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Ternium S.A. Form 6-K Summary: Q4 and Full Year 2018 Results

Business Context and Reporting Period

This Form 6-K, filed on February 19, 2019, reports the fourth-quarter and full-year 2018 financial results for Ternium S.A., Latin America's leading flat steel producer. The company operates facilities in Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America. Financial statements are prepared under IFRS and presented in USD. Notably, the company applied IAS 29 (inflation accounting) to its Argentine subsidiaries starting July 1, 2018, with prior 2018 quarters restated accordingly.

Key Financial Metrics

Q4 2018 Specifics: Net sales were $2,636.1 million (-5% YoY). Operating income was $382.7 million (+9% YoY). EBITDA was $512.8 million (+2% YoY). Net income was $435.4 million (+120% YoY), driven significantly by a non-recurring tax gain.

Material Changes vs. Prior Period

• Volume and Price Dynamics: Full-year steel shipments increased 12% to 12.95 million tons, driven by the consolidation of Ternium Brasil and higher "Other Markets" shipments. This offset volume declines in the Southern Region and Mexico. Revenue per ton increased $47 year-over-year due to higher steel prices in Mexico and Other Markets.
• Cost Structure: Operating costs per ton increased by $11 in 2018, primarily due to higher purchased slab and raw material costs, partially offset by operational integration benefits.
• Segment Performance: The Steel segment operating income rose to $2.1 billion. The Mining segment operating income declined to $26.9 million from $46.6 million in 2017 due to higher operating costs.
• Q4 Sequential Decline: Q4 2018 results were weaker than Q3 2018, with operating income dropping 46% sequentially. This was caused by a $55 decrease in steel revenue per ton, a $31 increase in operating cost per ton, and a 179,000-ton decrease in shipments.

Guidance, Outlook, and Risks

Outlook for 2019: Management expects global steel demand to show slight positive growth but anticipates margin normalization following a strong 2018. Global steel prices have been decreasing, and iron ore costs are rising. Ternium expects Q1 2019 EBITDA to decrease slightly compared to Q4 2018 due to lower margins, partially offset by higher shipments and increased slab sales mix. EBITDA per ton is expected to decrease sequentially in Q1 2019 due to lower revenue per ton in Mexico following contract price resets.

Dividend Proposal: The Board proposed an annual dividend of $0.12 per share ($1.20 per ADS), totaling approximately $235.5 million, subject to shareholder approval at the May 6, 2019 meeting.

Risks and Contingencies:

• Trade Environment: Global overcapacity and Chinese steel exports pose risks. The company anticipates the ratification of the USMCA and resolution of Section 232 tariffs will help normalize trade flows in North America.
• Argentina: Significant exposure to Argentine peso fluctuations and inflation. The 2018 results included a $104.1 million tax gain from asset revaluation and a $191.4 million gain from inflation adjustments (IAS 29) on net monetary positions.
• Market Conditions: Weak public and private investment in Mexico negatively affects the construction market.

Investor Verification Checklist

• Tax Gain Impact: Verify the sustainability of the $104.1 million non-recurring tax gain in Argentina which significantly boosted 2018 net income and Q4 2018 EPS.
• IAS 29 Application: Confirm the ongoing impact of IAS 29 inflation accounting on Argentine subsidiary reporting and its effect on comparability with prior periods.
• Margin Normalization: Assess the risk of margin compression in 2019 as management explicitly forecasts lower EBITDA per ton in Q1 2019 due to price resets in Mexico.
• Debt Reduction: Validate the net debt reduction of $1.0 billion to $1.7 billion and the resulting leverage ratio of 0.6x EBITDA.
• Trade Policy: Monitor the ratification status of the USMCA and Section 232 tariffs, as these are critical to the company's primary market in Mexico.