Ternium S.A. Q1 2019 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s unaudited financial results for the first quarter ended March 31, 2019. Ternium is Latin America's leading flat steel producer with operations in Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America. The results are presented in accordance with International Financial Reporting Standards (IFRS) in US dollars.
Key Financial Metrics
| Metric | 1Q 2019 | 4Q 2018 | 1Q 2018 |
|---|---|---|---|
| Net Sales ($ million) | 2,737.6 | 2,636.1 | 2,797.0 |
| Operating Income ($ million) | 307.3 | 382.7 | 446.2 |
| EBITDA ($ million) | 470.2 | 512.8 | 603.5 |
| EBITDA Margin | 17.2% | 19.5% | 21.6% |
| Net Income ($ million) | 224.9 | 435.4 | 376.7 |
| Equity Holders' Net Income ($ million) | 218.2 | 350.6 | 338.9 |
| Earnings per ADS ($) | 1.11 | 1.79 | 1.73 |
| Free Cash Flow ($ million) | 268.7 | N/A | N/A |
| Net Debt ($ billion) | 1.5 | 1.8 | N/A |
| Net Debt / LTM EBITDA | 0.6x | N/A | N/A |
| Capital Expenditures ($ million) | 209.8 | 164.6 | 97.7 |
Material Changes vs. Prior Periods
- Sequential (vs. 4Q 2018): Operating income decreased 20% to $307.3 million, driven by a $35 decrease in steel revenue per ton, partially offset by a 241,000-ton increase in steel shipments. EBITDA declined 8% to $470.2 million. Net income dropped significantly to $224.9 million, impacted by lower operating income, weaker financial results, and the absence of a non-recurrent $104.1 million tax gain recorded in the prior quarter.
- Year-Over-Year (vs. 1Q 2018): Operating income fell 31% to $307.3 million. This decline was primarily due to a $91 increase in operating cost per ton (higher raw material, slab, and maintenance costs) and a 318,000-ton decrease in steel shipments. Net sales decreased 2% to $2.7 billion. Net income decreased 40% to $224.9 million.
- Regional Performance: Mexico shipments decreased 12% year-over-year due to a weaker commercial market. Southern Region shipments dropped 31% due to lower demand in Argentina and destocking. Other Markets shipments increased 9% due to higher slab shipments to third parties.
Outlook, Risks, and Management Commentary
- Guidance: Management expects EBITDA to decrease slightly in Q2 2019 compared to Q1 2019 due to lower, normalizing steel margins, partially offset by moderately higher shipments.
- Market Outlook: In Mexico, realized steel prices are anticipated to decline further in Q2 due to delayed contract price resets reflecting the downturn from July 2018 to January 2019. Demand is expected to remain steady in the industrial sector but sluggish in the commercial/construction sector. In Argentina, shipments are expected to increase sequentially in Q2 as the local market recovers and destocking concludes.
- Risks: Key risks include global production capacity, tariffs, cyclicality in steel-consuming industries, and currency fluctuations (specifically the Argentine peso and Mexican peso against the US dollar).
- Unusual Items: Q4 2018 results included a non-recurrent tax gain of $104.1 million related to a tax asset revaluation in Argentina, which inflated the prior quarter's net income and effective tax rate comparisons.
Investor Verification Checklist
- Verify the impact of the $91 increase in steel operating cost per ton on future margin recovery.
- Confirm the extent of destocking in the Argentine value chain and its timeline for normalization.
- Monitor the realization of steel prices in Mexico following the Q2 contract price resets.
- Assess the sustainability of the 0.6x net debt to LTM EBITDA ratio given the current cash flow generation.
- Review the specific currency hedging strategies employed to mitigate exposure to the Argentine peso and Mexican peso.