Ternium - Earnings Call - Q3 2020
November 4, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to Ternium Third Quarter twenty twenty Results. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the conference over to Sebastien Marti. Thank you.
Please go ahead.
Speaker 1
Good morning. Thank you for joining us today. My name is Sebastian Marti, and I'm Ternium's Investor Relations and Compliance Director. Ternium released yesterday's financial results for the third quarter and 2020. 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 Borizio, who will discuss Ternium's business environment and performance. 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 call over to Mr.
Redojo.
Speaker 2
Thank you, Sebastian. Good morning, and thank you very much for your participation. We really appreciate your time and your interest in our company. And I think especially today, when I think some other things are happening which keep us a little bit busy or our mind there. Since our last conference call, there have been significant advances toward a more normal environment in the steel industry.
Steel demand increased as lockdowns and restrictions to operate for different industries were relaxed in the third quarter in all our markets. We continue to operate our facilities under strict sanitary protocols as discussed in previous calls and in this scenario, we have been able to increase operating rates to close to full capacity. In situations like this, it's when Ternium can demonstrate its operational flexibility. During the second quarter, at the worst of the pandemic related restrictions, we reduced Ternium's crude steel production by almost 30% compared to the first quarter. Then in the third quarter, we took production back up to an even higher level than that of the first quarter of the year.
I am proud of how quickly our people was able to react to these big changes in the market environment. Steel prices in North American market has also been helping as they were as they recover strongly from a very low base back three months ago when we had our last conference call. The higher shipment made possible by Ternium's operational excellence, together with improvements in the price scenario, enable us to report third quarter results that were significantly better than what we anticipated in our last conference call. Shipments increased 16% to 2,800,000 tons, not yet back to pandemic levels, to pre pandemic levels, but on our way there. EBITDA was $353,000,000 with a margin of 17% or $124 per tonne, also a significant increase with expectations of more to come in the fourth quarter of the year.
Free cash flow remained at a very high level as they did in the previous quarter with €389,000,000 in this quarter, driving another decrease of net debt will reach just $562,000,000 at the September. During the third quarter, we were able to restart our main CapEx projects, including the new hot rolling mill in Mexico, of which we continue to expect a commissioning by mid next year. We also resumed the final commissioning of the Greenfield River facility in Colombia. In this regard, I'm very glad glad to announce that in Monday, two days ago, we produced the first bar out of this new facility. The new mill will enable us to substitute imports of reinforcing bars in Colombia with total capacity equivalent to approximately a third of the market.
With this facility, we will be the only producer of rebar in the north of the country. This new capacity will also contribute to an increase in competitiveness with a lower cost of production than our existing facility. And we will also be able to broaden our product offering, integrating this new capacity with our existing facilities in the country. Let me now make a quick description of the situation in our main market. In Mexico, we recovered in the third quarter a little over half of the volume we lost in the second quarter.
We now expect shipments to return to pre pandemic levels in the fourth quarter. We are seeing a continued recovery of shipments to the automotive, household, appliances and HVAC industries driven by solid end user demand in The U. S. Market. We also expect shipments to the construction market to sub sequentially improve with steady demand from small construction and various government infrastructure projects like the new airport in Mexico City and the new refinery.
In Argentina, following record low shipments in the second quarter of the year, volumes recover in the 2020 to levels similar to those seen in the same quarter two years ago. Although the Argentina government successfully restructured its debt, uncertainty in Argentina continues to be high. The country continues to have macroeconomic challenges that it will need to overcome with reforms and time. If there are no negative news at the macro level, we could have an additional sequential shipment increase in the fourth quarter as the steel end markets continue to advance purchases. In Brazil, the steel market environment improved significantly over the last month and this has supported increased slab orders level in the domestic market.
The auto industry is recovering nicely in Brazil and the performance of the country's GDP in 2020 is going to be the less affected by the pandemic among the Latin American economies. Our slab facility in Rio is currently working at full capacity and we expect it to maintain in the fourth quarter of the year a high level of integration with our mills in the region it had in the third quarter. Prices of slabs in the global market has also improved over the last three months, and this is driven a recovery to more normalized margin levels in this facility. All right. I keep it short this time, so we have more time for Q and A section and the review of the quarter.
Summarizing, the profitability of the company is improving, and we have positive expectations for our performance in the fourth quarter of the year. Needless to say, although shipment levels in all our markets are currently strong, uncertainty persists about the future cost of the COVID-nineteen pandemic and the measures government around the world could take to contain it. As we are seeing in Europe, it is evident that the pandemic is not over, so we will continue to take a cautious stand. We also continue working hard to help our communities endure the effects of the pandemic with all the initiatives I detailed on our previous calls. I am particularly proud of how the field hospital we built and operate in Monterrey is supporting the health of those in need in the local community.
Looking ahead into next year, we are very much looking forward to the commissioning of our new hot rolling mill in Mexico. I believe this will be a game changer for Telenu, not only from a growth perspective, but also from a competitiveness point of view, always with the goal of sustaining our high profitability levels related to our competitors. I am also very positive about the future of the steel market in the USMCA region. With our expansion projects in the last stage of development, I believe Thallium will be in unique position to take advantage of the USMCA's many benefits. All right.
We're very nice to review in more detail the third quarter results. Please, Pablo, go ahead.
Speaker 3
Thanks, Maximo, and good morning to everybody. Let's review the earnings results for the third quarter of the year. As Maximo mentioned, you will see that our performance improved significantly in the third quarter. Over the last couple of quarters, we worked hard on sustaining internal profitability as well as on strengthening our balance sheet to cope with the difficult environment in our markets related to the COVID-nineteen pandemic. Let's see some of the results of these efforts starting on page three on the webcast presentation with the company's quarterly EBITDA and net results.
We have a significant EBITDA recovery with $353,000,000 in the third quarter. There was a sequential EBITDA margin expansion of 400 basis points or $33 per ton. We will discuss this in more details in the next slide. Net income in the period was 173,000,000 or $0.74 per ADS. The results compared to net income of $44,000,000 in the second quarter.
There we are, sorry. So we're saying that the result of the net income of the third quarter quarter compares to a net income of $44,000,000 in the second quarter. Sorry about that. We are having against some noise in the line. So and clearly, the second quarter was weak because of the consequences of the pandemic of COVID.
So let's look forward to the fourth quarter that the expectation is for a sequential increase in shipment and higher margins should result in a strong set of numbers. Turning now to Page four, let's review in more detail the degree of the recovery in shipments, one of the positive surprises in this third quarter. As shown in the upper left hand side chart, in Mexico, shipments increased 23% on a sequential basis in the third quarter. They were down by 11% if you compare to the last year. In the fourth quarter, we expect shipments in Mexico to continue recovering, reaching pre pandemic levels.
In the Southern Region, shipments in the third quarter revolved from a very weak second quarter, as well in the lower left hand side chart and were up year over year by 9%. If current market dynamic continue, we should see a further volume expansion in the fourth quarter. In the other market region, finished steel shipment increased sequentially and on a year over year basis in the third quarter, as you can see in blue in the upper right hand side chart. As for slab shipments to third party, in the same chart in gray, they decreased both in sequential and year over year comparisons. During the third quarter, we were able to further integrate Ternium's fab facility in Brazil with the company's industrial systems up to a level that resulted in a reduction in the volume of slabs shipped to third parties.
In the fourth quarter, we expect a similar volume slabs shipped to third parties. Turning to the next page, you can see in the upper left hand side chart the result of development, with consolidated steel shipments of 2,850,000 tons in the third quarter, up 16% sequentially. In the fourth quarter, we expect consolidated steel shipments to increase sequentially based on higher volume in our key markets as already discussed. Turning now to revenues. Average realized price increased 5% in the third quarter, as we see in the upper right hand side chart.
This is mainly explained by a sequential increase in the value of our sales mix. Steel prices in the North American markets experienced a very strong rebound since our last conference call. We were expecting this to happen, but not in the magnitude it actually did. This improvement is prevailing steel prices was mostly offset by weaker industrial contract related prices as a result of the lag price reset. This strong pricing background will drive an increase in revenue per ton in this region in the fourth quarter of the year.
Let's turn now to Page six to review the main sequential changes in EBITDA and net results in this quarter. The rebound in EBITDA reflected the recovery in steel shipments and improved profitability. EBITDA margin increased sequentially, mainly reflected reflecting an increase in revenue per ton, partially offset by a slight increase in operating cost per ton. The higher operating income led to a sequential improvement in net results, as you can see in the bottom chart. In addition, we have a better result from equity in earnings of Usiminas and higher income tax.
Turning now to Page seven, let's review the main changes in the first nine months of the year on a year over year basis. The change in EBITDA shown in the chart reflected the year over year decrease in shipments and EBITDA per ton. EBITDA per ton was negatively affected by lower steel prices, partially offset by lower purchased lab, raw materials, energy and labor cost per ton. As for the year over year changes in net income in the bottom chart, in addition to the decrease in operating income, you can see the effect of the net financial result of the significant fluctuation of the Mexican peso, the Argentine peso and the Brazilian real versus the U. S.
Dollar during this period. We also had an year over year higher income tax. The main reason behind this was a non cash deferred tax loss in the nine months of the year in comparison in connection, sorry, with the Mexican peso 16% depreciation in the period. Now to finish and before opening up the call to your questions, let's review on Page eight, free cash flow, capital expenditure and net financial debt. You can see in the slide strong set of numbers with the measures taken in the last two quarters.
Telnu has achieved a strong financial position with ample liquidity and net cash provided by operations activity reached $1,400,000,000 in the first nine months of this year, including a €628,000,000 working capital release and capital expenditure decreased significantly to €440,000,000 in the period. All that, we take into consideration everything that we have just mentioned with last net debt down to $562,000,000 as of the September, equivalent to 0.5 times net debt to last twelve months EBITDA. With the resumption of our investment plan, we expect capital expenditure to increase sequentially in the fourth quarter. Okay. These were our prepared remarks.
We are now ready to take your questions. Once again, thank you very much for your time and attention. Please, operator, proceed with the Q and A session.
Speaker 0
Our first question comes from the line of Jonathan Brandt with HSBC. Your line is open.
Speaker 4
Hi, good morning gentlemen. Congratulations on the results. Maximo, I first wanted to ask you about steel prices, both how quickly we should see the steel prices that happened in the third quarter in The U. S? How much of that should be captured in fourth quarter?
And how much of it will roll into the first quarter? And just sort of what is your outlook on North America steel prices today given sort of everything that's happening and the uncertainty, etcetera? And then my second question, I guess, maybe to Pablo, is just if you look at your leverage to 0.5x, it's sort of at the lower end of the historical range. So could you kind of walk us through what your uses of cash will be, particularly as it certainly seems like profitability and free cash flow will continue to increase as we go into the fourth quarter. What is the outlook for CapEx?
What is the outlook for dividends? What are some of the other uses of cash? Or should we expect leverage to remain at this sort of level? Thank you.
Speaker 2
Thank you, John, for the questions. Let me start with the steel prices. And I think there are two part of the questions. Steel prices, clearly, if you see our results, took advantage a little bit of the increase in the prices. And of course, we are going to take a little bit more advantage in the fourth quarter.
And I guess in the first quarter, Remember, part of our sales are contract price and part are spot prices. And so during the fourth quarter and probably during the first quarter, we are going to see an increase in prices from shipments from Tavium depending on the mix, but probably it's going to be an increase. What is the outlook? I mean, when we have our last conference call, I remember I was telling you that, well, prices in The U. S.
Were very low and it was incredible that the local prices in China for the first time in I think ten years were below the local price were above, sorry, the local prices in The U. S. So that we haven't seen that for the last ten years and so we expected prices to go up. It went up a little bit more quickly than what we thought. And I think that this level of prices should remain, I mean this environment should continue over the next couple of quarters.
Demand is good in The U. S, in Mexico, in this region. I think our customers are consuming. Construction is very solid. Industrial manufacturing is also increasing.
And so I think that from the demand side, I think that that it's it's it's strong. The increasing in the offer, the utilization rate, it's only at 70% and the lead times are quite long in The US. So I think that if The US producers continue with this rationality, I think we are gonna have several quarters with this price environment. We are expecting that. I think that answered the first question.
The second question, I asked Pablo to start, and then I'm going to comment on a more longer view in that question, John.
Speaker 3
Okay. Yes, Maximo, yes, I think that we can take these questions in two different ways. The first one is short answer to it, Jonathan was asking. Clearly, the fourth quarter will be a little different of what we saw during the last two quarters, where we had a reduced CapEx and an increase on the working capital that we released together with very strong numbers coming out of from the operation of the company. So that's clearly very positive.
In the fourth quarter, we will continue to have cash flow from operation on a strong level. But clearly, we will have, first of all, an increase in our CapEx from the third quarter to the fourth. We are expecting more than double to the level of CapEx in the fourth quarter. We are expecting to reach the level that we originally said of around $600,000,000 of CapEx for the year. As Martino mentioned, we are restarting fully the plans that we have.
And clearly also, it's very difficult to continue releasing working capital with the new level of production that we have, the new level of sales and of course, the new level of pricing that not only increase the value of our inventories, but also increase the value of our receivables. So clearly, it will be a quarter with a very strong cash flow from operations, but with a reduction in the level of free cash flow because of both things, the reduction in sorry, the increase in CapEx and the increase in working capital. All in all, no matter that, we will continue to keep having a reduced number of net debt that I think this lead to probably an answer in the longer run. So I think that Maximo can take now this answer and expand on the view on the basically the capital allocation of the company.
Speaker 2
Yes. Thank you, Pablo. And again, you, John. Yes. I mean, I think the answer of the cash usage, clearly, as Pablo said, we are generating good cash flow.
And what are our thoughts of the future? I think that three years ago, we started a very aggressive or a very important investment program for us. This program started with the acquisition of CSA in Brazil, which allow us to produce the state of the art facility and allow us to produce a whole new range of steel, which we're not able to produce that before. Then continue a month later of the acquisition with the launch of our investment programs program in the green feed green green green feed facility in Mexico. The the galvanized, the painting, the the hot mill, which those were CapEx programs very strong and and and the vision over that was that we were gonna change substantially.
We are changing already the the way turning of the way turning was going to new market, much more sophisticated, much more value added products. We are about six, seven, eight months of finishing that investment program. And so we are now looking that and we continue to see that there are good opportunities to continue growing or using that cash. I think we can mention three. One is Mexico.
We are very optimistic of Mexico or the NAFTA region or the North American region. I think that the foreign consumption still has to increase. I think all the things that were made with the USMCA, all these trade wars, regardless of who won in The U. S, it's going to continue and because it's good for the people. And I think that our power consumption is going to increase and we are very well positioned to take advantage of that.
So there's going to be probably expansions in the Mexican in our Mexican facility. The second thing is the melted and pool in the automotive industry in North America. As you know, we are part compliance of that, but we are not full compliant. So we have time. It's seven years.
So we have time to see what is our best option. We don't have to decide it today, but we we are going to be compliant. And the third is, of course, how we maintain our conservative balance sheet, but we also give dividends to our shareholders. That's the thing that we should continue doing and we want to do. And last, I think, is our track record shows that we also grow by taking advantage of different opportunities.
And I think that in this market, there's going to be I do believe there's going to be opportunities in our region for Ternium to grow. So I think in all these, hope, John, I'm sorry I was too long, but to answer the full question of you.
Speaker 4
No, no. That's great. Thank you. Just to follow-up, I mean, if would you see the potential for further M and A as a path for growth?
Speaker 2
Yes, I see. I mean, we don't have particularly now. We don't see anything. But as you know, when opportunities arise, we generally take advantage of that.
Speaker 4
Great. Thanks, Maximo. Thanks, Pablo.
Speaker 2
You're welcome.
Speaker 0
Our next question is from Thiago Lafiego with Bradesco BBI. Your line is open.
Speaker 5
Thank you. Good morning, gentlemen. Maximo, how sustainable do you think the volume increase in Argentina is? And what is your best outlook for 2021 at this point? And then the second question, I'll take a risk question here.
What is your view on the impact of the election scenario on The U. S. Steel market, on the North American steel market? You think do you think that Biden
Speaker 2
is You're asking me yeah. Sorry.
Speaker 5
Go ahead. Ahead.
Speaker 2
No. You're you're asking me to be a magician, not a CEO.
Speaker 4
It's always good to hear your
Speaker 2
view. But
Speaker 6
but but just just to to to
Speaker 5
to to make my my question here more specific, do you think if Biden wins, do you see the government gradually withdrawing from Section two thirty two? Do you see any changes the recent USMCA? So what do you think could happen in a Biden scenario? Thank you.
Speaker 2
Perfect. First, let me talk about Argentina. I mean, it's very difficult today to try to make any projections of the demand in Argentina. As I said before, if there's not a macroeconomic problem, fourth quarter is very it's gonna be good. But there's a lot of challenges in Argentina.
I mean, the the the what is happening with exchange rate, Argentina clearly needs some reforms. I need time to do some those reforms. And so I think we are going to see a very volatile scenario in Argentina. It's going to continue to be high and I'm not in any capability of saying what is going to happen in 2021 today. So again, we are very cautious on what is our stand on how we operate in Argentina.
We are continuing to be flexible in our operations there and try to we are increasing our production, but on a flexible way. Elections in The US. And what may happen
Speaker 5
I'm I'm sorry to interrupt you, but still on the Argentina answer here. What are the factors that you think are more will be more resilient in a worst case scenario in Argentina? It's like, you know, the outlook there doesn't improve. Actually, gets worse, what are the the factors that would say here here we see more resiliency, and here we we would think, you know, we're going to see more of a downside potential?
Speaker 2
Look. I mean, I'm I'm not saying this is gonna happen. So so don't quote But, I mean, probably I mean, the one way out of this is gonna be a devaluation in somehow. I mean, when you have these different types of exchange, that could be an outcome. What happened usually in a devaluation is that most of the market decreased, but then some of the export industrial manufacture continued increases and construction start to pick up also.
So for our market, we are going to probably see a downturn if it happened, if this happened. But there are markets that then it will continue to recover. But, again, the government is making a point of trying to solve the situation. And and and so that's why I said that that it's gonna be a very volatile environment for the next couple of of quarters probably.
Speaker 4
Got it.
Speaker 2
Election in The US, what happened if if Biden win? To be honest, I don't see a lot of changes regarding the manufacturing if if Biden wins. I mean, I don't see I don't think he's gonna change a lot of two three two. Probably, he's gonna, I mean, negotiate or or or or be a little bit more flexible with some countries which shouldn't have been in the two pay two probably in the first place. But I don't I mean, the the the thing of of of this US this regional approach where a manufacturer has to come back to the region, to The US, to Mexico, to Canada, this reassuring thing, it's it's it's in the mind of of of Donald Trump clearly of the actual president, but it's also in the mind of the democrat.
So I don't think there's gonna be a lot of changes. I I think on the contrary, both candidates are going to try to to make stronger the manufacturing in the in the area, in the region. Biden if you ask me one of the things Biden is gonna do a little bit more than than the other probably is in in the environmental issues, which for us, for Pernu should be a very good thing regarding our footprint our environmental footprint and how we are doing a lot of things. But that's the only change I see, really. I don't think I don't know if I answered a little bit your question.
Speaker 5
You did. You did, Massimo. Thank you. Thank you for both answers there.
Speaker 2
Yes.
Speaker 0
Our next question is from Diego Ojea with Goldman Sachs. Your line is open.
Speaker 7
I think my first question, I would like you to go back to The U. S. Prices, Maximo, if you allow me. We saw really sharp recovery on price in the past few weeks. I think my first question is, I I understand that, you know, there was a lag compared to the Chinese prices, which was, you know, unseen before.
But do you think this is sustainable? This is just like short term pickup and should accommodate in a lower price level? How should we think about U. Fuel price going forward? I think this is my first question.
And my second question is still related to The U. S. Steel market. We saw in the past few years a lot of announcement of new investments, include a few, I would say, America, including a few in Mexico. How do you see now these new investments coming through in the next couple of years?
It seems that some of them are on hold. What is the competitive landscape in your view for the next two, three years in North America? Thank you.
Speaker 2
Thank you, Thiago. I mean, US prices, as I said, I mean, clearly, the prices has increased in the last couple of weeks or in the last two months, to be honest. And and and it was a steeper increase than what we thought, but we we did see this coming and and prices going up. And and again, I think that demand is picking up in all our countries. I mean, China demand is gonna grow by 8% in the next in in this year.
China in the last four months was a net importer. I mean, usually, China is a net exporter for the last ten years of steel. In the last four months, it import more steel than the export. Europe is picking up, depends on what is going to happen with the new research of COVID, but it's picking up. And that in America, saw Brazil.
Brazil is clearly a huge increase in demand. So I think that for the next several quarters, I don't see an environment where prices going down in The U. S. And it will depend again on the rationality of The U. S.
Producers regarding the capacity utilization, to be honest. But if things continue today, I think that prices should remain in a healthy level for the next quarters. And again, that's my opinion. Thiago, I don't know if I answered the first question with that.
Speaker 8
No. You did. You did. So I I think now what I'm curious, you know,
Speaker 7
you know, given the current capacity utilization and the new project announcement, how do you think the competitive landscape will evolve in the next few years?
Speaker 2
Yes. So the second is investments that we are doing. There is new capacity coming on board in in the next couple of years in Mexico and in The US. And and and and and this is a concern clearly, but, I mean, two or three things. First of all, our power consumption is going to grow.
I mean, I think part of that new capacity is going to go to this increase in our power consumption. I mean, if you see the consumption in Mexico or the consumption in The US, it's less than two in both countries. In Mexico, I think it's a 150 kilograms per habitat. In The US, it's a little bit of two forty to 60. Depends on how you make the numbers.
This is I mean, if you see China, it's more than 600. If you see Korea, it's 900. If you see Japan, we told the chicken manufacturers more than 400. So this reassuring has to bring back some of that consumption to the region. That's for sure.
So consumption is going to grow. The second thing is that we are gonna find imports. I mean, there's a huge amount of imports in Mexico. And and and so part of this new capacity is going to to change or or to or or to replace these imports. The third thing is some of this capacity for sure is going to compete to other U.
S. Producers. There are some of The U. S. Producers that are not as competitive as an older capacity, which is higher cost.
And so I am not seeing a huge increase in that sense. And and the fourth, of course, is we are working to be more competitive than than the others in the region. And and and and and that's our focus today. I mean, are doing our facilities, as you see in the numbers, are clearly one of the most competitive in the region. And so we are very able to take advantage of this increase in consumption, but again, to compete with the new capacity that that that is arousing.
Mhmm. It's clear, Matmos. I hope I answered your question.
Speaker 7
Yeah. Yeah. I would just ask, what what is the size of the additional capacity that you consider credible to come online in the next couple of years both in Mexico and US? Do you have any figure that you work on your projection?
Speaker 2
No. No. I didn't understand, Thiago. I'm sorry. The line is cutting, and and I don't I don't I didn't understand very well the question.
Speaker 7
Sorry. My question is, you know, on this new CapEx that is coming online, what, Samuel, considers that really will go through, like, really will be built? Do you have a a total x amount of million tons of capacity that, for sure, will be added in Mexico and in US?
Speaker 2
No. For sure. I mean, the the new capacity in Mexico is our new hot stream mill. And and and and it's not still consumption, but the new hot stream mill of ArcelorMittal also is coming online. And and and in the region, I think in in the the new IPI plant in Texas is is clearly, they are building it.
I don't know the the timing exactly, but they are building. There's no the the the new facility of of Big River and the new plant of plates of of of Lukor. All those are things that in the next two, three years are going to be producing at full capacity, probably.
Speaker 7
That's clear, Massimo. Thank you a lot.
Speaker 2
Our
Speaker 0
next question is from Carlos Diablo with Morgan Stanley. Your line is open.
Speaker 9
Hi, thank you very much. Good morning, everyone or afternoon, I guess, closely. So just maybe Maximo or Paolo, could you please comment a little bit more on the first quarter outlook? I mean you mentioned, Massimo, that the prices in Mexico will probably continue to increase, at least you realize prices or revenue per ton will likely continue to increase in the first quarter just on the lag of the contracts. But could you elaborate a little bit more on what are you seeing in Argentinian prices in the fourth quarter and into the first quarter?
And maybe anything that you can add in terms of volumes and perhaps cost? And then I also have a second question.
Speaker 3
Carlos, how are you? Let me take this question. Let me make a caveat first before answering your question. Clearly, as Maximo explained during the initial remarks, we
Speaker 2
need
Speaker 3
to see how the pandemic evolves. And if there is a second wave in the region, clearly, things can change. But if we do not take that into consideration, we need to take other things into consideration. First one is the seasonality of volumes in the different markets where we are. Clearly, in the Southern Region, the first quarter is a seasonally lowest quarter.
In Mexico, this is more at the end of the year. So the first quarter tends to be a relatively good one. So we continue to see the coming quarters with a positive outlook. We are not going to see 100% of the price increase that we are seeing even right now reflected in the numbers of the fourth quarter. So there will be some price increase yet to be seen if price staying at the level as Maximo view is.
We will see also that reflected in the first quarter of the year. So we believe that the outcome or the outlook that we are going to for the fourth quarter is something that could be sustained with some reduction, as we said, in relationship to volumes in Argentina, could be sustained entering into next year. The second caveat that we need to make is also the one that Maximo mentioned, which is the situation in Argentina could make changes in the outlook for volume. But all in all, clearly, with the volatility of these projections, we should have a reasonable quarter in line what we are expecting for the fourth quarter of the year.
Speaker 9
Pablo, sorry. Thank you for that.
Speaker 2
Just on Argentina prices. So I put a third caveat to Carlos, and it's pandemic. I mean, clearly I mean and as I said, it's not over. And and so I don't know if some governments are going to come back to restriction. I think they want.
They they learned that it's not very useful, and it makes a lot of harm to the economy. But it's a possibility because cases are picking up in in some of our countries and and you Sorry. Hello?
Speaker 3
Yeah. I know. I we have some problem with the line of of Maximo. But go ahead, Carlos.
Speaker 9
Yeah. No. Just on prices, Pablo, maybe how do you see prices in Argentina? Or we are we
Speaker 3
are continue to see prices in Argentina following international price with as as usual, with less volatility at international prices. So we don't see much changes in prices in the region. Of course, if there is some changes in the foreign exchange rate, this would impact as usually happens in the short run, but we will be able to sustain pricing level as currently we are seeing in our markets.
Speaker 9
Right. And then my second question is on 2021 CapEx, if if there is any ballpark number or range that you can provide. And then if you could maybe talk a little bit more about the timing of the restart of the whole line in Mexico, which you said next year, but you could refine a little bit more the timing of that and how much production do you expect to have incremental, I guess, production you expect to have on that whole line next year? And is there any other updates on projects, that would be great.
Speaker 2
Yes, Carlos. I'm back again. CapEx, I mean, '21, it's going to be around also $600,000,000 It's quite the same number as twenty twenty one twenty twenty. So we are seeing that number as CapEx. Hot free mill in Pesqueria, I mean, we are I mean, the date for starting the hot free mill is July, but that's the first coil.
July year, remember those these equipments are very big and difficult. So there's a long ramp up period. So I think that the effect of the hot free meal, you're going to start seeing by the end of the year.
Speaker 4
All right. Excellent. Well, thank you very
Speaker 9
much and good luck with everything and particularly with the ramp up of that meal next year. Thank you.
Speaker 2
Thank you, Carlos.
Speaker 0
Next question is from Gabriel Galaveo with Credit Suisse. Your line is open.
Speaker 6
Hello, everyone. Thank you for taking my questions. So my first question would be regarding Brazil. So we have been witnessing several price hikes in the domestic market. And you also mentioned that your plan is to shift part of your third party sales from the exports to the domestic market.
So maybe you could provide us some color on how is the relative profitability between exports and domestic sales in Brazil? So my second question would be actually a follow-up on the dividends. So if I remember correctly, you said that dividends for 2020 would remain suspended since you usually only pay dividends once a year. So is this the case here? Thank you.
Speaker 2
Yes. Thank you, Gabriel. Brazil. I start with Brazil. Brazil, I mean, what is happening in Brazil is that the domestic consumption is increasing.
As you remember, we have the Ternium facility make slabs, we are not in the final market. But as the manufacturing production in Brazil increases, some of Usiminas, CSN, other companies are asking us to sell slabs to them because they are ramping up production of the hot spring mills and the cold rolled and the galvanized lines. What is impressive of Brazil, I think that the number of the manufacturing index, PMI was released yesterday and it was a high I mean, what a record high. So it's increasing. It's not a lot of change in the profitability.
We do have some advantage of freight and other things selling to the domestic market, but it's not a lot of change in profitability between one our export market and the domestic market. The second part of the question
Speaker 3
let me clarify one point before entering to the second answer. You mentioned that what we said is that there is a reduction in sales to third party in order to sell this or to send this product to our own operation facilities. Within the third parties, we include the local sales in Brazil. So clearly, Maximo was saying is right. We have increased or we saw an increase in demand for local demand, but the change from the second to the third quarter was due to a reduction of sales or what we report in our financial statement as sales to third parties and an increase of transfers to our own industrial facilities, both in Mexico and Argentina.
So that's a big change that you saw in the numbers. All in all, the total product in Mexico or Brazil was higher, but this is the change, not that we switch from third parties to local market. Local market increased, but the switch was from total third parties to internal transfer. So with that verification, maximum Yes.
Speaker 2
I thought the question was of the fourth quarter when we when I did said that we were going to change from other parties to the local. So depends on so so my part of the answer was of the four of the four quarter, Gabriel. I thought you were asking that.
Speaker 6
Well, I guess, actually, I was asking about the perspectives for the first the the fourth quarter because of this price hike and
Speaker 3
the relative profitability. But but, of
Speaker 6
course, this clarification also helps a lot.
Speaker 2
Yeah. And and and to make clear, from from what we sent to the third parties in the third quarter, the number is gonna be similar in the fourth quarter with the only difference that we are gonna ship more to to Brazil than to other parties. That's that's gonna be a difference because of this increase in demand in Brazil. But the number of third parties completely including Brazil is going to be the same. Dividends.
Well, you know that the Board in April, make the decision or the Board make the decision to skip dividend payments due to the pandemic and what we were thinking or what we were seeing in that time. I think it was I still consider it was the right decision. Considering the information we have available in April. I think it was decision. But it's clear now that the market is recovering much more quickly than what we expected.
The Board will propose the yearly dividend payment in February. We do dividends every year, so we are not changing that. But I strongly believe that the Board dividend proposal will take into consideration the skip dividend payment in 2020 when we when the Board make the recommendations for the dividend in 2021.
Speaker 6
All right. That's very clear. Thank you.
Speaker 0
Our next question is from Rodolfo Angeli with JPMorgan. Your line is open.
Speaker 10
Hi, everyone. You know, there's a lot of things that were already discussed, so I'll have just one question. You know, there are a few moments in Ternium's history that, you know, changed the company to another level, And we can kinda if we go back, the acquisition of IMS, I think, was the first one. You know, CSA was another one. And I think a Pesqueria could be also one of those moments.
We've been getting a lot of questions from investors who are looking at Ternium, and they want to try to understand the impact of the new mill in overall profitability of the company. So my question to you is, can you comment on a range of additional EBITDA per ton that Biscaria, when it's fully ramped up, will bring to your operations? Just a range, ballpark figures, what do you expect to see the impact there. And that's all from me, guys. Thank you very much.
Speaker 2
Pablo?
Speaker 3
Okay. I will start with the answer, and then if you want, let's complete on on on the answer. So, Rodolfo, your question is very clear. And what we do with every investment that we perform is to try to increase the profitability of the company or the EBITDA generation of the company. Clearly, what we have today with an EBITDA margin of 16.5% and projecting an increase on profitability in the coming quarter is everything that we do is to sustain this level of profitability.
In the case of Pecaria facility, as you put it, clearly one other point very important for Ternium and for the future of Ternium and is comparable to the one that you said, and Maximo mentioned this at the initial remarks, comparable to the acquisition of CSA. There are different components of profitability in the case of the Pesqueria facility. The first one is substitution of imports that we are doing. So we will substitute with production in the new facility imports of hot rolls that we are doing today. Second, we will stop utilizing one facility that we'll be using, which was not the most sophisticated one.
So we will close that down. In fact, we have already done that. And so we will have a new facility, a state of the art facility that will provide a better performance. And third, clearly, we will increase the product base. So all in all, we are expecting to have a little more than 2,000,000 tons of net products to sell into the market.
And there is where the number of EBITDA is coming. We will always say exactly the same. Our main target and our goal is to sustain the profitability of this company above the 15% EBITDA margin, clearly to reach as high as we can, but the range traditionally has been for us between 15% to 20%. We have some quarters with higher levels than that, but there is where we want to work. And everything that we do is to sustain that.
So that's my my my my initial comment. Maximo, don't know if you want to add something to that.
Speaker 2
No. I think it's very clear. I mean, I I think Pesqueria Everybody's hearing. Yes. Yes.
We are. We are, Maximo. Yes.
Speaker 1
Okay. Sorry. Think there's there might be some problems with the webcast, but the the the ones with the Okay.
Speaker 2
Because they are making signs here. No. But, Rodolfo, I I think that what Pablo is saying is true and and and you are saying it's true. Pesqueria together with with the acquisition with CSI, remember, this is a combo. It's a game changer for Ternium in the sense that it's a facility that's going to add four four point five million tons and of very high value added products and a completely new range of customers that we can serve.
So again, our intention with this is to increase our profitability, as Pablo said.
Speaker 10
Okay. I I I know let let me just insist. I know you, you know, you're already at the 15% mark today. Or So what what I'm trying to do is when investors come to us and say, okay. These guys have invested.
You know, what's the additional where where is the impact of that? Right? So maintaining the 15% is a very shy answer. If we were to think about the project alone, you know, what is Pesqueria bringing? That's you know, that can be a ballpark figure, you know, a range.
Is it $20 per ton? You know, I I don't know if you can comment on this, but I just wanted to insist. Because as I said, I think this is very important and I feel like the market is having difficulty in quantifying it. I'm sorry for insisting, but, you know, this is my last question. Fine,
Speaker 3
Rolfo. We need to go through it, but what we are trying to say is it's extremely difficult to put a number exactly to that because it's also dependent on the price of the product. It's also dependent on different things that is very difficult to say now we will increase profitability by 2% because among other things, we are having a mix of product that includes, of course, new painting products, new galvanized products, but also includes hot rolled products. So the prices are different in this one. So if you want to go through which will be the EBITDA generated by this facility, well, that's a different question.
Sustaining prices are what we see today. We are saying here more than 2,000,000 tons with the profitability of EBITDA per ton over 120,000,130 million dollars you are reaching to a number of more than $250,000,000 of EBITDA per year. So this year, let me correct the number that you said. This quarter, we are at 16.5% EBITDA margin. So I'm targeting a higher number for the following quarter.
So it's very difficult for us to say that with this investment, we will be able to move to a higher margin than 20%, which is something that you could be expecting for. But all in all, we are the expectation for us are huge in this new facility because we'll unveil a lot of opportunities for only in the level of free cash flow generation, in the level of EBITDA generation and sustaining margins and trying to increase them, but also of all the things that Maximo explained before. So first of all, it's a key investment for Ternium. Clearly, we'll increase the level of EBITDA generation. And clearly, we'll at least we'll sustain, but clearly, we believe that at some point, we'll increase the profitability of Ternium.
But it's very difficult to put a number to that, take into consideration the numbers that we are drawing. But clearly, as you mentioned and Maximo mentioned also, this is a game changer for Ternium, and the results will be there. Sorry not to give you exact number, but that is the view that we have with this investment.
Speaker 10
Okay. Thank you very much, guys. Thank you.
Speaker 0
Our next question is from Alex Hacking with Citi. Your line is open.
Speaker 8
Yes, thanks. I guess just a quick one for Pablo. So if I look at Sidra financial statements, the implied EBITDA per tonne there was back over USD 200 during the quarter. I guess, is that a sustainable level there my current utilization rates and current prices, or was there something weird going on with the accounting whereby, you know, there was sort of a one off boost in what that in what that looked like? Thanks.
Speaker 3
Hi, Alex. How are you? Yes. There were some things in relationship to Argentina. Remember that we have still inflation in Argentina.
We have devaluation in the country. So when you have these aspects, it tends to increase a little bit the total number of the company. Of course, if we are continuing to see exactly the same environment, the dollar impact of that is increased just because the portion of the cost that it is denominated in peso, which is around 35% of the total cost, clearly in dollar terms, as you have a devaluation, tends to be reduced, so you have a better margin on that respect. So you have these things when you have utilization of the inventory that you have before, valuated at the prevailing exchange rate at the moment or the end of the quarter. So there are some of these.
Also, the performance of Ternium Argentina was very, very good. But these things tends to accommodate and to go to more normalized levels. But clearly, the performance and the margins of Toronto and Argentina are high.
Speaker 8
Okay. Thanks. And then just one quick one. In your answer to Rodolfo just now, yeah, you talked about some, like, value added processing for for the Pesqueria product. I guess I didn't realize that you had excess kind of paint, galv capacity sitting around that that you could be utilizing.
Is there a way you can I was sort of assuming that you were gonna be selling it all as hot rolled? Is there a way you can quantify how much kinda excess or additional value added capacity that you have there? Thanks.
Speaker 3
Yes. Of of course. This is Maximo, please go ahead.
Speaker 2
No. No. No. Go you go ahead, Pablo.
Speaker 3
Okay. No. No. What I was trying to mention is that the the the the total investment in Pesqueria was not only the whole rolling mill, but also the new galvanized line and the new painting line that they are already up and running and they are working almost at full capacity. So it's not that we have spare capacity there or just waiting for the new facility to be up and running.
So we had that
Speaker 0
capacity and we have this this was part of the initial CapEx that entered into at the last of last year or at the end of last year or beginning of this year. So after the ramp up period, we are utilizing that facility. It's not that we have their available capacity waiting for
Speaker 3
the this to be up and running.
Speaker 8
Okay. I got it. I misunderstood. So the
Speaker 4
new
Speaker 8
capacity is effectively just going to be hot rolled capacity, right, with obviously future potential to add value add? Okay.
Speaker 2
Yes. Thank But Alex, I I think it's I mean, the new capacity is hot rolled. I remember that the galvanized line started six months ago to produce and the painting in December. So they are still in in in running up. But but one thing that the hot rolled new capacity gives us is new substrate for these lines also.
So substrate that give us the opportunity to make other products more efficiently in many cases in the current lines and other products that we are not able to do because we don't have the substrate. So it's going to be a change in the mix and probably we will have some increases in time in our current run the current rate of and how much we are running these galvanized and painting lines.
Speaker 8
Thank you.
Speaker 0
Ladies and gentlemen, this concludes the Q and A period. I'll now turn the call back over to Maximo for any closing remarks.
Speaker 2
Thank you. Okay. I hope this call has been informative and has helped all of you have a better understanding of our company. Thank you very much for participating today. I know it's a challenged day to be hearing to us, but thank you very much.
I hope you have a nice day. Contact us if you have any other questions or comments, and please stay safe. Bye.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.