Ternium Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 10 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your operator today. At this time, I would like to welcome everyone to the Ternium Second 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 session.

Operator

Followed by the number 1 on your telephone keypad. Thank you. It is now my pleasure to turn today's call over to Sebastien Marti. Please go ahead.

Speaker 1

Good morning, and thank you for joining us today. My name is Sebastian Mori, and I am Turing's Global IR and Compliance Senior Director. Ternium released yesterday its financial results for the Q2 and first half of twenty twenty three. This call is complementary to that presentation. Joining me today are Ternium's Chief Executive Officer, Maximo Vedoya and the company's Chief Financial Officer, Paolo Grittio, who will discuss Ternium's business environment and performance.

Speaker 1

At the conclusion of our prepared remarks, there will be a Q and A session. 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. 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.

Speaker 1

Mariano.

Speaker 2

Thank you, Sebastian. Good morning, and thanks to you all for participating in our conference call. In this quarter, we reported a strong set of results with adjusted EBITDA of $883,000,000 equivalent to a margin of 23%. We also announced the location of Ternium's new upstream mill in our Presqueria Industrial Center in Mexico, completing the integration of our facility in the country. And finally, we completed the acquisition of additional shares in the control group of Usiminas, a change that enabled us to have a more direct involvement in the company's management and the implementation of its strategy.

Speaker 2

Let me comment about the opportunities this positioning offer us in our main markets. In Mexico, Ternium is presented with 2 main opportunities, substitution to imports in the market and taking advantage of the near shoring of manufacturing capacity. Over the years, the flat steel market in Mexico has continually increased its sophistication. Before we began building to our facility in Pesqueria. The manufacturing industrial sector in Mexico represented 50% of apparent flat steel use.

Speaker 2

Last year, this went up to 66%, A more than 15 percentage point increase. This sector demands high value added products that require technology, know how and lengthy certification process. On top of this, a good share of flat steel consumption In Mexico, it's still being served by imports, which represent about 40% of the market. Over the past 10 years, most of our investments in the country have targeted the growth in industrial customer consumption of high value added products as well as a substitution of imports to this same market. A focus on sophisticated products and service enable us to compete based on differentiation, customer service and product development.

Speaker 2

On the other hand, as we have mentioned several times, reassuring is something that is happening and it is doing so faster than we expected. The 15% increase in the flat steel industrial market in Mexico is also linked to this dynamic. The pace of investment in the north of the country has been very significant and it has so far capture more than 2 thirds of the total nearshoreing demand coming to Mexico. This is reflected in our updated expectation for steel consumption in Mexico in 2023 with a growth of 4.3% compared to 2022. World Steel SRO previous estimation released in April was 2.5%.

Speaker 2

With this background in mind, the new slab mill in Pesqueria will be a key part of our growth strategy in the region. It will complement the integration of our facilities in Mexico, substantially accelerating our capacity to respond to changes in the market. And of course, it will significantly help with our decarbonization targets. In addition, We are reinforcing our position as a leading steel supplier in the region with our downstream investment program. We are going deeper into new value added products, which will help us better serve our customers in the automotive, renewable energy and home appliance industries among others.

Speaker 2

These projects represent an excellent opportunity for us to continue capturing demand from high end steel products in Mexico. Let me now make some comments about Brazil. As a first step, after the increase of our participation in the controlling group, Usiminas made changes to its Board of Director and Management. Marcelo Chada, The former CEO of Ternium Brasil is now Usiminas' CEO, replacing Alberto Ono, who has been appointed as Chairman of the Board. Usiminas is now beginning to make several organization changes.

Speaker 2

It is introducing new business practices while it designs a plan that will encompass all areas of the company, but with a special focus in its industrial operations. Usiminas can provide highly sophisticated steel grades for the most demanding industrial applications, including Auto grade steel, of which it is the number one supplier in Brazil. The Brazilian steel market has not been at its best lately, but I believe it has a great potential in the longer term. Brazil current steel consumption It's lower than what it was 10 years ago and fuel consumption per capita with 110 kilos per capita It's also very low when compared with other countries either developed or not. The main opportunities I see for this market are coming from near showing trends, which offer opportunities to integrate value chains with products containing Brazilian steel.

Speaker 2

It comes also from import substitution, the energy transition agenda, the aging of vehicles and agriculture machinery as well as improving the rate of inhabitants per vehicle, the significant gap in home availability and finally, the need to increase infrastructure investment in the country. All in all, Brazil has substantial opportunities to start growing consistently again under a new trend of industrialization, which should support an increased to intensity in the use of steel. Turning now to Argentina. We currently continue to see stable steel demand for the 3rd quarter, similar to shipments in the southern region during the Q2, but there is an election process underway that will be over by the end of the year. The country also needs significant macroeconomic reforms and it's probably going to get then sooner rather than later.

Speaker 2

We expect this to negatively impact this market in the near future. Before I wrap up my prepared remarks, I would like to make some brief comments about a very important matter, safety. 2 weeks ago, we celebrated our Annual Safety Day event. The event was scheduled with various activities throughout the week, including expert panels and the sharing of our team leaders' experience in the different countries where we operate. A recent change in this respect is that since the beginning of July, the position in charge of safety, The EHS Vice President has a direct report to me, enabling an even closer review of our safety 4 months.

Speaker 2

Finally, we issued last month our sustainability report. We included this included They are a comprehensive description of our activities regarding climate change, environmental issues, human resources and our relationship with the communities where we operate, which are all considered when assessing our business strategy. I encourage you to take a look. Let me now make some final comments to prepare or to close my prepared remarks. The regionalization of steel market recently, Exacerbate by Neassuring is a dynamic for which we have been preparing for a long time.

Speaker 2

With an aggressive growth strategy in Mexico, our expansion in Brazil and the new role for Usiminas, our new to R and D capabilities, a unique product portfolio offering throughout Latin America and the integration of ESG into our business strategy. I believe we are a stronger company now, a regional leader with greater integration. We have significant opportunity for growth in markets that we know and have great potential. The next steps of development will transform our company once again, strengthening even more our competitive position. All right.

Speaker 2

Pablo, please, you can now go ahead with the presentation of turning performance in the Q2.

Speaker 3

Thanks, Maximo, and good morning to everybody. Let's review Terminals performance during the quarter. Expected to improving market conditions during the Q2, particularly in North America, together with a normalization of production cost to write in a robust set of results for the period. On Page 3 of the presentation, you can see the to the performance of Ternium's EBITDA and net income on a quarterly basis. Adjusted EBITDA reached $183,000,000 in the 2nd quarter on a margin of 23% of net sales or $2.96 per tonne.

Speaker 3

The improved operating performance led to net income of $736,000,000 in the period with an earnings per ADS of 3 point and $0.19 Before we continue, let me call your attention on the fact that so far We have been accounting for Usiminas results as equity in earnings of non consolidated companies with no impact on Ternium's operating numbers. After the recent acquisition of additional shares of Usiminas, Ternium increased its stake in Usiminas Control Group and on the Ternium results in the Q3 of 2023, we'll fully consolidate Usiminas results. The consolidation of Usiminas financial data will have a significant impact on term reporting in the Q3. Today's qualitative guidance on term in shipment, margin, adjusted EBITDA and CapEx for the Q3 will not to account for the impact of Usiminas consolidation, because we believe it takes more sense that they remain comparable with the number reported in the Q2. And with that, let me turn to our analysis of Ternium's 2nd quarter results.

Speaker 3

Let me review now steel shipments on Page 4 of the presentation. In Mexico, Steel volumes were 2,000,000 tons in the 2nd quarter, slightly below the Q1 all time high. On a year over year basis, shipment increased 21% in the 2nd quarter, supported by a remarkable market share gain Mexico Flat Steel business over the last 12 months. However, turning shipments in Mexico in the Q2 fell short of our expectations mainly due to supply chain contained raw material and finished steel at our facilities. Looking forward, we expect shipments to increase in Mexico in the Q3.

Speaker 3

Our parent steel demand remains healthy. The industrial market continues to show strong activity with special mention to the automotive industry as well as to the white goods industry. For the time being, we are not seeing any sign of recession in the North American market. In addition, the commercial market in Mexico remains steady. This is a more volatile market and is more sensitive to price trends and to still inventory levels, but we do not believe inventories are high at this time.

Speaker 3

In the Southern region, shipments in the Q2 were 563,000 tons, slightly higher sequentially, mainly as a higher shipments in Argentina following a seasonally slow Q1. On a year over year basis, volume decreased 5%, reflecting lower steel demand in Argentina and reduced export to other countries in the Southern region. Looking forward, we expect shipments to remain relatively stable in this region. Turning now to other markets. Volumes decreased concurrently with the company increased integration and growing presence in Mexico.

Speaker 3

In this regard, to the new facility in Brazil increased shipments to the company's downstream facilities in Mexico. In the next page, number 5. You can see that combining these developments, we arrived at a consolidated shipment of 3,000,000 tons in the 2nd quarter, slightly below the Q1 level. Looking forward and without taking into consideration Usiminas' to consolidation. We anticipate consolidated steel shipments to increase sequentially in the Q3.

Speaker 3

Moving on to steel prices, revenue per ton in the Q2 increased sequentially by close to $120 per ton. The main driver behind this sequential increase in revenue per ton was the strength of the North American steel markets during the period. We expect Fermium consolidated revenue per tonne to decrease sequentially in the Q3 due to the impact of the current weaker steel pricing environment, which is expected to prevail over the positive impact of better contract prices in Mexico in the period. Let's review now on Page 6, the main drivers behind the improvement performance of the 2nd quarter. The sequential increase in EBITDA adjusted EBITDA was mainly the result of higher realized steel prices and to a lesser extent lower costs, including lower purchase slabs and energy prices, partially offset by higher maintenance expenses and services costs.

Speaker 3

Looking forward, we expect a sequential decrease in adjusted EBITDA in the 3rd quarter on lower adjusted EBITDA margin, driven by the decrease in revenue per ton as explained and slightly higher cost per ton, partially offset by higher shipments. The net income chart at the bottom shows that the sequential improvement was partially driven by better operational results. The income tax result was again very low in the Q2 with an effective tax rate of just 1%. Reflecting again in deferred tax results, Astell New Mexico subsidiary in connection with the Mexican peso 6% appreciation during the quarter. Let's now turn to Page 7 to analyze changes in cash flow and net cash position.

Speaker 3

Cash flow operation was $48,000,000 in the 2nd quarter, which include the negative effect of a $605,000,000 increase in working capital. This was mainly due to $414,000,000 increase in steel inventories as we revealed our steel inventories in Mexico after a decrease in the previous quarters and to an $89,000,000 increase in trade and other receivables reflecting higher realized price. We are not expecting working capital increases like this further on. The development led to 150,000,000 tons negative free cash flow in the Q2 of 2023 after CapEx of $198,000,000 As we progress with our investment plan in Mexico, we expect CapEx to continue increasing in the second half of the year. Tanium net cash position was $2,200,000,000 by the end of June, decreasing $800,000,000 in the 2nd quarter.

Speaker 3

This reduction mainly reflects the free cash flow results, a dividend paid to shareholders amounting to $353,000,000 and a dividend in kind paid to non controlling interest accounting to $234,000,000 Turning to Page 8. To review the numbers from the longer term perspective. Consolidated steel shipments in the first half were 6,000,000 tons similar to shipment levels in the first half of last year. Adjusted EBITDA was $1,400,000,000 in the period on a margin of 19% of net sales. This led to a net income of $1,200,000,000 and earnings per ADS of $5.10 in the first half of this year.

Speaker 3

This quarter, we also paid the 2nd part of our real dividend in May with a payment of $1.80 per ADS. To have increased shareholder return over the last years, and we will strive to sustain or improve shareholder return looking forward. Finally, in Slide number 9, you can see that the cash flow performance with cash flow operation of 360 $1,000,000 in the first half of the year after working capital increase of $387,000,000 mainly reflecting the higher fee inventory volumes and trade receivers. This led to free cash flow of $265,000,000 in the first half of this year after CapEx totaling $395,000,000 Okay. With this, we finish our prepared remarks.

Speaker 3

Thank you very much for your attention and participation today, and we are now ready to take your questions. Please, operator, proceed with the Q and A period.

Operator

At this time, I would like to remind everyone in order to ask a question, please. Your first question comes from the line of Carlos De Alba with Morgan Stanley. Your line is open. Carlos De Alba, your line is open.

Speaker 4

Yes. Sorry, I was on mute. Thank you very much. Good morning, Maximo, Pablo and Sebastian. So several questions, but let me stick to maybe 2 right now.

Speaker 4

The first one is on Usiminas consolidation. Pablo, you mentioned you're going to be fully consolidating the business, but obviously, The impact on the overall company numbers on margins, particularly with Aperto and returns is going to be negative given that Usiminas Struggling at the moment and hence, I guess, the opportunity for Ternium going forward. But how are you planning on, I guess keeping the transparency in your reporting so that the market and we all can appreciate what the trends are in what has been Ternium up until this time and the new Ternium with the consolidation of Fusiminas. Yes, that will be my first question. I'll come back with the second.

Speaker 3

Okay. Let me take that one. Hi, Carlos. How are you? Yes, you're right.

Speaker 3

This is an important question and important answer for us to give to you. Clearly, what you mentioned is completely right. We will be consolidating in Ciminas and the impact of this consolidation in our numbers We will be different depending on the line of our financial statement. Clearly, in the upper lines of our financial statement, sales and shipments and all these numbers, the impact will be not minor. But as you mentioned, looking at the results, The current result of Usiminas, the impact at the net income, the EBITDA level will be minor in comparison to the other numbers.

Speaker 3

Initially, we will be giving information on a segment basis separated between what we have today, which is the steel segment, the mining segment and then we will have a segment which will be Usiminas. So and then, of course, we will have the consolidation of these three segments. So you will have I think you will have the clarity you will need in order to analyze the numbers. And of course, you know that Vicinas continues to be a public company. So there you will see also more based on the explanations on the numbers of Usiminas.

Speaker 3

But this will be at least our initial proposition to show the numbers, And then we will analyze if there is a need for changing that is maximized to look at the number differently. But I guess you will have initially very clear numbers to look at.

Speaker 4

All right. Thank you, Pablo. And then just What are the expectations? How should we think about the 3rd party slab sales from Brazil? You've given the Greater integration that you have been having in the last few quarters.

Speaker 2

Yes, Carlos, hello. How are you? I think it's going to be 0, to be honest. I mean, Ternium together with Cosiminas is going to need to continue buying slabs. So most likely all the slabs from Ternium Brazil are going to go either to Sininas Or to Ternium Mexico or to Ternium Argentina.

Speaker 2

So there's not probably not going to be any sales, Sure.

Speaker 4

Understood. All right. Thank you, Maximo. I appreciate I'll get back on the line. Thank you.

Speaker 2

Okay. Thank you, Carlos.

Operator

Your next question is from the line of Thiago Lofiego with Bradesco. Your line is open.

Speaker 5

Thank you. Good morning, gentlemen. First question about Usiminas still. Massimo, could you talk a little bit more about the strategy? You mentioned the focus will be on the industrial side.

Speaker 5

So the question is, how much CapEx Do you think you will need to deploy Enosominas to bring the company back or up to the operating efficiency levels that you think is your potential target or optimal. So that's my first question. My second question is about the slab market. What's your view on slab supply demand globally and when and whether we should see the HRC slab spread, compressing or expanding from here. Thank you.

Speaker 3

I'll take the second one first. The slab market,

Speaker 2

as you know, it's always been another very big market. I mean, there's not a lot of transaction with Labs. We are the biggest buyers labs probably, but it's a small number compared to whatever is trading in hot rolled coils. And we don't see much changes in the gap today. I mean, in the future, we think that the gap was more or less sustained at the levels we are.

Speaker 2

With ups and downs, and you can see that in the history. But today, it's at a level that it's the same level of the average for the last 5 or 6 years. This is today the difference. So we expect that Difference to continue being what it is today. Again, with the volatility, of course, of the steel industry, but we don't see why it's going to change.

Speaker 2

Regarding Usiminas' strategy and CapEx, clearly, I mean, we don't have a number of CapEx yet. I'm not I don't think I'm able to give you today a number. We as I said, we are I mean, our team is going to Syminas. People are moving. Marcelo Chara took over as CEO, but the team of Ternium, some of them are arriving in the near future and we start changing our dynamics of how the company is managed.

Speaker 2

So probably we will spend some months before we can give you an exact number on the CapEx. Clearly, the agenda for Usiminas in the next few months is going to be increase the competitiveness of Usiminas, especially the competition of Huatatinga's upstream CapEx, the blast furnace, the steel shop number 2 and probably to finalize our plan for the coke to batteries. So we have to target the increased efficiency in Usiminas, and this will be the main focus. I think the other one is on the commercial side. As you know, several of the customers, Usiminas, are the same customers of Ternium.

Speaker 2

So with this more, let's call it integration, if you want, but it's not exactly integration. But we can offer more solution to the customers in all our markets. And so I think that's the second issue. But I think the first is that we have to focus on the efficiency of the industrial segment of Usulinas.

Speaker 5

Very clear, Matthew Muende. And just you just Quickly mention about timing for this, for us to be to know a more detailed CapEx number. You think this will be like the next until the end of the year or maybe like couple of months just for us to understand?

Speaker 2

I mean, we will have a rough Idea by the end of the quarter probably, to be honest. But again, it's going to be a moving target in the first few months until the end of the year. But we will have a rough number by the end of the You have to take into account, Thiago, that today, we are in the middle of the blast furnace Reining and steel shop number 2 and the problems we have with the battery the coke battery. So people are a little bit stressed in trying and things are going well. I mean, there is some delay, but I think that we are going to end in the middle of September.

Speaker 2

But people are much more focused on that and try to finish that in a good way. And in parallel, we are working on this plan. So by the end of September or at the end of the quarter, we should have something, but it's not going to be the definite one.

Speaker 5

Fair enough. Thank you, Massimo.

Speaker 2

You're welcome, Thiago.

Operator

Your next question is from the line of Kimna Tanners with Wolfe Research. Your line is open.

Speaker 6

Hey, good morning. Thanks everyone. Wanted to see if you wouldn't mind Trying to help us refine a bit the comments on your margin outlook and the Mexican shipments. So You guided to higher shipments in Mexico. We know that the demand there has been quite strong and that without AMSA running, there's a Gap in the market that's being fulfilled with even more imports than normal.

Speaker 6

So I'm just wondering how much more can you ship are you willing to ship if you can give us an order of magnitude there?

Speaker 2

Thank you, Tim. Good morning. Yes, to be honest, we had a plan That was a bigger shipment for this quarter, and we were not able to fulfill, as Pablo, I think he mentioned, because of some supply chain constraints. In the raw material coming to Mexico, some problem in one in some of our lines and supply chain constraint in the shipment to our customers. So we have much more orders for this quarter than what we shipped.

Speaker 2

We don't like that. It's not very good for us. So I think that next quarter, the plant is to ship at least 200,000 tons more. So a 10% increase roughly. I think some of these constraints has been addressed, but I don't want to promise all of that because again, it's very tight, All the supply change in Mexico, it's very, very tight, everything.

Speaker 2

So but yes, the orders we have the orders and we increased probably Even a little bit more than that, if we were able to ship them.

Speaker 3

Okay. Let me ask Paolo here. You mentioned the other issue is the margin, the expected margin for the Q3. I think that one important number to look at, of course, we have a very good margin during the Q2, which was 23. But if you look at the margin that Terniums make during the 1st part of this year, the 1st semester, we were at the level of 19 present, which is, if you remind, when we have our prior conference calls and meetings that Maximo presented as a target for the company to be in the range that we always talk about, which is 15% to 20%, but in the upper side of that range.

Speaker 3

So We should be in the coming quarter more in line with this level than, of course, to what we have in the 3rd in the 2nd quarter. So usually for us it's better to look the numbers of Ternium in a little more longer time frame than the quarter. But here is a clear example of if we look at what happened during the semester, it is more in line what we are expected to support.

Speaker 6

Okay, perfect. You answered the second part of my question. So I'll leave it there and pass it off to the next person. Thanks again.

Speaker 2

Thank you, Tina. Very welcome.

Operator

Your next question is from the line of Kyle Ribeiro with Bank of America. Your line is open.

Speaker 7

Good morning. Thank you for the opportunity. So I wanted to take advantage of the fact that you'll to consolidate with the Nina's results right in the coming quarter. To ask you a question specifically about the finished flat steel market in Brazil, right, where prices have been coming down recently given the high import parity, premiums, weaker demand and also the higher import penetration. I just wanted to get your perspective, right, on how you see flat steel prices evolving in Brazil in the coming weeks months.

Speaker 7

And then secondly, Dominik is in the midst of carrying out maintenance of this blast furnace in Patinga, right? So I wanted to ask you if you have any perspective on what impact the conclusion of that blast furnace maintenance could have on the margins of the company, right, once to backup and running at full capacity.

Speaker 2

Thank you. Yes. Thank you, Caio. Good morning. I mean, marketing in Brazil clearly has a problem today with imports.

Speaker 2

If you see at the number of imports is coming monthly to Brazil, it's around 400,000 tons a month, which is the same number as It was in 2021, but with a higher market. For us, this is a very, very big number and Our target is to reduce this number, should be our target and the target of the other steel companies in Brazil. I think that the other thing is that Brazil has to take into account that in some moment, some trade remedies against some further trade deal they have to put. All the markets have done that from Argentina to Mexico to Colombia, USA, Europe, I mean, everybody except Brazil has target unfair trade. And Brazil used to be a country with a very strong position in this.

Speaker 2

Somehow in the last years, This position has been a little bit more weak, but I think that we have to and I believe the government It's got it's willing to support this. And so that's the strategy. For one side, We have to take into account that we have to, let's put, combat these imports with our commercial efforts. But on the other, unfair trade has to be in the agenda much sooner than later. So that's your first question.

Speaker 2

The second question was about The

Speaker 3

impact on the after the relining of Los Angeles on the members of Usiminas, clearly the margin.

Speaker 2

Oh, Clearly, the margin will increase. I mean, the blast Usiminas has 3 blast furnace. The 2 that are operating today, as you know, are very to small blasjones with a much higher cost of production because of the fuel rate. Blast furnace number 3 is a very big one and very competitive one. So the numbers are going to change very positive.

Speaker 2

As soon as we start producing, that should be around middle of September.

Speaker 3

Okay.

Speaker 2

I hope, Caio, I answered the question.

Speaker 7

Is there any way that you can give us a number that you expect, I mean, If margins will return maybe to double digit, above 10% or any sort of guidance on that front? No, I don't have a number today

Speaker 2

to give you. Yes. No, Caio, not today. Probably next quarter, even in Usiminas conference call or in our conference, we can Put a target or a number, but I'm not able to put it today. Perfect.

Speaker 7

Thank you very much, Maximo. I appreciate it.

Speaker 2

Thank you to you, Caio.

Operator

Your next question is from Leo Korea with BTG. Your line is

Speaker 8

open. Hello. Good morning, everyone. Thank you. Yes.

Speaker 8

So just coming out with the more

Speaker 2

Can you speak a little bit? We cannot hear you very well.

Speaker 4

Sorry,

Speaker 3

Yes, it's better, much better.

Speaker 8

Yes, okay. So sorry about that, guys. Yes, so the first question It's a little bit more conceptual, Maximo. I mean, everyone has been following the story for many years, right? And now with Usiminas being consolidated, you guys obviously made a move some years ago with CSA and which has now turned in Brazil, which is also Super relevant.

Speaker 8

Just again, I know there's no decision and this is all very conceptual, but would it

Speaker 2

make any Since I mean, do

Speaker 8

you guys consider at some point entertaining the possibility of potentially merging Muziminas and Ternium Brazil, given the I mean the clear synergies, right, that, that would potentially involve. And the second question is moving more towards market questions. We're seeing, I mean, a bit of volatility mainly in sheet markets in the U. S, right? We saw prices reacting very sharply early in the year to the upside.

Speaker 8

Now we're seeing a bit of a correction. We saw 2 rounds of price hikes to try to stabilize prices. I mean, just wanted to get your view on where you think prices are headed towards the end of the year. So those are the 2 questions. Thank you very much.

Speaker 2

Perfect. Thank you, Leo. Usiminas and turning Brazil. Today, We don't have plans to do something like that. As you know, Usiminas is a public company and we have an agreement with our bond and Nippon Steel that we changed this agreement, but it was clear what the agreement is or what the agreement.

Speaker 2

So for the time being, we are not analyzing anything of that. We do know and we do expect that there's going to be synergies between Usiminas and Ternium that are going to make a positive impact in both companies, not in Ternium or not in Sabina. In both companies, Of course, the management practices, the complementation with slabs. I mean clearly Cubatao and Ternium Brasil are very close by, joining efforts in procurement, in I mean, putting together the purchasing power of both companies should be a synergy for both companies. And also, I think the customers are going to see Usiminas as they are the same at least the industrial customers the same in Argentina, Brazil, Mexico.

Speaker 2

Our shipments in U. S. Also, I mean, they see Our involvement in Ciminas has making Ciminas a little bit stronger. So I think there's a lot of synergies with the way it is. So that's the first question.

Speaker 2

Prices in North America, Clearly, the volatility is there. Prices went up. 1st quarter went down 2nd quarter, now Went a little bit up today, I think they went $5 down. So volatility is there, but I think that the range of prices, It's around today $950,000,000 but as I said, I think there's a new level of prices in the U. S.

Speaker 2

Or in the North American market that is around this 900s, the high 900s. And I think it's going to stay around there. The volatility is going Steel V. And I think we are going to have still volatility in the next couple of quarters. But I think it's going to be around over there.

Speaker 2

Why I said this, the demand is very strong. We see it in Mexico and we are also seeing it in the U. S. I think demand is strong. Clearly, imports are taking a share in the U.

Speaker 2

S. Market. But again, that share should be not that big that enables the U. S. Mills to maintain certain level of pricing.

Speaker 2

I mean 6 months ago, we were a little bit more worried about recession and we talked about recession in Conference call, everybody was talking. I think that risk for the last for the next 6 months, I really think that it's not much of a risk today. It's been lowered. So I think it should stay around there, the prices. I hope I make my point with this, Leon.

Speaker 2

Leo?

Speaker 8

Yes. It's very clear, Maximo. Thank you very much.

Speaker 2

Thank

Operator

you. And answer session. Your next question is from Carlos De Alba with Morgan Stanley. Your line is open.

Speaker 4

Yes. Thank you very much. Just a follow-up on the working capital. Yes.

Speaker 2

Capital. Yes. We check double with 2 questions. So, yes.

Speaker 4

Just one more, just one more, just to keep it interesting. And it's an easy one. So I want to make Pablo look good.

Speaker 2

Okay. Perfect.

Speaker 4

On working capital, so you consume a lot of cash This quarter, I think, Paolo, you mentioned that you don't expect that to continue in the coming quarters. But can you maybe give a little bit more color on the different moving pieces and maybe a range of or level of magnitude of the improvement on cash flow generation from working capital.

Speaker 2

Yes. Let me start answering and then I give it to Pablo. But one of the things that happened is that we increased our stock, particularly in Mexico. And that takes I think it's like 75% or 80% of the $600,000,000 what increasing in the stock. This have two things.

Speaker 2

First, if you remember, we generate a lot of cash from working capital in the last two quarters. I mean, in Q4 of last year and Q1 of this year, I think generation was like $1,200,000,000 So it's very natural that we were increasing shipments, prices are increasing, So working capital have to come up. And again, these supply chain restrictions, We suffer it very much of not having enough stock and supplying to our customers in Mexico. So that's the main reason why it went up that much, which we were not maybe expecting that much number, but we were expecting a high number of of working capital. Now for the future, Pablo, yes,

Speaker 3

let me add to that that looking forward, first, we think that we have now the level of Inventory that we need for the expectation of shipments in the coming quarter. And now we should be seeing movement to working capital more in line with the normal issues that affect working capital, increases in volumes, movement in prices on this type of thing. So that's why, as we said at the very beginning, we are not expecting to see a significant movement in working capital in the coming quarter. So more in line with normal change of working capital and significantly lower than what we saw The absolute number is significantly lower than what we showed during the Q2.

Speaker 4

All right. But okay. So just to clarify, this is great color. Just to clarify, it's not necessarily that you are going to generate cash from lower working capital.

Speaker 3

It's just that it's going

Speaker 4

to go back to more Traditional normal drivers changes, right?

Speaker 2

Yes. I don't think that we are going to see generation of working cash from working capital in the next quarter. It's going to be up or down a little bit, but we are not seeing. We are now at a level that is reasonable for the level of shipments that we have. Yes.

Speaker 2

All right.

Speaker 7

Thank you very much, Isaac.

Speaker 2

Thank you, Carlos.

Operator

Your next question is from the line of John Brandt with HSBC. Your line is open.

Speaker 9

Hey, good morning guys. Thanks for taking my question. Just two Quick ones for me. The first is just on near shoring. I know there's you said that there's lots of investment going into Northern I'm wondering if you can try and quantify that somehow.

Speaker 9

How much are you actually seeing? I mean, have you had negotiations with customers, particularly the auto customers about their likely need for increased steel demand. I mean, we've seen Tesla and GM and a whole host of other auto producers announcing plans. I mean, so could you just sort of help us clarify or quantify exactly what you're seeing from the near shoring impact. And then the second question just relates to cash and that's trapped Tina, what is I think there's still a fair amount of cash there.

Speaker 9

So if you can help us understand what are the plans for that given there's not a whole lot of investment going into Argentina. It's still relatively free cash Going into Argentina, it's still relatively free cash flow positive. Is the plan just to keep it there? Do you expect to dividend it out back to Ternium Inc. Or sort of what should we expect with that cash flow?

Speaker 2

Thank you. Thank you, John. I'll try to answer the first question, though it's a little bit difficult to answer it. I mean, the impact of me assuring I mean, I cannot put it today the number, to be honest. We are seeing a lot of customers investing in new lines and we are seeing customers that are coming to Mexico, probably not right now in the big automotive industry, But more in the auto parts, I mean, small customers that are bringing production from overseas to Mexico that consumes steel, We are seeing in white goods, we are seeing in HVAC, We are seeing in electric motors, we are seeing a lot of different industries or segments that people are increasing capacity or the white Gucci, for example, that they are putting new plants.

Speaker 2

Those are the ones that we are seeing today increasing our shipments. Of course, in a couple of years, There are some automotive at Tesla is coming to Monterey. As you know, Kia is announcing that it's I don't know if it's doubling or not the capacity, but somehow they're announcing a huge investment right beside our plant in Pesqueria. So those are things that we are going to see, but in a couple of years. Today, we are seeing a lot of small for medium sized companies, some of them are the suppliers of the automotive industry, some of them in other industries that are increasing or coming for the first time to Mexico.

Speaker 2

And that's the increase in the consumption because when you see even the increasing consumption in Mexico, although Mexico is not growing as a general. Most of that increase comes from flat industries or flat products, which is a reflection of consumption in industry And that's not come from long products. So I mean, again, difficult to put a number, but Most of our customers are increasing how their consumption. I hope I answered that first part, John. Yes.

Speaker 2

Perfect. Thanks, Maximo. Yes.

Speaker 3

So let me take the easy one now. The cash situation in Argentina. Hi, John. How are you? Clearly, you're right.

Speaker 3

We have a cash position in Argentina, a significant cash position in Argentina, which is, first of all, a reflection of the reality of our business in Argentina that keeps generating positive results. So the way we have been dealing with that is to 2 different perspective. 1 is paying dividend. So we have paid dividend last here $300,000,000 this year $600,000,000 So the idea is to continue to do that. But As you know, there are certain restrictions in the regulations and the regulation in Argentina unfortunately I changed quite rapidly.

Speaker 3

So there are certain restrictions for us to do a dividend payment again during this year. So we need to wait under the current restrictions in Argentina until next year to do that. In the meantime, the other thing that we do is try to protect the cash that we have in Argentina against any fluctuation on the price of the dollar or the devaluation of the currency in Argentina. Of course, there is not a perfect mechanism to that, but this is something that we are continuing trying to get the best strategy possible to first, to sustain the value of the cash that we have in Argentina in the meantime, in which we can distribute at least part of that as we have done during this year and during last year. I don't know if that was clear,

Speaker 2

but That's great. Thanks, Pablo.

Speaker 3

You're very welcome.

Operator

Your next question comes from the line of Timna Tanners with Wolfe Research. Your line is open.

Speaker 6

Yes. Hey, thanks for taking my follow-up. So I just wanted to follow-up actually on Argentina. If you could decipher a bit the comments there on stable demand, but Negative impact in the near future from some of the government reforms. What exactly do you mean does that impact volumes, shipments or prices evaluation.

Speaker 6

What exactly are you trying to get out there? I'm sorry if I'm being dense. Yep.

Speaker 2

No, no. And we are charging you for the 2nd time like Carlos. So don't worry,

Speaker 6

Dino. I'll pin Argentina.

Speaker 2

No. I mean, we have been repeating this for the last, I think, several quarters because every quarter we I mean, macroeconomics in Argentina is

Speaker 3

not doing very well.

Speaker 2

I mean, we have more than 100% of inflation. The Central Bank has no

Speaker 7

Donors or anything,

Speaker 2

there is some restriction to imports, imports of different things, even imports of some raw materials in some of our customers. We don't have problems yet, but we don't know if we are not going to have it in the future. So Argentina is in an economic situation, very, very delicate. And to be honest, we were expecting Change in this and a decrease in consumption of steel and of everything for quite several quarters now. This has not come and for the last, I think, 2 years and a half, Shipments have been very, very stable, which are not I mean, it doesn't make a lot of sense as how Argentina Economics is doing.

Speaker 2

Now there's going to be elections and the situation is decreasing, let's put it that way. So at some point, our shipments should be should decrease at least I think in the Q4

Speaker 3

now. Let me maximally relate to that. In our history, For many years, of course, in Argentina, this is usually what you see when you have an adjustment in the macro situation, either through evaluation, either through different type of mechanism that the macro just in Argentina. You see that initially when you have this adjustment, you will see an impact in your shipments, in your volumes, but usually they recover relatively soon if the plan implemented is a positive one. So that's why what we are trying to say that if Yes, it's a correction or adjustment.

Speaker 3

The initial reaction of the market will reduce volume to then recover to the We will need to see the level, but this is usually what happens in Argentina with this type of transitions.

Speaker 2

Got it. I hope that now we are

Speaker 3

a little bit Sorry?

Speaker 6

So you're talking about shipments then for the most part with that kind of commentary.

Speaker 2

Yes, for the most part is shipments. It's shipments and demand in Argentina.

Speaker 6

Okay. Super. And then I promised my last one. But the comments on the greater production from Mexico Makes a lot of sense. We know you're capable and all that.

Speaker 6

Just wondering if and when we see AMSA restart, assuming that happens, Would you expect to be able to maintain those levels? Or do you think that some of that is to displace just because of the displacement of tons?

Speaker 2

That's a good question, Tim Gaff. Everybody has a good question, but I don't have a great answer for that. I mean, Clearly, some of the market share we are gaining is against SAMHSA, that's for sure. Nevertheless, Again, there's a lot of imports, and we think we are more than capable of that I'm fighting those imports if we have the volume or the production. But the other thing that you have to take into account, Pimna, is that AMSA it's very difficult that AMSA to come back at the level of production that they have when they stop.

Speaker 2

I mean, Amsob was producing, I don't know, between 300,000 350,000 tons a month. I mean, being shut down for several months And again, using only the information that is available in the public or in the press, it's very difficult that AMSA will come back to that number in the near future. You know that yesterday or 2 days ago, They informed that they were shutting down the coal batteries. That's Something that you can fix in 2 or 3 years. So I mean, we don't see AMSA increasing a lot in the next quarters.

Speaker 3

Yes, which I'll say one thing there. When you refer to shipments of 300,000 tons, that was what they used to have. Yes, the month prior to shutting down completely, that number was A little over 100 of tonne around that number. So even if the return to the lowest number that we're producing is not a significant amount of tonnage back to the market and also take it to consideration what Maximo said that it will take even if they decide to come back to production, it will take some time to reach certain level of production.

Speaker 6

No, that's great. That's helpful. Thank you.

Speaker 2

You're welcome.

Operator

There are no further questions at this time. I will now turn the call back to Ternium's CEO for closing remarks.

Speaker 2

Thank you, and thank you very much all for participating to today's conference. Very good questions. We are very glad we can answer. I hope we can answer all of them. And as always, feel free to contact us with any additional comments or any questions.

Speaker 2

If not, we'll see you or we'll talk with you in the next conference call. Thank you very much, Toel.

Operator

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Ternium Q2 2023
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