Ternium SA

NYSE:TX

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to Ternium Fourth Quarter 2020 Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the call over to Mr. Sebastián Martí. Please go ahead.

[Sebastián Martí, Investor Relations & Compliance Director]

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 its 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.

[Máximo Vedoya, Chief Executive Officer]

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 result for the last quarter of the year, which have been actually been better than the ones we expected on our last conference call. Even though the pandemic continue 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 these later on.

Turning now to Ternium’s full year results, in 2020, we repeated the EBITDA of $1.5 billion we record in 2019. As all of us are aware, 2020 was a particularly difficult year to manage an industrial operation like Ternium’s. It requires the full dedication and commitment of all our people.

The results we were able to obtain surely is 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 comment 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 Board meeting, the Board also discussed in depth similar 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 got planned 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 roadmap 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 this target are: increasing the participation of energy from renewable 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 plans 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 structure: 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 one representative of the Board to oversee in 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 improve demand it what is widespread. The household appliance industry currently stands out as the strongest sector and the auto industry at the relatively weakest, I think, to be 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 cause the production –sorry, cause 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 potentially growing. Our expansion project in the country continues advancing a plan with a new hot-rolling mill at the Pesquería facility expected to begin operation 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 they’re ensuring for manufacturing capacity with us in the future.

The decision we took 3 years ago to expand our capability to supply sophisticated industrial customers in the region. It’s finally coming to fruition and I really believe this will transform our company.

In Argentina, we’ve seen a continue 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 reflect the shift in consumption patterns to our home improvement expenditures have 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. It is the market that most quickly recovered activity after the pandemic induced lockdown. 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 America with the help of a strong steel base in Brazil to better serve customers all over the region.

In Colombia, we recently commissioned our greenfield Ribera facility, I think, Colombia 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 be prevent unfair trade. This new facility with significant strengthens 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 show. I am 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 Pesquería facility will substantially increase our capability to serve the market with sophisticated product.

Second, I have no doubt the USMCA region will continue providing opportunities to develop our company. And finally, we’ll continue working towards Ternium sustainability and decarbonization, this is fee to continue delivering value to all of our stakeholders.

I’ll leave you now with Pablo, who will review our performance in the fourth quarter. Please, Pablo, go ahead.

[Pablo Brizzio, Chief Financial Officer]

Thank you, Máximo, and thank you everybody for participating in our call. 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 price in our main market, especially in North America, have combined with a boost in demand for the steel products to drive Ternium profitability and results to accelerate the level. We saw a raw material price is not yet fully reaching our cost of sale line. On top of these favorable developments, net income was positively impacted by 2 non-recurrent events that we’ll see later on.

Let’s start our presentation on Page 3, with the company EBITDA and net results in the fourth quarter. EBITDA reached $645 million and EBITDA margin of 25% or $210 per ton. The significant improvement by any measure both sequentially and year-over-year. We will see these in more detail in the next slide.

Net income in the period was $671 million or $3.06 per ADS, these are strong results in the outcome of strong operating performance, but also includes the positive effects of a $186 million non-cash gain related to the re-recognition of a contingency on certain tax benefits at Ternium Brasil equivalent to $0.95 per ADS. On 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 the developments. Our positive expectations for the next period we see sequentially higher margins, driven by a higher EBITDA in the fourth quarter of 2020.

Turning now to Page 4, let’s review the performance of our achievements in each region. The Mexico shipments in the fourth quarter fully recovered from the impact of the pandemic affected, shipments volume increased by 14% on a sequential basis, and 6% year-over-year. Looking forward into the fourth quarter, we expect sequentially stable shipments volume in the country, mainly as a result of the described reductions in the production that Máximo mentioned.

In the [total division] [ph], shipments in the fourth quarter of 2020 surpassed pre-pandemic levels by a wide margin, supported by increasing demand of durable goods and construction materials in Argentina. This shift in consumption patterns in Argentina continues, somewhat influenced by the COVID-19 pandemic. So looking forward, we expect these shipments in relation to stay strong in the first quarter of the year.

In the other market region, there was [coincidental] [ph] a year-over-year decrease in shipments in the fourth quarter, mainly of finished steel products. We expect a higher integration of Ternium’s slab facility in Brazil, with the company’s industrial systems in the first quarter of 2021, with a consequence decreasing volume of slab in third-party.

Turning now to the next page. Ternium’s consolidated in shipments reached 3.1 million tons in the fourth quarter, up 8% sequentially and 5% year-over-year. Consolidated shipments in the first quarter 2021 are expected to be similar to those of the fourth quarter, 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 continue strengthening since our last conference call, especially in North America. These together with a lagged reset of contract prices in Mexico, which prevented realized price increase more in the fourth quarter even more strongly in realized price in the fourth 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, number 6. Let’s review the main driver behind sequential improvement in the fourth quarter EBITDA and net income. The EBITDA just at top shows that the increase in revenue per ton was behind the strong performance in the fourth quarter with smaller contributions from increase the volumes partially offset by a slight increase in cost per ton. We expect a new sequential expansion of EBITDA margin in the first quarter of 2021 with higher revenue per ton person partially offset by an increase in cost per ton to reflect 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 includes 2 non-recurrent transactions. One – and the first one is 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 recognize in our financial statements, when we register in our books the purchase price allocation of the acquisition of our facility in Rio de Janeiro, now Ternium Brasil, formally CSA.

And it were related to tax incentives granted by the State of Rio de Janeiro, consistent of the referral of the [ASMS payer] [ph] by the company in connection with the construction and operations of the facility. These benefits has been challenged in Court through a Direct Action of Unconstitutionality, but it was ultimately reconfirmed by the State of Rio de Janeiro, a final ruling by the Supreme Court. So, this contingency was recognized and by now this decision is completely final.

The second one is a another non-recurrent transaction was a gain of $25 million related to a federal court ruling from the federal justice regarding the recognition on certain tax credits, stemming from the way of calculating [peaceful fin] [ph] taxes, another Brazilian type of tax.

The improvement in net income also reflected a better result from our investment in Usiminas and the 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, we will now turn on to full-year performance on Slide 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 upset by a $12 increase in a EBITDA performance.

Net income increased 38% in 2020, reaching $868 million, or $3.97 per ADS including the derecognition of the contingency in Brasil, if we went into $0.95 of [restructure commodity] [ph].

Let’s turn now to our balance sheet and cash generation in the quarterly performance. The chart on the next slide offer a clear illustration of the impact of the COVID-19 pandemic started in the second quarter 2020. At first, Ternium’s rapid adjustment to the new scenario targeting reducing working capital and lower cost to strength its cash position.

And in the fourth quarter the company resuming its growth agenda with increased capital expenditure and operating in a full recovery in market with higher working capital requirement. Looking forward in the first quarter of 2021, we expect working capital to continue increasing in the context of strong shipment volumes, increase revenue-per-ton and higher production costs.

On the last slide of the presentation, you will find the yearly review of Ternium cash generation, balance sheet and dividend payment. Free cash flow in 2020 reached $1.2 billion. This includes 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 project has already been finished, and the completion of the new hot rolling mill at the Pesquería facility was postponed to mid-2021.

Our capital expenditure estimates for 2021 is currently in line to what we explained in 2020. The strong cash generation over the last 3 years enable us to significantly reduce net debt from the peak of $2.7 billion at the end of 2017 after acquisition of our slab facility in Brazil to $372 million at the end of 2010, equivalent to just 0.2 times net debt to last 12 months EBITDA.

Regarding dividends, take into consideration the [restoration] [ph] as Máximo mentioned, Ternium Board of Directors proposed a dividend for 2020 of $412 million, equivalent to $2.10 per ADS.

Okay, with this, we finish 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]

[Operator Instructions] Your next question will come from Carlos De Alba from Morgan Stanley. Your line is open.

[Carlos De Alba, Morgan Stanley]

Yeah, thank you very much, gentlemen. Good afternoon. Very good results indeed, congratulations. Just 2 questions for me. Any significant cost or expense impact related to the energy crisis in Northern Mexico side of Texas last week? You did mention that, and it was in your press release the 80,000 tons loss, 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 pointed 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’ll be great.

And regarding CapEx, you can give us an update on your guidance for this year next, that’ll be great. Thank you.

[Máximo Vedoya, Chief Executive Officer]

Thank you, Carlos. Any significant cost, well, yes, we have an impact of these 30,000 tons. And we have an increase in the price of natural gas during the 4 or 5 days that the contingency last. 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 expect it to be around $600 million, a little bit more of what we have this year and that 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, this couple of months has been very good and very difficult – different than what happened in 2020. So we’re re-analyzing all our projects or growth opportunities that we were analyzing before. I mean, we, Ternium has a track record, I think in the last few years where we did very sound and very – quite good investment. CSA was a clearly an excellent M&A acquisition.

The Pesquería 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 of those exactly opportunities, but we do have opportunities and we are analyzing them. And some of them, we think that the USMCA, in Mexico 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.

[Carlos De Alba, Morgan Stanley]

Thank you, Máximo. Good luck.

[Máximo Vedoya, Chief Executive Officer]

Thank you, Carlos.

[Operator]

And your next question will come from Caio Greiner from BTG Pactual. Your line is open.

[Caio Greiner, ‎BTG Pactual]

Hi, thank you, good afternoon, everyone. 2 questions from our slide. So first one in North American fuel 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 Pesquería. 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 shipment you guys can actually materialize in the project, because 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 capacity or imports replacing so this is in our calculations, obviously. But I’m 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.

[Máximo Vedoya, Chief Executive Officer]

Thank you very much, Caio. First question, North American prices, and clearly, I mean, prices continued 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 they 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. steel 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 see is that it can stay at high levels for longer than what I thought. That’s what I’m seeing today.

Pesquería update. So Pesquería, we are going to produce our first coil in June. Of course, the set 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 expected that in a few years, we will be producing at 4.4 million tons in that facility. Remember that from that part, we have our own imports of hot-rolled. So we are going to substitute our own inputs that are whatever, even 1 million tons and little bit less than that. But so – part of the shipment is going to substitute imports. And I think that in incremental shipments 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.

[Caio Greiner, ‎BTG Pactual]

Yeah, yeah, you did. So just so – and I’d see if I understood it correctly. You didn’t believe that by 2023 you will be able to sell 3 million tons more than you’re selling in 2020, is that correct?

[Máximo Vedoya, Chief Executive Officer]

Correct. Some of those shipments can be exports. I mean, if you say shipment from Ternium Mexico, not to the Mexican market exactly.

[Caio Greiner, ‎BTG Pactual]

Yeah. Yeah. Okay.

[Máximo Vedoya, Chief Executive Officer]

But the facility is going to produce a full capacity replacing inputs that we have.

[Caio Greiner, ‎BTG Pactual]

Okay. That’s clear. Thank you.

[Máximo Vedoya, Chief Executive Officer]

You’re welcome.

[Operator]

And your next question will come from Timna Tanners from BofA. Your line is open.

[Timna Tanners, Bank of America Merrill Lynch]

Hey there. Good morning, guys. How’s it going?

[Máximo Vedoya, Chief Executive Officer]

Very good. Thank you. Good morning, Timna.

[Timna Tanners, Bank of America Merrill Lynch]

Good morning. I wanted to ask a few questions. One was on shipping to the South America region, I know you mentioned that things were returned to pre-COVID, but even before COVID, obviously, there was a recovery began. 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?

[Máximo Vedoya, Chief Executive Officer]

Well, I mean, our sales in the southern region are mostly in Argentina. First, what is going to be a very good quarter that the recovery of the Argentinian market is very good, I mean, to be honest, unexpected. But Argentina has a lot of our 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 will be achieved.

As I said, going forward, it depends a lot in [between] [ph] negotiations, and the successful [pathway] [ph] negotiation, and the stability in the macro economy context. I mean, inflation has to come back – it 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, you don’t show the results, this can continue forward. But first, we have to see what is happening in this area. I hope I’m clear, Timna.

[Timna Tanners, Bank of America Merrill Lynch]

Yeah. That’s clear as possible. I think we have to stay tuned. But that’s helpful. Thank you. I guess, I forgot people usually ask all their questions at once, if I could ask another 1 or 2?

[Máximo Vedoya, Chief Executive Officer]

Probably. Yeah, go ahead.

[Timna Tanners, Bank of America Merrill Lynch]

Okay. 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 lagged 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? But is it possible the board considered this dividend payment a new starting point going forward if your profitability continues in recent levels? Thanks.

[Máximo Vedoya, Chief Executive Officer]

Thank you, Timna. 2 great questions. Pablo, why don’t you answer the first one?

[Pablo Brizzio, Chief Financial Officer]

Okay. So you’re right, we were expecting a decrease in EBITDA margins we like to look at our numbers. And that is reflected an increase in the EBITDA return 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 big picture than the maximally big hit on prices in the North American market. This would be something in the following one. And then, we’ll need to analyze the area to see which is the impact of the new pricing scenario to reflect the number, again, what we have – we will continue to do I think that Pesquería facility will helps us to continue to result is to sustaining our margins at the highest level possible.

And even in this scenario, with a significant level of prices that we assume we keep having and the EBITDA margin related to our competitors and this is what we are looking for and what we are continuing working on. And then year-end we see, but we have very significant difficulties, we have reached the EBITDA margin double failure last year. So we see some facilities to continue incurring very high EBITDA margins, and EBITDA perform during the upcoming quarter. And we’ll keep working very fast in order to sustain as much as we can into these levels.

[Máximo Vedoya, Chief Executive Officer]

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 expectations of a strong performance at least in 2021, so if this continue – there’s no doubt that that these good performance would be reflected in the dividend payment of 2022.

I think that would be say, I answer the question.

[Timna Tanners, Bank of America Merrill Lynch]

Yes, definitely. Thank you so much. Best of luck.

[Máximo Vedoya, Chief Executive Officer]

Thank you, Timna.

[Operator]

And your next question will come from Andreas Bokkenheuser from UBS. Your line is open.

[Andreas Bokkenheuser, UBS Group AG]

Thank you very much. Just 2 quick questions from me, a follow-up on the capital allocation. You always mentioned dividends and CapEx. Obviously, you’re very cash generative at the moment. And obviously, your expansion in Mexico has kind of come to an end, any thoughts about being 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 pump down in the first quarter as reallocate volumes in Mexico. Why is it happening so early with the Mexico expansion, not ramping up until that just restocking driven? That’s driving that reallocation of slabs? Those are the 2 questions? Thank you.

[Pablo Brizzio, Chief Financial Officer]

Okay, 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 will consider everything together in analyzing this type of transactions. So it’s difficult for Ternium to move ahead with that. So what we’ll do in that directions and we probably we will be going for the market, but then we will 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, so why I do not see in the near future, a transaction like that. What we see continuing, as Máximo was claiming our dividend payment, our dividend increase as we have been joined in the last year. So there is where we are working on. Máximo?

[Máximo Vedoya, Chief Executive Officer]

Yeah. The second one, Andreas, is a slab. And you’re right. I mean, slabs, we are still buying or using the same amount of slabs, because beginning to start. But 2 things, first of all, this integration is going to happen. So in some sense, we are trying to certify that our slabs in a lot of customers with our own portfolio. But to be ready to improve and to sell from the new hot-rolling 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 opposed 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 given that it was better to ship more to Mexico than to sell from Brazil and shipped and buy from Mexico from other sources. So don’t you want to return, Andreas?

[Andreas Bokkenheuser, UBS Group AG]

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 you kind of expect it to take them for you to kind of reach the full run rate. And you always talk about 2023 in terms of sales of full nameplate capacity, but presumably it’s 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, from the new plant?

[Máximo Vedoya, Chief Executive Officer]

Yeah, you’re right. But remember, the new sales, I mean, the hot-rolling mill in Pesquería 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. But the thing is that most of all, an important part of the new sales. Our industrial customers which we have to go through a very long period of certifications, which we are advancing some of the customers, but not at all, so you have both, I mean, our Churubusco facility and our Pesquería facility, producing 100%, we probably take the 2023.

We will probably, I mean, improve – I mean, both our facility Pesquería at full capacity. And probably for some time that 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 Pesquería and then increase Churubusco in 2023.

[Andreas Bokkenheuser, UBS Group AG]

Got it.

[Máximo Vedoya, Chief Executive Officer]

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, we are able to certified all our products, we clear, probably, will increase that we will improve that.

[Andreas Bokkenheuser, UBS Group AG]

Yeah. That’s very clear and conservative is good. I appreciate you take the question. Thank you very much, and congrats on the solid results.

[Máximo Vedoya, Chief Executive Officer]

Thank you, Andreas

[Operator]

[Operator Instructions] Your next question comes from Thiago Lofiego. Your line is open.

[Thiago Lofiego, Banco Bradesco]

Thank you. Good morning, gentlemen. 2 questions on my side, the first one 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, very final one, just to double check, you mentioned 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?

[Máximo Vedoya, Chief Executive Officer]

Yeah, thank you, Thiago. For the third one being production lost north 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 lost in a facility that it’s a full capacity. So if we lost production with shipments, we cannot recover today. So with that, I mean, that’s the only thing.

The demand side in Mexico, I think, 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, in electronics, I mean, home appliances, HVAC, everything is running at full capacity, all our customers. Even automobile, the auto industry we chat the problems of the semiconductors. I mean, they are also running at a very high level with the stoppage going back and forward, because of this constraint, but they are very, – I mean, at a very high level of production, so all industrial sectors are very high in Mexico. Construction is starting to improve, but it’s not the main driver of the demand in Mexico.

[Thiago Lofiego, Banco Bradesco]

If I may, I’m sorry to interrupt. But on the very strong demand dynamic. How much of that do you attribute to the restocking cycle across different industries, because of the situation created that that pandemic? We’re seeing that in Brazil? That’s why I’m asking. So if you think that’s happening also in Mexico and other regions.

[Máximo Vedoya, Chief Executive Officer]

I don’t think it’s happening in Mexico. I think that that all the final goods are really consumption in Mexico, North America. I mean, people are spending much more in improvements in their houses in new houses. I mean – and to be clear, we don’t see a stock in distributors or high stocking 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 stuff in the U.S. So I’m not seeing an increase in that and seeing a real demand at least in the industrial part of our shipments. In construction, again, there are not much talk. 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.

[Thiago Lofiego, Banco Bradesco]

Understood.

[Máximo Vedoya, Chief Executive Officer]

I hope with this it’s clear.

[Thiago Lofiego, Banco Bradesco]

Yeah.

[Máximo Vedoya, Chief Executive Officer]

And again, we are not seeing also that in Argentina to be honest. I mean, the increasing stock in a lot of things, in some part, yes, but in others not. Slab market, how hot it is? I mean, all the prices have increased. I think it’s not only this not slab market. I mean, with hot rolled coil, with a price of $1,300 in the U.S., I mean, clearly, slab market is also increased the prices not as much, I think, but it increased the prices. So I think that that it’s a thing of all the market, not of slabs, particularly.

[Thiago Lofiego, Banco Bradesco]

Do you think there is a mismatch between supply and demand and the slab market, meaning some, integrated steel producers, basically, reduce capacity utilization? So they basically started to…

[Máximo Vedoya, Chief Executive Officer]

Well, in North America…

[Thiago Lofiego, Banco Bradesco]

…point, yeah, go ahead.

[Máximo Vedoya, Chief Executive Officer]

Yeah, in the 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 Lázaro Cárdenas, which they are shipping everything to them. So, the lack of slabs in the whole North America – North America economy, it’s a thing that happens, I mean, prior to pandemic and it’s happening today. I mean, that’s reality.

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

[Thiago Lofiego, Banco Bradesco]

Yeah, what I meant, Máximo, is just like the rolled steel demand might have recovered faster than capacity than slab production is recovering. And that created a mismatch. So, steelmakers that used to have their own slabs supplied internally, they are now buying in the market, while these stabilizes their slab production.

[Máximo Vedoya, Chief Executive Officer]

I am not seeing that. To be honest. I am not seeing that yet.

[Thiago Lofiego, Banco Bradesco]

Okay.

[Máximo Vedoya, Chief Executive Officer]

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

[Thiago Lofiego, Banco Bradesco]

Okay, all right. Thank you, Máximo.

[Máximo Vedoya, Chief Executive Officer]

You’re welcome.

[Operator]

And your next question comes from Jonathan Brandt from HSBC. Your line is open.

[Jonathan Brandt, HSBC]

Hi, good morning, good afternoon. Thanks for taking my question. 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 any other possibilities there? Or is the expectation that it’ll 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.

[Máximo Vedoya, Chief Executive Officer]

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 there was, for record, I mean, we have made M&A acquisitions. And part of our growth, our history was through M&A. So that is possible. If you said, well, you have something concrete, no, we don’t.

And some of the projects we are analyzing are organic growth for sure. I will know – as you know, we finished a couple of years ago our investment in Peña Colorada. We have some opportunities in iron ore. But the iron ore is 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.

[Jonathan Brandt, HSBC]

Okay, very good. Thank you.

[Máximo Vedoya, Chief Executive Officer]

Thank you, Jon.

[Operator]

At this time, I have no further questions. Thank you. I’ll turn the call back over to the presenters for closing remarks.

[Máximo Vedoya, Chief Executive Officer]

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 question or comments, please contact. Thank you very much and stay safe please.

[Operator]

Thank you, everyone. This will conclude today’s conference call. You may now disconnect.