Ternium S.A. (NYSE:TX) Q2 2023 Earnings Call Transcript

Ternium S.A. (NYSE:TX) Q2 2023 Earnings Call Transcript August 2, 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your operator today. At this time, I would now like to welcome everyone to the Ternium Second Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn today’s 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 second quarter and first half of 2023. 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 Brizzio, who will discuss Ternium’s business environment and performance. After 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.

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 measures 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 our conference call. In this quarter, we reported a strong set of results with adjusted EBITDA of $883 million, equivalent to a margin of 23%. We also announced the location of Ternium’s new upstream mill in our Pesqueria industrial center in Mexico, completing the integration of our facility in the country. And finally, we completed the acquisition of additional shares in the control group of Usiminas, a change that enable us to have a more direct involvement in the company’s management and the implementation of its strategy. Let me comment about the opportunities this positioning offer us in our main markets. In Mexico, Ternium is presented with two main opportunities: substitution imports in the market and taking advantage of the nearshoring of manufacturing capacity.

Over the years, the flat steel market in Mexico has continually increased its sophistication. Before we began building our facility in Pesqueria, the manufacturing industrial sector in Mexico represented 50% of apparent flat steel use. Last year, this went up to 66%, a more than 15 percentage point increase. This sector demands high value-added products that require technology, know-how and lengthy certification process. On top of this, a good share of flat steel consumption in Mexico is still being served by imports, which represent about 40% of the market. Over the past 10 years, most of our investments in the country have targeted the growth in industrial customer consumption of high value-added products, as well as a substitution of imports to this same market.

A focus on sophisticated products and service enable us to compete based on differentiation, customer service and product development. On the other hand, as we have mentioned several times, nearshoring is something that is happening and it is doing so faster than we expected. The 15% increase in the flat steel industrial market in Mexico is also linked to this dynamic. The pace of investment in the north of the country has been very significant, and it has so far captured more than two-thirds of the total nearshoring demand coming to Mexico. This is reflected in our updated expectation for steel consumption in Mexico in 2023, with a growth of 4.3% compared to 2022, World Steel SRO previous estimation release in April was 2.5%. With this background in mind, the new slab mill in Pesqueria will be a key part of our growth strategy in the region.

It will complement the integration of our facilities in Mexico, substantially accelerating our capacity to respond to changes in the market. And of course, it will significantly help with our decarbonization targets. In addition, we are reinforcing our position as a leading steel supplier in the region with our downstream investment program. We are going deeper into new value-added products, which will help us better serve our customers in the automotive, renewable energy and home appliance industries, among others. These projects represent an excellent opportunity for us to continue capturing demand from high-end steel products in Mexico. Let me now make some comments about Brazil. As a first step after the increase of our participation in the controlling group, Usiminas made changes to its Board of Director and management, Marcelo Chara, the former CEO of Ternium Brazil, is now Usiminas CEO, replacing Alberto Ono, who has been appointed as Chairman of the Board.

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

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

We expect this to negatively impact this market in the near future. Before I wrap up my prepared remarks, I would like to make some brief comments about a very important matter, safety. Two weeks ago, we celebrated our Annual Safety Day event. The event was scheduled with various activities throughout the week, including expert panels and the shoring of our team leaders’ experience in the different countries where we operate. A recent change in this respect is that since the beginning of July, the position in charge of safety, the EHS Vice President has a direct report to me, enabling an even closer review of our safety performance. Finally, we issued last month our sustainability report. We included — this included, there a comprehensive description of our activities regarding climate change, environmental issues, human resources and our relationship with the communities where we operate, which are all considered when assessing our business strategy.

I encourage you to take a look. Let me now make some final comments to prepare — or to close my prepared remarks. The regionalization of steel markets recently exacerbated by nearshoring is a dynamic for which we have been preparing for a long time, with an aggressive growth strategy in Mexico, our expansion in Brazil and the new role for Usiminas, our new R&D capabilities, a unique product portfolio offering throughout Latin America and the integration of ESG into our business strategy. I believe we are a stronger company now, a regional leader with greater integration. We have significant opportunities for growth in markets that we know and have great potential. The next steps of development will transform our company once again, strengthening even more our competitive position.

All right. Pablo, please, you can now go ahead with the presentation of Ternium performance in the second quarter.

Pablo Brizzio: Thanks Maximo, and good morning to everybody. Let’s review Ternium performance during the quarter. Expected improving market conditions during the second quarter, particularly in North America, together with a normalization of production costs derived in a robust set of results for the period. On page three of the presentation, you can see the performance of Ternium’s EBITDA and net income on a quarterly basis. Adjusted EBITDA reached $883 million in the second quarter on a margin of 23% of net sales or $296 per ton. The improved operating performance led to net income of $736 million in the period with an earnings per ADS of $3.19. Before we continue, let me call your attention on the fact that so far we have been accounting for Usiminas results as equity and earnings of non-consolidated companies, with no impact on Ternium’s operating numbers.

After the recent acquisition of additional shares of Usiminas Ternium increased it takes in Usiminas control group and consequently turning results in the third quarter of 2023, we will fully consolidate Usiminas results. The consolidation of Usiminas financial data will have a significant impact on Ternium reporting in the third quarter. Today’s qualitative guidance on Ternium shipment margin, adjusted EBITDA and CapEx for the third quarter will not account for the impact of Usiminas consolidation because we believe it takes more sense that they remain comparable with the number reported in the second quarter. Having said that, let me turn to our analysis of Ternium’s second quarter results. The review now still shipment on page four of the presentation.

In Mexico, steel volumes were 2 million tons in the second quarter, slightly below the first quarter, all-time high. On a year-over-year basis, shipment increased 21% in the second quarter, supported by a remarkable market share gain in Mexico flat steel business over the last 12 months. However, Ternium shipments in Mexico in the second quarter fell short of our expected expectations, mainly due to supply chain contained with raw material of finished steel at our facility. Looking forward, we expect shipments to increase in Mexico in the third quarter. Apparent steel demand remains healthy. The industrial market continues to show strong activity with special mention to the automotive industry as well as to the white goods industry. For the time being, we have not seen any sign of recession in the North American market.

In addition, the commercial market in Mexico remains steady. It is a more volatile market and is more sensitive to price trends and to steel inventory levels, but we do not believe inventories are higher at this time. In the Southern Region, shipments in the second quarter were 563,000 tons, slightly higher sequentially, mainly as a higher shipments in Argentina following a seasonally slow first quarter. On a year-over-year basis, volume decreased 5%, reflecting lower steel demand in Argentina and reduced export to other countries in the Southern Region. Looking forward, we expect shipments to remain relatively stable in this region. Turning now to other markets. Volumes decreased concurrently with the company increased integration and growing presence in Mexico.

In this regard, Ternium slab facility in Brazil increased shipments to the company’s downstream facilities in Mexico. In the next page, number five, you can see that combining these developments, we arrived at a consolidated steel shipment of 3 million tons in the second quarter, slightly below the first quarter level. Looking forward and without taking into consideration Usiminas consolidation, we anticipate consolidated steel shipments to increase sequentially in the third quarter. Moving onto steel prices. Revenue per ton in the second quarter increased sequentially by close to $120 per ton. The main driver behind the sequential increase in revenue per ton was the strength of the North American steel market during the period. We expect earning consolidated revenue per ton to decrease sequentially in the third quarter due to the impact of the current weaker steel pricing environment, which is expected to prevail over the positive impact of better contract prices in Mexico in the period.

Let’s review now on page six, the main drivers behind the improvement, the performance of the second quarter. The sequential increase in EBITDA — adjusted EBITDA was mainly the result of higher realized steel prices and to a lesser extent, lower costs, including lower purchase slabs and energy prices, partially offset by higher maintenance expenses and services costs. Looking forward, we expect a sequential decrease in adjusted EBITDA in the third quarter on lower adjusted EBITDA margin driven by the decrease in revenue per ton as explained, and slightly higher cost per ton, partially offset by higher shipments. The net income chart at the bottom shows that the sequential improvement was partially driven by better operational results. The income tax result was again very low in the second quarter with an effective tax rate of just 1%, reflecting a gain in deferred tax results Ternium Mexico subsidiary in connection with the Mexican peso 6% appreciation during the quarter.

Let’s now turn to page seven to analyze changes in cash flow and net cash position. Cash from operations was $48 million in the second quarter, which includes the negative effect of $605 million increase in working capital. This was mainly due to $414 million increase in steel inventories as we revealed our steel inventories in Mexico after the decrease in the previous quarter and an $89 million increase in trade and other receivables reflecting higher realized price. We are not expecting working capital increases like this further on. The development led to 150 million tons, negative free cash flow in the second quarter of 2023 after CapEx of $198 million. As we progress with our investment plan in Mexico, we expect CapEx to continue increasing in the second half of the year.

Ternium net cash position was $2.2 billion by the end of June, decreasing $800 million in the second quarter. This reduction mainly reflects the free cash flow results, a dividend paid to shareholders amounting to $353 million and a dividend in kind paid to non-controlling interest accounting to $234 million. Turning to page eight to review the numbers on the longer term perspective. Consolidated steel shipments in the first half were 6 million tons, similar to shipment levels in the first half of last year. Adjusted EBITDA was $1.4 billion in the period and a margin of 19% of net sales. This led to a net income of $1.2 billion and earnings per ADS of $5.10 in the first half of this year. This quarter, we also paid the second part of our yearly dividend in May with a payment of $1.80 per ADS.

It has increased shareholder return over the last years and we will try to sustain or improve shareholder return looking forward. Finally, in slide number nine, you can see that the cash flow performance with cash flow operation of $360 million in the first half of the year after working capital increase of $387 million mainly reflecting the highest inventory volumes and trade receivables. This led to free cash flow of $265 million in the first half of this year after CapEx totaling $395 million. Okay. With this, we finish our prepared remarks. Thank you very much for your attention and participation today, and we are now ready to take your questions. Please, operator, proceed with the Q&A period.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Carlos De Alba with Morgan Stanley. Your line is open. Carlos De Alba, your line is open.

Carlos De Alba:

[indiscernible] [20:55]:

Pablo Brizzio: Okay. Let me take that one. Carlos, how are you? Yeah. You’re right. This is an important and an important answer us to give to you. Clearly, what you mentioned is completely right. We will be consolidating Usiminas and the impact of this consolidation in our numbers will be different depending on the line of our financial statements. Clearly, in the upper lines of our financial statement, in sales achievements and all these numbers, the impact will be not minor. But as you mentioned, looking at the results, the current result of Usiminas, the impact at the net income, the EBITDA level will be minor in comparison to the other numbers. Initially, we will be giving information on a segment basis separated between what we have today, which is the steel segment, the mining segment and then we will have a segment which will be Usiminas.

So — and then, of course, we have the consolidation of these three segments. So, you will have — I think you have the clarity. You will need in order to analyze the numbers. And of course, Usiminas continues to be a public company. So, there you will see also more details on the explanations on the numbers that you see in that. But this will be at least our initial proposition to solve the numbers. And then, we will analyze if there is a need for changing that is if Maximo decides to look at the number recently. But I guess you will have initially very clear numbers to look at.

Carlos De Alba: All right. Thank you, Pablo. And then just what are the expectations — how should we think about the third-party slab sales from Brazil? You’ve given the greater integration that you have been — having in the last few quarters.

Maximo Vedoya: Yeah, Carlos. Hello. How are you? I think it’s going to be zero, to be honest. I mean, with Ternium together with Usiminas is going to need to continue buying slabs. So, most likely, all the slabs from Ternium Brazil are going to go either to Usiminas or to Ternium Mexico or to Ternium Argentina. So, there’s not — probably not going to be any sales slabs.

Carlos De Alba: Understood. All right. Thank you very much. I appreciate it. I’ll get back on the line. Thank you.

Maximo Vedoya: Okay. Thank you, Carlos.

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

Thiago Lofiego: Thank you. Good morning, gentlemen. First question about Usiminas steel. Maximo, could you talk a little bit more about the strategy? You mentioned the focus would be on the industrial side. So, the question is, how much CapEx do you think you will need to deploy in Usiminas to bring the company back or up to the operating efficiency levels that you think is your potential target or optimal? So that’s my first question. My second question is about the slab market. What’s your view on slab supply demand globally? And whether we should see the HRC slab spread compressing or expanding from here? Thank you.

Maximo Vedoya: I’ll take the second one first. The slab market, as you know, it’s always been another very big market. I mean, there’s not a lot of transaction with slabs. We are the biggest buyer of slabs probably. But it’s a small number compared to whatever is trading in hot oil coins. And we don’t see much changes in the gap today. I mean, in the future, we think that the gap will more or less sustain at the levels we are. We got some downs, and you can see that in the history. But today, it’s at the level that it’s the same level of the average for the last five or six years. This is today the difference. So, we expect that difference to continue being what it is today. Again, with the volatility, of course, of the steel industry.

But we don’t see why it’s going to change. Regarding Usiminas strategy and CapEx, clearly, I mean, we don’t have a number of CapEx yet. I am not — I don’t think I’m able to give you today a number. As I said — I mean, our team is going to Usiminas. People are moving. Marcelo Chara took over as CEO. But the team of Ternium, some of them are arriving in the near future. And we start changing our dynamics of how the companies manage. So, probably, we will spend some months before we can give you an exact number on the CapEx. Clearly, the agenda for Usiminas in the next few months is going to be to increase the competitiveness of Usiminas, especially the competition of Ipatinga’s upstream CapEx, the blast furnace, the steel shop number two, and probably to finalize our plan for the coke batteries.

So, we have to target the increased efficiency in Usiminas. And this will be the main focus. I think the other one is on the commercial side. As you know, several of the customers of Usiminas are the same customers of Ternium. So, with this more, let’s call it integration if you want, but it’s not exactly integration. But we can offer more solution to the customers in all our markets. And so, I think that’s the second issue. But I think the first is that we have to focus on the efficiency of the industrial segment of Usiminas.

Thiago Lofiego: Very clear, Maximo. And you just quickly mentioned about timing for this — for us to be — to know a more detailed CapEx number. You think this will be like until the end of the year or maybe like a couple months, just for us to understand?

Maximo Vedoya: I mean, we will have a rough idea by the end of the quarter probably, to be honest. But again, it’s going to be a moving target in the first few months until the end of the year. But we will have a rough number by the end of the year. You have to take into account, Thiago, that today we are in the middle of the blast furnace relining and the steel shop number two and the problems we have with the battery, the coke battery. So, people are a little bit stressed in trying and things are going well. I mean, there is some delay, but I think that we are going to end in the middle of September. But people are much more focused on that and try to finish that in a good way. And in parallel, we are working on these plans. So, by the end of September or at the end of the quarter, we should have something, but it’s not going to be the definite one.

Thiago Lofiego: Fair enough. Thank you, Maximo.

Maximo Vedoya: You’re welcome, Thiago.

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

Timna Tanners: Hey, good morning. Thanks everyone. Wanted to see if you wouldn’t mind trying to help us refine a bit the comments on your margin outlook and the Mexican shipments. So, obviously, you guided to higher shipments in Mexico. We know that the demand there has been quite strong and that without AMSA running, there’s a gap in the market that’s being fulfilled with even more imports than normal. I’m just wondering, how much more can you ship? Are you willing to ship? If you can give us an order of magnitude there?

Maximo Vedoya: Thank you, Timna. Good morning. Yeah. To be honest, we had a plan that was a bigger shipment for this quarter. And we were not able to fulfill, as Pablo, I think, mentioned, because of some supply chain constraints. In the raw material coming to Mexico, some problem in some of our lines and supply chain constraint in the shipment to our customers. So, we have much more orders for this quarter than what we shipped. We don’t like that. It’s not very good for us. So, I think that next quarter, the plan is to ship at least 200,000 tons more. So, a 10% increase, roughly. I think some of these constraints have been addressed. But I don’t want to promise all of that because again, it’s very tight, all the supply chain in Mexico. It’s very, very tight, everything. So, but yes, the orders — we have the orders and we increase probably even a little bit more than that, if we were able to ship them.

Timna Tanners: Okay.

Pablo Brizzio: Pablo here. You mentioned the other issue is the margin, as expected margin for the third quarter. I think that one important number to look at, of course, we have a very good margin during the second quarter, which was 23. But if you look at the margin that the Ternium make during the first part of this year, the first semester, we were at the level of 19%, which is, if you remind, when we have our prior conference calls and meetings, that Maximo presented as a target for a company to be in the range that we always talk about, which is 15 to 20, but in the upper side of that range. So, we should be in the coming quarter more in line with this level than, of course, to what we have in the second quarter. So, usually, for us, it’s better to look at the numbers of Ternium in a little more longer timeframe than a quarter. But here is a clear example of, if we look at what happened during the semester, it is more in line with what we are expected to support.

Timna Tanners: Okay. Perfect. You answered the second part of my question. So, I’ll leave it there and pass it off to the next person. Thanks again.

Maximo Vedoya: Thank you, Timna. You’re very welcome.

Operator: Your next question is from the line of Caio Ribeiro with Bank of America. Your line is open.

Caio Ribeiro: Good morning. Thank you for the opportunity. So, I wanted to take advantage of the fact that you’ll start to consolidate Usiminas results right in the coming quarter. To ask you a question specifically about the finished flat steel market in Brazil, right, where prices have been coming down recently, given the high import parity, premiums, weaker demand, and also the higher import penetration. I just wanted to get your perspective on how you see flat steel prices evolving in Brazil in the coming weeks and months. And then secondly, with Usiminas in the midst of carrying out maintenance up with blast furnace in Ipatinga, right? So, I wanted to ask you if you have any perspective on what impact the conclusion of that blast furnace maintenance could have on the margins of the company, right, once it’s back up and running at full capacity. Thank you.

Maximo Vedoya: Yeah. Thank you, Caio. Good morning. I mean, marketing in Brazil clearly has a problem today with imports. If you see the number of imports is coming monthly to Brazil, it’s around 400,000 tons a month, which is the same number as it was in 2021, but with a higher market. For us, this is a very, very big number. And our target is to reduce this number. It should be our target and the target of the other steel companies in Brazil. I think that the other thing is that Brazil has to take into account that at some moment, some trade remedies against some further trade steel, they have to put on — all the markets have done that from Argentina to Mexico to Colombia, USA, Europe. I mean, everybody except Brazil has target unfair trade.

And Brazil used to be a country with a very strong position in this. Somehow in the last years, this position has been a little bit more weak. But I think that we have to, and I believe the government is willing to support this. And so that’s the strategy. For one side, we have to take into account that we have to — let’s put combat these imports with our commercial efforts. But on the other, unfair trade has to be in the agenda much sooner than later. So that’s your first question. The second question was about…

Pablo Brizzio: The impact on the — after the relying on the numbers [technical difficulty].

Maximo Vedoya: Well, clearly margin will increase. I mean, the Usiminas have three blast furnaces. The two that are operating today, as you know, are very small blast furnace, which are much higher cost of production because of the fuel rate. Blast furnace number three is a very big one and very competitive one. So, the numbers are going to change very positive as soon as we start producing that should be around the middle of September.

Caio Ribeiro: Okay.

Maximo Vedoya: I hope, Caio, I answered the question.

Caio Ribeiro: Is there any way that you can give us a number that you expect? I mean, if margins will return maybe to double-digit, above 10% or any sort of guidance on that front?

Maximo Vedoya: No, I don’t have a number today to give you. Yeah, Caio, not today. Probably next quarter, even in Usiminas conference call or in our conference, we can put a target or a number, but I’m not able to put it today.

Caio Ribeiro: Perfect. Thank you very much, Maximo. I appreciate it.

Maximo Vedoya: Well, thank you to you, Caio.

Operator: Your next question is from Leo Correa with BTG. Your line is open.

Leonardo Correa: Hello, good morning, everyone. Thank you. Yeah, so just starting out with a more theoretical…

Maximo Vedoya: Can you speak a little bit louder? We cannot hear you very well. Leo?

Leonardo Correa: Sorry, Maximo. You guys can hear me now?

Maximo Vedoya: Yes, perfect.

Leonardo Correa: Yeah, is it better?

Maximo Vedoya: Yeah, it’s better. Much better.

Leonardo Correa: Yeah. Okay. So, sorry about that, guys. Yeah.

Maximo Vedoya: No worries.

Leonardo Correa: So, the first question is a little bit more conceptual, Maximo. I mean, everyone has been following the story for many years, right? And now with Usiminas being consolidated, you guys obviously made a move some years ago with CSA, which is now Ternium Brazil, which is also super relevant. Just again, I know there’s no decision and this is all very conceptual, but would it make any sense, I mean, do you guys consider at some point entertaining the possibility of potentially merging Usiminas and Ternium Brazil, given the clear synergies, right, that that would potentially involve? And the second question is, moving more towards market questions. We’re seeing, I mean, a bit of volatility, mainly in sheet markets in the U.S., right?

We saw prices reacting very sharply early in the year to the upside. Now, we’re seeing a bit of a correction. We saw two rounds of price hikes to try to stabilize prices. We just wanted to get your view on where you think prices are headed towards the end of the year. So, those are the two questions. Thank you very much.

Maximo Vedoya: Perfect. Thank you, Leo. Usiminas and Ternium Brazil, today, we don’t have plans to do something like that. As you know, Usiminas is a public company and we have an agreement with our partner, Nippon Steel, that we changed this agreement, but it was clear what the agreement is or what the agreement is. So for the time being, we are not analyzing anything of that. We do know and we do expect that there’s going to be synergies between Usiminas and Ternium that are going to make a positive impact in both companies, not in Ternium or not in Usiminas, in both companies. Of course, the management practices, the complementation with slabs. I mean, clearly, Cubatao and Ternium Brazil are very close by. Joining efforts in procurement — I mean, putting together the purchasing power of both companies should be a synergy for both companies.

And also, I think the customers are going to see Usiminas. At least industrial customers are the same in Argentina, Brazil, Mexico — our shipments in U.S. also. I mean, they see our involvement in Usiminas as making Usiminas a little bit stronger. So, I think there’s a lot of synergies with the way it is. So that’s the first question. Prices in North America, clearly, the volatility is there. Prices went up first quarter, went down second quarter. Now, went a little bit up. Today, I think they went $5 down. So, volatility is there. But I think that the range of prices, it’s around, today, $950. But as I said, I think there’s a new level of prices in the U.S. or in the North American market that is around these $900s, high $900s. And I think it’s going to stay around there.

The volatility is going to still be, and I think we are going to have still volatility in the next couple of quarters. But I think it’s going to be around over there. Why I said this? The demand is very strong. We see it in Mexico, and we are also seeing it in the U.S. I think demand is strong. Clearly, imports are taking a share in the U.S. market. But again, that share should be not that big that enables the U.S. to maintain a certain level of pricing. Six months ago, we were a little bit more worried about recession. And we talked about recession in this conference call. Everybody was talking. I think that risk — for the next six months, I really think that it’s not much of a risk today. It’s been lowered. So, I think it should stay around there, the prices.

I hope I make my point with this, Leo.

Leonardo Correa: Yeah. It’s very clear, Maximo. Thank you very much.

Maximo Vedoya: Thank you to you.

Operator: [Operator Instructions] Your next question is from Carlos De Alba with Morgan Stanley. Your line is open.

Carlos De Alba: Yeah. Thank you very much. Just a follow-up on the working capital.

Maximo Vedoya: Carlos, we can’t deal [ph] with two questions.

Carlos De Alba: Just one more. Just to keep it interesting. And it’s an easy one. So, I want to make Pablo look good.

Maximo Vedoya: Okay. Perfect.

Carlos De Alba: On working capital, so you consume a lot of cash this quarter. I think Pablo, you mentioned that you don’t expect that to continue in the coming quarters. But can you maybe give a little bit more color on the different moving pieces and maybe a range or level of magnitude of the improvement on cash regeneration from working capital?

Maximo Vedoya: Yeah. Let me start with — let me start answering and then I give it to Pablo. But one of the things that happened is that we increase our stock, particularly in Mexico. And that takes — I think it’s like 75% or 80% of the $600 million was increasing in the stock. And these have two things. First, if you remember, we generate a lot of cash from working capital in the last two quarters. I mean, in fourth quarter of last year and first quarter of this year, I think generation was like $1.2 billion. So, it’s very natural that we were increasing shipments, prices are increasing. So, working capital has to come up. And again, these supply chain restrictions, we suffer it very much of not having enough stock and supplying to our customers in Mexico. So that’s the main reason why it went up that much, which we were not maybe expecting that much number, but we were expecting a high number of working capital. Now for the future, Pablo.

Pablo Brizzio: Yeah. Let me add to that, that looking forward, first, we think that we have now the level of inventory that we need for the expectation of shipments in the coming quarter. And now we should be seeing movements in working capital more in line with the normal issues that affect working capital increases in volumes, movement in prices, and these type of things. So that’s why, as we said at the very beginning, we are not expecting to see a significant movement in working capital in the coming quarter. So, more in line with normal change of working capital and significantly lower than what we saw, the absolute number significantly lower than what we showed in the second quarter.

Carlos De Alba: All right. But — okay. So just to — this is great color, just to clarify, it’s not necessarily that you are going to generate cash from lower working capital. It’s just that it’s going to go back to more traditional normal drivers and changes, right?

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

Carlos De Alba: Yeah. Got it. All right. Thank you very much, guys.

Maximo Vedoya: Thank you, Carlos.

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

Jonathan Brandt: Hey, good morning, guys. Thanks for taking my question. Just two quick ones for me. The first is just on nearshoring. I know there’s — you said that there’s lots of investment going into northern Mexico. I’m wondering if you can try and quantify that somehow. How much are you actually seeing — I mean, have you had negotiations with customers, particularly the auto customers, about their likely need for increased steel demand? I mean, we’ve seen Tesla and GM and a whole host of other auto producers announcing plans. I mean, so could you just sort of help us clarify or quantify exactly what you’re seeing from the nearshoring impact? And then the second question just relates to cash and that’s trapped in Argentina.

What is — I think there’s still a fair amount of cash there, so if you can help us understand what are the plans for that given there’s not a whole lot of investment going into Argentina. It’s still relatively free cash flow positive. Is the plan just to keep it there? Do you expect to dividend it out back to Ternium Inc., or sort of what should we expect with that cash flow? Thank you.

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

Those are the ones that we are seeing today increasing our shipments. Of course, in a couple of years, there are some automotive. Tesla is coming to Monterey, as you know. Kia is announcing that it’s — I don’t know if it’s doubling or not the capacity, but somehow they’re announcing a huge investment right beside our plant in Pesqueria. So, those are things that we are going to see, but in a couple of years. Today, we are seeing a lot of small or medium sized companies, some of them suppliers of the automotive industry, some of them in other industries that are increasing or coming for the first time to Mexico, and that will increase in the consumption. Because when you see even the increasing consumption in Mexico, although Mexico is not growing as a general, most of that increase comes from flat industries or flat products, which is a reflection of consumption in industry and does not come from long products.

So, I mean, again, difficult to put a number, but most of our customers are increasing their consumption. I hope I answered that first part, John.

Jonathan Brandt: Yeah. No, perfect. Thanks Maximo.

Maximo Vedoya: Yeah.

Pablo Brizzio: So, let me take the easy one now. The cash situation in Argentina. Hi, John. How are you? Clearly, you’re right. We have a cash position in Argentina, a significant cash position in Argentina, which is, first of all, a reflection of the reality of our business in Argentina that keeps generating positive results. So, the way we have been dealing with that is in two different perspectives. One is paying dividends. So, we have paid dividends last year, $300 million. This year, $600 million. So, the idea is to continue to do that, but as you know, there are certain restrictions in the regulations and the regulations in Argentina, unfortunately, are changed quite rapidly. So, there are certain restrictions for us to do a dividend payment again during this year.

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

Jonathan Brandt: That’s great. Thanks Pablo.

Pablo Brizzio: You’re very welcome.

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

Timna Tanners: Yeah. Hey, thanks for taking my follow-up. So, I just wanted to follow-up, actually, on Argentina. If you could decipher a bit the comments there on stable demand, but negative impact in the near future from some of the government reforms. What exactly do you mean? Does that impact volumes, shipments, or prices, devaluation? What exactly are you trying to get out there? I’m sorry if I’m being dense. Yeah.

Pablo Brizzio: No, no. And we are charging you for the second time like Carlos, so don’t worry, Timna.

Timna Tanners: I’ll pay in Argentinian.

Maximo Vedoya: No. I mean, we have been repeating this for the last, I think, several quarters, because every quarter we expect — I mean, macroeconomics in Argentina is not doing very well. I mean, we have more than 100% of inflation. The central bank has no dollars or anything. There is some restriction to imports of different things, even imports of some raw materials in some of our customers. We don’t have problems yet, but we don’t know if we are not going to have it in the future. So, Argentina is in an economic situation, very, very delicate. And to be honest, we were expecting a change in this and a decrease in consumption of steel and of everything for quite several quarters now. This has not come. And for the last, I think, two years and a half, shipments have been very, very stable, which are not — I mean, it doesn’t make a lot of sense as how Argentina economics is doing.

Now there’s going to be elections and the situation is decreasing, let’s put it that way. So, at some point, our shipment should be — should decrease at least, I think, in the fourth quarter now.

Pablo Brizzio: Let me maximize a little bit to that. In our history, for many years, of course, in Argentina, this is usually what you see when you have an adjustment in the macro situation, either through devaluation or through different type of mechanism that the macro adjust in Argentina. You see that initially when you have this adjustment, you will see an impact in your shipments, in your volumes, but usually they recover relatively soon if the plan implemented is a positive one. So, that’s why what we are trying to say, that if there is a correction or adjustment, the initial reaction of the market will be a reduced volume to then recover to the — we will need to see the level, but this is usually what happens in Argentina with this type of transitions.

Timna Tanners: Got it.

Maximo Vedoya: I hope, Timna, we are a little bit — sorry?

Timna Tanners: So, you’re talking about shipments then for the most part with that kind of commentary?

Maximo Vedoya: Yeah. For the most part shipments, shipments and demand in Argentina, yeah.

Timna Tanners: Okay. Super. And then — I promised my last one, but the comments on the greater production from Mexico makes a lot of sense. We know you’re capable and all that. Just wondering, if and when we see AMSA restart, assuming that happens, would you expect to be able to maintain those levels or do you think that some of that is to displace, just because of the displacement of tons?

Maximo Vedoya: That’s a good question, Timna, or everyone is a good question, but I don’t have a great answer for that. I mean, clearly, some of the market share we are gaining is against AMSA, that’s for sure. Nevertheless, again, there’s a lot of imports and we think we are more than capable of get fighting those imports, if we have the volume or the production. But the other thing that you have to take into account, Timna, is that AMSA, it’s very difficult that AMSA come back at the level of production that they have when they stopped. I mean, AMSA was producing, I don’t know, between 300,000 and 350,000 tons a month. I mean, being shut down for several months, and again, using only the information that is available in the public, in the press, it’s very difficult that AMSA would come back to that number in the near future.

You know that yesterday or two days ago, they informed that they were shutting down the coal batteries. That’s something that you can fix in two or three years. So, I mean, we don’t see AMSA increasing a lot in the next quarters.

Pablo Brizzio: Yeah. Just one thing there. When you refer to shipment of 300,000 tons, that was what they used to have. The month prior to shutting down completely, that number was a little over 100,000 tons around that number. So, even if they return to the lowest number that they were producing, it’s not a significant amount of tonnage back to the market. And also take into consideration, Maximo, that it will take, even if they decide to come back to production, it will take some time to reach a certain level of production.

Timna Tanners: No. That’s great. That’s helpful. Thank you.

Maximo Vedoya: You’re welcome.

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

End of Q&A:

Maximo Vedoya: Thank you. And thank you very much all for participating in today’s conference. Very good questions. We are very glad we can answer. I hope we can answer all of them. And as always, feel free to contact us with any additional comments or any questions. If not, we’ll see you or we’ll talk with you in the next conference call. Thank you very much to all.

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