Ternium S.A. (TX) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Ternium Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder this conference call will be recorded. At this time I would now like to hand the conference over to Mr. Sebastian Marti. Sir, you may begin.

Thank you. Good morning and thank you for joining us today. My name is Sebastian Marti and I'm Ternium's Investor Relations’ Director. Ternium issued a press release yesterday detailing its results for the second quarter 2015, this call is complimentary to that presentation. Joining me today is Mr. Pablo Brizzio, the Company's CFO, who will discuss our performance. At the conclusion of our prepared remarks, we will open up the call to your questions. Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities & Exchange Commission and in our press release issued today. With that, I'll turn the call over to Mr. Brizzio

Thanks Sebastian and good morning to everyone. As we usually do I’ll briefly describe our performance in the quarter and then we’ll have a Q&A session. As anticipated in last quarter, as our press release and conference call, operating income has sequential decrease in the second quarter 2015, EBITDA was $212 million in the quarter referring to percent sequential decrease mainly reflecting lower steel prices partially offset by slightly lower costs. Net sales were up $2 million in the second quarter, a 6% sequential decrease almost in entire year attributable to a 5% lower still revenue per ton, steel shipment were relatively stable, with the increase of only 1% or 34,000 tons. In Mexico, shipments were 1.5 million tons, 5% lower sequentially and 3% higher than in the second quarter last year. After record high shipments in Mexico in the first quarter of the year, the second quarter show a decrease in connection with stocking trend in the value chain, something that we commented, would happen in our last latest conference call. The Mexican steel sector continue to show a healthy growth driven by demand from abroad for export of its manufactured products especially to the U.S. markets. We anticipated achievements with remain relatively stable in Mexico in the third quarter of the year, which implies an increased achievements compare to the same quarter last year. Steel revenue per tonne in Mexico was 7% lower sequentially in the second quarter 2015, equivalent to a decrease of $54 per ton. The prolonged down trend that steel prices in the U.S. and Mexico droves in the late last year had recently stabilized. Despite this positive development, we expect to show sequentially lower realized price in Mexico were reporting the third quarter 2015 results. As our financials has not yet reflected the full realization of steel market prices yet as a result of contract sales. As we commented during the last quarter conference call close to half of our sales in Mexico [Technical difficulty] contracts and this causes some lack from our revenue line to reflect the changes in the steel market prices. Achievements in the Southern region increased 4% sequentially in the second quarter, after essentially lower first quarter and revenue per tonne showed a 3% sequential decrease, we expect achievements in this region to remain relatively stable during the third quarter of the year and we are not anticipate any significant changes in revenue per ton. EBITDA margin decreased from 15% in the first quarter of the year to 11% in the second quarter. This is equivalent to EBITDA per tonne of $89 in the second quarter, a $40 sequential decrease reflecting, $45 lower steel revenue per ton, per sale offset by slightly lower operating cost per ton. As expected in the first quarter conference call, the second quarter EBITDA margin was usually low as a result of the difference speed of in which steel prices and input cost are reflected in internal financials. Looking at this from a six month point of view, EBITDA margin in the first half of the year was 13% and EBITDA per tonne was $109 per tonne. We believe that this is a where indicator of performance of the company. Prices for iron ore purchase slabs [indiscernible] continually trend during the second quarter of 2015 in some cases reaching level that have not been seen for a quite a while, this cost benefit in trend was not entirely reflected in Ternium operating cost per tonne in the second quarter, due in part to the ground work input to cost, our Ternium cost consumes in overtime and also to offset in connection to the increase in dollar terms of local cost in our Argentina subsidiary. We do expect to see in the third quarter 2015 a cost per tonne reaction as a result of the interval pass through of lower input cost as I have mentioned, however we don't expect that the core reaction will be entirely reflected yet in the third quarter. During the third quarter of the year, we expect that operating income will be roughly in line with that of the second quarter achievements in Mexico, Argentina, we remain relatively stable and expect to decrease in realized price in Mexico, should be offset by the ongoing decrease in cost per tonne. Again the third quarter will continue to be affected as well as in the second quarter by the mismatch between steel prices and costs. The steel prices were to remain stable at today's level, the fourth quarter should then reflect a margin expansion in par normalization margins. Net income was 50 million in the second quarter, a sequential decrease of 45 million mainly as a result of the decrease in operating income, partially offset by lower income tax expenses. Earnings per ADS were $0.21 in the quarter, a $0.14 decrease compared to the first quarter of the year. The decrease in net income was partially offset by lower results attributable to non-controlling interest in Siderar. Turning now to cash flow statement, net cash provided by the operating activities in the second quarter was $435 million including a $316 million lower working capital. Capital expenditure were $144 million up from $84 million in the previous quarter, and accumulating $228 million in the forecast of the year roughly in line with CapEx in the forecast of last year. Consequently, free cash flow reached $291 million in the second quarter, in addition there we are dividend payments made to Ternium shareholders and non-controlling interest from a total of $209 million and as you know $74 million payment made in connection with the purchase of the remaining minority stake in Ferrasa in Colombia. Finally, our financial position continued to be very strong with stable net debt at $1.5 billion and a low net debt to last 12 months EBITDA ratio of 1.2 times. We also mentioned is that the net debt reduction in the last 12 months was $450 million. Okay. These were the main issues I wanted to comment on. Please operator we can begin with the Q&A session now. Thanks.

Thank you. [Operator Instructions]. Our first question comes from [indiscernible] from Bank of America. Your line is open. Please go ahead.

Good morning, Pablo and Sebastian. Thank you for the questions. I have two questions, the first one is on the recently announced restriction on imports in Mexico. Could you please provide us an update on that, what you believe could be the impact in terms of additional demand over the coming quarters if there is more measures that could be taken in Mexico to restrict imports and that would be great? And my second question is on Usiminas if you could provide an update on the current situation? I mean how are the talks going with Nippon and what could be the next steps on this situation there? Those are my questions. Thank you.

As you know, we have been seeing a lot of activity in the commerce department of all the different countries. You mentioned Mexico, it is most important to mention the U.S. in trying to control dumping cases that are coming or being seen in a North American market. This trend has been steady and is positive, not only for what we are seeing and we expected to seen the demand in Mexico or also to stabilize the pricing as you are aware we believe is the most important impact of the start of activity against anti-dumping product coming to this market. As you know, pricing in the North American market has stabilized as there is significant decrease in almost if you were from the end of last year to almost this year and this stabilization that has taken place especially in the last month. We believe that these activity and these anti-dumping cases will contribute to stabilize the pricing that we will be able to see in our markets in the coming quarter. If you remember when we are in the last quarter conference call, we were expecting to see borrowing out of the pricing and prices trend into stable level. We believe that this new anti-dumping case will be analyzed and in both market, we contribute to sustain in this level. So we understand there is a key to sustain the profitability and to sustain the shipments of the companies within our vision and especially of course the one producing in our region. Trying to answer your second question, let me tell you that there is not many developments in the situation of Usiminas. As you know, we continue to believe that there is a lot of expected this coming from company was legal and again the contract that we have assigned with our partners. In the case, after this happen, Nippon has taken a leading position in the management of this company and the situation of the company has been significant situation take into consideration not only the market situation of Brazil or the specific situation in the steel market. In Brazil, which is also suffering from an important reduction in local demand. So Usiminas is facing a difficult time and this situation is of course I am assuming that the company we need to tackle.

Our next question comes from Ivano Westin from Credit Suisse. Your line is open. Please go ahead.

I just want to follow-up on your comments on this anti-dumping measures that state on Mexico and U.S. But if you could comment on what expect for the markets other countries in Latin America where you operate, what we can expect in terms of additional for the dumping measures on those countries? And on the price outlook that you mentioned that very likely pricing next call follow the trend in global price and we could see further decrease in price this quarter. Assume your accounting procedures very likely have been seen lower costs taking in Q4. So on these new norms just like if you could comment on where expect to see on a normalized basis 2016 your EBITDA per tonne or EBITDA margin on these new market environment? Thank you.

Ivano let me tell, let me first comment on your third question, which is measure have you been implemented in the North American market. Also we note the activity on anti-dumping cases or anti-dumping measures has been very high not only in our region, but also worldwide, probably 2015 will be a record year in these types of measures worldwide. This type of situations not only been seen in North America but it has seen throughout the region. So we are expecting to see these activity, I mean anti-dumping cases or measures implemented by the government throughout the producing countries in the whole America. So I don’t think that this is just something that will happen in North America, probably North America to lead on this but it is something that the government throughout the region especially or mainly the producing countries are taken very carefully. So just to answer briefly your question, we are expecting to continue to see this trend and being expanded to all the producing countries in the America. Regarding prices as you know and as always we say it is very difficult to predict pricing. What we are expecting in the short run is to continue to see this new level or this new stable level of pricing that we have seen in the last month, moving forward to rest of the year. So this is what we are expecting up till now. This year probably for you it is very difficult to understand, not only to you or whoever or the whole analyst that are following our company, it’s very especially or what we call a transitional year and difficult to see the trend or the number as always. And that’s why we mentioned during the opening remarkets that it’s probably better to look at the profitability of the company through the full number for the first semester, where the performance of the company of course lower and the last year mainly due to the reductions in pricing reflected 13% EBITDA margin and we are expecting to see a trend in the coming quarter as we describe where probably in the semester, we should tend to have also this level of numbers, because we are expecting to see roughly similar numbers in the third quarter. Because we’ll not be able during the third quarter to fully reflect the recovery on cost reduction. Because as we always mentioned especially the impact on the purchased slabs going through our financing. So in the fourth quarter, we are expecting to see most of the reduction being reflected in our financials, but if we suppose our pricing we’ll maintain this level, the stabilize level of EBITDA margin or EBITDA generation should started to reflect at the beginning of next year. I understand that we have a reduction in the performance of the company but if you put together the first half of the year 13% EBITDA margin is not, but number you can see only taking the second quarter. So we have seen reduction in the EBITDA margin and the EBITDA generation moving from the first quarter to second. We are expected to strength or maintain the similar levels in the third quarter and the reverse moving into the fourth meaning a recovery on the margin during the fourth quarter and stabilization of the result when the full and the total impact of the cost reduction in the beginning of next year.

Just as follow-up here on these measures that are taking to stabilize margins, we already saw a major improvement in our working capital this quarter on this front what can you expect moving forward? Is there any specific target that you can disclose to us? Thank you.

Thanks for the next question, that’s the important to mentioned. We have had a very significant working capital reduction during the quarter. It was something that we’re expecting probably you remember that we have increased our purchased slabs at the end of the year and we’re expecting to see an important reduction on working capital especially in an inventories. We are expecting to month end and at least this level of working capital and as you know we as a company are always working in ways to find different measures to keep producing working capital especially to reduce inventories. So we are not expecting to have this level of reduction in the coming quarter but our target is to find ways at least to sustain this level of working capital or we find alternative to further reduce it. Also important to mention that we have had a very important working capital reduction. In the quarter, the second quarter where we have, if you want the most important utilization of cash meaning the payment of dividends, we pay dividends from Ternium, we pay dividends from subsidiaries not fully under control of Ternium in Argentina where we pay dividend also to third parties and we pay for as we acquire from, that we have from [indiscernible] so in total we spend a significant amount of money that was compensated by the reduction in working capital and this allow us to sustain the debt during the quarter and have had already small reduction from 1.52 to 1.5. Also I mentioned during the opening remarks that it is important to take into consideration that during the last 12 month, we have been able to reviews our net debt by $450 million. And as you know when this has been also mentioned during the investor day, one of the key component of the strategy of a company is continuing working in waste not only on reducing cost and being more effective but also in looking ways for reducing our working capital and keep reducing or sustaining the very strong financial position that we continue what we are having at the moment and we are started to continue having in the near future.

Thank you. Our next question comes from Carlos de Alba from Morgan Stanley. Your line is open. Please go ahead.

So first question have to do, is it possible for you to quantify at least in the range, the expected reduction in cost per tonne coming out these from the slabs that you have already purchased and that I’m assuming are already including the production plan for a coming months. So maybe you already have a ballpark of the expect cash cost reduction per ton I mean from this driver? Second has to do with, we saw an increase in SG&A as a percentage of revenues in the quarter both versus the first quarter of the year and the second quarter of last year, I assume you could comment if there is a new level that you expect to see even the depress prices if you purchase that was currently or if there any measures that the management is implemented that should reduce the percentage of SG&A as a percentage of reviews in the coming quarters? And then finally any update on the potential growth projects announce or commented open in the Ternium day those in Mexico and if you have any details is to how the energy plant is progressing that will be also useful? Thank you.

Hi Carlos how are you? Okay so many questions put together, let me try to do to answer all of them. In respect of the impact of slabs coming into the third quarter, there should be an important reaction in the total cost of this input cost, and we are calculating that will be around $70 per tonne coming into next quarter only take into consideration the purchase of slabs, so as we were mentioning this is of course part of our total cost and this is an important reaction of quarters will be -- in other input cost or in some cases, but this will compensate or what we are expecting to see is a compensation of these reaction, this important reaction impart of our input cost with the decrease that we will see in our as prices during the third quarter. That is the reason why we are expecting to see a sustain level of EBITDA generation during the third quarter and when we stabilize in the fourth, we are expecting to see an increase in EBITDA margin and EBITDA generation.

Just to clarify this $70 per ton, deduction is on the price of the purchase slab or is on the cost per tonne, overall cost per tonne?

Now that's in the price of the reaction in price of the purchase slabs. Again, probably where I’m standing is important to in this specific case, where we are in the middle of the transition looking at the six month level is very indicator profitability of the company. Let me comment on, there is a component which is also important things for that question, the SG&A though we have a reduction in comparison to the second quarter last year that was an increase compared to last quarter. There are two things that we can comment them as one off we have had during this quarter increased donations specially to the technical schools that we are supporting both in Mexico and Argentina and there were some specific events related events that the company not only participated but promoted that the impact of that were inclusive during this quarter. This is something that should not be repeated in the coming quarter, the negative part if you notice that due to the increase in salaries in Argentina and not having the same level of the valuation of the currency we have an increase in dollar terms of the labor cost in Argentina. But we are expecting to see a reduction in the coming quarter in the SG&A, so it shouldn’t be taken as a new fixed number or a new fix level and similar comment that I made in relationship to the working capital applies also here. We are always working in different ways of parallel reducing not only the input cost or the profitability in relationship with the production of steel but we are also working very-very hard reducing the SG&A of the company. So you should not take these at the new level but a further reduction should be expected in the coming quarter. The other part of your question was related to the project and one that you mentioned is the power plant in Mexico. This plant or the construction of this plant is working very well. We continue to be on time and on budget. We are expected to finalize this project at scale and on the numbers that we are mentioning. In fact couple of which are all while being our facilities in Mexico, I have the opportunity to visit these plants and it’s amazing the advance that we have and while we are constructing over there. So we are expecting to continue to see this trend in the coming quarters. As you know this facility is till date for production of the new facilities in the third quarter of next year and we are working very hard to comply with this effect. We continue analyzing in respect to other projects and we are continually analyzing which are the [indiscernible] but we have not taken yet any decision or assumption that we will analyze very-very carefully.

Thank you. And our next question comes from Alfonso Salazar from Nova Scotiabank. Your line is open. Please go ahead.

The prices related to costs, I know that [indiscernible] replying in operating cost of $22 per tonne looks low in the quarter when do consider the decline in energy costs that are precision of the Mexican peso. So my question is when to the time there is more reduction is just a related to FIFO or is there something else that you can share with us? And also can you remind us how much of the cost and your SG&A is related to the Mexican peso? And the second question is regarding your guidance for Q3. Your operating income is likely to stay at similar levels like in the second quarter and shipments in Mexico and Argentina should remains stable, you also say that in Mexico lower prices will be up by lower costs, but when I see that our strategy is that operating margins should be lower with the higher costs. So the implication is that operating margins in Mexico need to improve sequentially. So just want to clarify if that is the case? Do you expect operating profit in Mexico to reach higher or stable in Q3? Again with the $70 decline in this slab [indiscernible] the margins should increase but just want to check with you. Thank you.

The most significant impact that we are seeing and is not allowing us to normalize EBITDA generation and [indiscernible] specially when significant portion of our production of steel is related to purchase laps. So these we’ve always comment as time fame between five to six months, we’re reflecting our financial. So this is the most significant impact that we are seeing and not allowing us to show better margin for the company and that’s why and we are certain and sure that this, since with the passing of time, this will be reflected clearly in our number. That’s why, I mentioned and also that the six months is better reflecting the profitability of the company in the second quarter. But you’re probably right the most important effect is first interest out, so all are the related to the purchased slabs. Of course we have been to see in reduction in our input costs like the one that you mentioned like energy, like iron ore like coal and natural gas. So this is also impacting positively, but is not allowing us to fully reflect the reduction in cost that we are having. In the middle of the situation where we have seen also very significant reduction on the prices, the selling price for our product. So that’s the main costs and that’s the main reason why we are expecting to see an improvement not in the second quarter because of the reason that we have been accommodate, but in the coming quarter. In relationship to SG&A or input costs, we basically have very similar numbers, if you want to know, which is the impact or the input cost related to Mexican peso or to Argentine pesos where we have around 30% to 35% of the input costs related to the local currency in both market. So that should be also a positive sign coming into the future, in the relationship to the input costs where we have important evolution of the Mexican currency especially during the last month and this also should be reflected in our costing. Opposite to that is a situation in Argentina, where we have seen an increase in the input costs because of the reviews evaluation of the currency in comparison to the increases of salary and this is impacting our costs, because in dollar terms, this is having an increase of that input. So it is something that of course we are taking everything consolidation and this should be clearly reflected unfortunately not in the coming quarter but in the following one where we are expecting to see further stabilization of the whole situation and if prices of full recommend of Spain, this level in the beginning of, -- there we should have a really stabilize and a new level of costs. Sorry, but I forgot your third question.

Yes, there is a question was regarding just slide five, the operating profit in Mexico should be high or stable in Q3?

Well, the Mexico we have special situation is something that we comment earlier, which is that since the significant portion of our sales around their contract. So and this contract usually are set on a quarterly basis. We have a delay on the sale price on this product. That’s why, we will expect to see a federal reduction of prices, our price special in our Mexican operation. That of course, we are expecting to see not only this reduction in price, but this reduction been at the level of profitability been replace by the reduction in costs that we are similar level of this generation and a normalize situation coming in the following quarter.

[Operator Instructions] Our next question comes from [indiscernible]. Your line is open. Please go ahead.

I just had a question on dividends and given the pretty significant free cash flow generation that we’re seen and the pretty low leverage levels currently, if we can expect payouts to remain at current levels or if you see room to boost cash returns going forward? And secondly diving a bit deeper into the next investment cycle if there is anything additional that you can share with us on a potential expansion into galvanizing capacity or the potential new DRI plan to close the slab that would be very helpful? Thank you.

Okay. Kyle let me comment regarding the dividend, we have just pay dividend as you know the company has dividend policy and as you said, was meeting once a year, the company may have been able to sustain a very significant level of the dividend payment, and the anterior very quite good for company in our sector. As I said, we don't have any policy but the trend of the company as we’ve been very clear, now we are expecting to sustain this trend. In relationship to the project we are working, as I mentioned very hard on finalizing whether we are having currently a contractor which is our the power plant, you know that this has been also commented during our investor day, we are advancing the analysis of the expansion of the [indiscernible] and this is something that we need some more further discussion, but this is something at some point, we should be able to announce, which will be our conclusion and in the other one, we’ll take longer for us to decide, because we need to clearly see the trends in the market, the trends in the slab sector. This is something that we will very-very carefully analyze. So we are not at this moment able to further comment on how are these, because we have not taken any decision at the moment that we are analyzing it very carefully.

Thank you. [Operator Instructions]. Our next question comes from Marcos Assumpcao. Your line is open. Please go ahead.

Hi good morning everyone. First question is related to working capital, sorry I got in to the call in the mid of the call, so I don't know if this was already asked or not, but if you could comment a little bit on the working capital improvement in this -- during this quarter is this sustainable? The second question is related to steel prices, in Mexico and in the U.S. if you see eventually as we start to see more anti-dumping cases in both countries, you could start to see prices recovering a bit in the short term? Thank you.

We have been commenting on the working capital, let me briefly describe what we have said before -- we have a very significant working capital reduction during this quarter especially in the line of inventories, something that we are expecting in the company and on this reduction was in the quarter where we have significant outflow of cost, if you remember during this quarter we pay dividend and we pay for the shares of referral we don't have. So all-in-all allow us to go through this quarter without increasing the level of debt in a quarter where we have significant payments. Of course we are expecting to have this level of reduction in the coming quarter. But we will be working very hard to not only to sustain this new level of working capital or also to reviews if we can, but we should not see a reduction on the levels that we see that we saw during this quarter but it was a special quarter because we utilize most of this reduction to made all the payments that we need to make without change in significantly or in fact without change in our all the net debt of the company. In relationship to prices, we tend to be quite conservative on predicting prices. So we believe that this new trend of anti-dumping case, anti-dumping measure we will have to sustain the new level of prices that we have been seen in the used market and as you know the reflection of that in the Mexican market during the last month, so we are expecting that this will help to sustain these new levels, and of course anything above that will be very welcome but it's very difficult for us to have a different prediction than there was --

Okay. And Pablo, one thing about antidumping. I think if I am not mistaken, I read this week that there was antidumping investigation against rebar coming from Brazil in Mexico and possibly turning was part of the simulating the investigation. Is this something that you started to see as a trends as a higher imports of rebar in Mexico?

The Mexican market is very competitive market and there are many companies in this sector not being turning the most important one, you know that our main market is a slab market. We have a significant portion of the long product market in Mexico, but there are more companies, having significant markets here. Imports are coming into the Mexican market from many-many different countries over capacity social issue that you need to consider. So as we have commented before we think that not only, Mexico to U.S. but to other regions, the activity of the different government is responding to anti-dumping activity in the region will be significant and is something positive we were commenting before to sustain a new framework to work in the market we are working specially in the producing countries and through that be able to stain pricing level that we are seeing today.

Thank you. I am not showing any further questions at this time. I would like to turn the call back over to Mr. Pablo Brizzio for closing remarks.

We have been able to comment all the main issues going through the company in this quarter and all the things I wanted to share with you today. Thank you very much for your timing. As usual we will keep in touch in the near future. Thanks a lot. Bye, bye.

Ladies and gentlemen thank you for participating in today's conference. This concludes the program, you may all disconnect. And have a wonderful day.