Business Context and Reporting Period
Ternium S.A., a leading steel producer in Latin America, reported its fourth quarter and full-year 2015 results on February 23, 2016. The company operates integrated manufacturing facilities in Mexico, Argentina, Colombia, the southern United States, and Guatemala. The reporting period covers the quarter and fiscal year ended December 31, 2015. Financial statements are prepared in accordance with IFRS and presented in U.S. dollars.
Key Financial Metrics
Fourth Quarter 2015
- Net Sales: USD 1,809.9 million (down 16% year-over-year).
- Operating Income: USD 191.6 million (stable year-over-year; up 36% sequentially).
- EBITDA: USD 297.1 million (margin of 16.4%).
- Net Loss: USD 126.5 million (including a USD 191.9 million impairment charge).
- Steel Shipments: 2.31 million tons (down 2% year-over-year).
- Net Debt: USD 1.1 billion (1.1x LTM EBITDA).
- Free Cash Flow: USD 189.6 million.
Full Year 2015
- Net Sales: USD 7,877.4 million (down 10% year-over-year).
- Operating Income: USD 639.3 million (down 40% year-over-year).
- EBITDA: USD 1,073.1 million (margin of 13.6%).
- Net Income: USD 59.8 million (vs. USD 104.2 million loss in 2014).
- Steel Shipments: 9.6 million tons (up 2% year-over-year, a record high).
- Free Cash Flow: USD 856.8 million.
- Capital Expenditures: USD 466.6 million.
Material Changes vs. Prior Period
Operating income for the full year declined significantly due to a USD 108 decrease in steel revenue per ton, driven by lower global steel prices and overcapacity, particularly from Chinese exports. However, operating costs decreased by USD 70 per ton due to lower raw material and energy costs, partially offsetting revenue declines. Steel shipments increased by 2% for the full year, reaching a record 9.6 million tons, primarily driven by growth in Mexico (+5%) and the Southern Region.
The fourth quarter net loss was heavily impacted by a non-cash impairment charge of USD 191.9 million related to Ternium's investment in Usiminas, a Brazilian steel company. Additionally, net financial expenses increased sequentially due to foreign exchange losses stemming from the 28% depreciation of the Argentine Peso against the U.S. dollar.
Guidance, Outlook, and Risks
Outlook: Ternium expects first quarter 2016 operating income to approach fourth quarter 2015 levels. Shipments in Mexico are expected to return to previous quarter levels, supported by industrial and construction demand. Conversely, shipments in the Southern Region are anticipated to decrease due to destocking and seasonality. Average realized prices are expected to decrease sequentially in main markets, partially offset by lower costs resulting from the Argentine Peso devaluation and pass-through of lower raw material prices in Mexico.
Risks and Contingencies:
- Usiminas Impairment: The investment in Usiminas was impaired due to a downgraded economic scenario and a "going concern" uncertainty noted by auditors. The remaining book value is USD 240.0 million.
- Market Conditions: Global steel industry overcapacity and low-priced Chinese exports continue to exert pressure on prices.
- Currency Volatility: Significant depreciation of the Argentine Peso and Mexican Peso impacts financial results and cost structures.
Dividend Proposal: The Board proposed an annual dividend of USD 0.09 per share (USD 0.90 per ADS), totaling approximately USD 180.4 million, subject to shareholder approval.
Investor Verification Checklist
- Verify the sustainability of the USD 191.9 million impairment charge on Usiminas and the remaining book value of USD 240.0 million.
- Confirm the impact of the Argentine Peso devaluation on future cost structures and the timing of cost pass-through in Argentina.
- Monitor the proposed dividend payment of USD 180.4 million and its approval status at the May 4, 2016 shareholder meeting.
- Assess the ability to maintain record shipment volumes in Mexico amidst global price pressures and potential trade policy changes.
- Review the net debt reduction trajectory, currently at USD 1.1 billion, against future capital expenditure plans.