Business Context and Reporting Period
Ternium S.A., Latin America's leading flat steel producer, reported its fourth quarter and full-year 2017 results on February 20, 2018. The reporting period covers operations in Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America. A significant operational change during the period was the consolidation of Ternium Brasil (formerly CSA Siderúrgica do Atlântico) into financial statements starting in September 2017.
Key Financial Metrics
| Metric | FY 2017 | FY 2016 | 4Q 2017 | 4Q 2016 |
|---|---|---|---|---|
| Net Sales (USD million) | 9,700.3 | 7,224.0 | 2,767.5 | 1,849.6 |
| Operating Income (USD million) | 1,456.8 | 1,141.7 | 350.0 | 246.7 |
| EBITDA (USD million) | 1,931.1 | 1,548.6 | 502.3 | 350.6 |
| EBITDA Margin | 19.9% | 21.4% | 18.2% | 19.0% |
| Net Income (USD million) | 1,022.9 | 706.9 | 198.0 | 144.8 |
| Net Income to Equity Holders (USD million) | 886.2 | 595.6 | 180.2 | 118.4 |
| Earnings per ADS (USD) | 4.51 | 3.03 | 0.92 | 0.60 |
| Steel Shipments (tons) | 11,597,000 | 9,764,000 | 3,411,000 | 2,378,000 |
| Net Debt (USD billion) | 2.7 | 0.9 | N/A | N/A |
| Capital Expenditures (USD million) | 409.4 | 435.5 | 126.5 | 100.4 |
Material Changes vs. Prior Period
- Revenue Growth: Full-year net sales increased 34% to $9.7 billion, driven by a 19% increase in steel shipments and higher revenue per ton in Mexico and the Southern Region. The "Other Markets" segment saw a 97% sales increase primarily due to the consolidation of Ternium Brasil.
- Profitability: Operating income rose 28% year-over-year to $1.5 billion. However, the EBITDA margin contracted from 21.4% to 19.9% due to higher raw material and purchased slab costs.
- Acquisition Impact: The acquisition of CSA resulted in a net cash use of $1.6 billion and increased net debt from $0.9 billion to $2.7 billion (1.4x net debt to EBITDA).
- Cost Pressures: Operating costs per ton increased due to higher prices for raw materials, energy, and purchased slabs, partially offset by the consolidation of Ternium Brasil's lower-cost slab sales.
- Foreign Exchange: Net financial expenses increased due to an $85.8 million negative year-over-year difference in foreign exchange results, largely driven by fluctuations in the Mexican and Argentine pesos against the US dollar.
Guidance, Outlook, and Risks
- Q1 2018 Outlook: Management expects higher operating income in Q1 2018 compared to Q4 2017, driven by increased revenue per ton in Mexico and Argentina. Shipments are expected to remain relatively stable sequentially.
- Market Fundamentals: The outlook for US and Mexican steel industries is positive due to resilient demand and adequate capacity utilization. Argentina's economy is expected to improve due to infrastructure projects and shale oil development.
- Trade Risks: The US Department of Commerce's recommendation for trade action against steel imports under Section 232 introduces market uncertainty pending a final decision.
- Unusual Items: Q4 2017 EBITDA included a $42.7 million non-recurring gain from a retroactive price adjustment on electricity sales in Mexico. FY 2017 included a $15.9 million donation to a technical school in Mexico.
- Dividend Proposal: The board proposed an annual dividend of $0.11 per share ($1.10 per ADS), totaling approximately $215.9 million, subject to shareholder approval.
Investor Verification Checklist
- Verify the sustainability of the $42.7 million non-recurring gain in Q4 2017 when analyzing recurring profitability.
- Monitor the impact of US Section 232 trade actions on Ternium's export volumes and pricing in the US market.
- Assess the integration progress and cost synergies of the Ternium Brasil (CSA) acquisition.
- Track the volatility of the Mexican and Argentine pesos, as currency fluctuations significantly impact reported financial results and deferred tax positions.
- Confirm the approval of the proposed $1.10 per ADS dividend at the May 2, 2018, shareholders' meeting.