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Business Context and Reporting Period

Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Ternium is a leading steel producer in Latin America, manufacturing flat and long steel products primarily in Argentina and Mexico. The company operates through subsidiaries including Siderar (Argentina) and Ternium Mexico (formerly Grupo Imsa and Hylsamex).

Key Financial Metrics (2008)

Note: 2008 results include the full-year consolidation of Grupo Imsa but exclude Sidor (Venezuela) after April 1, 2008, due to nationalization.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 50.3% to $8.46 billion, driven primarily by the full-year consolidation of Grupo Imsa and higher revenue per ton (up 38%).
• Profitability Decline: Despite higher operating income, net income attributable to equity holders decreased 8.8% to $715.4 million. This was caused by a $632.7 million net foreign exchange loss (due to the 25% devaluation of the Mexican peso) and the loss of income from discontinued operations (Sidor).
• Inventory Write-downs: The company recorded a $200 million inventory write-down in the second half of 2008 due to collapsing steel prices and excess supply.
• Debt Reduction: Total financial debt decreased by $815 million to $3.27 billion, utilizing proceeds from the sale of non-core U.S. assets to prepay borrowings.
• Discontinued Operations: Income from discontinued operations (Sidor) dropped significantly from $579.9 million in 2007 to $157.1 million in 2008, as Sidor was de-consolidated effective April 1, 2008.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Capital Expenditures: Due to the global economic downturn, Ternium delayed or canceled significant investment projects. 2008 CapEx was $544 million; 2009 CapEx is expected to be approximately $250 million, financed by cash from operations.
• Production Cuts: The company implemented temporary production cuts to reduce inventory and align with reduced global demand.
• Sidor Compensation: On May 7, 2009, Ternium completed the transfer of its 59.7% interest in Sidor to the Venezuelan state (CVG). The company agreed to receive $1.97 billion in compensation, with $400 million paid in cash and the remainder in installments through 2010.

• Global Economic Crisis: A sharp reduction in worldwide steel demand and protracted recession could materially adversely affect results.
• Steel Price Volatility: Prices fell sharply in late 2008; recovery timing is unpredictable.
• Foreign Exchange: Significant exposure to the Mexican peso and Argentine peso. A 1% devaluation of these currencies against the USD could reduce pre-tax income by $24.3 million.
• Energy Supply (Argentina): Restrictions on natural gas supply could curtail production at Siderar.
• Legal Proceedings: Ongoing arbitration with Corus regarding the early termination of a steel slab off-take agreement, with potential damages exceeding $150 million.

Investor Verification Checklist

• Sidor Receivables: Verify the collectability of the $1.57 billion remaining compensation from the Venezuelan government for the nationalized Sidor assets.
• Inventory Valuation: Assess the adequacy of inventory reserves given the steep decline in steel prices and the $200 million write-down already recorded.
• Debt Covenants: Confirm continued compliance with financial covenants (leverage and interest coverage ratios) given the decline in earnings and potential for further economic deterioration.
• Foreign Exchange Exposure: Review the effectiveness of hedging strategies against the Mexican peso, which caused a significant non-cash loss in 2008.
• Argentina Energy Constraints: Monitor the status of natural gas supply agreements and potential production curtailments at the Siderar facility.