Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2016
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Ternium is a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the United States, and Guatemala. The company operates two primary segments: Steel (manufacturing and processing finished steel products) and Mining (iron ore extraction). It also holds a significant investment in Usiminas, a Brazilian steel producer.
Key Financial Metrics (2016)
| Metric | 2016 (USD) | 2015 (USD) |
|---|---|---|
| Net Sales | $7,224.0 million | $7,877.4 million |
| Operating Income | $1,141.7 million | $639.3 million |
| Net Income (Total) | $706.9 million | $59.8 million |
| Net Income (Attributable to Owners) | $595.6 million | $8.1 million |
| Basic EPS (USD) | $0.30 | $0.00 |
| Operating Margin | 15.8% | 8.1% |
| Total Assets | $8,322.9 million | $8,062.6 million |
| Total Borrowings | $1,218.6 million | $1,521.0 million |
| Cash and Cash Equivalents | $183.5 million | $151.5 million |
| Capital Expenditures | $435.5 million | $466.6 million |
Material Changes vs. Prior Period
- Profitability Surge: Net income attributable to owners increased dramatically from $8.1 million in 2015 to $595.6 million in 2016. This was driven by a 79% increase in operating income and the absence of the significant impairment charge recorded in 2015 related to the Usiminas investment.
- Revenue Decline: Net sales decreased 8% year-over-year to $7.2 billion. This was primarily due to lower steel prices in key markets, partially offset by a 2% increase in shipment volumes (9.8 million tons).
- Cost Efficiency: Operating costs decreased by $1.1 billion. The cost per ton dropped by $133, driven by lower costs for purchased slabs, raw materials, energy, and labor.
- Debt Reduction: Total financial debt decreased by $302.4 million to $1.2 billion, reflecting net repayments of borrowings.
- Segment Performance:
- Steel Segment: Operating income rose to $1.1 billion from $670.7 million.
- Mining Segment: Turned a profit of $1.5 million compared to a $24.5 million loss in 2015.
Guidance, Outlook, and Risks
Recent Developments and Strategy
- Acquisition of CSA: In February 2017, Ternium agreed to acquire CSA, a Brazilian slab producer, for an enterprise value of €1.5 billion, financing the deal entirely with debt.
- Expansion in Mexico: Announced plans to build a hot-dip galvanizing line and a pre-painting line in Pesquería, Mexico, with an estimated investment of $260 million.
- Dividend Proposal: The Board proposed an annual dividend of $0.10 per share ($1.00 per ADS), totaling approximately $196.3 million.
Key Risks and Contingencies
- Usiminas Investment: Ternium holds a 20.5% stake in Usiminas. The investment carries a risk of further impairment due to ongoing governance conflicts within Usiminas' control group and economic volatility in Brazil. The carrying value was $411.1 million as of December 31, 2016.
- Geopolitical and Economic Risks: Operations in Argentina face risks related to inflation, exchange controls, and energy shortages. Operations in Mexico face risks related to security, crime, and potential changes to NAFTA or U.S. trade policies.
- Steel Industry Cyclicality: The company is exposed to global steel overcapacity, particularly from China, which can lead to price volatility and unfair trade practices (antidumping duties).
- Legal Proceedings: Outstanding litigation includes claims by CSN regarding the 2012 Usiminas acquisition (dismissed in lower courts but potentially appealable) and tax assessments in Argentina and Mexico.
Investor Verification Checklist
- Usiminas Valuation: Verify the current status of the governance conflict at Usiminas and the likelihood of further impairment charges on Ternium's $411 million investment.
- Argentina Liquidity: Assess the impact of Argentine exchange controls and inflation on Siderar's ability to repatriate cash and service debt.
- CSA Acquisition Financing: Review the terms of the debt financing for the €1.5 billion CSA acquisition and its impact on Ternium's leverage ratios.
- Trade Policy Exposure: Monitor U.S. Section 232 investigations and potential changes to NAFTA that could affect Ternium's exports from Mexico.
- Raw Material Costs: Track the volatility of iron ore, scrap, and energy prices, which significantly influence Ternium's cost structure.