Speaker #3: Good morning, ladies and gentlemen. Welcome to Ternium's conference call to discuss the results for the third quarter 2026. We would like to inform you that this event has been recorded and all participants will be in a listen-only mode during the company's presentation.
Speaker #3: After the company's remarks are completed, there will be a question-and-answer section. At that time, further instructions will be given. We would like to remind you that this conference call is intended exclusively for investors and market analysts.
Speaker #3: We request you that any question for journalists, be dedicated to the media relations through our website in the press section. With this, I would like now to turn the floor over to Mr. Sebastian Marty.
Speaker #3: You may proceed.
Speaker #2: Thank you. Good morning, and thank you for joining us today. My name is Sebastian Marty, and I am Ternium's Global IR and Compliance Senior Director.
Speaker #2: Yesterday, we announced our financial results for the third quarter and the first nine months of 2026. Today's call is intended to provide additional context to that presentation.
Speaker #2: I'm joined by Máximo Bedoglia, Ternium's Chief Executive Officer, and Pablo Bricio, the company's Chief Financial Officer, who will discuss Ternium's operating environment and performance.
Speaker #2: 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.
Speaker #2: 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 measure in the press release issued yesterday.
Speaker #2: With that, I'll turn the call over to Mr. Bedoglia.
Speaker #4: Thank you, Sebastian. Good morning, everyone, and thank you very much for joining. Ternium's conference call today. Ternium had a solid third quarter. As we expected in our last call, EBITDA increased driven by higher shipments and a stronger margin.
Speaker #4: Cash generation was healthy, with 600 million dollars from operations in the quarter. In this positive environment, our board of directors declared an interim dividend of 90 cents per ADS, in line with the interim dividends paid in 2025 and 2024.
Speaker #4: Now, let's go through our main markets, starting with Mexico, where we see encouraging signs. In the third quarter, our shipments to the Mexican market reached an all-time high.
Speaker #4: And in the first 9 months of the year, they grew by 13%. Most of this growth comes from market share gains, as we continue to replace imports.
Speaker #4: At the same time, demand is slightly better. We are also starting to see progress in infrastructure projects, which should support our volumes in the coming quarters.
Speaker #4: Two trends are also adding demand. The first is data centers, which require steel for racks and generate indirect demand for heavy equipment and air conditioning.
Speaker #4: The second is energy, with many gas pipeline projects under development. Looking ahead, the fourth quarter will show the usual seasonality. We expect volumes to keep growing further into the first quarter of 2027.
Speaker #4: Overall, the outlook for volume and prices in Mexico is positive. In Brazil, the steel market remains complex. World steel now expects apparent steel consumption in Brazil to fall 2.7% this year.
Speaker #4: Imports are the main concern. The anti-dumping measures against China, introduced early this year, have reduced imports from that origin. However, imports from Vietnam, South Korea, and Egypt are growing strongly.
Speaker #4: Indirect imports of steel also continue to put pressure on the industry, especially through cars that are made abroad or only assembled in Brazil with imported materials.
Speaker #4: The government is gradually reinforcing trained defense, and we trust it will continue on this path. More is still needed to ensure fair competition, including closing the many loopholes that still make trade measures less effective.
Speaker #4: In this environment, Uximinas will need to keep working hard on its competitiveness. Our mining business will also require a strong effort, given current iron ore prices and freight costs. We have temporarily stopped part of the operation at Musa.
Speaker #4: And we are fully focused on restructuring them to adapt to this challenging scenario. With Ternium Brazil and Uximinas, we have a strong industrial base in the country and we will keep working to make the most of it.
Speaker #4: In Argentina, our view of the market is similar to last quarter. Energy, mining, and agriculture continue to drive activity. On the other hand, industries such as home appliances and automotive face a difficult environment, with soft local demand and strong competition from unfair imports.
Speaker #4: Construction, an important sector for us in this market, remains at low levels. In this context, we're working on a productivity and efficiency agenda in our operations with four fronts.
Speaker #4: Internally efficiency and lower cost, being close to the industrial customers, defense against unfair trade imports, especially from China, and institutional actions to reduce the tax burden.
Speaker #4: Before moving on to my conclusions, let me share some recent highlights. We continue working to stay close to our customers, and this commitment has been recognized.
Speaker #4: Regal Rexnord have gave us its 2026 strategic partner award. Home Depot name us supplier of the year 2026, and Caterpillar renew our supply excellence certification at its highest levels.
Speaker #4: Across our operations, we also keep raising our environment and safety standard. In August, we opened a new environmental monitoring center at our Guerrero plant in Monterrey, adding to those at our main facilities in Brazil and Argentina.
Speaker #4: And today, we are holding our safe supplier award in Mexico to reinforce our commitment to zero accidents. To sum up, this was a solid quarter for Ternium, with higher EBITDA and strong cash generation.
Speaker #4: Looking ahead, we expect our volume to keep growing in the first half of 2027. At Pesqueria, construction of our new slab mill is progressing as planned.
Speaker #4: And we expect to start production in February. This mill will increase our vertical integration in Mexico and allow us to offer local supply with short lead times to our industrial customers with a much lower carbon footprint.
Speaker #4: I am confident in Ternium's prospects for the quarters ahead, and I want to thank our team for their hard work and commitment. Pablo, please go ahead with Ternium's performance in the third quarter.
Speaker #2: Thanks, Máximo, and thanks everybody for participating today in our call. So let's turn to our performance in the third quarter. Adjusted EBITDA increased 10% sequentially to $785 million in the third quarter, with adjusted EBITDA margin expanding further to 16.9%.
Speaker #2: Performance was driven by our steel segment, which delivered higher volumes and improved realized prices. Especially in Mexico, this gain was partially offset by higher cost per ton and a lower contribution from our mining segment.
Speaker #2: Looking ahead, we expect adjusted EBITDA in the fourth quarter to remain broadly in line with the third quarter. Typical ERN seasonality should lead to a slightly lower shipment, but this should be offset by a modest improvement in margin per ton.
Speaker #2: As higher revenue per ton more than offset rising raw material and slab costs. Net income was $368 million in the third quarter, compared to the second one, higher operating income and a positive swing in net financial results were more than offset by higher income tax charges.
Speaker #2: We have in the third quarter deferred tax losses of $116 million, mostly related to the impact of the Mexican peso depreciation. Compared to a gain of $86 million, in the previous quarter.
Speaker #2: Let's review the steel segment performance now. Shipment rose 5% sequentially in the third quarter, reaching $4 million tons. Mexico has been the main driver of our shipment growth in recent quarters.
Speaker #2: In the third one, we gained market share again. Commercial market shipment kept rising, with significant year-over-year growth and industrial volume also increased, both sequentially and versus last year.
Speaker #2: Moving to the steel segment performance, cash operating income rose 16% sequentially, supported by higher realized steel prices and shipments. This was partially offset by a higher cost per ton, mainly reflecting increased raw materials and purchased slabs.
Speaker #2: With off-going efficiency initiatives helping to mitigate this. Steel margin expanded to 17%. Turning now to the mining segment shipment decline in the third quarter and more expected for the fourth quarter.
Speaker #2: This reflects the partial suspension of most operations already mentioned by Máximo. Cash operating income decreased sequentially on lower volume and slightly lower realized iron ore prices, with the margin narrowing to 16%.
Speaker #2: Let's now review the cash flow and balance sheet. Cash flow from cash from operations was $613 million, in the quarter. This includes a $148 million increase in working capital.
Speaker #2: This increase came mainly from higher receivables reflecting higher volume and steel prices. And from higher inventory value due to the higher unit cost. Capital expenditure amounted to $398 million.
Speaker #2: Mostly as a result of the contraction of the new slab mill at the Pesqueria Industrial Center, which continues to advance according to plan. As a result, we generated positive free cash flow of $215 million in the quarter.
Speaker #2: With this, we ended September with a net cash position of $22 million. Compared to a net debt position of $112 million, at the end of June.
Speaker #2: This improvement was partially offset by a $74 million decline in the fair value of Argentine securities. Finally, let me close with a quick look at our performance in the first nine months of the year.
Speaker #2: Adjusted EBITDA reached nearly $2 billion. Up 73% year over year, with the margin expanded to 15% from 10% in the same period of 2025.
Speaker #2: Higher realized steel prices were the key driver, rising 8% year over year, while cost per ton remained stable, supported by several initiatives that enabled an increase in efficiencies and productivity across our operations.
Speaker #2: Net income for the period amounted to $1.2 billion, with shareholders earning off $4.26 per ADS. Close to three times the prior year level. Capital expenditures reached $1.2 billion in the first nine months, down almost 40% from $2 billion in the same period of last year, as we move beyond the peak of our investment cycle.
Speaker #2: Finally, Ternium board of directors approved an inter-individual of $0.90 per ADS or a total of $177 million payable on November 17. With this, we are concluding our prepared remarks for this quarter.
Speaker #2: So we welcome now any questions that you may have. Please, operator, go ahead.
Speaker #1: We will now begin the question and answer session. To ask a question, please press raise hand. To re-draw your question, you can leave the queue by clicking put hand down.
Speaker #1: Our first question comes from Tatiane Kandini from JP Morgan.
Speaker #3: Good morning, everyone. Thanks for having my questions here. Maybe to start, I would like to just explore a little bit more on the Mexican prices.
Speaker #3: You noted on the outlook that we should expect a higher margin per ton, and we saw already some price hikes during this quarter, like around 5% quarter over quarter.
Speaker #3: So I just wanted to explore a little bit more on what are your expectations for the fourth quarter when it comes to prices, what should we expect regarding to mix, and my second question is regarding capital allocation.
Speaker #3: I think we already explored a bit this in the last quarter. With Pesqueria now coming to the ramp up, we should expect lower capex for next year.
Speaker #3: So just wanted to take your heads and try to understand a bit on what your perspective on the cash generation for next year, if we could expect some changes on dividends, higher dividends for next year.
Speaker #3: Or if we should expect something more toward 2028 as too. Thank you.
Speaker #2: Thank you very much, Tatiane. Let me start with the first question. Mexican prices, as we said, Mexican prices are continue to growing or increasing and you saw that in the third quarter, probably in the fourth quarter is going to be a little bit more up.
Speaker #2: You have to remember that they are not going to get any near the US prices. And we discussed that several times why. But we saw we are seeing a strong demand we are seeing a strong demand in Mexico, as we said.
Speaker #2: We are seeing a strong demand in the US. So I think that prices will continue to hold in these level or a little bit up.
Speaker #2: You also have to consider that the industrial customers have a lag in the prices. So that lag is going to be reflected in the fourth quarter and probably in the first quarter of next year.
Speaker #2: I think with that, I covered the first one. Do you want, Pablo, the second one?
Speaker #4: Okay, let me take the second one. Thanks, Tatiane, for the question. So as usual, we discussed the capital allocation issue. You know that whenever we are ending a big capex plan, we need to take a couple of years to digest and to take advantage of everything that we have done.
Speaker #4: And so in the next couple of years, it's difficult to see any big project coming out of Ternium. Of course, there are one that you already know that we already mentioned many, many times, which is our mining activity in Brazil that we will continue to analyze and probably Maximo, you can add to that a little after my answer.
Speaker #4: But in general, what you should see is different things. First of all, we will end we will move into next year with probably higher cash flow generation because of the better performance that Maximo mentioned during the initial remarks.
Speaker #4: And also because a reduction in capex that after the big capex plan and moving from the big numbers that we have last year this year will be around $1.2 billion next year, $1.2 billion.
Speaker #4: So this will add to your point. So if this is the trend that we will follow and without any big project we will basically if this trend continue reinforce our dividend payment and besides that, we will be adding to the strong financial position of the company to be prepared for the possible next round of capex or decisions that we may take.
Speaker #4: You know that we have different propositions for the future, but in general, this is something that we take very seriously, and we take some time to do that.
Speaker #4: So I don't know, Maximo, if you want to add something.
Speaker #2: No, I think it's clear. I mean, our next two years will be our main agenda is execution. It's to focus on how we digest all the investment that we have done I mean, you know, Pesqueria Pesqueria is something fantastic.
Speaker #2: And it's starting now in February we already have started a lot of lines, but in February they still shall be starting. And this will give us a huge power of how we can manage even stronger relationship with all our customers.
Speaker #2: So we want to execute that and then probably 2028, we'll see what we do next. But this is a focus for next year. I hope with that, Tatiane, we answered both questions.
Speaker #3: No, you completely did. I just wanted to make a follow up on the compactus project that you mentioned. So is there any kind of change on the timeline of the decision since we have like, as you mentioned, a more challenging environment when it comes to frights and R&R prices and the shutdown on partial of the Yosemite's production?
Speaker #2: There's no real change today. As you know, we the decision we always said we have to make it in 2027, probably that decision is still there in 2027.
Speaker #2: And we continue analyzing the different options that we have with compactus. There are several as you said, several technical solutions that we are finding, we are maybe we can do a project with a little bit less or much less investment in a first stage and a bigger investment in a second stage.
Speaker #2: But all those things are things that we are analyzing. So there may be changes to what we originally thought was the big Compactus project.
Speaker #2: But to be honest, all those alternatives we are analyzing it and we will reach a conclusion during 2027. In the meantime, we are progressing with all the license we need to have, but those are not a big a very big investment.
Speaker #3: Super clear. Thank you, everyone.
Speaker #2: You're welcome.
Speaker #1: Our next question comes from Daniel Sazon from Itaú BBA. You can open a microphone.
Speaker #5: Hi everyone. Thank you so much for taking my questions. My first question is related to the US MCA or Section 232 negotiations. If you could update us on where the US-Mexico talks stand right now.
Speaker #5: Is if you think that a still specific deal is more likely than a full USMC review, your base case for timing of the 232 relief?
Speaker #5: So what do you assume for Mexico and HRC prices and for margins once that happens? Right? And my second question, you've said in the past that buying the remaining Yosemite shares would make sense long term, but that conditions on the shares complicate it short term.
Speaker #5: So with the net cash position restored, right, and capex filing falling as Tatia mentioned in the previous question, what's the timing and the path for the listing or tender offer?
Speaker #5: And you know, what conditions remain? Does the litigation that you have related to Yosemite's share play a role on the sense? So if you could just maybe strategically or qualitatively discuss this issue that would be that would be great.
Speaker #5: Thank you so much.
Speaker #2: Thank you to you, Daniel. I start with the first question, USMCA 232. I continue seeing this the same way as we talked during the analysis day and we talk in the last conference call.
Speaker #2: I think there is a very good I mean, making a renewal USMCA is good for everybody, not only for Mexico. Probably it's very good for the US also.
Speaker #2: And I always have said this. I think that there's still so many things to discuss on a renewal USMCA. Especially on fortifying rule of origins.
Speaker #2: And I think the two governments or the two administration are very commitment today to this. They see that having more value added production in the region is something very good.
Speaker #2: This is not only the US vision. It's also the Mexican vision. So at the end, I think that it's very reasonable to have a USMCA renewal on some date which one?
Speaker #2: I cannot say that. What I do think is that one of the Mexican priorities is to resolve the 232, not only for steel, but also for steel, aluminum, and their derivatives.
Speaker #2: And I know they're working through that. What type of agreement are they going to make? I don't know yet. But I think that that is a possibility.
Speaker #2: You asked and this deal what should it do with our price? As I said before, I don't think that it does anything to the US prices.
Speaker #2: Probably what it does is that you have a more reason to the Mexican price today is they have a huge gap to the American price, to the US price.
Speaker #2: And probably an agreement will make that difference lower in the future. So that's from the USMCA. You asked me, and I mean, you asked if we have a path or—today, we don't have any path to that.
Speaker #2: As I said several time, streaming our corporate structure remain part of our long-term objectives. But having said this, Yosemite's share is not only a financial decision.
Speaker #2: We have to consider other factors. We have as you said, some legal issues pending. And also we need to see we're a Brazil is going.
Speaker #2: In the future, there are still many things on the path before we take any decision in this respect.
Speaker #5: Thank you so much.
Speaker #2: Daniel, I hope that's okay.
Speaker #5: Yes. Thank you.
Speaker #2: No, you're welcome, Daniel.
Speaker #1: Our next question comes from Matheus Moreira from Bradesco BBA. You may open your line, sir.
Speaker #5: Yes. Thank you and morning all. Thanks for taking my questions. Two on my side. First, maybe a follow-up on the capital allocation question, but focusing more on dividends.
Speaker #5: I mean, you kept the nominal dividend and change versus last year. Despite the company being on a much better position in terms of results, right, with capex as Daniel mentioned, set some sharply decline in the coming quarters.
Speaker #5: Just wanted to better understand the rational behind the dividend and whether you see room for more aggressive payouts going forward. That's my first question.
Speaker #5: And then my second question on demand in Mexico. I mean, I wanted to get an overall view on how are you seeing overall demand trend in Mexico.
Speaker #5: Your volumes in the third quarter were very strong. But my understanding is that this was mainly driven by import substitution rather than underlying downstream demand growth.
Speaker #5: So I wanted to just touch and get your color on how do you see demand in Mexico by each and use segment and how do you see demand evolving especially in a scenario where US and Mexico reach an agreement on steel.
Speaker #5: Thanks. Those are my two questions.
Speaker #2: Okay. Thanks, Matthew for your question. So let me take the first one, which was related to dividends. Let me divide it into the first one is a long-term view.
Speaker #2: Which is very similar to the history that we have, which is that whenever we saw that the trend is positive to raise dividend and sustain that in the long run, that's something that we should that we will do.
Speaker #2: And clearly, if the projections and the views that Maximo mentioned and we have for Ternium are in that direction, clearly that will be something that with a very high possibility.
Speaker #2: In relationship to current dividends, you know that in the past we have also proposition of an interim dividend that reflects around one third of the total dividend of the year.
Speaker #2: So, if this is the situation and this is what we have just confirmed with the $0.90 dividend, we should be back to the level of dividend that we paid two years ago.
Speaker #2: After the reduction that you saw last year because we were in the middle of very uncertain period with the war in the Middle East.
Speaker #2: So this should be a trend. Of course, this to be confirmed. But our board of director, when they propose that to the shareholders meeting, but this should be the case and this should be the tendency for the future.
Speaker #5: And Matthew, the second question, demand in Mexico, you are right in part of what you are saying, in part in a part of what you're saying.
Speaker #5: This increase in our shipment is due mainly to the fact that we gained market share against imports. The market is growing, but it's growing at a very slight pace, at least these nine months.
Speaker #5: But we are seeing a pickup in demand for the following quarters. So, there are two things here: we are gaining market share, and we are seeing in the following quarters that demand in Mexico is starting to grow.
Speaker #5: There are and this is by several sectors, but mainly is infrastructure. There are more projects, public infrastructure, but also there's private projects. For example, energy and pipelines as I said, but also we are seeing more investment in renewable energy with all these schemes that were made between CFE and the private sector.
Speaker #5: And we're seeing that that will start construction in 2027. That has a lot of steel in that. And also we are seeing more demand from the industry.
Speaker #5: So there are two things here then. Gaining market share the past and we will continue focus on gaining market share, but also we are seeing a pickup in demand.
Speaker #5: All these pickup demand doesn't have yet a solution for the 232. So what you said of if there is an agreement, probably that it's on top of what I'm saying.
Speaker #5: Because in this forecast, we don't see yet any demand coming from a USMCA solution or whatever you can call it. So I hope that Matthew answered the second part also.
Speaker #5: Yeah, it does. Thank you very much.
Speaker #2: Welcome.
Speaker #1: Our next question comes from Emerson Souza Vieira from Goldman Sachs. You can open your microphone.
Speaker #4: Hello. Good morning. So I have two questions. First, first of them, on the market share dynamics, I just wanted to understand. I mean, how much room do you have to continue to gain market share over imports?
Speaker #4: I think in the capital market today, the company mentioned you were running at like 50% market share with such two imports declining by 10 to 11% in the first semester of this year.
Speaker #4: So going forward, I mean, how much for the room do you have to gain market share on imports? And then on dynamics as well, of the underlying demand, just to confirm here.
Speaker #4: So the value chain still remains with low inventory levels, right? I recall that prior quarters you were mentioning that you were seeing some movement in restocking, but still seems that there's no restocking happening at this point.
Speaker #4: And also second one on compactos, you mentioned a potential change in the project scope, right, with higher capex upfront. I mean, with lower capex upfront and higher capex later on.
Speaker #4: Can you give us more color on that in terms of what could be the potential change to the capex being split between those two phases, please?
Speaker #4: And in terms of how the project would change indeed with this revision. Thank you.
Speaker #5: Thank you, Emerson. Yes. Market share, I mean, there is a big room that we can increase. Today, imported in Mexico, if you take only flat products and flat products that we can produce, I take their other things that team played that we don't produce and plates.
Speaker #5: They're more than 400,000 tons every month that are imported in Mexico. So you make the math and I don't see any problem in taking more part of that.
Speaker #5: I mean, we have the product, we have the service, we have everything. So I think what we do need is to start continue working as our commercial team are working to increase little by little this market share.
Speaker #5: Of all this huge market. We're talking about 5 million tons a year, 6 million tons. So again, I mean, it's up to us to start to gain part of that.
Speaker #5: Compactos, look, we are still looking at compactos in a sense. There are several alternatives that we are analyzing. One of those is what I said that like putting first some of the part of compactos and then the other, but to be honest, we are not ready today to see that this is a feasible or not.
Speaker #5: It was an example of several things that we are seeing. And so, we will wait until probably next year to see if one of these is feasible.
Speaker #5: Especially in this new environmental of prices of iron ore. And which one will be. I hope that it's answered both questions, Emerson. I don't remember in the first one, you also were asking something about stocks or something like that.
Speaker #4: Yeah, if you were seeing some movement in restocking in your customers.
Speaker #5: No, not yet. It's still the same I mean, they are working with low inventories, to be honest. And they were working with low inventories because of the market dynamics.
Speaker #5: Now that demand is starting to pick up, I am thinking that inventories will shoot increase also. But we are not seeing any change in inventory levels or the low inventory levels of our customers.
Speaker #4: All right. And do you know what could be I don't know, a normalized inventory level at your customers?
Speaker #5: Well, it depends a lot on the backlog number from the past. No, it depends a lot in every industry. Every industry has a different number, commercial or industry or automotive.
Speaker #5: But what we are seeing in all the change that from a usual perspective, they are low in inventories. And every automotive is low in inventories across the board.
Speaker #5: They usually have a lot of inventory. Now they're low, but they are standard. And demand is, as I said, starting to pick up.
Speaker #4: Okay. Thank you. Very clear.
Speaker #5: You're welcome.
Speaker #1: Our next question comes from Alfonso Salazar from Scotiabank. You can open your microphone.
Speaker #2: Yes, hello, Maximo. I have two questions. Look, we have seen many cycles in this industry. But the question that I have for you is: how do you see the normalization of markets in Mexico, Brazil, and Argentina?
Speaker #2: I'm not going to ask you about the timing because that's very hard to say anything about. But what do you expect to see in the long term in these three main markets for Ternium in terms of normalized EBITDA margins, market dynamics, different conditions?
Speaker #2: And related to this question, the second one is, are you reviewing the expected exposure by industry across countries? And the reason why I'm asking you this is because without an industrial policy in Latin America, what we have seen, for example, in autos, is a flood of autos from China, cheap autos from China.
Speaker #2: So this is certainly a problem for long-term steel demand. And I don't know if you are considering this in your projections anything that you can say about how this exposure to different industries across the region would be very helpful.
Speaker #2: Thank you.
Speaker #5: Yeah, thank you, Alfonso. And that's a very good point. Let me start with that second question. I mean, as I said, unfair trade is not a problem only for the steel industry.
Speaker #5: And it's very clear for example, what is happening in cars in Brazil that you mentioned. With imports from a lot of Chinese car manufacturers that when you see your financial, their subsidies are 15 to 20 percent bigger than whatever any
Speaker #6: any automotive industry will have in Brazil or any other, uh, any other countries. So, uh, this is a main issue. I think in this regard, the US, Europe, Canada, they are taking the lead not only in fighting unfair steel trade, but fighting unfair trade.
Speaker #6: Mexico is following. So Mexico is starting to do a good job. And I think Brazil is starting to realize that the problem is not only steel, but this.
Speaker #6: So you're right, for normalized market in Brazil, these things has to take into account. We are expecting that the Brazil government starts seeing these things.
Speaker #6: I mean, and we know they're starting to see. We have to see how they react. And the market will normalize when they react to this trend of unfair trade imports.
Speaker #6: I think Argentina, is still on a further— and still has more work to do than Brazil, and Brazil has more work to do than Mexico.
Speaker #6: Mexico, and Mexico has still some things to do compared to the US. So, This is my vision, but the truth is, that the world is reacting to this.
Speaker #6: If you see, we have the G20 meeting in Milwaukee, I don't know, a month ago, I was there with all the ministers of economy.
Speaker #7: And the—
Speaker #6: And the decision of what they ended up saying in the meeting was very strong, because they have the G20 Global Excess Steel Capacity Forum over there.
Speaker #6: But they also mentioned all the industries where unfair trade, overcapacity, and subsidies are destroying the markets.
Speaker #7: So today,
Speaker #6: even the G20 acknowledged the huge problem that these unfair imports are causing to all the industries. And I think most of them are reacting.
Speaker #6: So that's my vision in that sense. There's something to be considered, it's something to to be very spoken about. And I think the governments are starting to react.
Speaker #6: I hope I answered that second question, Alfonso.
Speaker #8: Yes, just a follow-up on Argentina. There is a— Alacero released recently a report basically saying that they have now a more open market approach, you know, to trade.
Speaker #8: So just wondering, how's this affecting you and how is this, you know, how do you see that evolving?
Speaker #6: No, Argentina, the imports are a big problem. I think Argentina, as you say, and Alacero is mentioned in Argentina, the government of Argentina has a very good I mean, it's working very hard to normalize the macroeconomy, but it's yet to realize the big problem that the excess capacity in several industries are damaging the industry in Argentina.
Speaker #6: And that's That is a problem. I think there is some change in the mood in saying we have to to, um, to make this growth in energy mining be also a growth of the industry and how the industry of Argentina can support that growth in oil and gas and in energy and in mining.
Speaker #6: But it's still a subject that has to be developed.
Speaker #8: Very good. So thank you, thank you. Very, very useful, Maximiliano.
Speaker #6: Ah, thank you, Alfonso.
Speaker #8: Our next question comes from Ricardo Monegaglia for Safra. You can open your microphone, sir. Hi, Maximo. Hi, Pablo. Thank you for taking my questions.
Speaker #8: Uh, first one, we saw recently that Mexican prices are widening against US prices. I wonder if you have any clue on what caused that, or if it's only temporary.
Speaker #8: And a follow-up on that, we see a more strict treatment against imports in the US. So I wonder if in your view you think Mexico could take a more strict approach as well to imports, not only steel but also indirect imports of steel such as autos, as you mentioned.
Speaker #8: Do you think that is on the discussions currently? I'll ask my second one later.
Speaker #6: Yes, Ricardo, thank you. For sure, the agenda in Mexico I think is quite similar to the one in the US. If you recall, one year ago, the Mexican administration put a decree where they increased tariffs of 1,100 products.
Speaker #6: Of that, 200 were steel, but all the others were different products in the value chain. So I think the vision that the Mexican administration has is to increase value added in the region, to increase trade with the US, but trade that has more value added and it's not only maquila, as they call it.
Speaker #6: So I think that's something that that is in the agenda, and they're working on it. Of course, not with the same— they cannot do it in the same pace as the US.
Speaker #6: Mexico is a different economy. They have different needs. And I think it's a— the good approach is to see exactly where Mexico can push for these strict rules.
Speaker #6: Prices, they are a little bit wide because the US increases a little bit more. But if you take the percentage, they're still the same.
Speaker #6: I think it's only because prices continue to increase that the difference in dollars per ton is different. But as I said, I mean, this is the difference between the 232.
Speaker #6: If you get rid of the 232, probably Mexican prices will go again, to be the same in the US as the US prices.
Speaker #8: Yeah, I agree. And my second question on the Pesquería Upstream project, uh, we are getting closer to the startup, but could you remind us please, on the contribution that you expect from this project across 2027.
Speaker #8: Um, maybe if we could split between the halves of the year would be great. Thank you.
Speaker #6: Yeah, well, as I said before, remember, we are starting, uh, this is a huge project, so 2027 is a ramp-up. We start in February, but this is a very, very complex equipment, and, and so don't expect a huge increase in our profit because of the Pesquería, probably it's— I mean, it can be higher, but not because of the, the steel shop.
Speaker #6: What we are thinking in is more in the in the 2028 is for, for once the margin of the slabs is probably between $50 and $100.
Speaker #6: So that's what we— so we change the, the— when, when we use slab from Pesquería instead from buying abroad, but also This is much sophisticated products with conditions.
Speaker #6: of very low carbon emissions and of melted and poured in the region. So we are thinking of a price premium when we sell this product.
Speaker #6: That will add to that margin that I, that I already said, Ricardo.
Speaker #8: Thank you. But you will see that probably in 2028, to be honest. Perfect. So a lower cost of slabs and also maybe potentially an increase in realized price once Exactly.
Speaker #8: Okay, thank you and congrats on the results. Thank you. Thank you, Ricardo.
Speaker #9: Our next question comes from Marcelo Arazzi for BTG Pactual.
Speaker #10: Hi guys, thanks for the space here. I wanted to discuss a bit the outlook that you guys provided for Q4. You mentioned that ships will decline a bit and some increase in raw material prices.
Speaker #10: But looking at the speech that you guys provided, we have been seeing demand picking over the next couple of months. It's based on further market share gains, and prices are still very strong.
Speaker #10: We are seeing prices, HRC Mexican prices on plots rising more than 40% year over year, while Ternium's price has increased only 15%. So it seems like there is still some room for further growth.
Speaker #10: Is it fair to say that the outlook is somewhat conservative for Q4 and we could potentially see some EBITDA increase even amid a weaker seasonality?
Speaker #10: Thank you, guys.
Speaker #6: Thank you, Marcelo. I don't think it's conservative, to be honest. You have to remember, December, it's a very low month in all the 3 of our markets.
Speaker #6: And to be honest, January is also low in Argentina and Brazil. So, seasonally, we are going to have less shipments. And we also have several stoppages for CapEx in some of the lines.
Speaker #6: So we are going to see a little bit volume decrease. That is very— it's going to be compensated by the margin increase. And so that's why we put that outlook.
Speaker #6: What you can say is that the demand, and also probably margins, are going to increase in the first quarter. That's probably a good assumption to make.
Speaker #6: That's clear. Thank you. Thank you, Marcello.
Speaker #10: We remind you to use the raise hand feature if you would like to ask a question. Our next question comes from Kyle Greiner for UBS.
Speaker #8: Yes, good morning, guys. 2 quick questions from me, just circling back on the capital allocation theme. When we think about 2027, I mean, Ternium is supposed to generate a whole lot of cash.
Speaker #8: I mean, it's supposed to be like $1 to $1.5 billion depending on the estimate, depending on the EBITDA and HRC prices that you use.
Speaker #8: But no matter what, I mean, it's going to be a very, very strong cash burn for next year. And obviously when we look at your net debt, net cash position right now, you're close to zero.
Speaker #8: And so we're just looking at this and saying, okay, so you're starting to build a really elevated net cash position for next year. So you could end the year at R$500 million to R$1 billion in net cash depending on the dividend that you pay.
Speaker #8: So it seems a little bit too high. And I think the market is always wondering what are you going to do with this cash.
Speaker #8: And And we do understand that Ternium is more on the conservative side when it comes to dividend payments, when it comes to even just the net cash position that you hold.
Speaker #8: So I was just wondering, do you have a net cash target that we can use for next year that you think would be appropriate?
Speaker #8: And that we can think about this target as you could potentially pay additional dividends to your 2025 payment, which is what you suggested was going to be the case for 2027.
Speaker #8: Is there any indication here that we could work with in terms of your target net cash balance for for 2027? And the second question, real quickly on the CSN litigation, just wondering if you have any update there on how's the litigation going?
Speaker #8: Thank you.
Speaker #6: Thank you, Caio. CSN, we don't have any updates. Things are the same as we have always as the last quarters. So we don't have anything to add about that.
Speaker #6: For the first part of the question, first of all, we don't have a net cash objective or target. And the numbers you said could be right.
Speaker #6: But remember that we have to digest the investment. And although we see As I said, I'm a very— positive market outlook. You have to remember there are always seasonalities and there are always things that could happen.
Speaker #6: So in a sense, we are going to wait a little bit until what to do and if we may change our dividend policy in 2023.
Speaker #6: Late 2027 or '28. We don't have— I mean, we don't have to do it right now. I don't know, Pablo, if you want to add something to that.
Speaker #6: Of course, the numbers could be that one or others, but we continue to have CapEx that will be higher than normal. And if the trend
Speaker #10: of prices and volumes that we mentioned are the right one, clearly we will increase our working capital needs. So that will add to the needs for
Speaker #6: utilization of cash. But in general, as Maxime already mentioned, if the trend is a positive one, this should sign— this should be a signal for
Speaker #11: an elevated dividend payment in the future if we believe that this can be sustained. So I think that the signals are there for a better distribution in the near future, taking into consideration that there will be yet a significant level of cash utilization during the quarter or during the next year.
Speaker #11: And again, as we always said, sustaining certain level of cash is not something that we consider a negative situation because of all the volatility that Maxime mentioned and the possible opportunities that we may find.
Speaker #11: in the near future after adjusting all the CapEx that we are doing.
Speaker #6: I hope that answers the question, Caio. Yes, it does. Thank you, guys. Thank you.
Speaker #10: Once again, everyone, we remind you to use the raise hand feature if you would like to ask a question. Our next question comes from Carlos de Alba from MS. You can open your microphone, sir.
Speaker #8: Yes, hello. Thank you very much. Good morning. Just the question is what— on what Maximo said, I think 2 questions ago. Maximo, did you mention that
Speaker #6: you see higher margins and maybe higher EBITDA in Q1 2027 versus 4th quarter? Probably, Carlos. Yes, what I said is talking about Mexico because the question was about Mexico.
Speaker #6: And if we were conservative about volumes in Mexico. And I said in the 4th quarter, we are not conservative because usually the 4th quarter in December, December is not a very big month for Mexico.
Speaker #6: But we are seeing today that volumes in the 1st and 2nd quarter are probably higher than the 4th quarter. So the demand is picking up for those, those months.
Speaker #6: And we are not seeing much changes in the prices. I mean, we are seeing that the the price trend will continue in the 1st quarter.
Speaker #10: Yeah, thanks for that. I mean, yeah, that's what I— when I looked at the guidance for the 4th quarter of a stable EBITDA, my first reaction was that it might be conservative, broadly speaking, maybe not exactly just in Mexico.
Speaker #10: But look, in Mexico, there is always a lag in pricing.
Speaker #6: Prices have continued to go up, so I would maybe thought that that there was room for a better fourth quarter EBITDA than the third quarter.
Speaker #6: But you know, now I guess maybe maybe stable. In the 4th quarter and then room for a higher EBITDA in Q1 and Q2. That's probably what we are seeing, Carlos, today, because— and you have to take into account that Brazil also is seasonally low in December.
Speaker #6: Argentina is very low in December, and then Brazil is low in January also. So, all those things—you have to take them into account.
Speaker #6: And you'll see that probably flat in the 4th quarter and something better in the, in the 1st quarter. Great, thank you very much. You're welcome.
Speaker #10: That concludes the question and answer session. I would like to turn it back over to Mr. Máximo Veloia for closing remarks.
Speaker #6: Well, thank you everyone for joining us. And as always, if you have any comments or questions, we're always welcome. Have a very good day.
Speaker #6: Bye-bye.
