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Ternium S.A. Q2 2020 Results Summary

Business Context and Reporting Period

This Form 6-K filing presents Ternium S.A.'s unaudited financial and operational results for the second quarter and first half ended June 30, 2020. As Latin America's leading flat steel producer, Ternium operates in Mexico, Brazil, Argentina, Colombia, the southern United States, and Central America. The reporting period was significantly impacted by the global COVID-19 pandemic, which caused deep recessions in the company's key markets and necessitated operational adjustments.

Key Financial Metrics

Operational Volume: Steel shipments totaled 2.45 million tons in Q2 2020 (down 27% YoY) and 5.45 million tons in 1H 2020 (down 17% YoY). Iron ore shipments were 991,000 tons in Q2 2020 (up 19% YoY).

Material Changes vs. Prior Period

• Revenue Decline: Net sales dropped 37% in Q2 2020 and 27% in 1H 2020 compared to the prior year, driven by a 27% and 17% reduction in steel shipment volumes, respectively, and lower average selling prices.
• Profitability Compression: Operating income fell 72% in Q2 2020 and 63% in 1H 2020. EBITDA per ton decreased to $91.4 in Q2 2020 (from $121.4 in Q2 2019) due to lower steel prices, partially offset by reduced operating costs.
• Cost Management: Cost of sales decreased significantly ($768.9 million in Q2) due to lower volumes and reduced raw material, energy, and labor costs. SG&A expenses also declined.
• Financial Results: Q2 2020 included a $14.6 million net financial loss, contrasting with a $91.5 million net financial gain in 1H 2020. The 1H gain was primarily due to foreign exchange benefits from the depreciation of the Mexican peso and Brazilian real against the US dollar.
• Tax Impact: 1H 2020 net earnings were negatively affected by a $166.0 million non-cash deferred tax loss resulting from the depreciation of the Mexican peso.

Outlook, Risks, and Management Commentary

• Guidance: Management expects Q3 2020 EBITDA to be in line with Q2 2020. This outlook anticipates higher steel shipments but slightly lower margins due to softer prices in the North American market.
• Market Recovery: Shipments are gradually recovering as lockdowns relax. Mexico's auto and construction sectors are restarting. Brazil's slab facility is increasing production rates, and Argentina is seeing volume increases in construction and agribusiness.
• Liquidity Strategy: Ternium has slowed or postponed capital projects, reducing Q2 capital expenditures to $110.8 million (a 57% sequential decrease). The company generated strong operating cash flow ($503.7 million in Q2) and reduced net debt by $367.3 million to $917.4 million.
• Risks: Key risks include the uncertainty of the COVID-19 pandemic's duration and spread, global economic recession, market demand cyclicality, and foreign exchange volatility.

Investor Verification Checklist

• Verify the sustainability of the 13% EBITDA margin as steel prices remain soft in North America.
• Monitor the trajectory of the Mexican peso and Brazilian real, as currency fluctuations significantly impact reported net income and deferred tax positions.
• Confirm the pace of recovery in the Mexican automotive and construction sectors, which are critical to Ternium's volume recovery.
• Review the status of postponed capital projects and the revised full-year capital expenditure target of approximately $600 million.
• Assess the impact of the Usiminas investment on equity earnings, which contributed to losses in both Q2 and 1H 2020.