Ternium S.A. Form 6-K Summary
Business Context and Reporting Period
This filing is a Form 6-K reporting the second quarter and first half 2010 results for Ternium S.A., a leading steel manufacturer in Latin America with principal operations in Mexico and Argentina. The reporting period covers the six months ended June 30, 2010. Financial statements are prepared in accordance with IFRS and presented in U.S. dollars.
Key Financial Metrics
| Metric | 2Q 2010 | 1H 2010 |
|---|---|---|
| Net Sales | $1,926.6 million | $3,577.2 million |
| Operating Income | $359.2 million | $652.7 million |
| EBITDA | $453.2 million | $838.0 million |
| EBITDA Margin | 23.5% | 23.4% |
| Net Income | $230.7 million | $475.8 million |
| Net Income (Equity Holders) | $187.6 million | $392.9 million |
| Earnings per ADS | $0.94 | $1.96 |
| Free Cash Flow | $123.6 million | $382.2 million |
| Net Cash Position | $0.6 billion (as of June 30, 2010) | N/A |
| Shipments (Flat & Long) | 2,031,000 tons | 3,939,000 tons |
Material Changes vs. Prior Periods
- Revenue Growth: Net sales increased 69% year-over-year (YoY) in 2Q 2010 and 55% in 1H 2010, driven by a 34% increase in shipments and a 27% increase in revenue per ton due to higher steel prices.
- Profitability: Operating income surged from a loss of $52.1 million in 2Q 2009 to $359.2 million in 2Q 2010. EBITDA margin expanded significantly from 3.8% in 2Q 2009 to 23.5% in 2Q 2010.
- Net Income Volatility: While operating performance improved, Net Income for 2Q 2010 ($230.7 million) was down 61% YoY compared to 2Q 2009 ($584.7 million). This decline is primarily attributed to the absence of a $428.0 million discontinued operations gain in 2010 (related to the 2009 transfer of Sidor shares to Venezuela) and a $251.7 million decrease in non-cash foreign exchange results.
- Foreign Exchange: The company recorded a $32.8 million non-cash foreign exchange loss in 2Q 2010 due to the Mexican Peso's devaluation against the U.S. dollar, contrasting with a $219.1 million gain in 2Q 2009.
- Cash Flow: Free cash flow was positive at $123.6 million in 2Q 2010. The company collected $263.2 million in 2Q 2010 (and $563.4 million in 1H 2010) from the transfer of Sidor shares.
Outlook, Risks, and Corporate Actions
- Outlook: Management expects the business recovery in the NAFTA region to moderate, leading to stabilized shipment levels. Shipments in South & Central America are expected to remain stable. Operating margins are projected to decrease in the second half of 2010 compared to 2Q 2010 due to higher raw material costs.
- Corporate Reorganization: Ternium is undergoing a multi-step reorganization to transition from a Luxembourg 1929 holding company regime (tax-exempt) to an ordinary public limited liability company effective January 1, 2011. The company expects its overall tax burden will not increase and plans to record a special reserve for tax purposes.
- Risks: Forward-looking statements are subject to risks including global GDP uncertainty, market demand fluctuations, production capacity, tariffs, and cyclicality in steel-consuming industries.
Investor Verification Checklist
- Discontinued Operations: Verify the impact of the one-time $428 million Sidor gain in 2009 when comparing year-over-year net income figures.
- Foreign Exchange Impact: Assess the sensitivity of earnings to Mexican Peso fluctuations, noting the $32.8 million non-cash loss in 2Q 2010.
- Tax Regime Change: Confirm the details of the Luxembourg corporate reorganization and the expected tax implications post-December 31, 2010.
- Margin Compression: Monitor raw material costs in the second half of 2010, as management forecasts a decrease in operating margins.
- Working Capital: Note the $271.9 million increase in inventory in 1H 2010, which reduced operating cash flow despite higher operating income.