Ternium S.A. Q3 2017 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports the third quarter and first nine months of 2017 results for Ternium S.A., a leading flat steel producer in Latin America. The reporting period ended September 30, 2017. A material event during this period was the acquisition and consolidation of CSA Siderúrgica do Atlântico (Ternium Brasil), which began in September 2017 and significantly impacted shipment volumes and cost structures.
Key Financial Metrics
| Metric | 3Q 2017 | 3Q 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net Sales (USD million) | 2,479.5 | 1,856.1 | 6,782.3 | 5,374.4 |
| Operating Income (USD million) | 349.8 | 399.1 | 1,106.8 | 895.0 |
| EBITDA (USD million) | 466.1 | 502.2 | 1,428.8 | 1,198.0 |
| EBITDA Margin | 18.8% | 27.1% | 21.1% | 22.3% |
| Net Income (USD million) | 232.7 | 264.3 | 824.9 | 562.2 |
| Net Income to Equity Holders (USD million) | 194.9 | 228.9 | 706.0 | 477.2 |
| Earnings per ADS (USD) | 0.99 | 1.17 | 3.60 | 2.43 |
| Steel Shipments (tons) | 3,070,000 | 2,348,000 | 8,186,000 | 7,386,000 |
| Net Debt (USD billion) | 2.7 | N/A | 2.7 | N/A |
| Free Cash Flow (USD million) | 144.9 | N/A | 68.9 | N/A |
Material Changes vs. Prior Periods
- Sequential Decline (3Q vs. 2Q 2017): Operating income decreased by 11% to $349.8 million, and EBITDA fell 6% to $466.1 million. This was driven by a lower operating margin, primarily due to the consolidation of Ternium Brasil's slab sales which lowered the average revenue per ton. Shipments increased 16% sequentially.
- Year-Over-Year Decline (3Q 2017 vs. 3Q 2016): Operating income decreased 12% despite a 31% increase in shipments. The margin compression was caused by a $79 increase in operating cost per ton (higher raw material and slab costs) which outweighed a $13 increase in revenue per ton.
- Year-Over-Year Growth (9M 2017 vs. 9M 2016): Net sales grew 26% and Operating Income grew 24%. Net income surged 47% to $824.9 million, aided by a lower effective tax rate due to non-cash deferred tax gains from the appreciation of the Mexican peso.
- Debt Position: Net debt increased to $2.7 billion at September 30, 2017, up from $1.2 billion in June 2017, reflecting the $1.6 billion net cash use for the CSA acquisition.
Outlook, Risks, and Management Commentary
- Q4 2017 Outlook: Management anticipates lower operating income in Q4 compared to Q3. While shipments are expected to increase due to the full-quarter consolidation of Ternium Brasil, this will be offset by a lower operating margin. Revenue per ton is expected to decrease due to the lower value-added mix of slab sales and destocking in the US market affecting Mexican prices.
- Regional Drivers: The Argentine market showed recovery in Q3 with increased demand in household appliances and automotive sectors. Mexico experienced a seasonal slowdown in automotive and HVAC demand.
- Risks and Contingencies: Key risks include global production capacity, tariffs, cyclicality in steel-consuming industries, and foreign exchange fluctuations. The company noted a net short local currency position in Mexico, which resulted in an $88.9 million negative year-over-year difference in net foreign exchange results for the first nine months.
- Unusual Items: The effective tax rate in 9M 2017 was unusually low (19%) due to non-cash deferred tax gains from the 14% appreciation of the Mexican peso. In 3Q 2017, the tax rate returned to normal levels (31%).
Investor Verification Checklist
- Verify the impact of the Ternium Brasil consolidation on the product mix and average selling price in Q4 2017.
- Monitor the trajectory of raw material costs (iron ore, coking coal, scrap) and their pass-through to operating costs.
- Assess the sustainability of the effective tax rate given the volatility of the Mexican peso against the US dollar.
- Review the integration progress of CSA Siderúrgica do Atlântico and the associated debt servicing capacity (Net Debt/EBITDA of 1.5x).
- Confirm the extent of destocking in the US market and its potential impact on Mexican steel prices in the coming quarters.