Ternium - Earnings Call - Q1 2021

Transcript

Speaker 0

At this time, I would like to welcome everyone to the Ternium First Quarter twenty twenty one Results Call. I would now like to turn the conference over to Sebastian Marti. Please go ahead, sir.

Speaker 1

Good morning and thank you for joining us today. My name is Sebastian Marty and I'm Ternium's Investor Relations and Compliance Director. Ternium released yesterday's financial results for the 2021. 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, Paolo Vrizio, who will discuss Ternium's business environment

At the conclusion of our prepared remarks, there will be a Q and A session. Before we begin, I would like to remind you that this conference call contains forward looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page two in today's webcast presentation. With that, I'll turn the

Speaker 2

call over to Mr. Belojes.

Speaker 3

Thank you, Sebastian. Good morning, and thank you all for participating today in Ternium's conference call. Ternium reported outstanding results in the first quarter of the year with record EBITDA and EBITDA margins. Steel benchmark prices around the globe have had significant increases over the last nine months. Following a pandemic induced decrease during the first half of last year, demand for steel increased significantly outpacing the speed of recovery in global steel production.

As a result of these, inventories at the value chain reached very low levels. This unbalanced supply demand conditions happened not only with steel, but also with iron ore and with many other products along the world markets affecting supply chains across different industries. We expect steel prices will remain around current levels for the rest of the second quarter and could decrease during the second half of this year as steel capacity utilization gradually catches up with demand. On the other hand, there are some positive factors that will continue to support a healthy steel demand by the continuous deployment of government stimulus programs and the progress on the different countries' vaccination efforts. In yesterday's press release, we guided for substantially higher EBITDA and margins in the 2021.

The main driver for this guidance, a higher realized steel prices partially offset by a higher cost per tonne. It is worth noting that as more than half of our sales in Mexico are under contract, realized steel prices in the second and third quarters should remain high reflecting prevailing steel prices in the 2021 respectively. In addition, the cost of many of our raw materials like iron ore and scrap are also showing elevated levels and the same is happening with slabs. The higher costs are not yet being totally reflected in our cost per ton as we consume inventories over time. So during the rest of the year, you should see cost per ton gradually increasing.

Let me review now the state of our main markets. During February, extreme weather conditions in the Southern U. S. And Northern Mexico disrupted production at our facilities in Monterrey with a negative impact in shipments of approximately 80,000 tons in the first quarter. Since then, our facilities have been running at high capacity levels.

Demand from export led industrial customers in Mexico continue to be strong and activity at the commercial market is steady. Consequently, if market conditions remain as they currently are, we expect to subsequently increase shipments in Mexico in the second quarter. After that, during the second half of the year, shipments should continue to gradually increase as we expect our new hot rolling mill at the Pesqueria Industrial Center to start up in a month from now. Turning now to Argentina. Industrial activity in the country remained strong during the first quarter of the year did the construction sector.

Shipments in the first quarter had a slightly sequential decrease as this is the seasonally weak quarter for the region. Although we expect shipments to remain stable during the second quarter, supported by continued domestic demand for durable goods and building material, it is worth noting that a second wave of COVID-nineteen pandemic is currently underway across South America. For the time being, there has not been any government mandated lockdowns of industrial facilities as it happened last year. But if conditions deteriorate, we cannot rule this out. Our operations at Ternium slab facility in Rio De Janeiro are also working at high capacity levels as most facilities are currently in Ternium's industrial system.

Slab prices increased subsequently during 2021, reflecting the increase in iron ore price and better steel market conditions. This facility, which is capable of manufacturing the highest specification steels, is providing a very strong steel production base for ten years operations in the region as it was intended when we acquired it back in 2017. In today's high steel price environment, Ternium Brazil is key for Ternium's competitive positioning as it integrates further with our facilities across Latin America. In Colombia, Ternium's new facility in Palmar De Barilla is doing better than we expected. The local market is recovering strongly and the ramp up process is progressing faster than anticipated with a third ship being incorporated ahead of time.

With this production configuration, the new facility is providing Ternium, Colombia with approximately 20,000 tons extra shipments per month in addition to the substitution of 10,000 tons of steel that were previously purchased to third parties. All right. I would like to give some final remarks before going into Pablo's analysis of our performance in the first quarter. As I mentioned, we are very close now to put into operations the new hot rolling mill in Mexico. In the shorter term, this state of the art capacity will become very handy at the time of imbalance in the steel market as it increases our market offering with an expanded product range and enable higher productivity throughout our facilities.

As we ramp up this new line, our current expectations is to achieve total incremental shipments in the North American market, the USMCA, of more than 400,000 tons in the second half of this year. But with a longer term view, I truly believe this will be a significant milestone in Tarrion's life and it will make us ready for further steps in the country's development. Another issue I would like to mention is a long term development in the global steel industry that has the potential to be very beneficial for all steel companies. Plans to decarbonize steelmaking operations around the world are taking hold. In our case, we announced a medium term declaration enrollment in February.

In China, the government is gradually mandating cuts of steel production with the aim of progressing towards the country's decarbonization targets. It follows through this could have a relevant effect in the future of world steelmakers as it would have the potential to solve the country's chronic steel excess capacity and its detrimental effects in the world steel market. Today's news about Xenia's announcement that it will reduce the export rebates for many steel products and it will cut the import duty of pig iron, crude steel and recycled steel to zero are clear steps on the right direction. And finally, a quick note of cautions. The COVID-nineteen pandemic is not over as vaccination programs in many of the countries in which we operate are not progressing as fast as they are doing in developed countries.

So most probably, we will have to continue dealing for some more time with the pandemic effect in these markets, our personal lives and those of the people in our communities. If this is the case, you can rest assure that we will continue committed, working as a team, doing our best for our business and for our communities as we have done until now. Okay, Pablo, please go ahead with the slide presentation.

Speaker 2

Thanks, Maximo, and good morning to everybody. You will see throughout today's slides that following a very strong fourth quarter, Ternium's results and profitability in the first quarter has been outstanding. The attractive steel market environment that Maximo described in his initial remark is being reflected on Ternium's economic and financial performance with historically high margin, significant cash generation and a consistent strengthening of our balance sheet. Let's start on Page three in the webcast presentation to review this. EBITDA in the 2021 was $1,100,000,000 or an EBITDA margin of 33% or $341 per ton.

Net income in the period was $7.00 $7,000,000 or $3.7 per ADS. We expect an even stronger set of results in the second quarter of the year. We will discuss this in more details in the coming slides. Let's turn now to Page four to analyze steel shipments. Mexico in the first quarter increases 3% both sequentially and on a year over year basis.

We expect volumes in the country to increase in the second quarter. Achievements record from first quarter extreme weather conditions impact on our production. In the Southern Region, shipments in the 2021 decreased 5% sequentially and increased significantly year over year. Let me remind you that activity in the 2020 was affected by lockdowns related to the COVID-nineteen pandemic. Looking forward into the second quarter, we expect steel shipments in the region to remain at relatively similar levels.

In the other market region, you can see that the volume slab shipped to third parties in light gray decreased in the first quarter both sequentially and on a year over year basis. This reduction reflects the increasing integration of Ternium slabs facility in Brazil with the company Industrial Systems. We expect this large integration level to continue increasing in the second quarter of this year, offsetting the expected volume increase in Mexico. Now in the same chart in dark blue, you can see finished steel shipments in this region, which increased in the 2021. Of note, in this regard, we are ramping up the new facility at Palmar De Vadil in Colombia, which has contributed to higher shipments in the country.

So combining these developments, as you can see in the next page, we are right to consolidate its pre shipments of 3.1 tons in the first quarter, 1% higher sequentially and 3% higher year over year. Looking forward, summarizing all that has been discussed, we expect stable consolidated pre shipments in the second quarter with higher shipments in Mexico offsetting lower slab sales to third parties. Now turning to prices, revenue per ton increased sequentially and year over year in the third quarter of this year. Steel prices in our key markets continue strengthening since our last conference call, especially in North America. This, together with the lag reset of contract prices in Mexico, anticipates these trends to continue in the second quarter as commented by Maximo.

Moving on to net sales, in the bottom chart, the combination of relatively stable shipments and higher realized price resulted in a 26% sequential increase in the first quarter to $3,200,000,000 Compared to the same period last year, net sales increased 43% in the first quarter. Turning now to the next page, number six, let's review the main drivers behind the sequential changes in the first quarter EBITDA and net income. The chart on the top shows a significant influence of higher realized price on the EBITDA increase, which was partially offset by higher cost per ton as a result of higher raw material and purchased lap prices. We expect a new sequential increase in EBITDA in the second quarter of this year with even higher realized prices as previously discussed partially offset by higher cost per ton. An increase in raw material prices continued to flow through the company's inventories.

The Chartbio saw a slight sequential increase in net income in the first quarter as a result of significant increase in operating income that cannot be seen in the fees entirely due to the $186,000,000 non recurring gain in the fourth quarter of last year related to the recognition of the contingency in connection with the ISMS credits. This gain was excluded from the calculation of EBITDA in the fourth quarter. We also had in the first quarter better net financial results mainly due to a 3% depreciation of the Mexican peso against the U. S. Dollar compared to a 13% appreciation in the fourth quarter over a net short Mexican peso position.

The significant appreciation of the Mexican peso in the fourth quarter also impacted the effective tax rate, which went down to 1% in the fourth quarter compared to 27% in the third quarter of this year around what should be expected when there are no significant fluctuation of exchange rates. To finish the presentation, let's now turn to our cash flow and balance sheet quarterly performance on Page seven. Cash flow from operations in the first quarter was $328,000,000 even after the expected increases in working capital in this period. Of note, in the working capital increase were an extra $555,000,000 in trade and other receivables due to higher realized prices and $316,000,000 in higher value of raw material suppliers and others and in the cost of steel in our inventories. This was partially offset by higher accounts payable.

Looking forward into the second quarter, we expect further increases in working capital reflecting higher realized price and cost as previously discussed. Regarding free cash flow, the company managed to generate $198,000,000 after capital expenditures of $130,000,000 and the mentioned investment in working capital. This enabled Ternium to further reduce net debt to $229,000,000 at the March, equivalent to 0.1 times net debt to last twelve months EBITDA. Let me remind you that as previously announced, Ternium's Board of Directors has proposed a dividend of $412,000,000 equivalent to $2.1 per ADS. It's approved at the company Annual General Meeting of Shareholders.

It will be paid on May 11 to shareholders on record as of May 6. Okay. With this, we finish our prepared remarks. As always, we appreciate very much your time and attention. We are now ready to take your questions.

Please operator proceed with the Q and A session.

Speaker 0

And your first question comes from Kai Ribeiro with Credit Suisse.

Speaker 4

Hi. Good morning, everyone. Thank you for the opportunity. So my first question on flat steel prices in The US and Mexico. Know, clearly, prices have been trending very favorably year to date.

The market, you know, appears to be very tight right now. But there is, you know, considerable incoming new capacity, you know, both in The US and Mexico that's coming online this year and next. So I was wondering what your expectations are on the impact that this new capacity will have on prices. You know, do you see prices normalizing at a lower base, you know, once this new capacity comes online? And if so, you know, when do you see this happening?

And then secondly, I was just wondering if you could talk, about where you see the inventory levels, you know, for steel throughout the whole supply chain in in Mexico right now, and how, you think that they compare to normalized levels? Thank you.

Speaker 3

Thank you very much, Caio. Very good question. I start with the second one because it's a little bit more easy. Inventory levels are, at least in industrial customers, very, very low today. They're not yet a normalized level, and and and they are not even you can see they're even more low.

If you see the high rate of utilization that all our industrial customers have in the production base. So yes, inventories in Mexico, very, very low. Flat prices in The U. S. As I said in my remarks, I think flat prices in The U.

S. Are going to continue during the second quarter as they are today. And in the third and fourth quarter, should decrease somehow. Although I don't see something that is going to decrease prices too much. I don't see an event because demand is very strong, and and and the new capacity is not going to be in line in in the near future.

Speaker 1

So

Speaker 3

so I don't see an event that is going to diminish prices in the near future in the second, third quarter or fourth quarter by much. In the long term, and I don't know if your question was more of the long term and this new capacity that probably next year with Steel Dynamics and others is going to be online. But if you are talking about the long term, I don't see this new capacity coming online as a very problematic I mean and I'm gonna take a little bit longer, Kai. I'm sorry. But but this is a very good question.

There are few things that are moving the market in USA The US and Mexico. First, consumption is gonna grow. I mean, Mexico has a consumption that is 160 kilos per habitat. That's a very low consumption. If Mexico is gonna develop, it's going to start consuming more steel.

So that's consumption is going to grow in Mexico in the following years. The second effect is the reshoring issue. This is happening. It's happening at a pace that probably is going to incremental in the next few years, and this is going to be more consumption. And the third thing is infrastructure, which we didn't have in the past.

But if the plant of The US is going through, this is also going to have an impact in infrastructure. So new capacity that's coming online is coming to fulfill different things and compete with imports Because, I don't know, if you take the year 2020, imports from finished flat products in The US and Mexico were somehow 15,000,000 tons, a little bit more, a little bit less. And this is a year which is not a typical year. So you have a lot of room to compete with these imports. And so the question is, if the capacity we are building, at least the one that Permian is building, is able to compete with imports.

And that's why we are building our capacity with a very competitive cost position. And so we think that we are more than able to compete. So I don't see that this new capacity is going to have a huge impact on prices. I hope I con I I answered your question, Kai, although although a little bit longer.

Speaker 4

No. No. That's that's perfect, Massimo. I really appreciate the, you know, like, the full answer, you know, very complete. I mean, I was just trying to understand exactly, you know, the momentum in the short term and how that's gonna flow through in the medium to long term.

So that was a very, complete answer. Thank you very much. If I might may just follow-up with one thing very quickly on the inventory levels. Yes. How long do you think that this could take, you know, to normalize those inventory levels?

Speaker 3

To be honest, in Mexico, the commercial market, I think it's going to normalize in the near near future. Industrial customers, I I think it's gonna take a little more longer. If demand continue this way, I think it's not gonna be over until the net until the last of the until the final month of the year. Understood. Very clear.

Thank you again. You, Caio.

Speaker 0

And your next question comes from the line of Thiago Lofuego with Bradesco BBI.

Speaker 5

Thank you. Good morning, guys. A couple of questions here. On the capital location side, usual question here that you guys get every quarter, but your your cash generation will be significant in the coming quarters, right? I mean, most likely, yeah, in the coming year or two years.

So what should we think about here in terms of capital allocation Should we see you guys speeding up on the M and A agenda? Any other significant organic growth opportunities that you guys might consider? Or should we just really see more dividend? To understand how your mindset is at this point given this new scenario, given this very high level of steel prices globally.

And if that persists, how should how will Ternium approach this new world? And the second question is on more specific on on your third party's lab shipments for the second half of this year. Where where should we see that level as you ramp up the Tasqueria mill? Thank you.

Speaker 3

Well, I I start with the issue easy one, Thiago. The second one. The other one is also easy. But third party slabs, today, in Mexico, we consume around 3,000,000 tons of slabs, more or less. And with the ramp up of the new facility, probably next year, we are going to consume a little bit more of 5,000,000 tons.

In the fourth quarter, probably, we are going to run at a pace of 4,000,000 tons a year, next year probably at 5,000,000 tons of needs of slabs for Mexico probably a little bit more. On the other side, we have Ternium Brazil. Ternium Brazil is running almost at 5,000,000 tons, a little bit less than that, but almost at 5,000,000 tons. And as you know, we finished our contract with Calvert. So we don't have to sell anything to The U.

S. In the May. So if you see that way, we are almost balanced in our slab production and our slabs needs. Nevertheless, we are going to buy from third parties because we intend to sell from Brazil, from our slab facility in Brazil, particularly to the local market. But it's going to depend on that, Thiago, on on on what are the opportunities to buy from third parties and to sell to third parties.

But the the the premium is almost balanced today in our slabs needs. I hope that answered the question.

Speaker 5

Yeah. Massimo, just a a quick follow-up. So when you say you're gonna buy from third parties because you wanna sell to the market in Brazil, so that's solely because of, like, better economics for you guys to sell in Brazil at a premium? What is the rationale there?

Speaker 3

Exactly. Exactly. I mean, you don't have the freight. Yeah. Exactly.

Freight references are premium because we ship just in time to to the customers. I mean, instead of shipping instead of them receiving a vessel, I know, once a month with a huge transit time, we ship by train every day for these customers in so they pay a premium and you don't have the freight. So so it's an economic analysis, pure economic analysis. Mhmm.

Speaker 5

Oh, got it. That's it.

Speaker 3

The first question, capital allocation. Well, in the short term, we are going to have a CapEx around $600,000,000 in this year. We are going to still increase working capital. We have a huge investment in working capital in the first Q of almost July But in the second and probably in the third quarter, with this increase in prices and volumes, probably we are going to also invest in working capital. And next month, we are going to pay $412,000,000 in dividends.

Now in a little bit more further, which was your question, speed it up for M and A, organic growth of dividends, I think the answer is that they are all in the table, Thiago, for us. I mean, we always have the aim to analyze any opportunity that strengthens our strategic position in our markets. And that is what we are continuing doing today. We have to we have plans to continue developing our industrial platform in the region as long as we strengthen our position in this market. I mean, there are opportunities in Mexico.

We are very confident in the future of Mexico to grow. And there are also opportunities that we are seeing in other markets where we are strong today, and that's what we are going to do.

Speaker 5

Okay. That's clear, Maximo. Thank you.

Speaker 0

And your next question comes from the line of Kyle Greener

Speaker 6

Thank you. Good afternoon, everyone. So my first question would be on you guys' EB Doppler 10. I do understand that your guidance said that you're probably going increase EBITDA in the coming quarters. But I was just trying to understand how this equation is shaping out to be over the next one or two quarters ahead.

Because on one hand, fuel prices in The U. S. More than doubled year over year. And if we look at Tx revenue per ton only rising by 50%, that's something that calls our attention. I do understand that Turing has those industrial contracts and that prices might take one quarter in average to flow through results.

So I was just trying to understand how that's going to shape out over the next coming quarters. And on the other hand, you also have higher raw material cost raw material cost inflation that should also start flowing through results as they also flow through inventory. So and also on top of that, you also have Pesqueria coming online, which is something that you guys mentioned that should increase Ternium's profitability. So looking at all of those issues, I was just trying to understand how you guys are thinking about your EBITDA per ton levels over the coming quarters. Does it make sense for us to to look at turning in with an EBITDA per ton of above $400 over the coming quarters, maybe until the the end of the year?

Also, was just trying to see if you guys can help us with in forecasting the numbers for until the end of the year? And my second question, just a quick one as a follow-up of one of the previous ones. Maybe, Maximo, maybe can you share with us how how are Ternium's lead times in Mexico nowadays? If you can share with us how many months days or months are you guys taking to to actually deliver spot volumes? That would be great.

Thank you.

Speaker 3

Our lead times for spot volume are similar to those in The US today. So for a hot roll, you are more than eight weeks or a little bit more, to be honest. For spot volume, I mean, you know, we have contracts and we also have regular customers in a monthly base prices. Those have no problem. But if if there is a spot volume that someone wants, it's a little bit more of eight weeks.

Speaker 2

Maximo, if you Yeah. You love me, I'll I'll take the the first part

Speaker 3

of Yeah. Yes. And please go. Yeah. Okay.

Speaker 2

So hi, Caio. So yeah. You put it very well in your in your question. There are some moving parts in in in trying to analyze which a DVA per ton will we have in the in the coming quarters. Clearly, what we have guided is that the increase in prices that we will be seeing in the second and even in the third quarter will outpace the cost increase that we are seeing for specifically this coming quarter.

So clearly, what we are guiding and what we are looking is for an EBITDA per ton increase during the second quarter. Moving forward, that will start to depend a little bit on the pricing scenario that you would like to put here. If we follow what we have, what Maxi will comment on what we are seeing in the market is that in the second semester of the year, there will be some price adjustment, but we are not seeing signs at the moment that this price adjustment could reduce the price to levels that we saw last year. So we are expecting a good level of pricing in the second semester. You're also right that we will continue to see some cost moving to our numbers even during the third quarter because prices of specifically slabs continue to increase and continue to go through our numbers.

But in the third quarter with the expectation that we have, we should sustain a good level of EBITDA per ton. And the fourth quarter clearly will depend a lot in the pricing scenario that you would see will return to more normalized level of pricing even being a very good level of prices. Since cost then will take some time to reduce or to follow if the iron ore for example of slabs follow the same trend that the prices. So you could see some reduction there. But in any case, we are seeing the scenario that we have today is that we will continue to see very good level of EBITDA per ton throughout the year.

Speaker 6

All right. Thank you so much.

Speaker 0

Next question comes from the line of Carlos Galba with Morgan Stanley.

Speaker 1

Thank you very much. Good morning, everyone. So my question is coming back to the capital allocation. In the past, I don't think that we have seen turning paid a special dividend. But as you asked that way before, the the level of of cash in your balance sheet is is remarkable.

And I don't think maybe we have seen that before, but it is quite as quite good. And so is there a implicit policy by which Sternium doesn't like to pay special dividends and just speaks to a regular more or less, sustainable dividend. Do you see that changing? And then on the same vein, when you talk, Massimo, about Massimo, about the potential markets where you could do a a either a greenfield project or a brownfield project, but mostly greenfield and or m and a. Is is is the are you guys going to stick to The Americas?

Are there specific regions within The Americas where you would like to focus maybe getting more into The US directly with more manufacturing capacity there, may maybe crew a few capacity in in The US? And then finally, coming back to Tasqueria ramp up, could you just maybe repeat, I think you said 400,000 tons of incremental volumes in Mexico in the second half of the year. Could you confirm that number and maybe elaborate how do you see the progression of capacity utilization in the new Holocaust line in Vesqueria in the coming quarters or in four years? Thank you.

Speaker 3

Yes. Thank you very much, Carlo. I'll start with the last one. It's more easy again. Yes, I said 400,000 tons of incremental shipment because of the hot stream mill, the new hot stream mill.

Remember, the hot stream mill is going to start our first coil June 1 or probably a little bit earlier, but these are very complex equipment. So the ramp up curve, it's a long ramp up curve. So that's what we are seeing today. It's not that it's gonna produce more for sure, but remember that we are we're also importing products to fulfill all our needs. We were importing hot rolled coils from different countries in Mexico to fulfill the needs in the last quarter.

So it's going to replace that. And incrementally, we are going to sell 400,000 tons more in North America. This could be a little bit higher if the ramp up curve is better. But remember also that and one final comment, this hot stream mill is going to produce all the range of products that you can imagine. And for doing that, we have to make all the certification process with the provider of equipment.

And this takes a lot of time. So it's not that the ramp up curve only it starts producing and you start producing. You have to make sure that you can produce all the range of products, and that takes a lot of time of trying and stopping the line and making adjustments so that finally, the provider or the supplier of equipment certified all these range of products. And that's I think with that, I I I answered that question, Carlos. Capital allocation and and special dividend, we don't have a policy against that.

But I don't know. I mean, we we like to be very consistent. And and and if you see our track record except in in in 2020 when when I think we didn't pay dividend, and I think it was more than justified for what we know at that time. We want to continue with this pace. I mean, increasing or or or giving us sustainable dividend in the long term.

And you can see how we were moving in the different years. Potential markets, yes, our market Americas. We are not thinking on going to other continents, to be honest. If this includes The U. S, we yes, we have an operation in U.

S. And we had had in the past analyzed some new facility in The U. S. And as I said before, the three options we always analyze the three options and we are doing it now, but focus in The Americas, Carlos.

Speaker 1

Alright. And and and thank

Speaker 3

you very much, Marco, for that. And if I

Speaker 1

may just squeeze another one. Could you tell us what level great. Could could you tell us what is more or less the level or the volume of the slabs that's earning in Brazil is is now sending to Mexico? Or how much you expect for for the year?

Speaker 3

In the last quarter, I think the level exactly was 700,000 tons. Yeah. That's first first quarter of the year. And and it's gonna be around that, at least around that for the next quarters. Great.

Speaker 1

Thank you very much.

Speaker 3

Stay well. You're welcome, Carlos. You

Speaker 0

too. Your next question comes from Alfonso Salazar with Scotiabank.

Speaker 5

Hello, and good day,

Speaker 7

The question I have is regarding Mexico, the Mexican market and see if you can elaborate more on your constructive view on Mexico beyond the rebound that we expect in the GDP this year. And because consumption per capita, as you mentioned, is very low, but why should it increase in the future? Because what we read in the local press is how several reforms, like the energy reform, the the hydrocarbon reform, the outsourcing reform have been creating uncertainty and and investments have been declining for over two years now. Gross capital information is well below potential. So why do you think this is going to change and when?

And also, if you can comment on the expected impact of the energy reform and the outsourcing reform in your results. Thank you.

Speaker 3

Perfect, Alfonso. Very good questions. And let me start with the energy reform and the labor reform, which the main objective is to cancel the outsourcing. Energy reform is not a very good reform. I mean, it was a very bad reform to to.

But to be honest, I don't think it's gonna go through. As you know, there are more than a 120 I I don't know, but probably you know, a 120 demands already put, and and the law has been suspended. The Secretary of Energy already suspended the law. I don't think it's gonna go through. The rationale of the law, of course, is to give a more balance or to give a little bit more to Pemex and to CFE, the state owned company.

But I think that what people didn't realize in the government is that is not very good for the competitors. And now the people are realizing that. Labor reform does not have any impact on us. To be honest, I think it's even going to have a small positive from from us. We used to pay the the the performance bonus as a law require to all our employees.

So I I'm not seeing any any any affection for us in in in in this reform. The the first quest I I think what and also with that, I answered the the first two the the second question. I I don't know if anything is

Speaker 7

second question. No. No. No. I think that's fine.

Thank you. Yes. Why

Speaker 3

are we confident in Mexico? And and again, you are right that that the numbers are are not very good what the government is doing in kind of spending or helping after the effects of the pandemic. First of all, I think industrial base is going to continue growing. Again, reassuring is a thing that is happening. We are seeing it every day.

It's happening in The U. S. And in Mexico. And most of these transshipments or these plants that were supplying the North American market from production base in China, they are not going to go all to The U. S.

I mean, Mexico has a very strong competitive advantage and some of them are coming here. So consumption because of this, in the next year it's going to grow and it's going to continue growing first. And the other part is Mexico has a very don't know if you say it like this in English, but has a very balanced financial situation. I mean, the depth of the country is very low compared to others and the needs of infrastructure are very high. I know the government has concentrated in three projects only, but once sometime in the next year or the following, they are going to realize that the needs of infrastructure in Mexico are huge and that makes you have the means to do it.

And so those two things are going to increase consumption in Mexico steel because all those things take a lot of steel. So that's why we think Mexico is gonna grow. Again, it's not going to be in the near near future. I don't see next year a huge infrastructure bill. But in the next two or three years, Mexico has to make a huge infrastructure bill as The US is doing.

I hope I I answered the question, Alfonso.

Speaker 7

Yes. Yes. It's it's I think we can debate on on on how fast this is going to happen. But, yes, thank you very much.

Speaker 3

You are sure of yeah. The timing is the issue here. But I think that in the reassuring, the timing is gonna be much faster than what we are we are seeing. In the other one, it's a huge debate. Fair enough.

Thank you very much, Maximo. Thank you.

Speaker 0

Our final question comes from the line of Fabian Grayman with Pictek Agstep Management.

Speaker 8

Thank you very much. This is more of a request than a question and a bit of a repeat. As a shareholder, what I struggle with and what I'm disappointed about is clear communication about capital allocation longer term. When I look at your best in class peers across emerging markets, for example, you know, guys in Russia, there is a key leverage target and a dividend linked to free cash flow after CapEx. And I'm really not arguing against CapEx here, but and so the question is why do we not have a clear message on, let's say, the holy trinity of leverage, CapEx, and cash returns?

And, you know, just to state my preferences, as a shareholder, we we clearly like a dividend policy linked to free cash flow and a key leverage target. Yeah. That's it.

Speaker 0

I would now like to

Speaker 3

take the you're in mute. Yeah. Yeah. Yeah. Sorry.

I think

Speaker 2

Hi, Theresa, and and and thanks for for the question. Let me let me try to answer your your question. There there are two different things in in your question. The first one is leverage target, something we do not believe in, And let me explain the reason why. We as a company in the sector where we are with the volatility that the sector have, we believe in always having or try to have a strong financial position in order to, first of all, among other things, be able to sustain our dividend policy.

Second, to be able to take advantage of opportunities if they appear in the market and even during crisis year, like for example, last year or in many other years that happened in the past, we concentrated in our own business and developing our own business and our own plans without the need to to do some restructuring or issuance of capital or different instrument that you have to have when you have a difficult time. So that's why we believe in having a strong financial position. Probably, we can argue and you could be right that the ones that we have at this moment is too strong, but this is why we believe in having this without forgetting. First of all, as we said, paying an increasing dividend, fulfilling the needs of our CapEx plan and being always ready to have or to take opportunities if we can. And a clear example of that was our last acquisition.

Back in 2017, if you remember when we were analyzing the acquisition of our facility, many of our companies in our sector were doing capital issuance or restructuring the debt and we were having the means to move forward with this acquisition that has been proved to be a great acquisition for Teligent. The second point, which is the one of a clear dividend policy, you're right, it's something that we do not have a formal written dividend policy. But what we have is clearly conduct, a track record, a way of analyzing the way we pay our dividend and sustaining and increasing and at least paying a portion of the net income that we generate. We could improve with that in that sense. That is what we are taking from your question as a shareholders of the company.

But what is clear is that we have been paying a significant portion of our net income every year. And the track record that we have is of increasing the dividend payment as much as we can year after year. So probably it's not the answer that you were looking for, but it's what we are doing as a company and we take your concern to discuss internally because it's good to hear what our shareholders are saying.

Speaker 8

Thank you for that. Maybe just a quick follow-up on CapEx. There was talks about expanding capacity at Tethcareer. Could you buy, I think, 400,000 tons? Can you comment on that and sort of the when and how the decision will be made and what that was causing?

Speaker 3

No. I Fabienne, I don't think we you mean in this conference call, the comment of these 400,000? No. No. No.

Speaker 8

I I thought separately that there was a potential to expand the the nameplate capacity.

Speaker 3

No. No. I don't know if we make any comments to expand the the the capacity in Pesqueria. Although, you you know that Pesqueria is a site that has a lot of potential, and one of the things that we are analyzing is clearly the organic growing in Mexico. And if this go through, that organic growth should be in Pesqueria.

Speaker 8

And when should we have an update here? And what could the expansion project be?

Speaker 3

There are a little different side. Clearly one of and and we commend one of these is, you know that in 2027, the the rule of origins of USMCA changed. And in order to be considered local, you have to have melted and pour in the region for the automotive sector. As we said several times, in 2027, we are going to be we need to be compliant with USMCA. So one of the options is to invest in Pesqueria to be compliant.

There are other options. They are all under analysis, but this is one thing that we can produce be in Pesqueria.

Speaker 8

Got it. Okay. And sorry. Maybe maybe very last question just on, you know, on the current. And what what I think what I really struggle to, you know, put in my model, and I think what I felt that struggles a bit as well with is how will that impact be split between a total uplift in volume and an increase in EBITDA given that it's sort of a downstream integration?

Can you sort of guide how much you think, now say, through the cycle EBITDA per ton should lift given the controlling expansion growth?

Speaker 2

Well, yes. I think another question, I think there was Carlos or Kyle, your question that I tried to explain how we see this moving through our numbers. Clearly, as we explained during the call, we are work working at high capacity utilization. So that's why we cannot increase that much the shipments as you saw during the last quarter. And next quarter, we are guiding again for a sustained level of shipment that's because we don't have that much product to keep selling to the market.

So the increase that Maximo mentioned and we have that we have been commenting is clearly an increase of volume that we will be doing into the second quarter to add to the level that we are having today. So if we we are at the level of five of 3,100,000 tons in a quarter with that, let's say, it will not be the case. But let's say that evenly distributed in in every quarter, so we can say that we will move in the next semester to 3,300,000 tons. And we also are guiding that with the current level of prices, we are expecting to increase a little bit the increase the EBITDA margin or the EBITDA per ton in the second and even in the third quarter. And then we depend a little bit on the pricing scenario that you want to utilize in your model to know exactly or to have an idea which will be the margins of what they are.

But all in all, the message is Pesqueria will allow us to increase shipments starting next semester. And least in the coming couple of quarters, will be able to increase or sustain the margin that we are producing at the moment.

Speaker 8

Got it. Okay. Thank you very much. Thank you, Fabian.

Speaker 0

I would now like to turn the conference over to Ternium's CEO for final remarks.

Speaker 3

Alright. Thank you all again very much for your interest in in our company. I hope this call has been useful. Please remain safe and healthy and see you all in three months in our next conference call. Thank you very much.

Speaker 0

This does conclude today's conference call. Thank you for your participation. You may now disconnect.