Grupo Simec, S.A.B. de C.V. — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual Form 20-F, not a standalone fourth-quarter filing. Financial statements are consolidated and prepared under IFRS as issued by the IASB, with amounts primarily in millions of Mexican pesos unless stated otherwise.
Business context
Grupo Simec manufactures, processes and distributes special bar quality steel, structural steel, rebar, bars, wire products and related products in Mexico, the United States, Canada and Brazil. The company operated 15 facilities with approximately 5.3 million tons of crude-steel capacity and 4.5 million tons of rolling and finishing capacity at December 31, 2018. Sales were approximately 57% Mexico, 26% United States and 17% Brazil.
In May 2018, the company acquired the Cariacica steel plant in Brazil and obtained a lease for the Itauna rolling facility. Apizaco mini-mill 2 began operations in July 2018. The company also permanently shut down its Hamilton, Ontario facility during 2018 and expected to relocate equipment by the end of 2019.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | Ps. 35,678 million | Ps. 28,700 million | +24% |
| Gross profit | Ps. 5,115 million | Ps. 4,706 million | +9% |
| Gross margin | 14% | 16% | Down 2 percentage points |
| Net income | Ps. 3,447 million | Ps. 1,895 million | +82% |
| Controlling-interest income | Ps. 3,653 million | Ps. 1,895 million | +93% |
| Adjusted EBITDA | Ps. 5,147 million | Ps. 4,933 million | +4% |
| Adjusted EBITDA margin | Approximately 14.4% | Approximately 17.2% | Down approximately 2.8 percentage points |
| Cash flow from operating activities | Ps. 3,224 million | Ps. 3,184 million | +1% |
| Capital expenditures | Ps. 1,994 million | Ps. 3,040 million | Down 34% |
| Cash and cash equivalents | Ps. 6,987 million | Ps. 7,204 million | Down 3% |
| Total assets | Ps. 48,854 million | Ps. 45,977 million | +6% |
| Total liabilities | Ps. 13,345 million | Ps. 11,659 million | +14% |
| Stockholders’ equity | Ps. 35,509 million | Ps. 34,318 million | +3% |
Adjusted EBITDA is a non-IFRS measure defined by the company and should not be considered a substitute for net income or operating cash flow.
Operating and segment performance
- Finished steel shipments increased 4.8% to 2.192 million tons. The average selling price increased 18.6%, while average cost per ton increased 21.5%.
- Mexico generated net sales of Ps. 20,508 million, gross profit of Ps. 4,792 million and net income of Ps. 4,110 million. Shipments declined 2%, but gross margin improved to 23% from 22%.
- The United States generated net sales of Ps. 9,246 million but a gross loss of Ps. 48 million and a net loss of Ps. 406 million. Cost of sales reached 101% of sales, compared with 93% in 2017.
- Brazil generated net sales of Ps. 5,924 million, gross profit of Ps. 371 million and a net loss of Ps. 395 million. The loss primarily reflected a Ps. 603 million foreign-exchange loss following depreciation of the Brazilian real.
- Consolidated cost of sales increased 27% and rose to 86% of sales from 84%, reflecting higher raw-material, labor and energy costs, particularly in the United States.
- Production capacity utilization remained modest: melt-shop utilization was 44.9% and rolling-mill utilization was 51.5% in 2018.
Cash flow, debt and liquidity
- Operating cash flow was Ps. 3,224 million. Investing cash flow used Ps. 820 million, including Ps. 1,994 million of property, plant and equipment additions, Ps. 639 million of partial payments for the Brazil plants and Ps. 477 million of new related-party loans, partly offset by Ps. 1,939 million of collections of related-party loans.
- Financing cash flow used Ps. 2,641 million, principally reflecting Ps. 1,640 million of net share repurchases and Ps. 985 million of payments on related-party debt.
- Reported debt was nominal: Ps. 5.9 million of legacy medium-term notes, equivalent to less than Ps. 1 million in U.S. dollars. The notes matured in 1998 but remained outstanding because certain holders could not be identified.
- Working capital was Ps. 17,109 million. The filing states that management expects operating cash generation and available cash to cover currently anticipated requirements and capital expenditures.
- The company had approximately Ps. 137 million of current and non-current environmental reserves at year-end, based on the disclosed Ps. 51.1 million reserve for Republic’s facilities and additional environmental matters.
Material changes versus the prior comparable period
- Revenue growth was driven by higher steel prices, increased shipments and the consolidation of newly acquired Brazilian operations from May 2018.
- Profitability improved materially at the consolidated level, helped by higher sales, lower foreign-exchange losses and lower income-tax expense. The effective tax rate fell to approximately 16.9% from 38.9%, aided by utilization of tax-loss carryforwards.
- Consolidated margins deteriorated despite higher earnings because raw-material and production costs grew faster than revenue. The U.S. segment moved from a Ps. 557 million gross profit to a Ps. 48 million gross loss.
- Brazil shifted from Ps. 59 million of net income to a Ps. 395 million net loss, mainly because of foreign-exchange effects and higher costs.
- Cash declined modestly after substantial share repurchases, related-party debt repayment and investment in facilities.
- The company repurchased 27.6 million shares during 2018 and held 31.1 million treasury shares at year-end. The reserve authorized for repurchases increased to Ps. 5,000 million.
- The 2016 and 2017 financial statements were retrospectively restated for errors involving related-party loans, accrued interest, taxes and account classification. Restated 2017 net income increased from Ps. 1,722 million to Ps. 1,895 million.
Guidance, outlook, commentary and unusual items
- Management estimated 2019 capital expenditures of approximately Ps. 702.4 million, including Ps. 345.6 million for Republic and Ps. 356.8 million for Mexico. Actual spending may differ materially.
- First-quarter 2019 net sales increased 8% versus the fourth quarter of 2018, shipments increased 1% and selling prices increased approximately 6.9%.
- Management’s strategy emphasizes cost reduction, higher-margin and value-added products, customer relationships, disciplined acquisitions and reinvestment of operating cash flow.
- The Lorain, Ohio facility remained idle, with no near-term restart plan. The company carried approximately Ps. 643 million of Lorain property, plant and equipment and Ps. 953 million of coking-coal inventory that had not been used in recent years. The timing and economic feasibility of a restart remain uncertain.
- The company paid a U.S.$200,000 SEC civil penalty in January 2019 and agreed to retain an independent consultant following an internal-controls settlement.
- Management and the auditor concluded that internal control over financial reporting was not effective at December 31, 2018. Material weaknesses involved related-party transaction documentation, authorization and reconciliation, and information-technology backup, access, disaster-recovery and infrastructure controls. The auditor issued an adverse opinion on internal control over financial reporting while issuing an unqualified opinion on the consolidated financial statements.
- Mexican tax authorities asserted approximately Ps. 5.9 billion of additional taxes for 2013–2017. The company is contesting the assessments, and payment had not been enforced as of the filing date.
- The company reported an ongoing environmental remediation matter at Pacific Steel in California. The corrective-measures study had not established the final remedy, timing or cost. The tolling agreement was extended through August 10, 2020.
- An Ohio sales-and-use tax assessment of approximately U.S.$2.4 million remained under appeal, with no expense recorded because the company could not estimate a probable loss.
- An arbitration claim in Brazil sought approximately U.S.$1.4 million plus expenses; the company filed a counterclaim of approximately U.S.$5 million. The matter remained unresolved.
- Key business risks include steel-industry cyclicality, excess global capacity, competition, volatile scrap and ferroalloy prices, energy costs, tariffs and trade restrictions, foreign-exchange movements, labor negotiations, environmental compliance, customer concentration and related-party governance.
Most important facts an investor should verify
- Whether the company remediates the 2018 material weaknesses and obtains a clean internal-control opinion in subsequent filings.
- The ultimate resolution and cash impact of the approximately Ps. 5.9 billion Mexican tax assessments.
- Progress, cost and timing of the Pacific Steel remediation and other environmental obligations.
- Whether the U.S. segment can return to profitability given cost per ton above selling price in 2018.
- Brazilian plant integration, utilization, foreign-exchange exposure and the profitability of the acquired Cariacica and leased Itauna operations.
- Recoverability of the Ps. 953 million coking-coal inventory and the carrying value of the idled Lorain facility.
- Terms, authorization, collectability and concentration of related-party loans and receivables, including Ps. 2,334 million of long-term related-party receivables and loans at year-end.
- Impact of tariffs, USMCA implementation, raw-material inflation and energy prices on future margins.
- Effect of continued share repurchases on liquidity, trading float and minority-shareholder interests.
- The filing’s audited financial statements and restatement disclosures, particularly because prior-period balances were revised for related-party accounting errors.