Ternium Reports Higher First Quarter Results, Gives Outlook
05/01/2014 - Ternium S.A. announced its results for the first quarter ended 31 March 2014.
The financial and operational information contained in this press release is based on Ternium S.A.'s operational data and consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) and presented in U.S. dollars (US$) and metric tons.
Summary of First Quarter 2014 Results
Compared to the first quarter 2013, the company's operating income in the first quarter 2014 increased by US$47.2 million, mainly as a result of improved steel shipments and operating margin. Shipments in Mexico increased 166,000 metric tons year-over-year, while they remained relatively stable in the Southern Region. The year-over-year increase in operating margin was due to lower operating cost per ton, principally from lower raw material costs, partially offset by 3% lower revenue per ton mainly as a result of lower steel prices in the Southern Region.
Net income in the first quarter 2014 was US$188.2 million, an increase of US$17.2 million compared to net income in the fourth quarter 2013 mainly due to the above-mentioned higher operating income and better results from Usiminas, partially offset by higher income tax expenses. Relative to the prior-year period, net income in the first quarter 2014 increased by US$36.8 million mainly due to the same factors described in the sequential comparison.
Outlook
Ternium expects that the improved shipment levels in Mexico during the first quarter 2014 will continue in the second quarter, as the company realizes the benefits of the commercial initiatives it pursued last year. In addition, Ternium anticipates that the ramp-up of the new Pesquería facility, which is progressing according to plan, will gradually contribute to its shipments in the following quarters, and that Tenigal will continue advancing in its certification process with the different auto makers in Mexico.
Steel prices in North America improved at the end of the first quarter 2014, and the company anticipates they will remain at attractive levels throughout the second quarter 2014. Prevailing steel prices in Europe and Asia and the uncertainty regarding growth in China could have a negative impact on North American prices over the longer term.
Shipments in the Southern Region were seasonally lower in the first quarter 2014 and, although Ternium expects them to recover during the second quarter 2014, the recent uncertainty surrounding Argentina's macroeconomic environment could affect domestic steel consumption in the following quarters. U.S. dollar based average steel prices in Argentina sequentially decreased in the first quarter 2014 and the company anticipates no significant changes in average prices in this market during the second quarter 2014.
Ternium expects a slightly lower operating income in the second quarter 2014 compared to the first quarter 2014, mainly as a result of higher raw material and purchased slabs costs being partially offset by the above mentioned increase in shipments.
Analysis of First Quarter 2014 Results
Net income attributable to Ternium's equity holders in the first quarter 2014 was US$150.0 million, compared to net income of US$129.3 million in the first quarter 2013. Including non-controlling interest, net income for the first quarter 2014 was US$188.2 million, US$36.8 million higher in comparison with the first quarter 2013. Earnings per ADS in the first quarter 2014 were US$0.76 compared to Earnings per ADS of US$0.66 in the first quarter 2013.
Net sales in the first quarter 2014 were US$2.1 billion, 1% higher than net sales in the first quarter 2013, mainly as a result of higher steel products net sales in Mexico, partially offset by lower steel product net sales in the Southern Region and Other Markets. The following table outlines Ternium's total consolidated net sales for the first quarter 2014 and first quarter 2013:
1 The item "Other products" primarily includes pig iron and pre-engineered metal building systems.
Cost of sales was US$1.6 billion in the first quarter 2014, a decrease of US$19.7 million compared to the first quarter 2013. This was principally due to a US$24.8 million, or 2%, decrease in raw material and consumables used, mainly reflecting a decrease in raw material and purchased slabs costs, partially offset by a 4% increase in shipment volumes and higher energy costs; and a US$5.1 million increase in other costs, including a US$5.5 million increase in maintenance expenses and a US$4.5 million increase in services and fees partially offset by a US$4.9 million decrease in labor cost.
Selling, General & Administrative (SG&A) expenses in the first quarter 2014 were US$195.6 million, or 9.1% of net sales, a decrease of US$11.6 million compared to the first quarter 2013, mainly due to lower freight and transportation expenses and labor cost.
Operating income in the first quarter 2014 was US$319.0 million, or 14.8% of net sales, compared to operating income of US$271.8 million, or 12.7% of net sales, in the first quarter 2013. The following table outlines Ternium's operating income by segment for the first quarter 2014 and first quarter 2013:
Steel reporting segment
The steel segment's operating income was US$301.5 million in the first quarter 2014, an increase of US$47.6 million compared to the first quarter 2013, reflecting higher sales and lower operating cost.
Net sales of steel products in the first quarter 2014 increased 1% compared to the first quarter 2013, reflecting a 94,000 ton, or 4%, increase in shipments, mainly due to higher sales volume in Mexico, partially offset by lower sales volume in Others Markets. Revenue per ton decreased US$24, or 3%, mainly due to lower steel prices in the Southern Region partially offset by higher steel prices in Other Markets.
Operating cost decreased 1% due to a 5% decrease in operating cost per ton, partially offset by the above-mentioned 4% increase in shipment volumes. The decrease in operating cost per ton was mainly the result of lower raw material, purchased slabs and labor costs, partially offset by an increase in energy costs, maintenance expenses and services and fees.
Mining reporting segment
The mining segment's operating income was US$18.0 million in the first quarter 2014, a decrease of US$6.4 million compared to the first quarter 2013, mainly reflecting lower sales of iron ore and lower operating cost.
Net Sales of mining products in the first quarter 2014 were 24% lower than in the first quarter 2013, reflecting lower shipments and a US$4 decrease in revenue per ton. Shipments were 884,000 metric tons, 20% lower than in the first quarter 2013 as a result of lower sales to third parties and a decrease in shipments from Peña Colorada due to lower production.
Operating cost decreased 22% year-over-year, due to a 3% decrease in operating cost per ton and the above mentioned 20% decrease in shipment volumes.
EBITDA in the first quarter 2014 was US$416.9 million, or 19.4% of net sales, compared to US$367.7 million, or 17.2% of net sales, in the first quarter 2013.
Net financial results were a US$24.3 million loss in the first quarter 2014, compared to a US$40.8 million loss in the first quarter 2013.
During the first quarter 2014, Ternium's net interest results totaled a loss of US$19.5 million, a US$10.2 million improved result than in the first quarter 2013, reflecting lower indebtedness and weighted average interest rates.
Equity in results of non-consolidated companies was a gain of US$2.6 million in the first quarter 2014, compared to a loss of US$15.9 million in the first quarter 2013, mainly due to an improved result in Usiminas.
Income tax expense in the first quarter 2014 was US$109.1 million, or 37% of income before income tax expense, compared with an income tax expense of US$63.7 million in the first quarter 2013, or 30% of income before income tax expense.
Net gain attributable to non-controlling interest in the first quarter 2014 was US$38.2 million, compared to a net gain of US$22.2 million in the same period in 2013, mainly due to a higher result attributable to non-controlling interest in Siderar.
Cash Flow and Liquidity
Net cash used in operating activities in the first quarter 2014 was US$23.9 million. Working capital increased US$368.9 million in the first quarter 2014 as a result of a US$274.1 million increase in inventories and an aggregate US$168.3 million increase in trade and other receivables, partially offset by an aggregate US$73.5 million net increase in accounts payable and other liabilities. Inventories increased in the first quarter 2014 mainly reflecting higher inventory volumes, in a context of ramped-up production, and higher costs of raw materials, goods in process and finished goods. The above mentioned increase in working capital in the first quarter 2014 included a negative non-cash effect of US$91.7 million reflecting variations in the exchange rates used by subsidiaries with functional currencies other than the U.S. dollar, mainly related to inventories.
Capital expenditures in the first quarter 2014 were US$103.6 million. Ternium's ongoing projects included, among others, in Mexico an investment in a greenfield facility for the manufacture of cold rolled and galvanized steel products (Pesquería/Tenigal projects, in ramp-up period) and, in Argentina, the expansion of specialty steel production capacity (including a new continuous caster in the steel shop recently inaugurated) and the expansions and enhancements at the coking area.
In the first quarter 2014, Ternium had negative free cash flow of US$127.5 million5. Equity investments in, and loans to Techgen were US$3.0 million and US$40.9 million, respectively. The company's net proceeds from borrowings in the first quarter 2014 were US$56.5 million. As of 31 March 2014, Ternium's net debt position was US$1.6 billion6.
Summary of First Quarter 2014 Results
| 1Q 2014 | 4Q 2013 | 1Q 2013 | |||||||||||||||||||
| Steel Shipments (metric tons) | 2,335,000 | 2,232,000 | 5% | 2,241,000 | 4% | ||||||||||||||||
| Iron Ore Shipments (metric tons) | 884,000 | 994,000 | -11% | 1,101,000 | -20% | ||||||||||||||||
| Net Sales (US$ million) | 2,149.4 | 2,116.0 | 2% | 2,135.7 | 1% | ||||||||||||||||
| Operating Income (US$ million) | 319.0 | 295.6 | 8% | 271.8 | 17% | ||||||||||||||||
| EBITDA (US$ million) | 416.9 | 390.0 | 7% | 367.7 | 13% | ||||||||||||||||
| EBITDA per Ton1 (US$) | 178.5 | 174.7 | 164.0 | ||||||||||||||||||
| EBITDA Margin (% of net sales) | 19.4% | 18.4% | 17.2% | ||||||||||||||||||
| Equity in Results of Non-Consolidated Companies | 2.6 | (4.5) | (15.9) | ||||||||||||||||||
| Net Income (US$ million) | 188.2 | 171.1 | 151.4 | ||||||||||||||||||
| Equity Holders' Net Income (US$ million) | 150.0 | 125.6 | 129.3 | ||||||||||||||||||
| Earnings per ADS (US$) | 0.76 | 0.64 | 0.66 | ||||||||||||||||||
- EBITDA2 of US$416.9 million in the first quarter 2014, 7% higher than EBITDA in the fourth quarter 2013 mainly as a result of a 5% increase in steel shipments.
- Earnings per American Depositary Share (ADS)3 of US$0.76 in the first quarter 2014, an increase of US$0.12 per ADS compared to the fourth quarter 2013.
- Capital expenditures of US$103.6 million in the first quarter 2014, down from US$158.2 million in the fourth quarter 2013.
- Net debt position of US$1.6 billion at the end of March 2014, up from US$1.5 billion at the end of December 2013 mainly as a result of higher working capital.
Compared to the first quarter 2013, the company's operating income in the first quarter 2014 increased by US$47.2 million, mainly as a result of improved steel shipments and operating margin. Shipments in Mexico increased 166,000 metric tons year-over-year, while they remained relatively stable in the Southern Region. The year-over-year increase in operating margin was due to lower operating cost per ton, principally from lower raw material costs, partially offset by 3% lower revenue per ton mainly as a result of lower steel prices in the Southern Region.
Net income in the first quarter 2014 was US$188.2 million, an increase of US$17.2 million compared to net income in the fourth quarter 2013 mainly due to the above-mentioned higher operating income and better results from Usiminas, partially offset by higher income tax expenses. Relative to the prior-year period, net income in the first quarter 2014 increased by US$36.8 million mainly due to the same factors described in the sequential comparison.
Outlook
Ternium expects that the improved shipment levels in Mexico during the first quarter 2014 will continue in the second quarter, as the company realizes the benefits of the commercial initiatives it pursued last year. In addition, Ternium anticipates that the ramp-up of the new Pesquería facility, which is progressing according to plan, will gradually contribute to its shipments in the following quarters, and that Tenigal will continue advancing in its certification process with the different auto makers in Mexico.
Steel prices in North America improved at the end of the first quarter 2014, and the company anticipates they will remain at attractive levels throughout the second quarter 2014. Prevailing steel prices in Europe and Asia and the uncertainty regarding growth in China could have a negative impact on North American prices over the longer term.
Shipments in the Southern Region were seasonally lower in the first quarter 2014 and, although Ternium expects them to recover during the second quarter 2014, the recent uncertainty surrounding Argentina's macroeconomic environment could affect domestic steel consumption in the following quarters. U.S. dollar based average steel prices in Argentina sequentially decreased in the first quarter 2014 and the company anticipates no significant changes in average prices in this market during the second quarter 2014.
Ternium expects a slightly lower operating income in the second quarter 2014 compared to the first quarter 2014, mainly as a result of higher raw material and purchased slabs costs being partially offset by the above mentioned increase in shipments.
Analysis of First Quarter 2014 Results
Net income attributable to Ternium's equity holders in the first quarter 2014 was US$150.0 million, compared to net income of US$129.3 million in the first quarter 2013. Including non-controlling interest, net income for the first quarter 2014 was US$188.2 million, US$36.8 million higher in comparison with the first quarter 2013. Earnings per ADS in the first quarter 2014 were US$0.76 compared to Earnings per ADS of US$0.66 in the first quarter 2013.
Net sales in the first quarter 2014 were US$2.1 billion, 1% higher than net sales in the first quarter 2013, mainly as a result of higher steel products net sales in Mexico, partially offset by lower steel product net sales in the Southern Region and Other Markets. The following table outlines Ternium's total consolidated net sales for the first quarter 2014 and first quarter 2013:
| Net Sales (Millions US$) | 1Q 2014 | 1Q 2013 | Dif. | |||||||||
| Mexico | 1,206.9 | 1,064.7 | 13 | % | ||||||||
| Southern Region | 638.5 | 688.7 | -7 | % | ||||||||
| Other Markets | 286.9 | 346.7 | -17 | % | ||||||||
| Total steel products net sales | 2,132.4 | 2,100.1 | 2 | % | ||||||||
| Other products1 | 5.3 | 7.1 | -25 | % | ||||||||
| Total steel segment net sales | 2,137.7 | 2,107.2 | 1 | % | ||||||||
| Total mining segment net sales | 76.2 | 99.8 | -24 | % | ||||||||
| Intersegment eliminations | -64.5 | -71.2 | -9 | % | ||||||||
| Total net sales | 2,149.4 | 2,135.7 | 1 | % | ||||||||
Cost of sales was US$1.6 billion in the first quarter 2014, a decrease of US$19.7 million compared to the first quarter 2013. This was principally due to a US$24.8 million, or 2%, decrease in raw material and consumables used, mainly reflecting a decrease in raw material and purchased slabs costs, partially offset by a 4% increase in shipment volumes and higher energy costs; and a US$5.1 million increase in other costs, including a US$5.5 million increase in maintenance expenses and a US$4.5 million increase in services and fees partially offset by a US$4.9 million decrease in labor cost.
Selling, General & Administrative (SG&A) expenses in the first quarter 2014 were US$195.6 million, or 9.1% of net sales, a decrease of US$11.6 million compared to the first quarter 2013, mainly due to lower freight and transportation expenses and labor cost.
Operating income in the first quarter 2014 was US$319.0 million, or 14.8% of net sales, compared to operating income of US$271.8 million, or 12.7% of net sales, in the first quarter 2013. The following table outlines Ternium's operating income by segment for the first quarter 2014 and first quarter 2013:
| Steel segment | Mining segment | Intersegment eliminations | Total | ||||||||||||||||||||||||||||||||
| US$ million | 1Q 2014 | 1Q 2013 | 1Q 2014 | 1Q 2013 | 1Q 2014 | 1Q 2013 | 1Q 2014 | 1Q 2013 | |||||||||||||||||||||||||||
| Net Sales | 2,137.7 | 2,107.2 | 76.2 | 99.8 | (64.5) | (71.2) | 2,149.4 | 2,135.7 | |||||||||||||||||||||||||||
| Cost of sales | (1,646.3) | (1,655.8) | (55.1) | (66.0) | 64.0 | 64.7 | (1,637.4) | (1,657.1) | |||||||||||||||||||||||||||
| SG&A expenses | (192.2) | (198.1) | (3.4) | (9.1) | - | - | (195.6) | (207.2) | |||||||||||||||||||||||||||
| Other operating income, net | 2.3 | 0.6 | 0.3 | (0.3) | - | - | 2.6 | 0.3 | |||||||||||||||||||||||||||
| Operating income (expense) | 301.5 | 253.9 | 18.0 | 24.4 | (0.5) | (6.5) | 319.0 | 271.8 | |||||||||||||||||||||||||||
| EBITDA | 389.6 | 339.7 | 27.8 | 34.5 | (0.5) | (6.5) | 416.9 | 367.7 | |||||||||||||||||||||||||||
The steel segment's operating income was US$301.5 million in the first quarter 2014, an increase of US$47.6 million compared to the first quarter 2013, reflecting higher sales and lower operating cost.
Net sales of steel products in the first quarter 2014 increased 1% compared to the first quarter 2013, reflecting a 94,000 ton, or 4%, increase in shipments, mainly due to higher sales volume in Mexico, partially offset by lower sales volume in Others Markets. Revenue per ton decreased US$24, or 3%, mainly due to lower steel prices in the Southern Region partially offset by higher steel prices in Other Markets.
| Net Sales (million US$) | Shipments (thousand metric tons) | Revenue/ton (US$/ton) | ||||||||||||||||||||||||||||||||||||||
| 1Q 2014 | 1Q 2013 | Dif. | 1Q 2014 | 1Q 2013 | Dif. | 1Q 2014 | 1Q 2013 | Dif. | ||||||||||||||||||||||||||||||||
| Mexico | 1,206.9 | 1,064.7 | 13% | 1,415.2 | 1,249.2 | 13% | 853 | 852 | 0% | |||||||||||||||||||||||||||||||
| Southern Region | 638.5 | 688.7 | -7% | 612.7 | 608.8 | 1% | 1,042 | 1,131 | -8% | |||||||||||||||||||||||||||||||
| Other Markets | 286.9 | 346.7 | -17% | 307.4 | 383.5 | -20% | 933 | 904 | 3% | |||||||||||||||||||||||||||||||
| Total steel products | 2,132.4 | 2,100.1 | 2% | 2,335.2 | 2,241.4 | 4% | 913 | 937 | -3% | |||||||||||||||||||||||||||||||
| Other products1 | 5.3 | 7.1 | -25% | |||||||||||||||||||||||||||||||||||||
| Total steel segment | 2,137.7 | 2,107.2 | 1% | |||||||||||||||||||||||||||||||||||||
| 1 The item "Other products" primarily includes pig iron and pre-engineered metal building systems. | ||||||||||||||||||||||||||||||||||||||||
Mining reporting segment
The mining segment's operating income was US$18.0 million in the first quarter 2014, a decrease of US$6.4 million compared to the first quarter 2013, mainly reflecting lower sales of iron ore and lower operating cost.
Net Sales of mining products in the first quarter 2014 were 24% lower than in the first quarter 2013, reflecting lower shipments and a US$4 decrease in revenue per ton. Shipments were 884,000 metric tons, 20% lower than in the first quarter 2013 as a result of lower sales to third parties and a decrease in shipments from Peña Colorada due to lower production.
| Mining segment | ||||||
| 1Q 2014 | 1Q 2013 | Dif. | ||||
| Net Sales (million US$) | 76.2 | 99.8 | -24% | |||
| Shipments (thousand metric tons) | 884.4 | 1,101.3 | -20% | |||
| Revenue per ton (US$/ton) | 86 | 91 | -5% | |||
EBITDA in the first quarter 2014 was US$416.9 million, or 19.4% of net sales, compared to US$367.7 million, or 17.2% of net sales, in the first quarter 2013.
Net financial results were a US$24.3 million loss in the first quarter 2014, compared to a US$40.8 million loss in the first quarter 2013.
During the first quarter 2014, Ternium's net interest results totaled a loss of US$19.5 million, a US$10.2 million improved result than in the first quarter 2013, reflecting lower indebtedness and weighted average interest rates.
Equity in results of non-consolidated companies was a gain of US$2.6 million in the first quarter 2014, compared to a loss of US$15.9 million in the first quarter 2013, mainly due to an improved result in Usiminas.
Income tax expense in the first quarter 2014 was US$109.1 million, or 37% of income before income tax expense, compared with an income tax expense of US$63.7 million in the first quarter 2013, or 30% of income before income tax expense.
Net gain attributable to non-controlling interest in the first quarter 2014 was US$38.2 million, compared to a net gain of US$22.2 million in the same period in 2013, mainly due to a higher result attributable to non-controlling interest in Siderar.
Cash Flow and Liquidity
Net cash used in operating activities in the first quarter 2014 was US$23.9 million. Working capital increased US$368.9 million in the first quarter 2014 as a result of a US$274.1 million increase in inventories and an aggregate US$168.3 million increase in trade and other receivables, partially offset by an aggregate US$73.5 million net increase in accounts payable and other liabilities. Inventories increased in the first quarter 2014 mainly reflecting higher inventory volumes, in a context of ramped-up production, and higher costs of raw materials, goods in process and finished goods. The above mentioned increase in working capital in the first quarter 2014 included a negative non-cash effect of US$91.7 million reflecting variations in the exchange rates used by subsidiaries with functional currencies other than the U.S. dollar, mainly related to inventories.
Capital expenditures in the first quarter 2014 were US$103.6 million. Ternium's ongoing projects included, among others, in Mexico an investment in a greenfield facility for the manufacture of cold rolled and galvanized steel products (Pesquería/Tenigal projects, in ramp-up period) and, in Argentina, the expansion of specialty steel production capacity (including a new continuous caster in the steel shop recently inaugurated) and the expansions and enhancements at the coking area.
In the first quarter 2014, Ternium had negative free cash flow of US$127.5 million5. Equity investments in, and loans to Techgen were US$3.0 million and US$40.9 million, respectively. The company's net proceeds from borrowings in the first quarter 2014 were US$56.5 million. As of 31 March 2014, Ternium's net debt position was US$1.6 billion6.
Ternium is a leading steel producer in Latin America, with an annual production capacity of approximately 10.9 million tons of finished steel products. The company manufactures and processes a broad range of value-added steel products for customers active in the construction, automotive, home appliances, capital goods, container, food and energy industries. With production facilities located in Mexico, Argentina, Colombia, the southern United States and Guatemala, Ternium serves markets in the Americas through its integrated manufacturing system and extensive distribution network. In addition, Ternium participates in the control group of Usiminas, a Brazilian steel company.
1 Consolidated EBITDA divided by steel shipments.
2 EBITDA in the first quarter 2014 equals operating income of US$319.0 million adjusted to exclude depreciation and amortization of US$97.9 million.
3 Each American Depositary Share (ADS) represents 10 shares of Ternium's common stock. Results are based on a weighted average number of shares of common stock outstanding (net of treasury shares) of 1,963,076,776.
4 Operating cost per ton equals cost of sales plus Selling, General & Administrative expenses divided by steel shipments.
5 Free cash flow in the first quarter 2014 equals net cash used in operating activities of US$23.9 million less capital expenditures of US$103.6 million.
6 Net debt position at 31 March 2014 equals borrowings of $2.0 billion less cash and equivalents plus other investments of US$354.2 million.
