Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2024 (Unaudited)
Business Overview: Ternium is a global steel producer organized into two operating segments: Steel and Mining. Following the July 2023 acquisition of additional participation in Usiminas, Ternium now fully consolidates Usiminas. The company operates primarily in Mexico, Brazil, and the Southern Cone region.
Key Financial Metrics
| Metric ($ thousands) | Q1 2024 | Q1 2023 |
|---|---|---|
| Net Sales | 4,778,297 | 3,623,371 |
| Gross Profit | 1,103,553 | 642,620 |
| Operating Income | 674,856 | 357,390 |
| Profit for the Period | 491,431 | 479,520 |
| Profit Attributable to Owners | 361,436 | 374,374 |
| Earnings Per Share (Basic/Diluted) | $0.18 | $0.19 |
| Operating Cash Flow | 475,477 | 636,438 |
| Cash and Cash Equivalents (End of Period) | 1,780,464 | 1,220,149 |
| Total Borrowings (Current + Non-current) | 2,095,078 | 7,137,534 (Dec 31, 2023) |
Note: Borrowings decreased significantly from year-end 2023 ($3.78B current + $3.34B non-current) to $2.10B total as of March 31, 2024.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 31.9% to $4.78 billion, driven primarily by the full consolidation of Usiminas (Brazil) and higher volumes in Mexico.
- Operating Income: Increased 88.8% to $674.9 million, reflecting improved margins and the inclusion of Usiminas results.
- Profitability: While total profit for the period rose slightly (2.5%), profit attributable to owners decreased 3.5% due to higher non-controlling interests and financial expenses.
- Financial Expenses: "Other financial (expense) income, net" swung to a loss of $200.2 million (vs. $17.4 million loss in Q1 2023), largely due to a $133.8 million loss from changes in fair value of financial assets and net foreign exchange losses of $41.0 million.
- Cash Flow: Operating cash flow decreased 25.3% to $475.5 million, impacted by a $265.7 million use of cash for working capital changes.
Outlook, Risks, and Contingencies
Management Commentary and Unusual Items
- Usiminas Acquisition Impact: The full consolidation of Usiminas (completed July 2023) is the primary driver of the increased scale in sales and assets. A bargain purchase gain of $270.4 million was recognized in the prior year related to this transaction.
- Argentina Operations: Ternium Argentina operates under significant foreign exchange restrictions. While some restrictions were eased in late 2023, uncertainty remains regarding the timing and scope of changes. The Argentine peso devalued approximately 55% upon the change of government, creating valuation risks for ARS-denominated assets and liabilities.
- Pillar Two Tax: The company estimates a current tax expense of $5.6 million related to OECD Pillar Two rules effective January 1, 2024.
Material Risks and Contingencies
- CSN Litigation: A lawsuit by Companhia Siderúrgica Nacional (CSN) regarding a 2012 tender offer remains pending at the Superior Court of Justice (SCJ). While the SCJ previously rejected CSN's appeal, a motion for clarification is ongoing. If CSN prevails on the clarification motion, potential indemnification could reach approximately $0.6 billion for Ternium Investments and $0.2 billion for Ternium Argentina. Management believes the claims are groundless.
- Put/Call Options: A liability of $252.6 million is recognized related to put options granted to the NSC group regarding their remaining Usiminas shares.
- Legal and Tax Contingencies: Significant provisions exist for tax, labor, and civil contingencies, particularly in Brazil, totaling approximately $856 million recognized at acquisition, with balances fluctuating based on legal proceedings.
Investor Verification Checklist
- Usiminas Consolidation: Verify the impact of full Usiminas consolidation on segment reporting and future comparability.
- Argentina FX Exposure: Assess the risk of further Argentine peso devaluation and the liquidity impact of foreign exchange restrictions on repatriating earnings.
- CSN Litigation Outcome: Monitor the status of the SCJ motion for clarification regarding the CSN tender offer lawsuit, as a negative outcome could result in a multi-hundred-million-dollar liability.
- Financial Instrument Volatility: Review the $133.8 million loss on fair value changes of financial assets and the sustainability of such volatility in future quarters.
- Debt Reduction: Confirm the trajectory of debt repayment, noting the significant reduction in total borrowings from year-end 2023 to Q1 2024.