Grupo Simec 2020 Form 20-F Summary
Business context and reporting period
Grupo Simec, S.A.B. de C.V. is a Mexican steel manufacturer, processor and distributor operating in Mexico, the United States and Brazil. Its products include special bar quality steel, structural steel, rebar, hot-rolled bars, cold-finished bars and wire products, serving automotive, construction and industrial markets. This annual Form 20-F covers the fiscal year ended December 31, 2020, with comparative information for 2019 and 2018. The consolidated financial statements were prepared under IFRS as issued by the IASB and reported in Mexican pesos.
Key financial and operating metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | Ps.35,869 million | Ps.34,171 million | +5% |
| Gross profit | Ps.6,658 million | Ps.4,104 million | +62% |
| Gross margin | 18.6% | 12.0% | +6.6 percentage points |
| Adjusted EBITDA | Ps.6,090 million | Ps.3,576 million | +70% |
| Adjusted EBITDA margin | 17.0% | 10.5% | +6.5 percentage points |
| Net income | Ps.2,798 million | Net loss of Ps.1,640 million | Returned to profitability |
| Net margin | 7.8% | (4.8%) | Improved |
| Cash flow from operations | Ps.3,634 million | Ps.1,043 million | +249% |
| Capital expenditures | Ps.951 million | Ps.1,271 million | −25% |
| Cash and cash equivalents | Ps.7,728 million | Ps.7,446 million | +4% |
| Total assets | Ps.45,504 million | Ps.44,015 million | +3% |
| Total liabilities | Ps.12,485 million | Ps.11,405 million | +9% |
| Stockholders’ equity | Ps.33,019 million | Ps.32,610 million | +1% |
| Finished steel shipments | 2.441 million tons | 2.349 million tons | +4% |
Liquidity remained strong, with current assets of Ps.24,363 million versus current liabilities of Ps.8,427 million. The filing states that the company’s total consolidated debt was Ps.6,020 million, but the audited balance sheet and debt note show short-term debt of Ps.6,020 thousand, or approximately Ps.6.0 million. Investors should verify this apparent unit inconsistency. The company states that its borrowings are entirely U.S.-dollar denominated and that it generally does not use bank financing.
Material changes versus the prior comparable period
- Sales increased despite COVID-19 disruptions, driven by a 4% increase in shipments and a 1% increase in average selling price. Sales outside Mexico rose 9%, while Mexican sales rose 1%.
- Cost of sales declined 3% and cost of sales as a percentage of sales improved to 81% from 88%, primarily because average cost per ton decreased approximately 6.5%.
- Mexico generated Ps.1,008 million of net income compared with a Ps.1,412 million loss in 2019. Brazil generated Ps.537 million, up from Ps.291 million. The U.S. segment remained marginally profitable at Ps.4 million but continued to report a gross loss of Ps.128 million.
- Brazil sales increased 25% to Ps.10,659 million, with shipments rising to approximately 871,000 tons. U.S. sales declined 22% to Ps.5,549 million, and U.S. shipments fell 20% to 237,000 tons.
- Operating cash flow increased substantially to Ps.3,634 million, although working capital absorbed cash through higher receivables and inventories.
- The company paid a Ps.1,990 million dividend in March 2020 and does not currently expect additional dividends in the near future while it funds expansion and working capital.
- The company repurchased approximately 2.9 million shares during 2020 and held approximately 34.5 million treasury shares at year-end.
Guidance, outlook, risks and unusual items
- Management estimated 2021 capital expenditures of approximately Ps.1,368 million, including Ps.167 million for Republic facilities, Ps.780 million in Mexico and Ps.421 million in Brazil. Actual spending may differ materially.
- First-quarter 2021 net sales increased 31% versus the fourth quarter of 2020, while finished-steel volumes increased 13% and selling prices increased approximately 16%.
- COVID-19 continued to create demand, supply-chain, workforce and liquidity risks, particularly in automotive and construction markets. The company remained operational because its activities were treated as essential or critical infrastructure.
- Steel-industry cyclicality, excess capacity, intense competition, volatile scrap and alloy prices, energy costs, foreign-exchange movements and inability to pass through input-cost increases remain material risks.
- Approximately 49% of SBQ product sales were to automotive manufacturers, and direct automotive sales volumes declined 43% in 2020. U.S. sales are concentrated, with the ten largest U.S. customers representing approximately 68% of U.S. segment revenue and 15.5% of consolidated revenue.
- The company held 136,541 metric tons of coking coal inventory valued at approximately Ps.953 million. The Lorain, Ohio blast-furnace facility has been idle since 2016, and management has no near-term restart plan. The ability to use or sell this inventory remains uncertain.
- Other income in 2020 included approximately Ps.232 million from scrap sales and Ps.257 million of Brazilian tax benefits. These items were unusual and contributed to reported profitability.
- The company recorded a Ps.363 million foreign-exchange loss in 2020. The Brazilian real depreciated approximately 29% against the U.S. dollar, contributing to a Ps.1,096 million Brazilian-segment foreign-exchange loss.
- Environmental liabilities included a reserve of approximately Ps.49.8 million. A California remediation matter remains unresolved, with the timing, remedy and ultimate cost unclear. The company also faces unresolved Canadian and Ohio tax assessments and other legal contingencies.
- Management and the external auditor concluded that internal control over financial reporting was not effective as of December 31, 2020. The auditor issued an adverse opinion, citing material weaknesses involving monitoring, disaster recovery and business continuity, information-technology access and controls, account reconciliations, journal-entry support, tax and accounting review, and sales-price approvals.
Most important facts for investors to verify
- Reconcile the filing’s stated Ps.6,020 million debt figure with the audited balance sheet and debt note showing Ps.6,020 thousand of short-term debt.
- Assess whether the 2020 earnings improvement is sustainable after separating operating improvements from scrap-sale income, Brazilian tax benefits, lower taxes and foreign-exchange effects.
- Monitor remediation of the material weaknesses and the timing of any subsequent auditor conclusion that internal controls have become effective.
- Evaluate the U.S. segment’s persistent gross losses, low capacity utilization, customer concentration and the prospects for restoring profitability.
- Review the recoverability of the coking coal inventory, Lorain facility assets, goodwill and indefinite-lived trademarks, all of which depend on market and demand assumptions.
- Track COVID-19 effects, automotive demand, steel prices, scrap and alloy costs, energy prices, currency movements and trade remedies, including U.S. antidumping exposure.
- Review environmental, Canadian and Ohio tax matters, the Brazil arbitration settlement, and the adequacy of recorded reserves.
- Consider related-party balances and transactions, including approximately Ps.1,657 million of long-term receivables and loans from affiliates at year-end and Ps.199 million of 2020 administrative-service payments to Industrias CH.