Business Context and Reporting Period
Ternium S.A., a leading steel producer in Latin America, reported its third-quarter and first nine months of 2014 results on November 4, 2014. The company operates integrated manufacturing facilities in Mexico, Argentina, Colombia, the southern United States, and Guatemala, and holds a controlling interest in Usiminas, a Brazilian steel company. Financial data is presented in U.S. dollars in accordance with IFRS.
Key Financial Metrics
| Metric | 3Q 2014 | 9M 2014 |
|---|---|---|
| Net Sales (USD million) | 2,218.3 | 6,571.5 |
| Operating Income (USD million) | 314.5 | 864.9 |
| EBITDA (USD million) | 423.0 | 1,170.1 |
| EBITDA Margin | 19.1% | 17.8% |
| Net Income (USD million) | 160.2 | 528.7 |
| Net Income to Equity Holders (USD million) | 111.7 | 390.8 |
| Earnings per ADS (USD) | 0.57 | 1.99 |
| Steel Shipments (tons) | 2,335,000 | 7,027,000 |
| Capital Expenditures (USD million) | 94.8 | 334.8 |
| Net Debt (USD billion) | 1.7 | 1.7 |
| Free Cash Flow (USD million) | 193.1 | (37.3) |
Material Changes vs. Prior Periods
- Third Quarter 2014 vs. 3Q 2013: Net sales increased 3% to $2.2 billion. Operating income rose 18% to $314.5 million, and EBITDA increased 18% to $423.0 million. Net income grew 18% to $160.2 million.
- Third Quarter 2014 vs. 2Q 2014: Operating income surged 36% sequentially, and EBITDA rose 28%. However, Net Income to Equity Holders declined 14% due to higher income tax expenses.
- First Nine Months 2014 vs. 9M 2013: Net sales increased 2%. Operating income grew 6% to $864.9 million. Net income attributable to equity holders increased 18% to $390.8 million.
- Segment Performance: Mexico steel sales grew 15% in 3Q 2014 and 16% in 9M 2014. Conversely, the Southern Region (Argentina) saw sales declines of 12% in 3Q and 10% in 9M. Mining segment sales dropped 13% in 9M 2014 due to lower iron ore shipments.
Guidance, Outlook, and Unusual Items
- Unusual Items: Third-quarter results included a non-recurring gain of $57.5 million from an insurance recovery related to damages at the Siderar subsidiary in Argentina. Excluding this gain, 3Q 2014 EBITDA per ton was $157 and the margin was 16%.
- Outlook: Management expects to maintain strong shipment levels and operating margins in Q4 2014. Shipments are anticipated to be slightly higher in Q4 compared to Q3, driven by the ramp-up of new facilities in Mexico.
- Market Conditions: Demand in the U.S. and Mexico remains healthy. The Argentine construction and industrial sectors are expected to remain stable, though a moderate year-over-year contraction in shipments is anticipated for the Southern Region.
- Cost Environment: Excluding the insurance gain, operating income is expected to be relatively stable in Q4, reflecting slightly lower steel prices and costs due to lower raw material and purchased slab prices.
Investor Verification Checklist
- Insurance Recovery Impact: Verify the sustainability of operating income by excluding the $57.5 million non-recurring insurance gain recognized in Q3 2014.
- Regional Divergence: Monitor the contrast between strong growth in Mexico (16% sales increase in 9M) and contraction in the Southern Region (Argentina) due to local economic conditions.
- Working Capital Pressure: Review the $553.2 million increase in working capital during the first nine months, driven by higher inventories and receivables, which contributed to negative free cash flow for the period.
- Tax Rate Volatility: Note the impact of Mexican peso devaluation on deferred tax calculations and prior period tax adjustments, which influenced net income despite higher operating income.
- Capital Expenditure Reduction: Confirm the strategic shift in capital allocation, with 9M 2014 CapEx down 54% year-over-year to $334.8 million.