Ternium SA (TX) 2016 Q1 法說會逐字稿

Good morning. My name is Sean, and I will be your conference operator today. At this time I would like to welcome everyone to the Ternium first quarter 2016 results conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator instructions.)

Sebastian Marti, please go ahead, sir.

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 first quarter 2016. 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.

Good morning to everybody. And thank you again for your interest and for your participation in our Company and for taking the time to participate in today's conference call.

You know we are approaching the Ternium's investor day, which is going to take place at the Guggenheim Museum in New York on June the 16th, so that in this teleconference I will be very brief. And we will have time at the event to discuss, as always, about Ternium strategy in the global market as well as the latest developments and breakthroughs in Ternium and in the environment.

So that -- I would like to start pointing out the decision we took in Ternium's latest Board meeting yesterday, where we decided to invest in a new galvanizing facility in Mexico, and to share also with you my views on some concerns regarding our investment in Usiminas. And right afterwards, I will ask Pablo Brizzio to review our result for the first quarter of the year, and we will have -- and we will enter into the Q&A session.

So, let's begin. Yesterday, as you know, in Ternium's Board of Directors meeting we approved the doubling of capacity in Tenigal, the joint venture that we have with Nippon Steel for the manufacturing of hot-dip galvanized steel, including exposed parts and high strength qualities, to serve the Mexican industrial and automotive markets.

You know that what we decided is that, once completing studies with Nippon about some facility and technical issues, Tenigal will go ahead and will build a second hot-dip galvanizing line with a total annual production capacity of around 430,000 metric tons.

Some things that I wanted to point out about this investment is that we expect to start production in 2019. The plant -- the new facility will be located in Pesqueria next to Monterrey City, next to the airport for Monterrey. We will increase legal capacity from 400,000 to 830,000 metric tons per year combining both lines, the one that we have now and the one that we will build.

And the investment will be around $300 million. The focus will be the automotive industry, as I said before, exposed parts as well as inner parts, and also some industrial uses, home appliances and so on.

As you know and as we have been commenting in other investor days and in other conference calls, we believe that the automotive industry in Mexico could grow up to -- from the actual numbers, the current numbers of 3.4 million units to around 5 million units -- 5 million cars in 2020, so that in general we are very positive about Ternium and Tenigal growth as a leading provider of high value-added and high quality steel for the automotive industry here in Mexico.

And I believe that this investment will enable us to maintain this leading position and this role in this growing market, as well as to allow us to substitute and to continue the process of substituted imports through differentiation from our peers, through servicing plans and networking and so on.

So, this is the first comment that I wanted to make, and then the second one is on some news regarding our investment in Usiminas. As you may know, on March the 17th, Usiminas entered into a standstill agreement with the financial creditors for a term of 120 days. And also last week on April the 18th, in the Usiminas shareholders' meeting, it was approved an issuance of 200 million ordinary shares for an amount of around BRL1 billion, or $280 million.

In addition to that, Usiminas management mentioned yesterday in their first quarter results conference call that the restructuring of the financial debt of Usiminas is in an advanced stage and is working out properly, so that, at the end, Usiminas' tight financial situation is being worked out, even though the company will need to strengthen efforts in the cost cutting and breakthrough side in order to be able to pass through and to go through this difficult situation that we see in the Brazilian stream.

So that -- regarding the details of Usiminas shares issuance, as you know, existing shareholders have preemptive rights to subscribe the proposed increase at any time prior to the 23rd of May. Up to this moment, Ternium has not decided whether or not it will participate in the capital increase.

As you know, Ternium has subscription rights and entitled to subscribe ordinary shares at the price of BRL5.00 per share. That means 3.5, around 3.5 -- $1.50, sorry, dollars per share roughly.

Also, Ternium is entitled to subscribe, obviously, on a pro rata basis with other subscribing shareholders any ordinary shares that are not subscribed by Usiminas current shareholders, also at BRL5.00, $1.50. So, that's around $1.50 per share. As I said before, we have not yet decided whether or not we participate in the capital increase.

So, having said that and having mentioned very briefly about the decision to expand production in our galvanizing facility in Mexico as well as making a comment on the Usiminas issue, at this point I will pass to Pablo Brizzio that will take over to give a description on our performance in the first quarter. And afterwards we will enter into the Q&A session.

Okay. Thanks, Daniel, and good morning to everyone. As we have been doing in the latest conference call, we will follow the webcast presentation.

So, if we move to page three in that presentation, you can see that EBITDA in the first quarter here was $303 million. It was slightly higher to the EBITDA of the fourth quarter last year, and approached the level seen in the first quarter of 2015.

As can be seen in the chart, EBITDA has been gradually improving during the past four quarters, as substantially lower costs of raw material purchases and other inputs gradually went through our inventory.

We will see in the following slides that this improvement took place in a very challenging price environment, with our externalized price in Mexico, our main market, falling almost $200.00 per ton over the year.

EBITDA margin continues to increase, reaching 18.6% in the first quarter, equivalent to an EBITDA per ton of $125.00. In this first quarter, we have a net gain of $124 million, equivalent to an earning per ADS of $0.48.

We had had the $127 million net loss in the fourth quarter, mainly as a result of an impairment to our investment in Usiminas and certain non-cash foreign exchange losses in Argentina related to the devaluation of the local currency to the US dollar.

If we move now to the following page, we will review the latest developments in our market, our main market. Our sales -- and let's start by Mexico. Our sales in the Mexican market increased 4% sequentially in the last quarter of the year.

And this is the first increase in sales in quite a while. The reason for this improvement was the 14% sequential increase in shipments, which reached the record 1.6 million tons in a quarter.

On the other hand, revenue per ton continues to slide in this market, with a 9% sequential decrease in the quarter and, as I mentioned earlier, an almost $200.00 year-over-year reduction.

We expect a moderate sequential increase in steel shipments in Mexico in the second quarter of the year, as we see strong demand in the Mexican automotive industry for high value-added products and an overall volume improvement in the commercial market, after some inventory destocking in this first quarter of the year.

Also, the steel price environment in the US has continued to improve over the past few months, supported by inventory decreases in the value chain, discipline in mill capacity utilization, a declines in imports, and an uptrend in international steel price. This should support higher revenue per ton in the second quarter of the year.

Let's go to the following page where we will review what was going on in our southern region. As we had anticipated last quarter's press release and conference call, shipments and revenue per ton in the Argentine market decreased substantially, mainly as a result of destocking of the value chain together with the usual seasonality of this market at the beginning of the year.

Revenue per ton decreased 18% sequentially in the first quarter. Steel prices decreased following the sharp devaluation of the local currency at the end of December 2015, partially offset by a higher value-added product mix.

So, after the weak first quarter, in part related to seasonality, the Argentine steel market is in the process of adjusting to a period of lower economic activity. Consequently, we do not expect an improvement in our shipments to this market in the second quarter of this year. In addition, realized price -- steel price should remain relatively stable.

If we move to the next page, you can see the combined effect the developments in our two main markets had on our consolidated sales, shipments, and revenue per ton. Due to the increase in shipments in Mexico and the decrease in Argentina, Mexico accounted now for around 66% of Ternium shipments in the first quarter. The southern region was 23%. And other markets, mainly Colombia, the US, and Central America, accounted for the remaining 11%.

On the following page, we can see the strong country effect that got us to a fairly stable EBITDA in the sequential comparison. As anticipated in our fourth quarter 2015 press release, in the third quarter of the year we had higher achievements that were mostly offset by slightly lower EBITDA per ton.

We have just seen that price decrease substantially in our -- in all our markets. In the quarter, that deep decrease was offset by an also significant decrease in cost per ton.

In Mexico, the decrease was mainly the result of lower cost of stock, raw material, and tenancy. And in Argentina, it was principally due to the effect of the Argentine peso representation on local costs in the Company inventory.

We believe EBITDA in the second quarter of this year will be sequentially higher due to slightly higher achievement on EBITDA per ton, allowing the [collateralized] price to increase in the second quarter on account of the improvement in the steel price environment. In addition, cost per ton should be slightly higher, mostly due to higher costs in Argentina as the effect of the Argentine peso devaluation on inventories gradually dissipates.

In the following page, we can see a bridge chart of net results for the first quarter. The obvious difference was the impairment of our investment in Usiminas, already commented, and an improvement in the net financial result after substantial devaluation of the Argentine peso in the fourth quarter last year.

Let's now review in the following page the free cash flow generation during the quarter. Working capital was stable, and CapEx stood at the number of $98 million. After deducting the financial results and income tax, we got to a healthy free cash flow of $140 million in the second [sic -- first] quarter.

Finally, in the following page we can see the quarterly performance of cash flow operation, CapEx, and free cash flow. We continued to show restraint in CapEx and consistent cash generation over the quarter.

This has demonstrated a continued reduction of net debt, which was down to $1 billion at the end of March, equivalent to only 1 time last 12 months EBITDA. This is a very strong financial position, something not very common in our industry nowadays.

I believe with this we have covered the main issues that we wanted to cover. So, please let's go to the Q&A session. Thank you.

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

Great. Thank you very much, everyone, and good morning. Just wanted to ask you, on Argentina, your prices decline only around 18% quarter-on-quarter. And I think the news we saw is that prices in dollars in Argentina have fallen around 14% -- sorry, 24% or 25% from December to earlier in the quarter. So, is this lower decrease in your revenue per ton related basically just to better mix products? And what do you expect will be the evolution post the second quarter, as you already said that they're going to be relatively stable in the second quarter?

And also maybe, if you could, give us a little bit of details or color on how you see the reversal of the positive inventory accounting on your cost that we saw that benefitted the Argentina results or the southern region results in the quarter.

And then finally, just going a little bit more into the details of Usiminas, I understand that the Company has not made a decision if they will participate on the equity offering. But maybe, Daniel, if you could, give us a little bit of background of what is Ternium -- what are the parameters or the variables that Ternium is analyzing in order to decide whether or not the Company will participate. I think last time we spoke in this forum you mentioned that the Company was still quite committed to the investment in Usiminas and to Brazil. So, if you could add to your earlier comments, that would be great. Thank you very much, everyone.

Thank you, Carlos. And I will try to speak in a higher voice, because I know that maybe the sound is not doing that well.

So, let me start making some comments on what is going on in Argentina after all the things that happened in the last four months. As you know, the Argentine peso devaluated around 28% against the US dollar in the fourth quarter in 2015, and additionally 11% in the first quarter 2016.

The economy in Argentina is being readjusted after an important economic reform, and that is related with the free flow of capital and exchange rate normalization, so to speak. So, the Argentine steel market is related to what is going on in the economy and is in the process of adjusting as well, in prices and in volumes and in perspectives, in a period of slower economic activity because of the impact in the real salary -- in the actual salary brought about by the devaluation.

But, at the same time, the devaluation of the Argentine peso helped in the competitiveness of Siderar local cost, although some inflation that remains very high puts pressure on local prices and will maybe take back some of the gains in the cost side.

As we anticipated in the last quarter conference call, Siderar cost per ton ended up being very low in the first quarter of the year, as it used inventories with US dollar values that were reduced by the Argentine peso depreciation. No doubt that these factors will gradually normalize beginning in the second quarter, so that at the end the cost per ton in Siderar will increase a little bit in the quarters to come.

This happened mainly because Siderar uses the Argentine peso as a functional currency, while at the same time Ternium reports in US dollars. At the end, probably I see that in the third quarter of the year we will be -- this effect is going to be clean, and we will -- in the normal, standard path again.

Argentina is going through some adjustments that need to be done in order to be able to regain growth. So, it may be the following two quarters will not be as easy for the economy, but I am very confident that, once the structural changes consolidate, the growth will be regained. And this will happen maybe the fourth quarter of the year or first quarter of 2017.

You know that Argentina -- as we have been talking in some other teleconferences as well as in investor days, in our view Argentina has a very high potential for the years to come. Even if we only think on the investments in infrastructure that needs to be done in the country, we will have a strong and a very healthy demand for steel, so that we are confident that Argentina, based upon infrastructure development, energy development, agribusiness, and construction, will have in the medium term very good perspectives for our business.

Also, the access to international markets is a key factor. It has been recently attained, and so that Argentina will have maybe a positive flow of capital that will put fresh air in investment and in development in the country.

At the end, Argentina needs to regain competiveness in many sectors, but the government is aware of that and will work to help businessmen and business communities to go in the direction of efficiency, competitiveness, and growth.

Unfortunately, the environment in Brazil is not helping, and also the environment for commodities is not helping Argentina. But, it is not an easy landscape, but at the end the changes are needed. And no doubt that the changes in the economic side will have a positive impact in the economy and in our business in Argentina.

Before going to the Usiminas question, let me pass to Pablo Brizzio, who will quote on the product mix and on the pricing that you were mentioning.

Okay, Daniel. Carlos, you are right. In fact, the price decrease on the yearly basis was higher than the 18% that we mentioned, and was compensated by that the prices in Argentina today are still in line with the national pricing environment. So, we believe that this will continue in the future as usual, with this volatility in the national prices.

Daniel commented and was very clear on how the impact of the devaluation and the function of currency will impact our numbers. We believe that his comment is fair. If you have other questions, please let us know.

And now let's move to the issue of Usiminas.

Yes. To complement your question regarding prices, as we have mentioned in some other teleconferences as well as in investor day, as you know the steel price in Argentina follows the path of the US domestic market and the Mexico domestic market, so that in the quarters to come Argentina pricing will be in line with those prices that we see in the markets that I mentioned.

Also, as Pablo Brizzio mentioned, it's important to take into consideration that the Argentine domestic prices have less volatility than the international market so that, when the prices go down in the international market, in Argentina it happens slowly. And also, it's in the reverse side of the coin, so that when prices are going up, nowadays the prices in Argentina will follow, will adjust following this same trend.

Regarding the issue of Usiminas, as I mentioned in my preliminary remarks, we didn't take a decision yet. But, as you know, for us Brazil is a very important market for Ternium and it makes sense to remain. We don't know if we will subscribe the capital yet, and this decision will be based on differing factors.

One of them is the success or not and the terms and conditions on the financial restructuring. As you know also, the capital subscription coming from Nippon is related to the success of this financial restructuring.

So, at the end, we know that the management is working very hard to reach an agreement with the banks and with the financial institutions. They are doing well up to the moment in this aspect. And we will see the result of this and the output of this restructuring in the debt of the company in terms of interest rates, in terms of timing, in terms of specifics of the restructuring before taking our decision, among other factors. It's a daily factor as well as technical factors.

All right. Thank you very much, Pablo. And thank you very much, Daniel, yes.

Thank you.

Thank you.

Leonardo Correa, BTG Pactual.

Good morning, everyone. Thank you for taking my question. First on the -- maybe moving back to an issue we've been -- I think we've been asking for for quite a while on the balance sheet and on the cash flow side, I mean, things for Ternium have been working out very well. The Company has been generating quite a lot of cash. Leverage is now moving down to close to 1 times net debt to EBITDA. I mean, just looking at the numbers this year and looking at your guidance, I mean, we can clearly come to a conclusion that, I mean, the Company could generate potentially something around -- north of $400 million in free cash flow.

So, I just wanted to -- again, thinking strategically and just trying to reconcile where you would -- I mean, where your leverage is really trending to and your options of what to use that cash flow with. I mean, just on Usiminas, I understand that a decision has not been taken. But, just considering the size of the potential investment, I just wanted for you to talk about just how Usiminas is being viewed, given the relatively small size.

Also thinking of Tenigal, I mean, clearly an interesting project with an interesting market, still also very small, so just wanted to see if you're now in position to rethink some greenfield projects that have been talked about in the past, mainly on the slab side, if anything bigger in terms of CapEx is being considered. That would be my first question.

Moving down to the second question on Tenigal, just if you can help us with expectations on how much this incremental capacity can generate in terms of incremental EBITDA per ton, I think that would help us a lot on understanding really how to value this project and how we should see EBITDA per ton rising going forward for the Group. Thank you very much.

Hi, Leonardo. How are you? Let me start about your question on free cash flow. As you mentioned, the free cash flow of Ternium has been very consistent, has been very positive. This year -- this will not be different during this year.

The level of net debt reached a very low level last -- so, March this year reached $1 billion. And as you know, we will pay during this second quarter a dividend from both Ternium and our subsidiary in Argentina, so we will use a significant amount of cash during this quarter. That will probably not allow to further reduce debt during the second quarter, but we could recover this trend in the second part of the year.

The level of dividends that the Company has paid is very healthy. And it is a very good rate of dividend payments that the Company has shown and has sustained even during difficult times in the steel sector. So, most probably the Company will continue to do that.

We as usual -- and probably Daniel will comment maybe later on the further projects that we can have in the future. But, we have already announced new ones like Tenigal that will allow us to continue to generate positive not only free cash flow, but sustain the level of EBITDA per ton that we are showing today, which are quite high levels.

Let me remind increasing the capacity of mechanizing will increase our nonintegrated portion of production. So this, as we mentioned in the past when we discussed Tenigal 1, was for us to sustain this level of margin. Even without having integrated facilities, it is a very positive and is a sign that the return and the pricing that we can get through this facility is quite significant.

In any case, we are discussing about 430,000 tons out of almost 10 million tons that the Company is having. But, in any case, it proves that what we said in the past was right, which was that, even as we are increasing our nonintegrated utilization, we can sustain a very high EBITDA margin. And this is because of this authentication of the facility and this authentication of the product.

Moving forward, the CapEx plan for this year probably will be between $400 million and $450 million, because even announcing plans, you know that in the first part of the project you have a significant amount of money to the investment, that the money in this project will be in the following year.

So, even if we decide or not to participate in the capital increase of Usiminas, as you mentioned the amount of money is not that significant. So, it will not change substantially the well-being of the financial position of that.

So, basically this is what we believe will happen with the free cash flow and the level of debt. And we'll continue to analyze different projects. And Daniel, I don't know if you want to add other comments on this issue.

I do not have any important final comment. But, maybe going to the -- Leonardo's question on greenfield projects and organic growth and brownfield projects and acquisitions, let me comment that regarding our positions.

We are -- there is nothing we see of interest right now. We will only analyze regarding our positions if opportunity -- if any opportunity arises. But, we are not analyzing right now any concrete or any prospect acquisition, important acquisition in the horizon in particular.

Regarding greenfield projects, we are, as you know, in the process of announcing this expansion in our galvanizing facility. Tenigal needs to address the future growth and demand of high value-added and high quality steel in Mexico and go for it. The capacity of Tenigal -- regardless, we are running Tenigal at full capacity, so that current capacity will not be able to cope with the demand growth that we foresee and we have already in this market segment.

That's why we decided to double capacity and to launch this new project. And I think this is going to be very important for the consolidation of our presence in the Mexican market, especially in the automotive industry.

You know that the line will built in Pesqueria. And we are in the process of completing the analysis of the investment regarding product mix, current and future trends, regarding facility specifications, regarding technology together with Nippon. But, again, we are very positive about our role of a leading provider of steel for this market segment in Mexico.

In organic growth, you know we will continue to pursue a strategy of gaining market share against imports in Mexico and consolidating our commercial network. After the announcement of the expansion in Tenigal, we will continue analyzing some other options in the downstreaming, for example in greenfield. We are in the process of analyzing galvanizing for construction and for the -- also for industrial applications.

Also, we are paying a look to the alternatives that we have in vertical integration. We don't have a decision yet, but we are in the process always of analyzing slabs against the total cost in vertical integration; also more downstream integration in coating lines, lipping, cut to length and service centers and so on.

So, in organic growth, we will continue our strategy of downstreaming. And at the same time, we also pay looks to some strategic issues that we will comment more in depth and in detail in the investor day, like the DRI project and so on.

But at the end, Leonardo, and to answer your question, in greenfield we are in the process of this announcement and this study. That is a work in process first. Second, we are analyzing some other alternatives downstream to serve the industrial and automotive market in Mexico. In the brownfield, we continue the process for streamlining and debottlenecking our facilities. And in greenfield, as I said, we are not seeing anything of interest right now, but we are always looking for opportunities.

Karel Luketic, Bank of America.

Good morning, everyone. Thank you for the questions. I have two questions. The first one is on the Mexican market. Following the several antidumping measures that the US implemented through a series of regions, do you see risks that imports start to flow into the Mexican market, or is the Mexican market closed to the same markets as the US is? That's my first question.

And my second question is actually a follow up on prices in Argentina. Just to clarify, I don't know if I understood it correct, prices today when compared to international levels are at a parity or, let's say, in line to international prices, or we are seeing Argentina at a discount or premium to such levels? Those are my questions. Thank you.

Well, regarding the first question, I wouldn't say, Karel, that nowadays Mexico is closed for imports. But, the Mexican government has been very receptive to steel in its claims of unfair trade, especially coming from China and so on, so that at the end in both cases, the US and the Mexican market, are very closely related.

We have many dumping cases properly addressing the issues of dumping and subsidies that we do have in the industry as a consequence of a huge excess capacity, so that at the end in USA you have corrosion resistant imports coming from several countries with preliminary antidumping and countervailing duties. You have the same situation in cold rolled and cold rolled coils. And also, in the US is an ongoing antidumping investigation with definite measures that will come into the market in the months to come.

In Mexico, there is a 15% tariff for -- and in addition, that was extended during April for an additional six months, applied to imports of several steel products coming from countries that don't have free trade agreements with Mexico.

In Mexico, as you know, China cold rolled and cold rolled steel imports have definite antidumping duties. And Russian cold rolled and cold rolled steel imports are in the sunset review rollover, as well as Ukrainian cold rolled and Kazakhstan cold rolled, so that at the end Mexican ongoing antidumping investigations are doing well and are passing important measures, not closing the market but trying to face the issue of excess capacity and fair trade on one side.

Regarding the pricing in Argentina, I would say that the prices in Argentina, as I mentioned on some other occasions, follow the international trend, so that nowadays the prices in Argentina are similar to the prices in the domestic market of the US and the domestic market in Mexico.

Obviously, the pricing level in Argentina is positively affected by a very strong commercial network that we -- and a very strong market share that we have in Argentina. That allows us to pass a premium on pricing based upon the quality of our service, just in time delivery, penetration in the value chain of the customer, a very, very, very deep level of downstream integration in Argentina through our own service centers, hot-dip galvanizing lines, electro-galvanizing line, painting steel lines.

And at the end all this happens to be a premium based upon a product mix that is very rich and based upon quality in the service side that allows us to pass to the customer these advantages that are an advantage for them as well, because they enjoy this proximity, this reduction in the inventory levels, this just in time service and so on and so forth.

So, at the end, to answer your question, prices in Argentina, similar to the domestic prices of the US and Mexico, with a premium based upon the product mix and the commercial network and the level of very, very sophisticated service.

Okay. Thank you very much.

Thank you, Karel.

Ivano Westin, Credit Suisse.

Hi, Sebastian, Daniel, and Pablo. Thanks for the questions. I'd just like to follow up on this discussion on possible hikes on steel price in the various regions you operate. And clearly you have mentioned there is a correlation with price elsewhere, in Mexico and US and possibly in China as well. So, I'd just like to hear your thoughts on how you see the recent increase in steel price in the international market, and if you think that -- the recent hike we've been seeing, if that is sustainable. Basically, I just want to get your thoughts on whether you think we are already at the bottom of the steel market and we should see, not only for this year but for the years ahead, higher steel price.

And additionally, if you could, also comment on your CapEx plan for 2017 and 2018, and also provide the future breakdown of how you intend to invest these $300 million on the new expansion of the Tenigal plant. Thank you.

Well, regarding the pricing -- thank you for your question, Ivano. Regarding the pricing, if you remember, those of you that participated two conference calls back, I said and I quoted on that occasion that, in my view, the prices were at the bottom and there were no room to go down any more, and the prices could go up.

And it happened. It happened. I was right. And so, from December up, we saw a recovery in pricing in all the markets, I could say, including the domestic market of China.

The dynamic of this increase is different. The provision is different, the structure of the industry in each one of the places. Example, in China, the prices are going up as a consequence of a recovery in the demand because of a stimulation in consuming expenditure -- expenses coming from the government stimulus. But second, price is going up because of increasing prices of raw materials, iron ore, carbon, and energy as well.

And also, the prices in China are going up because of the financial situations of the companies that cannot cope anymore with this stress coming from a pricing level that was absolutely out of any reason.

So, that's dynamics in China. I think that maybe will continue. China is a stimulus kind of consumption in the economy side. And this cycle maybe will last for a while.

In the US, the situation is different. The price increase is based upon the increase in scrap, the cost of scrap in raw material. That is impacting the cost side of the minimums, the increase in carbon as well as iron ore, and also because of all these dumping cases that are put in a correction in the market that was very heavily affected by unfair trade, so that the imports went down in the US in tons and in market share.

The market is doing well. The prices of raw materials are going up. The scrap price is going up quite strong. Also, antidumping cases are no doubt correcting externalities in the market that were heavily affecting the bottom line of the US companies. In the rest of the world, I see recoveries in Europe. And in the emerging economies, the economies are following what is going on in the main market.

So, at the end, it is difficult to forecast what will happen with the prices level. But, I see that this recovery is strongly based on fundamentals and is coming to stay for a while, and maybe we would see in some markets like the US and China some further recoveries in prices in the quarters to come.

Regarding the CapEx in 2017 and 2018, I could mention that would be in the bracket of around $400 million to $450 million. So that, with a strong balance sheet that we are having nowadays and with the strong cash generation, we will have a further improvement in our debt level as well as in our financial structure.

Adding to that, Ivano, as you mentioned we need to add to the number the project that we have just announced. And the bulk of that investment will be divided between 2017 and 2018. So, adding to the number that Daniel already mentioned, you have to add these two increases in CapEx during these two years. And of course, this is what we have up to now.

As Daniel mentioned before, we are in the process of analyzing other investments. So, if we approve that or will announce something, we'll increase the CapEx levels in the following year. But, up to now, this is what we have.

Okay, very clear. Thank you very much.

Of course.

Thank you, Ivano.

Alex Hacking, Citi.

Thanks for the question, and good morning, everyone. Sorry, just to clarify, the CapEx guidance of $400 million to $450 million excludes Tenigal. Is that correct?

Yes.

That's correct.

Okay. And then we've seen prices in the US go up by $100.00 a ton so far this year, maybe even a little bit more. Have you been able to pass through similar levels of increases in Mexico, or prices there are moving up a bit slower?

And then just a final question on Usiminas. I mean, are you -- it seems to me very hard to consider that Ternium would not participate in an equity raise at $1.50 per share, considering the price that you've paid for the shares that you currently own. To sort of potentially lose control of the company for such a small amount of money, it seems hard that Ternium would even be considering that. So, maybe you could give us a little bit more color there. Thank you.

Yes. Thank you, Alex. Regarding the first question, we were able to pass the increases in the US market into the Mexican market because both markets are very strongly related, as you know, and also because an important part of our deliveries in Mexico are related to contracts, and the contracts are adjusted taking into consideration the numbers coming from journals like CRU and Metal Bulletin.

So, in the contracts part, the passing through of these increases are automatic, are very, very quick. And in the other part of the market, we were able to pass, no doubt, the price increase in the US. And the prices in Mexico are similar to the ones that we have that you see in US, taking into consideration a premium also based upon the same factors that I was depicting for Argentina, quick delivery, just in time, very quick service, electronic integration, value chain penetration and so on and so forth, so that the pricing level in Mexico is quite reasonable for us and also usually for the market.

Regarding what you mentioned on Usiminas, you are right. It is what it is. But I could say that I cannot make any comment right now on -- a further comment to the one that I made in my preliminary remarks. We have not decided whether or not to participate in the capital increase, even when we recognize what you said, Alex, that the price could be attractive.

But, we have to take into consideration some factors. As you know, as I already mentioned, also Nippon Steel is in some sense relating the participation based upon the quality and the result of the financial restructuring of Usiminas that is underway, so that we will wait until the very end of the process to see the quality of the restructuring in terms of interest rate and timing and conditions.

And we will pay a closer look to the financial and to the efficiency situation of the company and the prospects for the future. And we will try to take the best decision we could, having into consideration that, on top of the pricing of the share, we have to consider some other factors like our strategy in Brazil first; second, the quality of the financial restructuring; third, the future of the company in terms of the perspectives, efficiency, viability, competition in this market, market situation in Brazil, the competition issues against other local players, as well as other imports coming from a road in a very unfair competition.

Brazil is not taking action against unfair competition and though the market is being penetrated very aggressively by imports coming from countries like China, where most of the world have reacted very quick to stop this dumping of steel in a subsidy condition.

So, we will put all this in a kind of cocktail and we will see what it the output. We are not yet in a position to say if we will participate or not. But, it's not easy. There are many factors on the table, and we have to consider very cautiously all these factors, some of the factors that I'm detailing, and some of the factors are economic factors and financial factors.

Thank you.

Thank you, Alex.

Alfonso Salazar, Scotiabank.

Thank you. All my questions have been answered, but just wanted to follow up on what you're commenting on the view of the steel demand and the fundamentals for the steel industry. It seems to me that production is soaring in China with mills making high profits at today's prices, and World Steel is expecting demand to contract 4% in China this year. So, isn't it the case that it could be -- we can see a new wave of exports from China in the second half of the year or somewhere in 2017? What's your opinion on this? Thank you.

Yes. Thank you, Alfonso. As I mentioned earlier, the pricing issue is really very complicated, because it is the main factor to consider when analyzing the profitability of the industry and the health of the industry. On top of that, the strategy of our company was always to concentrate in the things that we can change and to take the things that we cannot change as a fact.

And the pricing, the price is fact. That's why we have an edge. And I think that we will -- we compare very good with all our peers, because we were all the time thinking -- we are all the time thinking in cost initiatives and new initiatives to reduce and to gain productivity, and this and the other.

But, in talking about the prices, there are infinite factors that affect the prices in different regions. The world is starting to change from a globalization to a regionalization, and in some cases to a country-ization. That means that the prices are also influenced heavily by the particular situation of each one of the regions and, in some cases, of the countries.

In the case of the US, as you can see, they passed all the dumping cases, an important -- and it's a new factor. And this is a new factor entering into the market. In China, we see different kind of forces interacting; one, the decision of the government to cut production.

As you know, China made an announcement to close capacity of 70 million tons in 2015 and 80 million tons in 2016. It's a huge amount of steel, but it's steel -- but it's more if you compare this closing of capacity against the total excess of capacity of China. That is in the range of 350 million, 360 million tons.

But, it's a signal that the government, and the centralized economy being contracted by the government, is concerned about the capacity issue for the first time in China. And this is an important thing now for the market.

As you mentioned, in the last ECON -- you know that the ECON is the economic committee of World Steel Association that use -- we gather every October and every April. In the last meeting in April, the 16th of April, we released a new forecast for 2016. In the case of China, World Steel -- we are forecasting a 4% decrease in China consumption, okay?

So, there you have the force of cutting production affecting positively the pricing. The force of this reduction or this slowdown in steel consumption is a negative factor for the pricing. The increases in raw materials in the countries that make imports of iron ore and coal and -- is positively affecting price level.

At the end, when you put all these factors in perspective, the prices are going up, going up sharply, are going up in a trend that we didn't see in the past. Let me pay a look to some numbers to share with you if I have here. For example, the pricing in China for domestic price of China for cold rolled coil is in the range of $380.00; used to be $270.00, $265.00 just three months ago, so that the increase is very sharp. And the speed of the recovery in prices is really astonishing, so to speak.

The same thing can be seen in the US, where the domestic prices of cold rolled coil is $557.00 according with the CRU, and used to be $380.00 just four months ago, so that, at the end, you have all these forces. And I see that the prices are recovering strongly and are doing -- are following the trend that, in my view, is difficult to reverse.

Then you have a particular situation in each one of the markets. Let's pay a look, for example, to the US market. On top of the dumping cases, on top of the increasing scrap, you -- if you follow up, for example, the inventory level of service centers, you can see that inventory levels of service centers in the US is reducing very sharply. And this is very good news for the industry.

You pay a look to the overall, the overall inventory level in the service centers used to 3 million tons five, six months ago. Now it's 2 million tons.

So, you put in perspective world trends. You put in perspective particular things, some very specific like inventory levels in service centers. If you put in perspective, for example, that China is not more -- is not exporting any more steel to the US, you put in perspective that the imports went down in the US from 32% to 20% market share in six months, so you see that there are dynamics in the prices that makes me feel more comfortable than I used to be two quarters back, two quarters ago.

At the end, I think that the prices came to stay. Except if something in particular happens that I cannot foresee, I see that maybe the cutting in capacity and production in China will further go on. And I see that the demand side is doing well in the US, in some emerging countries that could recover. On the other side of the coin, you have Brazil doing badly, but Brazil will recover, no doubt. Argentina having a slowdown, that in my view is -- will reverse in the -- after one or two quarters.

So, at the end, in the part of the world where are and in the rest of the pricing structure, I feel confident that -- and I feel optimistic that the pricing structure is healthy.

Okay, excellent. Thank you very much, Daniel.

And this concludes the Q&A portion of today's call. I'll now turn the conference back to the Chief Executive Officer.

All right. Thank you again to everybody for participating in our conference call. As always, feel free, obviously, to contact for any additional doubt or comment you may have at the end.

I hope to see you in New York in the Guggenheim Museum in our investor day, and I appreciate your questions and your interest in the Company. So, gentlemen, thank you again, and see you soon.

And this concludes today's conference. You may now disconnect.