Ternium S.A. Form 6-K Summary: Second Quarter 2017 Results
Business Context and Reporting Period
This filing reports the unaudited financial and operational results for Ternium S.A., a leading steel producer in Latin America, for the second quarter and first half ended June 30, 2017. The company operates integrated manufacturing facilities in Mexico, Argentina, Colombia, the southern United States, and Guatemala, with a production capacity of approximately 11.0 million tons of finished steel products annually.
Key Financial Metrics
| Metric | 2Q 2017 | 1H 2017 | 2Q 2016 | 1H 2016 |
|---|---|---|---|---|
| Net Sales (USD million) | 2,262.6 | 4,302.7 | 1,862.8 | 3,518.3 |
| Operating Income (USD million) | 392.8 | 757.0 | 293.5 | 495.9 |
| EBITDA (USD million) | 497.9 | 962.6 | 392.8 | 695.8 |
| EBITDA Margin | 22.0% | 22.4% | 21.1% | 19.8% |
| Net Income (USD million) | 281.8 | 592.2 | 174.3 | 297.8 |
| Net Income to Equity Holders (USD million) | 249.7 | 511.0 | 154.0 | 248.4 |
| Earnings per ADS (USD) | 1.27 | 2.60 | 0.78 | 1.27 |
| Steel Shipments (tons) | 2,641,000 | 5,116,000 | 2,608,000 | 5,038,000 |
| Net Debt (USD billion) | 1.2 | 1.2 | N/A | N/A |
| Free Cash Flow (USD million) | (77.9) | (76.0) | N/A | N/A |
Material Changes vs. Prior Periods
- Revenue Growth: Net sales increased 21% year-over-year (YoY) in 2Q 2017 and 22% for the first half, driven by a 20% increase in steel revenue per ton across all markets and slightly higher shipment volumes.
- Profitability: Operating income rose 34% YoY in 2Q 2017 and 53% for the first half. EBITDA per ton increased to $188.5 in 2Q 2017 from $150.6 in 2Q 2016.
- Cost Pressures: Operating costs per ton increased due to higher raw material (iron ore, coking coal, scrap) and purchased slab costs, partially offset by higher realized steel prices.
- Foreign Exchange Impact: Net income was impacted by a $37.5 million foreign exchange loss in 2Q 2017, primarily due to the Argentine peso's depreciation and the Mexican peso's appreciation against the U.S. dollar. This contrasts with a $19.8 million gain in 2Q 2016.
- Dividends: The company paid $226.9 million in dividends in 2Q 2017 and $196.3 million in net dividends to shareholders in the first half.
Guidance, Outlook, and Risks
- Q3 2017 Outlook: Management expects a sequential decrease in operating income for the third quarter compared to the second quarter. This is attributed to lower shipments (seasonal decrease in Mexico's automotive and HVAC sectors) and lower operating margins due to price resets and higher raw material costs.
- Market Conditions: North American steel fundamentals remain healthy with capacity utilization above 75%. In Argentina, the company anticipates a 10% growth in flat steel consumption in 2017 due to economic recovery signals.
- Risks: Key risks include global production capacity, tariffs, cyclicality in end-user industries, and currency fluctuations (specifically the Mexican and Argentine pesos). The company also notes concerns regarding unfair trade terms for finished steel imports in the U.S.
- Liquidity: Net debt stood at $1.2 billion at June 30, 2017, representing 0.7 times net debt to last twelve months EBITDA. Free cash flow was negative for both 2Q and 1H 2017 due to working capital increases and capital expenditures.
Investor Verification Checklist
- Currency Sensitivity: Verify the impact of Mexican and Argentine peso fluctuations on future earnings, given the significant non-cash deferred tax effects and foreign exchange losses reported.
- Raw Material Costs: Monitor trends in iron ore, coking coal, and purchased slab prices to assess the sustainability of the current operating margin expansion.
- Seasonality: Confirm the expected sequential decline in Q3 2017 shipments and margins, particularly in the Mexican automotive sector.
- Debt Levels: Review the trajectory of net debt, which increased from $0.9 billion in March 2017 to $1.2 billion in June 2017, alongside negative free cash flow.
- Trade Policy: Assess the potential impact of U.S. government actions regarding steel imports and tariffs on the company's North American operations.