Earnings Call Transcript - TX Q1 2026

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Ternium's conference call to discuss the results for the first quarter 2026. We would like to inform you that this event is being recorded. Please follow the operator instructions. We would like to remind you that this conference call is intended exclusively for investors and market analysts. We request that any questions from journalists be dedicated to Media Relations through our website in the Press section. With this, I would like now to turn the floor over to Mr. Sebastián Martí. You may proceed.

Sebastián Martí, Global IR and Compliance Senior Director

Good morning, and thank you for joining us. My name is Sebastián Martí, and I am Ternium's Global IR and Compliance Senior Director. Yesterday, we announced our financial results for the first quarter of 2026. Today's call is intended to provide additional context to that presentation. I'm joined by Máximo Vedoya, Ternium's Chief Executive Officer; and Pablo Brizzio, the company's Chief Financial Officer, who will discuss Ternium's operating environment and performance. Following our prepared remarks, we will open up the call 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 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.

Máximo Vedoya, Chief Executive Officer

Thank you, Sebastián. Good morning, everyone, and thank you for joining our conference call. Earnings margin in the first quarter continued on a recovery path, reaching 12%. This improvement reflects a combination of factors: an improving market environment in Mexico, a focus on profitability over volume in Brazil, and the continued work of our teams to increase efficiency across our industrial operations. In Mexico, apparent steel consumption fell around 10% in 2025, driven by uncertainty triggered by U.S. trade actions. In 2026, however, we see an improvement. The Mexican government has been actively working to mitigate the negative effects of U.S. trade measures on the Mexican economy by defending the local industry against unfair imports from Asia. These actions not only support the continued development of the Mexican industry but are closely aligned with the U.S. government's own trade strategy. Plan Mexico is also central to this effort. It promotes industrial development, increases domestic content in manufacturing and strengthens regional supply chains. In this same line, last week, the steel industry and the Mexican government signed a landmark agreement to prioritize domestically produced steel in all public procurements, a clear sign of the opportunity ahead. Taken together, these policies support our expectation of a recovery in Mexican steel demand. In this context, we expect volumes in Mexico to continue improving in the second quarter, driven mainly by the commercial market. The significant destocking that took place across the value chain in 2025 is now giving way to a normalization of apparent demand. Beyond that, we are seeing early movements in several infrastructure projects, which could add meaningful demand in the coming quarters. Turning to our Pesquería project in Mexico. The ramp-up curve of the cold rolling mill and the galvanizing line are running ahead of plan. We expect both lines to be operating close to full capacity by October. The slab facility is also advancing in line with expectation. This project is central to our strategy. It will significantly increase our vertical integration in Mexico, reduce our reliance on externally sourced slabs and enhance our product capabilities across automotive, industrial and construction applications. Importantly, as the automotive USMCA rule of origin enters into effect next year, this facility will position Ternium as a key player in meeting a growing demand. In this respect, I am pleased to share that we have been granted a patent in the United States for our new electrical steelmaking process, which will enable us to produce exposed steel at scale. This innovation leverages the integration of direct reduction at the same site. In addition, innovations such as a virtual stamping solution, which utilizes artificial intelligence to streamline the certification process for the automotive industry, reinforce our drive for operational excellence. This commitment continues to be recognized by our customers. In February, we were honored by Ariston Group with their Strategic Partner award, the highest recognition for quality and partnership. And in April, Ternium Mexico received the 2025 John Deere Crop Award and achieved the partner level, John Deere's highest distinction for cost-effective and long-term collaboration. Brazil steel consumption remains broadly stable with some sectors showing resilience and others facing more pressure. The automotive industry continues to perform well, with production expected to grow around 4% this year. On the other hand, sectors like agribusiness have seen weaker demand. A key challenge in the quarter was a significant increase in steel imports, up around 30% versus the previous quarter. Imports accelerated ahead of the government's antidumping measures on cold-rolled and coated products. This has resulted in elevated inventory levels of imported material in the market, which we expect to normalize by the second half of the year. As these trade defensive measures gain traction and inventories normalize, we expect Usiminas' market share to improve. However, it is also worth noting that import pressure is not limited to China. Volumes from Southeast Asia, particularly South Korea and Vietnam, have increased significantly, reflecting the indirect effects of China oversupply on the region's trade flow. In March, we were honored to welcome President Lula to the official inauguration of the Roberto Rocca Technical School located near our Rio de Janeiro plant. The school provides fully funded technical education to young people from the surrounding communities, offering them access to world-class education. Built with an investment of $50 million, we expect to welcome close to 600 students by next year. In Argentina, after a 2024 record of one of the lowest steel consumption levels in two decades, the market began to recover in 2025. However, 2026 did not start as we had expected. Demand is growing unequally. Mining, energy and agriculture are performing well. Automotive remains at reasonable levels. Construction remains soft. Metal mechanical and home appliance sectors are lagging, affected by weak domestic consumption. As I bring my remarks to a close, I am pleased to share that Ternium has once again been recognized as a Sustainability Champion by the World Steel Association. This recognition is granted to companies that integrate sustainability into their core strategy, combining environmental management, safety performance, innovation and responsible community engagement. Looking ahead, we are constructive on our market and our ability to continue improving performance. In Mexico, the combination of normalizing demand, supportive industrial policies and the ramp-up of our downstream projects position us well for the quarters ahead. In Brazil, as trade defensive measures gain traction and imports inventory normalize, we expect to see a healthy competitive environment. In Argentina, we continue to monitor the recovery closely while maintaining our operational discipline. Across all our operations, our teams remain focused on driving efficiency and lowering cost, and we're already seeing the benefits. Overall, the recognition we continue to receive from our customers reflects the quality of what we are doing every day. We are confident in Ternium's ability to deliver even stronger performance in the periods ahead. With that, I'd like to move to a review of our quarterly performance. Pablo, please go ahead.

Pablo Brizzio, Chief Financial Officer

Thanks, Máximo, and thanks, everybody, for participating in our call. So let's review our operational and financial performance for the first quarter of this year. Starting the webcast presentation on Page 3, we can see that the adjusted EBITDA increased sequentially by 21% in the first quarter, in line with our expectations and reflecting margin improvement. Looking ahead, we expect adjusted EBITDA margin to continue increasing, supported by higher revenue per ton, particularly in Mexico and Brazil, partially offset by higher cost per ton across our main markets. Let's move to the next slide. Net income for the first quarter of 2026 reached $372 million. This reflects improved operating performance, stronger net financial results, primarily driven by foreign exchange gain in Mexico, Argentina and Brazil, and positive deferred tax results. Deferred tax gain amounted to $122 million, driven mainly by currency fluctuations in Argentina and Brazil and inflation effects in Argentina. Net income in the quarter also included a $48 million loss from the quarterly update of the value of a provision from ongoing litigation related to the acquisition of the participation in Usiminas in 2012. Let's turn to Page 5 to review the Steel segment performance. Overall, shipments were broadly in line with the previous quarter. In Mexico, volumes increased, supported by solid commercial market activity. This was driven by more effective trade defenses against unfair imports, healthier inventory levels across the value chain and a seasonal recovery in demand. In Brazil, Usiminas prioritized profitability in the face of increased cost volatility, particularly in energy and logistics, resulting in a modest sequential decline in shipments. In the Southern region, demand softened, reflecting weaker industrial activity in Argentina, alongside typical seasonal factors, leading to a sequential decrease in shipments. Looking ahead, we expect shipments to trend higher, mainly driven by Mexico and Argentina, as trade measures gain traction in Mexico and demand conditions gradually improve across both markets. Let's turn to Page 6 to review the performance of our Steel segment. Steel cash operating income improved during the period, driven by higher margins, resulting from realized price gains, which were partially offset by higher raw material and purchased slab costs. On the next slide, the Mining segment reflects a different dynamic. In this case, shipments declined sequentially due to operational disruptions in Brazil caused by unusually intense rainfall. Finally, let's turn to the cash flow and balance sheet performance on Page 8. The company continues to generate strong cash flow from operations, although this quarter, we saw an increase in working capital, driven by an increase in trade receivables, mainly due to higher steel prices and volumes in Mexico. We anticipate that sales will grow in the second quarter of this year, likely requiring a further rise in working capital. Capital expenditures continue to reflect our progress in the expansion of our industrial center in Pesquería, now mostly focused on the construction of the slab-making facility. Finally, we ended the quarter with a net cash position of $327 million. On top of our CapEx needs, the cash position decline included a $350 million payment for acquisition of Usiminas shares from Nippon Steel, partially offset by a $150 million loan collection from Techgen, our nonconsolidated energy joint venture that supplies power to our operations in Mexico. Okay. This concludes our prepared remarks for the first quarter. We will now be happy to take your questions. Thanks, and please proceed with the Q&A session.

Operator, Operator

Please proceed with your questions. Our first question comes from Mr. Rodolfo De Angele from JPMorgan.

Rodolfo De Angele, Analyst (JPMorgan)

Okay. So I wanted to just hear your thoughts on two aspects that I think are relevant for Ternium's future performance. So first, there's been a lot of discussion on USMCA. If you could share your thoughts on what happens there and what it means in terms of different scenarios for the company's performance? And I also wanted to hear from you a little bit about the expectations for the slab market in terms of pricing outlook for the remainder of the year, especially. And that's all.

Máximo Vedoya, Chief Executive Officer

Thank you, Rodolfo. Let me start with the USMCA question. As you know, there have been a lot of discussions and talks about USMCA. I believe that there will be a deal between the U.S. and Mexico. The U.S. administration, through the USTR, and the Mexican government, through the Ministry or Secretary of Economy, are holding meetings. There is a formal meeting on the 25th of May, which is going to start formal discussions of the USMCA. Most of those discussions will probably be on stricter rules of origin and some other issues that have arisen. I think this is going to take some time. I am positive there is going to be an agreement, but I don't know the exact timeline; probably it won't be by the 1st of July and will likely take most of this year. There are also discussions about Section 232. I don't think there is comparability between Section 232 and USMCA. It doesn't make sense to make Mexico subject to Section 232 in steel, given that the U.S. has a steel trade surplus with Mexico. I know the Mexican administration has stated that while USMCA is negotiated, there has to be relief in steel and automotive from Section 232. They are discussing this in the coming weeks. Nevertheless, the Mexican administration has been very proactive in launching initiatives to strengthen steel consumption in Mexico. While these negotiations proceed, Plan Mexico, the targeted measures against unfair competition, and the imposition of tariffs for countries that don't have trade agreements with Mexico are active ways of addressing problems in the Mexican economy. In the end, I think USMCA will probably be renewed with much tougher rules of origin, which I think is positive. But I'm not certain on the timing; it will likely take a bit longer. On the slab market, prices, as has been the case for most steel products, have been increasing recently. Clearly, the increase in fuel has raised logistics costs for slabs. There has also been some increase in iron ore and other raw materials, which has made the slab market a little more expensive. Our buying of slabs is not as large as it used to be because most of the slabs come from our Ternium Brazil facility, but we are still buying in the market and seeing increases. This is compensated, to some extent, by increases in prices for finished products as well.

Operator, Operator

Our next question comes from Mrs. Timna Tanners from Wells Fargo Securities.

Timna Tanners, Analyst (Wells Fargo Securities)

So I wanted to ask, if I could, about a few things. One is to follow up on the USMCA discussions. The U.S. government is more interested in granting relief on tariffs if there is construction of production in the U.S. So just wondering if you would expand your U.S. presence. Also wondering along those same lines about hearing about a Mexican dumping case against U.S. galvanized imports. If you could address those?

Máximo Vedoya, Chief Executive Officer

Timna, we are not thinking of increasing production in the U.S. now. We do not have that as a plan today. Second, there is a dumping case against cold-rolled products in Mexico. There is no dumping case against galvanized in Mexico related to the U.S. There is a dumping case on galvanized against Vietnam and I think other countries.

Timna Tanners, Analyst (Wells Fargo Securities)

Okay. I heard that Mexico was working on one against the U.S. I thought that could be positive for your operations. So we'll stay tuned there. Second, can you expand a bit more on the mention of electrical steel—sorry, EAF capabilities to make exposed automotive and remind us what might be the time frame for doing that?

Máximo Vedoya, Chief Executive Officer

Yes, sure. The steel shop is going to start the ramp-up between the last quarter of this year and early next year. The facility is large and the ramp-up curve should take at least all of 2027. During this ramp-up, we are going to work with automotive customers to certify our products, not only exposed material but also other parts that need certification. They are eager to accelerate the certification process, and we have recently increased the capacity of our Ternium Lab in Pesquería to certify part of the process locally. The capacity that this EAF will have to produce exposed material in a sustainable and continuous way will be unique because of the process we are developing and the patents we are securing, especially to decrease the nitrogen content that EAFs usually have. This is a unique process we are developing with our technical people and our equipment supplier Tenova. The timing should be around next year, probably by the third to fourth quarter of next year, that we will supply in a sustainable way to the automotive industry.

Timna Tanners, Analyst (Wells Fargo Securities)

So it'll be qualified for 2028 or qualified for 2027?

Máximo Vedoya, Chief Executive Officer

No. The idea is to qualify everything for 2028.

Operator, Operator

Our next question comes from Mr. Alfonso Salazar from Scotiabank.

Alfonso Salazar, Analyst (Scotiabank)

A couple of questions from my end. The first one is regarding the outlook in Argentina. I want to see if you can give us more color on what's going on and what are your expectations for future demand. Also trying to understand better what's the situation regarding imports. It seems to be more problematic than in the past. And also exports from Argentina to other Latin American countries, what is the outlook there because of the same thing, imports from Asia? The second question is, some comments on the decarbonization trends in Latin America. It seems that we always knew it would take longer than Europe. Any comment on the outlook there as well, these trends of decarbonization and green steel?

Máximo Vedoya, Chief Executive Officer

Thank you, Alfonso. On Argentina, in the short term, shipments in the second quarter are going to increase because the first quarter in Argentina is seasonally low. January and February are holidays, so demand is typically low. Further down the road, some sectors present good opportunities—mining, oil and gas, and agriculture—while others like mechanical goods and white goods are not doing well. We expect some improvement but not huge growth compared to 2025. Regarding imports, although there has been a lot of talk about imports, we are not seeing significant imports in our products. We have seen some imports in value chains, but these are stable today. The main problem in value chains is weak consumption. On decarbonization in Latin America, the path is slower than in Europe. The pace in Europe has also slowed in some respects. In Mexico, there is an opportunity to move from coal to natural gas, so Mexico will likely continue to have among the lowest steel production emissions per ton. In Brazil, it is more difficult to change blast furnace-based production, so decarbonization will be achieved through incremental efficiency improvements while still operating blast furnaces.

Alfonso Salazar, Analyst (Scotiabank)

And the outlook for other Latin American countries, demand in other countries that you source from Argentina?

Máximo Vedoya, Chief Executive Officer

Regional countries usually don't have a huge impact on shipments. We continue to ship to Uruguay and Paraguay. Those are the countries we ship from Argentina, but their consumption is marginal, so they won't have a huge impact on our shipments.

Operator, Operator

Our next question comes from Mr. Marcio Farid from Goldman Sachs.

Marcio Farid Filho, Analyst (Goldman Sachs)

Obviously, another follow-up on USMCA and Section 232. I think what's changed maybe this time is that Mexico has put some import barriers to try and reduce triangulation or rerouting. Once Section 232 to Mexico is either removed or reduced, do you think the competitive environment would be different versus a few years ago when there were no such import barriers? In Mexico, imports are about 40% of demand. Do you think there's a structural change in the competitive environment between North America, Mexico and the U.S.? Second, demand was very weak in Mexico last year, down 10%. Part of the reason was destocking, but also weak activity as companies waited for visibility on their relationship with the U.S. You mentioned restocking helped pricing. Are you seeing demand or activity recovering, or do we need a final agreement with the U.S. for investments to resume in Mexico?

Máximo Vedoya, Chief Executive Officer

Thank you, Marcio. On triangulation and the efforts by the Mexican administration, I think there is already a structural change. Mexico has been focused on increasing the value-added content of what is produced domestically. Plan Mexico was designed to change the dynamic and increase regional content. The measures the Mexican government is taking are aimed at decreasing dependency on Asian products, especially in categories Mexico can produce. Steel is a clear example. There is already a structural change, which should be reinforced if Section 232 is reduced or removed between Mexico and the U.S. Regarding demand, we are seeing an increase in Mexico. World Steel has just released that demand in Mexico is expected to grow around 4% this year. Considering the 10% decrease in 2025, this is not a huge increase, but it is recovery, and we are seeing it today. I expect this to improve further once USMCA direction is clearer.

Operator, Operator

Our next question comes from Mr. Rafael Barcellos from Bradesco BBI.

Rafael Barcellos, Analyst (Bradesco BBI)

First question: last week, the Mexican government signed an agreement for the promotion of the Mexican steel industry. When do you expect these measures will translate into incremental demand for the country? What else could the government promote to incentivize the sector in the short term? Second question: you mentioned cost pressures. Can you elaborate on what we can expect for costs in the third quarter, for example?

Máximo Vedoya, Chief Executive Officer

Thank you, Rafael. The agreement in Mexico is between the government and the steel industry to commit that most government steel usage in infrastructure will be sourced domestically. This is important because new infrastructure investments by Pemex and CFE, as well as joint public-private projects, involve significant steel consumption—gas lines, renewables, solar and wind—which will drive demand. I don't expect investments to fully start in the next quarter, but by year-end these efforts should have an impact on demand. It's too early to quantify how much, but there will be an effect. Regarding cost, there will be an impact, but for Ternium it is not expected to be huge. The biggest impact is on logistics and slab imports in Brazil and probably Argentina. This is likely to be compensated by price increases in steel. The real macro risk is that if the conflict in the Middle East is not resolved quickly, it could increase recession risk. We see modest cost increases, but prices are outpacing them currently.

Pablo Brizzio, Chief Financial Officer

Cost.

Máximo Vedoya, Chief Executive Officer

The good price momentum is visible globally—in Europe, Brazil, China—driven in part by rising costs. Cost increases have been larger in some regions than others, which is contributing to the recent upward pressure on prices.

Rafael Barcellos, Analyst (Bradesco BBI)

As a follow-up, can you elaborate on what you're seeing for cost trends in the third quarter? And on the price side, what is the main driver for the recent good price momentum in Mexico?

Máximo Vedoya, Chief Executive Officer

As I mentioned, costs are increasing modestly, notably in logistics and some raw materials. The price momentum in Mexico is driven by global trends and by local factors such as destocking reversal, trade defenses, and improving demand conditions. The broader global increases in costs and reduced supply in some regions are also supporting price increases.

Operator, Operator

Our next question comes from Mr. Caio Ribeiro from Bank of America.

Caio Ribeiro, Analyst (Bank of America)

I have two questions linked to your investments at Pesquería. First, as you complete your upstream investments this year, what are some of the investment avenues you're contemplating now? Where does the MUSA expansion fit within your priorities? Second, assuming you don't greenlight another large investment right away and downstream CapEx drops versus your recent run rate, that should drive higher free cash flow. With that in mind, how do you think about dividend payments going forward? Is there room to boost dividends to cover a larger part of positive free cash flow in the coming years?

Máximo Vedoya, Chief Executive Officer

Thank you, Caio. Regarding upstream investments, we will start the ramp-up by the end of this year or early next year, but the ramp-up will take time. The major investment we are analyzing is the expansion of MUSA. Usiminas has continued to analyze alternatives regarding CapEx, production costs and feedstock availability. By the end of the year or early next year we expect to make decisions on where to go. We are not seeing the need or willingness to make another large investment immediately. CapEx will decrease from recent peak years. For context, 2025 CapEx was about $2.5 billion; this year it will be much lower, and in 2027 it may be around $1.0–$1.2 billion. Regarding dividends, if the numbers improve and we generate more cash, we will consider our dividend policy. We have a track record of dividend payments; the Board adjusted the payout given uncertainty, but Ternium's dividend yield is still attractive. We will continue with a prudent policy and consider increasing dividends if justified by results.

Pablo Brizzio, Chief Financial Officer

Thanks. Regarding capital allocation, we are in the middle of a large capital allocation cycle, including the Pesquería project, dividend payments and working capital needs due to increasing volumes. This year we will move from a net cash to a net debt position. Next year, with lower CapEx, we may rebuild cash, preparing for opportunities in the market. Corporate simplification is on our priorities list and would be analyzed carefully if an opportunity appears. We will continue to evaluate dividends and capital allocation as numbers evolve. The ramp-up and certification process for Pesquería takes time, so new large CapEx plans typically take a year or two to design.

Operator, Operator

Our next question comes from Mr. Caio Greiner from UBS.

Caio Greiner, Analyst (UBS)

Two questions. First, on Brazil: following recent antidumping duties, what is the strategy for your operations there, especially at Usiminas? Will you favor higher prices and profitability over volume as in Q1, or pursue market share and expand volumes? If pursuing volume, how much potential do you see and do you have enough capacity? If not, would relighting a blast furnace or other measures be considered? Second, on capital allocation: could corporate simplification or in-house initiatives similar to the Usiminas stake acquisition be on the pipeline?

Máximo Vedoya, Chief Executive Officer

Thank you, Caio. If we have to choose between prioritizing margin versus volume, we will prioritize profitability and avoid producing more than the market needs. We favor the profitability-over-volume strategy. The trade measures in Brazil are a good first step, and if unfair trade decreases, that could support higher volumes, but we will remain cautious. Regarding capacity and corporate initiatives, we have spare capacity in Brazil, especially at the Cubatão plant, which is not working at full capacity. We will also have more slabs available from our Ternium Brazil facility as we reduce slab shipments to Mexico once Pesquería is online. So we believe we have capacity in Brazil to grow if imports go down. As for corporate simplification and other in-house initiatives, those are on our priority list and we will analyze them carefully if opportunities arise.

Operator, Operator

That concludes the question-and-answer session. I would like to turn it back over to Mr. Máximo Vedoya for closing remarks. Please, Mr. Vedoya, you may proceed.

Máximo Vedoya, Chief Executive Officer

Well, thank you very much all for joining us. We welcome, as usual, any feedback or additional questions that you have. In the meantime, have a great day. Bye.

Operator, Operator

Ternium's conference call has now concluded. Thank you for attending today's presentation. You may now disconnect, and have a good day.