Ternium S.A. Q3 2023 Financial Summary
Business Context and Reporting Period
This Form 6-K filing summarizes Ternium S.A.'s unaudited results for the third quarter and first nine months ended September 30, 2023. The period is defined by the full consolidation of Usiminas, a Brazilian steel producer, following Ternium's acquisition of an additional stake in July 2023. This transaction increased Ternium's economic participation to 23.3% and control group participation to 51.5%, triggering full balance sheet consolidation.
Key Financial Metrics
| Metric | 3Q 2023 | 9M 2023 | 3Q 2022 |
|---|---|---|---|
| Net Sales ($ million) | 5,185 | 12,679 | 4,125 |
| Operating Income ($ million) | 527 | 1,616 | 526 |
| Adjusted EBITDA ($ million) | 698 | 2,089 | 679 |
| Adjusted EBITDA Margin | 13% | 16% | 16% |
| Net Income (Loss) ($ million) | (783) | 433 | 220 |
| Adjusted Net Income ($ million) | 323 | 1,539 | 220 |
| Adjusted EPS per ADS ($) | 1.38 | 6.48 | 0.78 |
| Cash from Operations ($ million) | 945 | 1,606 | 1,034 |
| Free Cash Flow ($ million) | 563 | 828 | 898 |
| Net Cash Position ($ billion) | 2.4 | N/A | 1.8 |
| Total Borrowings ($ million) | 2,165 | N/A | N/A |
Note: Total Borrowings calculated as sum of current ($971M) and non-current ($1,194M) borrowings as of Sept 30, 2023.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 34% sequentially and 26% year-over-year in Q3, driven primarily by a $1.2 billion increase from the consolidation of Usiminas sales.
- Profitability Decline: Adjusted EBITDA decreased 22% sequentially to $698 million. This was caused by lower steel prices in the USMCA region, higher purchased slab costs, and the consolidation of Usiminas, which recorded low profitability in the quarter.
- Reported Net Loss: The company reported a net loss of $783 million in Q3 2023, compared to a net income of $220 million in Q3 2022. This loss is largely attributable to a $1.1 billion non-cash charge related to the Usiminas consolidation.
- Operational Volume: Consolidated steel shipments rose 39% sequentially to 4.1 million tons, with Usiminas contributing 1.0 million tons of the increase.
Outlook, Risks, and Unusual Items
Unusual Items: Usiminas Consolidation
The Q3 results were significantly impacted by the accounting treatment of the Usiminas acquisition:
- Non-Cash Loss: A $1.1 billion non-cash loss was recorded, primarily due to the recycling of a $935 million Currency Translation Adjustment (CTA) from Other Comprehensive Income to Net Results. This reflects historical depreciation of the Brazilian Real against the US Dollar.
- Remeasurement Loss: A $171 million loss was recorded from the remeasurement of Ternium's previous stake in Usiminas.
- Contingencies: Ternium recognized $656 million in contingencies related to tax, civil, and labor issues previously not recognized in Usiminas' standalone balance sheet.
Guidance and Outlook
Management expects fourth-quarter Adjusted EBITDA to decrease compared to Q3, with lower margins partially offset by slightly higher shipments. Key regional outlooks include:
- Mexico: Strong apparent consumption expected, but realized prices will decrease sequentially due to contract resets.
- Brazil: Shipments expected to remain stable; realized prices anticipated to decrease.
- Argentina: Sequential decrease in shipments expected due to seasonality and government import restrictions. The macroeconomic environment remains highly unpredictable pending the new administration in December 2023.
Capital Allocation
The Board approved an interim dividend of $1.10 per ADS ($216 million aggregate), payable November 16, 2023. This represents a 22% increase over the prior year's interim dividend.
Investor Verification Checklist
- Usiminas Integration: Verify the long-term impact of Usiminas' low profitability on consolidated margins versus the volume benefits.
- Non-Cash Adjustments: Confirm the sustainability of Adjusted Net Income by excluding the one-time $1.1 billion Usiminas consolidation charge.
- Argentina Exposure: Assess the risk of government-imposed input restrictions and macroeconomic instability in Argentina affecting Q4 and 2024 operations.
- Price Realization: Monitor the sequential decline in realized steel prices in Mexico and Brazil as indicated in the Q4 outlook.
- Liquidity Position: Review the $2.4 billion net cash position, noting that $1.3 billion is held in Ternium Argentina, subject to local currency and regulatory risks.