Ternium S.A. Third Quarter 2006 Results Summary
Business Context and Reporting Period
This Form 6-K filing reports the third quarter 2006 results for Ternium S.A., a leading steel company in the Americas with operations in Mexico, Argentina, and Venezuela. The reporting period covers the three months ended September 30, 2006. Financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and presented in U.S. dollars.
Key Financial Metrics
- Net Sales: US$1.74 billion (2% increase quarter-over-quarter).
- Operating Income: US$508.2 million (29% margin).
- EBITDA: US$614.9 million (35% margin).
- Net Income: US$354.0 million total; US$257.4 million attributable to equity holders.
- Earnings Per ADS: US$1.28.
- Shipments: 2.23 million tons of flat and long products (8% decrease quarter-over-quarter).
- Revenue Per Ton: US$741 (9% increase quarter-over-quarter).
- Net Debt: US$472.9 million as of September 30, 2006.
- Cash Flow: Net cash provided by operating activities was US$286.4 million.
Material Changes vs. Prior Period
Compared to the second quarter of 2006, net sales increased 2% driven by a 9% rise in revenue per ton, which offset an 8% decline in shipment volumes. Operating income improved to 29% of net sales from 28% in the prior quarter. North American shipments declined 16% due to de-stocking and softer demand, while South & Central American shipments decreased 3%. Cost of sales remained stable at 62% of net sales despite higher metallic charge costs in Venezuela and Mexico, offset by lower volumes. Net financial expenses decreased to US$87.2 million from US$108.2 million, aided by reduced net debt and lower excess cash distributions related to Sidor.
Outlook, Risks, and Unusual Items
Outlook: Management expects demand and prices to remain stable in South & Central America but soften in North America due to ongoing de-stocking and slower U.S. economic growth. No sizeable impact from raw material or energy cost fluctuations is foreseen.
Operational Disruptions:
- Sidor (Venezuela): A union-led work slowdown began September 11, 2006, and continued into November. As of November 6, this reduced crude steel output by an estimated 170,000 tons and finished product output by 340,000 tons. Sales impact in Q3 was minimal due to existing inventories.
- Siderar (Argentina): Blast furnace #2 was taken offline in late October for a planned 110-day relining. Production capacity is expected to rise by 11% upon completion. Supply gaps are being managed via semi-finished steel inventories.
Risks: Forward-looking statements are subject to risks including GDP uncertainty, market demand fluctuations, global production capacity, tariffs, and industry cyclicality.
Investor Verification Checklist
- Verify the duration and resolution status of the Sidor union dispute and its potential impact on Q4 production volumes.
- Confirm the timeline for the Siderar blast furnace #2 relining and the sufficiency of semi-finished inventories to maintain shipments.
- Monitor North American de-stocking trends and their effect on Q4 shipment volumes and pricing power.
- Review the sustainability of the 35% EBITDA margin given the mix of higher prices and lower volumes.
- Assess the impact of the US$287.2 million reduction in financial debt on future interest expense and liquidity.