Ternium S.A. Form 6-K Summary: Fourth Quarter and Full Year 2012
Business Context and Reporting Period
This filing reports the fourth quarter and full-year 2012 results for Ternium S.A., a leading Latin American steel and mining company. The reporting period covers operations through December 31, 2012. Financial statements are prepared under IFRS and presented in U.S. dollars. The company operates primarily in Mexico and Argentina, with significant investments in Brazil (Usiminas) and other markets.
Key Financial Metrics
| Metric | 4Q 2012 | FY 2012 | FY 2011 |
|---|---|---|---|
| Net Sales (USD million) | 2,071.0 | 8,608.1 | 9,122.8 |
| Operating Income (USD million) | 122.7 | 915.9 | 1,251.8 |
| EBITDA (USD million) | 226.8 | 1,286.8 | 1,647.8 |
| EBITDA Margin | 11% | 15% | 18% |
| Net Income (USD million) | (275.0) | 187.2 | 649.9 |
| Net Income to Equity Holders (USD million) | (253.8) | 139.2 | 513.5 |
| Earnings per ADS (USD) | (1.29) | 0.71 | 2.61 |
| Net Debt (USD billion) | 1.7 | 1.7 | N/A |
| Operating Cash Flow (USD million) | 276.5 | 1,055.1 | 622.4 |
| Capital Expenditures (USD million) | 312.4 | 1,022.6 | 577.0 |
Material Changes vs. Prior Period
- Revenue Decline: Full-year net sales decreased 6% to $8.6 billion, driven by lower steel prices (revenue per ton down $43) and reduced shipments in the Southern Region and Other Markets.
- Profitability Compression: Operating income fell 27% year-over-year to $915.9 million. EBITDA margin contracted from 18% in 2011 to 15% in 2012.
- Usiminas Impairment: The primary driver of the net loss in 4Q 2012 was a $345.1 million loss related to the investment in Usiminas, including a $275.3 million goodwill impairment due to weaker industrial demand in Brazil and lower iron ore price forecasts.
- Foreign Exchange: Net foreign exchange results improved significantly, turning from a $236.1 million loss in 2011 to an $11.4 million gain in 2012. This was due to a change in the functional currency of Mexican subsidiaries to the U.S. dollar, eliminating translation losses on dollar-denominated debt.
- Cost Structure: Operating costs per ton increased slightly in 4Q 2012 due to higher third-party slab costs in Mexico and efficiency losses from a blast furnace stoppage in Argentina.
Guidance, Outlook, and Risks
- 2013 Outlook: Management expects apparent steel use in Latin America to accelerate in 2013, driven by construction and industrial activity. Operating income is expected to be higher in Q1 2013 compared to Q4 2012, aided by higher shipments and lower raw material costs.
- Operational Updates: The company plans to ramp up new facilities in Pesquería, Mexico, in Q3 2013 to serve the automotive sector. Blast Furnace #2 in Argentina is expected to restart, reducing costs.
- Dividend Proposal: The Board proposed an annual dividend of $0.065 per share ($0.65 per ADS), totaling approximately $130.3 million, subject to shareholder approval in May 2013.
- Risks: Key risks include global economic uncertainty, cyclicality in steel demand, raw material price volatility, and the performance of the Usiminas investment.
Investor Verification Checklist
- Usiminas Valuation: Verify the assumptions used for the $275.3 million impairment charge regarding Brazilian industrial demand and long-term iron ore prices.
- Argentina Operations: Confirm the timeline and cost impact of the Blast Furnace #2 restart and its effect on operating costs per ton.
- Debt Profile: Review the $1.7 billion net debt position and the weighted average cost of debt, which increased interest expenses in 2012.
- Segment Reporting: Note the change in operating segments to "Steel" and "Mining" and the new geographical reporting structure effective December 31, 2012.
- Free Cash Flow: Assess the sustainability of free cash flow, which was negative ($35.9 million) in 4Q 2012 due to high capital expenditures ($312.4 million).