Ternium SA (TX) 2022 Q1 法說會逐字稿

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ternium First Quarter 2022 Results Conference Call.

(Operator Instructions)

Sebastián Martí, you may begin your conference.

Thank you. Good morning, and thank you for joining us today. My name is Sebastián Martí, and I'm Ternium's Global Investor Relations and Compliance Senior Director.

Ternium released yesterday its financial results for the first quarter of 2022. 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 the 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, Sebastián. Good morning to everyone, and thank you very much for joining us today. Ternium showed a strong set of results in the first quarter of the year. Shipments are recovering and margins decreased as expected, although they remained at high levels. Since our last conference call in February, the global steel business environment changed significantly as a result of the invasion of Ukraine and a consequent wave of international sanctions against Russia, not to mention the humanitarian tragedy this conflict created. In an already volatile steel market environment, the conflict in Ukrainia brought even more disruptions as both of these countries are relevant participants in the trade of steel and related raw materials, creating scarcity of these inputs and a consequence, cost push to steel prices. Big iron, PCI, slabs and hot-rolled steel were particularly affected. As a result of these supply disruptions in the international steel markets, previously declining steel prices took a sharp turn up by the end of the first quarter and recently stabilized at relatively high levels.

Let's review now the latest development in our main markets in this new scenario. In Mexico, we expect shipments to continue increasing in the second quarter of this year. There is currently a restocking in the commercial market in response to these new conditions in the market, although it remains somewhat slow. On the other hand, the industrial market continues to be healthy, and we expect to continue growing in this market aided by the new hot strip mill in Pesqueria, increasing our market participation.

The auto industry continued to suffer from supply chain disruptions, creating order backlogs that should support higher steel demand down the road. We are now more positive in our expectation for this industry during the second half of the year as we are already seeing some recovery in orders.

The ramp-up of the new hot rolling mill in Pesqueria in Mexico is progressing as expected as we continue working on certifying our products with different industrial customers and gradually adjusting the facility and its logistics for a higher level of production. To complement the capacity offered by the new hot strip mill and to broaden our value-added product portfolio, we recently announced a new investment program at our Pesqueria industrial center. The program consists on a new cold rolling mill, a hot-dip galvanized line, a push-pull peak in line and a new -- and new finishing lines. The new investment program with expected startup of operation in the first half of 2024 should help us better serve our customers in the automotive, renewable energy and home appliance industries and will support our leading position as a steel supplier in Mexico. This adds through the already announced expansion of our Shreveport facility in U.S. state of Louisiana, with a second coil coating paint in line expected to start-up in mid-2024.

Let me now turn to Argentina. For some time now, the Argentine market has been a very stable one, despite a high degree of uncertainty, and this has not changed. Currently, steel demand remains healthy in the auto industry, construction, the agribusiness and the energy sector. Based on what we can see for the next few months, shipments in the second quarter should increase a bit from last quarter. However, there are some factors that could affect steel demand further on, mostly related to the unstable macro situation in the country.

We'd like now to make a quick comment regarding sustainability at Ternium and our ongoing projects. We are committed to the industry sustainable development, and our efforts were recognized once again by the World Steel Association. Early this month, Ternium was selected as a sustainability champion for the fourth year in a row. This was on top of the safety and health excellence recognition for safety management initiative also from World Steel. Also since our last call, we participate in a survey from EcoVadis on our ESG initiatives.

EcoVadis is an ESG rating agency used by several of our largest industrial customers. In this survey, we attained a top 10% score in our industry. The rate obtained is already higher than the rate required by our customers for 2025. This inquiry was structuring 4 main topics: environmental; labor and human rights; ethical behavior; and sustainable procurement.

Let me now wrap up these initial remarks with some final thoughts. We started the year with very good results, and we expect to have an even better performance in the second quarter, but we should not lose sight of the fact that there is significant uncertainty regarding the performance of the world's economy down the road. The ongoing disruption from the war in Ukraine and the COVID-related lockdowns in China are a cause of concern. This, together with the current inflationary environment in the world and the beginning of a monetary tightening cycle, could affect the world's economic growth rate in the future.

We believe we are very well positioned in this uncertain scenario. The transformation of our company since the acquisition of our slab facility in Brazil and the conclusion of our expansion projects in Mexico enables us to continue growing our market participation with an even better competitive position.

In addition, we currently have a strong financial position, and expect to have a significant cash generation in 2022. This is a comfortable situation from which to face any volatility in the steel markets. This financial strength will allow us to continue to execute our dividend program with the next payment due in May and the enhanced payment for 2022's dividend due in November. Now with a longer-term view, I'm positive regarding the downstream investment program in Pesqueria. This initiative is consistent with our long-standing strategy to continually optimize our industrial system in order to capture future market opportunities. I expect it to strengthen our competitive position, enable us to replace the imports in the Mexican market and better serve our customers with a broader and more technologically advanced product portfolio.

All right. I'll finish my remarks here. Please, Pablo, go ahead with your review of the quarter performance.

Thanks, Maximo, and good morning to everybody. The global steel scenario that Maximo has just discussed, has had a relatively limited influence on Ternium's performance during the first quarter of the year. But naturally, it's implication is expected to be more evident further on. Let's now examine Ternium's performance in the first quarter 2022 and also review our guidance regarding the second quarter under the new scenario.

Let's start on Page 3 of the webcast presentation. Slide 3 depicts Ternium EBITDA and net income in each of the last 5 quarters. By historical standards, EBITDA in the first quarter has been strong, although lower sequentially, as anticipated. The reason behind this is a decrease in EBITDA margins with reflected steel price correction from record high levels back in the second part of last year and a further increase in raw material costs. Looking forward, in the second quarter, we expect the company's EBITDA to rebound. We will analyze this in more details in the coming slides. The strong operating performance in the first quarter led to net income per ADS of $3.95, also a solid number.

In Page 4, let's review the performance of Ternium steel shipments in each market. In Mexico, in the first quarter of the year, we partially recovered the volume lost in the fourth quarter, and looking forward, we expect shipments to continue improving in the second quarter. In the Southern region, shipments decreased sequentially in the first quarter, reflecting seasonality, weaker demand in Argentina. Looking ahead, we expect shipments in the Southern region to increase slightly in the second quarter. In the other markets region, volumes decreased slightly on a sequential basis, reflecting lower volumes of large shipments to third parties, which was pretty much offset by higher finished steel shipments.

In Page #5, you can see that combining this development, we arrive at consolidated steel shipment of 3 million tons in the third quarter, up 4% versus the fourth quarter. Based on what we have discussed, we expect to report in the second quarter a sequential increase in consolidated steel shipments.

Let's now review steel prices and net sales. In the third quarter, revenue per ton declined 5% sequentially on lower realized steel prices, mainly in Mexico and the other market regions. The combination of sequentially higher achievements and lower revenue per ton, resulted in a stable net sales of $4.3 billion. Looking forward, we expect revenue per ton to rebound in the second quarter on higher realized price in Ternium's main steel markets for the reasons already discussed.

Moving to the next page. Revenue is now the main driver behind the sequential change in EBITDA and net income in the first quarter of the year. The EBITDA chart on the top shows the impact of other EBITDA of lower revenue per ton and higher cost per ton, which increased mainly as a result of higher raw material prices. These negative effects were partial by higher shipments. For the next quarter, we expect EBITDA to increase sequentially, reflecting higher steel shipments and margins as revenue per ton should increase more than cost per ton. The chart below is showing the first quarter a sequential decrease in net income, mainly driven by lower operating and financial results, which decreased mainly due to higher foreign exchange losses and a lower value of financial instruments. On the other hand, the effective tax rate in the first quarter was relatively low mainly to the positive deferred tax results at Ternium and Mexico and Argentina subsidiaries.

To conclude with today's presentation, let's review, on Page 7, Ternium cash flow performance and financial position. Cash from operations in the first quarter were $692 million. These numbers include income tax payments in the quarter of $868 million, and also a working capital release of $331 million, which reflected lower steel inventory volumes as well as expected impact of higher steel prices and raw material costs. Income tax was unusually high in the quarter, mainly as a result of the payment of the income tax balance of fiscal year 2021 in Mexico and with a tremendous increase in profit compared to the previous one to 2022. Let me remind you that we paid income tax advances during the year that were based on the income tax of the previous fiscal year. In this case, 2022 -- 2020, sorry, the year of the COVID-19 pandemic. So with strong recurring profitability in 2021, the income tax balance left to be paid in March 2022, for the results of the year 2021, resulted in a very high payment.

With a stable CapEx, cash from operations in the first quarter led to a very solid free cash flow in the period, raising our net cash position to $1.6 billion by the end of March. Our current expectation is that Ternium will continue showing healthy cash generation during the rest of the year based on a CapEx estimate for the year of approximately $600 million.

With this, we finish our opening remarks. Thank you very much for your attention. And we are now ready for taking your questions. Please, operator, proceed with the Q&A session. Thanks.

(Operator Instructions)

And your first question comes from the line of Caio Greiner from BTG Pactual.

So my first question on Pesqueria, I just wanted to check with you guys at what stage is the best do ramp up currently at? So far, we haven't really seen volumes rise as initially expected. And I remember speaking with you guys a few quarters ago, that the idea was to have incremental shipments of nearly 1.5 million tons already in 2022 and '23. And so far, it seems like this is still not the case. So what needs to happen for us to start seeing those incremental volumes for Ternium in Mexico and start seeing that thesis of import substitution play out which would still remain quite elevated. And just to understand, what has changed since then? Was it due to higher slab prices only, or is there any other reason behind that?

And my second question on capital allocation. So I just wanted to see if you guys could share with us an updated CapEx estimate for 2022 and '23. Because I'm just looking to understand how the $1 billion investment recently announced is going to impact cash flow generation over the next couple of years. And even so, I mean, you're still running on a $1.6 billion net cash position. So -- also just wanted to understand if on top of those investments, we could see more aggressive dividend payments in 2022, '23 and maybe into 2024 as well, or if you have any other short-term plans for that amount of cash that you're currently carrying.

Caio, thank you very much for your two questions, very good ones. Pesqueria ramp up. So there are two things here. First, the ramp-up of the Pesqueria facility is going very well, at least from a technical point of view. I mean, we produced in the fourth quarter of this year, roughly 500,000 tons, which was kind of the program. In the first quarter, we produced almost 700,000 tons from that country mill, and we expect to produce almost 1 million, I think, it's 900,000 tons in the second quarter and then 1 million and a little bit in the third quarter of this year. That's what we expected in the business plan when we make the investments. So that's -- from a technical point of view, it's running very well.

On the other side, you are right about the volumes. As we discussed last quarter, and I think the one before, we saw a slowdown in the commercial market in Mexico. And that made us produce less from the facility into (inaudible). I mean, the commercial market was very weak in Mexico in the fourth quarter, and it was -- and it started to increase a little bit this quarter, and I think it's going to be better next quarter, as I said in the previous remarks. So the plan to increase one was a little bit delayed. If you take outside -- I mean if you take this year, the sales of slabs from our -- because labs are going to decrease the sales as we send more slab from Brazil to Mexico, we are going to decrease slab sales to third parties. The volumes are going to increase this year. We got -- compared to last year, roughly in almost 1 million tons. And this is Mexico mainly. And North America, not only Mexico, but mainly what -- this delay was due to the market conditions. So I hope I answered the questions of the first one, Caio.

The second was regarding capital allocations. We have 3 things about capital allocations that I want to comment on this. The first one, of course, the capital allocation or the CapEx this year is going to be around 600 million tons. And then it's going to increase with this investment of $1 billion. Most of this $1 billion is going to be next year in our balance sheet. Second thing is we are going to continue with the dividend. I mean, remember that the -- our dividend pay was raised, I think that was 24%, the annual dividend proposal this year -- sorry, the 2021 compared with the 2020. And we expect to continue giving high dividends in the next future.

And the third is that, as you know, we have plans for more CapEx in the near future. We have cuts in the past our necessity to be USMCA compliance with melted and poured by 2027. This is something that we have to do. We are on the final state analyzing what is -- which one is the best way to do this. But that is going to require a high CapEx in the future. So those are the 3 things I could play I can't comment about capital allocation, Caio.

Maximo, just to make sure I understand. So the melted and poured investment that you're supposed to make in Mexico, this is supposed to be for the short term, right? Could we still see an announcement in 2022, or is this going to be coming for the...

'22 or '23, but it should be in the near future, yes. We have a team analyzing the project. And as you know, the projects we announced once we have completely understand and very clear what is the technical solution and where to be.

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

First question is, could you, maybe Maximo, remind us of what is the slab situation for Ternium as you ramp up Pesqueria, Churubusco, maybe lower than before? But you have given the situation in Ukraine and Russia and what is happening with the global slab market. What are your plans there? How much exposure do you think you have for this year and for next year as Pesqueria increases? And what are the alternatives that you see available to the company as you move forward?

And then maybe to complement, Pablo, and I'm sorry if I missed this, on working capital as you move forward. On working capital, very impressive results in the first quarter. Can you explain a little bit what is behind the fact that you released working capital in Q1? And also, what do you see going forward, again, given all the moving pieces that we're seeing in the market?

Thank you, Carlos. I'll take the first question because it's the difficult one, and then Pablo is with the easy one. You're right about slabs. I mean, clearly, the situation in Russia and in Ukraine, sorry, it's modifying or it's having some effects in the slab market, 30% of the world trade of merchants comes -- or did come from Russia and Ukrainia. Ukraine is not producing slab at all now because most of the factories that produce labs are in the conflict area. And of course, some of the Russian facilities are with I mean, we are not able to buy from them because of the sanctions. But nevertheless, with this, remember that from 2018, when we took the slab facility in 2017 in Brazil, we start increasing our shipment of slabs and that was the idea to Mexico from Brazil.

So today, in the first year, we run the facility, 30% of the slab from Brazil went to Mexico. This quarter, 85% of the slab from the facility of Ternium Brazil went to Mexico. So if you see the situation for now, it's not very tight. If you take on the other side, what we bring from Mexico, 90% of our total shipments in Mexico of slabs, our imports in Mexico comes today from Brazil. And the other 10%, we are finding other sources other than Russia. And so I think we can manage that with these other sources are now importing from. I hope I answered the question with Carlos?

Maybe just to clarify, Maximo and thank you for those details. So this year, what is the balance of the slabs that you're expecting and maybe for next year, what is the balance of third-party slabs that you may need to purchase on a net basis?

On a net basis this year, I think it's almost 0 on a net basis because it's a little bit less than 500,000 tons on a net basis. Next year is going to be a little bit more, but probably 1 million tons of net basis. But we are selling some because, I mean, we -- as we always discussed, we see advantage in selling and then buying from other sources a little bit more cheap. But it's not a huge volume. I mean, the slab facility is producing -- or will be producing almost 5 million tons.

Okay. I'll take the easy question now on working capital. Basically, what we had during this quarter, is a decrease on stock, which was not only good because we were able to reduce the level of inventory, but because the pricing of the different raw materials were increasing Secondly, we have an increase in our account receivables because of the increase of volumes to the market during the first quarter and especially the ones to the U.S. And the third leg of that is that we increased the level of account payables because of the increase of prices and the increase of volume required because of the new production levels at the higher price that we are already seeing in the market. So -- all-in-all, we have around $300 million of capital -- of working capital release during the quarter. Looking forward, we will continue to increase accounts receivable because of the higher level of shipments, we will -- we try to sustain the level of inventories and accounts payable will also -- should return to more normalized levels.

So from the working capital, probably we will be in a more stable situation as we continue to see prices going up. One important issue to comment, which is not working capital, but free cash flow or cash flow is that during this quarter, in the first quarter, we have a huge allocation of cash to pay (inaudible) is that during this quarter, in the first quarter, we have a huge allocation of cash to pay the balance of income taxes in Mexico.

So all-in-all, we paid above $700 million on taxes during this quarter that will not be in the next one. Of course, the advances that we're going to pay will be higher than what we have last year. But in comparison to what we paid during the first quarter, there will be a reduction. So all-in-all, we should continue to have a good result on free cash flow, though probably working capital will not help as much as we have this quarter.

If I may ask just another one very quickly. So next year, I think Maximo said, most of the $1 billion investment in Mexico will take place in 2023. So where do you see the CapEx in 2023 and maybe 2024, given that investment?

2023 probably is $1 billion.

And 2024 will depend on...

Yes, exactly. 2024, we need to wait a little bit a little bit, Carlos.

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

Two quick questions here. The first 1 on costs. How do you guys see costs evolving in the next couple of quarters? And the second one, Maximo, just about the slab position you mentioned. So -- correct me if I'm wrong, but you mentioned 1 million tons gap next year. So is this a structural gap considering car fully ramped up? And if so, do you think there might be opportunities to close this gap by M&A, or do you think from a strategic point of view, you guys are fine with this short position?

Thank you, Thiago. I'll take first the second question. I think it's -- so next -- I mean, remember, the facility -- Ternium's Brazil facility produced 5 million tons of slabs, roughly, I mean, the capacity is not producing that it's producing 4.6 million now or something like that. We will try to increase it at the maximum level. Pesqueria facility, the new hot strip mill, it's around 4 million tons. It's not still at that capacity, to be honest. Remember, it has a long ramp up these facilities. And the Molino, the Churubusco mill has roughly a capacity of a little less of 3 million tons. So the balance today would be 2 million tons if we are at full capacity. -- in Churubusco facilities. So that's the imbalance we have of flat 2 million tons.

But to be honest, there is sales to be made in, not in Brazil also to (inaudible), which we will like to participate. (inaudible) remember, has a hot strip mill in Cubatão facility with no upstream. So the idea in the future is to sell to (inaudible). And that's why -- and also, as I said before, we have to be USMCA compliant in 2027. So probably, we -- probably most likely, we are going to invest to be USMCA compliant. So that balance will be probably 0 in the future. I hope that, Thiago, I answered the question.

I'm a little bit confused here, Maximo. I'm sorry. Just from what you mentioned to Carlos, right? So you mentioned on an asset basis, you're going to have to purchase 1 million tons next year, right? Is that right?

Yes, exactly but we are not at full capacity at Churubusco facilities.

Okay. Got it. So when you go to the full capacity with Churubusco, you think your net purchases will be 0. Is that what you're saying?

No. My net purchases, if I go to full capacity will be around 2 -- 2 million tons. That's net. But as we want to sell to Usiminas, probably we need to buy a little bit more. But on the other side, again, we have to invest in the near future because if not, we are not going to be USMCA compliance in melted and poured. So that's a thing that we have to do before 2027. And so in the future, and I'm not talking about the near future, but at least in 4 or 5 years, we are going to be net 0. I mean, we are not going to need to buy slabs probably.

Got it. So I guess my question is, how are you going to get there?

Well, we have to invest in a steel jump.

Got it. okay. So you're not going to be...

North America, yes, USMCA market. The cost, Pablo?

Yes. Okay. So in relation to the cost, clearly, what we will be seeing enter into the next quarter is the increased price of slabs the same one that we were describing recently that we will be buying. Remember the price of slabs increased also quite significantly. The price of coal increased, PCI and different raw material, basically, agri raw material increased prices. So we will start to see them through our costs during the second quarter and also and especially during the third quarter. But what we have said during this mark is that we are expecting and as we saw in the market that prices of the finished products, steel prices will be higher than the impact of the different raw material cost increases. That's why we are expecting to see a better margin enter into the second quarter. Clearly, cost will be higher.

Okay. That's very clear. And if I may, I'm sorry, guys. I just -- Maximo, just back on the first question. So in a timeframe of the next maybe 2 to 3 years, would you expect to be doing that project on the slab side in North America? Is that reasonable?

Yes. Yes, we have to do it, to be honest. And so we are analyzing -- I think we talked a little bit about in our last conference call also. We are not ready to announce it, but it's very clear -- our automotive customers are very important for us. We sell more than 2 to 3 million tons to them in the North American market, and we expect to continue doing so. So we need to be USMCA compliance. Having said all this, Thiago, just on a clarification, it's not that in 5 years, we are going to be out of purchasing slabs, we are probably going to continue purchasing slabs, and probably with Brazil, our Brazilian mill will sell slabs to third party as we are doing today. But the net balance probably is going to be 0.

No, that's very clear.

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

I wanted to just to do a little bit more on the volume outlook. So I know you touched on an improvement into the second quarter and mentioned that demand was a little bit light into the first quarter. But it's still as hard for me to square with the declines year-over-year because there was still COVID hits a year ago. So if we think about Q2 and wethink about the 900,000 tons from Pesqueria and just assume flat year-over-year, I mean, we're talking about almost 4 million tons in Mexico -- sorry, overall.

Is that the right way to think about the potential upside quarter-over-quarter or am I missing something? That's my first question. And my second question was just to get some tax rate guidance given the light first quarter on the rate, not the payout. I understand the cash implication.

Okay. Timna, how are you? Let me start by the tax issue and then we go to the other question on volumes. Unfortunately, for us, it's very difficult to predict exactly how the tax rate -- the nominal tariff will be because it's very much dependent on the situation of the referent currencies. So if you have a revaluation you have reduced tax, you have a devaluation, you have a higher one. So that will depend on having the situation at the end of the market. You know that the tax rate for Ternium overall, without taking into consideration deferred taxes is around 28%, which is a mix of rates of Mexico, Brazil and Argentina.

So suppose, and that would be good, if there is no deferred taxes, the tax rate for Ternium should be that 28%. Clearly, we have different impacts in the currency during this first quarter, we have evaluations both in Mexico and in Argentina and devaluation revaluation in Mexico and Brazil, and we have a devaluation in Argentina, but the devaluation was below the inflation rate. So that's the cumulated impact of this. I know that is not very clear, but you need to see which is the cash position impact of this. I know that is not very clear, but you need to see which is the cash position or financial position of the company to see that. So in general, that's the rule. If you have a revaluation of the currency, you have a reduced tax rate.

If you have devaluation, probably you will have a little increase and in Argentina we'll depend very much on the relationship between devaluation and inflation. I know that is very difficult to understand a very complex on the tin. And unfortunately, you need to wait until the last day of the quarter to know exactly how this will work because we depend very much on how the movements of the different currencies were. I hope I have been clear with work because we depend very much on how the movements of the different currencies were. I hope I have been clear on that team is not we can then go to it in detail.

Because the volume being -- I don't know if I follow your math. So let me try to answer your question, but I mean, if this is correct. Our volume outlook, I mean, Argentina is going to be probably the same volume that we did this last year. I mean, although we were a little bit more pessimistic, we are seeing now the market with this uncertainty to, but we are seeing volumes coming, orders coming. So it's clearly -- it's healthy the market in Argentina, and we expect to continue that way, at least for this quarter and next quarter.

In the case of Brazil or slabs, this is going to decrease. Third-party slabs are going to decrease. Probably we'll ship half of that. And in the case of the other markets, our increase in volume will be probably a little bit more of 1 million tons 1 year compared to the other one. That's our volume outlook in this. With the market, as I said, in Mexico, which an industrial market in Mexico is very strong and a commercial market that most of that is construction, infrastructure that it's not growing very good in Mexico, as you well know. So it's a mixed part of the market. But I hope with this, I answered, but answer or correct me if I am wrong in that, please.

I think I was just simplistically saying a year ago, Q2, you produced almost 3.1 million tons. And if we just added simplistically 900,000 tons projected from Pesqueria, we'd be at 4 million tons. That seems like a big number relative to your Q1 side. I just want to say, is that right or wrong and why. And just in light of the fact that recent prices have spiked, we know you exit a bit from, I think, the ramp-up in Mexico. Is that not an opportunity also to boost volumes given where prices have run to internationally?

No, sure. Sure, we can -- I mean, I was talking mainly about Mexico, and you're right.

There is an opportunity to export, and we are seeing to ramp up those opportunities, to be honest. We don't have much of that volume yet in what all you if we increase a lot the export, much of that volume, yes, in what I told you, if we increase a lot the export we are very cautious of that also, not to increase to a lot of markets. But yes, it's an opportunity that we are seeing, Timna.

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

The question that I have is regarding growth. And what we can see is that there is a good period of high cash flow generation and an opportunity to, let's say, we think the stat is that there is a good period of high cash flow generation and an opportunity to, let's say, we think the size of the company we're just discussing the investments in Mexico or in North America for more slab. So I think it would be very, very useful if you can provide some guidance on how Ternium is going to look 5 or 6 years from now in terms of production capacity, in terms of geographical exposure, what's going to happen in Mexico? Our plants in Argentina to figure or LATAM, I think to have like a map on how Ternium is going to look, thinking 5 or 6 years ahead? And probably it's not an answer right now, but if you can help us to understand what the plan behind these investments? That would be very useful.

Yes, so thank you very much for your question. It's clearly a very broad question. And we have -- I mean several things I mean the growth path for Ternium, we're -- I mean, our growth path is the Americas. And we are going to have some growth in Argentina probably, but that's in value-added products, in talking in the long term. So thinking of this is something that that's in value-added products, in talking in the long term. So nothing of this is something that we are going to announce in the near future. We also have a view of growing in Brazil. Brazil, our acquisition of the CSA facility was very successful, and now we know much more of the market. So there is a thinking in Ternium, that's a market where most of our customers are also someday we can go there.

And clearly, the North American market is a place where we continue growing. I talk about the investments we are seeing. We are seeing that the volumes and the market there is going to increase. I know there is capacity also being built in North America, but we are seeing a lot of these near shoring or reshoring happening. I mean, China -- the problem between the U.S. and China, the war now, this is all making all people that have their supply chain in Asia, most of them are thinking or some of them are already coming to the U.S. and Mexico.

I mean, every month, you see new investments of our own customers or new customers coming to the north region of Mexico. So I think that the biggest opportunity of us is over there, and that's why we are getting ahead of that, doing the cold growth facility, the new one, the galvanized, (inaudible) and thinking of being a USMCA compliant with a much bigger CapEx. Pablo, I don't know if you want to add something to that.

Yes. Thanks, Max. Yes, just 1 thing just to complement what Alfonso was and you were saying. Clearly, the idea of Ternium is to build facilities that we are sure that we can work with them at the year. Here I mentioned it before you another question. Our idea is to have that facility working at the maximum capacity of that one. Then as we were facing the issue of the new hot-rolling mill, we are very -- we are approaching very fast full utilization of that facility, probably utilizing less others, but that one will be fully utilized. So that's the same idea with the new CapEx that we already announced and the CapEx that we analyze is probably in the next future. So -- that has been what we have done in the past. And clearly, it's something that we are planning to do in the near future. So just to complement your questions.

That's helpful, for sure. And I know that it is a very broad question, and probably we can talk about this in many conference calls and coming days to come. This could be helped a lot.

A follow-up on Mexico, if I may. The energy reform did not pass. I'm just wondering if you can say anything about how this changes the energy strategy helps your energy strategy or business opportunities in the country?

Yes. Thanks, on. You're right. The energy reform did not pass -- but I think there's still a lot of confusion about -- you call it (inaudible) in Spanish, I think this electric industrial law that was passed a couple of months ago or 6 months ago, and then it was not clear and constitutional, but it was not declared also constitutional. So there's going to be still a lot of noise about energy in Mexico, I think, for the next following months. In our case, in particularly, remember, we produce most of our own energy with a very competitive facility. .

And this is not going to change with this new law. So we are relatively comfortable in where we are. But I don't see a lot of energy investment in Mexico in the near future until this (inaudible) this electrical industry law is clarified and so new investments are going to come to Mexico. I hope with that, I clarified what is happening in Mexico.

And we have a follow-up question from Carlos De Alba from Morgan Stanley.

So regarding the situation of being a USMCA compliant, clearly, I guess there is 2 choices. You invest in core steel capacity in 1 of the 3 countries or you try to buy something. Is there anything that is available that would provide that second alternative or you are really only analyzing at this point, a greenfield facility?

Thank you. And hello again, Carlos. No, we are not seeing -- I mean, we are seeing a greenfield facility, yes.

It will likely be electric or furnace, right, or definitely be an electric or furnace.

Yes, it would definitely be electrical furnace. Yes, no doubt about it.

And if that's the case, would this come together with an expansion of your iron ore pellet facilities, or do you think that with what you have in terms of this of the iron ore mining side of it, you will be okay and member you just spend your pellet and DRI facilities?

Yes. Not necessary a mining operation right now. Probably a DRI facility, yes. And these are all the things, Carlos -- to be honest, these are all the things that we are analyzing, which is the best way to go. And that's why I mean, we are not announcing anything yet. We are discussing which is the best way, which is the best technical solution, clearly is electrical furnace. Clearly, it's a direct reduction. Not necessarily investing in new capacity of pellets in the near future or in the short term.

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

Okay. Thank you all very much for your participation today and for your interest in our company. As usual, please contact us for any feedback or any additional questions you may have. Take care and goodbye. Thank you very much again.

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