Ternium S.A. First Quarter 2009 Results Summary
Business Context and Reporting Period
This Form 6-K filing, dated May 4, 2009, reports Ternium S.A.'s consolidated financial results for the first quarter ended March 31, 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 International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric | 1Q 2009 | 4Q 2008 | 1Q 2008 |
|---|---|---|---|
| Net Sales (US$ million) | 1,174.7 | 1,721.1 | 1,942.6 |
| Shipments (tons) | 1,504,000 | 1,547,000 | 2,088,000 |
| Operating Income (Loss) (US$ million) | (26.5) | 186.3 | 359.4 |
| EBITDA (US$ million) | 95.0 | 281.1 | 464.4 |
| EBITDA Margin | 8% | 16% | 24% |
| Net Income (Loss) (US$ million) | (117.0) | (348.5) | 480.7 |
| Net Income to Equity Holders (US$ million) | (93.2) | (334.0) | 422.1 |
| Earnings (Loss) per ADS (US$) | (0.46) | (1.67) | 2.11 |
| Free Cash Flow (US$ million) | 341.0 | Not stated | (98.8) |
| Net Financial Debt (US$ billion) | 1.8 | 2.145 | Not stated |
Material Changes vs. Prior Periods
- Revenue Decline: Net sales decreased 40% year-over-year (YoY) and 32% quarter-over-quarter (QoQ), driven by a 28% drop in shipments and a 16% decrease in revenue per ton.
- Operating Loss: The company reported an operating loss of $26.5 million, a significant deterioration from an operating income of $359.4 million in 1Q 2008. This was primarily due to lower gross margins and a $123.1 million inventory write-down.
- Foreign Exchange Impact: A non-cash foreign exchange loss of $160.5 million occurred due to a 6% devaluation of the Mexican Peso against the U.S. dollar. This compares to a $622.5 million loss in 4Q 2008 and a $40.2 million gain in 1Q 2008.
- Cost Reductions: Operating costs per ton decreased by $197 compared to 4Q 2008, and capital expenditures were reduced by 60% compared to the prior quarter.
Outlook, Risks, and Management Commentary
- Market Outlook: Management expects weak apparent demand in the second quarter of 2009 due to continued inventory destocking. Shipments are anticipated to gradually increase in the second half of 2009.
- Pricing and Costs: Prices are expected to remain weak due to low industry capacity utilization. Costs are projected to decrease due to lower steel-making input prices and ongoing adjustment initiatives.
- Liquidity Strategy: The company anticipates a lower net debt position at the end of 2Q 2009, driven by declining working capital needs and low capital expenditures. Ternium plans to balance inventory levels with expected demand by the third quarter.
- Risks: Forward-looking statements are subject to risks including GDP uncertainties, market demand fluctuations, global production capacity, tariffs, and industry cyclicality.
Investor Verification Checklist
- Inventory Valuation: Verify the $123.1 million inventory write-down and the remaining inventory levels ($1.345 billion) given the destocking strategy.
- Currency Exposure: Assess the ongoing impact of Mexican and Argentine Peso devaluations on U.S. dollar-denominated debt and future earnings.
- Cash Flow Sustainability: Confirm the $341.0 million positive free cash flow is sustainable as capital expenditures may rise and working capital improvements normalize.
- Debt Servicing: Review the $2.9 billion total financial debt against the $1.2 billion cash position to evaluate liquidity coverage.
- Discontinued Operations: Note that 1Q 2008 results included a $159.9 million gain from discontinued operations (Sidor and non-core US assets), which is absent in 1Q 2009, making YoY comparisons of net income less reflective of core operations.