Ternium S.A. Q2 2015 Results Summary
Business Context and Reporting Period
This Form 6-K filing reports the second quarter and first half 2015 results for Ternium S.A., a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the southern United States, and Guatemala. The reporting period covers the three and six months ended June 30, 2015. Financial statements are prepared in accordance with IFRS and presented in U.S. dollars.
Key Financial Metrics
| Metric | 2Q 2015 | 1H 2015 |
|---|---|---|
| Net Sales (USD million) | 1,996.1 | 4,122.1 |
| Operating Income (USD million) | 103.1 | 307.2 |
| EBITDA (USD million) | 212.2 | 525.6 |
| EBITDA Margin | 10.6% | 12.8% |
| Net Income (USD million) | 50.5 | 146.3 |
| Net Income to Equity Holders (USD million) | 41.0 | 109.5 |
| Earnings per ADS (USD) | 0.21 | 0.56 |
| Free Cash Flow (USD million) | 291.1 (2Q) | 531.1 (1H) |
| Net Debt Position (USD billion) | 1.5 (as of June 30, 2015) | N/A |
| Capital Expenditures (USD million) | 143.6 (2Q) | 227.5 (1H) |
Material Changes vs. Prior Periods
- Revenue Decline: Net sales decreased 9% year-over-year (YoY) in Q2 and 5% YoY in 1H 2015, driven primarily by lower steel prices in main markets (Mexico, Southern Region, Other Markets).
- Profitability Compression: Operating income fell 55% YoY in Q2 and 44% YoY in 1H. EBITDA declined 36% YoY in Q2 and 30% YoY in 1H.
- Volume vs. Price: Steel shipments increased 2% YoY in Q2 and 3% YoY in 1H, but this volume growth was insufficient to offset a significant drop in revenue per ton (down 11% YoY in Q2).
- Cost Management: Operating costs per ton decreased due to lower raw material, purchased slab, and energy costs, partially mitigating the revenue decline.
- Segment Performance: The Steel segment operating income dropped 47% YoY in Q2. The Mining segment swung from a profit of $16.4 million in Q2 2014 to a loss of $12.5 million in Q2 2015 due to lower iron ore prices and shipments.
Outlook, Risks, and Management Commentary
- Q3 Guidance: Management expects Q3 2015 operating income to be roughly in line with Q2 2015. This assumes stable shipments in Mexico and Argentina, with anticipated revenue per ton decreases in Mexico offset by ongoing cost reductions.
- Market Dynamics: Steel prices stabilized in the U.S. and Mexico in Q2 following a downward trend. Management anticipates sequentially lower steel prices in Mexico for Q3 due to contract price resets.
- Trade Environment: Recent anti-dumping and countervailing measures are expected to help curb unfair trade practices and subsidizing of steel imports in the U.S. and Mexico during the second half of the year.
- Cost Trends: International prices for iron ore, purchased slabs, and scrap remain at multi-year lows. However, the full benefit of these lower input costs will be realized gradually as inventories are consumed.
- Risks: Forward-looking statements are subject to risks including GDP uncertainty, market demand fluctuations, global production capacity, tariffs, and industry cyclicality.
Investor Verification Checklist
- Restatement Impact: Verify the impact of the May 28, 2015 restatement regarding the Usiminas investment carrying amount on comparative financial data.
- Tax Rate Volatility: Review the effective tax rate (38% in Q2 2015 vs. 10% in Q2 2014), noting the non-cash deferred tax charge related to Mexican peso depreciation.
- Usiminas Exposure: Note that Q2 2015 results do not include Usiminas results as their financial statements were unavailable at the time of filing.
- Working Capital: Confirm the $316.2 million decrease in working capital in Q2, driven by inventory reductions and receivables management.
- Debt Servicing: Assess the net debt position of $1.5 billion against the free cash flow generation of $291.1 million in Q2.