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Ternium S.A. Q1 2018 Financial Summary

Business Context and Reporting Period

This Form 6-K filing reports Ternium S.A.'s unaudited consolidated results for the first quarter ended March 31, 2018. 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

Material Changes vs. Prior Periods

• Sequential Growth (vs. 4Q 2017): Net sales increased 7% and operating income surged 49% to $523.1 million. This was driven by a $45 increase in steel revenue per ton due to higher realized prices and slightly higher shipments (3% increase). EBITDA rose 32% to $665.1 million.
• Year-Over-Year Growth (vs. 1Q 2017): Net sales grew 43% and operating income increased 44%. Steel shipments rose 42% (1.0 million ton increase), primarily due to the consolidation of Ternium Brasil's shipments in 2018 and volume growth in Mexico and the Southern Region.
• Cost Structure: Cost of sales increased 43% year-over-year, reflecting higher volumes and increased costs for raw materials (slabs, pellets, scrap, zinc). SG&A expenses rose 39% to $240.5 million, driven by higher amortization, freight, and labor costs.
• Financial Results: Net financial results were a loss of $79.7 million, compared to a $39.9 million loss in 1Q 2017. This included a $42.5 million foreign exchange loss, largely due to the appreciation of the Mexican peso against the USD on a net short local currency position.

Outlook, Risks, and Management Commentary

• Q2 2018 Outlook: Management expects operating income to increase in Q2 2018 compared to Q1, driven by higher operating margins. Realized prices in Mexico are expected to rise, partially offset by higher costs per ton. Consolidated shipments are expected to slightly decrease due to lower sales of slabs to third parties as the company increases internal slab integration.
• Market Specifics: In Mexico, industrial demand remains strong, though the commercial/construction sector may show weakness. In Argentina, the company anticipates economic growth in 2018 despite a drought affecting agribusiness.
• Trade Risks: Significant uncertainty remains regarding US trade actions under Section 232 (25% tariffs on steel imports) and the ongoing NAFTA renegotiation. Many countries are negotiating exemptions or quotas, which could impact future steel price performance in North America.
• Liquidity: Net debt decreased to $2.6 billion (1.2x net debt to EBITDA) from $2.7 billion in the prior quarter, supported by a net repayment of borrowings of $180.6 million.

Investor Verification Checklist

• Consolidation Impact: Verify the extent to which year-over-year growth is driven by the consolidation of Ternium Brasil versus organic volume growth.
• Currency Exposure: Assess the sensitivity of future earnings to fluctuations in the Mexican peso and Argentine peso, given the significant foreign exchange losses reported.
• Trade Policy: Monitor developments in US Section 232 tariffs and NAFTA negotiations, as these directly impact the pricing environment in the company's largest market (Mexico).
• Slab Integration: Confirm the strategic shift toward internal slab integration and its long-term effect on reported shipments versus internal consumption.
• Working Capital: Review the $266.1 million increase in working capital, specifically the rise in receivables and inventories, to ensure it aligns with sales growth and does not signal collection issues.