Business Context and Reporting Period
Ternium S.A., a leading steel producer in Latin America, reported its fourth quarter and full-year 2013 results on February 19, 2014. The financial statements are prepared in accordance with IFRS and presented in U.S. dollars. The reporting period covers operations across Mexico, Argentina, Colombia, the southern United States, and Guatemala, including the proportional consolidation of Peña Colorada mining operations starting January 1, 2013.
Key Financial Metrics
| Metric | 4Q 2013 | FY 2013 |
|---|---|---|
| Net Sales (USD million) | 2,116.0 | 8,530.0 |
| Operating Income (USD million) | 295.6 | 1,109.4 |
| EBITDA (USD million) | 390.0 | 1,486.6 |
| EBITDA Margin | 18.4% | 17.4% |
| Net Income (USD million) | 171.1 | 592.9 |
| Net Income to Equity Holders (USD million) | 125.6 | 455.4 |
| Earnings per ADS (USD) | 0.64 | 2.32 |
| Free Cash Flow (USD million) | 88.5 | 208.9 |
| Net Debt Position (USD billion) | 1.5 | 1.5 |
| Capital Expenditures (USD million) | 158.2 | 883.3 |
Material Changes vs. Prior Period
- Profitability Surge: Fourth-quarter operating income increased 139% year-over-year (YoY) to $295.6 million, driven by improved margins and higher shipments. Full-year operating income rose 21% to $1.1 billion.
- Turnaround from Loss: Net income for 4Q 2013 was $171.1 million, a significant improvement from a $231.2 million loss in 4Q 2012. The prior year loss included a $275.3 million impairment charge on the Usiminas investment.
- Volume Growth: Steel shipments increased 3% YoY in 4Q 2013 and 3% for the full year. Iron ore shipments doubled in 4Q 2013 and increased 128% for the full year due to the consolidation of Peña Colorada.
- Revenue Mix: While total net sales were relatively flat (-1% for FY 2013), the mining segment sales grew 103% YoY, offsetting a 2% decline in steel product sales caused by lower prices in Mexico and Other Markets.
- Cost Efficiency: Operating cost per ton decreased 7% in 4Q 2013 and 6% for the full year, primarily due to lower costs for purchased slabs and raw materials.
Outlook, Commentary, and Risks
- Q1 2014 Guidance: Management expects steel shipments to increase sequentially in Q1 2014. Operating income is anticipated to remain relatively stable compared to 4Q 2013, as higher volumes will be offset by a slightly lower operating margin due to decreased revenue per ton.
- Strategic Investment: Ternium, Tenaris, and Tecpetrol have completed initial investments in Techgen, S.A. de C.V., a Mexican project company for a natural gas-fired power plant. Ternium holds a 48% stake and will contract 78% of the plant's capacity.
- Dividend Proposal: The Board proposed an annual dividend of $0.075 per share ($0.75 per ADS), totaling approximately $150.4 million, subject to shareholder approval in May 2014.
- 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
- Verify the impact of the proportional consolidation of Peña Colorada on mining segment revenue and operating income.
- Confirm the sustainability of the lower raw material and purchased slab costs driving the margin expansion.
- Monitor the execution and ramp-up of the Pesquería/Tenigal greenfield facility in Mexico.
- Assess the status of the proposed annual dividend and its approval at the May 2014 shareholders' meeting.
- Review the net debt position of $1.5 billion relative to the company's free cash flow generation capabilities.