Ternium S.A. First Quarter 2011 Results Summary
Business Context and Reporting Period
This Form 6-K filing reports Ternium S.A.'s financial and operational results for the first quarter ended March 31, 2011. Ternium is a leading steel manufacturer in Latin America with principal operations in Mexico and Argentina, producing flat and long steel products. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and presented in U.S. dollars.
Key Financial Metrics
| Metric | 1Q 2011 | 1Q 2010 | 4Q 2010 |
|---|---|---|---|
| Net Sales (USD million) | 2,146.9 | 1,650.6 | 1,927.5 |
| Shipments (tons) | 2,172,000 | 1,908,000 | 2,106,000 |
| Operating Income (USD million) | 291.0 | 293.5 | 133.7 |
| EBITDA (USD million) | 393.7 | 384.8 | 237.0 |
| EBITDA Margin | 18.3% | 23.3% | 12.3% |
| Net Income (USD million) | 243.2 | 245.1 | 102.8 |
| Net Income to Equity Holders (USD million) | 204.7 | 205.2 | 77.5 |
| Earnings per ADS (USD) | 1.03 | 1.02 | 0.39 |
| Free Cash Flow (USD million) | 139.0 | Filing does not provide clear value | Filing does not provide clear value |
| Net Cash Position (USD billion) | 0.8 | Filing does not provide clear value | Filing does not provide clear value |
Material Changes vs. Prior Periods
- Revenue Growth: Net sales increased 30% year-over-year (YoY) and 11% sequentially, driven by a 14% increase in shipments and a 15% increase in revenue per ton (to $968/ton).
- Profitability: Operating income remained flat YoY ($291.0M vs. $293.5M) as higher revenue was offset by increased raw material and purchased slab costs. However, operating income surged 118% sequentially compared to 4Q 2010.
- Foreign Exchange: A non-cash foreign exchange gain of $70.5 million was recorded, primarily due to the revaluation of the Mexican Peso against the U.S. dollar on USD-denominated debt. This contributed significantly to the 137% sequential increase in Net Income.
- Regional Performance: South & Central America sales grew 41% YoY, while North America sales grew 22% YoY.
Outlook, Risks, and Contingencies
- Outlook: Management anticipates higher operating income in 2Q 2011 compared to 1Q 2011, driven by improved operating margins and higher shipments. Demand in Argentina is expected to recover after a seasonally slow first quarter.
- Legal Contingency (Argentina): Siderar, Ternium's Argentine subsidiary, is facing legal challenges regarding a government decree (Decree 441/2011) and a court injunction suspending certain shareholder resolutions. Despite the injunction, Siderar confirmed it will proceed with a $370 million dividend payment on May 11, 2011.
- Capital Allocation: The company repurchased $150.0 million of its own shares from Usiminas during the quarter. Capital expenditures were $109.7 million, focused on greenfield facilities in Mexico and mill expansions in Argentina.
Investor Verification Checklist
- Verify the sustainability of the $70.5 million non-cash foreign exchange gain and its impact on future earnings volatility.
- Monitor the resolution of the legal injunction and government decree affecting Siderar in Argentina and potential impacts on dividend distributions.
- Assess the trajectory of raw material and purchased slab costs to determine if operating margins can expand in 2Q 2011 as guided.
- Confirm the execution of the $370 million dividend payment by Siderar despite the preliminary injunction.
- Review the progress of capital projects in Mexico (cold rolled/galvanized facility) and Argentina (hot strip mill expansion) against the $109.7 million Q1 spend.