Ternium SA (TX) 2016 Q4 法說會逐字稿

Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ternium fourth quarter 2016 results conference call. (Operator Instructions). Thank you. Mr. Sebastian Marti, you may begin your conference, sir.

Thank you. Good morning. Thank you for joining us today. My name is Sebastian Marti, and I am Ternium's Investor Relations Director. Ternium issued two press releases yesterday, detailing its results for the fourth quarter and full-year 2016, as well as announcing the agreement with thyssenkrupp to acquire CSA in Brazil. This call is complementary to that -- to these presentations.

Joining me today are Mr. Daniel Novegil, Ternium's CEO, and Mr. Pablo Brizzio, the Company's CFO, who will discuss our performance and the characteristics of the deal. 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 on page 2 in today's Webcast presentation.

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

Thank you, Sebastian. And good morning to everybody. Thank you very much. I do appreciate your participation in the -- in today's conference call.

Well, as you already know, yesterday, we announced our fourth quarter and full-year 2016 results. And we also announced that we agreed with thyssenkrupp the acquisition of their Steel America business, that is to say the CSA facility in Rio de Janeiro, Brazil.

Today, we do have a lot of issues and things to cover, so that I will try to keep my initial remarks as short as possible in order to be able to have some more time for the Q&A session.

Let's begin with the results of the year. I am glad to say that 2016 was a very good year for Ternium. We shipped almost 10 million tons of steel. The EBITDA reached $1.5 billion. We had an EBITDA margin of 21% and an EBITDA per ton of $160, as you know, well above our peers and competitors. The net income of Ternium was $700 million, and earnings per share were $3.03.

On the cash flow side, we also did very well. Our free cash flow was $660 million after CapEx of $440 million for 2016. And I would say that, last but not least, the Company net debt-to-EBITDA ratio went down again to reach a number of 0.6 times at the end of December 2016, again, 0.6 times, being the total debt of approximately $900 million, a little bit below this number, down $250 million from December of the previous year; that means December of 2015.

At the end, I am very proud of these results and with these numbers. I -- we believe that the -- these numbers are about the best in the industry and in comparison with peers and competitors.

Pablo Brizzio will afterwards comment on the drivers of these results and specifics of the financial statements. And let me now make some remarks on different issues and topics, and then we will go more in depth during the Q&A.

Looking forward the coming quarter, I would like to mention that we expect to show very healthy numbers because of the steel market in Mexico is continue doing well and is showing strength and the demand in Argentina is gradually improving and picking up.

In addition to that, there is a kind of uncertainty in the Mexican market because of possible changes in NAFTA or changes in the US tax regime that could have some impact in the economic activity and the investment climate in Mexico. We can talk more in detail afterwards about which is our view on this matter. But, at the end, I do consider that it's too early to properly assess this issue. And I don't see -- I don't foresee an important negative implication, economic implication, for Ternium because of this situation of changes and volatility in the US market.

Last but not least, let's pay a quick look over the CSA transaction that we announced yesterday. CSA is -- as you know, is a 5 million tons high-end steel slab facility in Rio de Janeiro, Brazil. CSA also has a deep-water harbor for raw materials as well as finished products and a combined-cycle power plant with a capacity of almost 500 megawatts, one half the size of Techint, that as you know is the energy plant that we have in Monterrey that successfully started operation in December 2016 and where we spent around $1 billion together with our partners.

As you know, the CSA power plant is fed exclusively with gas and steam coming from the process; that means blast furnaces (inaudible) and coke ovens. And in the energy plant, in the power plant, we do have an idle capacity, or CSA has an idle capacity that will be sold in the national system of around 200 megawatts per year.

Maybe we can enter right now in some very, very rough economics of the transaction and then to talk about and to discuss which is the rationale for Ternium for this acquisition. As you -- the price first was set as a kind of lockbox as of September 13, 2016, at a value of EUR1.26 billion, less than EUR1.3 billion, equivalent to an enterprise value of EUR1.5 billion after adding a debt with BNDES of around EUR311 billion -- EUR311 million.

The assets that are going to be acquired and according with a report by thyssenkrupp and under their Steel America business area had an EBITDA of EUR260 million on shipments of 4.3 million tons in 2016. Again, the EBITDA of CSA was in 2016 EUR260 million on shipments of 4.3 million tons up to -- out of a total capacity nowadays of 5 million tons per year, so that there is room, and you can see there to increase production and to better-up the EBITDA numbers.

We expect normalized and on a standard basis kind of EBITDA per ton of around $60 from this facility; that means that we will be -- we could be in the range of $280 million to $290 million per year without taking into consideration any synergies for the rest of the system that afterwards we can go in more detail.

The funding of the transaction will be 100% bank debt, so that we will begin working on the structure right after next week. The process, again, as always, will be led by Pablo Brizzio that will make the necessary contact with the banks in order to talk about the financing of the deal.

You know that, currently, Ternium has a very strong balance sheet, as we said before, with 0.6 times net debt-to-EBITDA ratio at the end of December. Somebody could also say that maybe this number is too strong and, as I mentioned before, being the net debt of only $900 million or a little bit below the $900 million.

We are buying these assets as of September 2016, as I said, so that in order to calculate the actual cash payment at the closing and consequently the financial needs, the EUR1.3 billion price will be subject to certain adjustments. But, all in all, we anticipate that our net debt-to-EBITDA ratio should increase to around 1.4 to 1.5 times that, as you know and you can see, is anyway a very low level of indebtedness.

Let me give you now some insights, soft insights. Afterwards, we can go deeper on that on the transaction, the rationale of the transaction. Why is it that we decided to go ahead with this, and what are we expecting from it?

CSA is, first, a state-of-the-art steelmaking facility in Latin America. It was built very recently with the latest technology and the highest standards of operation. It's a mill that is very well run, no doubt.

Second, Ternium strategy over the years has been to increase the value added and sophistication of the products in order to reach high-end customers. And we are already having facilities producing high-end steel in Mexico and Argentina, so that we know what -- we know the technology. We know the kind of operation. We had a similar operation in Argentina. We were able over the years to produce similar products. And so, with the acquisition of CSA, we are thinking about enhancing our ability and our capacity to serve sophisticated needs of our customers.

And CSA plays a very important role in this strategy, given that it will provide an additional base on which we will support a further and deeper growth of our high-end steel production and supply chain system and customer value chain penetration.

We know the technology, as I said before. We know the quality requirements. And we know perfectly well the kind of operations in which we are entering into, so that from the very beginning, we will be working on taking this facility to the full potential and working on capacity utilization as well as productivity and efficiency together with the current management team of CSA that proved to be over the years -- being very efficient and very proper and very professional for this kind of facility, so that we will leverage on them, and we will be working together with them, and no doubt that we understand and we believe that they are doing very well, and they will continue doing very well in -- under the new structure of ownership.

At the end, we will have an efficient and compact facility, a state-of-the-art technology, and building with just-in-time iron ore deliveries provided through a railroad system that goes directly into the mill and coal to feed the coking oven plants through our own harbor, the CSA harbor, so that at the end, cost savings, freight efficiency, inventory, opportunities to streamline logistics that are going to be very compact and very efficient, and at the end, this will mean a very low cost for iron ore and coal supply that are the cost base of the new -- of CSA.

The plant no doubt that is in the right place, in the right location, and then Ternium will have a combination of three facilities in the three largest steel markets in Latin America, Mexico, Brazil, and Argentina, together with a very sophisticated supply chain management and the knowledge, the track record, and the expertise to leverage on these assets in order to create value, in order to gain profitability, and to have a proper and appropriate payback for our investment.

If you have been following for us for some time, you know that Ternium grew across the region via organic growth as well as acquisitions. With the case of CSA, we increased substantially our tonnage capacity to produce high-grade steel slabs and in sophisticated qualities and in a facility that has proven to be very productive and very efficient.

At this point, I would say that I will let Pablo make -- Pablo Brizzio make [a depict] of our performance in the fourth quarter, and then we go direct to the Q&A. Thanks a lot for your attention.

Thanks, Daniel. Good morning to everybody, and thanks for participating in this conference call. As Daniel mentioned, we have a very important issue to discuss during this call, so I also will try to be very brief on the comments.

If we go to page 3 of the Webcast presentation, let me comment starting over here. EBITDA in the fourth quarter 2016 was $351 million. As anticipated in the third quarter press release, Ternium EBITDA decreased from the very high level it had in the third quarter, but nevertheless, EBITDA in the fourth quarter 2014 (sic - 2016) was 18% than in the fourth quarter previous year.

The chart on the lower left side of this slide showed that EBITDA per ton was a healthy $147 in the fourth quarter. This is equivalent to a 19% EBITDA margin. The reason for the sequential decrease in EBITDA per ton was a higher cost per ton, mainly as the higher purchase slab cost when through our inventories combined with a lower revenue per ton, mainly due to lower realized price in Mexico, as steel prices decreased in the third quarter of the year that were reflected in the fourth quarter as a result of the regular price reset index-based quarterly contracts with industrial customers.

We expect to show a sequential increase in EBITDA in the first quarter 2017, as we will have higher shipments in Mexico and higher realized price in all our markets.

In the following page, we can see the shipments in Mexico were stable in the fourth quarter, and revenue per ton went down 3%, mainly as a regular -- excuse me, as a result of the regular price reset of quarterly contracts, which reflected in the fourth quarter the decrease in market prices that happened during the third quarter.

We also expect sequentially higher shipment volumes in Mexico in the first quarter this year, reflecting a restocking in the value chain in response to strengthening steel prices.

Let's move now to the southern region on page 5 of the presentation. In this market, net sales increased as a result of an 8% higher shipments and 2% higher prices. As anticipated in our previous call, demand in Argentina bottomed up in the third quarter 2016 and has been gradually improving since then. We expect this to continue in 2017, although the first quarter will show the usual seasonality of the summer months.

On the next page, we see the combined effect of this development on our consolidated sales, shipments relatively stable, and small decrease in revenue per ton. The participation of each market in Ternium consolidated shipments did not [rise] that much, only 1% higher in the southern region and 1% lower in Mexico compared to the same quarter in the third quarter.

Let's review now the causes of the sequential decrease in EBITDA on page 7. The main driver of the decrease was an increase in cost related to the flow of higher prices [price] slab into our cost of sales, as I already mentioned, coupled with lower prices.

We don't expect big changes in cost per ton in the first quarter 2017, but we do expect to reflect the prevailing higher prices in our -- in all our markets, as well as healthy shipments in Mexico.

In the following page, page 8, it is clear that main driver of the sequential decrease in net income was a lower operating income, as I mentioned before, at a very high operating income in the third quarter, where first-in/first-out accounting [showed] very low cost at the height of steel prices prior to the decrease in the third quarter.

On page 9, we see free cash flow generation in the fourth quarter that reached $178 million after CapEx of $100 million. Also important to mention that working capital remains stable.

Going now to page 10, you can see an evolution of Ternium quarterly cash flow operations, CapEx, and free cash flow. We show consistent cash flow generation over the quarter and stable CapEx. At the same time, the Company net debt-to-EBITDA continues to improve, as it was only 0.6 times last 12 months EBITDA at the end of December 2016. Net debt decreased $169 million only in the fourth quarter.

Finally, let's do a quick review of our annual numbers. On the next page, at the upper right corner, we see that shipments have increased year after year, reaching 9.8 million tons in 2016. But, due to prices going down, our sales have diminished to $7.8 billion -- $7.2 billion, sorry.

On the EBITDA side on page 12, we have had in 2016 the highest EBITDA in the last five years with $1.5 billion. Same with EBITDA margin that reached 21%. We also had the highest net income and earnings per share per ADS of the last five years with $707 million and $3.03 per ADS. EBITDA per ton in the full-year 2016 was $159.

Finally, on the following page, on year view of cash flow and balance sheet, you can see that cash from operations was $1.1 billion in 2016. We have had a fairly consistent cash flow from operations over the last five years with an average of $1 billion per year.

Capital expenditure has also been fairly stable at around $450 million over the last three years, as we finished with our high-end investment program back in 2013. Consequently, free cash flow in 2016 reached a healthy $664 million.

On the lower right corner of the slide, you can see how our dividend payments grew over the years. Ternium Board of Directors proposed yesterday a dividend payment of $1 per ADS, the highest in Ternium history, reflecting the confidence the Company has in its future performance, as well as the strength of its balance sheet.

Okay. These were the points I want to share with you. Now, please, let's go to the Q&A session. Thanks.

(Operator Instructions). Karel Luketic, BofA Merrill Lynch.

Good morning, everyone. Thank you for the questions. I have two questions regarding the acquisition of CSA. The first one, on the side of the strategy, the question is if this in any way changes Ternium's focus in Brazil and in any manner the dynamic of the situation that we are currently ongoing in Usiminas. That's the first question.

And the second question, Daniel, you mentioned in your opening remarks that CSA could generate an EBITDA of $280 million to $290 million without synergies. Can you please comment on what the potential synergies can be here through this acquisition and where they can come from? That would be great. Those are my questions. Thank you.

Thank you, Karel. So, regarding the first part of the question, there is no relationship at all between the acquisition of CSA and our activity in Usiminas on top of saying that we still consider and we do consider Brazil as a good ground for opportunity for Ternium.

And what is going on here is that we found an opportunity, and we went for it. You know that this -- the replacement cost of this plant would be around $5 billion. We are buying a state-of-the-art brand new and very well-run asset at $1.5 billion, so that we -- with a multiple of 5 to 6 over the $280 million that we expect with no synergies, we believe that we will have a good rate of payback and a good rate of return. So, we are going for that because we believe that we will have a -- we will create value for Ternium.

Regarding the synergies, there is -- you know that the synergy with our facilities are going to come from opportunities to improve production coordination, quality, product range at a consolidated level. Being the acquisition 100% ownership on our side, we will be able to complement our supply chain management, and no doubt that this will produce an important and positive impact in the productivity level of our facilities because of production combinations, production planning, inventory levels, and so on.

We have not disclosed any quantification yet of expected synergies. But, we are in the process of analyzing that. And maybe we can quote more in detail during the Investor Day that will happen to be on the 28th of June in -- 29th of June in New York.

Having a larger crude steel production base in the region, meaning by the region Argentina, Mexico, and Brazil, will also give us more leverage to negotiate the slab purchases from third sources in the future. We will still have needs of slab from third parties. And -- but, we will no doubt have a better leverage vis-a-vis -- a better bargaining power vis-a-vis our suppliers to negotiate the pricing and deliveries and the procurement of slab as a whole.

Also, we are going to be able to reduce inventories, as I said before, not only of slab, as a result of better coordination, but also of finished products because of having a more complete and more concrete and more streamlined kind of production planning.

We are going to be able to improve production programming, customer service, and no doubt that, with a better customer service, we will be able to charge a price for a superior performance, for a superior service, and to gain a better market share. We will be more efficient. We will be quicker. We will be able to serve the needs of our customers with better speed, with better product range, and so on.

Finally, and we expect to incorporate CSA to Exiros. As you know, it's our procurement platform, something we anticipate will enable CSA to have a return on the procurement needs because of buying with a better condition of economies of scale and scope. These kind of synergies are not included in the valuation that I mentioned before when talking about the multiples.

That is great. Thank you very much.

Thank you, Karel.

John Brandt, HSBC.

Hi, good morning, guys. Thanks for taking my question. So, I guess I had two. First, my understanding is CSA has been available for sale for a while. So, I guess I'm wondering what the rationale for doing the acquisition now is [and not in] the past (inaudible), or do you think the slab market is expected to tighten over the coming years? I guess that's my first question.

And then second, I know your balance sheet is still in very good shape. And historically, you've always had a very conservative balance sheet. So, I'm wondering if this acquisition precludes you from doing further investments in the coming years. And if not, sort of what are your priorities now? Investing in Mexico, I know Tenigal is working above capacity, and would you look to expand those operations? Thanks.

Good. Well, let's start by the rationale and the slab market situation. No doubt that these, as we have mentioned in other calls and we also discuss in detail and in depth in the Investor Days, there is overcapacity still in the steelmaking globally.

And -- but, the rolling of slabs is a business that, on one hand, is doing very well for us and did very well in the last five, six years because the gap between the whole rolled coils and the slab prices was historical in record level on a GAAP basis.

Over the years, we increased our needs of slabs to 3.7 million tons per year because of increases in productivity on our mills, so that now, at this point of time, we are the number one buyer of slabs worldwide.

At the same time, we noticed that some of our suppliers that are few were also going downstream, so that maybe in the future, we could face a scenario of limited excess capacity for exports. And at the end, there are -- there is no additional capacity of the slabs for export being built nowadays.

To share with you some numbers, as you know, the total production or apparent consumption of steel worldwide is 1.6 billion tons of steel. The total trade of slabs in the world is around only 30 million tons. Half of that is trade between related parties, or if not related parties and long-term agreements, joint ventures, and so on. So the dependence of buying 3.7 million tons on our side out of a total supply base worldwide of only 15 million, 16 million tons per year of slab was raising some concern on our side.

As I said in the previous question, we -- and as we have mentioned over the years in our Investor Days, CSA meant a lot from a standpoint of vertical integration for Ternium. We found the opportunity, and we went for the opportunity. And we firmly believe that, even when we'll still be buying around 2 million tons maybe of slab in the open market, the dependence on third parties will diminish. And our bargaining power, our leverage will increase. And we will feel more comfortable in a situation of a better kind of equilibrium, so to speak.

Adding this state-of-the-art facility to our industrial system will open at the same time a lot of opportunities for Ternium. Especially, it will open alternatives for expanding our capacity with lower CapEx and know that that will be positively impacting our cash flow generation.

This is a technology, as I said before, that we know very well. We produce through the same technology in Argentina. We produce the same product range in Argentina. So, we know the technology. We know the -- how the operation is being run. We respect the way it has been run by thyssen and the management of thyssen. So, I think that, as I said, we found an opportunity, and we are taking advantage of this opportunity.

Regarding the priorities for the future, I would say that we are not now -- we are -- now, we are in the process of digesting this investment. We believe that there are still very good opportunities for downstream investment in Mexico, especially in coated metals, meaning coated metals by galvanized sheets and coils, and prepainted steel. But, it's something that we will reevaluate. And we will be putting the numbers and the ideas and the planning together. And it's something that maybe we will be sharing with you during the Investor Day.

For the time being, in -- regarding the Tenigal 2 plant, we are in a kind of a waiting mode, waiting for news coming from some economic reform in the US and the impact that this economic reform could have in the automotive industry, so that this is the main strategic stand for Ternium nowadays.

Maybe you can expand on the balance sheet issue and the strength of our cash flow, Pablo.

Yes, of course, Daniel. John, you're right that our financial statement looks extremely strong. And this transaction will, of course, increase the level of debt that the Company will have. But, in any case, we'll sustain and maintain Ternium in very healthy and reasonable levels.

We, of course, will continue with the way of seeing the financials and trying to sustain a very healthy position and being conservative on that respect.

Daniel kind of answered the other part of your question, which is that we need first to digest. We need first to digest the current acquisition. It will take some months. You know that we are expecting closing on the CSA transaction by the third quarter, prior to September 30th this year. So, we need to do some work in order to finalize this acquisition.

And also, as Daniel mentioned, this gives us the possibility of analyzing which will be the investments that we can have in the future. As he said, we continue seeing opportunities, especially in Mexico, to increase our participation in that market.

So, we will continue with the same policy we have in our -- in the way we manage our financials. And we will have time to carefully analyze which are the things which if any we need to invest. So, we are not in a rush to do that. We have time. We will carefully analyze. And you will know in due course which will be the opportunities that we will be taking.

Yes, to be more specific, John, and to answer your question, we do see, and no doubt that we do have very good opportunities to expand our downstream integration in Mexico to cover more market share and to gain market share against imports.

That means that, as I said before, if we do have very advanced analysis and paybacks and profitability analysis and internal rate of return for expansions in galvanizing and expansions in painting lines, so that in some point of time, we will go for this market opportunity.

As you know, 38% of the Mexican market is being imported and coming from abroad, so that being in the area, being in Mexico, having a very sophisticated commercial network, working very, very close with customers, and being able to serve this market very efficiently, we will also no doubt will take opportunity of this room that we have to expand our downstream, our aggregation of value in coating. You know?

Great. Thanks, Daniel. Thanks, Pablo.

You're welcome.

Marcos Assumpcao, Itau BBA.

Hi, good morning, everyone. Congratulations on the CSA deal. Two questions here, one on the potential tax benefits that you could enjoy in this operation. We know that CSA was accumulating ICMS or VAT taxes. Could you quantify that to us and also mention if there is any potential income tax benefit that you could have in this operation? And eventually, what would be the potential to invest in rolling capacity in Brazil, considering the tax benefits that you have?

A second question, if you -- if there is an opportunity to debottleneck CSA's crude steel capacity with marginal investments in the future. Thank you.

Yes, well, first, the -- let's start with the tax loss carried forward on the transaction. CSA has tax loss carried forward of approximately $1.5 billion. And this was not considered when determining the price to be paid and the value of the Company, so that they are an upside for the future.

And the capacity to use or to be able to use this carryforward, this tax loss carried forward, will depend on -- as you know, on different factors, marketing performance, being able to sell in the domestic market to local players, and so on. I anticipate that the net effect of consolidating these assets and into our financials will be positive from the beginning. And we will improve our results.

Regarding the ICMS and PIS/Cofins, another tax credit kind, CSA has tax credits from ICMS and PIS/Cofins. The credits amount approximately I would say $300 million in the case of ICMS and $160 million in the case of PIS/Cofins. So, there is the possibility, obviously, up to certain limitations that you already know, to request the tax return of the PIS/Cofins credit, what is not possible in the case of the ICMS.

Unless the applicable tax regulations change, the only way to recover the ICMS could be by selling slabs locally to local producers, to local customers, something that, up to some extent, CSA has been doing over the last years with part of the production and the output of the facility.

I cannot tell you right now at this point of time what will be the level of local sales or the share of local sales out of the total capacity in the future. It will depend on many factors. And it is a decision that we will take together with a gradual relocation of CSA production.

We are not considering right now at all any rolling capacity, hot-rolling capacity in Brazil to integrate downstream CSA. We will dedicate ourselves to increase productivity, efficiency, level of production, synergies, logistics, efficiency, and reducing cost in order to increase the $280 million, $290 million, or $300 million of EBITDA per year to a better number.

We feel that we can do it. We feel that we have the expertise. We have the background. We have the track record, and we will go for this. We are not thinking at all in any further integration of this facility in Brazil.

Regarding management -- marginal investments that were the third part of your question, we see a CapEx need of around $40 million to maybe $50 million per year in CapEx, not more than that. We do not expect to increase this number that much, even when we will be making a thorough assessment when we are in a position to take over the facility and to be there.

But, we don't see any important need of CapEx because, as I said, the Company's very well run, and they invested a lot in environment protection and in productivity and in facilities that, as I said, are state of the art and very, very expensive to be replaced.

All right. Thank you.

Thank you.

Alessandro Abate, Berenberg.

Daniel and Pablo and team, really, congratulations on this deal that I think is probably the deal of the century related to the potential synergy you have across your supply chain and the price that you paid.

I have a few questions. Just allow me to be a little bit against your view on the potential contribution in terms of EBITDA you might actually generate without the synergy because it seems that $290 million, $300 million, the markup that you're taking on each ton of slabs shipped is mostly conservative because it implies the profitability probably on commercial quality grade. So, I think there might be upside from that level.

The second question is related to Usiminas because, if I pair the potential recovery of Brazil from the economic regression, also the forward-looking outlook on a cash flow discounted basis Usiminas should increase, what is the potential revaluation case of Usiminas if the market gives signs of continuous improvement in Brazil?

The third one is related to Argentina. Clearly, I think that the recovery in Brazil maybe benefit Argentina because Brazil is shipping a lot to Argentina. If you could give us an indication in terms of potential EBITDA contribution from your assets in Argentina on a year-on-year basis, what the upside could be?

And the last one is related to Mexico. Clearly, Mexico's a net-importing country. You're going to get almost a super-fully integrated supply chain that should push you also, taking in consideration of the weak currency, a little bit in the same condition that Russian steelmakers were last year, where they basically turning out free cash flow like crazy because of the currency.

If, let's say, there is a deterioration of the market in Mexico and considering the fact that Mexico is anyway a net-importing market, would that change the visibility you have on the supply demand balance in the next two years so you can also rely on a balanced supply and demand situation despite potential worsening of the trade situation with the US? Thank you very much.

Well, thank you for your comment, Alessandro. I do appreciate. I do agree with you that maybe the $280 million, $290 million, or $60 per ton over a capacity of 5 million tons is conservative. But, it's the way we are doing the numbers. We feel that we have an upside potential coming from different factors, efficiency, productivity, streamlining of the operation, inventories, taxes loss carried forward, and so on, synergies in the system with Ternium, and first.

Second, regarding the market in -- regarding Brazil as a whole, we do also -- I do also agree with you that the market is bottoming up. We are looking at some signs of recovery in pricing and in demand. And this will be positively impacting the activity of Usiminas and the activity of CSA.

No doubt that there are also important avenues, so to speak, of complementation between CSA and Usiminas, especially regarding the -- or taking into consideration the proximity between CSA and the Cubatao plant, who as you know decided some time ago to close -- to shut down the upstream and now is rolling -- buying slabs from third parties, so that both companies, Usiminas and CSA, could enjoy a good relationship from a commercial standpoint in the benefits, obviously, of both companies and think -- and I think also and I feel that there is an upside potential over there.

Regarding the Argentine market, let me comment that I am really very positive about Argentina. I am very positive about Argentina because you know the market is recovering. We are expecting an increase in 2017 of 7% on a year basis against the previous year for steel consumption.

The recovery will continue in the months to come until the end of the year. And maybe also in 2018, we will -- Argentina will show a better economic stand. And so, we will benefit for this increasing the demand.

Sectors that are doing very well in Argentina are agribusiness, infrastructure, construction projects, and alternative energy. As you know, there is a new law and a new regulation there that is [attribulating] the use of wind and solar energy production, so that these sectors are going to be doing well.

Sectors that are stable, private construction for the time being because high inflation and still high interest rates, but inflation going down, interest rates going down following the rate of inflation, and the auto industry that, even when it's with a very good -- very, very good level of sales, they have still a good stand in local production, mainly because of the slowdown in the Brazilian economy that is not allowing the Argentine automakers, producers to make exports to this market.

At the same time, sectors that are weaker in Argentina, oil and gas, but as you know, Argentina having the second largest gas reserve worldwide in shale gas, second only after China, no doubt that this sector is also given a tremendous growth potential for the country. And no doubt that, even when it's not doing well at the time being because of the pricing structure, no doubt that will be -- will wake up in the near future and will have an important impact in all the level of -- in all levels of activity.

And regarding Mexico, you know, as you said, we are totally integrated. We are going very deep in this integration level. And let me mention that the trade between the US and Mexico is very negative for Mexico. I mean, Mexico is important -- is importing 38% of the market, 38% of the steel market.

In the case of flat products, the exports from the US market to the Mexican market are in the range of 2.2 million tons per year. The exports from Mexico to the US -- sorry again, exports of flat products from Mexico to the US are less than 1 million tons. The imports coming from the US are about the 2 million tons.

So, being the trade so negative, having growth in Mexico, and having a steel market that is nowadays having a market share of imports of 38% in most of the products, I would say that, even if we had a kind of slowdown or a decrease in the growth in Mexico, we still have a tremendous growth for -- a tremendous room for growth, gaining market share against imports.

Daniel, thank you. Just a follow-up question, if I may, on Usiminas. I just wanted to know whether you see a potential revaluation of your stake in Usiminas because, on your balance sheet book value, it went from $1.6 billion to about $400 million. And then considering the clear synergy between Usiminas, especially because they're just rolling and not producing slabs, and CSA, do you think that, in the future, there is enough motivation for you to basically try at least like an apology to recover the stake in Usiminas by assignment of the asset of Cubatao? Thank you.

Okay. Alessandro, let me take the first part of your question. You're right that we need to [impair] our investment in Usiminas due to different issues that too long to comment here. We could have the opportunity to recover part of that. But, it's a process in which we will need to be clear and certain that the variables are returning to more normal levels. And if this is the case that we agree with you that, at some point, this will be the case, we will be able to do it.

So, I don't know, Daniel, if you want to take the second part again, or I can?

You can go ahead.

We are -- as we said before, Alessandro, we are concentrating now in digesting this investment. We are not expecting to pursue with what you were proposing. This investment has been performed in order to reduce our dependency on third-party slabs. And this was the main driver on why we did this analysis and why we signed the contract with thyssen to acquire CSA. So, this is the [main], and we are not analyzing anything further in relationship to what you have expressed.

Thanks a lot, guys, and congratulations, again.

You're welcome.

Thank you, Alessandro.

Thiago Lofiego, Bradesco BBI.

Thank you, gentlemen. I have two questions, first if you could update us on how the controlling shareholder situation at Usiminas is evolving, what can we expect from here? Is there any kind of potential agreement within the parties that we can expect? That's the first question.

Second, regarding the slab supply agreement with ArcelorMittal in US, I'm sorry if you already answered on this one, but for how long will that agreement be valid? And do you intend, once it expires, not to renew, and what are the options there? Thank you.

Good. Well, regarding the first part of your question, the controlling group situation in Usiminas and the relationship with Nippon Steel, I would say that the relationship with Nippon Steel is good. I mean, we have a partnership in Mexico that is going very well that is Tenigal 1. We continue in the case of Usiminas working with Nippon Steel toward finding a way for both parties to solve our differences regarding the governance of Usiminas in the controlling group.

As we have discussed some time ago and in some other occasions, the main source of our misunderstandings are, as it is public, in the mechanism for the nomination of the Usiminas CEO and Chairman and some other governance issues related with the management.

As you know, in the current shareholders' agreement, we have a consensus mechanism stated that rules the nomination of CEO and Chairman. And Nippon Steel has a proposition, has proposed to change this consensus mechanism for an alternation mechanism, where CEOs and Chairmans are being nominated by -- are going to be nominated by each of us for a certain period of time.

Even when, over the last years, we didn't agree, and we still don't agree that maybe this is the best way to manage a company the size of Usiminas, the technology of Usiminas, but at the end, and in order to reach an agreement with them, together with them, and to continue working together as we have been doing in Usiminas, we would be willing to accept a mechanism like that, if at the same time, we have a way to find a solution to situations like in past or permanent conflicts between the two share -- main shareholders, so that we would be willing to accept the alternation at the extent that there is some kind of deadlock mechanism or impact mechanism to solve the conflicts.

Today, in the shareholders' agreement, there is no anything like this kind of resolution clauses. And we believe that is going to be important, especially if we change the consensus for alternation.

So, we are in the process of discussing this in good faith and in good relationship with Nippon Steel. We have been having some meetings regarding this matter. And we will continue exchanging opinions and trying to find a way of solving these kind of misunderstanding, and so that I'm optimistic that, maybe in the future, we will find a way.

Regarding the supply of slabs to Calvert, the acquisition of CSA does not change at all the slab supply contract between CSA that -- and Calvert. We expect that supply to continue without any changes, without any issues. It's a three-year contract. And I would say that I don't see any changes in that respect.

And after the -- we finish with this period of three years, we can sit down also with them, with Mittal, and we can also analyze other opportunity [cost] and other alternatives that we could have for this output in order to reach the best for the production. But, we will have the options open after the three years. For the time being, we don't see any important changes coming from the supply to Mittal.

Thank you, Daniel. If I may very quickly, does CSA have a contract with Usiminas in terms of flat supply, and could you tell us details?

CSA was supplying Usiminas, especially to be -- slabs to be rerolled in the Cubatao plant in the former Cosipa plant, and has been doing this very well. The products did well. The logistics are very, very efficient, and you know it is very convenient, obviously, for Usiminas to buy slabs in the domestic market as opposed of receiving this in -- from abroad, so that, even when there is no formal contract on a contractual basis, so to speak, they are buying -- they are negotiating on a quarterly basis. And I see that there is a ground for opportunity for both companies there in this relationship.

Okay. Thank you.

Thank you.

Carlos De Alba, Morgan Stanley.

Yes, thank you very much. Daniel, quick question for you. You mentioned that, today, at least, Ternium is not thinking on integrating CSA downwards or producing more finished steel products. What is the rationale for that? And why wouldn't the Company pursue that strategy if that is basically what Ternium has been focused on in the last few years?

And second, are there any -- what are the important questions or issues that might arise in the [CADE] revision of this transaction? Thank you.

Well, regarding the first part of the question, we believe that there is excess capacity of hot rolling in Brazil. And the Brazilian market is being served properly by the other competitors and the other players, so that entering into adding capacity in downstream in the operation will not make any sense from an internal rate of return at some point because we would have to spend a huge amount of money in a rolling facility just to be adding capacity in a market that is being very properly serviced by the other players, so that it will not make sense from a payback standpoint, so that in that respect, we will keep as it is.

We will concentrate our efforts in gaining efficiency. And we will be selling the output in the open market, in the Brazilian market to local players, in the US market to Calvert or some other customer, and to our Mexican operation. We will still be having an important presence in the third kind of supplier market because we will be buying some needs of slabs from third parties.

Regarding the CADE, there is no competition at all between CSA and any of our facilities in any place. So, we really do not see any issues, neither important nor unimportant, I would say. There are no -- it's a nonissue for us because there is no any competition at all. The products are different, and everything is different.

Very clear. And just does this transaction in any way reduce the willingness of Ternium to remain as a controlling shareholder of Usiminas?

Yes, I would say so. It's a good question, and it's a proper question because it could raise some concern that, maybe because of investing in CSA is because we don't feel -- no, no, it's not the way it is. I mean, this opportunity that we found, as I said at the very beginning, is something that we got in our way. We went for it, and we believe that it will add value from economic as well as from a strategic standpoint. And it will create value for shareholders in Ternium. And it's independent of our activity in Usiminas.

In Usiminas, we still have the same passion, the same enthusiasm that we had at the beginning so that we will continue their making all our efforts in helping and in coordinating with our shareholders in order to improve the performance of the Company.

We do believe that Brazil is bottoming up. I mean, we do believe that Brazil cannot go further down. I mean, Brazil will have a rebound, and Usiminas will benefit from this rebound, from a market as well as from a pricing standpoint.

Okay. And just final question, what is the CapEx that Ternium is expecting now for 2017?

Carlos, as we said before, without any further announcement or plan, we were expecting to have during 2017 a CapEx a little higher than what we have last year that was $430 million. We were expecting CapEx in the range of $500 million, a little higher than that, continues to be very limited. But, as we said, we need to reevaluate all our plans. We need to see which is or where is the best way to continue investing our resources. So, just to let you know, without taking into considerations anything of the things that I said before, our plans were to be a little higher over $500 million.

All right. Thank you very much, Pablo and Daniel.

Thank you.

Thanks a lot.

Kayo Riviero, BTG Pactual.

Good morning, and thanks for the opportunity. I was wondering if you guys could comment on what you consider a normalized EBITDA per ton for the Company going forward and how much this number could improve with the CSA acquisition.

And secondly, on working capital, there was a reduction in the quarter. And I'm just wondering how much more work you think that you can do here going forward and if there is any way to quantify any potential benefits that there could be in this metric from the CSA acquisition, perhaps in less inventory requirements, for example, which could lead to less working capital requirements for Ternium. Thanks, guys.

Yes, let me first tackle the issue of working capital. The working capital during the year has been sustaining at regular levels. And of course, this depends a lot on the prices of the different materials that we have in our inventories, especially slabs.

In the case of this acquisition of CSA, first of all, you know that the closing of this is expected by the third quarter. So, the impact during this year won't be that significant. But, clearly, one of the synergies that we are seeing, and Daniel already mentioned that, is that we will be able to have a better supply chain management, and we'll be able to reduce most probably the level of inventories that we need to have in Mexico to supply our hot rolling mills there.

So, this clearly is a synergy, is an advantage. We prefer not to start to give numbers on these issues. We will be very careful to analyze this. And probably in later meetings, we will be commenting on that.

In respect to the EBITDA per ton, you know that this year has been a very good year. We were able to sustain an EBITDA per ton of over $150 per ton on a yearly basis, which is something that we always are looking to sustain. You know that is very difficult due in line of or in view of the pricing scenario.

This specific figure depends a lot on the final price of the product. A high price could allow you to have a high EBITDA per ton. Lower prices works the other way around. That's why we are always looking to numbers of EBITDA per -- EBITDA margin, which is for us a better reflection of the reality of the Company because it's independent on or kind of independent on the price of the product.

Sustaining a level of EBITDA margin over [15] or at the levels that we see now is a key goal of this Company. So, we believe, firmly believe that the acquisition of CSA will help us to sustain, maintain, and increase these levels.

Okay. Perfect. Thank you very much.

Alfonso Salazar, Scotiabank.

Thank you for the question. And well, most of my questions have been answered, so just have one question on dividends. You are increasing the dividend for 2017, which I think is a good sign, especially considering that you already knew that this acquisition was coming.

So, just wondering what your plan for dividends in the coming years. We see an increase year on year since 2012 in your presentation. Even with the acquisitions, your net debt-to-EBITDA will still remain at a comfortable level. And the CapEx, the number that you mentioned looks also reasonable. So, what to expect in terms of dividends, and what's your plan for future dividend payments?

Hi, Alfonso. Let me say, first, that clearly we as a Company and our Board of Directors is showing significant confidence in our business to increase the dividend payment, even as you said knowing that we were investing an amount of money which will be important. But, it's clear that we believe that this Company will continue to generate money and continue to generate very good results.

So, it's very important from our side to propose this level of dividend that is an increase after two years of paying $0.90 per ADS and, prior to that, a little lower number. So, we -- as we always said, we do not have a dividend policy. The dividend as we are proposing right now is a dividend yield of more than 4%, a payout ratio of more than 30%, which is a number you should look in the future.

We don't have specific estimates for that because this is decided once a year in our Board of Directors as a proposal. But, you should see the trend of dividend that this Company's paying, which has been very, very healthy, very good numbers of dividend payment, and at least our intention to sustain what we have been doing up to now.

Excellent. Thank you very much, and congratulations on the acquisition.

Thank you very much.

I would now like to turn the call over to your CEO. Daniel, you may go ahead, sir.

Right. Well, again, thanks a lot for participating in the conference. Let me quote one last topic and as anticipation of the talks that we will have on the 28th of June meeting in New York. And it's related with the uncertainties or volatilities related with the NAFTA issues and the USA and Mexico relationship that I think that could be relevant when addressing the situation and the impact of some changes that could happen in the Mexican market. Let me be very brief on my views on what's going on in this respect.

First, I don't see any relevant change in demand or prices in the Mexican market in the short or medium run, medium meaning the rest of the year, short meaning the coming quarter and the one that follows.

The demand in Mexico stays strong. We have a 38% market share coming from imports. That means that, even in a slowdown, we do have a tremendous growth for opportunity of gaining market share in competing with imports coming sometimes with very, very far from sources.

The facilities that -- we are running the facilities at total full capacity I would say, very high levels of utilization. And we see very healthy steel demand and prices coming from the domestic market as well as from the pricing and system worldwide.

The NAFTA region has been very efficient to take a step to defend our region from unfair trade, especially from China. And so that, if we foresee or we see or we estimate some changes in trading or tax regulations, that type of thing that we have to address very properly when they come, I -- at the time being, I don't see an important risk for our activity.

And we are following the situation and actively participating in all the institutions that are in the process of negotiating and talking with authorities in the US in order to find a proper solution for the trading issues remaining open. But, you know this could stay for a while.

And at the end, not necessarily bad for Ternium, a well-thought renegotiation of the NAFTA agreement. Huge trade between US and Mexico are making both countries very dependent, one to the other, and very sophisticated mutually dependent supply chain ways are going to prevail at the end.

And both countries are facing a threat, common threat that is China. So, I see the US and Mexico complementing each other, working together, coordinating trade policies, and facing other threats coming from unfair trade and coming from subsidies, especially from China. So, that's the remark that I wanted to finish our call.

I hope to see you -- most of you in New York in -- on the 28th. And we will see -- also, we will maybe be talking on the next call.

And this concludes today's conference call. You may go ahead now and disconnect.