Ternium Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 25, 2024

There are 8 speakers on the call.

Operator

Hello and thank you for standing by. At this time, I would like to welcome everyone to the Ternium First Quarter 20 24 Results Conference Call. All lines must be placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference call over to Sebastien Marty.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us today. My name is Sebastien Mardy, and I am Ternium's Global IR and Compliance Senior Director. Ternium released yesterday its financial results for the Q1 of 2024. 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, Pablo Riccio, 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

Veloz.

Speaker 2

Thank you, Sebastian. Good morning to everyone, and thanks you very much for participating in today's call. Ternium began 2024 with strong performance and a healthy cash flow generation. We delivered good results across all regions despite some macroeconomic challenges in some of them, as we will discuss later on. Our adjusted EBITDA margin reached a recurring level of 17%, driven by higher steel prices and cost efficiency.

Speaker 2

We also continue showing a strong financial position, increasing our net cash to $2,000,000,000 as of the end of March. Our operation in Mexico, our main market, continued to show a positive performance. Neosharing in North America is intensifying as more manufacturing capacity relocates or expands in the region, driven by advantages of geographical proximity, lower logistic cost and shorter lead times. This trend is particularly favorable for our company as we have a strong presence and a diversified product portfolio in this market. Demand from the industrial sector grew in the Q1 compared to both the previous quarter and the same period last year.

Speaker 2

The auto industry looks especially healthy with good production levels and expectations of reaching 4,000,000 units in 2024, which would be a new record. On the other hand, the home appliances and electric motor industries face some demand headwinds. Finally, the commercial market is resuming activity after destocking phase in the Q1, triggered by a downturn in steel benchmark prices in North America. Due to these positive trends, we are expecting to see a sequential increase in shipments in the Q2 of the year. Another positive development is the recent implementation of a new import tariff by the Mexican government to prevent unfair competition in the local market.

Speaker 2

Over 500 products across various industries subject to duties ranging from 20% to 35%. These tariffs target imports from countries that have no trade agreement with Mexico, such as China, and aim to level the playing field for local producer. I believe this is an important development that set a positive example to other countries in the region. Moving to Brazil. Steam consumption started 2024 on a positive note, showing a slight improvement over the previous year.

Speaker 2

The construction sector is slowly picking up, driven by lower interest rates, improved consumer confidence and infrastructure project. In the auto industry, the latest production forecast point to a 6% increase in this year. With a medium term view, this should benefit Usiminas activity as it is the largest supplier of steel to the automobile industry in Brazil. Usiminas has a competitive edge in terms of quality, service and logistics as it operates 2 mills strategically located in the southern region of Brazil close to the main auto clusters. On the other hand, the Brazilian steel industry faces a significant challenge from the surge of imports in its steel market under unfair trade conditions, increasing by 16% in the Q1 compared to last year.

Speaker 2

Most of these imports are coming from China. To address this challenge, Brazil's Executive Management Committee recently decided to raise import tariffs to 25% for several steel products that supports a certain quarter level. This is expected to take effect in 30 days once officially published and to be valid for 12 months. This measure is perhaps less comprehensive than what other countries in the region have implemented, but we consider it, it is a first step in the right direction. Together with the recovery of this domestic market, Cosiminas has been focused on restoring its operational efficiency following the restart of its main blast furnace in the last quarter of 2023.

Speaker 2

This furnace is now operating and at the expected level for this stage, resulting in lower steel production costs than in the previous quarters. Despite the challenges that Usiminas faces, it is determined to improve its operational efficiency by applying benchmarking and implementing best practice in various areas across the company. Usiminas' new management has shown remarkable leadership and competence since they took office less than a year ago. However, we must be realistic and acknowledge that this is a gradual process. I am confident that Usiminas will achieve its goal and overcome its difficulties.

Speaker 2

Usiminas has also announced a decarbonization goal, which is to reduce scope 12 emissions intensity rate by 15% by 2,030 relative to 2019 baseline, following the World Steel methodology. This goal reflects its commitment to global effort to mitigate climate change and to the sustainable development of the steel industry. During 2024, we will work on formulating a consolidated decarbonation road map with Usiminas. Turning now to Argentina. Shipments declined sharply in the Q1, reflecting the negative short term impact of the government's economic stabilization measures on the construction and industrial sectors.

Speaker 2

Argentina's medium term outlook still remain uncertain, but we anticipate a broader recovery in steel shipment as the economy adjusts to the new policy framework and inflation moderates. In the Q2, we expect the agribusiness and the energy and mining sector to lead this recovery. We remain confident in the long term potential of Argentina, a country that has abundant natural resources, a diversified industrial base and a highly skilled workforce. If the government succeeds in stabilizing the macroeconomic situation and demobilizing the economy, Argentina will offer many opportunities for growth and development in various sectors that are relevant for our operation. Before I conclude my remarks, I would like to highlight some key aspects of our strategy and performance that will shape our future in the next few years.

Speaker 2

A crucial part of our strategy plan is to deliver our upstream and downstream projects at our industrial center in Peskaria on time and within budget. We are making good progress in building a significant increase in value added capacity from prequel line from prequel to galvanizing and customizing. The first stage of this project will come to function in 2024 with the pre clean line and the first line in our customers' process in the second half of the year. Moreover, the new slab making mill will complement an integration process that was studied more than a decade ago with the construction of the cold roll and galvanized line at Pesqueria, our first greenfield facility in Mexico. The new facility will be capable of producing the whole range of automotive grade seal with the lowest carbon emission level in the Americas.

Speaker 2

These projects are vital for our long term success in the region as they will allow us to benefit from the near shoring of manufacturing capacity, advance our CO2 emissions road map and reinforce our strong competitive position to replace imports in the Mexican steel market. Another key aspect or key element of our strategy for the coming years is to unlock the full potential of Usiminas. We believe that Usiminas has a great opportunity to enhance its profitability in the long run. It will require a steady and consistent effort, and we will stand by Usimira's management to help them achieve this goal. Okay, Pablo, please give us an overview of Ternium performance in the Q1.

Speaker 3

Thanks, Maximo, and good morning to everyone. Before we start, I would like to let you know that Ternium has redefined its operational segments to reflect the integration of Husiminas' operations. The new segments are Steel and Mining. The steel segment includes the sales of steel and other products. Meanwhile, the mining segment includes the sales of iron ore produced both in Brazil and in Mexico.

Speaker 3

Now let's review our company's operational and financial results on the webcast presentation for a more detailed picture of our performance. Let's begin with Page number 3. Ternium has demonstrated robust performance during the Q1 of this year marked by a rebound in margins and sustained high steel sales volume. Adjusted EBITDA for the Q1 was $855,000,000 up 31% from the prior quarter, representing a higher adjusted EBITDA margin that reached 17%. This positive operating performance was a result of improved pricing, reduced cost and a $56,000,000 gain related to readjusted of electricity transmission cost in Mexico.

Speaker 3

Looking forward to the Q2 of this year, Ternium anticipates a decline in the recovery in adjusted EBITDA. This is mainly due to a decrease in EBITDA margin, partially offset by increased shipments. The decrease in EBITDA margin results mainly from an expected decline in revenue per ton within the steel segment across most of Ternium's markets. Moving on to results. Both net income and earnings per ADS demonstrated significant strength during the Q1 due to a strong operating performance, partially offset by losses associated with FX result at the divestment of certain Argentine Sovereign Bonds Holdings.

Speaker 3

We will go deeper into these results later in the presentation. Let's shift our focus to the performance of our Steel segment. On Page 4, Mexico, target steel shipments remained strong during the period. Volume experienced slight decrease sequentially. This decline is attributed to a transitory destocking in Mexico commercial steel market.

Speaker 3

However, it was largely mitigated by strong demand for our industrial customers. Looking forward, timing of steel shipments in Mexico are expected to increase in the Q2. Steel shipments in Brazil were stable sequentially. The year over year increase reflects the consolidation of Usiminas from the Q3 of last year. In the Southern region, shipments experienced significant decline in the Q1 of 2024 attributed to the reduced activity level of Argentina and the restocking process in the steel value chain due to the negative short term effect of the government's economic stabilization measures.

Speaker 3

The outlook for Argentina remain uncertain, yet target anticipated a gradual recovery in its local shipments starting in the Q2 of this year. Let's now zoom in the Steel segment profitability on the next page. Focusing on the upper left chart, Steel Products sales decreased in the Q1 mainly as a result of the lower shipment. As steel revenue per ton saw a slight sequential increase of 2%. In Mexico, realized steel prices increased by 8%, reflecting the lag reset of industrial contract prices at higher levels.

Speaker 3

On the other hand, weak market condition in Argentina led to a 6% sequential decline in realized steel price in the Southern region. Looking ahead, we expect lower realized steel prices in the upcoming quarter with decreases in most of Ternium's markets. In the top right chart, we have included 2 measures of profitability of steel segments, cash operating income per ton and cash operating income margin. Cash operating income equals operating income adjusted to include depreciation and amortization as well as other certain non cash items. You can find a detailed reconciliation of these non GAAP measures at the end of the quarter results press release issued yesterday.

Speaker 3

Cash operating income per ton and margin for the Steel segment were strong in the Q1. This was driven by lower cost of purchased life, slabs and raw material along with improved operating efficiencies at Usiminas Steel Facilities in Ipatinga. Furthermore, the previously mentioned gain related to a readjustment of electricity transmission charges in Mexico had a positive impact on the cost of sales for the PDP. Now let's turn our attention to Page 6, where we will be examining the performance of the mining segment. In the top left chart, we observe that net sales for the mining segment decreased sequentially as a consequence of the reduced shipment and lower iron ore prices during the period.

Speaker 3

This will be primarily due to decreased iron ore production levels in Brazil as anticipated. Regarding profitability, the mining segment cash operating income per ton and margin in the Q1 showed attractive levels, although they were lower sequentially, mainly to a decrease in revenue per ton. Now let's go to the adjusted EBITDA and net income on Page 7. As previously commented in the top chart, the main drivers behind the sequential increase in adjusted EBITDA were a significant reduction in steel cost and increase in steel revenue per ton and the gain related to the reassessment of the electricity of revenue mentioned. These were partially offset by a lower contribution from the mining segment.

Speaker 3

The chart at the bottom, net income in the Q1 reflected a sequential increase in operating income, foreign exchange losses due to a fluctuation of the Mexican peso and the Brazilian real compared to FX gains in the prior quarters and better referred tax results, which caused an unusual low effective tax rate in this quarter. Now let's move on to the next slide to assess our cash flow performance. Cash flow for operation was healthy despite the $266,000,000 increase in working capital related to an increase in inventories and in trade and other receivables during the Q1. Capital expenditure increased sequentially in the Q1, primarily due to the completion of the relaying of the main class firms in Patinga, Brazil and a reduction in the advance payment to equipment manufacturer related to the construction of the new facility at the industrial center in Pesqueria. Finally, we continue to have a very solid financial position with net cash that saw a slight increase in the quarter, mainly related to a valuation of Ternium Argentine Holdings of Argentine Sovereign Bonds.

Speaker 3

Okay. With this, we have finished with our prepared remarks. Thank you very much for your attention and time. And now we can open to any questions that you may have. Operator, please, let's begin with the Q and A session.

Operator

First question comes from the line of Carlos De Alba. Please go ahead.

Speaker 4

Yes. Good morning, gentlemen. The first question is just a clarification on the $56,000,000 gain related to the readjustment of electricity transmission charges in Mexico. And maybe I don't know, Pablo, Maximo, can you provide some color? Is this something that you overpaid in the past or you pay more than what you should have and now it's just being reversed back and therefore you kept it as sort of an operational item in your reports?

Speaker 3

Hi Carlos, how are you? Basically this was a change that the authorities in Mexico introduced some years ago that we have of course, we did not agree with. We have a provision on that. And then we went to court in order to challenge that. And finally, we were successful in that.

Speaker 3

So and it's final by now. So we have reversed 100% of the provision that we have, and this should not be included anymore in our numbers.

Speaker 4

All right. Okay. That's clear. And then on Argentina, two questions. One is, I heard that you said that you expect a gradual recovery in volumes.

Speaker 4

There was a very sharp decline quarter on quarter in the Q1. So can you maybe provide a little bit more color as to how to interpret a gradual recovery? And the other part of the question is on the Argentine bond holdings that the company still has. You sold some in the Q1, but you highlighted in the release that there is still around $240,000,000 on negative comprehensive income in connection to the bonds that you still hold. What is the expectation there?

Speaker 4

Are you planning on potentially selling those bonds?

Speaker 1

Or what is the idea? Thank you.

Speaker 2

Yes. Hi, Carlo. How are you? I will take the first one. Argentina I mean, there is still a lot of uncertainty in Argentina.

Speaker 2

So I don't want to give you an exact number and whatever number you have to know that it can change because of the situation. But as I said in my initial remarks, we think that the path is correct and Argentina is doing what is necessary to do. The Q4, as you saw in the graphic, was a huge decline. I think it was more a 40% decline. If I have to say a number of the 2nd quarter will be a decline about 20% of the year before, not of this quarter.

Speaker 2

And that should give us an increase of 25% or something like that, quarter against quarter. So those are the numbers we are seeing today. So there is a recovery and that is a number we expect. But it shouldn't be a fixed number. As you know, the wells in Argentina usually occur very quickly.

Speaker 2

I hope I answered the question with that.

Speaker 4

Yes, that's very clear. Thank you very much and I will not call you to it.

Speaker 2

Thank you.

Speaker 3

Pablo, the second one? Okay. It's quite complex to explain, but let me try to be as simple as possible. What we have during the Q1 was that the company ends selling all the bonds that we received as a dividend payment from Argentina into the holding company and all the bonds that the government put in place in order to pay suppliers that were not paid by the former government occurred during the Q1. So at this point, we needed to reflect the loss that the value of these bonds that have a nominal value and then the real value in dollars going through the financial results of the company.

Speaker 3

These results were already in reserve. So at the balance sheet level, there was no change, but this needed to be moved from that reserve to the financial results. On the other side, we have finalized with this. So you will see not any other impact of this in the coming quarter. This was not related to the holding that we have in Argentina as cash in hand.

Speaker 3

This was related to bonds that the government issued to pay back suppliers and bonds that we have related to the dividend paid last year from Argentina. So it was a significant impact during the quarter, but it is finalized. So no impact in relationship to that will be seen in the coming quarters. I don't know if I've been clear because I would say it's not an easy issue to explain.

Speaker 4

No, that's clear, I think. But so just you then have a loss position in the bonds that you still hold of around $240,000,000 and it's already recorded in the comprehensive income, right?

Speaker 3

Exactly. That's in comprehensive income. And as you have seen, that reserve was reduced for $400,000,000 or $450,000,000 to $250,000,000 and that will depend on the evaluation of the bonds that we have in hand. So if there is a further revaluation of the bonds, that reserve will be reduced. But again, this reserve will not be reflected or the moment of the reserve will not be reflected in the financial result up to the moment that we try to do something with that bonds.

Speaker 4

Got it. Thank you very much.

Speaker 2

You're welcome. Thank you, Carlos.

Operator

Our next question comes from the line of Caio Ribeiro with Bank of America. Please go ahead.

Speaker 5

Yes, good morning. Thanks for the opportunity. So my first question is on the recently announced quotas, import tariffs for steel products in Brazil. And I know that you commented on them in your initial remarks, but I just wanted to explore it a bit further, right? And whether you think that the measures that were already announced are sufficient enough to quell the pressure from imports that we've been seeing over the past year?

Speaker 5

And perhaps also generate an opportunity for price hikes to recompose profitability in Brazil in the short term, right, so over the next few months. So how do you see that playing out? And then secondly, you mentioned in your press release, right, that there was an unexpected outage at one of your blast furnaces in Brazil. So I just wanted to see if you can share some more details on that, what the timing is on resolving this issue and whether you can share any expected impacts on costs as well? Thank you.

Speaker 2

Thank you, Caio. I'll take both questions. The announcement of the measures in Brazil, as I said in my initial remarks, I think that the measurements are a first step in the right direction. Will these measures be enough to combat unfair trade practices mainly from China, I am not sure. I think that a little bit more is needed.

Speaker 2

I mean, as you know, I don't have the exact description of how this is going to be implemented. As you know, it was made public in a conference call, but I don't have yet the details of how it's going to be implemented. But as I saw it, the numbers or the quota that it's allowed to be imported in some of the products, it's still an important quarter. So I don't know if it's going to have an impact in prices. But again, as I said, I think it's a good first step.

Speaker 2

And we should continue working as other governments are working. I know these measures are being made in the U. S, in Mexico, in Europe, in Turkey. A lot of countries are taking these measurements because of what is happening in China. As you realize, last month was one of the highest exports of the history of China in steel products, more than 10,000,000 tons in 1 single month.

Speaker 2

So China, it's dumping its steel everywhere now. And most of the countries are shutting down that unfair trade imports. So it's not enough, but it's a good first step. I hope I answered that question with this, the first question, Caio.

Speaker 5

Yes, absolutely. Very clear. Thank you.

Speaker 2

Perfect. The plus orders, this is plus orders number 1 in Ternium Brazil facility in Rio experienced a temporary disruption due to some unexpected outage in the last days of the Q1. I think it was in the 28 or 29 March. And we are now the blast furnace is now undergoing a restart process. So there is a huge when our platform is cold a little bit, you have a long process for the restoration of the restart process and we are now in that restart process.

Speaker 2

Having known the problem, we already purchased enough slabs to comply with all our commitment with the customers. We don't expect any noticeable impact on our shipment. We have already purchased all the slabs we need. So we don't expect any main impact on shipments.

Speaker 5

Understood. Thank you, Massimo. Very clear.

Speaker 2

Thank you, Caio.

Operator

Our next question comes from the line of Timna Tanners. Please go ahead.

Speaker 6

Hey, good morning. Thanks for the time. I wanted to probe the guidance commentary a bit more. So you talked about lower prices in most markets. What market might not be seeing lower prices?

Speaker 6

And then, you talked about EBITDA, EBITDA margins, but can we talk about costs a bit more and specifically when you might see the benefit of some declines in coking coal prices?

Speaker 2

Hi, Singa. Yes, I mean, in all markets, we are seeing a little bit of a lower prices, not exactly in Brazil, but it depends on the exchange rate. That will depend a little bit on the exchange rate when you see it in dollar terms. What we are going to see in Mexico is that you will have lower prices in the contract price in the contract sales because of the lack every quarter we have. But prices in the commercial market are increasing right now.

Speaker 2

So it's a mix between a lower price because of the contract and an increase in prices that we are seeing in our shipments to the commercial market. Overall, the price will probably be a little lower than the ones indeed in this quarter.

Speaker 3

Okay. If you want, Tim, how are you going to the cost side of the question, what we are expecting to see is sustained level of cost because there was a mixture of different things. We are going to reflect, as usual, the price of glass that we bought a couple of quarters ago. And then we have not yet seen the decline in the price of that raw material. There is also change in the cost of the iron ore that it is more immediate to see that impact in our numbers.

Speaker 3

The increased profitability in the Usiminas numbers or the Usiminas production will be also be reflected during next quarter and the following, as Maximo was explaining that the performance of the blast furnace number 3 after the realigning is starting to get up to a expected level. Though as Usiminas presented the numbers yesterday, you will have the impact of the increased price of slabs purchased in the market that will be impacting during the Q2. So all in all, it's why we are expecting to see a relatively stable level of cost for next quarter.

Speaker 6

Okay. And cooking call, it sounds like it takes a while to flow through then?

Speaker 3

Yes. Well, yes, exactly. It's something that we are buying for our operation in Brazil and it takes a little while for it to be reflected in our coffee market.

Speaker 6

Okay. Thanks for that. And then I wanted to ask a little bit about the cadence of ramp up. If you could remind us on Pescadio, you have the galvanizing lines and you also then of course have the DRIEF complex. So if you could remind us about the timing and also any update on project costs given that we've seen some broad inflation across many of these types of projects.

Speaker 6

How are you tracking there?

Speaker 2

Yes, Timna. Post, we don't have any update besides the one we gave the last quarter, where we increased a little bit, but we are seeing that the cost will be that one. I think it was EUR 3,400,000,000 the total cost of all the Pesqueria III, as we call it, project. Regarding timing, the first line that is coming online, it's coming in July with a ramp up curve. Of course, it's the pickling line.

Speaker 2

And then the customers' lines are starting, 1 also in July and going forward, the other 4, 2 months each one. So by the end of the year, we will have the 5 lines of the customers' lines working. Then we have the Galvanized line, the Galvanized 2 as we call it. That is going to start by the end of 2025. The cold rolling line, the PLTCM 2 as we call it, that is going to start in March of 2026.

Speaker 2

And then we have the EIF DRI facility that is going to start we are appointed to the middle of 2026.

Speaker 6

Okay. Massimo, just to clarify, what do you mean by a customized line? I'm just not familiar with that term.

Speaker 2

A line for finishing products. I mean to finish cold rolled and galvanized products and to serve the customer directly.

Speaker 6

Okay, got it. Thanks again.

Speaker 3

You're welcome.

Operator

Our next question comes from the line of Henrique Marquis. Please go ahead.

Speaker 7

Hi, thank you for taking my question. First question regarding capital allocation. We're seeing Ternium delivering strong results. Should we expect an increase in dividends? And also, I understand you're going through an investment cycle, but just do you guys have anything on the pipeline?

Speaker 7

Or are you thinking of any other opportunities maybe in other regions outside Mexico after this investment cycle is completed? Thank you.

Speaker 3

Okay. How are you? Let me take first the question on dividends. As you know, the company has been increasing the dividend payment. We have increased this year with the result of last year to $3.3 per ADS.

Speaker 3

That was an increase in comparison to the one that we paid last year. Though you're right that we have the financial resources in order to keep sustaining this level of dividend payment, you also need to take into consideration all the CapEx plan that we have and all the things that we need to do in our facilities. What we said, and I think we commented on this in the prior conference call, is that whenever we or the company decides to increase the dividend payment is because we understand and we have the resources to sustain at least this level. Then, of course, year after year, the Board of Directors needs to propose to the shareholders meeting the final number. But with this new increased level of dividend is the one that we think that the company can sustain the medium run.

Speaker 3

So we are not expecting any specific movement there, but at least to sustain the current level of dividend payments.

Speaker 2

And again, what was the second question again? Because we didn't hear very well here.

Speaker 7

Sorry about that. It was just on the pipeline of next investments, any other opportunities maybe in other regions outside Mexico?

Speaker 2

Well, we are always analyzing opportunities in Mexico and outside Mexico also. Our pipeline today is very full, as you may well be aware, And so we are not seeing any particularly today. But of course, there are regions outside Mexico that are also very important to us. As we always said, our focus has been in the Americas. We are not going to go to other parts of the world.

Speaker 2

We think there is good or big opportunities or good opportunities for us to continue growing, to continue implementing all the things that we are doing in this region, in the Americas. But we don't have any specific to give you today.

Speaker 7

Got it. Thanks. Just a quick follow-up on the last part of the question. The flattish cost outlook, is it already considering the purchase of extra slabs

Speaker 2

or

Speaker 7

should we see some impact from it coming from it?

Speaker 2

No, no. It's considering the buying of slabs.

Speaker 7

Got it. Thanks.

Speaker 2

You're welcome.

Operator

There are no further questions at this time. So I turn the call back over to 38H CEO.

Speaker 2

Thank you. Well, we appreciate your interest in and attention to this call. Thank you very much for participating. And if you have any questions, don't doubt to ask us or call us. Have a great day and take care.

Speaker 2

Bye bye.

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Ternium Q1 2024
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