Ternium S.A. Q3 2007 Financial Summary
Business Context and Reporting Period
This Form 6-K filing covers Ternium S.A.'s financial results for the third quarter and the first nine months ended September 30, 2007. The company is a leading steel producer in the Americas with operations in Mexico, Venezuela, Argentina, and the United States. A material event during this period was the full acquisition and consolidation of Grupo Imsa S.A.B. de C.V. on July 26, 2007, which significantly impacted volume, revenue mix, and cost structures.
Key Financial Metrics
| Metric (US$ Million) | 3Q 2007 | 3Q 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Net Sales | 2,343.4 | 1,740.4 | 6,102.7 | 4,979.0 |
| Operating Income | 432.6 | 508.2 | 1,298.6 | 1,377.4 |
| EBITDA | 587.9 | 614.9 | 1,700.8 | 1,696.3 |
| Net Income | 214.0 | 354.0 | 780.6 | 837.7 |
| Net Income (Equity Holders) | 159.8 | 257.4 | 618.9 | 655.0 |
| Earnings per ADS | 0.80 | 1.28 | 3.09 | 3.18 |
| Operating Cash Flow | 143.5 | 285.8 | 1,040.6 | 938.6 |
| Free Cash Flow (Adjusted) | 330.7 | 191.9 | N/A | N/A |
| Net Debt (as of 9/30/07) | 2,900.0 | 413.7 | N/A | N/A |
Note: 9M 2007 EBITDA calculated as Operating Income ($1,298.6M) + Depreciation/Amortization ($400.8M). Free Cash Flow for 3Q 2007 is adjusted for a one-time $296.2M tax payment related to the Imsa acquisition.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 35% in 3Q 2007 and 23% in 9M 2007 year-over-year, driven primarily by the consolidation of Grupo Imsa and higher prices in South & Central America.
- Profitability Decline: Operating income fell 15% in 3Q 2007 and 6% in 9M 2007. Net income dropped 40% in 3Q 2007. Margins compressed due to higher raw material, freight, and labor costs, as well as the lower margin profile of the acquired Grupo Imsa assets.
- Volume Increase: Shipments rose 23% in 3Q 2007 to 2.7 million tons, largely due to Imsa. Excluding Imsa, shipments were relatively stable or lower due to maintenance stoppages.
- Debt Expansion: Net debt surged from $413.7 million (Dec 2006) to $2.9 billion (Sep 2007) due to $3.6 billion in borrowings to finance the Grupo Imsa acquisition.
- Foreign Exchange Impact: A $37.8 million foreign exchange loss in 3Q 2007 resulted from the depreciation of the Mexican Peso against the US dollar on Mexican subsidiaries' debt.
Outlook, Risks, and Management Commentary
- Outlook: Management expects steel demand to remain at current levels, excluding seasonal year-end weakening. Full consolidation of Grupo Imsa in Q4 2007 is expected to increase sales volume and revenue per ton in North America.
- Cost Pressures: Cost per ton is expected to rise due to Imsa's higher production cost structure. Labor costs at Sidor may increase pending new collective bargaining agreements.
- Strategic Developments: Ternium secured a new iron ore mining concession in Mexico (56,000 acres) to support production expansion. Integration of Imsa is proceeding well, with synergies expected in 2008.
- Risks: Key risks include global economic cyclicality, fluctuations in raw material prices (iron ore, scrap, zinc), labor negotiations, and foreign exchange volatility.
Investor Verification Checklist
- Verify the sustainability of the revenue per ton increase ($801/ton in 3Q 2007) given the shift to a higher value-added product mix from Grupo Imsa.
- Monitor the trajectory of net debt ($2.9 billion) and interest expense coverage as the company integrates the acquired debt load.
- Assess the impact of Mexican Peso volatility on future earnings, given the significant US dollar-denominated debt held by Mexican subsidiaries.
- Track the realization of synergies from the Grupo Imsa acquisition, which management projects to begin in 2008.
- Review the status of labor negotiations at Sidor and their potential impact on future operating costs.