Ternium S.A. Q3 2019 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports the third-quarter and first nine months of 2019 results for Ternium S.A., Latin America's leading flat steel producer. The reporting period ended September 30, 2019. Financial statements are prepared in accordance with IFRS and presented in US dollars.
Key Financial Metrics
| Metric | 3Q 2019 | 9M 2019 |
|---|---|---|
| Net Sales ($ million) | 2,419.5 | 7,853.4 |
| Operating Income ($ million) | 224.4 | 766.9 |
| EBITDA ($ million) | 381.7 | 1,251.2 |
| EBITDA Margin | 15.8% | 15.9% |
| Net Income ($ million) | 110.6 | 543.2 |
| Net Income to Equity Holders ($ million) | 94.5 | 497.6 |
| Earnings per ADS ($) | 0.48 | 2.53 |
| Free Cash Flow ($ million) | 254.0 | 513.4 |
| Net Debt ($ billion) | 1.5 | 1.5 |
| Capital Expenditures ($ million) | 257.3 | 748.4 |
Material Changes vs. Prior Periods
- Sequential (vs. 2Q 2019): Net sales decreased 11% to $2.42 billion, driven by a 276,000-ton drop in steel shipments and a $28/ton decrease in revenue. Operating income fell 5% to $224.4 million. Net income dropped 47% to $110.6 million, impacted by a higher effective tax rate and negative foreign exchange effects from the Argentine peso.
- Year-Over-Year (vs. 3Q 2018): Net sales declined 19% due to lower steel prices and reduced volumes. Operating income plummeted 68% to $224.4 million from $708.9 million. EBITDA fell 55% to $381.7 million. Net income decreased 80% to $110.6 million.
- 9M 2019 vs. 9M 2018: Net sales were down 11%. Operating income decreased 56% to $766.9 million. EBITDA dropped 43% to $1.25 billion. Net income fell 56% to $543.2 million.
- Segment Performance: The Steel segment saw significant declines in revenue per ton across Mexico, Southern Region, and Other Markets. Conversely, the Mining segment operating income increased significantly year-over-year due to a 70% rise in revenue per ton for iron ore.
Outlook, Risks, and Management Commentary
- Guidance: Management expects EBITDA to decrease in Q4 2019 compared to Q3 2019 due to reduced shipments and lower steel margins.
- Market Conditions: Steel pricing in Mexico and the U.S. has been challenging, with prices sliding to new lows in October. Mexico volumes are expected to decrease sequentially in Q4 due to seasonality and a soft domestic construction sector.
- Argentina: Macroeconomic volatility caused by the election process is expected to keep shipments at low levels in Q4 2019.
- Risks: Key risks include currency fluctuations (specifically the Argentine peso depreciation), global production capacity, tariffs, and cyclicality in steel-consuming industries.
- Investment Program: Capital expenditures increased significantly year-over-year as expansion plans, including new capacity in Pesquería and Colombia, gain momentum.
Investor Verification Checklist
- Verify the impact of the Argentine peso's 26% depreciation in Q3 on the company's financial position and future cost structures.
- Confirm the sustainability of the 15.8% EBITDA margin given the projected decline in steel prices for Q4 2019.
- Assess the progress and ROI of the $748.4 million capital expenditure program in the first nine months.
- Monitor the "Other Markets" segment, which saw a 31% year-over-year sales decline, primarily due to reduced slab sales to third parties.
- Review the effective tax rate increase to 43% in Q3 2019 and its drivers, including deferred tax fluctuations related to the Mexican peso.