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Ternium: Steel Demand in U.S. & Mexico Remains Healthy
11/11/2014 - Ternium S.A. announced its results for the third quarter and first nine months ended 30 September 2014.
Summary of Third Quarter 2014 Results
Compared to the third quarter 2013, the company's operating income in the third quarter 2014 increased by US$48.5 million, mainly as a result of US$45.8 million higher gain on insurance recovery (US$57.5 million in the third quarter 2014 and US$11.7 million in the third quarter 2013). Operating margin remained relatively stable, as a US$17 increase in steel revenue per ton was offset by a US$19 increase in steel operating cost per ton. Steel revenue per ton was higher in Mexico and Other Markets, and lower in the Southern Region reflecting changes in steel prices and a better product mix. Operating cost per ton increased mainly due to higher purchased slabs and energy costs, partially offset by lower raw material costs.
Net income in the third quarter 2014 was US$160.2 million, a decrease of US$20.1 million compared to net income in the second quarter 2014 mainly due to higher income tax expense, partially offset by the above-mentioned higher operating income. Income tax expense in the second quarter 2014 included a non-recurring tax gain related to a non-cash reduction of deferred tax liabilities at one of Ternium's subsidiaries.
Relative to the prior-year period, net income in the third quarter 2014 increased by US$24.2 million, mainly due to the above mentioned higher gain on insurance recovery, partially offset by higher income tax expense reflecting increased operating income.
Summary of First Nine Months of 2014 Results
Net income in the first nine months of 2014 was US$528.7 million, US$106.9 million higher than net income in the first nine months of 2013 mainly as a result of the above mentioned increase in operating income, lower net financial expenses, better results from the Usiminas investment and lower income tax expense.
Outlook
Ternium expects to maintain in the fourth quarter 2014 the strong shipment levels and operating margin performance it has achieved over the first nine months of 2014.
Demand for steel products in the U.S. and Mexican markets remains at healthy levels, sustained mainly by the continued expansion of manufacturing activity in both countries. Ternium has been able to capitalize on this positive trend during 2014 through an increased commercial effort and focus on high value-added products, which have enabled a 16% increase in sales in the Mexican market year-over-year.
In the Southern Region, Ternium expects the performance of the Argentine construction and industrial sectors to be stable relative to the average of the first nine months of 2014. This continuing trend should translate into a moderate year-over-year contraction of steel shipments in this region for 2014 compared to 2013.
The company anticipates slightly higher shipments in the fourth quarter 2014 compared to the third quarter 2014 mainly as a result of the ramp-up of its new facilities in Mexico in a seasonally weaker quarter for this country. Excluding the effect of a non-recurring insurance recovery gain in the third quarter 2014, Ternium expects relatively stable operating income in the fourth quarter 2014, reflecting slightly lower steel prices and costs in the context of lower raw material and purchased slab prices.
Analysis of Third Quarter 2014 Results
Net income attributable to Ternium's equity holders in the third quarter 2014 was US$111.7 million, compared to net income of US$97.8 million in the third quarter 2013. Including non-controlling interest, net income for the third quarter 2014 was US$160.2 million, US$24.2 million higher in comparison to the third quarter 2013. Earnings per ADS in the third quarter 2014 were US$0.57 compared to Earnings per ADS of US$0.50 in the third quarter 2013.
Net sales in the third quarter 2014 were US$2.2 billion, 3% higher than net sales in the third 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. The following table outlines Ternium's consolidated net sales for the third quarter 2014 and third quarter 2013:
1 The item "Other products" primarily includes pig iron and pre-engineered metal building systems.
Cost of sales was US$1.8 billion in the third quarter 2014, an increase of US$80.5 million compared to the third quarter 2013. This was principally due to a US$57.5 million, or 4%, increase in raw material and consumables used, mainly reflecting a 1% increase in steel shipment volumes, higher purchased slabs costs and higher energy costs, partially offset by lower iron ore and coking coal costs; and US$23.0 million increase in other costs, including a US$16.2 million increase in depreciation of property, plant and equipment and amortization of intangible assets, a US$6.1 million increase in maintenance expenses and a US$3.9 million increase in labor cost.
Selling, General & Administrative (SG&A) expenses in the third quarter 2014 were US$206.2 million, or 9.3% of net sales, relatively stable compared to the third quarter 2013.
Other net operating income in the third quarter 2014 was US$62.1 million, higher than the US$11.3 million gain in the third quarter 2013. Other net operating income in the third quarter 2014 included a US$57.5 million income recognition on insurance recovery related to Ternium's subsidiary Siderar.
Operating income in the third quarter 2014 was US$314.5 million, or 14.2% of net sales, compared to operating income of US$266.1 million, or 12.4% of net sales, in the third quarter 2013. The following table outlines Ternium's operating income by segment for the third quarter 2014 and third quarter 2013.
Steel reporting segment
The steel segment's operating income was US$305.3 million in the third quarter 2014, an increase of US$46.8 million compared to the third quarter 2013, reflecting higher sales and an income recognition on insurance recoveries of US$57.5 million in the third quarter 2014, partially offset by higher operating cost.
Net sales of steel products in the third quarter 2014 increased 3% compared to the third quarter 2013, reflecting a 34,000 ton, or 1%, increase in shipments, mainly due to higher sales volume in Mexico, partially offset by lower sales volume in the Southern Region and in Others Markets. Revenue per ton increased US$17, or 2%, mainly due to higher steel prices in Mexico and Other Markets and an overall better products mix, partially offset by lower steel prices in the Southern Region.
Operating cost increased 4% due to a 1% increase in shipment volumes and to a 2% increase in cost per ton in comparison to cost per ton in the third quarter 2013. The increase in cost per ton was mainly due to higher purchased slabs and energy costs, partially offset by lower iron ore and coking coal costs.
Mining reporting segment
The mining segment's operating income was US$9.0 million in the third quarter 2014, a decrease of US$2.2 million compared to the third quarter 2013, mainly reflecting higher iron ore sales, partially offset by higher operating cost.
Net Sales of mining products in the third quarter 2014 were 10% higher than net sales in the third quarter 2013, mainly as a result of higher shipments. Shipments were 1.0 million tons, 8% higher than in the third quarter 2013 as a result of higher sales to third parties.
Operating cost increased 15% year-over-year, due to the above mentioned 8% increase in shipment volumes and a 7% increase in operating cost per ton.
EBITDA in the third quarter 2014 was US$423.0 million, or 19.1% of net sales, compared to US$358.4 million, or 16.7% of net sales, in the third quarter 2013.
Net financial results were a US$22.6 million loss in the third quarter 2014, compared to a US$25.8 million loss in the third quarter 2013. During the third quarter 2014, Ternium's net interest results totaled a loss of US$31.1 million, compared with US$26.6 million in the third quarter 2013.
Equity in results of non-consolidated companies was a loss of US$9.0 million in the third quarter 2014, compared to a loss of US$0.9 million in the third quarter 2013, mainly due to a lower result of our investment in Usiminas.
Income tax expense in the third quarter 2014 was US$122.8 million, or 43% of income before income tax expense, compared with an income tax expense of US$103.3 million in the third quarter 2013, or 43% of income before income tax expense. Income tax expense in the third quarter 2014 included tax expenses related to an amendment of a previous period tax return in Mexico and the negative effect of the Mexican peso devaluation on the tax base used to calculate deferred tax at our Mexican subsidiaries, which have the US dollar as their functional currency. Income tax expense in the third quarter 2013 included losses related to the adjustment of deferred taxes in connection with the introduction of a new withholding tax on dividend distributions in Argentina.
Net gain attributable to non-controlling interest in the third quarter 2014 was US$48.5 million, compared to net gain of US$38.2 million in the same period in 2013, mainly due to a higher result attributable to non-controlling interest in Siderar.
Analysis of First Nine Months of 2014 Results
Net income attributable to Ternium's equity holders in the first nine months of 2014 was US$390.8 million, compared to net income of US$329.8 million in the first nine months of 2013. Including non-controlling interest, net income for the first nine months of 2014 was US$528.7 million, compared to net income of US$421.9 million in the first nine months of 2013. Earnings per ADS in the first nine months of 2014 were US$1.99, compared to earnings of US$1.68 in the first nine months of 2013.
Net sales in the first nine months of 2014 were US$6.6 billion, 2% higher than net sales in the first nine months of 2013, mainly as a result of higher steel products sales in Mexico, partially offset by lower steel products sales in the Southern Region and Other Markets, and lower iron ore sales to third parties. The following table shows Ternium's consolidated net sales for the first nine months of 2014 and 2013:
1 The item "Other products" primarily includes pig iron and pre-engineered metal building systems.
Cost of sales was US$5.2 billion in the first nine months of 2014, an increase of US$170.0 million compared to the first nine months of 2013. This was principally due to a US$108.5 million, or 3%, increase in raw material and consumables used, mainly reflecting a 4% increase in steel shipment volumes, higher purchased slabs costs and higher energy costs, partially offset by lower iron ore and coking coal costs; and a US$61.6 million increase in other costs, including a US$38.4 million increase in maintenance expenses, a US$22.8 million increase in depreciation of property, plant and equipment and amortization of intangible assets and a US$3.8 million increase in services and fees.
Selling, General & Administrative (SG&A) expenses in the first nine months of 2014 were US$614.8 million, or 9.4% of net sales, a decrease of US$18.1 million compared to SG&A in the first nine months of 2013, mainly as a result of lower freight and transportation expenses, and lower taxes and contributions (other than income tax).
Other net operating income in the first nine months of 2014 was US$68.3 million, which was higher than the US$22.8 million gain in the first nine months of 2013. Other net operating income in the first nine months of 2014 included a US$57.5 million income recognition on insurance recovery.
Operating income in the first nine months of 2014 was US$864.9 million, or 13.2% of net sales, compared to operating income of US$813.9 million, or 12.7% of net sales, in the first nine months of 2013. The following table shows Ternium's operating income by segment for the first nine months of 2014 and 2013.
Steel reporting segment
The steel segment's operating income was US$821.9 million in the first nine months of 2014, an increase of US$61.5 million compared to the first nine months of 2013, reflecting higher sales and an income recognition on insurance recoveries of US$57.5 million, partially offset by higher operating cost.
Net sales of steel products in the first nine months of 2014 increased 3% compared to the first nine months of 2013, reflecting an increase in shipments partially offset by a decrease in revenue per ton. Shipments increased 271,000 tons, or 4%, compared to the first nine months of 2013, mainly due to higher sales volume in Mexico partially offset by lower sales volume in the Southern Region and Other Markets. Revenue per ton decreased US$8, mainly due to lower steel prices in the Southern Region partially offset by higher steel prices in Mexico and Others Markets.
Operating cost increased 3%, due to the above-mentioned 4% increase in shipment volumes partially offset by a 1% decrease in operating cost per ton. The decrease in operating cost per ton was mainly due to lower iron ore and coking coal costs partially offset by higher purchased slabs costs and energy costs.
Mining reporting segment
The mining segment's operating income was US$43.4 million in the first nine months of 2014, a decrease of US$13.0 million compared to the first nine months of 2013 mainly reflecting lower iron ore sales, partially offset by lower operating cost.
Net Sales of mining products in the first nine months of 2014 were 13% lower than in the first nine months of 2013, reflecting lower shipments and stable revenue per ton. Shipments were 2.8 million tons, 13% lower than in the first nine months of 2013, mainly as a result of lower iron ore production at Peña Colorada.
Operating cost decreased 9% year-over-year, due to the above mentioned 13% decrease in shipment volumes, partially offset by a 4% increase in operating cost per ton.
EBITDA in the first nine months of 2014 was US$1.2 billion, or 17.8% of net sales, compared with US$1.1 billion, or 17.1% of net sales, in the first nine months of 2013.
Net financial results were a US$78.1 million loss in the first nine months of 2014, compared with a US$105.1 million loss in the first nine months of 2013.
During the first nine months of 2014, Ternium's net interest results totaled a loss of US$77.8 million, compared to a loss of US$83.8 million in the first nine months of 2013, reflecting lower average indebtedness and weighted average interest rates.
Change in fair value of financial instruments included in net financial results in the first nine months of 2014 was a US$8.2 million gain, mainly related to results from changes in the fair value of financial assets, compared with a US$9.2 million loss in the first nine months of 2013.
Equity in results of non-consolidated companies was a loss of US$6.7 million in the first nine months of 2014, compared to a loss of US$27.1 million in the first nine months of 2013, mainly as a result of better results from Usiminas.
Income tax expense in the first nine months of 2014 was US$251.3 million, or 32% of income before income tax, compared with an income tax expense of US$259.9 million, or 38% of income before income tax, in the same period in 2013. Income tax expense in the first nine months of 2013 included losses related to the adjustment of deferred taxes in connection with the introduction of a new withholding tax on dividend distributions in Argentina.
Net gain attributable to non-controlling interest in the first nine months of 2014 was US$137.9 million, compared to a net gain of US$92.0 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 provided by operating activities in the first nine months of 2014 was US$297.5 million. Working capital increased US$553.2 million in the first nine months of 2014 as a result of a US$411.8 million increase in inventories and an aggregate US$191.9 million increase in trade and other receivables, partially offset by an aggregate US$50.5 million net increase in accounts payable and other liabilities. Trade receivables increased as a result of higher sales volume. Inventories increased in the first nine months of 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 nine months of 2014 included a negative non-cash effect of US$128.2 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 nine months of 2014 were US$334.8 million, down from US$725.1 million in the first nine months of 2013. The main investments carried out during the period included, in Mexico, those made in the new cold rolling mill (Pesquería facility), in mining and iron ore reduction facilities and for the expansion of service center capacity and, in Argentina, those made for the expansion of specialty steel production capacity (including a new continuous caster in the steel shop, inaugurated during the first quarter) and for the expansion and enhancement of the coking facilities.
In the first nine months of 2014, Ternium had negative free cash flow of US$37.3 million8. The company's net proceeds from borrowings in the first nine months of 2014 were US$200.1 million. In addition, net dividends paid to shareholders were US$147.2 million and net dividends paid to minority shareholders were US$33.6 million. As of 30 September 2014, Ternium's net debt position was US$1.7 billion9.
Net cash provided by operating activities in the third quarter 2014 was US$287.8 million. Working capital increased by US$48.7 million in the third quarter 2014 as a result of a US$107.0 million increase in inventories, partially offset by an aggregate US$19.6 million decrease in trade and other receivables, and an aggregate US$38.8 million net increase in accounts payable and other liabilities. Inventories increased in the third quarter 2014 mainly reflecting higher volumes of raw materials and purchased steel, partially offset by lower costs of raw materials. Capital expenditures were US$94.8 million in the third quarter 2014, compared to US$217.5 million in the third quarter 2013. Ternium's free cash flow in the period was US$193.1 million10. In addition, in the third quarter 2014 Techgen paid back Ternium US$62.5 million on loans granted during the first half 2014.
Ternium is a leading steel producer in Latin America, with an annual production capacity of approximately 10.9 million tons of finished steel products. The company manufactures and processes a broad range of value-added steel products for customers active in the construction, automotive, home appliances, capital goods, container, food and energy industries. With production facilities located in Mexico, Argentina, Colombia, the southern United States and Guatemala, Ternium serves markets in the Americas through its integrated manufacturing system and extensive distribution network. In addition, Ternium participates in the control group of Usiminas, a Brazilian steel company.
| 3Q 2014 | 2Q 2014 | 3Q 2013 | |||||||||||||
| Steel Shipments (tons) | 2,335,000 | 2,357,000 | -1 | % | 2,302,000 | 1 | % | ||||||||
| Iron Ore Shipments (tons) | 1,006,000 | 944,000 | 7 | % | 930,000 | 8 | % | ||||||||
| Net Sales (US$ million) | 2,218.3 | 2,203.7 | 1 | % | 2,143.8 | 3 | % | ||||||||
| Operating Income (US$ million) | 314.5 | 231.3 | 36 | % | 266.1 | 18 | % | ||||||||
| EBITDA1 (US$ million) | 423.0 | 330.1 | 28 | % | 358.4 | 18 | % | ||||||||
| EBITDA per Ton2 (US$) | 181.1 | 140.1 | 155.7 | ||||||||||||
| EBITDA Margin (% of net sales) | 19.1 | % | 15.0 | % | 16.7 | % | |||||||||
| Net Income (US$ million) | 160.2 | 180.3 | 136.0 | ||||||||||||
| Equity Holders' Net Income (US$ million) | 111.7 | 129.1 | 97.8 | ||||||||||||
| Earnings per ADS (US$) | 0.57 | 0.66 | 0.50 | ||||||||||||
- EBITDA of US$423.0 million in the third quarter 2014, a 28% increase compared to the second quarter 2014. EBITDA in the third quarter 2014 included a non-recurring gain of US$57.5 million related to income recognition on an insurance recovery in Ternium's Argentine subsidiary Siderar.
- Excluding the insurance recovery gain, EBITDA per ton increased to US$157 in the third quarter 2014, and EBITDA margin to 16%.
- Earnings per American Depositary Share (ADS)3 of US$0.57 in the third quarter 2014, a decrease of US$0.09 per ADS compared to the second quarter 2014 mainly due to higher income tax expense, partially offset by higher operating income.
- Capital expenditures of US$94.8 million in the third quarter 2014, down from US$136.4 million in the second quarter 2014.
- Net debt position of US$1.7 billion at the end of September 2014, down from US$2.0 billion at the end of June 2014.
Compared to the third quarter 2013, the company's operating income in the third quarter 2014 increased by US$48.5 million, mainly as a result of US$45.8 million higher gain on insurance recovery (US$57.5 million in the third quarter 2014 and US$11.7 million in the third quarter 2013). Operating margin remained relatively stable, as a US$17 increase in steel revenue per ton was offset by a US$19 increase in steel operating cost per ton. Steel revenue per ton was higher in Mexico and Other Markets, and lower in the Southern Region reflecting changes in steel prices and a better product mix. Operating cost per ton increased mainly due to higher purchased slabs and energy costs, partially offset by lower raw material costs.
Net income in the third quarter 2014 was US$160.2 million, a decrease of US$20.1 million compared to net income in the second quarter 2014 mainly due to higher income tax expense, partially offset by the above-mentioned higher operating income. Income tax expense in the second quarter 2014 included a non-recurring tax gain related to a non-cash reduction of deferred tax liabilities at one of Ternium's subsidiaries.
Relative to the prior-year period, net income in the third quarter 2014 increased by US$24.2 million, mainly due to the above mentioned higher gain on insurance recovery, partially offset by higher income tax expense reflecting increased operating income.
Summary of First Nine Months of 2014 Results
| 9M 2014 | 9M 2013 | |||||||
| Steel Shipments (tons) | 7,027,000 | 6,756,000 | 4 | % | ||||
| Iron Ore Shipments (tons) | 2,835,000 | 3,249,000 | -13 | % | ||||
| Net Sales (US$ million) | 6,571.5 | 6,414.0 | 2 | % | ||||
| Operating Income (US$ million) | 864.9 | 813.9 | 6 | % | ||||
| EBITDA (US$ million) | 1,170.1 | 1,096.5 | 7 | % | ||||
| EBITDA per Ton (US$) | 166.5 | 162.3 | ||||||
| EBITDA Margin (% of net sales) | 17.8 | % | 17.1 | % | ||||
| Net Income (US$ million) | 528.7 | 421.9 | ||||||
| Equity Holders' Net Income (US$ million) | 390.8 | 329.8 | ||||||
| Earnings per ADS (US$) | 1.99 | 1.68 | ||||||
- EBITDA6 of US$1.2 billion in the first nine months of 2014, 7% higher than EBITDA in the first nine months of 2013 due to slightly higher steel shipments and EBITDA per ton.
- Earnings per ADS7 of US$1.99 in the first nine months of 2014, US$0.31 higher than in the first nine months of 2013 due to higher operating income, lower net financial expenses, lower losses from Usiminas and lower income tax expense.
- Capital expenditures of US$334.8 million in the first nine months of 2014, 54% lower than capital expenditures of US$725.1 million in the first nine months of 2013.
Net income in the first nine months of 2014 was US$528.7 million, US$106.9 million higher than net income in the first nine months of 2013 mainly as a result of the above mentioned increase in operating income, lower net financial expenses, better results from the Usiminas investment and lower income tax expense.
Outlook
Ternium expects to maintain in the fourth quarter 2014 the strong shipment levels and operating margin performance it has achieved over the first nine months of 2014.
Demand for steel products in the U.S. and Mexican markets remains at healthy levels, sustained mainly by the continued expansion of manufacturing activity in both countries. Ternium has been able to capitalize on this positive trend during 2014 through an increased commercial effort and focus on high value-added products, which have enabled a 16% increase in sales in the Mexican market year-over-year.
In the Southern Region, Ternium expects the performance of the Argentine construction and industrial sectors to be stable relative to the average of the first nine months of 2014. This continuing trend should translate into a moderate year-over-year contraction of steel shipments in this region for 2014 compared to 2013.
The company anticipates slightly higher shipments in the fourth quarter 2014 compared to the third quarter 2014 mainly as a result of the ramp-up of its new facilities in Mexico in a seasonally weaker quarter for this country. Excluding the effect of a non-recurring insurance recovery gain in the third quarter 2014, Ternium expects relatively stable operating income in the fourth quarter 2014, reflecting slightly lower steel prices and costs in the context of lower raw material and purchased slab prices.
Analysis of Third Quarter 2014 Results
Net income attributable to Ternium's equity holders in the third quarter 2014 was US$111.7 million, compared to net income of US$97.8 million in the third quarter 2013. Including non-controlling interest, net income for the third quarter 2014 was US$160.2 million, US$24.2 million higher in comparison to the third quarter 2013. Earnings per ADS in the third quarter 2014 were US$0.57 compared to Earnings per ADS of US$0.50 in the third quarter 2013.
Net sales in the third quarter 2014 were US$2.2 billion, 3% higher than net sales in the third quarter 2013, mainly as a result of higher steel products net sales in Mexico, partially offset by lower steel product net sales in the Southern Region. The following table outlines Ternium's consolidated net sales for the third quarter 2014 and third quarter 2013:
| Net Sales (million US$) | ||||||||||
| 3Q 2014 | 3Q 2013 | Dif. | ||||||||
| Mexico | 1,219.2 | 1,057.1 | 15 | % | ||||||
| Southern Region | 671.2 | 767.1 | -12 | % | ||||||
| Other Markets | 313.4 | 309.8 | 1 | % | ||||||
| Total steel products net sales | 2,203.8 | 2,134.0 | 3 | % | ||||||
| Other products1 | 7.2 | 9.5 | -24 | % | ||||||
| Steel segment net sales | 2,211.0 | 2,143.5 | 3 | % | ||||||
| Mining segment net sales | 82.2 | 74.7 | 10 | % | ||||||
| Intersegment eliminations | (74.9 | ) | (74.4 | ) | ||||||
| Net sales | 2,218.3 | 2,143.8 | 3 | % | ||||||
Cost of sales was US$1.8 billion in the third quarter 2014, an increase of US$80.5 million compared to the third quarter 2013. This was principally due to a US$57.5 million, or 4%, increase in raw material and consumables used, mainly reflecting a 1% increase in steel shipment volumes, higher purchased slabs costs and higher energy costs, partially offset by lower iron ore and coking coal costs; and US$23.0 million increase in other costs, including a US$16.2 million increase in depreciation of property, plant and equipment and amortization of intangible assets, a US$6.1 million increase in maintenance expenses and a US$3.9 million increase in labor cost.
Selling, General & Administrative (SG&A) expenses in the third quarter 2014 were US$206.2 million, or 9.3% of net sales, relatively stable compared to the third quarter 2013.
Other net operating income in the third quarter 2014 was US$62.1 million, higher than the US$11.3 million gain in the third quarter 2013. Other net operating income in the third quarter 2014 included a US$57.5 million income recognition on insurance recovery related to Ternium's subsidiary Siderar.
Operating income in the third quarter 2014 was US$314.5 million, or 14.2% of net sales, compared to operating income of US$266.1 million, or 12.4% of net sales, in the third quarter 2013. The following table outlines Ternium's operating income by segment for the third quarter 2014 and third quarter 2013.
| Steel segment | Mining segment | Intersegment eliminations | Total | ||||||||||||||||||||||
| US$ million | 3Q 2014 | 3Q 2013 | 3Q 2014 | 3Q 2013 | 3Q 2014 | 3Q 2013 | 3Q 2014 | 3Q 2013 | |||||||||||||||||
| Net Sales | 2,211.0 | 2,143.5 | 82.2 | 74.7 | (74.9 | ) | (74.4 | ) | 2,218.3 | 2,143.8 | |||||||||||||||
| Cost of sales | (1,765.3 | ) | (1,690.3 | ) | (69.6 | ) | (59.6 | ) | 75.1 | 70.7 | (1,759.7 | ) | (1,679.2 | ) | |||||||||||
| SG&A expenses | (202.3 | ) | (205.9 | ) | (3.9 | ) | (4.0 | ) | - | - | (206.2 | ) | (209.9 | ) | |||||||||||
| Other operating income, net | 61.8 | 11.2 | 0.3 | 0.1 | - | - | 62.1 | 11.3 | |||||||||||||||||
| Operating income (expense) | 305.3 | 258.5 | 9.0 | 11.2 | 0.2 | (3.7 | ) | 314.5 | 266.1 | ||||||||||||||||
| EBITDA | 401.2 | 345.1 | 21.6 | 17.0 | 0.2 | (3.7 | ) | 423.0 | 358.4 | ||||||||||||||||
The steel segment's operating income was US$305.3 million in the third quarter 2014, an increase of US$46.8 million compared to the third quarter 2013, reflecting higher sales and an income recognition on insurance recoveries of US$57.5 million in the third quarter 2014, partially offset by higher operating cost.
Net sales of steel products in the third quarter 2014 increased 3% compared to the third quarter 2013, reflecting a 34,000 ton, or 1%, increase in shipments, mainly due to higher sales volume in Mexico, partially offset by lower sales volume in the Southern Region and in Others Markets. Revenue per ton increased US$17, or 2%, mainly due to higher steel prices in Mexico and Other Markets and an overall better products mix, partially offset by lower steel prices in the Southern Region.
| Net Sales (million US$) | Shipments (thousand tons) | Revenue / ton (US$/ton) | ||||||||||||||||||
| 3Q 2014 | 3Q 2013 | Dif. | 3Q 2014 | 3Q 2013 | Dif. | 3Q 2014 | 3Q 2013 | Dif. | ||||||||||||
| Mexico | 1,219.2 | 1,057.1 | 15 | % | 1,380.5 | 1,269.7 | 9 | % | 883 | 833 | 6 | % | ||||||||
| Southern Region | 671.2 | 767.1 | -12 | % | 624.9 | 689.0 | -9 | % | 1,074 | 1,113 | -4 | % | ||||||||
| Other Markets | 313.4 | 309.8 | 1 | % | 330.0 | 343.0 | -4 | % | 950 | 903 | 5 | % | ||||||||
| Total steel products | 2,203.8 | 2,134.0 | 3 | % | 2,335.4 | 2,301.8 | 1 | % | 944 | 927 | 2 | % | ||||||||
| Other products 1 | 7.2 | 9.5 | -24 | % | ||||||||||||||||
| Steel segment | 2,211.0 | 2,143.5 | 3 | % | ||||||||||||||||
| 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$9.0 million in the third quarter 2014, a decrease of US$2.2 million compared to the third quarter 2013, mainly reflecting higher iron ore sales, partially offset by higher operating cost.
Net Sales of mining products in the third quarter 2014 were 10% higher than net sales in the third quarter 2013, mainly as a result of higher shipments. Shipments were 1.0 million tons, 8% higher than in the third quarter 2013 as a result of higher sales to third parties.
| Mining segment | ||||||
| 3Q 2014 | 3Q 2013 | Dif. | ||||
| Net Sales (million US$) | 82.2 | 74.7 | 10 | % | ||
| Shipments (thousand tons) | 1,006.6 | 930.0 | 8 | % | ||
| Revenue per ton (US$/ton) | 82 | 80 | 2 | % | ||
EBITDA in the third quarter 2014 was US$423.0 million, or 19.1% of net sales, compared to US$358.4 million, or 16.7% of net sales, in the third quarter 2013.
Net financial results were a US$22.6 million loss in the third quarter 2014, compared to a US$25.8 million loss in the third quarter 2013. During the third quarter 2014, Ternium's net interest results totaled a loss of US$31.1 million, compared with US$26.6 million in the third quarter 2013.
Equity in results of non-consolidated companies was a loss of US$9.0 million in the third quarter 2014, compared to a loss of US$0.9 million in the third quarter 2013, mainly due to a lower result of our investment in Usiminas.
Income tax expense in the third quarter 2014 was US$122.8 million, or 43% of income before income tax expense, compared with an income tax expense of US$103.3 million in the third quarter 2013, or 43% of income before income tax expense. Income tax expense in the third quarter 2014 included tax expenses related to an amendment of a previous period tax return in Mexico and the negative effect of the Mexican peso devaluation on the tax base used to calculate deferred tax at our Mexican subsidiaries, which have the US dollar as their functional currency. Income tax expense in the third quarter 2013 included losses related to the adjustment of deferred taxes in connection with the introduction of a new withholding tax on dividend distributions in Argentina.
Net gain attributable to non-controlling interest in the third quarter 2014 was US$48.5 million, compared to net gain of US$38.2 million in the same period in 2013, mainly due to a higher result attributable to non-controlling interest in Siderar.
Analysis of First Nine Months of 2014 Results
Net income attributable to Ternium's equity holders in the first nine months of 2014 was US$390.8 million, compared to net income of US$329.8 million in the first nine months of 2013. Including non-controlling interest, net income for the first nine months of 2014 was US$528.7 million, compared to net income of US$421.9 million in the first nine months of 2013. Earnings per ADS in the first nine months of 2014 were US$1.99, compared to earnings of US$1.68 in the first nine months of 2013.
Net sales in the first nine months of 2014 were US$6.6 billion, 2% higher than net sales in the first nine months of 2013, mainly as a result of higher steel products sales in Mexico, partially offset by lower steel products sales in the Southern Region and Other Markets, and lower iron ore sales to third parties. The following table shows Ternium's consolidated net sales for the first nine months of 2014 and 2013:
| Net Sales (million US$) | ||||||||||
| 9M 2014 | 9M 2013 | Dif. | ||||||||
| Mexico | 3,648.2 | 3,150.0 | 16 | % | ||||||
| Southern Region | 1,974.6 | 2,197.7 | -10 | % | ||||||
| Other Markets | 901.9 | 980.6 | -8 | % | ||||||
| Total steel products net sales | 6,524.7 | 6,328.2 | 3 | % | ||||||
| Other products1 | 26.1 | 23.0 | 13 | % | ||||||
| Steel segment net sales | 6,550.8 | 6,351.3 | 3 | % | ||||||
| Mining segment net sales | 241.8 | 276.3 | -13 | % | ||||||
| Intersegment eliminations | (221.1 | ) | (213.6 | ) | ||||||
| Net sales | 6,571.5 | 6,414.0 | 2 | % | ||||||
Cost of sales was US$5.2 billion in the first nine months of 2014, an increase of US$170.0 million compared to the first nine months of 2013. This was principally due to a US$108.5 million, or 3%, increase in raw material and consumables used, mainly reflecting a 4% increase in steel shipment volumes, higher purchased slabs costs and higher energy costs, partially offset by lower iron ore and coking coal costs; and a US$61.6 million increase in other costs, including a US$38.4 million increase in maintenance expenses, a US$22.8 million increase in depreciation of property, plant and equipment and amortization of intangible assets and a US$3.8 million increase in services and fees.
Selling, General & Administrative (SG&A) expenses in the first nine months of 2014 were US$614.8 million, or 9.4% of net sales, a decrease of US$18.1 million compared to SG&A in the first nine months of 2013, mainly as a result of lower freight and transportation expenses, and lower taxes and contributions (other than income tax).
Other net operating income in the first nine months of 2014 was US$68.3 million, which was higher than the US$22.8 million gain in the first nine months of 2013. Other net operating income in the first nine months of 2014 included a US$57.5 million income recognition on insurance recovery.
Operating income in the first nine months of 2014 was US$864.9 million, or 13.2% of net sales, compared to operating income of US$813.9 million, or 12.7% of net sales, in the first nine months of 2013. The following table shows Ternium's operating income by segment for the first nine months of 2014 and 2013.
| Steel segment | Mining segment | Intersegment eliminations | Total | ||||||||||||||||||||||
| US$ million | 9M 2014 | 9M 2013 | 9M 2014 | 9M 2013 | 9M 2014 | 9M 2013 | 9M 2014 | 9M 2013 | |||||||||||||||||
| Net Sales | 6,550.8 | 6,351.3 | 241.8 | 276.3 | (221.1 | ) | (213.6 | ) | 6,571.5 | 6,414.0 | |||||||||||||||
| Cost of sales | (5,193.4 | ) | (4,998.9 | ) | (187.4 | ) | (201.9 | ) | 220.7 | 210.7 | (5,160.1 | ) | (4,990.1 | ) | |||||||||||
| SG&A expenses | (603.0 | ) | (614.8 | ) | (11.7 | ) | (18.1 | ) | - | - | (614.8 | ) | (632.9 | ) | |||||||||||
| Other operating income, net | 67.4 | 22.7 | 0.8 | 0.1 | - | - | 68.3 | 22.8 | |||||||||||||||||
| Operating income (expense) | 821.9 | 760.3 | 43.4 | 56.5 | (0.4 | ) | (2.9 | ) | 864.9 | 813.9 | |||||||||||||||
| EBITDA | 1,095.4 | 1,021.7 | 75.1 | 77.7 | (0.4 | ) | (2.9 | ) | 1,170.1 | 1,096.5 | |||||||||||||||
The steel segment's operating income was US$821.9 million in the first nine months of 2014, an increase of US$61.5 million compared to the first nine months of 2013, reflecting higher sales and an income recognition on insurance recoveries of US$57.5 million, partially offset by higher operating cost.
Net sales of steel products in the first nine months of 2014 increased 3% compared to the first nine months of 2013, reflecting an increase in shipments partially offset by a decrease in revenue per ton. Shipments increased 271,000 tons, or 4%, compared to the first nine months of 2013, mainly due to higher sales volume in Mexico partially offset by lower sales volume in the Southern Region and Other Markets. Revenue per ton decreased US$8, mainly due to lower steel prices in the Southern Region partially offset by higher steel prices in Mexico and Others Markets.
| Net Sales (million US$) | Shipments (thousand tons) | Revenue / ton (US$/ton) | ||||||||||||||||||
| 9M 2014 | 9M 2013 | Dif. | 9M 2014 | 9M 2013 | Dif. | 9M 2014 | 9M 2013 | Dif. | ||||||||||||
| Mexico | 3,648.2 | 3,150.0 | 16 | % | 4,206.8 | 3,710.3 | 13 | % | 867 | 849 | 2 | % | ||||||||
| Southern Region | 1,974.6 | 2,197.7 | -10 | % | 1,870.0 | 1,960.3 | -5 | % | 1,056 | 1,121 | -6 | % | ||||||||
| Other Markets | 901.9 | 980.6 | -8 | % | 950.5 | 1,085.4 | -12 | % | 949 | 903 | 5 | % | ||||||||
| Total steel products | 6,524.7 | 6,328.2 | 3 | % | 7,027.4 | 6,756.1 | 4 | % | 928 | 937 | -1 | % | ||||||||
| Other products 1 | 26.1 | 23.0 | 13 | % | ||||||||||||||||
| Steel segment | 6,550.8 | 6,351.3 | 3 | % | ||||||||||||||||
| 1 Primarily includes pig iron and pre-engineered metal building systems. | ||||||||||||||||||||
Mining reporting segment
The mining segment's operating income was US$43.4 million in the first nine months of 2014, a decrease of US$13.0 million compared to the first nine months of 2013 mainly reflecting lower iron ore sales, partially offset by lower operating cost.
Net Sales of mining products in the first nine months of 2014 were 13% lower than in the first nine months of 2013, reflecting lower shipments and stable revenue per ton. Shipments were 2.8 million tons, 13% lower than in the first nine months of 2013, mainly as a result of lower iron ore production at Peña Colorada.
| Mining segment | |||||||
| 9M 2014 | 9M 2013 | Dif. | |||||
| Net Sales (million US$) | 241.8 | 276.3 | -13 | % | |||
| Shipments (thousand tons) | 2,835.3 | 3,248.9 | -13 | % | |||
| Revenue per ton (US$/ton) | 85 | 85 | 0 | % | |||
EBITDA in the first nine months of 2014 was US$1.2 billion, or 17.8% of net sales, compared with US$1.1 billion, or 17.1% of net sales, in the first nine months of 2013.
Net financial results were a US$78.1 million loss in the first nine months of 2014, compared with a US$105.1 million loss in the first nine months of 2013.
During the first nine months of 2014, Ternium's net interest results totaled a loss of US$77.8 million, compared to a loss of US$83.8 million in the first nine months of 2013, reflecting lower average indebtedness and weighted average interest rates.
Change in fair value of financial instruments included in net financial results in the first nine months of 2014 was a US$8.2 million gain, mainly related to results from changes in the fair value of financial assets, compared with a US$9.2 million loss in the first nine months of 2013.
Equity in results of non-consolidated companies was a loss of US$6.7 million in the first nine months of 2014, compared to a loss of US$27.1 million in the first nine months of 2013, mainly as a result of better results from Usiminas.
Income tax expense in the first nine months of 2014 was US$251.3 million, or 32% of income before income tax, compared with an income tax expense of US$259.9 million, or 38% of income before income tax, in the same period in 2013. Income tax expense in the first nine months of 2013 included losses related to the adjustment of deferred taxes in connection with the introduction of a new withholding tax on dividend distributions in Argentina.
Net gain attributable to non-controlling interest in the first nine months of 2014 was US$137.9 million, compared to a net gain of US$92.0 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 provided by operating activities in the first nine months of 2014 was US$297.5 million. Working capital increased US$553.2 million in the first nine months of 2014 as a result of a US$411.8 million increase in inventories and an aggregate US$191.9 million increase in trade and other receivables, partially offset by an aggregate US$50.5 million net increase in accounts payable and other liabilities. Trade receivables increased as a result of higher sales volume. Inventories increased in the first nine months of 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 nine months of 2014 included a negative non-cash effect of US$128.2 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 nine months of 2014 were US$334.8 million, down from US$725.1 million in the first nine months of 2013. The main investments carried out during the period included, in Mexico, those made in the new cold rolling mill (Pesquería facility), in mining and iron ore reduction facilities and for the expansion of service center capacity and, in Argentina, those made for the expansion of specialty steel production capacity (including a new continuous caster in the steel shop, inaugurated during the first quarter) and for the expansion and enhancement of the coking facilities.
In the first nine months of 2014, Ternium had negative free cash flow of US$37.3 million8. The company's net proceeds from borrowings in the first nine months of 2014 were US$200.1 million. In addition, net dividends paid to shareholders were US$147.2 million and net dividends paid to minority shareholders were US$33.6 million. As of 30 September 2014, Ternium's net debt position was US$1.7 billion9.
Net cash provided by operating activities in the third quarter 2014 was US$287.8 million. Working capital increased by US$48.7 million in the third quarter 2014 as a result of a US$107.0 million increase in inventories, partially offset by an aggregate US$19.6 million decrease in trade and other receivables, and an aggregate US$38.8 million net increase in accounts payable and other liabilities. Inventories increased in the third quarter 2014 mainly reflecting higher volumes of raw materials and purchased steel, partially offset by lower costs of raw materials. Capital expenditures were US$94.8 million in the third quarter 2014, compared to US$217.5 million in the third quarter 2013. Ternium's free cash flow in the period was US$193.1 million10. In addition, in the third quarter 2014 Techgen paid back Ternium US$62.5 million on loans granted during the first half 2014.
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.
