Business Context and Reporting Period
Ternium S.A., a leading steel producer in Latin America, reported its third-quarter and first nine months of 2015 results on November 3, 2015. The company operates integrated manufacturing facilities in Mexico, Argentina, Colombia, the southern United States, and Guatemala, with a production capacity of approximately 11.0 million tons of finished steel products. The financial statements are prepared in accordance with IFRS and presented in U.S. dollars.
Key Financial Metrics
Third Quarter 2015 (3Q 2015)
- Net Sales: USD 1,945.4 million
- Operating Income: USD 140.5 million (7.2% margin)
- EBITDA: USD 250.4 million (12.9% margin)
- Net Income: USD 40.0 million
- Net Income to Equity Holders: USD 24.8 million
- Earnings per ADS: USD 0.13
- Steel Shipments: 2,463,000 tons
- Capital Expenditures: USD 115.3 million
- Net Debt: USD 1.3 billion (1.2x LTM EBITDA)
First Nine Months 2015 (9M 2015)
- Net Sales: USD 6,067.5 million
- Operating Income: USD 447.7 million (7.4% margin)
- EBITDA: USD 776.0 million (12.8% margin)
- Net Income: USD 186.3 million
- Net Income to Equity Holders: USD 134.3 million
- Earnings per ADS: USD 0.68
- Steel Shipments: 7,291,000 tons
- Capital Expenditures: USD 342.8 million
- Free Cash Flow: USD 667.2 million
Material Changes vs. Prior Periods
Sequential Comparison (3Q 2015 vs. 2Q 2015)
- Operating Income: Increased 36% to USD 140.5 million, driven by higher shipments and a USD 56 reduction in operating cost per ton, partially offset by lower steel prices.
- EBITDA: Rose 18% to USD 250.4 million.
- Net Income: Decreased 21% to USD 40.0 million, primarily due to lower results from the Usiminas investment and a higher effective tax rate.
- Shipments: Steel shipments increased 3% sequentially.
Year-Over-Year Comparison (3Q 2015 vs. 3Q 2014)
- Operating Income: Decreased 55% to USD 140.5 million, reflecting a USD 157 drop in steel revenue per ton, partially offset by a USD 107 reduction in operating cost per ton.
- Net Income: Improved significantly from a loss of USD 544.1 million in 3Q 2014 to a profit of USD 40.0 million. The 2014 loss included a USD 739.8 million impairment of the Usiminas investment.
- Net Sales: Declined 12% to USD 1,945.4 million due to lower realized steel prices in main markets.
- EBITDA: Decreased 41% to USD 250.4 million.
Year-Over-Year Comparison (9M 2015 vs. 9M 2014)
- Net Income: Turned from a loss of USD 175.6 million in 9M 2014 to a profit of USD 186.3 million, largely due to the absence of the 2014 Usiminas impairment.
- Operating Income: Declined 48% to USD 447.7 million, driven by lower steel prices (USD 102 decrease per ton) despite a 4% increase in shipments.
- Net Debt: Decreased by USD 461.1 million during the period.
Outlook, Risks, and Management Commentary
Outlook and Guidance
- Q4 2015 Expectations: Management anticipates operating income will increase sequentially compared to Q3 2015, driven by higher operating margins despite expected lower shipments.
- Shipments: Mexico shipments are expected to decrease sequentially in Q4 due to seasonality and a planned 30-day stoppage of the hot rolling mill for upgrades. Argentina shipments are expected to remain stable.
- Prices and Costs: Steel prices in NAFTA markets faced downward pressure from imports but are expected to remain sequentially stable in Mexico. Raw material costs (iron ore, coking coal, scrap, energy) are expected to continue declining, gradually passing through to lower operating costs.
Risks and Contingencies
- Market Conditions: Risks include global production capacity, tariffs, and cyclicality in steel-consuming industries.
- Usiminas Investment: Continued volatility in results from the non-consolidated Usiminas investment impacts net income.
- Trade Environment: High levels of low-priced steel imports into the NAFTA region under unfair trade conditions pose a risk to pricing power.
Investor Verification Checklist
- Verify the impact of the planned 30-day hot rolling mill stoppage in Mexico on Q4 2015 shipment volumes and revenue.
- Confirm the sustainability of the USD 107–157 per ton reduction in operating costs as raw material prices fluctuate.
- Monitor the performance and valuation of the Usiminas investment, which caused significant volatility in prior periods.
- Assess the effectiveness of cost pass-through mechanisms in contracts given the downward trend in steel prices.
- Review the net debt reduction trajectory and the company's ability to maintain a net debt-to-EBITDA ratio near 1.2x.