Ternium S.A. Q3 2012 Financial Summary
Business Context and Reporting Period
This Form 6-K filing, dated November 6, 2012, reports the third-quarter and first nine-month results for Ternium S.A., a leading steel manufacturer in Latin America with primary operations in Mexico and Argentina. The financial data is presented in U.S. dollars in accordance with IFRS. A significant accounting change occurred on January 1, 2012, when the functional currency of Ternium's Mexican subsidiaries was changed from the Mexican Peso to the U.S. Dollar.
Key Financial Metrics
| Metric | 3Q 2012 | 9M 2012 |
|---|---|---|
| Net Sales | $2,198.0 million | $6,537.1 million |
| Operating Income | $252.5 million | $793.2 million |
| EBITDA | $339.9 million | $1,059.9 million |
| EBITDA Margin | 15% | 16% |
| Net Income | $146.6 million | $462.2 million |
| Net Income to Equity Holders | $122.6 million | $393.0 million |
| Earnings per ADS | $0.62 | $2.00 |
| Net Debt | $1.8 billion (as of Sept 30, 2012) | N/A |
| Free Cash Flow | $32.2 million (3Q) | $68.4 million (9M) |
Material Changes vs. Prior Periods
- Revenue Decline: Net sales decreased 10% year-over-year (YoY) in Q3 2012 and 6% for the first nine months, driven primarily by a 7% decrease in revenue per ton in Q3 and a 4% decrease for the 9M period. Shipments were down 3% YoY in Q3 but relatively flat (-1%) for the 9M period.
- Operating Income Pressure: Operating income fell 28% YoY in Q3 and 19% for the 9M period. This was caused by lower revenue per ton, partially offset by a reduction in operating costs per ton due to lower raw material and purchased slab costs.
- Net Income Improvement: Despite lower operating income, Net Income surged 527% YoY in Q3 ($146.6M vs $23.4M) and declined only 10% for the 9M period. The Q3 surge was largely due to a $278.7 million reduction in net financial expenses, specifically the elimination of a $257.2 million non-cash foreign exchange loss recorded in Q3 2011 due to Mexican Peso devaluation.
- Segment Performance: Flat steel products saw a 12% sales decline in Q3, while long steel products saw a 2% sales increase. North America shipments increased, offsetting declines in South & Central America.
Outlook, Risks, and Unusual Items
- Outlook: Management expects steel demand in the Americas to increase in 2013. For Q4 2012, shipments are expected to remain stable compared to Q3, but operating income is projected to decrease due to lower average prices in North America and higher operating costs.
- Operational Disruption: An extraordinary repair is required for Siderar's Blast Furnace #2 in Argentina following issues during scheduled repairs. The repair is expected to take 3-4 months. Production losses will be mitigated by purchasing slabs and hot rolled coils from third parties.
- Capital Allocation: Ternium acquired an equity stake in Usiminas for $2.2 billion during the first nine months of 2012. Capital expenditures for the 9M period were $710.2 million.
- Risks: Forward-looking statements are subject to risks including GDP uncertainty, market demand fluctuations, global production capacity, tariffs, and industry cyclicality.
Investor Verification Checklist
- FX Impact: Verify the sustainability of the improved net financial results, noting that the Q3 2011 comparison included a massive one-time foreign exchange loss that is no longer applicable due to the functional currency change.
- Blast Furnace Repair: Monitor the timeline and cost implications of the extraordinary repair at Siderar's Blast Furnace #2 and the associated cost of purchasing third-party steel to maintain supply.
- Usiminas Investment: Review the strategic rationale and financial impact of the $2.2 billion acquisition of a stake in Usiminas, which resulted in an $18.8 million equity loss in the 9M 2012 period.
- Price Trends: Assess the outlook for steel prices in North America and Brazil, as management anticipates lower average prices impacting Q4 operating income.