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Ternium S.A. (NYSE:TX)

Investor Day 2013 Conference Call

June 27, 2013 9:15 AM ET

Executives

Daniel Novegil – Chief Executive Officer

Pablo Brizzio – Chief Financial Officer

Máximo Vedoya – Mexico Area Manager

Oscar Montero – Planning and Operations General Director

Sebastián Martí – IR Director

Analysts

Carlos F. De Alba – Morgan Stanley & Co. LLC

Alexander Hacking – Citigroup Global Markets Inc.

Leonardo A. Correa – HSBC Corretora de Títulos e Valores Mobiliários SA

Michael Holme – CQS

Daniel Novegil

So, as always, we do have a quite tight schedule though I will go straight to my presentation and to give some room afterwards to the Q&A. In this first part of the meeting and before going to and to enter in the Q&A, I will briefly present, first, an overview on the global market situation with focus in Latin America.

Second, Ternium performance in this particular landscape and how Ternium is building competitive advantages vis-à-vis competitors through innovation and through productivity. Third, we will enter into the Ternium competitive position specifically in this new approach that we are presented to the market today that these high-end approach to high-end products to high-end customers. At the end, we will wrap up and to finish with conclusions and with a view on what do we see looking forward.

Let’s take a look now to these slide, let me clarify a little bit the slide before passing some conclusions. Here you have apparent steel use growth rate World, Latin America and different regions and countries. Second, you have apparent steel use intensity GDP per capita that is income per capita $1000 per person and apparent steel use per person, kilos per capita. And third, in the right hand side of the slide, we have steel nominal overcapacity in 2013 by regions. The total of overcapacity in the world is in the range of 400 million tons maybe little bit less than one third of the total steel consumption and is allocated as is indicated in this slide in these regions.

Three conclusions or a couple of conclusions out of this slide. First, Latin America is one of the highest steel use growth rate in the world in the last five years especially in 2012 and 2013. Second, the steel intensity in Latin America give us the opportunity for growing. If we compare the steel intensity of Latin America is less than half of the one in USA and Canada, one fifth of the one in China and one third of the one in the European community though that makes us an interesting opportunity for growth through the intensity of use of steel.

And third, the overcapacity risk factor, many things have been said about the impact of our capacity in the pricing, the global pricing system, no doubt that the overcapacity cost and actual impact in global pricing but in my view the impact is not even. I mean, the impact is different by regions, the impact is different by companies and depends upon heavily in your ability to wield entry barriers, institutional entry barriers, commercial entry barriers in the region where you operate, logistic entry barriers and customer value chain penetration entry barriers and so on and so forth.

So, at the end, the overcapacity factor is having an important impact in the global pricing system of the steel industry. But in my view, it has to reanalyze on a regional basis instead of on a global basis. And you can see here the steel overcapacity in the region where we operate Ternium is quite low and is quite [aggravated] [ph]. You know that Latin America now is consuming 70 million tons, 67 million tons of steel per year. USA and Canada are consuming together 110 million tons of steel per year. So, all together, we are in a region where it’s being consumed 180 million tons of steel out of 1.5 billion tons of total steel consumption worldwide.

So, again, we are located in an area of a nice growth. We have an opportunity for growth because of increasing the intensity in use of steel. And in my personal view, the overcapacity has to reconsider also as a regional factor as opposed of considering only as a global factor.

Let me now turn into what is going on in Latin America regarding the growth and the situation. and again, in this slide, you can see here in the upper left hand side, the apparent steel use grow rate by country, interesting to see the growth, the continuous growth of Mexico in the last three years. Here in the upper right hand side of the slide, you have the steel market, the size of the market and the intensity of use of steel per capita in each one of the particular markets in Latin America to finish with the steel market as a whole in Latin America that is going up from 48 million tons to 71 million tons in the last eight years with a compound annual growth rate of 5.1%.

So, again, we are in an area where 80% of the steel of Latin America is being consumed mainly by three countries, 80%, Brazil, Mexico and Argentina. They concentrate 80% of the steel consumption in the area. The compound growth rate of the area is quite robust, is quite healthy; is having at 5.1% on a cumulative basis in the last eight years. and at the end, Mexico expands in this Latin America market having an impressive growth rate in the last three years.

Well, let me now address the issue of the import substitution opportunities that I see we have for Ternium and for other companies that are located in these particular part of the world in terms of the market size, to gain market share against the imports. This is again, let me clarify this slide in the bottom left hand side, you have finished steel imports in Latin America in 2012.

Latin America, as a whole, is importing 17.5 million tons of steel, the main importer being Mexico with a little bit less than half this amount 7.4 million tons per year. Imports representing 37% market share in Mexico. Then we have Brazil that is importing 3.6 million tons of steel that represent 14% of the apparent steel use of Brazil. Colombia is importing 50% of the apparent steel use; Peru, Chile, Argentina and others.

In total, interesting to see that the market share of imports in Latin America, direct import is 26% different by country and the total amount of steel import is 17 million tons of steel. But then on top of this, we have indirect steel imports. Indirect steel imports being, a steel that is contain that is included in automobile, home appliances, capital goods and so on and so forth. And again, we have an additional 17.5 million tons of steel being imported on an indirect basis imports that contain a steel.

Again, Mexico being the main importer, interesting to mention that Mexico has a positive balance in indirect steel. That means that it’s exporting more than the amount of steel that has been imported mainly to the U.S. through the free trade zone and so on. But at the end, in my view, in our view, we consider that we have here a very nice opportunity to gain market share against imports, gaining market share against direct steel being imported and indirect steel being imported.

Again, Ternium is located in Latin America. Latin America is consuming 70 million tons of steel, 26% of the steel that is being consuming in Latin America is being imported. The balance of – there is a good balance between supply and demand in Latin America and also we have the opportunity to enter into the U.S. market and the Canadian market through our operation in market and through the free trade zone within the NAFTA. On top of that, we can also gain market share when we think that another 17 million tons of steel is being imported in goods and in products.

Let me now enter into another chapter of the presentation that is related to the performance and trying to analyze why is that we have the highest margin of EBITDA per revenue in the region and one of the highest in the world. So let’s take a look to the performance. Here you see that the EBITDA ratio of Ternium is 15%. Long per user in the U.S. is having to 11%. Flat-rolled per user in Mexico, one of our peers is having 9.4%. USA Minimill 8.6%, Global Player average 8.4%, USA Integrated flat-rolled mill is having 5.4%.

So looking backwards or looking this performance why we consider that we are outperforming our peers? Well, first, because we have a focus on high value added products. Second, because we do have a flexible production configuration that means that we have blast furnaces, we have guided reduction and we have the slabs rolling. We have a level of upstream and downstream integration that also outperformed the one of our competitors.

We have a very broad distribution network. And looking forward, we believe that we are working very hard in breaking through learning curve effects through innovation in order to continue gaining market share – gaining productivity, gaining competitiveness vis-à-vis our competitors.

In other words, our track record is good. We are performing well. We outperform our competitors in terms of EBITDA ratio, but we are still working through innovation in breaking through the learning curve stepping up, the learning curve in order to gain to continue gaining competitiveness and effectiveness. We will see some examples of these new available and that we are now and going in order to continue having an outperforming base in our company.

Let me now comment in the next slide of my presentation, some of these new developments that are in fields like labor productivity, industrial operation, health and safety, IT and IS; Information Technology and Information Systems and supply chain. We are doing special things nothing innovative kind of applications in order to boost the productivity level of our company to a newer stage, to a new level in the competition arena.

This new initiatives are the new drivers of performance for Ternium in the year to come. Let me share some of these ideas with you. Here we have the sales and safety innovative program. This is a program that implies that the top management, those that work on a guided report with me, goes to the floor, talk with a blue-collar worker and work in identifying condition of the facilities, safety management and to work on behavior. The impact of this program has been really very, very important.

Look at the lost time injuries frequency rate for own personnel and contractors. This is lost time injuries per million work hours. So we have started a program in 2010 and the lost time injuries went down from 3.8 to 0.9 average actual numbers for year 2012. This number compares against 1.5 average of World Steel Company being delivered by World Steel Association. So the number is impressive. The achievement is impressive and we are doing very well and we continue working on that we believe that we still have room to improve this indicator. Global steel is recognizing Ternium because of the excellence of the impact of this particular program.

Let’s now pay a look to some indicators in productivity, labor productivity. Here we have two examples; just two examples on what are we doing in relationship with labor productivity? In the bottom left-hand side of the slide, here we have the labor productivity of white-collar in Ternium. So we were able to increase labor productivity in 81% in the last seven years reducing the headcount in 37% from 4,600 white-collar to 2,900 white-collar nowadays. In total, the labor productivity of white-colors in Ternium is 3,000 tons per person – 3,000 tons per employee by white-collar.

Another example is what we did in Mexico in the production of our hot-rolling mill without the increasing labor productivity of blue-collars went up 50% in the last seven years. And at the same time, the payroll went down 19%. So all-in-all, we are gaining productivity. We are working in new processes and now we are in the process of launching a new reengineering of administrative tasks will the aim to reduce the white-collars in 2.5% in the year to come and to reduce the blue-collar base in 2% in the year to come. So we still have room to continue working in this field. We are having impressive results and we will continue in the same fashion.

Talking about innovations and talking about gaining productivity through new practices. We also launched in Ternium an industrial excellence program. This program is a program that was designed and was depicted by the top management and means a direct personal involvement of the top managers in the floor, in the factories to talk with the employees, to talk with the local workers to find solutions to debottlenecking and practices and processes and so on and so forth.

That means a systemic approach and on site it’s scheduling of meetings with personal in-charge of production line. The focus is quality, production efficiency and cost reduction. And is again like the one of scale and safety, a program where the top management is personally and heavily involved.

Let’s pay a look to another example of this program in the last two years or in the last four years that brought about an increasing productivity in the hot-rolling mill as you know is the most profitable line in Ternium of 25%. In other words, the production of the most profitable line went up 40,000 tons per month that means it’s 0.5 million tons of additional capacity been added through these innovative programs that I was talking about, so impressive results and a good performance in the production floor.

Also we are entering into a new stage of development in IT and IS, in information technology and information system, were our idea is to be competitive advantages on the basis of differentiation against our competitors and also penetration on building the continuous supply and supply chain basis together with our customers. I would appreciate, Oscar Montero if you can quote on this program.

Oscar Montero

Okay. I think if you put the following chart, we are talking here about two different innovations, one is relating IT and the other one related to supply chain.

First, let me comment about the supply chain I think Daniel in the previous conference had mentioned what is the supply chain in Ternium is, it’s an area responsible of taking the sales or those from the customers, and moving them through the core production system until the delivery to fulfill the promised time to the customers.

In Mexico, that task is very complex because that means I will share with you some figures. Every month we have 26,000 order items of 1,200 different customers that we need to program in more than 200 production lines in eight different mills and five different service centers and to ship more than 1,000 trucks per day from at about 130 different shipping points.

So in order to manage all the system, we are all the way, all the time doing some innovations both on the operation side, in order to improve the productivity of the lines, and also on the information side, in order to provide our sales force with information to know exactly where the orders are and to give information to our customers.

One of the most challenging programs in IT that we are having now is what we call the NCA, it is a name in Spanish, it’s a new system that involves the active cycle of the business, like active cycles is, production and sales in the company. We call it no, because we already developed in-house and implemented in Argentina a system like that. And in Mexico because of the certification of the process there, we’re enhancing this system yeah, just to come and when we took over the companies in Mexico. We have about 30 different legacy systems because each company have different systems in order to manage all the sales and production. And at the same time, with the merger companies, we merge all the information system into this one.

So these new active cycle system will help us to improve utilization of the whole capacity to improve their lead times in order to give a better service to our customers to reduce the working capital, increase labor productivity, and managing all our very, very complex systems in one single model.

Daniel Novegil

Thank you, Oscar. So to move forward, let me make some comments on what is going on in Usiminas. I will comment some numbers that are coming from Usiminas public information. As you all know we do not control Usiminas on our own, but we share our control with Nippon Steel and Usiminas’ pension plan.

Up to now so far, we are very happy with the turnaround progress. And let me show you maybe some of these numbers because – our public numbers, but let me show you some of these developments. Here you have – in Usiminas guys have been working very hard in gaining market share against imports in concentrating exports on a regional basis, in increasing production, and where you will see streamlining and shutting down low occupation and low productivity lines and so on and so forth.

At the end, we have an indefinite increase in crude steel production of 7% in the last year, 15% increase in the steel shipments, EBITDA that is growing up quarter-by-quarter and also gaining labor productivity, 16% in the last year. We are using working capital $1 billion or R$2.2 billion, reducing CapEx and concentrated in doing and investing in what is really necessary with the highest payback period and internal rate of return and so on.

So at the end, we are happy with the turnaround process, Usiminas is doing well. This is an ongoing process. They will continue work in all these factors, labor productivity, working capital, CapEx optimization, sale of non-core asset and so on and so forth. So we believe that we are doing well, Usiminas is doing well and at the end, the process is moving forward at a very good speed.

Let me now enter into the chapter of – the idea of enhancing a competitive positioning of Ternium in vis-à-vis competitors. As we were talking in other Investor Day, we consider that our key drivers of profitability are the production flexibility that we have, slabs with rolling, data reduction, blast furnaces differentiation, the product differentiation, the ability to deal the entry barriers in our markets through and a marketing strategy of being very close to the customer, the level of downstream and upstream integration that is maybe one of the highest in the three industry and the set of differentiation. The ability to wield innovative tools like the ones that we were talking before, IT, IS, supply chain, value chain penetration and working with the customers in order to create value on the basis of service and delivery of operable on a logistic efficient base and so on.

So we will continue working in that, we will continue trying to implement innovative kind of tools in order to breakthrough continuously the process of learning curve, stepping up the productivity level.

Let me now enter into a chapter of what are we doing in the commercial side. We talk about efficiency, we are simply talking where we are, where is the world, where is Latin America, where is Ternium located in this Latin America and well now – then we talk about labor productivity, efficiency, new areas, IT, supply chain. And so let me now enter into a chapter of what we are doing recently in the commercial side and let me share some comments on that.

First, we are entering into a new world after Usiminas, after Tenigal that you know is a joint venture with Nippon Steel that is located in Monterrey, a new galvanizing line aiming at servicing the needs of high-end products mainly from the automotive industry, building a new cold-rolling mill in Monterrey as well. Building a new continuous capital that is going to be integrated in this coming first quarter 2014 in Argentina, a new vacuum degassing, we will quote about that in this likes to come, but in all-in-all, we are going to a new market segment, we are going to the merged market segment of high-end products.

What does it mean on a real basis? Well, what is the high-end market? The high-end market is advanced steel with high quality requirements. Its specialized production equipment and technology and limited production capacity and supply. This is a fast growing segment in Argentina, Mexico, and Brazil with a projected compound growth rate of 10% between 2012 and 2017, expected projected compound annual growth rate.

Most of the high-end products in Latin America now a days are being imported. There is no local production of these products and 64% of high-end products go to the automotive industry. So that if we take a picture in, if we could take a picture in 2017 we will estimate that the high-end market profile would be 64% of the products being dedicated to the automotive industry and so on in energy, electrical, packaging, appliances and construction.

So at the end the market size is important as you know the industrial sector is around 50% of flat-rolled, the flat-rolled in general can be split it in 50% industrial sector, high-end products 50%, construction business, commercial products. Out of these a 50% the high-end products are considered being at 20% of the industrial sector.

The growth rate of the high-end products are outperforming in Latin America heavily, the growth rate of the average of the market – for you to have an idea. The compound annual growth rate of the high-end products is 10% per year against 4% of the market in average. Most of these products I’ve said before are being imported into the region. And the automotive industry is taking the lion share of these markets.

Again here we can see that 98%, 99% almost 70% of the production of cars in Latin America are being produced in Mexico, Brazil, and Argentina. The vehicle production is going up in Latin America sharply and the focus in Mexico is because the compound annual growth rate in Mexico is higher than in the rate of the area, is 9% in vehicles in production and will be 9% in the years to come.

So at the end we identify these market needs, now we are changing our commercial side to serve these new approach to the market going for more sophisticated products, more value products with a better price, with a better rate of return and that's why we have been working in Monterrey in the hot galvanized lines, in the cold-rolling mill, in the continuous caster in Argentina, in the vacuum degassing in Argentina.

So at the end we will also be quoting with you or commented with you some changes in the marketing side, but our target will be to go for these market segment where we believe that we can differentiate our self and we can build and create value on the basis of logistics, IT, IS product quality and service.

Let’s take a look for example of our new hot galvanizing line to serve the Mexican automotive industry, with the capacity of 400 million tons per year and expect to start-up this next July. We will be stepping up the production and then we are going to enter into the Mexican galvanized steel market to the automotive industry, with a demand that is growing at a 10% per year and we’ll continue growing at this pace in the years to come.

Let me again stress that 70% of this steel is currently being imported from overseas of Latin America. The market is around 1.1 million tons in 2013. We are going for this market as I said before in an association with Nippon Steel through our new facility of Tenigal. Then we will also be inaugurated in August, the start-up of the full current facility in August, next August 2013.

Annual capacity of 1.5 million tons in the right hand side, you see that we can expand the thickness and the width of products, through the new capacity, when we compare the current production against the future production of these new lines. The focus and the target is to go for exposed surface grades and to the production of highest-strength micro-alloyed and advanced high-strength for galvanizing. So, with integrated products, market niches, automative industry, home appliances, high-end products to be served from our operation in Mexico.

We are very proud of the performance of the billing of these new facilities. The construction of this facility the project was on-time and on-budget. A good deal of discussion now a days about overruns in investments everywhere, so we did this investment $1.1 billion in Mexico, with no delays and with on-budget in of the expenses. So, we are very proud that we did this very efficiently. We’ll be operating – this new line is being own 100% by Ternium.

And, we will as I said before it start operation of full hand in August, 2013 and annealed material in the first quarter, second quarter of 2014. We expect to be working at full capacity in this line in 2015. This capacity will add 1.1 million tons in the short run, 1.5 million tons of sales in the medium run in five years.

Having in mind these ideas and having in mind, what is going on in the marketplace, meaning for that, new products, new developments, new plans, new approaches to the marketplace. We are now working in a new commercial approach. This new commercial approach means that we will be targeting 28 regional customers. That they are high-end oriented. They are demanding now 6.7 million tons of steel per year. And that means around 19% share of the flat steel market.

In order to approach this new market through the product that we will be producing through the vacuum degassing, through the hot galvanizing lines in Tenigal, through the cold-rolling line in Mexico, we develop a new marketing structure, organizational structure, new commercial structure with just have new idea, like for example the top management key account-sponsor.

The key account-sponsor could be myself, could be one of the gentlemen that are here or the area managers, and the idea is that they are in charge of the account, each one of us has a couple of this customer, in order to approach the customer to offer them, an open approach to serve their needs on a regional basis, to identify their needs, to work in research and development, to develop new products, new services, and to enter into a logistic alliances in order to penetrate the value change and in order to work together in supply chain and so on and so forth.

So a new approach, to serve a new market, to serve a new target, to serve the idea of going to the high-end products, through the new facilities that we are building.

On top of that we continue working in the commercial side, and we continue working in strengthening our commercial network downstream. Please could you comment Máximo on the developments that we are doing in our distribution network in Mexico.

Máximo Vedoya

Yes, good morning. Well another one of enhancing our competitive position is strengthening of the commercial network that we have been discussing in the past. So, let me give you a quick update of where we are now with this. As you know, the commercial network is one of the key elements of our commercial strategy in Mexico. It allow us to fulfill the needs of our broad amount of end-users, small and medium end-users across the country, which have value-added products with customized products and with service and logistics.

Daniel Novegil

It’s a little bit loud.

Máximo Vedoya

Isn’t it? Sorry about that. Well, because of these in the past few years we have been focused in increasing this commercial approach of these distributional centers around the country. We have now built or upgrade four new distribution centers located in the main areas of consumption of Mexico. Those are in Monterrey, in Puebla, in Mexico City and in Guadalajara, and with that we have today 10 different distribution centers that are spread across the country. You can see in this graphic in red and you can see that we have a huge amount to most of the areas of the Mexico.

We have also entered into agreement with local or regional retailers. So in the areas where we are not able to fulfill across our own distribution centers, we go in the agreement with this distribution, with these regional retailers, and so we fulfill the need of our customers without the need of a high investment in our own facilities. But I think what we have been working the most in the last two years is in changing or redesigning our management model of this network.

As you remember, three years ago we bought Ferrasa in Colombia. Ferrasa, we have several different markets or different models, what’s mainly a retailer, a steel distribution center in Columbia. So we took from them the best practice that they have and we applied them in Mexico. With this practice were in order management, where in the design of the logistic routes of each of this. Now, hello?

Daniel Novegil

Yeah.

Máximo Vedoya

Yeah. Of these distributing centers we are in the metric, in the service metrics of how we metric the service we give to each customers and it was also and how we manage our sales force. So we put all these together and we implement all these best practices in Mexico and this has had a very significant impact in the performance of the commercial network in Mexico.

And let me give you only two examples, but there are much more of that. The first is the service to the customers. We used to have a lead time or a promised delivery to the customer of five days. So a customer enter an order to one of these distribution center and we fulfill that order or the promise of fulfilling that order was in five days. Today, one year ago we changed that and it’s in 24 hours. So we’re fulfilling the needs of our customers in 24 hours and we are fulfilling this in 95% of the time. We used to have a 90% fulfillment of this when we have five days. With all these new initiatives we have 95%, but with 24 hours delivery.

Another one is the amount of active customers we have in this commercial network. If you see this graphic down, we used to have 610 our customer active each month and today we are in 830 active customers each month. This is a huge increase without increasing our sales force. The sales force we used to have two years ago is exactly the same that we have today. So it’s a huge increase, a 36% increasing the productivity of our labor force, and we are adjusted in one year time, if with the same sales force go to 1,000 customers active each month.

Daniel Novegil

Thank you.

Máximo Vedoya

Good. We are running out of time. As you know, we’d not be having a break. So we try to speed up. We are just finishing the process and in order to enter into Q&A. We talk about the market, we talk about the performance and track record, we talk about competitive positioning. We talk about new ideas, innovations in IT, in IS in high-end products in the commercial side.

So let me enter to a quick view on what is going on in our company upstream. So, and let me comment on Argentina first, where as you know, we are building a new continuous caster and a vacuum degassing station, the annual slab production will increase in 0.5 million tons per year. We will be able to produce ultra-low carbon steel grades, interstitial-free steel and bake hardening on new products and we will be able to gain market share against imports in this newer steel grades and we will also be dedicated these excess capacity of slab first to sell our own needs in Mexico, second to serve needs of slabs in Argentina, reserve a roller rate there and also to increase capacity in our hot-rolling mills.

So this new – the vacuum degassing station will enter into operation this coming third quarter in August, September 2013. And the continuous caster in Argentina will enter into operation in the first quarter of 2014. Again, this will change the profile of our Argentina operation expanding capacity of the slab and also allowing us to dedicate part of the steel to high grades.

In the iron ore side, let me make some very brief comments. First, as you know, we have 54% iron ore self-sufficiency, thanks to our operation, our mining operation in Mexico. We are producing 4.3 million tons of iron ore and 90% in the form of pellets in Mexico, through Las Encinas, some 50% of Peña Colorada. As you know, we have a joint venture of 50-50 with Mittal steel in Peña Colorada, and through the bottlenecking, through making some investment, increasing production, and so on and so forth.

Now we are in a situation where we are consuming 7.9 million tons of iron ore in the system in Ternium on top of the consumption of Usiminas that as you know also has their own mine. And so we also were able to increase the supply of Corumbá, Argentina is consuming nowadays 4 million tons of iron ore per year, 3 million tons, around 75% is coming from Corumbá. As you know, we have advantages in logistics, in pricing, in quality, in inventories, and so on, and so forth with iron ore coming from Corumbá.

And over the years we were able to go up in the use of fines and lumps coming from Corumbá at the point where we are supplying 75% of our needs from these mines. But as you know our captive mines so to speak, because the logistic corridor of the Parana River goes direct to our facility in Argentina as oppose of exporting these raw material from Corumbá to Europe or to the Far East.

So we are feeling that we have a good hedging in iron ore. We are doing well in Mexico. We continue working in the bottlenecking. We feel that we still have opportunity to grow in the production of iron ore. So we feel comfortable that we have a good iron ore supply situation.

Let me now conclude the presentation and to wrap up and to go to the conclusions, we consider ourselves being knowledge intensive company in the sense that we are all the time following and going for innovation, creativity, and so on to outperform, to be able to outperform our customers.

Let me comment on what we consider we are. We are a leading company in an attractive market. The Latin America market as we saw before is 70 million tons big; we can enter into the U.S. and Canada market that is 110 million tons big through the free trade zone with Mexico. So we are in a part of the world with an important critical mass in terms of demand, with import substitutions opportunity with a steel intensity opportunities with an important opportunity to growth through gaining market share against imports of direct steel as well as indirect steel.

We’re having a superior operating result vis-à-vis our competitors based upon the production flexibility, our industrial expertise and also based upon the close relationship that we were able to deliver the year vis-à-vis our customer base and vis-à-vis with other B2B relationship with customers.

We continue working in breaking through the learning curve and the experience curve through innovation and what I view is that we have to work through innovation in stepping up always the productivity level of our capacity, of our facilities. We really believe we are convinced that we still have tremendous growth, tremendous opportunity for growing in productivity leverage through innovation. And now we are in the process of building a new company based upon a new approach to the marketplace to follow, [we] have the high-end products through the new facilities and the new investments that have been done over the last years in order to take advantage of these growing segment of the automotive industry, the home appliances and benefiting them in Latin America to grow for more sophisticated and more high-end products.

So, having said that, let me enter now in the Q&A. And so, I will invite my colleagues Pablo, Máximo, Oscar to come here, and we are obviously open to try to answer your requests and your questions.

Question-and-Answer Session

Carlos F. De Alba – Morgan Stanley & Co. LLC

Thank you very much. Carlos De Alba with Morgan Stanley. A couple of questions. The first one is on the program to further reduce the white-collars and the blue-collars. Do you have an estimate of the savings that you can generate on an annual basis, and when we can see that coming through to the bottom line? and the second question, it was quite interesting, the high levels of imports into the Colombian market. Clearly you have been doing there for the last few years. Can you talk a little bit about your market share, how it has improved hopefully over those years and what are the expectations that you’re having in the near future?

Daniel Novegil

Yeah. Regarding the first question, in this short run, we are working reengineering the administrative task, especially in white-collar, but also in the blue-collar worker base and we are expecting gaining a 2% productivity in blue-collars and 2.5% productivity gain in white-collars in the coming year, short run. Then, we will continue doing some other innovative products. but this is a program that we are undergoing right now and it’s reengineering of administrative task program.

Second question, regarding the Colombian market, we are doing well in Colombia. We are increasing production 30% in our long products production in Manizales. We invested there. We are doing well. we are trying to deliver these products into the marketplace very fast and we are in the process of analyzing other opportunities. we can grow in Colombia. we expect to grow in Colombia. We believe that Colombia will continue growing at a good pace and we have opportunities in Colombia. we can grow in Colombia through, we can expect our growth in Colombia through the three vectors of growth, a brown-field, de-bottlenecking and increasing production in Manizales, second, maybe with a Greenfield that we are in the process of analyzing and maybe if the opportunity arises through an acquisition.

So, at the end, we look at the market intensively. we are very comfortable in Colombia. We are doing well. We are growing and we have opportunities to continue growing. We are looking at this market with a thorough attention.

Alexander Hacking – Citigroup Global Markets Inc.

Thank you, Daniel for the presentation. This is Alex Hacking from Citibank. And congratulations on all the operating success at Ternium, continues to do very well. The first question I have would be related to the fall in the cost of coking coal. Do you view this as a potential threat to your margins in Mexico given that you have discompetitive advantage historically of using natural gas in place of coking coal? And then, second question, I guess for you Daniel in your role as part of the World Steel Association, clearly the biggest problem of overcapacity sits in China, over 200 million tons of excess capacity. How do you think this situation resolves itself over the next few years? Do you have any views there? Do you sense that some capacity will be closed or do you continue to expect them to overproduce and export more and more into the global market? Thank you.

Daniel Novegil

Well, regarding the coking coal, the first question of the coking coal, as you know we are producing our own coke in Argentina, where we have blast furnaces. The technology that we are using in Mexico is direct reduction. So we do have, I would say, a balanced situation regarding coking coal and when you compare our operation against other peers we don’t have the need of importing coking coal. So at the moment, with our coke oven facilities we are doing well, importing coal and we do have a very efficient facility.

Second, regarding the second question, it’s a good question and it’s a complicated question, because in my view the overcapacity is in the marketplace and it’s impacting the pricing system of steel industry, no doubt. But in my view also the overcapacity is a regional factory. That means that it’s going to be difficult for China to continue exporting direct steel and indirect steel to rest of the world that is it’s exporting cheap labor to rest of the world on a dumping basis, on a countervailing basis and exporting not only labor but also environmental problems. So I believe that the world will react to that and will start controlling - and the system will self-control. I don’t see China sustaining the growth in the long run on the basis of exporting cheap labor to the rest of the world.

We were doing a very nice analysis in Latin America in what is going on in the industry in four countries: Argentina, Brazil, Colombia and Mexico where industrial [waste] [ph] is more developed. And what we found in these countries is that the industry participation in the lower GDP is going down. I mean, Brazil is going down, the participation of industry against GDP, Colombia the same, Mexico the same. Argentina is flat. It’s in 17%. The participation of the industry in the total GDP, 17%. Brazil went down from 20% to 14%, 20% to 14% in the last four years. Mexico went down, recovered and it’s down again and lost three points.

So there is a kind of primary cessation of the economy in Latin America at the expense of the industry. I think that this process that will be stopped by political action because Latin America needs jobs, needs quality jobs, needs the industry to develop. And so, the government, we presented this study to the government. They understood that they have, something has to be done and they will do that.

So I see China as a threat because of having idle capacity obviously, no doubt, $250 million of idle capacity, of excess capacity. But at the end, I think that the world system, the Latin American system in general, on a regional basis will overcome this problem and will face this problem through countervailing duties, through dumping basis and building barriers to protect the local production.

On the other hand, also let me tell you that part of the responsibility is in our own hand. I mean, we have to be able to compete against dumping and against countervailing through what, through better service, better quality, better supply chain penetration, better relationship with our customers on a B2B basis, innovation, creativity, mix, and building entry barriers in order to protect our pricing system against predatory practices. So partly it’s in the responsibility of political action, not allowing unfair practices of commerce and partly it’s in our hands, fighting these factors with productivity, effecting a close relationship with customer, services, quality and building entry barriers to protect our pricing system.

Leonardo A. Correa – HSBC Corretora de Títulos e Valores Mobiliários SA

Yes, hi. Thank you very much for your presentation and good morning everyone. This is Leonardo Correa from HSBC. So just thinking back, you’re coming through a series of some acquisitions, several projects being analyzed, Usiminas, some other M&A opportunities which were in discussion. 2014 is a big year, just given the amount of projects that are coming on stream. So just wanted to get a sense of the next steps thinking more medium and long-term for Ternium, I mean, would a potential merger of Usiminas and Ternium be something that would be strategically important for the company building a very important one of the leaders in Latin America even consolidating leadership. So I just wanted to get a sense of next steps more medium and long-term? Thank you.

Daniel Novegil

Okay, regarding the first part of your question, as you know, we do not control in Usiminas in a standalone basis. We are sharing the control with Nippon Steel. So we have to talk with them, we have to discuss with them, we have to analyze with them, we got the best options for the company looking forward.

As you talk about the merger of Usiminas with some other company like Ternium that’s something that has to be analyzed by the shareholders especially with Nippon Steel and the pension plan. I have to think about mainly in the future could be an option that could be open as other options as well.

Regarding the next steps, I would say that we are in the process now of digesting our investment in our Argentina, digesting our investment in Mexico in the process of stepping up production in order to capture a paybacks and to capture in terminal rates of return coming from these two amendments, so we are concentrating all our efforts in this new investment that we are undertaking.

But as you know, we are always alert and we are always looking for opportunities with we all announced that we have a level of vertical integration regarding the slab production that maybe we have to solve or not in the long run. At this time, we are enjoying a gap between a steel prices and price of a slab. So our operation of rolling is not very efficient. But this is a volatile market. We don’t know where this market is going to be going. So it’s something that we continue assess and we continue address and is something that we will be considering. And we can go for this market of expanding our vertical integration on producing slab through brownfield projects, expanding operations in Argentina or in Mexico, greenfield projects in Mexico or through an acquisition is the opportunity arises and we consider that the opportunity is having a good payback and a good rate of return. Pablo, will you like to quote on that looking forward how do you see our company looking forward on opportunities?

Pablo Brizzio

Well, as you mentioned, we have been enjoying a good opportunity in the slab market because of the gas prices that you mentioned in between the hot-roll and cold-roll and the slabs. We are the most important slab supplier in the world –world-wide buyer. And that gave us a very important advantage in term of flexibility and profitability.

But now that we are entering into this high-end market that Daniel talk about, we should be analyzing all the tiny opportunities to increase our vertical integration. Because of our policy, we are very quite and we will analyze very carefully the opportunities. For example, as you know, five years ago, we launched an integrated project in Mexico in 2008 that was approved and we made a press release et cetera.

And then because of the situation in the market, we decided to stop at the beginning and then to go ahead with the process, but in a different fashion, with the Monterrey project, a cold-rolled mill and a galvanizing line. So we have the opportunity to grow there. But we are only going to move forward if profitability and internal of return justify the investment.

Daniel Novegil

Yes, we just stepped down from the idea of building a plant in Pesquería as you know and we also decided no longer to participate in the CSA acquisition because as I was making some comments in the conference call three months ago or four months ago, we had a different value perception and also a different perception of the market situation.

So, we are analyzing and we are going ahead and we are stepping down from projects following the opportunities and following the financial, also the financial situation of the company that as you know is very strong, not only because of having a net debt that is very low, but because of having opportunity of leverage on the profitability and on the performance in order to get money to go for expansion in either of the three vectors.

As Oscar was mentioning, we made an announcement in 2008 in March – in September that we were building an integrated facility in Mexico whose total investment, if I remember properly, was $4.1 billion, $4.2 billion. At that time, I remember that we mentioned that the investment needed in the downstream was $1.5 billion and we still at this stage spending $1.1 billion. So we needed better than expected and we still have the chance of going for the second part of this investment that we have announced in late 2008.

So we are in the market looking for opportunities, looking for efficiency, the bottlenecking, working in brownfield and looking what we can do in order to create value. No doubt that we will not be entering into the risky kind of ventures. We are going to be conservative and going for good opportunities to strengthen our company and to create value for the shareholder.

Unidentified Analyst

Congratulations again for the performance. I’m (inaudible). And I have a question regarding the service centers. Can you please elaborate more about this part of the business? Just taking a look at the numbers in the U.S., as you mentioned in your presentation, an integrated flat producer in 2012 got 6% of EBITDA margins, probably a minimill about 10%. But Reliance and Metals USA and some other distributors have margins of 8% EBITDA margin. In Mexico, you’re on a privilege position where you controlled your own distribution. The question for you is, do you see this assuming that you can buy smaller distributors, be more vertically integrated into distribution, which is the business that the U.S. peers decided to give up and it was a huge mistake. In this world of overcapacity of steel part of the differentiation can be more integration into the client, no and to be the…

Daniel Novegil

Yeah, correct.

Unidentified Analyst

With better service in that sense protecting prices much better than the competitors. that in the U.S. would have been a home run, taking a look at the combined margins of Metals USA and Nucor; the margins would have been like 18% or 19% relative to the 10% that they got. Can you please elaborate a little bit about your business in Mexico and how you see these dynamics?

Daniel Novegil

Interesting question, and so maybe back to the owner of this business.

Máximo Vedoya

Thank you. Well, in Mexico, we have two kind of distribution centers or distribution market. First is the commercial part, which where we have discussed about our 10 distribution centers and of course, we are increasing that, I mean our expectation is to continue improving our service and to see with the four new distribution centers that are fully operated today. We try to adjust that for new, try to increase our amount of customers that end users, small end users that we go direct, and to see if we can grow from there to other regions of the country.

The other part of the distribution business is industrial business and going for cut-to-length for smelting lines or other time of service for big industrial customers. And that we are also very strong in Mexico. We have three service centers dedicated to the industry beside these 10, I have mentioned you, and we are investing in new lines.

we have a new smelting line that is going to come operated in October in the Churubusco plant and we are thinking of another one in San Luis Potosí. So we are thinking in both of these markets to increase our presence in a very – not huge steps, but every increasing a little bit our presence in that market and we will continue in that way.

Daniel Novegil

This is a complex question, I mean we can have different approaches. We can go to expansion through acquisitions, we can go through building sites on the basis of the sites that we already have. We can build the relationship with the customer going direct from our factories instead of cutting through the distribution system saving money and saving logistics is a very complex program.

I mean you have supply chain in the middle, you have logistics, you have freight. So it’s a complicated business where a huge amount of money is there and we can get this money and we are right enough, so it’s an interactive business, the distribution, the service center, adding value, high-end, capital ends, leaping and being very close to the very, very final need of the value chain of the customer.

Michael Holme – CQS

Hi, thank you for the presentation, Michael Holme from CQS. My question is that you told us that you’re going to be targeting the high-end part of steel focusing some extent on the auto companies and 28 regional customers. A question I have is, do you have today the technology to supply these customers; do you need to acquire additional technology and would that be through JV partnerships as you’ve done in Mexico or do you go out and acquire that technology? Thank you.

Daniel Novegil

We believe that we do have the technology. we’re adding some new technology. we have very good technical assistance coming from Nippon Steel through our joint venture. So we do have that we have this trend. We have the ability to go for this market, not only in the automotive industry, but also in home appliances and in capital goods and in fuels and pipes. So we believe that we have an opportunity there. we believe that we have a market niche there with an impressive growth rate, and we believe that we’ve done a good and to create value lowering for this part of the market. we will not be giving up the rate of the market. we will be also being concentrated through our downstream integration in the commercial side of the business, but we are in the process of targeting these new market where we have an opportunity where we have that there is a market need with impressive growth rates and with impressive size. and we understand that and we know that most of this still is really very important. So we do have very clear competitive advantages vis-à-vis, our competitors sending the steel from overseas through our distribution network, through our facilities, through our service, through our prompt deliveries, just-in-time delivery, and through our aggregation of value downstream. So, we can get value, we can create value there and we would evolve for these values.

On the technical side, you feel that we can have some restraints or some new investments that we could win in the years to come.

Daniel Novegil

As you mentioned, when you talk about the knowledge, you need to have the capacity of processing steel and also to have this straight for that steel. So in the more sophisticated part of the business, that is Pesquería, we have an association with Nippon Steel in which we have 51% and Nippon 49%. And among all the agreements we have, one of them is the Nippon Steel will supply the substrates – these very sophisticated substrates and also the technology in order to be able to process that steel into the final product.

So also just as a reminder, we have been supplying the automotive industry in Argentina for a long time ago, and we have the knowledge of the processes and products that the industry demands. However, when we decided to go ahead with a more sophisticated portion of that business in Pesquería in Mexico, we started up in a project stand-alone without any partner, then some companies came to us offering to join the project, among them a couple of Japanese companies, worldwide company and a U.S. company came to us. We analyzed what they could supply and every time you have a joint venture, you have same advantages and these advantages because of flexibility but Nippon Steel was the best balance of all and that’s why we decided to go ahead with it.

Pablo Brizzio

It’s a win-win kind of situation with Nippon Steel because we will be working together, we will no doubt create value for both of us, so we will do well. But the word, the word is differentiation, I mean high-end is the road, but the word is, the word is differentiation. What does this differentiation mean? In order to escape through these global over capacity trap, you have to just differentiate yourself against competitors, local competitors, as well as foreign competitors. So, one of the ways of differentiating is producing new products, innovative solutions, creativity and giving responses to the market needs through service and through new products, new quality and I don’t see the need of huge investments if it is your concern and looking for these new marketing approach. We’re saying, this is a question of strengthening our own strength and continue working in the same path.

Unidentified Analyst

Alright, good morning. Thanks for the presentation. My name is (inaudible) from Citi. It’s pretty simple questions, one, since most of these high-end steel has been imported, first question is where is it being imported from currently, and second is entering into this new business, do you plan to sustain the same margins that you have today entering to this new high-end market.

Daniel Novegil

Well, let me quote on the first part of your question. Well, first of all let’s identify who are these 28 customers, what are they, who are, which are the names and the names are pretty well known for all of you. This is – we are talking about General Motors, Nissan, GM, Whirlpool, [Mavis]. We are talking about Renault, we are talking about Caterpillar, we are talking about Toyota, so these are the customers. Who are the competitors? The competitors being POSCO, Legacy, U.S. Steel, part of Nippon, Nippon Steel, the main producers of high-end products all over the world. Regarding the profitability or regarding the rate of return of this new approach, let me tell you that we believe that we have been a good payback for the investment that we have already done in Mexico, the galvanizing line as well as the cold-rolling mill. But let me maybe go further in your concern and let me go further in your request and I will ask Pablo, it’s an easy question, and so talking about profitability and talking about financial results and also economic results of Ternium looking forward, but not looking forward in the very long run, because we are now going to be here. But actually in the quarters to come and because of this stepping up in the production side and then how do you see that company doing EBITDA wise, EBITDA rate wise and financial wise? Sorry for introducing your question to us.

Pablo Brizzio

Well, you know that the company has been working very hard in order to sustain a profitability level or (inaudible) of above 15% EBITDA margin over the years. We have been able to do that through the last three or four years in average and the company, as a whole, was working and will continue to work in order to sustain this level of profitability, which is among the best in the industry.

The company through these new projects is always working and aiming to sustain or to be or to have a level of profitability above the median of the industry or overall being the highest in the industry. Just to factor the second part of your question, while we are doing that we are able to sustain a very strong financial position. In the last two or three years we have been making different investment through acquisitions or within our own company, in which we were able to sustain a very strong financial position.

Now with this, we have a net debt to EBITDA of around 1.3 times, which is very, very good. While we are making significant investments not only the process that we mentioned in Mexico, Argentina, but the acquisition of shares of Usiminas and different things that we have doing. And putting this together will be a another question before, we are entering 2014, a year in which the biggest portion of our CapEx plan will be reduced significantly and we allow the company to generate significant cash flow to enhance the financial position the company has.

So the company in the years to come will be working out, we think, the margin that it has while sustaining a very strong financial position, and in fact, having aware of financial positions in the year to come if no additional plans coming through in line for the company. So the situation for Ternium in the years to come, we understand, will be good in both fronts, in the profitability and the financial position of the company.

Unidentified Analyst

Pablo, just given this strength in the free cash flow generation of the company, can we expect higher levels of dividends in the future years? And second, if you can give us a little bit more detail information on the outlook for the coming quarters. In Q1, you mentioned or in the press release, the company mentioned that the expectation was for flat operating income given lower prices and lower costs. You can give us an update on that, and then maybe Daniel you can give us a medium-term outlook of the pricing industry, the pricing trends in the industry? Thank you.

Pablo Brizzio

Okay. Regarding their dividend, the company does not have a dividend policy though the company have been paying pretty decent dividend every year. The dividend pay ratio of the company is quite good, in my understanding, is quite good. And we understand that the shareholders of the company will continue to sustain this level of dividend payment. The company is not foreseeing at the moment a huge increase in dividend payment if this is your question, but sustaining or even improving a little bit the level of dividend payment.

Regarding your second question, the outlook for the quarter, we are still speaking to the same outlook that we gave during the last conference call. We are expecting to have similar level of EBITDA generation in the quarter to come. So we are working with the same basis.

Daniel Novegil

Gentlemen, ladies, thanks a lot, thanks a lot for coming, and thanks a lot for participating in this meeting. I hope to talk to you again in our next conference call, and also to have the chance of meeting you in person again in our next year Investor Day. So, again, we really appreciate your support, and we really appreciate your patience in following our presentation. Thanks a lot and have a nice day. Bye-bye.

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