Business Context and Reporting Period
Ternium S.A., a leading steel producer in Latin America, reported its second quarter and first half 2013 results on July 31, 2013. The company operates integrated manufacturing facilities in Mexico, Argentina, Colombia, the southern United States, and Guatemala, with a production capacity of approximately 10.8 million tons of finished steel products. The financial statements are prepared in accordance with IFRS and presented in U.S. dollars.
Key Financial Metrics
| Metric | 2Q 2013 | 1H 2013 | 2Q 2012 | 1H 2012 |
|---|---|---|---|---|
| Net Sales (USD million) | 2,134.4 | 4,270.2 | 2,157.2 | 4,339.1 |
| Operating Income (USD million) | 276.0 | 547.8 | 259.0 | 543.1 |
| EBITDA (USD million) | 370.5 | 738.2 | 349.4 | 722.4 |
| EBITDA Margin | 17% | 17% | 16% | 17% |
| Net Income (USD million) | 134.4 | 285.8 | 115.4 | 286.6 |
| Equity Holders' Net Income (USD million) | 102.7 | 232.0 | 101.4 | 243.4 |
| Earnings per ADS (USD) | 0.52 | 1.18 | 0.52 | 1.24 |
| Steel Shipments (tons) | 2,213,000 | 4,454,000 | 2,173,000 | 4,335,000 |
| Iron Ore Shipments (tons) | 1,218,000 | 2,319,000 | 462,000 | 915,000 |
| Capital Expenditures (USD million) | 289.6 | 507.7 | 230.2 | 406.5 |
| Net Debt (USD billion) | 1.7 | 1.7 | N/A | N/A |
| Free Cash Flow (USD million) | (81.9) | 47.9 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue: Net sales decreased 1% year-over-year in 2Q 2013 and 2% in 1H 2013. This was driven by lower steel prices in Mexico and Other Markets, partially offset by higher volumes in the Southern Region and a significant increase in iron ore sales due to the proportional consolidation of Peña Colorada.
- Profitability: Operating income increased 7% year-over-year in 2Q 2013, primarily due to higher iron ore sales. EBITDA margin improved to 17% in 2Q 2013 from 16% in 2Q 2012.
- Net Income: Net income rose 16% year-over-year in 2Q 2013. However, Equity Holders' Net Income per ADS remained flat at $0.52 due to a $13.7 million non-recurring income tax charge related to a Mexican tax authority settlement and higher non-controlling interest results.
- Segment Performance: The Mining segment saw a 130% increase in net sales and a 164% increase in shipments year-over-year. The Steel segment saw a 3% decrease in net sales but a 2% increase in shipments.
- Costs: Cost of sales decreased 2% year-over-year in 2Q 2013, driven by lower raw material and purchased slab costs, despite higher energy and labor expenses.
Guidance, Outlook, and Risks
- Outlook: Management anticipates a reduction in operating income in the third quarter of 2013 compared to the second quarter. This is expected due to lower average steel prices in Argentina and Mexico, with Mexico's price decline attributed to contract pricing based on prior quarter levels.
- Market Conditions: Steel shipments in main markets remain healthy. Industrial activity in Mexico is strong, while the commercial/construction sector has yet to fully benefit from infrastructure investment. Southern Region shipment levels are expected to remain stable into Q3.
- Capital Projects: The Tenigal facility in Monterrey, Mexico, is concluding construction and produced its first hot dip galvanized coil in July 2013.
- Risks: Forward-looking statements are subject to risks including GDP uncertainties, market demand fluctuations, global production capacity, tariffs, and industry cyclicality.
Investor Verification Checklist
- Verify the impact of the $13.7 million non-recurring tax charge on the Mexican fiscal year 2004 claim settlement on future tax liabilities.
- Confirm the sustainability of the 164% year-over-year increase in iron ore shipments following the proportional consolidation of Peña Colorada.
- Monitor the realization of lower average steel prices in Mexico and Argentina for Q3 2013 as forecasted by management.
- Assess the progress and cost implications of the Tenigal greenfield facility in Mexico and other ongoing capital projects totaling $507.7 million in 1H 2013.
- Review the net debt position of $1.7 billion and the company's ability to service debt given the negative free cash flow of $81.9 million in 2Q 2013.