Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 6-K (Furnishing of 2018 Annual Report)
Reporting Period: Year ended December 31, 2018
Business Overview: Ternium is Latin America's leading flat steel producer with an annual crude steel production capacity of 12.4 million tons. Operations span Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America. The company serves automotive, home appliances, construction, and energy industries. In 2018, Ternium consolidated its acquisition of Ternium Brasil (formerly CSA), a slab-producing facility in Rio de Janeiro.
Key Financial Metrics (2018)
| Metric | 2018 Value | 2017 Value | Change |
|---|---|---|---|
| Net Sales | $11.45 billion | $9.70 billion | +18% |
| Operating Income | $2.11 billion | $1.46 billion | +45% |
| EBITDA | $2.70 billion | $1.93 billion | +40% |
| EBITDA Margin | 23.6% | 19.9% | +364 bps |
| Net Income (Parent) | $1.51 billion | $0.89 billion | +70% |
| Earnings per ADS | $7.67 | $4.51 | +70% |
| Free Cash Flow | $1.22 billion | ($0.03 billion) | Significant Improvement |
| Capital Expenditures | $520.3 million | $409.4 million | +27% |
| Net Financial Debt | $1.73 billion | $2.75 billion | -37% |
| Steel Shipments | 12.95 million tons | 11.60 million tons | +12% |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18% driven by a 12% increase in steel shipments (1.4 million tons) and a $47 per ton increase in revenue per ton. The consolidation of Ternium Brasil contributed significantly to volume growth in the "Other Markets" region.
- Profitability Surge: EBITDA rose 40% to a record $2.7 billion. Operating income increased 45% to $2.1 billion, reflecting strong steel market prices in Mexico and the integration of Ternium Brasil.
- Debt Reduction: Net financial debt decreased by $1.0 billion to $1.73 billion, resulting in a net debt-to-EBITDA ratio of 0.6x, down from 1.4x in 2017.
- Regional Performance:
- Mexico: Shipments remained stable (6.5 million tons) despite a weak construction sector, supported by strong automotive demand.
- Southern Region (Argentina): Shipments declined 8% year-over-year due to a deep recession, currency devaluation, and high inflation in Argentina.
- Other Markets: Shipments surged 63% primarily due to the full-year consolidation of Ternium Brasil slab sales.
- Tax Impact: The effective tax rate was unusually low at 18% (vs. 25% in 2017) due to a $104.1 million tax gain from an asset revaluation in Argentina.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Investment Strategy: Capital expenditures are expected to increase in 2019 and 2020 to fund the construction of a new hot-rolling mill in Pesquería, Mexico, and new galvanizing/painting lines. A new rebar mill in Colombia is expected to start up in late 2019.
- Dividend: The Board proposed an annual dividend of $1.20 per ADS (up from $1.10 in 2017).
- Market Conditions: Management highlights high uncertainty in political and economic environments in Mexico (USMCA negotiations, Section 232 tariffs) and Argentina (recession, currency volatility).
Risks and Contingencies
- Geopolitical & Trade: Risks related to USMCA ratification, Section 232 steel tariffs, and potential trade conflicts between the U.S. and Mexico.
- Argentina Economic Crisis: Severe recession, currency devaluation (51% in 2018), and high inflation impacting the Southern Region's performance.
- Environmental & Safety: Following the Vale tailings dam collapse in Brazil, Ternium is conducting new stability studies on its own dams in Mexico and its joint venture with ArcelorMittal.
- Legal: A putative class action lawsuit was filed in the U.S. regarding the "Notebooks Case" involving the Chairman and former CEO, alleging improper payments related to the Sidor expropriation. No provision has been recorded as the outcome is not considered probable.
- Raw Materials: Volatility in iron ore and coal prices, and potential supply disruptions following the Vale incident.
Key Facts for Investor Verification
- Argentina Hyperinflation Accounting: Verify the impact of the adoption of IAS 29 (Financial Reporting in Hyperinflationary Economies) for Argentine subsidiaries starting July 1, 2018, and its effect on financial statement comparability.
- Ternium Brasil Integration: Confirm the operational and financial synergies realized from the full-year consolidation of the Rio de Janeiro slab mill.
- Capital Expenditure Execution: Monitor the progress and cost of the new hot-rolling mill in Pesquería, Mexico, and the rebar mill in Colombia.
- Debt Covenants: Review compliance with financial covenants, particularly the leverage ratio, given the significant debt reduction and upcoming capital spending.
- Legal Proceedings: Track the status of the U.S. class action lawsuit and the ongoing tax assessments in Brazil (ICMS credits) and Mexico.