Ternium S.A. (TX) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Ternium Fourth Quarter 2018 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Sebastian Marti, you may begin your conference.

Thank you. Good morning. Thank you all for joining us today. My name is Sebastian Marti, and I'm Ternium's Investor Relations Director. Ternium issued a press release yesterday detailing its results for the fourth quarter and full year 2018. This call is complementary to that presentation. Joining me today is Mr. Maximo Vedoya, Ternium's CEO; and Mr. Pablo Brizzio, Ternium's CFO, who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, we will open up the call to your questions. Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation. With that, I'll turn the call over to Mr. Vedoya.

Thank you, Sebastian, and good morning to everyone. It is very nice to have the opportunity today to share with you our thoughts regarding Ternium's performance. As we always do, I’ll go through some prepared remarks and then Pablo will make a brief analysis of the latest quarterly numbers. And finally, we'll have a Q&A session. All right, we had an outstanding result in 2018, reported an EBITDA of $2.7 billion. This was the highest EBITDA in Ternium's history. We have 40% year-over-year increase. We had shipments of 13 million tons in the year and this is the first full year with Ternium Brazil as part of our production system. There in Ternium Brazil, we achieved our steel production record of 4.6 million tons last year. EBITDA margin was 24%, the highest we have had in the last decade. This strong performance led to earnings per ADS of $7.67 and also to a free cash flow of $1.2 billion, which translated into $1 billion decrease in net debt during the last 12 months taking our net debt to EBITDA ratio to just 0.6 times. The board of directors proposed to raise the annual dividends to $1.20 per ADS equivalent to an approximately 4% dividend yield. These proposals took into consideration the current strengths of our balance sheet as well as our ongoing investment program, which will require growing capital expenditures in 2019 and 2020. As Pablo will show you afterwards, we have been gradually increasing our payment – our dividend payment over the last years and our intention is to continue doing so in the years to come. Let’s turn now to what is happening in the steel markets. Our expectations are for a global steel demand in 2019 to grow moderately. In Mexico, our main steel market, we believe sales to industrial customers will continue to do relatively well in 2019 with a Mexican manufacturer eventually supported by growth expectations for the U.S. – in the U.S. economy. On the other hand, the construction market will probably continue to be weak in the country as a result of low public and private investments. Relevant issues to follow in this market in 2019 will be the expected gratification of the new NAFTA, The USMCA, which is achieved during the year, would be a positive step to reduce trade uncertainty. The eventual agreement on Section 232 steel tariff among the current NAFTA partners, which should help to normalize steel trade flows in the region and the commitment of the new Mexican administration to fight unfair trade and prevent redirection of export to the Mexican market as a result of higher trade barriers elsewhere. Global overcapacity continues to be a risk to fair trade, China’s increases in production while having a weakening economy activity, which is dependent on government stimulus measures. It is important for governments in Latin America to be aware of the situation and to take measures to prevent the damage it would cost to local industry. Turning now to Argentina, the economy has been under a very restricted monetary policy in 2018, with an aim attaining inflation. Economic activity in the country weakened significantly during the second half of 2018. And in the first quarter of 2019, we will continue showing low level of shipment, taking into conservation that on top of this, this is a seasonally slow quarter in Argentina. Further on, we expect a gradual recovery starting in the second quarter of 2019. The driver of this recovery would be a significantly better agribusiness performance based on improved yields in 2018 in [indiscernible] area, higher growth levers in the Brazilian economy, Argentina main, Argentina’s main destination of exports of manufactured goods and a gradual decrease in interest rate. In Brazil, Vale's event created a challenge equation affecting iron ore prices. For the time being we don't see any significant problem to ensure supply of iron ore to our facility in Rio. In that facility we will continue to work this year to increase even more it's capacity utilization. Finally we believe, Usiminas is very well positioned to take advantage of the positive prospect of the Brazilian steel market in 2019. So in a nutshell, we had a great 2018 and we look forward to continue growing our business in 2019. Margin in this year are not going to be as high as they were in 2018, as they are converging to a more sustainable long-term level. You can count on us striving to maintain our margin leadership in the Americas, working hard to maximize efficiency at our facility and reduce production costs. The ongoing investment project in Mexico will certainly help on these fronts, enabling a much high integration with our facility in Brazil and consolidating our world-class production system with the latest technology to maximize efficiency and productivity. Okay, with these Pablo please take over to comment about our performance in the fourth quarter.

Thanks Maximo. Good morning to everybody and thank you again for participating in our conference call. Let's review our performance in 2018, starting in Page 3 of the webcast presentation. As Maximo anticipated our performance in the year was exceptional. With record EBITDA of $2.7 billion and the EBITDA margin of 24%. As you can see in the upper right chart, our EBITDA in 2018 increased significantly compared to our EBITDA in 2017 and is also significantly higher than the EBITDA in the any other reported period in the last decade. In the upper left chart, shipment grew 1.4 million tons year-over-year in 2018 reaching the record 30 million tons. This increase was mainly related to the full consolidation of Ternium Brazil slab shipments to third-parties. As in 2017, we consolidated only four months, from September to December. Looking at Ternium’s EBITDA margin on the lower left side and EBITDA per ton on the lower right side, we recorded a margin of USD208 per ton in 2018, or 24% of net sales, well above the margin range reported in the last year, which was repeating $110 and $170 per ton. As Maximo commented, margins in 2019 will be lower than in 2018, comparison to a more sustainable long-term level. Please turn now to Page 4 to review the main drivers of the year-over-year improvements in EBITDA. As you can see in the upper chart, the significant year-over-year increase in EBITDA is a result of a steady EBITDA per ton and higher shipments, reflecting strong price environment in North American steel market and the full consolidation of Ternium Brazil. Ternium Brasil enabled us to integrate our operations and at the same time was able to take advantage of a strong slab market in 2018. Net income in the year raised USD1.7 billion, significantly higher than any other years since we listed Ternium’s share. The lower chart shows net income increased mainly due to higher operating income. With some additional help around improved results from our participation in Usiminas and the low effective tax rates due to a revaluation of assets for tax purposes in Argentina that have a positive effect in deferred taxes. Please turn now to Page 5. In the page, we are showing the evolution of free cash flow, capital expenditure, net debt and dividend payment. Free cash flow in the year was very strong $1.2 billion. Capital expenditures were $520 million in the year slightly above than 2017 mainly due to full consolidation of Ternium Brasil and investment projects underway being carried out mainly Pesqueria facility and also in Columbia. Looking forward into 2019, we expect to continue to grow in strength in cash flow generation, although we know the levels achieved during 2019 in line with lower EBITDA expectation or higher capital expenditures due to the development of our new hot-rolling mill in Pesqueria. Finally Ternium’s net debt decreased to $1.7 billion at the end of December, close to 40% increase in net debt reflecting the strong free cash flow in the year, less the dividend paid, and represents a comfortable level of 0.6 times EBITDA at the end of December. At the lower corner, you can see how Ternium’s dividend payment has been increasing pretty consistently over the year. And the current proposal of $1.2 is equivalent to around 4% year-on-year. The dividend should be payable at the beginning of May after shareholders’ meeting approval. Turning now to the fourth quarter of 2018, we will now review the next page, Page 6, our segment performance. Total steel shipments went down 180,000 tons sequentially or around 6% decrease. In Mexico, on the upper right chart, shipments of metallurgical were stable in the fourth quarter of the year. The quarter is normally, seasonally lowest in the year. So we expect shipments in Mexico will show some increase in the first quarter of this year. In other market in the lower right chart, you can see a sequential decrease in the fourth quarter 2018, mainly as a result of lower slab shipments from Ternium Brazil to third-parties as anticipated. Those slabs volumes were shipped instead to Ternium México however that’s eliminated in the process of consolidation of the fourth quarter. We expect these to revert in the first quarter of 2019 with higher shipments of slabs to third-party and lower intercompany sales. Turning finally to the South Region, the sequential decrease in shipments as shown in the lower left chart mainly reflect the first economic activity and it's starting process in the value chain in Argentina. The first quarter of the year is seasonally lowest in Argentina. So shipment we continued to be weak in this market and we expect them to begin their recovery in the second quarter as Maximo mentioned. So in the next page, you can see the effects in Ternium sales of the 6% decrease of steel shipment together with a 6% decrease in revenue per ton that was mainly related to the low realized price in the Mexican market as well as in the slab sales. We anticipate revenue per ton to continue to decrease in Mexico in the first quarter of 2019 as a result of the usual result reset of contract prices and some weakness in the spot market. The participant of each market in our net sales breakdown remains relatively stable with around half of the shipments being made in Mexico, 70% in the southern region and a third in other markets. On Page 8, we have a closer look to quarterly EBITDA. EBITDA margin was healthy in 19% in the fourth quarter of around $170 per ton. This was a decrease compared to the very high margin we had in the third quarter and we will go into that further on. Net income was $435 million, which is equivalent to $1.79 per ADS. Please turn now to Page 9 to review fourth quarter EBITDA and net income. In the first chart, we can see the components of a sequential EBITDA decrease. The major components was the decrease in the margins with some additional decrease related to lower steel shipments and lower sales of electricity in Mexico, as electricity sales price decreased seasonally in the winter. Revenue per ton went down mainly as a result of lower realized price in the Mexican market and in slab sales as we just discussed. The higher cost was mostly related to higher raw material, slab energy and labor cost, the effects of inflation account in Argentina was one of the reasons for this increase in costs. Especially the combination of high inflation with currency revaluation in the fourth quarter, something we're not expecting to happen. Also expected slab cost to increase in the quarter mainly as a result of first-in/first-out accounting. In the first quarter of this year, we have – we expect EBITDA to decrease slightly compared to the fourth quarter as a result of a lower margin, partially offset by higher shipment. EBITDA per ton through sequentially decrease, mainly due to lower revenue per ton in Mexico, higher participation of slabs in the sales mix, as we are allowing to send more slabs to third-parties unless slabs intercompany. On the other hand, cost per ton should remain relatively stable. In the second chart of this slide, you can see that the sequential decrease in net income was mostly a result of lower operating income, it was partially offset by better financial results, better results from our participation of Usiminas and a lower effective tax rate. There were significant sequential gains in net financial expenses, most of them related to currency fluctuations in Argentina and Mexico that were partially offset by lower gains related to inflation accounting over the net monetary position, of course, in Argentina. There was also a slight decrease in interest expenses, mainly reflecting a lower net indebtedness and average interest rates. Okay, thank you very much for your attention. So we are now ready to take your question. Please, operator, proceed with the Q&A session.

[Operator Instructions] Your first question comes from Marcos Assumpção with Itaú. Your line is open.

Hi, everyone. Good morning. It’s actually Daniel Sasson from Itaú. Thanks for the questions. My first question is on the reputation of the new NAFTA agreement. I know that you mentioned that you – of course you reduced uncertainties in terms of trade, but you could comment a bit on the impact you expect on U.S. and Mexico prices? And also maybe on costs, if we consider that the minimum wage workers in the steel making industry in Mexico might increase and the potential impacts of that or margins, that would be my first question. And my second question regarding, Argentina, we are likely seeing margin pressure in the short-term considering the sharp depreciation of the peso since May last year. But what do you expect looking ahead? The effect seems to be more stable now. And also what do you expect in terms of your normalized EBITDA per ton in 2019, considering that 2018 was a very strong, a very solid year in terms of your EBITDA per ton? Those would be my questions. Thank you.

Thank you, Marcos. I’ll start with the first one and Pablo will lead the second one. The new NAFTA agreement and what are the effects on prices; I mean, the effect will be of what will happen with the 232. I mean, today, the 232 against Mexico and Canada is still on place. The assumption we all have and the Mexican Government also have, that was that once we reach an agreement, 232 was going to be eliminated between Mexico and Canada, that didn't happen. But we do know that once – I mean, to sign NAFTA, 232 has to be solved. I don't know if the solution is going to be – eliminate the 232 between the countries or to put quotas between the countries. I mean, Mexico is going to have a quota in the U.S. and the U.S. is going to have a quota on Mexico. I think those were – are the two possibilities, I mean, to eliminate completely or to have a system of quotas. I don't see other solution for the 232. Both solutions I think are good to stabilize prices, especially Mexico. Remember that the U.S. prices has had a huge increase with the 232 and Mexico started lagging, prices in Mexico started lagging behind the U.S. prices, mainly because Mexico was also affected by the 232. I now today prices in the U.S. are decreasing, prices in Mexico were also decreasing, although not at the range in the U.S. But to solve the 232 and to have certainty between the trade between U.S. and Mexico in steel. We did eliminate, I think this uncertainty there is, and so we’ll benefit whatever the solution is, whatever the two solutions is, will benefit Mexico. Are you there still?

Yes, perfect. That was very clear. Do you expect any impacts on your cost front coming from the new agreements as well?

No. Remember the new agreement is specified at cost of $16 per hour in workers only in some part of the automobile industry, not on steel. And a lower were our salaries are much higher in the minimal wage. I mean, we don’t expect to have any increased due to NAFTA.

Perfect. That was very clear. Thank you.

Okay. Yes, of course. Let me try to answer your second question, which is not easy to do, because as you know the replacement accounting, that we need to have in Argentina is putting, especially in their first year of accounting for that some distortions in the numbers. The – and also take into consideration that during the fourth quarter, as I mentioned during the initial remarks, we have something what you can consider a little we are – which is we have an important level of inflation, which was 12%, but then we have also significant level of a reevaluation of the currency of 9%. So these things to where works if you want again the numbers of the company. And that was one of the reason why the total EBITDA of the company was below expectations. The total impact of these in the cost of Ternium through Argentina was quite significant. So of course, we cannot come or go through numbers without inflation accounting. But during the fourth quarter, if we had have not inflation accounting, probably our EBITDA have been even $50 million higher than what we have reported. Lower in the – enter into 2019 clearly things to start to normalize, because as Maximo mentioned, we are expecting to see some groundwater recovery of achievements in Argentina and the economy in Argentina. So we are not expecting between in the currency value level. So they should start to normalize. As a whole the EBITDA margin that we have seen for a future is, as we are, we discussed within the range that we are with thing is a normal level for a company of Ternium, which is between 15% to 20%. And of course, as happened in the last three or four years, or we’re trying to be very close to the upper side of this range. So that’s what we think should be the numbers coming in during this year.

Our next question comes from Caio Ribeiro with Credit Suisse. Your line is open.

Yes. Good morning, everyone. So my first question is related to domestic demand in Mexico. And I know that you have been talking about the possibility of the new administration boosting infrastructure spending, which could drive a demand for the commercial market up, which has been lagging for sometime. So I just wanted to get some view if whether they have been any new developments on this front and whether you can also provide some guidance for where you see steel demand growth in Mexico in 2019. And then secondly, regarding steel prices in the U.S., there have been some recent price hike announcement for flat steel by some of the major players in the last few weeks, in the last month as well. But overall, market prices, they have remained relatively flat and relatively unresponsive to these hikes. So I just wanted to get some color from you on what direction you expect flat steel prices in the U.S. to move towards in the next few months. And whether you already seen a bottom or whether you expect the weaker momentum that we’re seeing to continue. Those are my two questions. Thanks.

Thank you, Caio for your question. Let me start with the Mexican question, which is clearly a difficult question, because the government is starting and steel demand will depends on how the new government or the new administrations proceed. We’re still positive regarding Mexico and our business there. The new administration just only took office two months and half ago and I think there was a normal process of getting use of the changes. There has been some actions by the President administration that have deviated some uncertainty in the markets and I know that. But I think that they’ve some things that are moving in the right direction. Spending is increasing and it’s increasing first in Pemex, I mean, there was more activity going on Pemex, more drilling going on, more pipelines being build. So you see that the new administration is trying to improve the performance of Pemex, what will the operating performance of Pemex. And we are seeing that in some of our customers. And that’s the first step I think for more infrastructure spending that is much needed in Mexico. To be honest, we don’t see that infrastructure yet and we did in expect to see yet. This is things that normally took several months before a new administration comes in, the last administration that what we change from the PAN party to the PRI party, it was almost one year of almost zero investment. But I think here, what we have seeing in Pemex is a good sign that things are going to move in that direction. The other thing is that the government is very vocal and if you see that the conference had made President López Obrador did on Monday. You’re going to see that, it’s very vocal about developing the industrial sector in Mexico. I think the new President understand the importance of the industry and development of the whole supply change in the industry. So I think that we are also positive on what is going on in that front. Again, these are not things that you’re going to see in the near future, we don’t expect a bit increase in consumption in 2019. But we think that this is a right direction for improving in the Mexican conception in the following years. So again, we are quite positive regarding Mexico and our business there. Regarding prices in the U.S., you are right, I mean, the prices if you follow the CRU, came down to 735 metric ton, it increased a little bit, CRU in the last week. I think that regarding to your question, I think the U.S., they have reached the bottom, I think, all though imports are high, 232 is there and cost especially in iron ore is increasing for some of the companies, you also see an increase in the scrap prices in the market in the last two weeks. So I think cost for some of the mills that are exporting to the U.S. is getting higher and I think the U.S. within 232 ton still in the market. I think we'll be able to increase a little bit of prices and we are seeing the bottom of the price cycle.

Perfect. That's very clear. If I might just have a quick follow up here. If you are right, that the bottom in prices in the U.S. has really arrived, given that three to four months lag effect until your contract prices in Mexico reflect this rebound or this bottom. Can we start to see a rebound in the net revenue per ton in Mexico starting second quarter perhaps.

Yes. I think that is still very early, but I think that in the second or third quarter, we will see a rebound.

Perfect. That's very clear. Thank you.

Your next question comes from Carlos De Alba with Morgan Stanley. Your line is open.

Yes. Good morning everyone. So first question, if I may on the capacity utilization expected for Brazil or your total capacity and capacity utilization regarding Brazil this year on the back of your comments Maximo. And also how much volumes you expect to ship internally regarding Mexico this year? You mentioned that in the first quarter, it is going to be sort of a reversal of what we saw in the fourth quarter with more temporary shipments turning Brazil. But in the year you can give us at least a range of the volumes to be internally sold and that will be very useful. And then my second question is regarding electricity, your electricity sales in Mexico. Could you comment or remind us whether those sales are done at spot prices or you have a contract? And if it's a contract, is there any link to separate rate or how you determine the rates that you charged for these energy sales. Thank you.

Thank you very much, Carlos. Let me start with the Brazil question. Brazil, produced in 2017 if you remember, the full year 4.4 million ton, that was a record for the Brazil facility. This year 2018, we got another record of 4.6 million tons. Our target for the Brazil is to produce 5 million tons, which is what – which was ultimately the large capacity that the plant was built. And we think we are going to reach that in the next couple of years. There are some bottlenecks that we are starting to see and we are planning to invest, some of them are already going on. So I think that the maximum capacity or the maximum production will be this 5 million tons. But we are very confident that in the couple of years – next couple of years, we are going to get there. What are the volumes to Mexico? And this is not a very simple question to answer, because is changing every month. I mean, our idea knowing that the contract – we have [indiscernible] that says to the domestic market save to other customer is to ship to Mexico 1,000 tons every month. So that’s 1.2 million tons. And to buy from other suppliers, the 2 million or 2.5 million tons, we need – the other 2.5 million ton we need in Mexico. That’s our plant. But we are always making choice, if we have better opportunities, the amounts that we’re really going to ship 50,000 tons and we don’t have better opportunities, we are going to ship a 150,000 tons. And you can see that they are differ in months, so we are always making the account of where is to best supply that production of plants. But the plant is 1.2 million. Electricity sales, I mean, we are selling to the MEM, which is Mexican Electrical Market or mercado for instance Spanish, but it’s – PFE has the rates and then the system based on energy dependent on how the system produce the energy. So we base from the best – the best cost at big level and its production or consumption increases, it start to buy from the left competitive source. So it is our spot price, although, the price is set by the market, what happened in Monterrey. Monterrey is an electricity hub that spells energy in the winter but consumes more than what producers in the summer. And that was the thing that we know when we started plant there. So the sales are going to be at a higher price in the summer, but at lower prices in the winter. And that's what you see usually in the last two years. In the winter month, in the three winter months, I mean November, December, January, you have a lower energy sales, the prices are lower and then price is start increasing and they get the peak in July, September, depends on the heat that goes on in that summer month.

Understood, very clear. Thank you very much, Maximo.

Your next question comes from the Thiago Ojea with Goldman Sachs. Your line is open.

Hi. Thanks. Good morning, everyone. My first question is regarding the new expansions. If you can provide a little bit more information on how Pesqueria, the hot-rolling mill is evolving, if the target dates remains by the end of 2020, the galvanized line mid in 2019 and also the rebar in Colombia, if I'm not wrong, I should be up by first quarter of this year. And also regarding the situation in Argentina, can you provide a little bit more color in terms of the main – how this different sector are responding to the situation and if you're seeing more imports in for Argentina of steel. Thank you. Martín Berardi: Thank you Thiago. The first, the expansion projects, the hot strip mill will start December, 2020. We don't have any, we are on track to that, so we don't have any development, that other things. The painting line will start probably in April of 2019, the plan for the galvanized line is late June, early July. Although there are a couple of things that we are trying to accelerate to get to that -- to that time. And the Columbian project was December of 2019 and so far we are also on track to get that time. As you know, all those timings are very – I mean there are targets very hard -- very, I mean we put hard targets to reach, but so far we think that most of them we are going to reach. Argentina, to be honest, we are not seeing any imports or any imports of the material we produce. I mean the problem is not imports, the problem is that the decrease in consumption in Argentina due to all the things I told you earlier, I mean the interest rate going to more than 70% now in 44% and that’s created a huge impact in the domestic market. So lot of people not only decrease consumption but inventories went down a lot because of the capital cost of inventories with these interest rate. So I think it's more, the problem is more that than seeing imports or other things.

Okay, great. If I can follow up in terms of the CapEx often these projects, the extension project. What have been spent and how much is left? If also can provide a total CapEx guidance for 2019 would be helpful. Thank you. Martín Berardi: Yes. The CapEx for 2019 will be $850 million. So we are increasing from $550, almost to $850 and 2020 this is a long-term, but we'll be around $1 billion. So most of the CapEx of the hot strip mill that is remember was $1.1 billion will come in 2019 and 2020.

Okay. Thank you, Martin.

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

Thank you. I have two questions. The first one, regarding the fact that the Mexican government decided not to renew the 15% safeguard on steel imports from certain countries, this impact your view on the market that does impact your view on the time to keep you expand, in Mexico, which are [indiscernible] an expansion projects that just would like to get at least there. The second question, how do you see the Mexican auto industry growth in the coming years considering there are some import restrictions in to the labs, you think this might prevent a further capacity growth in Mexico for automakers and I confidently that would eventually impact your expansion plans in longer term?

Thank you, Thiago. The first one, the Mexican government, the 15% that we have, remember, this stage was only – it was very limited impact it has to be honest, it was only for countries that Mexico has not agreements, trade agreements and Mexico has trade agreements with more than 50 countries. So, import from Europe or Japan or the U.S., where free and some of the industries they have special size. So, they don’t pay this one. But nevertheless for us, I think for all the steel market and you saw MSA’s, you mentioned MSA’s reaction. for all the market – for all steel industries in Mexico, it was kind of a surprise, because it goes in a different way of what the government was saying. I think the government is reanalyzing that decision. And I think if we have – there is a possibility that they change this. I mean and I think there is a big possibility that, that they will change the decision. Auto industry, the automobile industry produces 3.9 million units in 2018 almost the same as 2017. This is a huge number. When we make the projection of the auto industry in the several years, we don’t expect a huge growth. I mean we said that the automobile industry will roll in 2020, 2021 to 4.2 million units, 4.4 million units there’s not a huge increase and mainly, this comes by the fact that there was already an agreement between Mexico and the U.S. regarding automobile exports if there is a 232. If you remember when they signed the NAFTA agreement, there was a side letter, where you put a quota on the automobiles export from Mexico to U.S. of 2.6 million units. Today, the exports to the U.S. are around 1.8 million units. So, there is still an increase in the exports up there, but increase is not very high. And so we always projected that the industry is going to grow, but it’s going to grow only a little bit, and we are talking about 10%. So, in our projections we already have that number. I don’t know if that’s clear or not Thiago.

Yes. that’s clear, Maximo. Just to follow up here, you mentioned, just to make this clear, the quarter might be 2.6 million units and now actually exporting 1.8 million units. Is that what your action?

Some of the numbers, the quota is 2.6 million units, I mean that’s signed and it was public, I think at least, I read it in the newspaper. So, it’s a public information that they signed the side letter. There’s also a side letter for auto parts, the side letter for auto parts is in billion dollars. I think the number is $100 billion and today, the export around $60 billion. So, there is also increase in auto parts. If 232 is coming – if the U.S. product that 232, which I don’t know if that’s – I mean there has been a lot of roamers and what we understand is that the DOC, the Department of Commerce just sent, President Trump, I mean more regarding 232 about autos. But we don’t know what it says.

Great. If I may, just one very last question. You mentioned in the beginning of the call that EBITDA per ton has normalized due to normal levels, right? And how comfortable are you that a $170 per ton, roughly, could be a sustained normalized EBITDA per ton generation for longer-term?

Hi, Thiago, this is Pablo. As you know, we prefer to discuss EBITDA margins and EBITDA per ton, because as we all discussed the pricing environment is slightly a huge role over there. What we’ll say is that, understand that the numbers would go to what we consider a normalized long-term level of between 20%, trying to saying the margins in the upper side as we have done in the past year, of course, 2018 was throwing a year, where we have a 24% EBITDA margin and the fourth quarter, which we have already targeted a little over 19% EBITDA margin. So that’s the expectation that the framework will work and there is where we want to be or to continue to be presenting numbers to the market.

Okay. Thank you, Pablo.

Your next question comes from Alfonso Salazar with Scotiabank. Your line is open.

Thank you, and good morning Maximo and Pablo. I have two questions. The first one there was in the local press, some news regarding that your plants in Mexico could be affected by the railway bookings in the state of Michoacán. So, I was wondering if you can provide some – what was the situation there, if you – we should consider an impact in Q1, because of the locates. The second question is regarding the negotiations with the communities in the mining operations, and if you can provide some comments on your plants for the mining division and because of what is happening in their market. Is it possible or would it make sense to increase capacity? What are you thoughts there? Thank you.

Yes. We have some ethics on the Michoacán block as you know, we bring two things from railways, from Michoacán, we buy slabs from Lazaro Cardenas,from Mittal through a facility, that was a main block, but also the things that we bring from Colima from the Peña Colorada or own mining facility in Colima, we’re also affected although for less time. So, we have a minor effect. We were going to have a minor effect. but it’s a little bit increase in cost. We have to ship to – we have to change instead of shipping by train. We ship by vessel. And so that’s a little bit of more cost. But today, as I said, the roads or the trains are already free and we are moving broader without any effect. Regarding mining, I mean we don’t have any development in the mining. I think that we are discussing with the community our new agreement, because we have to expand our mines in Aquila, but we are on track on that. We don’t expect any problems from that and an investment to be honest, if you remember long time ago, we have some plans of new investments in mining. Today, we are not – we are not seeing that in the near-near future, but as always we are analyzing – if you remember well, we have two big mines. One is the Aquila mine and the other one is Peña Colorada. And we open a third mine near our pellet plant but it’s a marginal mine, where we have a lot of research. In the past that was the project we analyzed, today we are not seeing it. But if things change, we can revisit that.

Okay, very clear thank you very much.

Your last question comes from Rodolfo Angele with JP Morgan. Your line is open.

Hi, good morning everyone. Can you comment a little bit more on the raw material situation in Brazil?

Yes Rodolfo, the raw material, I mean as you know Vale had an accident or an event that decreased production in some of the regions they have. What the effect today – I mean Vale changed quite a lot what was the effect. First, they said that they are going to close 40 million tons, then they had to close another 30 million tons because of different judge order or we don’t understand very well, but now they are saying that that reduction was quite less. The main effect that everybody is suffering is price increase in the supplies. Today, as you know, the Brazilian facility has an exclusive contract with Vale for the supply of our iron ore to our facility. And today Vale continues to make deliveries under the contract. And for the time being we don't see any significant problem to ensure the supply of iron ore to that facility. Of course, the price will have an effect in our Ternium Brasil facility because the price increased from around 70 it went to 95 one or two days and now it's around 88. So that's an increase in the cost. But as I said before, we are also seeing an increase in slab prices that we are not going to get immediately, but we are going to get once we start closing slabs for April and May.

And then finally just as a follow-up was – you used some material relevant amount of pellets in the CT operation?

Yes. From the 7.3 million tons, 7.3 million tons of iron ore that we buy from, from – for the Ternium Brasil facility, we purchase between 2.5 million tons to 3 million tons of pellets. That's roughly what we are doing today. But as I said Vale is supply independent for us.

Okay. Thank you.

And at this time I will turn the call over to CEO for closing remarks.

Alright, thank you very much for being part of our conference call today. As usual please give us a call if you need any further support to have a better understanding of our company. Thank you very much. And good bye.

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