Ternium S.A. Q3 2020 Results Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s unaudited financial and operational results for the third quarter and the first nine months ended September 30, 2020. Ternium is Latin America's leading flat steel producer with operations in Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America. The reporting period reflects a significant operational rebound from the pandemic-induced trough experienced in the second quarter of 2020.
Key Financial Metrics
| Metric | 3Q 2020 | 9M 2020 |
|---|---|---|
| Net Sales ($ million) | 2,138.6 | 6,155.8 |
| Operating Income ($ million) | 201.0 | 402.3 |
| EBITDA ($ million) | 353.4 | 879.3 |
| EBITDA Margin | 17% | 14% |
| Net Result ($ million) | 173.0 | 197.2 |
| Equity Holders' Net Result ($ million) | 145.6 | 178.1 |
| Earnings per ADS ($) | 0.74 | 0.91 |
| Free Cash Flow ($ million) | 388.8 | 1,000.0 |
| Net Debt ($ million) | 562.4 | 562.4 |
| Net Debt / LTM EBITDA | 0.5x | N/A |
Material Changes vs. Prior Periods
- Sequential Recovery (3Q20 vs. 2Q20): Steel shipments increased 16% to 2.8 million tons. EBITDA surged 58% to $353.4 million, and EBITDA per ton rose to $124.2 from $91.4. Net sales grew 23% sequentially.
- Year-Over-Year Decline (3Q20 vs. 3Q19): Steel shipments decreased 7% to 2.8 million tons. Net sales fell 13% to $2.1 billion, and EBITDA declined 9% to $353.4 million. Operating income dropped 12% to $201.0 million.
- First Nine Months (9M20 vs. 9M19): Steel shipments were down 14% to 8.3 million tons due to the COVID-19 outbreak. Net sales decreased 22% to $6.2 billion. EBITDA fell 30% to $879.3 million, and operating income dropped 48% to $402.3 million.
- Cost Structure: Cost of sales decreased significantly year-over-year due to lower raw material and energy costs, partially offset by lower mill utilization rates.
Outlook, Risks, and Unusual Items
- Guidance: Management expects Q4 2020 EBITDA to increase compared to Q3 2020, driven by higher shipments and realized steel prices in key markets. Mexico volumes are anticipated to return to pre-pandemic levels.
- Unusual Items:
- Currency Impact: A $77.8 million net financial gain in 9M2020 resulted from the depreciation of the Mexican peso (16%) and Brazilian real (29%) against the U.S. dollar.
- Tax Impact: A $141.2 million non-cash deferred tax loss in 9M2020 reduced net earnings, caused by the depreciation of the Mexican peso affecting the tax base of subsidiaries with U.S. dollar functional currency.
- Capital Expenditures: CapEx was reduced to $71.1 million in Q3 (down 36% sequentially) and $439.6 million for 9M2020 as the company slowed or postponed several projects, including the new hot-rolling mill in Mexico.
- Risks: Uncertainty persists regarding the future course of the COVID-19 pandemic and related countermeasures. Risks also include global production capacity, tariffs, and cyclicality in steel-consuming industries.
Investor Verification Checklist
- Verify the sustainability of the sequential EBITDA per ton increase ($124.2) given the mix of higher value-added products versus raw material costs.
- Confirm the impact of currency fluctuations on future earnings, specifically the volatility of the Mexican peso and Brazilian real against the U.S. dollar.
- Assess the timeline for the resumption of major capital projects, such as the Pesquería hot-rolling mill, and their effect on future cash flow.
- Monitor the recovery of steel shipments in Mexico and the Southern Region against pre-pandemic levels as projected in the Q4 outlook.
- Review the net debt position of $562.4 million and the company's ability to maintain a net debt to LTM EBITDA ratio of 0.5x amidst potential market volatility.