GRUPO SIMEC, S.A.B. De C.V. annual report, Q4 FY2023

Grupo Simec, S.A.B. de C.V. — Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2023; filed November 15, 2024. The filing is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS in Mexican pesos. Grupo Simec manufactures and distributes SBQ, rebar, structural and other long-steel products in Mexico, Brazil and the United States.

Key Financial Metrics

Metric	2023	2022	Change
Net sales	Ps. 41,139 million	Ps. 54,159 million	Down 24%
Gross profit	Ps. 10,039 million	Ps. 14,475 million	Down 31%
Gross margin	24.4%	26.7%	Down 2.3 percentage points
Net income	Ps. 4,274 million	Ps. 7,861 million	Down 46%
Net income attributable to controlling interest	Ps. 4,283 million	Ps. 7,863 million	Down 45%
EPS attributable to controlling interest	Ps. 9.28	Ps. 17.00	Down 45%
Cash flow from operating activities	Ps. 4,263 million	Ps. 8,949 million	Down 52%
Capital expenditures	Ps. 2,493 million	Ps. 1,696 million	Up 47%
Cash and cash equivalents	Ps. 23,584 million	Ps. 21,546 million	Up 9%
Total liabilities	Ps. 16,982 million	Ps. 19,639 million	Down 14%
Total equity	Ps. 49,805 million	Ps. 47,994 million	Up 4%

Cost of sales was Ps. 31,100 million, or 76% of sales, compared with 73% in 2022. Administrative expenses were Ps. 2,317 million, or 6% of sales. The company reported Ps. 932 million of interest income, Ps. 89 million of consolidated interest expense in its management discussion, and a Ps. 2,431 million foreign-exchange loss, primarily associated with the 13% appreciation of the peso against the U.S. dollar. The financial statements separately present Ps. 154 million of interest expense and a Ps. 64 million gain on financial instruments.

Consolidated debt was approximately Ps. 5.1 million, representing approximately U.S.$0.3 million of old 10.5% medium-term notes that matured in 1998 and remain outstanding. The filing states that the company generally does not rely on bank borrowing and had U.S.$33.6 million of undrawn bank credit lines available for letters of credit at year-end.

Operating and Segment Performance

Finished-product shipments declined 3.5%, to 2.176 million tons from 2.255 million tons. The average selling price declined approximately 21%.
Mexico sales were Ps. 24,777 million, down 20%; segment net income was Ps. 3,063 million, down 35%.
Brazil sales were Ps. 13,945 million, down 20%, while shipments increased to approximately 890,000 tons from 828,000 tons. Segment net income was Ps. 2,344 million, down 5%.
United States sales were Ps. 2,417 million, down 59%; the segment generated a gross loss of Ps. 982 million and a net loss of Ps. 1,502 million, compared with net income of Ps. 718 million in 2022.
U.S. operations at Canton, Solon, Massillon and Lackawanna were indefinitely shut down in August and September 2023. Republic Steel continues serving customers from Tlaxcala, Mexico.
Overall melt-shop capacity utilization was 38.5% and rolling-mill utilization was 44.3%, compared with 41.2% and 46.2%, respectively, in 2022.

Material Changes Versus 2022

Revenue and profitability declined primarily because of lower steel prices and lower shipment volumes. Sales outside Mexico fell 31%, while Mexican sales fell 18%.
Cash generated from operations fell by approximately Ps. 4,686 million, while capital expenditures increased to Ps. 2,493 million, primarily reflecting investment in Brazil.
Inventory declined to Ps. 10,204 million from Ps. 12,791 million. Trade receivables declined to Ps. 5,680 million from Ps. 6,633 million.
Foreign-exchange losses increased materially from Ps. 541 million to Ps. 2,431 million. The company also recorded Ps. 932 million of interest income, compared with Ps. 446 million in 2022.
Employees declined to 4,260 from 5,092, largely reflecting the U.S. plant closures.
Share repurchases reduced treasury shares to approximately 36.0 million at year-end. No dividends are currently expected in the near term.

Outlook, Guidance and Unusual Items

Management estimated 2024 capital expenditures of approximately Ps. 4,512 million, including Ps. 4,034 million in Brazil and Ps. 478 million in Mexico. Actual spending may differ significantly.
For the first nine months of 2024, sales declined 23%, shipments declined 6% and average product prices declined approximately 18% compared with the first nine months of 2023.
Management expected 2024 sales to decline, but anticipated gradual price increases in the fourth quarter of 2024 through January 2025 and additional orders beginning in October. These are forward-looking expectations, not firm guidance.
Management expects the U.S. closures to improve overall performance by reducing operating losses and the need for subsidies.
Republic recorded a provision of approximately U.S.$8.3 million for Steelworkers Pension Trust withdrawal liability; the liability is being disputed.
Republic maintains a U.S.$2.5 million environmental reserve. The EPA imposed a U.S.$700,000 Clean Water Act civil penalty in December 2023, which was accrued.
The company disclosed an ongoing SEC investigation into disclosures and internal controls following a 2022 Wells Notice. Potential outcomes include fines, sanctions, compliance requirements and litigation; the company cannot estimate the timing or impact.
Management assessed consolidated internal control over financial reporting as effective, and the external auditor issued an unqualified opinion. However, Republic’s auditors identified a subsidiary-level material weakness involving journal entries and account reconciliations, with an estimated Ps. 6.3 million effect on Republic’s net earnings. Management concluded this did not constitute a consolidated-level material weakness.
On October 30, 2024, fatalities occurred at the Apizaco, Tlaxcala plant following a liquid-steel spill. The investigation and assessment of potential governmental sanctions, compensation and restoration costs were ongoing as of the filing date.

Principal Risks

Cyclical steel demand, global overcapacity, imports, dumping, tariffs and volatility in steel prices.
Exposure to scrap, ferroalloy, electricity, natural-gas and transportation costs, with limited ability to pass through increases.
Operational disruption, plant closures, equipment failures, severe weather, water availability and the lack of catastrophe or business-interruption insurance.
Environmental remediation, regulatory compliance, emissions requirements and potential liabilities at U.S. facilities.
Foreign-exchange volatility, inflation, interest rates and economic or political developments in Mexico, Brazil and the United States.
SEC investigation, prior internal-control weaknesses, Republic accounting deficiencies and related litigation or regulatory sanctions.
Related-party transactions and concentrated ownership: Industrias CH and affiliates held approximately 76.19% of Series B shares and can substantially influence the company and dividend policy.
Limited liquidity of the Series B shares and ADSs, potential NYSE American delisting, and possible PFIC classification for U.S. tax purposes.

Investor Verification Checklist

Verify the reported debt amount and treatment of the matured 1998 medium-term notes, including accrued interest.
Assess the sustainability and use of Ps. 23.6 billion of cash, including related-party loans, investments and planned 2024 capital expenditures.
Review the impact of the U.S. closures on future revenue, fixed costs, environmental obligations, pension withdrawal liability and customer servicing from Mexico.
Monitor the SEC investigation, remediation of Republic’s material weakness and any subsequent restatements, penalties or enforcement actions.
Review the Apizaco incident, related compensation, operational disruption, regulatory findings and potential contingencies.
Evaluate assumptions supporting goodwill and intangible-asset recoverability, particularly the 12.9% discount rate and projected 2024 volume decline for the San Luis reporting unit.
Confirm the status of U.S. dumping duties, Ohio tax assessments, environmental claims and the Pacific Steel/BNSF remediation litigation.
Reconcile inconsistent presentation of certain interest-expense and capital-expenditure figures between the management discussion and audited financial statements.