Ternium SA (TX) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to Ternium second-quarter 2015 earnings conference call. (Operator Instructions) Later we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call may be recorded. At this time, I would like to hand the conference over to Mr. Sebastian Marti. Sir, you may begin.

Thank you. 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 second-quarter 2015. This call is complementary to that presentation.

Joining me today is 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. Brizzio.

Thanks Sebastian, and good morning to everyone. As we usually do, I will briefly describe our performance in the quarter and then we will have the Q&A session.

As anticipated in last quarter results press release and conference call, operating income has sequentially decreased in the second-quarter 2015. EBITDA was $212 million in the quarter, a 32% sequential decrease mainly reflecting lower steel prices partially offset by slightly lower costs.

Net sales were $2 billion in the second quarter, a 6% sequential decrease almost entirely attributable to a 5% lower steel revenue per ton as the shipment were further stable with increase of only 1% or 34,000 tons.

In Mexico shipments were 1.5 million tons, 5% lower sequentially and 3% higher than in the second quarter last year. After record high shipments in Mexico in the first quarter of the year, the second quarter saw a decrease in connection with stocking trend in the value chain, something that we commented will happen in our last -- latest conference call.

The Mexican steel sector continues to show a healthy growth path driven by demand from a growth for export of its manufactured products, especially to the US market. We anticipate that shipments will remain relatively stable in Mexico in the third quarter of the year which implies an increase of shipments compared to the same quarter last year.

Steel revenue per ton in Mexico was 7% lower sequentially in the second-quarter 2015 equivalent to a decrease of $54 per ton. The prolonged downtrend that steel prices in the US and Mexico shows in last -- since late last year has recently stabilized. Despite this positive development, we expect to show sequentially lower realized price in Mexico when reporting the third-quarter 2015 results as our financials has not yet reflected the full reduction of steel market prices yet as a result of contract phase. As we commented during the last quarter conference call, close to half of our sales in Mexico are under contracts and this causes some lag from our revenue line to reflect the changes in the steel market prices.

Shipments in the southern region increased 4% sequentially in the second quarter after a seasonally lower first quarter and revenue per ton showed a 3% sequential decrease. We expect shipments in this region to remain relatively stable during the third quarter of the year and we are not anticipating significant changes in revenue per ton.

EBITDA margin decreased from 15% in the first quarter of the year to 11% in the second quarter. This is equivalent to EBITDA per ton of $89 in the second quarter, a $40 sequential decrease reflecting $45 lower steel price -- steel revenue per ton partially offset by slightly lower operating cost per ton. As we expected in the first quarter conference call, the second quarter EBITDA margin was usually low as a result of the different steel in which steel prices and input cost are reflected on Ternium financials.

Looking at this from a six-month point of view EBITDA margin in the first half of the year was 13% and EBITDA per ton was $109 a ton. We believe that this is very indicator of performance of the Company.

Prices for iron ore, purchased slabs, scrap, and energy continue their downward trend during the second quarter of 2015 in some cases reaching level that have not been seen for quite a while. This cost benefiting trend was not entirely reflected in Ternium operating cost per ton in the second quarter due in part to the gradual pass through of those input to costs as Ternium cost consumes its inventory over time and also to an offset in connection to the increase in dollar terms of local cost in our Argentina subsidiary.

We do expect to see in the third-quarter 2015 a cost per ton reduction as a result of the gradual pass-through of lower input cost like I have just mentioned. However, we don't expect that the cost reduction will be entirely reflected yet in the third quarter.

During the third quarter of the year, we expect that operating income will be roughly in line with that of the second quarter as shipments in Mexico and Argentina will remain relatively stable and respective decrease in realized price in Mexico should be offset by the ongoing decrease in cost per ton.

Again, the third quarter will continue to be affected as was in the second quarter by the mismatch between steel prices and cost. If steel prices were to remain stable at today's level, the fourth quarter should then reflect a margin expansion (inaudible) our normalization margins.

Net income was $50 million in the second quarter, a sequential decrease of $45 million mainly as a result of the decrease in operating income partially offset by lower income tax expenses. Earning per ADS were $0.21 in the quarter, a $0.14 decrease compared to the first quarter of the year. The decrease in net income was partially offset by lower results attributable to non-controlling interest in Siderar.

Turning now to cash flow statement, net cash provided by operating activities in the second quarter was $435 million, including a $316 million lower working capital. Capital expenditure were $144 million, up from $84 million in the previous quarter and accumulating $228 million in the first half of the year roughly in line with CapEx in the first half of last year.

Consequently, free cash flow reached $291 million in the second quarter. In addition, there were dividend payment made to Ternium shareholders and non-controlling interest from a total of $209 million and as you know $74 million payment made in connection with the purchase of the remaining minority stake in Ferrasa in Colombia.

Finally, our financial position continued to be very strong with stable net debt at $1.5 billion and a low net debt to last 12 months EBITDA ratio of 1.2 times. Worth to mention is that the net debt reduction in the last 12 months was $450 million.

Okay, these were the main issues I wanted to comment on. Please, operator, we can begin with the Q&A session now. Thanks.

Thank you. (Operator Instructions) (inaudible) Bank of America.

I have two questions. The first one is on the recently announced restriction on imports in Mexico. Could you please provide us an update on that what you believe could be the impact in terms of additional demand over the coming quarters, if there's more measures that could be taken in Mexico to restrict imports? That would be great.

And my second question is Usiminas, if you could provide an update on the current situation, I mean how are the talks going with Nippon and what could be the next steps on the situation there? Those are my questions.

We -- as you know, we have been seeing a lot of activity in the commerce department of all the different countries. You mentioned Mexico, but it's also important to mention the US in trying to control dumping cases that are coming or are being seen in the North American market. And this trend has been steady and is positive for -- not only for what we are seeing or we expected to see the demand in Mexico, but also to stabilize the pricing scenario where we believe is the most important impact of this type of activity against anti-dumping product coming into this market.

As you know pricing in the North American market has stabilized after a significant decrease in -- almost from, if you want from the end of last year to almost all this year and this stabilization has taken place especially in the last month. We believe that this activity and these anti-dumping cases will contribute to stabilize the pricing that we will be able to see in our markets in the coming quarter.

If you remember, when we were asked in the last quarter conference call we were expecting to see bottoming out of the pricing and prices trending to stable levels. But we believe that these new anti-dumping cases being analyzed in both markets will contribute to sustaining this level.

So we understand that is key to sustain the profitability and to sustain the achievements of the companies within our region and especially of course the one producing in our region.

Trying to answer your second question, let me tell you that there is not many developments in the situation of Usiminas. As you know, we continue to believe that the dismissal of executive coming from a company was illegal and against the contract that we have signed with our partners. In any case, after this has happened, Nippon has taken a leaving position in the management of this company and the situation of the company is being -- it's a difficult situation taking into consideration not only the market situation of Brazil or the specific situation in the steel market in Brazil which is also suffering from an important reduction in demand, local demand. So Usiminas is facing a difficult time and this situation is of course some thing that the Company will need to tackle.

Ivano Westin, Credit Suisse.

I just wanted to follow-up on your comments on these anti-dumping measures that has stayed on Mexico and the US, specially if you could comment on what to expect for other markets, other countries in Latin America where you operate, what we can expect in terms of additional further dumping measures on those countries?

And on the price outlook that you mentioned, that very likely price in Mexico will follow the trend in global pricing or you could see further decrease in price this quarter? I assume your accounting procedures very likely are going to see lower costs kicking in Q4. So on these new norms, just like if you could comment on whether you expect to see on a normalized basis 2016 your EBITDA per ton or EBITDA margin on this new market environment?

Ivano, let me first comment on your first question which is the measures that we are seeing being implemented in the North American market. As probably you know, the activity on anti-dumping cases or anti-dumping measures has been very high, not only in our region, but also worldwide, and probably will be -- 2015 will be a record year in these type of measures worldwide.

These type of situations is not only being seen in North America, but is seen throughout the region. So we are expecting to see this activity, I mean anti-dumping cases of measures implemented by the government throughout the producing countries in the whole Americas. So I don't think that this is something that will happen in North America, probably North America took a leave on this, but it's something that the government throughout the region, especially or mainly the producing countries are taking very carefully.

So just to answer briefly your question, we are expecting to continue to see this trend, and being expanded to all the producing countries in the region, in the Americas.

Regarding prices, as you know and as we always say, it's very difficult to predict pricing. What we are expecting in the short run is to continue to see this new level or this new stable level of pricing that we have seen in the last months moving forward to the rest of the year. So this is what we are expecting up to now.

This year, and probably for you is very difficult to understand, not only to you, Ivano, but for the whole analysts that are following our Company, it's a very special year or what we call a transitional year and difficult to see the trend or the numbers that we are talking.

That's why we mentioned during the opening remarks that it probably is better to look at the profitability of the Company through the full number for the first semester where the performance of the Company of course lower than last year mainly due to a reduction in pricing reflecting a 13% EBITDA margin, and we are expecting to see a trend in the coming quarter as we describe where probably in the semester we should tend to have also this level of numbers because we are expecting to see roughly similar numbers in the third quarter because we will not be able during the third quarter to fully reflect the recovery on cost reduction because as we always mention especially the impact on the purchase slab going through our finances.

So in the fourth quarter, we are expecting to see most of the reduction being reflected in our finances, but if we suppose our pricing will maintain this level, the year stabilized level of EBITDA margin or EBITDA generation should be starting to reflect at the beginning of next year.

I understand that we have had a reduction in the performance of the Company, but if we put together the first half of the year, 13% EBITDA margin is not a bad number you can see only taking the second quarter. So we have seen a reduction in the EBITDA margin and the EBITDA generation.

Moving from the first quarter to the second, we are expected to sustain the -- or maintain the similar levels in the third quarter and the reverse moving into the fourth, meaning a recovery on the margin during the fourth quarter and a stabilization of the result when the full and the total impact of the cost reduction in the beginning of next year.

Okay. That's very clear, very helpful. I appreciate your comments. Just as a follow-up here on these measures that we are taking to stabilize margins, we already saw major improvements in our working capital this quarter. On this front, what can we expect moving forward? Is there any specific target that you can disclose to us?

Okay. Thanks for the question that's very important to mention. We have had a very significant working capital reduction during the quarter. It was something that we were expecting.

Probably you remember that we have increased our purchase of slabs during the beginning of the year and we are expecting to see an important reduction on working capital, especially in inventories. We are expecting to maintain at least this level of working capital and as you know, we as a company are always working in ways to find different measures to keep producing working capital especially to reduce inventories.

So we are not expecting to have this level of reduction in the coming quarter, but our target is to find ways at least to sustain this level of working capital or if we find alternatives to further reducing. Also important to mention that we have a very important working capital reduction in the quarter, the second quarter, where we have if you want the most important utilization of cash, mainly -- meaning the payment of dividends.

We pay dividends from Ternium, we pay dividend from subsidiaries not fully under control of Ternium mainly Siderar in Argentina, where we pay dividend also to third parties and we paid for the share that we acquire from -- the shares that we have from Ferrasa.

So in total, we spent a significant amount of money that was compensated by the reduction in working capital, and this allowed us to sustain the net debt during the quarter and just shall have a very small reaction from 1.52 to 1.5. Also I mentioned during the opening remarks that important to take into consideration that during the last 12 months, we have been able to reduce our net debt by $450 million.

And as you know, and this has been also mentioned during the Investor Day, one of the key component of the strategy of the Company is continuing working in ways not only on reducing cost and being more effective, but also in looking ways for reducing our working capital and keep reducing or sustaining the very strong financial position that we continue -- we are having at the moment and we are expecting to continue having in the near future.

Carlos De Alba, Morgan Stanley.

So the first question has to do, could you -- is it possible for you to quantify at least in a range the expected reduction in costs per ton coming at least from the slabs that you have already purchased and that I'm assuming are already included in the production plan for the coming months, so maybe you already have a ballpark figure of expected cash cost reduction per ton coming from this driver?

The second has to do with we see -- we saw an increase in SG&A as a percentage of revenues in the quarter both versus the first quarter of the year and the second quarter of last year. So if you could comment if there is this new level that you expect to see given the depressed prices 50% that we are seeing currently or is there any measures that the Management is implemented that should reduce the percentage of SG&A as a percentage of revenues in the coming quarters?

And then finally any update on the potential growth projects announced or commented upon in the Ternium Day, those in Mexico and if you have any details as to how the energy plant is progressing? That would be also useful.

Okay, too many questions put together. Let me try to answer all of them. In respect to the impact of slabs coming into the third quarter, there should be an important reduction in the total cost or this input cost. We are calculating that should be around $70 per ton coming into next quarter only taking into consideration the purchase slabs. So as we were mentioning, this is of course part of our total cost and this is an important reduction of further (inaudible) in other input costs or in some cases, but this will compensate or what we are expecting to see is a compensation of this reduction and this important reduction in part of our input cost with the decrease that we will see in average prices during the third quarter.

That's the reason why we are expecting to see a sustained level of EBITDA generation during the third quarter and when these stabilize in the fourth, we are expecting to see an increase in EBITDA margin and EBITDA generation. Again --

If I'm -- sorry, just to clarify, this $70 per ton reduction is on the price of the purchased slab or is on the COGS per ton, overall COGS per ton?

No, that's in the price of the reduction in price of the purchased slabs.

All right.

Again probably for a [very] understanding, it's important to in this specific case, where we are in the middle of this transition, looking at the six month levels is a very indicator of profitability of the Company.

Let me comment on your second point, which is also important. Thanks for that question. The SG&A though is -- we have a reduction in comparison to the same quarter last year, there was an increase compared to last quarter. There are two things there that we can comment them as one-off.

We have done -- have had during this quarter increased donations especially to the technical school that we are supporting in -- both in Mexico and Argentina, and there were some specific events, steel-related events, that the Company not only participated, but promoted that the impact of that were included during this quarter.

This is something that should not be repeated in the coming quarter. The negative part if you want is that due to the increase in salaries in Argentina, and the not having the same level of devaluation of the currency, we have an increase in dollar terms of the labor cost in Argentina. But we are expecting to see a reduction in the coming quarter in the SG&A, so it shouldn't be taken as a new fixed number or a new fixed level. And similar comment as I made in relationship to the working capital applies also here.

We are always working in different ways of better reducing not only the input costs or the profitability in relationship to the production of steel, but also working very, very hard in reducing the SG&A of the Company. So shouldn't -- you should not take these as a new level, but if at all a reduction should be expected in the coming quarter.

The other part of your question was related to the projects and one that you mentioned is the power plant in Mexico. This plant is -- or the construction of this plant is working very well. We continue to be on time and on budget and we are expecting to finalize this project at scale and on the numbers that we are -- we were mentioning.

In fact a couple of weeks ago, while being in our facilities in Mexico, I had the opportunity to visit this plant and it's amazing, the advance what we have and what we are constructing over there. So we are expecting to continue to see this trend in the coming quarters.

As you know, this facility, the [skill] date for production of the new facilities in the third quarter of next year, and we are working very hard to comply with these dates. We continue analyzing in respect to other projects, we continue analyzing which are the best facilities that we have, but we have not taken yet any decision. It is something that we will analyze very, very carefully.

Alfonso Salazar, Nova Scotiabank.

I have two questions. The first is related to costs. I know that (inaudible) the decline in the operating cost of only $2 per ton looks low in the quarter when you consider the decline in energy cost, the depreciation of the Mexican peso. So my question is what is behind this small reduction, it's just related to (inaudible) or is there something else that you can share with us? And also can you remind us how much of your cost and your SG&A is related to the Mexican peso?

And the second question is regarding your guidance for Q3. Your operating income is likely to stay at similar levels like in the second quarter and shipments in Mexico and Argentina should remain stable. Do you also say that in Mexico lower prices will be offset by lower cost? But when I read and see the last press release, it says that operating margins should be lower due to higher costs. So the implication is that operating margins in Mexico need to improve sequentially. So just want to clarify if that is the case, you expect operating profit in Mexico to be higher or stable in Q3?

I guess with a $70 decline in the slab cost, the answer is that the margin should increase. I just want to check with you.

You are right, the most significant impact that we are seeing is not allowing us to show a normalized EBITDA generation in the first-in first-out methodology, especially when a significant portion of our production of steel is related to purchase slabs. So this, as we have always comment, has time frame between five to six months will reflect in our financials.

So this is the most significant impact that we are seeing and not allowing us to show a better margin for the Company and is -- that's why -- and we are certain -- sure that this -- since with the passing of time, this will be reflected clearly in our numbers. That's why I mentioned also that the six months is better reflecting the profitability of the Company in the second quarter.

But you are completely right, the most important effect is the first-in first-out methodology related to the purchase slab. Of course we have been seeing reduction in other input cost like the one that you mentioned like energy, like iron ore, like coal and natural gas, so this is also impacting positively, but is not allowing us to fully reflect the reduction in cost that we are having in the middle of the situation where we have seen also a very significant reduction on prices, selling price for our product.

So that's the main cause and that's the main reason why we are expecting to see an improvement, not in the second quarter, because of the reason that we have commented, but in the coming quarter.

In relationship to SG&A or input cost, we basically have very similar numbers. If you want to know which is the impact or the input cost related to Mexican peso or to Argentine pesos where we have around 30%-35% of the input cost related to the local currency in both markets.

So that should be also a positive sign coming into the future in relationship to the input cost where we have had an important devaluation of the Mexican currency during the last -- especially during the last month and this also should be reflected in our cost line.

Opposite to that is the situation in Argentina where we have seen an increase in the input cost because of the reduced devaluation of the currency in comparison to the increases of salaries and this is impacting our cost because in dollar terms this is having an increase of that input. So it's something that of course we are taking everything in consideration and this should be clearly reflected unfortunately not in the coming quarter, but in the following one where are expecting to see a further stabilization of the whole situation and if prices of steel product are sustained at this level in the beginning of next year, there we should have a really stabilized and a new level of cost. Sorry, but I forgot your third question.

Yes, the third question was regarding just (inaudible) the profit operating profit in Mexico should be higher or stable in Q3?

Well, in Mexico we have special situation, this is something that we comment earlier which is that since a significant portion of our sales are under contract, so -- and these contracts usually are set on a quarterly basis we have a delay on the sale price on these products. That's why we will expect to see a further reduction of prices, average price in -- especially in our Mexican operation that of course we are expecting to see not only this reduction in price, but this reduction being in -- at the level of profitability being replaced by the reduction in cost that we are expecting to have.

That's why we are expecting to see a similar level of EBITDA generation and a normalized situation coming in the following quarters.

(Operator Instructions) [Kay Rivera], BTG.

I just had a question on dividends and given the pretty significant free cash flow generation that we're seeing and the pretty low leverage levels currently, if we can expect payouts to remain at current levels or if you see room to boost cash returns going forward?

And secondly, delving a bit deeper into the next investment cycle, if there's anything additional that you can share with us on a potential expansion at Tenigal into the -- to galvanizing capacity or a potential new DRI plant to close the slab deficit, that would be very helpful.

Okay, (inaudible), let me comment regarding the dividend. We have just paid dividend. As you know the Company doesn't have a dividend policy and this is set by the shareholders meeting once a year. The Company has been able to sustain a very significant level of dividend payment and the dividend really is quite good for a Company in our sector. As I said, we don't have a dividend policy, but the trend of the Company has been very clear and we are expecting to sustain this trend.

In relationship to the project we are working as I mentioned very hard on finalizing what we are having currently contracting which is our -- the power plant. You know that this has been also commented during our Investor Day, we are very advanced in the analysis of the expansion of the Tenigal and this is something that we need some more further discussion, but this is something that at some point we should be able to announce which will be our conclusion.

And in the other one will take longer for us to decide because we need to clearly see the trends in the market, the trends in the slabs sector, and this is something that we will very, very carefully analyze. So we are not at this moment able to further comment on how are these because we have not taken any decision at the moment, but we are analyzing it very, very carefully.

(Operator Instructions) [Mathias Zimkoff].

First question is related to working capital. Sorry I got into the call in the middle of the call, so I don't know if this was already asked or not, but if you could comment a little bit on the working capital improvement during this quarter and if it is sustainable?

And the second question is related to steel prices in Mexico, in the US, if you see eventually as we start to see more anti-dumping cases in both countries you could start to see prices recovering a bit in the short term?

Yes, we have been commenting on the working capital. Let me just briefly describe what we have said before. We have a very significant working capital reduction during this quarter especially in the line of inventories, something that we were expecting in the Company and we -- and this reduction was in a quarter where we have significant outflow of cash.

If you remember in this quarter we paid dividend and we paid for the shares of Ferrasa that we don't have. So all in all, allow us to go through this quarter without increasing the level of debt in a quarter where we have significant payments.

We -- of course, we are not expecting to have this level of reduction in the coming quarter, but we will be working very hard to not only to sustain this new level of working capital, but also to reduce if we can. But we should not see a reduction on the levels that we see -- that we saw during this quarter, but it wasn't a special quarter because we utilized most of this reduction to make all the payments that we needed to make without changing significantly or in fact without changing at all the net debt of the Company.

In relationship to prices, we tend to be quite conservative on predicting prices, so we believe that this new trend of anti-dumping cases, anti-dumping measure will help to sustain the new level of prices that we have been seeing in the US market and as you know the reflection of that in the Mexican Market during the last month. So we are expecting that this will help to sustain this new level and of course anything above that will be very welcome, but it's very difficult for us to have a different prediction than the one that we are saying.

Okay. And Pablo one thing about anti-dumping, I think if I'm not mistaken, I read this week that there was an anti-dumping investigation against [Ribar] coming from Brazil in Mexico and possibly Ternium was part of the -- was stimulating the investigation. Is this something that you see -- that you started to see as a trend like higher imports of Ribar in Mexico?

Well, the Mexican market is a very competitive market and there are many companies in this sector, not being Ternium the most important one. You know that our main market is the slab market. We have a significant portion of the [long] product market in Mexico, but there are more than five companies having significant market share.

Imports are coming to -- into the Mexican market from many, many, many different countries. Overcapacity is also an issue that you need to consider. So as we have commented before, we think that not only Mexico, the US, but throughout the region the activity of the different government in responding to anti-dumping activity in the region will be significant and is something positive as we were commenting before to sustain a new framework to work in the markets where we're working, specially in the producing countries, and through that be able to sustain pricing levels that we are seeing today.

I'm showing no further questions at this time. I would like to hand the conference over to Mr. Pablo Brizzio for closing remarks.

Okay. We have been able to commented all the main issues going through the Company in this quarter and all the things I wanted to share with you today. Thank you very much for your timing. As usual, we will keep in touch in the near future. Thanks a lot. Bye, bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.