Ternium S.A. (TX) Q2 2018 Earnings Report, Transcript and Summary

Good morning. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ternium Second Quarter 2018 Results Conference Call. [Operator Instructions] Thank you. Mr. Sebastián Martí, you may begin your conference. Sebastián Martí: Thank you. Hi, good morning, and thank you for joining us today. My name is Sebastián Martí and I'm Ternium's Investor Relations Director. Ternium issued a press release yesterday detailing its results for the second quarter 2018. This call is complementary to that presentation. Joining me today is Mr. Máximo Vedoya, Ternium's CEO; and Mr. Pablo Brizzio, Ternium's Chief Financial Officer, who will discuss Ternium's business environment and performance in the second quarter 2018. At the conclusion of our prepared remarks, we will open up the call to your questions. Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation. With that, I'll turn the call over to Mr. Vedoya. Máximo Vedoya: Thank you, Sebastián, and good morning to all of you. Thank you very much for participating in our call today. I would like to make some brief comments about our performance and the current state of our main markets, and then, I'll ask Pablo to discuss or to describe our second quarter's result. After that, we'll open up the call to your questions. We reported record EBITDA in the second quarter, mainly driven by higher realized prices in several of our markets. We were partially offset by higher cost and lower shipments as we anticipate. In the first half of 2018, Ternium's steel shipments reached 6.8 million tons and EBITDA increased 51% year-over-year, reaching $1.5 billion on a 24% EBITDA margin. Ternium Brasil has been an important factor in this good performance. And we continue working on integrating this top of the line facility into Ternium's industrial system. We expect to be able to continue showing a strong EBITDA level in the third quarter of the year, in line with that of the first half of 2018, with healthy margin despite lower shipments in Mexico and Argentina. Net debt continued to trend down in the second quarter, a quarter on which we made our annual dividend payment in May. This was possible due to $415 million free cash flow generation in the quarter. At the end of June, our net debt stood at only 1 time last 12 months EBITDA. Let me now make some comments about the latest development in our main market, starting with Mexico and a little bit comment of the U.S. also. After the introduction in the U.S. of trade measures against imports of steel under Section 232 in the first quarter of the year, different countries and trade blocks around the world announced retaliatory tariff against U.S. Also several of them introduced or are currently analyzing safeguards [ph] to prevent redirection of exports from affecting their steel markets. In the case of Mexico, the government announced both retaliatory against the U.S. and safeguard [ph] tariff shortly after Mexico lost its exemption to Section 232 in June of this year. The way the U.S. applied Section 232 is very harsh with a majority of exporting countries affected by a 25% tariff, and a few others like Brazil negotiated quotas with hard tops. This, together with a rather healthy local steel demand, provoked a sharp increase in prices, with an unusually high steel price gap between the U.S. market and those in the rest of the world. This steel price premium in the U.S. could narrow to more normal levels in the future, if trade measures change over the following quarters, with more countries being exempted from Section 232, but this is uncertain at this point. Going to Mexico, realized steel prices in Mexico also increased, although not as much as they did in the U.S. market. Demand in Mexico remains at good levels, even though it was impacted in some way by this trade friction as I mentioned before and the election process in the country, both of which brought significant volatility to the Mexican peso exchange rate. But this has abated after the election. The industrial market keeps on showing resilience in the second quarter, while construction market continued to have a weaker performance, which we anticipate will persist in the third quarter. Seasonality in the automobile, home appliance and HVAC industry will also affect volumes in Mexico in the third quarter. The trade situation in the world continue to be volatile, but I believe a good aspect of what is happening is that the issue of unfair trade, overcapacity, and subsidies in China, something that we have been talking about for a while, is an issue that today is very present on most of policy-makers' minds around the world. Turning now to Argentina, although we expected to see an impact in Argentina economy from the recent drought and subsequent flooding that significantly affect the yields of the last crop in the country, the effect ended up being much stronger than everybody anticipated. In addition, a sudden change in international financial market confidence in the country together with less favorable financial condition for emerging markets in the world, strongly affected the value of local currency in the second quarter, bringing significant volatility to local financial markets and also affecting economic growth. The peso exchange rate stabilized after the Argentina government took several measures to tackle the situation, but interest rate ended up at very high levels. The higher financial costs took at all on local steel demand. We translated in a subsequent decrease in shipments in this quarter - in this market in the second quarter of the year, and most probably a subsequent decrease, although, smaller during our third quarter. We believe better competitiveness conditions for the industrial sector together with positive performance of agribusiness sector should support a recovery of steel demand in Argentina over the medium-term. Also, the Brazilian economy seems to be in a process of recovery, apart from recent issues like a truck - like the truck strike and the change in confidence levels related to the election process in the country. This should also help Argentina recover from today stable, but weak demand situation. As Brazil is number one destination of Argentina manufacture export. Okay, I want to be very brief today, so we can have more time to Q&A. Please, Pablo, go ahead with highlights of our performance in the second quarter and in the first half of the year.

Thanks, Máximo. Good morning, and thank you all for participating our conference call. Let's review the performance of the second quarter of this year. Please let's start with Page 3 on today webcast presentation. As Máximo anticipated, our performance continues to be strong in the second quarter of the year with record EBITDA of $788 million higher than EBITDA in the first quarter, significantly higher compared to the same quarter last year, as forecasted in our last conference call. Looking on Ternium's EBITDA per ton on the lower left side and EBITDA margin on the higher right side, we reported a margin of $237 per ton in the second quarter or 25% of net sales, as revenue per ton increased more than operating cost per ton. As for net income in the second quarter, we reported $338 million, equivalent to earnings per ADS of $1.66. This means a $0.21 sequential decrease due mainly to higher net financial expenses and effective tax rate, mostly related to the exchange rate volatility in this period, as we will discuss later, of course, partially offset by higher operating income. We now will review our performance in the Mexican market in the following page. In the second quarter, Ternium's net sales increased 9% sequentially, due to 13% increase in revenue per ton, partially offset by 3% decrease in shipments. We anticipate volumes in Mexico to decrease again in the third quarter as a result of continued weakness in the construction market together with slight seasonal decrease in the automotive, home appliances and HVAC industries, as Máximo anticipated. Let's review now our performance in Southern Region of Page 5 of the presentation. In the second quarter, Ternium's net sales decreased 7% sequentially, mainly reflecting lower shipments. Also Máximo said, the economy activity in Argentina suffered a setback in the second quarter of the year, a strong impact in the agricultural sector of adverse work conditions and financial market volatility together with significant increase in interest rate results in lower steel shipments. In the third quarter, we expect certain additional retreat in the level of steel shipments in Argentina given the ongoing tight monetary tariffs. Let's now move to the following page in order to see the performance of the other markets. In the second quarter, Ternium's net sales increased 7% sequentially due to 19% increase in revenue per ton, partially offset by 10% decrease in shipments. Shipments decrease as a result of lower slab shipments to third parties. This is something that fluctuates every quarter as the contract slab volume varies from quarter-to-quarter. The increase in revenue per ton is the result of higher steel prices and a lower participation of slabs in the sales mix. On Page 7, we can see the consolidated net sales. The combination of all issues discussed, resulting in a 6% sequential increase in net sales with a 12% higher revenue per ton at 6% lower shipments. Please turn now to Page 8 to review the results of the second quarter EBITDA. As already discussed, shipments decreased 6% sequentially and steel revenue per ton increased 12%. On the other hand, cost per ton increased as well, mainly reflecting higher purchased slab costs. We expect to continue showing strong EBITDA levels in the third quarter with healthy margins and lower shipments. Let's review now the drivers of the EBITDA in the first half of the year on Page 9. On a year-over-year basis, steel demand and prices increasing the first half of this year in all Ternium markets. In addition, the consolidation of Ternium Brasil's slab sales in 2018 contributed to a 1.5 million ton year-over-year increase in shipments. Cost per ton increased mainly reflecting higher raw material and purchased slab costs. We will move now to analyze the second quarter net income on Page 10. You will see there was an $84 million sequential decrease in net income in the second quarter. Higher effective tax rate and net financial expenses were mostly related to foreign exchange rate fluctuations mainly the Mexican peso and the Argentine peso. The Mexican peso almost 8% appreciation in the first quarter and close to 8% depreciation in the second quarter produced significant sequential changes on deferred taxes, as well as in foreign exchange results on a net short local currency position in Ternium's Mexican subsidiaries. The Argentine peso 7% and 12% depreciation in the first and second quarter produced increasing negative non-cash impact on Ternium Argentina, U.S. dollar financial position. As Ternium Argentina uses the Argentine peso as its functional currency, as depreciation also has a negative impact on certain derivative instruments into, to cover Ternium's Argentine subsidiary's local currency denominated financial debt. Let's review now the net income in the first half on Page 11. On a year-over-year basis, there was $168 million increase in net income in the first half of 2018 on a strong operating income. Effective tax rate and net financial expenses increased year-over-year, again reflecting foreign exchange rate fluctuations. The Mexican peso appreciated 15% and depreciated 1% in the first half of last year and this year. And the Argentine peso depreciated 4% last year and 35% in the first half of this year. On Page 12, we can see the free cash flow in the second quarter, with rates at very strong $450 million in the period. Capital expenditure started to pick up as expected. Our guidance for 2018 is for capital expenditure within a range of $600 million and $650 million. Working capital showed a moderate increase in this quarter, mainly reflecting the pass-through of higher costs, partially offset by lower inventory levels. Let's now review the free cash flow in the first half on the next page. Free cash flow was $505 million in the period including a working capital increase of $351 million. Among the reasons we had increase in working capital, as you can see in the box, are the effect of higher cost of slabs and raw materials on our inventory value, and the effect of higher steel prices on our receivables. On the other hand, the physical inventories of steel products decreased. We will continue working - optimizing working capital across Ternium. Moving now to Page 14. You can see an evolution of Ternium cash flow from operations, free cash flow, capital expenditure and net debt over the last five quarters. Cash flow from operations, our free cash flow have been exceptionally in the second quarter of this year. We expect to continue showing cash flow trends in the third quarter in line with our EBITDA expectations. Capital expenditure, so accelerated further during the next quarter, as we advance in the new project in our industrial center in Pesquería. As Máximo mentioned, Ternium net debt decreased to $2.4 billion at the end of June, reflecting the strong free cash flow in the period, less the dividend paid, representing a comfortable level of 1 time EBITDA. Okay, I think with that, I will finish my prepared remarks, so 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 Thiago Lofiego from Bradesco BBI. Please go ahead.

Good morning, everyone, thank you for the call. So I have two questions, the first one about your guidance for the third quarter. You mentioned that you expect continue to help EBITDA generation levels in the third quarter. Could you may be give us a little bit more color on that, because what you mentioned in the release is that, you expect lower shipments, which is totally understandable. But just to try to understand, realized pricing dynamics and then also cost dynamics into the third quarter, what's your view there? Do you think it's possible that you repeat the EBITDA per ton levels that you delivered in the first half of 2018? So just thinking about the average level of the EBITDA per ton, do you think that's repeatable for the second half? And then, the second question about the demand deterioration in Argentina, could you also give us some more color on that? What is the magnitude of the demand decline that you're seeing in the country and what's your fresh forecast in terms of shipments growth in Argentina for 2018 or maybe if it's not growth anymore, I mean, what's the new number that you have in mind for shipments in Argentina for this year? Thank you. Máximo Vedoya: Thank you, Thiago. I start with the second one and then go back to the one of the EBITDA. I mean, the decrease in the demand we expect in Argentina or of our shipments year against year, it's around 4%. It's still a number that we are analyzing and calculating. The good news is that, for the last month, we see that the demand has stabilized. So it's not decreasing anymore as what happened in one month ago, stabilized. And we are seeing a recovery in some of the sectors that which with the devaluations are much more competitive now and starting to see growth in some of these regions. So we are expecting in our forecast that the year will stay at this level. We could have good news at the end of the year because of this, because of the level we are putting. But we are cautious in saying that we are going to decrease the 4%. And going to EBITDA, I'll let Pablo answer that.

Hi, Thiago, regarding your question…

Before - before, Pablo, I'm sorry. Máximo Vedoya: Yeah.

Before we go into the second question, just to clarify and to understand if you're talking about the same variable here, in the beginning of the year, that same 4% decrease that you're talking about right now was something like a 10% increase, that is… Máximo Vedoya: Was 9% increase exactly.

Okay, okay. And now the 9% increase turned into a 4% decrease, okay. Máximo Vedoya: Decrease, again, with a level that it's in the minimum for the last six months of the year. But can have some increase. I mean, but we want to be cautious.

Okay, that's clear. Thank you.

Going back, Thiago, to your question on the guidance, clearly, we believe that we will have a strong EBITDA margin and EBITDA generation in the third quarter. Due to the - to certain uncertainties that Máximo described in the opening remarks, regarding the trade issues in North America, reflection of that on prices in every market, and the impact of something that will happen in Argentina from now on, which is of inflation accounting that we will need to do starting July 1, there will be some uncertainty in the number. But going back to what you said, we believe that we will be able, and this is the guidance that we're giving, that we will - we will be able to sustain the EBITDA generation that we have on average during the half of the year. So if you want a little more clarity on the numbers, clearly, this is the number that we believe the company will have with the cautious of the uncertainties that we mentioned. But this should be a good number to refer to.

Okay, Pablo. Just, again, to confirm, I think the audio is not very good, you mentioned third quarter, you can sustain the average EBITDA generation that you had in the first half of 2018, not EBITDA per ton, but EBITDA.

Yeah, EBITDA, EBITDA, yeah, that's correct.

All right. Thank you.

You're welcome.

Your next question comes from the line of Jon Brandt from HSBC. Please go ahead.

Hi, good morning, gentlemen. Thank you for taking my call and congratulations on the results. Just coming back to Argentina, so I understand now you're looking at the 4% decrease, and you mentioned that you'd expect it to return to growth in the medium term. I'm wondering if that means 2019 or if it means later, what sort of rebound we could potentially expect next year? And secondly, just coming back to the trade tariffs et cetera, would you say that that Ternium has benefited from these trade tariffs just in terms of higher steel prices in Mexico. And if we were to see sort of a normalizing of these trade tariffs and trade issues, how much do you think U.S. steel prices and Mexican steel prices could come down on the back of that. And then, lastly, Pablo, if I could just ask on the IAS 29, was this an auditor's recommendation or a mandate or was this something that you decided to put in? Thank you.

Okay. If you want, Jon, let me start by the last part of your question, and then, Máximo will follow on, on the first part. It's not something that we have decided. It's something we will have to do. It's already [ph] decision by the auditors and the people that regulate these issues. In the case of the SEC, under U.S. GAAP was already fine a month ago. And that was followed by IFRS people that confirmed that from July 1, this will be mandatory an adjustment for companies under IFRS. So, yes, we will have to do it. Máximo Vedoya: Okay, Jon, with respect to the other two questions, Argentina, yes, we are expecting this growth to come in 2019. Again, we are seeing some different sectors of economy that could be - could increase early than that, because we are seeing some more movement in some of the different sectors, especially in construction. But we don't want to put that in our estimate yet. But we see growth in 2019. Regarding prices in Mexico and the U.S., clearly, prices in U.S. increased much more than prices increased - that prices that increased in Mexico. If you remember, prices in the North American region usually were the same or follow each other quite well. But the when the 232's - we start talking about the 232 and then it was clearly that the 232 was coming, prices in the U.S. increased much higher than prices in Mexico. What will happen if the 232 decreases the - and make some exception with Europe or NAFTA? Well, clearly, the prices in the U.S. can come back a little bit. But I think that what will happen is that Mexico prices and the U.S. will be again stick together as they used to be. So I don't think that whatever happened with 232 will have a big impact in Mexico's prices today.

Sure. So just a follow-up on that. The 232 is relaxed or the NAFTA renegotiations get worked out. You think, it'll more be a function of U.S. prices coming down rather than Mexican prices increasing? Máximo Vedoya: Well, I don't know, I think Europe will have a bigger effect than NAFTA, because they are also talking in the U.S. and Europe. Europe was a big exporter to the U.S., Mexico was not a big exporter to the U.S. So I think prices in the U.S., if the 232 it's open to Europe. Or it's - Europe is taking away from the 232. That could bring a decrease in the prices in the U.S., but not in Mexico.

Okay. Very clear. Thank you.

Your next question comes from the line of Carlos De Alba from Morgan Stanley. Please go ahead.

Great. Thank you. Máximo, is it possible to quantify or providing a range us to how much you expect shipments in Mexico and Argentina to decline in the third quarter? We saw the Southern Region shipments increased year-on-year 18% in the first quarter, and then we're basically flat 1% up in the second quarter year-on-year. And so how do we align the 4% decline in consumption of the steel in Argentina for the year with Southern Regional shipments that you're expecting in the third quarter? Should we see a very dramatic decline in the third quarter year-on-year, or more of a minor one - smaller smooth one? And then in Mexico, if you can also give us a range or a better sense of what you're seeing, that would be great. And then talking about Ternium Brasil, is it possible to mention how much - how many slabs is the company sending to either Mexico or Argentina from Brazil to roll in other Ternium's facility. And also any comments that you can provide us to maybe target in savings in Ternium Brasil and how you are progressing versus those, and if you see - we should expect those to accelerate in the second half of the year in 2019? Thank you. Máximo Vedoya: Okay. Thank you very much, Carlos. The decrease we are seeing for the third quarter it's in the small-single-digit. I mean, it's a little bit in Argentina, where we saw and rather similar in Mexico, so to give a guidance that's small-single-digit. Sales of Brazil to Mexico mainly, we are not shipping today from Brazil to Argentina although our plant is in the future to do so. Those change quarter-to-quarter, I mean, we do have a base of the shipments from Brazil to Argentina - from Brazil to Mexico that it's around 1 million tons every year. That's something that we will most likely do always, because are the high-end slabs that we are integrating Brazil to our facilities in Mexico to our customers. So they require a certification, they require a bid process. And I think, it's a very value-added for our customers to have all our steel from - all our products that are shipped to them from our steel. So we control the whole chain. But depends on the opportunities, sometimes we shipped more and sometimes we will ship less. For example in the second Q, the shipments were more than 500,000 tons. But in the third Q will be probably 350,000 tons. So that's more or less the real, but the base is 1.2 million tons.

All right. Thank you. And then, finally, if I may, squeeze another question. How did you see prices in Mexico, and if you could remind us the lagging effects that you have on your contract prices, and how much is spot and how much is under contract and the lag? Because, clearly that would be important to gauge the realized pricing in the country.

Okay, Carlos, yeah, your question on savings, let me answer that first, if not, we will [meet our] [ph] question. Clearly, the operation in Brazil is performing extremely well. We are working hard in order to take advantage of that opportunity that we got by integrating that facility to Ternium structure. And clearly, we are doing that, that we are working in trying to increase the volumes of the facility. Unfortunately, that there were some issues, as Máximo mentioned like the truckers strike in Brazil that, though we were able to continue to producing to put some pressure on the levels. So we are working very hard on doing that and clearly the results that we are obtaining from Ternium Brasil are extremely good and are helping the performance of the company. And we believe that we can sustain and increased that in the coming quarters. Máximo Vedoya: And now regarding prices, I think the question was prices in Mexico, isn't Carlos?

Right. Correct. Máximo Vedoya: Yeah. More or less 50% of our sales on contract, 50% are on a spot basis. But most of that spot is to regular customers. And contract, we have different type of contracts, monthly three months, six months and in some cases even yearly contract. So the lack will be kind of three months in average. But that's an average and it change a little bit depending on the timing.

All right. Thank you very much, Máximo and Pablo. Máximo Vedoya: Thank you.

Thank you.

Your next question comes from the line of Marcos Assumpção from Itaú. Please go ahead. Marcos Assumpção: Hi, good morning, everyone, congratulations on the strong results. First question is on the EBITDA per ton, it reached $237 in this quarter. Can you provide us a little bit of color and how much was EBITDA per ton, if you were to exclude the CSA or the impact of the Brazilian operation? And the second question is on strategy, if Máximo could talk a little bit about that. Leverage is already down to one-time net debt to EBITDA, and you'll likely continue to decline given the strong results expected for the third quarter? So what are the options for the use of the free cash flow that you're starting to generate strongly going forward? Thank you.

Okay. Marcos, let me start by your question - first question, as you know we are not disclosing numbers on the different operations. Clearly, the contribution of Ternium Brasil was important, and was something that we anticipated when we announced the acquisition with that facility that we were the ones that will take advantage of the margin of producing slabs instead of buying them into the market. So we are not only having the advantage of the gap between slabs and hot-rolled coil, but also we are having the benefit of the gap between the raw materials and a slab cost. So clearly, this is working very well. Clearly, this is working probably a little better than expected. But this is already an integral part of Ternium. And we are, of course, prioritizing our affiliations and the supply contracts and the rest is going to our own facilities. So that as Máximo explained, that make a variation on the total level of shipments depending on the sequencing of the sales to the contracts that we already have. So clearly, it's an important one, but is already an integral part of Ternium. Máximo Vedoya: Regarding the strategy, Marcos, several things first, we are starting two new projects, almost Greenfield projects, the one in Colombia, and the new one in Pesquería that will require us for the next two years to increase CapEx. So part of these leverage is going there. The second, we are going to continue reusing debt, and we are probably continue to paying a dividend as we have been and you have seen in the last five years of dividend has been increased. And therefore, we're always looking for opportunities, we don't have nothing concrete today, and we cannot comment on anything. But that's a thing that for the last several years, we have been doing and when the opportunity arise, we can be ready to do it. But the three - the first three things, I said, today the strategy of what we are doing. Marcos Assumpção: Okay, perfect, Máximo. Just a follow-up, Pablo, on your first answer. But for sure, EBITDA per ton for the regular business ex-CSA is above the average, right? And it's at the level that probably Ternium never saw on a sustainable basis. Do you think that this time will be different or we could see, we are probably - you are on a peak level in terms of profitability for the industry and for the company at least in this short-cycle?

Marcos, what we believe, and where we believe our margin should be on a sustainable basis. As you know that we tend to work with an EBITDA margin of above 15% and traditionally this was up to 20%. This was a history of our company. Clearly, due to many reasons, we were able to increase that margin during the last couple of years, and especially during this year. Among other things, clearly, the pricing issue that we are seeing worldwide, especially in the North American region also the possibility of taking advantage of the margin between producing slab and buying slabs that clearly is helping. And we understand that we will be able to sustain a level of EBITDA margin around these level that we showed during the first half of the year in the coming quarter. Clearly, the question is will you able to sustain 25% EBITDA margin in the coming years. Clearly, we cannot promise that or we cannot say that, because there are certain things that prevent us from making such a comment. The only thing that we can say that we will continue working on trying to have the best EBITDA margin possible and clearly above our competitors. So that's clearly the case. In the very short run, which is next quarter, you already heard what we said. We will be able to sustain a very short EBITDA margin. Marcos Assumpção: Perfect, Pablo. Thank you very much.

You are very welcome.

Your next question comes from the line of Rodolfo De Angele from JPMorgan. Please go ahead.

Hi, guys. Thanks. My question have been answered. Thank you. Máximo Vedoya: Thank you, Rodolfo.

Thank you, Rodolfo.

Your next question comes from the line of Renan Criscio from Credit Suisse. Please go ahead.

Hi, everyone. Thanks for the opportunity. Bulk of my question were answered already. But just if you can provide the updated guidance of CapEx for this year or the next one? That would be helpful. And also my second question, if there is any update on the situation with the potential [acquisition of MNR taking SIDAR out] [ph] from the government. Like, is there any new discussion on these or - and if that's the case would you consider buying the stake? Máximo Vedoya: Yeah, thank you, Renan. CapEx 2018 will be around $650 million, 2019 will probably be a little over $1 billion. This is because the big chunk of the Pesquería project will come in that year. So that's the main increase that we will have. Regarding Argentina, I let Pablo comment on that, we haven't had any update of that, but Pablo, please.

Yeah, just a follow-up on the CapEx issue, after what Máximo mentioned next year should be the top of the higher part of our CapEx. Then we should start to review them back to probably a number of around $100 million and then going back to normal level of CapEx. So going to your second question, as Máximo mentioned, there is no many news to comment that. It was mentioned in different articles in the country in Argentina, but we have nothing to mention in relationship to that. As you know in the past, we mentioned that this is something that the possibility exist. We will analyze it very carefully, because we understand that could be a transaction that would simplify our corporate structure and can be helpful for Ternium. But we need to be very cautious onto wait to see there is feasibility for that, and then we need to see the economics of that to see if this is positive for Ternium or not. So many things to comment at the moment.

Great. Thank you.

Your next question comes from the line of Leonardo Correa from BTG Pactual. Please go ahead.

Yes, thank you. Thank you. Guys, sorry to be repetitive. I think, there have been several of the answers have already been in this direction. So I'm going to try still to ask similar things here. But still on Argentina, guys, the story has obviously been unfolding quite interesting with major variable shifting quite a lot. I just wanted to see the - your views on sustainability of margins with this new level of currency and with these accounting standards. So just a little bit more color on how sustainable Argentina actually that our results could be with this new variables? The second one, you spoke a lot about pricing trends and correlations between U.S. and Mexico. When we look at some charts on prices. We've been seeing pricing in the U.S. quite resilient over the past weeks. In Mexico, the charts and the data sheets that we've been looking at. We are starting to see some softness in prices in Mexico. So I just wanted to confirm, if you're seeing the same, nothing major but we are seeing some softness in the series, I just wanted to see if you share those views on pricing in Mexico specifically. On the issue of spreads, if you can give us just a quick number on what you're seeing in terms of HRC to slab spreads nowadays? That would also be helpful. And finally, on the issue of dividends, I understand the answer that you've been providing over the past years. And looking at the history of the company, clearly, Ternium has been bumping up the dividend over the past years. From 2013, the dividend was $128 million, it's now close to $250 million. But with the stock trading at 3.5 times EBITDA, the most depressed level globally, and with the company generating 2 times of dividend basically we paid in the quarter in terms of free cash flow. I just wanted to see how management views the multiple and whether a potential bump in dividends would be the best alternatives and the easy way to re-rate shares? Those are the question, guys. Thank you. Máximo Vedoya: Okay, a lot of questions, Leonardo. Let's try to answer it in a different way. Argentina, I mean, margins in Argentina should continue to be rather the same that we are seeing today. Of course, the evaluation helps in the cost side. And so we don't expect decrease of the margin, if that was your question, or that's where your question was going.

Yes. Máximo Vedoya: Well, prices in Mexico and the U.S. What we saw in the prices, as I said before, prices were kind of similar, there was always a lack in the Mexican market against the price of the U.S. But the price in Mexico follows very - followed very well the price in the U.S. But prices in the U.S. has increased much more than the prices in Mexico. We are not seeing a fall or a deep fall in prices in Mexico. What we are seeing in Mexico, and we see it last year is that prices stay in a little bit lower level than the prices that the U.S. has today, which as you say, has been sustained at a high level. But that's what we are seeing in Mexico. Of course, it's a very, how you said, healthy level of prices, but it's not the price of the U.S., and we don't expect to get there. Dividends, I don't know what…

Yeah, just a small caveat on the answer on Argentina, as I mentioned in another answer, we will be introducing inflation accounting. So we don't have yet the final outcome of that. But probably could put some changes in the number and could be affecting that. But then we will analyze this at the moment come, and we will try to explain which were the impact of the inflation accounting. Going back to your dividend question, I don't want to repeat myself, because I believe I answered this question every quarter. But you're right; we continue to perform very well. We have been able to reduce debt significantly, though at a much higher level than we used to have. The EBITDA or the debt to EBITDA level is back to very comfortable level. You also need to consider what Máximo mentioned, which was that we will be increasing CapEx during the coming year at a significant level. But clearly, the company will have the chance to further increase dividend in the coming year, because the numbers could support clearly an increased dividend. Probably your question I understand is going to something different, which is an extraordinary dividend that's more difficult for us to say. But clearly, as you mentioned, the trend has been very positive. And the expectation, by looking at the numbers of the company, is that this can continue. But as you this is a decision is taken once a year. But the company is very well positioned to continue moving to that direction.

Thank you, Pablo and Máximo. Just a question I think that was still not address was on the HRC to slabs spreads, so if you can give us the update, please, that would be helpful.

Yes, well, the margin continues to be very positive. You know that traditionally has been at levels of over - or around $200 per ton. Clearly, this is increased during this coming quarter.

Okay, thank you very much.

You're welcome.

Your next question comes from the line of Alex Hacking from Citi. Please go ahead.

Hi, good morning. I just have a couple of quick questions on Mexico prices, if it's okay. Firstly, in the U.S. market, we're seeing quite a bit of compression between the spread of hot-rolled coil and the cold-rolled and galvanized. Is that a trend that you're also seeing in Mexico? And then, secondly, we're seeing U.S. imports come off quite a bit, following Section 232. Have you seen any deflection of that into Mexico yet, Turkish rebar product that was headed for the U.S., now headed for Mexico? Thanks. Máximo Vedoya: Thank you, Alex. First, the gap kind of the same in Mexico, that in the U.S. gap, it's always kind of the same. So, yes, it was very high, if you remember a couple of quarters ago. Now, it's reducing a little bit. We don't have a huge impact on that or we are not seeing a huge impact, but, yes, it's reducing a little bit. Imports, no, we are seeing - I mean, imports in Mexico are not increasing. To be honest, we expect imports to decrease in Mexico, mainly due to the retaliation the Mexican government did to the U.S. and the fact that the U.S. can sell in the U.S. at higher prices. Remember, Mexican import - the biggest importers in Mexico are U.S. companies, are steel coming from the U.S. But we haven't seen that yet either, so no increase and no decrease yet.

Thank you, very helpful, and congratulations on all your success. Thanks. Máximo Vedoya: Thanks.

Your next question comes from the line of Andreas Bokkenheuser from UBS. Please go ahead.

Thank you very much, and good morning. Just two questions from me. One just following up on the Section 232, a little bit of talk about the Section 232 export quotas on semi-finished steel from Brazil to the U.S., there has been some market report suggesting that the export quotas are kind of filling up. How do you think about that? Is that a concern to you in anyway - could we end up in a situation where the LatAm market ends up a bit oversupplied on the slab and semi-finished steel and are you kind of looking at other markets? In that case, if you can't get all of it into the U.S., is that a concern? So that's the first question. Second question, on the MSCI, obviously, now with Argentina in there, my understanding was that the MSCI rules were always a little bit more relaxed in Argentina than they are in Mexico. So are you giving any second thought to potentially a local listing in Argentina, anything of that nature? Has that - has the MSCI listing in Argentina kind of changed the way you think about the - or think about that event going forward? Thank you very much. Those are my questions. Máximo Vedoya: Thank you, Andreas. The first question about slabs from Brazil to the U.S., we don't have much concern. We are shipping to other markets also, a lot to Mexico, a lot to Brazil, which is very good for us. So really, we don't see any concern on that.

Okay. Going to the second question, regarding the MSCI, as you mentioned, Argentina was - the move to emerging in last month and that's been positive for the country. There you are right. Also there is some flexibility in respect to what trading is included in order to consider a company to include in the index. But there is no still full clarity on how this will work. Remember that up to now it has been very limited number of companies, including that. So we are - we need to see which is the final outcome. You know that we have discussed in the past alternative for us to consider possible ways of recover value. And this was - this one was one of the possible ideas. We need to analyze this very carefully. Nothing that we can do at the moment. But it's among the possible ideas that could help, but not yet something that we are thinking at the moment.

Understood. Maybe just one follow-up. This was something I was trying to look into. I couldn't really get any clarity on it. But do you - I seem to recall that in Mexico, you couldn't include the ADRs in New York in your liquidity count. But there was some talk I think that in Argentina you could be able to. Is that something you've heard? Is that something you confirmed as well or is that still a bit of a black-box? Máximo Vedoya: Yes, as I said, there is no full clarity on definition, because it will be next year in Argentina. But you're right, in the case of Mexico and as many countries, the MSCI only includes local listings. In the case of Argentina, there are few markets. I think China is one of their. You can sum up the listing in other markets, the U.S. market, of course.

That's very clear. Thank you very much. Máximo Vedoya: You're welcome.

Your last question comes from the line of Alfonso Salazar from Scotiabank. Please go ahead.

Thank you. I just want to have a clarification regarding Argentina and the margins that you expect there going forward. And, look, I was - if I'm correct, you mentioned that you expect margins to basically stay where they are or stable. That means that - I believe that the costs are increasing, you are going to use inflation accounting. I see that for example, the power bills are going up by 30% this month. Just want to understand what are you expecting in terms of cost going forward, and if you can give us a breakdown and the breakdown of cost in Argentina. And in the case of Mexico, well, there is a new administration. And the last time that we saw that happening with Peña Nieto, there was some changes in the rules for the housing industry. Many of the companies went bankrupt and there was a credit crunch and there was contraction in construction. What is your base case for today for this time? What are you expecting in terms of the construction industry? What are the risks that you see in terms - in construction or if there are some tariffs to the [indiscernible] are implemented in the U.S.? What do you think about those risks? Thank you. Máximo Vedoya: Thank you, Alfonso, I start if you don't mind with Argentina and the margins, I mean, there are several effects in the margins of Argentina. And I think overall, some of them are positives and some of them are negative. Inflation adjustment will be probably negative. But to be honest, we cannot yet say how much it will be. But for the - on the other hand, cost are coming down in Argentina because of the devaluation. So overall, we think that margins will be sustained, because of these effects and other ones, and inflation. It's another thing that elevates cost. And so, that's why we say that probably margin will be sustained. But we will know when we calculate clearly this adjustment for inflation. The other one is the construction in Mexico. It's true what you said about these companies, when Peña Nieto started ago. But to be honest, it was a very small amount of the construction industry in Mexico. It was only industry that was dedicated to these social houses, I mean, the lower income houses projects, which to be honest do not take much steel, so we didn't suffer anything during that time. What is true also is that construction, all the construction industry has not been doing very well in Mexico in the last year, but it's increasing this last two quarters, mainly because infrastructure is coming down from the last two or three years. The government is spending less in infrastructure. And private construction was kind of complimenting that and increasing. So the effect was almost neutral. But today, although private construction is still increasing in Mexico, it's not increasing at a pace that can compensate the decrease in infrastructure. Today, it's very difficult to say what is going to happen with the new government. But if you see the declarations of the new government, regarding this topic, López Obrador is very clear that Mexico is investing too little in infrastructure. And he wants to make a case for more spending in private and public infrastructure projects. The public ones will come from a reduce in the spending of the government. And that's what he's saying today. For me, it's very good news. And I think Mexico is reacting to this very good. But still four months more that they took and then to implement this plan. So I don't know on reality if this is going to happen or not. But it's a good projection what they are saying.

Okay, and regarding the tariffs - auto tariffs in the U.S.? Máximo Vedoya: The auto tariff in the U.S., that's a very difficult question to answer. I think that these are things that probably the U.S. is using to negotiate with Europe, different things. It's very difficult to justify tariff on automobiles because of security reasons. And it's very unlikely that this can go forward. It's our vision.

Okay, excellent. Thank you very much.

That concludes the question-and-answer period. I will now turn the call back over to the CEO for closing remarks. Máximo Vedoya: All right, thank you. Thank you very much for all participating today. I look forward to seeing you at the New York Stock Exchange on our Investor Day that will be held September 7. And we will go deeper into our strategy and long-term prospective. I really hope you can all make it there. Goodbye, and again, thank you very much.

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