Grupo SIMEC’s 2024 Financial Results: Currency Gains Mask Underlying Operational Struggles

Grupo SIMEC (NYSE: SIM), Mexico’s leading steel producer, has released its audited financial results for the year ended December 31, 2024. While the report highlights a 168% surge in net income to Ps. 11,475 million, the numbers tell a nuanced story of resilience amid a challenging steel market. Below, we dissect the key drivers, risks, and investment implications of these results.

Revenue Declines Reflect Structural Industry Headwinds

The company’s top-line performance was lackluster, with net sales plummeting 18% to Ps. 33,658 million. This decline stems from a 6% drop in steel shipments and a 13% fall in average selling prices, mirroring global steel industry struggles. Domestic sales in Mexico collapsed 25% to Ps. 18,270 million, likely due to weak construction demand—a critical end market for SIMEC’s products. International sales fared slightly better but still fell 8%, suggesting limited pricing power in global markets.

Net Income Surge Driven by Non-Operational Factors

The standout figure—a 168% jump in net income—is misleading without context. The gain was fueled by Ps. 6,630 million in comprehensive financial income, primarily from exchange rate fluctuations. The peso’s strengthening against the U.S. dollar (a key currency for global steel pricing) artificially inflated profits. Meanwhile, core operational metrics suffered:
- EBITDA dropped 21% to Ps. 6,864 million.
- Operating income fell 23% to Ps. 5,830 million.

This divergence underscores a critical risk: SIMEC’s earnings stability hinges on volatile currency swings rather than sustainable operational improvements.

Cost Management Holds Steady, but Margins Are Fragile

Despite falling prices and volumes, SIMEC maintained its 24% gross profit margin, aided by 13% lower input costs (driven by cheaper scrap metal). However, SG&A expenses rose 7% as a percentage of sales, signaling inefficiencies. The company’s minimal debt—Ps. 5.9 million—and strong liquidity (current ratio of 3.72x) provide a financial cushion, but reinvestment in growth remains constrained without revenue recovery.

Geographic and Product-Specific Weaknesses

• Domestic Exposure: Mexico’s construction slowdown hit SIMEC disproportionately, as its product mix relies heavily on construction-grade steel.
• Global Pricing Pressure: Even international sales faced headwinds, with average prices dropping 8% in Q3 2024. Special profiles (e.g., beams, rods) saw prices fall 14%, while commercial profiles dipped 7%.

Signs of Stabilization in Late 2024

A silver lining emerged in Q4 2024, with net sales rising 1% sequentially and average prices climbing 5%—a tentative rebound. This stabilization, if sustained, could signal improved demand in North America. However, the 7% year-over-year drop in Q3 operating income to Ps. 1,524 million highlights lingering challenges.

Key Risks and Investment Considerations

1. Currency Volatility: Earnings dependence on exchange rate swings introduces instability. A weaker peso could reverse gains in 2025.
2. Steel Industry Overcapacity: Global oversupply continues to depress prices, squeezing margins.
3. Mexico’s Construction Sector: Recovery in domestic demand is critical but uncertain amid economic slowdowns.

Conclusion: A Complicated Picture for Investors

Grupo SIMEC’s 2024 results are a mix of artificial earnings boosts from currency gains and operational stagnation. While the company’s low debt and liquidity offer resilience, its core business faces headwinds from weak demand and pricing pressures.

Investors should focus on two key metrics:
1. EBITDA recovery: A rebound from Ps. 6,864 million to pre-2023 levels (Ps. 8,638 million) would signal operational turnaround.
2. Domestic sales revival: A rebound in Mexico’s construction sector could lift domestic sales above Ps. 24,000 million.

Until then, SIMEC remains a high-risk, high-reward bet tied to macroeconomic factors beyond its control. For now, the currency tailwind has masked deeper vulnerabilities—a precarious position for long-term investors.

Final Note: Monitor Q1 2025 results for signs of sustained stabilization and track the peso’s exchange rate against the dollar for clues on future earnings volatility.