Ternium S.A. Q1 2014 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports the first quarter 2014 results for Ternium S.A., a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the southern United States, and Guatemala. The reporting period covers the three months ended March 31, 2014. Financial data is presented in U.S. dollars in accordance with International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric | 1Q 2014 | 1Q 2013 | 4Q 2013 |
|---|---|---|---|
| Net Sales (USD million) | 2,149.4 | 2,135.7 | 2,116.0 |
| Operating Income (USD million) | 319.0 | 271.8 | 295.6 |
| EBITDA (USD million) | 416.9 | 367.7 | 390.0 |
| EBITDA Margin | 19.4% | 17.2% | 18.4% |
| Net Income (USD million) | 188.2 | 151.4 | 171.1 |
| Net Income to Equity Holders (USD million) | 150.0 | 129.3 | 125.6 |
| Earnings per ADS (USD) | 0.76 | 0.66 | 0.64 |
| Steel Shipments (tons) | 2,335,000 | 2,241,000 | 2,232,000 |
| Net Debt (USD billion) | 1.6 | N/A | 1.5 |
| Capital Expenditures (USD million) | 103.6 | 218.1 | 158.2 |
| Free Cash Flow (USD million) | (127.5) | 129.6 | N/A |
Material Changes vs. Prior Periods
- Revenue and Profit Growth: Net sales increased 1% year-over-year (YoY) and 2% sequentially. Operating income rose 17% YoY and 8% sequentially, driven by a 4% increase in steel shipments and a 5% reduction in operating cost per ton.
- Regional Performance: Mexico shipments grew 13% YoY, contributing significantly to revenue. Conversely, the Southern Region (primarily Argentina) saw a 7% decline in net sales due to lower steel prices, despite stable shipment volumes.
- Mining Segment: Mining net sales dropped 24% YoY due to a 20% decrease in iron ore shipments and lower revenue per ton.
- Cost Structure: Cost of sales decreased 1% YoY. SG&A expenses fell 6% YoY, primarily due to lower freight and labor costs.
- Liquidity and Debt: Net debt increased to USD 1.6 billion from USD 1.5 billion in the prior quarter, attributed to a USD 368.9 million increase in working capital (inventories and receivables). Free cash flow was negative USD 127.5 million.
Outlook, Risks, and Management Commentary
- Guidance: Management expects slightly lower operating income in Q2 2014 compared to Q1 2014 due to higher raw material and purchased slab costs, partially offset by increased shipments.
- Operational Outlook: Improved shipment levels in Mexico are expected to continue. The new Pesquería facility ramp-up is on plan, and Tenigal is advancing its certification process with automakers.
- Market Risks: Steel prices in North America are currently attractive but face long-term risks from European/Asian prices and uncertainty regarding growth in China. Argentina's macroeconomic environment poses risks to domestic steel consumption.
- Unusual Items: Equity in results of non-consolidated companies improved significantly to a gain of USD 2.6 million (from a loss of USD 15.9 million in Q1 2013), largely due to better results from Usiminas.
Investor Verification Checklist
- Working Capital Impact: Verify the sustainability of the USD 368.9 million increase in working capital and its effect on future liquidity.
- Argentina Exposure: Assess the specific impact of Argentina's macroeconomic uncertainty on the Southern Region's revenue and consumption forecasts.
- Cost Inflation: Monitor the trajectory of raw material and purchased slab costs which are expected to pressure Q2 operating income.
- Project Execution: Confirm the timeline and cost adherence for the Pesquería/Tenigal ramp-up and the specialty steel expansion in Argentina.
- Debt Servicing: Review the net debt position of USD 1.6 billion against interest coverage ratios given the negative free cash flow in Q1.