U.S. Markets closed

Edited Transcript of TX earnings conference call or presentation 20-Feb-19 1:30pm GMT

Q4 2018 Ternium SA Earnings Call

LUXEMBOURG Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Ternium SA earnings conference call or presentation Wednesday, February 20, 2019 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Maximo Vedoya

Ternium S.A. - CEO

* Pablo Daniel Brizzio

Ternium S.A. - CFO

* Sebastián Martí

Ternium S.A. - IR Director

================================================================================

Conference Call Participants

================================================================================

* Alfonso Salazar

Scotiabank Global Banking and Markets, Research Division - Director of Metals and Mining

* Caio B. Ribeiro

Crédit Suisse AG, Research Division - Head of LatAm Metals and Mining Team

* Carlos De Alba

Morgan Stanley, Research Division - Equity Analyst

* Daniel Sasson

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Rodolfo R. De Angele

JP Morgan Chase & Co, Research Division - Head of Brazil Equity Research and Senior Analyst

* Thiago Augusto Ojea

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thiago K. Lofiego

Banco Bradesco BBI S.A., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ternium Fourth Quarter 2018 Results Conference Call. (Operator Instructions) Thank you.

Sebastian Marti, you may begin your conference.

--------------------------------------------------------------------------------

Sebastián Martí, Ternium S.A. - IR Director [2]

--------------------------------------------------------------------------------

Good morning. Thank you all for joining us today. My name is Sebastian Marti, and I am 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.

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [3]

--------------------------------------------------------------------------------

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, then Pablo will make a brief analysis of the latest quarterly numbers and finally we'll have a Q&A session.

We had an outstanding result in 2018, reported an EBITDA of $2.7 billion. This was the highest EBITDA in Ternium's history with a 40% year-over-year increase. We had shipments of 13 million tons in the year, and this is the first full year with Ternium Brasil as part of our production system. There in Ternium Brasil, we achieved a steel production record of 4.6 million tons last year.

EBITDA margins 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 0.6x.

The Board of Directors proposed to raise the annual dividend to $1.20 per ADS, equivalent to an approximately 4% dividend yield. This proposal took into consideration the current strength 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 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 market. Our expectations are for a global steel demand in 2019 to grow modestly. In Mexico, our main steel market, we believe sale to industrial customers will continue to do relatively well in 2019, with Mexican manufacturing to be supported by growth expectations 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 ratification of the new NAFTA, the USMCA, which if 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 continue to be a risk to fair trade. China's increasing steel 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 cause 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 a low level of shipment, taking into consideration 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 2019 (inaudible) area, higher growth leverage in the Brazilian economy, Argentina's main destination of exports of manufactured goods, and a gradual decrease in interest rate.

In Brazil, [Vale's] event created a challenge situation 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 Brazil. In that facility, we will continue to work this year to increase even more its 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 have a great 2018, and we look forward to continue growing our business in 2019. Margin in the [year], 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 thriving 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 this front, enabling a much higher integration with our facility in Brazil and consolidating our world-class production system with the latest technology to maximize efficiency and productivity.

With this, Pablo, please take over to comment about our performance in the fourth quarter.

--------------------------------------------------------------------------------

Pablo Daniel Brizzio, Ternium S.A. - CFO [4]

--------------------------------------------------------------------------------

Thanks, Maximo. Good morning to everybody, and thank you again for participating in our conference call.

Let's review our performance in 2018, starting Page 3 of the webcast presentation. Maximo anticipated, our performance in the year was exceptional, with record EBITDA of $2.7 billion and EBITDA margin of 24%. As you can see in the upper right chart, our EBITDA in 2018 increased significantly compared to EBITDA in 2017, and is also significantly higher than EBITDA in any reported period in the last decade.

In the upper left chart, shipment grew 1.4 million tons year-over-year in 2018, reaching a record 13 million tons. This increase was mainly related to the full consolidation of Ternium's Brasil slab shipments to third parties. As in 2017, we consolidated only 4 month, 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 reported a margin of $208 per ton in 2018, up 24% of net sales, well above the margin range reported in the last year which was between $110 and $170 per ton. As Maximo commented, margins in 2019 will be lower than in 2018, converging to a more sustainable long-term level.

Please turn now to Page 4 to review the main drivers of the year-over-year improvement in EBITDA. As you can see in the upper chart, the significant year-over-year increase in EBITDA is a result of a failure of EBITDA per ton and higher shipments, reflecting strong price environment in the North American steel market and the full consideration of Ternium Brasil. Ternium Brasil enabled us to integrate our operation, at the same time was able to take advantage of stronger slab market in 2018.

Net income in the year reached $1.7 billion, significantly higher than any other year since we listed Ternium shares.

The lower chart shows net income increased mainly due to higher operating income, with some additional help for our improved results from our participation in Usiminas and the lower effective tax rates, due to a reevaluation of assets for tax purposes in Argentina that had a positive effect in deferred taxes.

Please turn now to Page 5. In this page, we are lowering the [evaluation] of free cash flow, capital expenditure, net debt and dividend payment. Free cash flow in the year, reached a very strong $1.2 billion. Capital expenditures were $520 million in the year, higher than in 2017, mainly due to the full consolidation of Ternium Brasil and the investment projects underway being carried out mainly at the South Korea facility and also in Colombia.

Looking forward in 2019. We expect to continue showing strength in cash flow generation, although below the levels achieved during 2018, in line with lower EBITDA expectation and 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, a close to 40% decrease in net debt, reflecting the strong free cash flow in the year, less dividend paid, and represent a comfortable level of 0.6x EBITDA at the end of December.

In 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 shipment performance. Total steel shipments went down 180,000 tons sequentially or around 6% decrease. In Mexico, on the upper right chart, shipments remained relatively stable in the fourth quarter of the year. The quarter is normally the seasonally lowest in the year. So we expect shipments in Mexico will show some increase in the first quarter of this year.

In other markets, 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 Brasil to third parties as anticipated. Those slab volumes were shipped instead to Ternium Mexico and were, thus, eliminated in the process of consolidation of the fourth quarter. We expect this to revert in the first quarter of 2019, with higher shipments of slabs to third parties and lower intercompany sales.

Turning finally to the Southern Region. The sequential decrease in shipments as shown in the lower left chart mainly reflect the [burst] economic activity and [destocking] process in the value chain in Argentina. The first quarter of the year is [sufficiently] lowest in Argentina. So shipment will continue 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 effect in Ternium sales of the 6% decrease of the shipment together with 6% decrease in revenue per ton as well as mainly related to a lower realized price in the Mexican market as well as in the slab sales. We anticipate revenue per ton to continue decreasing in Mexico in the first quarter of 2019 as a result of the (inaudible) reset of contract prices and some weakness in the spot market. The participation of each market in our net sales breakdown remains relatively stable with (inaudible) shipments being made in Mexico, 70% in the Southern Region and 30% in other markets.

On Page 8, we have a closer look to quarterly EBITDA. EBITDA margin was a healthy 19% in the fourth quarter, 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 the sequential EBITDA decrease. The major component was a decrease in the margin, with some additional decrease related to lower shipments and lower sales of electricity Mexico as electricity sales price decrease seasonally in the winter.

Revenue per ton went down mainly as a result of lower revised price in the Mexican market and in the slab sales that we just discussed. The higher cost was mostly related to higher raw material, slab, energy and labor cost. The effects of inflation accounting Argentina was one of the reason for this increase in costs. Basically the combination of high inflation with currency reevaluation in the fourth quarter, something we were not expecting to happen. Also, expected slab cost increase in the quarter mainly as a result of first-in/first-out accounting.

In the first quarter of this year, we expect EBITDA to decrease slightly compared to the fourth quarter as a result of a lower margin partially offset by higher shipments. EBITDA per ton should sequentially decrease, mainly due to lower revenue per ton in Mexico and a higher participation of slabs in the size mix as we are going to send more slab to third parties and less slab intercompany. On the other hand, cost per ton should remain relatively stable.

In the second chart on this slide, you can see that the sequential decrease in net income was mostly result of lower operating income. It was partially offset by better financial results, better results from our participation in Usiminas and a lower effective tax rate.

There were significant sequential gains in net financial expenses, mostly 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 were also slight decrease in inter expenses, mainly reflecting a lower net investment in business and average interest rates.

Thank you very much for your attention. So we are now ready to take your questions. Please, operator, proceed with the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Marcos Assumpcao with Itau.

--------------------------------------------------------------------------------

Daniel Sasson, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

It's actually Daniel Sasson from Itau. My first question is on the ratification of the new NAFTA agreement. I know that you mentioned that you drew [a portion reduced] uncertainties in terms of trade. But if 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 of workers in the steel making industry in Mexico might increase and the potential impacts of that for 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 in the business since May last year. But what do you expect looking ahead? The FX 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.

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [3]

--------------------------------------------------------------------------------

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 in 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 in Mexico. I think those are the 2 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 start lagging. Prices in Mexico start lagging behind the U.S. prices, mainly because Mexico was also affected by the 232. I know today prices in the U.S. are decreasing. Prices in Mexico are 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 Mexican steel, would eliminate, I think, this uncertainty there is. And so we'll benefit whatever the solution is, whatever the 2 solutions is, will benefit Mexico.

--------------------------------------------------------------------------------

Daniel Sasson, Itaú Corretora de Valores S.A., Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Yes, perfect. That was very clear. Do you expect any effects on your cost front coming from the agreements of the…

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [5]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Daniel Sasson, Itaú Corretora de Valores S.A., Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

Perfect. That was very clear.

--------------------------------------------------------------------------------

Pablo Daniel Brizzio, Ternium S.A. - CFO [7]

--------------------------------------------------------------------------------

Let me try to answer your second question, which is not easy to do, because, as you know, the inflation accounting that we need to have in Argentina is putting, especially in the first year of accounting for that, some distortions in the numbers. 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 weird, which is we have an important level of inflation, which was 12%. But then we have also significant level of reevaluation of the currency of 9%. So these things will works, if you want, against 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 this and the cost of Ternium through Argentina was quite significant. So of course we cannot account or go through numbers without inflation accounting. But during the fourth quarter if we have not inflation accounting, probably our EBITDA would have been even $50 million higher than what we have reported. But in entering 2019, clearly things should start to normalize, because, as Maximo mentioned, we're expecting to see some gradual recovery of shipments in Argentina and in the economy in Argentina. So we are not expecting big swing in the currency value level. So this should start to normalize. As a whole, the EBITDA margin that we're seeing for the future is, as we already discussed, within the range where we think is a normal level for a company (inaudible) which is between 15% to 20%, and, of course, has happened in the last 3 or 4 years, always 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.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from Caio Ribeiro with Credit Suisse.

--------------------------------------------------------------------------------

Caio B. Ribeiro, Crédit Suisse AG, Research Division - Head of LatAm Metals and Mining Team [9]

--------------------------------------------------------------------------------

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 demand for the commercial market up, which has been lagging for some time. So I just wanted to get some view whether there 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 announcements 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're already seeing a bottom or whether you expect the weaker momentum that we're seeing to continue. Those are my 2 questions.

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [10]

--------------------------------------------------------------------------------

Let me start with the Mexican question, which is clearly a difficult question, because the government is starting and steel demand will depend on how the new government or the new administrations proceed. We are still positive regarding Mexico and our business there. The new administration just only took office 2 1/2 months ago. And I think there is a normal process of getting used to the changes. There has been some actions by the present administration that have created some uncertainty in the markets, and I know that. But I think that there are some things that are moving in the right direction. Spending is increasing, and it's increasing first in Pemex. I mean, there's more activity going on in Pemex, more drilling going on, more pipelines being built. So you see that the new administration is trying to improve the performance of Pemex, what is the [imperative] 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 didn't expect to see it yet. This is things that normally took several months before a new administration comes in. The last administration, when we change from the PAN party to the PRI party, it was almost one year of almost 0 investment. But I think here what we are seeing in Pemex, it's 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 the conference that made President Lopez Obrador did on Monday, you're going to see that he'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, on that front. Again, these are not things that you're going to see in the near future. We don't expect a big increase in consumption in 2019. But we think that this is the right direction for improving in the Mexican consumption in the following years. So again, we are quite positive regarding Mexico and our business there. Regarding prices in the U.S., you're right. I mean, the prices, if you follow, the CRU came down to 735 metric tonne. It increased a little bit, the CRU, in the last weeks. I think that regarding to your question, I think in the U.S., they have reached the bottom. I think although 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 slab prices in the market in the last 2 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., with this 232 on term 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.

--------------------------------------------------------------------------------

Caio B. Ribeiro, Crédit Suisse AG, Research Division - Head of LatAm Metals and Mining Team [11]

--------------------------------------------------------------------------------

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 3- to 4-month lag effect until your contract prices in Mexico reflect this rebound or this bottom, could we start to see a rebound in the net revenue per ton in Mexico, starting in second quarter, perhaps?

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [12]

--------------------------------------------------------------------------------

Yes, I think it does. It's still very early. But I think that in the second or third question, we will see a rebound.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [14]

--------------------------------------------------------------------------------

So first question, if I may, so on the capacity utilization expected for Brasil, yes, total capacity and then capacity utilization in Ternium Brasil this year on the back of your comments, Maximo. And also, how much volumes do you expect to ship internally to Ternium Mexico this year? You mentioned in the first quarter there's going to be sort of a reversal of what we saw in the fourth quarter, with more [thereby] shipments out of Ternium Brasil. But in the year, you can give us at least a range of the volumes to be internally sold, that would 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 is a contract, is there any link to the [CFAA] rates? Or how do you determine the rates that you charge on these energy sales?

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [15]

--------------------------------------------------------------------------------

Let me start with the Brasil question. Brasil produce in 2017, if you remember the full year, 4.4 million tons. That was a record for the Brasil facility. This year, 2018, we got another record of 4.6 million tons. Our target for the Brasil is to produce 5 million tons which was ultimately the last capacity that the plant was built. And we think we are going to reach that in the next couple of years. There's some bottlenecking 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 a couple of years, the 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 it's changing every month. I mean, our idea, knowing that the contract we have (inaudible), the sale to the domestic market, sales to other customers, 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 tons we need in Mexico. That's our plant. But we are always making choices. If we have better opportunities, [the demands] that we are only going to ship 50,000 tons and if we don't have better opportunities, we are going to ship 150,000 tons. And you can see that, that there are different [months]. But we are always making the account of where is best to supply that production of [plants]. But the plant is 1.2. Electricity sales, I mean, we are selling to the MEM, which is the Mexican Electrical Market, or (inaudible) in Spanish. But it's, TFE has the rates. And then the system buys energy, depending on how the system produce the energy. So it buys from the best cost available and its production -- or consumption increases, it start to buy from the last competitive source. So it is a spot price, although the price is set by the market. What happened in Monterrey? Monterrey is an electricity hub that sells energy in the winter, but consumes more than what produces in the summer. And that was a thing that we know when we started plant there. So the sales are going to be at the higher prices in the summer and at lower prices in the winter. And that's what you see usually in the last 2 years. In the winter months, in the 3 winter months, I mean November, December, January, you have lower energy sales, the prices are lower, and then prices start increasing and they get to peak in July, September, depends on the heat that goes on in the summer months.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Your next question comes from Thiago Ojea with Goldman Sachs.

--------------------------------------------------------------------------------

Thiago Augusto Ojea, Goldman Sachs Group Inc., Research Division - Equity Analyst [17]

--------------------------------------------------------------------------------

My first question's regarding the new expansions. If you can provide a little bit more information how Pesqueria, the hot rolling mill is evolving, if the target date remains by the end of 2020, the galvanized line in mid-2019, and also the rebar mill in Colombia, if I'm not wrong 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 [demand], how the different sectors are responding to the situation and if you're seeing more imports into Argentina of steel.

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [18]

--------------------------------------------------------------------------------

The first, the expansion projects. The hot roll mill will start December 2020. We are on track to that, so we don't have any development that says 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 time. And the Colombian project was December of 2019, and so far we are also on track to get that time. As you know, all those timings have very -- I mean, they 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 decreasing consumption in Argentina, due to all the things I told you early. I mean, the interest rate going to more than 70% now in 44%, that created a huge impact in the domestic market. So a lot of people, not only decreased consumption but inventories went down a lot because of the capital cost of inventory with this interest rate. So I think the problem is more that than seeing imports or other things.

--------------------------------------------------------------------------------

Thiago Augusto Ojea, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

--------------------------------------------------------------------------------

Okay, great. If I can follow up. In terms of the CapEx of often these projects, the expansion projects, what have been spent? And how much is left? You also can provide a total CapEx guidance for 2019, would be helpful.

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [20]

--------------------------------------------------------------------------------

Yes. The CapEx for 2019 will be $850 million. So we are increasing from $550 million to almost $850 million. And 2020, this is a long term, but will be around $1 billion. So most of the CapEx of the hot strip mill, that as you remember was 1.1, will come in 2019 and 2020.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Next question comes from Thiago Lofiego with Bradesco BBI.

--------------------------------------------------------------------------------

Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Research Analyst [22]

--------------------------------------------------------------------------------

I have 2 questions. The first one regarding the fact that the Mexican government decided not to renew the 15% safeguard on steel imports from certain countries. Does this impact your view on the markets? Does it impact your view on your plans to expand in Mexico? Now we saw AHMSA, for example, canceling an expansion project. So just would like to get a view there. The second question. How do you see the Mexican auto industry growth in the coming years, considering there are some import restrictions into the U.S.? Do you think this might prevent further capacity growth in Mexico for automakers? And consequently, that would eventually impact your expansion plans longer term?

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [23]

--------------------------------------------------------------------------------

The first one, the Mexican government, the 15% safeguard that we have, remember this safeguard was only -- it was very limited the 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 imports from Europe or Japan or the U.S., were free. And some of the industries, they have special tariffs so they don't pay this one. But nevertheless, for us, I think for all the steel market, and you saw AHMSA's -- you mentioned AHMSA's reaction. For all the 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 there is a possibility that they change this. I mean, and I think there's a big possibility that they will change the decision. Auto industry. The automobile industry produced 3.9 million units in 2018, almost the same as 2017. This is a huge number. When we make 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 grow in 2020, 2021, to 4.2, 4.4. That's not a huge increase. And mainly this comes by the fact that there's 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 export to the U.S., are around 1.8. So there is still an increase in the exports of there, but increase is not very high. And so we always projected that industry is going to grow, but it's going to grow only a little bit, and we're talking about 10%. So in our projections, we already have that number. I don't know if that's clear or not, Thiago.

--------------------------------------------------------------------------------

Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

Yes. No, that's clear, Maximo. Just to follow up here. You mentioned, just to make this clear, the quota might be 2.6 million units, and now Mexico's exporting 1.8. Is that what you mentioned?

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [25]

--------------------------------------------------------------------------------

Yes. It's the numbers. The quote is 2.6. 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 this 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 a 232 is coming, if the U.S. put a 232, which I don't know if that's -- I mean, there has been a lot of rumors. And what we understand is that the DoC, the Department of Commerce, just sent President Trump a memo regarding the 232 about autos, but we don't know what it says.

--------------------------------------------------------------------------------

Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Pablo Daniel Brizzio, Ternium S.A. - CFO [27]

--------------------------------------------------------------------------------

This is Pablo. As you know, we prefer to discuss EBITDA margins at EBITDA per ton, because as we often discuss the pricing environment plays a huge role over there. What we said is that, yes, we understand that the numbers would go to what we consider a normalized long-term level of between 20% -- trying to sustain the margins in the upper side as we have done in the past year. Of course, 2018 was an extraordinary year where we have 24% EBITDA margin in the fourth quarter, which we have already just [published] is little over 19% EBITDA margin. So that's the expectation. That's the framework where we'll work and there is where we'll want to be or continue to be presenting numbers to the market.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Your next question comes from Alfonso Salazar with Scotiabank.

--------------------------------------------------------------------------------

Alfonso Salazar, Scotiabank Global Banking and Markets, Research Division - Director of Metals and Mining [29]

--------------------------------------------------------------------------------

I have 2 questions. The first one, there was in the local press some news regarding that your plants in Mexico could be affected by the railway blockades in the state of Michoacan. So I was wondering if you can provide some -- what was the situation there, if we should consider any impact in Q1, because of the blockades. The second question is regarding the negotiations with the communities in the mining operations. And if you can provide some comments on your plans for the mining division and because of what is happening in the iron ore market, if it's possible or would it make sense to increase capacity? What are your thoughts there?

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [30]

--------------------------------------------------------------------------------

Yes, we have some effects on the Michoacan block. As you know, we bring 2 things from railways. From Michoacan, we buy slabs from Lazaro Cardenas from Mittal to our facility. That was a main block. But also, the things that we bring from Colima from the Pena Colorada or our own mining facility in Colima were also affected, although for less time. So we have a minor effect. We are going to have a minor effect, but it's a little bit increase in cost. 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 really free and we're moving product without any effect. Regarding mining, I mean, we don't have any development in mining. I think that we are discussing with the community a new agreement because we have to expand our mine 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 seeing that in the near, near future. But as always, we are [an icing]. If you remember well, we have 2 big mines; one is the Aquila mine and the other one is Pena Colorada. And we open a third mine near our pellet plant, but it's a marginal mine where we have a lot of reserves. In the past, that was a project we analyze. Today, we are not seeing it. But if things change, we can revisit that.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Your last question comes from Rodolfo Angele with JPMorgan.

--------------------------------------------------------------------------------

Rodolfo R. De Angele, JP Morgan Chase & Co, Research Division - Head of Brazil Equity Research and Senior Analyst [32]

--------------------------------------------------------------------------------

Can you comment a little bit more on the raw material situation in Brazil?

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [33]

--------------------------------------------------------------------------------

Yes, Rodolfo. The raw material, well, 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 change quite a lot. What was the effect? First, they said that they're 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 suffering is price increase in the slab prices. Today, as you know, the Brazilian facility has an exclusive contract with Vale for the supply of iron ore to our facility. And as today, Vale's continued 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 increase from around 70, it went to 95, I think, one or 2 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.

--------------------------------------------------------------------------------

Rodolfo R. De Angele, JP Morgan Chase & Co, Research Division - Head of Brazil Equity Research and Senior Analyst [34]

--------------------------------------------------------------------------------

And if I may, just as a follow-up. Did you use some material, relevant amount of pellets in the [facility] operation?

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [35]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Maximo Vedoya, Ternium S.A. - CEO [37]

--------------------------------------------------------------------------------

Thank you very much for being part of our conference call today. As usually, 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.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

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