Ladies and gentlemen, thank you for standing by, and welcome to the Ternium Second Quarter 2021 Results Conference Call. At this time all participants are in listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions]. Also please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Sebastian Marti. Thank you. Please go ahead, sir.

Good morning, and thank you for joining us today. My name is Sebastian Marti, and I am Ternium's Investor Relations and Compliance Director. Ternium released yesterday its financial results for the second quarter of 2021. This call is complementary to that presentation. Joining me today are Ternium's Chief Financial Officer, Mr. Pablo Brizzio; and Ternium's Chief Executive Officer, Mr. Máximo Vedoya who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, there will be a Q&A session. Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation. With that, I'll turn the call over to Mr. Vedoya. Máximo Vedoya: Thank you, Sebastian. Good morning. And thanks all for your participation in today's call. Ternium reported remarkable results in the second quarter of the year. We had record quarterly sales, margins, EBITDA and net income. And looking ahead, I believe the current strong global steel market environment should continue to support our solid financial performance over the rest of the year. Steel prices in our region increased steadily to high levels over the last 12 months with strong steel demand and low inventories in the value chains. Prices are probably going to begin a downtrend at some point during the second half. But I don't expect this to be a very profound downtrend. The main reason for this positive view are a steel demand that remains strong, constraining the supply chains, news from China with growing export rebates with the objective of limiting steel production and from Russia with taxes on steel export. In recent…

Thanks, Máximo and good morning to everybody. Ternium's performance in the first half of the year has certainly been remarkable. It reflects the varied conditions prevailing in the steel market that Máximo has just described. We will see now from this condition grow the company to new record level of profitability and results in the second quarter after a very strong performance in the first quarter of the year. Let's start by reviewing EBITDA and net earnings on Page 3 in the webcast presentation. EBITDA in the second quarter of the year reached $1.4 billion, an EBITDA margin of 36% or $463 per ton a new record high. These margin levels are higher than those of most of our peers probably at the world level. Although this out of the order margins are not going to be sustained over the cycle, I wanted to point out there is something that distinguishes Ternium among its peers, consistently higher margins and saw over the cycle. Net income in the period reached $1.2 million, or $5.21 per ADS. Looking out to the third quarter, we expect to achieve new record EBITDA with higher margins and volumes, and we will analyze this in more details later on. Let's turn now to Page 4 to review steel shipments. When we compare our volumes on a year-over-year basis we see a significant recovery in Mexico and the Southern Region in the second quarter of this year. As you know, last year, the second quarter activity levels were deeply affected by the COVID-19 outbreak. Now on a sequential basis, shipments in Mexico and the Southern Region increased 2% in the second quarter of the year, remaining at elevated levels in a scenario of strong steel demand in Ternium's main markets. Looking forward, considering the strong demand for…

[Operator Instructions]. Your first question comes from the line of Caio Greiner from BTG Pactual. Your line is open.

Hi, thank you. Good afternoon. So my first question on capital allocation. I mean, this is probably the main question surrounding the investment case. Nowadays, the company is moving to net cash, maybe in a matter of weeks. And we just wanted to understand how does Ternium see the growth versus dividends equation today? Because on one hand, the company is still ramping up Pesqueria, so we're not sure if you would be willing to kick off another project in the meantime, but if you are. What do you think you're most likely to invest in over the coming years? Would you see M&A as a failure as a feasible option or do you - would you rather to go with organic growth? What are the company's priorities on that, because if that would be investing where you currently operate, or maybe thinking about geographical diversification? And I do remember that some time ago, we were speaking of or there were some talks of building an EAS in Mexico, electric furnace in Mexico, and is that still the case or is that still the priority for the company? And if the company is not willing to kick off another project at the same time, where you ramp-up Pesqueria? Could we see Ternium being extraordinary dividends already in the second half or maybe could we be closer to seeing an official dividend policy being approved, maybe based on free cash flow generation? That's my first question. And my second question really quick on EBITDA per ton. So Ternium delivered EBITDA per ton levels above $400 per ton in the second quarter, that could be potentially above $500 per ton in the third quarter. So I just wanted to quickly understand where do you see EBITDA normalizing ahead, because I do remember…

Okay, let me take the second part of Caio's question like, hey, how are you? So right the margin or the EBITDA per ton that we generate in the second quarter for $150 per ton and with the perspective and the comments, both Máximo and myself made are pointing out for higher EBITDA per ton into the third quarter of the year. Also, it's important to mention, also it's important to mention that also the view that the company has stressed by Máximo is that we are not expecting to see a significant rapid reduction in prices in the coming quarters after the next one. So even though it's not reasonable to believe that will sustain this level of EBITDA pattern or EBITDA margins, we're not expecting also to see a significant reduction on these numbers. On the long run, we continue to work as we said, we have been always worked and it's also something that we mentioned in the opening remarks that the role of the company is to continue to achieve not only very high levels of EBITDA margins and EBITDA per ton but to keep sustain the feature that Ternium has which is to outperform our peers in any part of the cycle, the upper side or in the lower part of the cycle, we have been always able to achieve that and this is something that we work very hard to continue to have. So at this point probably will be easy to say that the margin of the range between 15% to 20% is something that we can easily overpass, but in a more normal market environment, this is something that we'll continue to sustain, always working to be not only the upper side of this range or even higher than that. And every investment that we made, especially the new mill and everything that we are analyzing is toward these goals. So we sustained clearly, probably in the next year being closer to 20% is something that is probably easy to achieve. But this is something that we will sustain and clearly we will work to increase as fast as much as we can with the performance of the company.

Thank you very much gentlemen.

You're welcome.

Your next question comes from the line of Carlos De Alba from Morgan Stanley. Your line is open.

Hello, good morning gentlemen. Hopefully, you're doing fine. A couple of questions, if I may. So Máximo, when you said the 600,000 tons increase, are you talking about overall volume or you talking about just the percentage of value-added volumes in the company's overall shipment? And second, if you could give us a little bit of an idea of how much is lab from the field you expect to sell internally in Mexico so internally and how much to external customers in the coming quarters, that will be great. Máximo Vedoya: Thank you, Carlos. And thanks for asking, we are doing fine. I hope all you too, the 600,000 tons, if you remember in our last conference call, I told that in the second quarter, in the second half of the year, the cost we need is going to increase 400,000 tons overall sales. That's what's coming from the new facility. And because of the ramp-up curve, we have updated this to 600,000 tons. So how much volume from the new facility we are putting in the market. The second part, if I remember the slabs. Okay, the slabs in the third quarter is going to be around between 800,000 tons and 900,000 tons the quarter to Mexico and to third-parties probably it's going to be around 300,000 tons to 400,000 tons. I mean, it's going to be in that range. So it's going to be decreasing from, I think was 700, no little bit less of what we do in the second quarter.

All right, fair enough. And then just final question, when you talk about potentially needing to invest in the steelmaking capacity in order to comply with the USMCA rules and MCA rules and when you consider the U.S., Canada or only Mexico? Máximo Vedoya: That's a very specific question, Carlos. I think that I mean, we are analyzing, as I said, we don't have any announcement to make probably what we have to do is part of that is doing it in Mexico. I mean, our hot roll mill is there and our customers are probably there. So it makes sense to make at least part of that in Mexico. Again, this is not an announcement, this is something we're analyzing remember the USMCA rule of origins are for the automotive industry and they are going to start in 2027. So we have time to analyze all the alternatives and that's what we are doing, Carlos.

Fair enough, I mean this is all hypothetical at this point in time, but on this basis, on this hypothetical basis, and considering the fact on the one hand that you have iron ore pellets and DRI in Mexico, and there are enormous pressures to reduce carbon emissions in the steelmaking process. Is it fair to say that EAF might be a better option for you guys than blast furnace integrated facility? Máximo Vedoya: That's for sure. No, that's for sure. We're not analyzing a blast furnace, that I can tell you.

Fair enough, thank you very much. All the best. Máximo Vedoya: Thank you.

Your next question comes from the line of Andreas Bokkenheuser from UBS. Your line is open.

Thank you very much. I hope you're all safe and well. Couple of quick questions on demand and exports pertaining to your strategy for Pesqueria. Just firstly on demand, so I think you mentioned that Mexican domestic demand for flat steel has been quite strong, it's been solid. We've been getting an increasing amount of calls suggesting that demand is actually on the weaker side in Mexico. So I'm just trying to kind of get a sense of what's happening there because of course, you could be capturing market share, either from domestic players or imports, so if you could talk a little bit about that you see yourself capturing market share, is that what you're seeing strong domestic demand or you actually seeing end demand pretty strong in Mexico at the moment despite the high price that is my first question? Máximo Vedoya: Thank you, Andreas. I will take that one, we are seeing both to be honest. I mean, the demand is increasing in Mexico compared to last year, it's not increasing as much as it is increasing in Brazil, or in the U.S., where power consumption is increasing more. But Mexico is going to close at around a little bit more of 10% steel consumption increasing in 2021, compared to 2020. So demand is increasing, but what you're also right is that it's very different between the markets, the industrial market, which we are very much invested in that market, it's very strong. And the commercial side with the commercial part of the flat products, and the long products is decreasing, or it's not improving sorry as much as the flat industrial part of the business. So there is a little bit above and clearly, we're gaining some market shares again imports.

That makes sense. Maybe a quick follow-up there. So you mentioned obviously from last year, I don't know if you have the numbers in front of you, do you have a sense of where we are this year versus pre-COVID in 2019, where demand is? Máximo Vedoya: It's almost the same. I mean last year, I don't have the exact number. But I think last year, the apparent consumption decrease around 8% to 9%. And we're seeing an increase this year of around 10%, probably a little bit more. But I want to be in the cash flow side here. So it's almost the same 2019 to 2021, a little bit more, but almost the same. Again with difference, Andreas, flat industrial products, the demand is much higher than 2019, construction products for commercial site, it's lower. So they are different in the market size.

Yes, that's clear, different on the product mix in terms of demand. That's very clear. And then just my second question just as you basically ramp-up Pesqueria, how are you kind of envisioning and I know it's a little bit, might not be an easy question to answer, but how are you kind of envisioning where those shipments will go. I mean, we've obviously seen the U.S. fuel price going up a lot, which seems to be more supply driven and demand driven with a lot of capacity having been shut down in the U.S. So does that mean that you see yourself exporting more than you proportionately have before from Pesqueria into the U.S. or do you see yourself more capturing market share from imports coming into Mexico from the U.S.? How do you see those, or where do you see those Pesqueria shipments? Máximo Vedoya: Yes, Andreas that's a very good question. I am not sure if I agree with you that the price is more supply driven than demand driven to be honest, I agree that there are some restrictions and some capacity that's down. But to be honest today, the U.S., the utilization in the U.S. is at pre-COVID levels. And Mexico is probably producing more. So no for America is not producing less than three COVID levels today, it's in the past. And again, we are seeing an increase in demand. I mean, the U.S. also - U.S. probably it's going to be, the demand in U.S. is going to probably grow up this year from more than 50% still six months ago, but it's a huge number. So, we are seeing some demand driven issues. And again, we're also seeing that that these reshoring which clearly is going to take time, it's happening, I mean, we are seeing investments in a huge range of different industries that consumes steel driven probably but USMCA driven by the fact that supply chains are getting more difficult, driven by a lot of things, but people are investing in the USMCA. So the demand is going to increase. Remember that the imports of steel are very important in the region but imports of high indirect steel or imports from final products that consume a lot of steel are much bigger than import from steel and we are seeing a trend that this is changing. It's going to take time, but it is changing. So I think that our new facility times comes just in the right moment for this. Again, so for us, the worry is that the volume is going, it's going to go mainly to Mexico, it's going to go mainly to substitute imports and new demand coming from these investments. And some part can be export for the U.S. But mainly, it's going to be for Mexico and the increase in demand and again the imports. And we see a lot of space there.

Okay, that's very clear. I would probably just make, I would probably just make the argument on the demand side for flat steel in the U.S. that if we look at the two dominant drivers of flat steel in the U.S. being autos, and energy, I think those account for about 80% of flat steel demand in the U.S., I mean, we know that auto production is down because of the semiconductors. And we know that energy is down because the rig count is down almost 50%. So if we put that together, it looks like demand is still lower than that it 2019 pre-COVID in the U.S. And it looks that steel production is up because imports are down from what we see. So I guess that's the basis of my question. We're right now seeing potential 1,500, which is $400 tons below the current stock price. So I think, I agree with you that we're going to see some weakness, but it's probably not going to be significant weakness in the short-term? Máximo Vedoya: Yes, and again, you're right about some parts. I mean, demand in oil and gas clearly is now going to return - I don't think it's going to return to pre - I don't know what 2017 or 2018. I mean, but again, on a general demand is increasing, apparent consumption is going to increase 15%, 2021 is going to consume more steel than 2019 in the U.S. according to our numbers. And this is a huge issue. And again, of course, you're right. Imports, I mean, we are more aggressive against imports, and most of the U.S. producers also. So it's a combination I think of course.

That's a good point. I don't want to monopolize the Q&A session, maybe one final follow up. Máximo Vedoya: Don't worry.

Do you think that continues into 2022? Because we're obviously seeing a lot of pent-up demand in 2021 from demand that was lost in 2020. So what got lost in 2020 got pushed into 2021? Does that continue into 2022 in your analysis? In your estimates, do you think we're going to see more demand growth in 2022 versus 2021 or does that stabilize? Máximo Vedoya: No, I think, yes. I mean, yes, if you look to the prospect or what we are thinking about the GDP increase in the U.S. and Mexico, even Canada, they are in 2022, not only 2021, there are huge increases. Again, there is the market, I mean, the market is very good economically point of view. So I think demand is going to continue increasing, I think exports are going to continue. I mean, there are cyclical, so they are going to increase a little bit by the end of the year, most likely in the U.S. But as the whole trend inputs are going to continue decreasing in the North American region. And the things that Russia and China is doing. Those are signals that overcapacity in those parts of the world. I mean, they're trying to finally do something about that. I mean, the thing of the China is, I mean considering all the export rebates, and probably thinking about putting an export. It's a huge issue, which is going to help all of these.

That's very clear, I appreciate your insights on this. And I've taken more than my fair share of the Q&A session. So thank you very much. Máximo Vedoya: Okay, thank you, Andreas.

Your next question comes from the line of Caio Ribeiro from Credit Suisse. Your line is open.

Yes, good morning, everyone. Thank you for the opportunity. So my first question is on the infrastructure package in the U.S. There is a lot more visibility on the different components now. And a few companies have already provided their estimates on the demand that it could generate for steel throughout its duration. So I just wanted to ask if you already have an estimate on that, on what kind of demand generation this package could generate for you in the market as a whole. And then secondly, on flat steel prices in the U.S. I just wanted to get your perspective on what's the supply additions that are expected for 2022 could generate for pricing momentum. We estimate that the supply additions, they could add up to 4 million or 5 million tons of additional capacity in 2022. So I just wanted to see how you think that that will impact pricing momentum. Do you think the market could become oversupply with these supply additions? Or do you see demand growth more than absorbing it? Thank you. Máximo Vedoya: Thank you, Caio. The first question about infrastructure in the U.S. To be honest, I don't have a different estimate that what the steel industries have said in the U.S. They clearly know more than that I do. So I'm not going to change that number. Our main issue here is, I mean, we are not seeing a lot of - or we are not participating a lot in that market to be honest. But clearly, it's going to be very good for us, because as you know, some of the U.S. Steel producer exports to Mexico and we compete with them. And this is something that is going to affect their ability to supply to Mexico. So for us,…

Perfect. That's very clear. Thank you, Máximo. Máximo Vedoya: You're welcome.

Your next question comes from the line of Thiago Lofiego, Bradesco. Your line is open.

Thank you, Máximo. Two questions. One, back to the pricing discussion that you had with Andrea. Just more of a theoretical maybe question here. What in your view would be the drivers for steel prices to trade at a new normal? And that new normal being a higher level versus the old normal, right? I think you already mentioned a bit of the changes that you're seeing and we are seeing as well. Right. So China is changing the way it is acting in the global market, potentially exporting less. But how would you defend a higher for longer pricing scenario for steel, even if we see steel pricing in the U.S. dropping let's say 50% is still going to be $1,000 per ton. Right. So that's way above normal levels. So how would you defend the higher for longer scenario? And then the second question, just to confirm, you mentioned news lab, the new level of lab shipments to third parties of 300 to 400,000 tons per quarter. Is that after the Pesqueria mill is fully ramped up or that in the near term just to understand what the new normal level will be after the program part of the DML very interesting. Thank you. Máximo Vedoya: Perfect, thank you, Thiago. I started with a second, which is a little bit more easy. And then I go to the pricing question if you don't mind. Thiago, I think that three times 1000 times four should be a new normal for the facility in Brazil to ship to third parties. Most of those third parties will probably be sales in Brazil to Semina, as we are doing today. But that doesn't mean I mean the new rolling mill in Pesqueria is going to produce more, it's going to reach out…

Okay, they're clear. I agree with you, Máximo, Thank you. Máximo Vedoya: Thank you. Thiago.

Thank you. Your next question comes from the line of Alfonso Salazar, Scotiabank. Your line is open.

Thank you, Máximo and Pablo. I have two questions. The first one is related to what you just mentioned that you are not analyzing the platform at the moment in time, and the question was more related to your plans for the mining operation in Mexico. And you can also give us some updates on the situation there, or your plan, and also about we hear a lot about violence in the region of Michoacan where the mine is located. So if you can give us an update on that as well. The second is regarding the South American operations. In China is implementing these in Wall Street export relations. And they become eventually our net importer of seeing what the patients for South America, this is the four year operations there because apparently that matrix software investment case in some countries for justice wants to hear this. Máximo Vedoya: Thank you, I found so the update of the mining operation, I mean the mining operation in Mexico are producing at full capacity. As you know, most of what we produce of pellet goes to our own facility, although we are exporting or selling to third parties, some of the extra rehab. But it's not a huge volume. We expect that this is continue working as it is. To be honest, I know your question about violence in Michoacan and other parts of the south of Mexico. We are not seeing any of that in our region. Although, one of our mining operation is in Michoacan it's very near the Colima border, so this is far away from the things you read in the news. South American operation and China, I think the first benefit from this is - remember, China is the first in order, for example, in Brazil. I mean, as you know, the Brazilian market is importing some - I mean the imports in Brazil are increasing, and most of them are coming today from China. So I think the benefit of this new policy is changing us the industry, so the steel industry there are going to ship more to the market and can increase their market share because of this new policy of China. I don't see yet our business case to increase steel capacity in Brazil, for example, for exports to China to be honest, I don't see today that case, I think that Brazil is going to still meet our operations in Brazil, it has to be more focused on the Brazilian market and some export to some regional countries.

Okay, what about marginal expansions or smaller expansions in other countries like Colombia. Do you see an investment case for that? Máximo Vedoya: We are not analyzing that. As you know, in Colombia, we are ramping up the new facility in Barranquilla. Today, we don't have a project in the near future to ramp him up. But again, there are things that we are analyzing if this trend changes, and there is a case for making a new investment in Colombia. Today, we don't have that in mind yet.

Fair enough. Thank you very much, Máximo. Máximo Vedoya: You're welcome, Alfonso.

[Operator Instructions]. There are no more questions at this time. Turning the call back over to Mr. Máximo Vedoya. Máximo Vedoya: Okay, thank you all very much for participating today in our conference call. And for your question, please keep in touch and contact us if you have any comments or additional question. And again, thank you very much. Have a nice day and please stay safe. Thanks a lot.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.