Ternium S.A. Form 6-K Summary: Q4 and Full Year 2023 Results
Business Context and Reporting Period
This Form 6-K, filed on February 20, 2024, reports Ternium S.A.'s fourth quarter and full-year results for the period ended December 31, 2023. Ternium is a leading steel producer in the Americas with operations in Mexico, Brazil, Argentina, and other markets. The financial statements are prepared under IFRS and presented in US dollars. The reporting period includes the full consolidation of Usiminas (Brazil) starting in July 2023 and significant macroeconomic shifts in Argentina following a change in government in December 2023.
Key Financial Metrics
| Metric | Q4 2023 | Full Year 2023 | Full Year 2022 |
|---|---|---|---|
| Net Sales | $4,931 million | $17,610 million | $16,414 million |
| Operating Income | $582 million | $2,198 million | $2,700 million |
| Adjusted EBITDA | $651 million | $2,740 million | $3,415 million |
| Adjusted EBITDA Margin | 13% | 16% | 21% |
| Net Income | $554 million | $986 million | $2,093 million |
| Adjusted Net Income | $554 million | $2,092 million | $2,093 million |
| Earnings per ADS (Adjusted) | $2.11 | $8.59 | $9.00 |
| Cash from Operations | $718 million | $2,501 million | $2,753 million |
| Free Cash Flow | $121 million | $1,040 million | $2,172 million |
| Net Cash Position | $1.9 billion | $1.9 billion (Year End) | $2.6 billion (Year End) |
| Total Borrowings | $2.1 billion | $2.1 billion (Year End) | $1.0 billion (Year End) |
Material Changes vs. Prior Period
- Revenue Growth: Full-year net sales increased 7% to $17.6 billion, driven by a 19% increase in steel shipments (14.2 million tons) and the consolidation of Usiminas. Q4 sales decreased 5% sequentially but rose 39% year-over-year.
- Profitability Decline: Full-year Adjusted EBITDA decreased 20% to $2.7 billion, and Operating Income fell 19% to $2.2 billion. This was primarily due to lower realized steel prices and the ramp-up costs associated with Usiminas' blast furnace relining.
- Argentina Impact: A significant devaluation of the Argentine Peso in December 2023 caused a $537 million decrease in the fair value of Argentine securities. However, this resulted in a $171 million net foreign exchange gain due to Ternium Argentina's net short local currency position.
- Non-Cash Adjustments: Reported Net Income for 2023 was reduced by a $935 million non-cash loss related to the recycling of Currency Translation Adjustment (CTA) upon increasing participation in Usiminas. Adjusted Net Income remained stable at $2.09 billion compared to 2022.
Guidance, Outlook, and Risks
- Q1 2024 Outlook: Management expects Adjusted EBITDA to increase sequentially compared to Q4 2023. Margins are anticipated to improve due to lower steel costs per ton and higher realized prices in Mexico and the U.S.
- Regional Dynamics:
- Mexico: Strong demand driven by nearshoring and infrastructure. New downstream projects in Pesquería are expected to start in H2 2024.
- Brazil (Usiminas): Focus on productivity improvements. Q1 2024 steel profitability expected to improve, though mining revenue may decline due to plant halts and seasonal rains.
- Argentina: New government reforms are expected to cause a recessionary effect in H1 2024, negatively impacting local shipments. A new captive wind farm is expected to be commissioned in 2024.
- Dividend Proposal: The Board proposed an annual dividend of $3.30 per ADS ($649 million total), representing a 22% increase over the prior year. This includes an interim dividend of $1.10 per ADS already paid.
- Risks: Key risks include macroeconomic volatility in Argentina, cyclicality in steel demand, input price fluctuations, and execution risks on the $3.5 billion Pesquería expansion project.
Investor Verification Checklist
- Usiminas Integration: Verify the timeline and cost implications of the Usiminas blast furnace relining and its impact on H1 2024 profitability.
- Argentina Exposure: Assess the magnitude of the $1.1 billion cash and investment position held in Argentina and the risks associated with currency controls and devaluation.
- Capital Expenditures: Confirm the revised $3.5 billion cost estimate for the Pesquería expansion and the funding strategy given the increased CAPEX.
- Non-GAAP Reconciliations: Review the reconciliation of Adjusted Net Income to GAAP Net Income, specifically the $935 million CTA recycling charge, to understand the true cash earnings power.
- Dividend Sustainability: Evaluate the ability to sustain the proposed 9% dividend yield given the projected recessionary impact in Argentina and lower steel prices.