Ternium S.A. Q1 2023 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, 2023. 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 accordance with IFRS and include non-IFRS measures such as Adjusted EBITDA and Free Cash Flow.
Key Financial Metrics
| Metric | Q1 2023 | Q4 2022 | Q1 2022 |
|---|---|---|---|
| Net Sales ($ million) | 3,623 | 3,546 | 4,305 |
| Operating Income ($ million) | 357 | 43 | 1,059 |
| Adjusted EBITDA ($ million) | 508 | 303 | 1,209 |
| Adjusted EBITDA Margin | 14% | 9% | 28% |
| Net Income ($ million) | 480 | 59 | 878 |
| Equity Holders' Net Income ($ million) | 374 | 40 | 776 |
| Earnings per ADS ($) | 1.91 | 0.20 | 3.95 |
| Free Cash Flow ($ million) | 414 | 873 | 567 |
| Net Cash Position ($ billion) | 3.0 | 2.6 | N/A |
| Steel Shipments (tons) | 3,065,000 | 3,020,000 | 2,951,000 |
Material Changes vs. Prior Periods
- Sequential Improvement: Operating income surged 730% to $357 million compared to Q4 2022, driven by a 68% increase in Adjusted EBITDA. This was primarily due to lower purchased slab, raw material, and energy costs, which improved Adjusted EBITDA per ton by $66.
- Year-Over-Year Decline: Net sales decreased 16% and Adjusted EBITDA decreased 58% compared to Q1 2022. The decline reflects lower realized steel prices, particularly in Mexico and other markets, offsetting a 4% increase in steel shipments.
- Regional Performance: Mexico shipments reached a record high of 2.1 million tons (up 31% YoY), driven by automotive recovery and commercial restocking. Conversely, the Southern Region saw an 8% sequential decline due to seasonality in Argentina, and "Other Markets" dropped 18% sequentially due to reduced slab sales to third parties.
- Cost Structure: Cost of sales decreased $138.3 million sequentially, mainly due to a 5% reduction in raw materials and consumables. SG&A expenses increased $18.4 million sequentially, largely due to higher allowances for trade receivables and labor costs.
Outlook, Risks, and Unusual Items
- Guidance: Management expects EBITDA to increase in Q2 2023 compared to Q1, driven by higher steel shipments and anticipated sequential price increases in North America. Cost per ton is expected to decrease further as lower-priced raw materials flow through inventories.
- Market Risks: Uncertainty regarding economic activity in the second half of 2023 could impact steel prices. In Argentina, high inflation and an unstable macroeconomic environment are expected to negatively impact demand in the second half of the year.
- Unusual Items: The Q1 2023 income tax result included a $79.4 million gain, primarily due to positive deferred tax results from the appreciation of the Mexican Peso against the US dollar. Additionally, Ternium Argentina approved a dividend in kind of approximately $624 million payable in US dollar-denominated Argentine bonds, subject to foreign exchange restrictions.
Investor Verification Checklist
- Verify the sustainability of the sequential cost reductions in raw materials and energy as inventory flows through.
- Monitor the realization of steel prices in Mexico, which are currently offsetting spot price increases with lagged contract resets.
- Assess the impact of Argentina's macroeconomic instability on the Southern Region's shipments and the collectability of the dividend in kind.
- Review the reconciliation of Adjusted EBITDA to Net Income to understand the impact of non-operating items and tax adjustments.
- Track the integration of the Brazilian slab facility and its effect on "Other Markets" shipment volumes.