TX

Business Context and Reporting Period

Ternium S.A., a Luxembourg-based holding company and Latin America's leading flat steel producer, filed a Form 6-K containing its Consolidated Management Report for the year ended December 31, 2019, and an Annex Update as of April 28, 2020. The company operates manufacturing facilities in Mexico, Brazil, Argentina, Colombia, and the southern United States. The filing includes an update regarding the postponement of the annual shareholder meeting and the withdrawal of the 2019 dividend proposal due to economic uncertainty caused by the COVID-19 pandemic.

Key Financial Metrics (Year Ended Dec 31, 2019)

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 11% to $10.2 billion, driven by an 8% drop in revenue per ton (due to lower steel prices in North America) and a 3% decrease in steel shipments (12.5 million tons).
• Profitability Compression: Operating income fell 59% to $864.6 million. EBITDA declined 43% to $1.5 billion. The decline was attributed to lower steel prices, higher raw material and energy costs, and reduced shipments in Mexico and Argentina.
• Regional Performance: Mexico shipments dropped 4% due to a softer commercial market. The Southern Region (primarily Argentina) saw a 16% shipment decline due to macroeconomic deterioration. Other Markets increased shipments by 4%.
• Capital Expenditures: CapEx more than doubled to $1.1 billion, reflecting investments in new hot-rolling and galvanizing capacity in Mexico and a new steel bar mill in Colombia.
• Debt Reduction: Net financial debt decreased by $0.3 billion to $1.5 billion, resulting in a net debt-to-EBITDA ratio of 1.0x.

Guidance, Outlook, and Risks

COVID-19 Impact and Operational Adjustments: As of April 28, 2020, the company reported reduced activity in Argentina and Colombia due to mandatory lockdowns, with blast furnaces operating at technical minimums. Mexico continued operations but faced reduced demand from the automotive sector. Brazil's slab facility also operated at technical minimums.

Capital Expenditure Revisions: To mitigate the impact of lower sales, Ternium slowed or postponed several projects. The startup of the new hot-rolling mill in Pesquería, Mexico, was delayed to the first half of 2021. The new steel bar and coil mill in Colombia was delayed to the second half of 2020.

Dividend Withdrawal: The Board of Directors withdrew the previously proposed annual dividend of $1.20 per ADS for fiscal year 2019 due to the uncertainty surrounding the recession caused by the pandemic.

Liquidity Position: As of March 31, 2020, the company reported a net debt of $1.3 billion and a cash position of $1.0 billion. Management believes it has sufficient resources to service debt and meet working capital needs.

Impairment Testing: Management performed impairment tests as of March 31, 2020, and recognized no impairment charges for any cash-generating units.

Key Risks: The filing highlights risks related to global economic downturns, excess steel production capacity (particularly from China), raw material shortages, and the potential for prolonged business interruptions due to the pandemic.

Investor Verification Checklist

• Dividend Status: Confirm the formal withdrawal of the 2019 dividend proposal and the timeline for future dividend resumption.
• Project Delays: Verify the revised completion dates for the Pesquería hot-rolling mill (H1 2021) and the Colombia steel bar mill (H2 2020) and their impact on future capacity.
• Liquidity Metrics: Monitor the cash position and net debt levels post-March 31, 2020, to ensure continued covenant compliance.
• Argentina Operations: Assess the duration of the technical minimum operations in Argentina and the impact of local exchange controls on repatriating funds.
• Steel Price Trends: Track global steel prices and Chinese export volumes to gauge pressure on margins in the coming quarters.