Ternium S.A. Q1 FY2021 Earnings Call

At this time, I would like to welcome everyone to the Ternium first quarter 2021 results call. I would now like to turn the call over to Sebastian Marti. Please go ahead, sir.

Good morning, and thank you for joining us today. My name is Sebastian Marti, and I am Ternium's Investor Relations and Compliance Director. Ternium released yesterday its financial results for the first quarter of 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, Pablo Brizzio, who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, there will be a Q&A session. Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation. With that, I'll turn the call over to Mr. Vedoya.

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 9 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 this, inventories at the value chain reached very low levels. This unbalanced supply-demand condition happened not only with steel, but also with iron ore and with many other markets worldwide, 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: the continuous deployment of government stimulus programs and the progress on the various countries' vaccination efforts. In yesterday's press release, we guided for subsequentially higher EBITDA and margins in the second quarter of 2021. The main driver for this guidance is higher realized steel prices partially offset by a higher cost per ton. 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 first and second quarters of 2021, respectively. Additionally, 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 regularly increasing. Let's 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 continues to be strong and activity in 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 about a month from now. Turning now to Argentina, industrial activity in the country remained strong during the first quarter of the year as 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 materials, it is worth noting that a second wave of the COVID-19 pandemic is currently underway across South America. For the time being, there have 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 the 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 subsequentially during 2021, reflecting the increase in overall 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 Ternium's 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 Varela 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 shift being incorporated ahead of time. With this production configuration, the new facility is providing Ternium Colombia with approximately 20,000 tons of extra shipments per month, in addition to substituting 10,000 tons of steel that were previously purchased from third parties. 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 enables higher productivity throughout our facilities. As we ramp up this new line, our current expectation is to achieve total incremental shipments in the North American market, the U.S. and Canada, 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 Ternium's life, and it will make us ready for further steps in the country's development. Another issue I would like to mention is the long-term development in the global steel industry that has the potential to be very beneficial for all steel companies. Plans to decarbonize steel-making operations around the world are taking hold. In our case, we announced a medium-term decarbonization roadmap in February. In China, the government is gradually mandating cuts in steel production with the aim of progressing towards the country's decarbonization targets. If followed through, this could have a relevant effect on the future of all steel makers, as it could have the potential to solve the country's chronic steel excess capacity and its detrimental effects on the world steel market. Today's news about Chile's announcement that it will reduce export rebates for many steel products and cut the import duty of pig iron, crude steel, and recycled steel to zero are clearly steps in the right direction. And finally, a quick note of caution. The COVID-19 pandemic is not over, as vaccination programs in many of the countries in which we operate are not progressing as fast as they are in developed countries. So most probably, we will have to continue dealing with the pandemic effects in these markets, our personal lives, and those of the people in our communities. If this is the case, you can rest assured that we will continue to be 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.

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 have been outstanding. The attractive steel market environment that Maximo described in his initial remarks is being reflected in Ternium's economic and financial performance with historically high margins, significant cash generation, and a consistent strengthening of our balance sheet. Let's start on Page 3 in the webcast presentation to review this. EBITDA in the first quarter of 2021 was $1.1 billion or an EBITDA margin of 33% or $341 per ton. Net income in the period was $707 million or $3.07 per ADS. We expect an even stronger set of results in the second quarter of the year. We will discuss this in more detail in the coming slides. Let's turn now to Page 4 to analyze steel shipments. In Mexico, 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. A shipment record from first quarter extreme weather conditions impacted upon our production. In the southern region, shipments in the third quarter of 2021 decreased 5% sequentially and increased significantly year-over-year. Let me remind you that activity in the first quarter of 2020 was affected by lockdowns related to the COVID-19 pandemic. Looking forward into the second quarter, we expect the shipments in the region to remain at relatively similar levels. In the other market regions, you can see that the volume of slabs 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 increased integration of Ternium's slab facility in Brazil with the company industrial system. We expect the slab 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 first quarter of 2021. Of note, we are ramping up Ternium's new facility at Palmar de Varela in Colombia, which has contributed to higher shipments in the country. So combining this development, as you can see in the next page, we are ripe to consolidate these steel 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 steel 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 continued strengthening since our last conference call, especially in North America. This, together with a 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 prices resulted in a 26% sequential increase in the first quarter to $3.2 billion. Compared to the same period last year, net sales increased 43% in the first quarter. Turning now to the next page, #6, let's review the main drivers behind the sequential changes in the first quarter EBITDA and net income. The chart on the top shows the significant influence of higher realized prices on the EBITDA increase, which was partially offset by higher cost per ton as a result of higher raw material and purchased slab 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 as increasing raw material prices continue to flow through the company's inventories. The chart below shows a slight sequential increase in net income in the third quarter as a result of significant increases in operating income that cannot be seen entirely due to the $186 million nonrecurring gain in the fourth quarter of last year related to the de-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 fluctuations in exchange rates. To finish the presentation, let's now turn to our cash flow and balance sheet quarterly performance on Page 7. Cash flow from operations in the first quarter was $328 million, even after the expected increases in working capital in this period. Of note, in the working capital increase were an extra $555 million in trade and other receivables due to higher realized steel prices and $316 million 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 prices and costs, as previously discussed. Regarding free cash flow, the company managed to generate $198 million after capital expenditures of $130 million and the mentioned investment in working capital. This enabled Ternium to further reduce net debt to $229 million at the end of March, equivalent to 0.1x net debt to the last 12-month EBITDA. Let me remind you that as previously announced, Ternium's Board of Directors has proposed a dividend of $412 million, equivalent to $2.10 per ADS. If approved at the company annual General meeting of shareholders, it would 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&A session.

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

So my first question is on flat steel prices in the U.S. and Mexico. Clearly, prices have been trending very favorably year-to-date. The market appears to be very tight right now. But there is considerable incoming new capacity, both in the U.S. and Mexico that's coming online this year and next. So I was wondering what your expectations are regarding the impact that this new capacity will have on prices, if you see prices normalizing at a lower base once this new capacity comes online? And if so, when do you see this happening? And then secondly, I was just wondering if you could talk about where you see the inventory levels for steel throughout the whole supply chain in Mexico right now, and how you think that they compare to normalized levels.

Very good question. I start with the second one because it's a little bit easier. Inventory levels, at least in the industrial customers, are very low today. They're not yet at normalized levels, and you can see they're even lower if you consider the high rate of production utilization that all our industrial customers have in their production base. So yes, the inventories in Mexico are 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 quarters, they should decrease somewhat, 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 the new capacity is not going to be online in the near future. So I don't see an event that is going to diminish prices in the near future, in the second, third, or fourth quarter by much. In the long term, and I don't know if your question was more over the long term on this new capacity that probably next year, with steel dynamics analysis, 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 issue. There are a few things that are moving the market in the U.S. and Mexico. First, consumption is going to grow. Mexico has a consumption that is 160 kilos per inhabitant. That's a very low consumption. If Mexico is going to develop, it's going to start consuming more steel. So consumption is going to grow in Mexico in the following years. The second piece is the reshoring issue. This is happening. It's happening at a pace that is probably growing incrementally in the next few years. And this will also increase consumption. And the third thing is infrastructure, which we didn't have in the past. But if the plans of the U.S. are going forward, this is also going to have an impact on infrastructure. So the new capacity that's coming online is coming to fulfill these three needs and to compete with imports. If you take the year 2020, imports of finished flat products in the U.S. and Mexico were around 15 million tons, a little more, a little bit less. This is a year that is not a typical year. So you have a lot of room to compete with these imports. And so the question is, is the capacity we are building, at least the one that Ternium is building, able to compete with imports? That's why we are building our capacity with a very competitive cost position. So we think that we are more than able to compete. I hope I answered your question, Caio, although it was a bit long.

No, no, that's perfect, Maximo. I really appreciate the full answer, very complete. I mean, I was just trying to understand exactly the momentum in the short term and how that's going to flow through in the medium to long term. So that was a very thorough answer. If I may just follow up with one thing very quickly on the inventory levels. How long do you think that it could take to normalize those inventory levels?

To be honest, in two sides. Commercially, in Mexico, the commercial market, I think, is going to normalize in the near future. Industrial customers, I think it's going to take a little longer. If demand continues this way, I think it's not going to be over until the final month of the year.

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

Thank you, a couple of questions here. On the capital allocation side, the usual question here that you guys get every quarter, but your cash flow generation will be significant in the coming quarters, most likely in the coming year or two. So what should we think about here in terms of capital allocation for Ternium? Should we see you guys speeding up the M&A agenda? Any other significant organic growth opportunities that you might consider? Or should we primarily expect more dividends? Just 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 will Ternium approach this new world? And the second question is more specific on your third-party slab shipments for the second half of this year. Where should we see that level as you ramp up the Pesqueria mill?

Well, I start with the easy one, Thiago, the second one. The other one is also easy. But third-party slabs, today in Mexico, we consume around 3 million tons of slabs, more or less. With the ramp-up of the new facility, probably next year, we are going to consume a little over 5 million tons. In the fourth quarter, probably we are going to run at a pace of 4 million tons a year. Next year, probably at 5 million tons of slab needs for Mexico, and then probably a little bit more. On the other side, we have Ternium Brazil. Ternium Brazil is running almost at 5 million tons, a little bit less than that, but almost at 5 million tons. And as you know, we finished our contract with Calvert. So we don't have to sell anything to the U.S. at the beginning of May. If you look at it this way, we are almost balanced in our slab production and our slab 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 will depend on that, Thiago, on what opportunities arise to buy from third parties and to sell to third parties. But Ternium is almost balanced today in our slab needs. I hope that answers the question.

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

Exactly. I mean, you don't have the freight expenses. Yes, exactly. Freight, weak currencies, a premium because we ship just-in-time to the customers. Instead of them receiving a vessel once a month with a huge transit time, we ship by train every day for these customers, so they pay a premium and you don't have the freight costs. So it's pure economic analysis.

Got it.

The first question on capital allocation, well in the short term, we are going to have a CapEx around $600 million this year. We are still going to increase working capital. We had a significant investment in working capital in the first quarter of almost $700 million. But in the second and probably in the third quarter, with this increase in prices and volumes, we will probably also invest in working capital. Next month, we are going to pay $412 million in dividends. Now in a little further, which was your question, whether to speed up M&A, organic growth, or dividends, I think the answer is that they are all on the table for us, Thiago. I mean we always aim to analyze any opportunity that strengthens our strategic position in our markets. That is what we continue to do today. 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.

And your next question comes from the line of Caio Greiner with BTG.

Thank you. So my first question would be on your EBITDA per ton. I do understand that your guidance said that you're probably going to increase EBITDA in the coming quarters, but I was just trying to understand how this equation plays out over the next one or two quarters ahead. Because on one hand, steel 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. But I do understand that Ternium has those industrial contracts and that prices might take one quarter on average to flow through results. So I was just trying to understand how that's going to shape out over the coming quarters. And on the other hand, you also have higher raw material costs, raw material cost inflation that should also start flowing through results as they also flow through inventories. And also, on top of that, you also have Pesqueria coming online, which is something that you guys also mentioned 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 look at Ternium with an EBITDA per ton of above $400 over the coming quarters, maybe until the end of the year? So I was just trying to see if you can help us in forecasting the numbers 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, can you share with us how are Ternium's lead times in Mexico nowadays, if you can share with us how many months or days you are taking to actually deliver spot volumes, that would be great.

Our lead times for spot volume are similar to those in the U.S. today. So for hot rolled, you are looking at more than 8 weeks, or a little bit more, to be honest. For spot volume, I mean, we have contracts, and we also have regular customers on a monthly base pricing. Those have no problem. But if there is a spot volume that someone wants, it's a little bit more than 8 weeks.

Okay. So yes, Caio, you put it very well in your question. There are some moving parts in trying to analyze which EBITDA per ton we will have 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 at 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 discussed and what Maximo commented and what we are seeing in the market is that in the second half 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 half. You also are right that we will continue to see some costs moving to our numbers even during the third quarter as prices of specifically slabs continue to increase and continue to roll through our numbers. But in the third quarter with the expectation that we have, we should sustain a good level of EBITDA per ton. The fourth quarter clearly will depend a lot on the pricing scenario that you would foresee. It could return to a more normalized level of pricing, even being a very good level of prices, as costs will also take some time to normalize or to follow the trend of iron ore, for example, or slabs. 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 a very good level of EBITDA per ton throughout the year.

Your next question comes from the line of Carlos De Alba with Morgan Stanley.

So my question is coming back to the capital allocation. In the past, I don't think that we have seen Ternium pay a special dividend. But as was elaborated before, the level of cash on your balance sheet is remarkable. And I don't think we've seen that before, but it is quite good. So is there an implicit policy by which Ternium doesn't like to pay special dividends and just sticks to a regular, more or less sustainable dividend? Do you see that changing? Then on the same vein, when you talked, Maximo, about the potential markets where you could do either a greenfield project or a brownfield project, but mostly greenfield and/or M&A, 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 U.S. directly with more manufacturing capacity there? And finally, coming back to the Pesqueria ramp-up—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 on how you see the progression of capacity utilization in the new hot roll coal line in Pesqueria in the coming quarters or years?

Yes. Thank you very much, Carlos. I start with the last one. Yes, I said 400,000 tons of incremental shipment because of the hot strip mill, the new hot strip mill. Remember, the hot strip mill is going to start our first coil on June 1, probably a little bit earlier. But these are very complex pieces of equipment, so the ramp-up curve is long. That's what we are seeing today. It's not that it's going to produce more for sure. But remember that we were also importing products to fulfill all our needs. We were importing hot-rolled coils from different countries in Mexico to meet the demands 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 higher if the ramp-up curve is better. But remember also that this hot strip mill is going to produce all the range of products that you can imagine. For that, we have to complete all the certification processes with the supplier of equipment, which takes a lot of time. So it's not that the ramp-up curve just starts producing, and we start producing. We have to ensure that we can produce all the range of products, and that takes a lot of time for trying and stopping the line and making adjustments until the provider or supplier of the equipment certifies this range of products. I think with that, I answered your question, Carlos. Capital allocation and special dividends, we don't have a policy against that. But I don't know. I mean, we like to be very consistent. If you see our track record, with the exception of 2020 when we didn't pay a dividend, which I think was more than justified for what we knew at that time, we want to continue this pace. We want to increase or give a sustainable dividend in the long term. You can see how we were moving over the different years. Potential markets, yes, our market is the Americas. We are not thinking of going to other continents, to be honest. If this includes the U.S., yes, we have an operation in the U.S. and we have previously analyzed some new facilities in the U.S. In analyzing the three options, we are always doing it now, but our focus is in the Americas, Carlos.

All right. Excellent. If I may, just to squeeze another one. Could you tell us what is more or less the level or the volume of the slabs that Ternium Brazil is now sending to Mexico or how much you expect for the year?

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

Our next question comes from Alfonso Salazar with Scotiabank.

Hello. Good Day, Maximo and Pablo. The question I have is regarding 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. 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 hydrocarbons reform, and the outsourcing reform, have created uncertainty, and investments have been declining for over two years now. Gross capital formation is well below potential. So why do you think this will change, and when? Also, if you can comment on the expected impact of the energy reform and the outsourcing reform in your results.

Very good questions, and let me start with the energy reform and the labor reform, which aims to cancel the outsourcing. The energy reform is not a very good reform. I mean, it was a very bad reform too. But to be honest, I don't think it's going to go through. As you know, there are more than 120 demands already filed, and the law has been suspended. The Secretary of Energy has already suspended the law. I don't think it's going to go through. The rationale of the law, of course, is to give more balance or to give a little bit more to Pemex and to benefit the state-owned company. But I think that what people didn't realize in the government is that, that is not very good for competitiveness. And now 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 impact for us. We used to pay the performance bonus as the law requires to all our employees, so I'm not seeing any effect from this reform. So I think I’ve addressed the second question. Why are we confident in Mexico? Again, you're right that the numbers are not very good regarding what the government is doing in terms of spending or helping after the effects of the pandemic. First of all, the industrial base is going to continue growing. Again, reshoring is something that is happening. We are witnessing it every day. It's happening in the U.S. and in Mexico. Most of these transshipments of these plants that were supplying the North American market from production bases in China 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, is going to grow and will continue to grow. The other part is Mexico has a very balanced financial situation. I mean, the debt of the country is very low compared to others. And the needs for infrastructure are very high. I know the government has concentrated on three projects only. But one of these days in the next year or the following, they are going to realize that the needs for infrastructure in Mexico are huge, and they do have the means to do it. These two factors will increase the consumption of steel in Mexico because all those developments require a lot of steel. That’s why we think Mexico is going to grow. Again, it’s not going to be in the 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 significant infrastructure investment, like the U.S. is doing. I hope I answered your question, Alfonso.

Yes, yes. I think we can debate on how fast this is going to happen. But yes.

Yes, sure. Yes, the timing is the issue here. But I think that in the reshoring context, the timing is going to be much faster than what we are seeing. In the other one, it's a huge debate.

Our final question comes from the line of Fabian Graimann with Pictet Asset Management.

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 the emerging markets, for example, the steel companies in Russia, they have a key leverage target and a dividend linked to free cash flow after Capex. I'm not arguing against CapEx here. But the question is why do we not have a clear message on, say, the holy trinity of leverage, CapEx, and cash returns? And just to state my preference as a shareholder, we clearly like a dividend policy linked to free cash flow and key leverage targets. Yes, that's it.

Yes, yes, yes, sorry. Hi, and thanks for the question. Let me try to answer this. There are two different things in your question. The first one is the leverage target, something we do not believe in, and let me explain the reason why. As a company in the sector where we are with the volatility that the sector has, we believe in always having— or trying to have a strong financial position in order to, first of all, among other things, be able to sustain our dividend policy; second, to take advantage of opportunities if they appear in the market. Even during crisis years like last year or in many other years that happened in the past, we concentrated on our own business and developing our own business and our plans without the need to do any restructuring or issuance of capital or different instruments during difficult times. That’s why we believe in having a strong financial position. Probably, we can have you onboard, and you could be right that the leverage we have at this moment is too strong. But this is why we believe in maintaining this without forgetting first of all, as we said, paying an increasing dividend, fulfilling the needs of our CapEx plan, and being ready to take opportunities if we can. A clear example of that was our last acquisition. Back in 2017, if you remember, we were analyzing the acquisition of a facility, while many other companies in our sector were doing capital issuance or restructuring their debt. We were able to move forward with this acquisition that has proven to be a great one for Ternium. The second point, which is the clear dividend policy, you’re right. It’s something we do not have a formal written policy. But what we have is clearly a conduct, a record, a way of analyzing how we pay our dividends and sustaining and increasing, and paying at least a portion of the net income that we generate. We could improve on that, in that sense, that is what we are taking from your question as a shareholder. But what is clear is that we have been paying a significant portion of our net income year after year. The track record we have is of increasing the dividend payment as much as we can. 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 concerns to discuss internally, because it's always good to hear what our shareholders are saying.

Maybe just a quick follow-up on CapEx. There were talks about expanding capacity at Pesqueria by, I think, 400,000 tons. Can you comment on that and sort of the —and when and how the decision will be made and what that was counting?

No, I don't think— you mean in this conference call that the comment of 400,000? No, I don't know if we made any comments to expand the capacity in Pesqueria, although you know that Pesqueria is a site that has a lot of potential. One of the things that we are analyzing is clearly organic growth in Mexico. If these go through, it should include investments in Pesqueria.

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

They are somewhat different types. Clearly, one —and we mentioned, you know that in 2027, the rule of origins of USMCA change. To be considered local, you have to have melted and poured in the region for the automotive sector. As we've said several times, by 2027, we are going to need to be compliant with USMCA. One option is to invest in Pesqueria to be compliant with these requirements. There are other options. They are all under analysis, but this is one thing that can happen in Pesqueria.

Got it, okay. And sorry, maybe a very last question just on the current status and what I think — what I really struggle to put in my model, and I think what I also struggle 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, through the cycle EBITDA per ton should increase, given this hot rolling expansion growth?

Well, yes, I think in another question, I think there was Carlos or Caio asking this. I tried to explain how we see this moving through our numbers. Clearly, as we explained during the call, we are working at high capacity utilization. So that's why we cannot increase shipments much, as you saw during the last quarter. Next quarter, we are guiding again for a sustained level of shipments, that's because we don't have that much product to keep selling to the market. The increase that Maximo mentioned and that we have been commenting on is clearly an increase in volume that we will be realizing in the second quarter, adding to the level that we are producing today. If we are at the level of 3.1 million tons in the quarter, let’s say it will not be the case, but let’s say that evenly distributed in every quarter. So we can say that we will move in the next semester to 3.3 million tons. We also are guiding that with the current level of prices, we expect to increase a little bit the EBITDA margin or the EBITDA per ton in the second and even in the third quarter. Then it will depend a little bit on the pricing scenario that you want to use in your model to know exactly or to have an idea, which will be the margins you would like to reflect in your forecasting. All in all, the message is that Pesqueria will enable us to increase shipments starting next semester. And at least in the coming couple of quarters, we will be able to increase or sustain the margin that we are producing at the moment.

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

All right. Thank you all again very much for your interest 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.

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