Ternium SA (TX) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ternium third quarter 2014 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question answer session, and instructions will follow at that time.

(Operator instructions) I would now like to introduce your host for 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 am Ternium's investor relations director.

Ternium issued a press release yesterday detailing its results for the third quarter 2014.

This call is complimentary 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 & Exchange Commission, and in our press release issued yesterday.

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

Good morning to everyone, and thank you very much for your interest in Ternium, and for participating in our third quarter results call.

I would like to start with a few highlights about Ternium's performance so far in 2014.

Then I will make some comment regarding the latest event related with our investment in Usiminas, and right after I will ask Pablo Brizzio to make a brief comment about Ternium results in the third quarter of the year, before going into the Q&A session.

So let me begin by saying that I'm very pleased with Ternium's performance during the year.

Our operating results and profitability compare very well against most of our peers in the industry, and they improved compared to our performance last year.

In the first 9 months of the year, we had a steel shipment of more than 7 million tons already, and we showed 17% EBITDA margin, equivalent to around $160 per ton.

So I am very proud we have been able to show this performance in a complex and volatile economic market environment.

I think that our focus on high value-added products with a flexible production configuration, and a diversified cost structure coupled with the different cost-cutting initiatives that we are pursuing, and that I will comment afterwards, enable us to show a resilient and a consistent performance.

With a net debt of $1.7 billion, we continue to have a solid financial position, equivalent to around 1.1 times EBITDA, another feature that distinguished us from our competitors in the steel arena.

So Ternium's main steel market, Mexico and Argentina, during this period, had a different performance, Mexico accounting for 60% of Ternium's shipment, our performance in Mexico has been extremely good, with a 16% increase in sales in the first 9 months of 2014, compared to the same period of 2013.

The bulk of this increase in shipments in Mexico was driven by the positive environment for the manufacturing industry, which enjoys high level of competitiveness, and a healthy export being demanded from the U.S.

Ternium was able to capitalize this situation, developing an increased commercial effort that showed the result from the beginning of the year through a significant increase in market share against import, thanks to its superior service performance, with delivery service assistance, and so on and so forth.

So then, on the other part of the coin, Argentina accounted for 24% of Ternium's shipment in 2014.

Our shipments in this market decreased only 6% in the first 9 months of 2014, compared with the same period in 2013.

This shipment showed normal levels up in the first quarter of the year, which is the seasonality low quarter, and then it stabilized on these slight lower levels during the second and third quarters.

During the year, we have been working on ramping up facilities in Mexico and Argentina.

The Pesqueria facility, and Tenigal joint venture have been increasing their production levels in Mexico, and we recently began to ship slabs to Mexico from our new continuous cast in Argentina.

To substitute purchased slabs from third parties, with an effort to boost production from Argentina to Mexico in high-end slab specifications, so allowing that to reduce the dependence on high-end kind of products from third parties.

Finally, I would like to share with you two new initiatives related with a cost reduction and efficiency, of which we are working on right now.

As you might now, at Ternium we pursue industrial excellence as a key value of differentiation for our company vis-a-vis our peers.

So on top of the managing initiatives that we have on a standard basis, we have launched additionally an energy-saving program focused on the defined opportunities in the consumption of electricity, natural gas, steam, nitrogen, and oxygen.

Also, we are developing continuous improvement teams supervised by full-time dedicated management, with an emphasis on production practices, quality, and material yield.

We will continue working on these two initiatives on top of the standard initiatives and get back to you with more detail in the future or in our investor day next year.

Also important to mention that we continue undertaking, as I shared with you in the last investor day, the cost reductions programs in relationship with labor productivity, logistics, and reduction of sub-contractors.

All of these programs are doing very well, and are showing interesting economic results.

So we can go in detail in the Q&A on some of the results of these programs, or even better to go in detail of the impact of these programs during the coming investor day next year.

But let me now update you on the latest events in Usiminas.

You may know during the third quarter, Usiminas board of directors, in a 5 to 5 position, dismissed Julian Eguren, the Company's CEO, together with two members of Usiminas management board, Paolo Bassetti who was in charge of Usiminas subsidiaries, including mining, and Marcelo Chara, Usiminas industrial vice president.

Also, through a 5 to 5 vote, the Usiminas board appointed Mr. Romel de Souza as interim transitory CEO.

These decisions were taken at the request of Nippon Steel, who voted against the rest of the controlling group.

As you know, Ternium and the Usiminas employees' pension fund also joined together with Nippon Steel, the control group of Usiminas.

And these decisions were made possible by a casting vote from Usiminas chairman of the board, Mr. Paulo Penido, who at the same time is provider of consultancy services to Nippon Steel from whom he receives a significant economic compensation.

In my view, it is also important to note, that last week, Usiminas supervisory board for fiscal council passed a resolution that among other things, stated that there was no fraud, bad faith, or interference of any event related to the issues on which the dismissal decision was based upon.

The same fiscal council also stated that the conclusions of the internal audit department report on which the board of directors' decision to dismiss the management was precipitated, biased, and based on, a superficial examination of documentation.

The mentioned council voted 4 to 1 for these resolutions, and only the Nippon Steel representative voted against it.

We believe the decisions taken by the board of directors previously were illegal, and the directors appointed by Nippon Steel breached the Usiminas shareholders agreement.

We also believe that these decisions will have a negative impact and a negative effect in Usiminas, as they disrupted the turnaround process that enabled the Company to significantly improve the performance and financial standing during the last 2 years as all of you know.

You know that we are always looking for Usiminas best interest, and at the same time we intend to take all reasonable actions to protect our right and investment in Usiminas.

We will keep you informed of any relevant event in relationship with this issue.

Let me now make a very short, or very brief comment related with the same issue of Usiminas, and based on our recent acquisition of 10% participation Usiminas ordinary shares from Previ, Banco do Brasil pension fund.

I consider that the price paid for the participation was BRL12 per share.

In our view this is a reasonable price for the share, and it is significantly lower than what I believe is their intrinsic value, considering the long-term improvement capability of the Company.

I am convinced Usiminas has a lot more to show, and will do so with time and good management team.

We are committed to our investment in Usiminas, and this commitment is shown in our increased participation in the Company as within the acquisition of Previ shares.

So then at this point of time, these are the main issues that I wanted to share with you today, so that I will ask Pablo Brizzio to take over and give you a brief description on our performance in the third quarter, and so please, Pablo, go ahead.

Thanks, Daniel.

Good morning to everyone.

As usual, I will describe our performance in the quarter, and then we'll go directly to Q&A.

EBITDA in the third quarter this year was $423 million, 28% higher than EBITDA in the second quarter this year.

The third quarter EBITDA included non-recurrent gain of $57.5 million related to income recognition of an insurance recovery in Ternium's Argentina subsidiary, Siderar, in connection with damages in a blast furnace and coking batteries in Argentina during year 2012.

Excluding this non-recurring gain, EBITDA in the third quarter was approximately $35 million higher than in the second quarter, and EBITDA margin went back to around 16%, or $157 per ton.

Net sales reached $2.2 billion in the third quarter, a 1% sequential increase, as a result of slightly higher revenue per ton, and relatively stable shipments, which were 2.3 million tons in the quarter.

Steel revenue per ton in the third quarter was 2% higher sequentially, with small increases in Mexico and in the southern regions.

Shipment to Mexico kept the strength shown in the first half of the year, with 1.4 million tons sold in the third quarter.

Shipments in the country increased approximately 0.5 million tons in the first 9 months of 2014, compared to last year.

As Daniel mentioned, this growth was mainly driven by sales to the manufacturing industry in Mexico, which is enjoying healthy demand from the U.S., while sales related to the construction sector remain stable.

As expected, realized, steel prices in Mexico showed a 2% sequential increase during the third quarter, although at attractive levels, steel prices in the region show some slight weakness since the end of the second quarter, so we expect somewhat lower prices in the fourth quarter 2014.

Shipments in the southern region were also relatively stable sequentially, as expected, and we believe they will remain at these levels during the last quarter of the year.

Realized price in the southern region showed a 2% sequential increase in the quarter, and we expect them to also show a slight decrease in the fourth quarter.

So as I mentioned before, excluding the income recognition on an insurance recovery in Siderar, consolidated EBITDA per ton of steel increased from $140 in the second quarter to $157 in the third quarter, back in line with our usual level of EBITDA per ton.

This increase in EBITDA per ton was mainly due to a $15 increase in revenue per ton as operating costs per ton remained stable.

For the fourth quarter of the year, we expect operating income will remain at more or less the same level we show in the third quarter, again, excluding the insurance recovery.

This will be the result of slightly lower level of revenue per ton and cost per ton with slightly higher shipments in Mexico as we continue the ramp up of our new facilities in a seasonally low quarter.

The income tax line has seen some volatility in Ternium in the last couple of quarters.

This was because there were some specific income tax gains and losses in the second and third quarter of the year.

Where the biggest one was a non-recurring tax gain in the second quarter, related to a reduction of deferred tax liability of one of Ternium's subsidiaries, and there were also certain income tax expenses related to an amendment of a previous period tax return in Mexico in the third quarter of the year, among other issues.

So, the effective tax rate in the second quarter was 10%, significantly lower than usual, and in the third quarter, it was 43%, somewhat higher than usual.

These positive and negative effects compensate each other, and throughout the first 9 months of the year, as effective tax rates for the accumulated period was 32%, which is in line with the effective tax range of 30% to 35%, you should expect in the long run for Ternium

This income tax effect also affected the quarterly sequential comparison of equity holder' net income, which in the third quarter was $112 million, or a gain of $0.57 per ADS, and in the second quarter 2014 was $129 million, or a gain of $0.66 per ADS.

From an accumulated perspective, earnings per ADS were $1.99 in the first 9 months of 2014, compared to $1.68 in the same period last year, equivalent to an 18% increase in earnings per ADS.

So net income decreases $20 million sequentially in the third quarter, mainly as a result of higher income tax, partially offset by higher operating income, but it increases $107 million year over year in the first 9 months of 2014.

As a result of increase in operating income, lower net financial expenses, better result from Usiminas, and lower income tax expense.

Let me now make a brief review of the cash flow statement.

Net cash flow provided by operating activities in the third quarter was $288 million.

In the context of increased production and sales, working capital was $49 million higher, mainly as the result of an increase in inventories, partially offset by a decrease in trade receivables, and an increase in account payable.

Inventories increased in the third quarter 2014, mainly reflecting higher volumes, raw materials, and purchased slabs, partially offset by lower cost of raw materials.

Capital expenditures continues in a downward trend, as they were $99 million in the third quarter of this year, or $335 million in the first 9 months of 2014, a more than 50% reduction when compared to CapEx of $725 million in the first half of 2013.

So Ternium free cash flow reached $193 million in the third quarter, and our financial position continues to be strong, with net debt of $1.7 billion at the end of September, 2014, equivalent to 1.1 times net debt to last 12 months EBITDA.

This compares to net debt of $2 billion at the end of June, 2014.

All right, these were the main issues I wanted to comment.

Please now we can go directly to the Q&A session.

Thanks.

Certainly.

(Operator Instructions).

And our first question is from [Carol Luketik], from Merrill Lynch.

Your line is now open.

Good afternoon, gentlemen.

Thank you for the questions.

As you can imagine, we have a lot of still questions on Usiminas, so if I may, I'll focus a couple of questions on that matter.

First, if you could help us understand what are the next steps on the legal steps, and also when you believe you can be able to propose to the board to reinstate a new management or not, do we need to wait until April for that?

If we could understand the next steps on that, on Usiminas, it would be great.

And my second question also on Usiminas, but on the shareholder agreement, is there any sort of clause or trigger that could enable Ternium or Nippon to break out the shareholder agreement in 2016?

That would be great to know also.

Thank you.

All right.

So what your question being what is the course of action from now on, and what we believe is the most probably outcome from this issue, and what are we doing to solve the issue.

What I can mention is that we will continue taking actions to protect our rights and interests in Usiminas, pursuing the reinstatement of the dismiss of the unfairly, and illegally in our view, dismissed executives.

We believe that we have a solid case, a solid legal case, a moral case, and that we will prevail in court.

It is important to mention again, the last week resolution from Usiminas fiscal council, in some European countries this fiscal council is mentioned like a supervisory board, that stated very clearly that there was no fraud, or interference with any officials in the company from dismissed executives, and that the board decision was wrong and baseless.

If you ask me when, that means if I could consider how long could it take in the Brazilian court, and what will happen with Usiminas in the meantime, so we at the end, we will have to reach a consensus with Nippon Steel on how to put an end to the current crisis and move forward.

In the meantime, will continued support no doubt the Usiminas, because we consider that the turnaround process that now was interrupted by this action being promoted by Nippon Steel, has to continue, because the Company was doing pretty much better as it has been considered unanimously by analysts and by economic actors in the steel world.

So regarding the last part of your question, I don't see what you mentioned in the shareholders agreement, but any change in the shareholders agreement to prevent future deadlocks like the current one had to be work, and had to be understood with Nippon Steel in order to resolve the current crisis, including how to address future deadlocks.

But Pablo, would you like to add something on this part of the question?

Yes, just to confirm what was just said, specifically there is no clause in the current shareholders agreement where it says that in 2016, either Nippon Steel or ourselves can get out of the shareholders agreement, so there is such a confirmation, there is no clause in that respect.

OK, thank you, Mr. Novegil, thank you, Pablo.

Thank you.

And our next question is from Leonardo Correa from BTG Pactual.

Your line is now open.

Hi.

Good morning, everyone.

Thank you.

So the first question, just before perhaps moving back to Usiminas, this is more of a strategic question, something that has been already asked in the past several times.

But all around, just thinking on how the Company views its current share price, and how the Company is viewing the trading level of shares, I know that shares for several reasons have been trading at the depressed valuation levels.

But just wanted to see with you, Daniel, if there was anything on the table that you're now looking to review, or to adjust, I mean any potential bump up in dividends to really potentially re-rate the share price, or eventually even spin off the Mexican business?

I mean you have quite solid fundamentals in Mexico, I mean the entire index in Mexico trades on a quite high multiple, so I just wanted to get a sense of from a strategic view if Ternium is studying any measures to re-rate the current share price.

That would be my first question.

And second on Usiminas, I know that you answered already several aspects of it, but just if we can focus on the next steps here.

I mean can you confirm if you have any talks underway with Nippon?

I mean has -- after the issues, I mean has Nippon and Ternium -- have you gone together and is there any talks underway now to resolve the issue?

And I just wanted to get your thoughts, Daniel, on how you view an independent management team, if that is something that Ternium would be considering, given that Nippon has been expressing some interest in appointing a new, independent management team for Usiminas.

Those are the questions, thank you.

Thank you.

Well regarding the second part of your question, and I will ask right afterwards to compliment my answer by Pablo Brizzio, right now at this time we are not considering any important measures, any important initiatives in order to boost the share price.

As you know, we have been performing quite well in comparison with peers, even when I recognize that maybe in terms of multiples, we could be having a better valuation, no doubt about that, because of the fundamentals as you said, and also because of the perspective, and also because of the relative performance of our Company vis-a-vis competitors, and the potentiality of our market.

As we can mention afterwards, I really see a demand being quite strong, and very good perspectives in North America, and also price is an area that could be also giving us a nice environment.

But to answer the first part of your question, before going to the second part, my answer is that at this time, right now, we are not considering any new initiatives, or any positive initiatives to boost the share price through dividends flow, or through trading, or share buyback.

as we have been discussing some others calls.

But Pablo, would you expand on my comment?

Yes, of course, Daniel.

First of all, we are not planning to list [lease] Mexico independently from Ternium that clear.

You know that the dividend that the Company pays is set once a year in the shareholders meeting, and we always try to maintain at least certain level of dividend payments compared to our results.

So if our results get better, the dividend should reflect that.

The only piece of news that appear recently in publicly, is that probably there will be some amendments to the rules of MSCI in order to include different companies.

And if this move forward, probably that could be the possibility to achieve Ternium being included as a Mexican company.

So this is something that has been widely discussed with you and some other people that this could help Ternium in the future.

So this is my only comment to add to this point, Daniel.

Right.

So going to the second part of your question, the first one was if we were speaking with Nippon about what is going on in Usiminas, you know, that Usiminas' well-being is our priority.

Accordingly we are always open to discuss with Nippon ways of putting an end to the current crisis.

But for example, although we will continue working on the reinstatement of the dismissed executives, we have recently proposed the appointment of Tulio Chipoletti as industrial vice president of Usiminas.

Tulio is a former Tenaris employee.

His appointment was unanimously accepted in the controlling group.

Mr. Chipoletti is already taking care of this new important function, and in an interim function until a definite management team is appointed.

So that we will continue taking all possible actions and ways that could contribute to Usiminas best interest.

Needless to say that we will also continue talking and taking actions to protect our rights and interests in Usiminas, pursuing the reinstatement of the unfairly dismissed executives.

To be honest, I cannot deny that the relationship with Nippon Steel is not in the best moment, no doubt about that.

But at the same time, we will continue taking actions to protect our rights and interests in Usiminas.

As I said before, pursuing the reinstatement of the executives who have been unfairly and illegally dismissed.

In the last part of your question you mentioned if we would agree to have an independent management in Usiminas.

I believe that what you meant is a management that is not appointed by either Ternium or Nippon Steel.

And let me comment on that, that the appointment of management in Usiminas was made and has to be made by consensus, according with the shareholders agreement.

Our objective was and is always to appoint the best possible management for Usiminas.

Any manager so appointed must be Usiminas managers, not Ternium or Nippon Steel managers.

Let me comment on that, that we also believe that Nippon Steel practice of supplementing the compensation of these managers, nominated by Nippon Steel.

For example like the case of the current chairman of the Company, Mr. Pablo Penido, in our view is questionable, and against any good governance practice and management standards.

So at the end, we will do whatever we can in order to have a better Usiminas.

We will talk all the time that is necessary, and at the same time, we will protect our right, and we will be very firm in pursuing the restatement of the manager that has been unfairly and illegally dismissed.

OK, thank you very much, Daniel and Pablo.

Thank you.

Thank you.

Thank you, and our next question is from Ivano Westin, with Credit Suisse.

Your line is now open.

Hi, good evening, everyone.

Thanks for the questions, and thanks for all the comments on Usiminas.

Just going back to operations, on the volume side you were delivering the expansion in Mexico.

Just like you to comment on your guidance in terms of the volume growth in 2015, especially Mexico, but also in other business divisions, and also in terms of price, I would much appreciate if you would comment on the outlook of price in Mexico, and how sustainable they are compared to international price, and what to expect in terms of Argentina as well.

Thank you so much.

So let me start by your comment on the market situation in Mexico, and you know we have the target at the same time of gaining market share in Mexico, mainly from import coming from overseas.

And we have been very successful in doing so, especially in the last part of this year, when we are dedicating our main commercial efforts to gain market share in high-end products and in the industrial sector, where we can have a price premium recognizing a superior service, with delivery and better logistics vis-a-vis our competitors, especially as I said before, coming from overseas.

The ramping up of Tenigal has been successful so far.

We see good prospects, especially in Mexico, in relationship with a project related with energy, and also especially after the energy reform that the government is pursuing and is undertaking through some different regulations.

Also the automotive industry is doing very well following the performance in the U.S., and we see very, very good perspectives there, especially now that we are present in these markets through our Tenigal facility, and through our new marketing approach of targeting high-end and more sophisticated products.

The construction is lagging a little bit behind in the short run, but no doubt that even that Mexico has a very good demographic, with a very young population, and a positive demographic growth in the future.

We see that at the end, and in the mid-term and long-term, we will have also the construction business very good prospects, so that all in all, in Mexico we see the market doing well, we see the market being strong, healthy, and we feel that we have good perspectives looking forward.

Regarding your question on prices, you know is the $1 million question.

I mean we have now in the marketplace, especially in Mexico, different opposite forces interacting in the landscape.

On one side we have raw material prices going down, especially iron ore and carbon.

Interesting also to mention between brackets, that our operation in blast furnaces is really very competitive, and now with raw material prices have become the more -- maybe the most competitive force in our industrial base.

Also looking at the landscape in raw materials, the gas prices are stable and low, the scrap price is stable and high, maybe with a downward trend in the medium term, and in the pricing sector we see a decoupling -- no doubt, an important decoupling between U.S. domestic pricing against European domestic prices like Germany or Italy, and also the China domestic prices.

But as you know, at the end, the supply -- the prices are a consequence of supply and demand dynamics, as you knew this same week, it was announced by a AK, Mittal and US Steel, a price increase that they are trying to pass into the market of around $20 per metric ton.

So that they are backing up this price increase in the fact that the demand in North America looks healthy.

Well that's not the case, for example, in China, where we will have only 1% increase in apparent consumption, when the GDP will grow around 7.5%.

So we are looking in China a reversal of the positive elasticity in steel demand vis-a-vis GDP growth, now the elasticity is negative.

That means when the GDP is growing 7.5%, the steel demand, or the apparent consumption only is growing at 1%.

But you know, all in all, putting this in perspective, and taking into consideration these other factors, raw materials going down, gas and energy costs being stable and low, and decoupling between different markets performance in domestic pricing, and supply and demand dynamics, I would say that all together, at the end, I see prices similar to the current levels for the quarter to come.

Maybe being cautious I would say that -- or being more cautious, I would say that maybe they can go down an additional $20 below the current level.

that means that we could see the hot rolled coil prices in the U.S. market at levels between $680 to $710 per metric ton, which is maybe $15 to $20 below the current level, being cautious.

In Argentina, also the steel dynamics and the steel demand is growing quite well.

The market is going down only 6% in relationship with the market demand last year, that was at all-time record for the consumption of steel in Argentina.

Taking out the 2013, also 2014 even when a little bit weaker than 2013, there is a kind of slow-down in some sectors of the economy, like automotive and like construction, but in any event, it's taking out the 2013 levels, the 2014 even with this slow-down, is also an all-time record level for Argentina demand.

The pricing in Argentina, as all you know, is also following the dynamics of the international prices, so that we quote our prices taking into consideration our cost, our import competition, and the dynamics of the demand and supply in the domestic market.

So I don't see any important changes in this respect, and the prices in Argentina will follow the dynamics of the domestic market in developed countries.

Thank you very much for the detailed answer.

This is helpful.

I just went through follow on on the initial comments on the positive outlook for Mexico.

Is it possible at this stage to help us to quantify what expect in terms of volume, sales or growth in Mexico and in Argentina?

Thank you.

Yes, we don't make this kind of speculations.

We are always obviously looking with our forecast programs, and so Pablo, could you comment on that?

You are the specialist on these forecast.

Yes.

OK, Daniel, the only thing that we have already commented in the past, which is fair to comment again, is that with the new facilities that we have been ramping up in Mexico and also in Argentina, especially Mexico, we have been able to achieve basically the goals that we have for this year, and we are still working to achieve the goals that we have for next year, which is to have a net 1 million tons additional product to sell into the market.

So the goal for 2015, as you already know, is to reach a level of shipment as a whole in Ternium of close of around 10 million tons.

And this year we are achieving basically mid-term between the 9 million tons that we shipped in 2012 and 2013, and the 10 expected, or forecasted, tonnage that we are wanting to ship to the market in 2015.

So up to now, we've already shipped 7 million tons in both markets, so in all the markets that we have, and we are expected to see somehow a little increase in volumes coming out of Mexico, so if you project the fourth quarter to what we already have up to the start, we should be around this number.

That's clear.

Thank you very much.

To complement your question, as you know, we just are in the process of finishing our investment in Mexico, the BD PLDCM, and the Tenigal line in Argentina, the new continuous caster and vacuum degassing that are allowing us to sell high-end products, slab products in sophisticated specifications to Mexico.

That's why also you are looking at decreasing the CapEx that we are showing this year in relationship with last year.

And the reason for that is that we've finished this huge project, and now we are in the process of managing and administration of many, many, many different project to boost productivity, efficiency, yield rate, and so on and so forth.

And sometimes it is difficult to manage on our side for engineering standpoint, and managerial standpoint, of managing all these projects at the same time, that's why the CapEx went down, and it had a positive effect in the net debt of the company.

It was not mentioned yet, but I see that the net debt of the Company going down in almost $300 million is a positive new, and it's reflecting a continuous pursuing from the Company side in bettering off our numbers, and bettering off our all initiatives in the sense of reducing working capital and working logistics, and so on.

So that's what I wanted to say.

OK.

Thank you very much.

Thank you.

And our next question comes from the line of Milton Sullyvan, with Brasil Plural.

Your line is now open.

Hey, guys.

Thank you very much for the question.

I have two questions actually.

The first one is on CapEx, if you guys could give us a little bit more color on that, we saw this significant decline this quarter.

I would like to know what should we expect from now on.

Do you see it decreasing a little bit more as you finish the last investments you still have to do?

And the second question, coming back to the Usiminas issue once more, there are many -- we saw that above the stake that you guys bought from Previ, you guys already mentioned and the relevant fact that you don't think it triggers a mandatory public offering for minority holders.

However when we look at CVM's rules, this seems far from a precise calculation, and many investors that we're talking to believe that the one-third of the free flow limit was breached.

Could you guys please share some color on why you think this assessment is wrong, and if you already have an indication from CVM that no offer would be required?

Thank you.

OK, Daniel, let me take these two questions.

First of all, in relationship to Capex continue this trend, so by year end, we should be looking at numbers of $450 million for the year 2015, or around these numbers.

Without any new announcement of new CapEx, we should be at same level that we announced before, which is $500 million of CapEx for next year.

So basically demanding the level of CapEx we have at the moment, with the current plan that we have, and the one commented by Daniel, the processes that we are trying to implement and improve within the Company.

Going to your second question, I know that this has been a question analyzed by different persons, but we have been quite clear on this point.

The number of shares that we bought from Previ has been, from our side, in fact publicly announced, that we went through the calculations, we and our lawyers.

And we said that the numbers that we bought are below the threshold that would require a mandatory tender offer, not only for us that, but also the Previ with the seller of the shares.

As you know, they did not sell all the shares that they have, because of the same reason, so they also publicly announced that the number is below the famous threshold that requires a mandatory tender offer.

We are very comfortable with our calculation, which is based on the specific methodology that the CVM regulations and interpretations are required to follow.

As you know, anybody can ask the CVM to have a saying on this issue, but we are confident on the calculation that we made, and that's why we went ahead and bought the shares.

Yes.

To compliment your question, and the question being at the end, why we bought the Previ shares, and as I mentioned, and we mentioned together with Pablo in our remarks, we are convinced that Usiminas has a lot more to show, and will do so with time, and with a good management team.

Before the transaction, we had a 10% economic participation in Usiminas, and this participation went up by 50% right now, nowadays.

We pay the premium, that's correct.

But when we started to talk with Previ about the sale of their stake in Usiminas, we believed we understood that this was an opportunity for a clean and swift transaction at a reasonable price according to our Company valuations.

So trying to acquire 10% of the Company in the market could have entailed a lengthy process, with an uncertain price tag.

So that's why we went ahead with the transaction, and as Pablo explained, we are very comfortable with our calculation, which is based on the methodology specified by applicable CVM regulations, and interpretations.

So we feel comfortable, and we don't see any trouble there.

Do you have any expectations on when CVM should have a say on this issue?

This is a question of CVM [you know] they take their time having the same case.

Remember in 2012 we acquired a share from Votorantim and Camargo, and some minority shareholders asked the CVM to take a view on the possibility of a mandatory opa.

And after some months, they ruled out that possibility.

So you know the -- probably you know better than me which is the timing of the CVM to comment on these issues.

All right, thank you very much.

You're welcome.

Thank you.

And our final question comes from the line of Andre Pinheiro, from Itau BBA.

Your line is now open.

OK, good afternoon, everyone.

Two quick questions.

The first just going back to leverage.

Your leverage is currently low.

You mentioned that before.

It's only slightly higher than 1 times net debt to EBITDA.

And historically we've seen Ternium go through a growth cycle, and then deleverage very quickly right after that.

I would like to know if you are near to announcing a next growth step right now, and what are the next growth steps that you would be considering right now?

Would it be another strategic M&A opportunity to reduce your slab gap, other projects, even eventually increasing your stake in Usiminas through a tender offer or something of the sort, to reduce the price you paid in the past?

And on working capital, just going to the subject, working capital increased more than $500 million year to day.

We've seen actually this has been an increase because of production and higher inventories.

Are you working on reducing working capital for next year, or should we see working capital continue to increase with the ramp up of your projects?

That's basically it.

Yes.

Let me comment very short, and then I will pass to more detailed explanation on the hand of Pablo Brizzio.

Regarding the first two questions, we are not considering at this point in time, right now, any new growth cycle, as it was mentioned by you, or any M&A opportunity, meaning either integration downstream, or upstream.

We are not considering right now any step in that direction.

Regarding the working capital, it is correct that the working capital went up, mainly because of two reasons.

First, because of seasonality effect in the river in Argentina, that affected the freight above iron ore coming from the north through the Parana River, so that inventories of raw materials went up in Argentina, first.

And second, the reason for in absolute term of an increase in inventories was because the market went up, we were gaining market share, and we wanted to sustain a good service approach date upon a superior level of inventory.

But no doubt, as you also mentioned in your question, that there is room to reduce a working capital looking forward, because we will stabilize our position regarding raw materials in Argentina once the river is going to be entering into a new anti-cycle on a seasonal basis, and also because we will be working in MRO, spare parts, and many, many different areas where we have chances to reduce working capital looking forward.

Pablo?

We are -- just a couple of issues, Daniel.

We are quite comfortable with the level of net debt that the Company has.

As you mentioned, we don't have an specific program mat the moment, and we will continue to analyze which is the best alternative that the Company has in the future.

Regarding working capital, we are always working in ways to reduce it.

There were some specific issues like the ones Daniel mentioned this quarter, the devaluation in Argentina also has a very significant impact throughout the year, especially at the first quarter of the year in Argentina.

And we would like to stabilize and keep working in ways to have a reduce working capital in the future.

So you should see the Company working in that respect, not only next year, but from now on as we always do.

So that's it.

Perfect.

That's very clear.

Thank you.

You're welcome.

Thank you.

And at this time, I'd like to turn the call back over to the CEO for any further closing remarks.

So just to thank you again for your interest in the Company, and in Ternium, and for the time that you dedicated to us today.

We really look forward to remaining in touch with you, and to answer all with all the information that we have in hand, all the questions you could have about the Company doing.

And as always, please contact us if you have any additional questions, or any quotations, and I hope to see you in the next -- or listen to you in the next call, as well as to see you in our coming investor day.

So have a nice rest of the day, and thanks a lot.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may now all disconnect.

Everyone have a great day.