Good morning. My name is Emma and I will be your conference operator today. I would like to welcome everyone to the Ternium Third Quarter 2021 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. Sebastian Marti, you may begin your conference.

Good morning, and thank you for joining us today. My name is Sebastian Marti and I'm Ternium's Global Investor Relations and Compliance Senior Director. Turning to release yesterday's financial results for the third quarter of 2021. This call is complementary to that presentation. Joining me today are Ternium's Chief Executive Officer, Máximo Vedoya; and the company's Chief Financial Officer, Pablo Brizzio, who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, there will be a Q&A session. Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation. You will also find any reference to non-IFRS financial measures reconciled to the most directly comparable IFRS measures in the press release issued yesterday. With that, I'll turn the call over to Mr. Vedoya.

Thank you, Sebastian, and thank you all for joining us today. Ternium reported outstanding results in the third quarter with record EBITDA sales margins and net income. With a strong performance expected also for the fourth quarter, we are headed to a record year in 2021. Let's now review the state of our steel markets. The global steel business environment remains healthy. The USMCA market continues to be relatively tight, although there are some signs that this situation is moderating. Steel inventories in the US are increasing but continue to be at relatively low levels and lead times are also slowly normalizing. A recent development is that the US and Europe announced an agreement to relieve the European steel imports from Section 232 tariffs subject to certain conditions including a specified maximum tonnage and the need for the steel to be melted and poured in Europe. In this environment, benchmark steel prices in the US currently remain high. We continue to believe that steel prices are going to begin a downward trend at some point in the following months, although we don't expect them to reach the lows we saw back in 2020. There are several reasons for us to have this view. Steel demand in the region is steady, especially in the industrial markets. Global supply chains are continuing to have significant disruptions. Backlogs in certain industries like automotive and white goods should help sustain strong steel demand levels into 2022. We are seeing nearshoring of manufacturing capacity to the USMCA region, and steel production in China is decreasing in line with the country's efforts to control carbon emissions. Looking ahead, after a tight steel market in 2021, we expect the steel supply-demand environment to gradually balance in 2022 with steady steel demand and a normalization of global supply chains. Let's move now to a review of our main markets. The Mexican steel market is currently showing two different business environments. On one side, the industrial market, made up of different manufacturing industries in the country, is operating at very high levels of utilization to meet strong end product demand. The only exception to this is the automotive industry, which in the third quarter continued to be significantly affected by the semiconductor supply chain disruptions. This is preventing OEMs from utilizing their full production capacity. So it is possible that Mexican automotive industry production in 2021 will end up being similar to that of last year. Opposite to this broadly positive environment in the industrial market, the construction sector in Mexico continues to weaken. This sector has not been able to recover to pre-pandemic activity levels, unlike the industrial sector. Going to Argentina, steel shipments in this market have been pretty healthy for the last 12 months. After a lengthy restocking process following the COVID-related drop, inventories in the value chain in Argentina are now back to normal levels. The best-performing sectors are currently the automotive industry and construction. We expect to see relatively stable shipments in Argentina during the fourth quarter, with some seasonally lower volumes by December. Nevertheless, Argentina continues to suffer from significant uncertainty regarding its main macroeconomic variables and its capacity to renegotiate its debt with the IMF. Activity in 2022 will depend on how these pending issues are addressed. I would like now to make a quick comment regarding the progress of some of our sustainability initiatives in the quarter. In February, we announced a midterm target to reduce Ternium's CO2 intensity rate by 20% by 2030, along with the main initiatives needed to achieve this. One of these initiatives is the expansion of carbon dioxide capture capacity in our facilities in Mexico. This is not new for us; we have been capturing CO2 in our three DRI models for many years. These models in Monterrey and Puebla are among the greenest in the world, and there are actually very few like them out there. In September, we finished the first stage of our new carbon capture program with the expansion of the carbon capture system of the DRI models at the Monterrey facility, resulting in a 38% increase in its capture and usage capacity. The CO2 is sold to different industries, avoiding new CO2 emissions and favoring a circular economy. After this expansion, we expect to have clearly carbon capture and usage capacity of 285,000 tons of CO2 between our facilities in Monterrey and Puebla. This represents the annual emission of approximately 61,000 tons, and we have a second stage in the making that will increase this even more. Another development in this field since our last conference call is the signing of a Memorandum of Understanding with Vale, our main iron ore supplier, to jointly develop steelmaking decarbonizing solutions. We are analyzing different alternatives from this, like iron ore briquetting plants located at our Ternium Brazil facility and plans to produce metallic products with a low carbon footprint using Vale Tecnored Technology, Ternium's HYL, and other technologies for iron ore reduction. As part of our ESG program, we received confirmation from UN Women in September for our application to be a signatory of the growing women's empowerment principle, which promotes gender equality. Diversity and inclusion are two important topics on Ternium's agenda. We work to create a workplace environment that attracts and develops talent across all genders, nationalities, and generations, valuing our individual differences. Another positive development in the quarter was Ternium's Board of Directors announcing an interim dividend payment of $0.80 per ADS. This decision reflects the strong business environment and the significant cash generation the company has achieved so far during this year. It also marks the transition from an annual dividend payment schedule to a twice-a-year payment with an advance in November and a final payment in May. I believe this change in our dividend payment schedule is a very positive development that underscores our long-term commitment to returning value to our shareholders. Before finishing my remarks, I would like to give a quick update on the status of the COVID-19 pandemic at Ternium. Active COVID-19 cases among Ternium's personnel are currently very low, reflecting a decrease in the rate of infections in Latin America over the last month. Despite this good news, we continue applying strict sanitary protocols in all our facilities. The government vaccination program has progressed well in the different countries where we operate. Currently, 92% of Ternium's employees have received at least one dose of the COVID vaccine, and almost 70% are fully vaccinated. Okay, I will stop here and let Pablo go over our performance in the third quarter. Pablo, please go ahead with the webcast presentation.

Ladies and gentlemen, this is the operator. We are currently experiencing technical difficulties. Your call will resume shortly, and until then, your lines will be placed on music hold. Thank you for your patience. Ladies and gentlemen, we apologize for the delay. The conference will now resume.

Okay. Sorry about that. We are back here. So, good morning to everybody. Let me discuss Ternium's performance for the third quarter and the expectations for the last quarter of this year. Ternium delivered a very strong set of results, actually the strongest in the company's history. We have a very high starting point here, but yet the results the company expects to achieve in the fourth quarter should be very solid again. You can see on page three of the webcast presentation that EBITDA is reaching $1.9 billion in the third quarter, representing a 41% EBITDA margin and $612 EBITDA per ton, with net income reaching $1.4 billion or $6.12 per ADS. For the fourth quarter, we expect a sequential increase in costs per ton, partially offset by an increase in revenue per ton. With shipments remaining relatively stable, this should lead to a slight decrease in EBITDA quarter-over-quarter. Let's analyze this in more detail, starting with steel shipments in the next page of the webcast presentation. On a sequential basis, Ternium shipments in Mexico and in the southern region decreased slightly in the third quarter. In the other market region, shipments increased 7% sequentially, mainly due to higher finished steel shipments as slab sales to third parties remained relatively stable. On the next page, number five, you can see that combined in these developments, our total steel shipments amounted to 3.1 million tons in the third quarter. This volume is the same as in the second quarter and 8% higher year-over-year. Looking into the fourth quarter, we expect shipments to remain relatively stable with a slight finished steel increase in the other market region offset by lower sales of slabs to third parties and lower shipments in Argentina and Mexico, partly affected by seasonality at the year-end of 2021. Now, let's comment on steel prices. Changes in revenue per ton have been relatively uniform across the company's main steel markets and they are reaching record high levels. Realized prices in the Mexican and Russian markets are expected to increase again in the fourth quarter, reflecting the upward trend in US spot steel prices we have witnessed this year as contract prices in Mexico region were relaxed. Turning now to net sales, in the bottom left chart, the combination of higher realized steel prices and stable shipments resulted in a 17% sequential increase in net sales to a record high $4.6 billion in the third quarter. Moving to the next page, let's review now the main drivers behind the sequential increase in quarterly EBITDA and net income. The EBITDA chart on top shows that it increased sequentially reflecting mainly higher realized prices, partially offset by increases in costs per ton due to higher raw material prices and purchase slab costs. We expect in the fourth quarter a further increase in costs per ton as the higher purchase prices of raw materials and slabs continue to flow through the company's inventories. As I mentioned at the start of my presentation, the increase in costs and revenue per ton are expected to lead to a slight decrease in EBITDA in the fourth quarter. The chart below shows that the sequential increase in net income in the third quarter was due to record-high operating income, partially offset by lower results from our participation in Usiminas, which had, as you remember, a one-off gain in the second quarter. Turning now to page 7, we can see the same changes but for the nine months of the year. The drivers of the record high EBITDA level in the nine-month period were the same as in the third quarter. For net income, the main drivers of the increase were record-high operating income and equity in earnings from Usiminas. Now, in our last page, let’s review our quarterly cash flow and balance sheet performance. Cash flow from operations in the third quarter was $586 million, even after a significant increase in working capital. As you can see in the upper right chart, the increase in working capital was the result of a combination of factors such as higher steel and raw material costs and higher inventory volumes, partly related to the ramp-up of the new hot rolling mill in Pesqueria. Trade receivables also increased mainly as a result of higher selling prices, with just a slight increase in days of sales. Regarding the decrease in commercial debt, it was mainly the result of the decrease in iron ore prices in Ternium Brasil. Looking forward, steel prices continue to be high and as the new hot rolling mill in Pesqueria advances in its ramp-up process, we should see some investments in working capital, but nowhere near the figures we registered in the third quarter. Regarding free cash flow, the company generated $475 million after capital expenditures of $111 million in the quarter. This led to a net cash position of $271 million as of the end of September. As Máximo mentioned, please take into consideration the strength of the company's performance and financial position. The Board of Directors has proposed an interim dividend payment of $0.80 per ADS, equivalent to $157 million, payable on November 16th to shareholders on record as of November 15th. Okay. With this, we conclude our prepared remarks. Once again, thank you very much for your time and attention. We are now ready to take your questions. Please operator, proceed with the Q&A session.

Your first question comes from the line of Caio Greiner with BTG Pactual. Your line is now open.

Thank you. Good morning. So my first question is on your outlook. You mentioned you expect slightly lower EBITDA for the fourth quarter. I just wanted you to elaborate a bit more on what you're seeing in terms of realized prices and costs for the coming quarter. On prices, you already have good visibility on the rare adjustment of your contracts. I do understand that. But what do you expect for the commercial side and other shipments based on spot prices for the fourth quarter? And on the cost side, you mentioned raw material cost inflation driving up costs. I would assume this is mostly coal prices on the rise flowing through the results. On the other hand, you also have iron ore prices materially dropping over the third quarter. So if you could please provide some more details on this equation, that would be very helpful. My second question, if I may, is on Pesqueria. I mean, you guys mentioned the project has been ramping up at a slower pace. So I just wanted to see if you can maybe update what you expect in terms of shipments for the project, that equation of incremental shipments that you guys have been sharing with us over the last quarter. If you can maybe share what you expect for the fourth quarter and for 2022 in terms of incremental shipments from Pesqueria, that would be very helpful. Thank you very much, gentlemen.

Thank you, Caio, for your questions. Let me first try to answer your questions. Regarding the cost, the increase in cost is mainly from the slabs, from the purchases of slabs, because as you said, iron ore is decreasing, and it compensates by the cost of carbon, which has increased dramatically. So both those prices compensate each other. However, the slabs we were buying were higher for the fourth quarter than for the third quarter. As you remember, some part of our slabs we ship from the Brazil operation, but others we buy in the market. So that is the increase in the cost. Prices are, as you said, in the industrial market, going to be higher because of the reset of the contract prices. Practically, in the commercial market, as you know, there are spot prices, and as you saw the prices of the CRU, for example, in the North American market, it decreased a little bit in the last two weeks. So we expect that slow decrease of those prices, at least from the Mexican market, but not for the other markets. Regarding the Pesqueria update, our plan for Pesqueria is we had a setback because of the permission issues. To be honest, the equipment was ready and was running, but this authorization for the transportation of natural gas was an unforeseen delay we had. But now the ramp-up curve of the facility is back on track. We are again in the ramp-up curve. Our expectation for 2021 is that the facility will provide us between 1.5 and 2 million tons of additional volume. Some of that volume is going to the Tenigal facility, which imported material before. But probably those are the numbers, Caio.

Just to clarify, Caio, we are referring to 2022 volume.

Okay. That's great. Understood. Thank you very much, Máximo and Pablo.

Your next question comes from the line of Jonathan Brandt with HSBC. Your line is now open.

Hi. Good morning, gentlemen. My first question relates to I guess pricing and auto demand. So you mentioned that auto demand wasn't great. I'm hoping you could quantify that a bit, what you've been seeing over the past few weeks and what your expectation is for 2022? If this is at least in your view, why you think steel prices in the US have been coming down? And sort of how much further do you think they could come down given the loosening of the steel supply-demand environment that you're seeing? My second question just relates to the natural gas that you have in the Mexican facilities. If you could just sort of help me understand how much of the natural gas price increase that we've seen in the spot market will increase your cost base? Are you on contracts, or are you subjected to spot? Any data you could give around that would be appreciated. And then just a quick third one if you'd allow me, just on the dividend payment. Could you just sort of elaborate as to why you decided to change the policy or why the Board decided to change this policy from annual to semiannual? Thank you.

Thank you, Jonathan. A lot of questions. I'll start with the natural gas because it's very simple. All our gas supplies are under contract for the volume, but those contracts are always based on the Centrica index. So yes, with a little bit of luck, we are being affected by the increase in this index, but not in LNG. In Centrica, we suffered that in our cost. That probably is also something I forgot to mention in the cost part in the first question. Thank you, Jonathan. Second, regarding the automotive industry, the automotive sector suffered more than we anticipated. I mean, the third quarter production in Mexico was around 220,000 tons per month. The effect was almost like 70,000 units every month due to this chip shortage. This impact was more significant than what the automotive makers expected in Mexico. Fortunately, we are seeing that things are starting to get a little bit better, but are still not normalizing. What we hear is that normalization will come in the first or second quarter of the year, but to be honest, we thought this would happen much earlier. So yes, we have had an impact. The numbers are from 220,000 to 70,000, those are monthly figures. This could also affect the price, since some of this volume is in storage. I think Jonathan, another question of yours was about steel prices in general. I don't remember very well.

Correct. I'm just wondering, what your expectation is of US steel prices given sort of the auto industry issues with the chips.

Well, I don’t think that the automotive industry chip issues are affecting steel prices as a whole; it’s one more factor in an enormous amount of factors that affect US prices. Again, US prices are at a very high level. I mean, we repeat this in most of our conference calls. I think the drivers indicate that prices will decrease. I can tell you clearly, US capacity is back to pre-pandemic levels, and even higher than that. Inventories in the country are increasing, and lead times are much shorter than they were a couple of months ago. Lead times for hot-rolled coils now are between five and seven weeks, which is far away from the 12 weeks it was. Steel imports are high, and new capacity is coming online in the next couple of months. Those are drivers that suggest that the price will decrease, but on the other hand, demand is very strong. If you see this year, Mexico is expected to increase consumption by 13%. That’s a huge number. The US by 15%, and other countries in the region even more; Brazil by 24%. This is the demand increase we are seeing in 2022 as well. And if the chip problem is resolved, there will be a lot of unsatisfied demand, and these companies will produce more vehicles. Disruption in global supply chains is still an issue, and many steel consumers are planning to import less for next year. Also, freight costs are continuing to rise, making it more expensive to move steel. Furthermore, China's production is decreasing as well. In May, China produced almost 100 million tons, and in September, that was down to 73 million tons. That’s a huge decrease in production, which changes the market dynamics. As we heard, this decrease is expected to continue. Therefore, I think prices, while they are moving slowly down, will not do so at a high speed because of all these factors I mentioned. I hope that answers your question.

No, that's perfect. Thank you very much.

So, I will ask Pablo to answer the question regarding the dividend.

Okay. Yes. Hi, Jonathan. I think the move taken by the Board is a natural step after increasing the level of dividend paid with the results of 2020 at the beginning of 2021, and as was commented during different conference calls. This new level reflects the strong position of Ternium and the free cash flow generation of the company. So we consider it a natural way of sustaining this new dividend level that is divided into an interim dividend in advance, which is a portion of the dividend that then will be decided or proposed during the quarter of February. Clearly, this is a way of sustaining this new level of dividend that the company decided to implement into two portions; an interim dividend and then the confirmation of the full dividend announced in February.

Okay, so we shouldn't look at this as just split equally in half. So it won't be up 1.6% for the whole year. It's just some portion of it?

Exactly. Yeah. You shouldn't take it as half. It’s just a portion of the dividend that will then be discussed and analyzed by the Board of Directors and approved by the shareholders meeting in April or May.

Thank you. Good morning, everyone. Two questions. Back on the dividend question, why are you not more aggressive on the dividend side given your net cash position and the positive outlook for the business? Even if steel prices are potentially going down, you guys are doing an excellent job. Steel margins are still pretty healthy. So why not be more aggressive on the dividend front? And within that same question, what should we expect in terms of average payout? Historically, you've paid more like a 30% level. Would it be reasonable to think about a 50% payout? My other question is about the impact of the US-Europe on the S232. What impact are you expecting from that, if any? And what do you think the next steps will be in terms of the S232 deal?

Thank you, Tiago. I’ll start with the second question. We are not seeing a lot of impact from this arrangement. I mean, Europe was already exporting materials to the US, paying the 25% tariff, and I think the numbers are very similar. So I don't think much more volume from Europe is going to the US. Probably, what we will see is that Europe increases a little bit of prices so they don't have to pay the 25%. For the dividend, well, we thought we were a little bit aggressive because our policy was always to pay once a year. And now with this interim, we are kind of making forward at least a portion of that dividend that we paid in May.

Okay. Yeah. To add to that, clearly, the company has shown an increase in the dividend payment during this year with the results of 2020. This shows that we have a new normal level that reflects more aggressive dividend payments based on the strong performance of Ternium and the cash flow generation. In the long run, the numbers will likely reflect levels similar to those you mentioned historically, around 30%. However, in a specific year, it may differ due to unusual circumstances. But in general, the company is showing a sustained increase in dividend payments.

Okay, Pablo. So if I may, for modeling purposes looking into 2022, would it be fair to assume a payout ratio above the 30% which is your normal payout ratio? And then as we normalize the model, we should continue to assume 30%. Is that fair?

I think that you need to take in the long run that 30% number. Probably this year is different because of the results of 2021 being extraordinary in comparison to the normalized level of the company. But in general, this should be the average going forward.

Thank you very much. I just want to follow up. So just to clarify, then the dividend policy is based on a percentage payout ratio or more on a dividend yield? That will be my first question. The second question is, if you could comment on the levels of profitability that you are experiencing in Brazil, given the different moving pieces of slab prices, raw material costs, coking coal, natural gas, and the currency? The third question, if I may, could you comment on any potential plans to restructure the corporate structure to change, improve, or modify it to make it more transparent or easier to understand, less convoluted and therefore easier for the market to value the company? Finally, if you could provide timing of any potential next big projects, I mean, you are a company that is always investing, sometimes improving technology, trying to reduce costs, sometimes expanding capacity or adding value. Could you comment on what the potential next projects could be and the timing? Any update on CapEx for this year and next year?

Thank you very much, Carlos. If you allow me, I will start with the last one, which is very interesting. As you said, we are always looking for new or big projects. And as I mentioned in the last conference call, we don't have any particular projects to announce now, but as you know, the ramp-up of the new hot-rolling mill in Mexico took us two months longer than expected due to issues in Mexico. This opens up many opportunities for us. We are looking at additional pickling lines, a cold rolling mill, and galvanized capacity—all of these options. There are also other things in the process where we should support the growth we have in the Metal Building segment platform in the south of the US. Additionally, we mentioned in the last conference call that we are aiming to comply with USMCA standards in six years. Therefore, we are analyzing how and where to expand our upstream capacity. These are all areas that we are currently examining, with a focus on strengthening our strategic position in the market, which should yield good returns on investments. For the dividend part of your other questions, Pablo, can you answer them?

Sure. No issues. And just to complement, Carlos, regarding the CapEx, we expect it to be close to $600 million for this year and without any major projects to add, as Maximo mentioned, we are analyzing various options continuously. To clarify your questions about the dividend policy, we don't have a recent dividend policy as such. We maintain a strong dividend track record with significant increases in sustaining or moving around certain levels. As I was answering earlier, we have a payout ratio of around 30% over the long run. In general, we see a lot of positive indicators on the long-term, which we plan to sustain.

Thank you very much. Just one final question on Ternium Brazil. I think in the past the normalized long-term level of profitability was mentioned around $50 EBITDA per ton. Is this still something that applies today, or has it moved higher?

Fortunately for us, it's not that low anymore. The normalized level, as you know, is much higher these days, averaging more than $60 per ton of EBITDA. In general, the numbers from Brazil are much higher than previously mentioned. This was a number we looked at in the past since it was typical for a slab producer. I think that this level has improved and should sustain at a higher level than before. However, I don’t want to repeat what Máximo was saying; the pricing environment will adjust a little bit, but we will continue to expect better margins this next year.

Thank you very much.

Thank you, Carlos.

Your next call comes from the line of Alex Hacking with Citi. Your line is now open.

Yes, good morning, Máximo and Pablo. I appreciate the questions. My first question is around pricing. A couple of the US steel mills on their conference calls this quarter are targeting that they realize higher steel prices next year than this year. And this is even considering the HRC forward curve, which is in a steep backwardation. Could you remind us how exposed Ternium is to lag contracts, particularly annual contracts in Mexico? I know you don't give any forward guidance on pricing, but is this something realistic for Ternium as well, even as US prices roll over, that you could be better next year due to the lagged effect of contracts? Thank you.

Thank you, Alex. A very good question. I'll try to answer. But you are correct. What the US producers or our competitors are saying relates to the industrial market. They have a lot of contracts based on annual agreements. To be honest, we don't have many; our main contracts are on a quarterly basis or every six months. Thus, while our contracts for the fourth quarter are going to be higher, for next year, probably most of our first six months will have contracts that are higher compared to this year. However, since we have many contracts that are on a quarterly basis, the actual changes will depend significantly on what the prices are in the second quarter of next year.

Okay, thanks. So we should be thinking more of like three to six months lags?

Exactly.

Okay. And then my second question, which is a bit random actually, is around prime scrap. You mentioned in your answer to one of Carlos' questions that at some point you'll be looking to add upstream capacity. There is spirited debate in the US steel market right now about prime scrap, where some believe it is going to get quite tight. It would seem like Mexico is a good source of prime scrap, right? You have this big build-out of the manufacturing base, particularly automotive. I know that the new mill in Texas is looking to Mexico for prime scrap. Is this something that Ternium is looking at? Because it seems like you could have first-mover advantage in getting access to that. Thank you.

Alex, you are completely right. This is indeed one of the things that we are looking at.

Your next question comes from the line of Lucas Yang with JPMorgan. Your line is now open.

Hi, good morning. Thank you for taking my questions. I have two quick ones. The first one would be, would you consider hedging through prices given a more balanced outlook for next year? And the second question would be that the future curve is pointing to prices around $1,000 per ton by mid-2022. How does this curve compare to your expectations?

Okay. Maximo, let me take the first part of the question on prices. Because of the structure of prices that we have, we think that we have kind of a natural hedge and we are not planning to further increase the hedging of our structure beyond what we have today. You know that in this area, we consider it an advantage of Ternium. The different raw materials that we manage, for example, in Mexico, we are fully hedged on natural gas, and we are exposed to the market as you can recall, as Maximo explained. This yields an increase, but we are still at regular levels. This reflects the price of the finished product and again, we are exposed to different raw materials. But, in general, we consider that we are in a strong position. We have had hedging strategies in the past regarding these materials but we don't think that we are in this moment to go back to this level of strategies again.

Regarding the second question, I think those future prices are very low. I don’t think we will see steel prices going down to that level.

That concludes today's question-and-answer section. Máximo, I turn the call back to you.

Okay. Thank you everyone for your interest and participation today. Please keep in touch and contact us if you have any comments or additional questions. Have a nice day, and we see you back in three months.