Ternium S.A. Q1 2013 Earnings Summary
Business Context and Reporting Period
This Form 6-K contains the transcript of Ternium S.A.'s First Quarter 2013 earnings conference call held on April 30, 2013. The company reported results for the period ended March 31, 2013. A significant accounting change occurred in Q1 2013: Ternium began consolidating 50% of the assets, liabilities, revenue, and expenses of the joint operation Peña Colorada, whereas previously it was treated as an investment in a non-consolidated company. This change increases reported figures for the mining segment compared to prior periods.
Key Financial Metrics
- EBITDA: $368 million (up $140 million sequentially from Q4 2012).
- Net Income: $151 million ($0.66 per ADS), compared to a $233 million net loss in Q4 2012 (which included a $275 million loss on the Usiminas investment).
- Steel Shipments: Increased 3% sequentially; up 73,000 tons versus Q4 2012.
- Revenue per Ton: Decreased 1% sequentially ($11 decrease per ton).
- Operating Cost per Ton: Decreased $68 per ton sequentially.
- EBITDA per Ton: Increased 56% to $164 (from $105 in Q4 2012).
- Net Debt: $1.5 billion (down from $1.7 billion in Q4 2012), representing approximately 1.2x trailing twelve-month EBITDA.
- Cash Flow: Net cash provided by operating activities was $348 million.
- Capital Expenditure (CapEx): $218 million for Q1 2013.
Material Changes vs. Prior Period
The primary driver for the sequential improvement in EBITDA was a combination of higher steel shipments and significantly lower operating costs per ton, which offset a slight decline in revenue per ton. The reduction in operating costs was attributed to lower raw material and purchased slab costs, as well as better absorption of fixed costs following the restart of a blast furnace in Argentina in February. The mining segment reported EBITDA of $35 million, up from $26 million in Q4 2012, largely due to the new consolidation of Peña Colorada.
Guidance, Outlook, and Management Commentary
- Q2 2013 Outlook: Management expects operating income in the second quarter to be roughly in line with the first quarter. This outlook assumes a sequential reduction in steel costs per ton will offset a softer pricing environment.
- Market Conditions: North American steel capacity utilization remains high relative to consumption, creating downward pressure on prices. Industrial sectors (especially automotive) are driving demand, while construction remains weak but improving.
- CapEx Guidance: Total capital expenditure for 2013 is estimated at $800 million.
- Dividends: The company proposed a dividend of $130 million for shareholder approval. Ternium does not have a fixed dividend policy but has paid sustainably every year.
- Strategic Updates:
- CSA Acquisition: Ternium is no longer participating in the CSA sale process due to valuation differences and industry conditions.
- Projects: The Pesquería galvanizing line is scheduled to start operations in August 2013. A new continuous caster in Siderar (Argentina) is expected to operate by March 2014.
- Porto do Açu: The project in Brazil was written down in Q4 2012 due to natural gas availability issues and delays in the Anglo American Minas-Rio project.
Investor Verification Checklist
- Verify the impact of the Peña Colorada consolidation on year-over-year comparability for the mining segment.
- Monitor the lag effect of raw material costs (specifically slabs) on Q3 2013 margins, as current lower costs may reverse.
- Confirm the status of the proposed $130 million dividend at the upcoming shareholders' meeting.
- Track the ramp-up schedule for the Pesquería galvanizing line and the Siderar continuous caster.
- Assess the risk of further price compression in North America due to high capacity utilization.