Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 6-K (Consolidated Management Report)
Reporting Period: Year ended December 31, 2019
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 also participates in the control group of Usiminas, a major Brazilian flat steel producer.
Key Financial Metrics
| Metric (USD Million) | 2019 | 2018 |
|---|---|---|
| Net Sales | 10,192.8 | 11,454.8 |
| Operating Income | 864.6 | 2,108.4 |
| EBITDA | 1,525.7 | 2,697.7 |
| Profit for the Year | 630.0 | 1,662.1 |
| Profit Attributable to Owners | 564.3 | 1,506.6 |
| Free Cash Flow | 595.4 | 1,219.0 |
| Capital Expenditures | 1,052.3 | 520.3 |
| Net Financial Debt | 1,453.4 | 1,734.9 |
| Cash and Cash Equivalents | 520.0 | 250.5 |
Key Ratios & Per Share Data:
- EBITDA Margin: 15% (2019) vs 24% (2018)
- Net Debt to EBITDA: 1.0x
- Basic Earnings per ADS: $2.87 (2019) vs $7.67 (2018)
- Proposed Dividend per ADS: $1.20
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.
- Profitability Compression: Operating income fell 59% to $864.6 million. EBITDA declined 43% to $1.5 billion. The decline was attributed to lower revenue per ton, higher operating costs per ton (raw materials, energy, depreciation), and reduced shipment volumes.
- Regional Performance:
- Mexico: Shipments decreased 4% due to a softer commercial market.
- Southern Region (Argentina): Shipments dropped 16% due to significant deterioration in Argentina's macroeconomic situation.
- Other Markets: Shipments increased 4%, offsetting some declines elsewhere.
- Capital Expenditures: Increased 102% to $1.1 billion, reflecting investments in new hot-rolling capacity in Pesquería (Mexico), a new steel bar and coil mill in Colombia, and environmental/safety improvements.
- Debt Reduction: Net financial debt decreased by $0.3 billion to $1.5 billion, despite higher capital spending, aided by a $572.7 million reduction in working capital.
Guidance, Outlook, Risks, and Unusual Items
- Outlook & Investments: The 2020 capital program focuses on completing the new hot-rolling mill in Pesquería (expected operational Q4 2020) and the steel bar and coil mill in Colombia (expected completion H1 2020). These projects aim to replace imports and expand market share.
- Dividend Proposal: The Board proposed an annual dividend of $0.12 per share ($1.20 per ADS), totaling approximately $235.5 million, subject to shareholder approval.
- COVID-19 Risk: The filing explicitly states that the impact of the coronavirus outbreak on the industry and Ternium's operations is currently unknown and unpredictable. It poses risks of shutdowns and supply chain disruptions.
- Argentina Risks: Continued economic instability, high inflation (53.8% in 2019), and exchange controls in Argentina remain significant risks. Ternium Argentina's functional currency is changing to the US Dollar effective January 1, 2020, to reduce earnings volatility.
- Usiminas Investment: Ternium holds a significant investment in Usiminas (carrying value $486.6 million). The company monitors this for impairment risks related to Brazilian economic conditions and governance issues.
- Legal Contingencies: A putative class action lawsuit in the U.S. regarding the "Notebooks Case" remains pending. Additionally, there are ongoing tax disputes in Mexico and Brazil, though management believes provisions are adequate.
Important Facts for Investor Verification
- Argentina's Economic Trajectory: Verify the impact of Argentina's sovereign debt restructuring and exchange controls on Ternium Argentina's ability to repatriate cash and maintain operations.
- Steel Price Trends: Monitor global and regional steel prices, particularly in North America and Latin America, as revenue per ton is highly sensitive to these fluctuations.
- Capital Project Execution: Track the timeline and cost of the Pesquería hot-rolling mill and the Colombia steel bar mill to ensure they meet the projected operational dates and capacity targets.
- Usiminas Valuation: Assess the recoverability of the $486.6 million investment in Usiminas given the volatility in the Brazilian market and potential for further impairment charges.
- COVID-19 Impact: Evaluate the actual operational and financial impact of the pandemic on supply chains, demand, and production capacity in 2020, as the filing provides no quantitative estimate.