Ternium S.A. (TX) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Ternium Third Quarter 2019 Results Conference Call. And at this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sebastián Martí. Please go ahead. Sebastián Martí: Good morning and thank you for joining us today. My name is Sebastián Martí, and I am Ternium’s Investor Relations Director. Ternium issued a press release yesterday detailing its results for the third quarter and first nine months of 2019. This call is complementary to that presentation. Joining me today are Mr. Máximo Vedoya, Ternium’s CEO; and Mr. Pablo Brizzio, Ternium 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 two in today’s webcast presentation. With that, I will turn the call over to Mr. Vedoya. Máximo Vedoya: Thank you, Sebastián, and good morning to everyone, and thank you very much for participating in our conference call. As usual, I will go through some highlights of our business and Pablo will describe our performance in the third quarter, while he goes through a webcast presentation. At the end we will have a Q&A session. We reported a good EBITDA level in the third quarter with 16% margin. This was higher than what we had expected on the last conference call, in part, because we had best results in Argentina and Pablo will go through the details of this during the webcast presentation. In the first nine months of 2019, Ternium EBITDA was $1.3 billion with a 16% EBITDA margin equivalent to a EBITDA per ton of $130. The good operation -- operating performance Ternium show in this first nine months of the year translated in earning per ADS of $2.53. Free cash generating has also been strong reaching $513 million in the first nine months of this year. Net debt decreased to $1.5 billion as of the end of September or just 0.9 times last 12 months EBITDA. Even though CapEx more than doubled to $748 million from the first nine months of the year as we develop our expansion project at Pesqueria facility in Mexico. The work in Pesqueria are progressing well as we continue to expect the hot rolling mill to begin operations by the end of next year. Turning to our business in Mexico. We had a good performance in this market during the third quarter. As expected we were able to increase our shipments in the country which reached 1.6 million tons in the quarter. The Mexican has not change much from our last conference call, construction sector remain soft and shipments to Industrial customers have been relatively stable. Shipments in this markets are going to decrease in the fourth quarter mainly due to seasonality. Now about steel prices, one our last conference call, the expected prices in the NAFTA region to recover as they were bottoming out at the time and they did so briefly. But then resume a downward trend and reach new lows in October. Steel prices are now at levels still back in 2016 when cost of the main raw materials were lower than where they are today, a difficult environment for the steel industry. On the positive side, talks in the value chains are not high and many steel companies in the region have recently announced prices increases, a trend that may finally take steel prices to more reasonable levels. We in Ternium are well-positioned for adverse price environment like this today. Our integrated facility in Mexico are base in electric arc furnaces operating a mix of the iron scrub consuming energy that we produce with natural gas purchased at very convenient prices. I now know that were mined from our own mining operations in the country. These are very competitive facilities that can sustain good profitability in all kind of environments. Regarding our non-integrate facility in Mexico, this facility rely in apart on slab provided from our Brazilian mill. The production of slabs in Brazil is currently having some pressure on margins as a result of weak global slab price environment and prices of raw material particularly iron ore. In addition, local slab sales are currently weak as low expectations in Brazil are taking longer to materialize than expected. We are adjusting the Brazilian mills production level to achieve an overall lower production cost, minimizing the use of iron ore pellets and purchased of external coke, as well as deploying other cost cutting initiatives. In the fourth quarter, slab shipments to third-party are going to decrease a bit more, mainly due to lower slap sales and the lower production I have just mentioned. Let’s review Argentina now. The scenario is in Argentina change materially from our expectations on last quarter’s conference call. Following August primary elections, there was a significant fluctuation of the country main macro macroeconomic variables with a 26 exchange rate devaluation and an increase in inflation in the third quarter. This volatility affected did Argentina steel market demand, and as a result, our shipments did not continue recovering in the third quarter of 2019 as they did in the second quarter. In this scenario, we expect shipments to remain at low level in the last quarter of the year as well. We have already adjusted our facility in Argentina to a low -- a lower level of demand and we continue to adapt this operation to the incremental increased level of uncertainty, Argentina’s economy is going through. Next step in this market will be a change of government administration in December to have a better view of 2020, we will need to wait until the new government introduces a new set of policy to tackle the current economic situation. So wrapping up, we are currently in a challenging price environment that could begin to slowly turn better. In the mean time, we are working fast to adapt the economy to the current situation. The first quarter -- the fourth quarter of this year will show a lower margin than the third quarter. But, all-in-all, we expect to report a good full 2019 and I am cautiously optimistic regarding 2020 in if this price recovery get some grip over the following months. I will stop here and asks Pablo to go ahead with the comment regarding the results of the third quarter. Thank you.

Thanks, Máximo. Good morning and thank you again for participating in our conference call. Let’s review the performance in the third quarter 2019 starting on page three in the webcast presentation. As you can see in the first chart in the third quarter 2019 we reported EBITDA of $382 million is slightly lower sequentially and above our expectation for the quarter back in July. Ternium EBITDA margin in the third quarter increased to 16% of net sales or $125 per ton. An Argentina, the market volatility related to electoral process cut steel demand during the period as Máximo mentioned, and on the other hand, caused significant depreciation of the local currency that have a positive impact on margins in Ternium Argentina, Máximo Vedoya: Pablo, sorry. I am told there is a problem with the PPT version of the webcast presentation. Please, if you are connected via webcast, you can open the PDF version that works.

Okay. Good to know. So going back to the result of the company and regarding net income, in the third quarter of 2019, we reported $111 million or $0.48 per ADS. When compared to the second quarter 2019, earnings per ADS decreased $0.58, including non-cash foreign exchange related results that we will analyze with more details in the following slides and an increase in the effective tax rate. Let’s now review in the next page our shipment performance in each region. As you can see, shipments in Mexico in the third quarter increased 4% sequentially and 7% on a year-over-year basis, as we had expected. Looking forward, we anticipate a slight decrease in shipments in the fourth quarter, mainly due to seasonality and the domestic construction sector that remains soft. In the other markets region in the upper right-hand chart, shipment decreased 26%. The main driver behind the decrease were 307,000 tons lower slab sales to third parties, as we increase internal shipments to our own operations in Mexico, again as we had expected. Looking forward to the fourth quarter, slab shipments to third parties are expected to increase a little more. In the Southern region, shipments remained relatively stable sequentially in the third quarter. And looking forward to the fourth quarter, shipments in the region are expected to remain at these low levels as volatility in the Argentine market continues. Turning to page five, you can see in the first chart that the combination of these developments resulted in consolidated steel shipment in the third quarter, decreasing 8% sequentially and 3% on a year-over-year basis. Looking forward and considering what we have already discussed, we expect steel shipments in the fourth quarter to sequentially decrease mainly due to the lower shipments in the Mexican market and lower slab shipments to third parties. Going now to realized prices in the upper right-hand side chart, you can see that our realized price continue decreasing in the third quarter of the year, mainly driven by lower steel prices in Mexico and other markets. As Máximo mentioned, steel prices currently appear to be bottoming out, yet Ternium expect lower realized prices in Mexico in the fourth quarter due to the lag related to contract price resets. Now the lower left-hand side chart shows the net sales decreased sequentially 11% as a result of the 8% decrease in shipments, together with the 4% decrease in consolidated revenue per ton. Let’s now turn to page six to review in more detail the drivers of EBITDA and net results in the third quarter of the year. Regarding EBITDA, the main changes were the decrease in shipments as we had showed partially upset by slight improvement in EBITDA per ton. During the third quarter of the year, cost per ton decreased sequentially mainly as a result of lower purchased slabs and raw material cost, lower maintenance expenses and lower labor cost. These changes include a net positive accounting in effect on the cost per ton of Argentina -- excuse me, of Ternium’s Argentina subsidiary. As you know, uses Argentine peso as a functional currency as a result of the 26% depreciation of the Argentine peso at a 12% inflation rate recorded in the third quarter. The overall cost per ton improvement was partially upset by the decrease in revenue per ton we have saw. As Máximo anticipated in the fourth quarter 2019, we expect to report a lower EBITDA level with the decrease in shipments and lower revenue per ton in Mexico, as well as a decrease in slab shipments to third parties, as already discussed. On the second chart, we can see the main factor behind the decrease in third quarter net income. In addition to a slight decrease in operating income, Ternium’s net income was affected by the negative non-cash impact of the Argentine peso depreciation against the U.S. dollar on Ternium’s Argentine U.S. dollars financial position. A lower equity in earnings of Usiminas and a higher effective tax rate mainly due to the non-cash effect on deferred taxes of the depreciation of the Mexican pesos that happened during the third quarter, compared to a low effective tax rate in the second quarter, when the Mexican peso appreciated against the U.S. dollar. On page seven, you can see the drivers of the first nine months year-over-year changes in EBITDA in our results. The decrease in EBITDA in the first nine months was mostly related to the decrease in EBITDA per ton and the decrease in net income was mainly due to lower operating income, partially offset by better financial results. Let’s turn now to page eight. This is the last page in the presentation where we can see the performance of cash flows operations, excuse me, cash flow operations, capital expenditure, free cash flow and net debt. Free cash flow in the third quarter reached $244 million and $54 million. In this period, the decrease in working capital contributed with $208 million and capital expenditures were strong, $257 million, as we have already expected. The capital expenditure to remain high in the fourth quarter of this year and during next year, considering our expected progress in the construction of the new mill in fiscal year. All-in-all, Ternium net debt decreased to $1.5 billion at the end September versus $1.7 billion at the end of June, equivalent to a comfortable level of 0.9 times last 12 months EBITDA. Okay. Thank you very much for your attention. We are now ready to take your questions. Please, operator, proceed with the Q&A session. Thanks.

[Operator Instructions] Your first question comes from the line of Caio Ribeiro with Crédit Suisse.

Yes. Good morning, everyone, and thank you for the opportunity. So, first of all, I wanted to see whether you could provide some more color on what your expectations are for steel demand growth in Argentina in 2020 in light of the recent results of the elections? And then secondly, on the cost side in this quarter, there was a pretty significant drop in labor and maintenance costs. I just wanted to see if you could provide a little bit more color on what drove that and whether this is sustainable going forward? Thank you. Máximo Vedoya: Thank you very much, Caio. I will take the first one, though it’s a very difficult one to answer today. I mean election has just happened in Argentina. And to be honest, there is still no plan -- no economic plan that the new government has put together, at least nobody knows if there is, I am sure they are working on one. So knowing what the demand will be in Argentina in 2020 is still a little bit difficult. We have prepared our operation and running our operation as if demand will continue in the levels they are today, which are levels below the -- what we expected a couple of months ago. And so what we are preparing for is to stabilize our company in this level of shipments that are around the 150,000 tons every month roughly, a little bit more, maybe, but that’s what we think today of 2020. The second part?

Yeah. I will take it, Máximo, if you want. You are right, Caio, that we have a reduction in the cost, mainly driven by couple of issues. One is, as you mentioned, labor cost and maintaining cost, and you need to consider that not only in Argentina we have devaluation of the currency, which was very significant, but we have also the devaluation of the currency in the other two main markets, which are Mexico and Brazil. So the effect of that is positive, taking into consideration that part of our cost or our input cost is based in local currency, so that clearly had a positive effect in both maintenance and labor cost. In the case of, specifically, Argentina, the weak devaluation and the way you need to account taking into consideration inflation accounting and the functional currency, whenever you have a big devaluation has always a positive impact in the numbers as you are drawing as cost. Looking forward to the fourth quarter, clearly, we need to see or to expect or to wait, sorry, which will be these effects coming forward. The more difficult one to predict will be the case of Argentina where it’s very difficult to, as Máximo also was mentioning, it’s very difficult to know exactly, which will be the situation by the end of the year, which of course is the end of the fourth quarter where we need to report our new data. But also I think it’s important to confirm or affirm what Máximo was saying that we continue working very, very hard to reduce our cost as much as we can, and clearly, though we have -- we want the help of the devaluation of the currency, clearly, the results are showing that we are in the good direction in order to take this advantage of working very hard on reducing costs.

Perfect. That’s very clear. Thank you gentlemen. Máximo Vedoya: Thank you, Caio.

Yeah.

Next question comes from Jon Brandt with HSBC.

Hi. Good morning, gentlemen. Thank you for taking my questions. I first wanted to ask you about the slab and the impact that that had on margins during the quarter. So, obviously, you sold less slab during the quarter and then you bought less third-party slab. So I am wondering if you can sort of quantify how much that helped margins and make some comments around the cost level of your Brazil unit versus the cost of slab from third parties, I guess, I am trying to get a sense of how much more this could help margins in the future and trying to understand where margins could be in the next couple of quarters? And then secondly, just back on Argentina, I understand it’s a difficult moment. But are you also preparing for maybe going back to the old cluster levels where there were price controls and import restrictions and things like that it, is that under your consideration at all? Thank you.

Okay. If you want, I take the first part, which was the cost related -- Máximo Vedoya: The easy one.

The easy one, yes, because Jon, as you know, and I think, we have mentioned this at the very beginning after acquisition of the facility in Brazil, that due to the reason that the Brazilian operation had a mix of sales to third parties and to internally to overall operation. This will make our total level of shipment to fluctuate quite a lot depending on the mix of these sales. Clearly, the sales that we are doing to our own facilities in Mexico are now reflected at sales because they are consolidated. So we are all only reflecting the sales to third parties and depending on this level of sales is the case that will be reflected in the result for the quarter. That’s why the significant reduction in slab shipments to third party, which does not mean that we reduce the total shipments out of Brazil, reflect -- was reflected in an important decrease on the number. Going forward, we are expecting further small decrease on shipments to third parties and also, as Máximo mentioned, we are working very hard to adjust the cost structure of the production level of our Brazilian unit to cope with the reduction in margins due to the lower prices of slabs that are basically in line with the reduction on the prices of steel in the market, especially in the U.S. and what we saw in the past, which is an increased level of mainly iron ore cost and coal cost, both of them have been reducing later on. So we are expecting to see a sustained level of shipments and in the coming year to third parties, we will continue to do that following the contract that we have and the shipments to the local -- in the local market and putting together the reduction in cost that Máximo was mentioning and the possible increase in prices, this should have a very prospective for next year. Máximo Vedoya: Yeah. Jon, I think, what -- and adding to what Pablo is saying, the important thing of the facility in Brazil is that we have to be flexible to what is happening in the market. And so if you remember, 2018 we produced roughly 4.6 million tons in that facility and we were expecting to reach this year 4.7 million tons to 4.8 million tons. That’s not going to happen because what we have done in this last quarter when conditions started going down because of the decrease in prices and the increase of the raw material, especially iron ore, is that we reduced our marginal cost production. That means that this year we are going to reach the 4.3 million tons and we are now producing at a level -- an annual level of 4.1 million tons. This allow us to put in the blast furnaces much less pellets. So the cost of the coal facility is going down, and of course, in the cost sense, we are doing much more other things. But that is one of the important things that we are doing. So we try to adapt very quickly to the market conditions and leave the Brazilian facility to be very, very competitive against the world in producing slabs, this is the way. The second question was in Argentina and what’s coming, and if we are prepared or not. As I said, we don’t know what is coming in Argentina. I mean, there is a lot of speculations and we don’t want to speculate. Clearly, that if you look at the history of the last 10 years, 12 years, Argentina went through a series of economic policies, which we were able to manage. And so we think that we can -- if this comes, and we don’t know, I mean, if this is coming, we don’t have any certainty or we don’t have any insight that some of the things that you mentioned are coming. But if this is coming, we think we are prepared because we had had it in the past.

Okay. Helpful. Thank you very much.

Next question comes from Carlos De Alba with Morgan Stanley.

Hello. Good morning, gentlemen. So the first question maybe -- Máximo Vedoya: New Carlos…

Yes. Exactly. New last name. So if you could provide an update on the price in Mexico and if you could -- if I may ask you how, there were some news that a competitor of yours in northern Mexico may be up for sale or for a joint venture. How would that feed your portfolio in the country and overall in Ternium? And then if I may just follow up on some of the questions on Ternium Brazil. Can you give us a range of the level of profitability, which that plant is operating right now, which if I understood correctly Máximo, it is running around $4.1 million per year as we speak? Thank you. Máximo Vedoya: Okay. A lot of question, Carlos, I will try to answer them. The first one was about prices in Mexico, I believe?

Yeah. Máximo Vedoya: No.

The projects. The projects. Máximo Vedoya: Project. Project in…

Yeah. Máximo Vedoya: Project in Mexico are going well. Baking line is already running. We started a little bit later than what we thought, we would like, we did wanted to started in July, it started in August, September, but the curve is much higher. So today, we have produced almost the same as we expected in the business plan, because it’s producing much faster than what we think -- what we thought. Galvanized line is coming on line as we speak. We didn’t have yet the first coil, but it’s coming in any moment. And the big one, the hot steel mill, it’s -- I mean our plan is to start it in the 1 of December, but we are very confident that we can start it earlier, because in that case, I think, we are ahead of the planning, so if everything goes well, we will start it a little bit earlier. And regarding to your second question about what is happening with a competitor of ours. As you know, Ternium has a long history of growing through organic growth and acquisitions. This is always part of the strategy and our area of interest is in the Americas and so any opportunity that arise over there we will always analyze that opportunity. Now having said that, about a particular company, we don’t have anything to report at this time regarding any potential transaction. Regarding the fees because you also asked about the company and the fees that this company will have to have. Again, I cannot speak in anything particularly about these companies in general, but let me give you a view on the subject of what is my opinion and there are two trends that are going on that is happening in the steel world market. The first one is that the steel global market is shifting from a global perspective to be more regionalized. That’s something that is happening in the last years. I think all these dumping cases and two, three tools and all these safeguards are going in this direction. If you say -- if you take the share of international trade steel in the last 10 years declined from 36% to almost 26%. So it’s a huge decline. So the steel market is getting regional. And the other trend or the other thing, or the other trend or the other challenge of the industry is the overcapacity. I mean, the overcapacity is still here. It has been here for the last several years. So for those two things, consolidation is a good thing. So if somebody of the region pursues this company, it could be a good thing for the steel industry in general. So my opinion is that it should fit some of the participants in the region.

Carlos, your third question was related to Brazil, I believe…

Yeah.

…and the production level that we are expecting to help…

The profitability. Yeah. The profitability, if you can give a sense of the profitability.

Yeah. Sorry. There was a noise when you were asking your question, it was difficult to understand. Yeah. The profitability is the -- with respect to the Brazilian operation, as you know has been very, very positive in last year in relationship to the very good prices that we saw in the slab market coupled with the reduction level or reduced level of raw material cost. Lately, we have the opposite situation, which was a reduction in the price level and an increase, probably, unexpected, and if you want, a normal increase in several materials meaning basically iron ore that put some pressure on margins. We are positive in the sense that through the initiative that we are taking and the changes in the environment or prices on both of steel and raw material, the profitability of this company will go back to more normal levels. Clearly, not at the levels we saw in 2018, because the price level there was, as you very well know, very, very high, but at the very profitable level and more normalized levels.

Thank you, Máximo and Pablo. Máximo Vedoya: You are welcome.

You are welcome.

Next question comes from Thiago Lofiego with BBI.

Thank you, gentlemen. Máximo, you mentioned you expect demand to remain at current levels in Argentina. So just wondering your, I mean, why not expect a retraction on demand in 2020 and what would be a rationale for this flattish demand outlook? Second question still on the demand front, when do you expect construction activity and infrastructure projects to begin to rebound in Mexico and what’s your demand outlook for 2020 for Mexico as well? Thank you. Máximo Vedoya: Thank you, Thiago. Yeah. The two questions, Argentina and retraction of the demand. To be honest, demand in Argentina is very, very low. So if you remember, Argentina went through a crisis starting I think in September, October of last year and shipments were reduce dramatically. When we did our expectations a couple of months ago, we thought that the demand was going to increase to levels of 170,000 to 175,000 tons in the domestic market only in Argentina, I am not counting some export that Argentina do, 170,000 tons. But today, we are in the 150,000. This is a very, very low level. So it’s very hard to see except for December and January, which are seasonably low month, to see a demand less than that in Argentina. Remember that in the last crisis 2002, 2003 long time ago, the month -- the lowest month was a little bit higher than 100,000. So I mean it’s very difficult to go below this number, I think, so that’s why we are expecting the demand should stay at this level. Mexico --

Máximo, if I may, just on the number you mentioned. So the lowest level in the last crisis was 100,000 tons, you mentioned, correct? Máximo Vedoya: I think in the last crisis was in 2003 remember what…

Yeah. Máximo Vedoya: More than 15 years ago and it reach one month I think 90,000 tons, from that started to increase again. There is a level of consumption that should stay there in Argentina. It’s a country that some of the markets have continued to grow. I mean energy and Bacamorta [ph] all that investment. I don’t think the new government is going to destroy, I mean, it doesn’t make any sense. Agriculture, that is another sector that we do business a lot, it’s also going to continue, Argentina is very competitive in that. So there is a level of demand that is there that although the crisis will continue, it’s difficult to see it lower than that, at least in the steel consumption, I am saying.

That’s clear. Máximo Vedoya: Mexico, our expectations is that consumption in Mexico will stay the same in 2020. That -- if you see there the last report that the world steel did a couple of weeks ago in our Annual Meeting, the Board Members of world steel ended up with this outlook of the Mexican steel consumption. I think it was a grow of 1% only but mainly flat. There are some figures that I think could increase this demand, and first of all, is what will happen with infrastructure. I mean, infrastructure has been declining for the last six years to seven years, the investment infrastructure from the government. The new government in Mexico, it’s not that new, but the new government is realizing this and it’s trying to work with the private sector to see if there can be an incremental investment in infrastructure in Mexico, which is not needed. I don’t know if this is going to -- if all of us are going to be able to do this in 2020, for sure in 2021. But if they are able, demand should increase in 2020 a little bit more. The second thing that is very, very positive is the new NAFTA deal, the USMCA. If we are able as region to approve the USMCA this year, which I think there are still possibilities that can happened that could also be a trigger to increase consumption of steel in Mexico and in the North American region. So for us, as I said again, we expect the demand to be almost flat, but there are some positive things that we are looking that can increase that number.

Great. Thank you, Máximo. Máximo Vedoya: You are welcome.

Next question comes from Timna Tanners with BoA Merrill Lynch.

Yeah. Hey. Good morning. I wanted to ask two questions. So one is given that, as you point out, your balance sheet is looking really steady strong cash flows even with the increase in CapEx, I know M&A is a sensitive topic. But maybe you could just remind us about your priorities for capital allocation. Pesqueria is a big project, but what other types of things are you thinking down the road and what other priorities for cash? And the second question was just in the case that prices don’t recover much from current levels, absent obviously, currency moves, can you talk us through a little bit more what kind of triggers you can pull on cost savings and what kind of other specific plans you might have there? Thanks a lot. Máximo Vedoya: Yeah. Thank you, Timna. Let me start with CapEx allocation and what else, as you know, we are undergoing this expansion project in Pesqueria. We said it before the CapEx of 2019 will be around $1 billion and 2020 will be around $800 million. And that’s -- and then our expectation in 2021 is back to our normal levels that are around $450 million, $500 million to sustain the production and make improvements. Today, we are not thinking of other things else, I mean, we don’t have the plans to do anything else, I mean anything -- any new investments today. We -- as I said, we analyze a lot of things, but we don’t see today the need to increase or to invest in other areas except of the normal CapEx.

Also take into consideration we are investing in Colombia. Máximo Vedoya: Yeah. We are investing a new -- we feel it’s a little bit smaller, it’s $90 million in Colombia too. Second question, if prices don’t go up is the question, clear, sorry?

What triggers you can pull in terms of further cost savings and absent devaluation and assuming not a lot of change to prices. Máximo Vedoya: Yeah. We are going to continue making more competitive our operation. The new Pesqueria facility remember, it’s a very competitive one that is not only going to substitute some of the imports that are coming to Mexico, but we are also going to substitute things that we buy, because we don’t have enough capacity and we are going to close some of the line, the very old ones, as Malinovono [ph] that’s what it called, that has much higher cost than the Pesqueria new facility. So our strategy is to continue working in making our operations much more competitive. We think they are very competitive considering all our competitors. But we are going to continue working in that sense regardless of the prices, I mean, if prices go up, we are also always working on how competitive, how productive our operations are.

Clearly, the new Pesqueria facility here continue or moving forward our goal or target of sustaining margins in the range that we are working that we will continue to work. So together capital, as Máximo was saying, the cost savings is -- for us is key, is part of what we do and we are looking for. Máximo Vedoya: Remember that also the new Pesqueria facilities enable us to produce products that we are not able to produce before. These products are going to be produced with less cost, because all the Pesqueria facilities has much lower cost than the old one. But also has carried by value added prices, I mean, there are higher value added products, more sophisticated products that has better prices. So we are going to increase both or decreased cost and increased not prices, relative prices, I mean the amount of extra that we can charge this more sophisticated steels.

Got you. Okay. Thank you very much.

[Operator Instructions] And we have a question from Alex Hacking with Citi.

Yeah. Good morning. Just following up on the projects, can you remind us when the new galv and the new paint line of Pesqueria will get to their full production rates, what quarter do you estimate that would be? And then second question, I assume that you have some annual contracts in Mexico or some annually price contracts in Mexico with the automakers, I guess, my question is what percentage of your total sales in Mexico is on annual contracts? Thank you. Máximo Vedoya: The second first is very simple, very, very few. We don’t have much annual prices. We don’t like it. So we have very, very few. We have prices on annual basis, but change regarding different indicators, but we don’t have a fixed annual price, very, very little. So it’s not very significant to our operation. Projects, when are the projects coming? The painting line is already producing. I think it’s going to be producing by the end of this year at full capacity. Galvanized line at full capacity will be produced in the first quarter. And as I said, the cost for mill will take a little bit longer, but it’s going to start at the end of November and we will start producing regular coils by February…

2021. Máximo Vedoya: …of 2021.

Thanks.

[Operator Instructions] And we do not have any telephone questions at this time. I will turn the call over to the presenters. Máximo Vedoya: Okay. Thank you very much for your participation today. Don’t hesitate to contact for any additional support or comments. Good-bye and thank you very much to all again

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.