Ternium SA (TX) 2019 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Ternium First Quarter 2019 Conference Call.

(Operator Instructions) I would now like to turn the call over to Mr. Sebastián Martí.

Please go ahead.

Good morning.

Thank you for joining us today.

My name is Sebastián Martí and I am Ternium's Investor Relations Director.

Ternium issued a press release earlier today detailing its results for the first quarter 2019.

This call is complementary to that presentation.

Joining me today are Mr. Máximo Vedoya, Ternium's CEO; and Mr. Pablo Brizzio, Ternium's CFO, who will discuss the company's business environment and performance.

At the conclusion of our prepared remarks, we will open up the call to your questions.

Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied.

Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation.

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

Thank you, Sebastián.

Good morning, and thank you very much for participating in our conference call today.

It's a pleasure to talk with all of you.

As usual, I will make a very brief comment about the state of the steel industry in our main markets and then Pablo will review our performance in the first quarter of the year.

And lastly, we have a Q&A session.

In the first quarter of the year, we had an increase in steel volume, mainly driven by a higher sales of slabs to third parties from our Brazilian facility, and also by slightly higher sales in Mexico.

This last one, a positive development considering this market has been challenging lately.

EBITDA for the quarter was $470 million, a slight decrease compared to the fourth quarter of 2018 in line with our expectations.

We continue showing a good level of EBITDA margins with 17% in the quarter.

Finally, we had a free cash flow of $269 million, also an attractive level.

Let's turn to Mexico now.

Steel consumption in Mexico decreased close to 4% in 2018, according to World Steel, which released these numbers last week.

We believe our market share increased in 2018 and also in the first quarter of 2019.

Our shipments to the industrial markets in the country are doing fine, mainly driven by good end use of demand in the U.S., although there is a moderate destocking at some automotive service centers that is weighing a little on volumes in Mexico.

On the other hand, our shipment to the commercial market, more related to construction activity and infrastructure investment, have been weak since at least the third quarter of 2018 as a result of lower public and private investment, a situation that will likely continue for some time.

Steel issues to monitor in this market are the eventual ratification of the USMCA, or what will happen if this is not ratified and if the old NAFTA will continue in place; and also the eventual removal of Section 232 tariff for Mexico and Canada.

I believe that the ratification of the USMCA could unlock several new projects that need to see this happen to reduce uncertainty on new investments.

Mexico has taken the necessary steps.

This week the labor reform was approved in the Congress of Mexico and this was the last step that the U.S. was requiring to put in motion the ratification of the new agreement.

Ternium's realized price in Mexico has been decreasing in the last couple of quarters, reflecting the delayed effect of the price downturn that began in the market in the second half of 2018, through the beginning of this year.

Spot prices in the North American region have remained in a narrow range since then.

The delay of realized prices to reflect prevailing prices is a result of having around half of our sales in Mexico under contract.

With the majority of them, we're setting prices every three months.

Turning now to Argentina, the economic situation in the country continues to be volatile, and interest and inflation remain at the higher levels.

Although this market continue to show low levels of demand, January was the bottom in shipments and we are seeing a gradual recovery since then.

And the second quarter helped also by the ending of the destocking in the value chain that began during the second half of 2018.

With the visibility we have today, shipments in Argentina could increase a little over 10% in the second quarter compared to this quarter.

In Brazil, our slab facility in Rio is doing well and we expect it to sequentially increase sales in the second quarter of the year with higher shipments to third parties.

Regarding CapEx, the first quarter of 2019 showed a sequential increase to $210 million as the investments for the new hot rolling mill in Mexico are increasing while the projects advance.

We expect CapEx to continue growing in the coming quarters, in line with our full year target of between $900 million and $1 billion.

By mid-year, we should start up the new painting line in Pesqueria facility and in the second half we should bring online the new galvanized line.

On the other hand, the works for the new hot rolling mill are progressing on schedule, as are the works for the new steel bar and coil mill in Colombia.

All right.

With this, I'll stop here.

Please, Pablo, go ahead with the comments about our results in the first quarter.

Thanks, Máximo.

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

Let's review our performance in the first quarter of this year, starting in Page 3 of the word capitalization.

As you can see in the upper left-side charts, in the first quarter 2019 we reported EBITDA of $470 million, slightly lower sequentially, as expected.

These reflect a weaker pricing environment, mainly in Mexico, and relatively low shipment level in the southern region.

Likewise, Ternium's EBITDA margins in the first quarter, decreased to $147 a ton, or 17% of net sales as you can see in the slide.

As for net income, in the first quarter 2019, we reported $225 million or $1.11 per ADS.

On healthy operating income, and more [related] financial losses as our net indebtedness remains relatively low.

Yet, when compared to the fourth quarter last year, earnings per ADS decreased $0.68, of which $0.32 were related to non-recurring lower deferred tax in the fourth quarter 2018 in connection with an asset revaluation for tax purposes in Argentina that we described last quarter.

More [normalized] drivers of these changes in EBITDA and net income in the following slides.

We now review, next page, our shipments performance.

In the first quarter, the steel volume increases, with higher shipments in Mexico (inaudible) market partially offset by lower shipments in the southern region.

As you can see in the bottom right-hand chart, slab shipments to third parties increased.

The combination of these developments resulted in consolidated steel shipments increasing 8% sequentially.

As Máximo mentioned, shipments in Mexico increased sequentially.

Compared to the same quarter in 2018 shipments decreased, mainly due to weakness in the Mexican commercial market as well as very strong shipment in the prior year period due to steel prices rising strongly in the first half of the year.

Looking forward to a second quarter, we anticipate relatively stable shipments in Mexico.

In Argentina, shipments decreased sequentially in the first quarter due to a combination of weaker steel demand and persistence of stocking process in the value chain, and the negative effect of seasonality.

Looking forward to the second quarter, shipments are expected to sequentially increase despite a weak economic forecast.

The anticipated increase should result from a gradual recovery of the local steel markets and the eventual conclusion of the restocking in the country's steel industrial value chain.

Based on all these factors, we anticipate for the second quarter 2019 on a consolidated basis, moderately higher steel shipments compared to the first quarter.

Turning to the next page, net sales increased 4% sequentially in the first quarter, as the 8% increase in shipment volume that we have just saw were partially offset by a 4% decrease in consolidated revenue per ton as shown in the lower left-side chart.

Let's turn now to Page 6 to review more details of the drivers of EBITDA and net results in the first quarter of the year.

The main driver behind the slight sequential decrease in EBITDA were weaker prices, partially offset by higher shipments.

In the second quarter 2019, we expect to report slightly lower EBITDA levels as a result of a lower, still-normalizing, steel margins partially offset by moderately higher shipments.

We anticipate lower revenue per ton in Mexico as contract price in the second quarter has continued to reflect the steel price downturn from July last year through January this year.

On the second chart, we can see the main drivers behind the decrease in the third quarter net income.

Financial results mainly reflected the effect of the fluctuation of local currency against the U.S. Dollar on Ternium's Argentine and Mexican subsidiaries, which was actually the opposite to what happened in the previous quarter -- an appreciation or depreciation of the currency in each case.

The increase in effective tax rate in the first quarter 2019 mainly reflected what we already mentioned, which was a non-recurring $104 million tax gain in the fourth quarter 2018 due to the effect of an asset valuation for tax purposes on Ternium's Argentine subsidiary.

Please turn now to Page 7 which is the last page of the presentation, where you can see the evolution of free cash flow, capital expenditures, net debt and dividend.

Free cash flow in the first quarter 2019 reached a strong $269 million.

In this quarter, working capital decreased by $167 million.

Capital expenditures were $210 million in the period, and are expected to increase in coming quarters as Máximo mentioned.

Finally, Ternium net debt further decreased to $1.5 billion at the end of March, reflecting the strong free cash flow in the period.

This is equivalent to a comfortable level of 0.6 times last-12-months' EBITDA.

On the lower right corner, you can see how Ternium's dividend payments have been increasing consistently over the years.

Our Board of Directors proposed to our shareholders a dividend of $1.20 that, if approved, at next Monday's meeting will be paid on May 14 and represents a dividend yield of around 5%.

Okay.

That were our initial remarks, so we can now take your questions.

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

(Operator Instructions) Your first question comes from Carlos Alba from Morgan Stanley.

So the first question has to do with the outlook for volumes, particularly -- or I guess both in Argentina and Mexico.

The two countries are experiencing very unique or interesting dynamics and so you already mentioned what you see for the second quarter.

But is there any visibility or at least your expectations as to how the second half of the year could evolve in both of your main markets?

And then on Argentina, could you please give us any of the (inaudible) color as far as you can comment on the legal investigation on potential illegal payments to the former Argentine government by the Techint Group, and how these may or may not influence Ternium?

Let me start with the first one.

Volumes.

First in Argentina as I told you, the lower shipment was in January and then they start to increase, mainly because the destocking was over.

Shipments in the second quarter will be, if things continue like this, a little bit more than 10% the shipments we had in the first quarter.

And we expect today the third quarter to be a little bit more higher.

Argentina, the thing that is happening, is that they have an election.

And it's not an easy election.

And so what will happen in the third quarter and fourth quarter is still -- they have a lot of uncertainty to be honest.

And it depends a little bit of the political side.

Today, as I said, I think the second quarter is very solid at what we had.

And the third quarter we expect a little bit more.

Mexico, it's not in the path of Argentina.

I mean Mexico we increased a little bit the shipments, although the market was down.

As I told you, the numbers of rolled steel said that the consumption in Mexico decreased 4% in 2018.

The new numbers for 2019 is an increase of a little bit more than 1% but it is very, very small.

Nevertheless, we expect shipments in the second quarter to be in line with those in the first quarter.

And we expect that it should have a recovery in the third and fourth quarter.

That's our estimations today.

Not a huge recovery because I mean, the predictions of all the economies in Mexico is that Mexico is going to grow between 1% and 1.5% this year.

And so there's not going to be a lot of increase in the volume although we don't see any decrease in the volume with that.

The second question was the investigation.

Regarding the investigation of Argentina, I don't know if you saw the last news, but the Argentina Court of Appeals found that there was no evidence to link our Chairman to the notable cases.

As a result the court reversed the preliminary decision.

It's called a procesamiento in Spanish.

I don't know the exact words in English.

Issued by the first instance judge, investigation [the notable case] with their respect to Mr. Rocca, to our chairman.

And let me remind you that Ternium as a company is not involved in any investigation at this time.

Thank you, Máximo.

And if I may squeeze another question there, how do you see the margin evolution beyond the second quarter?

I mean you already mentioned slightly lower EBITDA margin in the second quarter.

But in the second half with everything that is moving on, the lags in Mexican prices, the stable prices in the U.S., or with a lot of uncertainty recently.

And then higher iron-ore volumes, or sorry, prices, that may squeeze your margins in Brazil and Argentina?

Yes.

There's a lot of things going on.

Let me -- but there are two main events that will clearly show what is going to happen in the second and the third quarter.

The first is the prices in the U.S. that are kind of linked to the prices in Mexico.

Prices in the U.S., as you saw, are coming down.

The differences between the marketing -- the prices in Mexico and the prices in the U.S. have decreased a lot lately mainly because U.S. prices fall more than the Mexican prices.

Now what is going in the U.S.?

The U.S., the demand is good.

I mean there's not a problem of demand.

I think it's more of a problem of supply.

Imports are coming down but not at the speed that I think the U.S. producers expected, and U.S. production is coming up.

I mean they are working at 83%, 84% of capacity for the last couple of months.

So there is more supply for a market that is healthy, but it's not that healthy.

So today, the decrease in prices is mainly due to local competition.

What is going to happen during the second quarter, I think imports are going to start coming down more speedy than they were because there's no margin for imports to pay 25% and compete with the -- with the U.S. local producers.

So by the third quarter, we expect that prices are going to start recovering a little bit.

And I don't think it's going to start in the second quarter, as some analysts are saying.

But I think they're going to start to recover in the third quarter because again, demand is good.

And the imports should start coming down because the prices the U.S. producers are selling, there's no room for imports.

That's for the price side.

The other side is iron ore.

I mean after the [action], the value of iron ore increases by almost $30 a ton.

I mean there were $67, $68, and went up today.

I think they are $94, $95 a ton.

This is almost -- not all, but a big part of that is already reflected in the first quarter because as you know, we have a just-in-time delivery from Vale so the prices are adjusted on a daily basis.

And so we don't expect iron ore to continue growing prices.

I think that on the contrary, they should decrease a little bit now that -- now that things in Brazil are starting to look a little bit more normal in the mining sector.

I mean I think there was an over-saturation in closing mines that were perfectly in good state and now I think the different authorities are seeing that some of the mines have to be closed but not all of them.

And so for example, in Vale they open up one of the mines, [Burucutum] to steady production again.

So I think that the supply side of the iron ore is going to start normalizing although there is going to be a little bit more less production.

It's going to start normalizing so prices in iron ore should stay stable or going a little bit down.

But as I said, we have already reflected that in our cost because that is almost on a daily basis.

The next question comes from Caio Ribeiro from Credit Suisse.

So my first question is again on the flat steel prices in the U.S. I just wanted to explore this a little bit further.

Given that you said that imports, they should start coming down and prices recovering in third quarter, I just wanted to see when you expect that that should start filtering through into your earnings.

Would that show as a recovering net revenue per ton more towards fourth quarter?

Or closer to first quarter 2020?

And then secondly on the new NAFTA agreement, I just wanted to see if you could give us an update on whether there have been any new developments regarding the Section 232 tariffs for Mexico, whether they're going to be removed or not and what your expectations are on the final result of this?

If prices start going up in the third quarter, it's going to be reflected in our fourth quarter, not in the third quarter.

Although a little bit can.

In the spot market, what we're saying in the spot market should be reflected a little bit in the third quarter but mostly in our fourth quarter.

So that's the first question.

The new NAFTA agreement, and 232.

As I said, the new NAFTA agreement, one of the things that were holding the U.S. to present the new NAFTA agreement to the Congress was the labor law in Mexico because that was a commitment that Mexico made to the U.S. when they signed the agreement the last day of November of last year.

So today, there is nothing holding the U.S. government to present the agreement, and that time start running to confirm the agreement.

Again, I don't know what the U.S. is going to do regarding this, but I know that the -- the U.S. administration and the government of Mexico are talking and they are meeting together during this week and next week to discuss how this is going to be implemented or what is the strategy to implement, and the NAFTA approved in the three congress.

232, I think 232 -- I think we -- I mean, there's going to be an agreement or there should be an agreement on 232 before the NAFTA is approved.

Mexico government is pushing hard that there should be no 232 to Mexico.

I mean as we have a new NAFTA that is stronger, and it's stronger on a lot of things regarding steel, one of them, there should be no -- I mean, Mexico should be incented of 232.

And I think the U.S. wants to have an agreement, but this agreement should be based on mutual quotas.

So Mexico put quotas without tariff to the U.S., and the U.S. needs quotas without tariff to Mexico.

So those are the two positions, and again, I think during these weeks this should be discussed and we should have an agreement before the NAFTA is signed.

Your next question comes from Thiago Lofiego from BBI.

A few questions on steel prices in the U.S. and Mexico.

Where's the current gap between Mexico and the U.S. steel prices at the moment and where do you expect this gap to normalize?

And also, related to the pricing question here specifically in the U.S., how concerned are you guys with the capacity expansion in the U.S.?

Second question regarding slab sales to third parties, where should we see those slab sales to third parties evolve in the coming quarters, and what is your view on that pricing and supply and demand dynamics, please?

Thiago, I'll start with the first question and then I'll ask you to repeat part of the first question because there was a noise on the line, at least here.

First, in Mexico, the gap between prices in Mexico, it's very small today.

I mean if you remember a few quarters ago when 232 went into place there was more than $100 I think we said.

I don't remember exactly the number that we said, but the gap has increased.

Today the gap is much smaller than that.

It's almost insignificant.

In some cases $20, in some cases a little bit more, but no more than that.

And then depends on the market and on the moment.

The second part of the question was about capacity.

Where, because I -- we couldn't hear it very well, I'm sorry.

Sure.

Yes, it was about just how concerned are you guys with the capacity expansions in the U.S., and what kind of impact do you guys foresee in terms of steel prices in the U.S. and in Mexico?

But before that, just you mentioned the $20 gap between U.S. and Mexico now.

Do you think that should be the normalized level, or do you see room for that number to change?

The price gap depends entirely on how the 232 is resolved, to be honest.

And depends on how it's resolved, it's going to be how the 232 evolves.

Another thing that of course narrowed the gap was that if you remember, the Mexican government remove -- renewed, sorry, the [sale] what we have for steel products.

Last quarter, we talked about these.

This was not removed, renewed.

It was removed or was not extended.

But one month ago, the new government understand the situation of the steel industry and so that -- they renew the same [one] so that's another important fact for that gap to be much lower.

But the final gap will depend on how 232 is resolved between Mexico and the U.S., and between the U.S. and the rest of the world.

Expansion in the U.S., I mean, again, if the two -- if we have an agreement on the 232 the U.S. will be limited to export to Mexico.

So to the volumes they're exporting today.

So there's not going to be any concern with the new capacity.

I mean this new capacity is going to fight -- clearly it's going to fight imports in the U.S. or local players in the U.S. So I don't think it's going to affect very much the Mexican market, to be honest.

And the second question, Thiago, was about slabs for third parties.

Again, there was a noise and I'm very sorry, I have to have you repeat.

Sure, no problem.

So where do you expect slab sales to third parties to evolve, where to do you expect slab sales to evolve in the coming quarters and what's your view on slab pricing and supply and demand dynamics?

Well, slabs -- I mean, we have the flexibility to sell, to ship slabs to our facility in Mexico or to sell to third parties.

And to be honest we analyze every quarter what to do.

And that's why in some quarters we ship more to Mexico or in some quarters we ship more to third parties.

In the second quarter, we are going to ship more to third parties.

In the third quarter probably a little bit less, and in the fourth quarter even less and more to Mexico.

But that's -- if you see our history it's like that in the past too.

And so I mean that's my vision.

Market for slabs, I mean, slabs, we have market to sell slabs.

So we don't have a problem with that.

Prices increases of slabs in the last month because of iron ore, not because of the market.

I think today there are decreasing a little bit, and it should decrease a little bit in -- in -- in the next -- in the next month because the increase was viewed mainly because of iron ore and not because of the market.

Your next question comes from Jon Brandt from HSBC.

First, I wanted to ask you about the slabs and the impact that that had on this quarter, and maybe the impact that it'll have on the next couple of quarters, just on the margin.

How much of -- I mean, my assumption is that the slab margin is less than sort of your overall margin.

So I'm wondering if you could sort of clarify or quantify how much of an impact that -- the increased slab sales had on the margin this quarter, and maybe what it looks like for the next quarter or two?

If it's a significant impact.

And secondly, I just wanted to ask you about the possibility of listing in Argentina.

You've mentioned this in years past, about potentially doing this to close the valuation gap between yourself and peers.

I'm wondering with everything going on in Argentina, if that's still a possibility, if there's been any discussions with the government about potentially buying out their [Cerrar] stake?

Anything you could add would be much appreciated.

Let me take this, your questions.

In relationship to the slab margin impact in Ternium, of course there is some.

We try to anticipate these from the very beginning.

We require the operations of [these in Brazil], clearly the margin of the slab is lower than margin of selling [fringe] products, especially the ones that we are selling in Mexico to the automotive sector.

Clearly, we will increase the size of the sales to third parties of slabs, then you will see some reflection of that in the total margins.

That most impact will happen during these first quarters since we have two effects.

One, a reduction in price as we have already discussed and Máximo described at length.

And the other one was the increase in total shipments of slabs to third parties.

That also put some pressure in the total price and that was the part of the increase.

We are expecting to have a similar, maybe a higher shipment of slabs in the coming quarter and then as Máximo mentioned, probably we see reviews in -- entering into or at the end of the second semester.

That will have the opposite situation where we help by changing the mix, having the better pricing for Ternium, all things being equal.

So clearly has an impact depending on the product that you sell, depending on the changes in prices in the market where we are.

But this is something that we try to anticipate from the very beginning because clearly it's not exactly the same, and sometimes we [are low and] we have increase in volume, some a decrease in volumes, but at the very end the total level of production or the total level of shipments, either to us or to third parties, globally is basically the same, evolving quarter-after-quarter because as you know, we are having a plan to increase that level.

Going to your second question, yes, you're right.

We have discussed this in the past.

We have these as an possible opportunity to unload some value.

But clearly as we also discussed in the last couple of quarters, this is something that we require the acceptance, first of all, of the shareholders in our subsidiary in Argentina that is basically the government, to be part of a transaction of this kind.

And basically we are leasing the subsidiary in Argentina which is something that we considered is not feasible to realize, especially during an election year like the one that we have today in Argentina.

So unfortunately, it's nothing that we can think of during this year.

Okay.

Just to follow up on the price and the slab impact on the EBITDA, if I look at the quarter and your slides, you said there was about $113 million of negative EBITDA from the price and mix.

I mean could you sort of break that out?

I mean how much of it was -- was from a reduction of prices and how much of it was from I guess a lower mix?

Well, Jon, you know that we -- put detailed information to give.

Clearly, the most significant part of the increase that we have during this quarter is in the volume side.

We have a significant increase in volume to third parties, as we look in Page 4 of our webcast presentation.

There was an increase of 28% in the volume of the -- of sales in other markets, which is basically sales of slabs to third -- to third parties.

So clearly there where you have an impact and again, the margin that we're showing of -- in Ternium is around $150 a ton or 17% of EBITDA margin.

Clearly the number from selling slabs is a little lower than this -- than these numbers.

Your next question comes from the line of Timna Tanners from Bank of America Merrill Lynch.

I wanted to follow up on -- I wanted to say first of all that your explanation of the U.S. market conditions is the best I've heard from anyone this season, so thank you for that.

Most coherent and honest.

Wow.

Let's end the conference now.

But I did want to follow on Thiago's question about the new capacity in the U.S. because I know you said it wouldn't affect the Mexican market as much.

But a couple of the new entrants or the additional capacity is specifically targeting the Mexican market.

So wondering if -- and even mentioning Ternium's capacity as maybe a competitor.

So I know it's not until 2022, but just wondering if you think there'll be enough demand to absorb it.

And then just more on the near-term Mexican market conditions.

So one question is about the 2022 time frame, but the other one is really why, why so much destocking?

Seasonally usually there'd be restocking.

Is that just a mismatch in order entry, people got too optimistic?

And do you think we're near complete in that process?

Thank you very much for the first part of your comment.

Clearly, I mean, Mexico and the U.S. has always compete, that's for sure.

I mean so new capacity in Mexico or new capacity in the U.S., we are going to compete no doubt.

What I said first is, it depends a lot on 232.

I mean I know -- I don't know if they say publicly, and you can answer that, but what I heard from U.S. producers is that they expect 232 to be in place for a long time.

And 232 is going to be solved.

What they are expecting to solve 232 is with quotas.

And the proposal of the U.S. is quotas in both sides.

So the U.S. is not going to be able to export more than 3 million tons that they export today, to Mexico.

So if you limit the amount of exports that the U.S. can go to Mexico, there is not going to be any impact in Mexico.

That's one part.

The other part is, you said was there's no going to be 232 and both countries are going to be free to export one another.

And clearly, in that case there's going to be competition.

But also both Mexico and the U.S. are huge importers of steel.

And they still are huge importers in the U.S. besides 232.

So yes, I think there is going to be demand.

But we are going to have to fight imports.

And again, Mexico consumption is -- not probably this year because of what I said first.

But remember, consumption in Mexico is 180, 190 kilos per capita.

In the U.S., it's 350.

In China, it's more than 600.

So when Mexico start growing, which I expect it does, and start growing its manufacturing base, taking advantage of the new NAFTA and especially taking advantage of what is happening in China, consumption in Mexico should increase much higher than increasing GDP.

So yes, without 232 clearly the U.S. will try -- this new U.S. capacity will try to compete with Ternium, with AMSA and all the Mexican players.

But I think there is a demand increase to attend that, fighting imports.

But without 232 we are also going to fight each other, that's for sure.

The stocking I was talking about was in service centers for the automobile industry.

There are some -- if you see the production of cars in Mexico, there was a slight not decrease, but not increase, which what was expected.

And so that's why the U.S., the service centers that serve the automobile market, not the other industrial market, has a little bit more of stock.

And that's what I said in the beginning, Timna.

Your next question comes from Alfonso Salazar from Scotiabank.

I have two questions.

The first one relates to the labor reform in Mexico and the second to China.

The first question is regarding the labor reform.

You mentioned that it was approved recently.

Do you have any comment any of what we hear in Mexico, that this is something positive for workers in the medium and long term?

But there could be some unrest, labor unrest in the near term?

So if you could comment on that, share your view on the labor reform implications.

The second question is regarding China.

When you see that crude steel production is up almost 10% in the first quarter, and World Steel projects the amount to increase only 1%, so there is a big gap between these two numbers.

And of course the first thing that comes to mind is a risk of more exports and a correction in the global price of the steel.

But you have to consider as well protectionism in big markets.

So there are some markets that might be more exposed to if there is an increase in exports from China, and Latin America tends to be a target.

So if you can comment what you think about exports from China, what is going on there, I think that could be very interesting to hear.

Thank you very much.

Labor reform in Mexico, I mean, it's a labor reform that gives a little bit more rights to the unionized people.

I mean if you ask me, there are probably some things that the businesspeople are complaining and said, okay, we should have made this or that different.

But I don't see it as a great change, I mean, that is going to provoke a lot of unrest, at least in our steel operations.

I don't see it.

I mean we have unions for a long time.

I mean we have discussions of contract every year.

So most of the things that are there, we already do it.

So I don't think there's a huge impact for Ternium, at least for now.

China, what's happening in China.

I mean the [money] in China is increasing.

And so I don't see today.

And if you see export in China in the two, in the first two or three months of this year, have been the same as the export in China last year.

And the decreasing the VAT, it's going to increase even more internal demand in China.

So I don't see a huge increase in exports from China in the near future.

Also, restrictions, environmental restrictions are coming in, in this part of the year.

So I don't see this situation as one of the problems for the near future.

Of course, overcapacity in China is the issue, and you know all the things we're doing in all our countries.

I mean most of other countries have dumping duties to China, and we are participating in the G20 and the [OOCD] forum of [I'd say capacity] are going to diminish all the incentives of all the subsidies that China's industry receive.

But I don't see a situation in the near future where China increases, dramatically, exports.

The next question will come from Santiago Petri from Franklin Templeton.

This is a follow-up on the situation in the U.S. You mentioned that overcapacity, they are all -- the expansion in capacity will not have a big impact in quantities.

But I would like to know your view on the impact of prices, of higher capacity in the U.S. I mean with the quotas there won't be much threat into Mexico, but the higher capacity in the U.S. theoretically will be -- will put some pressure on prices in the U.S. and that will translate to Mexico.

So I'd like to know your views on this.

Again, we are talking about 2022, I think.

And again, what I said is if there is -- if there is -- if the U.S. continues with the 232, of course none of -- there's not going to be increase of export of the U.S. to Mexico, that's for sure.

But I guess that if imports doesn't come down there is going to be competition in the U.S. between U.S. producers.

I don't know how that's going to end in 2022.

I don't have that sight.

But I think it's a question more for the U.S. producers that are increasing capacity.

I think they see that consumption is going to increase more, that the demand is going to be higher in the U.S., and that they're going to be able to compete with imports or most likely against other U.S. producers up in the north.

Okay.

So essentially you don't see a threat of pressure on prices?

I mean in the long future 20-something, no?

2022?

Again, I think -- I see that demand should be there to absorb some part of this capacity, and this capacity is also going to push imports out.

Some effect on prices in the U.S. has to happen because of this.

At least as it is happening today.

I mean today, the prices in the U.S. are going down because they are fighting -- they are competing each other with more capacity and I mean, pushing away imports.

So things like today, they are going to happen.

I don't know, I don't think that it's going to be a war in prices where margins would return to very, very low levels because it doesn't make any sense for people to produce with margins so low.

Your next question comes from Andreas Bokkenheuser from UBS.

Just one follow-up question from me on the slab side of things.

How does it work with the quotas into the U.S.?

We've kind of noticed that there is quite a bit of an inflow of semi-finished steel in the first half of the year coming into the U.S., and particularly from Brazil.

Is that a reflection of slab producers from Brazil pushing as much slab into the U.S. before the quotas are filled?

Is that how it works?

Is it a supplier's push or are you seeing increasing orders from buyers very early in the year to kind of fill up inventories before the quotas are filled?

How does that actually work, if I may ask that question?

Thank you, and the answer is both.

This will bring our Q&A session to an end.

I will turn the call back over to Ternium's CEO for closing remarks.

Okay.

Thank you all again for participating today and of course, please contact us for any additional support you may need.

Thanks again, and goodbye.

Thank you, everyone.

This concludes today's conference call.

You may now disconnect.