Ternium S.A. (TX) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Shaun, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ternium First Quarter 2016 Results Conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Sebastian Marti, please go ahead.

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 first quarter 2016. This call is complementary to that presentation. Joining me today are Mr. Daniel Novegil, Ternium's CEO; and Mr. Pablo Brizzio, the company 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 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 again for your interest and for your participating in our company and for taking the time to participate in today's conference call. You know we are approaching the Ternium's Investor Day which is going to take place at the Guggenheim Museum in New York on June 16th. So that in this teleconference I will be very brief and we will have time at the event to discuss about Ternium strategy in the global markets as well as the latest development and breakthroughs in Ternium environment. So that I would like to start pointing out the decision we took in Ternium's latest report meeting yesterday where we decided to invest in a new galvanizing facility in Mexico and to share also with you of my views and some concerns regarding our investment in Usiminas. Right afterwards I will ask Pablo Brizzio to review our result for the first quarter of the year and we will enter into the Q&A Session. So let's begin. Yesterday as you know in Ternium's board of directors meeting we approved the doubling of capacity in Tenigal. The joint venture that we had with Nippon Steel for the manufacturing of hot-dip galvanized steel including exposed parts and a high trend qualities to serve the Mexican industrial and automotive market. You know that what we decided is that once completed studies with Nippon about some facility and technical issues, Tenigal will go ahead and will be the second hot-dip galvanizing line with a total annual production capacity of around 430,000 metric tons. Some points or some things that I wanted to point out about this investment is that we expect will start production in 2019. The new facility will be located in Pesqueria next to Monterrey City, next to the airport of Monterrey. We will increase Tenigal capacity from 400,000 to 830,000 metric tons per year combining both lines the one that we do have now and the one that we will build, and the investment will be around $300 million. The focus will be in the automotive industry, as I said before it's part as well as inner part, and also some industrial uses home appliances and so on. As you know and as we have been commenting in other investor day and in other conference call, we will enter the automotive industry in Mexico could go up to the actual number, the current numbers of 3.4 million units to around 5 million cars in 2020. So that in general we are very positive about Ternium and Tenigal role as a leading provider of high-value added and high quality steel for the automotive industry here in Mexico, and I believe that this investment will enable us to maintain this leading position and this role in this growing market as well as to allows us to substitute and to continue the process of substituted imports through differentiation from our peers through service intensive networking and so on. So this is the first comment that I wanted to make. And then the second one is on some news regarding our investment in Usiminas. As you may know on March 17 Usiminas entered into a stainless steel agreement with the financial creators for a term of 120 days and also last week on April 18 in the Usiminas shareholders' meeting it was approved an issuance of 200 million ordinary shares for an amount of around BRL 1 million or $290 million. In addition to that Usiminas management mentioned yesterday in their first quarter results conference call that the restructuring of the financial debt of Usiminas is seeing an advanced stage and is working out properly, so that at the end Usiminas tight financial situation is being worked out even though the company will need to strengthen efforts in the cost cutting breakthrough side in order to be able to pass through and to go through this difficult situation that we see in the Brazilian [ph]. So regarding the details of Usiminas shares east-west, as you know existing shareholders have preemptive rights to subscribe the proposed increase at any time prior to the 23rd of May. Upto this moment Ternium has not decided whether or not it will participate in the coming days. As you know Ternium has a subscription right that entitled to subscribe ordinary shares at a price of reals per share that means $1.5 per share, roughly. Also Ternium is entitled to subscribe obviously on a proprietary basis without subscribing shareholder, any ordinary shares that are not subscribed by Usiminas current shareholders, also BRL 5, $1.5 around $1.5 per share. As I said before, we have not yet decided whether or not we participate in the capital increase. So having said that and having mentioned very briefly about the decision to expand production in our galvanizing facility in Mexico as well as making a comment on the Usiminas issue. At this point I will pass to Pablo Brizzio that will take over to give a description on our performance in the first quarter and afterwards we will enter into the Q&A Session.

Okay. Thanks, Daniel and good morning to everyone. As we have been doing the latest conference call, we will follow the webcast presentation. So we move to Page 3 in our presentation. You can see that EBITDA in the first quarter here was $3 million. It was higher to the EBITDA in the fourth quarter, here an approach the level seen in the first quarter of 2015. It can be seen, chart the EBITDA has gradually improved during the past fourth quarter of substantially lower cost for material versus last and our inputs gradually went through our investments. We will see in the following slides that this improvement took place in a very challenging price environment in Mexico, our main market, falling almost $200 per ton over the year. EBITDA margin continues to increase reaching 18% or 18.6% in the first quarter equivalent to an EBITDA per ton of $125. In this first quarter we have a net gain of $124 million equivalent to an earning per arrears of $0.48. We forecast a 127 net loss in the whole quarter mainly as a result of an impairment to our investment in Usiminas and certain non-cash foreign exchange losses in Argentina related to the devaluation of the local currency compared to dollar. We will move now to the following page. We will review the latest development in our market, our main market, our sales and its entire biometrics, our sales in the Mexican market increased 4% sequentially in the last quarter of the year, this first increase [ph]. The reason for this improvement was the 14% sequential increase achievement which reached the record 1.6 million tons in a quarter. On the other hand revenue per ton continues to supply in this market with a 9% sequential decrease in the quarter as I mentioned, almost $200 year-over-year. We expect a moderate sequential increase in shipments in Mexico, in the second quarter of the year as we see strong demand in Mexico automotive industry for high value products and overall volume improvement in the commercial market after some inventory stocked in through this first quarter of the year. Also, the price environment in the U.S. has continued to improve over the past few months supported by inventory increases in the value chain, disciplining new capacity utilization and declined imports in other trends international front. This should support higher revenue per ton in the second quarter of the year. Let's go to the following page where we'll review what was going on in our southern region. And we have anticipated on last quarter press release and conference call, achievements and revenue per ton in dozen as the market decreased mainly the result of the talking of the value change together with the usual seasonality of this markets at the beginning of the year. Revenue per ton decreased 18% sequential in the first quarter till prices decreased following a sharp devaluation of the local currency at the end of December 2015. As earlier said, the higher value added [ph]. So after weak first quarter related to seasonality, the Argentine market is in the process of adjusting to a period of lower economic activity. Consequently, we do not expect an improvement in our achievement in this market in the second quarter of this year. In addition, we like price to remain collectively stable. We move to the next page. You can see the combined effect of the development in our two main market has consolidated; achievement and revenue in first quarter. Due to increase in shipments in Mexico and decrease in Argentina, Mexico counted now were on 66% of turn achievements in the first quarter. The ratio of over 23% in another markets mainly the Colombia, the U.S., and Central America accounted for the remaining 11%. Following page, we can see the strong terms of effect for us as fairly EBITDA with sequential comparison anticipating our fourth quarter 2015. In every quarter of the year we have high year achievement where mostly was set by slightly lower EBITDA. We have sustained price decrease especially in the total of our market. The quarter was a bit decreased was offset by a significant decrease in cost. In Mexico, the decrease was mainly the result of lower raw material while in Argentina; it was principally due to the effect of the Argentine peso depreciation on the lower cost on the company inventory. This year it will be sequential higher due to slightly higher achievement on EBITDA per ton. Our prices are to increase second quarter on the account of the improvement in the prices. In addition, cost per ton should be slightly higher, mostly due to the higher cost and the effect of Argentine peso devaluation on inventories. In following page, we continue to reach the net result for the first quarter. There will be reference for the impairment of our investments and improvement in the next financial results after sequential devaluation of the Argentina peso in the fourth quarter last year. Let's now review the following page; the free cash flow generation in the quarter. Working capital was stable and CapEx too was at $98 million. After deducting financial results and income tax we got a healthy pre cash flow of $140 million in the second quarter. Finally, in the following page, we can see the quarterly performance or cash flow operation, CapEx and free cash flow. We continue to show restraint in CapEx and consistent cash generation over the quarters. We discussed translating a continued reduction of net debt was down to $1 million at the end of March, equivalent to only one-time in last twelve months EBITDA. This is very strong financial position, something not very common in our industry now-a-days. With this, we have covered the main issues that we wanted to cover. So please let's go to the Q&A session. Thanks.

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

Great. Thank you very much everyone and good morning. Just wanted to ask you on Argentina, the prices declined only around 18% quarter-on-quarter and I think the news we saw is prices in Argentina have fallen around 14% -- sorry, 24% to 25% from December to earlier in the quarter. So is this lower decrease in revenue per ton related basically just to better mix products and what do you expect will be the evolution post the second quarter as you already said that they're going to be stable, relatively stable in the second quarter? And also, maybe if you could use a little bit of details or color on how do you see the reversal of the positive inventory accounting on your cost that we saw or that benefited the Argentina results, the southern regions results in the quarter? And then finally, just got to the details of the Usiminas, I understand that the company has not made a decision if they will participate in the equity offering but maybe Daniel, if you could give us a little bit of background of what are the parameters or the viable that Ternium is analyzing in order to decide whether or not the company will participate. I think last time we spoke in this forum, you mentioned that the company was still quite committed to the investment in Usiminas and to Brazil, so as you could add to your area of comments. Thank you very much everyone.

Thank you, Carlos. And I would try to speak in higher voice because I know that maybe the sound isn't doing that well. So let me start making some comment on what is going on in Argentina after all the things that happened in the last four months. As you know, the Argentine peso evaluated around 28% against the U.S. dollar in the fourth quarter 2015. And additionally, 11% in the first quarter 2016. The economy in Argentina is being readjusted, after an important economic reform, and that is related with a free flow of capital and exchange rate normalization so to speak. So the Argentine steel market is related to what is going on in the economy and is in the process of adjusting as well in prices, and in volumes, and perspectives. In a period of slower economic activity, because of the impact in the real salary, in the actual salary brought about by the devaluation, part of the same time the devaluation of the Argentine peso has in the competitiveness of seasonal local cost. Although some inflation that remains very high puts pressure on local prices and we maybe take back some of the gains in the cost side. As we anticipated in the last quarter conference call, seasonal cost ended up being very low in the first quarter of the year as it using ventures with U.S. dollar values that were reduced by the Argentine peso depreciation. No doubt that these factor will gradually normalize beginning in the second quarter so that at the end the cost per ton will increase a little bit in the quarter to come. This happens mainly because the value of Argentine peso as a currency quite at the same Ternium's report in U.S. dollars. At the end, probably I see that in the third quarter we will be -- this affect is going to be clean and we will in the normal standard path, again. Argentina is going through some adjustments that need to be done in order to be able to regain a growth. It maybe the following two quarters will not be easy for the economy but I'm very confident that once that a structural change is consolidate, the growth will be regained and this will happen mainly in the fourth quarter of the year or first quarter of 2017. Argentina, as we have been talking in some other teleconference as well as in Investor Day, in our view, Argentina has a very high potential for the year to come. Even if we only think on the investments in infrastructure, at least to be done in the country, we will have a strong and a very healthy demand for us so that we are confident that Argentina based upon infrastructure development, energy development, and construction will have in the medium term things to do for our business. Also the access to international market is a key factor. It has been recently attained and so that Argentine will have maybe a positive flow of capital that will put a fresh air in development in the country. At the end Argentina needs to regain competitiveness in many sectors, but there aren't many surveyor of that and will work to help a businessman and business community to go in the direction of complacency, competitiveness and growth. Unfortunately, the environment in Brazil is not helping and also the environment for commodities is not helping Argentina. But it is not an easy landscape, but at the end changes are needed and no doubt that the changes in the economic side will have a positive impact in the economy and in our business in Argentina. Before going to the Usiminas question, let me pass to Pablo Brizzio as we go on the products mix and pricing that you were mentioning.

Okay, Daniel. Carlos, you're right but the price decrease in either way is higher than what is mentioned and was contemplated by prices in Argentina today is in line with international pricing and strategy. So we will continue as usual. Daniel commented on that, it was very clear on how the impact on the devaluation of currency affected the business there.

Now let's move to the issue of -- its complimenting, your question regarding prices as we have mentioned in some other teleconference and in Investor Day. As you know the steel price in Argentina follows the path of the U.S. domestic market and the Mexican domestic market. So that in this world to come, Argentina, the pricing will be in line with those prices that we see in the markets that I mentioned. Also as Pablo Brizzio mentioned, it's important to take into consideration that the Argentine domestic prices have less volatility than the international markets. It shows that when the prices goes down in the international, in Argentina it happens slowly and also in the reverse side of the coin. So that when prices are enough now-a-days, the prices in Argentina will follow with the same trend. Regarding the issue of Usiminas, as I mentioned in my preliminary remarks, we didn't take a decision yet. And as you know, for us, Brazil is a very important market of Ternium and it makes sense to remain with us knowing we will subscribe the capital yet and this decision will be based in different factors. One of them is a success or not and the terms and conditions on the financial restructuring. As you know, also the capital subscription coming from this is related to the success of this financial restructuring. So at the end, we know that the management is working very hard to reach an agreement with the banks, with the financial institutions. They are doing well upto a moment in this aspect and we will see the result of this and the output of this restructuring in the rate of the company in terms of interest rates, in terms of timing, in terms of specifics of the restructuring before taking our decision among other factors, as well as the technical factors.

Alright. Thank you very much, Pablo. Thank you very much, Daniel.

Thank you.

Your next question comes from Leonardo Correa, BTG Pactual. Your line is now open.

Hi, hello, good morning everyone. Thank you for taking my question. First on the -- maybe moving back to an issue we've been -- I think we've been asking for quite a while. On the balance sheet and on the cash flow side, things for Ternium have been working out very well; the company has been generating quite a lot of cash. Leverages now moving down to close to one-times on net debt-to-EBITDA, I mean just looking at the number this year and looking at your guidance, I mean we can clearly come to a conclusion that I mean the company could generate potentially something around north of $400 million in free cash flow. So I just wanted to again, thinking strategically and just trying to reconcile where you would -- I mean where you're leverage is really trending to and your option of what to use -- that cash flow with -- I mean just on losing in as I understand that a decision has not been taken but just considering the size of the potential investment, I just want you to talk about just how oozing into this being viewed given the relatively small size, also thinking of -- clearly, an interesting project with an interesting market, still also very small. So I just wanted to see if you're now in position to rethink some Greenfield projects that have been talked about in the past, mainly on the slab side, if anything bigger in terms of CapEx is being considered, that would be my first question. Moving down to the second question on Tenigal, just if you can help us with expectations on how much this incremental capacity can generate in terms of incremental EBITDA per ton? I think that would help us a lot on understanding really how to value this project and how we should see EBITDA per ton rising going forward for the group? Thank you very much.

Hi, Leonardo, how are you? Let me start by your question on free cash flow. As you mentioned, the free cash flow has been very consistent and has been very positive. The fee on this will not be refund even this year. The level of net debt reached a very low level as of March this year reaching $1 billion. And as you know, we will pay during this second quarter dividend both subsidiary in Argentina, so we will use significant amount of cash during this quarter, that will probably not allow to reduce debt during the second quarter but we could recover this trend in the second part of the year. The level of dividend that the company is paying is very healthy; it's a very good rate of dividend payment that the company has shown given the difficult times in the steel sector. So most probably the company will complete it. We as usual probably we comment later on the project that we're going to have in the future but we have already announced a new one like Tenigal that will allow us to continue to generate positive -- not only free cash flow but the level of EBITDA that we are knowing today which are quite high level. Do you remind increasing the capacity will increase our non-integrated portion of production, so these as we mentioned in the past when we discussed technical one, for us to sustain this level of margin even without having the facilities is very positive and is designed that the return and the pricing that we can get through these facility is quite significant. In any case we are discussing about 430,000 tons after almost 10 million tons the company discussed but it indicates and is proved that we'll be certainly in past which goes down till we are increasing our non-integrated utilization, we can sustain very high EBITDA margin, and this is because there is a potential of facility and an indication of the products. Moving forward, the CapEx plan for this year probably will be between $400 million and $450 million because even we were announcing plans as you know that in the first of the project you have significant amount of money to be investment as the money in this project will be followed if we need. So even if we decide or not to participate in the capital increase of Usiminas as we mentioned, the amount of money is not that significant so we'll not change substantially the financial position there. So basically this is what we believe will happen with the free cash flow and we continue to analyze different projects, and Daniel I don't know if you want to add another comment on this issue.

Maybe going to Leonardo's question on Greenfield projects and brown organic growth and brownfield projects. In acquisitions, let me comment that. Regarding acquisitions, there's nothing we see of interest right now. We will only analyze regarding our decisions if any opportunity arises but we are not analyzing right now any concrete or any prospect acquisition, important acquisition in the horizon. Regarding Greenfield projects, as you know in the process of announcing this expansion in our galvanizing facility. Tenigal needs to address the future growth of demand of high-value added and high quality steel in Mexico and go for it. The capacity of Tenigal, we are running Tenigal at full capacity so that the covering capacity will not be able to cope with the demand growth that we foresee and we have already in this market segment that's why we decided to double capacity and to launch this new project that I think is going to be very important for the consolidation of our presence in the Mexican market especially in the automotive industry. You know that the line will be very busy in Pesqueria, and we are in the process of completing the analysis of the investment regarding product mix, current and future trends regarding facility specifications regarding technology together with Nippon. And but again we are very positive about our roll off leading provider or steel for this market segment in Mexico. In organic growth, we will continue to pursue a strategy of gaining market share as imports in Mexico and consolidating our commercial network. After announcement of the expansion in Tenigal we will continue analyzing some other options in the down streaming, for example in greenfield, we are in the process of analyzing galvanizing for construction and also for industrial applications. Also we are taking a look to the alternatives that we have in vertical integration. We don't have a decision yet but we are in the process always of analyzing a slash against the hollow coils in vertical integration, also more downstream integration in coating lines and service centers and so on. So in inorganic growth, we'll continue our strategy of down streaming. At the same time we also pay looks to some strategic issues that we will commend or in-depth as detailed in the Investor Day, like the DRI project and so on. But at the end, and otherwise to answer your question, in Greenfield we are in the process of disallowment in this study that this is a working process, first. Second, we are analyzing some other alternatives downstream to sell the industrial and automotive market in Mexico. In the Brownfield, we continue the process of streamlining and the bottleneck in our facilities. And in Greenfield as I said we have not seen anything of interest right now, but we are always looking for opportunities.

And your next question comes from Caroll Luctis [ph] with Bank of America. Your line is now open.

Good morning, everyone, thank you for the questions. I have two questions. The first one is on the Mexican market, following the several anti-dumping measures that the U.S. implemented to a series of regions. Do you see risks that imports start to flow into the Mexican market or the Mexican market closed to the same market as the U.S.? That's my first question. And my second question is actually a follow up on pricing in Argentina. Just to clarify, I don't know if I understood it correctly. Prices today when compared to international levels are at parity or let's say in line to international prices or we are seeing Argentina at a discounted premium to such levels. Those are my questions. Thank you.

Well regarding the first question, I wouldn't say carrying that, now a days in Mexico is closed for imports but the Mexican government have been very receptive to the steel industry claims of and fair trade especially coming from China and so on. So that at the end in both cases the U.S. and the Mexican market that are very closely related, we have many rapid cases totally addressing the issues of dumping and subsidies that we do have in the industry as a consequence of a huge excess capacity, so that at the end in U.S.A. you have corrosion resistant imports coming from similar countries with preliminary anti-dumping and conservative duties, you have the same situation in cold rolled coils and hot rolled coils. And also the U.S. is in an ongoing anti-dumping investigation with definite measure that will come into the market in the months to come. In Mexico there is a 15% tariff for an additional that was extended during April for an additional six months applied to imports of similarity products coming from countries that don't have free trade agreements with Mexico. In Mexico as you know China, cold roll and cold roll steel import have definitive anti-dumping duty, and Russian hot roll and cold roll steel imports are in the sunset review rollover, as well as Ukrainian cold roll and Kazakhstan cold roll. So that at the end Mexican ongoing anti-dumping investigations are doing well and are passing important measures, not closing the market but trying to fend the issue of excess capacity and a fair trade on one side. Regarding the pricing in Argentina I would say that the prices in Argentina as I mentioned in some other locations follow the international trend so that now a days the prices in Argentina are similar to the prices in the domestic market of the U.S. and the domestic market in Mexico. Obviously, the pricing level in Argentina is positively affected by a very strong commercial network and a very strong market share that we have in Argentina that allows us to pass a premium on pricing based upon the quality of our service, just in time delivery and penetration in the value chain of the customer, a very, very, very deep level of downstream integration in Argentina through our own service centers called the galvanizing line, electro-galvanizing line, painting steel line. So at the end all these happened to be a premium based upon a product mix that is very rich and based upon a quality in the service side that allows to pass to the customer these advantages that are an advantage for them as well, because they enjoy this proximity, this reduction in the debenture level, this just in time service and so on and so forth. So at the end to answer your question, prices in Argentina, similar to the domestic prices of U.S. and Mexico with a premium based of all the product mix under a commercial network and the level of very, very sophisticated service.

Okay, thank you very much.

Thank you, Carroll.

And your next question comes from Ivano Westin, Credit Suisse. Your line is now open.

Hi, Sebastian, Daniel and Pablo, thanks for the questions. I just like to follow up on the discussion on possible hikes on steel price in the various regions you operate and clearly you have mentioned this correlation with price elsewhere in Mexico and U.S. and possible in China as well. So I just like to get your thoughts on how you see the recent increase in steel price in the international market and if you think that the recent hike that we've been seeing if that is sustainable. Basically I just like to get thoughts on whether you think we're already at the bottom of the steel market and we should see not only for this year but for the year's ahead higher steel price. And additionally if you could also comment on your CapEx plan for 2017 and '18, and also to provide the future breakdown of how you intend to invest this $300 million owned in the expansion of the Tenigawa plant. Thank you.

Well regarding the pricing, thank you for your question, Ivano. Regarding the pricing, if you remember those of you that participated to conference calls back, I said and I quoted in that occasion that in my view the prices were at the bottom and there were no room to go down anymore and the prices would go up and it happened. I was right. And so from December we saw a recovery in pricing in all the markets I would say, including the domestic market of China. The dynamics of this increase is different per region and different per structure of the industry each one of the places. Example in China, the prices are going up as a consequence of a recovery in the demand because of stipulation in consumer expenditure and expense coming from the government stimulus, first. Second, prices going up because of increase in prices of raw materials, iron ore, carbon, and energy as well. And also the prices in China are going up because of the financial situation of the company that cannot cope anymore with the stress coming from the pricing level that was absolutely out of any reason. So the dynamics in China I think that maybe will continue. China is in a stimulus kind of consumption in the economy side, and this cycle maybe will last for a while. In the U.S. the situation is different the price increase based upon the increase in scrap and raw materials that is impacting the cost side of the minimums, the increase in carbon as well as iron ore and also all these dumping cases that are put in the correction in the market that was very heavily affected by a fair trade, so that the imports went down in the U.S. in dose and in market share. The market is doing well. The prices of raw materials are going up. The scrap price is going up quite strong. Also anti-dumping case are no doubt correcting externalities in the market that were heavily affecting the bottom line of the U.S. companies. In the rest of the world I see recoveries in Europe and the emerging economies are following what is going on in the main market. So at the end it is difficult to forecast what will happen with the pricing level. But I see that this recovery is strongly based on fundamental and is coming to a state for a while and maybe we would see some markets like the U.S. and China some farther recoveries in prices in the quarter to come. Regarding the CapEx in 2017 and 2018, I would mention that would be in the bracket of around $400 million to $450 million. So that with the strong balance sheet that we are having now a days and with a strong cash generation we would have a farther improvement in our debt, as well as in our financial structure.

And adding to that, Ivano, as you mentioned we need to add to the number the project that we just announced and the bulk of that investment will be divided into 2017 and 2018. So eyeing to the numbers Daniel already mentioned, you have to add this to increases in CapEx during these two years and of course this is what we have to have and as we have mentioned before we are in the process of analyzing other investments. So we approve that the formula now will increase in the CapEx levels in the form of this but upto now this is what we have.

Okay, very clear. Thank you very much.

Thank you, Ivano.

And your next question comes from Alex Hacking with Citi. Your line is now open.

Thanks for the question and good morning everyone. Sorry, just to clarify that the CapEx guidance of $400 million to $450 million excludes Tenigawa, is that correct?

Yes, that's correct.

Okay. And then we've seen prices in the U.S. go up by $100 a ton so far this year, maybe even a little bit more. Have you been able to pass for a similar levels of increases in Mexico or prices there are moving up a bit slower? And then, just a final question on Usiminas, I mean are you -- it seems to me very hard to consider that Ternium would not participate in an equity race at $1.50 per share considering the price that you've paid for the shares that you currently own, to sort of lose, potentially lose control of the company for such a small amount of money. It seems hard that Ternium would even be considering that. So maybe you could give us a little bit more color on that. Thank you.

Yes. Thank you, Alex. Regarding the first question we were able to pass the increases in U.S. market into the Mexican market because both markets are very strongly related as you know. But also because of an important part of our deliveries in Mexico are related to contract and the contracts are adjusting taking into consideration the numbers coming from journals like CIU and Metal Bulletin. So in the contracts part the passing through of these increases are automatic, are very weak and the other part of the market we're able to pass no doubt the price increase in the U.S. and the prices in Mexico are similar to the one that we have that you see in U.S. taking into consideration in premium also banked up on the same factors that was depicting for Argentina, quick deliveries, just in time, very quick service, electronic integration, value chain penetration and so on and so forth. So that, the pricing level in Mexico is quite reasonable for us and also usually for the market. Regarding what you mention on Usiminas, you are right it is what it is. I would say that I cannot make any comment right now or further comment to the one that I made in my preliminary remark. We have not decided whether or not to participate in the capital increase even when we recognize what you said, Alex, that the price could be attractive. But we have to take into consideration some factors, as Daniel mentioned, also is some sense relating the participation based upon the quality and the result of the financial restructuring of Usiminas that is on the way. So that we will wait until the very end of the process to see the quality of the restructuring in terms of inter-freight, in timing and conditions, and we will pay a closer look to the financial and to the efficiency situation of the company, the prospects for the future, and we will try to take the best decision we could shoving into consideration that on top of the pricing of the share we have to consider some other factors, like our strategy in Brazil, first; second, the quality of the financial restructuring; third, the future of the company in terms of perspective, efficiency, viability, competition in this market, market situation in Brazil, the competition issues against other local player, as well as other imports coming from the road in a very unfair competition. Brazil is not taking action against unfair competition, and though the market is being penetrated very aggressively by imports coming countries like China where most of the world have reacted very quick to stop this dumping of steel in the subsidy conditions. So we would put all these in a kind of cocktail and we will see what is the output. We are not yet in a position to say if we will participate or not. But it's not easy, there are many factors on the table and we have to consider very cautiously all these factors. Some of the factors are strategic and some of the factors are economic factors and financial factors.

Thank you.

Thank you, Alex.

And your next question comes from the line of Alfonso Salazar from Scotia Bank. Your line is now open.

Thank you. All my questions have been answered but just want to follow up on what you comment, Daniel, on the view of the steel demand and the fundamentals for the steel industry. It seems to me that production is soaring in China with mills making high profit at today's prices. And what steel is expecting demand to contract 4% in China this year. So isn't it that it could be -- we can see a new wave of exports from China in the second half of the year or somewhere in 2017? What's your opinion on this? Thank you.

Yes. Thank you, Alfonso. As I mentioned earlier the pricing issue is really very complicated because it's the main factor to consider when analyzing the profitability of the industry and the help of the industry. On top of that with the strategy of our company was always to concentrate in the things that we can change and to take the things that we cannot change as a fact and the price is fact. That's why we have an edge and I think that we will compare very good with all our peers because we were all the time thinking, well not all the time thinking in a cost initiatives and new initiatives to learn new and to gain productivity and this and the other. But talking about the prices, there are different factors that affect the prices in different region. The world is starting to change from a globalization to regionalization and in some case into countrylization, that means that the prices are also influenced heavily by the particular situation of each one of the regions and in some cases of the country. In the case of the U.S. as you can see the impact of the dumping cases are important and is a new factor, and is a new factor in entering into the market. In China we see different kind of forces interacting. One, the decision of the government to cut production, as you know in China made an announcement to a close capacity of 70 million tons in 2015 and 80 million tons in 2016. It's a huge amount of steel but it's still very small if you compare this closing of capacity against the total exchange of capacity of China that is in the range of 350, 360 million tons. But it's a signal that the government and the centralized economy being contacted by the government is concerned about the capacity issue for the first time in China, and this is an important thing now for the market. As you mentioned in the last, the economic committee of world steel association that we gather every October and every April. In the last meeting in April 16 we released a new forecast for 2016. In the case of China it was still -- we are forecasting a 4% decrease in upper-end steel consumption, so that you have the force of cutting production affecting positively the pricing. The force of this reduction or this slowdown in steel consumption is a negative factor for the pricing. The increases in raw materials in a country that make imports or iron ore and coal, and also is positively affecting the pricing level. At the end when you put on these factors in perspective the prices are going up sharply and going up in a trend that we didn't see in the past, and then if you look to some numbers to share with you if I have here. For example; the pricing in China for domestic price of China for cold rolled coils is in the range of $380, used to be $270, $265, just three months ago. So that the increase is very sharp and the speed of the recovery in prices is really astonishing so to speak. The same thing can be seen in the U.S. where the domestic prices of cold rolled coils is $557 according with CIU and used to be $380 just four months ago. So that at the end you have all these forces and I see that the prices are recovering strongly and are doing, are following a trend that in my view is difficult to reverse. And then you have a particular situation in each one of the market. Let's take a look for example to the U.S. market. On top of the dumping case, on top of the increase in scrap, you follow-up for example the inventory level of service centers, you can see that inventory levels of service centers in the U.S. is reducing very sharply and this is a very good news for the industry. If you take a look to the ores, inventory level in the service center used to be 3 million tons five, six months ago, now its 2 million tons. So you put in perspective world trends. You put in perspective particular things, very specific like inventory levels in service centers. If you put in perspective for example that China is not exporting anymore steel to the U.S. you put in perspective that the imports went down in the U.S. from 32% to 20% market share in six months. So you see that they are dynamic in the prices that make me feel more comfortable that I used to be two quarters back, two quarters ago at the end. I think that the prices came to stay except in some scene, particular happens that I cannot foresee. I see that maybe the cutting in capacity and production in China will farther go on, and I see that the man side is doing well. In the U.S., in some emerging countries that could recover. On the other side of the coin you have Brazil doing badly, but Brazil would recover no doubt, Argentina having a slowdown that in my view will reverse after one or two quarter. So at the end in the part of the world where we are and in the rate of the pricing structure, I feel confident and I feel optimistic that the pricing structure is healthy.

Okay, excellent. Thank you very much, Daniel.

And this concludes the Q&A portion of today's call. I'll now turn the conference back to the Chief Executive Officer.

All right, thank you again to everybody for participating in our conference call. As always feel free obviously to contact for any additional doubt or comment you may have, Sebastian. I hope to see you in New York, in Guggenheim Museum in our Investor Day, and I appreciate your questions and your interest in the company. So gentlemen, thank you again and see you soon.

And this concludes today's conference. You may now disconnect.