Ternium S.A. Q1 2017 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s results for the first quarter ended March 31, 2017. Ternium is a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the southern United States, and Guatemala. The financial data is presented in U.S. dollars in accordance with IFRS.
Key Financial Metrics
| Metric | 1Q 2017 | 1Q 2016 | 4Q 2016 |
|---|---|---|---|
| Net Sales (USD million) | 2,040.1 | 1,655.5 | 1,849.6 |
| Operating Income (USD million) | 364.2 | 202.4 | 246.7 |
| EBITDA (USD million) | 464.8 | 303.0 | 350.6 |
| EBITDA Margin | 22.8% | 18.3% | 19.0% |
| Net Income (USD million) | 310.4 | 123.6 | 144.8 |
| Net Income to Equity Holders (USD million) | 261.3 | 94.4 | 118.4 |
| Earnings per ADS (USD) | 1.33 | 0.48 | 0.60 |
| Steel Shipments (tons) | 2,475,000 | 2,431,000 | 2,378,000 |
| Net Debt (USD billion) | 0.9 | N/A | 0.9 |
| Free Cash Flow (USD million) | 1.9 | N/A | N/A |
Material Changes vs. Prior Periods
- Revenue Growth: Net sales increased 23% year-over-year (YoY) and 10% sequentially, driven by a 21% increase in revenue per ton and a 2% increase in steel shipments.
- Profitability: Operating income rose 80% YoY and 48% sequentially. EBITDA increased 53% YoY, with EBITDA per ton rising to $187.8 from $124.7 in 1Q 2016.
- Regional Performance: Mexico contributed significantly to growth with a 31% increase in net sales and 4% increase in shipments. The Southern Region saw a 10% sales increase despite a 2% shipment decline.
- Cost Structure: Operating costs per ton increased 15% YoY due to higher raw material, energy, and purchased slab costs, partially offset by higher realized steel prices.
- Financial Results: Net financial results were a loss of $39.9 million, worsened by a $41.7 million foreign exchange loss due to the Mexican peso's 10% appreciation against the USD.
Outlook, Risks, and Management Commentary
- Q2 Guidance: Management anticipates further growth in shipments in Q2 2017, driven by industrial demand in Mexico (automotive, appliances) and restocking in construction. Argentina shipments are expected to increase sequentially and YoY.
- Margin Outlook: Operating income is expected to remain strong in Q2, though operating margins may decline slightly due to higher cost per ton (slab and coal prices) partially offset by higher revenue per ton.
- Cash Flow: Working capital increased by $317.8 million, primarily due to higher inventory values and receivables. Free cash flow was $1.9 million in Q1.
- Risks: Forward-looking statements are subject to risks including GDP uncertainty, market demand fluctuations, global production capacity, tariffs, and industry cyclicality.
Key Facts for Investor Verification
- Tax Rate Impact: The effective tax rate dropped to 10% (from 32% in 1Q 2016) largely due to a non-cash deferred tax gain from the Mexican peso revaluation; verify the sustainability of this rate.
- Foreign Exchange Exposure: Confirm the company's hedging strategy regarding the Mexican peso, as a 10% appreciation caused a $41.7 million FX loss.
- Cost Pass-Through: Monitor the ability to pass through rising raw material and slab costs to customers to maintain margins in Q2.
- Working Capital: Review the $317.8 million increase in working capital, specifically the $232.9 million rise in inventories, to ensure it aligns with sales growth and does not signal overstocking.