Ternium S.A. Q2 2022 Results Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s financial and operational results for the second quarter and first half of 2022, ended June 30, 2022. Ternium is Latin America's leading flat steel producer with operations in Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America. The results are presented in US dollars and metric tons in accordance with IFRS.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | 1H 2022 | 1H 2021 |
|---|---|---|---|---|
| Net Sales ($ million) | 4,438 | 3,920 | 8,743 | 7,169 |
| Operating Income ($ million) | 1,071 | 1,271 | 2,130 | 2,177 |
| Adjusted EBITDA ($ million) | 1,225 | 1,420 | 2,433 | 2,478 |
| Adjusted EBITDA Margin | 28% | 36% | 28% | 35% |
| Net Income ($ million) | 936 | 1,158 | 1,814 | 1,865 |
| Equity Holders' Net Income ($ million) | 799 | 1,022 | 1,575 | 1,625 |
| Earnings per ADS ($) | 4.07 | 5.21 | 8.02 | 8.28 |
| Steel Shipments (tons) | 2,957,000 | 3,068,000 | 5,909,000 | 6,167,000 |
| Free Cash Flow ($ million) | (166.1) | 467 | 401.4 | 665 |
| Net Cash Position ($ billion) | 1.0 | N/A | 1.0 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 13% year-over-year in Q2 2022 and 22% in 1H 2022, driven by a significant increase in realized steel prices across all markets and a higher value-added sales mix. Revenue per ton rose to $1,471 in Q2 2022.
- Volume Decline: Steel shipments decreased 4% year-over-year in Q2 2022 and 4% in 1H 2022. This was primarily due to a reduction in slabs shipped to third parties, partially offset by increased finished steel shipments reflecting production integration.
- Margin Compression: Adjusted EBITDA margin declined to 28% in Q2 2022 from 36% in Q2 2021. While steel prices increased, margins were pressured by higher costs for purchased slabs, raw materials, and energy.
- Cash Flow Volatility: Q2 2022 saw negative free cash flow of $166.1 million due to a $681.4 million increase in working capital (primarily inventory costs) and significant income tax cash outflows of $617.2 million. However, 1H 2022 free cash flow remained positive at $401.4 million.
- Regional Performance: Mexico shipments were down 3% year-over-year due to weaker industrial demand, while the Southern Region (Argentina) was down 5% year-over-year. Other Markets shipments decreased 3% year-over-year.
Outlook, Risks, and Management Commentary
- Q3 2022 Guidance: Management anticipates adjusted EBITDA will decrease in the third quarter compared to the second quarter. This is expected due to lower steel margins as contract prices reset to reflect recent market price decreases and steady shipment levels.
- Cost Pressures: Cost per ton is expected to increase due to high raw material and slab costs flowing through inventories.
- Market Risks: The global steel market is normalizing after the Ukraine invasion disruption. Risks include inflation, monetary tightening in Western economies, and economic slowdown in China. In Mexico, supply chain constraints continue to limit automotive production. In Argentina, demand faces macroeconomic volatility.
- Dividends: The company paid $1.80 per ADS in Q2 2022, totaling $2.60 per ADS for fiscal year 2021.
Investor Verification Checklist
- Working Capital Impact: Verify the sustainability of the $681.4 million working capital increase in Q2, specifically the $407.4 million increase in steel inventory costs.
- Tax Liabilities: Confirm the status of the substantial tax payments made in Q2 ($617.2 million) regarding outstanding balances from fiscal year 2021 in Argentina and advance payments in Mexico.
- Margin Trajectory: Monitor the Q3 reset of contract prices to validate management's forecast of margin compression against rising input costs.
- Argentina Exposure: Assess the impact of Argentine Peso depreciation (11% in Q2) on net financial results and local currency positions.
- Volume Mix: Track the shift from slab shipments to finished steel to ensure the integration strategy continues to offset volume declines in third-party slab sales.