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Ternium S.A. Q1 2013 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, 2013. Ternium is a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the southern United States, and Guatemala. A significant accounting change occurred in this period: starting January 1, 2013, the company began proportionally consolidating its 50% interest in the Peña Colorada mining joint operation, whereas previously it was accounted for as an investment in a non-consolidated company.

Key Financial Metrics

Material Changes vs. Prior Periods

• Sequential Improvement (vs. 4Q 2012): Operating income surged 119% to $271.8 million, and Net Income swung from a loss of $233.1 million to a profit of $151.4 million. This turnaround was primarily driven by a $279.7 million reduction in equity losses from non-consolidated companies (specifically the reversal of a Usiminas impairment recorded in 4Q 2012) and a 3% increase in steel shipments.
• Year-Over-Year Decline (vs. 1Q 2012): Net sales decreased 2% to $2.1 billion, and Operating Income fell 4% to $271.8 million. The decline was caused by a $70 per ton decrease in steel revenue, largely due to lower prices in Mexico and Other Markets, which offset a 4% increase in shipment volumes.
• Segment Performance: The Steel segment operating income dropped $34.9 million year-over-year due to lower prices. Conversely, the Mining segment operating income increased $23.7 million year-over-year, driven by the proportional consolidation of Peña Colorada and lower third-party ore purchases.
• Cost Efficiency: Steel operating cost per ton decreased by $68 sequentially and $50 year-over-year, attributed to lower raw material costs and the restart of a blast furnace in Argentina.

Outlook, Risks, and Management Commentary

• Guidance: Management expects second-quarter 2013 operating income to be roughly in line with the first quarter. This outlook anticipates a sequential reduction in steel costs per ton offsetting a potentially weaker pricing environment.
• Market Conditions: Steel consumption is gradually recovering, with the automotive sector showing strength. However, North American capacity utilization remains moderately high relative to consumption, posing a risk to steel pricing. Construction activity remains low but improving.
• Liquidity and Debt: The company reduced its net debt position to $1.5 billion from $1.7 billion in the prior quarter, aided by $274.1 million in net debt repayments. Free cash flow for the quarter was $129.7 million.
• Risks: Forward-looking statements are subject to risks including GDP uncertainty, global production capacity, tariffs, and cyclicality in downstream industries.

Investor Verification Checklist

• Usiminas Impairment: Verify the nature of the $279.7 million reduction in equity losses compared to 4Q 2012 to ensure it is a non-recurring adjustment rather than a sustained operational improvement in the investment.
• Accounting Change Impact: Assess the long-term impact of the proportional consolidation of Peña Colorada on future revenue recognition and cost structures in the mining segment.
• Pricing Trends: Monitor the $70 per ton revenue decline in Mexico and Other Markets to determine if this is a temporary market fluctuation or a structural shift in pricing power.
• Debt Reduction Sustainability: Confirm if the $274.1 million in net debt repayments is sustainable given the current free cash flow generation of $129.7 million per quarter.