Ternium SA (TX) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ternium Third Quarter 2019 Results Conference Call.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Sebastián Martí.

Please go ahead.

Good morning, and thank you for joining us today.

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

Ternium issued a press release yesterday detailing its results for the third quarter and first 9 months of 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 Ternium'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 to everyone, and thank you very much for participating in our conference call.

As usually, I will go through some highlights of our business, and Pablo will describe our performance in the third quarter when he goes through a webcast presentation.

At the end, we'll have a Q&A session.

We reported a good EBITDA level in the third quarter with 16% margin.

This was higher than what we had expected on the last conference call, in part because we had better results in Argentina, and Pablo will go through the details of this during the webcast presentation.

In the first 9 months of 2019, Ternium's EBITDA was $1.3 billion with a 16% EBITDA margin, equivalent to EBITDA per ton of $130.

The good operation -- operating performance Ternium showed in this first 9 months of the year translated in earnings per ADS of $2.530.

Free cash flow generating has also been strong, reaching $513 million in the first 9 months of this year.

Net debt decreased to $1.5 billion as of the end of September or just 0.9x last 12 months EBITDA.

Even though CapEx more than doubled to $748 million from the first 9 months of the year as we develop our expansion project at the Pesqueria facility in Mexico.

The works in Pesqueria are progressing well as we continue to expect the new hot rolling mill to begin operations by the end of next year.

Turning to our business in Mexico, we had a good performance in this market during the third quarter.

As expected, we were able to increase our shipments in the country, which reached 1.6 million tons in the quarter.

The Mexican market has not changed much from our last conference call.

Construction sector remains soft and shipments to industrial customers have been relatively stable.

Shipments in this market are going to decrease in the fourth quarter, mainly due to seasonality.

Now about steel prices.

On our last conference call, we expected prices in the NAFTA region to recover as they were bottoming out at the time, and they did so briefly, but then resumed a downward trend and reached new lows in October.

Steel prices are now at levels seen back in 2016 when cost of the main raw materials were lower than what they are today, a difficult environment for the steel industry.

On the positive side, stocks in the value change are not high and many steel companies in the region have recently announced prices increases, a trend that may finally take steel prices to more reasonable levels.

We, in Ternium, are well positioned for adverse price environments like this today.

Our integrated facility in Mexico are based in electric arc furnaces, operating a mix of DRI and scrap, consuming energy that we produce with natural gas purchased at very convenient prices, iron ore that were mined from our own mining operations in the country.

These are very competitive facilities that can sustain good profitability in all kinds of environments.

Regarding our nonintegrated facility in Mexico, this facility rely in part on slab provided from our Brazilian mill.

The production of slabs in Brazil is currently having some pressure on margins as a result of weak global slab price environment and prices of raw material, particularly iron ore.

In addition, local slab sales are currently weak as growth expectation in Brazil are taking longer to materialize than expected.

We are adjusting the Brazilian mill production level to achieve an overall lower production cost, minimizing the use of iron ore pellets or purchase of external coke as well as deploying other cost-cutting initiatives.

In the fourth quarter, slab shipments to third party are going to decrease a bit more, mainly due to lower slab sales and lower production, I had just mentioned.

Let's review Argentina now.

The scenarios in Argentina changed materially from our expectations on last quarter's conference call.

Following August's primary elections, there was a significant fluctuation of the country main macroeconomic variables, with a 26% exchange-rate devaluation and an increase in inflation in the third quarter.

This volatility affected Argentina steel market demand.

And as a result, our shipments did not continue recovering in the third quarter of 2019 as they did in the second quarter.

In this scenario, we expect shipments to remain at low level in the last quarter of the year as well.

We have already adjusted our facility in Argentina to a lower level of demand, and we continue to adapt this operation to the incremental -- increased level of uncertainty Argentina's economy is growing -- going through.

Next step in this market will be a change of government administration in December.

To have a better view of 2020, we will need to wait until the new government introduces a new set of policy to tackle the current economic situation.

So wrapping up, we are currently in a challenging price environment that could begin to slowly turn better.

In the meantime, we are working fast to adapt the economy to the current situation.

The fourth quarter of this year will show a lower margin than the third quarter, but all in all, we expect to report a good full 2019.

And I am cautiously optimistic regarding 2020 if this price recovery gets some grip over the following months.

I will stop here and ask Pablo to go ahead with a comment regarding the results of the third quarter.

Thank you.

Thanks, Máximo.

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

Let's review the performance in the third quarter 2019, starting on Page 3 in the webcast presentation.

As you can see in the first chart, in the third quarter 2019, we reported EBITDA of $382 million, slightly lower sequentially and above our expectation for the quarter back in July.

Ternium EBITDA margin in the third quarter increased to 16% of net sales or $125 per ton.

In Argentina, the market volatility related to the electionary process curbed steel demand during the period, as Máximo mentioned, and on the other hand, caused a significant depreciation of the local currency that had a positive impact on margins in Ternium Argentina.

Pablo, sorry.

I'm told there's a problem with the PPT version of the webcast presentation.

Please, if you're connected via webcast, you can open the PDF version that works.

Okay.

Good to know.

So going back to the results of the company.

Regarding net income in the third quarter of 2019, we reported $111 million or $0.48 per ADS.

When compared to the second quarter 2019, earnings per ADS decreased $0.58, including noncash foreign exchange-related results that we will analyze with more details in the following slides and an increase in the effective tax rate.

Let's now review in the next page our shipment performance in each region.

As you can see, shipments in Mexico in the third quarter increased 4% sequentially and 7% on a year-over-year basis, as we have expected.

Looking forward, we anticipate slight decrease in shipments in the fourth quarter, mainly due to seasonality and the domestic construction sector that remains soft.

In the other markets region, in the upper right-hand chart, shipments decreased 26%.

The main driver behind the decrease were 307,000 tons lower slab sales to third parties as we increased internal shipments to our own operations in Mexico, again, as we had expected.

Looking forward to the fourth quarter, slab shipments to third parties are expected to decrease a little more.

In the Southern region, shipments remained relatively stable sequentially in the third quarter.

And looking forward to the fourth quarter, shipments in the region are expected to remain at these low levels as volatility in the Argentine market continue.

Turning to Page 5. You can see in the first chart that the combination of these developments resulted in consolidated steel shipments in the third quarter, decreasing 8% sequentially and 3% on a year-over-year basis.

Looking forward and considering what we have already discussed, we expect steel shipments in the fourth quarter to sequentially decrease, mainly due to the lower shipments in the Mexican market and lower slab shipments to third parties.

Going now to realized prices in the upper right-hand side chart, you can see that our realized price continue decreasing in the third quarter of the year, mainly driven by lower steel prices in Mexico and other markets.

As Máximo mentioned, steel prices currently appear to be bottoming out.

Yet Ternium expects lower realized prices in Mexico in the fourth quarter due to the lag related to contract price resets.

Now the lower left-hand side chart shows the net sales decreased sequentially 11% as a result of the 8% decrease in shipments together with the 4% decrease in consolidated revenue per ton.

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

Regarding EBITDA, the main changes were the decrease in shipments, as we said so, partially offset by slight improvement in EBITDA per ton.

During the third quarter of the year, cost per ton decreased sequentially, mainly as a result of lower purchased slabs and raw material costs, lower maintenance expenses and lower labor cost.

These changes include a net positive accounting effect on the cost per ton of Argentina -- excuse me, of Ternium's Argentine subsidiary.

As you know, uses Argentine peso as a functional currency, as a result of the 26% depreciation of the Argentine peso, and a 12% inflation rate recorded in the third quarter.

The overall cost per ton improvement was partially offset by the decrease in revenue per ton we have said so.

As Máximo anticipated in the fourth quarter 2019, we expect to report a lower EBITDA level with a decrease in shipments and lower revenue per ton in Mexico as well as a decrease in slab shipments to third parties, as already discussed.

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

In addition to slight decrease in operating income, Ternium's net income was affected by the negative noncash impact of the Argentine peso depreciation against the U.S. dollar on Ternium's Argentine U.S. dollar financial position.

A lower equity in earnings of Usiminas and higher effective tax rate, mainly due to the noncash effect on deferred taxes of the depreciation of the Mexican peso that happened during the third quarter compared to a low effective tax rate in the second quarter when the Mexican peso appreciated against the U.S. dollar.

On Page 7, you can see the drivers of the first 9 months year-over-year changes in EBITDA and net results.

The decrease in EBITDA in the first 9 months was mostly related to the decrease in EBITDA per ton, and the decrease in net income was mainly due to lower operating income partially offset by better financial results.

Let's turn now to Page 8. This is the last page in the presentation where we can see the performance of cash flow of operations -- excuse me, cash from operations, capital expenditure, free cash flow and net debt.

Free cash flow in the third quarter reached $244 million -- $254 million.

In this period, the decrease in working capital contributed with $208 million and capital expenditures were strong $257 million, as we have already expected.

The capital expenditure should remain high in the fourth quarter of this year and during next year, considering our expected progress in the construction of the new mill in Pesqueria.

All in all, Ternium's net debt decreased to $1.5 billion at the end of September versus $1.7 billion at the end of June, equivalent to a comfortable level of 0.9x last 12 months EBITDA.

Okay.

Thank you very much for your attention.

We are now ready to take your questions.

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

(Operator Instructions) Your first question comes from the line of Caio Ribeiro with Crédit Suisse.

So first of all, I wanted to see whether you could provide some more color on where your expectations are for steel demand growth in Argentina in 2020 in light of the recent results of the elections?

And then secondly, on the cost side in this quarter, there was a pretty significant drop in labor and maintenance costs.

I just wanted to see if you could provide a little bit more color on what drove that and whether this is sustainable going forward?

Thank you very much Caio.

I'll take the first one, though it's very difficult one to answer today.

I mean election has just happened in Argentina.

And to be honest, there's still no plan -- no economic plan that the new government has put together, at least nobody knows if there is, I'm sure they're working on one.

So knowing what the demand will be in Argentina in 2020 is still a little bit difficult.

We have prepared our operation and running our operation as if demand will continue in the levels they are today, which are levels below the -- what we expected a couple of months ago.

And so what we are preparing for is to stabilize our company in this level of shipments that are around 150,000 tons every month roughly, a little bit more maybe.

But that's what we think today of 2020.

The second part...

Yes, I'll take it, Máximo, if you want.

The -- you're right, Caio, that we have a reduction in the cost, mainly driven by a couple of issues.

One is, as you mentioned, labor cost, maintenance cost.

You need to consider that not only in Argentina we have a devaluation of the currency, which was very significant, but we have also a devaluation of the currency in the other 2 main markets, which are Mexico and Brazil.

So the effect of that is positive, taking into consideration that part of our cost or our input cost is based in local currency.

So that clearly had a positive effect, both maintenance and labor costs.

In the case of specifically Argentina, the weak devaluation and the way you need to account, taking into consideration inflation accounting and the functional currency, whenever you have a big devaluation, has always a positive impact in the numbers that you are drawing as cost.

Looking forward to the fourth quarter, clearly, what we need to see or to expect or to wait, sorry, which will be this effect coming forward.

The more difficult one to predict will be the case of Argentina where very difficult to -- as Máximo also was mentioning, it's very difficult to know exactly which will be the situation by the end of the year, which, of course, is the end of the fourth quarter where we need to report our new data.

But also, I think it's important to confirm or reaffirm what Máximo was saying that we continue working very, very hard to reduce our costs as much as we can.

And clearly, though we have, if we want the help of the devaluation of the currency, clearly, the results are showing that we are in the good direction in order to take this advantage of working very hard on reducing costs.

Next question comes from Jon Brandt with HSBC.

I first wanted to ask you about the slab and the impact that, that had on margins during the quarter.

So obviously, you sold less slab during the quarter and then you bought less third-party slabs.

So I'm wondering if you can sort of quantify how much that help margins and make some comments around the cost level of your Brazil unit versus the cost of slab from third parties.

I guess I'm trying to get a sense of how much more this could help margins in the future and trying to understand where margins could be in the next couple of quarters?

And then secondly, just back on Argentina, I understand it's a difficult moment, but are you also preparing for maybe going back to the old custom levels where there were price controls and import restrictions and things like that, is that under your consideration at all?

Okay.

If you want, I'll take the first part, which was the cost related issue...

The issue on...

The issue on, yes, because, Jon, as you know, and I think we have mentioned this at the very beginning after acquisition of the facility in Brazil that due to the reason that the Brazilian operation had a mix of sales to third parties and to -- internally to our own operations, this will make our total level of shipment to fluctuate quite a lot depending on the mix of the sales.

Clearly, the sales that we are doing to our own facilities in Mexico are not reflected at sales because they are consolidated.

So we are only reflecting the sales to third parties.

And depending on this level of sales is the case that will be reflected in the results for the quarter.

That's why the significant reduction in slab shipments to third party, which does not mean that we reduce the total shipments out of Brazil, reflect -- was reflected in an important decrease on the number.

Going forward, we are expecting a further small decrease on shipments to third parties and also, as Máximo mentioned, we are working very hard to adjust the cost structure or the production level of our Brazilian units to cope with the reduction in margins due to the lower prices of slabs that are basically in line with the reduction on the prices of steel in the market, especially in the U.S., and what we saw in the past, which is an increased level of mainly iron ore cost and coal cost, both of them have been reducing later on.

So we are expecting to see a sustained level of shipments in the coming year to third parties.

And we will continue to do that following the contract that we have and the shipments to the local market, and putting together the reduction in cost that Máximo was mentioning and the possible increase in prices, this should have a better perspective for next year.

Yes.

Jon, I think what -- and adding to what Pablo is saying, the important thing of the facility in Brazil is that we have to be flexible to what is happening in the market.

And so if you remember 2018, we produced roughly 4.6 million tons in that facility, and we were expecting to reach this year 4.7 million, 4.8 million tons.

That's not going to happen because what we have done in this last quarter when conditions started going down because of the decrease in prices and the increase of the raw materials, especially iron ore, is that we reduced our marginal cost production.

That means that this year we are going to reach the 4.3 million tons.

And we are now producing at a level -- an annually level of 4.1 million tons.

This allow us to put in the blast furnaces much less pellet, so the cost of the whole facility is going down.

And of course, in the cost sense, we are doing much more other things, but that is one of the important things that we are doing.

So we try to adapt very quickly to the market conditions and let -- and leave the Brazilian facility to be very, very competitive against the world in producing slabs, and this is the way.

The second question was in Argentina and what's coming, and if we are prepared or not?

As I said, we don't know what is coming in Argentina.

I mean there's a lot of speculations, and we don't want to speculate.

Clearly that if you look at the history of the last 10, 12 years, Argentina went through a series of economic policies, which we were able to manage.

And so we think that we can -- if this comes, and we don't know, I mean, if this is coming, we don't have any certainty or we don't have any insight that some of the things that you mentioned are coming, but if this is coming, we think we are prepared because we have had it in the past.

Next question comes from Carlos Villa (sic) [Carlos De Alba] with Morgan Stanley.

So the first question, maybe if you provide...

A new Carlos?

Yes, exactly, new last name.

So if you could provide an update on the projects in Mexico.

And if you could -- if I may ask you how -- there were some news that a competitor of yours in Northern Mexico may be up for sales -- or for sale or for a joint venture.

How would that feed your portfolio in the country and overall in Ternium?

And then if I may just follow-up on some of the questions on Ternium Brazil.

Can you give us a range of the level of profitability, which that plant is operating right now, which, if I understood correctly, Máximo, it is running around 4.1 million tons per year as we speak.

Okay.

A lot of questions, Carlos.

I'll try to answer them.

The first one was about prices in Mexico, I believe, no?

The projects, the projects.

Ah, projects.

Projects in Mexico are going well.

Painting line is already running.

We studied a little bit later than what we thought we would like -- we did want to start it in July.

It started in August, September, but the curve is much higher.

So today, we had produced almost the same as we expected in the business plan because it's producing much faster than what we think -- what we thought.

Galvanized line is coming online as we speak.

We didn't have yet the first coil, but it's coming in any moment.

And the big one, the hot-strip mill, it's -- I mean, our plan is to start it in the 1st of December, but we are very confident that we can start it earlier because in that case I think we are ahead of the planning.

So if everything goes well, we will start it a little bit earlier.

Regarding your second question about what is happening with a competitor of ours.

Well, as you know, Ternium has a long history of growing through organic growth and acquisitions.

This is always part of the strategy, and our area of interest is in the Americas.

And so any opportunities that arise over there, we will always analyze that opportunity.

Now having said that, about a particular company, we don't have anything to report at this time regarding any potential transaction.

Regarding the fit, because you also asked about the company and the fit that this company will have to us, again, I cannot speak with -- in anything particularly about these companies in general, but let me give you a view on the subject of what is my opinion.

And there are 2 trends that are going on -- or that is happening in the world of -- in the steel world market.

The first one is that the steel global market is shifting from a global perspective to be more regionalized.

That's something that is happening in the last years.

I think all these dumping cases and 232s, and all these safeguards are going in this direction.

If you say -- if you take the share of international trade, steel in the last 10 years declined from 36% to almost 26%.

So it's a huge decline.

So the steel market is getting regional.

And the other kind, or the other thing, or the other trend, or the other challenge of the industry is the overcapacity.

I mean the overcapacity is still here.

It has been here for the last several years.

So for those 2 things, consolidation is a good thing.

So if somebody of the region pursues this company, it could be a good thing for the steel industry in general.

So my opinion is that it should fit some of the participants in the region.

Carlos, your third question was related to Brazil, I believe...

Yes.

And the production level that we are expecting to have...

Yes, the profitability, if you can give more like a sense of the profitability.

Yes.

Sorry, there was a noise when you were asking your questions and it was difficult to understand.

Yes, the profitability is -- with respect to the Brazilian operation, as you know, has been very, very positive in the last year in relationship to the very good prices that we saw in the slab market coupled with reduction level or reduced level of raw material cost.

Lately, we have the opposite situation, which was a reduction in the price level and an increase, probably unexpected, if you want, abnormal increase in some raw material, meaning basically iron ore that put some pressure on margins.

We are positive in the sense that through the initiatives that we are taking and the changes in the environment for prices on both of steel and raw material, the profitability of this company will go back to normal -- more normal levels.

Clearly, not at the levels we saw during 2018 because the price level there was, as you very well know, very, very high, but at a very profitable level and more normalized levels.

Next question comes from Thiago Lofiego with BBI.

Máximo, you mentioned you expect demand to remain at current levels in Argentina, so just wondering your -- I mean why not expect a retraction on demand in 2020?

And what would be your rationale for this flattish demand outlook?

Second question, still on the demand front, when do you expect construction activity and infrastructure projects to begin to rebound in Mexico?

And what's your demand outlook for 2020 for Mexico as well?

Thank you, Thiago.

Yes, the 2 questions, Argentina and retraction of the demand.

To be honest, demand in Argentina is very, very low.

So if you remember, Argentina went through a crisis starting, I think, in September, October of last year, and shipments were reduced dramatically.

When we did our expectations a couple of months ago, we thought that the demand was going to increase to levels of 170,000, 175,000 tons in the domestic market only in Argentina, I'm not counting some exports that Argentina do, 170,000 tons.

But today we are at 150,000.

This is a very, very low level.

So it's very hard to see, except for December and January, which are seasonably low months, to see a demand less than that in Argentina.

Remember that in the last crisis, 2002, 2003, long time ago, demand -- the lowest month was a little bit higher than 100,000.

So -- I mean it's very difficult to go below this number, I think.

So that's why we are expecting that demand should stay at this level.

Máximo, if I may.

Just on the number you mentioned.

So the lowest level in the last crisis was 100,000 tons, you mentioned roughly?

I think the last crisis was in 2003, remember what -- more than 15 years ago.

And it reached 1 month, I think, 90,000 tons, and from that started to increase again.

There is a level of consumption that should stay.

Argentina is a country that some of the markets have continued to grow.

I mean energy, Vaca Muerta, all that investments, I don't think the new government is going to destroy -- I mean it doesn't make any sense.

Agriculture, that is another sector that we do business a lot, is also going to continue, Argentina is very competitive in that.

So there is a level of demand that is there that although the crisis will continue, it's difficult to see it lower than that, at least in the steel consumption, I'm saying.

That's clear.

Mexico.

Our expectations is that consumption in Mexico will stay the same in 2020.

That -- if you see the last report that the World Steel did a couple of weeks ago in our annual meeting, the Board members of the World Steel ended up with this outlook of the Mexican steel consumption.

I think it was a grow of 1% only, but mainly flat, mainly flat.

There are some triggers that I think could increase this demand.

And the first of all is what will happen with infrastructure?

I mean infrastructure has been declining for the last 6 or 7 years, the investment in infrastructure from the government.

The new government in Mexico, well, it's not that new, but the new government is realizing this and it's trying to work with private sector to see if there can be an incremental investment in infrastructure in Mexico, which is much needed.

I don't know if this is going to -- if all of us are going to be able to do this in 2020, for sure in 2021.

But if they are able, demand should increase in 2020 a little bit more.

The second thing that is very, very positive is the new NAFTA deal, the USMCA.

If we are able, as a region, to approve the USMCA this year, which I think there's still possibilities that, that can happen, that could also be a trigger to increase consumption of steel in Mexico and in the North American region.

So for us -- I said, again, we expect the demand to be almost flat, but there are some positive things that we are looking that can increase that number.

Next question comes from Timna Tanners with BoA Merrill Lynch.

I wanted to ask 2 questions.

So one is, given that, as you point out, your balance sheet is looking really steady, strong cash flows, even with the increase in CapEx, I know M&A is a sensitive topic, but maybe you could just remind us about your priorities for capital allocation.

Pesqueria is a big project, but what other types of things are you thinking down the road?

And what other priorities for cash?

And my second question was just in the case that prices don't recover much from current levels, absent, obviously, currency moves, can you talk us through a little bit more what kind of triggers you can pull on cost savings and what kind of other specific plans you might have there?

Yes, thank you.

Let me start with CapEx allocation and what else?

As you know, we are undergoing this expansion project in Pesqueria.

We said it before, the CapEx of 2019 will be around $1 billion and 2020 will be around $800 million.

And that's -- and then our expectation in 2021 is back to our normal levels that are around $450 million, $500 million to sustain the production and make improvements.

Today, we are not thinking of other things else.

I mean we don't have the plans to do anything else, I mean anything -- any new investments today.

We -- as I said, we analyze a lot of things, but we don't see today the need to increase or to invest in other areas except of the normal CapEx.

Also take into consideration currently we are investing in Colombia.

Yes, we are investing in the new -- we feel it's a little bit smaller, $90 million in Colombia too.

Second question, if prices don't go up is a question, sorry?

Just what triggers you can pull in terms of further cost savings and absent devaluation and assuming not a lot of change to prices?

Yes.

We are going to continue making more competitive our operation.

The new Pesqueria facility, remember, it's a very competitive one that it's not only going to substitute some of the imports that are coming to Mexico, but we are also going to substitute things that we buy because we don't have enough capacity.

And we are going to close some of the lines, the very old ones, that's molino uno, that's what you call, that has much higher cost than the Pesqueria new facility.

So our strategy is to continue working in making our operations much more competitive.

We think they are very competitive, considering all our competitors, but we are going to continue working in that sense regardless of the prices.

I mean if prices go up, we are also always working on how competitive, how productive our operations are.

Clearly, Pesqueria -- the new Pesqueria facility is a trigger to continue or moving forward our goal or target of sustaining margins in the range that we were working, and we'll continue to work.

So this together coupled with what Máximo was saying, the cost savings is -- for us, is key.

It's part of what we do, and what we are looking for.

And remember that also the new Pesqueria facility enables us to produce products that we are not able to produce before.

This products are going to be produced with less cost because all the Pesqueria facility has much lower cost than the old one, but also has high value-added prices.

I mean there are high value-added products, more sophisticated products that has better prices.

So we are going to increase both or decrease cost and increase -- not prices -- relative prices, I mean, the amount of extra that we can charge this more sophisticated steels.

(Operator Instructions) And we have a question from Alex Hacking with Citi.

Just following up on the projects.

Can you remind us when the new galv line and the new paint line at Pesqueria will get to their full production rates?

What quarter did you estimate that would be?

And then second question, I assume that you have some annual contracts in Mexico or some annually priced contracts in Mexico with the automakers.

I guess my question is what percentage of your total sales in Mexico is on annual contracts?

The second, first, it's very simple.

Very, very few.

We don't have much annual prices.

We don't like it.

So we have very, very few.

We have prices on annual basis, but change regarding different indicators, but we don't have a fixed annual price.

Very, very little.

So it's not very significant to our operation.

Projects, when are the projects coming?

The painting line is already producing.

I think it's going to be producing by the end of this year at full capacity.

Galvanized line at full capacity will be producing in the first quarter.

And as I said, the hot-strip mill will take a little bit longer, but it's going to start at the end of November, and we'll start producing regular coils by February...

Of 2021.

Of 2021.

(Operator Instructions) And we do not have any telephone questions at this time.

I will turn the call over to the presenters.

Okay.

Thank you very much for your participation today.

Don't hesitate to contact for any additional support or comments.

Goodbye, and thank you very much to all again.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.