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Ternium S.A. Q1 2023 Financial Summary

Business Context and Reporting Period

This Form 6-K filing presents the unaudited consolidated condensed interim financial statements for Ternium S.A. for the three-month period ended March 31, 2023. Ternium is a global steel producer organized into two operating segments: Steel (flat and long products) and Mining (iron ore and pellets). The company operates primarily in Mexico, Brazil, and the Southern Cone region.

Key Financial Metrics

Note: Total Borrowings (Current + Non-current) for Q1 2023 were $880,332 thousand. Total Liabilities were $3,654,006 thousand.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by approximately 15.8% year-over-year, driven by lower volumes and pricing in the steel market.
• Profitability Compression: Operating income fell by 66.3% to $357.4 million. Gross margin contracted significantly from 30.7% in Q1 2022 to 17.7% in Q1 2023.
• Cost Structure: Cost of sales remained relatively flat ($2.98 billion) despite lower sales, indicating a decrease in gross margin efficiency. Selling, general, and administrative expenses increased slightly to $292.9 million.
• Financial Income: Net financial results improved due to higher interest income ($41.4 million vs. $24.3 million) and a reduction in net foreign exchange losses, though other financial expenses remained negative.
• Investment Activity: Capital expenditures increased to $197.9 million, and there was a significant net increase in other investments ($667.8 million outflow).

Outlook, Risks, and Strategic Developments

• USMCA Expansion: Ternium approved a $2.2 billion project to build an electric arc furnace (EAF) and direct reduced iron (DRI) module in the USMCA region, expected to commission in H1 2026. This raises 2023 expected capital expenditures to $1.1 billion.
• Usiminas Transaction: Ternium agreed to acquire additional shares in Usiminas from the NSC group for approximately $111 million. Upon closing, Ternium's participation in the Usiminas control group will rise to 51.5%, allowing Ternium to consolidate Usiminas into its financial statements.
• Argentina FX Restrictions: Significant foreign exchange restrictions in Argentina continue to impact operations. Ternium Argentina approved a dividend in kind of ~$624 million in US dollar-denominated Argentine bonds. The company notes that continued restrictions could limit the ability to purchase inputs or distribute dividends.
• Geopolitical Risks: The Russia-Ukraine conflict poses risks to the supply chain for steel slabs, iron ore, and coal, potentially leading to higher input costs and production limitations.
• Legal Contingency: The Superior Court of Justice in Brazil rejected CSN's appeal regarding a tender offer litigation in March 2023. However, CSN may still appeal to the Supreme Court, creating ongoing uncertainty.

Investor Verification Checklist

• Usiminas Consolidation: Verify the closing timeline and regulatory approval status for the Usiminas share purchase to confirm when consolidation will begin.
• Argentina Dividend Realization: Assess the liquidity impact of the "dividend in kind" and the potential discount realized when converting Argentine bonds to international market value.
• Margin Recovery: Monitor steel pricing trends and input costs to determine if the Q1 2023 gross margin compression is a temporary anomaly or a structural shift.
• Capital Expenditure Funding: Review the company's cash flow projections to ensure the $1.1 billion 2023 capex plan is sustainable given the reduced operating cash flow.
• CSN Litigation Status: Track any further appeals by CSN to the Brazilian Supreme Court regarding the tender offer dispute.