Ternium S.A. Form 6-K Summary: Second Quarter 2008 Results
Business Context and Reporting Period
This filing reports Ternium S.A.'s financial and operational results for the second quarter and first half ended June 30, 2008. The data is presented in U.S. dollars and metric tons in accordance with International Financial Reporting Standards (IFRS). A significant accounting change occurred during this period: Ternium ceased consolidating the results of its investment in Sidor as of April 1, 2008, due to the nationalization process in Venezuela. Sidor's results are now classified as discontinued operations.
Key Financial Metrics
| Metric | 2Q 2008 | 1H 2008 | 2Q 2007 | 1H 2007 |
|---|---|---|---|---|
| Net Sales (US$ million) | 2,374.8 | 4,327.5 | 1,255.9 | 2,430.7 |
| Operating Income (US$ million) | 610.4 | 973.6 | 203.0 | 413.1 |
| EBITDA (US$ million) | 714.1 | 1,184.3 | 281.9 | 557.8 |
| EBITDA Margin | 30% | 27% | 22% | 23% |
| Net Income (US$ million) | 498.9 | 982.4 | 315.0 | 566.6 |
| Equity Holders' Net Income (US$ million) | 415.6 | 837.8 | 236.9 | 459.1 |
| Earnings per ADS (US$) | 2.07 | 4.18 | 1.18 | 2.29 |
| Shipments (thousand tons) | 2,063.2 | 4,151.6 | 1,603.9 | 3,148.0 |
| Net Debt (US$ billion) | 2.5 (as of June 30, 2008) | - | - | - |
| Free Cash Flow (US$ million) | (195.0) | (293.8) | 116.0 | 358.0 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 89% year-over-year in 2Q 2008 and 78% in 1H 2008. This was driven by higher steel prices and the consolidation of Grupo Imsa.
- Profitability: Operating income surged 201% year-over-year in 2Q 2008. EBITDA per ton for flat and long steel rose to US$337 in 2Q 2008 from US$162 in 2Q 2007.
- Volume: Shipments increased 29% year-over-year in 2Q 2008, primarily due to the inclusion of Grupo Imsa volumes.
- Discontinued Operations: 2Q 2008 results exclude Sidor, whereas 2Q 2007 included a US$199.0 million gain from Sidor. 1H 2008 included US$159.9 million in gains from discontinued operations (US assets sale and Sidor).
- Cash Flow: Operating cash flow turned negative in 1H 2008 (US$42.9 million used) compared to positive in 1H 2007 (US$520.7 million provided), largely due to a US$940.8 million increase in working capital (inventory and receivables).
Outlook, Risks, and Management Commentary
- Guidance: Management expects a slightly lower operating margin in 3Q 2008 compared to 2Q 2008. This is attributed to higher purchased slab and raw material costs flowing into cost of sales as inventory is consumed.
- Market Outlook: Demand in North America remains stable but prices may soften in the second half of 2008 due to weakness in construction, home appliances, and automotive sectors. Demand and prices in South & Central America are expected to remain healthy.
- Cost Pressures: Higher costs for raw materials, energy, and labor are impacting margins. The consolidation of Grupo Imsa introduced a higher cost structure for purchased slabs.
- Capital Allocation: Capital expenditures for 1H 2008 were US$250.8 million, focused on expansion in Mexico (Monterrey flat steel shop) and Argentina (blast furnace relining). The company aims to reach 4 million tons of crude steel capacity in Argentina by mid-2010.
- Risks: Risks include global production capacity, tariffs, cyclicality in steel-consuming industries, and foreign exchange fluctuations (specifically the Mexican Peso).
Investor Verification Checklist
- Sidor Deconsolidation: Verify the impact of removing Sidor from consolidated results on future comparability and the valuation of the remaining investment.
- Working Capital Build: Assess the sustainability of the US$940.8 million increase in working capital and its impact on future free cash flow.
- Cost Pass-Through: Monitor the ability to pass higher raw material and slab costs to customers in the North American market where price softening is anticipated.
- Grupo Imsa Integration: Review the long-term margin profile of the newly consolidated Grupo Imsa assets versus Ternium's historical operations.
- Debt Levels: Confirm the net debt position of US$2.5 billion and the company's strategy for debt repayment amidst negative free cash flow.