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Ternium S.A. Form 6-K Summary: Second Quarter and First Half 2014

Business Context and Reporting Period

This filing reports the unaudited financial and operational results for Ternium S.A., a leading Latin American steel producer, for the second quarter and first half ended June 30, 2014. The company operates integrated manufacturing facilities in Mexico, Argentina, Colombia, the southern United States, and Guatemala, and holds a controlling interest in Usiminas (Brazil). Results are presented in U.S. dollars in accordance with IFRS.

Key Financial Metrics

Material Changes vs. Prior Periods

• Sequential Performance (2Q vs. 1Q 2014): Operating income declined 27% to $231.3 million, and EBITDA fell 21% to $330.1 million. This was driven by a $57 increase in steel operating cost per ton, primarily due to higher raw material/purchased slab costs and maintenance expenses from planned stoppages in Mexico. These cost increases were only partially offset by a $15 increase in revenue per ton.
• Year-Over-Year Performance (2Q 2014 vs. 2Q 2013): Net income increased 34% to $180.3 million, despite a 16% drop in operating income. The net income improvement was driven by significantly lower income tax expenses (due to non-cash deferred tax liability reductions) and better results from Usiminas. Steel shipments rose 7% year-over-year, led by a 18% volume increase in Mexico, while the Southern Region saw a 5% volume decline.
• First Half 2014 vs. First Half 2013: Net income rose 29% to $368.5 million. Operating income remained flat ($550.3 million vs. $547.8 million) as a 5% increase in steel shipments offset lower revenue per ton in the Southern Region. Mining segment sales dropped 21% due to lower iron ore shipments to third parties.

Outlook, Risks, and Management Commentary

• Outlook: Management expects healthy shipment levels to continue in Mexico for the third quarter, with a slight increase in revenue per ton. Shipments in the Southern Region are expected to remain stable with average prices not changing significantly. Overall, Ternium anticipates a slightly higher operating income in Q3 2014 compared to Q2, driven by higher revenue per ton partially offset by higher costs.
• Liquidity and Cash Flow: The company reported negative free cash flow for both the quarter and the first half, primarily due to a $504.5 million increase in working capital (driven by higher inventories and receivables) and capital expenditures. Net debt increased to $2.0 billion from $1.6 billion at the end of Q1.
• Risks and Contingencies: Key risks include global production capacity, tariffs, cyclicality in steel-consuming industries, and foreign exchange fluctuations. Specifically, the Argentine subsidiary (Siderar) faced cost increases in local currency terms that were not fully mitigated by the 2% devaluation of the Argentine Peso against the USD in Q2.

Investor Verification Checklist

• Working Capital Build-up: Verify the sustainability of the $504.5 million increase in working capital (inventories and receivables) and its impact on future cash flow.
• Cost Structure in Argentina: Monitor the impact of local currency devaluation on Siderar's cost base, as the 2% devaluation in Q2 failed to offset local cost increases.
• Iron Ore Segment: Assess the long-term strategy for the mining segment, which saw a 22% drop in shipments and 18% drop in sales due to lower production at Peña Colorada.
• Tax Normalization: Note that Q2 net income benefited from non-cash tax gains; verify if future periods will reflect normalized tax rates.
• Debt Levels: Track the net debt position, which rose to $2.0 billion, and the company's ability to service debt given negative free cash flow.