Ternium S.A. Q2 2023 Results Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s unaudited financial and operational results for the second quarter and first half ended June 30, 2023. Ternium is Latin America's leading flat steel producer with operations in Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America. The results are presented in accordance with IFRS and include non-IFRS measures such as Adjusted EBITDA and Free Cash Flow.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | 1H 2023 | 1H 2022 |
|---|---|---|---|---|
| Net Sales ($ million) | 3,871 | 4,438 | 7,495 | 8,743 |
| Operating Income ($ million) | 732 | 1,071 | 1,089 | 2,130 |
| Adjusted EBITDA ($ million) | 883 | 1,225 | 1,391 | 2,433 |
| Adjusted EBITDA Margin | 23% | 28% | 19% | 28% |
| Net Income ($ million) | 736 | 936 | 1,215 | 1,814 |
| Equity Holders' Net Income ($ million) | 627 | 799 | 1,001 | 1,575 |
| Earnings per ADS ($) | 3.19 | 4.07 | 5.10 | 8.02 |
| Steel Shipments (tons) | 2,982,000 | 2,957,000 | 6,048,000 | 5,909,000 |
| Operating Cash Flow ($ million) | 48 | (5) | 660 | 687 |
| Free Cash Flow ($ million) | (150) | (166) | 265 | 401 |
| Net Cash Position ($ billion) | 2.2 | 1.0 | 2.2 | 1.0 |
Material Changes vs. Prior Period
- Revenue and Profitability: Q2 2023 net sales decreased 13% year-over-year (YoY) to $3.87 billion, driven by lower realized steel prices. However, Adjusted EBITDA per ton increased sequentially by $130 to $296 due to higher prices in Mexico and lower costs, though it remained down $118 YoY. Operating income improved 105% sequentially but declined 32% YoY.
- Volume Trends: Steel shipments were flat YoY (+1%) but down 3% sequentially. Mexico shipments grew 21% YoY, while the Southern Region declined 6% YoY due to weak demand in Argentina. "Other markets" shipments dropped 43% YoY.
- Cash Flow Dynamics: Q2 operating cash flow was $48 million, significantly impacted by a $605 million increase in working capital (higher inventory and receivables). This resulted in negative free cash flow of $150 million for the quarter, contrasting with positive free cash flow of $265 million for the first half.
- Financial Results: Net financial results were a loss of $18 million in Q2, primarily due to foreign exchange losses from the appreciation of the Mexican and Colombian Pesos against the US dollar.
Outlook, Risks, and Unusual Items
- Usiminas Consolidation: Ternium will fully consolidate Usiminas into its financial statements starting in Q3 2023. This will materially alter reported figures, including the inclusion of Usiminas' 76.7% non-controlling interest in profit attribution.
- Q3 Guidance: Excluding Usiminas consolidation, management expects Q3 EBITDA to decrease compared to Q2 due to lower international prices and slightly higher costs, despite anticipated higher shipments in Mexico.
- Regional Risks: Argentina faces significant headwinds including high inflation, raw material import constraints, macroeconomic instability, and election-related uncertainty, which are expected to negatively impact demand in the second half of 2023.
- Dividends: The company paid $353.4 million in cash dividends to shareholders and $233.5 million in dividends in kind to non-controlling interests during the first half.
Investor Verification Checklist
- Verify the impact of the Usiminas consolidation on Q3 2023 comparability and the treatment of non-controlling interest.
- Monitor the trajectory of steel prices in Mexico and the Southern Region, as revenue per ton is highly sensitive to these markets.
- Assess the sustainability of working capital levels, particularly inventory build-up, which significantly pressured Q2 cash flow.
- Track the macroeconomic environment in Argentina and its effect on Southern Region demand and logistics.
- Review the reconciliation of Adjusted EBITDA to Net Income to understand the magnitude of non-operating items and tax impacts.