Ternium S.A. Form 6-K Summary
Business Context and Reporting Period
This filing reports the financial and operational results for Ternium S.A. for the second quarter and first half of 2009, ended June 30, 2009. Ternium is a leading steel manufacturer in Latin America with principal operations in Mexico and Argentina. The results are presented in U.S. dollars and metric tons in accordance with IFRS.
Key Financial Metrics
| Metric | 2Q 2009 | 1H 2009 | 2Q 2008 | 1H 2008 |
|---|---|---|---|---|
| Net Sales (US$ million) | 1,140.3 | 2,315.0 | 2,364.2 | 4,306.9 |
| Operating Income (Loss) (US$ million) | (52.1) | (78.6) | 606.2 | 965.6 |
| EBITDA (US$ million) | 43.4 | 138.3 | 708.1 | 1,172.5 |
| EBITDA Margin | 4% | 6% | 30% | 27% |
| Net Income (US$ million) | 584.7 | 467.7 | 495.7 | 976.4 |
| EPS per ADS (US$) | 2.81 | 2.34 | 2.07 | 4.18 |
| Free Cash Flow (US$ million) | 354.2 | 695.2 | (195.0) | (293.7) |
| Net Financial Debt (US$ billion) | 1.0 | 1.0 | N/A | N/A |
| Cash and Equivalents (US$ billion) | 1.8 | 1.8 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 52% year-over-year in 2Q 2009 and 46% in 1H 2009, driven by a 26% drop in shipments and a 35% reduction in revenue per ton due to lower steel prices.
- Operating Loss: The company reported an operating loss of $52.1 million in 2Q 2009, a significant reversal from the $606.2 million profit in 2Q 2008. This was caused by lower volumes, lower prices, and increased personnel reduction charges ($34.1 million in 2Q 2009 vs. $8.3 million in 1Q 2009).
- Net Income Volatility: Despite the operating loss, Net Income was $584.7 million in 2Q 2009, up from $495.7 million in 2Q 2008. This increase is primarily due to a $428.0 million gain from discontinued operations (transfer of Sidor shares to Venezuela) and a $219.1 million non-cash foreign exchange gain.
- Balance Sheet Strengthening: Net financial debt decreased to $1.0 billion as of June 30, 2009, down $759.8 million from the end of 1Q 2009, aided by a $400.0 million cash payment received from the Sidor transaction.
Outlook, Risks, and Unusual Items
- Unusual Items: The financial results are heavily influenced by the transfer of Sidor shares to Venezuela's CVG on May 7, 2009. This generated a $428.0 million gain in discontinued operations and $57.1 million in interest income. Additionally, a $219.1 million foreign exchange gain in 2Q 2009 was driven by the revaluation of the Mexican Peso against the U.S. dollar on U.S. dollar-denominated debt; this is a non-cash item.
- Outlook: Management expects apparent demand in main markets to gradually increase in 3Q 2009 as destocking concludes. The company anticipates positive operating results in 3Q 2009 due to lower operating costs per ton, higher shipments, and stable revenue per ton, with capacity utilization averaging approximately 70%.
- Risks: Forward-looking statements are subject to risks including global GDP uncertainties, market demand fluctuations, global production capacity, tariffs, and cyclicality in steel-consuming industries.
Investor Verification Checklist
- Quality of Earnings: Verify the sustainability of Net Income by excluding the $428.0 million discontinued operations gain and the $219.1 million non-cash foreign exchange gain, which mask the underlying operating loss.
- Working Capital Dynamics: Confirm the extent of the inventory destocking process ($621.7 million reduction in 1H 2009) and whether this trend can continue to support positive free cash flow.
- Debt Maturity Profile: Review the schedule for the $2.8 billion financial debt, noting approximately $500 million due in 2010 and 2011, and $1.3 billion due in 2012.
- Cost Structure: Assess the impact of personnel reduction charges ($34.1 million in 2Q 2009) on future operating leverage and whether cost per ton reductions are sustainable.
- Market Demand: Monitor the recovery of steel demand in North America and South/Central America, where shipments dropped 24% and 40% respectively in 2Q 2009 compared to 2Q 2008.