Ternium S.A. (NYSE:TX) Q4 2023 Earnings Call Transcript
Ternium S.A. (NYSE:TX) Q4 2023 Earnings Call Transcript February 21, 2024
Ternium S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to Ternium Fourth Quarter 2023 Results Call. Participants will be able to listen only until the question-and-answer portion of this call. Please note that today's call is being recorded. [Operator Instructions] I'd like to introduce the call to Sebastian Marti. You may now proceed. Thank you.
Sebastian Marti: Good morning, and 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 fourth quarter and full year 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. 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. 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 turn the call over to Mr. Vedoya.
Maximo Vedoya: Thank you, Sebastian. Good morning to everyone, and thank you very much for participating today in our conference call. 2023 was a key year for Ternium. We made good progress in several fronts following the transformation path we envisioned a couple of years ago. The new projects in Mexico are firmly under development. The new downstream lines in Pesqueria will enable us to offer new high value added products to our customers in the region. This capacity will be integrated with an upstream project, a new steel slabs mill currently under construction. This will be the greenest and most technologically advanced automotive steel -- product steel mill in the Americas. It will be able to supply the full range of auto products from exposed grade to advanced high strength steel.
This slab mills will be based on electric arc furnace technology that could be supplied with renewable energy. In addition, the project includes a direct reduction iron facility with capability to capture CO2. On the other hand, Ternium's new role in Usiminas is already showing good results for the company. The new management team there is taking decisions that are having a significant positive impact on its performance. In addition to these strategic developments, in 2023 Ternium had a solid year from a financial performance point of view, adjusted EBITDA, and net income was strong as well as cash generation. As a result of these good results and strong financial position, Ternium’s Board of Directors proposed an annual dividend of $3.30 per ADS, a significant year-over-year increase.
This is the highest annual dividend on record. As we continue to develop a consistent growth path for our return to shareholders. Let me now review the latest developments in our main markets. Growth in Mexico's steel market has been strong. Consumption of flat steel in 2023 reached an all-time high of more than 18 million tons, equivalent to an yearly increase of 18%. Our shipments in the country grew by 22% with a significant market share gain, supported by the ramp up of our new hot rolling mill in Pesqueria. The market environment in Mexico continues to be healthy, industrial activity strong, the auto industry is working at high levels of capacity, rebuilding stocks in the value chains. In 2023, automotive production increased by 14%, reaching 3.8 million units.
Construction activity in the country also remains at good levels with non-residential, like industrial warehouse, natural gas pipelines, and other infrastructure projects doing well. On the other hand, residential construction is being negatively affected by the increasing prices of construction inputs. The nearshoring of manufacturing capacity is clearly one of the factors contributing to economic activity in the region. Mexico offers a compelling combination of geographic proximity, skilled labor, and a supportive business environment, contributing to increased supply chain resilience. Looking ahead to the first quarter, we expect shipments in Mexico to maintain the strong level reported in the fourth quarter of 2023. However, there is a downside risk to this short-term volume view as steel prices in the region have recently begun a downward trend.
And there is some opportunistic demand retraction, which is typical in such a scenario. In addition, we anticipate lower cost per ton and slightly higher revenue per ton to push margins back up. Regarding our growth projects, we expect to integrate the first line of our downstream project in Pesqueria during the second half of this year with a startup of a 550,000 tons per year pickling line and the first lines of our service center. By the end of next year, we plan to start up the new galvanizing line followed shortly by the cold rolling mill. The ramp-up of all these new lines should enable us to gradually increase the value added of our shipment in Mexico. The construction of both our slab mill and the downstream lines is progressing as expected, with suppliers already assigned for all the main equipment and different level of advance in the work of each of them.
We have updated our budget for these projects and we are now estimating a total investment of $3.5 billion, up 9% from the $3.2 billion in our initial estimation disclosed one year ago. The main source of this increase were inflation on the pricing of equipment and fluctuations in the FX rate. Let's turn now to Brazil. After an increase in our participation, in July of 2023 we began fully consolidating Usiminas’ result. This happened during a transformational year for Usiminas as it successfully relined its main blast furnace. With the appointment of a new management team, Usiminas took strong decisions as, for example, putting out of operation one of the smallest blast furnace and one of restocking facilities. In addition, the new management team took decisions that lead to higher efficiency of the metallic charge in the actual process and lower fuel rate of the blast furnace.
This is part of a significant management initiative which focuses on Usiminas's industrial system with the aim of increasing its productivity. And it will continue to be Usiminas's focus throughout this year. Usiminas mining operation had a very good year with annual shipments reaching an all-time high of 9.1 million tons in 2023. On the other hand, Usiminas expects a deterioration in its mining business during the first half of 2024 due to the temporary stoppage of one of its oil processing plants and seasonal rains at the beginning of the year. A key issue in the steel market in Brazil is that adequate trade measures are taken to defend it from unfair trade, as has already been made in many other important markets like the U.S., Mexico, and Europe.
Import of steel so below cost of production is having a toll in the Brazilian steel market. The Brazilian Steel Association, together with all steel companies are actively trying to find a solution to this issue. For the first quarter of 2024, Usiminas anticipate a sequential improvement in the profitability of the steel business, mainly as a result of lower cost per ton, as the productivity of the steel business is gradually improving. In Argentina, a new government administration took office in December and is determined to introduce significant macro reforms. The first measures taken by the new administration were a steep devaluation of the Argentinian peso, significant government spending cuts with the aim of controlling inflation, and the proposal of several market friendly reforms.
These much needed reforms, although positive for the medium to long term, are expected to initially have a recessionary effect in Argentina's economy and consequently negatively affect Chinese shipment in the local market. If the government is able to successfully stabilize the macroeconomic situation in the country and introduce this market-friendly reform, Argentina is a country which offers many opportunities for all kinds of investments in different fields, which would bring a long-awaited path to economic recovery, something that would be very positive for our operations in the country. On the other hand, we are advancing in Argentina with the construction of our first self-owned wind farm, which will begin operation by the end of the year.
We are also analyzing ways of replicating this experience in other countries. Let me now make a few final comments before closing my prepared remarks. 2024 will keep us busy as we continue implementing our strategic plan which represents the largest growth initiative in Ternium's history. The development of the downstream project in Pesqueria will enable us to begin shipping higher value added products to our customers during the current year. We have a strong competitive position in Mexico, a market that is being significantly benefiting by the nearshoring of manufacturing capacity. Argentina, we have a bumpy year, But I'm confident we have the expertise to navigate through a rough period. We do have some opportunities to substitute any steel demand decrease in the local market with cheapens to other Ternium facility to complement their productions.
And finally, this is an important year for Usiminas, it has many opportunities for productivity improvement. I trust that the new management team in place will successfully guide it to its full potential. With this, Pablo, go ahead and review Ternium's performance in the fourth quarter, please.
Pablo Brizzio: Thanks, Maximo, and good morning to everyone. Let's review our company operating and financial results and the webcast presentation for a more detailed picture of our performance. If you want, let's start by Page 3, please. Ternium delivered strong results in the fourth quarter of this year, 2023. Margins in the period were slightly above our last quarter expectations, mainly due to lower costs. Adjusted EBITDA for the fourth quarter was $651 million, a 7% decline from the third quarter 2023. This decrease was primarily driven by lower steel prices, partially offset by lower costs. In addition, the profitability of Usiminas mining operation increased sequentially during the period. Adjusted EBITDA margin stayed constant at 13%, mirroring the prior quarter performance.
This relatively low level was again affected by the consolidation of Usiminas steel operation, which continued to record low profitability as it ramped up its main blast furnaces at Ipatinga facility. Looking forward, we anticipate an increase in adjusted EBITDA for the first quarter of 2024, primarily driven by an improvement in our margins, resulting from lower steel costs per ton and slightly higher revenue per ton. Going now to the results. Both net income and adjusted earnings per ADS drove notable strength during the fourth quarter. The results include non-cash positive effects from Usiminas post-retirement liabilities and contingencies reversals, along with a net foreign exchange gain related to a substantial devaluation of the Argentine peso against the U.S. dollar.
We will go deeper into this on the upcoming slides. Let's turn now to our shipments performance on Page 4. In Mexico, Ternium shipments remain strong in a seasonally weaker period, aided by continued growth of commercial customer demand. Equally remarkable, as Maximo mentioned, Ternium shipments in the country for the full year 2023 surged by 22% over the prior year, indicating substantial gain in market share, driven by the ramp up of our new hot rolling mill in Pesqueria. Looking ahead, we anticipate shipments to increase slightly in the USMCA region in the first quarter of 2024. In Brazil, the increasing volume reported in the second half of 2023, primarily reflected the consolidation of Usiminas. Usiminas expect stable shipments in the first quarter of 2024.
Steel shipments in the southern region decreased by 7% in the fourth quarter, as government imposed restriction on import of inputs affected Ternium steel production rates in Argentina. In the coming quarter, we expect demand in Argentina to decrease compared to the fourth quarter due to the seasonal slowdown and the impact of the macroeconomic reform in our value chain as Maximo explained. On the following page number 5, you will see that with this factor combined, we achieve in the fourth quarter very similar steel shipments compared to the third quarter. Looking ahead in the first quarter 2024, we anticipate slightly higher shipments in the USMCM region to be offset by lower shipments in Argentina. Moving on to steel prices, steel revenue per ton decrease further in the fourth quarter as expected, reflecting lower realized prices in most of Ternium markets.
Looking forward, as market prices in the USMCA region increase during the fourth quarter, contract prices in Mexico are resetting at higher levels in the first quarter. On the other hand, during January and February, market prices in the USMCA region have been decreasing. All in all, we expect higher realized steel prices in Mexico in the upcoming quarter. Now, let's review adjusted EBITDA and net income on a quarterly basis on Page 6. In the chart at the top, the primary factor contributing to sequential decreasing adjusted EBITDA was a decline in realized steel prices, partially offset by a better cost performance and a more profitable mining operation in Usiminas. I will show you the chart at the bottom, net income increase sequentially, driven by several positive factors.
$109 million gains from reversal of post-retirement liabilities at Usiminas, $63 million gains from a contingency reversal due to dismissal of public civil action against Usiminas, the favorable effect of the devaluation of the Argentine pesos on Ternium’s Argentina net short local currency. And finally, an improved deferred tax. On the other hand, net income was negatively impacted by the decrease in recurrent operating income and an impairment chart on Ternium’s mining assets in the fourth quarter of 2023. Now let's review in the next page our cash performance. You can see a healthy cash generation from operations in the fourth quarter, aided by a decrease in working capital. CapEx in the fourth quarter increased sequentially and significantly, reflecting the investment we are currently doing at our Pesqueria facility for our new project.
This was partially offset by lower CapEx at Usiminas as the bulk of the investment in the [indiscernible] furnace are now being left behind. Despite this higher CapEx level, Ternium managed to record positive free cash flow in the period. By the close of 2023, Ternium maintained a solid net cash position of $1.9 billion. This declined by around $500 million in the quarter, mainly due to a decrease in the fair value of the Argentine bonds, the majority of which are held by Ternium Argentina. These bonds are valued using Argentinian pesos quotation and reported in US dollar using the official Argentine peso exchange rate. The decrease in valuation was mainly the result of a significant devaluation of the Argentine peso by the end of the year.
And it reflected in other comprehensive income as long as these bonds are not sold. When eventually these bonds are sold, any positive or negative results in our comprehension income is recycled to financial results in the income statement. Let's now shift our focus to Page 8 to assess our full-year performance. Steel shipment surpassed those of 2022 by an increase of 19% with higher shipment in Mexico and the consolidation of Usiminas. Ternium adjusted EBITDA was $2.7 billion, supported by a record level of finished steel shipments and a healthy adjusted EBITDA margin. Despite the negative effects of the consolidation of Usiminas operation, as it [indiscernible] main blast furnace at Ipatinga. Adjusted net income remained unchanged in 2023.
With weaker operating performance, offset by positive effects on deferred tax of local currency fluctuations, and better net foreign exchange results mostly related to the fluctuation of the Argentine peso. Moving on to shareholder return, as Maximo mentioned, Ternium board of directors put forth a proposed for an annual dividend of $3.30 per ADS. The company already paid an interim dividend of $1.10 in November 2023 and intend to pay the remaining $2.20 on May 8, 2024 pending shareholder’s approval. As you can see in the chart, Ternium has been consistently increasing its return to shareholders over the last four years. The dividend proposal for 2023 is equivalent to a dividend yield of around 9%. Now, in the final slide, you can see the strength of Ternium cash generation in 2023.
Cash from operations was $2.5 billion and free cash flow of $1 billion of the CapEx of $1.5 billion. Looking ahead, we anticipate CapEx to be around $1.8 billion in 2024. All right, we have concluded our prepared remarks. Thank you for your time and attention. And we are now ready to take any questions you may have. Please operator proceed with the Q&A session.
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