Ternium Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 9 speakers on the call.

Operator

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ternium Third Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer simply press star followed by the number 1 on your telephone keypad.

Operator

Thank you. I would now like to turn the call over to Sebastien Marti. Please go ahead.

Speaker 1

Good morning, and thank you for joining us today. My name is Sebastian Marty, and I'm Ternium's Global IR and Compliance Senior Director. Ternium released yesterday its financial results for the Q3 and the 1st 9 months of 2023. This call is complementary to that presentation. Quarter.

Speaker 1

Joining me today are Ternium's Chief Executive Officer, Maximo Vedoya and the company's Chief Financial Officer, Paolo Riccio, who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, there will be a Q and A session. Conference call. Before we begin, I would like to remind you that this conference call contains forward looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation.

Speaker 1

You will also find any reference to non IFRS financial measures reconciled to the most directly comparable IFRS measures in the press release issued yesterday. With that, I'll turn the call over to Mr. Milosevic.

Speaker 2

Quarter. Thank you, Sebastian. Good morning and thank you all for participating in Ternium's conference call today. Quarter. I am glad to report we have healthy 3rd quarter.

Speaker 2

With the consolidation of Usiminas, for the first time, we had a margin of 13%. Quarter. As you may know, Usiminas' main blast furnace has been offline for a realigning, and its operating results in the quarter were affected accordingly. Quarter. When considering Ternium operations, before the consolidation, we had a margin of approximately 17% in the quarter, which is within our usual margin range.

Speaker 2

With fuel prices recently increasing in the U. S. MCA region Anushiminas starting the ramp up of its main blast furnace, I am positive that from the beginning of next year, we will see more normalized improved margin performance. With this in mind, we announced yesterday an interim dividend payment of $1.10 per ADS, equivalent to $216,000,000 to be paid on November 16. This represents an increase of $0.20 per ADA quarter or 22% more compared to last year interim dividend payments.

Speaker 2

After my initial remarks, Pablo will go through the details of our performance in the quarter and the explanations for the following ones. Let's now review the business environment in our main markets, beginning with Mexico. Apparent steel demand in Mexico remains strong. As we have been discussing during the last conference calls, reassuring is happening and it's developed is positive for the USMCA consumption of steel. I see this trend as giving sustainability to steel demand in the region for the years to come.

Speaker 2

In this context, the new capacity and high end products we can offer now as a result of the investment programs we developed during the last few years enable us to increase our shipments by 25% in the 1st month of 2023 compared to the same period of 2022. We are expecting Ternium shipment in Mexico to continue increasing in the Q4 as we have been working on solving certain supply chain bottlenecks, quarter, which affected the previous quarters. We expect this to happen even though this is the seasonally weakest quarter in the year. Steel prices recently bottomed up in this region and this is fueling quarter. A restocking in the value change in the commercial market due to low inventory levels.

Speaker 2

On the other hand, industrial market continued to show rather healthy steel demand. The auto industry in Mexico has not been affected by the strikes in the U. S. The positive pricing dynamics we are seeing in the USMCA region will be more notable in the Q1 of next year as the last effect of contract prices in Mexico will be a drag on the 4th quarter realized prices. Moving to Brazil.

Speaker 2

Quarter. In this quarter, we fully consolidated Usiminas into Ternium's financials for the first time. So let me review quarter. The latest developments in Brazilian market. We have always believed the potential of this market is outstanding, quarter.

Speaker 2

But Brazil has recently been going through some challenges. Steel demand in the country is at reasonable levels, but still imports in Brazil increased by 57% in the 1st 9 months of the year, reaching the highest level in more than 10 years as a percentage of steel consumption quarter. And about 80% of flat steel imports are coming from China. This is a big concern, not only for Usiminas, For the whole industrial sector in Brazil, with the surge of steel import from China, The government of several countries in the Americas as in the U. S.

Speaker 2

And Mexico has taken trade measures to avoid being flooded by unfairly trade Chinese steel. Brazil should follow this same path. The local steel industry has been vocal about the needs to defend the country from this dangerous dynamic, and we plan to be very active in this front. In this difficult context, Usiminas has just finished the relining of its blast furnace in Ipathinga. This lengthy investment process together with the deteriorating steel pricing environment have certainly cut their toll on Usiminas profitability in the 3rd quarter quarter.

Speaker 2

And we will not see a significant improvement until early next year when the new facilities are ramped up. Let me finish my comments about Brazil by stating that we are fully committed to Usiminas. In this new stage, we have reinforced Usiminas' management teams since we entered the company 4 months ago. This new team in Usiminas has been working round the clock to bring the company to its full potential. Many efficiency increasing initiatives I've been designed and put in place.

Speaker 2

The focus today is on the industrial operations, the heart of the company. Quarter. We expect this process to be a marathon, not a sprint, but I'm confident that Susiminas will be able to increase its competitiveness and regain its position in the market in the Brazilian market. Let me turn to Argentina. Quarter.

Speaker 2

Although our operation in Argentina continued to perform well in the 3rd quarter with relatively stable shipments. The constraint to import of imports for production for our company and our value chain Have been worsening over time and will likely impact economic activity in the company and in the country. Quarter. The macroeconomic in Argentina is currently extremely unstable and the high degree of uncertainty Regarding the outcome of presidential elective to be held in 3 weeks, make it hard to have a clear picture of the measures The next administration is going to take to tackle this unsustainable situation. The new administration would likely have to put in place a series of needed reforms during 2024, quarter, which will probably have a toll in economic activity at the beginning.

Speaker 2

The sectors with potential to weather the storm and Prosper in a better post reform scenario, remain being the energy, Vaca Muerta, mining and agribusiness sector. Moving now to our sustainability agenda. We are proud to announce that we recently won a bid to extend our wind farm project in Argentina from 72 Megawatts of annual capacity to 99 Megawatts. Didex. This expansion will enable us to replace 90% of the purchased energy for our facilities in the country, reducing a total of over 127,000 tons of CO2 emissions per year.

Speaker 2

This additional expansion will align quarter. With our current construction schedule, we are proceeding with the preparatory work, including roads and expect to initiate the foundation of works this week. We anticipate installing the first turbines by May next year. In Mexico, we are also making progress with our project to build a steelmaking facility in Pesqueria using DRI EIS technology. The facility's emission intensity will be almost 70% lower than the world's average for the BFBOF route and we'll be able to produce all qualities of steel demanded by the auto industry.

Speaker 2

We have already closed most of the most important equipment procurement contracts for the DRI facility, the EIF and also for the downstream lines Like the new corn rolling mill and the galvanized lines. Let me now make a few final comments to close these prepared remarks. I am very positive with what's Ternium's ahead of Forternium. Quarter. Although the Q4 is going to show a decline due to the works in the blast furnace in Usiminas and the downward reset of contract prices in Mexico, which we should see improvement beginning in the Q1 next year.

Speaker 2

1, the blast furnace Inociminas has ramped up and the new pricing scenario in Mexico reflects on our financials. With a longer term view, quarter. We will be working on deepening the synergies of our industrial system in the region with the capability to serve our industrial customers seamlessly across the continent. Also, we will refocus on the expansion of our facility in Piscaria, which will turn into the most sophisticated and sustainable steel industry system in the Americas. All right.

Speaker 2

Please, Pablo, go ahead now with your analysis of Ternium performance in the 3rd quarter.

Speaker 3

Thanks, Maximo, and good morning to everybody and thanks again for participating today in our conference call. In today's presentation, we will review our operations and financial performance and the effect of the consolidation of Usiminas in the first for the first time in the Q3 of this year. If we go to Page 3 of the presentation, you will see that Ternium's quarter. Operating results were relatively strong in the Q3, in line with operating results in the same period of last year Excuse me, and decreasing moderately on a sequential basis as expected. As you can see in the chart at the top, adjusted EBITDA reached $698,000,000 in the 3rd quarter, up 2% versus the same period of last year and down 22% versus the 2nd quarter.

Speaker 3

Quarter. The sequential decrease in adjusted EBITDA was mainly the result of lower realized steel prices and higher costs, quarter, partially offset by higher steel shipments. Adjusted EBITDA margin in the 3rd quarter was 13%, dump from 23 in the 2nd quarter. As Maximo mentioned, this margin was affected on one side by a decrease in realized steel prices in the USMCA market and on the other side by the consolidation of Usiminas operating results as Usiminas recorded almost nil margin level in the period. Looking forward, we expect adjusted EBITDA to decrease in the 4th quarter due to decrease on our core margins, partnership set by slightly higher steel shipments.

Speaker 3

We will analyze this in more details in the coming slides. Moving on to net results, adjusted net income and adjusted earnings per ADS decreased sequentially to $323,000,000 and $1.38 respectively, reflecting the decrease in operating results and lower before tax results. Adjusted net income was calculated as net result adjusted to quarter. A $1,100,000,000 non cash loss related to the increase in the participation in Usiminas. We will analyze this in more detail in coming slides.

Speaker 3

Let's turn now to our shipments performance on Page 4. In Mexico, expected Ternium's shipments to reach A new all time high of 2,100,000 tons in the 3rd quarter. Shipments were up 5% sequentially and 24% versus the prior year Q3, supported by sustained market demand and an issue of some logistic constraints affecting our performance in the Q2. Prospects in this market are quite positive. We continue to healthy demand in the industrial sector at a very active commercial market, dividend by lower inventories and increasing steel market prices.

Speaker 3

In Brazil, reported volumes in the Q3 were quarter. Almost entirely attributable to the consolidation of UC Milnas. The industrial sector in Brazil accounted for approximately 70% of the shipments in the period. Looking forward to the Q4, we expect shipments in Brazil to remain relatively stable. Quarter.

Speaker 3

In the Southern region, shipments were 603,000 tons in the 3rd quarter, up 7% sequentially, mainly due to the consolidation of Usiminas sales in the country. Looking forward, we anticipate a sequential decrease in steel shipments quarter, mostly as a result of the import restrictions in Argentina already mentioned by Maximo. Quarter. In Argentina, the uncertainty regarding the steel demand remains high as a new administration will take office in December And we are expecting to see which are the new measures that the company that the government will be taking. In the next page, number 5, you can see that combining these redevelopments, we arrived at consolidated steel shipments of 4,100,000 tons.

Speaker 3

Quarter. Looking forward, we expect steel shipments to increase slightly in the Q4. Consolidated net sales were $5,200,000,000 of the total net sales of steel products accounted for $5,000,000,000 and mining and other product net sales accounted for 2.21 $1,000,000 Ternium reported iron ore shipments to third parties of 2,200,000 tons in the Q3 as a result of the consolidation of Usiminas. As Ternium's mining operations in Mexico continue exclusively serving our own iron needs in the country. Moving to steel price, consolidated steel revenue per ton in the 3rd quarter was down sequentially by $74 and decrease year over year by close to $160 per ton.

Speaker 3

Quarter. In the Q3, the sequential decrease was mainly the result of a lower steel price in Mexico with a negative trend in benchmark steel prices quarter offset by higher industry cost contract prices. Looking forward, we anticipate quarter. Realized steel prices to decrease further in the 4th quarter, reflecting lower industrial contract prices in Mexico and lower realized steel prices in Brazil. Let's now review adjusted EBITDA and net income on Page 6.

Speaker 3

On the chart at the top, The main reason behind the decrease in adjusted EBITDA was a decrease in realized steel prices and higher costs, quarter. Partially offset by higher shipments as the consolidation of Usidinas did not have significant adjusted EBITDA in this quarter. At the turn of the bottom, you can see the impact of net results of the lower operating income, lower deferred tax results and the non cash effect Q3 increase in the participation in Usiminas. The increase in the participation of Usiminas has 2 non cash effects, A $135,000,000 loss due to the recycling of other copper sensitive can to net results and $171,000,000 loss due to the remeasurement of Ternium's stakes in Usiminas resulting from the purchase price allocation. $935,000,000 loss mainly included currency translation adjustments.

Speaker 3

Losses accumulated along the years in connection with the depreciation of the Brazilian real versus the U. S. Dollar on the valuation of Ternium's stake in Usiminas. This loss was non cash, which has no income tax effect and did not change the value of Ternium's equity. Moving on to income tax results, we recorded the 3rd tax loss at Ternium Mexico and Argentina subsidiary in connection with the depreciation of the local currency to the U.

Speaker 3

S. Dollar. Now let's review in the next page our cash performance. Cash from operations was $945,000,000 in the 3rd quarter aided by a $388,000,000 decrease in working capital. Quarter.

Speaker 3

This was mainly due to lower inventories, partially at Usiminas and higher trade payables. Free cash flow reached $563,000,000 in the 3rd quarter after CapEx of $382,000,000 We invested $119,000,000 in the acquisition of original shares of Usiminas. Quarter. And in addition, we consolidated Usimienta's net debt position. All in all, Ternium net cash position increased $200 quarter, reaching $2,400,000,000 by the end of September.

Speaker 3

Let's now turn to Page 8 of the presentation to review our performance in the 1st 9 months of the year. The shipments were really over 10,000,000 tons in the period, quarter increasing 1,300,000 tons year over year. The main changes between these two periods were On the positive side, a shipment increase of 1,300,000 tons in Mexico, as already explained, and the consolidation of Viciminas, which added about 1,000,000 tons. On the other side, we have lower shipments in other markets in other regions, totaling around 600,000 tons, a higher level of integration during 2023 between our Rio Dioneira slab facility and our operations in Mexico, which directed a little over 400,000 tons off slab shipments to the 3rd parties in the comparison. Adjusted EBITDA in the 1st 9 months of the year were $2,100,000,000 decreasing from $3,100,000,000 in the same period of last year, mainly as a result of lower ethane prices, partially offset by lower costs.

Speaker 3

Adjusted net income was 1 point $5,000,000,000 in the 1st 9 months, lower than the $2,100,000,000 in the same period of 2022, with adjusted earnings per ADS of $6.48 This was the result of lower operating results, partially offset by a higher deferred tax result. Moving on to shareholder return on November 16, 2023, we will be paying the first part of our yearly dividend corresponding to 2023. The interim dividend announced amounted to 1 point and $0.10 per ADS representing 22% increase over the interim dividend paid last year. Now on the final slide number 9, you can see Ternium's accumulated cash flow performance. Cash from operations, which is $1,600,000,000 in the 1st 9 months of the year with stable working capital.

Speaker 3

This led quarter. Free cash flow of $828,000,000 after CapEx of $778,000,000 Okay. With this, we finish our prepared remarks. Thank you very much for your time and attention. We are now ready to take any questions you may have.

Speaker 3

3rd. Please, operator, proceed with the Q and A session. Thanks.

Operator

Thank you. Your first question comes from Carlos de Alba with Morgan Stanley. Please go ahead.

Speaker 4

Yes. Good morning, gentlemen. Thank you very much. So first question is just very simply, what do you have a number for Ternium EBITDA ex Usiminas?

Speaker 3

Okay. Can I say, we'll speak before your second question?

Speaker 4

Quarter. Yes, I'll answer just maybe one out of time.

Speaker 3

We have seen the analysis that you that the different analysts have been doing. It's not exactly the same, the number ex Usiminas, because you know that we need to reflect the number of Usiminas accordingly to the adjustment of the purchase price allocation. So The number that we have been reflecting in our numbers of Usiminas is a little above $25,000,000 In any case, It's a very minor number that we have received from the Usiminas consolidation during this quarter. And as we have already mentioned, both Maximo and myself, we are not expecting to see any different number till the Q1 of next year where We will be starting to see more normalized level of EBITDA generation.

Speaker 4

But you're not going to disclose what was the EBITDA before Usiminas.

Speaker 3

No, no. From now on, we need to be consolidating 3rd. The numbers altogether.

Speaker 4

All right. And then the other question I have is, have you 3rd. When do you expect to come up with a plan for Usiminas? Clearly, a lot of things are going on besides just Stabilizing the operations, you need to decide whether you're going to invest on repairing the coking oven batteries, if you're going to invest in the mining business, if you're going to restart the Cubatao blast furnaces or maybe perhaps you're going to do an electric car furnace there. What do you have in mind and when should we expect you to announce the plans for Ximinas.

Speaker 2

Yes, we don't Carlos, hello, Maximo. How are you? Thanks for the question. We don't have a date to announce the plants. We are doing the Some of the plants were already taking care and some of the other things we are still analyzing.

Speaker 2

Clearly, Musa is a very interest project that, as you know, we haven't decided going through. But in some cases, We are making all the progress so that we can decide if we go through to start it right immediately. There's a team working on that project in particularly. Blast furnace in Cubatao will never came online again. I mean, we will have a plan probably for Tubalutao, but in the long term, but we do not include blast furnace for sure.

Speaker 2

And for the coke, we have been doing some progress in the coke. We shut down old facilities that we were spending a lot of money. And in the near future, we are going to have the solution for the coke in a much smaller probably scale than when we have to. So all the things We are going through in the day to day work. The objective, as you know, is that all the facilities reach the standard level that we have at Ternium at the end.

Speaker 2

I mean, we have opportunities in most of the lines of Usiminas And our objective and our plan is to do that, to have the same standards as Ternium. I hope I quarter. Good afternoon. Yes, that's good.

Speaker 4

Very good color, Maxime. Thank you very much. And just maybe final question on my end, and I'll get back on the queue, From the what is it is around 2 point quarter. Yes, almost $3,600,000,000 in cash and cash equivalents plus other investments that you reported. $1,300,000,000 are in Argentina.

Speaker 4

And given what we have seen happening there with the currency, How do you mark to market this cash position that you have in Argentina? What more color can you add there given that 3rd. There is a key concern from the market on this significant amount of cash that you have or Equivalence that you have in Argentina.

Speaker 3

Yes. Carlos, let me talk a little bit about that because it's an important thing to mention. As you said, we have, as of September, dollars 1,250,000,000 in cash based in Argentina. Of that, we have different instruments. As we have mentioned in the past, the way We want to hedge or cover this exposure that we have in Argentina is to the dollar and to use In order to do that, we need to use the limited instruments that are available these days in the country.

Speaker 3

So we are having a small fraction of that, which is related to peso eliminated instruments, which are basically for the day to day operation of the company. A significant portion of around $800,000,000 that are based on bonds, Argentine bonds that are quoted in dollars or are denominated in dollars, Veracette, and other instruments that are directly dollar denominated instruments like corporate bonds. Call. This last one, I'm not exposed to any devaluation on the currency or any situation because at the very end, directly dollar instruments. The issue is in relationship to the Argentine bonds that we need to account for them at the official exchange rate.

Speaker 3

So there, we are exposed 2. Any devaluation, any fluctuation of the value, the dollar value of that bonds in international market and also in the regard that is there between the official exchange rate and the financial strength. So we found that the best instrument to Protect our money in the country. And we are not Let's say, we are to marketing that bonds, but take into consideration the official exchange rate, which is the only one that you can use in the country. I don't know if I clarify your point, but if you have any other or specific clarification on this point, please let me know and we will try to do that.

Speaker 4

3rd. Just one follow-up there. What is of the $800,000,000 more or less that are in bonds, in U. S. Dollar denominated bonds, How much is Argentine government bonds and how much is private company bonds?

Speaker 3

Of this $800,000,000 that this is 100 percent Argentine bonds, we have an addition of $200,000,000 on corporate bonds.

Speaker 4

Okay. All right. And then about 300 in peso denominated instruments.

Speaker 3

A little bit

Speaker 2

less, yes.

Speaker 3

Yes, a little bit less because dollar link peso eliminated instruments among other things, but yes.

Speaker 4

Okay. Thank you.

Speaker 2

Quarter. You're welcome.

Operator

Thank you. Your next question comes from the line of Timna Tanners with Wolfe Research. Please go ahead.

Speaker 5

Yes. Hey, good morning. Good morning. I wanted to ask a little bit more about costs. Obviously, things are a little muddied with the addition of Usiminas, but not as close to that story and would be helpful to get a sense of what the cadence of cost could look like once the blast furnace reline is done.

Speaker 5

Just looking at the per ton number, If you have it in that format or whatever way you can share with us how you think of those costs falling off. And specifically, any thoughts on the Q4 costs With the prices coming down, are we going to see any relief on costs?

Speaker 3

Okay. Let me hi, Timna. How are you? Let me tell first the issue of the cost and then Maximo, you can comment on the pricing environment. Yes.

Speaker 3

So Let me first give you a direct answer and then we will try to deepen on that. We are expecting to see very similar costs coming into the 4th quarter. Quarter. Why? First of all, because we are not seeing much changes in the price of the different raw materials and the prices of slabs that we that will go through our financials in the 4th quarter.

Speaker 3

Though we have finished the realigning of the blast furnace in Usiminas, we are not expecting yet to see the impact of that during the Q4, and we are expecting to start to see that during the Q1 of next year. So clearly, we are not reflecting the cost of producing our own flaps in Usiminas, but The cost of imported or purchased labs. So all in all, we are not expecting to see much changes in the different parts of Ternium in relationship to cost coming into the 4th quarter. And we are expecting to see in the Q1 a decrease in price in the whole Ternium on a consolidated basis.

Speaker 2

The other one was prices. Sorry, Tina.

Speaker 6

I was just wondering about

Speaker 5

the order of magnitude about how to think about the realign, the magnitude of that cost Coming up, I heard that it was going to be lower. I'm just wondering if there was any color there?

Speaker 3

Clearly, it will be much lower because As you know, we will be we are at this moment, as Usiminas at this moment is participating slab. Quarter. The whole margin of buying slab against produced slab will be gained by the company entering into the Q1 of the year. So Whatever number you would like to put to that, it's a quite significant number that we'll be helping Ternium to recover The profitability and to draw a much lower number or lower number on the cost side, together with other things that we need

Speaker 2

to consider like the impact of some reduced price on slabs and costs and raw materials. And the other thing, Timna, is that Currently, Usiminas is working with 2 the other 2 blast furnace, number 1 and number 2, which are very small and not very efficient. Number 3 is much bigger and much more competitive. So you are going to change at least one of these small plus vertex for the big one.

Speaker 5

Got it. That makes sense. Okay. So then the other part of my question is really and to your point on prices. So the price Pikes that are being announced now in the U.

Speaker 5

S. Are really more of a Q1 story. So for Ternium, given it often lags a quarter because of the contract structure, quarter. Does that mean these price hikes that are announced now are more of a second quarter story? Or are they also going to be lagging into the Q1 like typical

Speaker 6

Delays on the quarter or so.

Speaker 2

Yes. For Ternium and we are talking about Mexico now. Remember, 40% of our shipments in Mexico are commercial spot markets. So we are seeing From the last 2 or 3 weeks and increasing prices. How much of that is going to be in the Q4 is not much.

Speaker 2

But November December, we are going to have higher prices at September October. On the other side, the 60% of our shipments are contracts. So you're clear, we are not having we are not going to have any effect on the Q4 and prices in the industrial sector in the Q4 are going to be lower. But for the Q1, we are going to see increases. The amount of those increases still depends a little bit on the increases that we are going to receive in the next several weeks.

Speaker 2

I think everybody thinks that prices at least in the next couple of months are going to continue to improve in the USMCA region. So we are going to see an increase in the Q1 for sure.

Speaker 5

Makes sense. Okay. If I could squeeze one more in, just wanted to ask about the demand story. Thanks. In Mexico, the demand story sounds really good on restoring of course and manufacturing.

Speaker 5

But are you not seeing any impact from higher interest Some of the color in the U. S. Is certainly some weaker construction activity and concern over automotive. So any impact from Fillover of the higher interest rates that you can point to in the Mexican region?

Speaker 2

Yes. To be honest, we are not seeing that yet, and I put yet because we have been talking for the last couple of conference calls that we were expecting some kind of impact. But still demand is still very robust in the U. S. To be honest.

Speaker 2

And we are not seeing a decline on demand that is going for industrial sectors that are also dependent on the U. S. Production of car increased like 7% or 8% in the year. All the other industrial sectors are guidance in the same line as last year without any decrease on that. And the commercial market in Mexico is also very strong.

Speaker 2

Although interest rate has increased also in Mexico, construction is coming back. Inventory in the commercial markets are low. So we are not seeing this effect yet. I think that in some point, we are going to see that, but this is taking much longer, Thanks, Scott. That's what we thought.

Speaker 2

So for now, we are seeing very robust demand in both markets.

Speaker 5

Okay. Good stuff. Thanks again.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from the line of Gabriel Samos with Goldman Sachs. Please go ahead.

Speaker 7

Hi. Thank you for the presentation. Thank you for taking my questions. First question, I would like to piggyback on Tina's question in the Mexican market. So you mentioned you're still seeing strong demand for the market as a whole.

Speaker 7

But I just wanted to understand how much room you see for Ternium to continue to gain market share from its competitors in the near term? And if you've seen the dynamics change in the market since the implementation of the higher import tariffs, given that Gaining share from imports was also one of the goals here with the higher investments in the country. And the second question here would be on dividends. So you announced higher interim dividends this quarter than you did for the same period last year. And you wanted to better understand how we should think about cash returns going forward given that you still have a very comfortable cash position at Ternium, but at the same time sizable investments to make in the Pascadia facility and potentially higher investments at Usiminas as well.

Speaker 7

So just wanted to understand how we can factor all these things and to think about cash returns in the future. Thank you.

Speaker 2

Okay. Thank you, Gabriel. I'll start with the first question and it's demand in Mexico. I mean, the demand in Mexico, as you said, It's very robust. If you take the 9 months of the year, we are at least 7% higher than last year.

Speaker 2

So it's a huge increase in demand. Of course, our shipments increased much more for several reasons. First, our market share against imports, of course, in Greece. And also, one of our competitors is not producing in the market. So that's also helpful.

Speaker 2

Now on what can we gain more? I think we have still a very huge amount of the market that we can gain. Our problem is how we increase production because most of our lines today All working at rather full capacity. We have some production in the hot three mill in Chilobuzco, and we are increasing that production. And we have to I mean, imports today are still at high demand, even though the increase in the tariff.

Speaker 2

Although we have seen some decrease in September from July August, There is a big decrease in September, but there's still some import share that we can gain with the capacity we have. So we are very confident that we can continue gaining this market share in Mexico, and we have room for that. I hope I clarified a little bit your question Gabriel with this. You did. Thank you.

Speaker 3

Pipe. Okay. Gavi, let me take your second question. Let me mention, first of all, that the dividend that This announcement is just an interim dividend. And in the last 2 years, Though you know that the shareholders meeting needs to approve the final dividend in the last 2 years, this the internal dividend represented 1 third of the total dividend for the year.

Speaker 3

So there you have an expectation of the dividend that will be paid On a yearly basis, which as already mentioned, will be around 22% higher than we paid last year. So there you have one reflection of what the company is doing in relationship to capital allocation. So Outside the normal usage of cash that the company has, and we have already mentioned many times that the expectation of CapEx for next year is around $1,500,000,000 without including the CapEx of Vicinas that we are expecting to see an additional $300,000,000 or around that number for 2024 in Usiminas. So besides that, we are increasing the dividend payment. And as we always know, the company is in a position we'll continue to follow that trend.

Speaker 3

So basically, what we are doing is, 1st of all, financing the CapEx that the company is having. There is a significant level of CapEx coming in next and the following years in order to finalize project in Mexico and then sustain and increasing the level of dividend payment. Besides that, we will continue and we are in a position to continue having a very strong financial position, we think it's important for the years to come in Ternium.

Speaker 7

That's perfect. Thank you very much for the answers.

Speaker 3

You're welcome.

Operator

Quarter. Thank you. Your next question comes from the line of Rodolfo Adriano Risenda Angel. Please go ahead.

Speaker 8

Hi, good morning. I have a few questions. My first question is, In this scenario that we're seeing, you mentioned that increase in steel imports in Brazil. We've been hearing the local industry discussing lobbying for increasing taxation of imports. I wanted to hear your thoughts around that.

Speaker 8

That's my first question.

Speaker 2

Yes, Rodolfo, quarter. I think it's something that the Brazilian government has to do. I mean, as I said in my initial remarks, Rodolfo, Most of countries, U. S, Mexico, Europe, some Asian countries, they are all protecting against Unfair Trade, especially from China. I mean, so if you want to have an industry, which I think is very important in Brazil, You have to have some defense of that industry.

Speaker 2

It's impossible today If you don't have that, so I think it's very important that the government takes into account and I'm very supportive of what the local Brazilians as I say, I fully agree with them.

Speaker 8

Okay. Second question is more about How do you see mining in this environment? Because we saw Chinese steel hurting steel margins for number of years in the past. And during that period, it was always challenging for the steel makers, but the ones that had is some type of backward integration, especially into Arenore kind of feared, came out a little bit better than the rest. You already have exposure to Arenore.

Speaker 8

So I just wanted to hear your thoughts on how do you see Arenore overall? And what's the We know about the expansion of Moosa. You mentioned that there isn't a decision yet, but how do you go about it? What are the what do you need to see to make a decision to go ahead with that. And then I have a final question after this.

Speaker 2

Okay, Rodolfo. I mean, it's not that we have to take the decision today. We are working and In order to analyze and to go all the steps we have before having to have Make a decision. This doesn't as I said, this doesn't does not mean that we are not working. I mean, we are working And the decision has to be made, I think, between 1 2 years, because we are going through from the permission and the environmental permission, we are going through with all the analysis and the quotations and engineering of the equipment.

Speaker 2

So we are going

Speaker 3

through the project

Speaker 2

of Musa as If the project is going through, but the approval of the project, we have to take it in, I think it's a little bit more than 1.5 years. So that's the only reason why we are not saying. A year and a half from now, when we have all the engineering, when we do realize What are the different issues of the reserves, of the equipment, the final cost of all this engineering? We should make an announcement if we go through or not.

Speaker 6

Okay. Makes sense.

Speaker 8

My final question is a question I got from an investor. I didn't know the answer. So we of course know about the changes between the Control and Shareholder Group and with Nippon selling out and leaving gradually more room for the Taked Group in Usiminas. And The question I got was in about Unigail, if there is any discussion eventually about Nippon Steel selling also their stake there to you or to Usiminas itself. Anything changes there or not?

Speaker 2

No, no, there has no Unigail is still or is still and I think it will be 70% Usiminas, 30% Nippon Steel. I don't think we're going to change that or there's any plan to change that. Remember, we also have the same facility in Mexico where we have 51% and Nippon has 49% of that. So For that particular market, for that particularly type of line, a Galvanized and Galvanil line for the automotive industry. We are very comfortable with this.

Speaker 2

So I don't see any changes.

Speaker 6

Okay. Thank you very much. That was all for me.

Speaker 2

Thank you.

Operator

Call. Thank you. Your next question comes from the line of Carlos de Alba with Morgan Stanley. Please go ahead.

Speaker 4

Yes. Thank you very much. I just wanted to follow-up, Maximo, on the discussion of potential imports steel imports in Brazil. Thinking about this, how what is the level that you believe it could be feasible for in Brazil because I hear you and I hear the Brazilian executives talking about Mexico and the U. S, Canada 20%, 25%, but None of these countries export to China as much as Brazil does.

Speaker 4

So how can the Chinese government sorry, the Brazilian government go and tell the Chinese, We don't want your steel, but we want you to take our iron ore and our proteins and our grains. So it's I think a much more complex discussion Than it is for Mexico and the U. S. So is it realistic that we can get the 20% or is it more likely that we stay maybe at 15% if we are lucky?

Speaker 2

I think there are 2 different things, Carlos, and make me clear. I mean, going in the primary sector, As you said, grains and iron ore, I think it's more of a commodity market. And so it's not that China is doing Brazil Any Favor or Argentina buying the grains. I mean, it's a market it's a commodity market where the price ESET in a very different environment and has nothing to do with Brazil, China or anything. In the industrial sector, I think It's very different because what you cannot permit or what you cannot compete with is unfair trade.

Speaker 2

And what we're talking here is about unfair trade, and that is important. I mean, Canada exports to China a lot. Europe exports to China a lot of equipment and everything. Nevertheless, What we have to do is respect the rule of law. I respect the rule that you cannot selling to a market with unfair practices of trade.

Speaker 2

And that's the thing that the Brazilian steel industry and I think Other industries should start fighting in Brazil. If you see what 3rd. The story of USMCA or the story of Mexico is a story of reindustrialization, of relocalization, but reindustrialization, where clearly have much more higher salaries for people from the primary sector. And Brazil has gone for the last 10 years in a very different road. And I think that's some of the problems that Brazil is having.

Speaker 2

And so making a case for unfair trade for defending from unfair trade. It's a very valid case from Brazil, and it's a thing that the government should Go back to the to their thinking several years ago where they did that. So I think it's a completely different position. Correct. I don't know if I'm clear about this.

Speaker 2

Quarter. Yes, yes, fair point. And again, it's something that it's making very huge I mean, I have a lot of people from Brazil asking me, What is Mexico doing very well? Because Mexico is doing very well, to be honest. And what Mexico is doing very well is exactly this.

Speaker 2

It's the near shoring is fighting unfair trade. It's not other thing than that. And for Brazil to go this way, to have the increase in demand, to have increase in growth, You have to go this way. You have to defend your industry. If not, you're going to primaryize even more the economy, which everybody knows is not very good.

Speaker 4

Fair enough. Thank you very much, Maximo.

Speaker 2

You're welcome, Carlos.

Operator

Thank you. Your next question comes from the line of Caio Greiner with BTG Pactual. Please go ahead. Hi, good morning guys. Just a confirmation from my side, the call quality is a little poor here.

Operator

You guys mentioned your CapEx estimates for 2024. Can you please repeat that?

Speaker 2

We didn't I don't know if you mentioned

Speaker 3

We did? Yes, yes. We've stated that we are expecting to have CapEx for 2024 of $1,500,000,000 Ternium and around $300,000,000 for Usiminas.

Speaker 2

Yes. Remember, Caio, Our expected CapEx for Ternium in 2023 was $1,000,000,000 but because of some of the delays in the contracts of Pesqueria, That CapEx is going to be $850,000,000 only Ternium. This $850,000,000 is going to be go to 1.5 because all the investment in Pesqueria start coming in. At Enoziminas, it's going to decline from 600, I think $650,000,000 this year

Speaker 1

to $300,000,000

Operator

quarter. Thank you. Your next question comes from the line of Camilla Barter with Bradesco. Please go ahead.

Speaker 6

Hi, good morning guys. I think most of my questions have been answered right now. So I just wanted to answer a quick question on capital allocation trends. There has been a large working capital release this quarter. So just wanted to get some more color on what you are expecting In terms of working capital in the coming quarters.

Speaker 3

Yes, okay. Hi, Camilla. Let me comment into that because a significant portion of the working capital release during this quarter was coming from Usiminas. As we were discussing, in order to prepare the realignment of the blast furnace, it's willingness to build up the inventories slab. So as the months are going through the relining process, they started to use 3rd.

Speaker 3

That flat sold, there was a capital working capital reduction in relationship to it. In the case of Ternium, there was also some working capital reduction, and we are expecting to sustain a similar level of working capital in the coming quarter. As we mentioned, we are expecting to see nice differences in the cost of of our product in the cost of raw material and some decrease in the price of our price. So Similarly, all in line what you saw this quarter in Ternium is what we are expecting to see next quarter in Ternium 2.

Speaker 6

Okay. Thank you.

Speaker 3

You're welcome.

Operator

Call. Thank you. I would now like to turn the call back over to Ternium's CEO for closing remarks. Please go ahead.

Speaker 2

Thank you, and thank you all very much for participating on today's call. As usual, feel free to contact us conference call.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Ternium Q3 2023
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