Business Context and Reporting Period
This Form 6-K, filed on May 6, 2008, serves as a notice of the Annual General Meeting of Shareholders for Ternium S.A., a leading Latin American steel producer. The filing includes the 2007 Annual Report, covering the fiscal year ended December 31, 2007. Ternium manufactures flat and long steel products with operations in Mexico, Argentina, Venezuela, the southern U.S., and Guatemala. The company is currently undergoing significant strategic shifts, including the integration of the Grupo Imsa acquisition and the ongoing nationalization of its Venezuelan subsidiary, Sidor.
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 (USD Millions) | 2006 (USD Millions) |
|---|---|---|
| Net Sales | 8,184.4 | 6,565.6 |
| Operating Income | 1,586.4 | 1,636.6 |
| EBITDA | 2,152.3 | 2,074.3 |
| Net Income (Total) | 1,001.2 | 996.0 |
| Net Income (Attributable to Equity Holders) | 784.5 | 795.4 |
| Free Cash Flow | 1,127.9 | 839.2 |
| Capital Expenditures | 436.3 | 405.8 |
| Total Financial Debt | 4,084.9 | 1,057.1 |
| Net Financial Debt | 2,893.6 | 413.7 |
| Basic EPS (USD) | 0.39 | 0.41 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 25% to $8.2 billion, driven primarily by the consolidation of Grupo Imsa (acquired July 2007) and higher shipment volumes (10.5 million tons vs. 9.0 million tons in 2006).
- Profitability Pressure: Despite revenue growth, operating income and net income attributable to equity holders remained flat or slightly declined compared to 2006. This was due to higher raw material costs (slabs, iron ore), increased labor costs, and the lower EBITDA margins of the acquired Grupo Imsa processing assets.
- Debt Expansion: Total financial debt surged from $1.1 billion to $4.1 billion, and net debt increased from $414 million to $2.9 billion, largely to finance the $1.7 billion Grupo Imsa acquisition.
- Asset Divestiture: In a subsequent event (Feb 2008), Ternium sold non-core U.S. assets acquired from Grupo Imsa to BlueScope Steel for $726 million to reduce debt.
Guidance, Outlook, and Risks
- Sidor Nationalization (Critical Risk): The Venezuelan government announced the nationalization of Sidor (Ternium's 59.7% owned subsidiary) in April 2008. Ternium is negotiating compensation terms. The impact on financial position is currently indeterminable, but the loss of Sidor represents a significant short-term setback.
- Dividend Proposal: Management proposes a dividend of US$0.05 per share (US$0.50 per ADR), totaling approximately $100.2 million, payable in June 2008 if approved.
- Capital Expenditures: The company plans to increase capital expenditures over the next 2-3 years to expand capacity in Argentina (1.2 million tons) and Mexico, aiming to reduce costs and offset the potential loss of Sidor.
- Market Outlook: North American demand is expected to remain soft due to the U.S. economic slowdown, while South and Central American markets are projected to continue growing, though potentially impacted by the Sidor situation.
Investor Verification Checklist
- Sidor Compensation: Verify the progress of negotiations with the Venezuelan government regarding the fair value and terms of compensation for the nationalized Sidor assets.
- Debt Service Capacity: Assess the company's ability to service the increased debt load ($4.1 billion) given the flat operating income and potential loss of Sidor's cash flows.
- Integration Synergies: Monitor the realization of cost synergies from the integration of Grupo Imsa and the impact of the subsequent sale of non-core U.S. assets.
- Raw Material Costs: Track the volatility of slab and iron ore prices, which significantly impacted margins in 2007 and remain a key cost driver.
- Dividend Approval: Confirm shareholder approval of the proposed dividend at the June 4, 2008 Annual General Meeting.