Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Accounting Standards: International Financial Reporting Standards (IFRS)
Overview: Ternium is a leading steel producer in Latin America, operating primarily in Mexico, Argentina, and Colombia. The company manufactures flat and long steel products for construction, automotive, and industrial sectors. In 2010, the company recovered from the 2008-2009 global economic downturn, driven by increased steel consumption in North and South America.
Key Financial Metrics (2010)
| Metric | 2010 (USD) | 2009 (USD) |
|---|---|---|
| Net Sales | $7,382.0 million | $4,959.0 million |
| Gross Profit | $1,716.8 million | $848.6 million |
| Operating Income | $1,053.9 million | $296.4 million |
| Net Income (Total) | $779.5 million | $767.1 million |
| Net Income (Attributable to Equity Holders) | $622.1 million | $717.4 million |
| Basic EPS (Attributable to Equity Holders) | $0.31 | $0.36 |
| Total Assets | $11,112.3 million | $10,292.7 million |
| Total Borrowings | $1,939.7 million | $2,326.7 million |
| Cash and Cash Equivalents | $1,779.4 million | $2,095.8 million |
| Operating Cash Flow | $806.8 million | $1,161.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 49% year-over-year to $7.4 billion, driven by a 27% increase in shipments (8.1 million tons) and an 18% increase in revenue per ton ($895/ton) due to higher steel prices.
- Operating Performance: Operating income surged 256% to $1.1 billion, reflecting improved margins and volume recovery. Gross margin improved to 23.3% from 17.1% in 2009.
- Discontinued Operations: Unlike 2009, which included a $428 million gain from the transfer of Sidor shares to Venezuela, 2010 had no discontinued operations results. Consequently, while total net income remained relatively flat, net income attributable to continuing operations increased significantly.
- Debt Reduction: Total borrowings decreased by approximately $387 million to $1.9 billion, primarily due to repayments related to prior acquisitions.
- Acquisitions: In August 2010, Ternium acquired a 54% interest in Ferrasa (Colombia) for $74.5 million, expanding its presence in the Colombian market.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: 2010 capital expenditures were approximately $350 million. Management expects 2011 capital expenditures to reach approximately $700 million, financed mainly by cash from operations.
- Strategic Projects: Key initiatives include the Tenigal joint venture with Nippon Steel in Mexico (expected production start 2013) and expansion of cold-rolling and galvanizing facilities.
- Market Conditions: Management notes that while steel prices rebounded in late 2010, they decreased in Q2 2011 due to excess capacity. The company remains focused on being a low-cost producer and shifting its sales mix toward higher-margin value-added products.
Risks and Contingencies
- Sidor Receivables: Following the nationalization of Sidor by Venezuela, Ternium holds a receivable of approximately $187 million (as of mid-2011) from CVG. This represents a significant credit concentration risk.
- Siderar Governance (Argentina): Significant legal and regulatory uncertainty exists regarding the voting rights of ANSeS (Argentina's social security agency), which holds 25.97% of Siderar. A government decree attempting to remove voting caps led to legal challenges and a temporary suspension of dividend payments approved in April 2011.
- Input Costs and Supply: The company faces risks related to natural gas shortages in Argentina and price volatility of raw materials (iron ore, scrap, slabs) and energy.
- Foreign Exchange: Operations in Mexico, Argentina, and Colombia expose the company to currency fluctuations. A 1% devaluation of these currencies against the USD would reduce pre-tax income by approximately $17.2 million.
- Legal Proceedings: An arbitration dispute regarding a slab off-take agreement with Tata Steel (formerly Corus) was settled in June 2011, with Ternium Procurement paying its share of $21.3 million.
Investor Verification Checklist
- Siderar Dividend Status: Verify the resolution of the legal dispute regarding ANSeS voting rights and the ability of Siderar to distribute the $370 million dividend approved in April 2011.
- Sidor Receivable Collection: Monitor the payment schedule of the remaining $187 million receivable from Venezuela's CVG and any further rescheduling agreements.
- Capital Expenditure Execution: Track the progress and cost overruns of the $700 million 2011 capital expenditure program, specifically the Tenigal joint venture and Mexican facility expansions.
- Input Cost Pass-Through: Assess the company's ability to pass on rising raw material and energy costs to customers in the face of global steel price volatility and excess capacity.
- Argentina Energy Supply: Monitor natural gas supply constraints in Argentina and their potential impact on Siderar's production capacity.