Ternium SA (TX) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Ternium Fourth Quarter 2020 results.

(Operator Instructions) I would now like to turn the call over to Mr. Sebastián Martí.

Please go ahead.

Good morning, and thank you for joining us today.

My name is Sebastián Martí, and I am Ternium's Investor Relations and Compliance Director.

Ternium released yesterday financial results for the fourth quarter and full year 2020.

This call is complementary to that presentation.

Joining me today are Ternium's Chief Executive Officer, Máximo Vedoya; and the company's Chief Financial Officer, Pablo Brizzio, who will discuss Ternium's business performance and environment.

At the conclusion of our prepared remarks, there will be a Q&A session.

Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied.

Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation.

With that, I'll turn the call over to Mr. Vedoya.

Thank you, Sebastián, and good morning.

Thank you very much to all of you for participating in this conference call and your interest in Ternium.

I am glad to share with you, today, a very good set of results for the last quarter of the year, which has been -- actually been better than the ones we expected on our last conference call.

Even though the pandemic continued to impose operating difficulties on all our facilities in the fourth quarter of 2020, we took steel shipments to pre-pandemic levels, reaching 3.1 million tons, where we were also able to take advantage of an attractive steel business environment, showing a significant increase in our margins to 25% in the fourth quarter while never losing sight of a strict cost control.

Our current expectation is that Ternium's margin and EBITDA will continue to increase in the first quarter of the year.

I'll let Pablo elaborate on this later on.

Turning now to Ternium's full year results.

In 2020, we repeated the EBITDA of $1.5 billion we recorded in 2019.

As all of us are aware, 2020 was a particularly difficult year to manage an industrial operation like Ternium's.

It required the full dedication and commitment of all our people.

The results we were able to obtain show this successful team effort.

Ternium's performance and results over the second half of 2020 were outstanding.

Taking this into account, Ternium's Board announced yesterday its dividend proposal for the year with an amount in line with our comments on previous conference calls of $2.10 dividend per ADS to be paid in May after the expected approval of the shareholders meeting.

The return to shareholder is embedded in our company's culture, something that can be reflected in the long track record of progressively higher dividend payments over the last 15 years.

We intend to continue returning capital to our shareholders as we have done in the past while, at the same time, growing our company profitably when we see an opportunity to do so.

We trust we are going to be able to do this while maintaining, as usual, a strong balance sheet.

In yesterday's Board meeting, the Board also discussed in depth several initiatives related to sustainability.

The care for the environment is a key aspect of Ternium's operations.

The steel industry, as many others, has been increasingly allocating resources towards improving its environmental footprint.

In the last 5 years, Ternium invested approximately $300 million in environmental and energy-efficient related projects throughout its facilities.

We have launched now an additional $460 million plan, the majority of which will be implemented over the next 6 to 7 years.

Climate change was also a key part of the Board's discussions, as we have been working for some time now in a plan to reduce our CO2 emissions.

The results of this work is our first road map to decarbonization with a medium-term target of 20% reduction of CO2 emissions per ton of steel produced by 2030.

The main initiatives we intend to pursue to achieve these targets are increasing the participation of energy from renewal source in our facility to approximately 40%, increasing the scrap share in metallic mix, increasing carbon capture capacity at our DRI facilities in Mexico, partially replacing met coal with charcoal in Brazil and Argentina and prioritizing lower specific emission steelmaking technologies.

And we are also working on plan to continue decarbonizing our operations beyond 2030.

To better manage all these issues, we have recently put in place a reorganization of our environmental functions, with 2 distinctive structures: one to tackle with long-term strategic environmental decisions and another to oversee the day-to-day environmental issues.

In addition, the Board of Directors has nominated 1 representative of the Board to oversee, on a quarterly basis, Ternium's climate change strategy.

Carbon neutrality is a goal that can only be achieved if all parts of society work together.

I expect there will be many more things in years to come that we will be able to do to improve our carbon footprint.

So you will continue hearing more from us on this subject in the near future.

Let me now make a quick comment regarding the business environment in our main markets.

In Mexico, we are having strong demand from industrial customers, mostly driven by finished goods exports.

Although industrial customers improved demand, it is what is widespread, the household appliance industry currently stands out as the strongest sector and the auto industry as the relatively weakest as it's been affected by a semiconductor logistics bottleneck and its supply chain.

Until the beginning of last week, our facilities in the country have been running at full capacity.

But extreme weather conditions in the Southern U.S. and Northern Mexico caused the interruption of a stable provision of natural gas and energy in this area, with a negative effect on production for approximately 80,000 tons.

All facilities in the area are currently back to normal operations.

As a result of these events, we expect shipments in Mexico in the first quarter of this year to remain at levels similar to those of the fourth quarter of 2020 instead of sequentially growing.

Our expansion projects in the country continue advancing as planned, with the new hot rolling mill at the Pesqueria facility expected to begin operations in 4 months.

Mexico is our biggest market in the region, and we believe we are uniquely positioned to take advantage of the opportunities the USMCA and especially ensuring our manufacturing capacity will offer us in the future.

The decision we took 3 years ago to expand our capability to supply sophisticated industrial customers in the region is finally coming to fruition.

And I really believe this will transform our company.

In Argentina, our shipments continued increasing in the fourth quarter even after significant recovery in the third quarter, driven by growing demand for durable goods and building materials.

This mostly reflects a shift in consumption patterns to our home improvement expenditures as it happened in other markets in the region.

Even though the first quarter of the year is the seasonally weakest in the Argentinian market, we expect shipments in the first quarter of 2021 to remain at high levels.

Finally, turning now to Brazil.

This is a market that most swiftly recovered activity after the pandemic-induced lockdowns.

Our slab facility in Rio de Janeiro is working at full capacity, and we are increasing its integration with Ternium Mexico in the first quarter.

So we expect lower slab -- sales of slabs to third parties compared to the fourth quarter of last year.

2021 will be a pivotal year for Ternium.

We are going to be adding significant state-of-the-art capacity in Mexico, expanding our product range, and, at the same time, increasing the cost efficiency of our operations.

This new capacity will also allow us to integrate even more our industrial system in the Americas with the help of our strong steel base in Brazil to better serve customers all over the region.

In Colombia, we recently commissioned our greenfield rebar facility.

Colombia's President, Mr. Iván Duque, was present at the event as well as several members of his cabinet.

And on his inaugural speech, he was very supportive of the commitments of the country's government to prevent and fair trade.

This new facility will significantly strengthen our presence and competitive position in Colombia.

Wrapping up my remarks, first, I would like to acknowledge our people effort in last year, which made possible the amazing results we showed.

I'm proud of their commitment and teamwork in this very, very difficult year.

Going forward, the following years will be a turning point in Ternium's life.

First, the new hot rolling mill at Pesqueria facility will substantially increase our capability to serve the market with sophisticated products.

Second, I have no doubt the USMCA region will continue providing opportunities to develop our company.

And finally, we will continue working towards Ternium sustainability and decarbonization.

This is key to continue delivering value to all of our stakeholders.

I leave you now with Pablo, who will review our performance in the fourth quarter.

Please, Pablo, go ahead.

Thank you, Máximo, and thank you, everybody, for participating in our call.

And let me review the results for the fourth quarter of 2020.

Indeed, our performance in the fourth quarter has been remarkable, above our expectations.

Higher steel prices in our main market, especially in North America, have combined with a boost in demand for the steel products to drive Ternium's profitability and results to extraordinary levels, with higher raw material price not yet fully reaching our cost of sale line.

On top of this favorable development, net income was positively impacted by 2 nonrecurring events that we will see later on.

Let's start in our presentation on Page 3 with the company EBITDA and net results in the fourth quarter.

EBITDA reached $645 million, an EBITDA margin of 25% or $210 per ton, a significant improvement by any measure, both sequentially and year-over-year.

We will see this in more details in the next slide.

Net income in the period was $671 million or $3.06 per ADS.

This outstanding result is the outcome of strong operating performance, but also includes the positive effect of $186 million noncash gain related to the derecognition of a contingency on certain tax benefits at Ternium Brazil equivalent to $0.95 per ADS and the net positive effect of a 13% appreciation of the Mexican peso against the U.S. dollar in the fourth quarter.

In the next slide, we will review these developments too.

As for our expectations for the next period, we see sequentially higher margins, driven by a higher EBITDA in the first quarter of 2020.

Turning now to Page 4. Let's review the performance of our shipments in each region.

In Mexico, shipments in the fourth quarter fully recovered from the impact of the pandemic, as expected.

Shipment volume increased by 14% on a sequential basis and 6% year-over-year.

Looking forward into the first quarter, we expect sequentially stable shipment volume in the country, mainly as a result of the described -- this -- the interruptions in the production that Máximo called on.

In the Southern region, shipments in the fourth quarter 2020 surpassed pre-pandemic levels by a wide margin, supported by increased demand of durable goods and construction materials in Argentina.

The shift in consumption patterns in Argentina continues, somewhat influenced by the COVID-19 pandemic.

So looking forward, we expect the shipments in the region to stay strong in the first quarter of the year.

In the other markets region, there was a sequential and year-over-year decrease in shipments in the fourth quarter, mainly of finished steel products.

We expect a higher integration of Ternium slab facility in Brazil with the company's industrial systems in the third quarter of 2021, with a consequent sequential decrease in volume of slabs from third parties.

Turning now to the next page.

Ternium's consolidated steel shipments reached 3.1 million tons in the fourth quarter, up 8% sequentially and 5% year-over-year.

Consolidated steel shipments in the first quarter 2021 are expected to be similar to those of the fourth quarter on relatively stable volumes in our key markets, as already discussed.

Revenue per ton increased sequentially and year-over-year in the fourth quarter of the year.

Steel prices in our key markets continued strengthening since our last conference call, especially in North America.

This, together with a large reset of contract prices in Mexico, which prevented realized price to increase more in the fourth quarter, will show even more strongly in realized price in the first quarter of this year.

The combination of higher shipments and revenue per ton in the fourth quarter resulted in a 21% sequential increase in net sales to $2.6 billion, equivalent to a 15% year-over-year increase.

Turning to the next Page, #6.

Let's review the main drivers behind sequential improvement in fourth quarter EBITDA and net income.

The EBITDA chart on top shows that the increase in revenue per ton was behind the strong performance in the fourth quarter, with smaller contributions from increased steel volumes, partially offset by a slight increase in cost per ton.

We expect a new sequential expansion of EBITDA margins in the third quarter of 2021, with higher revenue per ton, partially offset by an increase in cost per ton, reflecting the increase in raw material prices.

The net income chart below shows that the net income increased sequentially, mostly as a result of better operating performance.

Operating results in the quarter included 2 nonrecurring transactions.

One -- and the first one is the -- and the biggest one is the derecognition of a contingency related to tax benefits in Brazil amounting to a net noncash gain of $186 million.

We have not included this amount in the EBITDA figures.

This was a contingency that we recognized in our financial statements when we registered in our books the purchase price allocation of the acquisition of our facility in Rio de Janeiro, now Ternium Brazil, formerly CSA.

And it was related to tax incentives granted by the state of Rio de Janeiro consistent of the referral of the ICMS payable by the company in connection with the construction and operations of the facility.

This benefit has been challenged in court through a direct action of unconstitutionality, but it was ultimately reconfirmed by the state of Rio Janeiro, had a final ruling by the Supreme Court.

So this contingency was recognized, and by now, this decision is completely final.

The second one is another nonrecurring transaction, was a gain of $25 million related to a favorable court ruling from the Federal Justice regarding the recognition of certain tax credits stemming from the way of calculating taxes, another Brazilian type of tax.

The improvement in net income also reflected a better result from our investment in Usiminas and a net positive effect of higher deferred tax gain, partially offset by higher foreign exchange loss, both related to 13% appreciation of the Mexican peso against the U.S. dollar.

Let's reveal now Ternium's full year performance on Page 7. EBITDA was $1.5 billion in 2020, virtually the same as of in 2019.

The 9% year-over-year decrease in shipments in 2020 reflected the impact of the COVID-19 pandemic and was offset by a $12 increase in EBITDA per ton.

Net income increased 38% in 2020, reaching $868 million or $3.97 per ADS, including the derecognition of a contingency in Brazil equivalent to $0.95 that we have just commented.

Let's turn now to our balance sheet and cash generation in the quarterly performance.

The chart on the next slide offer a clear of the impact of the COVID-19 pandemic that started in the second quarter 2020.

But first, Ternium's rapid adjustment to the new scenario, targeting and reducing working capital and lower cost to strengthen its cash position.

And in the fourth quarter, the company resumed its growth agenda with increased capital expenditure and operating in a full recovery steel market with higher working capital requirements.

Looking forward, in the first quarter of 2021, we expect working capital to continue increasing in the context of strong shipment volumes, increased revenue per ton and higher production costs.

On the last slide of the presentation, you will find a yearly review of Ternium's cash generation, balance sheet and dividend payment.

Free cash flow in 2020 reached $1.2 billion.

This included a working capital release of a little more of $350 million.

Capital expenditure in the year were $560 million, lower than in 2019, as several expansion projects has already been finished and the completion of the new hot rolling mill at the Pesqueria facility was postponed to mid-2021.

Our capital expenditure estimate for 2021 is currently in line to what we expended in 2020.

The strong cash generation over the last 3 years enabled us to significantly reduce net debt from the peak of $2.7 billion at the end of 2017 after the acquisition of our slab facility in Brazil to $372 million at the end of 2020, equivalent to just 0.2x net debt to last 12-month EBITDA.

Regarding dividends, taking into consideration the situation that Máximo mentioned, Ternium Board of Directors proposed a dividend for 2020 of $412 million equivalent to $2.10 per ADS.

Okay.

With this, we finished our prepared remarks.

As always, we appreciate very much your time and attention.

And now we are ready to take your questions.

Please, operator, proceed with the Q&A session.

(Operator Instructions) And your next first question will come from Carlos De Alba from Morgan Stanley.

Very good results indeed.

Congratulations.

Just 2 questions from me.

Any significant cost or expense impact related to the energy crisis in Northern Mexico south of Texas last week?

You did mention and it was in your press release that the 80,000 tons lost.

But anything that we should also model in terms of cost or expenses?

And then, clearly, the company has done a remarkable job in terms of generating cash flows.

Your net debt-to-EBITDA now, as you just point out, Pablo, is really low.

So I wonder what is the next step for Ternium in terms of capital allocation or investments?

You are also completing in a few months or starting to produce in a few months hot rolled coil in Pesqueria.

So what comes next?

Is it more dividends potentially, another round of investments, whatever you can comment, that would be great.

And regarding your CapEx, if you can give us an update on your guidance for this year and next, that would be great.

Thank you, Carlos.

Any significant cost?

Well, yes, we have an impact of these 80,000 tons.

And we have an increase in the price of natural gas during the 4 or 5 days that the contingency lasts.

We are still discussing the final numbers, but it is a big number.

I mean for the 80,000 tons, probably in the EBITDA will be a hit of $40 million.

But again, this is because we won't be able to replace or to fulfill the shipments, because we are at full capacity.

So we are not going to be able to recover these shipments in the quarter.

CapEx next year, we are expecting to be around $600 million, a little bit more of what we have this year, and that's the number.

And the second question is, of course, the cash or the capital allocations we are going to see in the future.

And that's a very good question, Carlos.

2020 was a very, not only difficult, but strange year.

So on the first, I think, 9 months of the year, we were -- our focus was more on trying to solve the crisis and see where the market is going.

Clearly, today, these couple of months have been very good and very difficult -- different at what happened in 2020.

So we're reanalyzing all our projects or growth opportunities that we were analyzing before.

I mean we, at Ternium, have a track record.

I think in the last years, where we did a very sound and very -- quite good investment, CSA was a clearly excellent M&A acquisition, the Pesqueria 2 projects were very, very good.

And I think today, we are starting to analyze -- or we do have opportunities.

I'm not prepared today to say which one are those exactly opportunities.

But we do have opportunities, and we are analyzing them.

And some of them, we think that the USMCA in Mexico in particularly has opportunity to grow.

And probably, in the next couple of months, we are going to see where we allocate some more investments.

And clearly, the returning to shareholders through dividends is also a priority for us in the future.

And your next question will come from Caio Greiner from BTG Pactual.

Two questions from my side.

So first one on North American steel prices.

So we're still seeing lead times quite elevated in the U.S. especially.

And we have been seeing virtually no volumes on the spot market.

So I was just wondering if you can share with us your expectations on how long do you really think that prices can be sustained at current levels?

And how do you see new capacity in North America impacting those prices in the medium term?

And my next question is regarding Pesqueria.

So I was just wondering if you guys can share with us an update on the project.

And I was trying to understand how much of incremental shipments you guys can actually materialize in the project.

Because you -- this is a 4.4 million tons project, and I do understand that you guys have 2.5 million to 3 million tons, which is not a capacity or imports replacements in this -- in our calculations, obviously.

But I was just wondering if you guys can have -- can provide any guidance regarding how much in terms of incremental shipments, you believe, you can actually deliver over the coming years.

I don't know if you guys can share a number for 2021, 2022, that would be great.

Thank you very much, Caio.

First question on North American prices, and clearly, I mean, prices continue to increase, and we are seeing that every day.

I remember in the last conference call, we talked about prices.

We said that -- we see that there are continuing to improve, but we thought that, in the second quarter, they were going to start, not decreasing, but not increasing.

Clearly, today, they are much higher than what we expected.

And I think one of the things that are happening is that the consumption in all markets, not North America, I mean, it's very high.

I mean there is a change in the pattern of consumption of steel that we see in most of the -- in our markets, but we are seeing in other markets, people are spending more in refurnishing their house, in moving.

I mean construction is very big in all markets, we can see, even in Europe.

And so consumption in -- it's one driver of the prices.

Prices in North America has increased, but if you see prices in Europe also are increasing substantially.

On the other hand, the offer -- I mean utilization in the U.S. still is at 75%, 76%.

So this is making that prices are at these high levels.

Do I see more increases?

It's very difficult to say, I see that.

I think that the prices are going to stabilize.

But what I think is that it can stay at high levels for longer than what I thought.

That's why I'm -- what I'm seeing today.

Pesqueria update.

So Pesqueria, we are going to produce our first coil in June.

Of course, this -- the step-up of one of these facilities is a long one.

So it's not going to be reflected a lot more in 2021.

But we are expecting that in a few years, we would be producing 4.4 million tons in that facility.

Remember that from that part, we have our own imports of -- so we are going to substitute our own imports that are, whatever, near 1 million tons, a little bit less than that.

But -- so part of the shipments is going to substitute imports.

And I think that in incremental shipments from the Ternium -- from Ternium would be around 3 million tons in the next -- not in 2021 or 2022.

I mean, again, it's a process.

But 3 million tons is probably in 2023, the incremental shipments of Ternium Mexico.

I hope with this, I answered both questions, Caio.

Yes.

Yes, you did.

So -- and I see if I understood it correctly.

You do believe that by 2023, you will be able to sell 3 million tons more than you're selling in 2020.

Is that correct?

Correct.

Some of those shipments can be exports.

I mean if you shave shipments from Ternium Mexico, not to the Mexican market exactly.

Yes.

But the facility is going to produce at full capacity, replacing imports that we have.

And your next question will come from Timna Tanners from BofA.

I wanted to ask a few questions.

One was just shifting to the South America region, I know you mentioned that things were returning to pre-COVID.

But even before COVID, obviously, there was a recovery begun.

So just wondering if you could give us a little bit more color on the southern market, if the fourth quarter is a good run rate into 2021 and beyond?

Well, I mean our sales in the southern region are mostly in Argentina.

First quarter is going to be a very good quarter.

The recovery of the Argentinian market, it's very good, I mean, to be honest, unexpected.

But Argentina has a lot of, how I say, challenge going forward.

I mean there's a renegotiation of the debt with the IMF that has to come.

And there are some challenges in the macro economy.

So how it's going to be in the first 2 quarters?

I think these volumes would be achieved, as I said.

Going forward, it depends a lot in these renegotiations and the successful debt renegotiation and the stability in the macro economy context.

I mean inflation has to cash to come back -- has to come down in Argentina and stabilize the debt problem.

So that's -- I mean I think that's going to be what -- I mean if those are resolved, this can continue forward.

But first, we have to see what is happening in this area.

I hope I'm clear, Timna.

Sure.

As clear as possible.

I think we have to stay tuned, but that's helpful.

I guess I forgot, people usually ask all their questions at once.

If I could ask another 1 or 2.

Probably.

Yes, sure.

I am slower these days, I guess.

With the fourth quarter -- on the third quarter call, you had said that EBITDA margins could get to as much as $200 per ton.

So it did.

And I know that we -- you anticipate higher pricing, especially because of the lag effect into the next couple of quarters.

So can that margin be sustained and grow?

I mean are you continuing to grow faster than your cost?

That's my second question.

My other question is following up on the dividend comments from before to Carlos.

Is it possible that -- I know that you were compensating for not paying last year.

Was it possible the Board considered this dividend payment a new starting point going forward if your profitability continues in your recent levels?

Thank you, Timna.

Two great questions.

Pablo, why don't you answer the first one?

Okay.

So you're right.

We were expecting an increase in EBITDA margins.

Like we like to look at our numbers, and that is reflected in an increase in the EBITDA per ton to higher than $200 per ton.

Clearly, we are expecting an increase in that number for the first quarter of the year and take into consideration the picture that Máximo repeated on prices in the North American market.

This could be sustained in the following one.

Then we will need to analyze clearly and to see which is the impact of the new pricing scenario to reflect that number.

Again, what we have, what we'll continue to do, and I think that the Pesqueria facility will help us to continue to do that, is to sustain our margins at the highest level possible.

And even in this scenario, we are seeing with the significant level of prices that we are seeing.

We keep having an EBITDA margin much higher than our competitors.

And this is what we are looking for and what we are continuing working on.

And even in this area, though we have very significant difficulties, we have reached an EBITDA margin that was higher than last year.

So we see some possibility to continue having very high EBITDA margins and EBITDA per ton during the upcoming quarter.

And we will keep working very hard in order to sustain as much as we can into these levels.

And the second about the dividends, Timna.

I mean dividends, as you know, in our company, are decided by the shareholders' meeting.

So I cannot comment exactly if this is a new standard or not.

Having said that, I see -- our expectation is of a strong performance at least in 2021.

So if this continue, there's no doubt that this good performance would be reflected in the dividend payment of 2022.

I think that with this, I answered the question.

And your next question will come from Andreas Bokkenheuser from UBS.

Just 2 quick questions from me.

A follow-up on the capital allocation.

You obviously mentioned dividends.

You mentioned CapEx.

Obviously, you're very cash-generative at the moment.

And obviously, your expansion in Mexico is kind of coming close to an end.

Any thoughts about doing a potential share buyback at this point in time?

That is the first question.

And secondly, you've also mentioned that you expect slab sales to kind of come down in the first quarter as you reallocate volumes into Mexico.

Why is it happening so early with the Mexico expansion not ramping up until due?

Is that just restocking driven that's driving that reallocation of slabs?

Those are the 2 questions.

Okay.

Martí, well, let me take the first one.

You know that we always look at different alternatives to increase our share price.

The issue with the share buyback is that the level of floating that we have.

So we now will consider everything together in analyzing this type of transactions.

So it's difficult for Ternium to move ahead with that, because going to that direction, we probably -- it will be good for the market, but then we would -- we could be generating additional problems in the near future after taking a decision like that.

So that's why we have been reluctant to take a decision like that one in Ternium.

And we continue to believe exactly the same.

So I do not see in the near future a transaction like that one.

What we see is continuing, as Máximo was explaining, our dividend payment, our dividend increase in -- as we have been enjoying in the last year.

So there is where we are with respect to that.

Máximo?

Yes.

The second one, Andreas, is slab, and you're right.

I mean, slabs, we are still buying or using the same amount of slabs, because we milled it at start.

But 2 things.

First of all, this integration is going to happen.

So in some sense, we are trying to certify our slaps in a lot of customers with our own hot rolled mill, but to be ready to improve and to sell from the new hot rolled mill just from the beginning.

So that's one of the reasons.

And the second reason is more a commercial reason.

I mean we are always looking of what is our best opportunity as cost to buy and sell or to transfer to Mexico.

So we are always using this -- I mean this equation to see what is.

And to be honest, in the first quarter, the equation gave us that it was better to ship more to Mexico than to sell from Brazil and ship and buy from Mexico from other sources.

So those were the 2 reasons, Andreas.

Okay.

That's very clear.

I appreciate that.

And maybe a quick follow-up.

So you can't -- you already answered this question partly, but just to clarify.

For the expansion in Mexico, how many months or quarters do you kind of expect it to take from you to kind of reach the full run rate?

I mean, you obviously talked about 2023 in terms of sales or full nameplate capacity.

But this presumably is not going to take 18 months to ramp it up.

So how should we kind of think about the sequential increase in production, the way you're planning it right now from the new plant?

Yes.

And you're right.

But remember, the new sales, I mean, the Pesqueria will probably be at full capacity as soon as possible.

I'm not saying in 6 months, but I mean, in next year, we will probably be producing at full capacity.

The thing is that most of -- an important part of the new sales are industrial customers, which we have to go through a very long period of certifications, which we are advancing in some of the customers, but not on all.

So to have both, I mean, our Churubusco facility and our Pesqueria facility producing at 100% will probably take to 2023.

We will probably -- I mean improve -- I mean put our facility in Pesqueria at full capacity.

And probably for some time, the Churubusco facility will decrease a little bit production.

It's a facility older and with a higher cost.

So we are going to focus over everything in Pesqueria and then increase Churubusco in 2023.

Got it.

So it's a way of being -- I mean it's conservative, I know, but we want to do it that way.

I mean, again, if the market -- or we are able to certify all our products.

Are we clear?

Probably will increase that -- we will improve that.

No, that's very clear and conservative is good.

I appreciate you taking the question.

And congrats on the solid results.

(Operator Instructions) The next question comes from Thiago Lofiego.

Two questions on my side.

The first one on slab -- on the slab market.

Could you comment on the dynamics there, supply and demand?

We are seeing pretty pressured prices if you expect this to hold for longer.

And the second question on the demand side in Mexico, what are the sectors that you're seeing the most positive demand momentum if you could comment on that as well?

And then the very final one, just to double check, you mentioned the -- a $40 million impact because of the specific issues on the fourth quarter.

Is that just production loss or that there are other costs associated there?

Yes.

Thank you, Thiago.

I'll start with the third one being production loss, most of it, I mean, there's not much else.

There's some part of that we purchase natural gas a little bit higher, but the main impact is production loss in a facility that is at full capacity.

So we lost production, we lost shipments.

We cannot recover today.

So with that -- I mean, that's the only thing.

Demand side in Mexico, I think most -- all of the industrial customers are at full capacity here, I mean, all the sectors.

As I said, I think, in my remarks, I mean, electronics, I mean, home appliances, HVACs, everything is running at full capacity at all our customers.

Even the auto industry, which has these problems of the semiconductors, I mean, they are also running at a very high level with this stoppage going back and forward because of this constraint.

But they are very -- I mean at a very high level of production.

So all the industrial sectors are very high in Mexico.

Construction is starting to improve, but it's not the main driver of the demand in Mexico.

If I may, I'm sorry to interrupt.

But on the -- on this very strong demand dynamics, how much of that do you attribute to a restocking cycle across different industries because of the situation created by the pandemic?

We're seeing that in Brazil, that's why I'm asking.

So is -- do you think that is happening also in Mexico and other regions?

I don't think it's happening in Mexico.

I think that all the final goods are really consumption in Mexico, North America.

I mean people are spending much more in improvements in the houses, in new houses.

I mean -- and to be clear, we don't see a stock in distributors, high stock in distributors or intermediates.

We don't see that.

Service centers don't have much stock in Mexico.

I don't think they have a lot of stock in the U.S. So I'm not seeing an increase in that.

I'm seeing real demand, at least in the industrial part of our shipments.

In construction, again, there are not much stock, but it's not that high as the industrial sector.

I'm not saying it's not improving.

It's improving a lot since the pandemic, but it's not as high the demand as it is in the industrial sector.

I hope with this, it's clear.

And again, we are not seeing also that in Argentina, to be honest.

I mean the increase in stock in a lot of things.

In some part, yes, but in ours, not.

Slab market, how hard it is?

I mean, all the prices have increased.

I think it's not only the slab market.

I mean with a hot rolled coil with a price of $1,300 in the U.S., I mean, it's clearly -- slab market has also increased the prices, not as much, I think, but increased the prices.

So I think that is a thing of all the market, not of slabs particularly.

Do you think there is a mismatch between supply and demand on the slab market, meaning some integrated steel producers basically reduced capacity utilization.

So they basically started to -- yes, go ahead.

Well, in North America -- yes, in North America, there's always a lack of supply of slabs, that's for sure, before the pandemic and clearly now.

I mean there's not even one producer of slabs except probably Lazaro Cardenas, which they are shipping everything to them.

So the lack of slabs in the whole North America unit, North America economy, it's a thing that happens, I mean, prior to pandemic, and it's happening today.

I mean that's a reality.

In the rest of the market, I think Brazil and Russia, which are the 2 main suppliers of slabs, I mean they are producing slabs normally.

Yes.

What I meant, Máximo, is just like the rolled steel demand might have recovered faster than capacity, then slab production is recovering and that created a mismatch.

So steelmakers that used to have their own slabs supplied internally, they are now buying the market, while these slab production.

I am not seeing that.

To be honest, I am not seeing that yet.

I'm not saying that it's not happening, but it shouldn't be a huge impact on the slab market.

Our next question comes from Jonathan Brandt from HSBC.

I just wanted to return back to capital allocation.

So Máximo, you mentioned you have a few different things under study at the moment.

I'm just wondering sort of how does M&A fit into that?

Is that something you're also looking at?

Or are there -- is there any possibilities there?

Or is the expectation that it will be typically organic growth going forward?

And then secondly, just as it relates to some of the internal projects, is it fair to say that this would be sort of more in incremental steel capacity?

I'm just wondering sort of how you're thinking about iron ore at the moment.

Would it be possible for you to increase production of iron ore and sell more to third parties, given the high price.

Is that under consideration?

Thank you, Jon.

Capital allocation, organic or M&A, I think -- I mean we always look to both, to be honest.

We analyze both.

And you see that with our track record.

I mean we have made M&A acquisitions and part of our growth, our history was through M&As.

So that is possible.

If you said, well, do you have something concrete, no, we don't.

And some of the projects we are analyzing are organic growth for sure.

Iron ore, as you know, we finished a couple of years ago our investment in Peña Colorada.

We have some opportunities in iron ore, but they are not still big opportunities.

I mean we are going to increase production, but not in a substantial way yet.

I mean we have to look more for that.

At this time, I have no further questions in queue.

I'll turn the call back over to the presenters for closing remarks.

Okay.

Thank you very much to all of you for attending this conference, for your interest in Ternium.

I hope this call has been useful.

And if you have any additional questions or comments, please contact.

Thank you very much, and stay safe, please.

Thank you, everyone.

This will conclude today's conference call.

You may now disconnect.