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, 2023. Ternium is a leading steel producer in the Americas, with operations primarily in Mexico, Brazil, Argentina, and Colombia. A significant corporate development in 2023 was the full consolidation of Usiminas, a major Brazilian flat steel producer, beginning in July 2023 following an increase in Ternium's participation in the Usiminas control group to 51.5%.
Key Financial Metrics
| Metric ($ million) | 2023 | 2022 |
|---|---|---|
| Net Sales | 17,610 | 16,414 |
| Operating Income | 2,198 | 2,700 |
| Adjusted EBITDA | 2,740 | 3,415 |
| Net Income | 986 | 2,093 |
| Adjusted Net Income | 2,092 | 2,093 |
| Free Cash Flow | 1,040 | 2,172 |
| Capital Expenditures | 1,461 | 581 |
| Total Borrowings | 2,146 | 1,032 |
| Net Cash Position | 1,886 | 2,597 |
Note: Adjusted metrics exclude non-cash effects related to the Usiminas consolidation and other specific items. Net Cash is defined as cash and cash equivalents plus other investments less borrowings.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7% to $17.6 billion, driven by a 19% increase in steel shipments (14.2 million tons) and the inclusion of Usiminas volumes. However, revenue per ton decreased 12% due to lower realized steel prices in key markets.
- Profitability Decline: Operating income fell 19% to $2.2 billion, and Adjusted EBITDA declined 20% to $2.7 billion. Margins compressed from 21% to 16% due to lower steel prices, partially offset by reduced raw material and energy costs.
- Usiminas Consolidation Impact: The full consolidation of Usiminas in July 2023 resulted in a $1.1 billion non-cash net loss recorded in 2023. This comprised a $935 million recycling of currency translation adjustments (CTA) and a $171 million remeasurement loss. Excluding this item, Adjusted Net Income remained flat at $2.09 billion compared to 2022.
- Balance Sheet Expansion: Total assets grew to $24.2 billion from $17.5 billion, and total borrowings increased to $2.1 billion, largely due to the acquisition of Usiminas' debt. Despite higher debt, the company maintained a net cash position of $1.9 billion.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Dividend Proposal: The Board proposed a record annual dividend of $3.30 per ADS (a 22% increase over 2022), subject to shareholder approval in April 2024.
- Investment Strategy: Ternium is advancing a $3.5 billion expansion in Pesquería, Mexico, including a new EAF-based steel shop and DRI module expected to start operations in 2026. This aims to meet USMCA "melted and poured" requirements and support decarbonization.
- Regional Outlook:
- Mexico: Expected to see moderate demand growth supported by nearshoring and infrastructure spending.
- Argentina: A new government administration is expected to introduce macroeconomic reforms that may cause a recessionary effect in the first half of 2024, negatively impacting local shipments. Foreign exchange restrictions continue to limit raw material imports.
- Brazil: Usiminas' main blast furnace is expected to stabilize in the first half of 2024, improving productivity. The market faces challenges from low-priced steel imports, primarily from China.
Risks and Contingencies
- Argentina Exchange Controls: Restrictions on accessing the foreign exchange market limit Ternium Argentina's ability to import raw materials and repatriate cash. The company holds approximately $1.1 billion in Argentine assets, including sovereign bonds, which are subject to valuation volatility due to currency devaluation.
- Legal Contingency (CSN Litigation): A lawsuit by Companhia Siderúrgica Nacional (CSN) regarding a tender offer for Usiminas shares remains pending at the Superior Court of Justice. While Ternium believes the claims are groundless, a ruling against the company could result in an indemnification of approximately $0.9 billion.
- Operational Risks: Mining operations in Mexico face security challenges and community disputes. Climate change regulations and carbon pricing mechanisms in Mexico, Argentina, and Brazil may increase production costs.
Key Facts for Investor Verification
- Usiminas Consolidation Accounting: Verify the treatment of the $1.1 billion non-cash loss and the impact on future currency translation adjustments now that Usiminas is fully consolidated.
- Argentina Liquidity: Assess the realizable value of the $1.1 billion in Argentine assets and the potential impact of ongoing foreign exchange restrictions on cash flow repatriation.
- CSN Litigation Status: Monitor the progress of the CSN lawsuit at the Superior Court of Justice, as a negative outcome could materially impact net worth.
- Capital Expenditure Execution: Track the progress and cost overruns of the $3.5 billion Pesquería expansion project, which is critical for meeting USMCA requirements and future growth.
- Dividend Sustainability: Evaluate the ability to sustain the proposed record dividend of $3.30 per ADS given the compressed operating margins and high capital expenditure requirements.