Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 6-K (Furnishing of 2017 Annual Report)
Reporting Period: Year ended December 31, 2017
Business Overview: Ternium is Latin America's leading flat steel producer with an annual crude steel production capacity of 12.4 million tons. Operations span Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America. The company also participates in the control group of Usiminas, a major Brazilian steel producer.
Key Financial Metrics (2017)
| Metric | 2017 Value | 2016 Value | Change |
|---|---|---|---|
| Net Sales | $9,700.3 million | $7,224.0 million | +34% |
| Operating Income | $1,456.8 million | $1,141.7 million | +28% |
| EBITDA | $1,931.1 million | $1,548.6 million | +25% |
| Net Income (Parent) | $886.2 million | $595.6 million | +49% |
| EPS (ADS) | $4.51 | $3.03 | +49% |
| Steel Shipments | 11.6 million tons | 9.8 million tons | +19% |
| Capital Expenditures | $409.4 million | $435.5 million | -6% |
| Free Cash Flow | ($25.5) million | $664.1 million | N/A |
| Net Financial Debt | $2,748.3 million | $884.3 million | +211% |
| Debt/EBITDA Ratio | 1.4x | 0.6x | N/A |
Material Changes vs. Prior Period
- Acquisition of Ternium Brasil: The primary driver of growth was the acquisition of thyssenkrupp's slab production facilities in Brazil (Ternium Brasil) in September 2017. This added 1.4 million tons to shipments and significantly increased revenue and debt.
- Regional Performance:
- Mexico: Shipments reached a record 6.6 million tons (+3%), driven by automotive and industrial sectors.
- Southern Region (Argentina): Shipments rose 11% to 2.3 million tons, reflecting economic recovery.
- Other Markets: Shipments surged 121% due to the consolidation of Ternium Brasil.
- Cost Structure: Cost of sales increased $2.0 billion, primarily due to higher raw material costs (slabs, scrap, coal) and volume increases. Operating margin decreased slightly to 15.0% from 15.8% in 2016.
- Cash Flow: Free cash flow turned negative ($25.5 million) compared to a positive $664.1 million in 2016, largely due to the $1.6 billion cash outflow for the Brazil acquisition and increased working capital requirements.
Guidance, Outlook, and Risks
- Investment Plans: Management announced a $1.1 billion investment plan in Mexico for a new hot-rolling mill (4.1 million tons capacity) and a $90 million investment in Colombia for a new rebar facility.
- Dividend Proposal: The Board proposed an annual dividend of $1.10 per ADS (up from $1.00), reflecting improved financial results.
- Usiminas Governance: A new governance agreement was reached with Nippon Steel & Sumitomo Metal Corporation (NSSMC) regarding Usiminas, including an exit mechanism and alternating CEO/Chairman nominations.
- Key Risks:
- Trade Policy: Exposure to US Section 232 tariffs (25% on steel imports) and potential retaliatory measures. Ternium is exempt from US tariffs but faces risks from unfair trade practices and import restrictions in other markets.
- Currency Volatility: Significant exposure to fluctuations in the Mexican peso, Argentine peso, and Brazilian real against the US dollar.
- Commodity Prices: Sensitivity to global steel prices and input costs (iron ore, scrap, energy).
Investor Verification Checklist
- Debt Servicing: Verify the sustainability of the increased net financial debt ($2.7 billion) and the 1.4x EBITDA leverage ratio in the context of future capital expenditure plans.
- Integration Synergies: Monitor the integration progress of the Ternium Brasil acquisition and the realization of expected cost savings and volume synergies.
- Trade War Impact: Assess the potential impact of US Section 232 tariffs on Ternium's export markets and the stability of the North American trade environment (NAFTA renegotiations).
- Usiminas Performance: Track the financial recovery and governance stability of Usiminas following the new agreement with NSSMC.
- Working Capital: Review the trend in working capital requirements, which increased significantly in 2017 due to inventory build-up and higher unit costs.