Ternium S.A. Q2 and H1 2016 Financial Summary
Business Context and Reporting Period
This Form 6-K filing, dated August 2, 2016, presents Ternium S.A.'s unaudited financial results for the second quarter and first half of 2016, ended June 30, 2016. Ternium is a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the southern United States, and Guatemala. The company also holds a significant investment in Usiminas, a Brazilian steel producer. Results are prepared under IFRS and presented in U.S. dollars.
Key Financial Metrics
| Metric | 2Q 2016 | 1H 2016 |
|---|---|---|
| Net Sales (USD million) | 1,862.8 | 3,518.3 |
| Operating Income (USD million) | 293.5 | 495.9 |
| EBITDA (USD million) | 392.8 | 695.8 |
| EBITDA Margin | 21.1% | 19.8% |
| Net Income (USD million) | 174.3 | 297.8 |
| Net Income to Equity Holders (USD million) | 154.0 | 248.4 |
| Earnings per ADS (USD) | 0.78 | 1.27 |
| Steel Shipments (tons) | 2,608,000 | 5,038,000 |
| Net Debt (USD billion) | 1.1 | 1.1 |
| Free Cash Flow (USD million) | 231.4 (2Q) | 371.0 (1H) |
Material Changes vs. Prior Periods
- Profitability Surge: Operating income for 2Q 2016 increased 185% year-over-year (YoY) to $293.5 million and 45% sequentially. EBITDA rose 85% YoY to $392.8 million.
- Volume vs. Price: Steel shipments increased 9% YoY to 2.6 million tons, driven by a 20% increase in Mexico. However, revenue per ton decreased 13% YoY due to lower realized steel prices across all markets.
- Cost Efficiency: Operating costs decreased significantly, with cost per ton down 24% YoY. This was driven by lower raw material costs (iron ore, scrap, energy) and the favorable impact of the Argentine peso devaluation on inventory valuation.
- Regional Performance: Mexico contributed to record shipments and higher revenue per ton sequentially. The Southern Region (Argentina) saw a 15% decrease in shipments and a 17% decrease in revenue per ton YoY due to weak local market conditions.
- Non-Operating Items: Net foreign exchange results included a $19.8 million gain in 2Q 2016 due to the Mexican peso devaluation. Income tax expense increased to $124.0 million (42% effective rate) due to a non-cash deferred tax charge related to the peso devaluation.
Guidance, Outlook, and Risks
- Q3 2016 Outlook: Management anticipates a sequential increase in operating income for Q3 2016, driven by higher operating margins despite expected lower shipments.
- Price Environment: Average realized prices are expected to increase in Q3, reflecting improvements in the U.S. steel market, though slab price increases will likely pass through to costs only in Q4.
- Regional Risks:
- Mexico: Shipments expected to decrease in Q3 due to inventory buildup in the commercial market and seasonality in automotive and HVAC sectors.
- Argentina: Market conditions remain weak; further weakness in domestic shipments is expected, partially offset by higher exports to neighboring countries.
- Capital Allocation: Significant cash outflows in 2Q included $227.5 million in dividends, a $114.4 million capital contribution to Usiminas, and a $29.4 million loan to Techgen.
Investor Verification Checklist
- Currency Impact: Verify the sustainability of cost savings derived from the Argentine peso devaluation and the impact of future Mexican peso fluctuations on deferred tax liabilities.
- Inventory Levels: Confirm the extent of inventory buildup in the Mexican market and its potential to suppress Q3 shipments.
- Usiminas Investment: Review the performance and capital requirements of Usiminas, given the recent $114.4 million cash contribution.
- Cost Pass-Through: Monitor the timeline for passing through higher slab market prices to customers, currently projected for Q4 2016.
- Debt Metrics: Validate the net debt position of $1.1 billion and the leverage ratio of 0.9x LTM EBITDA in the context of ongoing capital expenditures and dividend payments.