Ternium S.A. First Quarter 2015 Results Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s unaudited financial results for the first quarter ended March 31, 2015. 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. Financial statements are prepared in accordance with IFRS and presented in U.S. dollars.
Key Financial Metrics
| Metric | 1Q 2015 | 1Q 2014 | 4Q 2014 |
|---|---|---|---|
| Net Sales (USD million) | 2,126.1 | 2,149.4 | 2,154.6 |
| Operating Income (USD million) | 204.1 | 319.0 | 191.3 |
| EBITDA (USD million) | 313.4 | 416.9 | 300.9 |
| EBITDA Margin | 14.7% | 19.4% | 14.0% |
| Net (Loss) Income (USD million) | (22.2) | 188.2 | 60.1 |
| Net (Loss) Income to Equity Holders (USD million) | (42.8) | 150.0 | 61.6 |
| Earnings (Loss) per ADS (USD) | (0.22) | 0.76 | 0.31 |
| Steel Shipments (tons) | 2,431,000 | 2,335,000 | 2,354,000 |
| Free Cash Flow (USD million) | 240.0 | N/A | N/A |
| Net Debt Position (USD billion) | 1.5 | N/A | 1.8 |
Material Changes vs. Prior Periods
- Revenue and Volume: Net sales decreased 1% year-over-year (YoY) to $2.13 billion, driven by lower steel prices despite a 4% increase in steel shipments. Mexico shipments rose 9% YoY, while "Other Markets" declined 11%.
- Profitability: Operating income fell 36% YoY to $204.1 million due to a $44/ton decrease in revenue per ton. However, operating income improved sequentially by 7% compared to 4Q 2014, aided by lower operating costs ($47/ton reduction).
- Net Loss: The company reported a net loss of $22.2 million, a significant swing from the $188.2 million profit in 1Q 2014. This was primarily caused by a $132.7 million loss from non-consolidated companies, specifically a $109.7 million impairment of the Usiminas investment.
- Liquidity: Net debt decreased to $1.5 billion from $1.8 billion at the end of 2014. Free cash flow for the quarter was $240.0 million.
Outlook, Risks, and Unusual Items
- Usiminas Impairment and SEC Review: Ternium recorded a $109.7 million impairment on its Usiminas investment due to lower steel/iron ore price expectations and a weaker Brazilian Real. The SEC staff has issued comments regarding the carrying value of this investment. Ternium has requested a 15-day extension to file its 2014 Annual Report (Form 20-F) and warned that a restatement of 2014 and 1Q 2015 financials may be required if the SEC determines an additional impairment is necessary.
- Acquisitions: Ternium completed the acquisition of the remaining 46% minority interest in its Colombian subsidiary Ferrasa for $74.0 million and sold its 54% interest in Ferrasa Panamá for $2.0 million.
- 2Q 2015 Outlook: Management expects a slight softening in Mexico shipments due to high steel imports and destocking. Operating margins are expected to decline in 2Q 2015 as revenue per ton decreases faster than cost per ton (due to inventory lag). Shipments across all markets are expected to remain relatively stable.
- Foreign Exchange: The company benefited from a $9.1 million foreign exchange gain, primarily from the depreciation of the Mexican peso against the U.S. dollar on a net short local currency position.
Investor Verification Checklist
- Usiminas Restatement Risk: Verify the status of discussions with the SEC regarding the Usiminas investment carrying value and the potential for financial restatements.
- Margin Compression: Monitor the lag between falling input costs and falling selling prices in 2Q 2015, which management predicts will lower operating margins.
- Market Dynamics: Assess the impact of high steel imports and destocking in the U.S. and Mexico on future shipment volumes and pricing power.
- Debt Reduction: Confirm the sustainability of the $300 million reduction in net debt achieved in Q1 2015.