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Ternium S.A. Q3 2008 Financial Summary

Business Context and Reporting Period

This Form 6-K filing, dated November 5, 2008, reports Ternium S.A.'s consolidated results for the third quarter and first nine months ended September 30, 2008. Ternium is a leading Latin American steel manufacturer with principal operations in Mexico and Argentina. The financial statements are prepared in accordance with IFRS and presented in U.S. dollars. The period includes the full consolidation of Grupo Imsa (acquired in late 2007) and treats Sidor and non-core U.S. assets as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Periods

• Quarter-over-Quarter (3Q 2008 vs. 2Q 2008): Operating income declined 14% to $524.9 million, and Net Income dropped 50% to $247.1 million. This was driven by an $85.5 million reduction in operating income and a $249.7 million swing in net foreign exchange results (from a gain to a loss). Shipments fell 11% due to lower demand, though revenue per ton increased 14%.
• Year-over-Year (3Q 2008 vs. 3Q 2007): Net Sales surged 63% to $2.4 billion, and Operating Income increased 136% to $524.9 million. Net Income rose 15% to $247.1 million. The growth was fueled by higher steel prices (revenue per ton up 57%) and the consolidation of Grupo Imsa, partially offset by higher input costs and a $131.7 million inventory write-down.
• Discontinued Operations: Results for discontinued operations (Sidor and non-core U.S. assets) turned from a gain of $143.5 million in 3Q 2007 to a loss of $2.8 million in 3Q 2008, primarily due to currency translation adjustments on the Sidor investment.

Outlook, Risks, and Management Commentary

• Outlook: Management expects reduced activity and lower operating income in Q4 2008 compared to Q3 2008. This is due to downward trends in steel demand and prices in North America and softening conditions in South/Central America caused by global financial market disruptions. However, production costs are expected to decline due to local currency devaluations and lower scrap prices.
• Inventory Write-down: A significant $131.7 million write-down of purchased slabs was recorded in Q3 2008, reflecting lower finished product prices at the end of the quarter.
• Foreign Exchange: A non-cash foreign exchange loss of $150.1 million in Q3 2008 impacted net income, resulting from the fluctuation of the Mexican Peso against the U.S. dollar on Ternium Mexico's debt.
• Liquidity: Free cash flow for the first nine months of 2008 was negative $473.5 million, compared to positive $509.3 million in the prior year, largely due to a $1.7 billion increase in working capital (inventory and receivables) and higher capital expenditures ($420.2 million).

Key Facts for Investor Verification

• Inventory Valuation: Verify the magnitude and justification of the $131.7 million inventory write-down related to purchased slabs and its impact on future cost of sales.
• Foreign Exchange Exposure: Assess the sensitivity of future earnings to Mexican Peso fluctuations, given the $150.1 million non-cash loss in Q3 2008.
• Working Capital Trends: Monitor the $1.7 billion increase in working capital over nine months and its effect on liquidity and free cash flow generation.
• Discontinued Operations: Confirm the status of Sidor-related cash flows and currency translation adjustments, which caused significant volatility in discontinued operations results.
• Cost Structure: Evaluate the sustainability of the 22% increase in operating cost per ton in Q3 2008 versus the expected cost declines in Q4 2008.