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Ternium S.A. Q1 2021 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, 2021. Ternium is a global steel and mining company organized into two reportable segments: Steel (flat and long steel products) and Mining (iron ore and pellets). The company operates primarily in Mexico, Brazil, and the Southern Cone region (Argentina, Chile, Paraguay, Uruguay, Bolivia).

Key Financial Metrics

Note: Total Borrowings as of March 31, 2021, were $1,701,762 thousand (Current: $576,512; Non-current: $1,125,250). Total Liabilities were $4,660,700 thousand.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by approximately 43% year-over-year, driven by higher steel prices and volumes. The Steel segment contributed $3.24 billion in sales, while the Mining segment contributed $123 million.
• Profitability Surge: The company swung from a net loss of $19.4 million in Q1 2020 to a net profit of $706.7 million in Q1 2021. Gross margin expanded significantly from 15.4% in Q1 2020 to 34.2% in Q1 2021.
• Debt Reduction: Total borrowings decreased substantially from $4,660,700 thousand in total liabilities (Q1 2020 context) to a specific borrowing balance of $1,701,762 thousand in Q1 2021, reflecting aggressive debt paydown.
• Working Capital: Net cash provided by operating activities decreased to $327.8 million from $442.8 million in the prior year, primarily due to a $666.2 million increase in working capital requirements (inventory build-up and receivables growth) compared to a decrease in the prior year.

Outlook, Risks, and Contingencies

• COVID-19 Impact: Management states that negative effects on steel demand are behind them, with all facilities operating at normal production levels. However, uncertainty remains regarding new virus variants. The company maintains adequate liquidity and access to credit markets.
• Argentina Foreign Exchange: Ternium Argentina faces a complex economic environment with restrictive foreign exchange regulations. While commercial payments are accessible, repatriation of dividends and payments to related parties require central bank approval, which is granted on a restricted basis.
• Legal Contingencies:
  • CSN Litigation: A lawsuit by Companhia Siderúrgica Nacional (CSN) regarding a tender offer for Usiminas shares is pending review by Brazil's Superior Court of Justice. Ternium believes the claims are groundless and has recorded no provision.
  • Usiminas Shareholder Claims: An appeal regarding a 2014 acquisition of Usiminas shares is pending a ruling by the CVM Board of Commissioners, expected in 2021.
• Investment in Usiminas: Ternium holds a 20.4% stake in Usiminas. The market value of this stake ($787.3 million) significantly exceeds its carrying value ($423.3 million) as of March 31, 2021.

Key Facts for Investor Verification

• Verify the sustainability of the gross margin expansion (34.2%) given the cyclical nature of steel pricing and raw material costs.
• Monitor the status of the CVM ruling on the Usiminas tender offer obligation, as an adverse outcome could require a significant cash outflow or share sale.
• Assess the impact of Argentine foreign exchange restrictions on the ability to repatriate the $174 million net profit generated by Ternium Argentina in Q1 2021.
• Review the $666 million increase in working capital to ensure it aligns with strategic inventory positioning rather than collection issues.
• Confirm the valuation of the Usiminas investment, noting the $364 million difference between market value and book value.