Ternium Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ternium Second Quarter 2024 Results. 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

I would now like to turn the call over to Sebastien Marti. You may begin.

Speaker 1

Thank you. Good morning and thank you for joining us. My name is Sebastien Marti, Turning Global IR and Compliance Senior Director. Yesterday, Turnip released its financial results for the Q2 and the first half of twenty twenty four. This call is intended to complement that presentation.

Speaker 1

I'm joined today by Maximo Vedoya, Ternium's Chief Executive Officer and Paolo Viglizio, Ternium's Chief Financial Officer, who will discuss Ternium's business environment and performance. We will open the floor to questions following our prepared remarks. Before we begin, I would like to remind you that this conference call contains forward looking information and that actual results may vary from both 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.

Speaker 1

With that, I'll turn the call over to Mr. Villarrealza.

Speaker 2

Good morning, and thank you for joining us today for our 2nd quarter's earnings call. Ternium posted a healthy adjusted EBITDA of $545,000,000 for the 2nd quarter, maintaining stable shipments with a 12% margin during a weak steel price environment. The company generated strong cash from operation of $656,000,000 which contributed to maintaining a solid net cash position of $1,900,000,000 even after distributing record dividends during the quarter and sustaining significantly capital expenditures due to ongoing expansion initiatives. In addition, net income during the quarter was affected by the recording of an accounting provision that we were required to make as a result of an adverse Brazilian court decision issued in last June related to our acquisition of a stake in Usiminas back in 2012. Ternium believes that such decision is contrary to applicable substantive and procedural law.

Speaker 2

We did not acquire sole control over Zuminas when we joined the control group. The courts changed in their previous view, now finding that the change of control occurred contradicts both the terms of the Usiminas shareholders agreement and how Usiminas governance worked in reality. Consequently, we plan to strongly defend our position, which has been confirmed by a long line of precedents and court decisions and file all motions and appeals available to us. All such notions and appeals will need to be resolved before the case becomes final and the determination of an actual payment amount, if any, should be made by a lower court in a separate proceeding. Let me now give you an update on our growth projects.

Speaker 2

I am glad to say that we just started up the first line in the downstream project, a 550,000 tons split in line and also the first line in our new finishing center in Pesqueria. The rest of the finishing lines should be ready by the end of the year and the coal rolling mill and galvanized lines are on track to be delivered between the end of next year and the beginning of 2026. In addition, in early July, we introduced a new galvanized simulator in our R and D center in Mexico. This will enable us to shorten certification times and improve the assessment of our product quality. With the downstream project in Mexico and our new R and D center, we are adding more value added products that will enable us to better serve our customers in the automotive, renewable energy and Hoya Appliance Industries as well as in the construction and agriculture sectors.

Speaker 2

These new lines are a great opportunity for us to consolidate our position as a leading steel supplier in the region as we continue to meet the demand for high end steel products in Mexico displacing steel imports and benefiting from near shoring. In addition, the new 2,600,000 tons steel slab mill in Pesqueria continues to advance with completion expected by mid-twenty 26. These projects will enhance our capabilities in the USMCA region and position us as a leader in low emission steelmaker. This is a large expansion project in our history and we are thrilled about its progress. Let me now make some comments about our main steel markets.

Speaker 2

The steel market in Mexico remains healthy, operating at good levels after last year's significant 14% year over year increase in apparent steel consumption. Industrial steel market is stable and strong with the auto industry showing healthy steel demand. Automotive production in Mexico in the first half of this year increased 5% year over year. The commercial market has been a little more affected by the steel prices downturn during the quarter, which this is a destocking process. In addition, construction activity has was impacted by a tropical storm by the end of the quarter.

Speaker 2

On the other hand, activity related to warehousing and logistics infrastructure continue to be strong as well as natural gas pipeline projects. A recent development in this market was implementation of the EU by the U. S. Administration of a 25% duty under Section 232 on imports from Mexico of steel produced, not melted and poor in the USMCA region. Following this, Mexico's President announced that export of steel products made with Brazilian steel would be exempted from this duty.

Speaker 2

This exception is in process of being formal. Regarding this subject, there has been much discussion in the U. S. Market about a supposed surge of steel of Mexican steel imports and about the need to control transshipments of Chinese steel through Mexico. So let me be clear, this view is mistaken and trade data indicates even the opposite situation.

Speaker 2

Still trade between Mexico and the U. S. Is mutually beneficial with a surplus for the U. S. In 2023, the U.

Speaker 2

S. Export 4,100,000 metric ton of finished steel to Mexico. On the other hand, Mexico exported 2,300,000 tons of finished steel to the U. S. This is 43% less than what the U.

Speaker 2

S. Export to Mexico. Looking at these numbers in terms of market share, steel from the U. S. Represent 14% of Mexican market share, while Mexico Steel represents only 2.5% of U.

Speaker 2

S. Market share. Regarding the surge in imports from Mexico, when comparing the 1st 5 months of this year, U. S. Export of finished steel to Mexico increased by 7% compared to the same period in 2023.

Speaker 2

In contrast, Mexican export to the U. S. Decreased by 12%. This followed the trend observed in 2023 when U. S.

Speaker 2

Export of finished steel to Mexico rose by 11%, while Mexico export to the U. S. Declined by 28% year over year. And regarding China's transshipment, U. S.

Speaker 2

Statistics published in SEMA shows that in 2023, 144 1,000 tons of steel melted in China entered the U. S. Via 3rd countries. Of that volume, 52% come from Thailand, 15% from Oman, 13% from Canada. Mexico was responsible for only 0.2% of that volume, almost nothing.

Speaker 2

Mexico has shown a strong commitment to fight against unfair trade practice, mainly from Asia countries, which truly harm the U. S. NCA economy and it continues and Mexico continues to work on this issue. So to avoid misconception, USA trade data plainly show that there's neither a surge nor China's transshipment in Mexico still exports to the U. S.

Speaker 2

Market. Moving now to Brazil, the operational issues we had with 1 blast furnace in our Rio de Janeiro slab facility were resolved and the furnace is back to full capacity now. Although this had an impact on our shipments in Mexico during the Q2. On the other hand, Usiminas shipments in Brazil grew by 6% with growth in all segments, especially in the automotive industry and manufacturing sector, reflecting growth in apparent consumption of flat steel in the country during the Q2. Crude's drill production increased 17% in the Q2.

Speaker 2

This is due to the stabilization of Usiminas plus furnace number 3, which has now finished its ramp up. In June, this blast furnace was able to achieve the highest monthly production of the last 11 years. There are significant efficiency gains being achieved as Guadociminas does today with 2 plus furnace in the past was done with 3 plus furnace. On the other hand, as we have talked in the past, the Brazilian steel sector faces a serious threat from imports in the domestic market under predatory conditions monthly from China. There is an increase in import tariff to 25% for some steel products that exceed a certain quarter is a positive, but until now inefficient measure.

Speaker 2

It falls short of what other countries in the region has adopted to safeguard their local producers and we have not seen any significant decline in imports during the Q2. We have said that the authorities will acknowledge the situation and maintain their course of action with the introduction of additional price measures down the road. In Argentina, shipments began to recover after the significant decrease in the Q1, reflecting a global improvement in steel demand, although they continue to be affected by short term impact of Argentina's government economic stabilization measures on the construction and industrial sectors. On our climate change initiative, our climate change initiatives are advancing with the on schedule construction of our 1st wind farm in Buenos Aires province in Argentina, which should be operational by year end. In addition, our technical school in Pesqueria was recognized by the Mexican government in the Voluntary National Reports towards United Nations' Agenda for Sustainability Development.

Speaker 2

Our technical school was considered an institution that serve as a model of how companies can positively impact their communities and sustainability. CCCI in 2016, the school has graduated more than 600 students with 83% either staying or employed. We are extending this practice to Brazil with the construction of our second technical school in Santa Cruz near our plant in Rio de Janeiro, which with activity sets to commence next. Finally, I am positive regarding Ternium's performance as we move through the following quarters. After an expected bottom of margins in the Q3 related to the lack of set of contract price at lower levels, we anticipate shipments to continue growing with healthy demand in our main markets and margins to increase as steel prices are beginning to rise and costs are showing downtrends.

Speaker 2

Okay, Pablo, please proceed now with your comments about our performance in the Q2. Thanks, Maximo, and good morning to everyone. Let's now look at

Speaker 3

the webcast presentation for detailed review of our company operating and financial results. If we start with Page 3, we will review the Q2 performance. Our adjusted EBITDA achieved $545,000,000 The primary driver of the sequential change were lower realized prices in our key markets, together with a modest price in cost per ton. Consequently, our adjusted EBITDA margin saw a slight decrease, settling at 12%. Looking ahead to the Q3, starting with expected decline in adjusted EBITDA, that is mainly due to a decrease in the BBA margins, although increased shipments across key markets will partially offset this impact.

Speaker 3

We anticipate lower realized steel prices in the Q3, primarily because contract prices in Mexico will adjust to lower levels as a result of soft spot prices conditions during the Q2. Net income during the quarter was negatively affected by a recording of a $783,000,000 provision for the ongoing litigation related to the acquisition of her participation in Usiminas in 2012 that Maximo already mentioned. We were required to make as a result of the adverse Brazilian court decision issued in June. Excluding this provision, adjusted net income decreased sequentially to $40,000,000 reflecting a significant change in deferred tax fees of $191,000,000 due to the 9% depreciation of the Mexican peso against the U. S.

Speaker 3

Dollar during the quarter. Now let's turn our attention to the performance of our Steel segment on Page 4. In our last earnings release call, we guided for increasing shipment in Mexico. In fact, timing between shipment in Mexico experienced slight decline in the 2nd quarter. As Rodrigo explained at Maximo, in the commercial market, demand was negatively affected by a downturn in steel prices during the whole quarter.

Speaker 3

In addition, shipments were also negatively impacted by a tropical storm, which affected the value chain in the state of Nueva Leon at Amaulipas during June. In industrial markets, the automotive industry remains strong with some small decline in houseware appliances industry tied to increasing housing in the U. S. Looking forward, we anticipate a consistent demand in Mexico industrial and commercial market with supply chain stocks and manageable levels. Shipments in Brazil increased sequentially by 6% in the Q2 with growth across all segments, particularly in the automotive industry and the manufacturing sector.

Speaker 3

Looking ahead, we expect a rise in shipments in the 3rd quarter, supported by the projected growth of the automotive industry's Panavanses in the construction sector. In the southern region, steel shipments saw slight increase, reflecting improving conditions in the Argentina steel market. While the pace of the recovery for Argentina remain uncertain, we anticipate an increase in shipment in the Q3. Let's now review the Steel segment consolidated sales and profitability on the next page. Looking at the upper left chart, steel product sales declined in the 2nd quarter, primarily due to lower realized steel prices in Ternium's main markets.

Speaker 3

Cash operating income per ton and margin for the steel segment in the top right chart were also impacted by the price decline. Additionally, cost per ton increased slightly during this period. Looking ahead, we expect margins to decline sequentially in the Q3, primarily due to the effect of contract prices in Mexico to lower levels and the current soft spot prices condition. Now let's turn to Page 6 to examine the performance of the mining segments. We see that net sales for the mining segment remains stable as both volume and revenue per ton in the Q2 were steady.

Speaker 3

In Page 7, let's see the adjusted EBITDA and net income. As previously commented, the top chart highlighted the primary factor we have the sequential decrease in adjusted EBITDA, a significant drop in realized price in our key markets and a minor increase in cost per ton. In the chart below, we can see the impact of net results from the decreased operating income and the higher deferred tax loss, primarily to the depreciation of the Mexican peso, as I mentioned before. This was partially offset by improved financial results. Now let's proceed to the next slide to evaluate our cash flow performance in the Q2.

Speaker 3

It was strong cash flow provided by operational activities of BRL656,000,000 helped in part by a decrease in working capital. Capital expenditure were $409,000,000 during this period and the advance in the development of the downstream and upstream projects in Tuscaria in the field center and also the advances in the constructions in our new wind farm in Argentina. The strong cash generated together with $150,000,000 increase in the fair value of financial instrument contributed to maintain Ternium's solid financial position as of the end of the second quarter with a net cash position of $1,900,000,000 experiencing only a modest decline during the quarter while we paid a record level of dividend. Turning to Page 9, sequential performance on the 3rd half of the year. Steel shipment reached 7,700,000 tons in the first half.

Speaker 3

This growth was primarily driven by a consolidation of Usiminas, which also influenced mining shipments according to the upper right chart. Adjusted EBITDA for the first half of the year was 1.5 1.4 $1,000,000,000 The margin declined year over year largely due to the lower steel prices and the consolidation of Viciminas in the second half of last year. In the lower right chart, adjusted earnings per ADS stood at 1.7 in the first half. This represents a decline compared to the first half of last year. The decrease is attributable to lower operating results and the deferred tax loss I have mentioned before.

Speaker 3

On the final slide, cash flow from operation was strong in the first half of twenty twenty four, amounting to $1,100,000,000 after accounting for capital expenditures of 858 $1,000,000 free cash flow in the first half of the year was $274,000,000 So with this, we will prepare our initial remarks and we can now start the Q and A session. Thank you very much for your attention. Please go ahead.

Operator

Our first question comes from the line of K. O. Ribero with Bank of America. Your line is open.

Speaker 4

Good morning, everyone. Thanks for the opportunity. So my first question is more market related. Just wanted to see if you could provide an update on HRC prices in the U. S, right, which have been under pressure over the last months and whether you see any green shoots emerging ahead, which could support a rebound.

Speaker 4

And then secondly, more specific to Muza, right, I just wanted to see if you have any updates on that front, any revised CapEx expectations regarding that potential expansion at the Musa asset and when you would expect to take a decision with that project or not? And then on a similar note, still related to Musa, with the recent correction in iron ore prices $100 per tonne, whether there would be any changes to your planned production levels in the asset? And if not, if there would be a certain price level where you would contemplate reducing your 3rd party iron ore sales from that asset? Thank you.

Speaker 2

Thank you, Caio, for your questions. The first one, prices in North America or in the U. S, I mean, I said it in my initial remarks, hot rolled coils in the U. S. Were down to around 7 $100 per metric ton by the end of last month.

Speaker 2

But we are seeing today that these prices by the end of July, not last month, by the last week, I guess. But we are seeing increasing prices. So we feel that this is a bottom of the price. Of course, in our pricing, some part of this you're not going to realize it in the Q3 because of the lack of the contract part of our business. But yes, we are seeing this to be the bottom part and we are seeing some indication that this is coming up.

Speaker 2

In a more medium or long term, as I always said, I think that demand both in the U. S. And in Mexico is still very strong in different sectors. But I see Mexico, although it grew by 14% last year, the apparent consumption of steel, It's still growing in Mexico and I see robust demand in the U. S.

Speaker 2

Again, I think that what impact prices the last couple of months was the excess production of China, which that production for the last 5 or 6 months, China has been on a record of export of steel. And this is coming down and it has to come down. It's not that this volume is coming to the U. S. Or Mexico, but clearly this is affecting other markets, which then are shipping to Mexico and the U.

Speaker 2

S. So on the bottom, I think, yes, it is a bottom and we are seeing clear evidence that prices are going up and will be going up in the near future. I hope what is with this, Caio, I answered your question, the first one at least.

Speaker 4

Yes, definitely. That's very clear. Thank you, Maximo.

Speaker 2

Perfect. Senkon, Musa, I think we talked in the past, but I don't remember, but the decision of the Musa project should be taken by the end of next year. We are working on the project. We are working in all advancing in all the things that we are advancing, engineering,

Speaker 3

which will

Speaker 2

be the technology, the permission, the yes, all the permissions that we need, the scope of the project. There is a team working in everything. But the decision we are not going to make the decision this year. Probably, it should be by the end of next year. And regarding the production, we are not seeing today a decline or a huge decline in production.

Speaker 2

As you well mentioned, prices have been a little bit volatile, but they're decreasing to 100, then going up a little bit, then decreasing again to 100, then going up a little bit. So it seems that 100 is kind of the bottom of the spectrum of the prices of iron ore. It's not the price that we are very, very comfortable, but Musa can work with that price. So we are not expecting a huge decline in volumes in Musa, but probably apart or a small part, we are revising the marginal cost of some of the production at Musa, but it shouldn't be huge.

Speaker 4

Thank you, Maximo. That's super clear. I appreciate it.

Speaker 2

You're welcome, Cai.

Operator

And the next question comes from the line of Carlos De Alba with Morgan Stanley. Your line is open.

Speaker 5

Yes. Good morning, everyone. Thank you very much. Just a question, Maximo, maybe on the 25% import tariffs that the U. S.

Speaker 5

Put on Mexican steel exports into the U. S. That are not melted in the country. The 25% the exemption for Brazil, is that official and a done deal? Or is still subject to negotiations and a final decision?

Speaker 5

Because I haven't really seen an official document or announcement. And in fact, there is talks that maybe the U. S. Officials are having call fit on that.

Speaker 2

Hello. Good morning, Carlos. I think it's official. I mean, the President of Mexico announced it. So I don't know if and then there is a formal proclamation from the Mexican government saying this.

Speaker 2

So I guess it is sufficient. I think that what is happening, it has to be implemented. Remember, when they announced the 25%, the implementation came 2 weeks later. And I think this is happening now, but we are working on that assumption.

Speaker 5

Yes. What I'm hearing is that the U. S. Officials have not signed up on that. And the fact that Mexico Brazil has said it doesn't necessarily mean that the U.

Speaker 5

S. Is going to follow. But anyway, I mean, something to monitor clearly because of the relevance that it will have on turning on business. And then on Usiminas, what like how do you see the evolution of this lawsuit from CSN? Can you mention a little bit on your prepared remarks, but if you can elaborate a little bit more on what would be the next steps and that will be one point.

Speaker 5

And the second point on the same topic is apparently there is

Speaker 3

a court

Speaker 5

decision that is forcing CSN to sell the shares that they own in Usiminas in the short term, I guess. Would Ternium negotiate with CSN and acquire those shares? Is that a possibility? Or you are not interested in increasing further your stake in Usiminas at this time?

Speaker 2

Okay. I answer the second question first, Caio. No, Carlos, sorry, Carlos. The same letter, at least. The second part of that question, the answer is no.

Speaker 2

And the first part of the question regarding the status of the CSN Pernium judicial process. Let me say that, I mean, this is a judicial process that is ongoing right now this week and the following weeks. So to be honest, I prefer not to add much more of what I have said already in my prepared remarks, because I mean, as I said, it's something that is ongoing and there's a lot of things going on. So I stick to what I said in my initial remarks, Carlos. I hope you understand.

Speaker 5

Yes, no, for sure. And then just a follow-up on the first part of my second question. Why wouldn't Ternium negotiate with CSN more senior shares? If you can add any color there, that would be great.

Speaker 3

Carlos, this is Paolo. First of all, as you know, this is a process that you're right, is going on in Brazil. But the process in Brazil are long. So we cannot count that this will be the case immediately. So it's not in we are not in any position to say what will happen and what we will do in respect to that.

Speaker 3

So it's happening in Brazil, but it's nothing that we can do at this moment.

Speaker 2

Okay. Thank you, Paulo. Thank you, Carlos.

Speaker 5

Thank you, Massimo. Bye.

Operator

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

Speaker 6

Yes. Hey, good morning. Regarding the situation with the Brazilian imported slabs, it's all very interesting. But at the end of the day, does it really matter that much for Ternium if indeed, as you pointed out very nicely, Mexico doesn't export that much to the U. S?

Speaker 6

And also, seems like you're pretty busy with good demand in Mexico. Lazaroquinas isn't going to produce much in the Q3, if any. Are you seeing opportunities to take share? Can you talk a little bit more about any opportunity from Amstel potentially declaring bankruptcy? Thanks.

Speaker 2

Thank you, Timna. You are a little bit right. But of course, I mean, nobody likes to have something taken away. I mean, and remember, we are not the only ones exporting to the U. S.

Speaker 2

So I mean, the sense is having a restriction in the export from Mexico to for the method and pull from Brazil, when both countries, the U. S. And Mexico, both imports left from the U. S. From Brazil.

Speaker 2

From Brazil, sorry, from Brazil, doesn't make any sense. It's clearly for more the volume is maybe not big volume as a volume as a whole in Ternium, but it's volume important for what Mexico exports to the U. S. So putting a restriction, small as it may be from the U. S.

Speaker 2

From the Mexico to the U. S, when the U. S. Exports that much more to Mexico, it doesn't make any sense. And that's our position, to be honest.

Speaker 2

You're right that compared to all the volume that Mexico sells and our opportunities in the domestic market, it's not that big. But we need to fulfill our customers in the U. S. Also. So that's your first part of the question.

Speaker 2

You asked something about AMSA. To be honest, we don't know much of AMSA besides what's in the press that supposedly there's a deadline for the I think it's the 4th August where ANSA should go to the bankruptcy process because there was no agreement. Nevertheless, I think it's still a long process, the bankruptcy process. It's not going to be something immediately. I mean, there's a it's not a very easy bankruptcy process.

Speaker 6

Got it. Thank you. So I recognize it's more about the principal. That's a really fair point. If you could also touch on any opportunity with lacero cardamomist.

Speaker 6

And then if I could, a second question. If the price in the U. S. Is just starting to stabilize here for September, is that still enough to help the 4th quarter cadence for pricing? Just because I'm trying to think about the timing and if you could also talk about the magnitude of the margin opportunity with some of the raw materials decreases?

Speaker 6

Thanks.

Speaker 2

Yes. I think the prices in the Q4, yes, should improve should improve, sorry, because of this increase in the prices that we are starting to see this week and should continue a little bit through this month and the following month. So yes, the magnitude of the increase, it's very difficult to say right now. Dina, I always said that a normal price in the North American region should be between $800,000 $900,000 of course, with the volatility we are accustomed to. So I mean that's our view, but I don't I'm not saying that, that is going to be in the Q4 yet, but it's going to be increased.

Speaker 3

Okay. Timna, this is Paolo. You asked in relationship to the possibility of a recoverability of the margins entering into the Q4. As we always try to say is always the volatility could be there, but in the long run, we should be achieving certain level of margin. If you took together the 1st semester of this year, we are still at the level of 15%.

Speaker 3

So clearly, we have a reduction during the Q3 because of all the things that we said. And if the prices that you mentioned and Maximo confirmed are increased and these are reflected together with some reduction in cost that we need to see during the Q4 because of the first thing in first one, the total utilities that we utilize should recover our margins to a higher level than what we see or what we will see during the Q3. So yes, we have the chance to recover at the full year after all these effects, if we are correct, should position us in a very reasonable level of margin.

Speaker 2

Signac, let me put yes, let me add something more because I don't want to sound with this problem of the U. S. And Meditam Poor. I mean Mexico and this is not Ternium. Mexico as a whole export something like 1.2000000, 1,400,000 tons of flat products, which is finishing flat products, around that $1,000,000 $1,200,000 Of that, more than in volume or in price, something like half of that comes from not melted and poor.

Speaker 2

So semi finished products, slabs that come from different parts, some of them from Brazil. It's not a huge volume, but it's very important for what Mexico exports to the U. S. So it doesn't make any sense to have this restriction in, as I said, the numbers I said before in my remarks.

Speaker 6

Got it. Okay. Thanks again.

Speaker 2

You're welcome.

Operator

And your next question comes from the line of Marcio Ferrad with Goldman Sachs. Your line is open.

Speaker 7

Thank you. Good morning, Maximo and Pablo. Thanks for the opportunity. I have a question on the demand side. You obviously mentioned that demand is quite strong both in the U.

Speaker 7

S. And in Mexico as well. Shipments for the quarter were relatively weak. My understanding is that that's basically bias holding back purchases on a declining price environment. Just wanted to

Speaker 8

check with you if you're already seeing

Speaker 7

clients coming back and buying since you're already seeing some initial signs of price stabilization and potentially HIC price recovery as well? And secondly, just a follow-up on the taxation risk. I know you've talked a lot about the interdependence between U. S. And Mexico

Speaker 8

for the trade flows and you

Speaker 7

just feel like U. S. Is a lot more aggressive than Mexico is at the moment, right? But with election U. S.

Speaker 8

Election was just around the corner.

Speaker 7

What are the potential risks you are assessing? There are even suggestions by one of our competitors that USMMA should end and this kind of but I mean, what are the kind of potential risks you're seeing on a new U. S. Administration into next year, please? Thank you.

Speaker 2

Thank you, Mario. The first part of the question, demand, yes, we are seeing a pickup in Mexico. Part of that is also because for external for different reasons, also we shipped a little bit less than what we should have shipped in the Q2, not only because of the demand, but also because of the apartment Alberto. We were 2 weeks with a lot of problems. Also the slab shipments from Brazil to Mexico also had problems because of the Brownsville port and some other issues and the problem we have with the glass furnace.

Speaker 2

So we are seeing both things, a pickup in our shipments because of this and a pickup of our shipments because people are realizing, the ones that had stocks, that prices are starting to go up. So both things we are seeing, as you mentioned. Regarding U. S, Mexico and USMCA, I mean, I don't see I mean, my view, it's going to be the same regardless of who is in the U. S.

Speaker 2

Government. I think Mexico and U. S. Relationship, it's a very strong one and it's both sides. I mean, I don't see I mean, I see the USMCA as an excellent agreement for the 3 countries, not only for Mexico, for Canada or for the U.

Speaker 2

S. The 3 countries has benefited a lot from the U. S, from the USMCA. I mean, if you put also let me give you some advice, but there's a lot of evidence about this. But if you take from 2019 to 2023, exports from the U.

Speaker 2

S. To Mexico increased by 26%. So export of the U. S. And this is only in Vienes, in goods, not services, which is much more, 36%.

Speaker 2

Mexico also increased export to the U. S. By 30%, but both numbers are similar. So both countries are benefiting a lot from that. You take the states of the U.

Speaker 2

S, 33 states in the U. S. Has Mexico as one of the top destinations of their exports. I don't know, jobs. There's a lot of evidence and different jobs of the millions of jobs the U.

Speaker 2

S. MCA has created in the U. S. So I don't see that somebody would think of changing or canceling the USMCA with all the benefits that this is bringing to Mexico and to the U. S.

Speaker 2

I think there are some things that we can improve for sure, but others, no. The other issue that you didn't mention it, but it's very mentioned in the press is the Chinese investment in Mexico as a reason of, I don't know, putting in doubt the USMCA. But the numbers, again, they are not there. I mean, there are some Chinese companies investing in Mexico as there are some Chinese investment in the U. S.

Speaker 2

But if you take the foreign direct investment that China made in Mexico and not 1 year, right, put the last 4 years, 2020 to 2023, it's less than 1% of the FDA of all Mexico. So it's insignificant. Yes, there are some companies coming, but the numbers are very, very small. So there's no invasion or anything of that. Again, that U.

Speaker 2

S. Is also receiving foreign direct investment from China and much more bigger numbers. But the bottom line here is, I think it's mutual for the 3 countries. And yes, we have to, the 3 countries, make tougher loss against unfair trade, not only steel, but in a lot of other products. We have to work together to make that possible.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Alex Hacking with Citi. Your line is open.

Speaker 9

Yes, thanks. Good morning. I just wanted to ask quickly on Sidra. When I look at the financial statements for the quarter, they seem to be reporting an operating loss and that's not including the provision, right? So that would seem to be an underlying operating loss.

Speaker 9

Is that just FX accounting or is this something more fundamental that's happened at Sidra? And I guess how would you see profitability there evolving in the Q3? And am I even correct that there was an operating loss in the Q2? Thanks.

Speaker 2

Yes. Alex, you're kind of correct. It's almost 0. I mean, the main issue and Pablo then elaborate a little bit more. But the main issue is that the Q2 was a quarter where we the volumes were very low.

Speaker 2

Remember, Q1 and Q2 were the lowest level of Ternium Argentina in a long time. We are seeing now an increase in the volumes due to the situation of the Argentine market or the whole economy market. But I don't know, Pablo, if you want to elaborate a little bit more.

Speaker 3

No, you're right. And Alex, how are you? You're totally right. It was unfortunately not the best quarter for starting in Argentina because not only what Maximo explained, we also had the some cost increase due to our first infrastile metrology that impacted all today in the same quarter. Again, we as we discussed before, at the very end, if we then sum up the Q4 for the year, we should see a different result.

Speaker 3

We are expecting to see higher volumes during the coming quarters. We should see also some reduction in cost in the coming quarters. So the situation that you clearly saw during the Q2 should be reversed during the 3rd and the 4th quarter.

Speaker 9

Okay. Thanks. That's clear. It just caught my eye because

Speaker 2

it's basically a bit of a calculation.

Operator

And your next question comes from the line of Leo Kora with BTG Pactual. Your line is open.

Speaker 3

Hello, good morning everyone.

Speaker 8

Thanks. Yes, so Pablo, quick one, more detail here, but hopefully you can help

Speaker 1

with it.

Speaker 8

So first one,

Speaker 7

for you Pablo, the dividend situation, right?

Speaker 5

I mean, the term has been consistently increasing

Speaker 8

the dividend over the past 4. Year. We're now I mean, we've got to still have a bit of a high CapEx program also going forward given the projects in Mexico. And this somewhat messy situation with Sias Strand on

Speaker 2

this litigation, we don't know exactly how this ends.

Speaker 8

Of course, you guys have great arguments, but you never know how to predict these things. And I can imagine there's a high level of uncertainty and as a consequence, you're increasing your provision, right? So just wanted to double check if there's any risk that you

Speaker 2

guys reevaluate the dividend going forward.

Speaker 8

I know this is a Board decision, but anyway, just given how conservative you guys are on balance sheet management, I

Speaker 5

just wanted to double check on that.

Speaker 8

2nd point, we've been talking a lot about steel prices over this call. Clearly, the situation in China is the key culprit. I'm not sure anything changes sometimes. Looking at slab prices, the price has obviously collapsed close to $500 I'm just curious to hear you on how does CSA, how does turning Brazil slab plant? How can it operate in this environment?

Speaker 8

I mean, what type of economics are you generating? Is the plant breakeven at these levels? Just wanted to hear

Speaker 5

a bit more on that.

Speaker 2

Thank you. Those are the 2 minutes. Hi, Lior.

Speaker 3

How are you? Paolo, let me start with the first question regarding dividend. We see no reason to change the what we have been doing in relationship to dividends. And let me expand a little bit on that. You mentioned a couple of things in your question.

Speaker 3

We'll continue to generate very positive free cash flow that was reflected in the numbers during this quarter and the semester. And also, even though that we paid the reconciliation during this 1st semester, the reduction in the total cash position of the company was very much not affected. So a very minor change in the level of net cash that the company continues to have. The CapEx plan that we have is online, on track. So no nothing that could change there because that was something that was expected before and that we will continue to do.

Speaker 3

So shouldn't be anything in relationship to that. And then what we have been discussing on the recoverability of margins and results together with the pricing and increased volumes in the coming quarters, again, put us in the position to really in what we said at the very beginning. We see no reason to change what we've been doing up to now with dividend payments. Massimo, you can take the second one.

Speaker 2

Yes. Leo, hello. How are you? Yes, the situation of prices, especially slabs. First of all, remember, Ternium is a net buyer of slabs.

Speaker 2

Ternium plus Usiminas is even greater. So it's not a bad thing, the prices of slabs. Pernium Brazil sends I mean, sells, if you can say this, everything to our own companies, either Usiminas or either Ternium Mexico or either Ternium Argentina. So we are not seeing a problem in the production of Ternium Brazil. As you know, Ternium Brazil is very efficient, so it can work at this level of prices.

Speaker 2

But again, for Ternium, as a whole, we are net buyer of slabs.

Operator

And your next question comes from the line of Rodolfo Angielli. Your line is open.

Speaker 10

Hi. Thanks everyone. Just wanted to confirm that the overall message from the call in terms of outlook was that things are bottoming, prices should be getting better in North America. But in the guidance, in the release, you mentioned EBITDA weaker into the next quarter. So I know there is a bit of a timing difference, but I just wonder if you could comment on this with a bit more details.

Speaker 10

That's all. Thank you.

Speaker 2

No. Yes, I start and then Pablo. But yes, the message, Rodolfo, you are right. Next quarter, the outlook we did we gave for the next quarter is the one that you just recall. Prices should decrease, especially in Mexico, because of the contract price, not the spot prices, but the contract prices, the lack in the contract prices.

Speaker 2

So our price overall will see probably an increase in spot prices from the ones we have in July in June, sorry, not June July. But overall, in the quarter, prices because of industrial prices are going to be down. Volume in Mexico a little bit higher and then an increase in volume from Argentina and a little bit from Brazil. Overall, the outlook is a decrease in the EBITDA regarding the Q2. And we are seeing that this is the bottom and an increase following this bottom.

Speaker 2

Yes. Let me add

Speaker 3

that we will also be continuing to see certain level of cost that will be reflecting the purchased glass and the purchased raw material in the past. So it's still reflecting higher prices than what we are seeing today. That's why when we mentioned that the 4th quarter should start to reflect a better scenario for Ternium, reflecting not only the price increases that we are seeing right now, but also a reduction in cost that we are also seeing. It was mentioned also over here that iron ore is going down, coal prices are going down. So prices are also reducing from a material.

Speaker 3

We will not see that yet fully during the Q3. This is more for the Q4 and year end. That's why we always like to look at a longer period than a quarter because usually you could have the lag and the timing difference on the cost of the prices and this could lead to that. But in general, yes, we are clearly seeing a bottom during the Q3, a recovery in the 4th and entering into next year.

Operator

And there are no further questions at this time. I will now turn the call back over to the CEO.

Speaker 2

Thank you and thank you to all. We appreciate your participation on this call and all the questions you ask. We welcome any feedback you may have. So thank you again and have a nice day. Bye bye.

Operator

And this concludes today's conference call. You may now disconnect.

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Key Takeaways

  • Ternium delivered a healthy Q2 with adjusted EBITDA of $545 million at a 12% margin, generated $656 million of operating cash flow, and maintained a net cash position of $1.9 billion despite record dividend payments and ongoing capex.
  • The quarter’s net income was hit by a $783 million provision following an adverse Brazilian court decision over the 2012 Usiminas acquisition, which Ternium plans to appeal vigorously.
  • Major expansion projects advanced as planned: the 550 kt/y coil split line and first finishing line in Pesquería are now operational, a new galvanized simulator was commissioned in Mexico, and a 2.6 Mt slab mill is on track for mid-2026 completion.
  • Ternium highlighted solid steel demand in Mexico and the U.S. auto and industrial sectors, criticized the U.S. 25% Section 232 duty on Mexican steel not melted domestically, and cited trade data showing no surge of Chinese transshipments via Mexico.
  • Looking ahead, Q3 EBITDA is expected to dip on lower contract prices, but management anticipates shipments to grow and margins to recover in Q4 and beyond as spot prices firm and raw‐material costs ease.
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Earnings Conference Call
Ternium Q2 2024
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