Good day, ladies and gentlemen, and welcome to the Ternium Third 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 follow at that time. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. Sebastian Marti. Please go ahead, sir.

Good morning and thank you for joining us today. My name is Sebastian Marti, and I am Ternium's Investor Relations Director. Ternium issued a press release yesterday detailing its results for the third quarter 2015. This call is complementary to that presentation. Joining me today are Mr. Daniel Novegil, Ternium's CEO, and 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. I would like to let you know that, this quarter, we added a presentation to the usual audio webcast for you to be able to better follow the CFO's description of our performance in the quarter. Those of you that are only connected via telephone might want to also connect through the webcast to be able to follow this presentation. 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 in our press release issued yesterday. With that, I'll turn the call over to Mr. Novegil.

Good morning to everybody, and thank you very much for participating in today's conference call to review Ternium's performance in the third quarter. As always, I would like to briefly comment about some specific topics that I believe are relevant for Ternium's business and right afterwards, I will ask Pablo Brizzio to describe our performance in the third quarter 2015, and the outlook for the last quarter of the year. And then we will enter into the Q&A session. So that let me begin with some highlights about the state of the global steel industry as a whole, given that a couple of weeks ago, in Chicago, the Economic Committee of the World Steel Association in the 2015 Annual Conference issued the last short-range outlook for 2015 and 2016. After the global steel demand growth of only 0.7% in 2014, World Steel is forecasting a decrease of 1.7% in 2015. Right afterwards, they are forecasting also an increase in global steel demand of 0.7% in 2016. These forecasts, as you know, are heavily influenced by an expected decrease in China's Steel demand of 3.5% and 2.0% for 2015 and 2016, respectively. While on the other part of the coin, the world steel demand excluding China is expected to be stagnant in 2015, but to grow 2.9% in 2016. In my view, it will be very important to follow-up the Chinese Government announcement regarding the new five years plan for the period between 2016 and 2020, specifically regarding this issuance that could mean better demand prospects related to infrastructure projects and/or new capacity closures for the target of the period. There are some countries on the other side that – in which World Steel is forecasting a healthy growth in steel demand, and among them, I would like to point out…

Thanks, Daniel. Good morning to everyone. As we usually do, I will briefly describe our performance in the quarter, and then we will have a Q&A session. I would like to remind you that today we will have a webcast presentation together with this audio. Let's begin on page 3 of the webcast presentation. Ternium's net sales were almost $2 billion in the third quarter 2015, down 3% sequentially. The reason for this decrease was a 4% reduction of revenue per tonne, partially offset by a 3% increase in shipments. As you can see in the charts, this has been the case for most of the year. Shipments has been increasing, while revenue per tonne has been decreasing. Our business in Mexico has a lot to do with this dynamic, as you will see in the following pages. Let me now just mention that in the third quarter, shipments in Mexico were 62% of Ternium's total shipments, and shipments in Argentina represented 25%. Moving to page 4, you can see net sales in Mexico. Shipments in the third quarter increased 5% sequentially to 1.5 million tonnes, returning to the record levels seen in the first quarter. As in previous quarter, shipments to the automotive, home appliances and other industrial customers in the country continued to drive Ternium growth in Mexico. Shipments to customers in the construction sector are also growing, although not at the same pace. We expect to see a sequential decrease in shipments in Mexico in the fourth quarter of this year, related in part to year-end seasonality and also to a planned 30-day stoppage of one of our hot rolling mills in connection with an upgrade of the line that will enable a broader product range. Steel revenue per tonne in Mexico was 8% lower sequentially in…

[Operator Instructions] Our first question comes from the line of Carlos De Alba of Morgan Stanley. Your line is open.

Yes, thank you very much, gentlemen. So my first question is regarding the potential impact of the stoppage in Mexico. Can you give us the volumes that you expect to miss due to this maintenance? And also, is it possible to compensate at least partially with any inventory that you might have built ahead of this event? Second, also in Mexico, we read news today that Mittal is stopping around 90% of their slab production in Lazaro Cardenas. Does that mean that you will have to import more slabs from outside? What is basically the impact or the potential impact on Ternium, if any? And then finally, given the reduction in iron ore prices that we have seen, do you have any plans to maybe reduce or adjust the production of iron ore in Mexico? Thank you.

Good. Regarding the first question, I would say that we will have in the forward a kind of seasonally reduction in our shipments to the market. And we will take advantage of this small slowdown that is common for this part of the year, because between other factors, December has less working days, than the rest of the months. We will take advantage for that to make some repairments and to open some of our facility for wrecks and for reparations. No impact at all in cost-wise. Not impact at all in revenue base or in the EBITDA rate. For the second, regarding the Mittal question, we do not know yet which is the timing or specifics about the Mittal announcement. On our part, we are still in the process of sourcing and negotiating with Mittal to continue sourcing ourselves partially from Lazaro Cardenas. In the case of a slowdown in this production, we will be importing more steel from other sources, and also, we were able to build a good level – a pretty good and proper level of inventory in the few months ago in order to face such kind of a situation. So I don't see an important impact also in our activity or in our bottom line. Regarding the iron ore question, Carlos, I would say that we are not in a process of reducing production, even with these low prices. We are still competitive, and we are sourcing ourselves with production of iron ore coming from our mines and also from Pena Colorada that as you know is a joint venture that we do have, 50-50, with Mittal. So I don't see any important reduction in iron ore production because of the iron ore pricing.

All right, thank you very much, Daniel.

Thank you, Carlos.

Thank you. [Operator Instructions] Our next question is from the line of Marcos Assumpcao of Itau BBA. Your line is open.

Hi. Good morning, everyone. My first question is regarding volumes in Argentina. In the outlook, you mentioned that volumes should remain stable in the fourth quarter, but the conditions in the local market could change in 2016. So if you could, give us some color on what you're expecting for 2016, and also answer if this outlook will depend on the elections, as well. Last question, on steel prices, what is your view on prices in the U.S. and the impact of the prices in the region, in Mexico, as well, for 2016? Thank you.

Good. Well, regarding Argentina, I would say that we do not expect any impact in our shipments for the rest of the year. We have been having strong sales in Argentina because of an active market, based upon expansion in construction, home appliances and also in other related matters. So we do not expect any impact at all for the rest of the year. Regarding the election, as you know, there is a runoff between Mr. Scioli and Mr. Macri taking place on November 22. We do believe we understand and we firmly believe that Argentina has an enormous potential for growth in mining, energy, agribusiness, infrastructure, construction, and all these fields no doubt from our perspective will attract investments in the months to come. It is very important to have access to international debt and finance markets, and you know that both candidates are going to be going in that direction, according with expressions that they had in the last months. Argentina has a relatively high industrialized economy, but on the other hand, Argentina needs to regain competitiveness in many sectors, and so I understand and I believe that both candidates understand the changes that are needed to regain the economic growth in the country. On the flipside of the coin, today's environment for emerging markets economy is not as good as it used to be, and also, in the specific relationship with Argentina, the need of rebalancing an implementation of economic reform will be very positive in the medium run, but maybe with an initial period of some kind of uncertainty. It is very difficult for us to evaluate if this uncertainty will effectively affect the domestic market sales. I also would like to mention that the pricing system in Argentina is based on U.S. dollars, and payments…

Perfect, just if I could, a follow-up on Argentina. What's the current sales mix between domestic sales volumes and exports?

Maybe 15% export, 85% to 90% domestic market.

And you are running at nearly full capacity?

Yes, we are running at almost full capacity in rerolling. We are in the process of closing down one blast furnace, and we are going to be operating with one continuous cutter, and we are going to be operating at full capacity in the rerolling. We can switch on the blast furnace pretty soon if the conditions are able to do that, because we don't see very good perspectives for exports going out of Argentina, because of the situation in neighbor countries, as well as for the prices in the system.

All right, perfect. Thank you very much.

Appreciate it.

Thank you. Our next question is from the line of Humberto Meireles of Goldman Sachs. Your line is open.

Hi. Good morning, everyone. Thanks for the call. So the first question is on cost. I mean how should I think about the benefit that we still have from lower slab purchases, meaning what is the difference between your production cost and your cost of goods sold? So if you mark to market your spot raw materials, what would be the cost per tonne benefit that you should have? And the second question is regarding long-term growth strategy, so we are in the global sort of trough of the cycle, and asset prices are declining, and do you see any potential M&A chance increasing in the future?

Well, in the first part of the question, as you know, we have one-third of our cost coming from the rerolling of slabs, the gap between the slab import price and the hot rolled coiled price is around $200. That is a pretty good value for rerolling, and it's giving us a good advantage and a good strength in our bottom line. One-third is coming from DRI, where we are enjoying the very low price of gas. As you know, the gas now in Mexico, we are buying the gas in Mexico at $2.10, $2.20 per million BTU, and the third part of our equation is coming from blast furnaces in Argentina, where the iron ore is in $48. It's almost a record low for the last seven, eight years, and also, the coking coal is at a very, very low price. So all-in-all, our production base, that is very flexible, and we can switch production from one facility to the other if it's an advantage. And the marginal cost that we do have is very competitive vis-à-vis our competitors. That's one of the main reasons why we do have a distinctive EBITDA when compared with peers. If you couple this advantage in the cost with all the cost initiatives that we are undertaking regarding efficiency, cost cutting, energy saving, productivity, competitiveness and so on, if you put together the cost advantage of the production base with the cost initiatives and with the fact that our level of vertical integration is allowing us to charge a price premium to our customers because of differentiation, because of being very close to them, because of penetrating the value chain of the customers, because of prompt delivery, just in time delivery and so on, we combine three or four things that are giving…

Okay. Yes, Humberto, in fact, these days the flexible production of [indiscernible] that Daniel was mentioning is yielding us very similar results. The cost of producing through the DRI steel products or the cost of producing steel products through buying slabs is very similar these days. So this gives us the significant improved results that Daniel was mentioning. And we are also having a very good level of profitability in our operation in Argentina through blast furnaces because of the low cost of the raw material, of course, impacted there by some high cost of peso-denominated portion of our cost structure. But all in all, we are at the moment kind of balanced in the way of producing steel in the three different ways that we do that.

Yes, thank you very much. Just a quick follow up on the first cost question, so I was more like trying to think about given you operate under FIFO accounting, right, your third quarter cost per tonne still reflects some more expensive raw material that you bought throughout this year. So if we mark-to-market looking forward, what is more or less the benefits that you're having the difference between third quarter production costs and cost of goods sold?

Yes, that's a very fair question, Humberto. We are still seeing that we have yet to pass through our cost line a further reduction of over $50 per tonne in our slab purchases. So this is why we still believe that entering into the fourth quarter, this will be reflected, and probably depending on the market situation, we will continue to see some not as high as this number in the following quarter.

At the end, Humberto, there's no doubt that the substantial reduction in the steel pricing is negatively impacting the profitability of the industry as a whole, but in our case, the impact is offset in grand part because of the fact that we are buying and enjoying very low costs in our slab rerolling bases. And also because all the cost-cutting initiatives that I mentioned during the Investor Day are now entering into the bottom line, and we are now enjoying the benefits of these initiatives. And so if you combine that, because of the use of first in, first out to account for inventories, and there is a kind of mismatch between prices and costs on Ternium accounting, we will have these three or four positive effects in the fourth quarter. And even when on a seasonally basis the shipments could be a little bit lower, no doubt that as we were mentioning in our outlook, we will have a better quarter, and also - and also, this better quarter from an accounting standpoint will also have a positive impact in the first quarter of the year to come. Regarding CapEx, in 2015, we will be probably close to $450 million. That is a reasonable amount of money for the kind of facility that we do have, and it's a number that is well below what we have been spending in the average in the last four years.

Excellent. Thank you very much.

Thank you.

Thank you. [Operator Instructions] Our next question is from the line of Rodolfo Angele of JPMorgan. Your line is open, sir.

Hi. Good morning, everyone. So Ternium is quickly deleveraging. It's been able to generate free cash flows, which is great, especially in such a tough environment for the steel industry globally. So we discuss here M&A. It seems to be out of the cards. So how can we think about use of proceeds, whatever cash is accumulated in the Company now? Is it - should we start considering higher dividend payments in the future? Are there any new projects that are being eventually studied on the CapEx side? So if you could talk a little bit about that, it would be great. And my second question will be I wanted to hear your thoughts on the current state of assets at Usiminas. I've been asked a lot about what's going to happen next steps, if there will be eventually an equity offering. So any thoughts there, and if it comes to raising equity, what's the view of Ternium's management in terms of participating on that? Thanks.

Okay, Rodolfo. Let me take the first question that you make. As you clearly pointed out, Ternium is generating a very healthy level of free cash flow. If we consider the last nine months of the year, 2015, we have generated over $600 million of free cash flow, also, of course, taking into consideration that the CapEx level that we have is relatively limited to a number of $450 million throughout the year. With that, up to now, we have been doing basically two things. The first one is to pay dividends, and as you know, during this year, during the May/June period, we have been - we paid a dividend of $180 million from Ternium, which was an increase from previous year. So though this year, we are, as you know, looking at numbers, reducing the total EBITDA and net income generated during the year, we internally are not expecting to see a change, a negative change on the dividend payment. But as you know, we don't have a written dividend policy, but we expect the company to continue to pay healthy dividends in the coming year, especially taking into consideration what you have been mentioning, that the company has every quarter reduced debt and has a stronger financial position. The second part of the free cash flow generation is dedicated basically to do that, to reduce the total level of debt and to keep having and maintaining and sustaining a very strong financial position, as you know that we consider it's important to take opportunities if they appear in the future. In relationship to projects, we don't have different projects from the one that we already mentioned, and Daniel mentioned during our latest Investor Day. One that was mentioned there, and we are still in the process of final analysis, is the expansion of our facilities in Tenigal to keep increasing the output of our galvanizing line to go with the growth that we are seeing on the automotive demand. So this is the project that we are seeing closer in the moment, and we are still analyzing all the alternatives. In the meantime, we will continue to do what we have been doing, which is reduce debt and sustain a very healthy level of dividend payments. So, Daniel, if you would like to take the second one, the second part of the question from Rodolfo?

Yes, to reinforce what you said, and Rodolfo knows, we do not have a formal dividend policy. However, we pay consistently dividends every year, except for 2009, where the dividend was not paid because of having a conservative approach toward a global financial crisis. The latest annual dividend of $180 million, as it was quoted by Pablo that was paid out in May, was the highest of all the dividends, and meant a 20% increase compared to the dividend payment in the previous year. Looking forward, I would say that we will continue to assess our financial performance, our growth plans and the market perspective when proposing dividend payments for the shareholders. So I don't see any problem with that. Regarding your question in Usiminas, that after the September 2014 events that as you know, in our view, were not in the best interest of the company, when three officials were dismissed, we are having a more – we at Ternium is having a more limited role in managing Usiminas. But no doubt that we continue supporting the management efforts to restructure the company in this very tough environment. Usiminas, as you know, also had third quarter results that were very weak. The economic situation in Brazil is not helping, because of the slowdown in the economy and so on and so forth. You know better than me. Also, at the same time, the depreciation of the local currency will help cost wise, because that the costs related to local currency will go down in dollar terms. But, also, more actions are needed to cope with the very severe state of the Brazilian steel industry, and the management we consider is aware about the situation and is presenting plans in order to cope with that and to go ahead with…

Okay, thanks, Daniel.

Thank you. And our last question is from the line of Carlos De Alba with Morgan Stanley Your line is open.

Yes, it was about Usiminas, so a lot has been said. Just maybe, Daniel, let me ask you a question that is perhaps tough and hypothetical, but if the situation in Usiminas continues to be as poor as it is and the company did require an equity offering, will Ternium try to keep, maintain its current stake in the company? Or would Ternium perhaps at this stage prefer to see its stake diluted in Usiminas?

Well, to be very, very clear on that, nowadays, today, an equity contribution is not on the table, so we are not considering an equity contribution in Usiminas. But I would say that our commitment for Usiminas is the same that we had in the moment when we made the investment, and also with our commitment with Brazil is also the same. As you know, Brazil is a major economy in Latin America. As we have been discussing in the past, we had to have a part in this table, and we went ahead with our investment with the hope of having a reasonable return. The facts are in the table. I will not open a new discussion on which were the results, but the commitment is the same. I don't see now any equity contribution being needed or being discussed, and the commitment of Ternium is the same. But, Pablo, I also would like to pass some comments on your side.

I agree. As you know, Carlos, we prefer not to speculate on possible situations that will come up in the future, but I totally agree with Daniel. The Company is working very hard at the moment to try to adjust to the current situation and discuss also with the financial community. So a capital contribution is not discussed at this moment. So prefer not to speculate on what will happen in the future.

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

You've very welcome.

We appreciate your questions. So, gentlemen, any other questions are required? End of Q&A

I'm showing no further questions on the phone lines at this time.

All right. Okay, so thank you very much, again, for participating in Ternium's conference, for the questions, for your patience to listen to our ideas and our comments. As always, please feel totally free to contact us through Sebastian for any additional doubt or comment or questions that you may have. So bye-bye, have a nice day, a nice week, as well.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.