Ternium S.A. (NYSE:TX) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would now like to welcome everyone to the Ternium Third Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Sebastian Marti. Please go ahead.

Sebastian Marti: Good morning. Thank you for joining us today. My name is Sebastian Marti and I am Ternium's Global IR and Compliance Senior Director. Ternium released yesterday its financial results for the third quarter and the first nine months of 2023. This call is complementary to that presentation. Joining me today are Chinese Chief Executive Officer Maximo Valeria and the Company's Chief Financial Officer, Pablo Brizzio who will discuss the risk business environment and performance. At the conclusion of our prepared remarks there will be a Q&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.

A steel rod, bent and contoured to the exact specifications of the company.

Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on page two in today's webcast presentation. You will also find any reference to non-IFRS financial measures reconciled to the most directly comparable IFRS measure in the press release issued yesterday. With that, I'll turn the call over to Mr. Vedoya.

Maximo Vedoya: Thank you, Sebastian. Good morning. And thank you all for participating in Ternium's conference call today. I'm glad to report we have healthy third quarter with the consolidation of Usiminas. For the first time we had a margin of 13%. As you may know, Usiminas main blast furnace has been offline for a realigning, and its operating results in the quarter were affected accordingly. When considering Ternium operations, before the consolidation, we had a margin of approximately 17% in the quarter, which is within our usual margin range. With steel prices recently increasing in the USMCA region. And Usiminas starting the ramp up of its main blast furnace, I am positive that from the beginning of next year, we will see more normalized improved margin performance.

With this in mind, we announced yesterday an interim dividend payment of $1.10 per eight ADS equivalent to $216 million to be paid on November 16. These represent an increase of $0.20 per ADA or 22% more compared to last year interim dividend payments. After my initial remarks, Pablo will go through the details of our performance in the quarter and the explanations for the following ones. Let's now review the business environment in our main markets begin with Mexico. Apparent steel demand in Mexico remain strong. As we have been discussing during the last conference calls, nearshoring is happening and its developed [Ph] is positive for the USMCA consumption of steel. I see this trend as giving sustainability to steel demand in the regions for the years to come.

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

The auto industry Mexico has not been affected by the strikes in the U.S. The positive pricing dynamics we are seeing in the USMCA region will be more notable in the first quarter of next year. As the luck effect of contract practice in Mexico will be a drag on the fourth quarter realized prices. Moving to Brazil, in this quarter we fully consolidated Usiminas into Ternium’s financial for the first time. So let me review the latest developments in Brazilian market. We have always believed the potential of this market is outstanding. But Brazil has recently been going through some challenges. Steel demand in the country is at reasonable levels. But steel imports in Brazil increased by 57% in the first nine months of the year, reaching the highest level in more than 10 years as a percentage of steel consumption.

And about 80% of flat steel imports are coming from China. This is a big concern not only for Usiminas, but for the whole industrial sector in Brazil. With the surge of steel import from China, the government of several countries in the Americas, as in the U.S. and Mexico has taken trade measures to avoid being flooded by unfairly trade, Chinese steel, Brazil should follow this same path. The local steel industry has been vocal about the need to defend the country from this dangerous dynamic and will plan to be very active in this front. In this difficult context, Usiminas has just finished the relining of its blast furnace in Ipatinga. This lengthy investment process, together with a deteriorating steel pricing environment, have certainly cut their toll on Usiminas' profitability in the third quarter and we will not see a significant improvement until early next year, when the new facilities are ramped up.

Let me finish my comments about Brazil by stating that we are fully committed to Usiminas. In this new stage, we have reinforced Usiminas' management teams since we entered the company four months ago. This new team in Usiminas has been working around the clock to bring the company to its full potential. Many efficiency-increasing initiatives have been designed and put in place. The focus today is on the industrial operations, the heart of the company. We expect this process to be a marathon, not a sprint, but I'm confident that Usiminas will be able to increase its competitiveness and regain its position in the Brazilian market. Let me turn to Argentina. Although our operations in Argentina continue to perform well in the third quarter with relatively stable shipments, the constraints of import for production for our company and our value chain have been worsening over time and will likely impact economic activity in the company and in the country.

The microeconomic in Argentina is currently extremely unstable. The high degree of uncertainty regarding the outcome of the presidential election to be held in three weeks makes it hard to have a clear picture of the measures the next administration is going to take to tackle this unsustainable situation. The new administration will likely have to put in place a series of needed reforms during 2024, which will probably have a toll on economic activity at the beginning. The sectors with potential to weather the storm and prosper in a better post-reform scenario remain being the energy, Bacamguarta [Ph], mining, and agribusiness sector. Moving now to our sustainability agenda, we are proud to announce that we recently won a bid to extend our wind farm project in Argentina from 72 megawatts of annual capacity to 99 megawatts.

This expansion will enable us to replace 90% of the purchased energy for our facilities in the country, reducing a total of over 127,000 tons of CO2 emissions per year. This additional expansion realigns seamlessly with our current construction schedule. We are proceeding with preparatory work, including roads, and expect to initiate the foundation of works this week. We anticipate installing the first turbines by May next year. In Mexico, we are also making progress with our project to build a steelmaking facility in Pesquería using DRI-EAF technology. The facility's emission intensity will be almost 70% lower than the world's average for the BF-BOF route and will be able to produce all qualities of steel demanded by the auto industry. We have already closed most of the most important equipment procurement contracts for the DRI facility, the EAF, and also for the downstream lines like the new rolling mill and the galvanized lines.

Let me now make a few final comments to close these prepared remarks. I am very positive with what's ahead for Ternium. Although the fourth quarter is going to show a decline due to the works in the blast furnace in Usiminas and the downward reset of contract prices in Mexico, we should see improvement beginning in the first quarter next year. One, the blast furnace in Usiminas has ramped up and the new pricing scenario in Mexico reflects on our financials. With a longer-term view, we will be working on deepening the synergies of our industrial system in the region with the capability to serve our industrial customers seamlessly across the continent. Also, we will be focused on the expansion of our facility in Pesquería, which will turn into the most sophisticated and sustainable steel industry system in the Americas.

All right. Please, Pablo go ahead now with your analysis of Ternium performance in the third quarter.

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

The sequential decrease in adjusted EBITDA was mainly the result of low realized prices and higher costs, partially offset by higher steel shipments. Adjusted EBITDA margin in the third quarter was 13%, down from 23% in the second quarter. As Maximo mentioned, this margin was affected on one side by a decrease in realized steel prices in the USMCA market, and on the other side by the consolidation of Usiminas operating results as Usiminas recorded almost no margin level in the period. Looking forward, we expect adjusted EBITDA to decrease in the fourth quarter due to a decrease in operating margin, partially offset by slightly higher steel shipments. We will analyze this in more detail in the coming slides. Moving on to net results, adjusted net income and adjusted earnings per ADS decreased sequentially to $323 million and $1.38 respectively, reflecting the decrease in operating results and lower deferred tax results.

Adjusted net income was calculated as net result adjusted to exclude a $1.1 billion non-cash loss related to the increase in the participation in Usiminas. We will analyze this in more detail in coming slides. Let's turn now to our shipments performance on page four. In Mexico, expected Ternium’s steel shipments reached a new all-time high of 2.1 million tons in the third quarter. Shipments were up 5% sequentially and 24% versus the prior year third quarter, supportive of sustained market demand and an ease of some logistic constraints affecting our performance in the second quarter. Prospects in this market are quite positive. We continue to have the demanding industrial sector at a very active commercial market, driven by lower inventories and increasing steel market prices.

In Brazil, reported volumes in the third quarter were almost entirely attributable to the consolidation of Usiminas. The industrial sector in Brazil accounted for approximately 70% percent of steel shipments in the period. Looking forward to the fourth quarter, we expect shipments in Brazil to remain relatively stable. In the southern region, shipments were 603,000 tons in the third quarter, up 7% sequentially, mainly due to the consolidation of U.S. of Usiminas sales in the country. Looking forward, we anticipate a sequential decrease in steel shipments in the fourth quarter, mostly as a result of the import restrictions in Argentina already mentioned by Maximo. In Argentina, the uncertainty regarding the steel demand remains high, as a new administration will take office in December, and we are expecting to see which are the new measures that the government will be taking.

In the next page, number five, you can see that combining these developments, we arrive at consolidated steel shipments of 4.1 million tons. Looking forward, we expect steel shipments to increase slightly in the fourth quarter. Consolidated net sales were $5.2 billion. Of the total, net sales of steel products accounted for $5 billion, and mining and other product net sales accounted for $221 million. Ternium reported iron ore shipments to third parties of 2.2 million tons in the third quarter as a result of the consolidation of Usiminas. As Ternium's mining operations in Mexico continue exclusively serving our own iron needs in the country. Moving to steel price, consolidated steel revenue per ton in the third quarter was down sequentially by $74 and decreased year-over-year by close to $160 per ton.

In the third quarter, the sequential decrease was mainly the result of the lower steel price in Mexico, with a negative trend in benchmark steel prices, which was partially offset by higher industry cost contract prices. Looking forward, we anticipate realized steel prices to decrease further in the fourth quarter, reflecting lower industrial contract prices in Mexico and lower realized steel prices in Brazil. Let's now review adjusted EBITDA and net income on page six. On the chart at the top, the main reason behind the decrease in adjusted EBITDA was a decrease in realized steel prices and higher costs, partially offset by higher shipments, as the consolidation of Usiminas did not significantly adjust the EBITDA in this quarter. At the chart at the bottom, you can see the impact of net results of the lower operating income, lower deferred tax results, and the non-cash effects to the increase in the participation in Usiminas.

The increase in the participation of Usiminas has two non-cash effects, $945 million loss due to the recycling of other competitive income to net results, and $171 million loss due to the re-measurement of Ternium stakes in Usiminas resulting from the purchase price allocation. The $945 million loss may include currency translation adjustments. Losses accumulated along the years in connection with the depreciation of the Brazilian real versus the U.S. dollar on the evaluation of Ternium stakes in Usiminas. This loss was non-cash. It has no income tax effect and did not change the value of Ternium’s equity. Moving on to income tax results, we recorded a deferred tax loss at Ternium Mexico and Argentinian subsidiary in connection with the depreciation of the local currency to the U.S. dollar.

Now let's review in the next page our cash performance. Cash from operations was $945 million in the third quarter, aided by a $388 million decrease in working capital. This was mainly due to lower inventories partially at Usiminas and higher trade payables. Pre-cash flow reached $563 million in the third quarter after a CapEx of $382 million. We invested $119 million in the acquisition of the original shares of Usiminas and in addition we consolidated Usiminas net debt position. All-in-all, Ternium net cash position increased $200 during this quarter, reaching $2.4 billion by the end of September. Let's now turn to page eight of the presentation to review our performance in the first nine months of the year. Achievements were really over 10 million tons in the period, increasing 1.3 million tons year-over-year.

The main changes between these two periods were on the positive side, achievement increase of 1.3 million tons in Mexico, as already explained, and the consolidation of Usiminas, which added about 1 million tons. On the other side, we have lower achievements in other markets and other regions, totalling around 600,000 tons, a higher level of integration during 2023 between our Rio de Janeiro slab facility and our operations in Mexico, which directed a little over 400,000 tons of slab achievements to the third parties in the comparison. Adjusted EBITDA in the first nine months of the year were $2.1 billion, decreasing from $3.1 billion in the same period of last year, mainly as a result of lower steel prices, partially offset by lower costs.

Adjusted net income was $1.5 billion in the first nine months, lower than the $2.1 billion in the same period of 2022 with adjusted earnings per ADS of $6.48. This was the result of lower operating result, partially offset by a higher deferred tax result. Moving on to shareholder return on November 16, 2023, we will be paying the first part of our yearly dividend corresponding to 2023. The interim dividend announced amounted to $1.10 per ADS, representing 22% increase over the interim dividend paid last year. Now in the final slide, number nine, you can see Ternium’s accumulated cash flow performance. Cash flow operations reached $1.6 billion in the first nine months of the year with stable working capital. This led to free cash flow of $828 million after CapEx of $778 million.

Okay, with this, we finish our prepared remarks. Thank you very much for your time and attention. We are now ready to take any questions you may have. Please operator proceed with the Q&A session. Thanks.

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