Ternium SA (TX) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Ternium's Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce you to your host of today's conference, Mr. Sebastian Marti. Sir, you may begin.

Good morning, and thank you for joining us today. My name is Sebastian Marti and I'm Ternium's Investor Relations, Director. Ternium issued a press release yesterday, detailing its results for the second quarter, 2014. This call is complementary to that presentation. Joining me today are, Mr. Daniel Novegil, Ternium's CEO; and Mr. Pablo Brizzio, the company's CFO, who will discuss our performance. At the conclusion of our prepared remarks, we will open up the call to your questions.

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

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

Hello to everybody. It is my pleasure to participate in this Ternium conference call. I apologize because I'm on transit so that maybe I will not be able to stay with you the whole conference. In any event, I will try to do my best in order to stay online as much as possible. So that given the schedule that we have today, let we make some initial remarks and some comments to start the conference call.

As you remember when we did the outlook for the second quarter when commending the Ternium results after the first quarter of 2014, we had stated in summary, that we had expected a good demand in Mexico if steel prices in North America retain attractive levels throughout the second quarter. Shipments in southern regions in the first quarter were low because of seasonal effect, but would recover in second quarter which did not happen as I will explain afterwards. And at the end, we said that we would expect a slightly lower operating income in the second quarter 2014.

As you already know, because you did receive some -- all the information that is in our press release, we had some deviations in the second quarter with respect to the second quarter that we expected before, and the reason of the main deviations were; first, weaker than expected domestic demand in Argentina that did not recover in the second quarter with respect to the first quarter. Second, longer than scheduled [rigs] that means extraordinary maintenance of mini-mill in Mexico, due to PLC -? this is salt water -- complications that extended the idle period for the reparation and for the maintenance. Third, higher than expected costs, again driven by a stoppage for maintenance in Mexican facility, and some other factors that afterwards Pablo Brizzio will enter into some details. On the positive, we have been having better than expected Mexican domestic market and still good pricing remaining against previous quarter and also we expect that to the prices that we consider reasonable for these regions, for North America.

The second important deviation happened to be in working capital. And so, that meant that net debt went up. If you analyze other quarters there is a seasonal factor affecting the second quarter, so to speak. And on top of that, we had dividends of $181 million being paid by Ternium and minority subsidiary taxes of $127 million negative, account receivables at $37 million negative and also our investment in Techint, this our generation plant in Monterrey of $20 million. So these factors you can see are non-recurrent, so in working capital we do have room for improvement in coming quarter in the third quarter of the current year.

Again, let me quote, close cost wise, that the cost up in Mexico happened because of a mix, a different mix, than the one that we expected with respect to own steel being produced by ourselves, against this last being brought through third parties. And also, the cost was up in Argentina mainly because of the valuation effect that Pablo Brizzio will explain in more detail. At the same time, all sub and general expenses went up or went above our expectations, especially because third party services meaning for contractors and also freight rates. At the end, despite of these effect, I consider that Ternium is [speedy], is performing very well, despite some of these setbacks. Some of them, as I was quoting before, I consider being non-recurrent in a -- so we are doing well despite, as I said before, cost and working capital setbacks.

So let me comment also on some fundamentals of Ternium going back maybe to the talk and the conversations that we had during our Investor Day that happened to be only two months ago. From then on, there is no forecast coming from working association that there is no estimation and no forecast on steel demand is apparent consumption worldwide. So accordingly the ECON Committee that, as you know, I used to be chairman some time ago, Mexico is doing better than expected. Brazil is doing worse than expected. Argentina is being a little bit worse than expected. Europe is doing pretty much well than expected with respect to the previous forecast that was delivered in April, year 2014.

Also, for the first time, China reached more than 50% of total steel production worldwide, having China a share of the total world steel production of 50.5% and this is a world record an all time record and for the first time China represents more than half of the world steel production. Also, China steel sustains a pretty high level of exports, even when in June the exports of China went down from 8 million tons in May to 7 million tons in June, and also as you know, China nowadays, is facing several dumping cases been open or about to be opened the USA, Mexico, Brazil and so on and so forth.

So on the other positive side, the service centers inventories in USA are stable, are in the range of 2.2 months with this low level of inventories meaning that the level of activity in the US is high enough to sustain a high level of occupation in the local means as well as the high level of imports. So, the USA economy and also the Mexican economy are doing very well, of serving all these steel that is coming from the local means as well as the imports.

Also let me comment that another fundamental is going on in the US market that we were not able to comment in detail in the Investor Day that is the consolidation factor. As you know, Alabama was taken over from Thyssen through a partnership between Mittal Steel and Nippon Steel; Dearborn was taken over from Severstal from AK; and Columbus was taken over from Severstal to Steel Dynamics. So that means that, the consolidation process in the US market -- I mean the US supply -- is going on what we consider being a positive for all the participants in the region. Also, let me mention that the gas price again went down and is now at a very low level of $3.85 per million of EPU which is seasonally low but still better than expected.

Regarding the Ternium initiatives, we have been discussing in the Investor Day, that we work hard in the last two years in working capital streamlining, logistic optimization, contractors efficiency program, and white color regenerating. On top of that, now we are undertaking two new initiatives that I didn't comment on the Investor Day that there was consumption efficiency program for you to know Ternium is spending nowadays around $800 million in energy and so we'll put an important stress and an important emphasis in getting savings in energy consumption.

And also, we are undertaking a new initiative that is the continuous improvement in industrial activities and floor plant therefore being undertaken by all the industrial directors of our facilities. So all in all, we had a second quarter that a little below what we have been expecting because of the factors that I had mentioned working capital and some non-recurrent effect like, dividends, taxation and so on and so forth and also some setbacks in cost.

Let me have the opportunity also of being in touch with you to comment on what is going on in Argentina regarding the debt restructuring and the holdout issue. So, the current situation in Argentina regarding this turn of debt is an ongoing process. And as I'm speaking, Argentina government is in negotiations to find a positive solution to the current situation. I do believe that as long as there is time to continue negotiating, a positive solution could be found. And I really hope that they are able to reach a mutually convenient solution, so that, at the end, we will have to wait until then to know the answer but I am relatively optimistic that they will end up the process with good news.

Let me also comment that the Argentine government made some indication of the willingness to agree upon servicing debt and solving some conflicts that were open like, for example, the negotiations with Repsol, the Paris Club restructuring debt, and also the intention being explained by the government to own all the rest of the not restructured debt that means the holdouts and so on. So, at the end, we have to wait a little bit for a final outcome of the negotiation, but we do expect that we will be reaching a positive solution.

Before entering into the comments coming from Pablo Brizzio, let me say that we anticipate as an outlook for the third quarter, a slightly higher operating income compared to the second quarter 2014, with extinguished shipments and an increasing operating margins as a result of higher revenues per ton, may be partially offset by higher cost per ton. But, at the end, and as a fundamental we see that the prices are doing well especially North America and the market continues doing well North America US and the Mexican markets as well as in Argentina.

So having said that, let me pass to Pablo Brizzio who will comment on detail and if we do have time then we'll go back to you for the Q&A. Thank you very much.

Thanks, Daniel, and good morning to everyone. As usual, I will describe our performance in the quarter and expand on some comments that already Daniel made during his initial remarks. EBITDA in the second quarter 2014 was $330 million, 21% lower than EBITDA in the first quarter, 2014, as a result of lower EBITDA per ton partially offset by a 22,000 tons increase in steel shipments. EBITDA in the second quarter of the year was lower than we expected during our last conference call, as Daniel mentioned. But then, with the maintenance sequential decrease of EBITDA mainly as a result of lower margins due to higher cost of raw materials in Argentina and purchase lapse in Mexico, partially offset by higher shipments in Argentina following a seasonally lower first quarter of the year.

EBITDA, ended up being sequentially lower as anticipated but the decrease was stronger than we expected. The main two reasons -- the main two factors that differ from our estimations, among other issues, were related to the recovery of shipments to Argentina and the Argentina peso effects rate. We already mentioned that shipments in Argentina during the second half of 2014 would be affected by uncertainty surrounding the macroeconomic environment in the country. We believe that the second quarter of the year would be only partially affected, and that we would see some pick up in shipments in the second quarter after the seasonal decrease in the first one.

This will happen as second quarter shipments in Argentina market were similar to shipments in the first quarter, with a consequent impact in the second quarter EBITDA. We also started to see in second quarter 2014, a further devaluation of the Argentine peso to the US dollar exchange rate, after sequential devaluation of 8%, 13% and 23% in the third quarter, 2013 fourth quarter 2013 and first quarter 2014 respectively. But the devaluation of the [Fed rate] in the second quarter 2014 ended up being only 2%.

Inflation in the country increased the cost of low cut currency denominated items like labor and local services. And these increases are not mitigated by the valuation of the local currency against the US dollar, costs increased in dollar terms as we noticed during the second quarter. As you know, Siderar, our subsidiary in Argentina used the Argentine peso as the fractional currency and values inventory using first in, first out accounting. Another way that portion of Argentine peso exchange ratio affected cost in Argentina is the effect it has in the cost of inventories.

Even though, Siderar mined raw materials like iron ore or coal are priced in US dollar, as Siderar uses the Argentine peso as its foreign exchange currency, inventories are registering books in low cut currency terms. When inventories are sold in the given quarter, a devaluation of the peso reviews the cost in dollar terms of those inventories that were acquired in previous quarter are registered in pesos at the lower exchange rate. So as explained, the lower devaluation rate of the second quarter affected the numbers of the Company.

Finally, the second quarter 2014, as already mentioned by Daniel, result in increasing and maintenance expenses in combination with planed stoppages performed during the period mainly in our Mexican facility. Although this was expected the total spend up being a little longer than anticipated, so the increase in cost was somewhat higher. Keep in mind, also that when we produce a lower quantity of steel in our integrated operations in this case the ones that underwent maintenance in the second quarter we had to replace the lower production with products manufactured out of the last purchase to third parties, plus the higher cost than the ones that we are able to produce ourselves.

Net sales reached $2.2 billion in the second quarter, a 3% sequential increase as a result of higher revenue per ton and slightly higher shipments, which were 2.4 million tons in the quarter. Steel revenue per ton in the second quarter was 2% higher sequentially with small increase in all regions. Shipments in Mexico were 1.4 million tons, keeping the strength shown in the first quarter of the year.

Shipments in the country increased 386,000 tons or 16% in the first half of 2014 over the first half of 2013. The industrial sector in Mexico continues to drive steel consumption in the country, and Ternium's commercial efforts in the sector, have good results. On the other hand, there are signs of an increase of expanding in the country, and although we don't expect to see an significant increase of steel sales in the construction sector in the very short term, if these trends continue it could provide the means for an increased demand in the future.

Prices in the US and Mexico again, as Daniel already commented, continue to show attractive levels as expected, and we believe this will persist during the third quarter. With slightly higher revenue per ton in the region as steel demand remains healthy and inventories in the value chain are at reasonable levels. Shipments in the southern region in the second quarter were also relatively stable sequentially, as we have already mentioned, with weakness in many of the sectors. We served Argentina with exemptions of energy industry. We are expecting no significant changes in prices in the region in the third quarter.

Consolidated EBITDA per ton of steel was $140 in the second quarter compared to $179 in the first quarter, and EBITDA margins fell to 15% from 19% in the first quarter. EBITDA per ton decreased as a result of a $57 increase in operating cost of ton partially offset by a $15 increase in revenue per ton. The main reasons for the increased operating costs per ton were the ones we have already mentioned. Important to mention that EBITDA in the first half 2014 was $747 million. This compared to $738 million in the first half of 2013.

It is worth mentioning that EBITDA per ton in the first half 2014 reached almost $160 compared to $166 in the first half of 2013. And, that most of the difference in EBITDA per ton between these two periods were related to higher sales of iron ore to third parties in the first half of 2013. Our expectation for the third quarter of the year is to see a slight sequential increase in operating income with relatively stable achievements and increasing operating margins as a result of slightly higher revenue per ton, partially offset by increase in cost per ton mainly coming from our Argentina subsidiary.

Equity-holder's net income in the second quarter 2014 was $129 million or a gain of $0.66 per ADS. These results compared with an equity holders net income of $150 million in the first quarter of 2014 or $0.76 per ADS. Net income decreased mainly as a result of the already mentioned lower operating income partially offset by a lower income tax expenses. Income tax expense was $90 million lower in the second quarter, compared to the first quarter of the year. The decrease was related in part to lower income in the period and part to certain non-recurrent results that reduced the effective rate.

Income tax, in the second quarter included a net gain of $37 million related to a non-cash reduction of deferred tax liability of one of Ternium subsidiaries, partially offset by higher tax and connection to Siderar dividend payment in April 2014. On the account effective upgrade in the first quarter 2014 has been slightly higher reaching a 37% level, and the reason for this was that income tax in the first quarter includes certain non-cash net losses, mainly related to settlements of claims from the Mexican tax authorities related to fiscal year 2006, and to changes Mexican regulation in connection with the new mining laws.

Let me now make a brief review of our cash flow statements. Net cash provided by operations in the second quarter was $34 million. In the context of increased production and sales, working capital was $136 million higher, mainly as a result of increased inventories, an increase in (inaudible) levels and a decrease in accounts payable. Also Daniel already commented into these issues. Capital expenditures were $136 million in the second quarter or $240 million in the first half of 2014 more than 50% reduction when compared to CapEx of $508 million in the first half of 2013.

In addition to CapEx, we pay dividends in the quarter and we used some other funds to put money into our joint venture in Mexico in relationship to the power plant. Our financial position remains strong with net debt of $2.0 billion at the end of June 2014 equivalent to 1.3 times net debt to last 12 months EBITDA. Traditionally, the second quarter of the year suffered an increase in the debt as a result of the yearly dividend payment, and the accumulated year income tax payment. These reductions is gradually recovered in the following quarters as we are expecting to do. Okay, these are our main issues that I wanted to comment with you. So now, please operator we can begin with the Q&A session. Thanks.

Certainly. (Operator Instructions). And our first question comes from the line of Carlos De Alba of Morgan Stanley. Your line is now open.

Good morning, gentlemen. Thank you very much. First question is it possible Pablo, perhaps to quantify the impact of the longer than expected maintenance in Mexico? And also the impact of the higher purchases lab volumes that you had to acquire to compensate for these longer than expected maintenance? And second, I don't know if Daniel or Pablo can comment on what expectations are for working capital going forward? I mean the company has always been quite good in keeping low working capital level. So we were surprised negatively what we saw in the quarter, but if you can comment about what is outlook for the whole year that would be good. Thank you.

Okay, Carlos, let me start by your first question, the impact -- First of all, we have plant maintenance of different equipment in Mexico, and the issue was that we have a little longer than expected and in some cases where we were in the process of putting back in place these facilities we have some issues that's already Daniel mentioned. We are calculating that the amount of these deviations from what we were expecting was a number of between $5 million to $10 million for the quarter. In relationship to slag as usual, we have a delay in due to first in first out we have delay on when we see the impact of this last purchase and the impact of this last consumed in our proxy.

So, the difference is that during the first quarter when we [are utilizing slab] that we purchased as average cost of around $560 per ton during the second quarter where it [lies since last that we are] purchased comprised of around $580 per ton. So there you have the difference that we were impacting our results. Of course, as we already mentioned, these were increases that were already expected when we gave you our outlook during the first quarter. Regarding the working capital issue that you mentioned, let me clarify a couple of them that makes us very positive in the reaction that we see in the coming quarter.

First of all, we have an increase in our Argentine operation of iron ore due to the issues that this is the time of the year where you can utilize the most the river where the barges needs to go and there are other parts of the year where the barges cannot move through the river. So we need to accumulate higher level of inventories of iron ore during this quarter. So this is one issue that, of course, will not be repeated in the coming quarter. We are reducing inventories in Mexico and we are expecting to continue this decrease coming from a higher inventory in the first quarter due to commercial resources in our slab purchases for our operations in Mexico.

Also, due to these higher purchases of iron ore and slab of course payments of these took place during the quarter and increased the level of capital utilization in working capital. So most of these issues are things that will change in the near future and as already as Daniel mentioned we are expecting to see a positive reduction in the coming quarters in relationships, not only to working capital, but also it will reflect in our net debt that will be reduced in the coming quarters also having the reverse effect as we have already mentioned.

Let me mention also or let me add that you know Carlos we do follow very tightly the working capital. So we had a good room for improvement. Net debt went up mainly because non-recurrent reasons for example that payment of dividends the taxation issue the investment in pension and the CapEx program. But no doubt that regarding inventories we are going to be putting stress, putting emphasis and we will have room for a good improvement in the quarters to come, especially in the third quarter.

Thank you very much.

Thank you, Carlos.

Thank you. Our next question comes from the line of Renato Antunes of Brasil Plural. Your line is now open.

Good morning, everyone. Thanks for the question. The first one on Argentina, if you could talk a bit about steel prices. We saw prices uptick in this quarter. We had seen a drop in the first quarter. I mean how do you guys believe this is going to behave looking forward? Could we actually believe that prices will be US dollar based, for real? And the second question on CapEx, if you could just share your views on how do you see CapEx trending in the next year. I think the budget for this year seems clear, but if you could even if, call it speaking what you expect as we move forward towards 2015 and onwards? That's it. Thanks.

Yes, Daniel?

Now, Pablo will share some numbers, but let me comment on a general basis that in Argentina as you know the domestic prices follow the international system. So that we price in Argentina where products are following the international trends and coming into our mind the domestic prices of the US, Mexico and Brazil. So all in all, we do not expect important changes in prices and if your comment goes in the direction of some currency fluctuation in Argentina, we had some of this situation in the past, but always we were able to recover in a short period of time at the previous level. So, we do not expect right now any important changes in the prices system in Argentina on the one hand. And on the second hand, also we can expect in 2014 as well as in 2015 some level of reduction in the CapEx of the Company comparison with the last two years but maybe you can quote in more detail on that, Pablo.

Yes Daniel no worries I'll comment in your answer respect pricing but in respect to CapEx, as I already mentioned, we have invested $240 million during the first half of the year, and these should follow and continue to be the trend for the coming semester. And as Dan mentioned, we are not planning at the moment to increase any further in the coming years the capital until we decide to analyze where any expansions or any move from the company. So up to now, with the expectations we are seeing now, this is the level of CapEx that we see in the coming future.

Thanks.

You're welcome.

Thank you. And our next question comes from the line of Marcelo Aguiar with Goldman Sachs. Your line is now open.

Hi guys. Thank you for the opportunity. My questions will be more related to the demand trends more interested on the demand first on the demand trends in Argentina. How you're seeing the industry evolving regardless any let's say positive outcome is going to happen today or tomorrow regarding of the debt renegotiations? So, how do you see demand evolve in the margin should we continued to have an extended recession in the industry, and that will impact your results?

And then the same would like to understand for Mexico, I mean are you seeing like extended high elasticity of still demand IP or to GDP in Mexico? I mean should we start to see the demand in Mexico for still growing two, three times IP? So that will be on the demand side. And now on the more general question, I mean you guys I mean Ternium has been quite stable in terms of let's say the EBITDA per ton and around $178 per ton level. So, given the whole depreciation impact and maybe the new outlook for Argentina domestic demand, are we going to get back on this 140, 150 level, or how do you see evolving EBITDA per ton on a consolidated basis going forward, having in mind that may be Argentina could be weaker for a little while? Those are my questions. Thank you.

Alright. Let me comment first on the North American market, as I mentioned in my remarks, the domestic market in Mexico, the total consumption of steel there but in the steel consumption in Mexico is doing well, is doing better than expected. We expect now, an increase in steel consumption in 2014 of 4% or 4.5% upper in steel consumption up in comparison with 2013. Also, we are looking at the US market that this also doing better than expected. As I mentioned, we were updating [working] association forecast and in comparison with the one that we have done in April 2014 and we found out the US market as well and the Mexican market are doing a little bit better, or better than we have seen before. So the demand in Mexico and the US is strong.

I see inventory level in service centers is low. Our concern is on the side of the imports coming into the US market, but up to now the market is strong and able to absorb the local supply and on top of that also a record kind of import. Also, as you know we are doing very well in the building in the startup of our Tenigal plant as well as our PL-TCM plant in Pesquer'a, Monterrey. So that we expect we will be on the top of the market performance. We are going to be gaining some market share especially in high-end products, in the automotive industry as well as in the home appliance industry.

Regarding the Argentine market, we see that the market is doing differently by sectors for example, the automotive industry is not doing well it has been impacted also by a decreasing consumption of automotives in Brazil. Home appliances are doing also weaker than expected but on top of that we see the construction doing well, and also the energy related projects and investments doing very well. Also the agro is doing very well in Argentina. So all in all, the mining in Argentina even when it is below our expectations at the beginning of the year, it's not that bad I mean it's doing relatively well, and we don't see important changes right now with respect to the second quarter.

Regarding -- it is also it is very difficult not to comment on the holdout issue when making these comments on Argentina but, as I said in my remarks, we have to wait a little bit the negotiations that were -- our still alive and still in place and we expect, as I said before, a positive solution to this situation, especially taking into consideration that the Argentine government is sending signals that wants to restructure and wants to do another debt. Regarding the margins and operating income per ton so may be Pablo you can enter into more detail.

Of course. Marcelo as you know yes we have $140 per ton EBITDA during the second quarter but we've used them up. As I mentioned the full semester we reached a level of $160 which is basically in line with the levels we have in previous years from previous quarter. We also mentioned that we are expecting a small recovery in these margins coming to the third quarter. So the expectation is still to sustain a very good level of EBITDA margin per ton throughout the year. We have during this quarter decreased, compared to the first quarter, but all in all, putting in the first semester together, the number was basically in line with what we used to have in the previous semesters.

I'm sorry. So just to be clear on the Argentine demand, so you guys are not seeing weaker demand in the third quarter versus the second let's take in consideration what's happened in July so far?

Yes that's what Daniel was trying to say we are not expecting to see a further decrease up to now taking into consideration of what we know up to now the level of achievements below we saw in the second quarter. And you know that we already mentioned that the level in the second quarter was below our expectations and in line with the seasonally low level of the first quarter but all in all we are expecting to see ? (multiple speakers)

Yes, up to now we do see a similar levels of activity. Even when it is difficult to forecast because, as I said before, there is a good volatility or a different situation among the different these sectors. Automotive industry is doing badly also home appliance is doing weaker than expected but as oppostite the agro business is doing very well. The construction business is doing very well and energy related projects are doing very well. So all in all we do not have yet reasons to think that the market will be different to the one that we had in the second quarter.

Thank you very much gentlemen.

Thank you. And our next question comes from the line of Alex Hacking of Citi Bank. Your line is now open.

Thank you for the question and the call. I just have one question. Daniel mentioned earlier, an increase in anti-dumping investigations against Chinese steel in various countries. Can you remind us if there are any kind of cases that are under investigation or pending which are potentially relevant or material for Ternium, either in I guess the US or Mexico or Brazil? Thank you.

Daniel?

Yes, hello?

Yes. Did you hear the question?

I was out of line for couple of seconds, but if I understood properly the question is in relationship with my comment on anti-dumping cases. So I don't have anything more to quote because as you know I cannot open into details in the things and in the matters related with dumping that we are analyzing and studying and we are not presented yet or under the study of the authorities. So I would prefer not to mention any specific rate cases. But there are no new cases in Argentina no doubt. There are some concerns in Mexico that we are addressing properly and we are studying in detail analyzing the opportunities analyzing the facts, and analyzing the damage into the marketplace and the dumping situations.

Okay. It's clear. Thank you.

Thank you. And our next question comes from the line of Thiago Lofiego of Merrill Lynch. Your line is now open.

Hi. Two questions, are you still evaluating the possibility of buying an additional stake in Usiminas given, needs to sell it or is this totally out of the picture for you guys? And the second question, if you could comment on demand growth expectations for the Mexican market, and if you could comment on the sub markets, the auto market and other subsectors for the next couple of years that would be great.

Okay Daniel, if you'll allow me let me take the first half of the question. As we have already mentioned, Thiago, this is the recurring question throughout the quarters and we have nothing to add to that. And we have already commented on which is our expectation with relationship to shares of Usiminas, so we have nothing to add to that. In relationship to sectors in Mexico, Daniel, I don't know if you want to comment or let me go ahead with it?

Yes, go ahead.

Okay. We tend to divide the Mexican markets into two different sectors, industrial sector and the commercial sector which is more related to the construction sector. In the first one, in the industrial sector which is mainly lead by the auto sector and the home appliances one, they are really -- they are doing relatively well and these are the sectors that are driven the demand up into Mexico. And especially as you know, these sectors are mainly dedicated to export back to the US, Canada and the rest of the world.

So these sectors are doing pretty well. Because commercial sector which was not doing well throughout the last years are still not doing extremely well, but we are excited to see some signs of recovery in these sectors especially coming from some infrastructure program announced by the government. So we are positive that in the future these sector would also pick up and will be an incentive for demand in Mexico in the coming quarter. So all in all, the expansion the Mexican consumption is doing pretty well. Is why the country is seeing a higher number on steel consumption, and up to now, driven by the industrial sector while we are expecting to see some recovery also in the commercial one.

Okay. Perfect. Thank you.

You're welcome.

Thank you.

Gentlemen, I apologize, but I do -- as I said in the beginning, I do have to take a plane so I will be out of the conference now. I will try to connect when traveling by car through my cellular phone, but I'm not sure if I will be able. So, I wish you a very nice rest of the week and I hope to see you soon. Thanks a lot.

Thanks, Daniel.

Thank you. And our next question comes from the line of Leonardo Correa of BTG Pactual. Your line is now open.

Yes, hello. Good morning everyone. So my first question is regarding the ramp up of projects in Mexico. I understand previously I mean there was quite limited visibility on your overall impacts. But Pablo, just now after several months into the ramp up, I mean if you can help us understand maybe overall impact on EBITDA per ton, if you have those numbers I mean I think that would be very helpful. What type of level you think those parties have contributed in terms of EBITDA per ton?

And also may be a second question, and I understand that during the call you mentioned that CapEx should trend lower, and that there is still nothing regarding new phase of expansion. But if you can, just thinking bigger picture, what would be potentially the next phase given that Ternium doesn't really have a history of increasing the dividend more significantly. Just if you can help us out to understand what the next phase, next wave of investments? Where those could potentially be? Will there be slabs or potentially moving back to M&A so just wanted to understand those may be bigger picture themes. Thank you very much.

Okay Leonardo let me start by that. We discussed the level of CapEx expected for this year to be around the levels that we are seeing during the first semester, moving to second semester. We have an additional plant that is already in place, and is included in the plant that we have which is the power plant in Mexico that is undergoing the moment and is expected to finish in 2016. This is the last plant that we announced and also as was commented in the press in Mexico, we are having a rally feast the second place of our galvanized lines expansion in Mexico, the one that we have in Tenigal together with Nippon Steel, we have under analysis further expansion of these lines to double capacity in order to keep supplying the increasing Mexican auto market.

So this is the one that we have as you know as we already said that, this will take around a month to finalize the analysis and take a decision over that. So besides that, to developments we don't have at the moment any further plans to mention, but as you mentioned also we are always open and we are always analyzing the rest strategy for our company to continue and we never roll out anything. We continue analyzing which is the best possibility that the company has. In relationship to your question on the expansion in Mexico, we are still going through a ramp up period and as we have already mentioned, we are online with that. We are expecting to be up by year end, at full capacity at these facilities, but not in the case of Tenigal 100% case to the auto industry until the beginning of next year.

So we are moving to the direction and working well in fulfilling these goals. In relationship to the margins that this will generate, we already in the past and we are still under the same scenario and trying to comply with what we said which is that though, this new tonnage will come from a non-integrated facility which as you know, has lower margin that the private facility, we contribute to sustain the level of EBITDA per ton, EBITDA margin as company at the moment. This is the plan that we sell and we are working on fulfilling these as we have been commenting from the very beginning. We need to finalize this process, it's on track. It will end at the beginning of next year when we will have the facility mainly dedicated to the auto industry which is not the case at the moment and the ramp up process will finish and we will see the final result of that. So we need to wait a little bit to see these being through the numbers of the company.

Thank you very much, Pablo.

You're welcome.

Thank you. And our next question comes from the line of Marcos Assumpco from. Your line is now open.

Marcos Assumpco -- ITAU

Hi. Good morning, everyone. My first question is regarding the slab prices. You mentioned that in the second quarter results were a little bit pressured by higher slab prices. What is your expectation for those slab prices in the second half of the year? How you're seeing this spread between HRC and slab prices? And the second question, regarding competition with the Chinese exports, are you seeing the increase in Chinese exports impacting your markets? Is this having a negative impact on prices in Latin America regions where you operate to Columbia?

Okay, Marcos. How are you? Let me go ahead first on the slab question. We are still expecting to see some further increases in the slab cost that we will see in the third quarter compared to the second. We are expecting to see an additional between $10 to $15 of additional cost slab that it is already included our expectations for the quarter and this will be reduced by all other things that we are not expecting to suffer at the end of the third quarter like the maintenance issue and other things, like for example, when we have this facility slab on track, we will produce more in directly facilities and utilize less purchased slab.

But the -- and this is of course well known that the cost of slabs during the first quarter were higher than they were the fourth quarter of last year. And these are the prices of slabs that we see coming to our cost in the third quarter. Your second question was? Sorry, the competition of Chinese the imports into our markets. We are not seeing Chinese imports or imports coming from China having a significant increase or an important impact nor in our Mexican market or in the US as well as in some of the other countries in Latin America.

Though you are right, that in some of the countries the impact of the Mexican imports are being important -- Chinese importer are really important like Central America which is suffering a lot of imports, though the market is small, we are seeing some there. But in our main markets we have not up to now seen some pressure from Chinese imports. You need to take into consideration also for example, in the Mexican markets, imports is a significant portion of the total consumption of the market.

All right. If I may, can I have a third question here on the prices in the US.

Yes.

We're seeing good level of prices in the recent quarters. On the other hand, prices elsewhere in the world mainly China they're still depressed. Do you see this gap between the prices in the US and in China sustainable for the coming quarters?

Well, this is as usual is very difficult question to answer, but we are seeing and we are believing is that at least this situation was sustained during the third quarter, due to different reasons. And they want consolidation of recovery of the Mexican specifically the US market, some control on the production levels. So we are seeing that this we will be sustained at least in the third quarter. One other thing as you mentioned, the gap between the slabs and the (inaudible) steel is sustained at a very healthy level for the company.

Okay. Perfect. Thank you very much.

You're welcome.

Thank you. And at this time, I'm showing no further participants in the queue. I'd like to turn the call back over to Pablo Brizzio for any closing remarks.

Okay. Thank you. As usual, thank you very much for the interest and for your time today. And we continue to look forward to remain in touch with you and as usual, please contact us if you have any further questions. Thank you very much for the call. Goodbye.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect. Everyone have a great day.