Ternium S.A. Form 6-K Summary: Fourth Quarter and Full Year 2019 Results
Business Context and Reporting Period
This filing reports the fourth quarter and full-year 2019 results for Ternium S.A., Latin America's leading flat steel producer. The reporting period covers operations through December 31, 2019, with results prepared under IFRS and presented in US dollars. The company operates facilities in Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America.
Key Financial Metrics
| Metric | FY 2019 | FY 2018 | 4Q 2019 | 4Q 2018 |
|---|---|---|---|---|
| Net Sales ($ million) | 10,192.8 | 11,454.8 | 2,250.0 | 2,636.1 |
| Operating Income ($ million) | 864.6 | 2,108.4 | 92.2 | 382.7 |
| EBITDA ($ million) | 1,525.7 | 2,697.7 | 263.1 | 512.8 |
| EBITDA Margin (%) | 15.0% | 23.6% | 12.0% | 19.0% |
| Net Income ($ million) | 630.0 | 1,662.1 | 89.9 | 435.4 |
| Net Income to Equity Holders ($ million) | 564.3 | 1,506.6 | 70.5 | 350.6 |
| Earnings per ADS ($) | 2.87 | 7.67 | 0.36 | 1.79 |
| Free Cash Flow ($ million) | 595.4 | N/A | 85.5 | N/A |
| Net Debt ($ million) | 1,500.0 | N/A | 1,500.0 | N/A |
| Net Debt / LTM EBITDA | 1.0x | N/A | N/A | N/A |
| Capital Expenditures ($ million) | 1,052.3 | 520.3 | 307.4 | 173.8 |
Material Changes vs. Prior Period
- Revenue Decline: Full-year net sales decreased 11% to $10.2 billion, driven by an 8% drop in revenue per ton and a 3% decrease in steel shipments. The decline was primarily due to weaker steel prices in North American markets compared to the strong pricing environment of 2018.
- Profitability Compression: Operating income fell 59% year-over-year to $864.6 million. The 4Q 2019 operating income dropped 76% compared to 4Q 2018, reflecting lower revenue per ton and seasonally weak shipments.
- Volume Trends: Steel shipments decreased 3% for the full year (12.5 million tons). Mexico shipments fell 4% and the Southern Region (Argentina) fell 16%, partially offset by a 4% increase in "Other Markets" due to higher slab sales.
- Cost Dynamics: Operating costs per ton increased by $30 for the full year due to higher raw material and energy costs, though 4Q 2019 saw a year-over-year cost decrease due to lower purchased slab and raw material costs.
- Financial Results: Net financial results improved to a $99.0 million loss in 2019 from a $179.6 million loss in 2018, aided by lower average indebtedness and reduced foreign exchange losses.
Outlook, Guidance, and Risks
- 2020 Outlook: Management expects steel demand to recover in Brazil and Colombia, with a lesser recovery in the US and Mexico. Steel price volatility is anticipated to decrease as trade negotiation uncertainty moderates.
- Q1 2020 Guidance: Ternium expects EBITDA to increase in Q1 2020 compared to Q4 2019, driven by higher shipments and margin recovery from slightly lower costs. Mexico shipments are expected to increase seasonally.
- Argentina Specifics: Shipments in Argentina are expected to seasonally decrease in Q1 2020. The macroeconomic environment remains highly dependent on the normalization of public debt. Notably, Ternium Argentina changed its functional currency from the Argentine Peso to the US Dollar effective January 1, 2020.
- Dividend Proposal: The Board proposed an annual dividend of $0.12 per share ($1.20 per ADS), totaling approximately $235.6 million, subject to shareholder approval.
- Risks: Key risks include GDP uncertainty, market demand fluctuations, global production capacity, tariffs, and cyclicality in downstream industries.
Investor Verification Checklist
- Verify the impact of the functional currency change for Ternium Argentina (effective Jan 1, 2020) on future financial reporting and translation adjustments.
- Confirm the sustainability of the projected Q1 2020 margin recovery given the lagged effect of contract pricing in North America.
- Monitor the execution of the $1.1 billion capital expenditure program, specifically the new hot-rolling and galvanizing capacity in Pesquería and the new mill in Colombia.
- Assess the sensitivity of results to further fluctuations in the Argentine and Mexican pesos against the US dollar, particularly regarding the short net monetary position.
- Review the approval status of the proposed $235.6 million annual dividend at the April 27, 2020 shareholders' meeting.