Ternium S.A. Q2 2019 Financial Summary
Business Context and Reporting Period
This Form 6-K filing summarizes Ternium S.A.'s press release announcing results for the second quarter and first half of 2019, ended June 30, 2019. Ternium is Latin America's leading flat steel producer with operations in Mexico, Brazil, Argentina, Colombia, and the southern United States. Financial statements are prepared in accordance with IFRS (IAS 34) and presented in US dollars.
Key Financial Metrics
| Metric | 2Q 2019 | 1H 2019 | 2Q 2018 | 1H 2018 |
|---|---|---|---|---|
| Net Sales ($ million) | 2,813.4 | 5,598.7 | 3,022.4 | 5,819.4 |
| Operating Income ($ million) | 238.3 | 545.7 | 570.5 | 1,016.7 |
| EBITDA ($ million) | 410.0 | 883.6 | 724.9 | 1,328.4 |
| EBITDA Margin | 14.6% | 15.8% | 24.0% | 22.8% |
| Net Income ($ million) | 205.7 | 429.9 | 289.3 | 665.9 |
| Equity Holders' Net Income ($ million) | 181.1 | 398.9 | 293.7 | 632.5 |
| Earnings per ADS ($) | 0.92 | 2.03 | 1.50 | 3.22 |
| Free Cash Flow ($ million) | (4.2) | 264.4 | N/A | N/A |
| Net Debt ($ billion) | 1.7 | 1.7 | N/A | N/A |
| Capital Expenditures ($ million) | 273.9 | 485.1 | 131.9 | 229.6 |
Material Changes vs. Prior Periods
- Revenue Decline: Net sales decreased 7% year-over-year (YoY) in Q2 and 4% YoY in 1H 2019, driven primarily by lower realized steel prices in Mexico and Other Markets.
- Profitability Compression: Operating income fell 58% YoY in Q2 and 46% YoY in 1H. EBITDA dropped 43% YoY in Q2 and 33% YoY in 1H due to lower margins and higher operating costs per ton.
- Volume Trends: Steel shipments were flat YoY in Q2 (+0%) but down 4% YoY in 1H. Mexico shipments declined 9% in Q2 and 10% in 1H due to a soft commercial market. Southern Region shipments fell 16% in Q2 and 24% in 1H due to weaker demand and destocking. Conversely, "Other Markets" shipments increased 26% in Q2 and 17% in 1H, driven by higher slab sales to third parties.
- Cost Pressures: Operating costs per ton increased due to higher raw material, energy, transportation, and tax costs, partially offset by lower labor costs.
- Financial Results: Net financial results improved significantly, with losses narrowing from $101.5 million in Q2 2018 to $5.5 million in Q2 2019, reflecting lower average indebtedness and interest rates.
Guidance, Outlook, and Risks
- Q3 Outlook: Management expects EBITDA to decrease in Q3 2019 compared to Q2 2019. This is attributed to steel margins below historical long-term trends and lower shipments, specifically a sequential drop in low-margin slab sales to third parties.
- Regional Outlook:
- Mexico: Shipments expected to gradually recover in H2 2019 to levels higher than H2 2018. Realized prices are expected to decrease in Q3 due to contract price resets reflecting the Q2 downturn, partially offset by a rebound in commercial market prices.
- Argentina: Anticipates a sequential increase in steel shipments in Q3 due to domestic market improvement.
- Risks: Forward-looking statements are subject to risks including GDP uncertainty, market demand fluctuations, global production capacity, tariffs, and industry cyclicality. Currency fluctuations (Mexican peso, Brazilian real, Argentine peso) continue to impact financial results.
Investor Verification Checklist
- Margin Sustainability: Verify the trajectory of steel prices in Mexico and Argentina to assess if the projected Q3 margin compression will persist into H2.
- Volume Recovery: Monitor Mexico and Southern Region shipment volumes to confirm the anticipated recovery in the second half of the year.
- Cost Control: Review raw material and energy cost trends to determine if operating cost per ton increases can be mitigated.
- Currency Exposure: Assess the impact of local currency appreciation/depreciation (MXN, BRL, ARS) on future financial results and tax provisions.
- Capital Allocation: Confirm the progress of the investment program (CapEx) in Pesquería, Colombia, and mining operations against the reported $485.1 million spend for 1H 2019.