Ternium's (TX) CEO Daniel Novegil on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Ternium S.A. (TX)

Ternium SA (NYSE:TX)

Q2 2014 Earnings Conference Call

July 30, 2014 10:00 AM ET

Executives

Sebastián Marti – IR

Daniel Novegil – CEO

Pablo Brizzio – CFO

Analysts

Carlos de Alba – Morgan Stanley

Renato Antunes – Brasil Plural

Marcelo Aguiar – Goldman Sachs

Alexander Hacking – Citi

Thiago Lofiego – Merrill Lynch

Leonardo Correa – BTG Pactual

Marcos Assumpção – Itaú

Operator

Good day, ladies and gentlemen. Welcome to the Ternium’s Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

I would like to introduce to your host of today’s conference, Mr. Sebastián Marti. Sir, you may begin.

Sebastián Marti

Good morning, and thank you for joining us today. My name is Sebastián Marti and I’m Ternium’s Investor Relations, Director. Ternium issued a press release yesterday, detailing its results for the second quarter, 2014. This call is complementary to that presentation. Joining me today are, Mr. Daniel Novegil, Ternium’s CEO; and Mr. Pablo Brizzio, the company’s CFO, who will discuss our 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 in our press release issued yesterday.

With that, I’ll turn the call over to, Mr. Novegil.

Daniel Novegil

Hello to everybody. It is my pleasure to participate in this Ternium conference call. I apologize because I’m on transit so that may be I will not be able to stay with you the whole conference. In any event, I will try to do my best in order to stay online as much as possible. So that given the schedule that we have today, let we make some initial remarks and some comments to start the conference call.

As you remember when we did the outlook for the second quarter when commending the Ternium results after the first quarter of 2014, we had stated in summary, that we had expected a good demand in Mexico if steel prices in North America retain attractive levels throughout the second quarter. Shipments in southern regions in the first quarter were low because of seasonal effect, but it would recover in second quarter which did not happen as I will explain afterwards. And at the end, we said that we would expect a slightly lower operating income in the second quarter 2014.

As you already know, because you did receive some – all the information that is issued in our press release, we had some deviations in the second quarter with respect to the second quarter that we expected before, and the reason of the main deviations were; First, weaker than expected domestic demand in Argentina that did not recover in the second quarter with respect to the first quarter. Second, longer than scheduled that means extraordinary maintenance of Minatitlán[ph] in Mexico, due to PLC complications that extended the idle period for the reparation and for the maintenance. Third, higher than expected costs, again driven by a stoppage for maintenance in Mexican facility, and some other factors that afterwards Pablo Brizzio will enter into some details. On the positive, we have been having better than expected Mexican domestic market and still good prices remaining against previous quarter and also we expect that to the prices that we consider reasonable for these regions, North America.

The second important deviation happened to be in working capital. And so, that net debt went up, if you annualize other quarters there is a seasonal factor affecting the second quarter so to speak. And on top of that, we had dividends of 181 million being paid by Ternium and minority subsidiary taxes of 127 million negative, account receivables at $37 million negative and also an investment that this our generation plant in Monterrey of $20 million. So these factors you can see are non-recurrent, so in working capital we do have room for improvement in coming quarter in the third quarter of the current year.

Again, let me quote, close cost wise, that the cost up in Mexico happened because of a mix, a different mix, than the one that we had expected with respect to own steel being produced by ourselves, against the last being brought through third parties. And also, the cost was up in Argentina mainly because of the valuation effect which Pablo Brizzio will explain in more detail. At the same time, all sub original expenses went up or went above our expectations, especially because third party services meaning for contractors and also freight rates. At the end, despite of these effect, I consider that Ternium is speeding, is performing very well, despite these setbacks some of these setbacks. Some of them I feel was quote in before I consider being non-recurrent in a – so we are doing well despite as I said before, cost and working capital setbacks.

So let me comment also on some fundamentals of Ternium going back may be to the talk and the conversations that we had during our Investor Day that happened only two months ago. From then on, there is no forecast coming from working association that there is no estimation and no forecast on steel demand is apparent consumption worldwide. So according the ECON Committee that as you know are used to be chairman some time ago, Mexico is doing better than expected, Brazil is doing worse than expected, Argentina is being a little worse than expected, Europe is doing pretty much well than expected with respect to the previews forecast that was delivered in April, year 2014.

Also, for the first time, China reached more than 50% of total steel production worldwide, having China a share of the total world steel production of 50.5% and this is a world record an all time record and for the first time China represents more than half of the world steel production. Also, China steel sustains a pretty high level of exports, even when in June the exports of China went down from 8 million tons in May to 7 million tons in June, and also as you know, China nowadays, is facing several dumping cases been open or about to be opened the USA, Mexico Brazil and so on and so forth.

So on the other positive side, the service centers inventories in USA are stable, and in the range of 2.2 months with this low level of inventories meaning that the level of activity in the U.S. is high enough to sustain a high level of occupation in the local means as well as the high level of imports. So, the USA economy and also the Mexican economy are doing very well, of serving all these steel that is coming from the local means as well as the imports.

Also let me comment that another fundamental is going on in the U.S. market that we were not able to comment in detail in the Investor Day that is the consolidation factor. As you know, Alabama was taken over by Thyssen through a partnership between Mittal Steel and Nippon Steel; Dearborn was taken over from Severstal from AK; and Columbus was taken over from Severstal to Steel Dynamics. So that means that, the consolidation process in the US market I mean the US supply is going on what we consider being a positive for all the participants in the region. Also, let me mention that the gas prices again went down and is now at a very low level of $3.85 per million of EPU with seasonally low but still better than expected.

Regarding the Ternium initiatives, we have been discussing in the Investor Day, that we work hard in the last two years in working capital streamlining, logistic optimization, contractor’s efficiency program, and white color regenerating. On top of that, now we are undertaking two new initiatives that I even comment on the Investor Day that there was consumption efficiency program for you to know Ternium is suspending nowadays $800 million in energy and so we’ll put an important stress and an important emphasis in getting savings in energy consumption.

And also, we are undertaking a new initiative that is the continuous improvement in industrial activities and floor plant therefore being undertaken by all the industrial directors of our facilities. So all in all, we had a second quarter that read below what we have been expecting because of the factors that I had mentioned working capital and some non-recurrent effect like, dividends, taxation and so on and so forth and also some setbacks in costs.

Let me have the opportunity of being in touch with to comment with you what is going on in Argentina regarding the debt restructuring and the holdout issue. So, the current situation in Argentina regarding this turn of debt is an ongoing process. And as I’m speaking, Argentina government is in negotiations to find a positive solution to the current situation. I do believe that as long as there is time to continue negotiating, a positive solution could be found. And I really hope that they are able to reach a mutually convenient solution, so that, at the end, we will have to wait. Until then (inaudible) I am relatively optimistic that they will end up the process with good news.

Let me also comment that the Argentine government made some indication of the willingness to agree upon servicing debt and solving some conflicts that were open like, for example, the negotiations with Repsol, the Paris Club restructuring debt, and also the intention being explained by the government to own all the rest of the not restructured debt that means the holdouts and so on. So, at the end, we have to wait a little bit for a final outcome of the negotiation, but we do expect that we will be reaching a positive solution.

Before entering into the comments coming from Pablo Brizzio, let me say that we anticipate as an outlook for the third quarter, a slightly higher operating income compared to the second quarter 2014, with extinguished shipments and an increasing operating margins as a result of higher revenues per ton, may be partially offset by higher cost per ton. But, at the end, and as a fundamental we see that the prices are doing well especially North America and the market continued doing well North America U.S. and the Mexican markets as well as in Argentina.

So having said that, let me pass to Pablo Brizzio who will comment on detail and if we do have time then we’ll go back to you for the Q&A. Thank you very much.

Pablo Brizzio

Thanks, Daniel, and good morning to everyone. As usual, I will describe our performance in the quarter and expand on some comments that already Daniel made during his initial remarks. EBITDA in the second quarter 2014 was $330 million, 21% lower than EBITDA in the first quarter, 2014, as a result of lower EBITDA per ton partially offset by a 22,000 tons increase in steel shipments. EBITDA in the second quarter of the year was lower than we expected during our last conference call, as Daniel mentioned. But then, with the maintenance sequential decrease of EBITDA mainly as a result of lower margins due to higher cost of raw materials in Argentina and purchase flats in Mexico, partially offset by higher shipments in Argentina following a seasonally lower first quarter of the year.

EBITDA, up being sequentially lower as anticipated but the decrease was stronger than we expected. The main two reasons – the main two factors that differ from our estimations, among other reasons, were related to the recovery in shipments to Argentina and the Argentina peso effects. We already mentioned that shipments in Argentina during the second half of 2014 would be affected by surrounded in macroeconomic environment in the country. We believe that the second quarter of the year would be only partially affected, and that we would see some pick up in shipments in the second quarter after the seasonal decrease in the first one.

This will happen as second quarter shipments in Argentina market were similar to shipments in the first quarter, with a consequent impact in the second quarter EBITDA. We also started to see second quarter 2014, a further devaluation of the Argentine peso to various dollar exchange rate, after sequential devaluation of 8%, 13% and 23% in the third quarter, 2013 for quarter 2013 and first quarter 2014 respectively. By the devaluation of the February in the second quarter 2014 ended up being only 2%.

Inflation in the country increased the cost of low cut currency denominated items like labor and local services. And these increases are not mitigated by the evaluation of the local currency against the US dollar, cost increased in dollar terms as we noticed during the second quarter. As you know, Siderar, our subsidiary in Argentina used the Argentine peso as the instruction of currency and values inventory used in first in first out accounted. Another way that percentage of Argentine peso exchange ratio affected cost in Argentina in the effect it has been in the cost of inventories.

Even though, Siderar main raw materials like iron ore or coal are priced in US dollar, as Siderar uses the Argentine peso as its currency inventories are registering books in low cut currency terms. When inventories are sold in the given quarter, a devaluation of the peso reviews the cost. In those (inaudible) those inventories that were acquired in previous quarter are registered in pesos at the lower exchange rate. So as explained, the lower devaluation rate of the second quarter affected the numbers of the company.

Finally, the second quarter 2014 as already mentioned by Daniel, result in increase in maintenance expenses in credential with plan as properties performed during the mainly in our Mexican facility. Although the respected the spent up been a little longer than anticipated so the increase in cost was somewhat higher. Keep in mind, also that when we produce a lower quantity of steel in our integrated operations in this case the ones that underwent maintenance in the second quarter we had to replace the lower production with products manufacturer out of the last purchase to support, plus the higher cost than the ones that we are able to produce ourselves.

Net sales reached $2.2 billion in the second quarter, a 3% sequential increase as a result of higher revenue performance and slightly higher shipments, which were 2.4 million tons in the quarter. Steel revenue per ton in the second quarter was 2% higher sequentially with some more increase in all regions. Shipments in Mexico were 1.4 million tons, keeping the strength in the first quarter of the year.

Shipments in the country increased 386,000 tons or 16% in the first half of 2014 over the first half of 2013. The industrial sector Mexico continues to drive steel consumption in the country, and Ternium’s commercial airports in the sector, has good results. On the other hand, there are signs of an increase of expanding in the country, and although we don’t expect to see an increase of steel station in the construction sector in the very short term, if these trends continue it could provide the means for an increased demand in the future.

Prices in the U.S. and Mexico again as Daniel already continued to show attractive level as expected, and we believe this will persist in the third quarter. With slightly higher revenue per ton in the region as steel demand remains – inventories in the value chain at a reasonable level. Shipments in the southern region in the second quarter were also relatively stable sequentially, as already mentioned, with weakness in many of the sections. We saw Argentina with exemptions of steel industry. We are expecting no significant changes in prices in division in the third quarter.

Consolidated EBITDA per ton of steel was $140 in the second quarter compared to $179 in the first quarter, and EBITDA margins fell to 15% from 19% in the first quarter. EBITDA per ton decreased as a result of $57 increase in operating cost of ton partially offset by $15 increase in revenue per ton. The main reasons for the decrease in operating costs per ton were the ones we have already mentioned. Important to mention that EBITDA in the first half 2014 was $747 million. This compared to $738 million in the first half of 2013.

It is worth mentioning that EBITDA per ton in the first half 2014 reached almost $160 compared to $166 in the first half of 2013. And, the most of the difference in EBITDA per ton between these two periods were related to higher sales of iron ore to third parties in the first half of 2013. Our expectation for the third quarter of the year is to see a slight sequential increase in operating income with relatively stable achievements and increasing operating margins as a result of higher revenue per ton, partially offset by increase in cost per ton mainly coming from our Argentina subsidiary.

Equity-holder’s net income in the second quarter 2014 was $129 million or a gain of $0.66 per ADS. These results compared with an equity holders net income of $150 million in the first quarter of 2014 for $0.76 per ADS. Net income decreased mainly as a result of the already mentioned lower operating income partially offset by a lower income tax expenses. Income tax expense was $90 million lower in the second quarter, compared to the first quarter of the year. The decrease was related impart to lower income in the period and part to certain non-recurrent results that reduced the effective rate.

In context, in the second quarter included a net gain of 37 million related to a non-cash reduction of deferred tax liability of one of Ternium subsidiaries, partially offset by higher tax and connection to Siderar dividend payment in April 2014. On the account effective upgrade in the first quarter 2014 has been slightly higher reaching a 37% level, and the reason for this was that income tax in the first quarter includes certain non-cash net losses, mainly related to settlements of claims from the Mexican tax authorities related to fiscal year 2006, to the changes in connection with new mining laws.

Let me now make a brief review of our cash flow statements. Net cash provided by operations was $34 million. In the context of increased production working capital was $136 million higher, mainly as a result of increased inventories and increase in levels and a decrease in accounts payable. Also Daniel already commented into these issues. Capital expenditures were $136 million in the second quarter or $240 million in the first half of 2014 more than 50% reduction when compared to CapEx of 508 million in the first half of 2013.

In addition to CapEx, we pay dividends in the quarter and we used some other funds to put money into our joint venture in Mexico in relationship to the power plant. Our financial position remains very strong with net debt of 2.0 billion at the end of June 2014 equivalent to 1.3 times net debt to last 12 months EBITDA. Additionally, the second quarter suffered an increase in the debt as a result of the yearly dividend payment, and the accumulated year income tax payment. These reductions will gradually recover in the following quarters as we are expecting to do. Okay, these are our main issues that I wanted to comment with you. So now, please operator we can begin with the Q&A session. Thanks.

Question-And-Answer Session

Operator

Certainly. [Operator Instructions]. And our first question comes from the line of Carlos De Alba of Morgan Stanley. Your line is now open.

Carlos de Alba – Morgan Stanley

Good morning, gentlemen. Thank you very much. First question is it possible Pablo, perhaps to quantify the impact of the longer than expected maintenance in Mexico? And also the impact of the higher purchases lab volumes that you had to acquire to compensate for these longer than expected maintenance? And second, I don’t know if Daniel or Pablo can comment on what expectations are for working capital going forward? I mean the company has always been quite good in keeping low working capital level. So we were surprised negatively what we saw in the quarter, but if you can comment about what is outlook for the whole year that would be good. Thank you.

Pablo Brizzio

Okay, Carlos, let me start by your first question, the impact – First of all, we have plant maintenance of different equipment in Mexico, and the issue was that we have a little longer than expected and in some case when we were in the process of putting back in place these facilities we have some issues that’s already Daniel mentioned. We are calculating that the amount of these deviations from what we were expecting was a number of between $5 million to $10 million for the quarter. In relationship to class as usual, we have a delay in due to first in first out we have delay on when we see the impact of this last purchase and the impact of this last consumed in our proxy.

So, the difference is that during the first quarter when we were flat that we purchased as average cost of around $560 per ton during the second quarter where it’s that the purchase comprised of around $580 per ton. So there you have the difference that we were impacting our results. Of course, as we already mentioned, these were increases that were already expected when we get a view of our outlook during the first quarter. Regarding the working capital issue as you mentioned, let me clarify a couple of them that make us very positive in the regards in the coming quarter.

First of all, we have an increase in our Argentine operation of iron ore due to the issues that this is the time of the year where you can utilize the most the river where the needs to go and there are other parts of the year where the wire cannot move through the river. So we need to accumulate higher level of inventories of iron ore during this quarter. So this is that issue of course we will not be repeating in the coming quarter. We are reducing inventories in Mexico and we are expecting to continue decrease coming from paid inventories in the first quarter due to commercial resources in our flat purchases in our operations in Mexico.

Also, due to these higher purchases of iron ore and slab of course payments of these took place during the quarter and increased the level of capital utilization in working capital. So most of these issues seems that will change in the near future and as already as Daniel mentioned we are expecting to see a positive reduction in the coming quarters in relationships, not only to working capital, but also it will reflect in our net debt that with reviews in the coming quarters also having the reverse effects as we have already mentioned.

Daniel Novegil

Let me mention also or let me add that you know Carlos we do follow very tightly the working capital. So we had a good room for improvement. Net debt went up mainly because non-recurrent reasons for example that payment of dividends the taxation issue the investment in pension and the CapEx program. But no doubt that regarding inventories we are going to be putting stress, putting emphasis and we will have room for a good improvement in the quarters to come, especially in the third quarter.

Carlos De Alba – Morgan Stanley

Thank you very much.

Daniel Novegil

Thank you, Carlos.

Operator

Thank you. Our next question comes from the line of Renato Antunes of Brasil Plural. Your line is now open.

Renato Antunes – Brasil Plural

Good morning, everyone. Thanks for the question. The first one on Argentina, if you could talk about a bit about steel prices. We saw prices up taking this quarter we had seen a drop in the first quarter. I mean how do you guys believe this is going to behave looking forward because we actually believe that prices will be US dollar base for real? And the second question on CapEx, if you could just share your views on how do you see CapEx trending in the next year I think the budget for this year seems clear, but if you could even if speaking what we should we expect as we move forward towards 2015 and onwards? That’s it. Thanks.

Pablo Brizzio

Yes, Daniel?

Daniel Novegil

Now, Pablo will share some numbers, but let me comment on a general basis that in Argentina as you know the domestic prices follow the international system. So the price in Argentina the products we are following the international trends and coming into our mind the domestic prices of the U.S., Mexico and Brazil. So all in all, we do not expect important changes in prices and if your comment goes in the direction of some currency fluctuation in Argentina, we had some of this situation in the past, but always we were able to recover in a short period of time at the previous level. So, we do not expect right now any important changes in the prices system in Argentina on the one hand. And on the second hand, also we can affect in 2014 and we’ll have some level of reduction in the CapEx of the company comparison with the last two years so maybe you can quote in more detail Pablo.

Pablo Brizzio

Yes Daniel no worries I’ll comment in your answer to pricing but in respect to CapEx as I already mentioned we have invested $240 million during the first half of the year, and these should follow and continue to be the trend for the coming semester. And as again mentioned, we are not planning at the moment to increase any further in the coming years the capital still we decide to analyze where any expansions or any move from the company. So up to now, we are seeing now this is the level of CapEx we see in the coming future.

Renato Antunes – Brasil Plural

Thanks.

Pablo Brizzio

You’re welcome.

Operator

Thank you. And our next question comes from the line of Marcelo Aguiar with Goldman Sachs. Your line is now open.

Marcelo Aguiar – Goldman Sachs

Hi guys. Thank you for the opportunity. My questions will be more related to the demand trends more interested on the demand first on the demand trends in Argentina. How you’re seeing the industry evolving regardless any let’s say positive outcome what is going to happen today or tomorrow regardless of the debt or negotiations? So, how do you see demand evolving in the margin to be continued to have an extended recession in the industry, and that won’t impact your results?

And then the same would like to understand for Mexico, I mean are you seeing like an extended high elasticity demand IP to GDP in Mexico I mean should we start to see the demand two three times IP? So that will be on the demand side. And now on the more general question, I mean you guys I mean Ternium has been quite stable in terms of let’s say the EBITDA per ton and around $178 level. So, given the whole depreciation impact may be the new outlook for Argentina domestic demand, are we going to get back on this 140 150 level, or how do you see evolving EBITDA per ton on a consolidated basis going forward, having my mind that may be Argentina could be weaker for a little while? Those are my questions. Thank you.

Daniel Novegil

Alright. Let me comment first on the North American market, as I mentioned in my remarks, the domestic market in Mexico, the total consumption of steel and steel consumption is doing well is better than expected. We expect now, an increase in steel consumption in 2014 of 4% or 4.5% upper in steel consumption up in comparison with 2013. Also, we are looking at the U.S. market that this also doing better than expected. As I mentioned, we were updating work in association forecast and in comparison with the one that we have done in April 2014 and we found out the U.S. market as well and the Mexican market are doing a little bit better or better than we have seen before. So the demand in Mexico and the U.S. is strong.

I see inventory level in service centers is low. Our concern is on the side of the imports coming into the U.S. market, but up to now the market is strong and able to absorb the local supply and above that also a record kind of import. Also, as you know we are doing very well in the building in the startup of our Tenigal plant as well as our PL-TCM plant in Pesquería, Monterrey. So that we expect we will be on the top of the market performance. We are going to be gaining some market share especially in high-end products, in the automotive industry as well as the home appliance industry.

Regarding the Argentine market, we see that the market is doing differently by sectors for example, the automotive industry is not doing well it has been impacted also by a decreasing consumption of automotives in Brazil home appliances are doing also weaker but on top of that we see the construction doing well, and also the energy related projects and investments doing very well. Also the agro is doing very well in Argentina. So all in all, the mining in Argentina when it is below our expectations at the beginning of the year, it’s not that bad I mean it’s doing relatively well, and we don’t see important changes right now with respect to the second quarter.

Regarding – it is also it is very difficult not to comment on the holdout issue when making this comments on Argentina that as I said in my remarks, we have to wait the negotiations that were –- our steel in place and we expect as I said before a positive solution now to this situation, especially taken into consideration that the Argentine government is sending signals that wants to restructure and wants to do another debt. Regarding the margins and operating income per ton so may be Pablo you can enter into more detail.

Pablo Brizzio

Of course. Marcelo as you know yes we have $140 per ton EBITDA during the second quarter we used them up. As I mentioned before full semester we reached a level of 160 which is basically in line with the levels we have increased this year from previous quarter. We also mentioned that we are expecting a recovery in these margins coming to the third quarter. So the steel to sustain a very good level of EBITDA margin throughout the year. We have during this quarter a decrease compared to the first quarter, but all in all, put in the first semester together the number was basically in line with what we used to have in the previous semesters.

Marcelo Aguiar – Goldman Sachs

I’m sorry. So just to be clear on the Argentine demand, so you guys are not seeing weaker demand in the third quarter versus the second let’s take in consideration what’s happened in July so far?

Pablo Brizzio

Yes that’s what Daniel was trying to say we are not expecting to see a further increase up to now taking into consideration of what we know up to now the level of achievements what we saw in the second quarter. And you know that we already mentioned that the level in the second quarter was below our expectations and in line with the seasonally low level of the first quarter but all in all we are expecting –

Daniel Novegil

Yes, because up to now we do see a similar level of activity. It is difficult to forecast as I said before there is a good volatility a good different situation among the different sectors automotive industry is doing badly also home appliance is weaker than expected but I the agro business is doing very well the construction business is doing very well and energy related projects are doing very well. So all in all we do not have yet reasons to feel that the market will feel would be different to the one that we have in the second quarter.

Marcelo Aguiar – Goldman Sachs

Thank you very much gentlemen.

Operator

Thank you. And our next question comes from the line of Alex Hacking of Citi Bank. Your line is now open.

Alexander Hacking – Citi

Thank you for the question and the call. I just have one question Daniel mentioned earlier, an increase in anti-dumping investigations against Chinese steels in various countries. Can you remind us if there are any kind of cases that are under investigation or pending which are potentially relevant or material for Ternium, either in I guess the U.S. or Mexico or Brazil? Thank you.

Pablo Brizzio

Daniel?

Daniel Novegil

Yes, hello?

Pablo Brizzio

Yes. Did you hear the question?

Daniel Novegil

I was out of line for couple of seconds, but if I understood properly the question is in relationship with my comment on anti-dumping cases. So I don’t have anything more to quote because as you know I cannot open into retails in the things and in the matters related with dumping that we are analyzing and were not presented yet or under the authorities. So I would prefer not to mention any specific rate cases. But there are no more cases in Argentina no doubt. There are some concerns in Mexico that we are addressing properly and we are studying in detail analyzing the opportunities analyzing the facts, and analyzing the damage into the marketplace and the dumping situations.

Alexander Hacking – Citi

Okay. It’s clear. Thank you.

Operator

Thank you. And our next question comes from the line of Thiago Lofiego of Merrill Lynch. Your line is now open.

Thiago Lofiego – Merrill Lynch

Hi. Two questions, are you still evaluating the possibility of buying an additional stake in Usiminas given, needs to sell it or is this totally out of the picture for you guys? And the second question, if you could comment on demand growth expectations toward the Mexican market, and if you could comment on the auto markets and other subsectors for the next couple of years that would be great.

Pablo Brizzio

Okay Daniel, if you’ll allow me let me take the first half of the question. As we have already mentioned Thiago this is the current question throughout the quarter we have nothing to add to that. And we have already commented on which is our expectation with measures to shares of Usiminas, so we have nothing to add to that. In relationship to sectors in Mexico, Daniel as you know if you want to comment or let me go ahead with it?

Daniel Novegil

Yeah, go ahead.

Pablo Brizzio

Okay. We tend to divide the Mexican markets into two different sectors, industrial sector and the commercial sector which is more related to the construction sector. In the first one, in the industrial sector which is mainly lead by the auto sector and the home appliances one, they are really – they are doing relatively well and sectors that are driven the demand up in Mexico. And especially as you know, these sectors are mainly dedicated to export back to the U.S. and kind of to the rest of the world.

So these sectors are doing pretty well. Because commercial sector which was not doing well throughout the last years are still not doing extremely well, but we are excited to see some signs of recovery in these sector especially coming from some infrastructure program announced by the government. So we are positive that in the future this sector would also pick up and we are incentive for demand in the coming quarter. So all in all, the expansion the Mexican consumption is doing pretty well country is seeing a higher number on steel consumption, and up to now, driven by the industrial sector while we are expecting to see some recovery also in the commercial one.

Thiago Lofiego – Merrill Lynch

Okay. Perfect. Thank you.

Pablo Brizzio

You’re welcome.

Operator

Thank you. And our…

Daniel Novegil

Gentlemen, I apologize, but I do as I said in the beginning, I do have to take a plane so I will be out of the conference now. I will try to connect when traveling by car through my cellular phone, but I’m not sure if I will be able. So, I wish you a very nice rest of the week and I hope to see you soon. Thanks a lot.

Pablo Brizzio

Thanks, Daniel.

Operator

Thank you. And our next question comes from the line of Leonardo Correa of BTG Pactual. Your line is now open.

Leonardo Correa – BTG Pactual

Yes, hello. Good morning everyone. So my first question is regarding the ramp up of projects in Mexico. I understand previously I mean there was quite limited visibility on your overall impacts. But Pablo, just now after several months into the ramp up, I mean if you can help us understand may be overall impact on EBITDA per ton, if you have those numbers I mean I think that would be very helpful. What type of level you think those party have contributed in terms of EBITDA per ton?

And also may be a second question, and I understand that during the call you mentioned that CapEx should trend lower, and that there is still nothing regarding new phase of expansion. But if you can, just thinking bigger picture, what would be potentially the next phase given that Ternium doesn’t really have a history of increasing the dividend more significantly. Just if you can help us out to understand what the next phase, next wave of investments? Where those could potentially be? Will there be flats or potentially moving back to M&A so just wanted to understand those may be bigger picture themes. Thank you very much.

Pablo Brizzio

Okay Leonardo let me start by that. We discussed the level of CapEx expected for this year to be around the levels that we are seeing during the first semester, moving to second semester. We have an additional plant that is really in place, I think in the plant that we have which is the power plant in Mexico that is undergoing the moment and is expected to finish in 2016. This is the last plant that we announced and also as was commented in the press in Mexico, we are having a rally feast of second place of our galvanized lines expansion in Mexico, the one that we have in Tenigal together with Nippon Steel, we have under analyzes further expansion of these lines to double capacity in order to keep supplying the increasing Mexican auto market.

So this is the one that we have as you know as we already said that, this will take around a month to finalize the analysis and take a decision over that. So besides that, to developments we don’t have at the moment any further plans to mention, but as you mentioned also we are always open and we are always analyzing the rest strategy for our company to continue and we never roll out anything. We continue analyzing which is the best possibility that the company has. In relationship to your question on the expansion in Mexico, we are still going through a ramp up period and as we have already mentioned, we are online with that. We are expecting to be by year end, at full capacity at these facilities, but not in the case of Tenigal 100% case to the auto industry until the beginning of next year.

So we are moving to the direction and working well in fulfilling these goals. In relationship to the margins that we generate, we already in the past and we are still under the same scenario and trying to compare with what we said which is that though, these new tonnage will come from a non-integrated facility which as you know, has lower margin that the private facility, we contribute to sustain the level of EBITDA per ton, EBITDA margin as company at the moment. This is the plan that we sell and we are working on fulfilling these as we have been commenting from the very beginning. We need to finalize this process, this contract. It will end at the beginning of this year when we will have the facility mainly dedicated to the auto industry which is not the case at the moment and the ramp up process will finish and we will see the final result on that. So we need to wait a little bit to see these being through the numbers of the company.

Leonardo Correa – BTG Pactual

Thank you very much, Pablo.

Pablo Brizzio

You’re welcome.

Operator

Thank you. And our next question comes from the line of Marcos Assumpção from Itaú. Your line is now open.

Marcos Assumpção – Itaú

Hi. Good morning, everyone. My first question is regarding the slab you mentioned that in the second quarter results were a little bit pressured by higher slab prices. What is your expectation for those slab prices in the second half of the year? How you’re seeing this spread between each your prices? In the second question, regarding our competition with the Chinese exports, are you seeing the increase in Chinese exports impacting your markets? Is this having a native impact on prices in Latin America regions where you operate from Columbia?

Pablo Brizzio

Okay, Marcos. How are you? Let me go ahead first on the last question. We are still expecting to see some further increases in the slab cost that we will see in the third quarter compared to the second. We are expecting to see an additional between $10 to $15 of additional cost slab that it is really including our expectations for the quarter and these will be reduced by all other things that we are not expecting to suffer at the end of the third quarter like the maintenance issue and other things, like for example, when we have this facility right on track, we will produce more and the facilities and utilize land first class.

But the – and this is of course well known that the cost of slabs during the first quarter were higher than they were the fourth quarter of last year. And these are the prices of slabs that we see come in here to our cost in the third quarter. Your second question was? Sorry, the competition of Chinese the imports into our markets. We are not seeing Chinese imports or import coming from China having a significant increase or an important nor in our Mexican market or in the U.S. as well as in some of the other countries in Latin America.

Though you are right, that in some of the countries the impact of the Mexican imports are being important – Chinese importer are really important like Central America which is suffering a lot of imports, though the market is small, we are seeing some there. But in our main markets we have not up to now seen some pressure from Chinese imports. You need to take into consideration also for example, in the Mexican markets, significant portion of the total consumption of the market.

Marcos Assumpção – Itaú

All right. If I may, can I have a third question here on the prices in the U.S.

Pablo Brizzio

Yes.

Marcos Assumpção – Itaú

We’re seeing good level of prices in the recent quarters. On the other hand, prices elsewhere in the world mainly China they’re still depressed. Do you see this gap between the prices in the U.S. and in China sustainable for the coming quarters?

Pablo Brizzio

Well, this is as usual is very difficult question to answer, but we are seeing and we are believing is that at least this situation was sustained during the third quarter, due to different reasons. And they want consolidation of recovery of the Mexican specifically the U.S. market, some control on the production levels. So we are seeing this we think at least in the third quarter. When I think as you mentioned the gap between the slabs and the steel sustained at a very healthy level for the company.

Marcos Assumpção – Itaú

Okay. Perfect. Thank you very much.

Pablo Brizzio

You’re welcome.

Operator

Thank you. And at this time, I’m showing no further participants in the queue. I’d like to turn the call back over to Pablo Brizzio for any closing remarks.

Pablo Brizzio

Okay. Thank you. As usual, thank you very much for your interest and for your time today. And we continue to look forward to remain in touch with you and as usual, please contact us if you have any further questions. Thank you very much for the call. Good bye.

Operator

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes the program. You may now disconnect. Everyone have a great day.

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Ternium (NYSE:TX): Q2 EPS of $0.66 misses by $0.13. Revenue of $2.2B (+3.3% Y/Y) misses by $10M.