Ternium S.A. Q2 2018 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s unaudited financial results for the second quarter and first half of 2018, ending June 30, 2018. Ternium is Latin America's leading flat steel producer with operations in Mexico, Brazil, Argentina, Colombia, and the southern United States. The results reflect the full consolidation of Ternium Brasil, acquired in September 2017, and the application of IAS 29 for hyperinflationary accounting in Argentina effective July 1, 2018.
Key Financial Metrics
| Metric | 2Q 2018 | 1H 2018 | 2Q 2017 | 1H 2017 |
|---|---|---|---|---|
| Net Sales (USD million) | 3,134.0 | 6,095.3 | 2,322.7 | 4,397.8 |
| Operating Income (USD million) | 650.3 | 1,173.4 | 392.8 | 757.0 |
| EBITDA (USD million) | 787.6 | 1,452.7 | 497.9 | 962.6 |
| EBITDA Margin | 25.1% | 23.8% | 21.4% | 21.9% |
| Net Income (USD million) | 337.8 | 759.9 | 281.8 | 592.2 |
| EPS per ADS (USD) | 1.66 | 3.53 | 1.27 | 2.60 |
| Free Cash Flow (USD million) | 414.6 | 504.3 | N/A | N/A |
| Net Debt (USD billion) | 2.4 | 2.4 | N/A | N/A |
| Net Debt/EBITDA | 1.0x | N/A | N/A | N/A |
Material Changes vs. Prior Periods
- Revenue Growth: Net sales increased 35% year-over-year (YoY) in Q2 and 39% for the first half, driven by a 26% increase in steel shipments and higher realized prices. The consolidation of Ternium Brasil significantly boosted volumes in the "Other Markets" segment.
- Profitability: Operating income rose 66% YoY in Q2. EBITDA per ton increased to $237.1 in Q2 2018 from $188.5 in Q2 2017, reflecting strong pricing power despite higher raw material costs.
- Sequential Decline: Q2 2018 net income ($337.8M) decreased 20% sequentially from Q1 2018 ($422.1M). This was primarily due to higher net financial expenses and a higher effective tax rate caused by foreign exchange fluctuations, partially offset by higher operating income.
- Cost Pressures: Operating costs per ton increased due to higher raw material and purchased slab costs, though this was largely offset by revenue increases.
Outlook, Risks, and Management Commentary
- Outlook: Management expects strong EBITDA levels in Q3 2018 with healthy margins, despite anticipating lower shipments in Mexico (due to construction weakness) and Argentina (due to softening demand from currency depreciation and high interest rates).
- Trade Risks: The filing highlights significant uncertainty regarding US Section 232 trade measures, which have disrupted global trade flows and created a wide price gap between US and non-US markets. Sustainability of current price levels is uncertain.
- Foreign Exchange: Significant volatility in the Argentine peso (30% depreciation in Q2) and Mexican peso impacted financial results through non-cash foreign exchange losses and changes in deferred tax liabilities.
- Capital Allocation: Capital expenditures were $135.5M in Q2. The company maintained a strong liquidity position, reducing net debt to $2.4 billion (1.0x EBITDA) and paying $244.9M in dividends.
Investor Verification Checklist
- Argentina Accounting: Verify the impact of the new IAS 29 hyperinflationary accounting standard applied to Argentine subsidiaries starting July 1, 2018.
- FX Sensitivity: Assess the exposure to Argentine and Mexican peso volatility, which drove significant non-cash losses and tax rate fluctuations in Q2.
- US Trade Policy: Monitor the sustainability of steel prices and trade flows given the disruption caused by US Section 232 tariffs.
- Debt Metrics: Confirm the net debt position of $2.4 billion and the leverage ratio of 1.0x EBITDA against future cash flow projections.
- Volume Trends: Track shipment volumes in Mexico and Argentina, which management forecasts to decline in Q3 due to local economic conditions.