Ternium's (TX) CEO Daniel Novegil Hosts Investor Day 2014 (Transcript)

May.29.14 | About: Ternium S.A. (TX)

Ternium S.A. (NYSE:TX)

Investor Day 2014

May 29, 2014 09:00 AM ET


Sebastián Marti - Director IR

Daniel Novegil - CEO

Máximo Vedoya - Mexico Area Manager

Martín Berardi - Siderar EVP

Pablo Brizzio - CFO


Alex Hacking - Citi

Sal Tharani - Goldman Sachs

Sebastián Marti

Good morning and welcome to Ternium’s Investor Day. My name is Sebastián Marti and I am Ternium’s IR Director. Joining me today we have Mr. Daniel Novegil, and seven members of the new management team. Let me first give a quick note on safety. In the unlikely case of an emergency, we follow the exit signs located at the end of the room, that exit will take you directly to the street level.

Let me begin with the agenda for today. We have a presentation by Mr. Novegil, and after that we go directly into the Q&A session. After the closing of the event, there will be available at exhibit of the new exhibition in the museum for those of you interested.

Let me finalize, with -- let me finalize, I would like to remind you, that this presentation contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect our results are contained in our Securities and Exchange Commission filings and on page 2 in today’s presentation.

With that I will leave you with Mr. Novegil.

Daniel Novegil

Good morning to everyone, thank you very much for coming in the new edition of our Investor Day and I am particularly grateful for those of you that are coming from overseas. I really appreciate your effort for being with us today. Let me start by introducing some of our members of our management team. I will appreciate if you could stand up when I mention your names. First, Pablo Brizzio, who is the CFO of the company, then Máximo Vedoya, who is heading our Mexican operation and will be in charge of a part of the presentation, then Martín Berardi who is heading our Argentina operation and also we have a chance of talking to him afterwards; Oscar Montero, who runs Planning and Operations, and then finally you have been welcomed by Sebastián Martí, who as you know is our Investor Relations Director.

As always in this kind of event, we do have a very tight schedule. So I will go straight to my presentation. I will try to be as brief as possible but as you know it takes some time to develop the ideas that we want to share with you.

So in this part of the meeting, before going to the Q&A, I will briefly present, at first an overview of the safety initiatives and performance of Ternium. Second, an overview of the steel market, how Ternium earnings position in Americas and how our main markets are doing, are expected to evolve in the following years. Third we will review what I believe there are the key factors behind our competitiveness and our operational outperformance viz-a-viz competitors and some of the new initiatives that we are undertaking currently in order to boost the company competitiveness and productivity.

Also, I will share with you some indicators on the performance of Usiminas and at the end we will pay a look to the new profile, that newly -- in the light of the investment that we have done in the last three or four years where Ternium is positioned and where we are going looking forward, the new opportunities that we will have in the future based upon the investment that we were doing and our strategic position in the steel landscape. So let me begin presenting some numbers and some ideas regarding our safety performance.

As you know, in 2010 we have started a new safety approach and a new comprehensive program to affect the safety factor or the safety issue. This program included traditional and innovative tools inspiring best practices worldwide. Since then we look the safety records -- in the slide, since then we can see a steady improvement over the years, but as you know, a traffic accident happened in July 2013. We saw the indicator went up and we had unfortunately to have this very-very unexpected event. So from then on we decided to re-emphasize and to relaunch our safety program, and we decided to contract Dupont as an expert in industrial safety to reshape and to reemphasize our management system and train our personnel as well in how to improve the performance in safety.

In addition, we decided to apply for a full OHSA 18000 certification, so at the end, and at present, success in the performance of indicators we are in world class indicators. Here you have the average indicator for safety performance measured in lost-time injuries frequency rate that is an international indicator. This is the performance of the evident companies in World Steel Association, so we are doing very well and we are well in the world class performance, so we are doing very well. We have been doing very well. We will boost the efforts in safety so we will again be performing better than our competitors present success and world class performance indicators as expected in 2013. We need to sustain the good indicators that we had in the past, and push forward in order to even better off the performance in safety.

Then let’s take a look at where we are standing in our positioning in the competitive arena and analyze the steel market where we stand and where we expect to be and the main changes that we foresee in the market in the time to come.

Well, let’s start and let me briefly quote of some highlights of this slide, some demographics of Latin America in the world arena. And let me quote very briefly first Latin America is a very attractive market. It’s had significant demographics twice the population of U.S.A plus Canada, half the population of China, high income per capita 50% above China and six times the one of India. And in Latin America, we believe that there are enormous opportunities for growth as a result of lack of infrastructure, import substitution potential in steel and development of substantial energy resources. Also in Latin America, as you know we have a quite balanced supply demand situation in the region coupled with the competitive position of Ternium so because of that I really we feel that we can deal entry barriers in order to command attractive steel prices, steel pricing.

So, the attractive demographics and growth potential, import substitution opportunities, balanced supply-demand equation in the region in steel and price competitive labor force, abandoned raw materials availability and attractive steel prices because of effect of the entry barriers that I mentioned before. So, we are in the right place in the right moment, place of growth and place of attractive demographics.

Now let me turn to Ternium positioning and our footprint in the Americas. As you can see in this slide, Ternium sold 9 million tons in the Americas in 2013 with a main focus in Latin America. Our main markets being Mexico, Brazil, Colombia, Argentina and this market together account for 70% of the regional population again, Argentina, Brazil, Colombia, Mexico account for 70% of the regional population, 73% of the total GDP in the region, 80% of the regional steel demand. And on top of that these countries concentrate almost all relevant industrial capacity in the region.

At present NAFTA represent 60% of our sale. Additionally since early 2012, Ternium participates in Usiminas controlling group together with Nippon Steel as you know. So at the end we do have a very strong market presence in the main Latin American market, high market share, close proximity to customers with vertical integration, unmatched distribution and service centers network. In other words, we can create value through switching cost vis-à-vis our customers and again entry barriers based upon service of steel, differentiation and innovation.

Let’s now enter into our main market the Mexican market. As I mentioned before, Mexico is the second largest market in Latin America with almost 20 million tons of annual steel consumption. Today, we will focus especially and specifically in the industrial market of a steel in Mexico.

The industrial market of Mexico is very well developed, sophisticated manufacturing base, represents 60% of the total flat steel market the industrial sector as opposed of the construction sector represent 60% of the flat steel market in Mexico, demand high end steel products is strongly integrated with the U.S. consistent growth of Mexican export of manufactured goods to NAFTA that grew five times in the last 10 years. As we can see in bottom back of the slide is led by steel export product goods, automobile, home appliances and so on from Mexico to the U.S. Import substitution opportunities, very nice opportunities for growth based upon gaining market share against imports and needs of infrastructure and development.

In that point and in order to get more in detail in the Mexican market let me pass you to Máximo Vedoya who will give you some insights and some numbers and ideas about what is going on in the Mexican market.

Máximo Vedoya

Thank you Daniel and good morning to everyone. So let me start first with the industrial market of Mexico, if you can put the next one. In this market we have obtained a significant growth in the last two years, you can see the upper side of the graphic next year the industrial market of Mexico will represent more than 50% of our shipments. This is more than 10 points since 2010, so we increased allot the shipments to this industrial market. We did that by developing new products by a certification process with all the industrial customers, in fact last year we certificate more than double the certification we had in 2012. We involve with the customers in the early development of products, especially in the white good segment in Mexico and of course the ramp up of the Pesquería project and the Tenigal will give us a lot of new products, high value added products that will boost our shipment to this market.

If you see the bottom side of the slide, you see that our shipment is annualized, the shipment in the first quarter of this year we ship -- we’re going to ship in 2014 0.5 million tons more than last year. So this is a huge improvement or growth in the shipments to this market. Of all the industrial customers of course the start of this industry is the automobile industry in Mexico. Last year the auto industry produced almost 3 million units, this is a record high but with all the investment that is coming on like the Honda new facility, Nissan, Audi and some others that are analyzing. In 2017 the industry will grow from 3 million units today to 4 million units.

So it’s a huge increase in the production of automobiles in Mexico. And I think that Ternium is very well positioned to this to improve this. Today we are the biggest supplier to the automobile industry, the biggest key supplier to the automobile industry. And the ramp up of the Tenigal and Pesquería give us a huge range of products that will of course strengthen this leadership that we have.

Talking about Tenigal and Pesquería let me give you now an update on how we are in the process of the ramp up. Daniel if you put the next one. The whole project, the whole Pesquería project was completed on budget and on time. These all is very important because usually in the industry, with these big projects, it's not something that is very common to end up on budget and on time. We start production as you can see in this bottom graphic, we are today at 84% of capacity and from July we are going to be at 100% capacity in the Tenigal facility. We started sales to the automobile for the major OEMs and in the first quarter of next year the whole capacity of Tenigal is going to be dedicated to sales to the automobile industry.

So we are in the process of certifications by six months from now the whole capacity will be dedicated to the automobile industry. One important thing also about this market is that the coated market in Mexico apart from all these investment we have made is still supplied by a lot of imports. And you see here in the upper side graphic that a lot of imports are coming. So there is a substantial opportunity of growth for Ternium there, and currently we are analyzing putting the second line in Tenigal to supply this market.

And finally let me comment a little bit about the construction market in Mexico, which as you know almost 50% of our sales goes to these markets. And this market has not performed very well in the last years but we are very positive about the prospect of the demand in the near future. Mainly for two reasons; the first one is that the new government has announced a very aggressive infrastructure plan, it’s almost $600 billion for the next five years. And second the reforms that the government are doing especially the energy reforms will require a lot of investments in infrastructure and that is going to boost the steel market for construction goods.

And two important things about these construction markets that I want to share with you. The first one is that we supply a whole range of products to this market. I mean there is not only one product that we supply to the construction market. In fact you can see here it's only 25% of our share is long products. But the rest are high value added products. So we supply to them complete material galvanized [indiscernible] profile. So the whole range of products that we supply to this market. And the second is what is our competitive advantage in this market, and we are well positioned here because we have an extensive commercial network, you can see here in this graphic that the red dots are our own facilities, distribution and service centers across the whole country and the other small dots are exclusive distributors. So we supply to the whole country with this distribution and we also are continuing investments in IT tools that we talk about in the last Investor Day but today for example the new addition is that any customers of this commercial network come into an order in a mobile device via an iPhone or an iPad and we are able to supply from one of the centers in less than 34 hours. So it’s a whole new investment in IT tools that's giving us a big advantage to this market.

So, I thank you and with that I give you back to Daniel.

Daniel Novegil

Good, thank you, Máximo. And let me now turn into the Argentine market. We did go in through a period of a slowdown or contraction nowadays but on the other hand very good news are coming from Argentina, the low financing oil in Vaca Muerta, the renegotiation of the Paris Club that was announced today, the negotiation with the hold out, the closing with Repsol and the participation of Repsol in YPF, and so on, so please Martín give us an idea of what is going on in Argentina regarding marketing and oil developments.

Martín Berardi

Thank you, Daniel. Good morning to everybody. Let me talk a little bit about Argentina and how we are doing currently in Argentina. Could you please pass to the next one?

As Daniel was saying we have an extraordinary year in 2013 with record domestic sales in Argentina, we grew by 10% in local sales compared to 2012 and this was because an extraordinary recovery from the agricultural sector and a very good activity in the construction market. The construction accounts for more than 50% of our domestic sales.

2014, as Daniel was anticipating, is the picture is a little bit different. The economy is undergoing somehow adjustments was characterized by higher inflation rates, higher interest rates and higher devaluation price. This is impacting in the short term somehow in the all sectors. And despite the fact that we haven’t seen a decline in sales in the first half of the year, I think that we will not be able to sell at same level that we sell at the second half of the year compared to the previous year. So, as a whole year we’ll see a decline in our sales, domestic sales, around 4% to 5%.Well, it’s not bad if you compare to a record sales in 2013.

But when we look ahead in the medium term I think that we have a very positive outlook for many reasons. We see an opportunity of growth in two very important segments, infrastructure investment and fixed asset investment has been lagging behind. So I think that we will be in the to do list for sure and the top position of the to do list of the next government and that will be in office at the end of the next year to promote investment in infrastructure and fixed assets. That’s for sure will have an impact in steel construction in Argentina.

And the second one that we will go in more detail in the next slide is energy sector. That requires a lot of investment and there is a huge opportunity. And there are two other sectors that are very positive for us that the opportunity to gain market share in two important sectors, automotive and the production -- it was in the construction I am sorry.

You will see that automotive sector and the construction sector accounts for more than 65% of our domestic sales. And we are gaining market share in both segments. In this segment in vehicle production thanks to our new caster machine that is ramping up right now in Argentina and the new vacuum degassing equipment in our steel shop we will be able to produce higher steel rates for this industry. And in fact we are now certificating new steel rates and we’ll be gaining market share. Take into account that today we have only a 30% of market share in this segment so there is a great opportunity there.

And the construction sector has been growing fast in last year almost more than 50% in the last eight years, and we’ll maintain the level in 2014 and 2015 but in this sector also there is an opportunity to gain market share because of the substitution of traditional materials like wood and tires for the use of steel in steel framing for structural use or the use of galvanizing and [pre-patent] steel for roofing applications, and besides that the economy somehow is softening a little bit. We haven’t seen decline in our sales to this segment yet.

Let’s go a little bit to the next one and see some numbers, astonishing numbers of the energy sector in Argentina. As you may hear before the name of Vaca Muerta and Vaca Muerta is one of the biggest resource of shale oil and shale gas in the world. In fact, Argentina ranks number two in shale oil and shale gas in the world. Only behind China and ahead of the USA, and you have seen the tremendous impact that the shale oil and shale gas has already have in -- had in the U.S. and compared to the size of the economy these are extremely huge resource.

It’s particularly important for Argentina because natural gas accounts for 54% of the energy consumed by the country and 30% of this natural gas is being imported right now at very high prices both from Bolivia and LNG coming from Qatar. So there is some urgency to develop this sector.

And the activity has been ramping up in fact the number of the rig count the number of rigs in activity has increased 26% this year in the absence of a clear regulatory framework. So we think that we’ll be top in the priority list of the next government to have a very clear framework that regulate this segment and the investment will be huge and we will have a strong impact intensive in the use of steel, intensive use of steel, and also in the whole economy. That’s why we are very positive in the medium term outlook for Argentina. Thank you and Novegil.

Daniel Novegil

Let’s now enter into first, we pay grand on the competitive position of Ternium vis-à-vis competitors first, second we will pay also look on what are the initiative that we have entered and taking them to sustain this outperformance that we do have now a days against peers and then we will enter in to the last part of the presentation trying to pay a quick overview or a quick look on the strategic agenda of the Company.

Let’s look at these numbers that you have there, you can compare the last five years of EBITDA margin of Ternium that this in yellow color or orange color against competitors. If you pay a look to the competitors, you can easily draw the names of the company that are included in each one, the second one, the light gray is a global player then you have USA integrated, then you have Long Steel in America, you have USA Minimill and so on so.

In other words, Ternium has permanently outperformed peers in the last five years even in quite different business environment. The landscape change that Ternium still continues maintaining the competitive edge against competitors and why is that high market share differentiation and superior service innovation in managerial practices for that flexibility and I guess a kind of leadership all factors drive to a superior result.

In this respect, we have been doing well. We are doing well. We compare that -- if you compare the performance of Ternium against competitors that we are always undertaking new initiatives. Let me share with you as example very-very quick. The thing that we are doing and we consider innovative and we consider that will contribute to another big through in the life of our company in order to break and to speed up the learning curve and the experience curve effect in productivity.

Let me share some with you some of the examples of new initiative. One of them is the logistic managerial program. You know that we are spending roughly $1 billion annually in logistic cost, so what we are doing. We’re working on optimizing truck loads and rail load freight rates. We are renegotiating tariffs, we are minimizing warehouse in rent, we are minimizing the demurrage, we are analyzing on implementing investment focus in logistic implementations and optimization at the end. We feel confident that this initiatives will yield our important saving over time and we estimate this saving in around $30 million to $40 million per year in 2015 and from then on, on a permanent basis. So this is a program that has proved to be successful. We have a good opportunity there and we have many things to do.

Let's share some another program, that this the labor productivity program and you know we have been always looking for opportunities to reduce our white-collar headcount and to increase white-collar productivity. We undertook this last two years a very intense program in IT, IS, sharing services, and expanding a span of control. At the end, we were able to reduce the headcount of white-collar to 7% in the last two years. At the same time, we increased production of hot rolled coil in 8%, so as a combination we have an interesting and impressive increase in lower productivity of white-collar through innovative programs of increasing productivity.

Another example of this new initiative is a contractor management program. What we found is that we revive from third parties from contractor services, around $300 million per year. We also found that the level of productivity in our facility was pretty much higher than the level of probability of our contractors because of technology, because of processes because of analysis of debottlenecking of critical parts and so on and so forth. At the end what we are doing is investing in sending consultant being paid by Ternium to our contractors in order to gain productivity in the contractor base and afterwards to past this part of the saving to our company sharing the benefit of the efforts to rental activity in the contractor base. Again, this innovative program we are going to be reducing our 10% the cost that we are paying to subcontracts and this program will be in place for the coming five years, passing productivity and passing learning curve effect to the contractor base and sharing the benefit of the savings between the contractor and the company.

Another important initiative that we are in the process of undertaking is an energy factor, the energy related factor. The electricity bill in Mexico is around $350 million per year, electricity on top on gas and so on. So we are participating in a company whose name is TechGen together with Tecpetrol, and with Tenaris and we are building a natural gas fired power plant to target 100% self sufficiency of our electricity needs in Mexico. As you know this is a joint venture between Ternium and Tecpetrol that also bill out to the Techint Group and Tenaris, the plant is expected to be operational at the end of 2016 and the basic total investment is $1 billion, the expected saving is around 28% of the electricity ticket if we compare the electricity coming from TechGen against our opportunity cost of buying electricity in the marketplace. Again, 28% savings coming from TechGen a nice internal rate of return for this investment where are attacking one of the main factors of our cost that is electricity, the electricity ticket. Always comparing the tariff that we will be paying to TechGen against the opportunity cost for the alternative supply.

We will now at this point of time, I would like to share with you some indicators that show how the performance of Usiminas is doing, we are really feeling very pleased with the performance of Usiminas and how Usiminas was developing the activity so far. So let me share some of these indicators.

Usiminas has shown important developments in increasing products on labor productivity, reducing working cap, controlling CapEx programs, sale of non-core assets like the automotive business division and so on and so forth. So at the end the EBITDA is going up and the last quarter that was reported had an EBITDA rate of 21% against revenues coming from 8-7% in average when we entered together with Nippon Steel into the new stage of Usiminas development, their steel business, this is the total EBITDA number for Usiminas steel plus mining here you have steel business that's isolated went up from 3-4% to 17% so Usiminas is doing very well, labor productivity increases, working capital reductions, CapEx control and concentration in core business.

Also, interesting improvements in shipments to Brazilian markets, where we were gaining market share especially against the import, iron ore shipments going up, the head count was reduced 25% in two years coming from 30,000 people to 22,000 people that means almost 10,000 people in three years, so is a number, is a very good indicator of increasing the productivity and the net debt to EBITDA ratio went down from 4.9 times to 1.7 times today that is pretty civilized, so to speak.

So, at the end we are happy with entry of Usiminas, Usiminas is doing better, Usiminas is doing well and many indicators are performing very well, so it’s a good experience for Ternium in this partnership as I mentioned before remain positive.

Then let me now pay a look to the opportunities looking forward and to see where is Ternium standing, as a consequence of the last three years of investment and work from then onwards with we can see for the future which are the main vectors of opportunity, the main vectors of development in order to continue growing the company, looking forward.

Let’s pay a look to this investment plan that we entered in the last five years especially I would say in the last three years. The investment plan that we had in place was focused mainly in differentiation and cost reduction. These were the main factors, the main vectors of the effort that where we were putting the money in our CapEx. Some indicators of these, expand the North America operation, targeting high-end products, targeting the auto industry, consolidation of market share, key import substitution, reducing cost and increase in-house lab supply. These were the targets of the investment plan.

The main project that we undertook under this investment plan were the Tenigal facility in Pesquería to produce high-end galvanized products, the new cold-rolling mill in Pesquería Monterrey, the most advanced mill in Latin America that enables us to offer coils and cold-roll sheets for the automotive industry especially. And a new continue factory in Argentina capital, with a new vacuum degassing station that increases our high end capabilities in Slab and allows us to sell Slab high-grade high-quality, through our operation in Mexico and to touch over 0.5 million per year from now on. So at the end, an interesting effort in CapEx, we have a different and quite new profile in Ternium looking forward and as a result of this CapEx and the strategy of the company we have a new position in the marketplace, and we have a new focus on the marketplace that we believe will pay off.

Let’s pay a look to some numbers and some indicators of these new positioning. The opportunities offered by, as we saw before, Mexico is growing close to the U.S., the U.S. is growing, the industrial factoring in Mexico is performing very well represents more than 60% of the steel market in Mexico. So we are targeting and we are focusing in these particular markets and following the growth of the industrial sector, we are focusing high-end products and especially the automotive industry.

On the lower part of the slide, you can see the marketing profile that is coming more oriented towards high-end products. In 2015, for example, the high-end products will represent 20% of our sales in Mexico; again 6% in 2010. So the increase in shipments to the Mexican market, the Mexican market and the NAFTA market representing two thirds of the activity of Ternium now a days, so this is a company whose main focus is in the NAFTA area and the high-end products grow increasing also the participation in the total, going up from 6% of our shipment to 20% expected value of high-end products in 2015.

I remember that in the last Investor Day, we had the chance of paying a look to a kind of metrics with opportunities that we identified at that time in Brownfield projects, Greenfield projects, M&A, the debottlenecking and so on and so forth; all the vectors that allow a company to grow in a very competitive arena. So now we sudden, good effort in the last three years mainly in Greenfield Projects as well as in Brownfield projects and we have an ambition in for -- the ambition is that this is a consequence of the strategy and is a consequence of the efforts that we were doing in investments. Which are these ambitions that we have?

We want to be a leader in key markets that’s why I started mentioning why we consider Latin America being very important for us; because of demographic, because of import substitution opportunities, because of growth, because of infrastructure needs, because of energy development. So at the end we envision our company being a leader in key markets, important markets that represents 80% of the industrial base in Latin America and also we target a high market share in this market in order to influence, to be entry barriers and to be able to build price differentiation and price premiums, we will focus on the high-end and value added products using our very intense, vertical integration from upstream to downstream, mining, service centers, popular little products, a commercial network with a distribution on a regional basis as well as a customer base very close to the needs of the customers and so on. Differentiation against competitors has been an important part of our ambitioning, profit sustainability and growth.

With this in mind, we have very different options in order to grow and in order to continue our development. And these options are still open. Where can we go from now on? We can continue integrating our self-downstream to cover this huge market that we have in NAFTA in Mexico for example we are starting to study now the Tenigal number 2 line in order to serve again an additional market that is being served from overseas in Mexico, so we have a nice opportunity there. We are now in the process of ramping up the continuous caster and they're back in Argentina that will allow us to serve around 5 million tons of high grade slab from Argentina to Mexico reducing the dependence of slabs in the total system.

We are undertaking also and analyzing also other opportunities in debottlenecking our facility to increase production on a very cheap marginal cost basis. We are analyzing also the opportunity of building a new galvanizing line in Argentina to help the construction business and the needs in Argentina that will come from the development of the energy resources and so on and so forth.

So at the end, we have different opportunities debottlenecking brownfield new projects, Greenfield new project, technical projects, the galvanizing line in Argentina. We have to be cautious in our integration in the slab. We will leave this for the Q&A part because we receive through the -- there are questions regarding which are the opportunities that we see in increasing our in-housing supply of slabs but we will leave this open, I will leave this open to the Q&A part.

At the end as a conclusion and before entering into the Q&A, I would say Ternium is a leading company with a leading market share in an attractive market with very good growth opportunities in the marketplace.

Our position is in the NAFTA market, industrial sector through investments in new facilities, a state-of-the-art and through a network of services that is very sophisticated. We are looking for superior result based on industrial expertise, performance, track record with focus on value added products as well as the diversified production base.

As you know we have a flexible product supply. We can supply a slab, so we will grow in Mexico, we can use that in reduction, intensive gas production we can increase production in Argentina through iron ore and coking coal, so we have the three possible production bases being very flexible. We are rolling a gas-intensive value reduction and coal intensive in blast furnaces in Argentina.

The focus will be to continue outperform our peer to have a superior performance in [indiscernible] and to create a value for the shareholder value -- for the shareholder base.

Thanks a lot and I appreciate again your presence here in this meeting. And we will now be open to discussion to listen some questions for this last part of the meeting. Yes.

Question-and-Answer Session

Unidentified Analyst

Thank you very much, Daniel. First question is could you give us an update on the next investment plans for the company? Clearly, as you just mentioned the Tenigal 1 was focused on contra-document initiation. The next one should we expect it to see more growth, to have early start of the plan that was announced in September of 2008 with growth in Mexico.

And the second question will be if you can give us an update on Argentina, we heard from Marti that, I think that the volume would decline 4% to 5% compared to 2013. But can you comment on what are you seeing in terms of pricing in U.S. dollars, given the devaluation and also any trends on cost? Thank you.

Daniel Novegil

It’s a multiple question; well let’s start by the CapEx program. Well, you see here in the slide that we were showing when talking about the strategic agenda so to speak that after a tremendous effort that we did in our CapEx in 2012 and now that we finish the Pesquería project, the cold-rolled mill as well as the Tenigal 1 plant in Mexico as well as the continuous caster and the vacuum degassing in Argentina that were our main project lately. Again the Pesquería project the LATCM the cold-rolled mill, the Tenigal facility, the continuous caster in Argentina, the vacuum degassing in Argentina, we are now in a process where the CapEx is going down and maybe we’ll maintain around these number in the coming two years. If I have to forecast which will be our CapEx program for the coming two years it will be in the range of this number maybe$600 million per year to $650, $700 million, mainly dedicated to productivity in cases, debottlenecking increases marginally supply and production with very low marginal cost. And from then on we will continue analyzing business opportunities, where, in Mexico, downstream as I said before the Tenigal line number two, we are in the process of analyzing the market and the ramping up of this current facility in order to see which is the best moment in order to enter with this new investment, we will also be looking very closely what is going on in the Argentine market in relationship with the energy developments and as well as the contraction of business development. So it will give us a chance of building a new galvanizing line maybe in Argentina also will have -- will continue paving lot of opportunities in the marketplace.

Some of you came with some questions through the email; maybe I am anticipating a little bit voice because you wanted to mention who was the one that was asking the question in order to give him a chance of expressing himself. But there were some questions coming saying well why didn’t you participate in the Alabama project. Well we considered and we analyzed, we found that the internal rate of return and the payoff was not convenient; the payback was not convenient in respect to our expectations so we decided to step aside.

Some of you are also asking we are anticipating in the acquisition of the assets of Severstal and Columbus. And we paid a look to that, now we are not in the process, again for the same reasons. There was another question regarding -- sorry, I am including your questions and some other concern, but may be some of you also share a concern, why we're using our head with the opportunity in CSA in Brazil.

Again it was drastically, we analyzed carefully, we consider that it could have been a good opportunity. We had different perception on the value and we decided that again to step aside, we will wait for a nice opportunity. Then I will enter into the supply demand issue of the Slab and if it is convenient itself to build capacity in this slab in this overcapacity world that we have -- but anyway. We will continue analyzing opportunities, Mexican market in the U.S. market and we will go for these opportunities, if these opportunities appear to be attractive in internal rate of return basis.

Going to the second question, Argentina. As Martin was mentioning Argentina is under a process of adjustment, so to speak because of inflation, because of a budget deficit focus, and because of different reason also maybe with some influence on the political side, because as you know we have elections in Argentina in 2015, there are many candidates competing and so this puts some kind of uncertainty so to speak in the marketplace.

But again we maybe we are having and we are witnessing a kind of slowdown in Argentina, a kind of contraction in Argentina and not that bad but you were mentioning the number of around 10% to 12% maybe.

Unidentified Analyst

Growth of 10% the previous year.

Daniel Novegil

That’s correct but if you compare the amount to come against [Multiple Speakers] And average the year we know that if you see the coming months against the previous year you have maybe 10%, but its uneven by sector energy is doing very well, automotive industry is knowing that is not doing that well because acceleration and influence from Brazil that is also buying less cars from Argentina that we used to have a year ago, the construction business is doing well the agro business doing very well, so uneven. In average the slowdown is not that bad, it’s soft kind of a slowdown.

On the other part of the coin, on the other side of the coin, we see very good opportunities of Argentina looking forward. Many good news are coming from Argentina, for the first time in many years. For example the negotiation with Repsol regarding the appropriation of Repsol in YPF, the closing negotiation with Pesquería today that allowed Argentina to enter again in the market in the finance market, the negotiation with holdout that is now in the U.S, the finding of [indiscernible] and the huge energy resources that we'll build about and that will bring a new wind of prosperity to the country. No doubt that it’s happened in the U.S. and it's happened in many other places.

So in the medium run we are optimistic in Argentina and that’s why we are reanalyzing our position in there in order to see how to serve the growth that we expect in the medium run. In the meantime, we have to wait a little bit maybe and to look very carefully what is going on with this slowdown that we are foreseeing now.

Again, CapEx plan to summarize going down from $1 billion to $600 million per year, we will debottleneck, we will build some doubt in international facilities, we will pay a lot for opportunities in the marketplace for M&A analyzing and looking which is the best sectors for growth. And in Argentina good perspectives in the medium run. And so we are optimistic.

Unidentified Analyst

Yes, I have two questions, number one energy reform in Mexico. What exactly do you expect which will benefit you -- can you give us maybe one or two main events that you think could happen that would benefit your business because kind of a broad topic just trying to get more clarity.

And the second question, if iron ore prices and energy prices generally came down in the next year or two, do you expect the steel industry to improve or not and how do you feel about the Chinese supply in the lower iron ore cost environment, how should we think about this?

Daniel Novegil

Yes let me start by the second part of your question, iron ore. According with our analysis and according with our coronations and this and the other, the long term price that we foresee for iron ore is between $100 and $110, now that is a little bit below this number. That low iron ore price means a low steel price that’s not that clear, it’s not that clear it depends on many competitive dynamics and competition impact.

I do believe that the steel market has as always good news, bad news. In the good news side in my view we will have a rebound in pricing because of increasing economic activity, weaker competition from China, China is getting more expensive everyday because of appreciation of the local currency, because of lack of proper labor resources, because of utilization processes. Also I believe that the prices of steel could go up as a consequence of a better consolidation, a higher consolidation in the U.S. market, the Alabama factor the [indiscernible] and Columbus factor and maybe some other that could come in the years to come.

So at the end I see an active steel market growth in the U.S. recovery in Europe not that bad the slowdown in China, China will not grow at 9% maybe will be between 7.5 to 7.8, 8% of this is not that bad maybe driven by different factors not different factors but the organization less intensive in steel no doubt than electricity rate obviously is lower when you build infrastructure and you roll out 9% of your GDP then when you build somewhere and universities and hospital because of organization factor so the intensity of it will go down.

But anyway different factors in a cocktail of competitive influences and at the end I believe that in this uncertain world of supply and demand and going to your question of the iron ore, we see the iron ore price in the range of 100 and 110, we’ll see that Ternium has a tremendous competitive advantage vis-à-vis competitors because our sources of iron ore are three, first our own iron ore mines where we serve our net in 50%, 50% of our net are being served by the mines that we have in Mexico.

An important factors our needs are coming from Corumba that are optimized that are located north of Argentina are owned by Valley and is a mine that depends on the activity in Argentina and this allows us to have an intensive price in comparison with the opportunity cost of our competitor.

And the third source of iron ore are the slabs, and the slabs are one third of our needs of plus of iron ore and examining the form of products that we opted in Europe and well of over capacity where we are enjoying a nice gap between the steel price and the slab price. So in this flexible production kind of configuration that we have in Ternium the opportunities of sourcing iron ore on a direct or an indirect basis are pretty competitive.

If you tell me well if you ask me do you consider that the steel prices today are well related with iron ore prices I would say yes according with our correlation. The steel prices now are quite reasonable in relationship with the price of iron ore, so if iron ore moves up, the prices will go up, depending on the competitive dynamic that I was mentioning before, supply demand but certainly in general it will move accordingly.

Another important question will be, but you can see now that the gap between different markets is pretty much higher than the one that we had before, but this is another cup of tea, this is another question that we kind of raise and we can look afterward.

Regarding the second question, on the energy, the situation in Mexico, I would say that the superior graph is an advantage for our operation in day of reduction. As I mentioned in my chart, we were worried about the increasing price of electricity. We have a bill of $350 million, $340 million per year. We have target this problem reducing cost with investment with a very high rate of return intentionally. So we have a right, very good and very competitive energy equation in Mexico. In Mexico maybe you can quote in more in detail the new ideas of the government regarding the energy in Mexico.

Martín Berardi

But we think that the energy reform will be very good for us. I mean, you’re not going to see the results this year or maybe next year because it’s a huge reform and it will take time for the investment to come, but the estimations are of billions of dollars of investment every year and then it does not have the capacity to invest that. So I think for us it’s going to be very good, in three or four parts, first, the infrastructure is very low in Mexico for serving the energy industry, this is going to boost all the investment infrastructure is very intensive in steel demand.

Second and we are seeing that right now is the building of all gas pipelines and the oil pipelines, so you don’t have connections in Mexico to take the oil from where it’s going to be to the industry and so forth. So it’s going to be very and that’s very demanding Q2. We are starting to serve the Ramones project, but that’s only one project, you need several of those projects very intensive team and for the next five or six years that’s going to be, I mean a lot of investment in that.

The third part and this is a little bit on the long run is a cost of energy in Mexico. I think one of the only problems of Mexico for all the industry is a cost of energy today. And although industries that are consuming steel are coming to Mexico, automobile industry, white gold so a lot of industries, the energy cost is high for Mexico, the labor cost is low, but the energy cost is high.

So the energy reform is going to change a little bit that. I mean CFE; the energy state-owned company has to compete with others. So, in five or six years we are going to see a reduction of the energy bill for this industry, that in our perspective are going to mean that more companies coming to Mexico, more steel is consumed in Mexico. So overall in the energy reform is it goes, that it seems it’s going, it’s going to be very positive for all of us. Thank you.

Unidentified Analyst

If you know almost…

Martín Berardi

Between not our cost because we are in a special rate but between an industry that is connect with the medium or low tension in Mexico and compared with other taxes is almost double.

Unidentified Analyst

I am Dr. [indiscernible] from Goldman Sachs. Thank you very much for the presentation and first question regarding dividends and use of cash. So, given the relatively comfortable roller sheet situation and rise CapEx program over the next two years, how should we think about dividends in the next two years?

And second question was Usiminas; we learned about the CSN situation of divesting its stake, there’s any interest in the stake and from Ternium? Thank you.

Daniel Novegil

Well, let’s start by dividends. As you know we do not have a clear cut or an open or a disclosed dividend policy as some of you would desire, would prefer, but we were paying dividends properly and the dividends that we have been paying and we were able to pay from Argentina to Ternium and from Ternium to the market and so on, we're pretty reasonable in the last year, so we feel confident that we can sustain a dividend flow similar to this. Regarding the use of cash, as you mentioned, as I mentioned in my presentation we have a CapEx program that is going down so we are reducing debt. We will continue paying dividends at the reasonable rate and we will continue looking at opportunities in order to boost competitiveness. Pablo, you have any kind of comment on the cash use under the dividends and policies?

Pablo Brizzio

First of all, let me mention that the dividend payment of a company is relatively high. The prelease around 10%, the pre-operation is 30% of our net income and the deal is around 3%, so it’s a healthy level of dividend payment, so the company as I mentioned that will have a dividend policy where it's continuing ambition in paying this level of dividend.

On the use of cash the Company has a very healthy balance sheet and CapEx is also down. So in the very short run we’ll continue to reduce our level of debt in order to be prepared to take any advantage that we may have here on the CapEx on the year one. So that the ambition of the Company has because of the presentation that you have seen, the Company believes still that it has a lot of opportunities to keep growing in our market.

Daniel Novegil

And regarding the next question on Usiminas, you mentioned mainly two factors. One is CSN situation on the other one was the opportunity to buy Usiminas share. Buying Usiminas share could be reasonable from a financial standpoint. You analyze the pricing and the evolution of the price and so obviously for us buying Usiminas share has other implications, the government implications, capital allocation implications, limitations from the shareholder, controlling shareholder and belonging that we have and so well could be intensive but we’re not considering that right now. We’re not in the process of considering that.

As I said before it could be reasonable from a financial standpoint but it’s not in our agenda. Regarding the stake of CSN, we know that there is a competition ruling coming from the “Brazilian Sec” whose name is CVM and so it is not an issue knowhow for Ternium because we note the term. We do note which are the terms of this ruling from the CVM. We only heard that through the newspapers but the conditions of the sale of stake of CSN remain confidential in number and also in fact in the timing. So we are not involved in that. So I would say that we feel -- before we feel very good with performance of Usiminas, the management is doing very well. We have a lot of things to do there and we’re not in a process of considering, right now to change our stake there. Next question?

Alex Hacking - Citi

Thank you. Good morning, Daniel. This is Alex Hacking from Citi. Thank you for the presentation. I guess couple of questions related to Mexico. You’ve done a good job of displacing imports into Mexico. Are you seeing any increase in import pressure recently? We’re seeing a lot of steel export leaving China this year? And then a second question which I guess is linked -- over the past 12 months, it seems the like gap between North American steel price if we want to call it and the global export steel price seems to have been wider than we historically have seen. Do you think this is something structurally changed or how should we think about this gap going forward or I guess what you actually to the fact that the gap has been relatively wide? Thank you.

Daniel Novegil

Good. So, let me address first the Mexico question. Pressure is coming from import. I don’t see any import and increase in the years to come. I see the import entering into our market in Mexico as an opportunity. As you know around 40% of the market is being supplied by import. So in that respect being close to the customer, being very efficient and having a good portfolio, having a very efficient service center activities, having a country covenant that is full -- full country covenant. So we do have advantages again seeing import in logistics in steel of service, in the ventures, in just in time delivery, in product development, in so many factors.

And that I see that the imports that are coming into Mexico are a huge opportunity for Ternium for growth in the bottlenecking in the supply base, for growth in building new downstream facilities as we were doing and to expand the production base of our Company in order to continue a gain in the market share against the import. I don’t see any deterioration of the import equation in the months to come. Regarding the steel price differential, it is true that between USA market and the international market, we have a gap that is higher than the usual gap, no doubt, especially lately in the last month.

I feel that the prices in the U.S. are reasonable in relationship with the productivity and the cost base of the U.S. producers. I do believe that in the medium run, it will not be easy to say the long run -- because in the long run we are all there. But in the medium run, I would say that maybe the prices in the international system will go up, we’ll have possibly adverse pressure because of different factors, increasing economic activity in the U.S where I do foresee very good perspective, especially in energy-related projects, matters and out streaming the advantage in energy in the U.S, in lateral activities of manufacturing, taking advantage of the abundance of resource.

You also see Europe recovering. I see, as I said before a slowdown in the growth in China. The GDP maybe from 9% to 8.5% per year to 7.5% in this range, in GDP, and what my concern is the change in the elasticity rate of steel in relationship with the GDP. It used to be twice. Any time the GDP was growing at 9%, the steel consumption was growing at 18%. This number is below one now. Because of the Yen [ph] inflation and all these matters and you know what I mean. But at the end consolidation in the U.S. market, Alabama, Colombo, Durban, some of the consolidations may be coming in the months or in the year to come.

The pricing and the cost system in China; no doubt, that will increase because I’m not sure for how long they can sustain this subsidy system that is covering most of the business industries, companies are not working in the free market season. They don’t pay dividend, they don’t pay debt. So I believe -- I feel that it will be corrected sooner than later. Also I feel that China is becoming more expensive everyday because of conversation of the currency, because of lack of labor, because of prime political and imperial coming from the labor fall that is demanding more access to different markets. And also I believe that China has to address the problem of pollution.

I’m not sure if some of you have the chance of visiting China or Korea lately. For example, in Korea I went to visit a plant [indiscernible]. I couldn’t go by helicopter because you couldn’t see 40 meters from the place where you were standing; pollution coming from China. So the pollution factor in China is becoming very, very, very intense and it is becoming very difficult to tolerate and you got to need money that has to repour in house of fumes [ph] and many, many industry that no doubt will increase the cost. So at the end they got to be worse widening. We [indiscernible]. I feel that will narrow because of pressure in pricing in China and in Europe because of recovery in the economies and because of pressures in cost in the China equation.

Alex Hacking - Citi

One quick follow up if I may. If you move ahead with Tenegal of second-line, would it be a replication of the first-line; something like another 600,000 ton?

Daniel Novegil

We are in a very early stage on this investment because we are in the presence of analyzing the market. We are also following up the ramp up; that is very successful that this has to continue. We will be running at Tenegal One [ph] at 70% utilization rate. In?

Unidentified Company Representative


Pablo Brizzio

In July, we’re at 100% of production. But by end of this year we will be supplying 100% of the capacity to the automobile customers. So the ramp up here is very accelerative. So we see the market, we have the ability, we have the product, we have the contact with customers. So we have everything to put together some ideas, but maybe you can quote on these ideas that we have in strategy Tenegal Two and other developments in the Mexican market as well as in other markets in U.S. or Argentina.

Martín Berardi

You mentioned about the line being seen like the one where basically if we go ahead with the second line, should be something very similar, another 400,000 tons per year capacity. As Daniel mentioned there is a huge market there and steel, we have enough place to continue rolling in that end market with a second line. So I think that the opportunity is there.

Unidentified Analyst

Thank you very much for the presentation, and congratulations for the great results., One question about Mexico and the cost of energy [indiscernible] after the development of the joint-venture. Or the returning customers, one as a shareholder of the joint-venture with 49% and the other one as the taker of the energy with 70% of -- what type of PPAs you do negotiate for these and the implication is what is going to be the sensitivity to that prices in 2017. Let’s say that you guys are going to keep -- did you fix a price in dollars, did you link it to price of natural gas, what type of PPA did you select? And also probably that has huge implications in terms of how to finance that project, no? If you have fixed PPA in dollars so that you can finance 70% of the total construction cost with very low cost of debt, so how do you think about it and what type of construction do you want for Ternium?

Daniel Novegil

Good question. As I mentioned before we have a very high energy ticket, electricity ticket in Mexico. We are going to address this problem. We’re going to be having a cost reduction of 28% in the tariff. On top of that we have the dividends coming from the activity of Techgen. So both numbers together, the internal rate of return of this investment is going to be quite high and quite attractive. Regarding the finance maybe, Pablo you can quote on the structure.

Pablo Brizzio

Yes, as mentioned we are planning to finance around 70% of the cost of this facility. We are very close to ending this process with the help of some banks present here and the rate that we will pay for these are extremely low to finance this project. We are very confident that we will close it very soon and it will be very good for the coming time for this project. So of course it will be very well financed on very low rate.

Daniel Novegil

In Mexico, they got ticket for 2017.

Pablo Brizzio

No, the cost of the energy that we have will be based on the gas price. I mean this is going to be a cost plus. So the Techgen is going to produce energy with gas coming from Houston, from Texas. We already have signed the agreement with Kinder Morgan. So we have the capacity of bringing the gas from Texas to our plant and so it’s going to be a pass through, cost plus and so of course the energy will depend on the cost of the natural gas. But on the other side the energy in Mexico also depends on the cost of the gas. So the gas will probably continue being this 28% that Daniel was mentioning.

Sal Tharani - Goldman Sachs

Sal Tharani from Goldman Sachs, couple of questions. It looks like a lot of your growth is coming from automotive sectors and you talking about Tenigal too now. I was wondering what are your thoughts about the aluminum industry or aluminum penetration into the automotive bodies, and is that a threat to the segment where you are in New Mexico and also what are you doing it in terms of fighting it in higher strength steel, are you developing that also.

And second thing, your comments on the U.S. market, like to correct that, it is a disrupting foundation here and looks like that U.S. prices can maintain a higher premium than usual from the global prices for quite some time and also lot of capacity has been taken out, our steel has gone shallow spit [ph] and all those -- I was just wondering even in that scenario, why do you think that Severstal is not a good investment for you and how do you look at the expansion of margins? I understand that for the last five years, it’s been a terrible industry but looks like it’s turning around and have you looked at beyond sort of next three-four years how things are going to turn around in the U.S. impacting the margin.

Daniel Novegil

Good, nice question. So let me quote and afterwards I will pass to Oscar Montero that he should have a better answer than mine. Like it’s intensive, I couldn’t exactly [ph], but anyway, starting with the first part I don’t see any further penetration of aluminum in the lifecycle of the products. The energy consumption to produce steel is pretty much cheaper than the one of aluminum. So during the lifecycle, the steel continues in the automotive and other applications pretty much better than aluminum, especially in the world of high energy price because aluminum consumes is energy intensive.

The second is the high strength lower level products. We are in the process of concentrating, tremendous effort in R&D and in the development of high end applications as I mentioned before. This high end is the segment that we will go for because we feel that there we can build barriers and we can build like premiums and we can build differentiation and to build a company that is going to be with a different profile than the one that we had in the past. As you remember, if you participated in some other of our Investor Day, we have lot about construction and commercial uses. Now we are in a different kind of approach.

We are growing in high end and that means that we have to develop different products, high strength low alloys. That’s why we are building [indiscernible] degassing facility, now continue caster at Tenigal line, that this is state of the art, the cold-rolling mill that is a state of the art and is obviously the most modern facility in Latin America. So we are going to be targeting this niche -- this market niche of specialties, of high end products, of high strength low alloy. You’ve seen the background that we have and also the possibility of leveraging the knowledge that we have in our facilities and to good effort, adding effort in R&D. Regarding the U.S, pricing system, the GAAP again, profitability in the US and the Severstal; I will pass to Oscar, maybe can.

Oscar Montero

On the pricing front also to complement your first question, the answer to your first question; the aluminum issue is something that is not new, that and all the times coming in, concerns about the capability of aluminum to compete against steel. And every time steel -- not only develop a new grades of steel with new capabilities but also engineering and the design of course help a lot in order to reduce the weight of the steel because at the end of day what car manufacturers are looking for is reducing the weight of the car.

So basically you can say okay, with a light raw material car is lighter but at the same time you need to design a car in a way that you use a little amount of that raw material. So steel was very successful in that. And also Daniel can know very well because he participate in World Steel and also this is an issue that is always in the agenda of World Steel Association where Daniel with some member and they are always discussing this issue. So we don’t foresee actual issues from that.

Regarding the second question, I do have different thoughts. We are participating in the U.S. market through two different ways. One, we have a small facility in Shreveport and with a galvanizing line, it’s relatively small. And we also ship steel from our facility in Mexico. We are more focused in the southern part of the U.S. market where market has been growing very wealthy and we fill an important amount of steel there and we fill 5% of our sales for in that.

Regarding the assets that several sellers selling in the U.S., they are selling a package of type of assets. There are two assets one DL1 [ph] in the north and Columbus in the south. And for Ternium probably Columbus has more [indiscernible] with our activities, although at the same time has limitations. For example it was not proven yet that aluminum can produce automobile for use and it is something that is in our agenda and we are analyzing this and alternatives in order to face that issue.

And in particular as I mentioned before, we are more related with southern market of the U.S. and [indiscernible] away from waiting that but I don’t see what I understand but I don’t know, maybe you know more than us and Sultan [ph] is looking to sell the whole package actually in Africa and once that the asset in separate ways, it’s not effective for that.

Daniel Novegil

Yeah well if they were [ph] -- have been located in Columbus, it could have been more attractive to us. So we have to change the path because of the profit profile. Regarding the question of aluminum, you know that you enter into a subject that this question of debate in World Steel Association almost every year, I am a board member and I have been a board member for many years and the discussion is very funny because you have the -- what we call the aluminum paradox. Well then as your price goes up, the pressures to reduce the weight of the car increases and so the use of aluminum becomes more popular because car producers are forced to reduce the weight. So they use that. Every time they price of the energy goes up, the aluminum loses competitiveness against it. So there is a paradox. The higher the price of energy, the more users of aluminum, even when it is less competitive against steel.

At the end what we consider in the industry as the level of competitiveness of steel in the auto industry is now is admitable [ph]. The aluminum cannot enter on a competitive basis. And regarding the use of energy in the lifecycle is pretty much more efficient. So, we don’t see any, let’s say, fair competition coming from aluminum on a rational world but regulations changes the dynamics of the market and enters into asymmetries that affect the market forces. With no asymmetries the aluminum cannot compete efficiently against steel. But when you have the regulations, there are some changes. Any other questions? Yes.

Unidentified Analyst

Hello. I have a quick question about the mining tax in Mexico. How is that impacting your business and have you heard of any update in the tax, the 7.5% mine tax? Thank you.

Daniel Novegil

Thank you. Let me quote some brief comments on the mining activity in Mexico. Now we are not planning to expand capacity at this time in mining in Mexico, not planning. We are investing in mining because we want to maintain the production level. Regarding the taxation and the low regulation, Máximo, you know the new?

Máximo Vedoya

The new tax, it’s supposed to be 7.5% regarding an EBITDA of the steel mining activity although it’s not regular right now. So we don’t have the full impact that it’s going to impact today but what we are talking is that the inside it shouldn’t be very large because it’s going to be only on the part of the extraction. It’s not going to be the process but it’s only going to be the extraction. So it’s going to touch only the rock that you take from the ground but not all the mining process. So this shouldn’t be a large tough deal for us. But we are going to know this at the end of the year when the rule, I mean when they make the law available.

Unidentified Analyst

Thank you for taking my question. I was hoping to follow-up a little bit on a subject that’s been discussed a couple of times and a question was asked about import substitution and the opportunity that you have. Can you help me kind of -- you mentioned a lot of the competitive advantages that you have but can you help me quantify what that opportunity is currently, whether it’s in some sort of GAAP in terms of how much more profitable you are relative to the imports that are coming in, so I can try to understand how to monitor that opportunity? Thanks.

Daniel Novegil

Yes. It’s a good point because as you said we feel and we understand that we have good import substitution opportunities in different markets but especially in Mexico. Also you take into consideration that the possibility to increase our market share is coming not only from the fact of sale more steel to compete against import coming from overseas but also to be competitive enough to share our competitiveness with our customers, in order to pass to them productivity to takeover and to gain market share in import in the, especially in the U.S. market.

Mexico is performing very well in producing goods and continue gain, have important gains in market share in the U.S. So, we have both opportunities, to takeover imports coming from overseas. You see the proximity to the market, to the customers, you have seen the speed, you have seen IT and yes a system, you have seen penetrations in the value chain building, switching cost, and in other words strengthening the relationship with the customer. So we have there an opportunity and also we have an opportunity in strengthening the competitiveness of our customers in the arena of industrial production in the main market of the U.S. in cars, in home appliances and other devices.

Also see the competition in substitution in the future. If you, currency also, the competitiveness of Mexico, which are the fundamentals in your view of the competitiveness of Mexico, skilled labor, cheap labor, energy, critical mass to produce.

Máximo Vedoya

So, in Mexico the import environment -- basically when we talk about import substitution we are talking about Mexico where we have a more opportunities to grow vis-à-vis imports. And as you mentioned before, imports are currently taking a very important portion of the market because there is not enough production of steel in Mexico and you have two sources of -- two kinds of products; products that are currently produced by Mexico and products that are not produced or were not produced and now because of Pesquería, we are now able to produce more ample line of products than we didn’t produce before.

So, and also when you analyze, this is really from the perspective of products. Then you analyze the perspective of auditing and when you analyze the auditing in Mexico, because of this issue of sophisticated products and some of them not produced by Ternium and required by the industry and the market; a big portion of the imports come from countries like the U.S. and Europe and Japan, Canada also. So and I mentioned this because there are products that are more sophisticated and there are no -- the prevalence [ph] of prices. So a bigger import and opportunity there because if we have the capacity to produce more steel, we could take that portion of the market with important profitability your value. So its very different when you say okay, there is 90% of imports coming from China at a price where nobody would like to produce. This is not the case in Mexico.

We also were very successful and because the Mexican government also have been protecting producers for no fair practices. For example we were very active in [indiscernible] cases and we were very successful [indiscernible] and so this is right opportunity that we have there in that respect.

Unidentified Analyst

A follow up, just going to Argentina, what’s interesting, as you mentioned that you have a 30% market share of the automotive industry, and automotive is like 13% of your sales. So it could be a potential upside there if you were able to supply those kind of products. So wanted to understand what is retaining from increasing that mortgage share? And if that is actually still imports or long [ph] steel or is it also like indirect sales of steel in the final product that comes as car parts et cetera?

Daniel Novegil

In the case of Argentina automotive industry it is both, the imports of auto parts and the imports of steel that dumps in Argentina. So there is a huge opportunity in both products. The fact was that previously before having the new continued casting machine and before having the new vacuum degasser we were not able to produce many of the steel that the industry uses today. So now we are in the process of certificating new policies and we see that in the short-term we will supply and maybe going from 30% to 50% to 45% in one or two years. That’s the perspective.

Unidentified Analyst

You have, just didn’t have the capacity to…

Daniel Novegil

Yes, now we have the steel that the industry is demanding.

Unidentified Analyst

And on the imports, is it a lot of…

Daniel Novegil

Those imports were coming mainly from CSN, [indiscernible] and Usiminas. We are replacing those imports. But to complement the answer, as you said in your question it is not steel against steel. It’s steel against spare parts. It’s steel against parts. The reason why we were not producing in Argentina is some parts that were coming steel included coming from overseas, because we didn’t have the right technology in order to sell this market.

Now with the vacuum degassing and new continue cutter, we have the opportunity to gain market share against these standard parts. When talking steel against steel, the market share of steel in Argentina is dominant, is more than 90%, more than 90%, steel against steel stamping Argentina. The reason why we have this market share is because in the automotive industry the value of being very close of the customer, of speed in the deliveries, just in time, grow inventory level, service and communication is very high. So that is why will enter on the basis of service and valuation [ph] and we have all the market share we could have 90%. What we can gain market share is in stamp parts coming from overseas and now that we have the technology, we have the opportunity to take over.

It’s not that easy, because you have to supply guys in order to stamp in Argentina, that means in investment on our side, the side of our customers. So it’s a question that will take some more time but we’ll grow in that direction no doubt.

Pablo Brizzio

Let me add Brazil [ph] in that segment because we’re already importing steel from Brazil and come to learn in our facilities servicing the industry. So those qualities will be easily and quickly replaced.

Unidentified Analyst

Did you mention the level of productivity results or achievements that the Company has had, but there was no savings expected for next year. Could you comment about further potential savings coming from that area as a company or have you seen most of the results of the efforts in reducing white collar?

Daniel Novegil

As you know we always have this -- your question gave me the chance of analyzing the way we behave. We believe in the process and the result is a consequence of the process. So we concentrate our efforts on improving the way we do things, the way we process things, the way we look at the administrative processes as well. So we have an obsession in gaining productivity. Because our task is to be more competitive than not to be competitive. To be more competitive than our customers means that we have to continually innovate in making through the learning curve effect. You know the learning curve effect takes some time and afterwards become [indiscernible] so to speak.

So the way we look at ourselves and manage it is that we have to have the ability to change and to break through and expect these kind of learning curve effects to have the advantage and the edge against the competitor. So in white-collar, every single year we launch another program, IT intensive, IS intensive. Now we are in the process incorporating a service sharing. We contracted -- Accenture is servicing our needs in leads [ph] performance, deliveries and so on of all the faculties. So we -- and critical mass and we reduced cost.

And so we expect to continue that. Obviously it’s a process that at one point in time becomes more, but we will continue no doubt and we were doing in the last two year. Now what we could have imagined that we had enough room to review the white-collar base in 7% in two years because everyone will figure that we had a quite good and quite impressive white collars productivity. But with innovation you can change the way you are doing the things and to gain more labor productivity.

Now we are going to concentrate in the efforts in blue collar where we have good opportunity and in contractors because as I said before, we’re quite competitive, we’re happy with the level of competitive that we have been. We have revised, we’ve raised huge amount of money coming from third parties that they don’t productivity because of different factors and because of being capital intensive they don’t have the money because they don’t have the finance because they don’t critical mass because the market where they are don’t give them the critical mass to be competitive, because they don’t have the technology, because they don’t have the knowledge because they don’t have the ability, because they don’t have the passion, because they don’t have different things.

So the opportunity that we have now is to look at them, to analyze the productivity and to pass them productivity sharing the benefit of this gain. And we have a huge amount of money there. As I mentioned in this main context that we were analyzing we revised the $100 million trade [ph], if we are able to reduce 10% to 15%, we will be getting $30 million to $40 million per year on a regular basis, six times. It’s a quite nice amount of money. So we are continuing this process and we are all the time looking for these opportunities in the marketplace and every single year it appears very nice opportunities.

Sebastián Marti

I believe there are no more questions in the room. All the questions have received from people that could not make it here today have been answered. So just a quick note, those who are interested on the tour of the new exhibition, we’ll meet at the Rotunda. We are ready for Daniel’s closing remarks.

Daniel Novegil

All right, so thank you very much. Again I really appreciate having the time on listening to us. I wish you a nice day and thanks a lot. Bye-bye now.

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