Ternium S.A. Q1 2016 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s unaudited results for the first quarter ended March 31, 2016. Ternium is a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the southern United States, and Guatemala. The company also holds a controlling interest in Usiminas, a Brazilian steelmaker. Financial data is presented in U.S. dollars in accordance with IFRS.
Key Financial Metrics
| Metric | 1Q 2016 | 4Q 2015 | 1Q 2015 |
|---|---|---|---|
| Net Sales (USD million) | 1,655.5 | 1,809.9 | 2,126.1 |
| Operating Income (USD million) | 202.4 | 191.6 | 204.1 |
| EBITDA (USD million) | 303.0 | 297.1 | 313.4 |
| EBITDA Margin | 18.3% | 16.4% | 14.7% |
| Net Income (USD million) | 123.6 | (126.5) | 95.8 |
| Net Income to Equity Holders (USD million) | 94.4 | (126.2) | 68.5 |
| Earnings per ADS (USD) | 0.48 | (0.64) | 0.35 |
| Free Cash Flow (USD million) | 139.6 | N/A | N/A |
| Net Debt (USD billion) | 1.0 | 1.1 | N/A |
| Capital Expenditures (USD million) | 97.8 | 123.8 | 83.8 |
Material Changes vs. Prior Periods
- Revenue Decline: Net sales decreased 22% year-over-year (YoY) to $1.66 billion, driven by a 22% drop in steel revenue per ton due to lower realized prices in main markets. Sequentially, sales fell 9%.
- Profitability Resilience: Despite lower sales, Operating Income remained stable YoY ($202.4M vs. $204.1M) and increased 6% sequentially. This was achieved through a 25% reduction in operating costs, offsetting the revenue decline.
- Turnaround from Loss: The company reported a Net Income of $123.6 million, a significant improvement from the $126.5 million loss in 4Q 2015. The prior quarter's loss included a $191.9 million impairment charge on the Usiminas investment.
- Cost Drivers: Operating cost reductions were driven by lower raw material and energy costs, and in Argentina, the consumption of inventories valued at a lower U.S. dollar equivalent following the December 2015 peso devaluation.
- Foreign Exchange: Net foreign exchange results were a loss of $19.1 million in 1Q 2016, compared to a gain of $9.1 million in 1Q 2015, primarily due to an 11% depreciation of the Argentine Peso against the U.S. dollar.
Guidance, Outlook, and Strategic Initiatives
- Q2 Outlook: Management expects a sequentially higher operating income in Q2 2016 due to slightly higher shipments and EBITDA per ton. Average realized prices are expected to improve, partially offset by moderate cost increases in Argentina as inventory devaluation effects dissipate.
- Regional Demand: Mexico is expected to see a moderate sequential increase in shipments, supported by strong automotive demand. The Argentine market is expected to remain flat in Q2 due to slower economic activity.
- Investment: Ternium and partner Nippon Steel & Sumitomo Metal Corporation (NSSMC) agreed to build a second hot-dip galvanizing line in Mexico (Tenigal JV). The $300 million project will add 430,000 tons of annual capacity, with production starting in 2019.
- Liquidity: Net debt decreased to $1.0 billion (1.0x LTM EBITDA). The company generated $237.4 million in operating cash flow and repaid $85.5 million in borrowings during the quarter.
Investor Verification Checklist
- Argentina Currency Risk: Verify the ongoing impact of Argentine Peso volatility on reported USD costs and inventory valuation.
- Usiminas Investment: Confirm the status of the Usiminas investment and the likelihood of future impairment charges or recoveries.
- Steel Price Environment: Monitor global and regional steel price trends to validate the assumption of improving realized prices in Q2.
- Capital Allocation: Review the execution timeline and funding sources for the $300 million Tenigal expansion project.
- Debt Servicing: Assess the sustainability of the net debt position relative to EBITDA given the cyclical nature of the steel industry.