Ternium S.A. Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2023, with comparisons to 2022 and 2021. The filing is an annual Form 20-F rather than a standalone quarterly filing; fourth-quarter items are identified where disclosed. Financial statements are prepared under IFRS Accounting Standards and presented in U.S. dollars.
Business context
Ternium is a Latin American steel producer with operations in Mexico, Brazil, Argentina, Colombia, the United States and Central America, and with iron ore mining activities in Mexico and Brazil. In July 2023, Ternium acquired additional shares in Usiminas, increased its participation in the Usiminas control group to 51.5%, and began fully consolidating Usiminas. As a result, 2023 results include Usiminas only from July onward.
Ternium reported three operating segments for 2023: Steel, Mining and Usiminas. Following management’s review in the first quarter of 2024, the company expects to report Steel and Mining as its operating segments beginning in 2024.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $17.610 billion | $16.414 billion | +7% |
| Gross profit | $3.559 billion | $3.927 billion | -9% |
| Operating income | $2.198 billion | $2.700 billion | -19% |
| Operating margin | 12.5% | 16.4% | Down 3.9 percentage points |
| Profit for the year | $986 million | $2.093 billion | -53% |
| Profit attributable to owners | $676 million | $1.768 billion | -62% |
| Basic EPS | $0.34 | $0.90 | -62% |
| Net cash provided by operations | $2.501 billion | $2.753 billion | -9% |
| Capital expenditures and advances | $1.461 billion | $581 million | +152% |
| Cash and cash equivalents | $1.846 billion | $1.653 billion | +12% |
| Total borrowings | $2.146 billion | $1.032 billion | +108% |
| Net cash position | Approximately $1.9 billion | Approximately $2.6 billion | Down $711 million |
Steel product shipments increased 19% to 14.213 million tons, including approximately 2.1 million tons added by the consolidation of Usiminas. Revenue per ton declined 12% to $1,197, reflecting lower realized steel prices, particularly in the USMCA region.
Mexico remained the primary market. Mexican steel shipments increased 22% to 8.355 million tons, while Mexican steel sales increased 5% to $9.311 billion. Southern Region shipments decreased 4%, and sales in Other Markets declined 35%. Consolidated mining product sales were $329 million and included Usiminas mining products following consolidation.
Gross margin declined to approximately 20.2% from 23.9%, primarily because lower steel prices more than offset lower purchased slab, raw material and energy costs. SG&A increased to $1.472 billion from $1.144 billion, partly due to higher freight and transportation costs.
Cash flow, liquidity and debt
- Operating cash flow was $2.501 billion. Working capital provided $321 million, including a $202 million reduction in inventories.
- Investing cash outflow was $1.470 billion, primarily reflecting $1.461 billion of capital expenditures and advances, a $718 million increase in investments with maturities exceeding three months, and the $119 million cash purchase of additional Usiminas shares. Cash acquired with Usiminas was $781 million.
- Financing cash outflow was $766 million, including $569 million of cash dividends, $138 million of net debt repayment and $59 million of lease payments.
- Cash, cash equivalents and other investments totaled approximately $4.0 billion at year-end, against $2.146 billion of borrowings, producing net cash of approximately $1.9 billion.
- Approximately 44% of borrowings were current. Major maturities include the $500 million Ternium Brasil syndicated loan due August 2024 and $750 million of Usiminas bonds due July 2026.
- Ternium reported compliance with all debt covenants and stated that available liquidity and operating cash flow should be sufficient for working capital, debt service, dividends and planned capital expenditures.
Material changes versus the prior comparable period
- Usiminas became fully consolidated in July 2023. The acquisition contributed $2.737 billion of revenue and $129 million of net income from the acquisition date through year-end.
- The Usiminas transaction generated a $171 million net loss from remeasurement and purchase-price allocation and a separate $935 million non-cash recycling loss from accumulated currency translation adjustments. Together, these items reduced 2023 pre-tax income by approximately $1.106 billion and materially depressed reported net income.
- Capital expenditures increased substantially to support the Pesquería expansion in Mexico, Usiminas projects, mining investments and the Argentine wind farm.
- Operating income fell 19%, despite higher volumes, because of lower selling prices and higher SG&A. Net financial results improved to a $123 million gain from a $70 million loss, helped by higher interest income and a $98 million foreign-exchange gain.
- Argentine securities holdings declined in fair value by $555 million during 2023, principally following the December peso devaluation. In the fourth quarter, disposal of Argentine sovereign bonds generated a $58 million loss from recycling accumulated other comprehensive income.
- Ternium recorded a $42 million impairment charge on certain Las Encinas mining assets in the fourth quarter.
Guidance, outlook and management commentary
- Management characterized Mexican market conditions as healthy, supported by nearshoring, strong industrial activity and high automotive production. It noted short-term weakness in commercial construction-related demand due to customer destocking.
- The Pesquería expansion budget was increased from $3.2 billion to approximately $3.5 billion, primarily because of inflation and foreign-exchange effects. The program includes downstream processing lines, a 2.6-million-ton annual-capacity EAF slab mill, a 2.1-million-ton DRI module and a port facility.
- Expected commissioning dates are a pickling line and initial service-center lines in the second half of 2024, a galvanizing line by the end of 2025, a cold-rolling mill in the first half of 2026 and the new slab mill during 2026.
- 2024 capital expenditures are expected to be $1.8 billion to $2.0 billion, including approximately $350 million for Usiminas and advanced payments to equipment manufacturers.
- Ternium targets a 20% reduction in steelmaking carbon-emissions intensity by 2030 from a 2018 baseline and plans to use 40% renewable energy for steel operations by 2030. A 99-megawatt Argentine wind farm is expected to begin operating by year-end 2024 and is expected to replace approximately 90% of Ternium Argentina’s third-party electricity purchases.
- The board proposed a 2023 annual dividend of $0.33 per share, or $3.30 per ADS, including the $0.11 per share interim dividend paid in November 2023. Subject to shareholder approval, the remaining $0.22 per share was scheduled for payment on May 8, 2024.
Risks, contingencies and unusual items
- Steel prices, demand, industry overcapacity, Chinese exports, trade restrictions, tariffs and the cost and availability of slabs, iron ore, coal, scrap and energy remain major earnings risks.
- Mexico is exposed to potential energy-market reforms, USMCA implementation requirements, trade disputes and the execution risk associated with the approximately $3.5 billion Pesquería program.
- Argentina presents significant inflation, currency-devaluation, foreign-exchange-control, import-payment, energy-supply and repatriation risks. Ternium Argentina held approximately $1.1 billion of cash and investments, much of it in Argentine securities whose U.S.-dollar value is subject to local-market and exchange-rate volatility.
- A Brazilian CSN lawsuit concerning a potential tag-along tender offer for Usiminas remains unresolved. Based on the position of two Supreme Court justices, potential aggregate indemnification exposure for Ternium Investments and Ternium Argentina could reach approximately BRL3.1 billion and BRL1.1 billion, respectively, or about $0.8 billion in total at year-end exchange rates. Ternium disputes the claims and cannot predict the outcome.
- Year-end provisions totaled $839.9 million, substantially higher than $81.4 million in 2022, largely because of provisions assumed in the Usiminas business combination.
- Usiminas carries significant labor, tax, civil and environmental contingencies, including approximately $856 million recognized at acquisition. Ternium Brasil also had a $37.5 million provision related to contested Brazilian ICMS tax credits.
- Mining risks include community conflict and security issues in Mexico, permitting and tailings-dam risks, reserve-estimation uncertainty, and the need for a future Compactos Project to process certain Usiminas iron ore reserves.
- Cybersecurity incidents in 2023 were contained and caused no known material business impact, but Ternium does not maintain cybersecurity insurance.
- Climate regulation, carbon pricing, environmental compliance, water availability and extreme weather could increase capital expenditures and operating costs. Ternium does not carry business-interruption insurance.
- The company is subject to OECD Pillar Two minimum-tax rules beginning in 2024. Management had not yet reasonably estimated the quantitative effect but expected no major impact based on transitional safe-harbor rules.
Most important facts for investors to verify
- Whether the Usiminas consolidation and related non-cash accounting effects are properly separated from recurring operating performance.
- The pace, final cost and financing of the $3.5 billion Pesquería expansion and the $1.8 billion to $2.0 billion 2024 capital-expenditure plan.
- Steel prices, realized revenue per ton, shipment trends and margins in Mexico, Brazil and Argentina.
- The liquidity and transferability of Ternium Argentina’s approximately $1.1 billion cash and investment position under continuing exchange controls.
- The status and potential financial impact of the CSN Usiminas litigation and other Usiminas contingencies.
- Usiminas’ operating recovery following the blast-furnace relining, including capital requirements and the Compactos Project decision.
- Debt maturities, particularly the August 2024 Ternium Brasil syndicated loan and July 2026 Usiminas bonds.
- Progress toward the 2024, 2025 and 2026 commissioning dates, the 2030 decarbonization targets and the Argentine wind-farm start-up.
- The audited financial statements and the effect of IFRS accounting, non-IFRS net cash measures, currency translation and Argentine securities valuation on reported results.