Ternium Announces Results for the Third Quarter and First Nine Months of 2008

Wednesday, November 05, 2008 4:01 PM

Symbols: TX

LUXEMBOURG -- (Marketwire) -- 11/05/08 -- Ternium S.A. (NYSE: TX) today announced its results for the third quarter and first nine months ended September 30, 2008.

The financial and operational information contained in this press release is based on consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) and presented in U.S. dollars and metric tons.

Summary of Third Quarter 2008 Results(1)

                                  3Q 2008      2Q 2008         3Q 2007
Shipments (tons)                 1,844,000  2,063,000  -11% 1,788,000    3%
Net Sales (US$ million)            2,447.7    2,374.8    3%   1,506.1   63%
Operating Income (US$ million)       524.9      610.4  -14%     222.5  136%
EBITDA (US$ million)                 638.6      714.1  -11%     318.5  101%
EBITDA Margin (% of net sales)          26%        30%             21%
EBITDA per Ton, Flat & Long
 Steel (US$/ton)                       327        337   -3%       169   93%
Discontinued Operations (US$
 million)                             (2.8)         -           143.5
Net Income (US$ million)             247.1      498.9  -50%     214.0   15%
Equity Holders' Net Income (US$
 million)                            211.7      415.6  -49%     159.8   32%
Earnings per ADS (US$)                1.06       2.07  -49%      0.80   32%

Operating income was US$524.9 million in the third quarter 2008, a decrease of 14% when compared to the second quarter 2008. This resulted mainly from a US$131.7 million write-down of Ternium's inventory during the third quarter 2008 primarily related to purchased slabs, reflecting lower prices for finished products at the end of the quarter. Net sales were stable in the third quarter 2008 when compared to the second quarter 2008, as an 11% decrease in shipments due to lower demand was offset by a 14% increase in revenue per ton. Operating cost per ton increased 22% in the third quarter 2008 compared to the second quarter 2008 as a result of higher raw material, energy and labor costs, as well as the aforementioned inventory write-down. Operating income in the third quarter 2008 increased 136% when compared to the third quarter 2007 mainly as a result of higher prices, partially offset by higher raw material, energy and labor costs and the inventory write-down referenced above.

Net foreign exchange result was a loss of US$150.1 million in the third quarter 2008 compared to a gain of US$99.7 million in the second quarter 2008. These results were primarily due to the impact of the Mexican Peso fluctuation on Ternium's Mexican subsidiary's US dollar denominated debt. In accordance with IFRS, Ternium Mexico prepares its financial statements in Mexican Pesos and registers foreign exchange results on its net non-Mexican Pesos positions when the Mexican Peso appreciates or depreciates to other currencies. These results are non-cash when measured in US dollars, and are offset by changes in Ternium's net equity position in the currency translation adjustments line.

Ternium does not have a significant position in foreign exchange derivatives and only uses these instruments for hedging purposes.

Net income during the third quarter 2008 was US$247.1 million, a decrease of 50% when compared to the second quarter 2008 mainly due to a US$249.7 million lower net foreign exchange result related to Ternium Mexico's financial debt and a reduction of US$85.5 million in operating income, partially offset by a US$118.2 million lower income tax expense. Net income during the third quarter 2008 increased 15% when compared to the third quarter 2007. This year-over-year increase was mainly due to an increase of US$302.4 million in operating income, partially offset by a US$105.8 million lower net foreign exchange result related to Ternium Mexico's financial debt and a US$146.4 million lower discontinued operations result.

Summary of Results for the First Nine Months of 2008(2)

                                                  9M 2008       9M 2007
Shipments (tons)                                 5,996,000  4,936,000   21%
Net Sales (US$ million)                            6,775.1    3,936.7   72%
Operating Income (US$ million)                     1,498.5      635.6  136%
EBITDA (US$ million)                               1,822.9      876.3  108%
EBITDA Margin (% of net sales)                          27%        22%
EBITDA per Ton, Flat & Long Steel (US$/ton)            291        166   75%
Discontinued Operations (US$ million)                157.1      462.3
Net Income (US$ million)                           1,229.6      780.6   58%
Equity Holders' Net Income (US$ million)           1,049.4      618.9   70%
Earnings per ADS (US$)                                5.23       3.09   70%

Operating income was US$1.5 billion in the first nine months of 2008, an increase of 136% when compared to the first nine months of 2007. This resulted mainly from higher revenue per ton and the consolidation of Grupo Imsa, partially offset by the US$131.7 million write-down of Ternium's inventory referenced above and higher raw material, energy and labor costs during the 2008 period.

During the first nine months of 2008, results from discontinued operations of US$157.1 million comprised after-tax gains of US$97.5 million related to the sale of non-core US assets and US$59.6 million related to Sidor. During the first nine months of 2007, results from discontinued operations were an after-tax gain of US$462.3 million mainly related to Sidor.

Net income during the first nine months of 2008 was US$1.2 billion, an increase of 58% when compared to the first nine months of 2007. This increase in net income was mainly due to higher operating income, partially offset by lower gains from discontinued operations and higher income tax expenses.

Outlook

Steel product demand and prices in the North America Region continue on a downward trend, reflecting weak end-customer demand and a de-stocking of the steel industry's value chain. Demand and prices in the South & Central America Region are softening as well, as the disruption in the global financial markets has started to affect the region's economy.

Ternium expects a reduced level of activity resulting in a lower operating income in the fourth quarter 2008 compared to the operating income it achieved in the third quarter 2008, with lower shipments and prices in all of its regions partially offset by a lower cost per ton. Cost of production is expected to decline due to the devaluation of local currencies to the US dollar and lower prices for scrap and other inputs.

Analysis of Third Quarter 2008 Results

Net income attributable to the Company's equity holders in the third quarter 2008 was US$211.7 million, compared with US$159.8 million in the third quarter 2007. Including minority interest, net income for the third quarter 2008 was US$247.1 million, compared with US$214.0 million in the third quarter 2007. Earnings per ADS(3) for the third quarter 2008 were US$1.06, compared with US$0.80 in the third quarter 2007.

Net sales for the third quarter 2008 increased 63% to US$2.4 billion compared with the same period in 2007. Net sales increased mainly due to higher steel prices and the consolidation of Grupo Imsa. Shipments of flat and long products were 1.8 million tons during the third quarter 2008, an increase of 3% compared to shipment levels in the third quarter 2007. Revenue per ton shipped increased 57% to US$1,278 in the third quarter 2008 versus the same quarter in 2007, mainly as a result of higher steel prices in all regions.

                  Net Sales              Shipments        Revenue / ton
                (million US$)         (thousand tons)       (US$/ton)
                                                          3Q   3Q
             3Q 2008 3Q 2007 Dif.  3Q 2008 3Q 2007 Dif.  2008  2007  Dif.
  South &
   Central
   America     784.4   528.9   48%   680.4   637.8    7% 1,153  829     39%
  North
   America   1,273.4   731.8   74%   901.8   834.7    8% 1,412  877     61%
  Europe &
   other         2.6    11.5  -77%     2.8    18.5  -85%   933  619     51%
             ------- ------- ----  ------- ------- ----  ----- ---- ------
Total flat
 products    2,060.4 1,272.2   62% 1,585.1 1,491.0    6% 1,300  853     52%
  South &
   Central
   America     104.2    28.7  262%    86.0    52.3   64% 1,212  550    120%
  North
   America     192.0   156.0   23%   173.3   244.8  -29% 1,108  637     74%
  Europe &
   other           -       -             -       -           -    -
             ------- ------- ----  ------- ------- ----  ----- ---- ------
Total long
 products      296.2   184.8   60%   259.2   297.1  -13% 1,142  622     84%
Total flat
 and long
 products    2,356.6 1,457.0   62% 1,844.3 1,788.1    3% 1,278  815     57%
Other
 products       91.1    49.1   86%
             ------- ------- ----
Total Net
 Sales       2,447.7 1,506.1   63%
(1) Primarily includes iron ore, pig iron and pre-engineered metal
    buildings.

Net sales of flat products during the third quarter 2008 totaled US$2.1 billion, an increase of 62% compared with the same quarter in 2007. Net sales of flat products increased as a result of higher steel prices and higher shipments. The consolidation of Grupo Imsa, which began on July 26, 2007, was not fully reflected in the third quarter 2007. Shipments of flat products totaled 1.6 million tons in the third quarter 2008, an increase of 6% compared with the same period in 2007. Revenue per ton shipped increased 52% to US$1,300 in the third quarter 2008 compared with the same period in 2007, mainly due to higher steel prices in all regions.

Net sales of long products were US$296.2 million during the third quarter 2008, an increase of 60% compared with the same period in 2007 due to higher steel prices, partially offset by lower shipment levels. Shipments of long products totaled 259,000 tons in the third quarter 2008, representing a 13% decrease versus the same quarter in 2007. Revenue per ton shipped increased 84% to US$1,142 in the third quarter 2008 over the third quarter 2007.

Net sales of other products totaled US$91.1 million during the third quarter 2008, compared to US$49.1 million during the third quarter 2007. This increase resulted mainly from higher iron ore shipments and prices, higher pig iron prices and higher revenue related to Ternium's pre-engineered metal buildings business in Mexico.

Net sales of flat and long products in the North America Region were US$1.5 billion in the third quarter 2008, an increase of 65% versus the same period in 2007. Shipments in the region totaled 1.1 million tons during the third quarter 2008, similar to that of the same period in 2007. Revenue per ton shipped in the region increased 66% to US$1,363 in the third quarter 2008 over the same quarter in 2007 mainly as a result of higher prices.

Net sales of flat and long products in the South & Central America Region were US$888.6 million during the third quarter 2008, an increase of 59% versus the same period in 2007. This increase was due to higher shipments and revenue per ton. Shipments in the region totaled 766,000 tons during the third quarter 2008, or 11% higher than in the third quarter 2007. Revenue per ton shipped in the region increased 43% to US$1,159 in the third quarter 2008 over the same quarter in 2007, mainly due to higher prices.

Cost of sales totaled US$1.7 billion in the third quarter 2008 compared to US$1.1 billion in the third quarter 2007. Cost of sales increased as a result of the consolidation of Grupo Imsa, a US$131.7 million write-down of Ternium's inventory primarily related to purchased slabs and higher costs for raw materials, third party steel and other supplies, as well as for freight, services and labor.

In the third quarter 2008 scrap and energy prices increased in Mexico, while the price of zinc was lower, when compared to the prior year period. Iron ore costs were higher during the third quarter 2008 than they were in the same period in 2007, mainly as a result of higher annual contract prices for third party iron ore supplies.

Selling, General and Administrative (SG&A) expenses in the third quarter 2008 were US$186.2 million, or 8% of net sales, compared with US$143.8 million, or 10% of net sales, in the third quarter 2007. The increase in SG&A was due mainly to higher export volumes and prices, higher taxes as well as higher labor costs.

Operating income in the third quarter 2008 was US$524.9 million, or 21% of net sales, compared with US$222.5 million, or 15% of net sales, in the third quarter 2007.

EBITDA(4) in the third quarter 2008 was US$638.6 million, or 26% of net sales, compared with US$318.5 million, or 21% of net sales, in the third quarter 2007. Equity holders' EBITDA in the third quarter 2008 was 78% of EBITDA.

Net financial expenses were US$183.7 million in the third quarter 2008, compared with US$87.9 million in the same period in 2007. During the third quarter 2008 net interest expenses were US$26.9 million and net foreign exchange losses were US$150.1 million. Net interest expenses in the third quarter 2008 decreased US$7.3 million over the same period the previous year mainly as a result of lower interest rates on debt.

Net foreign exchange result was a loss of US$150.1 million in the third quarter 2008 compared to a loss of $44.3 million in the third quarter 2007. Ternium does not have a significant position in foreign exchange derivatives and only uses these instruments for hedging purposes. These results were primarily due to the impact of the Mexican Peso fluctuation on Ternium's Mexican subsidiary's US dollar denominated debt. In accordance with IFRS, Ternium Mexico prepares its financial statements in Mexican Pesos and registers foreign exchange results on its net non-Mexican Pesos positions when the Mexican Peso appreciates or depreciates to other currencies. These results are non-cash when measured in US dollars, and are offset by changes in Ternium's net equity position in the currency translation adjustments line.

Income tax expense for the third quarter 2008 was US$91.1 million, or 27% of income before income tax, discontinued operations and minority interest, compared with US$63.7 million in the third quarter 2007, or 47% of income before income tax, discontinued operations and minority interest.