Title

Presentation

Operator: Hello and thank you for standing by. At this time, I would like to welcome everyone to the Ternium First Quarter 2024 Results Conference Call. [Operator Instructions] I would now like to turn the conference call over to Sebastian Marti. Please go ahead.

Sebastian Marti: Good morning, and thank you for joining us today. My name is Sebastian Marti and I am Ternium’s Global IR and Compliance Senior Director. Ternium released yesterday it’s financial results for the first quarter of 2024. This call is complementary to that presentation. Joining me today are Ternium’s Chief Executive Officer, Maximo Vedoya, and the Company’s Chief Financial Officer, Pablo Brizzio, who will discuss Ternium’s business environment and performance. At the conclusion of our prepared remarks, there will be a Q&A session. Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today’s webcast presentation.

You will also find any reference to non-IFRS financial measures reconciled to the most directly comparable IFRS measures in the press release issued yesterday. With that, I turn the call over to Mr. Vedoya.

Maximo Vedoya: Thank you, Sebastian. Good morning to everyone, and thank you very much for participating in today’s call. Ternium began 2024 with strong performance and a healthy cash flow generation. We delivered good results across all regions despite some macroeconomic challenges in some of them as we will discuss later on. Our adjusted EBITDA margin reached a recurring level of 17% driven by higher steel crisis and cost efficiency. We also continue showing a strong financial position increasing our net cash to $2 billion as of the end of March. Our operation in Mexico, our main market, continue to show a positive performance nearshoring in North America is intensifying as more manufacturing capacity relocate or expand in the region, driven by advantages of geographical proximity, lower logistic costs and shorter lead times.

This strength is a particular favorite for our company, as we have a strong presence and a diversified product portfolio in this market. Demand from the industrial sector grew in the first quarter compared to both, the previous quarter — the previous quarter and the same period last year. The auto industry looks especially healthy with good production levels and expectations of reaching 4 million units in 2024, which would be a new record. On the other hand, the home appliances and electric motor industries face some demand headwinds. Finally, the commercial market is resuming activity after restocking phase in the first quarter triggered by a downturn in steel benchmark prices in North America. Due to these positive trends, we are expecting to see a sequential increase in shipments in the second quarter of the year.

Another positive development is a recent implementation of a new input tariff by the Mexican government to prevent unfair competition in the local market. Over 500 products across various industries [indiscernible] to duties ranging from 20% to 35%. These target import from country that have no trade agreement with Mexico, such as China, and aim to level the playing field for local producer. I believe this is an important development that set a positive example to other countries in the region. Moving to Brazil, steel consumption started 2024 on a positive note showing a slight improvement over the previous year. The construction sector is slowly picking up driven by lower interest rates, improved consumer confidence and infrastructure project.

In the auto industry, the latest production forecast point to a 6% increase in this year. With a medium term view, this should benefit Usiminas activity as it is the largest supplier of steel to the automotive industry in Brazil. Usiminas has a competitive edge in terms of quality, service and logistics, as it operates to mill [ph] strategically located in the southern region of Brazil, close to the main auto clusters. On the other hand, the Brazilian steel industry faces a significant challenge from the surge of import in it’s steel market under unfair trade conditions, increasing by 16% in the first quarter compared to last year. Most of these inputs are coming from China. To address this challenge, Brazil’s executive management committee recently decided to raise import tariffs to 25% for several steel products that support a certain quota [ph] level.

This is expected to take effect in 30 days, once officially published, and to be valid for 12 months. This measure is perhaps less comprehensive than what other countries in the region have implemented, but we consider it — it is a first step in the right direction. Together with the recovery of it’s domestic market, Usiminas has been focused or restoring it’s operational efficiency, following the restart of its main blast furnace in the last quarter of 2023. This furnace is now operating and at the expected level for this stage, resulting in lower steel production costs than in the previous quarters. Despite the challenges that Usiminas faces, it is determined to improve it’s operational efficiency by applying benchmarking and implementing best practice in various areas across the company.

Usiminas new management has shown remarkable leadership and competence since they took office less than a year ago. However, we must be realistic and acknowledge that this is a gradual process, I am confident that Usiminas will achieve it’s goal and overcome it’s difficulties. Usiminas has also announced a decarbonisation goal, which is to reduce Scope 1 and 2 emissions intensity rate by 15% by 2030, relative to 2019 baseline following the world steel methodology. This goal reflects its commitment to global effort to mitigate climate change, and to add to the sustainable development of the steel industry. During 2024, we will work on formulating a consolidated decarbonisation roadmap with Usiminas. Turning now to Argentina; shipments declined sharply in the first quarter, reflecting the negative short-term impact of the government’s economic stabilization measures on the construction and industrial sectors.

Argentina’s medium-term outlook still remain uncertain, but we anticipate a gradual recovery in steel shipment as the economy adjust to the new policy framework and inflation moderates. In the second quarter, we expect the agribusiness and the energy and mining sector to lead these recovery. We remain confident in the long-term potential of Argentina, a country that has abundant natural resources, a diversified industry industrial base, and a highly skilled workforce. If the government succeeds in stabilisizing the macroeconomic situation and deregulating the economy, Argentina will offer many opportunities for growth and development in various sectors that are relevant for our operation. Before I conclude my remarks, I would like to highlight some key aspects of our strategy and performance that will shape our future in the next few years.

A crucial part of our strategic plan is to deliver our upstream and downstream projects at our industrial center impact carrier [ph] on-time and within budget. We are making good progress in building a significant increase in value-added capacity from breaking line [ph] — from peaking to galvanizing and customizing. The first stage of this project will come to function in 2024 with a peaking line and the first line in our customized process in the second half of the year. Moreover, the new slab making mill will complement an integration process that was started more than a decade ago with the construction of the cold wall [ph] and galvanized line at Pesquería, our first Greenfield facility in Mexico. The new facility will be capable of producing the whole range of automotive grade steel with the lowest carbon emission level in the Americas.

These projects are vital for our long-term success in the region, as they will allow us to benefit from the nearshoring of manufacturing capacity, advanced our CO2 emissions roadmap and reinforce our strong competitive position to replace imports in the Mexican steel market. Another key aspect or key element of our strategy for the coming years is to unlock the full potential for Usiminas. We believe that Usiminas has a great opportunity to enhance its profitability in the long run. It will require a steady and consistent effort and we will stand by Usiminas management to help them achieve this goal. Okay, Pablo, please give us an overview of Ternium performance in the first quarter.

Pablo Brizzio: Thanks, Maximo and good morning to everyone. Before we start, I would like to let you know that Ternium has refined it’s operational segments to reflect the integration of Usiminas operations. The new segment are filled on mine [ph]; the segment includes the phase of steel and other products. Meanwhile, the mining includes the sales of iron ore produced both, in Brazil and in Mexico. Now let’s review our company’s operational and financial results on the webcast presentation for a more detailed picture of our performance. Let’s begin with page number 3. Ternium’s has recorded [ph] robust performance during in the first quarter of this year marked by advanced [ph] margins and sustain high sales volume. Adjusted EBITDA for the first quarter was $655 million [ph], up 31% from the prior quarter, representing a higher adjusted EBITDA margin that reached 17%.

The positive operating performance was a result of improved pricing, reduced cost and $56 million [ph] medium gain related to readjusted of electricity transmission cost in Mexico. Looking forward to the second quarter of this year, Ternium anticipates a decline in recovering adjusted EBITDA. This is mainly due to a decrease in EBITDA margin, partially offset by increased shipments. The decrease in EBITDA margin results mainly from an expected decline in revenue per tonne within the steel segment across most of Ternium’s markets. Moving on to results, both net income and earnings per ADS demonstrated significant strength during the first quarter due to a strong operating performance partially offset by losses associated with effective result under divestment of certain assets and sovereign bonds holdings, we will go deeper into these results later in the presentation.

Let’s shift our focus to the performance of our field segment. On page 4, Mexico’s Ternium steel shipments remained strong during the period; volume experienced slight decrease sequentially. This decline is attributed to a transitory re-stocking in Mexico commercial steel market. However, it was largely mitigated by strong demand from industrial customers. Looking forward, Ternium steel shipments in Mexico are expected to increase in the second quarter. As Jim mentioned, Brazil was stable sequentially. The year-over-year increase reflects the consolidation of Usiminas around the third quarter of last year. In the following region, shipments experienced significant decline in the first quarter of 2024, attributed to the reduced activity level of Argentina and in stocking process in the steel value chain due to the negative effects of the government economic stabilization measures.

The outlook for Argentina remain uncertain, yet Ternium anticipated recovering in its local shipments starting the second quarter of this year. Let’s now zoom in the steel segment profitability on the next page. Focusing on the upper left chart, steel products sales decreased in the first quarter mainly as a result of a lower shipment. Our steel revenue per tonne’s slight sequential increase of 2%. In Mexico, legalized steel prices increased by 8%, reflecting the lack of industrial contract prices, up higher levels. On the other hand, with market conditions in Argentina, it led to a 6% sequential decline given realized steel price in the southern region. Looking ahead, we expect lower realized steel prices in the upcoming quarter with decreases in most of the new markets.

In the top right chart, we have included two measures of profitability of steel segments; cash operating income per tonne, and cash operating income margin. Cash operating income equals operating income adjusted to depreciation and amortization, as well as other certain non-cash items; you can find a detailed reconciliation of these non-GAAP measures at the end of the quarter results press release issued yesterday. Cash operating income per tonne, a margin for the steel segment was strong in the first quarter. This was driven by lower cost of purchase slabs and raw material alongwith improved operating efficiencies of Usiminas facilities [ph]. Furthermore, as previously mentioned gain related to a readjustment of electricity transmission charges in Mexico has a positive impact on the cost of sales for the Ternium [ph].

Now let’s turn our attention to Page 6 where we will re-examine the performance of the mining segment. In the top left chart, we observe that net sales for the mining segment decreased sequentially as a consequence for review statements and lower iron ore prices during the period. It was primarily due to decreased iron ore production levels in the field as anticipated. We are in profitability, the mining segment cash operating income per tonne as mentioned in the first quarter showed attractive levels, although they were lower sequentially, mainly due to a decrease in revenue per tonne. Now, let’s go through the adjusted EBITDA and net income on Page 7. As previously commented, in the top chart, the main drivers behind the sequential increase in adjusted EBITDA were a significant reduction in the cost and increase in state revenue per tonne, and the gain related to the reassessment of the electricity already mentioned.

These were partially offset by a lower contribution from the mining segment. The chart at the bottom; net income in the first quarter reflected a sequential increase in operating income, foreign exchange losses due to fluctuation of the Mexican peso and the Brazilian real compared to FX gains in the prior quarters, and better deferred [ph] tax results which caused an unusual low effective tax rate in this quarter. Now, let’s move on to the next slide to assess our cash flow performance. Cash flow from operation was healthy, despite the $266 million [ph] increase in working capital related to an increase in inventories, and in trade and other receivables during the first quarter. Capital expenditure increased sequentially in the first quarter, primarily due to the completion of the relaying of the main blast furnace in [indiscernible] Brazil, and a reduction in the advance payment to equipment manufacturing related to the construction of the new facility at the industrial center in Pesquería.

Finally, we continue to have a very solid financial position with net cash that showed slight increase in the quarter, mainly related to evaluation of turning Argentine holdings of Argentine sovereign bonds. Okay. With this, we have finished with our prepared remarks. Thank you very much for your attention and time. And now we can open to any questions you may have. Operator, please, let’s begin with the Q&A session.

Operator: [Operator Instructions] The first question comes from the line of Carlos de Alba. Please go ahead.

Carlos de Alba: Good morning, gentlemen. The first question is just a clarification on the $56 million gain related to the readjustment of electricity transmission charges in Mexico. Maybe — I don’t know, if Pablo or Maximo, can you provide some color; is this something that you overpaid in the past, so you pay more than what you should have and now it’s just been reversed back, and therefore you kept it as a sort of an operational item in your report?

Pablo Brizzio: Basically, this was a change that the authorities in Mexico introduced some years ago. But we have — of course we did not agree with it. We have a provision on that, and then we went to court in order to challenge that. Finally, we were successful in that. So, on this final by now, so we have reversed 100% of the provision that we have, and these should not be included anymore in our numbers.

Carlos de Alba: All right. Okay, that’s clear. And then on Argentina, two questions. One is, I heard that you said that you expect a gradual recovery in volumes. There was a very sharp decline quarter-on-quarter in the first quarter; so can you maybe provide a bit more color as to how to interpret a gradual recovery? And the other part of the question is on the Argentine bond holdings that the company still has. You sold some in the first quarter, but you highlighted in the release that there is still around $240 million on negative comprehensive income in connection to the bonds that you see hold. What is the expectation there? Are you planning on potentially selling those bonds? Or what is the idea? Thank you.

Maximo Vedoya: I would take the first one. Argentina, I mean, there is still a lot of uncertainty in Argentina. So I don’t want to give you an exact number and whatever number, you have to know that it’s — it can change because of the situation. But as I said in my initial remarks, we think that the past is the correct and Argentina is doing what is necessary to do. The fourth quarter, as you saw in the graphic was a huge decline; I think it was more of 40% decline. If I have to say a number of the second quarter will be a decline, about 20% of the year before, not of this quarter. And that should give us an increase of 25% or something like that quarter-against-quarter. So those are the numbers we are seeing today. So there is a recovery, and that is the number we expect. But it shouldn’t be a fixed number, as you know, develops in Argentina usually occur very quickly. I hope I answer the question with that?

Carlos de Alba: Yes, it was very clear. Thank you very much. And I will not call you to it.

Maximo Vedoya: Thank you. Pablo, the second one?

Pablo Brizzio: Okay. That is quite complex to explain but let me try to be as simple as possible. What we have done in the first quarter was that the company in selling all the bonds that we receive as civilian payment from Argentina into the holding company, and all the bonds that the government put in place in order to pay the suppliers that were not paid by the former government, it occurred during the first quarter. So at this point, we needed to reflect the loss that the value of these bonds that have a nominal value, and then the real value in dollars, going through the financial results of the company; the results we’re really in reserve [ph], so at the balance sheet level there was no change, but these need to be moved from that reserve to the financial results.

On the other side, we have finalized with this. So, you will see not any other impact of this in the coming quarter. This was not related to the holding that we have in Argentina as cash in hand, this was related to bonds that the government issued to pay back suppliers and bonds that we have related to the dividend paid last year from Argentina. So it was a significant impact during the quarter, but it is finalized. So no impact in relationship to that will be seen in the coming quarters. I don’t know if everything is clear because as I said, it is not an easy issue to explain.

Carlos de Alba: No, that’s clear, I think. But so — just till then have a loss position in the bonds that you still hold off around $240 million, and it’s already recorded in comprehensive income, right?

Pablo Brizzio: Exactly. That is comprehensive income and as you you’ve seen, that reserve was reduced from $400 million or $450 million to $250 million and that will depend on the valuation of the bonds that we have in hand. So, if there is a further revaluation of the bonds, that reserve will be reduced. But again, these reserves will not be reflective of the moment, these reserve will not be reflected in the financial result upto the moment that we had to do something with that bonds.

Carlos de Alba: Got it. Thank you very much.

Pablo Brizzio: You’re welcome.

Operator: Our next question comes from the line of Cairo [ph] with Bank of America. Please go ahead.

Unidentified Analyst: Yes, good morning. Thanks for the opportunity. So my first question is on the recently announced quotas, import tariffs for steel products in Brazil. And you know, I know that you commented on them in your initial remarks but I just wanted to explore it a bit further, right. And whether you think that the measures that were already announced are sufficient enough to quell [ph] the pressure from imports that we’ve been seeing over the past year, and perhaps and also generate an opportunity for price hikes to recompose profitability in Brazil in the short-term, right, so over the next few months. So how do you see that playing out? And then secondly, you mentioned in your press release, right, that there was an unexpected outage at one of your blast furnaces in Brazil.

So, I just wanted to see if you can share some more details on that, you know, what the timing is on resolving this issue? And you know, whether you can share any expected impacts on costs as well. Thank you.

Maximo Vedoya: Thank you, Cairo [ph]. I will take both questions. The announcement of the measures in Brazil, as I said, in my initial remarks; I think that the measurements are our first step in the right direction. Will these measures be enough to combat unfair trade practices, mainly from China? I am not sure. I think that a little bit more is needed. I mean, as you know, we — I don’t have the exact description of how this is going to be implemented. As you know, it was made public in a conference call but I don’t have yet the details of how it’s going to be implemented. But as I saw it, the numbers or the quota that is allowed to be imported in some of the products, it’s still an important quota; so I don’t know if it’s going to have an impact in prices.

But again, as I said, I think it’s a good first step. And we should continue working as other governments are working. I know, these measures are being made in the US, in Mexico, in Europe, in Turkey, a lot of countries are taking these measurements because of what is happening in China; as you realized, last month was one of the highest exports of the history of China in steel products, more than 10 million tons in one single month. So China is dumping it’s steel everywhere now, and most of the countries are shutting down that unfair trade imports. So it’s not enough but it’s a good first step. I hope I answered that question with this; the first question, Cairo [ph].

Unidentified Analyst: Yes, absolutely. Very clear. Thank you.

Maximo Vedoya: Perfect. The blast furnace — this blast furnace is number one in Brazil [ph] — in turning Brazil facility in real experience which is a temporary disruption due to some unexpected outage in the last days of the first quarter; I think it was on 28th or 29th of March. And we are now — the blast furnace is now undergoing a restart process; so there’s a huge — when a blast furnace account a little bit, you have a long process for the restorage or the restart process. And we are now in that restart process. Having known the problem we already purchased enough slabs to comply with all our commitment with the customers, we don’t expect any noticeable impact on our shipment. Also we have already purchased all the slabs we need; so we don’t expect any main impact on shipments.

Unidentified Analyst: Understood. Thank you, Maximo. Very clear.

Operator: Our next question comes from the line of Tim Tanners [ph]. Please go ahead.

Unidentified Analyst: Hey, good morning. Thanks for the time. I wanted to probe the guidance commentary a bit more. So, you talked about lower prices in most markets, what market might not be seeing lower prices? And then you’ve talked about EBITDA and EBITDA margins but can we talk about costs a bit more, and specifically when you might see the benefit of some declines in coking coal prices?

Maximo Vedoya: Yes, I mean, in all markets, we’re seeing a little bit of a lower prices not exactly in Brazil, but it depends on the exchange rate — that will depend a little bit on the exchange rate, when you see it in dollar terms. What we are going to see in Mexico is that you will have a lower prices in the contract, right, in the contract sales because of the lack every quarter we have. But prices in the commercial market are increasing right now. So it’s a mix between a lower price because of the contract and an increase in prices that we are seeing in our shipments to the commercial market. Overall, the price will probably be a little lower than the ones indeed in this quarter.

Pablo Brizzio: Okay. If you want to however go into the cost side of the equation, what we are expecting to see is same level of cost because it was a mixture of different things. We are going to reflect as usual the price of slabs that we bought a couple of quarters ago, and then we have not yet seen decline in the price of that raw material. There is also a change in the cost of the iron ore that is more immediate to see that that impact in our numbers. The increased profitability in the Usiminas numbers or the Usiminas production will be also be reflected during next quarter and the following. As Maximo was explaining that, the performance of the blast furnace example — after the realigning [ph] is starting to get upto a steady level.

Though as Usiminas presented the numbers yesterday, you will have the impact of the increased price of slabs purchased in the market that will be impacted during the second quarter. So all in all, is why we are expecting to see a relatively stable level of cost for next quarter.

Unidentified Analyst: Okay. And coking coke, it sounds like it takes a while to flow through then [ph]?

Pablo Brizzio: Yes. Well — yes, exactly. It’s something that we are buying for our operation in Brazil. And it takes a little while for it to be reflected in in our modern life [ph].

Unidentified Analyst: Okay, thanks for that. And then, I wanted to ask a little bit about the cadence of ramp up if you could remind us on Pesquería [ph]. You have the galvanizing lines; you also then of course, have the DRIEAS [ph] complex. So if you could remind us about the timing and also any update on project costs given that we’ve seen some broad inflation across many of these types of projects? How are you tracking there?

Maximo Vedoya: Yes. Costs, we don’t have any update besides the one we gave the last quarter where we increased a little bit. But we are seeing that the cost will be that one; I think it was $3.4 billion [ph]; the total cost of all the — the Pesquería 3 as we call it project. Regarding timing, the first line that is coming online, it’s coming in July with a ramp up, of course, it’s the peaking line [ph], and then the customers lines are starting one also in July and going forward the other four; two months, each one. So by the end of the year we will have the five lines of the customers lines working. Then we have the galvanized line; the galvanized 2 as we call it. That it’s going to start by the end of 2025, the coal [ph] rolling line, the PLT CM2 [ph], as we call it, that is going to start in March of 2026. And then, we have the CIF DRI [ph] facility, that is going to start — we are appointed to the middle of 2026.

Unidentified Analyst: Okay, last one. And just to clarify, what do you mean by a customized line? I’m just not familiar with that term.

Maximo Vedoya: A line for the finishing products, I mean to finish [indiscernible] and galvanized products, and to serve the customers directly.

Unidentified Analyst: Okay, got it. Thanks, again.

Maximo Vedoya: You’re welcome.

Operator: Our next question comes from the line of Enrique Marquez. Please go ahead.

Enrique Marquez: Hi, thank you for taking my question. First question regarding capital allocation. We’re seeing Ternium delivering strong results, should we expect an increase in dividends? And also, I understand you’re going through an investment cycle but just — do you guys have anything on the pipeline? Or are you thinking of any other opportunities maybe in other regions outside Mexico after this investment siphons [ph] completed? Thank you.

Pablo Brizzio: Okay. So, let me take first the question on dividends. As you know, the company has been increasing the dividend payment. We have increased this year with the result of last year to $3.3 [ph] paid, that was an increase in comparison to the one that we paid last year. Though you’re right that we have the financial resources in order to keep — sustain this level of dividend payment, you also need to take into consideration all the CapEx plans that we have and all the things that we need to do in our facilities. What we share and I think we we’ve commented on this in the prior conference call is that whenever we or the company decides to increase the dividend payment is because we understand we have the resources to sustain at least this level then, of course, year after year, the Board of Directors needs to propose to the shareholders meeting the final number, but with these new increased level of dividend is the one that we think that the company can sustain the medium run.

So we are not expecting any specific movement there but at least to sustain the current level of dividend payments.

Maximo Vedoya: And again, what the second question again, because we didn’t hear very well here.

Enrique Marquez: Sorry about that. It was just on the pipeline of next investments; any other opportunities maybe in other regions outside Mexico?

Maximo Vedoya: Well, you know, we are always analyzing opportunities in Mexico and outside Mexico, also. Our pipeline today is very full, as you may well be aware and so we are not seeing any particularly today. But of course, there are regions outside Mexico that are also very important to us. As we always said, our focus is been in the Americas, we are not going to go to other parts of the world; we think there is good, big opportunities or good opportunities for us to continue growing, to continue implementing all the things that we are doing in this region in the Americas, but we don’t have any specific to give you today.

Enrique Marquez: Got it. Thanks. Just a quick follow-up on the last question. The flattish cost outlook; is it already considering the purchase of excess slabs or did we see some impact from it — coming from it?

Maximo Vedoya: No, no; it’s considering the buying of slabs.

Enrique Marquez: Got it. Thanks.

Maximo Vedoya: You’re welcome.

Operator: There are no further questions at this time. So, I’ll turn the call back over to Ternium’s CEO.

Maximo Vedoya: Thank you. Well, we appreciate your interest in and attention to this call. Thank you very much for participating. And if you have any questions, don’t doubt to ask us or call us. Have a great day and take care. Bye, bye.