Grupo Simec, S.A.B. de C.V. — FY2019 Form 20-F Summary
Business context and reporting period
Grupo Simec is a Mexican steel manufacturer, processor and distributor operating in Mexico, the United States and Brazil. Its products include special bar quality steel, structural steel, rebar, bars and wire products serving automotive, construction and industrial markets. This Form 20-F covers the fiscal year ended December 31, 2019, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS and reported in Mexican pesos.
The company operated 15 facilities with approximately 5.8 million tons of crude steel capacity and 4.9 million tons of rolling and finishing capacity. Total shipments increased to 2.349 million tons from 2.192 million tons in 2018.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | Ps. 34,171 million | Ps. 35,678 million | Down 4% |
| Gross profit | Ps. 4,104 million | Ps. 5,115 million | Down 20% |
| Gross margin | 12% | 14% | Down 2 percentage points |
| Adjusted EBITDA | Ps. 3,576 million | Ps. 5,147 million | Down 31% |
| Adjusted EBITDA margin | Approximately 10.5% | Approximately 14.4% | Down approximately 3.9 percentage points |
| Net income attributable to controlling interest | Loss of Ps. 1,636 million | Income of Ps. 3,653 million | Reversed to a loss |
| Net loss | Ps. 1,640 million | Net income of Ps. 3,447 million | Material deterioration |
| Cash flow from operating activities | Ps. 1,043 million | Ps. 3,224 million | Down 68% |
| Capital expenditures | Ps. 1,271 million | Ps. 1,994 million | Down 36% |
| Cash and cash equivalents | Ps. 7,446 million | Ps. 6,987 million | Up 7% |
| Total assets | Ps. 44,015 million | Ps. 48,854 million | Down 10% |
| Total liabilities | Ps. 11,405 million | Ps. 13,345 million | Down 15% |
| Total stockholders’ equity | Ps. 32,610 million | Ps. 35,509 million | Down 8% |
The filing discloses approximately Ps. 5.7 million of short-term debt, consisting of legacy medium-term notes that matured in 1998 and remain outstanding. Management states that financial debt was less than U.S.$1 million at year-end. The filing does not present a conventional current debt balance comparable with the company’s cash holdings.
Material changes versus the prior comparable period
- Sales declined despite a 7% increase in shipment volume because the average selling price fell approximately 11%.
- Cost of sales declined 2%, but cost of sales as a percentage of sales increased to 88% from 86%, compressing gross margin.
- Administrative expenses increased 52% to Ps. 1,637 million, including higher Mexican expenses related partly to tax-authority reviews and a full-year contribution from newly acquired Brazilian operations.
- Foreign-exchange loss increased to Ps. 785 million from Ps. 147 million, reflecting peso appreciation against the U.S. dollar and translation effects.
- Income tax expense increased to Ps. 3,276 million from Ps. 752 million. The 2019 amount included approximately Ps. 2,324 million related to tax matters and remedial agreements with Mexico’s tax authority.
- Mexico remained the largest segment, but revenue fell 10% and net income shifted from Ps. 4,110 million to a Ps. 1,412 million loss. The U.S. segment remained loss-making, with gross loss of Ps. 632 million and net loss of Ps. 674 million. Brazil improved to net income of Ps. 291 million from a Ps. 395 million loss, supported by higher volume and the 2018 plant acquisitions.
- U.S. shipments fell 23% to 298,000 tons, while Brazil shipments increased 58% to 684,000 tons. Mexico shipments were broadly stable at approximately 1.367 million tons.
- Cash flow from operations fell sharply, primarily because of the net loss, although lower inventory and receivables supported cash generation. Investing cash use was limited to Ps. 107 million, partly because the company collected Ps. 1,071 million of related-party loans.
- Grupo Simec increased its ownership of SimRep Corporation, the Republic Steel parent, to 99.41% on January 1, 2019 by converting approximately U.S.$290 million of debt into equity.
Outlook, commentary, risks and unusual items
- Management estimated 2020 capital expenditures of approximately Ps. 1,127 million, including Ps. 332 million for Republic, Ps. 343 million for Mexico and Ps. 453 million for Brazil. Actual spending may differ materially.
- The filing reports that first-quarter 2020 sales increased 16% versus fourth-quarter 2019, shipment volume increased 9%, and average selling prices increased approximately 6.5%; the filing text contains an apparent date inconsistency in its price comparison.
- COVID-19 was identified as a material risk to automotive and construction demand, supply chains, production, liquidity, capital access and internal controls. The company qualified as an essential activity in Mexico and as critical infrastructure in the United States, but reported reduced demand and disruption.
- Steel prices, excess global capacity, competition, raw-material and energy costs, customer pricing pressure, foreign-exchange movements and trade restrictions remain key operating risks.
- The U.S. segment’s underutilized capacity and high labor and alloy costs continued to impair profitability. The Lorain, Ohio facility remained idle, with no near-term restart plan; its related property, plant and equipment had a net book value of approximately U.S.$41.5 million at year-end.
- The company held 136,541 metric tons of coking coal inventory valued at Ps. 747 million, although the Lorain blast furnace has been idle since 2008. Future utilization or impairment of this inventory remains uncertain.
- A preliminary 6.75% dumping rate was imposed in January 2020 on certain rebar exports to the United States; the company expected the rate to decrease following a February 2020 physical review.
- The company paid a Ps. 1,990 million dividend on March 10, 2020, approved after year-end. Management stated that additional near-term dividends were not expected because cash would be directed toward expansion and working capital.
- In February 2020, an arbitration decision involving SMS Concast required payments by the company’s Brazilian entities in various amounts and currencies. The filing does not provide a clear aggregate liability.
- Environmental liabilities included a Ps. 49.1 million reserve for probable U.S. environmental obligations. A California remediation matter remains unresolved, and the timing and cost of the required remedy are not clear.
- The company settled SEC internal-control charges in January 2019, paid a U.S.$200,000 civil penalty and retained an independent consultant. Management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2019, following remediation of previously reported weaknesses.
- The company is controlled by Industrias CH, which held approximately 78% of the Series B shares. Related-party loans, purchases, sales and service agreements are material governance considerations.
Most important facts for an investor to verify
- Whether the U.S. segment can return to profitability and whether the Lorain facility will restart or require further impairment.
- The sustainability of cash generation after the Ps. 1,990 million dividend and during the COVID-19 demand shock.
- The ultimate amount and timing of Mexican tax assessments, the approximately Ps. 2.324 billion remedial tax payments, and the reported tax credits under litigation.
- The outcome and financial impact of the SMS Concast arbitration and unresolved environmental remediation matters.
- The recoverability of Ps. 747 million of coking coal inventory and the valuation of goodwill and the San 42 trademark.
- The effect of U.S. trade remedies, tariffs and anti-dumping proceedings on exports.
- The terms and exposure of related-party loans and transactions with Industrias CH and affiliated entities.
- The company’s ability to maintain effective internal controls after the 2019 remediation program and SEC settlement.