Ternium SA (TX) 2017 Q4 法說會逐字稿

Good morning.

My name is Ruth, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Ternium's Fourth Quarter 2017 Results Conference Call.

(Operator Instructions)

Sebastian Marti, you may begin your conference.

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 fourth quarter 2017.

This call is complementary to that presentation.

Joining me today is Mr. Daniel Novegil, Ternium's CEO; Mr. Pablo Brizzio, Ternium's Chief Financial Officer; and Mr. Maximo Vedoya, Ternium's Mexico's Executive President; and Mr. Pablo Brizzio, Ternium's Chief Financial Officer, who will discuss Ternium's performance in the fourth quarter and the industry's environment.

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.

Good morning to everybody, and thanks a lot for participating in today's Ternium's call.

As Sebastian mentioned, Maximo Vedoya, who will be the CEO of Ternium from March the 1st on, is also participating in our call.

As you know, Maximo joined Ternium in 1992, and we have been closely working together throughout these years.

And no doubt that he has been an important leader of our success story, if you allow me to qualify.

I would like to start with a brief comment about the recent announcement agreement with Nippon Steel regarding Usiminas governance and then a very short introduction on our performance in 2017.

Afterwards, Maximo will share his view about the current state of the industry and our business with a specific focus in Mexico.

And finally, Pablo Brizzio will talk about our performance in the fourth quarter before opening the door to the Q&A session and questions.

So let me start with the Usiminas issue.

I am really very pleased that we were able to finish our agreement with Nippon Steel regarding Usiminas governance.

We talked a lot about this issue in other conference calls as well as in the Investor Day.

And you know, after a very long negotiation process and internal discussions, we finally reached an agreement that allowed us to find a solution that is acceptable and good for both parties.

And in my view and in our view, no doubt that will have a positive impact in Usiminas.

This agreement marks a new positive chapter in Nippon Steel and Ternium relationship.

And I believe that, because of the details of the agreement, the agreement will prevent new conflicts in the future.

And now we will work together towards rebuilding our mutual trust and strengthening our partnership.

We remain commitment.

We have the compromise and the commitment to the best interest of Usiminas, and together with Nippon Steel, we will continue supporting Usiminas management in the effort to the turnaround and breakthrough of the company.

So we will continue again with the same path of supporting the management in their efforts.

I am confident, I hope, I wish that this new start will give us a better position from which to support the Usiminas growth and profitability in the future for the benefit of the company first and of the stakeholders and constituencies.

Having said that, let me now make a brief comment about our results for the year.

I am proud to report that 2017 marks yet another year with a very strong set of numbers for Ternium.

As you know, the 2017 EBITDA increased 25% against 2016, reaching $1.9 billion, again, $1.9 billion.

The EBITDA margin was 20% on revenues of almost $10 billion -- to be precise $9.5 billion -- while at the same time, shipments reached 11.6 million tons of steel, which set a new record high in Mexico and the start of a strong recovery in Argentina.

The balance sheet of Ternium continued to be very strong with a net debt-to-EBITDA ratio of only 1.4x, even after recent acquisition of CSA in Brazil and the consequent financial effort on our side.

So at the end, this excellent performance and solid balance sheet supported Ternium board of directors to take the decision to propose an increase of 10% in the yearly dividend payment, raising it to $1.10 per ADS.

And as you well know, we have been growing our dividend payments year after year.

And the dividend proposed for 2017 is 70% higher than 5 years ago.

So at this point, not to consume more time, we have a quite tight schedule today, thank you very much for your kind attention and for your participation.

And please, Maximo, go ahead with the review of our business.

Thank you, Daniel, and good morning to everyone.

I would like first to give you my view regarding the state of the steel industry.

The current environment for the steel industry is firmly favorable.

And I believe we will have an opportunity to continue our good performance in 2018.

Steel consumption will continue growing at a global level.

And there is synchronized economic growth in most of the biggest markets of the world.

China's government is also in a process to correct overcapacity, shutting down inefficient and mostly polluting facilities, and merging steel companies in a search for more rationality.

It is true that China has still a long way to go, but this seems to be a good starting point.

After our record steel export levels in the last 2 years, I mean 2015 and 2016, of more than 100 million tons every year, last year, 2017, China steel export decreased by 31%.

From a fundamental perspective, 2018 looks like a year in which the largest economies in the Americas will continue growing at a healthy rate.

Both the U.S. and Mexican steel markets are having an attractive growth, with apparent steel consumption increasing between 4% and 5% in 2017 and a commitment from the government to prevent unfair trade.

In addition, Brazil, Argentina and Colombia are in a different stage of economic recovery, and we are quite positive regarding the steel market for the year to come.

Going now to Mexico, our sales industrial customers have been the driver of shipments growth in the country over the last past years.

The automotive industry, the home appliance and HVAC industries, heavy equipment and metal mechanic industries, all of them grew in 2017, and we expect them to continue doing well in 2018.

On the other hand, construction activity has remained relatively stable, with a reduction in the government infrastructure investment, but that is offset by an increase in the private construction over the last years.

In the meantime, as you know, we have started our significant expansion project in our Pesqueria facility near Monterrey to integrate our new acquired slab facility in Brazil with our high-end cold rolling and galvanized capacity in Pesqueria.

The different projects involved in this plan are advancing as anticipated.

And we expect to have the first lines -- this is the painting line and the galvanized line -- commissioned as early as next year.

The painting line will start in February of 2019, and the galvanized line will start in July of 2019.

The steel price, on the other hand, environmental has turned considerably positive for the industry lately.

The steel industry structure improvement I mentioned at the beginning of the remarks helped significantly in increasing the steel prices.

This also helped steel prices in America to recover to levels we have not seen in a while.

NAFTA negotiation continue.

This is bringing some short-term uncertainty that may be delaying some investments until there's more visibility regarding the outcome of the NAFTA negotiation.

But as we mentioned on the last conference call, we believe that the trade between the U.S., Canada and Mexico will continue with or without the renegotiated NAFTA agreement because it's evident that it benefits all the parties involved.

But NAFTA negotiations continue.

There was a sixth round in Mexico City last month.

And in the last month, our view has turned more positive regarding the outcome.

Another recent development that is bringing some uncertainty to the market is the last week's disclosure of the U.S. Department of Commerce recommendation for trade action against import of steel under the Section 232.

This is something that we and the market are looking with cautious, and we can talk more about our view in the Q&A section.

But in the case of Mexico, I think it's worth mentioning that the U.S. export consider more steel to Mexico than what Mexico exports to the U.S. So today, almost 50% of all the imports in Mexico comes from the U.S. So to be honest, it would make no sense for the U.S. to import tariff to the Mexican export of steel and get a probably retaliation from the Mexican government for the export of the U.S. to Mexico.

Going now to Argentina, the gradual but constant institutional change in the country are fostering an economic recovery that gained momentum in the second half of 2017.

Apparent steel consumption in the country grew by almost 17% in 2017, and we expect to continue seeing a recovery in 2018.

Growth at the end of 2017 was broad based, with construction and agribusiness as strong drivers, although the recent drought that is affecting Argentina in some degree affects a little bit the performance of the agribusiness.

The home appliance industry is also beginning to show an attractive activity level in 2018 as well as the auto industry, supported by a strong local demand and a good prospect for export to the Brazilian market, which is the top destination of these facilities in Argentina.

Turning now to our new steel facility in Brazil, after closing the acquisition in September, the integration of a mill into Ternium's industrial system is going as planned.

Overall, we are very happy with this top-class asset we have incorporated to Ternium.

And our plans there are to continue working on increasing production and efficiency.

Production of steel slabs reached 4.5 million tons in 2017, which is the highest production level achieved since the mill's startup.

And it's also worth mentioning that in November, last November, we accomplished a historical monthly production record.

In addition, metal spreads have been turning beneficial for the slab producer when comparing slab prices with raw material prices.

Finally, during December, we renegotiated Ternium Brazil slab supply agreement with ArcelorMittal Calvert facility.

We spread the remaining volume of the contract in a longer period.

And consequently, we free internally produced slabs for our Mexican operation.

The new maturity of the contract is December of 2020, which also has a better coordination with the expected startup of the new upstream mill in Pesqueria.

This means we will decrease slab shipment from Calvert -- to Calvert, sorry, from 2 million tons a year to 1.2 million tons a year.

With this, at this point, thanks very much.

And I will pass it to Pablo to go ahead with the comments about our results.

Thanks, Maximo.

Good morning and thank you for participating in our conference call.

As Daniel said, I will give you an overview of our performance in the fourth quarter.

And afterwards, we will go directly to the Q&A session.

Let's please turn now to Page 3 on today's Webcast presentation.

Our performance continues to be strong in the fourth quarter of the year, with EBITDA of $502 million.

This is different from what we have anticipated in our last quarterly results conference call, thanks in part to a nonrecurring gain, as we will see further on.

Before we continue, let me remind you that the quarter we reported yesterday, the fourth quarter, is the first one that includes the full consolidation of Ternium Brazil.

This naturally resulted in higher shipments than in the third quarter and more so when compared to 2016.

Having said that, looking at Ternium's EBITDA per ton on the lower left side and EBITDA margin on the higher right side, we reported in the fourth quarter a rather stable margin of $147 per ton or 18% of net sales.

Despite the full consolidation of Ternium Brazil, which is natural for a slab producer, as you know, has a lower margin than an integrated producer such as Ternium.

The stability was in part aided by the $43 million nonrecurring gain related to the retroactive price adjustment on Ternium Mexico electricity sales between December 2016 and October 2017.

As for net income in the fourth quarter of the year, we reported $198 million, equivalent to earnings per ADS of $0.92, a $0.07 sequential decrease due to a higher effective tax rate, as we will see further on.

In the following page, Page 4, we can see that, in the fourth quarter, Ternium's net sales in Mexico declined 3% sequentially, mainly due to lower revenue per ton and seasonally lower shipments, as anticipated.

Revenue per ton and shipments in Mexico are expected to increase in the first quarter of this year, 2018, as seasonality factors declined and underlying demand increased in a strong pricing environment.

Let's go now to Page 5 to review the performance of the southern region.

As anticipated, following the recovery in steel demand in Argentina in the third quarter, shipments remained a strong level in the fourth quarter and will probably continue doing so in the first quarter of this year.

Steel prices increased in the fourth quarter in this region, and we expect a slightly further improvement in the first quarter of 2018.

In next page, number 6, we can see the significant effect in other market shipments and revenue per ton of the full consolidation of Ternium Brazil slab sales to third parties, mainly directed to the U.S. and Brazilian market.

In the first quarter 2018, other market shipments should decrease to reflect the amendment Maximo mentioned to the slab supplier agreement with Calvert in the U.S.

In the next page, we see the combined effect of this development on our consolidated net sales.

We had shipments of 3.4 million tons in the quarter, up 11% sequentially.

Consolidated sales grew 9%, and revenue per ton declined 4%.

In the first quarter, revenue per ton should increase to reflect an increase in prices in Mexico and to a lesser extent in Argentina.

We anticipate shipments to remain relatively stable sequentially with higher shipments in Mexico offset by lower shipments of slabs to the U.S., as mentioned before.

Please turn to Page 8 now please so we can see the drivers of the first quarter and full year EBITDA.

In the left-hand graph, you see the positive quarterly sequential impact of higher steel shipments on EBITDA.

The steel segment EBITDA margin decreased as anticipated, although the $43 million nonrecurring gain related to our sales of electricity in Mexico made the decrease less steep.

We had a lower steel revenue per ton, as we saw in the previous slide, which was partially offset by a decrease in steel cost per ton due to the full quarter consolidation of Ternium Brazil in the period, also lower purchase slab cost and higher raw material cost.

In the right-hand graph, you can see our EBITDA performance in 2017.

The main driver behind the EBITDA increase was higher steel shipments, and we also had slightly higher steel EBITDA margin.

The increase in steel EBITDA margin included higher steel revenue per ton and cost per ton.

Steel revenue per ton increased year-over-year in Mexico and the southern region.

And it decreased in other markets as a result of the consolidation of Ternium Brazil slab sales.

On the other hand, operating cost per ton increased mainly as a result of higher raw material and purchase slab costs, partially offset by the consolidation again of Ternium Brazil.

We expect sequentially higher EBITDA in the first quarter of this year, with higher revenue per ton and relatively stable steel shipments.

In relationship to cost, slightly higher cost per ton in most of the company's geographical market should be offset by lower cost per ton in Ternium Argentina, mainly as a result of the local currency depreciation impact on the U.S. dollar value of its inventories, leading to not significant changes in the cost during the quarter.

Let me remind you that Ternium Argentina uses the Argentine peso as its currency -- excuse me, as its financial currency.

And as a result of the U.S. dollar value of its inventory decrease when there is a depreciation of the local currency against the U.S. dollar.

Let's now review net income on Page 9. There was a $35 million sequential decrease in net income in the fourth quarter, mainly due to a higher effective tax rate.

The effective tax rate was affected by the noncash effect on deferred taxes of the fluctuation of the Mexican peso against the U.S. dollar in the quarter, which depreciated 8% during the period.

Turning to Page 10.

We can see a year-over-year increase in net income in 2017, mainly on higher operating income, a lower effective tax rate and higher results from the equity in earnings of Usiminas, partially offset by higher net financial expenses.

Effective tax rate in 2017 was 25%.

Also here, the main reason behind the low rate was the noncash effect of the 5% appreciation of the Mexican peso against the dollar during the year.

On the other hand, effective tax rate was the previous year, 2016, 37% because of the Mexican peso depreciation of 17% during that year.

On Page 11, we can see the free cash flow in the fourth quarter, which reached a negative $94 million in the period.

We continue carrying on a moderate capital expenditure program in the fourth quarter, but there was a $310 million increase in working capital, the reason for which we will see in details in the following page, 12.

But let me summarize this by saying that the working capital increase had 2 important components.

The working capital normalization of our operation in Brazil that represented close to $210 million and also higher receivables related to the retroactive adjustment of the energy in Mexico of $43 million.

As you can see, these 2 factors represented around 80% of the working capital increase, and they are nonrecurrent.

The difference are normal movements in working capital due to prices and volumes.

We are expecting to normalize working capital in the coming quarter and year, but considering also the expected price increases that we will see in the coming quarters.

In addition, free cash flow in Page 14 (sic - Page 13) includes the explanation of what happened during the year.

You can see there that there was -- the free cash flow was affected by an income tax payment of $610 million.

As you may remember for last quarter conference call, the main variation to this item occurred during the first half of the year, and we explained them in previous calls.

In addition, the free cash flow included an increase in working capital of $865 million, the reason for which we will see in the following page, Page 14.

In 2017, our inventory increased by $540 million, 40% of this increase happening in the fourth quarter, for the reasons that I have just mentioned.

All in all, we have higher volume and prices of raw material and steel.

During the year, physical steel inventory increased by $129 million, reflecting increase in operation rates in all of Ternium facilities and the mentioned effect of Brazil.

In addition, the price of our steel inventory grew by $258 million, again as a result of higher prices of raw material flowing through inventories.

Turning to trade receivables.

The increase mostly reflected higher prices and shipments in Ternium's main steel markets and also an increase in connection with the sales of slabs in our operation in Brazil.

Going now to Page 15, you can see an evolution of Ternium's EBITDA, free cash flow, capital expenditure and dividends over the last years.

2017 EBITDA was the highest in the last 5 years.

Capital expenditures remained stable after we finish our later expansion cycle back in 2013.

Free cash flow was negative in 2017, as we discussed, after very strong free cash flow generation over the previous year.

We expect free cash flow to recover in 2018, also a stronger capital expenditure in the year, as the announced new project in Mexico starts to gain speed.

In addition, we announced another increase in our yearly dividend payment proposal to $1.1.

In the last 5 years, there was a $0.45 per share raise, which is quite significant.

Finally, Ternium's net debt stands at $2.7 billion as of December 31, representing a comfortable 1.4x EBITDA.

This is after the acquisition of CSA, which resulted in an additional net cash use of $1.6 billion.

Okay.

Thank you very much for your attention.

These were all my initial remarks.

We are now ready to answer your questions.

Please, operator, proceed with the Q&A session.

Thanks.

(Operator Instructions) Your first question comes from the line of Ivano Westin with Credit Suisse.

First one, just a few points on CSA.

It's clear that you extended the agreement with Calvert until 2020.

So appreciate if you comment on the rationale of this, why it was extended to 2020, not beyond, and if you could comment on the price aggregate there, if it's similar to the market price, the aggregate in all the regions.

And also, on CSA, you also comment that you may take advantage of the recovery in Brazil.

Just wondered if you could comment on the maximum amount of volume that you can sell to the local market in Brazil.

Also, on the outlook that you mentioned you had anticipated, expect higher revenue per ton in Mexico and a lesser extent in Argentina.

So just wondered if you can comment when you expect the premium between U.S. price and Mexico price to normalize moving forward.

And if you could also comment your expectations of your scrap cost in Mexico.

All right.

Thanks for the question.

And well, regarding the Calvert agreement and the Calvert situation, we finally decided to sit down with Mittal and attend their request to extend the duration of the contract so that we decided in full agreement and in consensus to extend the maturity to December 2020, or in other words, from 24 months to 40 months.

Important to say that it is the same total volume and that the rest of the commercial terms of the agreement remain exactly the same.

That means that shipments will go from 2 million tons per year to around 1.2 million tons per year.

That is quite good for us, and I believe that it's totally understandable that it would be convenient for both parties to extend the relation period.

We will be selling most of the production to Mexico, Argentina and third parties.

When talking about third parties, I am referring to local and overseas customers.

Just for you to have an idea and answer your question, in 2018, we are planning to sell approx.

1.2 million tons to Calvert under the extended contract or amended contract, around 1.2 million tons of local sales in Brazil, mainly to Usiminas.

When talking about Usiminas, I'm talking about Cubatao former Cosipa plant that some time ago decided to close down the upstream production.

So they closed down the blast furnaces and the continuous caster, and they have to supply the rerolling buying slabs from third parties -- and a little over 2 million tons to other Ternium's facilities, included in that some small sales, yes, I would say a few tons to some third parties.

The new maturity, in our view, has a better fit with our expansion plans in Mexico.

As you know that the new hot rolling mill is coming online in 2020.

Regarding the premium that you mentioned on our pricing system, as you know, and we talked about this issue many times in our -- especially in our Investment Day, when we have the chance of getting in touch and going more in depth in our strategies, the premium is based upon its superior service, just-in-time delivery, superior commercial network, a very clean and lean and mean relationship with customers and distributors, so that the premium will remain as far as we are able to sustain a superior service vis-a-vis our competitors, especially those that are coming from abroad.

Obviously, the pricing system of Mexico and in Argentina will copy and will follow the trend in the international marketplace.

As you know, for example, the prices of China have been increasing because of reductions in production, because of duty and countervailing actions against unfair trade against China all over the world or in many places in the world so that prices in the domestic market went up.

And also, the prices in the USA are going up and have been -- gone up during the year, so that -- the previous year.

So at the end, the prices will copy the international marketplace, and we will continue having a premium based upon the fact that we consider that we have a premium service as well.

Okay.

Very clear.

If you could comment on the scrap cost that you expect moving forward in Mexico, that would be highly appreciated.

The scrap, well, this is a nice question because, as you know, we have had a quite convenient, so to speak, based cost, given that the supply of iron ore has been stable and growing.

And so the iron ore didn't grow as fast as the prices went up in the last year.

Also, the carbon is in a stable situation.

In the case of the carbon, you will always have to be alert to climate disruptions, to environment disruptions because the price of carbon is obviously heavily impacted by climate kind of volatilities.

But at the end, I could say that, even when the prices -- the cost of our raw materials went up no doubt during 2017, the prices overpassed these increasing costs, so that the general profitability of the sector, the steel sector, went up.

Regarding the scrap, as you mentioned, it's a good point because what we are looking at is that, in the case of China, China is cutting production.

And when I say it's cutting production, I'm referring especially to blast furnaces, idle capacity, environmental trends, similar kind of facilities.

And so that when the production has to follow the demand that is still growing in China, the steel consumption in China grew 3% in 2017, and I expect that we will be maybe witnessing another 3% in 2018, as I will mention afterwards.

So that in order to catch up with this increase in total apparent steel use in China, it was some pressure in the local market of China on the scrap.

And this pressure will continue.

So I would say that, regarding raw materials, I see a good and nice supply base in iron ore.

I see coal going down, but we have to be alert of climate volatilities in scrap.

Maybe we can expect a growth.

But as you know, the cost structure of Ternium is not that sensitive to scrap because we are only buying marginal quantities of scrap to complement the iron ore and that is coming from our own mine and also from Valle, especially through the system of Corumba in the north of Argentina.

Also important to mention regarding the raw materials is that the gas that is intensive in our operation in Mexico, as you know, in Mexico, we are gas intensive in energy, as we are coal intensive in Argentina at the same token.

And the gas has remained very low in relative terms to the history and in relative terms to other competitors.

So in all, maybe we can expect some increase in scrap in the USA because of increasing production of the mini-mills related to the 232 action.

Then we will maybe be looking at some increases in cost of scrap as well in China.

But the increase in scrap is not having an important effect in our cost base because of the fact that it's only a marginal raw material for us.

Your next question comes from Karel Luketic with Bank of America.

Your next question comes from the line of Jon Brandt with HSBC.

I'm hoping you could expand a little bit on your Section 232 comments and the implications.

I'm wondering, it seems pretty clear that the U.S. government is going to have some sort of protectionist measure, whether it's an increased tariff or a quota.

I'm wondering what that means for you, if you still see the connection between U.S. steel prices and Mexico prices, or if potentially there's a disconnect between the 2, if you expect to see imports that were previously bound for the U.S., if they could find their way into Mexico, or any other implications that you could think of regarding the Section 232.

And then secondly, I wanted to ask, just coming back to Ternium Brazil, if you could talk a little bit about the margins that you're seeing on that mill as you ramp up, as you increase the efficiency, what sort of cost savings you're seeing from producing your own slabs versus buying them in the market.

Thank you, Jon.

Well, regarding the 232, we still don't know the effects.

We are in the process of analyzing, presenting ourselves against different scenarios.

There is a recommendation, as you know, coming from the DOC with 3 different vectors or 3 different scenarios.

One is -- the first one is increase in duties across the board on 24%.

The second one is an increase of duty for 12 countries plus quotas based upon report sales -- export sales to the USA in 2017.

And third, it is another scenario.

The third scenario is a quota related to exports quota, no duties related to exports in 2017.

The U.S. President could take a final decision regarding what to do on the recommendation of the DOC.

And there is a date that is April the 11th.

You know that maybe he could go either for one of the options that I mentioned, again, increase in duties across the board, increase of duties with a mix of quotas as well and/or quotas.

And the U.S. President could take a final decision that could be -- either be could be one of the options that I mentioned or a combination of the 3 or even postponing the decision for a while until having more information in relation with the impact to the industry in the domestic market, exports of the U.S. and so on and so forth.

Going more in detail, maybe at this point, Maximo, you could expand on which is your view on the 232 in the Mexican market and also in the rest of the world.

Yes, sure.

Well, first of all, I think that the recommendations that the DOC made, well, they were rather harsh recommendations.

I think nobody was expecting to have the 3 recommendations very hard.

The aim they are looking for clearly is to increase utilization of the steel industry in the U.S. from 75% or around 75% they have today to a little bit more of 80%, although they are very different between the different products.

As Daniel mentioned, we really don't know what the President is going to decide.

Higher tariff or quotas, if they set or they put exactly the 3 ones they mentioned, could put a heavy burden on also in the competitiveness of the U.S. manufacturing industry costs or the consuming -- or the consumers' cost increase also.

So we really don't know where this is going.

As what effects this will have for us, for Ternium, based on this information that we have today, we don't anticipate a significant impact for us in the near future, neither from our exports to the U.S. market from our Brazilian operation.

And as you know, Ternium Mexico exports are quite marginal to the U.S. So we don't expect there to have any problems.

As you said, prices in Mexico usually follow prices in the U.S. We think this is going to continue, although at a much -- I mean, prices in the U.S. will probably go higher much quickly.

But we are confident that the government from Mexico and all the other governments of the region could take action to avoid collateral effects involving unfair trade that before -- that today goes to the U.S. and tomorrow will come -- will try to go to Mexico, to Brazil.

We are very confident that the government will take action of this.

So I think we are not seeing a major disruption for Ternium in this.

Yes, even when we don't know yet the decision, if any.

If any is coming, yes.

And in the short run.

But in any way then, going to the second question regarding the Brazil margin, I would say that we entered into CSA recently.

We see room for efficiencies in cost.

We see room for efficiencies in volume.

We are getting very good levels of production.

Also, putting (inaudible) our procurement portal in the procurement base of the company will no doubt have an impact, a positive impact in the cost.

But if, Pablo, might pass to you to mention on margins.

Yes, okay, Daniel, but basically, you mentioned the main items that we are working with.

The only thing I wanted to mention is, even though we consolidated fully Ternium Brazil in the fourth quarter, the margins that we were able to sustain are still very high.

With a margin of over 18% during the fourth quarter, when we are fully reflecting the Brazilian operation, is a way to show that we are very hard working on the things that you, Daniel, mentioned, which are increasing volumes and reducing costs that will at the very end reflect, of course, in a lower margin that the rest of our operation, because it's only slab production, but we are not expecting to see a significant impact or a significant reaction in the final number for Ternium.

Okay.

Just to follow-up on the Section 232, if the U.S. increases tariff on imports, the 1.2 million tons that you send to the Calvert facility, that extra cost needs to be borne by the Calvert facility, not by yourselves.

Is that correct?

Yes, we -- yes, on our current analysis on what we are reading is that the effect or the measures will not affect our exports to the Calvert facility.

Because the contract is based upon delivery, duty, and paid.

That means that, if we had an export tax on Brazil, we should pay this export tax.

And if the customer has an import tax or tariff or whatever, it has to be paid by them because, as I said before, the contract is based upon delivery, duty, and paid.

Your next question comes from Thiago Lofiego with Bradesco BBI.

Gentlemen, 2 questions on my side.

The first one, on the steel inventory buildup in Mexico, just trying to understand if this is an isolated factor, or is it a change in strategy?

Just trying to understand what's the reason behind the big uptick on inventory levels in Mexico?

And still regarding this free cash flow generation theme here, could you please confirm the CapEx budget for 2018?

And then the second question, if you -- regarding the whole Usiminas situation and the agreement with Nippon, once the initial lockup expires, would you consider buying Nippon's stake, or would you be more of a seller, or you think the base case here is that nothing changes?

All right.

Good.

Thank you, Thiago.

Regarding inventories, no change in policy.

We love to work with Mexico inventory level.

As a matter of fact, the inventory -- the cash flow that you mention stress is there, is in the company, is not -- nothing that was an overrun or an expected CapEx.

It's just an increase in inventories because of seasonality, because of marketing service and because of putting together the numbers of Brazil that needs to be some adjustment made.

Regarding the free cash flow, Pablo, you also mentioned in your presentation, but you can expand on that and the relationship with the working capital.

Exactly, yes.

We -- there was clearly a couple of effects during this fourth quarter that make us -- took an important increase in working capital, which I tried to summarize during the opening remarks.

But let me repeat them because I think it's very, very important.

The first one is the normalization of the working capital in Brazil, which was necessary because of the very low level of account receivables that we had at the moment of entering to the company, then the increase in volumes to the local market and the increase in prices of slabs during the period that made us show the numbers that we are showing.

At the very end, we -- let me comment the second issue, and then I will comment on what we are expecting for the future.

The second one was the mentioned recovery of adjustment of the price that we saw in the energy in the system in Mexico, which was $43 million.

This was agreed in November last year, but the collection expected in the coming months.

So this is also increasing our working capital.

With both items that I am mentioning explains the most significant part of the working capital increase.

As I said, we are expecting to normalize this in the first quarter and during 2018.

But also, you need to take into consideration that we are expecting also to increase a little bit the volumes.

And price, if they continue to increase, of course, they will have an impact on the working capital.

But we're also expecting to see any specific issue, and we are counting on a normalization of the working capital in our Brazilian operation.

So I guess, Daniel, there was a third part.

Yes, in Usiminas.

And in Usiminas, let me comment on Usiminas because it's an interesting topic because, as you know, maybe it took too long to reach this agreement, but we've been working, as you well know, very hard.

And we discussed with you personally and with other gentlemen in this same room with all implications of reaching an agreement, the positive implications of reaching an agreement with Nippon Steel.

It seems to me that maybe it was required for us, for both of us, to reach a kind of mature stage in the relationship in order to go ahead in this kind of agreement that made us possible to change the governance rules of Usiminas in a way that is acceptable and good for both parties in the benefit of Usiminas always.

The agreement that we reached is expected to be deployed in order to avoid similar conflicts in the future, so that we are happy with the performance of Usiminas nowadays.

The performance improved after Sergio Leite was appointed as CEO because of his action together with his leadership and to the action of the other managers as well as a more positive environment because Brazil is rebounding, and the steel industry is gaining momentum.

So we believe that the good performance will continue.

And the agreement is good for Ternium because it eliminates uncertainty, and it will avoid us being distracted and sidetracked, so to speak, from our core business and occupations.

But let me go to your point on the lock and exit clause because, at this point of time, let me stress that ourselves as well as Nippon, the parties, will remain and have remained with a strong compromise and commitment to Usiminas with a long-term view.

I mean, the exit clause is aimed at providing a solution to eventual conflicts in the future, obviously always preserving the company interest and value.

But when we enter into the new agreement, the parties are reaffirming their initial intention and commitment to reveal the mutual trust in the partnership and to work together in the benefit of Usiminas and to help and support the management of Usiminas.

So we are not thinking at all nowadays in exercising this mechanism in 4.5 years from now.

That's clear.

If I may, just one last question here.

You had other product sales of $132 million in the quarter, of which you mentioned in your note that part of that is the electricity sale to Mexico, and the other part is Ternium Brazil's electricity sales.

Could you provide a breakdown or maybe the number on Ternium Brazil's electricity sales, and if that number is -- if we can consider that number recurring going forward?

Thiago, yes, you're right, we have included because, if we are going to express it, the sales we are doing of energy, both in the Mexican market and the Brazilian market, the breakdown on the sales is 2/3 in Mexico, one-third in Brazil.

And we are, especially in the case of Mexico, expecting this to sustain with fluctuation in prices because the price of energy is not the same during the year.

In the case in Brazil will depend on the increase of our production, but on a short period of time, we should think of these levels sustaining in the coming quarters.

I'm sorry, Pablo.

I couldn't understand exactly at the end of your explanation.

1/3 that is related to Brazil, will that remain, or not?

Yes, it would remain, but at some point, will be reduced because, as you know, we are expecting to increase the production locally.

So we will need to use a higher level of electricity.

Remember that this is the electricity that we produce in our own plant, and the one that we'll not consume is selling into the market.

But in the short run, this should be a number that could be sustained in the coming quarters.

Your next question comes from Carlos De Alba with Morgan Stanley.

Just coming back to CSA, the first question I have is if there were any sales volumes from CSA or Ternium Brazil to either Ternium Mexico or Ternium Argentina.

If you could share the volumes, that would be helpful.

Second, on CSA, is if the 1.2 million tons per year to Calvert will be equally distributed amongst the 4 quarters of the year.

And then just coming back a little bit to the expectations on CapEx because of the new projects, could you remind us what the CapEx outlook is for 2018?

And if you have numbers for 2019, that would be useful.

Good.

Regarding the Calvert operation, we will be selling approx.

1.2 million tons to Calvert per year in the coming 40 months.

That means around 800,000 tons per month.

Obviously, as it depends on the ships capacity and level, so you can have some small difference between one quarter and the other, but it should be equalized easily and in a very short period of time because we have the scheduling of the plant to respond the needs of Calvert.

And we perfectly know quality wise, volume wise and delivery wise the needs that they have.

So the volume will continue pretty even, I would say, at the level of 800,000 tons per month approx.

Then we have the sales in Brazil is 1.2 million tons of slabs mainly to Usiminas.

This number could go up.

It is convenient for CSA because of the tax bracket.

And it is convenient for Usiminas, especially obviously the former Cosipa de Cubatao plant because of prompt delivery, just-in-time delivery, quality, specifications and the logistics that is very, very easy for them compared with other suppliers.

Then we have in Argentina, as you know, we -- in Argentina, we took the decision of closing down one of the blast furnaces.

These blast furnaces will continue being closed down until we have a better and more clear market indication of what is going on in the steel arena, so that we will continue the selling to Argentina around 0.5 million to 600,000 tons per year roughly, depending on the needs of Argentina.

And the rest will be dedicated to serve our needs in Mexico.

As Maximo was mentioning, it is very convenient for Mexico to be supplied these high-end qualities, Maximo, no?

Yes, for Mexico operation, if you remember, the slab facility, the hot strip mill in Churubusco, is our high-end facility today.

So most of our special customers we sell material that comes from that mill.

And we formerly had to buy all the slabs, which customers didn't like very much.

So having our own facility with our own research and development with our own product capacity for them I think gets a huge advantage for us in the Mexican market.

Good.

Then regarding CapEx in Brazil, we are going to be having $40 million to $50 million on a normalized basis to CSA.

And then for Ternium, Pablo?

Yes, with the start of the new projects, we should increase our CapEx level in 2018 to a little over or around $600 million, with the bulk of the investment moving to 2019.

And we are anticipating to have a CapEx level on that year of around $1 billion, and then returning to more normal levels.

Okay.

And Daniel, just in the fourth quarter, were there any volumes sold from Ternium Brazil to Ternium Mexico or Argentina?

Yes, there was -- of course, we need to deliver slab that we produce, and they were mainly dedicated, almost all dedicated to the Mexican operation.

Okay.

And then, Pablo, the guidance of higher sequential operating income for the first quarter 2018, is that considering the $350 million operating income reported in the fourth quarter that includes the $43 million nonrecurrent, or should we consider it after or excluding the $42 million nonrecurrent -- the $43 million nonrecurrent?

You can take the number that you like.

We are expecting to have a higher operating margin in the coming quarter, mainly due to increase in volume in Mexico and the pricing scenario that we decide.

So yes, we are expecting to have an increase of margin coming to the next quarter.

All right.

And then, Daniel, I don't know if this is your last conference call.

If it is, I just want to say or wish you all the best in your retirement or whatever else it is that you're going to pursue after a very successful tenure as CEO of Ternium.

No, I appreciate your comment, Carlos.

And I remain obviously open to talk with you as we have been doing over these years working together.

As you know, I will continue in the company as a Vice Chairman of Ternium and delivering support to Maximo and the rest of the management in the strategic matters as well as institutional matters.

Obviously, the operation will be in the hand, the full hand of Maximo.

And I will be participating in the coming call because, as a matter of fact, I will be in charge of January and February, so that I will be having -- because we delivered 2/3 steel.

And as you say, as you can see, we have a positive outlook.

So I will not be missing this quarterly call.

It could be the opposite, depending on a different outlook.

But with this outlook, no doubt that I will be here.

But thanks a lot for your comment.

I do appreciate your comment.

Your next question comes from Caio Ribeiro with JPMorgan.

So first off, I just wanted to see if you could go over some of your expectations in terms of the growth of the different demand components in Mexico, so for the auto sector, manufacturing, etc., for 2018, and what that translates into demand growth expectations as a whole for 2018 in Mexico.

And secondly, if you could just talk a little bit more about the one-off gain related to the electricity sales, just exactly what the price readjustment comes from and if there is anything additional in the next quarters.

Thank you, Caio.

I will take both of them.

Demand in Mexico according to the World Steel will grow in 2018 almost 3%.

We think that most of that demand will continue coming from the industrial sector.

It's not a huge growth, but I think all the industry, the auto industry, the HVAC, the home appliances, will continue growing, not as a base of 2017.

If you remember, automobile industry in Mexico reached 3.7 million units in 2017.

It was a new record.

It's going to be a little bit bigger in 2018, but it's not going to be much more bigger than that.

But our growth can continue growing in substitution imports.

I mean, imports in Mexico of steel are still very high.

And our target is to continue growing substitution that imports.

That's according to the demand.

In the construction part, we don't see much change.

We think it's going to be stable, but we don't see much more growth there in Mexico.

It's an election year in Mexico.

So things are not going to improve a lot in that sense.

To the electricity point, it was an adjustment in the tariff.

The market was started in Mexico a couple of years ago, the new electricity market.

And so the unused electricity that we don't use in the Techint facility in the Central Electrica, we sell it to the market.

The payment that the market gave us, there are 2 different prices.

There is a price on advance of the day that is given to us the day before, and there is the daily or the hourly market price.

Those price supposed to be the same, but were not the same in these 9 or 10 months.

But the CFE pay us with a price in advance.

And the losses they are now paying us in the daily and in the hourly market price.

So that difference in these 10 or 12 months is what makes this $43 million.

So they recognize this difference, and they pay it to us.

It's not going to be again because now they're paying us with the hourly market price.

Okay.

Perfect.

That's very clear.

And just a quick follow up, if I may.

On Argentina, are you guys still expecting a 10% growth in volumes in 2018, or has anything changed?

Well, in 2018, we still expect the 9% to 10% growth, and we are seeing good numbers.

At the end of the Q&A, I will make a closing remark, where I will mention some numbers regarding the fundamentals and the general markets of Ternium in the world, in China, and I will make some short comments in this point, in particular in Argentina.

But we expect, after having in 2017 with a 17.2% growth in Argentina over a very low number in 2016, it is true.

But we still expect a 9% to 10% growth for 2018.

Your next question comes from Marcos Assumpcao with Itau.

First question on NAFTA, you already gave a little bit of an update on the topic, but what is your views on future auto production in Mexico?

Before, I remember you had a very constructive view on auto production, eventually reaching 5 million units by 2020.

Do you think that could change a little bit?

And also regarding the investment in Mexico in the galvanizing and the painting, do you think that, pending on the discussions on NAFTA, this -- the CapEx could be a little bit delayed because of that or not?

And last question, probably for Pablo, you mentioned before that you were worried about the difference in multiples, or you were studying or analyzing why Ternium multiples were so different than peers.

What has been done so far to reduce the valuation gap?

What is your analysis on that topic as well?

Okay, Marcos, thank you very much.

Regarding NAFTA and Mexican auto production, as I said before, I don't know yet what will the NAFTA renegotiation outcome will come.

What I do see is that, the last month, I am a little bit more optimistic that we are going to reach an agreement, or they are going to reach an agreement.

What is clear is that I don't see today that, in 2020, Mexico is going to reach the 5 million units.

I think that number, it's more near the 4.4 million units than the 5 million units.

I don't see any delay in the galvanized and painting.

Remember that these lines are for all industrial and construction industry.

The galvanized is not an automotive industry or automotive line only, as it would have been (inaudible) to.

This is for all markets.

And I don't see any delay, regardless of NAFTA negotiations.

Okay, Marcos, I will take the last part of your questions.

This is something that is continuous work in process for us since -- and you know we have been discussing this for many years.

I think that the company has worked strongly on the performance and showing very good investments in the last years, especially the CSA acquisition, that we understand that it is starting to be reflect in our market that has been increasing during the last years.

Our margin is -- our multiple, sorry, is today over 5, which is decent.

But we still believe that we have room for improvement.

And this, as we discussed in the past, is nothing that we can do immediately to change that.

But we will be sure that the company will continue to work very hard in time to find ways to improve that in the coming years.

Okay.

Perfect.

The last question to Daniel probably on his news on Usiminas, regardless of your position of a buyer or seller in the future on the company, how far do you think the company is from their full value or from the full valuation or true potential in terms of valuation?

I don't know because this is a question of market perception, and I wouldn't speculate about that.

What I can see is that there is no doubt that Usiminas has tremendous room for improvement, I mean efficiency wise, productivity wise, streamlining wise, procurement wise, and so that the management is doing very well.

And with our support and working together with expertise of Nippon and also our support and our expertise as well, I believe that there is important room for improvement.

I cannot speculate on how this increase could reflect in the value of the share.

But no doubt that the company is going to be performing well.

And it has a tremendous potential.

I always thought that when we bought the company.

And afterwards, we had some problems.

But now I think that is going to be doing well.

There are no further questions at this time.

I'll turn the call back to the CEO for any closing remarks.

Good.

Well, thanks a lot for your questions.

And I think that all of us are running out of time right now.

But let me share some final insights and fundamentals, so to speak, that I wanted to mention looking forward.

What'll happen in steel consumption looks promising, according with World Steel Association.

China grew 3% in 2017, and world ex-China grew also 3% in 2017.

Next April the 9th in Mumbai, India, we will have our meeting on World Steel Association, and the committee will present the new forecast for 2018.

And maybe, in this forecast, we will see growth in China in 2018, but in steel consumption as well.

Looking at our [bad] year, USA grew 4.8% in 2017, Mexico 4.1% up, Brazil 5.3% up, Argentina 17.2% up, from a very low level in 2016.

But we are still expecting an additional 9% to 10% for 2018.

With these numbers, Mexico kilos per capita is reaching 210, well above the 110 average of Latin America, being the USA 300 kilos per capita, and growing from 131 in 2009.

So Mexico grew steel consumption per capita in the last 8 to 9 years 60% from 131 to 210, very promising.

China is cutting production.

We see a good domestic market and steel exports going down in China from 110 million tons in 2015 to 75 million tons in 2017, meaning a 35% decrease in production.

USA and Mexico market doing well.

Demand is strong in oil and gas, contractual infrastructure, durable goods.

And so the capacity utilization is stable to upwards.

And inventory levels in service centers are at low levels, so that the prices are reflecting the supply and demand quite well because there is no buffer coming from the inventories.

So we are in the process of addressing the bad and the implication of the 232 regulation and that we are now analyzing what could happen with that.

Brazil is rebounding based up9on better industrial activity.

Specifically, the auto industry is increasing production.

Construction is doing well as well as infrastructure, and very low levels of inflation and interest rates stable with a downward trend.

So Brazil will continue the path of recovering in our view no doubt for the months and for the years to come.

Argentina is under economic reform.

The public state management is very good, and they are working very hard and doing the right things.

And so the activity in the domestic market is looking strong.

Just as an example, the car domestic sales are in the range of almost 1 million cars per year in Argentina, meaning almost twice the domestic sales per capita rate of Brazil and Mexico.

Afterwards, Pablo Brizzio and Sebastian could share some more details on that.

But that means that the consumption in Argentina is doing well.

Home appliances as well as car, as I said before, meaning that is almost twice the level of domestic cars per capita being sold in Mexico and in Brazil.

Raw material prices, as we commented in our Q&A session, seems to be relatively stable, especially iron ore because of the supply-demand situation and coal.

And also, the natural gas in Mexico and the U.S. is pretty stable and low, very low, so that we foresee some pressure on scrap, as we were making some comments, but with very low impact in the cost of Ternium.

Ternium continues outperforming peers and competitors with an EBITDA ratio of around 20% against an average of 11% of peers.

The peers are raising from 9% to 13%.

And in the peers, we are including U.S. integrated mills, U.S. mini-mills.

Japan is integrated, 2 mills, a global world company, America's long products integrated, and Korea.

You can easily put your names in these peers.

So that the performance continue being good based upon a flexible and efficient production configuration and a concern for the cost and for the productivity.

We hope also that the governments in the region will react in an appropriate mood to the implication of the 232 and do their homework and as the rest of the world is doing.

And regulations will prevent unfair trade worldwide, like the recent, for example, antidumping cases of the European community against China.

So to finish, good luck to my friend and my colleague and my peer Maximo.

And thank you so much for your attention in this conference and for your support for all these years.

So bye, bye now, and see you soon.

This concludes today's conference call.

You may now disconnect.