Ternium S.A. Q1 2020 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s unaudited results for the first quarter ended March 31, 2020. Ternium is Latin America's leading flat steel producer with operations in Mexico, Brazil, Argentina, Colombia, and the southern United States. The quarter was significantly impacted by the onset of the COVID-19 pandemic, leading to mandatory lockdowns in Argentina and Colombia and reduced demand in Mexico, particularly from the automotive sector.
Key Financial Metrics
| Metric | 1Q 2020 | 1Q 2019 | 4Q 2019 |
|---|---|---|---|
| Net Sales ($ million) | 2,271.4 | 2,735.8 | 2,250.0 |
| Operating Income ($ million) | 135.7 | 307.3 | 92.2 |
| EBITDA ($ million) | 302.1 | 470.0 | 263.1 |
| EBITDA Margin | 13% | 17% | 12% |
| Net Result ($ million) | (19.4) | 224.9 | 89.9 |
| Net Result to Equity Holders ($ million) | (11.6) | 218.2 | 70.5 |
| Earnings per ADS ($) | (0.06) | 1.11 | 0.36 |
| Free Cash Flow ($ million) | 185.2 | 265.6 | N/A |
| Net Debt ($ billion) | 1.3 | N/A | N/A |
| Net Debt / LTM EBITDA | 0.9x | N/A | N/A |
Steel shipments totaled 2,998,000 tons, a 6% decrease year-over-year but a 3% increase sequentially. Iron ore shipments increased 8% year-over-year to 993,000 tons.
Material Changes vs. Prior Period
- Revenue Decline: Net sales fell 17% year-over-year to $2.27 billion, driven by a 11% drop in revenue per ton and a 6% decrease in steel shipment volumes.
- Profitability Pressure: Operating income dropped 56% year-over-year to $135.7 million. EBITDA declined 36% to $302.1 million, though it improved 15% sequentially due to lower raw material and energy costs.
- Net Loss: The company reported a net loss of $19.4 million, compared to a profit of $224.9 million in 1Q 2019. This was primarily due to a $189.1 million non-cash deferred tax loss resulting from a 20% depreciation of the Mexican peso.
- Financial Gains: Net financial results swung from a $26.9 million loss in 1Q 2019 to a $106.2 million gain in 1Q 2020, largely due to foreign exchange gains from the depreciation of the Mexican peso and Brazilian real against the US dollar.
Outlook, Risks, and Management Commentary
- Guidance: Management expects a reduction in EBITDA for the second quarter of 2020, citing significant shipment decreases in main markets and a moderately lower EBITDA margin compared to Q1.
- Operational Impact: Lockdowns in Argentina and Colombia have forced operations to technical minimums or ceased production for non-essential sectors. In Mexico, demand from the automotive industry has weakened significantly.
- Capital Expenditures: To preserve liquidity, the company has delayed the startup of its new hot-rolling mill in Pesquería, Mexico, to the first half of 2021 and the new steel bar and coil mill in Colombia to the second half of 2020.
- Dividends: The Board of Directors withdrew the previously announced annual dividend proposal for fiscal year 2019 due to economic uncertainty.
- Risks: Key risks include the duration and severity of government-mandated lockdowns, continued volatility in steel prices, and currency fluctuations.
Investor Verification Checklist
- Verify the sustainability of the $106.2 million foreign exchange gain and its impact on future earnings if currency rates stabilize.
- Confirm the timeline for the delayed capital projects (Pesquería and Palmar de Varela) and their impact on future capacity.
- Monitor the recovery of the automotive sector in Mexico, which is a primary driver of demand.
- Assess the company's ability to maintain liquidity given the withdrawal of the 2019 dividend and reduced cash flow expectations for Q2.
- Review the specific impact of the 20% Mexican peso depreciation on the $189.1 million deferred tax charge and whether this is a one-time or recurring item.