Ternium S.A. Form 6-K Summary: Second Quarter 2012 Results
Business Context and Reporting Period
This filing reports the unaudited financial and operational results for Ternium S.A. for the second quarter and first half ended June 30, 2012. Ternium is a leading steel manufacturer in Latin America with principal operations in Mexico and Argentina. The results are presented in U.S. dollars in accordance with International Financial Reporting Standards (IFRS). Notable accounting changes include the prospective change of the functional currency for Mexican subsidiaries to the U.S. dollar effective January 1, 2012, and the deconsolidation of Peña Colorada.
Key Financial Metrics
| Metric | 2Q 2012 | 1H 2012 | 2Q 2011 | 1H 2011 |
|---|---|---|---|---|
| Net Sales (USD million) | 2,157.2 | 4,339.1 | 2,332.5 | 4,467.1 |
| Operating Income (USD million) | 257.6 | 540.8 | 345.3 | 631.3 |
| EBITDA (USD million) | 348.0 | 720.0 | 448.9 | 835.1 |
| EBITDA Margin | 16% | 17% | 19% | 19% |
| Net Income (USD million) | 125.1 | 315.6 | 246.9 | 490.1 |
| Net Income to Equity Holders (USD million) | 110.8 | 270.4 | 197.7 | 402.4 |
| Earnings per ADS (USD) | 0.56 | 1.38 | 1.01 | 2.04 |
| Shipments (tons) | 2,173,000 | 4,335,000 | 2,172,000 | 4,344,000 |
| Net Debt (USD billion) | 1.9 | 1.9 | N/A | N/A |
| Free Cash Flow (USD million) | (74.5) | 36.2 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 8% year-over-year in 2Q 2012 and 3% in 1H 2012, driven primarily by lower revenue per ton due to declining steel prices, particularly in North America and South/Central America.
- Profitability Compression: Operating income fell 25% in 2Q 2012 and 14% in 1H 2012 compared to the prior year. EBITDA margins contracted from 19% to 16% in the second quarter.
- Financial Results: Net financial results shifted from a gain of $15.6 million in 2Q 2011 to a loss of $46.6 million in 2Q 2012. This was caused by higher net interest expenses due to increased indebtedness and a significant reduction in non-cash foreign exchange gains following the change in functional currency for Mexican subsidiaries.
- Usiminas Investment: Ternium's equity investment in Usiminas contributed a loss of $6.7 million in 2Q 2012. Additionally, a 10.9% depreciation of the Brazilian Real resulted in a $215.8 million reduction in Ternium's equity via currency translation adjustments.
- Segment Performance: Flat steel operating income dropped 27% year-over-year in 2Q 2012, while long steel operating income declined 13%.
Outlook, Risks, and Management Commentary
- Outlook: Management expects shipment levels to remain steady in the third quarter of 2012. However, declining regional prices are anticipated to result in a lower average price and reduced operating income for the third quarter compared to the second.
- Liquidity and Capital: Net debt increased to $1.9 billion at June 30, 2012, up from $1.7 billion at the end of March. This increase was driven by a $700 million syndicated term loan to finance the acquisition of a stake in Usiminas and dividend payments of $147.2 million to shareholders.
- Capital Expenditures: Capex for 1H 2012 was $406.5 million, focused on greenfield facilities in Mexico and mill expansions in Argentina and Guatemala.
- Risks: Forward-looking statements highlight risks related to global economic uncertainty, market demand, production capacity, tariffs, and cyclicality in steel-consuming industries.
Key Facts for Investor Verification
- Verify the impact of the functional currency change for Mexican subsidiaries on future foreign exchange volatility and reported earnings.
- Monitor the integration and performance of the Usiminas investment, including exposure to Brazilian Real fluctuations.
- Assess the sustainability of operating margins given the trend of declining revenue per ton in key markets.
- Review the trajectory of net debt levels following the $700 million borrowing for the Usiminas acquisition.
- Confirm the accuracy of the $10.2 million non-recurring tax loss in Mexico and its impact on the effective tax rate.