Ternium S.A. (TX) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Denise and I'll be your conference operator today. At this time I'd like to welcome everyone to the Ternium Fourth Quarter 2017 Results Conference Call. [Operator Instructions]. Sebastian Martí, you may begin your conference. Sebastian Martí: Good morning, and thank you for joining us today. My name is Sebastian Martí and I am Ternium's Investor Relations Director. Ternium issued a press release yesterday detailing its results for the fourth quarter 2017. This call is complementary to that presentation. Joining me today is Mr. Daniel Novegil, Ternium's CEO; Mr. Maximo Vedoya, Ternium's Mexico's Executive President; and Mr. Pablo Brizzio, Ternium's Chief Financial Officer; who will discuss Ternium's performance in the fourth quarter and the industries environment. At the conclusion of our prepared remarks, we will open up the call to your questions. Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation. With that, I'll turn the call over to Mr. Novegil.

Good morning to everybody and thanks a lot for participating in today's earnings call. I will start today by mention Maximo Vedoya who will be the CEO of Ternium from March the 1st on; he's also participating in our call. As you know Maximo joined Ternium in 1992 and we have been closely working together throughout these years. And no doubt that he have been important leader of our success story you allow me to quantify. I would like to start with a brief comment about the recent announcement we made with Nippon Steel regarding Usiminas governance and then a very short introduction on our performance in 2017. Afterwards, Maximo will share his view about the current state of the industry and our business with the Pacific specific what you're seeing in Mexico. And finally, Pablo Brizzio will talk about our performance in the fourth quarter before opening the door to the Q&A session and questions. So, let me start with Usiminas issue. I am really very pleased that we were able to finish our agreement with Nippon Steel regarding Usiminas governance. We talk a lot about this issue in other conference calls as well as seen in better day. There are a very long negotiation process and internal discussions. We finally reached an agreement that allow us to find a solution that is acceptable and good for both parties. And in my view and our view, no doubt that we'll have a positive impact in Usiminas. This agreement in March in no positive chapter in Nippon Steel and Ternium relationship and I believe that because of the details of the agreement will prevent new conflicts in the future. And now we will work together towards reveling our mutual trust and strengthening our partnership. We remain commitment, we'll have the compromise and the commitment to the rest interest of Usiminas and together with Nippon Steel, we will continue support in Usiminas management in the effort to the turnaround and breakthrough of the company. We'll continue again with the same path of supporting the management in their efforts. I am confident, I hope, I wish that these newest start will give us a better position from which to support the Usiminas growth and profitability in the future for the benefit of the company first. I know that the holders and procedures is. Having said that, let me now make a brief comment about our results for the year. I am proud to report that 2017 marks yet another year with a very strong set of numbers of Ternium. As you know the 2017 EBITDA increased 25% against to any '16 reaching $1.9 million, again $1.9 million. The EBITDA margin was 20% on revenues of almost $10 million, to be precise $9.5 million while at the same time shipments reach 11.6 million tons of steel which set a new record high in Mexico and the stat of a strong recovery in Argentina. The balance sheet of Ternium continue to be very strong with a net debt to EBITDA range of only 1.4 times even after recent acquisition of CSA in Brazil and the consequent financial effort on our side. So, at the end these excellent performance and solid balance sheet support the Ternium Board of Directors to tailor efficient to propose an increase of 10% in the yearly dividend payment raising it to $1.10 ADS. And as you will know, we have been growing our dividend payments year-after-year and the dividend proposed for 2017 is a 70% higher than five years ago. So, at this point, that you know that not to consume more time, we have a quite tighter schedule today. Thank you very much for your kind attention, for your participation and please, Maximo go ahead with a review of our business.

Thank you, Daniel. And good morning to everyone. I would like first to give you my view regarding the state of the steel industry. The current environment for the steel industry is fairly favorable and I believe we will have an opportunity to continue our good performance in 2018. Till conception, we continue growing at a global level and there is synchronized economic growth in most of the biggest markets in the world. China's government is also in a process to correct over capacity, shutting down inefficient and mostly polluting facilities and merging steel companies in a search for more rationality. It is true that China has still a long way to go but this seems to be a good starting point. After our record steel import levels in the last two years, I mean 2015 and 2016, of more than a 100 million tons every year. Last year 2017, China still export decreased by 31%. From the fundamental perspective, 2018 looks like a year in which a larger just economies in the Americas will continue growing at a healthy rate. Both the U.S. and Mexican steel markets are having an attractive growth with apparent steel conception increasing between 4% and 5% in 2017. And a commitment from the government to prevent and fair trade. In addition, Brazil, Argentina, and Columbia are in a different stage of economic recovery and we are quite positive regarding the steel market for the year to come. Going now to Mexico, our sales in the industrial customers have been the driver of shipments growth in the country over the last past years. The automotive industry, the home appliance and HVAC industries, heavy equipment and metal mechanic industries, all of them grew in 2017 and we expect them to continue doing well in 2018. On the other hand, construction of DVD have remained relatively stable with a reduction in the government infrastructure investment but that is offset by an increase in the private construction over the last years. In the meantime, as you know we have started our significant expansion project in our Pesqueria facility near Monterrey to integrate our new acquired slab facility in Brazil with our high end controlling and galvanized capacity in Pesqueria. The different project involved in this plan are advancing as anticipated and we expect to have the first lines, this is the painting line and the galvanize line, commission necessarily as next year. The painting line will start in February of 2019, and the galvanized line we start in July of 2019. The steel prize on the other hand environmental has turned considerably positive for the industry lately. The steel industry's structure improvement I mentioned at the beginning of the remarks help significantly in increasing the steel prices. This also helps steel prices in America to recover to levels we have not seen in a while. NAFTA negotiation continue. This is bringing some short term uncertainty that may be delaying some investments until there's more visibility regarding the outcome of the NAFTA negotiation. But as we mention on the last conference call, we believe that the trade between the U.S., Canada, and Mexico will continue with or without the negotiation NAFTA agreement because it's evident that it benefits all the parties involved. But NAFTA negotiations round continue, there was a six round in Mexico city last month, and in the last month our view has turned more positive regarding the outcome. Another recent development that is bringing some uncertainty to the market is the last week's disclosure of the U.S. department of commerce recommendation for trade action against import of the steel under the section 232. This is something that we and the market are looking with cautious and we can talk more about our view in the Q&A section. But in the case of Mexico, I think it's worth mentioning that the U.S. export considering more steel to Mexico than what Mexico exports to the U.S. So today, almost 50% of all the imports in Mexico comes from the U.S. So, to be honest, it will make no sense for the U.S. to import tariff to the Mexican export of steel and get appropriately retaliation for the Mexican government for the export of the U.S. to Mexico. Going now to Argentina, the gradual but constant institutional change in the country are fostering an economic recovery that gave momentum in the second half of 2017. Apparent steel conception in the country grew by almost 17% in 2017 and we expect to continue seen a recovery in 2018. Growth of the end of 2017 was broad-based with construction and agribusiness as a the strong drivers. Although the recent loss that is effecting Argentina in some degree affect a little bit of performance of the agribusiness. The home appliance industry is also beginning to show an attractive of DVD level in 2018 as well as the auto industry supported by a strong local demand and a good prospect for export to the Brazilian market which is the top destination of this export facilities in Argentina. Turning now to our new steel facility in Brazil. After closing the acquisition in September, the integration of the mill into Ternium's industrial system is going as planned. Overall, we are very happy with this top class asset we have incorporated to Ternium. And our plans there are to continue working on increasing production and efficiency. Production of steel slabs reach 4.5 million tons in 2017, which is the highest production level achieved since the mill start up. And it's also worth mentioning that the November last November we accomplished an historical monthly production record. In addition, metal spreads has been turning beneficial for the slab producer when comparing slab prices with raw material prices. Finally, during December, we renegotiate Ternium Brazil slab supply agreement with ArcelorMittal Calvert facility. We spread the remaining volume of the concept in a longer period and consequently we free internally produced slab for our Mexican operation. The new maturity of the contract is December of 2020, which also has a better coordination with this expected startup of a new hot strip mill in Pesqueria. This means we will decrease slab shipment from Calvert -- to Calvert, sorry, from 2 million tons a year to 1.2 million tons a year. With these at this point, thanks very much and I will pass it to Pablo to go ahead with the comments about our results.

Thanks, Maximo. And good morning and thank you for participating in our conference call. As Daniel said, I will give you an overview of our performance in the fourth quarter and afterwards we will go directly to the Q&A section. Let's please turn now to page 3 on today's webcast presentation. Our performance continues to be strong in the fourth quarter of the year with EBITDA of $502 million. This is different from what we have anticipated in our last quarterly results conference call since impart to a nonrecurring gain as what we see further on. Before we continue, let me remind you that the quarter we reported yesterday, the fourth quarter is the first one that includes the full consolidation of Ternium Brazil. These natural results is in high achievements than in the third quarter are more so when compared to 2016. Having said that, looking a third news EBITDA per ton on the lower left side, an EBITDA margin on the higher right side will report in the fourth quarter a rather stable margin of $147 per ton or 18% of net sales. Despite the full consolidation of Ternium Brazil, which is natural for a slab producer has, as you know has lower margin than an integrated producer such as Ternium. The stability was in part aided by the $43 million nonrecurring gain related to retracted price adjustment on Ternium Mexico electricity sales between December 2016 and October 2017. As for net income in the fourth quarter of the year, we reported $198 million equivalent to earnings per eight years of $0.92, a $0.07 sequential decrease due to a higher effective tax rate as what we see further on. In the following page, page 4, we can see that in the fourth quarter, Ternium's net sales in Mexico declined 3% sequentially mainly due to lower revenue per ton and seasonally lower shipments as anticipated. Revenue per ton and shipments in Mexico are expected to increase in the first quarter of this year 2018 as seasonally factors decline another line demand increase in a strong pricing environment. Let's go now to page 5 to review the performance of the southern region. As anticipated, following the recovery in the steel demand in Argentina in the third quarter steel shipments remained a strong level in the fourth quarter. And we'll probably continue doing so in the first quarter of this year. The steel prices increase in the fourth quarter in the region, now we expect is lightly further improvement in the first quarter of 2018. In next page, number 6, we can see the significant effect in other mark achievements and revenue per ton of the full consolidation of Ternium Brazils slab sales to third parties; mainly directed to the U.S. and Brazilian market. In the first quarter 2018, other mark achievements should decrease to reflect the amendments Maximo mentioned to the slab supply agreement with Calvert in the U.S. in the next page, we see the combined effect of these development on our consolidated net sales. We have shipments of 3.4 million tons in the quarter up 11% sequentially, consolidated sales grew 9% and revenue per ton declined 4%. In the first quarter, revenue per ton should increase to reflect an increasing prices in Mexico and to a lesser extent in Argentina. We anticipate shipments to remain relatively stable sequentially with high achievements in Mexico offset by lower shipments of slabs to U.S. as mentioned before. Please turn to page 8 now, please. So, we can see the drivers of the fourth quarter around full year EBITDA. In the left hand on the graph, you see a positive quarterly sequential impact of higher steel shipments on EBITDA. The steel segment EBITDA margin decrease as anticipated, although the 43 million nonrecurring gain related to our phase of electricity in Mexico, made a decrease less steep. We have a lower steel revenue per ton as we saw in the previous slides. We do a partial offset by decrease in steel cost per ton due to a full quarter consolidation of Ternium Brazil in the period. Also, lower per slab cost and higher raw material cost. In the right hand graph, you can see our EBITDA performance in 2017. The main driver behind the EBITDA increase was higher steel shipment and will occurs slightly higher steel EBITDA margin. The increase in steel EBITDA margin includes higher steel revenue per ton and cost per ton. Steel revenue per ton increased year-over-year in Mexico or the southern region. And it decreased in other market as a result of the consolidation of Ternium Brazil slab sales. On the other hand, operating cost per ton increased mainly as a result of higher raw material and purchased slab cost per sale of set by the consolidation again of Ternium Brazil. We expect sequentially higher EBITDA in the first quarter of this year. We've higher revenue per ton and relatively stable steel shipments. In relationship to cost, slightly higher cost per ton in most of the companies geographical market should be offset by lower cost per ton in Ternium Argentina mainly as a result of the local currency depreciation impact on the U.S. dollar value of investors; leading to not significant changes in the cost view in the quarter. Let me remind you that Ternium Argentina uses the Argentine peso as its currency, excuse me, as its functional currency. And as a result of the U.S. dollar value of its inventory decrease when they see depreciation of the local currency against the U.S. dollar. Let's now review net income on page 9. There was a $35 million sequential decrease in net income in the fourth quarter mainly view to a higher effective tax rate. The effective tax rate was effected by the non-cash effect on deferred taxes of the fluctuation of the Mexican peso against the U.S. dollar in the quarter; which depreciated 8% during the period. Turning to page 10. We can see an year-over-year increase in net income in 2017. Mainly on higher operating income and lower effective tax rates and higher results from the equity in earnings of -- behind. The lower rate was the non-cash effect of the 5% appreciation of the Mexican peso against the dollar during the year. On the other hand, effective tax rate was the previously 2016, 37% because of the Mexican peso depreciation of 17 during that year. On page 11, we can see the free cash flow in the fourth quarter, would reach a negative $94 million in the period. We continue carrying on a moderate capital expenditure program in the fourth quarter but there was a $310 million increase in working capital. The reason for which what we see in details in the following page 12. But let me summarize these by saying that the working capital increase head to importer components. The working capital normalization of our operation in Brazil that we presented close to $210 million and also higher receiver's related to the refractive adjustment of the energy sale in Mexico of $43 million. As you can see, these two factors represented around 80% of the working capital increase and the year non-recurrent. The difference are normal movements in working capital due to prices of volumes. We are expecting to normalize working capital in the coming quarter and year by considering also the expected price increases that we will see in the coming quarters. In addition, free cash flow in page 14 includes the explanation of what happened during the year. You can see there was an the free cash flow was affected by an income tax payment of $610 million. As you may remember for last quarter conference call, the main variation to these item occur during the first half of the year, now we explain them in previous calls. In addition, the free cash flow includes an increasing working capital of $865 million, the reason for which what we see in the following page, page 14. In 2017, our inventory increased by $540 million; 40% of this increase happen in the fourth quarter, for the reason that I have just mentioned. All-in-all we have higher volume and prices of raw material and steel. During the year, physical steel inventory increased by $129 million reflecting increasing operation rate in all of Ternium facilities and the mentioned effect of Brazil. In addition, the price of our steel inventory grew by $258 million, again as a result of higher prices of raw material flow in through inventories. Turning to trade receivables. The increase mostly reflected higher prices and shipments in Ternium's main steel market and also an increase in connection with the face of slabs in our operation in Brazil. Going now to page 15, you can see an evolution of Ternium's EBITDA, free cash flow, capital expenditure and dividends over the last year. 2017 EBITDA was the highest in the last five year. Capital expenditures remain stable after we finish our later expansion cycle back in 2013. Free cash flow was negative in 2017 that we discussed after very strong free cash flow generation over the previous year. We expect free cash flow to recover in 2018, also a stronger capital expenditure in the year as the announced new project in Mexico start to gain speed. In addition, we announced another increase in our yearly dividend payment proposal to $1.01. In the last five years, there was a $0.45 per share raise, which is quite significant. Finally, Ternium's net debt stands at $2.7 billion as of December 31, representing a comfortable 1.4 times EBITDA. This is after the acquisition of CSA which resulted in an additional net cash views of $1.6 billion. Okay, thank you very much for your attention. This were all my initial remarks. We are now ready to answer your questions. Please operator, proceed with the Q&A session. Thanks.

Thank you. [Operator Instructions] Your first question comes from the line of Ivano Westin with Credit Suisse. Please go ahead.

Hi, good morning. Thanks for the questions. The first one, I just had to point so much I say, it's created an extent the agreement on with Calvert in 2020. So, I'd appreciate if you comment on the ration of these why towards the at 2020 not beyond. And if you could comment on the market price on the price that are there, there if it's similar to the market price, that will get not the regions. And also on the CSA, you also commented that you may take the advantage of the recovery in Brazil. I just wonder if you can comment on the maximum amount of volume that you can sell to the local market in Brazil. Also, on the outlook that you mentioned, your anticipated expect a higher a revenue per ton in Mexico in lesser extent in Argentina. So, I just wonder if you can comment where you expect the premium between U.S. price and Mexico price to normalize moving forward. And if you could also comment or expect some of your slab cost in Mexico. Thank you.

All right, thanks for the question. And well, regarding the Calvert agreement and the Calvert situation, we finally decided to sit down with Mittal and attain their request to extend their duration of the contract, so that we decided in full agreement and in consensus to extend the maturity to December 2020. Or in other words, from 24 months to 40 months. Important to say, that it is the same total volume and that the rest of the commercial terms of the agreement remain exactly the same. That means that shipments will go from 2 million tons per year to around 1.2 a million tons per year; that is quite good for us and I believe that is totally understandable that it would be convenient to both party to extend duration period. We will be selling most of the production to Mexico, Argentina, and third parties. When talking about third parties, I am referring to local and overseas customers, just for you to have an idea and answer your question in 2018, we are planning to sell approx. 1.2 million tons to Calvert and they extended contract or amended contract around 1.2 million tons of local phase in phase in Brazil mainly to Usiminas. When talking about Usiminas, I'm talking about Cubatao, former cosepa plant that some time ago decided to close down their upstream production. So, they closed down the blast furnaces and the continuous caster and have to supply their re-rolling binds lapse of third parties. And a little over 2 million tons to other Ternium's facilities. Including in that, some small sales, some I would say few tons to some third parties. The new majority, in our view has a better feet with our expansion plants in Mexico, as you know that the new hot rolling mill is coming online in 2020, in 2020. Regarding the premium that you mentioned on our pricing system, as you know and we talk about this issue many times in our especially in our investment in our Investment Day when we have the chance of getting in touch and going more in depth in our strategies, the premium is based upon it's pure service, just in time delivery, superior commercial network, a very clean and lean and mean relationship with customers and the distributor. So, the premium will remain as far as we are able to sustain a superior service, these are our competitors especially those that are coming from a road. Obviously, the operating system of Mexico will and in Argentina will copy or will follow the trends in the international market place. For example the prices of China have been increasing because of reductions in production because of duty and countervailing actions against and fair trades against China all over the world or in many places in the world. So, that prices in the domestic market went up and also the prices in the U.S.A are going up and has been when gone up during the year. So, that the previous year. So, that the end the prices will copy the international market place and we will continue having a premium based upon the fact that we consider that we have a premium service as well.

Okay, very pleasing, very much. If you could comment on the scrap cost that expect moving forward in Mexico, that would be highly appreciated.

The scrap. Well, this is a nice question because as you know we have had a quite convenient so to speak a base cost given that they supply of iron ore have been stable and growing and so the iron ore didn’t grow as fast as the prices went up in the last year. Also the carbon is in a stable situation. In the case of the carbon, you will always have to be alert to climate disruptions to environment disruptions because the patch of carbon is obviously heavily impacted by a climate kind of volatilities. But at the end, I would say that even when the prices, the cost of our raw material went up, do doubt during 2017, the prices overpass these increasing cost. So, that they didn’t have profitability of the sector, the state sector went up. Regarding the scrap, as you mention is a good point because what we are looking at is that in the case of China, China is cutting production and when I say it's cutting production, I'm referring especially to blast furnaces, iron capacity, environmental and kind of facilities. And so that when the production had to follow the demand that this is still growing in China, the steel consumption in China grew 3% in 2017 and I expect that we will be maybe witness in another 3% in 2019 as I will mention afterwards. So, that in order to catch up with this increase in total upper and steel use in China, it was some pressure in the local market of China on the scrap. And this pressure will continue. So, I would say that regarding raw materials I see a good and nice supply base in iron ore, I see coal goal going down but we have to be alert, some climate volatilities in scrap maybe we can expect to grow. But as you know because the structure of Ternium is not that sensitive to scrap, because we are only buying marginal quantities of scrap to complement the iron ore that is coming from our own mine and also from a valid especially through the system of Corumba in the north of Argentina. Also important to mention regarding the raw material is the gas that is intensively operation in Mexico. In Mexico we are gas intensive in energy and we are coal intensive in Argentina at the same token. And the gas is just has remained very low in relative terms to the history and in relative terms to other comparable. So, in all, maybe we can expect some increase in scrap in the U.S.A. because of increase in production of the many needs related to the 232 action. Then we will maybe looking at some increases in quarter of a scrap as well in China. But the increase in scrap is not having an important effect in our cost base because of the effect that this is only marginal raw material for us.

It's very clear. Thank you, very much.

Thanks a lot.

Your next question comes from [Carrick Cajek] with Bank of America. Please go ahead. -- Carrick Cajek, your line is open. Your next question comes from the line of John Brandt with HSBC. Please go ahead.

Hi, good morning, Gentlemen. I'm hoping you could expand a little bit on your section 232 comments and the implications. I'm wondering, it seems pretty clear that the U.S. government is going to have some sort of protectionist measure whether it's a increased tariff or a CODA. I'm wondering what that means for you if you still see the connection between U.S. steel prices and Mexico prices or if potentially there is a disconnect between the two if you expect to see imports that were previously bound for the U.S. if they could find their way into Mexico or any other implications that you could think of regarding the section 232. And then secondly, I wanted to ask just coming back to Ternium Brazil, if you could talk a little bit about the margins that you're seeing on that mill is as you ramp up as you increase the efficiency, what sort of cost savings you're seeing from producing your own slabs versus buying in the locket. Thank you.

Thank you, John. Well, regarding the 232, we esteemed or no the effect we add in the process of analyzing percent in our sales against the different scenarios. There is a recommendation as you know coming from the DOC with a three different vectors or three different scenarios. One is the first one is increased endurance across the board on 24%. The second one is an increase of duty for 12 countries, plus CODAs based upon report sales, export sales to the U.S.A. in 2017. And third, it is another scenario the further scenario is the CODAs related to exports CODA no endurance related to exports in 2017. The U.S. President could take a final decision regarding that what to do on the recommendation of the DOC and there is a day that this April the 11th, you know that maybe he could go either for one of the options that I mention, again increased endurance across the board, increase of endurance with a mix of CODAs as well and core CODAs and the U.S. President could take a final decision that could be either be one of the options that I mention or a combination of the three or even postponing the decision for a while and dealer having more information in relation with the impact to the industry in the domestic markets exports of the U.S. and so on and so forth. While in more in detail, maybe this point makes a maximum you could expand on which is your view on the 232 in the Mexican market in and also in the rest of the world.

Yes, sure. First of all I think that the recommendations that the DOC made. Well, they were rather harsh recommendations, I think nobody was expecting to have the three recommendations very cut. The end they're looking for clearly to increase utilization of the steel industry in the U.S. from 75% or around 75% they have today to a little bit more of 80%. Although, they're very different between the different products. And as Daniel mentioned, we really don’t know what the President is going to decide. Higher tariff or CODAs if the set of the booth, exactly the three ones they mention could put a heavy burn and also in the competitors of the U.S. manufacturing industry cost or the consumers cost increase also. So, we really don’t know where this is going, as what effects this will have for us for Ternium based on this information that we have today, we don’t anticipate a significant impact for us in the near future. Neither from our exports to the U.S. market from our Brazilian operation and as you know Ternium Mexico export are quite marginal to the U.S. So, we don’t expect there to have any problems. As you said prices in Mexico, usually follow prices in the U.S. we think this is going to continue although at a much I mean prices in the U.S. would probably go higher much quickly but we are confident that the government from Mexico and all the other governments of the region could take action to avoid collateral effects involving on fair trade that the force that today goes to the U.S. and tomorrow we can we'll try to go to Mexico to Brazil. We are very confident that the government will take action of these. So, I think we're not seeing a major disruption for Ternium in this.

Yes. Even when we don’t know, yet we'll see some if any.

Yes. If any. Coming in there.

That you're right. But in anyway and going to the second question regarding the Brazil margin, I would say that we enter into CSA recently. We see room for efficiencies in cost, we see room for in efficiencies in volume. We are getting very good levels of production, also put in Exiros, our procurement portal in the procurement base of the company. We'll no doubt have an impact of positively a positive impact in the cost. But Pablo might back to you to mention on margins.

Yes, okay. But basically you mention remain items that we are working with, the only thing I wanted to mention is even though we consolidated fully Ternium Brazil in the fourth quarter, the margin that we were able to stay are still very high with a margin of over 18% during the fourth quarter. When we are fully reflecting the Brazilian operation is a way to show that we are very hard working on this things that you that you mention which ware increasing volumes and reducing cost that will at the very end reflect in of course in the lower margin in that the rate of our operation because it's only slab production. But we are not expecting to see a significant impact or a significant reaction in the final number for Ternium.

Okay, thank you. Just a follow-up on the section 232. If the U.S. increases tariff on imports. The 1.2 million tons that you sent to the Calvert facility that extra cost needs to be borne by the Calvert facility not by yourselves. Is that correct?

Yes. We, our current analysis on what we are real needs that the effect or the measures will not affect our exports to the Calvert facility.

Because they contact the base upon delivery duty unpaid that means that we have an export tax on Brazil we should pay. This export tax and with customer has an import tax or tariff or whatever, it has to repaid by them because as I said before the contact is based upon delivery, duty, and pace.

Thank you, very much. Very helpful.

Thank you.

Your next question comes from Thiago Lofiego with Bradesco BBI. Your line is open.

Thank you. Gentlemen, two questions on my side. The first one on the steel inventory buildup in Mexico, just trying to understand if this is a nice lead of factor or is this a change in strategy. Just trying to understand what's the reason behind the big uptick on inventory levels in Mexico. And still regarding this the free cash flow generation seeing here, could you could confirm the CapEx budget for 2018? And then the second question, if you regarding the whole inner situation and the agreement with Nippon. Once the initial lock up expires, would you consider buying Nippon stake or would you be more of a seller or you think the base case here that nothing changes? Thank you.

Right, good. Thank you, Thiago. Regarding the inventories, no change in policy. We'll have to one with Brazil inventory level. As a matter of fact, the inventory, the cash flow that you mention first is there, you see in the companies. Not nothing that was an overrun or an expected CapEx, is that an increase in inventories because of seasonality; because of marketing service; because of putting together the numbers of Brazil that needs to be some adjustment made. Regarding the free cash flows, Pablo, you also mentioned in your presentation but you can expand on that and the relationship with the working capital.

Exactly, yes. We there was clearly a couple of effect during these fourth quarter that make us drove an important increasing working capital which I try to summarize during the opening remarks. But let me repeat them because I think it's very important. The first one is the normalization of the working capital in Brazil which was necessary because of the very low level of account receivables that we had at the moment of entering to the company. Then the increase in volumes to the local market and the increase in prices of slabs during the period that made us show the numbers that we're showing. At the very end, we let me comment the second issue and then I will comment on what we're expecting for the future. The second one was the mentioned recovery or adjustment of the price that we sold the energy in the system in Mexico which was $43 million. This was agreed in November last year but the collection is expected to come in the coming month. So, this is also increasing our working capital. We both items that I am mentioning is explains the most significant part of the working capital increase. As the third, we are expecting to normalize these in the first quarter and during 2018, but also you need to take into consideration that we are expecting also to increase a little bit the volumes and price. If they continue to increase, of course they will have an impact on the working capital. But we're also making to see any specific issue and we are counting on a normalization of the working capital in our Brazilian operation. So, I guess Daniel, there was a sort of birth.

Yes. So, in Usiminas. And in Usiminas, let me comment on Usiminas, because this is an interesting topic because as you know maybe it took too long to reach these agreement but we are being working as you well know, very hard, and we discussed with you personally and with other gentlemen in this same room with all implications of reaching an agreement and a positive implications of regional agreement with Nippon Steel. It seems to me that maybe it was require for us for both of us to reach a kind of mature stage in the relationship in order to go with here in this kind of agreement that made us possible to change the governance rules of Usiminas in a way that is acceptable and good for both parties in the benefit of Usiminas always. The agreement that will reach is expected to be deployed in order to avoid similar conflicts in the future, so that we are happy with the performance in Usiminas nowadays, the performance improve after Sergio Leite was appointed as a CEO because of his action together with his leadership and to the action of other managers as well as the more positive environment. Because Brazil is rebounding and the steel industry is gaining momentum. So, we believe that a good performance will continue and the agreement is good for Ternium because it eliminates uncertainty and it will avoid as been destructed and side track so to speak from my core business and occupations. But let me go to your point on the deadlock and exit the clause, because at this point of time, let me stress that ourselves as well as Nippon, the parties will remain or remain with a strong compromise and commitment to Usiminas with a long term view. I mean, the exit clause is aimed at providing a solution to eventual conflict in the future, obviously always preserving the company interest of value. But when we enter into the new agreement, the parties are reaffirming their initial intention and commitment to reveal their mutual trust in the partnership and to work together in the benefit of Usiminas. And to help and support the management of Usiminas. So, we are not thinking at all nowadays in exercising this mechanism in four years and we have from now.

That's cleared, thank you. If I may, just one last question here. Do you had other product say as of $132 million in the quarter of which you mentioned in your note that part of that is the electricity sale in Mexico and the other part is Ternium Brazil's electricity sales. Could you provide a breakdown on maybe the number on Ternium Brazil's electricity sales and if that number is if we can consider that number recurring moving forward?

Well, Thiago, yes you're right. We have included the cost the fair way to express it the sales that we are doing of energy both in the Mexican market and the Brazilian market. The breakdown on the sales is 2/3rds in Mexico, 1/3rd in Brazil, and we are especially in the case of Mexico expecting these to sustain with fluctuation in prices because the price of energy is not the same during the year. In the case in Brazil will depend on the increase of our production but on the short period of time we should think of these levels sustaining in the coming quarters.

I'm sorry, Pablo, I couldn't understand exactly the end of your explanation. We got 1/3rd that is related to Brazil, will that remain or not in them?

Yes, will remain but at some point will be reduced because as you know we are expected to increase the production locally. So, we'll need to use a higher level of electricity. Remember that this, this is the electricity that we produce in our own plant and wonder we not consume a sale into the market. But in the short run, this should be a number that could be sustained in the coming quarter.

Okay, clear. Thank you.

You're welcome.

You next question comes from Carlos De Alba with Morgan Stanley. Please go ahead.

Thank you very much, gentlemen. Just coming back to CSA, first question I have is, if there were any sales volumes from CSA or Ternium Brazil to either Ternium Mexico or Ternium Argentina, if you could share the volumes that will be helpful. Second one on CSA is the 1.2 million tons per year to cover will be equally distributed among the four quarters of the year. And then just coming back a little bit to the expectations on CapEx because of the new projects. Could you remind us what the CapEx outlook is for 2018 and if you have numbers for 2019; that'll be useful?

Good. Regarding the Calvert operation, we will be selling approx. 1.2 million tons to Calvert per year in the coming 40 months. That means, around a 100,000 tons per month. Obviously, as it depends on the ship's capacity and level. So, you're going to have some small difference between one CODA or and the other but it should be equalized easily and in a very short period of time. Because we have the scheduling of the plan to respond the needs of Calvert and we perfectly know quality wise; volume wise; and delivery wise the needs that they have. So, the volume will continue pretty even I would say at the level of 800,000 tons per month approx. Then we have the sale team Brazil is 1.2 million tons of slab mainly to Usiminas, these number could go up. It is convenient for CSA because of the tax bracket and it is convenient for Usiminas especially obviously the former Cosepa the Cubatao plant because of prompt deliveries, I think that delivery, quality, specifications and the logistics. That is very easy for them compared with other suppliers. Then we have in Argentina, you know we in Argentina we do the session of closing done. One of the blast furnaces will continue being closed down until we have a better and more clear market indication of what is going on in the steel arena, so that we will continue be selling to Argentina around 0.5 million tons to 600,000 tons per year roughly depending on the need of Argentina. And the rest will be dedicated to serve our needs in Mexico as Maximo was mentioning it is very convenient for Mexico to be supply these high-end quality, Maximo, no?

Yes. For Mexico operation, if you remember the slab facility cuts a meaning Siderurgica is our high end facility today. So, most our special customers we sell material that comes from that mill and we formally have to buy all that slabs which customers didn't like very much. So, having our own facility with our own research and development; with our own product capacity for them; I think gets huge advantage for us in the Mexican market.

Good. Then regarding CapEx in Brazil, we are going to be having 40 to 50 million on a normalized basis to say and then for turning to Pablo.

With the start of the new project, we should increase our CapEx level in 2018 to little lower around $600 million with the bulk of the movement moving to 2019. We're anticipating to have a CapEx level on the tier of around $1 million and then returning to more normal levels.

Okay. And Daniel, thank you for those answers. Just in the fourth quarter, were there any volume sold from Turnium Brazil to Turnium Mexico or Argentina?

Yes, there was. Of course, we need to deliver slab that we produce and there were mainly dedicated almost all dedicated to the Mexican operation.

Okay. And then Pablo, the guidance of higher sequential operating income for the first quarter 2018, is that considering the 350 million operating cum reporting in the fourth quarter that includes the 43 million non-recurrent or should we consider after or excluding the 42 million non-recurrent -- the 43 million non-recurrent?

You can take the number as you like. We are expecting to have a higher operating margin in the coming quarter mainly due to increase in volume in Mexico and the pricing scenario that we find. So, yes we are expecting to have an increased margin coming to the next quarter.

All right. And then Daniel, I don't know if this is your last conference call. If it is I just want to say wish you all the best in your retirement or whatever else is that you are going to pursue after a very successful tenure, CEO of Ternium.

I do, I appreciate your comment Carlos and you remain obviously open to talk with you and we have been doing over these years working together. I, yes, and know I will continue in the company as a Bi-Chairman of Ternium and delivering support to Maximo and the rest of the management in the strategic matters as well as institutional matters. Obviously, the operation will be in the hand -- the full hand of Maximo and I will be participating in the coming call because as a matter of fact I will be in charge of January and February. Yes. So, that I will be having, I will be there even in 2/3rds April. And as you say, as you can see we have a positive outlook. So, I will not be missing these quarter call. It could be the opposite, depending on these outlook but with this outlook no doubt I will be here you know.

All right.

But thanks a lot for your comment; I do appreciate your comment.

Thank you.

Your next question comes from Caio Ribeiro with JPMorgan. Please go ahead.

Good morning, guys. And thank you for the opportunity. So, first off I just wanted to see if you could go over some of your expectations in terms of the growth of the different demand components in Mexico. So, for the auto sector manufacturing et cetera and for 2018 and what that translates into a demand growth expectations as a whole for the 2018 in Mexico. And secondly, if you could just talk a little bit more about the one-off gain related to the electricity sales. Just exactly what the price readjustments comes from and if there is anything additional in the next quarters. Thank you.

Thank you Caio, I will take both of them. Demand in Mexico according to the where steel will grow in 2018; almost 3%. We think that most of that demand will continue coming from the industrial sector. It's not a huge grow but I think all the industry; the auto industry; the HVAC; the home appliances will continue growing not as pace of 2017. If you remember automobile industry in Mexico reached 3.7 million units in 2017. It was a new record and it's going to be a little bit bigger in 2018 but it's not going to be much more bigger than that. But our growth can continue growing substitution imports. I mean imports in Mexico of steel are still very high and our target is to continue growing substitution that imports. That's according to the demand. In the construction part, we don't see much change. We think it's going to be stable but we don't see much more growth there in Mexico. It's an election year in Mexico, so things are not going to improve a lot in that sense. To the electricity point, it was an adjustment in the tariff. They are, the market was steady in Mexico a couple of years ago the new electricity market. And so the unused electricity that we don't use in the Texan facility in the central electrical, we sell it to the market. The payment that the market gave us, there are two different prices. There is price on advance of the date that is given to us the day before and there is the daily or the hourly market price. Those price supposed to be same but were not the same in these nine or 10 months but the CSA pay us with a price in advance. And the losses that are now which's paying us in the daily in the hourly market price. So, that difference in these 10 or 12 months is what makes these $43 million. So, they recognize these difference and they pay to us. It's not going to be again because now they are paying us with the hourly market price.

Okay perfect, that's very clear. And just a quick follow-up if I may. On Argentina, are you guys still expecting a 10% growth in volumes in 2018 or has anything changed?

Well, in 2018 we still expect the 9% to 10% growth and we are seeing good numbers. At the end of the Q&A, I will make a closing remark where I will mention some numbers regarding the fundamentals and the general markets of Ternium in the world, in China, and I will make some short comments in these points in particularly in Argentina. But we expect after having a 2017 with a 17.2% growth in Argentina over the very low number in 2016 it is true. But we did expect a 9% to 10% growth for 2018.

Okay perfect, thank you.

Thank you, so much.

Your next question comes from Marcos Assumpcao with Itaú. Please go ahead.

Hi, good morning everyone. First question on NAFTA. You already gave a little bit of an update on the topic but what is your views on future auto production in Mexico? Before, I remember you had a very constructive view on auto production eventually reaching 5 million units by 2020. Do you think that could change a little bit? And also regarding the investment in Mexico in the galvanizing and the painting, do you think that painting on the discussions on NAFTA, this the CapEx could be a little bit delayed because of that or not? And last question on probably for Pablo. You mentioned before that you were worried about the difference in multiples or you were studying or analyzing why Ternium was multiples were so different than peers. What has been done so far to reduce the evaluation gap? What is your analysis on that topic as well? Thank you.

Okay Marcos, thank you very much. Regarding NAFTA and Mexican auto production, as I said before I don't know yet what will the NAFTA recognition outcome will come. What I do see is that the last month, I am a little bit more optimistic that we are going to reach an agreement or they are going to be reach an agreement. What is clearly that I don't see today, that in 2020 Mexico is going to reach the 5 million units? I think the number it's more near the 4.4 million units than the 5 million units. I don't see any delay in the galvanize and painting, remember that these lines are for all industrial and construction industry; the galvanize is not an automotive industry or automotive line only as it would have been telling all too. This is for all markets. And I don't see any delay regardless of NAFTA negotiations.

Okay. Marcos, I will take the last part of your question. This is something that is continuous work in process for us since and we have been discussing this for many years. I think that the company has worked strongly in the performance and join a very good investments in the last years, especially the CSA acquisition that we understand is starting to reflect in our multiple that has been increasing during the last years. Our margin is our multiple -- sorry, is today over five which is decent but we still believe that we have room for improvement and this as we discussed in the past it's nothing that we can do immediately to change that but we will be sure that the company will continue to work very hard in time to find ways to improve that in the coming years.

Okay, perfect. The last question to Daniel probably on his use on Usiminas. Regardless of your position of buyer or seller in the future on the company, how far do you think the company is from their full value or from the full evaluation or full potential in terms of valuation?

I don't know because this is a question of market perception and I wouldn't speculate about that. What I can see is that there is no doubt that Usiminas has a tremendous room for improvement. I mean; efficiency wise; productivity wise; streamlining wise; procurement wise; and so that the management is doing very well and with our support and working together with the expertise in of Nippon and also our support that our expertise as well. You need that there is important role for improvement. Kind of then speculate on how these increase could reflecting the value of the share but no doubt that the company is going to be performing very well and it has a tremendous potential. I always thought that when we bought the company and afterwards we had some problems but now we are I think that this is going to be doing well.

All right, perfect. Thank you, very much.

Thanks, you're welcome.

Thanks.

There are no further question at this time. Switching the call back to the CEO for any closing remarks.

Good. Well, thanks a lot for your questions. And I think what that all of us are running out of time now right now. And but let me share some final insights and fundamentals so to speak that I wanted to mention. Looking forward, it will happen in the steel consumption looks promising according with the World Steel Association. China grew 3% in 2017 and world ex-China grew also to 3% in 2017. In next April the 9th, in Mumbai, India, we will have our meeting on World Steel Association and the air con committee will present the new forecast for 2018. And maybe in these forecast we will see growth in China in 2018 apart in the steel consumption as well. Looking at our backyard, U.S.A. grew 4.8% in 2017; Mexico 4.1% up; Brazil 5.3% up; Argentina 17.2% up from a very low level in 2016 but we are still expecting an additional 9% to 10% for 2018. With these numbers, in Mexico key loss per capita is reaching to fact to a 110, well above the 110 average of Latin America being the USA 300 key loss per capita and growing from a 131 in 2009. So, Mexico grew a steel consumption per capita in the last eight to nine years, a 60% from a 131 to 210; very promising. China is cutting production. We see a good domestic end market on a steel exports going down in China from a 110 million tons in 2015 to 75 million tons in 2017; meaning a 35% decrease in production. USA and Mexico market doing quite well. Demand is as strong in oil and gas contraction infrastructure durable goods and so the capacity utilization is stable to adverse and the major levels in service centers are at a low level, so that the prices are reflecting the supply and demand quite well because there is no upsell, there is no buffer coming from the inventors, the inventories. So, we are in the process of addressing the impact and the implication of the 232 regulation and we are now analyzing what could happen with that. But I see this rebounding based upon better industrial activity at specifically auto industry. The auto industry is increasing production, contractually doing well as well as infrastructure and very low levels of inflation and interest rate is stable with the downward trend. So, what I feel we'll continue the path of recovering in our view no doubt for the months and for the years to come. Argentina is under economic reform. The public state management is very good and they are working very hard and doing the right things. And so, the activity under domestic market is looking strong. Just as an example, the car domestic sales are in the range of almost 1 million cars per year in Argentina, meaning almost twice the domestic sales per capita rate over Brazil and Mexico. Afterwards, Pablo Brizzio and Sebastian could share some more details on that but that means that the consumption in Argentina is doing well. Home appliances as well as cars as I said before meaning that it's almost twice the level of domestic cars per capita being sold in Mexico and in Brazil. Raw material prices as we comment in our Q&A sessions seems to be relatively stable, especially iron ore, because of the supply demand situation and coal and also the natural gas in Mexico and the U.S. is pretty stable and low; very low. So, that we foresee some pressure on the scrap as we were making some comments but with very low impact in the cost of Ternium. Ternium continues our performing peers and competitors with an EBITDA range of around 20% against an average of 11% of peers. The peers are raising from 9% to 13% and in the peers we are including the U.S. integrated mills; U.S. mini mills; Japanese integrated two mills; a global world company; America's long products integrated; and Korea. You can easily pull your names in these peers. So, that the performance continue being good based upon a flexible and efficient production configuration and a concern for the cost and for the productivity. We hope also that the governments in the region will react in an appropriate mode to the implication of the 232 and do their homework and as the rest of the world is doing. And regulations will prevent a fair trade worldwide like the recent for example anti ramping cases of European community against China. So to finish, good luck to my friend and my colleague and my peer Maximo. And thank you so much for your attention in this conference and for your support for all these years. So, bye-bye now. I will see you soon.

This concludes today's conference call. You may now disconnect.