Ternium S.A. (NYSE:TX) Q4 2022 Earnings Call Transcript

Ternium S.A. (NYSE:TX) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Good morning, my name is Rob and I’ll be your conference operator today. At this time. I would like to welcome everyone to the Ternium Fourth Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. Sebastian Marti, you may begin your conference.

Sebastian Marti: Good morning, thank you for joining us today. My name is Sebastian Marti and I am Ternium’s Global Investor Relations and Compliance Senior Director. Ternium released yesterday its financial results for the fourth quarter and full year 2022 and announced new investment projects. 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 with our 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 2, in today’s webcast presentation. You will also find any reference to non-IFRS financial measures reconciled to the most directly comparable IFRS measures in the press release issued yesterday. With that, I’ll turn the call over to Mr. Vedoya.

Maximo Vedoya: Thank you, Sebastian, good morning to all and thanks very much for your interest in this conference call. Ternium had a strong performance in 2022, EBITDA reached $3.4 billion. Net income was $2.1 billion and earnings per ADS were $9. On-top of this very positive results, the company had significant cash generation with free cash flow of $2.2 billion, which increased our net cash position to $2.6 billion. Considering these good results and Ternium’s solid financial position, the company’s Board of Directors proposed an annual dividend for 2022 of $2.70 per ADS, equivalent to $530 million. This represent an increase of $0.10 per ADS compared to 2021’s annual dividend. Another thing I would like to share today is that yesterday we approved several projects that are very significant to our company.

First, we launched a project to build a new slab facility in the USMCA region. We talked about this plan several times in previous calls, and we are excited to be able to give you the details about this project today. I believe this initiative will be very positive for our company. It will include the construction of an electric arc furnace base steel shop with annual capacity of 2.6 million tons, as well as a DRI module with annual capacity of 2.1 million tons. Together with this, we will also build a port facility for raw material handling. We currently expect to commission these facilities in the first half of 2026 with a total CapEx of $2.2 billion. The exact location of the facilities will be disclosed in due course. After careful consideration, we choose to install a technology that we believe have several advantage against others alternative, the steel shop.

We have, only one large EAS instead of two smaller units. This lowers the CapEx of the project as well as it’s operating expenses. The facility will also have a vacuum degassing facility and a slab caster with two lines. All of this will enable us to produce the highest specifications steel necessary for the most demanding applications like those of customers from the auto industry. In addition, this increased slab production capacity will complement and support our new state-of-the art hot rolling mill, which began operations in 2021 and the downstream project in Mexico that we announced in February of 2022. The implementation of the USMCA trade agreement and the recent trends of nearshoring manufacturing capacity in the steel value chain has made the USMCA region an attractive destination for continued investment.

These new project will advance the integration of our industrial system and reform Ternium’s position as a leading steel supplier in the region. This initiative will also support our ongoing compliance with the USMCAs melt and pour requirements for the auto industry. Another significant aspect of this new project is related to the decarbonization of our operations. The technology we decided to use for the steel shop is the most modern and greener currently available. Also the new direct reduction model will include carbon capture capabilities as all of our DRI models do and it will be ready to switch from natural gas to green hydrogen whenever this is feasible in the future. Wrapping up this announcement of this new project, we expect it to be very beneficial for Ternium, not only from a business aspect but also from a sustainability of its operation in the years to come.

And with sustainability in mind, I’m also very excited to announce that Ternium will build a wind farm in Argentina from which it will source electricity. We expect to invest $160 million in this projects which will have alumina power capacity of 72 megawatts and will begin operations in the second half of 2024. This will allow us to replace 65% of the electricity that our Argentine subsidy currently purchases from external providers. We have already secure access to the national grid to transport this power to our facilities in the country. This wind farm will be our first company owned renewable energy project, and we plan to expand its capacity if we see opportunities for doing so in the future. We are thrilled with these announcements we are sharing with you today as I believe this project are proof of the commitment of Ternium has to make its operation more and more sustainable over-time.

As you know, another top priority for Ternium is safety in our operations. In this aspect as we close 2022, I’m glad to report that we had a lost time injury frequency rate of 0.6 accident per million hours worked in the year. This is the lowest rate in the history of the company. The safety of our people has always been a priority in our agenda and we keep incorporating the best safety practice and make awareness of its important to all levels. Let’s turn now to the state of our main markets. We have a positive expectations regarding Ternium’s performance in 2023. During the first half of the year, we expect margins to normalize as cost per ton should decrease and steel prices in the USMCA region are recovering. The second half of 2023, is a bit more difficult to forecast considering the ongoing interest-rate tightening cycle which introduces some uncertainty regarding its impact on the economy down the road.

In Mexico, we anticipate a continued increase in steel volumes during the first half of the year. Since the end of 2022 when steel prices in the region began recovering, we are seeing a restock in the commercial market. On the other hand, industrial market demand is slightly improving and Ternium most recent investment program is yielding new still products that are allowing us to gain market share against imports. In this positive situation, we are increasing the utilization of our downstream facilities in the country and capitalizing on opportunities to serve new customers. Ternium is perfectly positioned to take advantage of this market environment as we are very advanced in the ramp-up of our new constraint mill and we are bringing back up capacity utilization in other lines, which we had reduced last year to adjust to lower market demand.

Another interesting dynamic under development in the Mexican market is an increase in the investment activity of the value change linked to the nearshoring of manufacturing capacity. Since our last conference call, a remarkable number of companies in the steel value chain has announced expansion of capacity of greenfield investments in the country. And the New Orleans state where our main facilities are allocated is the number one destination for these investments. We are ready to serve this growing needs in the market. In addition, the different projects we are currently under development such as new steel shop and the project we launched last year to expand our downstream facility will put us in an even better position to take advantage of this opportunity to grow our business.

Photo by yasin hm on Unsplash

Turning now to Argentina, our customers in the industrial and construction sector are performing well are maintaining a good level of purchasing activity. The most active ones during 2022 were construction, the automotive industry and the energy sector. The agri business also did very well in 2022, although the extend drought in the country should affect activity index sector in the year to come. We are expecting good levels of demand in Argentina during the first half of 2022 with the usual seasonality in the first quarter, but macroeconomic uncertainty is always present in this market. So this could adversely affect economic activity and steel demand in the future. To finish my prepared remarks, I would like to emphasize our positive view regarding Ternium’s performance in 2023.

In addition, we are very excited with the growth project under development. We believe this project will enable Ternium, drug company, the growth of the USMCA region support in the near-shoring of manufacturing capacity and contributing to the company’s, de-carbonization and import substitution strategy. With this, Pablo, please go ahead. With the review of Ternium results in the fourth quarter and full 2022. Thank you.

Pablo Brizzio: Thanks Max and good morning, to everyone. Let me start by describing Ternium achievements and to do that. Let’s begin on Page 3, of the webcast presentation. Ternium previous achievement reached in 2022 the highest level on record, supported by our investment in the new hot strip mill in Mexico. In addition, Ternium has advanced its integration strategy as evidenced by the reduction of the volume of slab shipped to third-parties, which moved from 2.9 million tons in 2018 to 800,000 tons in 2022. Adjusted EBITDA and net income were very strong in 2021. And in 2022 was the beginning of a transition to a more normal level of profitability. The decrease in year, during the last year, mainly reflecting higher cost of sales due to increased price of, purchased slabs and raw material linked to the disruption in the global steel and raw material market caused by Russia’s invasion of Ukraine.

This negative effect was partially offset by higher realized steel prices, mostly reflecting a higher value sales mix due to integration of Ternium’s slab production in Brazil. And annually leave impairment increased significantly in the last five years from $1.20 in 2018 to $2.70 proposed for 2022, equivalent to $530 million. We have started to pay interim dividends in 2021, with $0.80 per ADS in November of 2021 and $0.90 in November last year. Once the Board later proposal is approved, the company will pay the remainder of 2022 dividends in May, equivalent to $1.80 per ADS, or $353 million. This is the annual dividend payment, net of November interim dividends. On the next page, you can see, Ternium cash generation in the past five years.

Cash from operations was partially strong in 2021 and also in 2022, the significant shift in working capital in those year reflecting tariff fluctuation in steel prices and raw material cost and an inventory buildup in 2021 in connection with the ramp up of the new mill in Mexico. CapEx over the last three years have been relatively stable at $500 million to $600 million per year. This is about to change as a result of investment projects under development. Mainly the upstream project we announced yesterday and the downstream project we announced last year which has – that is clearly into two of the four initiatives the cold rolling mill and the galvanizing line, which are now expected to start-up at the end of 2025. Some of these projects will take total CapEx for the company in 2023, to approximately $1.1 billion and we add a total of $2.9 billion to the company CapEx over the next four years, with big CapEx intensity in 2025.

Turning now to free cash flows, as can be seen in the chart, it has been exceptionally strong in the last two years, at around $2.2 billion each. This is equivalent to $11 per ADS. The significant cash generation strengthens Ternium’s balance sheet enables us to continue with a high-level of dividend payment and will also help us when we announced new capital expenditure products. Let’s now review Ternium’s results for the fourth quarter in the next page. As we anticipated in the previous quarter’s call. Adjusted EBITDA margin in the fourth quarter declined to a level below the company’s usual range. This happened because there was a mismatch in the pace at which revenue per ton and cost per ton deflated with lower price raw materials lagging the decline in revenue per ton and raw material prices gradually slow through the company’s inventory before impacting the cost of sales.

We expect Ternium’s cost per ton to continue decreasing over the next couple of quarters. Reflecting lower priced raw materials purchased in the second half of last year. We believe this development should help Ternium’s margin to gradually normalize over the coming quarters. Net income was $59 million in fourth quarter reflecting the decreased level of adjusted EBITDA and also the negative impact of $99 million write-down of Ternium’s investment in Ternium Brazil. Turning now to Page 6, we can see a 9% increase in steel shipments in Mexico, we reached an all-time high of 1.9 million tons in the fourth quarter. Shipments in Mexico increased mostly driven by the factors, as described in Maximo’s initial remarks and should continue growing in the next few quarters.

On the other hand shipments in the other market division decreased 16% in the fourth quarter compared to the third and sales volume in the Southern region remained unchanged. We expect shipment in the Southern region to seasonally decrease in the first quarter of this year. Let’s turn now to Page 7. As anticipated, consolidated revenue per ton declined sequentially in the fourth quarter, as steel prices decreased in Ternium steel market and Mexico contract steel prices reset at lower levels. Although support steel prices are improving in the USMCA region. We expect this positive trend to be offset in the first quarter of this year, by the reset of contract prices at lower levels. So we anticipate revenue per ton to stabilize after the decreases days ago during the second half of last year.

In Page 8, let’s review the main drivers behind the decrease in net income in the fourth quarter. The sequential decrease in net income reflected the mention decrease in adjusted EBITDA and the $99 million write-down of the company investment in Ternium Brazil. These negative results were partially offset by the answers for the fourth quarter of two items that we already analyzed in the third quarter earnings call. A $120 million impairment of Ternium in Usiminas and a $95 million decrease in the fair value of the securities received as a dividend in time from Ternium Argentina. To finalize the presentation, let’s now review Ternium cash generation on Page 9. Cash flow operations in the fourth quarter was $1.1 billion including a working capital release of $955 million.

The change in working capital resulted from the impact of declining prices of steel, purchased slab and raw material. Free cash flow in the fourth quarter of last year was $873 million after CapEx of $159 million. This drove our net cash position to $2.5 billion at the end of December. With this, I am finalizing my presentation. Thank you very much for your time and attention, and now we are ready for your questions. So please operator, let’s start with the Q&A session.

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Q&A Session

Operator: Your first question comes from the line Caio Greiner from BTG Pactual. Your line is open.

Caio Greiner: Hello, good morning, everyone. Thank you. So, my first question on the project. I guess the EAF mill was slightly smaller scale than you guys had been indicated in the past. I think it’s slightly lower CapEx per ton two. So I just wanted to understand what were the main drivers for that. And also if you can provide any details on the estimated cost per ton for this planned that will be helpful too or if you can provide a number or just any color on whether it will be on the first quartile or the second quartile of the cost curve. I think it be helpful too. And secondly on the direction of margins, I mean, you guys mentioned that you expect the normalization of margins in the first half of 2023, but I just wanted to understand your views on the first quarter, specifically.

So firstly on prices even though spot prices are on the rise, I mean we might still see some damage from the resetting of quarterly contracts in the fourth quarter, so I just wanted to understand the direction of revenue per ton here for the first quarter. And then on costs, I understand that that trends, so downwards but maybe if you guys could provide any color on the magnitude for the first quarter. That would be helpful too. Thank you very much.

Maximo Vedoya: Okay, thank you, and good morning to you, Caio. I’ll take the first part of your question regarding the investment. It’s not that it’s a smaller EAF. The EAF we are putting is the biggest — probably the biggest EAF that is available in the market today. What we have said in the past that the alternative would probably be putting two EAF, for a total capacity of roughly 3 million tons. What we are doing today, is putting only one of those EAF’s, but much bigger of the two EAFs of 4 million tons. So we are changing a little bit the configuration putting only one EAF, give you the 2.6 million tons or roughly the 2.6 million tons and that help us with the other part of that question. That is the CapEx is lower or it’s little bit smaller than what we thought would be if we put the other configuration, that’s number one.

Number two, the cost, the operating cost is smaller. If you have only one EAF, that’s also. And number three, but this is in the long-run, so don’t expect this revenue, but it could allow us to grow the capacity fairly see in the future putting a second one. So, I think it’s very convenient for our operation to go through these technology then to do the different alternatives that was putting a little bit more capacity, but with two EAFs. So that’s I think is the answer for the first question. The second question about margins, Pablo, why don’t you answer that.

Pablo Brizzio: Okay, perfect. Hi Caio, how are you? So, as we have been expecting the fourth quarter we have been seeing a squeeze on margin, because everything that we have already got which is the decreasing prices in an environment of also decreasing costs but taking longer to be reflected in our numbers. Clearly, what we have done in the fourth quarter, the EBITDA margin at around 9% is below the expected range or within the expected range of Ternium have. So we are expecting to get back to this range in the coming years, specifically in the coming quarters. Clearly prices that are — we increased in the reason, I guess at some point Maximo will comment, extensively on that. Will not yet be fully reflected in our numbers in the coming quarter, because the reset of prices of our contracts, especially in Mexico.

On the other hand, costs, we continue to see some reduction and we are expecting to see that coming into the first quarter results. So all-in all and to give you more precise answer and summarizing the whole thing as I’ve been saying, we will start to recover and return to more normal levels in the first quarter of the year, not yet in the range that we are expecting to have that, but we should be approaching that level at the end of the second quarter or beginning of the third quarter.

Maximo Vedoya: I hope Caio, with that we answer the two questions.

Caio Greiner: Yes, just one point on the project still. Can you guys provide any color on what you’re expecting in terms of cost for the EAF plus DRI facilities. In terms of cost per ton for your slab production operations in the – for the announced projects, not the total CapEx, but your expected cost per ton.

Maximo Vedoya: So, I mean it’s very deep. Yes, now I understand the question Caio, I’m sorry. It’s very difficult to provide a number because as you might expect some part of that depends on the cost of our raw materials. To put some numbers and I put the numbers that are today. Slab market price are around $700 and the operating cost of this project if we take, today’s numbers will be around $550. That’s what I can tell you about the cost.

Caio Greiner: That’s helpful. Thank you, Maximo. Thank you, Pablo.

Maximo Vedoya: You’re welcome Caio.

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

Timna Tanners: Hi, good morning guys, and thanks for the great detail. I wanted to follow up on the last question and get a little more color on how you’re thinking about volumes. So on the last question the answer you gave was about margins returning to more normal. When you talk about normal, I just want to reiterate is that the historical guide of 15% to 20% target that you’re talking about when you refer to normal EBITDA in the steel making segment. That’s the first question if you could just clarify that would – it sounds like definitely in that range second half. And then kind of approaching that in the first half. Does that mean first quarter would be more like fourth quarter or improving from the fourth quarter. And then my second question like I said on volumes, obviously with AMSA not operating fully, there seems to be kind of a gap in availability in the Mexican market.

So is it possible to see a meaningful uptick in your volumes to fill that gap given the good demand you described. Just any more color on where volumes could go to given your availability would be great. Thanks, a lot.

Maximo Vedoya: Thank you, Timna, good morning. Yes, the first question, the answer is yes. When we refer to normalized margin is between 15% and 20% in the first quarter, what we expecting is not to be like the fourth quarter, a little bit more near the lower range of these margin. We are not getting the normalized range, but would be a little bit more closer to those numbers, then the fourth quarter. Volumes in Mexico. Yes, volumes in Mexico are going to increase in the two following quarters. Clearly, one aspect of that is AMSA. The second aspect that you can see is that we are gaining market-share against imports. And so we are starting to work our facilities at much higher depreciation rate, especially the old mill, the old – it’s not old, its renewed, but the Churubusco facility which was the one that was working at a very low capacity.

And so forth at least for the next few quarters, we see that facility working at much higher capacities. The exact number of the increase, we don’t have it yet clear, but we are very – working very hard with our customers to see the final demand. I think that – one thing that is also clear, Timna, is that demand in – the consumption of steel in Mexico. We are thinking that is going to increase in the future and we are seeing all the investments. Our customers, our new customers are doing, but it is coming on the time over time. Last year, apparent consumption decreased in Mexico next year when we see the kind of set of figures, it’s going to increase, but marginal. So the volumes we are gaining is against important market share. And so, that’s kind of what we are seeing in the market today Timna.

I hope with this, I clarified a little bit your question.

Timna Tanners: No that’s really helpful. So it sounds like even if AMSA were to reopen. And I’m not sure I’m quite up to-date on this telenovelas you don’t know what’s happening?

Maximo Vedoya: Convening here.

Timna Tanners: If we do see it return to operations, do you think that at least some of the volume improvement is sticky because of market share gains and against imports. It sounds like as well, yes?

Maximo Vedoya: Yes, yes you see both trends. Remember in Mexico you have, AMSA you now have ArcelorMittal, of course, with the new hot strip mill and you have us. And what we are seeing is that we are increasing market share against mainly imports and of course, AMSA is producing less tons, that’s also true. What we expect in the future, probably not next year, but you are seeing that demand is going to increase for several years to come. With this near shoring with this all the industrial manufacturers that are coming, remember that our capabilities also before the hot strip mill some of the products, we couldn’t be able to produce. So now, industrial customers, we are going through the – painful, let’s put it this way, painful certification process, a lot of industrial customers, which is. I mean, they have to do it, but this year and next year, all the certification process, are mostly completed. So, we are started to gain all that volume against imports.

Timna Tanners: Okay, great. Thanks again for the color.

Maximo Vedoya: Yes.

Operator: Your next question comes from the line of from Morgan Stanley. Your line is open.

Unidentified Analyst: Yes, hello, thank you for taking my question. I just wanted to ask, where do, you plan to divert the volumes of Ternium Brazil and to which markets. And also, I want to ask of the volumes you currently have integrated from Ternium Brazil to your Mexican operations. What percentage goes to the auto industry approximately, yes just to have some more color there?

Maximo Vedoya: Yes James, thank you for your question, very good question. Let me start with a broad answer. The capacity we have in Mexico and a little bit in Argentina we’ll put it, because Argentina also have a spare capacity of course with mill. We have capacity of roughly 7.5 million tons that need slabs. So I’m taking out the Guerrero facility, the mini mill facility. So, if we are – producing at full capacity, which were not producing yet at full capacity. But if we produce the hot strip mill in Pesquería full capacity, the Churubusco mill at full capacity and the mill in Argentina probably will need between 7.5 and 8 million tons of slabs. Brazil is producing today around 4.7 million tons. So we have a deficit that is bigger, or its kind in-line with the new capacity we are bringing in.

So, we don’t have to divest anything from Ternium Brazil, probably we will continue consuming most of the slabs in our own operations. Having said that there are customers and a partner of us that is that needs slabs for the long-term in Brazil. So we’ll probably, will increase our selling to USMCA and we continue buying in the market, some slabs for Ternium as a general, that’s our view when these new capacity come into line. Volume specific of the automotive industry from Brazil is increasing. I would say that 2023 will be around – I think 1.2 million tons specific for Brazil. Remember in Mexico, we sell around today around 2 million tons to the automotive industry.

Unidentified Analyst: Okay, perfect, very clear. Thank you so much.

Maximo Vedoya: You’re welcome.

Operator: Your next question comes from the line of Isabella Vasconcelos from Bradesco BBI. Your line is open.

Isabella Vasconcelos: Thank you. Good morning, thanks for the opportunity. I have one question here on my end. In terms of Mexican demand, you mentioned that there is destocking happening in the commercial market. So I just wanted to understand where do you think that stock are currently at in the supply chain is already above-average or if we just continue to see more restocking happening in Mexico in the coming months?

Maximo Vedoya: Okay, thank you. Good morning, Isabella and thank you very much. I think the restocking is just starting to be honest, when you see the apparent consumption in Mexico the decrease 2% last year. Although GDP in Mexico increases, you see that through the year, especially in the second half, there was a destocking or profound destocking in Mexico. So I’m expecting that these restocking and we see it in all the value change. There not much stock in the value, change in Mexico. So I think it’s going to continue for a couple of months or at least a couple of quarters. And then as I said, industrial demand, we’ll come on, there are some industries that are increasing automotive industry is one of them we have huge problems in the automotive industry in the consumption of the automotive industry in Mexico, because of the lack of components, but we are seeing in January that most of the OEMs in Mexico are producing again.

Without any stoppage, because of lack of components and it seems that the supply change in the automotive industry is already working. So we are expecting more demand from them. And I think that in the second half of the year or in the second quarter demand for other industries are going to come back. So that’s our view that we have from the Mexican market. I hope it helps lsabella.

Isabella Vasconcelos: Yes, that’s very helpful, one quick follow up on near shoring, have you already been seeing actual demand for near shoring products – projects or do you think that something to expect in later on in 2023/2024?

Maximo Vedoya: No, I mean in all our numbers for 2022 and 2023, we are not seeing demand. Except the demand you have in the construction of the facilities that takes a lot of steel, of course, but we are not seeing that demand, because of demand. That production is coming onboard, late ’23, the first one we saw last year and it’s going to come in ’24 and ’25. That’s what I said – why I said in the beginning that near shoring, it’s something that is happening, that we are seeing, because we are seeing the buildings and the factory has been built. But this is coming in a couple of years, when all the production facility is running.

Isabella Vasconcelos: That’s clear. Thank you.

Maximo Vedoya: You’re welcome.

Operator: Your next question comes from the line of Alfonso Salazar from Scotiabank. Your line is open.

Alfonso Salazar: Thank you and good morning, everyone. And the questions, that I have the first one is regarding the location of the new plant that you are building the new . Yes, just wanted to know what are the considerations for the location that they do you need to have to keep in mind. Does it have to do with water availability, energy – a clean energy availability, your carbon goals because Pesquería looks to me like a good fit, but don’t know if you can give some color on what is – what are you considering for the location. The second question is just a clarification about Ternium Brazil. So if I understood you correctly, you will be with this new slab facility. You will be basically neutral on your slab needs even if the margin you would be bagging a small amounts for some plant or selling some for, you’ll see mean another end users, is it correct?

Maximo Vedoya: Yes, thank you Alfonso. I think the second part, you are correct. We are being – we are going to be almost hedged, I think. But, yes, mainly, yes, but as I said, we are go probably going to sell to . I think it’s a very reasonable and very logistic — from a logistic point-of-view, it’s makes a lot of sense and so we are going to continue buying probably slabs in the market as Ternium, but we are going to be almost hedged. To the location, yes, Pesquería could be or one of the possibilities, clearly. But as I said, we are discussing and the exact location to be honest, we are going to disclose it soon. I mean, there’s still some things, we are analyzing. I hope I tried to answer the question, Alfonso.

Alfonso Salazar: Yes, just to clarify, we know there were some problems with water scarcity in the region of in the State of Nuevo León. Energy is not really a problem at this point, but it could be in the future and clean energy availability is also a concern of many that invest in Mexico, so, I just want to understand this — those are kind of consideration that you have.

Maximo Vedoya: Well yes, and no. I mean to be honest, water for our Pesquería plant. It’s not a problem. As you know, all the – I mean, from a water standpoint of view, Pesquería plant is the — Pesquería plant with the increase in the downstream facilities and the electrical plant, we had all of that consumes water from the disposal facility that is close to Pesquería. So we are not consuming clean water and so it’s very, very efficient from a water point of view and the plant is prepared to grow. So although it’s a concern in the north of the country, the water part is not a concern for Pesquería at all because of the sustainability, we felt the plant and we are consuming all, I don’t know how you said it in English, the black waters.

Yes I think sewage waters. And so we don’t have any problem with water. Energy, which is a big concern in Mexico. I think it’s not a concern in the north of the country. The north of the country has more energy supply that energy consumption. So it shouldn’t be another problem. I think that our decision is based on discussing alternative we have and to disclose the location pretty soon.

Alfonso Salazar: Okay, that’s really helpful. Thank you, Maximo.

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

Alex Hacking: Good morning, and thanks for the call. I just have a few follow-ups. I guess mostly on the projects. So with the DRI, would Ternium be consuming all of that DRI at the new EAF facility or would you be selling some of that to third parties?

Maximo Vedoya: Yes.

Alex Hacking: Okay.

Maximo Vedoya: We are all consuming the DRI.

Alex Hacking: What technology is that going to be based on, will it be the technology, that you’re very familiar with?

Maximo Vedoya: And most likely. I mean, there are two technology . Clearly, we have in all our plants, probably it’s not decided. But of course, is what we intend to do.

Alex Hacking: Okay. And then finally, are there any steel quality implications from shifting from very high quality Brazilian slabs, to slabs made in an EAF? In particular for your automotive supply chain, exposed auto body sheet are you fully comfortable that you can replicate your current tolerances and quality?

Maximo Vedoya: Yes, the answer is, yes, of course, it’s a different technology. But we have to go that road for several reasons. First, we have to be USMCA melted and pour compliance. We are not going to make a blast furnace in Mexico or anywhere, to be honest. So we worked hard all last year to see the technology and to see exactly how this steel shop will be to produce the same quality that the Brazilian slabs operation produces. And the secondary steel shop will be probably the same as that we have in Brazil. So we are comfortable although we are working very hard that the quality will be the same.

Alex Hacking: Okay, thanks. And then just back on the raw material side. I assume that outside of the DRI and you would also be using some prime scrap in the mix, is that a correct assumption?

Maximo Vedoya: Yes, probably the mixed — depends of course of the steel, the quality of the steel and the facilities prepared to produce with more DRI or with less DRI depending again in the steel quality, but roughly on a general mixed, it’s going to be 65% DRI, and 35% scrap.

Alex Hacking: Okay, perfect. Thank you for the clarifications.

Operator: And there are no further questions at this time. I will turn the call back over to Ternium’s CEO, Maximo Vedoya for some closing remarks.

Maximo Vedoya: Okay, thank you all very much for your interest in our call today for your very good questions. And as usual, please contact us if you have any comments or any additional questions. If not, we’ll talk next conference call. Thank you very much, and goodbye.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.