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Business Context and Reporting Period

This Form 6-K filing contains the Annual Report of Ternium S.A. for the fiscal year ended December 31, 2022. Ternium is a leading steel company in the Americas with operations in Mexico, Brazil, Argentina, the southern United States, Colombia, and Central America. The company is incorporated in Luxembourg, and its American Depositary Shares (ADSs) are listed on the New York Stock Exchange (NYSE: TX). The financial statements are prepared in accordance with IFRS and presented in U.S. dollars.

Key Financial Metrics

Operational Volume: Total steel shipments were 11.896 million tons in 2022, a 1% decrease from 12.065 million tons in 2021. Revenue per ton was $1,353 in 2022, up $45 from the prior year.

Material Changes vs. Prior Period

• Profitability Decline: Operating income decreased 49% year-over-year to $2.7 billion, and Adjusted EBITDA fell 42% to $3.4 billion. This was primarily driven by a significant increase in raw material, energy, and labor costs, which outpaced the slight increase in realized steel prices.
• Revenue Growth: Net sales increased 2% to $16.4 billion despite a 1% drop in shipment volumes, supported by a higher value sales mix and integration of the industrial system.
• Impairment Charges: The company recorded a $99.0 million impairment charge on its investment in Ternium Brasil and a $120.4 million impairment on its investment in Usiminas (recorded in equity earnings).
• Foreign Exchange Impact: Net financial results were a loss of $70.1 million, largely due to a $163.7 million net foreign exchange loss driven by the 42% devaluation of the Argentine Peso against the U.S. dollar.
• Liquidity Improvement: The company strengthened its balance sheet, moving from a net cash position of $1.2 billion in 2021 to $2.6 billion in 2022, aided by strong operating cash flow of $2.8 billion and debt repayment.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management highlighted that despite a difficult global economic context (inflation, interest rates, Ukraine war), results remained solid. The company is executing a strategy to replace imports in the Mexican market and advance decarbonization goals.

• Capital Expenditures: 2023 capital expenditure guidance was raised to $1.1 billion following the approval of a new upstream production project in the USMCA region.
• Major Investments:
  • USMCA Project: A $2.2 billion investment to build a new electric arc furnace (2.6 million tons capacity) and direct reduced iron module (2.1 million tons capacity), expected to commission in H1 2026.
  • Pesquería, Mexico: Downstream projects including a cold-rolling mill and galvanizing line, expected to begin operations by end of 2025.
  • Argentina Wind Farm: A 72-megawatt facility expected to begin operations in H2 2024.
• Dividends: The Board proposed an annual dividend of $2.70 per ADS ($0.27 per share), totaling $530 million, subject to shareholder approval.

Risks and Contingencies

• Argentina Exchange Controls: Significant restrictions on foreign exchange transactions limit the ability to transfer cash surpluses or pay dividends in cash. The company holds $1.4 billion in investments in Argentina, valued at official exchange rates, creating potential valuation risks.
• Raw Material Costs: Volatility in the price of slabs, iron ore, and energy remains a key risk. The Russia-Ukraine conflict has disrupted supply chains for these inputs.
• Regulatory and Political Risks: Operations in Mexico face potential impacts from energy reforms favoring state-owned companies. Brazil faces political instability and potential tax reforms. Argentina faces high inflation and economic volatility.
• Impairment Risk: The company holds significant goodwill ($662.3 million) and investments in non-consolidated companies ($821.6 million), which are subject to annual impairment testing.

Investor Verification Checklist

• Argentina Liquidity: Verify the realizable value of the $1.4 billion in Argentine investments and the impact of exchange controls on future dividend repatriation.
• Cost Pass-Through: Assess the company's ability to pass on rising raw material and energy costs to customers in 2023 given the 49% drop in operating income.
• USMCA Project Execution: Monitor the timeline and cost management of the $2.2 billion upstream integration project approved in February 2023.
• Usiminas Valuation: Review the market value vs. carrying value of the Usiminas investment, which had a market value of ~$356 million compared to a carrying value of $726 million as of year-end 2022.
• Debt Maturity: Confirm the repayment schedule for the $125 million outstanding on the Ternium Mexico syndicated loan maturing in June 2023.