Ternium S.A.

Global IR and Compliance Senior Director. Yesterday, Ternin released its financial results for the third quarter and first nine months of 2024. This call is intended to complement that presentation. I am joined today by Maximo Bedoya, Ternin's Chief Executive Officer, and Pablo Grillo, Ternin's Chief Financial Officer, who will discuss Ternin's business environment and performance. We will open up the floor to questions following our prepared remarks. 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 findings 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. I'll turn the call over to Mr. Bedoya.

Good morning, and thank you very much for participating in today's Sternium third quarter earning calls. Sternium reported an adjusted EBITDA of $368 million and a net income of $93 million for the third quarter. We experienced increased shipments across all our primary markets and, as anticipated in the last quarter's call, our margins declined, primarily due to the decrease in realized price in our main market. Let's review the status of these markets. The steel market in Mexico remains healthy, operating at consistent levels after last year's significant 14% year-over-year increase in apartment steel consumption. In fact, in the third quarter of 2024, we had record high shipments in this market. For the fourth quarter, we expect a decline in shipments as a result of this period being the seasonally week of the year. Additionally, public investment has been soft recently, which is common in Mexico following a change of administration. Once this process is completed, we expect demand from infrastructure projects to return as a new government has announced plans to launch several projects aimed at enhancing the competitiveness of the Mexican industry. Looking ahead, our outlook has several bright spots. In the first quarter of next year, we expect sequential shipment growth in this market. In part, this will be the result of our new peak in 2009, which is boosting our capacity for automotive and industrial markets as it ramps up production. Furthermore, I am optimistic about the Mexican market in the year to come. Automatic production increased by 7% year-over-year in the first nine months of 2024 and is expected to reach 4.2 million units in 2025, which would be a record high. Finally, nearshoring trends are expected to persist, benefiting the steel markets on both sides of the border. The new administration in Mexico recognized this opportunity for the country and has stated its commitment to pursuing a policy of industrialization and import substitution very much in line with what we have been advocating for many years. Moving to Brazil, we see healthy industrial activity and a dynamic distribution market. Steel consumption in Brazil market has been growing during the year, increasing 9% year over year in the first nine months of this year. Vehicle production is growing as well, with an expected 5% increase in 2024. On the other hand, flat steel imports jumped 20% year over year in these first nine months, mainly from China, as this country significantly increases steel shipments to the international markets. As It has already happened in other countries. The Brazilian government noticed this increase in unfair trade from China and as a result of their still excess capacity and put in place a one year quote system under which still imports above certain quarter are subject to a 25% tariff. Unfortunately, These measures haven't yielded the expected results. Following this, several anti-dumping investigations have been initiated over imports of cold-walled steel, coached steel, and pre-painted steel, mainly from China. These measures are promising. We encourage the Brazilian government to continue this path to prevent more decentralization in Brazil. Finally, let's review Argentina. Steel volumes in Argentina market has shown a recovery over the past several quarters, both within the industrial and the commercial market. In the fourth quarter, we expect to maintain a stable level of steel shipments, despite the seasonally slowdown in activity towards the end of the year. With a long-term view, I think Argentina's industrial and construction activity will improve in 2025, favoring a recovery in local steel demand. The Argentine government is implementing an ambition reform program that we expect will promote investment in the country. However, there is a risk in this market of an increase in imports of unfair trade and products made with steel. This will be an important issue to follow up with the Argentine authorities during next year. Our wind farm in Argentina will begin operation by year-end, boosting our use of self-generated renewable energy and reducing reliance on external sources. The project is progressing as planning, with the completion of 22 bases and the installation of 14 wind turbines to date. We anticipate that the first unit will begin delivering energy in December, with the project expected to reach full completion by January. This represents a significant milestone in our commitment to renewable energy and decarbonization. Let me now give you an update on the progress of our expansion projects. The clipping line and three of the five lines in the new finishing center in Pesqueria has started operation and are currently ramping up. These lines are at 550,000 tons per year of plicking capacity and 310,000 tons a year of customized products capacity. During the next two months, we plan to start up the two remaining lines in the finishing center. In addition, we are making steady progress on the 600,000 tons per year galvanizing line and the 1.6 million tons per year cold rolling mill. We plan to start this operation at the end of 2025 and early 2026, respectively. We have completed the soil movement and the civil work, and assembly of structure and buildings are advancing rapidly. Equipment shipments have already come in. Lastly, for the construction of the 2.6 million ton per year slab-making facility in Pesqueria, we have completed the cleaning and soil movement in most areas. We are making progress in the civil work, foundation, and structural installations. Also, key operational contracts have been awarded and are underway. We expect to start up this lab facility by mid-2026. The new production lines in Pesquería project will enable the company to enhance its product offerings with a broader range of high-quality steel products to deliver diverse customer needs more effectively, meeting the high-quality requirements of the automotive and appliance sectors. Moreover, the new slab facility is expected to significantly increase ternium's raw steel production capacity in Mexico, ensuring a steady supply of slabs from downstream processing. This facility will also enhance ternium operation efficiency and reduce the tendency on external suppliers, leading to cost savings and improved profit margins. Finally, I would like to highlight the publications of Ternium's latest sustainability report. This report includes, among other new features, an update on Ternium's decarbonization target, detailing several enhancements introduced since our initial target was set in 2021. For the first time, our target includes Scope 3 emissions, which are not directly associated with our company. These include Company 1 emissions related to the production of semi-finished products such as slabs and billets produced from third parties, and Category 10 emissions generated by our customers during the processing of our slabs and billets. We are expanding the boundaries of our CO2 emissions reporting beyond crude steel to include hot-rollet steel production. And we migrate to GHG protocols methodology to improve comparability with other indices and prepare for future regulatory requirements. The update target is a 15% reduction in emissions intensity by 2030, using 2023 as a baseline. As in previous years, our greenhouse inventory for 2023 was audited by a third party following, as I said, both GHG protocols and war steel methodology. With these changes to our reporting, we are among the very few companies that include Scope 3 emissions in their target. with this decision is to significantly increase transparency and accuracy in our mission report. We invite you to download the report from our website and review the extensive information on our sustainability initiatives. The detailed insights will offer a comprehensive understanding of our commitment to sustainable practices. To wrap up my initial remarks, I'd like to say I'm confident in Ternium's performance in 2025. I believe our main markets will offer several opportunities for our company, with the strength of the neutral market in Mexico, the recovery of steel consumption in Brazil, and the significant reforms to Argentina's economy. In addition, I expect our margins to gradually improve during the year, with lower costs of raw material and slabs, and our continued work in cost-cutting initiatives. With this, please, Pablo, you can now proceed with the review of standard performance of the third quarter.

Thanks, Maximo, and thanks, everybody, for participating in our conference call. Let's move to the webcast presentation for a detailed overview of our operations and financial results. If we start by page three, we see that, as anticipated, our adjusted VDA declined this quarter. The main factors driving this result were lower realized steel prices across our main market, which were partially upset by a small decline in steel costs per ton and an increase in shipments. Looking ahead to the fourth quarter, we expect a more frequent increase in adjusted EDA, driven by slightly better margins, although this will be partially upset by a seasonal decrease in shipments. Turning to the next slide, Net income for the third quarter was $93 million. When comparing second quarter adjusted net income to the third quarter net income, we see lower deferred tax losses and improved financial results in the third quarter. Partial offset by a decline in operating income. The effects gained in the quarter reflect the favorable effects of the Mexican peso depreciation and the Brazilian real appreciation against the U.S. dollar, Costing effects gain on TANUS Mexico, net short local currency position, and Lusimina's U.S. dollar-nominated debt. Let's turn to our steel segment performance on page five. This quarter, we significantly increased in our key markets. Looking ahead, we anticipate a decrease in achievements in the fourth quarter due to usual ERN seasonality, both in Mexico and in Brazil. Now let's take a look at the consolidated sales and profitability of the field segment on the next page. Despite an increase in the achievement, sales held steady compared to the previous quarter due to the decline in revenue per ton, driven by a decrease in realized field prices in our primary market, which affected our margins. The price decline was partially upset by a small decrease in field cost per ton, as we continue to use previously bought raw material and slab during the third quarter. And turning, using mined dust furnace, operations recorded efficiency gains in the period, particularly in fuel consumption. In addition, labor and maintenance costs decreased sequentially in the third quarter. Let's move on to slide seven to review the performance of our mining segment. In the third quarter, shipments rose by 13% sequentially. driven by higher production in our Mexican and Brazilian operations. Despite this quarter-over-quarter growth, net sales were relatively stable due to the upset of lower iron ore market prices. Our margins in the mining segment decreased in this quarter, mainly due to this drop in iron ore prices, while slight reduction in cost per ton helped to soften the impact of this decrease. on to the next slide to review our cash flow performance. As of the end of September, turning net cash position declined to $1.7 billion. We decreased in cash flow from operation compared to the second quarter, primarily due to a decrease in the VBA and an increase in working capital together with higher capital expenditure. Moving to the final slide, we can see a summary of our performance over the past five years. In the first nine months of 2024, our capital expenditure shows a significant year-over-year increase. We continue making progress, as Maxime explained, in the construction of new facilities in our Cascadia Industrial Center, as well as in the new wind farm in Argentina. We expect to have a total capex of between $1.7 to $1.8 billion in 2024. To conclude this presentation, I would like to highlight that yesterday, terms with the Board of Directors, announced the payment of an interim dividend of $0.90 per ABA, totaling $177 million. Over the past three years, the company has structured its dividend so that the interim payment in November represents roughly a third of the total annual amount, with the remaining third distributed in May following shareholders' approvals. We expect this time to follow the similar approach. So our total dividend payment corresponding to the fiscal year 2024 would represent a dividend yield of about 8% based on the current share price and a 68 payout ratio based on adjusted net income for the past 12 months. Over the past three years, Additionally, the Board has consistently decided to distribute a substantial dividend annually. The current dividend decision aligns with this established practice of providing an attractive dividend yield and allocating a significant portion of net income. even during periods of increased capital expenditure. This capability is a result of Ternium's solid financial position. With this, we have concluded our initial prepared remarks. We would like now to go and to take any questions you may have. Operator, please begin the Q&A session. Thanks.

At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Our first question comes from the line of Marcio Farid with Goldman Sachs. Your line is open.

A couple of questions on my side. Yes, can you hear me? Sorry, Marcio? Yeah, now yes, I think.

All right. Let me know if it's not good. Yeah, morning. Thanks for the opportunity. A couple of things on my side. I think we started the call by showing still good conviction on Mexico's demand going into next year and somewhat profitability improvement as well on lower costs. Argentina seems to be performing well, and we also showed some good conviction as well. I understand, obviously, HSC prices, benchmark prices have been lower, and that's the main reason for for weaker earnings in the third quarter, right? But then the surprise was the dividend cut. Our initial understanding is that you would sustain stable to growing dividends through the cycle, even if the cycle turn. And that's one of the reason why balance sheet leverage has been kept at low levels to allow you to execute capex and at the same time keep the commitment on a flux to growing dividends, right? So it was a bit of a surprise to us. And when we hear about uh the constructive outlook uh we're just trying to understand you know the reason why um you've you know the board decided to cut and um dividends this year and if you can assume you know eventually we will resume the 3.3 a share that you paid last year um as well um and and secondly i mean it's obviously a big topic today the outcome of the u.s election I think it's laid out some of the important actions that the Mexican administration is taking to support industrial activity in Mexico, to some extent, reassuring, but also important to the institution as well. So obviously, we've seen some of the headlines suggesting higher taxation and potentially a tougher instance. on Mexico as it relates to renegotiation of the U.S.-CMA agreement. So if you can talk about that as well, your initial thoughts and risks and opportunities for turning being in Mexico and directly and indirectly exposed to the U.S. and North America, that would be great. Thank you.

Thank you very much, Marcio. I will start with the second part of your question, and then we go to the dividends. if you allow me, the outcome of the U.S. election, and you were very clear. I mean, I see this as an opportunity, to be honest. I think, first of all, we are out of the uncertainty. We have two new administrations, one in Mexico that are already a month in the job, and now we have one in the U.S. So I think That's something good because now people can start talking and can start working together. I think from the Mexican point of view, the new administration, President Sheinbaum, I think she understands and shares very much the concern that the U.S. and the Trump administration, especially Trump, have with China and fair trade. And she has been very clear and very vocal about this. As you know, or you probably know, several weeks ago, we participate in the U.S.-Mexico CEO Dialogue, which is a dialogue that's been going on for quite a few years between CEOs of Mexico and the U.S. And this was with the new administration in Mexico. I think there was a big... consensus of all the participants that the opportunity to strengthen the North American region and to safeguard against violations of trade, especially by Asia. And in that meeting, also, people were very positive about the good outcome of the new USMCA. I mean, the new USMCA, which was negotiated in 2018, bring a lot of benefits, both from Mexico, but also from the U.S., which increased exports to Mexico by more than 30% in that period of time. The other thing that the president of Mexico said in that meeting was she was very firm about the vision she had of, again, strengthening North America, and reducing, I'm using her words, the trade deficit that Mexico has with Asia, about $200 billion. So I think the alignments are quite similar. I think that it's positive. The discussion has to start. There's going to be a revision of the USMCA, which, again, I think it's very good, the USMCA, but clearly it has room to improve. So I'm positive about the outcome of these elections. I hope I answered the question, or that part of the question, Marcio. That was great. Thank you. Very detailed. And Pablo, why don't you call about dividends?

Yeah. Okay. Yes, Max. I will do that. So if you want, the board decision was for a nominal reduction of of dividend payment, but if you consider on the broader spectrum, you will see that the dividend that was proposed and that was approved is a dividend that not only maintains or increases the dividend yield of the company, but significantly increases the payout ratio that the company is having and will have. taking into consideration not only that the company has reduced the VBA generation during this year, but also has reduced a little bit the total net cash position, but also taking into consideration that we are entering into the part of the capex plan next year, which will be higher, as you know, than this year. So all in all, what the company is doing is sustaining a very strong VBA payment uh with a very high level of distribution and as i say on the opening remarks this is possible because as you know we discuss many times the strong financial position that the company is having that allow us to sustain a very strong financial position while we are doing a very very important and transformation type of topics like the one that we are doing in pesqueria so in our view What we have done with this approval of the dividend payment is basically sustaining the high level of dividend payments that the company is having. We have increased substantially dividend payments in the last three or four years, and this continues to be the case. Of course, if you look just by the nominal number, there has been more reduction on that one, but if you look at all comparisons and all ratios, the dividend payment continues to be very high. We hope to answer your question, Marshall.

Yeah, no, that's great. Is it fair to assume that we then should look at more of the dividend yields? Because obviously the share price is down by about 20% here today, and that's helping the yields, right? But is it fair to say we should look more at the yields and the payouts rather than the nominal term?

Exactly, because again, the payout ratio basically is around 70%, which is quite high in comparison to any other companies than what we have done in the past, in the past three or four years. So we are interviewing a significant amount of what we have generated during the year.

Okay. That's great.

Thank you very much. You're very welcome.

And your next question comes from the line of Alfonso Salazar with Scotiabank. Your line is open.

Yes. Thank you for the call and for taking the question. Maximo, I have another question for you. And this is regarding the steel industry in North America, not only Mexico. What is the outlook here? Because what we know is that North America is a big net importer of steel. There is more capacity needed for all these efforts for reshoring and nearshoring. But at the same time, we have this overcapacity problem globally, and it's only getting worse as China weakens, demand in China is weakening. And there are tariffs that could be implemented, but that is going to impact competitiveness in the region. And even there is a risk that there are tariffs within the North American region. We cannot rule out that possibility. So how do you see the global steel market going to balance Are we going to have two separate steel markets globally? One by China and another one by North America and Europe? How is this going to unfold over the next three to five years?

I would like to... Alfonso, that's a great question. I don't know if I have a great answer for you. But clearly, there is an overcapacity in China. There is an overcapacity in China that was made not because of market forces, but because of a Chinese government policy, or you can call it industrial policy, whatever you want, but it was a government incentives that create an overcapacity, not only steel, on many industries. So that's a problem in itself. And as I always said, it's impossible to compete with China with all the subsidies and all the schemes that the Chinese state enterprises have in steel or in many, many other products. What will happen, or what is happening, is that most of the regions are reacting to this. North America is reacting to this. The U.S., Canada, and Mexico have implemented a series of actions. Brazil is starting to react. Europe has already reacted. So I think we are going to have many regional markets, and that's how it's going to operate in the future. In the case of North America in particular, I think the North America region is a very competitive region to produce steel, especially low carbon intensity steel. I mean, as you know, Mexico probably of the big markets, of the big producer, is the lowest of CO2 emissions per tonne followed by the US, and in a competitive way. So I think that North America itself is very competitive, and again, some of the companies in North America, including Ternium, is investing in more capacity, is investing in being able to supply all the needs of the region. in a competitive way. Again, no one can compete with a state like China, and I think that it's because of that, that reaction is that the governments are taking place. I hope I gave a short answer of a very long topic, Alfonso.

Yes, thank you. That helps. Just one question on this question. But, you know, the risk of tariffs for still going to enter in the U.S., there is a risk in your view. You know, what can TANIM do if that happens? Or what could be the strategy?

Look, I cannot speculate today about tariffs in the U.S. I think As I said in the beginning, I think that this is more of an opportunity to strengthen all the North American supply chain. And I think that the administration in Mexico and the new administration or the future administration in the U.S. has a common objective in this. I'm very confident that, of course, there will be discussions and negotiations, but at the end, they are looking the same. So I guess things are going to be resolved.

Okay. So basically what North America needs is to reduce impost from other regions.

That would be the goal. Well, that's a clear objective of the president of Mexico. And she was very public about this in several things. And she even put the number of $200 billion into in the public. I think it's also the objective of the future administration of the U.S. I think President Trump was very clear about this, and the U.S. in general is very clear that the dependence of China is not the way to go. And the strength of a North America supply chain, I think, is beneficiary for everyone. I mean, there's a lot of positive things to discuss. Integration of the energy sector in the North America, that's also a very important subject that can benefit a lot the U.S. and Mexico. So I think there are very positive things to discuss, which I think will be the way. So I'm very positive about this.

Okay, last one, I promise. And this question is, in the near term, the region will need to continue importing steel from elsewhere, from other countries. There is no way around it, right? So it may not be China. I'm not sure about that.

I'm not sure about that. I mean, I think the region, if you count Canada, US and Mexico, I think we can supply most of the steel that is consumed in the region.

Yeah, but net imports were 44 million last year, so it's a big amount.

But there you have the imports between both countries.

Right, right.

So you have to discount that. Correct. So the net imports, you're talking about net imports of steel of less than 15 million or 20 million, and I think if we increase capacity, most of that And some of the imports come from Europe and Japan, and that's things that you can manage.

Correct. Okay, yeah, that's just what I wanted to understand. Thank you so much, Maxime.

No, thank you to you, Alfonso.

And your next question comes from the line of Henrique Braga with Morgan Stanley. Your line is open.

Morgan, thanks for taking my question. I have two questions on my side. First one is regarding the steel imports in Brazil. I know you mentioned that you thought much more about how the government is now studying and revisiting the quota system. I just wanted to know from you, what is the company doing now if you're working closely with the government? and what's the outcome that you expect from that, if the quota system is going to reduce somehow, if it's going to extend for a longer period of time, or if the tariffs are going to increase in some way. And the other one is about the future investments. I know you have an ongoing CapEx plan, but if you have some thoughts about what's the next step for Tanium, after the investments in Mexico, we will plan to continue in the Americas or an extension in any other regions. It is a possibility. Thank you.

Thank you, Enrique. Steel imports in Brazil. I mean, the government implemented this quota system. It was implemented in June, so it's very early. But I don't know, I mean, maybe you know it, but it's a system that you have a quota, a four-month quota. So you cannot surplus supposedly that quota. And let me give you an example. These are real numbers. The quota for the flat product was around 400,000 tons. That's the quota for the fourth first month. the imports, mainly from China, because 80% of that is China, of that quarter, instead of 400, was 900,000. So it's more than double. And most of those didn't pay taxes, this tariff of 25%. So what we're saying to the government, not Ternium in particular, the association, is saying to the government is, as it is implemented, it's a good... I mean, I don't know. It's a good first step, but it's not working because there are some loopholes in the system. So for one side, we're saying, okay, we should continue working to close off those loopholes. The second thing that Ternium and other companies are doing is filing dumping cases. I think that's the long-term view as most of the countries are doing, but that takes long time. But we are doing that as a second step. I hope this is clear from the first question, Enrique.

Yes, very clear.

Okay. Future investments, I mean, as we always said, we are going to be focused in America. We are not going to go to other regions. I think we have a a place or opportunities in the Americas, in the countries, especially in Latin America where we are, to continue growing, to continue investment. Today, as you know, we are focused mainly in the increase of the pesquería project. As you know, it's the biggest project we have ever had in our history. So we are not focused in the next two years in completing uh this project on time and and and with the quality as you know it's it's going to be really the first steel shop of their kind so we are very focused on completing this and be successful in this

And once again, if you would like to ask a question, please press star and 1 on your telephone keypad. Our next question comes from the line of Camilla Barter with Bradesco BBI. Your line is open.

Hi, good morning. Thank you for the opportunity for taking my question. Just two quick questions. First, on CapEx, not sure it's too early to say, but is there any estimate for CapEx in 2025? And on cost, for Q4, you mentioned we could expect a drop as lower raw material inventory flow for results. But looking at 2025, what can we expect in terms of cost? And also, if you could provide your expectation for free cash flow in the coming quarter, it would be great as well. Thank you.

Thank you, Camila, very much for your questions. CapEx in 2025, I think that was your first question. A total CAPEX will be around $2.3 billion. This is including Usiminas. A big part of that is going to the Pesqueria project, of course. 2025 will be probably the year of more CAPEX in our history because of the Pesqueria project.

Well, then, yeah. Sorry, but we didn't hear that well, your questions, but I think the second one was in respect to our expectation for free cash flow generation in the coming quarter. Let me take that one. Yeah, please. Okay, yeah. Both are, yeah, you're right. That was your question. So in respect to free cash flow, what we are expecting is, first of all, to continue to increasing our capex investment, as you have already asked, and Maximo gave you the amount. So without taking that into consideration, which here is a very significant amount, we shouldn't have that significant changes in working capital. It was quite special, the increase in working capital this quarter. It was basically account payables and increasing account payables and nothing else, no increase in inventories or in our account receivables. So we shouldn't have that case in the coming quarters. So we should have a positive operating cash flow and then continue increasing in the capex. So all in all, we should be in a better position than the one that we have this quarter. Secondly, as we have already mentioned, both Maximo and myself, our expectation is to continue reducing costs different ways to do that. One of them is something that we discuss almost every quarter, which is that we are still utilizing raw materials, especially slabs bought in prior quarters that have a higher price than the current one, and that's why we should see a reduction in cost coming in the next and the following quarter. That is one of the reasons why we said that we can have a slightly better EVDA generation in the coming quarter. And also, as was mentioned, we are always, especially in this situation, working very hard in continuing our cost reduction program in all the facilities where we operate. So we tend to be positive in that respect. The numbers that we already mentioned for the fourth quarter and especially for 2025.

Very clear. Thank you.

Thank you, Camila.

And there are no further questions at this time. I would like to turn the call back over to the CEO, Maximo De Voya.

Okay. Thank you very much all for joining us. In this call, we welcome your feedback and have a great day. See you in three months.

This concludes today's conference call. You may now disconnect.