Ternium S.A. Q1 2018 Financial Summary
Business Context and Reporting Period
This Form 6-K filing presents the unaudited consolidated condensed interim financial statements for Ternium S.A. for the three-month period ended March 31, 2018. Ternium is a global steel manufacturer with operations primarily in Mexico, the Southern Cone (Argentina, Paraguay, Chile, Bolivia, Uruguay), and other markets including Brazil and the United States. The company operates through two reportable segments: Steel and Mining. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric (USD Thousands) | Q1 2018 | Q1 2017 |
|---|---|---|
| Net Sales | 2,961,313 | 2,075,108 |
| Gross Profit | 757,821 | 543,646 |
| Gross Margin | 25.6% | 26.2% |
| Operating Income | 523,071 | 364,151 |
| Profit for the Period | 422,095 | 310,389 |
| Profit Attributable to Owners | 366,724 | 261,335 |
| Earnings Per Share (Basic/Diluted) | $0.19 | $0.13 |
| Net Cash from Operating Activities | 192,118 | 85,760 |
| Total Borrowings (Current + Non-Current) | 3,010,217 | 3,442,521 (Dec 31, 2017) |
| Cash and Cash Equivalents | 232,642 | 337,779 (Dec 31, 2017) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by 42.7% year-over-year, driven by higher volumes and the consolidation of the newly acquired Ternium Brasil (formerly CSA) operations since September 2017.
- Profitability: Operating income rose 43.6% to $523.1 million. Profit for the period increased 36.0% to $422.1 million.
- Segment Performance: The Steel segment generated $508.1 million in operating income, while the Mining segment contributed $12.3 million.
- Working Capital: Net cash provided by operating activities more than doubled to $192.1 million, though changes in working capital consumed $266.1 million of cash flow.
- Debt Reduction: Total borrowings decreased by approximately $432 million compared to the year-end 2017 balance, reflecting net repayments of $180.6 million during the quarter.
Outlook, Risks, and Unusual Items
- Acquisition Integration: The Q1 2018 results include the full impact of the acquisition of thyssenkrupp's Brazilian steel assets (Ternium Brasil), completed in September 2017 for approximately $1.89 billion. This acquisition significantly expanded capacity in Brazil.
- Usiminas Governance: Ternium resolved a long-standing governance dispute with NSSMC regarding its investment in Usiminas (Brazil). A new shareholders' agreement was signed in April 2018, establishing alternating rights to nominate the CEO and Chairman of the Board.
- Contingencies:
- CSN Litigation: A lawsuit by Companhia Siderúrgica Nacional (CSN) regarding a tender offer for Usiminas shares was rejected by the São Paulo Court of Appeals in March 2018. CSN may appeal to the Superior Court of Justice.
- Tax Matters: A potential Mexican income tax adjustment of approximately $63.6 million is under review; management believes an unfavorable outcome is not probable. Additionally, significant provisions were recorded for the acquired Brazilian business regarding ICMS tax credits and fishermen association claims.
- Accounting Changes: The company adopted IFRS 9 (Financial Instruments) and IFRS 15 (Revenue) effective January 1, 2018. The adoption of IFRS 9 resulted in a net increase to opening retained earnings of $569,000.
Investor Verification Checklist
- Verify the sustainability of the 42.7% revenue growth, distinguishing between organic growth and the impact of the Ternium Brasil acquisition.
- Monitor the status of the CSN tender offer litigation and the potential for further appeals to the Superior Court of Justice in Brazil.
- Review the progress of the new governance structure at Usiminas and its impact on Ternium's $483.7 million investment carrying value versus its $926.4 million market value.
- Assess the impact of the $63.6 million potential Mexican tax adjustment and the $617.1 million provision related to ICMS tax benefits in Brazil.
- Track the company's debt repayment trajectory, noting the $180.6 million net reduction in borrowings during Q1 2018.