Earnings Call Transcript - TX Q2 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your operator today. At this time, I would now like to welcome everyone to the Ternium Second Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. It is now my pleasure to turn today's call over to Sebastian Marti. Please go ahead.

Sebastian Marti, Global IR and Compliance Senior Director

Good morning. Thank you for joining us today. My name is Sebastian Marti, and I am Ternium's Global IR and Compliance Senior Director. Ternium released yesterday its financial results for the second quarter and first half of 2023. This call is complementary to that presentation. Joining me today are Ternium's Chief Executive Officer, Maximo Vedoya; and the company's Chief Financial Officer, Pablo Brizzio, who will discuss Ternium's business environment and performance. After the conclusion 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 two, in today's webcast presentation. You will also find any reference to non-IFRS financial measures reconciled to the most directly comparable IFRS measures in the press release issued yesterday. With that, I'll turn the call over to Mr. Vedoya.

Maximo Vedoya, CEO

Thank you, Sebastian. Good morning and thank you all for participating in our conference call. In this quarter, we reported a strong set of results with adjusted EBITDA of $883 million, equivalent to a margin of 23%. We also announced the location of Ternium's new upstream mill in our Pesqueria industrial center in Mexico, completing the integration of our facility in the country. And finally, we completed the acquisition of additional shares in the control group of Usiminas, a change that enables us to have a more direct involvement in the company's management and the implementation of its strategy. Let me comment on the opportunities this positioning offers us in our main markets. In Mexico, Ternium is presented with two main opportunities: substitution of imports in the market and taking advantage of the nearshoring of manufacturing capacity. Over the years, the flat steel market in Mexico has continually increased its sophistication. Before we began building our facility in Pesqueria, the manufacturing industrial sector in Mexico represented 50% of apparent flat steel use. Last year, this went up to 66%, a more than 15 percentage point increase. This sector demands high value-added products that require technology, know-how, and a lengthy certification process. On top of this, a good share of flat steel consumption in Mexico is still being served by imports, which represent about 40% of the market. Over the past 10 years, most of our investments in the country have targeted the growth in industrial customer consumption of high value-added products, as well as the substitution of imports to this same market. A focus on sophisticated products and service enables us to compete based on differentiation, customer service, and product development. On the other hand, as we have mentioned several times, nearshoring is happening and is doing so faster than we expected. The 15% increase in the flat steel industrial market in Mexico is also linked to this dynamic. The pace of investment in the north of the country has been very significant and has so far captured more than two-thirds of the total nearshoring demand coming to Mexico. This is reflected in our updated expectation for steel consumption in Mexico in 2023, with a growth of 4.3% compared to 2022. World Steel's previous estimation, released in April, was 2.5%. With this background in mind, the new slab mill in Pesqueria will be a key part of our growth strategy in the region. It will complement the integration of our facilities in Mexico, substantially accelerating our capacity to respond to changes in the market. And of course, it will significantly help with our decarbonization targets. In addition, we are reinforcing our position as a leading steel supplier in the region with our downstream investment program. We are going deeper into new value-added products, which will help us better serve our customers in the automotive, renewable energy, and home appliance industries, among others. These projects represent an excellent opportunity for us to continue capturing demand for high-end steel products in Mexico. Let me now make some comments about Brazil. As a first step after the increase of our participation in the controlling group, Usiminas made changes to its Board of Directors and management. Marcelo Chara, the former CEO of Ternium Brazil, is now Usiminas CEO, replacing Alberto Ono, who has been appointed as Chairman of the Board. Usiminas is now beginning to implement several organizational changes. It is introducing new business practices while designing a plan that will encompass all areas of the company, but with a special focus on its industrial operations. Usiminas can provide highly sophisticated steel grades for the most demanding industrial applications, including auto-grade steel, of which it is the number one supplier in Brazil. The Brazilian steel market has not been at its best lately, but I believe it has great potential in the long term. Brazil's current steel consumption is lower than what it was 10 years ago, and steel consumption per capita at 110 kilos is also very low when compared with other countries, whether developed or not. The main opportunities I see for this market are coming from the nearshoring trend, which offers opportunities to integrate value chains with products containing Brazilian steel. It also comes from import substitution, the energy transition agenda, the aging of vehicles and agricultural machinery, as well as improving the rate of inhabitants per vehicle, the significant gap in home availability, and finally, the need to increase infrastructure investment in the country. All in all, Brazil has substantial opportunities to start growing consistently again under a new trend of industrialization, which should support an increased intensity in the use of steel. Turning now to Argentina. We currently continue to see stable steel demand for the third quarter, similar to shipments in the Southern Region during the second quarter, but there is an election process underway that will be over by the end of the year. The country also needs significant macroeconomic reforms, and it will probably get them sooner rather than later. We expect this to negatively impact this market in the near future. Before I wrap up my prepared remarks, I would like to make some brief comments about a very important matter: safety. Two weeks ago, we celebrated our Annual Safety Day event. The event was scheduled with various activities throughout the week, including expert panels and the sharing of our team leaders' experiences in the different countries where we operate. A recent change in this respect is that since the beginning of July, the position in charge of safety, the EHS Vice President, has a direct report to me, enabling an even closer review of our safety performance. Finally, we issued last month our sustainability report. This included a comprehensive description of our activities regarding climate change, environmental issues, human resources, and our relationship with the communities where we operate, all of which are considered when assessing our business strategy. I encourage you to take a look. Let me now make some final comments to close my prepared remarks. The regionalization of steel markets, recently exacerbated by nearshoring, is a dynamic for which we have been preparing for a long time, with an aggressive growth strategy in Mexico, our expansion in Brazil, and the new role for Usiminas, our new R&D capabilities, a unique product portfolio offering throughout Latin America, and the integration of ESG into our business strategy. I believe we are a stronger company now, a regional leader with greater integration. We have significant opportunities for growth in markets that we know and have great potential. The next steps of development will transform our company once again, strengthening even more our competitive position. All right, Pablo, please, you can now go ahead with the presentation of Ternium's performance in the second quarter.

Pablo Brizzio, CFO

Thanks, Maximo, and good morning to everybody. Let's review Ternium's performance during the quarter. Expected improving market conditions during the second quarter, particularly in North America, together with a normalization of production costs, led to a robust set of results for the period. On page three of the presentation, you can see the performance of Ternium's EBITDA and net income on a quarterly basis. Adjusted EBITDA reached $883 million in the second quarter, with a margin of 23% of net sales or $296 per ton. The improved operating performance led to net income of $736 million in the period, with earnings per ADS of $3.19. Before we continue, let me call your attention to the fact that so far we have been accounting for Usiminas' results as equity and earnings of non-consolidated companies, with no impact on Ternium's operating numbers. After the recent acquisition of additional shares of Usiminas, Ternium increased its stake in Usiminas' control group and consequently, starting in the third quarter of 2023, we will fully consolidate Usiminas' results. The consolidation of Usiminas' financial data will have a significant impact on Ternium's reporting in the third quarter. Today's qualitative guidance on Ternium's shipment margin, adjusted EBITDA, and CapEx for the third quarter will not account for the impact of Usiminas' consolidation because we believe it makes more sense for these to remain comparable with the numbers reported in the second quarter. Having said that, let me turn to our analysis of Ternium's second quarter results. The review now still shipment on page four of the presentation. In Mexico, steel volumes were 2 million tons in the second quarter, slightly below the first quarter all-time high. On a year-over-year basis, shipments increased 21% in the second quarter, supported by a remarkable market share gain in the Mexican flat steel business over the last 12 months. However, Ternium's shipments in Mexico in the second quarter fell short of our expectations, mainly due to supply chain constraints with raw materials and finished steel at our facility. Looking forward, we expect shipments to increase in Mexico in the third quarter. Apparent steel demand remains healthy. The industrial market continues to show strong activity, with special mention to the automotive industry as well as to the white goods industry. For the time being, we have not seen any sign of recession in the North American market. In addition, the commercial market in Mexico remains steady. It is a more volatile market and is more sensitive to price trends and steel inventory levels, but we do not believe inventories are higher at this time. In the Southern Region, shipments in the second quarter were 563,000 tons, slightly higher sequentially, mainly due to higher shipments in Argentina following a seasonally slow first quarter. On a year-over-year basis, the volume decreased 5%, reflecting lower steel demand in Argentina and reduced exports to other countries in the Southern Region. Looking forward, we expect shipments to remain relatively stable in this region. Turning now to other markets. Volumes decreased concurrently with the company's increased integration and growing presence in Mexico. In this regard, Ternium's slab facility in Brazil increased shipments to the company's downstream facilities in Mexico. In the next page, number five, you can see that combining these developments, we arrived at a consolidated steel shipment of 3 million tons in the second quarter, slightly below the first quarter level. Looking forward, and without taking into consideration Usiminas' consolidation, we anticipate consolidated steel shipments to increase sequentially in the third quarter. Moving onto steel prices. Revenue per ton in the second quarter increased sequentially by close to $120 per ton. The main driver behind the sequential increase in revenue per ton was the strength of the North American steel market during the period. We expect earnings consolidated revenue per ton to decrease sequentially in the third quarter due to the impact of the current weaker steel pricing environment, which is expected to prevail over the positive impact of better contract prices in Mexico in the period. Let's review now, on page six, the main drivers behind the improvement in the performance of the second quarter. The sequential increase in adjusted EBITDA was mainly the result of higher realized steel prices and, to a lesser extent, lower costs, including lower purchased slabs and energy prices, partially offset by higher maintenance expenses and services costs. Looking forward, we expect a sequential decrease in adjusted EBITDA in the third quarter, driven by lower adjusted EBITDA margins due to the decrease in revenue per ton, as explained, and slightly higher cost per ton, partially offset by higher shipments. The net income chart at the bottom shows that the sequential improvement was partially driven by better operational results. The income tax result was again very low in the second quarter, with an effective tax rate of just 1%, reflecting a gain in deferred tax results for Ternium's Mexico subsidiary in connection with the Mexican peso's 6% appreciation during the quarter. Let's now turn to page seven to analyze changes in cash flow and net cash position. Cash from operations was $48 million in the second quarter, which includes the negative effect of a $605 million increase in working capital. This was mainly due to a $414 million increase in steel inventories as we rebuilt our steel inventories in Mexico after the decrease in the previous quarter and an $89 million increase in trade and other receivables reflecting higher realized prices. We do not expect working capital increases like this further on. The development led to a negative free cash flow of $150 million in the second quarter of 2023 after CapEx of $198 million. As we progress with our investment plan in Mexico, we expect CapEx to continue increasing in the second half of the year. Ternium's net cash position was $2.2 billion by the end of June, decreasing by $800 million in the second quarter. This reduction mainly reflects the free cash flow results, a dividend paid to shareholders amounting to $353 million, and a dividend in kind paid to non-controlling interest amounting to $234 million. Turning to page eight to review the numbers from a longer-term perspective. Consolidated steel shipments in the first half were 6 million tons, similar to shipment levels in the first half of last year. Adjusted EBITDA was $1.4 billion in the period, with a margin of 19% of net sales. This led to a net income of $1.2 billion and earnings per ADS of $5.10 in the first half of this year. This quarter, we also paid the second part of our yearly dividend in May with a payment of $1.80 per ADS. We have increased shareholder return over the last few years and will try to sustain or improve shareholder return moving forward. Finally, in slide number nine, you can see that the cash flow performance was $360 million in the first half of the year after working capital increase of $387 million, mainly reflecting the highest inventory volumes and trade receivables. This led to a free cash flow of $265 million in the first half of this year after CapEx totaling $395 million. Okay. With this, we finish our prepared remarks. Thank you very much for your attention and participation today, and we are now ready to take your questions. Please, operator, proceed with the Q&A period.

Operator, Operator

Your first question comes from Carlos De Alba with Morgan Stanley. Please go ahead, Carlos.

Carlos De Alba, Analyst

Thank you very much for your attention and participation today. We are now ready to take your questions. Please, operator, proceed with the Q&A period. Your first question comes from the line of Carlos De Alba with Morgan Stanley. Carlos De Alba, your line is open.

Pablo Brizzio, CFO

Okay. Let me take that one. Carlos, how are you? Yeah. You're right. This is an important answer for us to give to you. Clearly, what you mentioned is completely right. We will be consolidating Usiminas, and the impact of this consolidation in our numbers will be different depending on the lines of our financial statements. Clearly, in the upper lines of our financial statement, in sales achievements and all these numbers, the impact will not be minor. But as you mentioned, looking at the results, the current result of Usiminas, the impact on net income, the EBITDA level will be minor in comparison to the other numbers. Initially, we will be providing information on a segment basis separated between what we have today, which is the steel segment, the mining segment, and then we will have a segment for Usiminas. So, you will have clarity on these numbers for your analysis. And of course, Usiminas continues to be a public company. There you will see also more details on the explanations on the numbers that you see in that. But this will be at least our initial proposition to clarify the situation. We will analyze if there is a need to change that if Maximo decides to look at the numbers recently. But I believe you will have initially very clear numbers to look at.

Carlos De Alba, Analyst

Thank you, Pablo. What are the expectations for third-party slab sales from Brazil, considering the greater integration you've achieved in the last few quarters?

Maximo Vedoya, CEO

Yeah, Carlos. Hello. How are you? I think it's going to be zero, to be honest. I mean, with Ternium together with Usiminas, we're going to need to continue buying slabs. So, most likely, all the slabs from Ternium Brazil are going to go either to Usiminas or to Ternium Mexico or to Ternium Argentina. So, there's probably not going to be any sales of slabs.

Carlos De Alba, Analyst

Understood. All right. Thank you very much. I appreciate it. I'll get back on the line. Thank you.

Maximo Vedoya, CEO

Okay. Thank you, Carlos.

Operator, Operator

Your next question is from the line of Thiago Lofiego with Bradesco. Your line is open.

Thiago Lofiego, Analyst

Thank you. Good morning, gentlemen. First question about Usiminas steel. Maximo, could you talk a little bit more about the strategy? You mentioned the focus would be on the industrial side. So, the question is, how much CapEx do you think you will need to deploy in Usiminas to bring the company back or up to the operating efficiency levels that you think is your potential target or optimal? So that's my first question. My second question is about the slab market. What's your view on slab supply-demand globally? And whether we should see the HRC slab spread compressing or expanding from here? Thank you.

Maximo Vedoya, CEO

I'll address the second question first. The slab market has always been significant, though transactions are limited. We are likely the largest buyer of slabs, but the volume is small compared to what is traded in hot rolled coils. Currently, we don't anticipate much change in the gap. We believe it will remain relatively stable at the levels we see today. We have experienced some downturns in the past, which is evident in the historical data. Presently, the gap mirrors the average of the last five to six years. Therefore, we expect this difference to persist. Naturally, there is volatility within the steel industry, but we don't foresee any major shifts. Regarding Usiminas' strategy and capital expenditures, we do not have a CapEx figure to share at this time. Our team is transitioning into Usiminas, and with Marcelo Chara now as CEO, some members from the Ternium team will be arriving soon. It will likely take a few months before we can provide a precise CapEx number. The priority for Usiminas in the coming months will be enhancing its competitiveness, particularly concerning the upstream CapEx in Ipatinga, the blast furnace, steel shop number two, and finalizing plans for the coke batteries. Our focus will be on improving efficiency at Usiminas, which is our primary concern. On the commercial side, many customers of Usiminas overlap with Ternium's clients. This connection allows us to provide more comprehensive solutions across all our markets. Ultimately, our main emphasis is on boosting the efficiency of Usiminas' industrial segment.

Thiago Lofiego, Analyst

Very clear, Maximo. And you just quickly mentioned about the timing for us to know a more detailed CapEx number. You think this will be until the end of the year or maybe like a couple of months, just for us to understand?

Maximo Vedoya, CEO

I mean, we will have a rough idea by the end of the quarter probably, to be honest. But again, it's going to be a moving target in the first few months until the end of the year. But we will have a rough number by the end of the year. You have to take into account, Thiago, that today we are in the middle of the blast furnace relining and steel shop number two, and the problems we have with the coke battery. So, people are a little bit stressed in trying to manage, and things are going well. I mean, there is some delay, but I think that we are going to finish in the middle of September. But people are much more focused on that and trying to finish that in a good way. And in parallel, we are working on these plans. So, by the end of September or at the end of the quarter, we should have something, but it's not going to be the definitive number.

Thiago Lofiego, Analyst

Fair enough. Thank you, Maximo.

Maximo Vedoya, CEO

You're welcome, Thiago.

Operator, Operator

Your next question is from the line of Timna Tanners with Wolfe Research. Your line is open.

Timna Tanners, Analyst

Hey, good morning. Thanks, everyone. Wanted to see if you wouldn't mind trying to help us refine a bit the comments on your margin outlook and the Mexican shipments. So, obviously, you guided to higher shipments in Mexico. We know that the demand there has been quite strong, and that without AMSA running, there's a gap in the market that's being fulfilled with even more imports than normal. I'm just wondering, how much more can you ship? Are you willing to ship? If you can give us an order of magnitude there?

Maximo Vedoya, CEO

Thank you, Timna. Good morning. Yeah. To be honest, we had a plan that was for bigger shipments for this quarter. And we were not able to fulfill, as Pablo mentioned, because of some supply chain constraints in acquiring raw materials coming to Mexico and some challenges in our lines and supply chain constraints in the shipment to our customers. So, we have many more orders for this quarter than what we shipped. We don't like that. It's not very good for us. So, I think that next quarter, the plan is to ship at least 200,000 tons more, a roughly 10% increase. I think some of these constraints have been addressed. But I don't want to promise all of that because again, it's very tight; all the supply chain in Mexico is very, very tight. So, yes, the orders are there, and we plan to increase probably even a little bit more than that if we are able to ship them.

Pablo Brizzio, CFO

Pablo here. You mentioned the other issue is the margin, as expected, for the third quarter. I think that one important number to look at, of course, we have a very good margin during the second quarter, which was 23. But if you look at the margin that Ternium made during the first part of this year, the first semester, we were at the level of 19%, which is, if you remember, what we have presented in our prior conference calls and meetings, and that Maximo presented as a target for the company to be in the range that we always talk about, which is 15 to 20, but in the upper side of that range. So, we should be more in line with this level than, of course, at what we have in the second quarter. Usually, for us, it's better to look at the numbers of Ternium over a longer timeframe than a quarter. But here is a clear example of if we look at what happened during the semester, it is more in line with what we are expected to support.

Timna Tanners, Analyst

Okay. Perfect. You answered the second part of my question. So, I'll leave it there and pass it off to the next person. Thanks again.

Maximo Vedoya, CEO

Thank you, Timna. You're very welcome.

Operator, Operator

Your next question is from the line of Caio Ribeiro with Bank of America. Your line is open.

Caio Ribeiro, Analyst

Good morning. Thank you for the opportunity. So, I wanted to take advantage of the fact that you'll start to consolidate Usiminas' results right in the coming quarter to ask you a question specifically about the finished flat steel market in Brazil, where prices have been coming down recently, given the high import parity premiums, weaker demand, and also the higher import penetration. I just wanted to get your perspective on how you see flat steel prices evolving in Brazil in the coming weeks and months. And then secondly, with Usiminas in the midst of carrying out maintenance on the blast furnace in Ipatinga, I wanted to ask you if you have any perspective on what impact the conclusion of that blast furnace maintenance could have on the margins of the company, once it's back up and running at full capacity. Thank you.

Maximo Vedoya, CEO

Yeah. Thank you, Caio. Good morning. I mean, the market in Brazil clearly has a problem today with imports. If you see the number of imports that are coming monthly into Brazil, it's around 400,000 tons a month, which is the same number as it was in 2021, but with a higher market. For us, this is a very, very big number. And our target is to reduce this number. It should be our target and the target of the other steel companies in Brazil. I think the other thing is that Brazil has to take into account that at some moment, they will need trade remedies against some foreign steel; they have to start doing that. All the markets have done that, from Argentina to Mexico, Colombia, the USA, Europe. I mean, everybody except Brazil has targeted unfair trade. And Brazil used to be a country with a very strong position in this. Somehow, in the last years, this position has weakened. But I believe that the government is willing to support this. And so that's the strategy. On one side, we have to combat these imports with our commercial efforts. But on the other, unfair trade has to be on the agenda much sooner rather than later. So that's your first question. The second question was about the impact of maintenance on the margins.

Pablo Brizzio, CFO

The impact after relining on the numbers.

Maximo Vedoya, CEO

Well, clearly, the margin will increase. I mean, Usiminas has three blast furnaces. The two that are operating today are very small blast furnaces, which have much higher production costs because of the fuel rate. Blast furnace number three is a much larger and more competitive one. So, the numbers are going to change very positively as soon as we start producing, which should be around the middle of September.

Caio Ribeiro, Analyst

Okay.

Maximo Vedoya, CEO

I hope, Caio, I answered your question.

Caio Ribeiro, Analyst

Is there any way that you can give us a number that you expect? I mean, if margins will return to double-digit, above 10%, or any sort of guidance on that front?

Maximo Vedoya, CEO

No, I don't have a number today to give you. Yeah, Caio, not today. Probably next quarter, even in Usiminas' conference call or in our conference, we can provide a target or a number, but I'm not able to do that today.

Caio Ribeiro, Analyst

Perfect. Thank you very much, Maximo. I appreciate it.

Maximo Vedoya, CEO

Well, thank you to you, Caio.

Operator, Operator

Your next question is from Leo Correa with BTG. Your line is open.

Leonardo Correa, Analyst

Hello, good morning, everyone. Thank you. I wanted to start with a more theoretical question.

Maximo Vedoya, CEO

Can you speak a little bit louder? We cannot hear you very well. Leo?

Leonardo Correa, Analyst

Sorry, Maximo. You guys can hear me now?

Maximo Vedoya, CEO

Yes, perfect.

Leonardo Correa, Analyst

Yeah. Is it better?

Maximo Vedoya, CEO

Yeah, it's better. Much better.

Leonardo Correa, Analyst

Yeah. Okay. So, sorry about that, guys. Yeah.

Maximo Vedoya, CEO

No worries.

Leonardo Correa, Analyst

The first question is somewhat conceptual, Maximo. Everyone has been following the story for many years, right? With Usiminas now consolidated, you made a move some years ago with CSA, which is now Ternium Brazil and is also very relevant. While I know there is no decision yet and this is all hypothetical, do you believe there might be a time when you consider the possibility of merging Usiminas and Ternium Brazil, given the potential synergies? The second question shifts towards market issues. We're noticing some volatility, particularly in the sheet markets in the U.S. Prices reacted sharply upward earlier this year, but now we are observing a bit of a correction. After two rounds of price hikes aimed at stabilizing prices, we would like your perspective on where you think prices are heading as we approach year-end. Those are my two questions. Thank you.

Maximo Vedoya, CEO

Thank you, Leo. Currently, we do not have plans involving Usiminas and Ternium Brazil. As you know, Usiminas is publicly traded, and we have an agreement with our partner, Nippon Steel, which we have modified, but the terms remain clear. At this point, we are not evaluating any new initiatives. However, we anticipate that there will be synergies between Usiminas and Ternium that will positively benefit both companies. This includes management practices and the complementarity with slabs, as Cubatao and Ternium Brazil are geographically close. By combining our procurement efforts, we can leverage the purchasing power of both companies, leading to mutual advantages. Additionally, our industrial customers perceive our partnership with Usiminas as strengthening Usiminas. Therefore, we see significant synergies already in play. Regarding prices in North America, there is indeed volatility. Prices increased in the first quarter, fell in the second quarter, and have slightly risen again, with a recent decline of $5. Currently, prices are around $950, and I believe we are establishing a new price level in the North American market in the high $900s. This volatility is likely to persist in the upcoming quarters, although I think prices will stabilize around that range. The demand remains robust, evident in both Mexico and the U.S. While imports are gaining market share, they should not dominate, allowing the U.S. to sustain certain pricing levels. Six months ago, we were more concerned about a potential recession, which was a prevalent topic during this call. However, I believe that the recession risk for the next six months has significantly diminished, enabling us to maintain prices at that level. I hope this answers your question, Leo.

Leonardo Correa, Analyst

Yeah. It's very clear, Maximo. Thank you very much.

Maximo Vedoya, CEO

Thank you to you.

Operator, Operator

Your next question is from Carlos De Alba with Morgan Stanley. Your line is open.

Carlos De Alba, Analyst

Yeah. Thank you very much. Just a follow-up on the working capital.

Maximo Vedoya, CEO

Carlos, we can't deal with two questions.

Carlos De Alba, Analyst

Just one more. Just to keep it interesting. And it's an easy one. So, I want to make Pablo look good.

Maximo Vedoya, CEO

Okay. Perfect.

Pablo Brizzio, CFO

On working capital, so you consumed a lot of cash this quarter. I think Pablo, you mentioned that you don't expect that to continue in the coming quarters. But can you maybe give a little bit more color on the different moving pieces and maybe a range or level of magnitude of the improvement in cash regeneration from working capital?

Maximo Vedoya, CEO

Let me start answering and then I will give it to Pablo. One of the things that happened is that we increased our stock, particularly in Mexico. I think about 75% or 80% of the $600 million was an increase in stock. This has two implications. First, if you recall, we generated a significant amount of cash from working capital in the last two quarters, specifically in the fourth quarter of last year and the first quarter of this year, where I believe the generation was around $1.2 billion. It's natural that as we increased shipments and prices rose, working capital had to rise as well. We also faced challenges from supply chain restrictions due to insufficient stock to supply our customers in Mexico. This is the main reason for such a notable increase, which we may not have fully anticipated. However, we were expecting a high level of working capital. Now, I will hand it over to Pablo.

Pablo Brizzio, CFO

Let me add to that, that looking forward, first, we think that we have now the level of inventory that we need for the expectation of shipments in the coming quarter. And now we should be seeing movements in working capital more in line with the normal issues that affect working capital increases in volumes, movement in prices, and these types of issues. So, that's why, as we said at the very beginning, we are not expecting to see a significant movement in working capital in the coming quarter. It will be more in line with normal changes in working capital and significantly lower than what we saw, the absolute number significantly lower than what we showed in the second quarter.

Carlos De Alba, Analyst

All right. So just to clarify, it's not necessarily that you are going to generate cash from lower working capital. It's just that it will return to more traditional normal drivers and changes, right?

Maximo Vedoya, CEO

Yeah. I don't think that we are going to see generation of cash from working capital in the next quarter. It's going to be up or down a little bit, but we are not seeing. We are now at a level that is reasonable for the level of shipments that we have.

Carlos De Alba, Analyst

Yeah. Got it. All right. Thank you very much, guys.

Maximo Vedoya, CEO

Thank you, Carlos.

Operator, Operator

Your next question is from the line of John Brandt with HSBC. Your line is open.

Jonathan Brandt, Analyst

Hey, good morning, everyone. I appreciate you taking my question. I have two quick ones. First, regarding nearshoring, I know you mentioned significant investment going into northern Mexico. Can you provide any specifics on that? Have you had discussions with customers, especially in the auto sector, about their expected increase in steel demand? We've seen announcements from companies like Tesla and GM. Could you clarify or quantify what you're observing from the nearshoring effects? For my second question, I'd like to know about the cash situation in Argentina. I believe there's still a considerable amount of cash there. Can you explain your plans for that, given the limited investment opportunities in Argentina, although it remains cash flow positive? Are you planning to keep it there, or do you expect to distribute it back to Ternium Inc.? What can we anticipate regarding that cash flow? Thank you.

Maximo Vedoya, CEO

Thank you, John. I'll try to address the first question, although it's challenging to put a specific number on it. I cannot quantify the impact of nearshoring at this moment. We are witnessing many customers investing in new production lines, particularly in the auto parts sector, with smaller companies moving production from overseas to Mexico. This trend is evident in various sectors such as white goods, HVAC, and electric motors, where companies are expanding capacity or establishing new plants. These developments are driving an increase in our shipments. In the coming years, we may see larger automotive players like Tesla entering Monterey, and Kia is announcing significant investments near our plant in Pesqueria. While these changes will take time, currently, we are seeing many small to medium-sized companies, some of which are suppliers to the automotive industry, entering Mexico or increasing their capacity, which will enhance consumption. It's important to note that the increased consumption we observe in Mexico, despite the country not experiencing overall growth, largely stems from flat industries or products, reflecting industry consumption, rather than long products. So, while it’s tough to assign a specific number, the majority of our customers are indeed increasing their consumption. I hope that answers your first question, John.

Jonathan Brandt, Analyst

Yeah. No, perfect. Thanks, Maximo.

Pablo Brizzio, CFO

So, let me take the easy one now. The cash situation in Argentina. Hi, John. How are you? Clearly, you're right. We have a cash position in Argentina, a significant cash position in Argentina, which is, first of all, a reflection of the reality of our business in Argentina that keeps generating positive results. So, the way we have been dealing with that is in two different perspectives. One is paying dividends. So, we have paid dividends last year, $300 million, this year, $600 million. So, the idea is to continue to do that. But as you know, there are certain restrictions in the regulations and the regulations in Argentina, unfortunately, are changing quite rapidly. So, there are certain restrictions for us to make another dividend payment again during this year. So, we need to wait under the current restrictions in Argentina until next year to do that. In the meantime, the other thing that we do is try to protect the cash that we have in Argentina against any fluctuation on the price of the dollar or the devaluation of the currency in Argentina. Of course, there is not a perfect mechanism to do that, but this is something that we are continuing trying to get the best strategy possible to, first, to sustain the value of the cash that we have in Argentina. In the meantime, in which we can distribute at least part of that as we have done during this year and last year.

Jonathan Brandt, Analyst

That's great. Thanks, Pablo.

Operator, Operator

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

Timna Tanners, Analyst

Yeah. Hey, thanks for taking my follow-up. So, I just wanted to follow-up, actually, on Argentina. If you could decipher a bit the comments there on stable demand, but negative impact in the near future from some of the government reforms. What exactly do you mean? Does that impact volumes, shipments, or prices, devaluation? What exactly are you trying to convey?

Pablo Brizzio, CFO

No, no. And we are charging you for the second time like Carlos, so don't worry, Timna.

Maximo Vedoya, CEO

No, we have been saying this for several quarters because we expect that macroeconomic conditions in Argentina are not good. There is over 100% inflation, and the central bank lacks sufficient dollars. There are restrictions on imports, including some raw materials essential for our customers. While we are not facing problems currently, we are uncertain about potential future issues. Argentina is in a fragile economic state. Honestly, we anticipated a change and a decline in the consumption of steel and other products for quite a while now, which has not happened. Over the past two and a half years, our shipments have remained very stable, which seems illogical given the country's macroeconomic conditions. With upcoming elections, the situation is worsening. Therefore, I believe our shipments are likely to decline, particularly in the fourth quarter.

Pablo Brizzio, CFO

Let me clarify that a little bit. Throughout our history, in Argentina, we often see this pattern when there is an adjustment in the macroeconomic situation, whether through devaluation or other mechanisms. Initially, such adjustments can impact shipments and volumes, but they typically recover relatively quickly if the plan implemented is effective. Therefore, what we are trying to convey is that if there is a correction or adjustment, the market's initial reaction may be a reduction in volume, followed by a recovery. We will need to gauge the specific level, but this is generally what occurs in Argentina during these transitions.

Timna Tanners, Analyst

Got it.

Maximo Vedoya, CEO

I hope, Timna, we are a little bit clearer.

Timna Tanners, Analyst

So, you're talking about shipments then for the most part with that kind of commentary?

Maximo Vedoya, CEO

Yeah. For the most part, shipments, and demand in Argentina, yeah.

Timna Tanners, Analyst

Okay. Super. I promised this would be my last question, but the comments on the increased production from Mexico make a lot of sense. We know you have the capability. I'm just curious, if and when we see AMSA restart, assuming that it does happen, would you expect to maintain those levels, or do you think some of that is due to the displacement of tons?

Maximo Vedoya, CEO

That's a good question, Timna. I mean, clearly, some of the market share we are gaining is against AMSA, that's for sure. Nevertheless, again, there's a lot of imports, and we think we are more than capable of combating those imports, if we have the volume or the production. But the other thing that you have to take into account, Timna, is that AMSA, it's very difficult that AMSA comes back up to the level of production that they had when they stopped. I mean, AMSA was producing, I don't know, between 300,000 and 350,000 tons a month. I mean, being shut down for several months and, again, using only the information that is available in the public, in the press, it's very difficult that AMSA would come back to that number in the near future. You know that yesterday or two days ago, they informed that they were shutting down the coal batteries. That's something that you can't fix in two or three years. So, I mean, we don't see AMSA increasing much in the next quarters.

Pablo Brizzio, CFO

Yeah. Just one thing there. When you refer to a shipment of 300,000 tons, that was what they used to have. The month prior to shutting down completely, that number was a little over 100,000 tons around that number. So even if they return to the lowest number that they were producing, it's not a significant amount of tonnage back to the market. And also take into consideration, Maximo, that it's going to take a while, even if they decide to come back to production, to reach a certain level of production.

Timna Tanners, Analyst

No. That's great. That's helpful. Thank you.

Maximo Vedoya, CEO

You're welcome.

Operator, Operator

There are no further questions at this time. I will now turn the call back to Ternium's CEO for closing remarks.

Maximo Vedoya, CEO

Thank you. And thank you very much all for participating in today's conference. Very good questions. We are very glad we could answer. I hope we were able to answer all of them. And as always, feel free to contact us with any additional comments or questions. If not, we'll see you or we'll talk with you in the next conference call. Thank you very much to all.

Operator, Operator

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.