Ternium S.A.

And welcome to Ternium's second quarter 2025 results conference call. Please note that this call is being recorded. I would now like to hand the call over to Sebastian Marti. Please go ahead, sir.

Good morning and thank you for joining us. My name is Sebastian Marti and I'm Ternium's Global IR and Compliance Senior Director. Yesterday we announced our financial results for the second quarter and the first half of 2025. This call is meant to provide additional context to that presentation. I'm joined today by Maximo Bedoya, Ternium's Chief Executive Officer and Paolo Grigio, the company's Chief Financial Officer who will discuss Ternium'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 could affect results are contained in our filings with the Securities and Exchange Commission and on page two in today's webcast presentation. You will also find any reference to non-IFRS financial measures reconciled to the most directly compiled IFRS measures in the press release issued yesterday. With that, I'll turn the call over to Mr. Bedoya.

Good morning and welcome to Ternium's conference call. In the second quarter of the year, we delivered an improved EBDA relative to the first quarter. This better performance was mainly driven by higher realized prices in Mexico and a relatively stable cost per ton, despite a slight dip in shipments. The operating environment remains uncertain and volatile and our main markets are no strangers to these developments. In this context, our focus is on reducing cost to strengthen the competitiveness of our company. We are positive on the outcome of these initiatives and on the future of Ternium. In line with this, we are already anticipating a sequential improvement in EBDA. In the third quarter, we expect a slightly increase in shipments, lead primarily by Mexico with the possibility of some additional support from Argentina and relatively stable volumes in Brazil. In Mexico, the business environment is currently marked by cautious, pending clear information regarding US trade policy and the conclusion of ongoing tariff negotiations with the United States. In response to this volatile environment, the Mexican government has taken some measures to increase domestic production defense against unfair trade practices, especially from Asian countries. These actions have recently contributed to some decrease in steel imports in Mexico, creating a more level playing field in local markets. This supports our expectations of higher sequential shipments in Mexico in the third quarter. I remain confident that ongoing negotiations between the US and Mexico will eventually yield a reasonable and mutually beneficial agreement. This conviction strengthens our commitment to the steady progress of our expansion project in Pesquerea. We continue as planned and serve as a cornerstone of our growth strategy. Unlike the recent developments in Mexico, the Brazilian steel market is facing significant challenges due to a surge of unfair imported steel. Imports continue to flow this market, undermining the competitiveness of local manufacturers and erasing their margins. It is crucial in our view that the Brazilian government responds precisely to this unfair trade practice. The impact expands well beyond the steel industry, affecting the wider manufacturing sector and putting at risk investments, jobs, and the long-term stability of these industries. Concrete measures are urgently needed to defend Brazil industrial base, ensure a level playing field, and foster a sustainable market environment. In this challenging context, Uximena is actively working on its cost structure in order to improve its competitiveness. Moving to Argentina, the country has experienced a significant increase in shipments during the second quarter, driven by seasonal factors as well as a gradually recovering macroeconomic environment. The automotive industry continues to operate at a healthy level of activities, and the agricultural machine sector is experiencing good demand. By contrast, the construction sector is not improving significantly, and certain market segments such as home appliances and packaging are being affected by an increase in imports of finishing goods. In face of ongoing uncertainty and volatility in global trade, we continue to focus on strengthening the operation efficiency and improving margins. Throughout 2025, we have concentrated our strategy approach to cost management, seeking opportunities to optimize Ternion's production process and supply chain and eliminate inefficiencies. Our competitive improvement plan centers of optimizing our logistic network to streamline transportation and reduce cost, improving our procurement for better supply and negotiation and cost control, enhancing production facility process for a greater efficiency, and boosting labor productivity by incorporating technology and innovation across our pre-production lines. These measures support our goal of strengthening profitability and fortifying our competitive position in a dynamic market environment. Before I wrap up my remarks, I would like to take a moment to highlight the release of our sustainable report in affirming our commitment to the creation of a long-term value throughout sustainable industrial development. The report details our efforts to advance environmental performance, foster social responsibility, and promote transparency across our operations. I encourage you to review it for a comprehensive overview of Ternion's strategies supporting long-term sustainability. In conclusion, trade policy continue to evolve rapidly. We are seeing the United States adopt a more assertive approach in negotiating bilateral agreements and implementing targeted trade action. While this ship has introduced a high degree of volatility, we recognize the US government's intention to address predatory trade practices by many Asian countries, most notably China, and to work towards restoring fair competition across the region. Mexico shares this perspective and is following a similar path. Even in this uncertain environment, Ternion's strong position in the region help us face this challenge. I expect that our ongoing project and focus on improving operations will enable Ternion to adjust to market changes and reach our goals. All right, this concludes my prepared remarks. Pablo, please go ahead with your comments about our performance last quarter.

Thanks, Maximo, and thanks everybody for being here today with us in this call. So let's start looking at the webcast presentation for a closer look at the operational and financial performance of the company. Beginning on page three, we note that Ternion's adjusted EVDA increased by 25% in the second quarter, mainly driven by stronger, realized steel prices in Mexico, partially offset by slight increase in cost of Ternion. We expect this positive trend to continue to the third quarter, mainly supported by ongoing cost efficiency measures and operational improvements. Turning to the next page, net income for the second quarter of 2025 amounted to $259 million. These figures include a 40 million provision adjustment related to the ongoing litigation associated with acquisition of a participation in the SEMINAS backing 20 child. The adjustment reflects both aggressive interest and the appreciation of the Brazilian real against the US dollar during the quarter. Adjusted net income excluding this provision amounted to $299 million. This was mainly supported by a very operational performance and favorable deferred tax result due to a 7.5 revaluation of the Mexican peso during the period. On the other hand, we have a decline in net financial result, primarily driven by the same Mexican foreign exchange fluctuations. Now turning to page five, let's review the performance of our steel segment. During the quarter, shipments declined primarily in Mexico and the US. This was partially mitigated by higher volumes in our southern regions. For the third quarter, we anticipate a mixed performance across our key markets. In Mexico, we expect some sequential growth in shipments supported by recent government measures aiming at curbing unfair trade practices. In contracts, USEMINAS in Brazil continues to face headwinds. The Brazilian market remains in the pressure due to a sharp increase in unfair trade steel imports primarily from China, which is undermining local competitiveness and impacted demand. Meanwhile, in Argentina, following strong increase in the second quarter, driven by seasonal demand and gradual macroeconomic improvement, we're expecting somewhat shipments to hold steady on the positive side. Let's now turn to page six. Of the presentation, in the second quarter, there was an increase in average selling price, especially in Mexico, although this was offset by lower shipments. The margins improved, supported by the higher price with the most impact from increased cost per ton. Turning to slide seven, we will now review the performance of our mining segment. Our shipments growth quarter over quarter, driven by increased production levels. Despite these high volumes, net sales remain broadly unchanged in the second quarter, as low or high or lower prices offset volume gains. The segment margin slightly declined to reflect the impact of weaker prices, although this was partially offset by lower operating cost per ton. Let's proceed to the final slide of the presentation to review our cash flow performance and balance ship positions. Cash flow operations in the second quarter total $1 billion, a very significant reduction in working capital. This reflects our work on adjusting inventory volume as well as decrease in trade receivables. In addition, a high level of capex contributed to an increase in commercial debt. Cappex increased this quarter as a result of ongoing expansion at the Pesquerea Industrial Center in Mexico. This training is consistent with the project expenditure forecast, which identified 2025 as the peak year for the investments. Finally, the net cash position decreased in the second quarter, primarily as a result of the elevated capex level and the distribution of the $353 million dividend during the previous year. This was partially offset, but there was operation cash flow generation. And nevertheless, the cash position of the company continues to be very, very solid, totaling $1 billion at the end of June. Okay, this also concludes my prepared remarks. We are ready now to take your questions. Please operator, go ahead with the Q&A session. Thanks.

If you'd like to ask a question, please press star and the number one on your telephone keypad. Additionally, if you'd like to withdraw your question, please press star one again. Now our first question comes from the line of Kyle Griner from UBS. Please go ahead.

Hello, good morning, everyone. Thank you. So my first question on the state of supply, steel supply in Mexico, can you guys elaborate a bit better on the supply picture in the country touching on two points? The first one, as you mentioned, Mexico's recent implementation of trade measures, which eventually led to lower imports. In the second one, Arceba Mital reported an incident over these last few days at the Steelworks, which is supposed to impact 30% of their production. So touching on those two points, do you think that these are enough to rebalance steel markets in Mexico? To what extent are they actually going to help the supply demand picture, help to raise prices back to normalized levels? And is Ternium well positioned to capture a higher market share from these two events? The second question on the cost outlook that you provided, you mentioned that you expected cost reduction to drive higher margins for the third quarter. Can you elaborate a bit more on those operational enhancement and cost reduction initiatives that you discussed? How much of the cost decline that you anticipate is coming from these bottom-up initiatives versus lower raw material costs? We're seeing coal prices decline. We're seeing slab prices declining. So maybe break that down would be really helpful. And maybe if you could also quantify the level of cost reduction that we should expect into the third quarter. Thank you very much.

Okay, thank you, Cairo. Let's start with the first one, Mexico. As you know, Mexico, let me split it into, one is the flat products. Flat product has an input around 40% of its production. 40% of market share in Mexico is from imported steel. And as you know, our current consumption in Mexico decreased a little bit this year. And in the third part, with all the investment we have been doing and the increase in productivity, today we have capacity to start gaining market share and it's what we are doing. And I think we are going to improve this in the following quarters. That because of the lower imports and the effort for one side, the government is doing in this fighting and fair trade. And on the other side, our own job in trying to be a good alternative for all these customers. So I think from the flat side products, I think you are going to see an increase in market share. This is, you're not going to see a huge increase in shipment because as I said, compared to last year, the consumption in Mexico, because all the things we discussed, is a little bit low. Regarding ArcelorMittal, well, we just find out yesterday or Monday about the problem in ArcelorMittal. I don't know exactly what the problem is yet, but that is in the long products. So yes, we are probably going to gain a little bit share while this problem arouse in the long product market. But as you know, long products, there are not a lot of imports in long products and there are several players in the long product market in Mexico. So that gain is going to be only marginal, I guess. But the gain is going to be in the flat products, which is our main market. So that's for the first question. The second question, cost reduction. So additionally to the decrease in, as you said, in iron ore and clath, we anticipate, I think in our analyst day in June, that we are seeking an additional $300 million decrease in cost efficiency during the cold year. Part of that, we already have realized in the first quarter, almost a third of that. And this two thirds of that volume is going to be realized in these next two quarters. And this is several initiatives from our procurement front, but expecting renegotiations and new suppliers and enhanced control, it's almost $70 million. Improving through different initiatives, the stability in several of our processes is also $50 million. A change in the supplier of metallic in the EIF, rebalancing, as you said in Mexico, we are rebalancing the production and we are shutting some of the lines and improving productivity in order with decrease in cost. So there are several, the wind farm in Argentina, which of course is giving energy at a much lower cost than we used to. So all these in total are the $300 million we set besides the decrease in raw materials that you mentioned. I hope with this, Cairo, it is clear the numbers.

Yes, Maximo, thank you very much. Maybe if I can, just a quick follow up. On the trade import measures that Mexico took, just wanted to understand if you think these are sufficient to balance local markets in Mexico, thank you.

Oh, thank you, Cairo, very good question. I think it's a good start, a very good start. But clearly Mexico is analyzing more measures. I think in the sense as the US is doing and Canada also doing. So at the end, I'm expecting that the whole North American market will have a defense mechanism similar in each country. So if you compare Mexico's measures to the US measures, I think there's still a gap, but I understand that the Mexican government is analyzing to reduce that gap.

Thank you very much, Maximo, really helpful.

You're welcome, Cairo.

Thank you. Our next question comes from the line of Carlos De Alba from Morgan Stanley. The line's open.

Yes, hello, good morning, gentlemen. Just a couple of questions, if I may. First on EBITDA, one short term and one long term. Can you maybe give us a better sense of the magnitude of the potential improvement sequentially, given that you already seems to have bottom out and start improvement, the step up in that recovery that you see ahead will be important. And a little bit more longer term, can you maybe quantify, give us a range of the expected boost in EBITDA in millions of dollars that you see coming from the ongoing and recent investments in Mexico?

Okay, hi, Carlos. Sorry, let me take at least the first part of your question. Clearly, as we have described in recent calls, we have bottom out from the lowest level of EBITDA generation. Clearly, there was important increase in this quarter. Our expectation is for this to continue. There are a lot of variables, of course, moving around, but the expectation is something that we already mentioned in the past to reach by the fourth quarter an amount of an average EBITDA margin closer to around 15%. As you know, has been our goal for the company in the short run. So we believe that with all the measures that Maximo described on our plans to reduce costs and be more efficient, we will be able to achieve that in a normal market environment. And we are working for that. And the third quarter should be the case and the follow should be an additional increase in order to achieve these levels. In the longer term view, I think Maximo, you can take it. Yeah,

Carlos, hello, how are you? Longer term view of the projects. Remember the projects, at the end of this year, we are going to start the galvanized line and the new cold rolling mill, the PLTCM2. This is going to increase, it's gonna give 1.5 million tons a year of new capacity. But remember that all these equipment has a very long run part period. So you're not going to see in the 2026 huge increase. But it's 1.5 million of that, probably half million tons, we are going to close very old capacity. Remember the Guerrero cold rolling mills or the Universidad cold rolling mills are very old capacity with one single, stand so very, very inefficient. So part of that is gonna have an increased margin or a BDA of 30, $40 because of the cost efficiency. And the other part, probably we have an ABA per ton of around 150 to $200 a ton. So you can make the math. But again, they have a long ramp up period.

Yeah, let me add Maximo. This is just the part that we are.

Yeah, you're right.

The idea here and then we have the second part of the function plan. But that

will be 2027. 2027, exactly.

Okay, got it. On 2027 it will be the EAF. Yeah, and again,

a long ramp up period, even longer.

Okay, all right. That's helpful, thank you. Then the two short ones, well, hopefully one is not that short, but we'll see. On the CSN litigation or the Ushimina's alleged shareholder control, changing in control, where do we stand and what will be the next steps in that litigation? And then one small one, the Shreveport facility in the US, you typically import material from, I think, Mexico into that plan for the processing. With the 50% tariff, what is the strategy there? Yeah,

let me start with the second one, which is very simple. I mean, today we are buying most of our supply from local suppliers. Clearly the 50% tariff, make us buy more locally. Brazil and CSN, I mean, regarding the litigation with CSN, to be honest, there haven't been significant developments later, the last development we reported in the fourth quarter of last year. So there haven't been, in that quarter, I think, was that we changed, we adjust the provision we had because of that development, but since then, there hasn't been much update to that. So I- And,

I'm going forward, what are the next steps in the legal process for eventually get final resolution on this?

Is there

another- To be honest,

no, no, we already appealed, and the Supreme Court of Justice has to decide if our appeal is going to the Supreme Court in Federal Tribunal, the SPF, as you call it in Brazil. This is still pending. Thank you. Thank you very much. To be clear, I mean, we filed an extraordinary appeal against the SAPJ decision, and we are waiting for that appeal. That was, I think, in February. Okay,

excellent. Thank you very much, Maximo and Paulo.

You're welcome.

Thank you. Our next question comes from the line of Emerson Villera from GF. The line's open.

Hey guys, good morning. I'm taking, thank you for the opportunity. So I have two follow-ups. The first one is on the cost reduction target of $300 million. I just want to understand if that compared to 2024's figures or to a run rate figure from the 4Q 2024. So just understand what is the comparison base for this cost reduction, and if that includes Uzi Minas. A second question is just on the impact that this lower import into Mexico is having on the two prices. And so you guys believe that this should support further increases going into the third Q. That's it. Thank you.

Thank you, Emerson. The first question, these 300 million are compared to 2024 without the effect of the change of raw material prices, of course. So to see it in the shift balance, it's a little bit difficult, but we are continuous following that and making these improvements compared to 2024. Uzi Minas is not included on this number. Uzi Minas, we are making Uzi Minas a very aggressive competitiveness plant, but it's not included in this number. The second part of prices in Mexico, prices in Mexico will probably increase a little bit, but as I said, we are probably going to gain market share, but the change in prices, they're not going to improve radically. It's gonna be a mild improvement.

Okay, and just to follow up on the Mexican measures as well, can you just elaborate a little bit on it? Are we talking about quota systems into the MPI, and if you can provide us some insight into the next measures that the government is analyzing, as you mentioned, that would be helpful. Thank you.

What they are doing is revising all the several abuses that were in the system, in the imports in Mexico, not only from steel, and the tax authority and the economy minister, or the secretary of economy, are doing different schemes to shut down all the looks that were for dumping cases and the tariff that Mexico today is, for example, all temporary imports. Well, they are revising because a lot of that was clearly a loophole that people were using, and so they are closing all those loopholes. And also, they are taking, we are seeing a much more, much more analyzing in new dumping cases. So they are enhancing the capability of analyzing all different dumping cases, and I hope soon we will have good news about that.

So quickly, thank you very much.

Thank you, Emerson. Thank you. Again, if you'd like to ask a question, please press star and the number one on your telephone keypad. And our next question comes from the line of Rafael Darchelos from the Desco BBI. The line's open.

Hey, good morning. Thanks for taking my questions. I have two questions related to capital allocation. So the first one, if you could please elaborate further on your capex cycle, I mean, whether we should see the peak of the capex level closer to the end of this year or more to the beginning of next year, if you could give us a sense of when you're planning to post the peak of this capex level. And on this point, also, if you could provide more color on the execution of the PISCaria project, could be interesting as well. Then the second question, it's a more, you know, it's a broader question in the sense of, I wanted to hear from you, what are your thoughts on the overall capital allocation strategy going forward? I mean, whether you believe you could increase dividends in the coming years and given the ongoing difficulties in Brazil following the recent increase in imports, I mean, how is your appetite to keep investing in the country? Thank you.

Thank you, Rafael. Capex, probably this quarter, the $800 million of capex of this quarter will probably be, or definitely will be the top quarter of this cycle. I mean, for the remaining of the year, our projection is to be between the 2.5 and the 2.6 billion dollars of capex that we set last conference call. With that, the next two quarters are going to be very high on the order of $700 million, but lower than this quarter. Next year, 2025, will probably be around 1.9 billion, and 2027 will probably be around 1.1, 1.2 billion. So as you see, this year is the peak and this quarter particularly will be probably the peak of all these capex investments. The execution in Pesqueria, to be honest, is doing very good. As I said, the PLTCM and the Galvanize are going to stop the ramp up in December. That was the original date for the Galvanize and we are moving forward two months, the one in the PLTCM. So I mean, very comfortable with that. The steel shop and the direct reduction unit, but they're going well. If you like, there are some videos in our web pages or in the media, which you realize how the investment is going through, the size of the investment and the challenge, but as you would see from the videos, it's going very, very well and on time. So with that, we are very comfortable today, of course, making a lot of effort to deliver that in time and in budget. The third one, Brazil, you are very correct. I mean, Brazil has to, I mean, as a country, they have to take some measures because if not, clearly, not only steel industry, but a lot of industries cannot compete with unfair from China. Not the steel, not the automotive, anybody. I know the automotive industry in Brazil just released a very tough memo about all this. So this is something that probably Brazil has to figure out before investments are going there. But the long-term dividends, Pablo?

Yeah, the question of both including dividends and also the capital allocation of the company. As you know, we are in the middle of a very, very significant capex plan for turning $4 billion. We are in the middle of that. As Maximus mentioned, this year, total capex 2.5, next year, close to $2 billion. So we are in the middle of significant capital allocation that we need to cover. With this level of capex, we also mentioned and we also confirmed that we will sustain our level of dividend payment. And we have been doing that lately. So we have a significant outflows of capital to be allocated within the project and within the dividend that we are planning to have. Of course, as usually happens with our big capex plan, then we take a year or a little more to digest all the investment that we have been doing. As Maximus mentioned before, the ramp-up period of these capex plans are significant, especially these ones that are very, very sophisticated. So we think that we have a very clear view of what we will be doing in the near future. We have, as you know, other plans, they are feasible for the future, but the main focus of the company, at least for the next couple of years, is to, of course, get a better level of a VBA, better level of margins for the company to sustain our dividend payment and to sustain all the capex plan that we are performing right now.

Okay, thank you. Just a quick follow-up. So just go first. So you mentioned that the peak of the capex was the second tier, right? So in the coming quarters, your capex level should go down slightly, right?

Exactly. We are putting the number at 1.4 billion for the next semester, around 700 each quarter, a little bit more or less, but that is the number, approximately, compared to the 800 of this quarter. Okay, thank you. You're welcome.

Thank you. There are no further questions. I will send the call back over to our CEO for closing remarks.

Okay, thank you very much all for joining us in today's call. As usual, we value very much your feedback, and so call us with any doubt, and have a great day. Thank you very much.

The meeting has now concluded. Thank you all for joining. You may now disconnect.