Ternium SA (TX) 2021 Q3 法說會逐字稿

Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ternium Third Quarter 2021 Results Conference Call. (Operator Instructions) Sebastian Marti, you may begin your conference.

Good morning, and thank you for joining us today. My name is Sebastian Marti, and I'm Ternium's Global Investor Relations and Compliance Senior Director. Ternium released yesterday’s financial results for the third quarter of 2021. This call is complementary to that presentation. Joining me today are Ternium's Chief Executive Officer, Maximo Vedoya; and the company's Chief Financial Officer, Pablo Brizzio, who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, there will be a Q&A session.

Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation. 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.

Thank you, Sebastian, and thank you all for joining us today. Ternium reported outstanding results in the third quarter with a record EBITDA, sales, margins, and net income. With a strong performance expected also for the fourth quarter, we are headed to a record year in 2021. Let's now review the state of our steel markets. The global steel business environment remains healthy. The USMCA market continues to be relatively tight, although there are some signs this situation is moderating. Steel inventories in the U.S. are increasing, but continue to be at relatively low levels and lead tanks are also slowly normalizing. And a recent development, the U.S. and Europe announced an agreement to relieve the European steel imports from Section 232 tariffs, subject to certain conditions, including a specified maximum tonnage and the need for the steel to be melted and poured in Europe.

In this environment, benchmark steels in the U.S. currently remain at high levels. We continue to believe that steel prices are going to begin a down trade at some point in the following months, although we don't expect them to reach the lows we saw back in 2020. There are several reasons for us to have this view. Steel demand in the region is steady, especially in the industrial markets. Global supply chain continue having significant disruptions. Backlog in certain industries like automotive and wide goods should help sustain good steel demand levels into 2022. We are seeing near-shoring of manufacturing capacity to the USMCA region, and steel production in China is decreasing in line with the country's efforts to control carbon emission. Looking ahead, after a tight steel market in 2021, we expect the steel supply-demand environment to gradually balance in 2022 with steady steel demand and a normalization of global supply chains.

Let's move now to a review of our main markets. The Mexican steel market is currently showing 2 different business environments. On one side, the industrial market made up of the different manufacturing industries in the country is working at very high level of utilization to meet strong end product demand. The only exception to this is the automotive industry, which in the third quarter, continued to be significantly affected by the semiconductor supply chain disruptions. This is preventing OEMs from utilization -- from utilizing their full production capacity. So it is possible that Mexican outdoor industry production in 2021 and up being similar to that of last year.

Opposite to this broadly positive environment in the industrial market, the construction sector in Mexico continues to weaken. This sector has not been able to recover to pre-pandemic activity levels yet as the industrial sector is. Going to Argentina, steel shipments in this market has been pretty healthy for the last 12 months. After a lengthy restocking process following the covenant in related drop-downs, inventories in the value chain in Argentina are now back to normal level. The best-performing sectors are currently (inaudible) industry, the automotive industry, and construction. We expect to see relatively stable shipments in Argentina during the fourth quarter with some seasonally lower volumes by December.

Nevertheless, Argentina continues to suffer from significant uncertainty regarding its main macroeconomic variables and its capacity to renegotiate its debt with the IMF. Activity in 2022 will depend on how these pending issues are addressed.

I would like now to make a quick comment regarding the process on some of our sustainability initiatives in the quarter. In February, we announced a midterm target to reduce by 20% Ternium's CO2 intensity rate by 2030 together with the main initiatives needed to achieve this. One of these initiatives is the expansion of carbon dioxide capture capacity in our facilities in Mexico. This is not new for us. We have been capturing CO2 in our 3 DRI models for many years. These models in Monterrey and Puebla are among the greenest in the world, and they are actually very few of this kind out there.

In September, we finished the first stage of our new carbon capture program with the expansion of the carbon capture system of the DRI models at the Monterrey facility, with an increase of 38% in its capture and usage capacity. The CO2 is sold to industries, to different industries, avoiding new CO2 emissions and favoring secular economy. After this expansion, we expect to have clearly carbon capture and usage capacity of 285,000 tons of CO2 between our facilities in Monterrey and Puebla. This represents the annual emission of approximately 61,000, and we have a second stage in the making that will increase this even more.

Another development in this field since our last conference call is the signature of an MOU with Vale, our main iron ore supplier to jointly develop steelmaking decarbonizing solutions. We are analyzing different alternatives from this line and iron ore briquetting plant located at Ternium Brasil facility and plans to produce metallic products with low carbon footprint using Vale’s Tecnored Technology, Ternium's HYL and other technologies for iron ore reduction.

Also, as part of our ESG program, we received in September confirmation from UN Women to our application to be a signatory of the growing women's empowerment principle, which promotes gender equality. Diversity and inclusion are 2 important topics in Ternium agenda. We work to create a workplace environment that attracts and develop talent across all genders, nationalities, and generation, valuing our individual differences.

Another positive development in the quarter was Ternium's Board of Director announcement of an interim dividend payment of $0.80 per ADS. This decision reflects the strong business environment and the significant cash generation the company has achieved so far during this year. It also marks the transition from an annual dividend payment schedule to a twice a year payment with an advance in November and a final payment in May. I believe this change is in our dividend payment schedule is a very positive development that underscores our long-term commitment to the return to our shareholders.

Before finishing my remarks, I would like to make a quick update about the status of COVID-19 pandemic in Ternium. Active COVID-19 cases among Ternium's personnel are currently very low, reflecting a decrease in the rate of infections in Latin America over the last month. Despite this new -- this good news, we continue applying strict sanitary protocols in all our facilities. The government vaccination program has progressed well in the different countries where we have operations. And at the moment, 92% of Ternium's employees has received at least one dose of COVID vaccine, and almost 70% are fully vaccinated.

Okay. I will stop here and let Pablo go over our performance in the third quarter. Pablo, please go ahead with the webcast presentation.

Ladies and gentlemen, this is the operator. We are currently having technical difficulties. Your call will resume shortly. Until that time, your lines will be placed on music hold. Thank you for your patience. (technical difficulty) Ladies and gentlemen, we apologize for the delay. The conference will now resume.

Okay. Sorry about that. We are back here. So good morning to everybody. And let me discuss Ternium's performance for the third quarter and the expectations for the last quarter of this year. Ternium delivered a very strong set of results, actually the strongest in the company's history. We have a very high starting point here, but yet, the results the company expects to achieve in the fourth quarter should be very solid again. You can see on the page 3 of the webcast presentations, EBITDA is reaching $1.9 billion in the third quarter, representing 41% EBITDA margin and $612 EBITDA per ton and net income reaching $1.4 billion or $6.12 per ADS.

For the fourth quarter, we expect a sequential increase in cost per ton, partially offset by an increase in revenue per ton. With shipments remaining relatively stable, this should try to a slight decrease in EBITDA quarter-over-quarter. Let's analyze this in more details, starting with steel shipments in the next page of the webcast presentation.

On a sequential basis, Ternium shipments in Mexico and in the southern region decreased slightly in the third quarter. In the Other Market region, shipments increased 7% sequentially, mainly due to higher finished steel shipments as slab sales to third-party remained relatively stable. In the next page #5, you can see that combined in these developments, we are try to consolidate steel shipments of 3.1 million tons in the third quarter. This volume is the same as in the second quarter and 8% higher year-over-year. Looking into the fourth quarter, we expect shipments to remain relative stable, with slight finished steel increase in the Other Market region, offset by lower sales of slabs to third parties and lower shipments in Argentina and Mexico, in part affected by seasonality at the year-end of this 2021.

Now let's come in steel prices. Changes in revenue per ton has been relatively uniform across the company's main steel markets in their way, are to record high levels. Realized prices in Mexico and Russian market are expected to increase again in the fourth quarter, reflecting the outward trend in the U.S. spot steel prices we witnessed this year as contract prices in Mexico region were relaxed.

Turning now to net sales in the bottom left chart. The combination of higher realized steel prices and stable shipments resulted in a 17% sequential increase in net sales to a record high $4.6 billion in the third quarter. Moving to the next page. Let's review now the main drivers behind the sequential increase in quarterly EBITDA and net income. The EBITDA chart on top shows that it increased sequentially reflecting mainly higher realized prices, partially offset by an increase in cost per ton on higher raw material prices and purchase labs costs. We expect in the fourth quarter, a further increase in cost per ton as higher purchase price of raw materials and slabs continue to flow through the company's inventories. As I mentioned at the start of my presentation, the increase in cost and revenue per ton are expected to lead to a slight decrease in EBITDA in the fourth quarter.

The chart below shows the sequential increase in net income in the third quarter was due to record-high operating income, partially offset by lower results from our participation in Usiminas, which had, as you remember, a one-off gain in the second quarter. Turning now to Page 7. We can see the same changes, but for the 9 months of the year. The drivers of the record high EBITDA level in the 9-month period were the same as in the third quarter. For net income, the main drivers of the increase were record-high operating income and equity in earnings in Usiminas.

Now in the last page, let's review the finish -- and to finish this presentation, our quarterly cash flow, and balance sheet performance. Cash flow from operations in the third quarter was $586 million, even after a significant increase in working capital. As you can see in the upper right chart, the increase in working capital was a result of a combination of factors, such as higher steel and raw material costs, higher inventory volume in part related to the ramp-up of the new hot rolling mill in Pesqueria. Trade receivables also increased mainly as a result of higher selling price with just slight increase in days of sales. Regarding the decrease in commercial debt, it was mainly the result of the decrease in iron ore prices in Ternium Brasil. Looking forward, steel prices continue to be high, and the new hot rolling mill in Pesqueria advances in its ramp-up process, we should see some investments in working capital, but nowhere near the figures we registered in the third quarter.

Regarding free cash flow, the company generated $475 million after capital expenditure of $111 million in the quarter. This led turns to a net cash position of $271 million as of the end of September. As Maximo mentioned, take into consideration the strength of the company's performance and financial position, the Board of Directors have proposed an interim dividend payment of $0.80 per ADS, equivalent to $157 million payable on November 16th to shareholders on record as of November 15th.

Okay. With this, we conclude our prepared remarks. Once again, thank you very much for your time and attention. We are now ready to take your questions. Please, operator, proceed with the Q&A session.

(Operator Instructions) Your first question comes from the line of Caio Greiner with BTG Pactual.

So my first question on your outlook. So you mentioned you expect slightly lower EBITDA for the fourth quarter. And I just wanted you to elaborate a bit more on what you're seeing in terms of realized prices and costs for the coming quarter. On prices, you already have a good visibility on the rare adjustment of your contracts. I do understand that. But what do you expect for the commercial side and other shipments based on spot prices for the fourth quarter? And on the cost side, you mentioned raw materials, cost inflation driving up costs. And I would assume this is mostly coal prices on the rise flowing through the results.

But on the other hand, you also have iron ore prices materially dropping over the third quarter. So if you could please provide some more details on this equation, that would be very helpful. And my second question, if I may, on Pesqueria. I mean, you guys mentioned the project has been ramping up at a slower pace. So I just wanted to see if you can maybe update what you expect in terms of shipments for the project, that equation of incremental shipments that you guys have been sharing with us over the last quarter. So if you can maybe share what you expect for the fourth quarter and for 2022 in terms of incremental shipments from Pesqueria, that would be very helpful.

Thank you, Caio, for your questions. Let me try to answer your questions. Regarding the cost, the increase in cost is from the slabs, from the purchases of slabs because, as you said, iron ore is decreasing and it compensate by the cost of carbon, which increased dramatically. So both those prices compensate each other. But the slabs we were buying were higher for the fourth quarter than for the third quarter. As you remember, some part of our slabs, we ship them from the Brazil operation, but others we buy in the market. So that's the increase in the cost. And prices is, as you said, prices in the industrial market are going to be higher because of the reset of the contract prices.

Quite in the commercial market, as you know, there are spot prices, and as you saw, the prices of the CRU, for example, in the North American market, it decreased a little bit in the last 2 weeks. So we expect that slow decrease of those prices, at least from the Mexican market, not for the other markets. Pesqueria update. Our plan for Pesqueria is -- we have this setback because of the permission issues. To be honest, the equipment was ready and was running, but this authorization for the transportation of natural gas was unforeseen delay we had. But now the ramp-up curve of the facility is now okay. I mean, we are again in the ramp-up curve. Our expectation for 2021 is that the facility is going to provide us between 1.5 and 2 million tons of additional volume. Some of that volume is going to the Tenigal facility, which before that imports material. But probably, those are the numbers, Caio.

Just to clarify, Caio, we are referring to 2022 volume...

2022, yes. From the year.

Okay. That's great. Understood.

Your next question comes from the line of Jonathan Brandt with HSBC.

My first question relates to pricing and auto demand. So you mentioned that auto demand wasn't great. I'm hoping you could quantify that a bit, what you've been seeing over the past few weeks, and what your expectation is for 2022? And if this is, at least in your view, why you think steel prices in the U.S. have been coming down? And sort of how much further do you think they could come down given the loosening of the steel supply-demand environment that you're seeing?

My second question just relates to the natural gas that you have in the Mexican facilities. If you could just sort of help me understand how much of the natural gas price increase that we've seen in the spot market, how much of that will increase your cost base? Are you on contracts? Or are you supposed to spot? Any data you could give around that would be appreciated. And then just a quick third one, if you'd allow me, just on the dividend payment. Could you just sort of elaborate as to why you decided to change the policy or why the Board decided to change this policy from annual to semiannual? Thank you.

Thank you, Jonathan. Well, a lot of questions. I'll start with the natural gas because it's very simple. All our -- we have contracts for the volume of all the natural gas, but that contracts are always based on the Centrica. So yes, with a little bit of luck, but the increase in can recap, not in LNG. In Centrica, we suffered that on our cost. That probably is also -- I forgot to mention in the cost part in the first question. Thank you, Jonathan. Second, automotive industry, but the automotive suffered more than what we thought. I mean, the third quarter production in Mexico, I think the number was 220,000 ton per month in the third quarter. And that's -- and the affection was almost like 70,000 units every month because of this -- because of this chips. This was much bigger than the one in the second quarter.

So that was a little surprise for most of the market, even for the automotive makers in Mexico. Things as we are seeing, are starting to get a little bit better, not still normalizing. And what we are hearing is that normalization will come in the first, second quarter of the year. But to be honest, last few months before this was 3 month, they expected this much earlier. So yes, we have an impact. The numbers these are, I mean, from 220,070, these are monthly numbers. And this could have an effect on the price also because some of this volume is in storage. I think, Jonathan, another question of you was about the steel prices in general. I can -- I don't remember very well.

Correct. I'm just wondering what your expectation is of U.S. steel prices, given sort of the auto industry issues with the chips?

Well, I don't think that the automotive industry in the chips is affecting -- so it's one more factor in an enormous amount of factors that affect the U.S. prices. And again, the U.S. prices are at a level -- at a very high level. I mean, we repeat this in most of our conference calls. I think the drivers that are set that the price is going to decrease. I can tell, I mean, clearly, U.S. capacity is back to pre-pandemic steel capacity. It is back or even higher than pre-pandemic levels. Inventories in the country are increasing and lead times are still far away from normalized, but a much shorter than they were a couple of months ago. I mean, lead times of hot-rolled coils now are between 5 and 7 weeks. Normal of that is 4 weeks or 3 weeks, but it's far away from the 12 weeks, it was.

Steel imports are high yet. And some new capacity, it's coming on board in the next couple of months. So those are drivers that said that the price is going to decrease in December -- in the next month. But on the other hand, the drivers that doesn't speak to that, I mean, demand is very, very good. I mean, if you see this year, Mexico is going to increase consumption by 13%. That's a huge number. U.S. by 15%. Other countries in the region, even by more, Brazil by 24%. This is the demand increase. We are seeing in 2022, also demand very kind in a lot of sectors and if the chip problem is resolved, there is a lot of unsatisfied demand that I think -- those companies are going to produce more cars.

Disruption in the global supply chains, I mean it's still there. And I know a lot of consumers of steel are thinking of importing even less for next year. And freight costs are continue increasing. So this getting much more expensive to move steel. So I think, as you said, another factor also, 2 other factors, I think, Jonathan, is, one, China production. I mean, in May, China produced almost 100 million tons. And September, that was 73 million tons. That's a huge decrease in the production, which was always a factor that changed the dynamics of the market. And as we heard, this is going to continue to decrease. And so several factors that we see that we are going to have a healthy steel demand in 2022. So prices, as I said, are slowly moving down, but they're going to move slowly down, not at high speed because of all these things I'm telling, I don't know if I answer or correct the question, Jonathan. I take a little bit of time.

No, that's perfect.

So I ask Pablo to answer the question of the dividend.

Okay. Yes. So I think that the move taken by the Board, this is a natural move after increasing the level of dividend paid with the results of 2020 at the beginning of 2021 and as was commented during different conference call, since this new level is reflecting the strong position of Ternium and the free cash flow generation of the company. And so we consider it is natural in order -- or in way of sustaining this new level of dividend that this one is divided into an interim dividend in advance, which is a portion of the dividend that then will be decided or proposed during the quarter of February. So it's clearly as a way of sustaining this new level of dividend that the company decided to be valued into 2 portion in advance as an interim dividend and then the full confirmation of the full dividend announced by February.

Okay. So we shouldn't look at this as just split equally in half. So it won't be up 1.6% for the whole year. It's just some portion of it?

Exactly. Yes. You shouldn't take as a half. It's just a portion of the dividend that then will be discussed analyzed by the Board of Directors and then approved by the shareholders meeting in April or May, and this will be the one. So yes, you're right.

Your next question comes from the line of Thiago Lofiego from Bradesco BBI.

2 questions. Back on the dividend question. 2 questions within that. So why are you not more aggressive on the dividend side, given your net cash position and the positive outlook for the business? Even if steel prices are potentially going down, you guys are doing an excellent job. Steel margins are still pretty healthy. So why not more aggressive on the dividend front?

And within that same question, what should we expect in terms of average payout? Historically, you've paid more like 30% level, would it be reasonable to think about a 50% payout or something within a 50% to 60%? I'm not sure. And then my other question is on the impact of the U.S., Europe on the S232. What is the impact that you're expecting from that, if any? And what do you guys think the next steps will be in terms of the S232 per se?

Thank you, Thiago. I'll start with the second one. We are not seeing a lot of impact from this arrangement. I mean Europe was already importing or exporting materials to the U.S., paying the 25% tariff. I think the numbers are very similar. So I don't think that much, much more volume from Europe is going to the U.S. I think what we are going to see is probably that Europe increases a little bit of prices, so that they don't have to pay now the 25%. Second, on the dividend. Well, we thought we were a little bit aggressive because our policy was always to pay once a year. And now within this interim, we are kind of -- I don't know, making forward, at least a portion of that interest that dividend that we paid in May. But for the second part of the answer, I ask Pablo to answer it.

Okay. Yes. Let me add to that, Maximo. Clearly, the company showed an increase in the dividend payment during this year with the results of 2020. And clearly, we understand that what we are showing today is that this is a new normal or a new level that is reflecting, if you want more aggressive dividend payment from the company to reflect the return that we are returning to the shareholders. And on the long run, the numbers will be basically very similar, Thiago. The dividend yield or the dividend payout in the long run will continue to reflect probably the number that you mentioned, in a specific year, probably is not exactly the same, but the company has been showing a sustained increase in dividend payment.

We pick up last year with the dividend we paid in May 2021. And what we are doing right now is sustaining this new level of this distribution of dividend to shareholders. So we understand that, of course, you can always be more aggressive on dividend payment, but the company is showing that as the results of the company are where the dividend payments have increased and sustained. And in general, the payout ratio in the long run should be sustained.

Okay, Pablo, so if I may, for modeling purposes, looking into 2022, would it be fair to assume a payout ratio above the 30%, which is the normal payout ratio for you guys? And then as we normalize the model, we should continue to assume 30%. Is that fair?

I think that you need to take in the long run, this 3%, probably this year is different because the numbers, you basically -- you know the numbers that we will be or will we be proposing to pay a dividend in the next vote. And again, probably this year, the results of 2021 will be extraordinary in comparison to the normalized level of the company. And probably there, you have a difference. But in general, this would be -- I mean if you look at the history of the company, you will be -- you will see that in average, that was our dividend yield.

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

I just want to follow. So just to clarify then, the dividend policy is based on a percentage payout ratio or more than a dividend yield? That will be my first question. The second question is if you could comment as to the levels of profitability that you are experiencing in Brazil, given the different moving pieces, slab prices, raw material costs, and coking coal and natural gas, and the currency. The third question, if I may, if you could comment on any potential plans to restructure the corporate structure has to change, improve, modify the corporate structure of the company in terms of who owns what and potentially making it more transparent or more easy to understand, less convoluted and therefore, easy for the market to value the company?

And then finally, and I apologize for all these questions, but I'll just put them all out there at once. If in terms of the timing of the potential next big projects, I mean, you are a company that is always investing sometimes improving technology, the cost, trying to reduce cost, sometimes expanding capacity or adding value. Could you comment as to what are the potential next projects on the timing? And then any update on CapEx for this year and next year?

Thank you very much, Carlos. If you allow me, I will start with the last one. Which is very interesting. As you said, we are always looking for new or big projects. And as I said in the last conference call, we are -- we don't have any particularly now to announce, but as you know, the ramp-up of the new hot-rolling mill in Mexico, which took us 2 months more than what I expected because of these problems in Mexico, open ups very -- a lot of opportunities. I mean -- and you're going to ask me like what? I am going to say like an additional in picking line, a cold rolling mill, a galvanized capacity, all are those things that we are analyzing in Mexico.

There are also other things that are in the process where we should support the growth we have in the Metal Building segment platform in the south of the U.S. And so we should increase our prepainting capacity we have there. And also, I mentioned in the last conference call, and I think you asked me about if it was going to be blast furnace or no. But we are going to be USMCA compliance in 6 years. So we are going to require to expand our upstream capacity, and we are analyzing today how, where. So these are all things that we are analyzing right now, opportunities that I think will strengthen our strategic position in the market. And it's going to be a good return on investments. So those are the things we are looking at right now, Carlos. And for the dividend part of the other question, Pablo, can you answer them?

Yes, sure. No issues. And just to complement on that one, Carlos, you asked on the amount of CapEx. We are keeping exactly the same numbers because, as Maximo is mentioning, we are still studying which are our moves. So we will be close to $600 million of CapEx for this year and without any new CapEx as the ones that Maximo mentioned that we are analyzing continuously to be exactly the same. So go into your questions, let me clarify first that we, as a company, do not have a recent dividend policy. So it's not that I can tell you that exactly which will be the number. What we have is a very clear track record of dividend payment with very important increases and sustaining or moving around certain levels.

And as I was answering with Thiago's questions, well, we have a payout ratio of around 30% on the long run. But again, probably when you have some years where you have a higher result or a lower result, it's not exactly because, again, we don't have a great dividend policy, and this is defined by a proposal from the Board of Directors and then approved by the shareholders' meeting. But in general, you need to look at the change and what we are doing and with the changes that we're doing to reflect the results from the company.

The other question that you asked was in relationship to the corporate structure, which is something that we pay very significant attention, and if you look at, again, at the history of Ternium, we have done a lot of things, and we have reduced the level of intermediate companies. Whenever we have an acquisition, we try to simplify as much as we can the corporate structure. We are still some things to do in order to fully simplify the corporate structure. And it's a plan that we have always had in our mind. And if there is a chance to do it, we will try to do that, if it is reasonable. Unfortunately, we don't have this chance specifically at this moment because it includes some other issue that is not dependent only in -- if everything that was possible for us to do, we have already done. We are still missing a part. And as soon as we have a chance to do it, and we can do that, of course. It is something that we clearly want to do to finalize the simplification of our corporate structure.

So -- and the last one, which is a question regarding the margins in Brazil. Clearly, Brazil has been contributing extremely well to the numbers of Ternium because the prices of slabs also were reflecting the level of pricing that we see in other markets. There was a correction on the prices of slabs in the last quarters, on the last month. Now its returning to a more normalized level. And again, the margins of producing slabs continues to be quite positive. And as also Maximo mentioned during the opening remarks and during the answers of different questions, the production of Ternium Brasil will be mostly dedicated to supplying our internal needs. So that's why we were mentioning that you will see some reduction in shipments of slabs to third parties that will be compensated by sales of finished product. That was our original plan, as you know, from talking to (inaudible).

Just one very fine question on Ternium Brasil. I think in the past, the normalized level, the normal long-term level of profitability was mentioned about $50 EBITDA per ton. Is this still something that applies today? Or has it moved higher?

Fortunately, for us, it's not because the number, as you know, is much higher these days, having more than $60 per ton of EBITDA. In general, the numbers of Brazil is much higher than this number. And you are right that this was a number at the very beginning that we were looking for because it was the typical margin of slab producer. I think that, that improves, and we sustain it at a higher level than this one. But of course, I don't want to repeat what Maximo was saying because we understand that pricing environment will be adjusting a little bit, but we will continue to have -- and this is our expectation, at least enter into next year, better margins than expected.

Your next call comes from the line of Alex Hacking with Citi.

So my first question is around pricing. A couple of the U.S. steel mills on their conference calls this quarter are targeting that they should realize higher deal prices next year than this year. And this is even considering the HRC forward curve, which is in a steep backwardation. And the reason for that is obviously the lagged effects of higher contracts rolling over. So could you just remind us for Ternium, how exposed are you to lag contracts, particularly annual contracts in Mexico? And I know you don't give any -- I know you don't give forward guidance on pricing. But I mean, is this something that could be realistic for Ternium as well, but actually, even as U.S. prices roll over that you could be better next year because of the lagged effect of contracts?

Thank you, Alex. A very good question. I try to answer. But I mean, you are right. What the U.S. producers or our competitors are saying is in the industrial market. The contracts, they have a lot of contracts that are annually based contracts. To be honest, we don't have -- our main contracts are quarterly basis or every 6 months. And we don't have a lot of annual contracts in our industrial base customers. So it's true that our contracts for the fourth quarter are going to -- the quarter contracts for the fourth quarter are going to be higher. And for next year, probably most of our first 6 months are going to have contracts that are higher than the ones of this year. But as we have a huge amount of contracts that are quarterly based, it is going to depend in general of what the price would be in the second quarter of next -- in the third quarter of next year. So again, it's -- it probably is true, but it's not as strong as in the U.S., I think.

Okay. So we should be thinking more of...

To be honest, I prefer to have contracts every 3 months.

Okay. So we should be thinking more of like 3 to 6 months lags.

Exactly.

Okay. And then my second question, which is a bit random, actually, is around prime scrap. So you just mentioned in your answer to one of Carlos' questions. But you -- at some point, you'll be looking to add upstream capacity. I'm sure you know that that's a spirit debate in the U.S. steel market right now about prime scrap, which some people think is going to get quite tight. It would seem like Mexico is a good source of prime scrap, right? You have this big build-out of the manufacturing base, particularly automotive. I know that the new mill in Texas is looking to Mexico for prime scrap. Is this something that Ternium is looking at? Because it would seem like you could maybe have a first-mover advantage in getting access to that.

Alex, you are completely right. This is one of the things that we are looking at also.

Our next question comes from the line of Lucas Yang with JPMorgan.

I have 2 quick ones. First one would be, would you consider hedging through prices given like more balanced outlook for next year? And the second question would be...

Sorry, Lucas, I couldn't hear the first question.

Sure. Would you consider hedging steel prices for next year? And the second one would be that the future curve is pointing to prices around $1,000 per ton by mid-2022, right? How does this curve compares to your expectations?

Okay. Maximo, let me take the -- let the first part of the question on prices. Because of the structure of prices that we have, we think that we have kind of a natural hedge, and we are not planning to further increase the hedging of our structure beyond what we have today. And you know that in -- I think this is an advantage of Ternium, the different raw materials that we have, for example, in Mexico, we are fully hedged on that. In natural gas, we are exposed to the, as Maximo explained, and this is yielding, of course, an increase, but we are still at regular levels -- and then this is reflected in the price of the finished product. And again, we are exposed to different raw material. But in general, we consider that we are in a good position. We have got, of course, hedging strategies in the past in relationship to this infra material, but we don't think that we are now in this moment to go back to this level or this hedging for next year.

And so what was the second question?

Yes, the future curve is pointing to prices around $1,000 per ton by mid next year, like how does the curve compares to your expectations?

Well, I think those are very, very low. I mean, without -- what I said about prices, Luke, I am not seeing prices going down to that level.

That concludes today's question-and-answer section. Maximo, you may turn the call back to you.

Okay. Thank you, everyone, for your interest in – interest and participation today. Please keep in touch and contact us if you have any comments, any additional questions. Have a nice day, and we see you back in 3 months.