarks.

Okay, thanks again for your interest in Ternium and your time today. I remind you again of our Investor Day coming on May 29th in New York. So we are looking forward to remaining in touch with you. And as always, please contact us if you have any additional questions. Thanks a lot. Good-bye.

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