Q2 2022 Ternium SA Earnings Call
I don't know if everybody's hearing.
Leave other side.
Sorry, I will continue to tell you this.
with a margin of more than $400 per ton. These results were similar to those obtained in the first quarter of the year, representing a solid start for 2022.
Okay.
Thank you.
Okay.
Over the past 12 months, turning solid competitive position and the outstanding effort of its people enabled it to take advantage of a very attractive business conditions.
In this period, we generate $5.8 billion of adjusted EBDA.
One for nine billions.
dollars of free cash flow and returned to shareholders over 500 million dollars in dividend payments.
Looking ahead, we expect increased volatility in the business environment.
In the first quarter, purchase invasion of Ukraine costs an absurd in raw material and steel prices.
But over the last few months, higher energy costs, inflationary pressures, a consequence monetary tightening and the effect on global supply chains. And the effect on global supply chains.
of China's COVID-19 restrictions drove raw materials and twist and skill prices to a significant decrease.
Looking ahead, I believe the main steel business variables are today closer to a more sustainable level. We could see a stabilization during the next couple of months.
Having said this, volatility will persist for some time, as there continues to be a considerable level of uncertainty related to the factors that just mentioned.
Let's turn now to a review of our main market.
In Mexico, the industrial market remains relatively healthy, with different dynamics in the different industries. The auto industry continue to suffer from supply chain disruptions, affecting the availability of semiconductors, and other inputs for its production process.
We have been expecting these disruptions to decrease for several quarters already, but they seem to be harder to solve than what most people expected. And recent China's lockdowns continue to affect these global supply chains.
On the other hand, there is significant unsatisfied end-user demand in this industry.
So when these procurement problems are finally worked through, there will be an opportunity for us to increase shipments to OEMs. In addition, we have been making progress with product certification in our new hot rolling meeting, Pescaria, something that will enable us to gain market share in this sector.
Other manufacturing industries like HVAC and electric motors are doing well. On the other hand, the Watt-Woods industry is low in down production rates at the result of a combination of end product inventory in the value change.
Finally, the commercial market in Mexico, mostly the living by construction activity, is currently having weak apparent demand due to a destocking process resulting from the decrease in field prices over the last few months, as well as the impact on end customers of fire interest rate and inflation.
Looking forward, the low level of inventories in the market is going to need a restocking that will totally happen during the second class.
Moving now to Argentina, still demand in the market remains at similar levels to those of the last few quarters despite higher level of volatility in the country's macroeconomic environment.
Most of the sector in Argentina continue to show good demand like Agribusiness sector, the AutoIndus III, the White Good Indus III and the Energy sector.
But the uncertainty regarding the country's macro situation has increased since our last conference call. So still the man further on may reflect substantial macroeconomic volatility.
I could like night to share.
Our progress on some sustainability topics. Last quarter, Telneum released its annual sustainability report.
In this new edition, we reinforce our reporting framework by adding
SASB standards for iron and steel producers.
and also the recommendations of TCFD.
We believe this is a step forward in the sustainability disclosure of our company in line with current discussions on the matter.
We have also been working on improving the tools we use for the management of CO2 emissions in our company.
Recently, the completed assessment of Damien's greenhouse
Green gases emission.
under the G-AG protocol accounting standards.
This is complementary to the porting of CO2 emissions and the world's steel methodology which have been carried out over the last few years.
with the application.
Application of the GHE protocol standards, VREX.
Tending the assessment boundaries to the whole company.
This methodology also provides enhanced...
emissions management capabilities down to each production line.
It is important to note that we have also performed for the first time a third part verification of termium emission metrics.
Another relevant topic for Tornium is safety. A few weeks ago, we had a one-hour annual safety day event with the participation of employees and managers from all the countries where we operate.
It is an opportunity to share the results of safety programs in place, our best practices around the organization and future actions planned.
Safety is a key issue in the company's agenda, and we are encouraged by the results we are getting so far. As our last time injury frequency rate, during the first half of the year, has been the lowest ever. The last half of the year, has been the highest ever. The last half of the year, has been the highest ever. The last half of the year, has been the highest ever. The last half of the year, has been the highest ever. The last half of the year, has been the highest ever.
Rubby map.
We expect to keep showing healthy shipments over the following quarters. On the other hand, the normalization of steel-business variables will bring a decrease of margin to more sustainable levels.
I am positive that new is well positioned to show distinctive profitability, one still business variables stabilize and all recent changes.
to steel prices and raw material costs goes through our books.
the strength of ternium's balance sheet and our enhanced competitiveness.
Position will enable Ternum to navigate the expected volatility in the market.
Further on, we anticipate cash generation will remain robust.
As we should weatherly release a good share of the working capital investments made with input cost and steel prices were significantly higher than they currently are.
Okay with that I stop here and ask Pat Bollo to go ahead with the review of our quarter's performance.
Thank you much, and thank everybody for being in our call.
As you will see in today's web presentation, starting to continue showing very strong results in the second quarter of the year, similar to those recorded in the third quarter.
Let's start by looking at page three with a presentation. We'll adjust the VDA and the attorneys. Adjust the VDA in the second quarter was at $1.2 billion on margins of 28% or $400.14 dollars a ton.
Respect low or much into the forward, at the start to reflect the significant decrease in the steel bench bar prices over the last three months. Although market prices for Romati as has also been decreasing lately, respect costs for tonking increase in the third quarter at the company we consume, the role of Romati has been brought into families.
The income in the period reached $936 million or $4.07 per year, solved by historical standards.
Reflecting the strong operating performance.
Let's turn now to page 4 to review the situation.
In Mexico, the volumes were 1.7 million tons in the second quarter of the year, increasing sequentially and slightly below the level achieved in the prior year second quarter.
In the south of the region, shipments to the second quarter were 600,000 tons, light the air, sequentially and down from the year of year basis.
In the Almaty region, shipments were 376,000 tons in the second quarter, lower sequentially.
On a year away, a basis to be taken to the volume of slapstick in per-party was mostly observed by higher finish in ten years market in the region.
Ternu has been gradually increasing the integration of the class facility in Brazil, and it is finishing facilities in Mexico and Argentina. It is finishing facilities in Mexico and Argentina.
As you can see in the top right, in the light blue.
In the next page number five, you can see that combining the development we arrived at a consolidated agreement of three million tons. We arrived at a consolidated agreement of three million tons.
in the second quarter. Stable sequentially and a little down, that versus the prior year second quarter. Looking forward into the third quarter, we anticipate in and to re-explanate on the third quarter.
Moving on to steel prices, turning revenue per ton in the second quarter increased slightly sequentially and substantially on a year-over-year basis.
The mentioned earlier, it dissipates the decreased in release, the increased still prices in the third quarter are still prices have decreased significantly and this will be gradual with the set by the level of the set of contact prices still Mexico.
Let's now review on page six the new drivers behind the changes in adjusting the VBA and net income. Let's now review on page six the new drivers behind the changes in adjusting the VBA and
There was a slight sequential increase in adjusted EVA in the second quarter reflecting higher realized in prices in Mexico and Argentina, partially offset by higher costs.
labor costs increasing the second quarter mainly in connection with terms Mexico employees profiteering. Disturbera with increased energy cost was budget offset by lower purchase, LARCO.
Let me remind you that we use First Interset Health accounting to value our inventory. So it takes up to five months to reflect in our financial changes in lab and raw material crisis.
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Let's turn now to page 7.
There was no cash for operations in the second quarter, mainly as a result of a working capital increase of $681 million and income tax cash payments of over $600 million.
Tax payments in the period include an increase in our bond payments for fiscal year 2022 in Mexico and the payment of the outstanding tax balance for fiscal year 2021 in Argentina.
both as a result of strong earnings record in 2021.
The increase in working capital includes the significant impact in vectoring values of higher steel and raw material costs, as well as slightly higher volumes.
Precarselo in the second quarter of 2022 was a negative $166 million of the cup of $161 million.
This together with the $353 million dealing pay in May results in a reaction of turning the net cost position to $1 billion by the end of the day. This is the first time I've ever seen a $1 billion in the day. This is the first time I've ever seen a $1 billion in the day. This is the first time I've ever seen a
Now, in the final slide number 8, let's review our casual performance on the year of day 2.
cash from operation in the circle of this year was $390,000,000,000, up to the exact income tax payment of $1.5 billion, and work capital increase of $3.50 million.
What we're doing is we're helping the year, our expectations that can you will show health and cash generation based on the cap that's estimated for the year, the top of the $600 million, a decrease in tax payment compared to those of the first half and a reaction we're working capital as a price, legislation, office, steel and raw material flow, property ka do utilise not throughout the year Gain,rásia, Cuba,-,-,-,--,-,-,-,-,-,-,-, –-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,,-,-,-,-,-,-,-,-,-, you
Okay, with this, the finish of what we've done remarks, thank you very much again for your time and attention, and now, Iarveli, for the questions. Please operate the proceed with the EO-Multi-San. Okay.
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. If your question has already been asked and you'd like to remove yourself from the queue, please press star one again. Please hold for your first question.
Your first question comes from online.
Tamina Tanner, we're both research.
Yeah, hey, good morning everyone.
Good morning, Tim. Good night.
I wanted to ask volumes a few questions if I could. First one was just looking at the volumes down year over year in Mexico still begs the question of where the Pescaria volumes are showing up or if it's just offsetting existing tonnage. And should we expect that to continue to ramp up as you get qualified at any time frame there? The other question is just on the EWIT DAW guidance of a more sustainable level. I was hoping to see if you could help quantify that a little bit better.
We look at the five years prior to COVID, the average has been about 150 bucks a ton, but of course the last couple years has been close to the 400 bucks a ton. So any thoughts on the gap between those two levels would be helpful. Thank you.
Okay, thank you, Tina Volumes of Pesquaria. Pesquaria is running at between 80 and 85% of. Pesquaria is running at between 80 and 85% of.
of capacity which is very high.
and to be honest, running very good. But I think I mentioned in the last conference call, the problem are the market in Mexico, especially the commercial market, where we have a decrease.
and in apparent demand because of what we are talking. So the issue with the volumes is that the other Hotspur Mill, the one in Tudobusko, is running lower than what.
so forward.
much lower capacity.
The other issue is the certification process of all these new skills take time and all the automatic certification take at least one year. So we are starting to see now this new product starting to flow through our customers but this is a process that we take.
at least one year more.
ramp him up every quarter.
the main issue. Regarding EBITDA, your second part of the question, what do we mean with a more sustainable level? I think, and I would like then Pablo.
and put more color to this. But if you remember Tim, we have always put...
that are objective of ABD ratio.
before these last almost two years, let's say, was between 15 and 20%. That was a normal and higher compared to most of our peers.
I think this is the outlook we are looking at.
this range for the third quarter.
And probably what we will be doing in the future, especially in the next year, is that we will have to...
be doing in the future, especially in the next year, is that we will have to.
increase that objective that we have and put the bar a little bit higher of this range between 15 and 20%. So this is our, I don't know Pablo if you want to put.
more clarification into this.
Hi, Tina. Okay, Maxine, you have a ray answer. I should be quick to start. Let me add some color to it. So yes, clearly what Maxine was saying is respecting, entering to this second part of the year. We are looking at, we are respecting, of course, where it's then certainty that Maxine mentioned in prices especially. But we should be returning during this period to the levels that we have before the pandemic.
But I think it's important also what Maximo mentioned, which is that going forward or entering into 2023 or if you want, depending on your expectations, when we have a more normalized level of prices and especially raw materials, that term after all the investment that we did at the ramp up of the new Pescaria facility, we should be targeting margins that are at the upper side of the range or even a little over that range.
on stream, the vertical integration in Mexico and some of the other company specific actions. Is that what you're saying?
Yeah, exactly, exactly. You're right. Of course, taking into consideration the prices of the final product that you never know where we'll be, but this is clearly what you have said. It's clearly what we are looking for and we're working with the targeting.
Great, thanks. I'll hand it over. Thanks again.
Thank you, Tim.
Your next question is from a line of Andreas Bokenhauser with UBS.
Thank you very much. Just two quick questions from me. Just looking at the Mexican steel market at the moment, I mean, we've always seen some new capacity coming online in the US and some of that volume was reportedly destined for Mexico. Are you starting to see increased import volumes or increased price pressure from some of the volumes that is coming in from the US into Mexico? That's the first question. And maybe the second question, if you could just give us your updated thoughts on potentially expanding.
I think it was between March, April and October , November , when prices were going up. The prices were going up.
and our steel mill, our hot spring mill was not still functioning.
And then prices started to decrease and those volumes come, I mean the lead time of imported material are very high. So it was a long or several months of drag of those imports.
Today we are seeing that reports are coming down from that peak and to be honest, they are a little bit lower than what they were in 2020.
So we are not seeing, I think our market share is going up, or that's at least the numbers we have. So we are not seeing that.
problem that say in Mexico.
at least not yet, but again, we are seeing our customers a very eager to buy the material from us.
and the market share increasing.
The second question was sorry and raised.
I'll just an update on your updated thinking on expanding on the EAS or food
No, I mean as I told you
Last contract called this a project, it's a very complicated project, but we are still doing all the engineering and we should. We need to do all the engineering and we should.
I mean...
go forward to have.
US NCAA compliance for the Automotive Industry in 2027.
for sure. So we are going, I mean, we are stealing the process of doing all the engineering and the site and everything.
So, speeding truck.
Got it. That's very clear. Thank you very much.
You're welcome Jess.
Your next question is from the line up.
Our fondle cell bar with Scorsia Bank.
Yes, hello, and thank you for taking my questions. So I have to. The first one is, I know that we have been asking these for years now, but if you can comment anything about the how it's going to look value, and try to really handle the swings that we've seen, the shape, the price, and very related to field prices. So in anything that you can.
going toward having more
And the second is regarding the outdoor industry and some trends that we are seeing today. For example, there is this trend in which OEMs are reducing the menu in the menu. Affordable cars, they are basically disappearing from the menu. And the third is regarding the outdoor industry and some trends that we are seeing today. For example, there is this trend in which OEMs are reducing the menu in the menu. Affordable cars, they are basically disappearing from the menu. Affordable cars, they are basically disappearing from the menu.
And they are focusing more on SUVs, premium vehicles. And in that regard, considering that there are EVs coming and the price tag is going to be much higher, it's unclear to see why auto sales will return to past levels. And again, this backdrop, I want to understand what is the strategy of...
OEMs increasing the use of high strength steel and how it compares with aluminum auto parts. Aluminum is gaining more – it's very attractive for OEMs to produce out using more aluminum. So I just want to understand what is the strategy there and how do you see this market going forward for turning. What is the strategy there? What is the strategy there? What is the strategy there?
Okay, I have one for let me let me take the first question that you make.
As you know, we have been discussing this for a long period of time. What we are seeing today, and then we can reflect on the future, is that...
Probably taking out some of the US companies, the rest of the steel sector is having clearly a low multiple on reflecting the value of the companies. And probably this is a consequence of the reassignment that we maximized, we were mentioning during the opening remarks, where we are seeing a steep dimension also during this her question.
that there will be an adjustment on margins to probably a region closer to what we used to have prior to the pandemic after having a couple of years of very or extremely good margins in the companies. And since we are still having or reflecting the multiple with an EVDA that is not yet reflecting that new level, we are seeing in multiple that are lower than...
the historical numbers. So on itself, these multiple should recover at some point, but also if you look at the share price of ternium, which I think is your specific question, has all relatively well in comparison to our peers. And clearly we have been taking certain actions in the past to try to enhance and to support.
the value of our company and this has been very clear, we have discussed also in the past like dividing the deal in payment into parts or increasing or significantly increasing the deal in payment in relationship to the deal of the pay or raise. Now I have quite high comparison to our company.
We continue to work in our front. We have tried to perform our operations in order to review or simplify our corporate structure. We have been able to get successful to do that. But what I'm trying to say is that we have different alternatives. And if we find a way to show that the company value is higher than we have today, if we are trying to do that.
I would have time to show the market that not only will care, but will work in that direction.
Of course there are some other things that will be.
Difficult because we have...
Some facts that are characteristic are different from our peers like the diversity of geographies that we have that will be in some cases a plus, but in some cases a minus. So we have that issue also to take into consideration. But in general first the market will need to return to some point and then we will continue to perform and do the things that we have been doing up to now in order to try to increase our share value.
SUV because of the restriction they have and clearly they prefer selling SUV and luxury cars and more luxury cars that are more high margins.
and then producing the other type of course, but it's more of a restriction of all these inputs and semiconductors. So they choose...
to do the higher margin products because they don't have enough capacity because of these restrictions. I think that's...
If you see the automotive market, the total production of automotive in the world, I'm saying, but it's similar in every market, it was around 103 million units. That's the total automotive production of the world. Last year it was the final 78 million units.
Although the sale forecast of them was to do similar and the demand that we see in the market was to do similar 2017. This year is 82 million units.
Again
D. D. ?ossi
is the rescuations and not the demand. I think in the US and in Mexico you see it also in Brazil we are seeing it also there are not not inventory in the dealers.
There's no inventory. So I think that it's, I mean, once...
this
to play Jane issues, which as I said in the main initial remarks.
I've seen very much harder to solve that what everybody thinks, is it including the OEMs?
and
So that's the first part, aluminum versus steel. I don't see a big change.
I mean, if you see the different reports that are out there, probably demand for steel for the automotive industry, it's going to stay stable for the next couple of years until the new generation of batteries come forward. And then cost will be also the main issue from industry. So demand for steel is again going to peak.
I think in the long term, electric vehicles are going to be produced mostly from steel. That's what we are seeing. I mean, the cost-driven, or the equation of course, even, it's very clear there. It's very clear there.
So I don't see a problem also there, I found so. I hope to this I answer the question, but I know I don't know if I left.
so they are up on so I hope to this I answer the question but I know I don't know if I left something.
not answering the counsel.
No, thank you, Maximo. Yeah, so those are my concerns. What I think is that this could be a little bit more structural, the fact that OEMs are realizing that they can do better margins by producing affordable cars in the future. And it has also to do with safety regulations, with emission regulations, which are very expensive for them to comply with. And that makes a affordable car less interesting to them.
there is no margin left. So that is probably something that we will see in the future, how this evolves.
No, I totally agree with you, but I am not seeing that trend. I think that some of the OEMs are going to produce affordable cars.
I mean there is a demand and somebody's going to do if you see what Tesla is doing. I mean they want to do.
They want to do the high margin cars, this model X, model S.
But more than three and the new one that they are talking about, they are much less expensive cars.
And they are much more skill usage.
On the other side, but somebody is going to build the demand. I mean the world is needing.
the more affordable cars also.
I totally agree with you. I'm just concerned that it's going to be Asian brands and Chinese brands coming, which are going to get this. I would pass it that much, but we'll see how things go. Thank you, Maxwell. Also, it could be Alfonso, but they need to use steel, melted and poor in the NAFTA to be USMCA compliant. No.
I mean, customers, if we have Chinese, so we have America, and we have Japanese. For us, they are customers.
That's a good thank you from Max.
as questions from the line of Kyra Griner would...
B-T-G petrol.
Hello, good morning, everyone. Thank you. Just two quick questions from my first one of the situation in Argentina. I mean, we've seen some companies with operations are in the Argentinean reporting, what could be seen as unsustainably high results, largely because of the large gap between the official and the unofficial foreign exchange. So just two points here. And I know it's mostly on the consumer side. So I just wanted to check with you.
What kind of impact could we expect from this going forward to, for turniam on an accounting perspective if we should be aware of anything that's going to be coming up for the third quarter or anything that we could have seen in the second quarter as well. And the second point, what kind of impact have you guys been sensing to steal demand in the country? I mean, have you seen any slowdown from your customers or anything that we should be on alert for? And the second point here, just to follow up to previous question, on this idea, I do remember that in the last in the last conference
one year, so we might not see that for 2022. So, just wanted to check if we can get an updated estimate for those incremental volumes for Mexico, and even if you guys have anything for 2023 as well, that could be helpful. Thank you.
Okay, thank you very much, Cairo. I start with the second part of the Argentinian question and let Pablo talk about accounting your first part. The impact on the market. As I said before, yes.
We are not seeing yet any impact in the market. I mean shipments from Ternium Argentina and still the man is still...
At the same levels as last quarter and the quarter before, I mean it has been very stable and at the very good levels to be honest.
Having said these.
I mean, today is important day. The new minister of economy is going to speak about the new...
economic plan and as I said in my initial remarks, the macroeconomic situation is very complicated. So...
We think that at the end there is going to be an affection to the demand in Argentina.
When it's coming...
I, we, we are not, I am not able yet to say.
But again, today we see very stable our orders.
are very good and our customers are selling everything to be honest. So we are very cautious.
In spite of that, we are very cautious.
Pablo, why don't you ask the accounting part? Okay, okay, Caio, how are you? So let me try first to answer your question in a theoretical way and then we can enter into what's happening in the chat. If, as you said, especially in some cards.
Let's say customers or companies that are working in Argentina more in the retail side are able to buy at the official exchange rate and put in prices more related to the financial extent of it, clearly there will be an expanded margin.
So this could be the case of some companies that you have been talking to.
the case of some companies that you have been talking to. And this is not our case.
We use the official exchange rate, which is by the way the only exchange rate that you can use to have the numbers both in selling our products and in buying our products.