Ternium S.A. Third Quarter 2013 Results Summary
Business Context and Reporting Period
This Form 6-K filing reports the unaudited financial and operational results for Ternium S.A., a leading Latin American steel producer, for the third quarter and first nine months ended September 30, 2013. The company operates integrated steel facilities in Mexico, Argentina, Colombia, the southern United States, and Guatemala, and holds a controlling interest in Usiminas (Brazil). Financial data is presented in U.S. dollars in accordance with IFRS.
Key Financial Metrics
| Metric | 3Q 2013 | 9M 2013 |
|---|---|---|
| Net Sales | $2,143.8 million | $6,414.0 million |
| Operating Income | $266.1 million | $813.9 million |
| EBITDA | $358.4 million | $1,096.5 million |
| EBITDA Margin | 16.7% | 17.1% |
| Net Income | $136.0 million | $421.9 million |
| Net Income to Equity Holders | $97.8 million | $329.8 million |
| Earnings per ADS | $0.50 | $1.68 |
| Free Cash Flow | $72.5 million | $120.4 million |
| Net Debt | $1.6 billion | $1.6 billion (as of Sept 30) |
| Capital Expenditures | $217.5 million | $725.1 million |
Material Changes vs. Prior Periods
- Revenue: Third-quarter net sales decreased 2% year-over-year (YoY) to $2.14 billion, driven by lower steel prices in Mexico and Other Markets, partially offset by volume growth in the Southern Region. For the first nine months, sales were down 2% YoY.
- Profitability: Operating income increased 5% YoY in Q3 ($266.1M vs. $254.1M), aided by an $11.7 million insurance recovery in Siderar and lower operating costs. EBITDA margin improved to 16.7% in Q3 from 15.5% in Q3 2012.
- Net Income: Net income remained stable YoY in Q3 ($136.0M vs. $135.6M). However, earnings per ADS (EPADS) declined to $0.50 from $0.57 due to a $24.0 million deferred income tax charge related to a new 10% withholding tax on dividends in Argentina and higher minority interest results.
- Operations: Steel shipments increased 2% YoY to 2.3 million tons. Iron ore shipments surged 106% YoY to 930,000 tons due to the proportional consolidation of Peña Colorada mining operations starting January 1, 2013.
- Costs: Operating costs decreased 3% YoY in Q3, primarily due to lower raw material and purchased slab costs, offset by higher maintenance and energy expenses.
Outlook, Risks, and Management Commentary
- Guidance: Management expects steel shipments to slightly decrease in Q4 2013 due to seasonal effects. Operating income is expected to remain relatively stable compared to Q3, supported by slightly higher operating margins and revenue per ton.
- Regional Outlook: Industrial sector activity in Mexico remains healthy, while the commercial/construction sector lags. Demand in the Southern Region is stable at strong levels.
- Tax Contingency: A significant non-recurring item was a $24.0 million deferred tax charge in Argentina due to new dividend withholding tax legislation. Additionally, a $13.7 million non-recurring tax charge was recorded in the first nine months related to a settlement with Mexican tax authorities.
- Risks: Forward-looking statements are subject to risks including GDP uncertainty, market demand fluctuations, global production capacity, tariffs, and cyclicality in steel-consuming industries.
Investor Verification Checklist
- Argentina Tax Impact: Verify the long-term implications of the new 10% dividend withholding tax on future cash distributions to shareholders.
- Peña Colorada Consolidation: Confirm the sustainability of the 106% increase in iron ore shipments and the associated margin compression (revenue per ton down 33% YoY) resulting from the consolidation of Peña Colorada.
- Debt Reduction: Monitor the trajectory of net debt reduction, which decreased from $1.7 billion in Q2 to $1.6 billion in Q3, driven by significant loan repayments.
- Regional Price Dynamics: Assess the impact of declining steel prices in Mexico (revenue per ton down 6% YoY) and Other Markets on future gross margins.
- Capital Allocation: Review the $725.1 million in YTD capital expenditures, specifically the ramp-up of the Pesquería/Tenigal projects in Mexico and expansions in Argentina.