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Ternium S.A. Q3 2018 Results Summary

Business Context and Reporting Period

This Form 6-K filing reports Ternium S.A.'s unaudited financial results for the third quarter and first nine months ended September 30, 2018. Ternium is Latin America's leading flat steel producer with operations in Mexico, Brazil, Argentina, Colombia, and the southern United States. The financial statements are prepared in accordance with IFRS (IAS 34) and presented in US dollars. Notably, the company applied IAS 29 (hyperinflationary accounting) to its Argentine subsidiaries starting July 1, 2018, adjusting prior quarter figures.

Key Financial Metrics

Material Changes vs. Prior Periods

• Revenue Growth: Net sales increased 15% year-over-year (YoY) in Q3 and 23% for the first nine months (9M), driven by higher realized steel prices in Mexico and "Other Markets" (primarily Brazil consolidation) and increased shipment volumes.
• Profitability Surge: Operating income rose 97% YoY in Q3 and 54% for 9M. EBITDA increased 78% YoY in Q3 and 50% for 9M, reflecting improved margins (28.6% in Q3 vs. 18.4% in Q3 2017) and lower operating costs per ton.
• Volume Dynamics: Steel shipments decreased 5% sequentially in Q3 (3.14M tons) due to lower demand in Mexico and the Southern Region, though they increased 2% YoY. For the 9M period, shipments grew 22% YoY, largely due to the consolidation of Ternium Brasil.
• Financial Expenses: Net financial results showed a loss of USD 112.6 million in Q3, significantly higher than the USD 28.8 million loss in Q3 2017. This was driven by a USD 99.0 million foreign exchange loss, primarily due to the 30% depreciation of the Argentine peso and the appreciation of the Mexican peso.
• Tax Impact: The effective tax rate in Q3 2018 was unusually low at 13% (vs. 31% in Q3 2017) due to a non-cash gain on deferred taxes resulting from the Mexican peso's appreciation.

Guidance, Outlook, and Risks

• Q4 Outlook: Management expects EBITDA to remain healthy but lower than the record Q3 levels. Steel shipments are anticipated to decrease slightly due to seasonality and reduced slab sales to third parties (specifically the US).
• Regional Risks:
  • Mexico: Commercial markets remain weak; revenue per ton is expected to decline sequentially due to lower steel prices, while costs may rise due to higher purchased slab prices flowing through.
  • Argentina: High interest rates and financial market volatility continue to negatively impact industrial production and construction, leading to lower steel demand and shipments.
• Contingencies: The application of IAS 29 for Argentine subsidiaries introduces volatility in reported figures due to inflation adjustments and currency fluctuations.

Investor Verification Checklist

• IAS 29 Impact: Verify the specific adjustments made to prior quarters and the ongoing impact of Argentine inflation on reported earnings and deferred taxes.
• FX Sensitivity: Assess the exposure to Argentine peso depreciation and Mexican peso appreciation, which significantly impacted Q3 net financial results and tax rates.
• Debt Reduction: Confirm the trajectory of net debt reduction (down to USD 2.1 billion) and the sustainability of free cash flow generation (USD 340.0 million in Q3) amidst capital expenditure plans.
• Brazil Consolidation: Review the contribution of Ternium Brasil to the 22% volume increase in 9M 2018 and its integration status.
• Cost Pass-Through: Monitor the ability to pass through higher raw material costs (slabs, scrap, coal) to customers in Mexico and other markets to maintain margins.