Grupo Simec, S.A.B. de C.V. — 2021 Form 20-F Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2021, filed May 17, 2022. The filing is prepared under IFRS as issued by the IASB and reports consolidated operations in Mexico, the United States and Brazil. Grupo Simec manufactures, processes and distributes special bar quality steel, structural steel, rebar, wire rod and related products. The filing does not provide a separately reported fourth-quarter income statement; references to “2021 Q4” should therefore be interpreted in the context of the full fiscal year.
The company operated 19 facilities with approximately 6.0 million tons of crude-steel capacity and 5.2 million tons of rolling and finishing capacity. Finished-steel shipments increased to 2.504 million tons from 2.441 million tons in 2020.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | Ps. 55,620 million | Ps. 35,869 million | +55% |
| Gross profit | Ps. 15,652 million | Ps. 6,658 million | +135% |
| Gross margin | 28% | 18% | +10 percentage points |
| Income before taxes | Ps. 13,836 million | Ps. 4,876 million | +184% |
| Net income | Ps. 9,446 million | Ps. 2,798 million | +238% |
| Net margin | Approximately 17% | Approximately 8% | Improved |
| Operating cash flow | Ps. 8,387 million | Ps. 3,634 million | +131% |
| Capital expenditures | Ps. 1,066 million | Ps. 951 million | +12% |
| Cash and cash equivalents | Ps. 15,130 million | Ps. 7,728 million | +96% |
| Total liabilities | Ps. 15,543 million | Ps. 12,485 million | +25% |
| Total equity | Ps. 41,800 million | Ps. 33,019 million | +27% |
Cost of sales was Ps. 39,968 million, or 72% of sales, compared with 81% in 2020. Income tax expense was Ps. 4,390 million, resulting in an effective tax rate of 31.7%. Interest expense was Ps. 87 million. The financial statements report short-term debt of Ps. 6.2 million, representing approximately U.S.$0.3 million of legacy 10.5% medium-term notes that matured in 1998 and remain outstanding. The filing states that the company does not generally use bank loans or other financing transactions.
Material changes versus the prior comparable period
- Average steel prices increased approximately 51%, while shipments increased 2.5%; the combination drove the significant increase in sales and margins.
- Sales increased in all principal segments: Mexico to Ps. 29,678 million from Ps. 19,661 million, the United States to Ps. 8,217 million from Ps. 5,549 million, and Brazil to Ps. 17,726 million from Ps. 10,659 million.
- Mexico generated Ps. 5,245 million of net income, Brazil Ps. 3,722 million and the United States Ps. 716 million. The U.S. segment improved from approximately break-even net income in 2020 and returned to positive gross profit.
- Operating cash flow increased substantially, and cash more than doubled despite Ps. 1,066 million of capital expenditures and Ps. 162 million of financing cash outflows.
- Raw-material pressure remained significant. Scrap prices increased approximately 62% in 2021 and ferroalloy prices increased approximately 33%, according to the filing. Energy costs also remained exposed to market volatility.
- The company acquired fixed assets for a wire-production plant in Silao, Guanajuato, for approximately U.S.$10 million and continued improvements at its facilities.
Guidance, outlook, risks, contingencies and unusual items
- Management reported that first-quarter 2022 net sales increased 17% versus the fourth quarter of 2021, finished-steel volumes increased 13% and selling prices increased approximately 3%. No broader formal earnings guidance was provided.
- The filing estimates 2022 capital expenditures at approximately Ps. 56,412.7 million, including Ps. 56,069 million attributed to Brazil. These figures appear internally inconsistent with the filing’s other financial data and should be verified against the original filing or subsequent disclosures.
- Management expects to prioritize higher-margin and value-added products, cost reduction, customer relationships and disciplined organic or acquisition-led growth. The company expects cash generated from operations to fund currently anticipated requirements and capital expenditures.
- Grupo Simec has material weaknesses in internal control over financial reporting, principally involving IT monitoring, access controls, disaster recovery and business continuity. Additional weaknesses relate to complex accounting and tax matters in Brazil. Management concluded that internal controls were not effective, and the independent auditor issued an adverse opinion on their effectiveness, although the auditor issued an unqualified opinion on the consolidated financial statements.
- A preliminary 66.7% U.S. dumping rate was imposed on certain Mexican rebar exports. The company is challenging the determination, and the filing states that the outcome could not be predicted as of May 11, 2022. A separate 4.93% rate resulted in a U.S.$189,000 payment in March 2022.
- Environmental matters include ongoing remediation uncertainty at Pacific Steel’s California site. The company maintains an environmental reserve of approximately Ps. 51 million, but the ultimate cost and timing of the remediation plan remain unclear.
- An Ohio sales-and-use-tax assessment remains under appeal. The company has not recorded a provision because the outcome is uncertain. Canadian tax matters were resolved favorably during 2021.
- The Lorain, Ohio facility remains substantially idled. Management has no near-term plan to restart the main facility, although selected rolling equipment is being recommissioned. The company continues to carry substantial coke inventory and property associated with Lorain.
- Major risks include steel-cycle volatility, excess global capacity, inability to pass through scrap and energy costs, customer concentration, automotive and construction demand, labor disruptions, tariffs and trade remedies, foreign-exchange fluctuations, environmental liabilities, cybersecurity and potential impairment charges.
- Dividends have not been consistent. Management does not currently expect additional dividends in the near future because cash is intended for expansion and working capital.
Most important facts for an investor to verify
- Reconcile the reported 2022 capital-expenditure estimate, particularly the unusually large Brazil amount.
- Review remediation plans, reserves and potential exposure for the Pacific Steel environmental matter and other U.S. facilities.
- Monitor the appeal and financial impact of the 66.7% U.S. dumping-rate determination.
- Assess whether the identified IT, disaster-recovery and accounting-control weaknesses have been remediated and whether the auditor’s internal-control opinion improves.
- Evaluate the sustainability of 2021 margins if steel prices decline or scrap, ferroalloy and energy costs remain elevated.
- Verify the status and economics of the idled Lorain facility, including potential restart costs and the recoverability of related assets and inventory.
- Review related-party receivables, including approximately Ps. 1,718 million of long-term receivables and loans, and the terms of transactions with Industrias CH and affiliates.
- Consider governance and liquidity implications of Industrias CH’s controlling ownership, related-party transactions and the limited public float.