Ternium S.A. (TX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ternium Fourth Quarter 2024 Results Conference Call. [Operator Instructions]. At this time, I will turn the call over to Mr. Marti. Please proceed.

Good morning, and thank you for joining us. My name is Sebastián Martí, and I am Ternium's Global IR and Compliance Senior Director. Yesterday, Ternium released its financial results for the fourth quarter and full year 2024. This call is meant to provide additional context to that presentation. I'm joined today by Maximo Vedoya, Ternium's Chief Executive Officer; and Pablo Brizzio, Ternium's Chief Financial Officer, who will discuss the company's business environment and performance. After our prepared remarks, we will open up the floor to any questions. Before we begin, I would like to remind you that this conference call contains forward-looking information, that actual results may vary from those expressed or implied. Factors that could affect that is contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation. You will also find any references on 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.

Thank you, Sebastian. Good morning and thanks everybody for joining us today. Ternium reported shipments of 16 million tons for 2024 with adjusted EBITDA of $2 billion on a 12% margin. In a challenging year for the steel industry, our operation generated $2 billion in cash. The company's net cash position remains strong at $1.6 billion by the end of December, even though CapEx was close to $2 billion in the year and we paid dividend of more than $600 million. During the quarter, we made significant progress on our downstream expansion project in Mexico. The pickling line at Pesqueria, along with the finishing center, started operations and a steadily advancing in the ramp-up process. We currently have two remaining lines under construction for the completion of this project, a cold rolling mill whose planned startup has been advanced to December of 2025 and a hot-dip galvanized line, which will also commence operation by the end of the year. Another positive development of the fourth quarter is that the wind farm in Argentina began generating electricity in December. All of the 22 wind turbines have already been installed. The wind farm is expected to deliver approximately 480 GWh -- 480 GWh per year, replacing the majority of our purchase of third-party electricity in the country. This initiative provides substantial economic benefits and assists the company in achieving its decarbonization goals. I would like now to address the latest developments in international trade. A surge in US trade actions during the last few weeks has been creating substantial uncertainty in the global market. Mexico, together with Canada, are among the countries that have been singled out by the recently announced trade measures. In addition, steel has been a specific target, as the US announced it will revoke all country specific exceptions to the 25% tariff on steel imports under Section 232. I'm a strong believer in the advantage of the USMCA. There is a deeply complementary relationship among USMCA members, which has led to increased trade, investment and job creation within the North American region. The USMCA has played a critical role in enhancing the competitiveness of the whole area. Therefore, we believe that the value chains among these nations will continue to thrive further deepening commercial integration among the three countries is the way to go, and it will be beneficial for all of them. Ternium is well equipped to navigate any potential trade scenarios due to its ability to adapt its structure in response to changes in the landscape. As always, we will continue our effort to enhance the efficiency of our operations to reduce costs. We are ready to compete effectively in today's uncertain environment. Now, let's review our main steel markets. In Mexico, shipments in the fourth quarter decreased due to a weaker than expected commercial market. The industrial market in Mexico is showing steady activity levels following an increase of 6% in auto industry's production in 2024. On the other hand, weak government infrastructure investment and uncertainties surrounding trade actions are affecting volumes in the commercial market. This will probably continue to happen until a definitive understanding of the final trade measures is achieved. Moving now to Brazil, 2024 was a positive year with flat steel apparent consumption increasing a healthy 10%. Vehicle productions grew strongly as well with a 10% increase compared to 2023. 2024 saw significant operational improvements in Usiminas, resulting from investments made in recent years, particularly the relining of blast furnace No. 3. As a result, Usiminas produced 3.2 million tons of crude steel, among the highest volume levels of the last 10 years. On the other hand, imports of flat steel exceeded 3 million tons in 2024, setting a new record. China remains a destabilizing factor in the international steel market. The construction of steel consumption in its domestic market in recent years has led to a disproportionate increase in export under unfair trade conditions. Imports from China have significantly disrupted the Brazilian market, accounting for approximately 80% of flat steel imports. The import quota system implemented last year did not achieve its goal. We look forward to more effective trade measures from the Brazilian government, especially as other countries strengthen their defense against unfair trade, potentially causing a diversion of China's exports to other markets. On a different subject, we are very proud to share that last week the Roberto Rocca Technical School in Santa Cruz, located near Ternium Brazil facility, began its first classes. This is the second technical school that Ternium built and operate with the first one active since [indiscernible] near our Pesqueria facility in Monterrey, Mexico. The school will provide high quality technical education to its initial cohort of 192 students in the community and will accommodate close to 600 students over the next 3 years. All students at the Roberto Rocca Technical School Network receive scholarships based on their family financial needs, ensuring equal access to education. This initiative reflects Ternium's dedication to supporting the development of the communities near its production site and creating transformative opportunities for their youth. Turning now to Argentina. In 2024, shipments experienced a year of a real decline of approximately 20%. This reduction was primarily due to the implementation of macroeconomic measures by the Argentine government, which aimed to address substantial economic imbalance. Although Argentina's steel demand has been recovering throughout 2024, it's starting from a low base and has yet to return to historic sales volumes. The authorities in Argentina are advancing the transformation of the local economy through a process of the regulation, reducing public spending and taxes, and opening up trade. Although we welcome this transformation and even progress in this area could increase the risk of higher imports of unfair trade products in the steel value chains. I would like to close my prepared comments with a few thoughts. US trade measure against imports are currently fluid. During the first half of 2025, it is likely that we will continue to navigate this uncertain scenario in the North American region. We trust that at the conclusion of the negotiations, rational decision making will prevail, resulting in a region experiencing significant growth and improved defense against unfair trade practice. In the same line, the Plan Mexico recently announced by the Mexican government aims to address issues related to regional integration with a focus on industrializing for import substitution. The plan outlines strategies to attract investment and increase the local and regional content of manufactured goods throughout near shoring, infrastructure development and support for MSEs. In this context, our expansion projects in Mexico are crucial for strengthening Ternium's integration into the North American market. As rule of origin regards melted and pour steel products are expected to become stricter. In Brazil, Usiminas manufacturing facility achieved significant efficiency improvements in 2024, a trend we expect will continue in 2025 as operations are further streamlined. Finally, given the improvements in macroeconomic conditions in Argentina, I expect our achievements will continue recovering throughout this year. This concludes my remarks. Pablo, please proceed with the review of Ternium's performance in the fourth quarter.

Thanks, Maximo, and good morning to everybody and thanks for being with us today. Let's turn to the webcast presentation for a deeper look at our operations and financial results. If we begin in Page 3, we see that adjusted EBITDA decreased this quarter. The key factors behind these results include lower realized steel prices in our main market and the reduction in shipments. These were partially upset by an increase in the steel cost per ton. As we look ahead to the first quarter of this year, 2025, we anticipate a sequential increase in adjusted EBITDA supported by a marginal improvement and small increase in volumes. Moving to the next slide, net income for the fourth quarter was $333 million. The company recognized $404 million provision reversal for ongoing litigations related to the 2012 acquisition of stake in Usiminas. The main difference between net income in the fourth quarter and the third quarter was a decline in operating income, as we have already seen, along with a negative effect of changes in foreign exchange results. On the other hand, we record lower income tax charges and the provision mentioned provisional reversals. Regarding to changes in foreign exchange results, it is important to point out the impact of the Brazilian Real 12% depreciation against the U.S. dollar in the fourth quarter for Usiminas U.S. dollar-denominated financial debt. This is because Usiminas uses the Real as a functional currency, not the U.S. dollar. Now let's review the performance of our steel segments on Page 5. In this quarter, steel shipments across all of Ternium's key markets declined, primarily due to the typical seasonal reduction in demand by the end of the year. And additionally, the commercial market in Mexico experienced a downturn, as Maximo already explained. Looking ahead, we expect some increase in shipments in Brazil during the fourth quarter -- excuse me, during the next quarter of the year, first quarter of '25, while shipments in Mexico and Argentina are expected to remain stable. In the following page, we see the steel segment net sales declined sequentially by 14% in the fourth quarter. In addition to lower shipments, this decrease was driven by a reduction in realized prices across all markets. The decline in prices was partially offset by a reduction in cost per ton, which, however, was not enough to avoid the decrease in margins. It's worth noting that the pace of cost reduction in our books is slower than the decline in raw material prices in the market as the company is consuming high-priced inventories acquired in earlier periods. Next, let's turn to Slide 7 for the overview of our mining segment performance. Mining shipments remained stable during the quarter. But year-over-year, they were around 9% in the fourth quarter, mainly due to lower production levels both in Mexico and Brazil. On the other hand, margins improved, mainly driven by lower costs. Let's move on to the next slide to review our cash flow performance. Ternium reported cash flow from operations in the fourth quarter, supported by a decrease in working capital, mainly driven by lower trade receivables. CapEx increased as we advanced the expansion project in Pesqueria and finished the wind farm in Argentina. And additionally, we paid interim dividends in November. Even though we have the significant cash development in the fourth quarter, our financial position remains strong with $1.6 billion in net cash at the end of December, helped by a $2 million increase in the fair value of financial estimates. Let's now shift our focus to Page 9 to assess our full-year performance. EBITDA declined in the last 2 years, primarily due to the consolidation of Usiminas and the downward pressure of lagging steel prices. These factors have affected our results, are reflected in net income. The decline also incorporates the net provision I mentioned earlier, together with negative deferred tax result and the impact of a significant depreciation of the Brazilian Real during the year on Usiminas foreign exchange results. Ternium's cash from operation was solid in 2024, allowing us to finance the increased level of CapEx in the year. Looking ahead, we expect CapEx to peak in 2025, reaching around $2.5 billion. Important to mention, the Board of Directors put forward a proposal for an annual dividend of $2.70 per ADS. This represents a dividend yield of approximately 9%. We have already distributed an interim dividend of $0.90 in November. And subject to shareholders' approval, the remaining $1.80 will be paid out in May. All right. This concludes our prepared remarks. We are now ready to take your questions. Operator, please begin the Q&A session.

[Operator Instructions] Our first question comes from Carlos De Alba with Morgan Stanley.

So first question is, I'm going to try to press a little bit on the outlook for the first quarter. I know a lot of uncertainty out there, but how did you define a slight improvement, right? There is a wide range of consensus forecast, and so it will really help that you can provide a little bit more details as to how you see the quarterly evolving. And then also I wanted to also ask an update on the different wrap-ups and the Electric Arc Furnace project in Pesqueria. If you can, may be a little bit -- when do you expect the ramp-up of the finishing lines to be completed? And when do you expect cold coil and the hot-dip galvanizing new lines to be running at close to full capacity or full capacity if they start in December of this year? .

Carlos. We'll start with the second, which is much more direct and then try to answer the first one. Ramp up of Pesqueria. So in the finishing lines, sorry, in the downs -- we have 4 projects, let's put it that way. The pickling line and the finishing lines are already producing, are a little bit ahead of what we planned, and I think for the next 2 or 3 months, we are at full capacity, I will put it. Then we have the galvanizing line, which was supposed to start in December, we are not seeing any delay in the ramp-up curve that starts in December of this year. I mean all the equipments are there in Pesqueria, and we have all the people working in the construction and putting those equipment. In the cold rolling facility in the PLTCM 2, we were expected to start in March -- February, March of 2026, but we are seeing some improvements and some better advance in the construction of equipment and the facility, so we are expected to start in December of this year. So we are advanced, the rapid curve, a couple of months. So on those projects, we don't see any problem, and we are going forward at full speed. And the other one is the steel shop and the reduction unit, that is supposed to start in mid-2026, we are still having that date. But as you know, in that facility, we don't have yet all the contracts finalized. I mean we are finalizing in this quarter some of the contracts for equipment and, more important, most of the contracts for the construction. Although the construction is going through. So by the end of next quarter, we will probably have an idea exactly of when we will start, but we are still holding the time for mid-2026.

And just maybe to clarify, when do you -- when would you expect the cold roll and the hot-dip galvanized to be reaching full capacity?

Well, the ramp-up curve in these projects are usually between 9 months and 1 year. But they are steady producing -- starting producing day 1. And for example, in the case of the cold roll to get the 120,000 or 130,000 tons, it could get between 9 months and 1 year. That's what we have in our plans. We will try harder to get that closer to December of 2025. But for now, it's between 9 and 12 months. I hope that answers the question or the second question. So outlook, Pablo.

Okay. I'll take that. Carlos, as we said, we are expecting to see an increase -- more increase in EBITDA generation for the first quarter of the year. And this is the sum up of 3 different things that will happen in the quarter. First, volumes. As we have described and Maximo also described in the opening remarks, we are expecting to see a steady level of shipments in the different markets where we are. This, coupled with the issues that Maximo mentioned and also some seasonality, so we are expecting to sustain level of shipments during the first quarter. That's the first point. The second point is that though prices are moving, we see some decline in the average price of the company due to the issue that you know very well, which is that prices are reset every quarter, so all changes in prices are not reflected immediately. And the most important part is that during the first quarter, we will see a decline in cost differently from what we saw during the fourth quarter. This decline in cost will be higher than what we are expecting to see of the decline in prices. So we are expecting to see a better margin during the first quarter. We continue or we will continue to see the same situation that we saw during the first - during the fourth quarter of the year, which is that there is a delay in reflecting the prices throughout our cost structure due to first-in, first-out methodology that we utilize. So we are expecting to continue seeing the evolution of the cost reduction throughout the semester, and having a better picture in the second quarter of this year in that respect.

Your next question comes from the line of Caio Ribeiro of Bank of America.

So my first question on your stake in Usiminas, right? Later this year, you have the option to purchase Nippon stake within the control block. And Nippon has the option to sell that stake to Ternium. So my question is, is adding to your stake in the company something that you're contemplating now? And is there any color that you can share on how both sides see this particular transaction? And then secondly, still on Usiminas, with the blast furnace revamp completed, what are the next priorities that you see for the company. Right? Do you see a potential to greenlight the CapEx in the mine division this year or next? And if so, how would the company fund that CapEx?

Thank you, Caio, for the 2 questions. Regarding the first one, I mean, the only thing that happened, as I said, in July is that both Nippon Steel and Ternium, we have the option -- the options to sell or buy and they can exercisable. I mean we can exercise those from July. That's the only thing that changed in Usiminas. I clearly cannot speak of what Nippon is thinking of this. But from our side, I can say that, as you saw in the results, I am very pleased with how Usiminas and our partnership with Nippon Steel are performing today. So we will -- for now, we will keep working with the goal of bringing Usiminas to highest potential. Regarding the priorities in Usiminas, clearly, the CapEx in mining is one of the things that we are working. As I said in some other calls, we have to take the decision by the end of this year or the beginning of next year. But in the mean time, we are working very hard to get to the point of how to make the decision with most of the things done so that we don't have any delays if we go through that project. And the other priorities at Usiminas are clearly improving the performance of Ipatinga's mill, that's clearly a priority of the management. There are some investments we have to do and that we are doing in order to decrease cost and increase productivity. And the second is the commercial side where we have all the challenges with the input from China and how we approach customers and give more value to customers. So those are the priorities that we are working in Usiminas right now. I hope it answers your questions, Caio.

Yes, absolutely. That's very clear.

Your next question comes from the line of Alejandro Demichelis with Jefferies.

A couple of questions, please. The first one is, Maximo, you talked about Ternium being prepared to navigate the situation of tariffs and so on. Would that also include, say, putting on hold some of your new investments, what is in Mexico or any of those of the regions? That's the first question. And then the second question is in the case of Argentina, you talked about the situation about recovery efforts. Could you please talk also about the situation of the scrap exports and how that could impact also your cost base over there?

Yes. The second one, the scrap export, is not very significant for us. As you remember -- I mean, in Argentina, we don't use much scrap, it's different than in Mexico. And so the amount of scrap we bought from the market every month is around 8,000 tons. So it's clearly not an issue, the scrap. Probably it's an issue for other steel companies in Argentina that has a much more scrap basis in their inputs. But remember, us in Argentina, no. Regarding the call of new instruments, no, we are not thinking of stopping or postponing any investment. As I said, the PLTCM, the cold rolling mill and the galvanized are almost completed. I mean by the end of the year, they are going to be completed. And if you see what is happening in Mexican market, the Mexican market has a huge amount of imports from third countries, which we are not able to really attack, let's put it, or substitute -- that's better, substitute, because we don't have enough capacity probably to do so in the technical issue. So we are going to forward and it's very rational to continue. The other one is the steel shop. And the steel shop, I guess, probably in all this that is happening, as you mentioned, in this uncertainty in the North American market. One thing that sure is going to happen is that the rule of origin are going to be strengthened even more. So multi-temp requirements are going to -- we are going to need the melted and pour. And so for that, I think that strong -- the Pesqueria project strong the position of Ternium. I hope, Alejandro, it's clear.

It is very clear. And if I can follow up a little bit on that. So on the discussions that you're having with your main customers, particularly the -- in the automotive industry for the rest of the year, how are they indicating volumes, say, between now and the end of the year? .

They have any changes in the volumes. The auto industry in Mexico ended up a year with growth, and they are not indicating any changes. What they are doing is clearly working on changing some of the imports they have from third countries. So we are working with them to start changing or making running changes of imports they have from Asia, mainly.

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

I wanted to -- Maximo, I wanted to pick your brain really on the theme, I feel like, of the introductory remarks was really that China continues to be a big problem for the 3 main regions you operate. So do you have any level of optimism that those countries, Argentina, Brazil, Mexico, can implement enough barriers or will be interested in doing so to help prevent those problems in imports that you've been talking to any time soon?

Yes. I am optimistic in different levels, depending on the country. I mean let me put the perspective of China a little bit, and then I talk specific of what the 3 countries are doing. China or the steel in China -- but it's not only up to the steel industry, it applies to a lot of industry. So China has been decreasing consumption for the last 3 years, apparent consumption in the country. So it reduced, I think in average, 4% each year for the last 3 years. But on the contrary, production has been the same. So this is a huge imbalance of the Chinese steel industry. Export from China steel increased in 2024 by 25%. That's an enormous amount of steel. And then if you see the balance of what is happening in the steel industry in China, well, most of the companies are running out of money. So it's not a sustainable situation. Having said that, they are still exporting and doing all the things that have no sense. In our countries, I think Mexico is the one that's actually affected by this. Clearly, they understand very well what is going on in China, they understand the importance of defending the industry again unfair trade, and they are working in this sense. So they are putting the dumping cases. They are putting some tariffs. And I think that they are starting to work in other issues that are fighting shipments that is happening in Mexico, in the U.S., in Canada. So China is looking for ways to evade this tariff. And I think Mexico has very clear path how to work. In the middle is Brazil, which -- they made measures of this quarter, but clearly, this quarter, as I said, is not working. So the dumping cases have been presented. And I think the government -- I mean, I'm quite positive that the government is going to go through these dumping cases, which will be much affected barrier to unfair trade. Argentina, I think it's what -- it's a little bit behind all this, because Argentina still trying to stabilize the macroeconomy. But again, I think that some part of this year, they're going to start realizing that if we want to sustain an industry, we have to fight again unfair trade. That's simply the reason. So I'm optimistic that in some part of this year, they're going to realize this and we are going to work together doing this. Timna, I hope I understand -- I answered part of your question.

Yes. That was helping, Maximo. So I wanted to also put you on the spot regarding U.S.-Mexico trade policy on steel. So with -- in the past, you've also talked about how any tariff on Mexican steel could be positive for Ternium because any retaliatory tariff would keep -- because the U.S. net importer of steel, so if there were a retaliatory tariff then that outstate in Mexico and you could be -- you could fill the gaps and take share, right, from imports. But on the other hand, if -- now that those tariffs look to be applied to the downstream side, some downstream customers could be affected, and of course, you already addressed auto. So I mean any updated thoughts on retaliation? Or if the tariffs are in place as it is, is it more negative just because of your customer impact than the positive of no longer receiving U.S. imports?

Thank you, Timna. It's a very uncertain question to answer because, clearly, I don't know where this is going to end. What I can tell you is, first of all, Ternium, as of today, we don't export significant volume to the U.S. So 4% of our rolled -- flat-rolled products goes to the U.S. It's not a very significant amount. And as you said, in the relationship, steel relationship between Mexico and the U.S., Mexico has a huge steel trade deficit. I mean I think that it's the only country -- Mexico is the only country where the U.S. industry has a surplus and a surplus that is very big compared to -- between exports and imports. So I mean -- the challenge that both the U.S. and Mexico are working -- are facing today is not the trade between these 2 countries, but it's the trade we have in Mexico, that they have in the U.S. with all these other countries. So at the end, I think that the U.S. and Mexico are going to reach a reasonable agreement in this situation. I'm not seeing any scenario where it goes further, as you were telling, of tariff on both sides because, again, this should be a reasonable agreement given the situation. But again, it's difficult to speculate on all these negotiations that are going through between the U.S. and Mexico today.

I appreciate that, thank you Maximo, sorry to put you on the spot.

No, no, it's not on the spot. But I mean, it's negotiations that are happening right now. And again, when you see the numbers, when you see the -- especially in steel, it's very easy to reach an agreement. This shouldn't go further than reaching an agreement, Timna. And I think that's the best for all outcomes from the U.S., from Mexico, from the government.

Your next question comes from the line of Alfonso Salazar with Scotiabank.

Yes. Maximo, you mentioned in your presentation that we hope that rational decision-making will prevail. I think we all agree with you on that. Now the question that I have is regarding how is the U.S. planning to balance the supply and demand without the imports in the U.S.? I mean it doesn't look to me that's something that will be easy to do. Is the appetite to invest in more capacity? Given that there is a global overcapacity, what would be the implications for end users of steel? Also for the global scrap markets in North America and globally if there is more of the scrap in the U.S., I mean, it seems that it's going to have lots of ramifications that eventually would be severe. And we can end in a world which -- in which basically we have this bifurcation of trade with China selling more to other countries and selling more steel. And then you have like a sanctuary in -- not in North America any more, but only U.S. But that doesn't seem to be a situation that could stay for long. So any color that you can provide, especially how do you envision a market that is properly supplied without imports in the U.S.? And the scrap market -- the implications of the scrap markets as well.

Yes. Alfonso, thank you very much. It's a very good question. I don't know if I have the answer to that. I think it's a question for other companies. But I mean -- but you are right about -- I mean, I don't think that the outcome of all these negotiations could be that what you are saying. But as I said in the initial remarks, I know against the rest of the world, and I'm not capable of saying what would the relationship between the U.S. and China or Asia or Europe. But I am a strong believer in the advantage of the USMCA. If you see the story of the USMCA, which is not a very long story, the trade among the members of the 3 countries grew significantly over the last year in every way. I mean, from Mexico to U.S., but the U.S. to Mexico also, almost in the same amount. And the USMCA play a role in enhancing the competitive of the area. I mean, it's very reasonable. It's -- to think as the USMCA as a way of strengthening the supply chain there to get competitiveness for fighting or -- not fighting, but defending or competing with other regions like China. So for me, again, I think that, at the end, it will prevail because I think the USMCA is beneficial for the 3 countries. On the other side, I see how Mexico is reacting before all this trade -- even before all this trend, if you see the Mexico Plan, the Plan Mexico, that President Sheinbaum announced, I think, in the beginning of the year, is very focused on what we have been saying for a long time, in how we must focus on industrializing import substitution for Asia, strengthening North America supply chain. I mean if you hear to what Mexico is doing, the plan Mexico has, it's also going the same way. So again, it's -- I am optimistic that region will prevail. I can say you that also.

Yes. Just any comment on the global scrap trade and how you see that changing or unfolding given what we know about tariffs and the idea to produce more in the U.S., in particular?

Well, I think to produce more in the U.S., it's a long time. So at least any new capacity will be 3, 4, 5 years to come in, except of what we're already seeing in the U.S. So I don't think the there's going to be a lot of change. Of course, scrap, it's going to be -- but we know this, I mean it's going to be a market where more people are going to use scrap because we are changing the route from blast furnace to electrical arc, but this is taking a long way. So I don't foresee any major changes in the next two years.

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

Okay. Thank you very much all for participating. Very good questions. Always, your feedback is much appreciated, if you have any. Have a good day. We'll see or we'll talk in the next 3 months. Thank you.

This concludes today's conference call. Thank you for joining. You may now disconnect.