Ternium S.A.

Hello, everyone, and welcome to the first quarter 2025 results call. Please note that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you'd like to ask a question during that time, please press 4 followed by 1 on your telephone keypad. Thank you. I'd now like to hand the call over to Sebastian Marti. Please go ahead.

Good morning, and thank you for joining us. My name is Sebastian Marti, and I am Eterning's Global IR and Compliance Senior Director. Yesterday, Eterning released its financial results for the first quarter of 2025. This call is meant to provide additional context to that presentation. I'm joined today by Maximo Bedoya, Eterning's Chief Executive Officer, and Pablo Grillo, Eterning's Chief Financial Officer, who will discuss the company's business environment and performance. After our prepared remarks, we will open up the floor to your questions. 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 do affect results are contained in our filings with the Security and Exchange Commission and on page two in today's webcast presentation. You will also find any references to non-IFRS financial measures reconciled to the most directly comparable IFRS measures in the press release issued yesterday. With that, I'll turn the call over to Mr. Rodríguez.

Thank you, Sebastián. Good morning, and thank you all for joining Sternium Conference Call. In the first quarter of the year, we reported a sequential increase in EBITDA driven by improved margins and slightly higher shipments. Trade tensions in recent months have created a climate of uncertainty, enticing interest business confidence, and posing risk to global economic growth. On the other hand, there is a consensus that unfettered trade practices in recent decades have adversely impacted manufacturing around the world. Many countries are now addressing this issue, which is a promising development. In this content, the operating environment in Mexico has been challenging, as uncertainty is affecting investment and consumption. However, the current administration has shown support for reducing reliance on Asian suppliers within the North American regional market. And my view is that they are doing a very good job in this front. In this line, the recent announcement of the Plan Mexico aims to enhance industrialization and import substitution to strengthen North American supply chains. includes strategies to attract investment and increase the local and regional content of manufactured goods through nearshoring, infrastructure development, and support for SMEs. In addition, the future renegotiation of USMCA presents a significant opportunity for Mexico to further align its trade strategy with that of the United States. while also enhancing the defense of the Mexican market against unfair trade practices from Asian countries. Moving now to Brazil, the local market is showing resilient steel demand, but the issue of unfair trade practices persist, with a significant year-over-year increase in imports during the first quarter of this year. Brazilian trade authorities recently released preliminary results of an anti-dumping investigations on imports from China of cold-rolled steel and corrosion resistant steel, identifying substantial dumping margins. But unlike the usual practice in many countries, the authorities did not recommend the preliminary position of anti-dumping tariffs. A final determination is expected to be made in October. In Argentina, the microeconomic situation is showing signs of improvement, which provides optimism for our shipment in this market in the upcoming quarters. In this demanding trade environment, our goal is to enhance Ternius competitiveness by increasing operational efficiency and reducing costs. Specifically, in recent quarters, we have been focusing on several initiatives that have already yielded good results on per annum numbers. We will continue to implement similar actions in the coming quarters to maximize the profitability of our operation during these uncertain times. For the second quarter, we anticipate achieving a double-digit EBITDA margin supported by the increase in realizes prices in Mexico, as well as by our cost reduction initiatives. I would now like to provide an update on our expansion project in Mexico following the completion of our most recent review. The pickling and finishing lines have already started operation, and the cold rolling mill and galvanized lines are scheduled to begin on time by the end of December. The steel slab mill and DRI facilities, known as the upstream project, and now anticipate to be operational by the fourth quarter of 2026, which represents a slight delay from the original schedule. In this review, the total capex for the whole expansion project has revised to $4 billion, representing an increase of approximately 16% compared to our previous estimated disclosure in February of 2024. The primary focus contributing to the project's cost increase were higher assembly and construction prices and larger volume of structures and civil works. The project will put Pernium in a whole new competitive position. The integration of advanced technology in our picking, finishing, code rolling, and galvanizing lines will not only increase operation efficiency, but also enhance product quality and expand our product range. In addition, by completing the upstream project, we will be able to provide our customers with a complete product range up to the most demanding industrial applications. This will be the first time that an electric arc furnace-based mill will be able to produce exposed material automotive steel with significantly lower CO2 emissions than previously possible. In addition, this expansion capacity will enable us to meet our expectation of growing melted and pool requirements in the USMCA region. Let me conclude by my prepared comments with some final remarks. Global trade is currently undergoing major changes, resulting in considerable market uncertainty. However, adjustments were necessary. as China's progress with no competitive trade practices has contributed to declining manufacturing, employment, and value addition over the past two decades. In North America, both the U.S. and Mexico administration are working to address this issue. Therefore, it would be reasonable to expect an agreement on trade issues between the two countries. Although uncertainty and volatility are currently affecting consumption and investment, Impacting steel demand in Mexico market, we expect implementation of Plan Mexico to work together with a better alignment of Mexico trade strategy with that of the U.S. will enable these countries to better defend the region against unfair trade. This could result in a gradual shift in production from Asia and other countries to the USMCA region. All in all, I expect the USMCA to become stronger and better prepared to continue growing. Now, Pablo, please go ahead with the review of premium performance in the first quarter of this year.

Thanks, Maximo, and thanks, everybody, for being today in this conference call. Let's now move to the webcast presentation for a detailed review of our operating and financial results. If you look to page three, you will see the adjusted VDA improvement this quarter. This was driven mainly by better margins and higher steel and iron ore shipments. The main contributor to the slight improvement in the margins was a decrease in steel cost per ton, which was partially upset by a decline in realized steel prices. Looking ahead, we expect a sequential increase in adjusted VDA in the second quarter, supported by higher realized steel prices and another slight decrease in cost per ton, which together should help our adjusted VBA margin get to double-digit territory as Maximo mentioned. Now, moving to next slide, net income for the first quarter of 2025 stood at $142 million. This figure includes a $45 million provision adjustment charge related to the ongoing litigation in connection with the acquisition of our participation in . The adjustment reflects both interest accruals and appreciation of the against the US dollar during the quarter. Excluding the measure charge was 188 million, marking a significant improvement over the prior quarter. Among the main differences, net financial results improved by $130 million, mainly due to the foreign exchange gain, unrealized gain from the partial divestment of bonds holdings in Argentina. Now, let's take a look at the performance of our steel segment on page five. This quarter, we saw high achievements in Brazil and other markets, partially upset by lower sales volumes in Mexico. Entering the second quarter, We expect the steel shipments to remain relatively stable on a sequential basis. In Mexico, volumes are anticipated to remain subdued due to the ongoing tariff situation. In Argentina, shipments are anticipated to increase during the second quarter, supported by an improving macroeconomic environment. Meanwhile, in Brazil, UC Minas anticipates sequential stable shipments in the second quarter, with resilient steel demand. And in the other market, we will probably see a decrease in shipments to the U.S. market. Moving on, net sales in the steel segment were slightly higher in the third quarter. Although revenue per ton declined mostly, the sequential drop in raw material cost and purchase lapse cost, as well as efficiency improvement in our facilities, supported a better margin. Let's move to slide seven for the summary of the mining segment performance. increased slightly quarter-over-quarter and rose 14% year-over-year, given by higher production levels in Mexico and in Brazil. The sequential decrease in margins in the first quarter was due to the higher cost per ton, which was partially upset by higher realized iron ore prices. Moving to the final slide of the presentation, we can review the cash flow performance and balance sheet. We continue to show significant capital level this quarter. as we make progress on the construction of the new facility industrial center. Maximum mentioned earlier, the total cost of the project was increased compared to our latest review, which was in February last year. Of the 4 billion new estimates, 1.4 billion have already been invested as of March this year. Looking ahead, the remaining capex is expected to be roughly $1.4 billion over the next nine months of 2025, $1 billion next year, and $200 billion in the rest. Considering both the expansion plan and the rest of our CAPEX investment, we project Ternium to continue to have a CAPEX in 2025 to be around $2.5 billion. Finally, this period of high CAPEX is supported by a very strong balance sheet. with a net cash position of $1.3 billion at the end of March 2025. So with this, we conclude our remarks, and we are ready to take any questions you may have. Please, operator, begin with the Q&A session.

Thanks. We are now opening the floor for question and answer session. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. Press star followed by 1 on your telephone keypad. We will pause for a brief moment to wait for the questions to come in. Your first question comes from the line of Carlos de Alba of Morgan Stanley. Your line is now open.

Thank you very much, and good morning. So first question is regarding the situation in Mexico. We'll see what happens with GDP this morning. I think it's going to be announced, but most likely Mexico is in a technical recession or a very, very low growth environment. And so I hear your comments on the industrial customers still doing all right, and it's hard to believe that they're not making adjustments. So if you can share a little bit more colors the color around what ahead, maybe beyond just the next second quarter or the ongoing quarter. What sort of measures are they taking or planning on taking, given the uncertainty of the entire auto supply chain and also the impact that it will have on other businesses in the Mexican economy? And then the second question has to do with the level of – margins and profitability overall that the company is experiencing for the second consecutive quarter. And actually, last year, in the past, we've only seen these level of margins, if I remember correctly, in 2009, 2015, and 2019. In those instances, we had a severe crisis, not only in one of the countries that you operate, like Argentina. And to be fair, Argentina's exposure in your business overall has decreased dramatically. So how do you – what can you tell – when do you expect things to really improve? Because prices in your biggest market are not necessarily low in Mexico. So I really – I'm struggling to understand – when we can see an improvement in operating margins.

Yes, Carlos, hello, how are you? Well, let me start with Mexico and what is happening in Mexico. I don't know the numbers of the GDP of the first quarter, so I'm not going to comment on that. What I can say is what is happening in the steel industry, and you're right. I mean, apparent consumption of steel decreased almost 5% in 2024, last year. So we are operating at a level of consumption that is lower than in the past. This is mainly due for the commercial market. I mean, the infrastructure and construction in Mexico, part because of the new government and the change of government, usually big infrastructure projects end with the ongoing or the outgoing administration. And the new administration always take time to this. And also construction is not doing very well in Mexico. So that's what is happening in Mexico is still demand. I expect that demand is going to start increasing in the following quarters, especially in the commercial market. Construction has to pick up. And the numbers are not going to be a significant increase, but they're going to be good enough to be better. And the other part is that imports are coming down, and we are going to start gaining market share with the new lines that are coming up to date in the pesqueria project. So I think overall, Consumption is not very good, as you said, but I think our shipments are going to start moving forward in the second half of the year because of all this. So I hope I answered Mexico's question with this. You talked also about industrial customers. Clearly, this is an uncertainty and it has to do or it's going to be resolved when the trade discussions between Mexico and the US are finished. I don't know when this is going to happen in time, but it's going to happen in some moment, and as I said in my initial remarks, we are operating on the assumption that the USMCA is not only going to to go forward, but it's going to be stronger. So we continue thinking that that's the ultimate outcome of these negotiations. Second question was? The level of margin. Ah, level of margin. Pablo.

Okay, okay. Yeah. Hi, Carlos. How are you? Let me make a couple of comments in relation to that. You're right that there was a decrease in margins in the latest quarters. But let me point out that the situation that we saw in 2024 was a decrease of margin through the year. So we started with very good margins, and then we decreased them through the year until the fourth quarter where we reached probably lowest in the series, which was 7%, going with the decline in prices in the market. Now, what we are seeing is probably, and this is the expectation, the opposite situation. We have already a margin in the first quarter, which is not only higher, of course, not significantly compared to the fourth quarter, but it is in line with the margin that we have in the third quarter last year. Secondly, we have already said, and Maximo mentioned this at the very beginning, that our expectation is for a better margin in the second quarter, which is, Of course, if we took the opposite position or the opposite situation as last year, we'll be better than the third quarter last year. So, and then there is a lot of uncertainty, things to be clarified, issues to be negotiated, but the expectation is for this to sustain or even be a little better moving forward. So if that trend is followed, we should be able to increase our margins through the rest of the year and be in a position to be at least or above the levels that we saw last year. So if that situation is the one that at the very end will be seen during the coming quarter, we will return to more or much reasonable margins that we have seen in the last two quarters, the fourth and the first quarters of the year. So that's our view as the situation that we can predict from now on. Hopefully answering your question, Carlos.

Your next question comes from the line of Tina Tanners of Wolf Research. Your line is now open.

Yeah, hello. Good morning. Good morning. Good morning. I wanted to ask about costs a little bit further. You talked about more costs declining into Q2. So, could you elaborate and, you know, is that going to be the lowest or are there still areas to continue to cut costs?

Hi, Tina. How are you? There are issues that are moving because of, you know, that we have 13,500 meteorologists. We are still seeing the reduction in cost that we saw in the last quarter, especially the slab or the some raw materials that Junoda has been producing in the last couple of quarters. And this has been reflected during and we continue to expect to see that coming to the second quarter and further on. And also, Maximo mentioned in his remarks that we are going through a program of cost reduction, and that has an important impact during the first quarter, and we are expecting this to continue. So, again, we are saying already that our margins will move to a double-digit region, that, of course, the most significant part of that will be the impact price reset in our face, especially in the Mexican market, but also an impact to the cost reduction program. We, or our expectation is that to continue, of course, we need to see how the raw materials and slabs move further on in the coming quarter to have a full answer to your question. But it's not that we have finalized our plans. We will continue to work And the expectation for us is to continue having some reduction costs in the coming quarters.

Okay, great. Thank you. And then with regard to volumes, I know you gave volume guidance for Q2, but broadly speaking, I think you have still quite a bit of spare capacity in Mexico. Assuming a bit better demand and clarity, can you talk about what order of magnitude volumes could grow to to take some share in Are we still getting imports from the U.S., or has the trade flow kind of stopped both ways lately? Just wondering if you can elaborate on the opportunity for further volumes even before, well, the expansion will just be upstream, I guess. But just talk about maybe some market share opportunities that you might see as the year progresses.

Yes. Of course, we are in a capacity to increase volumes in Mexico today. The imports have decreased from, I'm going to take rough numbers, but 500,000 tons for flat products in the middle of 2024 to today 400,000 tons every month. So there's a huge possibility of increase in that sales. Most of those imports are industrial customers. So we are going through the process of certifying all our products in that customers. 70% of that imports come from the U.S., from Japan, and from Korea. So I think there are places or customers that we will be able to get a share of that imports. So, again, we have the capacity today, and we are working in trying to increase. So, there is opportunities. It's up to us how much we get.

Got it. Appreciate that. Thank you.

You're welcome. Your next question comes from the line of of Bank of America. Your line is now.

Yes, good morning. Thank you for the opportunity. So my first question is on cash returns, right? And Ternium has been consistently increasing its dividend per share ratio over the past years, right? Yet in 2020, with the pandemic, the company opted to suspend those dividend payments. So I wanted to see if you could discuss how the trade tension escalation via the announced tariffs could impact those decisions in regards to the DPS, if at all, right, going forward. And then secondly, I just wanted to see if you can focus a little bit more on Argentina and, you know, in light of the recent IMF agreement, how you see the outlook for the steel sector changing in the country. And if, you know, those macro improvements, you know, could lead you to eventually expand capacity in Argentina. Thank you.

Let me take the first question in relation to the cash return. Well, first of all, your comment was right. We have been increasing our dividend yield payment in relationship to that, besides the year of the pandemic. If you remember, what we have always said is that whenever we took that decision of increasing our dividend ratios is because we believe that we can sustain that during the long period or reasonable period. I will continue to say the same. you know that even that we are in the middle of a big capex plan, the largest capex plan that we have in our history, we continue to have a very solid financial position. And this should support and sustain dividend payment. Of course, we are in the middle of an uncertain period. We are in the middle of trade negotiations. We don't know exactly how this will end and the impact or the real impact that this will have in growth in both in the US or in Mexico or worldwide, or the real impact that we have specifically to our company. But taking into consideration everything that we have said, that Maximo mentioned during the opening remarks on the view that we have on this process, as of today, we continue to have exactly the same position of sustaining these kinds of billion returns.

Good morning, Caio. Argentina. The outlook is improving for the steel sector and for the economy in general. I think that what the Argentina government is doing, well, it's clearly positive. There's still a lot of risk in Argentina, so I don't want to say that we are over the problem. Inflation is still high. But in a sense, shipments of Argentina, probably Q1 would be the lowest in the last queues. And following queues are going to increase, projection is at least 20% next queue of increasing shipments. And we don't see any decrease in the third and fourth queue. So yeah, expansion in Argentina, we are not seeing yet that. We have spare capacity in our Argentina meals. So I think we are going to be able to sustain or to grow those shipments with the spare capacity we have.

Thank you. That's very clear, Maximo and Pablo.

Welcome, Cairo. Welcome. Cairo.

Your next question comes from the line of Henrique Marquez of Goldman Sachs. Your line is now open.

Hi. Thanks for taking my question. I just wanted to better understand the key reasons to the increase on the CAPEX and the extended deadline. Just to understand if it was more of a mistake on the budget planning or was there any operational issue during the construction? And just make sure, when should we see this increase in CAPEX? Should this hit this year? This additional 500 minutes, should it be next year? Or... so we just distributed that over the two years. Thank you.

Yes, thank you, Enrique. I mean, the capex, you're going to see that over the project. I mean, this year, just to give you an idea, this year is going to be one, well, no, the total capex of Thernium this year is going to be 2.5. Next year is going to be around two, and in 2027, around one. That's the total. From the project, I would say that this year, from that, what I tell you, the project is indeed, it's 1.4. We are 1.4 already invested in the project until March of this year. The rest of the year, the nine months, the rest of the year is going to be around 1.4, 2026 around 1, and 2027, 200 million. So that's the idea of the CAPEX. The increase, as I said, we received different budgetary process, and then when we started negotiating the reality, a lot of contracts came with inflation and came with increase in some of the prices, and that's the main reason why we are increasing the capex. There is also some increase in the structure, in the amount of structure that we have to have, especially in the DRI facility and the steel shop. But the main reason is the increase in prices of the vendors and of all the construction.

Thank you. You're welcome.

If you'd like to ask a question, please press star followed by one on your telephone keypad. Press star followed by one on your telephone keypad. We will pause for a brief moment to wait for the questions to come in. Your next question comes from the line of , of UBS. Your line is now open.

Hi. Good morning, everyone. Thank you. So two questions here. The first one circling back to the U.S.-Mexico relationship. Maximo, I know that you mentioned that your base case is currently for that the USMCA agreement is going to get stronger and that this is going to positively impact the outlook for the region as a whole. But the fact is that for steel, it has been negative for Mexico, right? I mean, we're seeing the U.S.-Mexico prices for HRC specifically decoupling. And I wanted to see how do you all see this going forward? Because at the end of the day, Mexico also has a 25% tariff, but it also has several trade agreements with its partners. So I'm not really sure how to interpret that. the recent moves to the Mexican supply-demand balance for steel? And more specifically, where do you see the new price equilibrium at this new market environment? The second question, and again, I know that the base case is for steel, a stronger USNC agreement. But I wanted to explore a little bit more the downside or the bear case as to how does Ternium see its capital allocation in a scenario that the Mexican economy slows down, that US in fact restricts imports of several goods coming from Mexico. I mean, how would Ternium position itself in a bear case, in a scenario which which the U.S.-Mexico relationship is actually not the same as it has been. And I'm really sorry if I may squeeze in a final real quick one. How do you see the recent changes in FX controls in Argentina impacting your ability to pay dividends from Tournament Argentina to the controlling company?

Thank you. Thank you, Caio. Well, I start, I try to answer the first and second question all together, U.S.-Mexico relationship in steel particularly. As I said, one thing is the global picture and where we think are going. You're right about steel. Steel is still a problem between the U.S. and Mexico. My view is that, and I think this is the view of the Mexican authority, or the Mexican government, is that steel and aluminum has to be solved more quickly than in the long term. I mean, when you see what is happening with the steel industry between Mexico and the U.S., I mean, it's clearly that Mexico is not a problem for the U.S. steel industry. if you take the numbers of the new 232 of steel, where you put steel and steel derivatives, the U.S. has a huge surplus in the export to Mexico than the export from Mexico to the U.S. I mean, rough numbers, I think there are that the U.S. exports $17 billion dollars in 2024, a little bit more, and Mexico export $11 billion, still and still derivatives I'm talking about. So it doesn't make sense to put tariffs to Mexico or that Mexico has to put tariffs to the US. I hope we don't get to there, but at the end, if we have to get there, I mean, we are going to be better off Again, it's not the idea, and we are working very close with Mexican administration, with the Mexican government, to try to make this a very reasonable negotiation. So I think that in the end, because the logical is to have an agreement, is that we are going to have an agreement. I mean, I think it's in the best interest of the U.S. steel industry also to have an agreement in this. The other issue is that we have to work together as a steel industry to try to enhance the market. I mean, there are roughly speaking 11, 12 million tons of finishing products that today are finishing steel products. And this is not, I'm not taking account derivative products that are coming to the U.S. and to Mexico from Asian countries. What the agreement has to do is that we have to work together to enhance the market and defend their region against those imports and not put tariffs between Mexico and the US both ways. So I think that's where we have to go. In a bearish scenario of Mexico, I would say there's still a lot of market to gain in Mexico, and we are working to that. So we are going to have the capacity. We are going to have, in some cases, we don't have today the product or the quality of the product to go to some market, and with the new investment, we are starting to get that. So we are going to go little by little, gain in market share of those 400,000 tons of flat products that today, every month, that are imported to Mexico. So we have a huge market to grow, Caio. The third one, Pablo. Okay, yeah.

Hi, Caio. How are you? So you mentioned the effects measures implemented in Argentina. First of all, it's very positive to have this because you know that that was one of the uncertainties that the Argentinian market had, how the Argentine government would implement getting out from the capital control scenario. So that's on the very positive side, so you have this uncertainty over. You know that the program that was implemented in Argentina is a complete openness of the market for the general population, but there is some limitation for companies. The government has introduced also specifically, which was your question, on dividend payments, a couple of things that you can do as a company in Argentina, but clearly that is not an open market as we speak. So the first thing that the government allowed was for research generating during this year that will be freely available to be paid in dollars if you want. all the results that Terminal Argentina is generating during 2025 would be able to be paid after these numbers are released, let's say, in April next year. So, from now on, with all the results generated by any company in Argentina, they are free to be paid as dividends, so no restrictions from there. There is some stock of dividends not being paid in the last year, and the government is but we don't have yet the final details, the issuance of a bond similar to the one the government issued to solve the question of unpaid commercial debt with suppliers to Argentina that was at the very beginning of the government that was very successful. So the government is planning to do exactly the same and allowing companies to buy these bonds to pay dividends. So all in all, there are still certain restrictions but there is a path for companies to move in the direction of paying dividends in the near future. Hopefully answering your question, Cayo.

Yes. Thank you both so much.

Thank you, Cayo.

Thank you.

There are no further questions, and I'd like to hand the call back to our CEO. Please go ahead.

Okay, thank you very much. We appreciate very much your participation in today's call, and we welcome your feedback. And I hope to talk to you in the next conference call. Thank you very much.

Thank you for attending today's call. You may now disconnect.