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Business Context and Reporting Period

Company: Ternium S.A.
Filing Type: Form 6-K (Consolidated Management Report)
Reporting Period: Year ended December 31, 2020
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, construction, home appliance, and energy industries.

Key Financial Metrics (2020)

Note: EBITDA for 2020 includes a $186.0 million non-cash gain related to the derecognition of a tax contingency at Ternium Brasil.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 14% to $8.7 billion, driven by a 9% drop in steel shipment volumes (11.4 million tons vs. 12.5 million tons) and lower revenue per ton ($748 vs. $790) due to weak steel prices in the first half of 2020.
• Profitability Improvement: Despite lower sales, Operating Income increased 25% to $1.1 billion. This was primarily due to a $186.0 million non-cash gain from the resolution of a tax contingency in Brazil, lower raw material and energy costs, and favorable currency impacts.
• Debt Reduction: Net financial debt decreased significantly by $1.1 billion (74%) to $371.5 million, resulting in a net debt-to-EBITDA ratio of 0.2x.
• Capital Discipline: Capital expenditures were reduced by 47% to $560.0 million as the company postponed or slowed several investment projects, including the new hot-rolling mill in Pesquería, Mexico.
• Dividend Policy: The 2019 dividend was withdrawn in April 2020 to preserve liquidity. A new annual dividend of $2.10 per ADS was proposed in February 2021.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management expects to complete the new hot-rolling mill in Pesquería, Mexico, in 2021, which will expand capacity and allow for the substitution of high-value-added steel imports. The company is progressing with the ramp-up of a new steel bar and coil mill in Colombia. Ternium has adopted a decarbonization strategy targeting a 20% reduction in CO2 emission intensity by 2030 compared to 2018 levels.

Risks and Contingencies

• COVID-19 Pandemic: While operations recovered in the second half of 2020, uncertainty remains regarding new virus variants and potential future containment measures.
• Argentina Economic Environment: High inflation (36.1% in 2020), sovereign debt restructuring with the IMF, and strict foreign exchange controls limit the ability to repatriate funds and pay dividends from Ternium Argentina.
• Steel Market Volatility: Prices remain sensitive to global demand, raw material costs, and potential trade restrictions or tariffs.
• Legal and Tax: Ongoing litigation regarding Usiminas tender offers and potential Mexican income tax adjustments exist, though management believes provisions are adequate or outcomes are not probable.

Investor Verification Checklist

• Tax Contingency Gain: Verify the sustainability of the $186.0 million non-cash gain from the ICMS tax benefit derecognition in Brazil, as this significantly boosted 2020 operating income.
• Argentina Liquidity: Assess the impact of Argentine foreign exchange restrictions on the ability to repatriate cash and the valuation of assets/liabilities in a hyperinflationary environment (functional currency changed to USD in 2020).
• Capital Expenditure Resumption: Monitor the timeline and funding for the delayed hot-rolling mill in Mexico and other postponed projects.
• Usiminas Investment: Review the carrying value ($422.9 million) versus market value ($756.3 million) of the investment in Usiminas and potential impairment risks given Brazilian economic conditions.
• Dividend Approval: Confirm the approval of the proposed $2.10 per ADS dividend at the Annual General Meeting scheduled for May 3, 2021.