Business Context and Reporting Period
Ternium S.A., a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the southern United States, and Guatemala, reported its fourth quarter and full year results for the period ended December 31, 2014. The company also holds a significant stake in Usiminas, a Brazilian steel producer. The filing was submitted on February 19, 2015.
Key Financial Metrics
Fourth Quarter 2014
- Net Sales: USD 2,154.6 million (up 2% year-over-year).
- Operating Income: USD 191.3 million (down 35% year-over-year; down 39% sequentially).
- EBITDA: USD 300.9 million (down 23% year-over-year).
- EBITDA Margin: 14.0% (down from 18.4% in 4Q 2013).
- Net Income: USD 60.1 million (down 65% year-over-year).
- Earnings per ADS: USD 0.31 (down from USD 0.64 in 4Q 2013).
- Steel Shipments: 2,354,000 tons (up 6% year-over-year).
- Net Debt: USD 1.8 billion.
- Capital Expenditures: USD 108.7 million.
Full Year 2014
- Net Sales: USD 8,726.1 million (up 2% year-over-year).
- Operating Income: USD 1,056.2 million (down 5% year-over-year).
- EBITDA: USD 1,471.0 million (down 1% year-over-year).
- EBITDA Margin: 16.9% (down from 17.4% in 2013).
- Net Income: USD 588.8 million (down 1% year-over-year).
- Earnings per ADS: USD 2.30 (down from USD 2.32 in 2013).
- Steel Shipments: 9,381,000 tons (up 4% year-over-year).
- Free Cash Flow: USD 62.4 million.
- Capital Expenditures: USD 443.5 million (down 50% from 2013).
Material Changes vs. Prior Period
Fourth Quarter Performance: Operating income declined significantly compared to both the prior quarter and prior year. The sequential drop was driven by lower steel prices and the absence of a non-recurring USD 57.5 million insurance recovery recognized in Q3 2014. Year-over-year, operating margin compression resulted from a USD 31 decrease in steel revenue per ton and a USD 20 increase in operating cost per ton. Net income was further impacted by a higher effective tax rate due to the depreciation of the Mexican and Colombian pesos against the US dollar.
Full Year Performance: Despite a 4% increase in steel shipments, primarily driven by a 13% volume increase in Mexico, full-year operating income decreased slightly. This was due to lower revenue per ton in the Southern Region and Other Markets, partially offset by higher prices and a better product mix in Mexico. Capital expenditures were significantly reduced by 50% compared to 2013.
Usiminas Investment: The company recorded a USD 196.4 million impairment loss on its investment in Usiminas due to a weaker industrial environment in Brazil and lower commodity prices. This was partially offset by a USD 188.9 million gain from the purchase price allocation of additional Usiminas shares acquired in October 2014.
Guidance, Outlook, and Risks
Outlook: Management expects relatively stable operating income in the first quarter of 2015 compared to Q4 2014. This forecast assumes lower revenue per ton in main markets, offset by lower cost per ton (due to lower raw material prices and the devaluation of the Mexican peso) and slightly higher shipments, particularly in Mexico.
Market Conditions: Steel prices in North America trended downward in Q4 2014 and continued to decline in early 2015 due to increased imports and reduced demand from the energy sector following the drop in oil prices. Conversely, fundamentals in Mexico remain strong with a vibrant manufacturing industry.
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 in May 2015.
Risks: Key risks include global economic uncertainty, cyclicality in steel-consuming industries, tariff changes, and volatility in raw material and energy prices.
Investor Verification Checklist
- Verify the impact of the USD 196.4 million Usiminas impairment and the USD 188.9 million purchase price allocation gain on the consolidated equity results.
- Confirm the sustainability of the cost reductions in Mexico driven by the peso devaluation and lower raw material prices.
- Monitor the trend of North American steel prices and import volumes, which are negatively impacting revenue per ton.
- Review the proposed dividend of USD 0.90 per ADS and its approval status at the May 2015 shareholder meeting.
- Assess the company's net debt position of USD 1.8 billion in the context of reduced free cash flow in 2014.