Ternium SA (TX) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Ternium's third quarter 2020 results. (Operator Instructions)

I would now like to hand the conference over to Sebastián Martí. Please go ahead.

Good morning. Thank you for joining us today. My name is Sebastián Martí, and I am Ternium's Investor Relations and Compliance Director.

Ternium released yesterday its financial results for the third quarter and first 9 months of 2020. This call is complementary to that presentation. Joining me today are Ternium's Chief Executive Officer, Máximo Vedoya; and the company's Chief Financial Officer, Pablo Brizzio, who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, there will be a Q&A session.

Before we begin, I would like to remind you that this conference call contains forward-looking information and that actual results may vary from those expressed or implied. Factors that could affect results are contained in our filings with the Securities and Exchange Commission and on Page 2 in today's webcast presentation.

With that, I'll turn the call over to Mr. Vedoya.

Thank you, Sebastián. Good morning, and thank you very much for your participation. We really appreciate your time and your interest in our company and I think especially today when I think some other things are happening which keep us a little bit busy or our minds there.

Since our last conference call, there have been significant advances toward a more normal environment in the steel industry. Steel demand increased as lockdowns and restrictions to operate for different industries were relaxed in the third quarter in all our markets. We continue to operate our facilities under strict sanitary protocols, as discussed in previous calls. And in recent scenario, we have been able to increase operating rates to close to full capacity. In situations like this is when Ternium can demonstrate its operational flexibility.

During the second quarter, the worst of the pandemic-related restrictions have reduced Ternium's crude steel production by almost 30% compared to the first quarter. Then in the third quarter, we took production back up to an even higher level than that of the first quarter of the year. I am proud of how quickly our people was able to react to these big changes in the market environment.

Steel prices in North American market has also been helping as they were -- as they recovered strongly from a very low base back 3 months ago when we had our last conference call. The higher shipments, made possible by Ternium's operation and excellence, together with the improvement in the price scenario, enabled us to report third quarter results that was significantly better than what we anticipated in our last conference call. Shipments increased 16% to 2.8 million tons, not yet back to pandemic levels -- to pre-pandemic levels but on our way there.

EBITDA was $353 million with a margin of 17% or $124 per ton, also a significant increase, with expectations of more to come in the fourth quarter of the year. Free cash flow remained at a very high level as they did in the previous quarter with $389 million in this quarter. Driving another decrease of net debt, we've reached just $562 million at the end of September.

During the third quarter, we were able to restart our main CapEx projects, including the new hot rolling mill in Mexico, of which we continued to expect a commissioning by mid next year. We also resumed the final commissioning of the greenfield rebar facility in Colombia. In this regard, I'm very glad to announce that in Monday, 2 days ago, we produced the first bar out of this new facility. The new mill will enable us to substitute imports of reinforcing bars in Colombia with total capacity equivalent to approximately 1/3 of the market.

With this facility, we will be the only producer of rebar in the north of the country. This new capacity will also contribute to an increase in competitiveness with a lower cost of production than our existing facility. And we will also be able to broaden our product offering, integrating this new capacity with our existing facilities in the country.

Let me now make a quick description of the situation in our main markets. In Mexico, we recovered in the third quarter a little over half of the volume we lost in the second quarter. We now expect shipments to return to pre-pandemic levels in the fourth quarter. We are seeing a continued recovery of shipments to the automotive, household, appliances and HVAC industries, driven by solid end-user demand in the U.S. market. We also expect shipments to the construction market to subsequently improve with steady demand from small construction and various government infrastructure projects like the new airport in Mexico City and the new refinery.

In Argentina, following record-low shipments in the second quarter of the year, volumes recovered in the third quarter of 2020 to levels similar to those seen in the same quarter 2 years ago. Although the Argentina government successfully restructured its debt, uncertainty in Argentina continues to be high. The country continues to have macroeconomic challenges that it will need to overcome with reforms and time. If there are no negative news at the macro level, we could have an additional subsequent shipment increase in the fourth quarter as the steel end markets continue to advance purchases.

In Brazil, the steel market environment improved significantly over the last months, and this has supported increased flat orders level in the domestic market. The auto industry is recovered nicely in Brazil, and the performance of the country's GDP in 2020 is going to be the least affected by the pandemic among the Latin American economies.

Our scrap facility Rio is currently working at full capacity, and we expect it to maintain in the fourth quarter of the year the high level of integration with our mills in the region it had in the third quarter. Prices of slabs in the global market has also improved over the last 3 months, and this has driven a recovery to more normalized margin levels in this facility.

All right. I keep it short this time so we have more time for Q&A section and the review of the quarter.

Summarizing, the profitability of the company is improving, and we have positive expectations for our performance in the fourth quarter of the year. Needless to say, although shipment levels in all our markets are currently strong, uncertainty persists about the future cost of the COVID-19 pandemic and the measures government around the world could take to contain it.

As we have seen in Europe, it is evident that the pandemic is not over, so we will continue to take a cautious stand. We also continue working hard to help our communities endure the effects of the pandemic. With all the initiatives I detailed on our previous calls, I am particularly proud of how the field hospital we build and operate in Monterrey is supporting the health of those in need in the local community.

Looking ahead into next year, we are very much looking forward to the commissioning of our new hot rolling mill in Mexico. I believe this will be a game changer for Ternium, not only from a growth perspective but also from a competitive point of view, always with the goal of sustaining our high profitability levels related to our comparatives -- competitors.

I am also very positive about the future of the steel market in the USMCA region. With our expansion projects in the last stage of development, I believe Ternium will be uniquely position to take advantage of the USMCA's many benefits.

All right. We are ready now to review in more detail the third quarter results. Please, Pablo, go ahead.

Thanks, Máximo, and good morning to everybody. Let's review Ternium's results for the third quarter of the year. As Máximo mentioned, you will see that our performance improved significantly in the third quarter. Over the last couple of quarters, we worked hard on sustaining Ternium's profitability as well as on strengthening our balance sheet to cope with the difficult environment in our markets related to the COVID-19 pandemic.

Let's see some of the results of these efforts. Starting on Page 3 on the webcast presentation with the company's quarterly EBITDA and net results. We have a significant EBITDA recovery with $353 million in the third quarter. There was a sequential EBITDA margin expansion of 400 basis points or $33 per ton.

We will discuss this in more details in the next slide.

Net income in the period was $173 million or $0.74 per ADS. The results compared to net income of $44 million in the second quarter.

(technical difficulty)

There we are, sorry. So I was saying that the result of -- net income of the third quarter compares to a net income of $44 million in the second quarter.

(technical difficulty)

There we are. So -- and clearly, the second quarter was weak because of the consequences of the pandemic, of COVID. So let's look forward to the fourth quarter. The expectation is for a sequential increase in shipment, and higher margins should result in a strong set of numbers.

Turning now to Page 4. Let's review in more detail the degree of the recovery in the shipments, one of the positive surprises in this third quarter. And so in the upper left-hand side chart, in Mexico, shipments increased 23% on a sequential basis in the third quarter. They were down by 11% if you compare it to the last year. In the fourth quarter, we expect shipments in Mexico to continue recovering, reaching pre-pandemic level.

In the Southern Region, shipments in the third quarter rebounded from a very weak second quarter, as shown in the lower left-hand side chart, and were up year-over-year by 9%. If current market dynamics continue, we should see a further volume expansion in the fourth quarter.

In the Other Markets region, shipments increased sequentially and on a year-over-year basis in this third quarter, as you can see in blue in the upper right-hand side chart. As for slab shipments to third party, in the same chart in gray, they decreased both in sequential and year-over-year comparisons. During the third quarter, we were able to further integrate Ternium S.A. facility in Brazil in the company's industrial systems up to a level that resulted in a reduction in the volume of slabs shipped to third parties. In the fourth quarter, we expect a similar volume of slabs shipped to third parties.

Turning to the next page. You can see in the upper left-hand side chart the result of this development, with consolidated shipments of 2.85 million tons in the third quarter, up 16% sequentially. In the fourth quarter, we expect consolidated shipments to increase sequentially based on higher volume in our key markets, as already discussed.

Turning now to revenues. Average realized price increased 5% in the third quarter, as we see in the upper right-hand side chart. This is mainly explained by a sequential increase in the value of our sales mix.

Steel prices in the North American market experienced a very strong rebound since our last conference call. We were expecting this to happen but not in the magnitude it actually did. This improvement in prevailing steel prices was mostly offset by weaker industrial contract realized prices as a result of a large price reset. This strong pricing backdrop will drive an increase in revenue per ton in this region in the fourth quarter of the year.

Let's turn now to Page 6 to review the main sequential changes in EBITDA and net results in this quarter. The rebound in EBITDA reflected the recovery in the shipments and improved profitability. EBITDA margin increased sequentially, mainly reflected -- reflecting an increase in revenue per ton, partially offset by a slight increase in operating cost per ton. The higher operating income led to a sequential improvement in net results, as you can see in the bottom chart. In addition, we have a better result from equity in earnings of Usiminas and higher income tax.

Turning now to Page 7. Let's review the main changes in the first 9 months of the year on a year-over-year basis. The change in EBITDA, as shown in the chart, reflected the year-over-year decrease in shipments and EBITDA per ton. EBITDA per ton was negatively affected by lower steel prices, partially offset by lower purchased slab, raw materials, energy and labor cost per ton.

As for the year-over-year changes in net income, in the bottom chart, in addition to the decrease in operating income, you can see the effect on the net financial results of the significant fluctuation of the Mexican peso, the Argentine peso and the Brazilian real versus the U.S. dollar during this period. We also had a year-over-year higher income tax. The main reason behind this was a noncash deferred tax loss in the 9 months of the year in comparison -- in connection, sorry, with the Mexican peso's 16% depreciation in the period.

Now to finish and before opening up the call to your questions, let's review on Page 8 Ternium's free cash flow, capital expenditure and net financial debt. You can see in the slide strong set of numbers. With the measures taken in the last 2 quarters, Ternium has achieved a strong financial position with ample liquidity, and net cash provided by operations activity reached $1.4 billion in the first 9 months of this year, including a $628 million working capital release. And capital expenditure decreased significantly to $440 million in the period.

All that -- we take into consideration everything that we have just mentioned with, last , net debt down to $562 million as of the end of September, equivalent to 0.5x net debt to last 12 months EBITDA. With the resumption of our investment plan, we expect capital spend to increase sequentially in the fourth quarter.

Okay. These were our prepared remarks. We are now ready to take your questions. Once again, thank you very much for your time and attention.

Please, operator, proceed with the Q&A session.

(Operator Instructions) Our first question comes from the line of Jonathan Brandt with HSBC.

Congratulations on the results. Máximo, I first wanted to ask you about steel prices, both how quickly we should see -- the steel prices that's happened in the third quarter in the U.S., how much of that should be captured in fourth quarter? And how much of it will roll into the first quarter? Just sort of what is your outlook on North America steel prices today given sort of everything that's happening, the uncertainty, et cetera?

And then my second question, I guess, maybe to Pablo, is just if you look at your leverage at 0.5x, it's sort of at the lower end of the historical range. So could you kind of walk us through what your uses of cash will be? Particularly as -- it certainly seems like profitability and free cash flow continue to increase as we go into the fourth quarter.

What is the outlook for CapEx? What is the outlook for dividends? What are some of the other uses of cash? Or should we expect leverage to remain at this sort of level?

Thank you, Jon, for the questions. Let me start with the steel prices. And I think there are 2 parts of the question. Steel price is clearly -- if you see our results, we took advantage a little bit of the increase in the prices. And of course, we are going to take a little bit more advantage in the fourth quarter and, I guess, in the first quarter.

Remember, at Ternium, part of our sales are contract price and part are spot prices. And so during the fourth quarter and probably during the first quarter, we are going to see an increase in prices for shipments from Ternium, depending on the mix, but probably it's going to be an increase.

What is the outlook? I mean when we have our last conference call, I remember I was telling you that, well, prices in the U.S. were very low, and it was incredible that the local prices in China for the first time in, I think, 10 years were below the local price -- were above, sorry, the local prices in the U.S. So that -- we haven't seen that for the last 10 years.

And so we expected prices to go up. It went up a little bit more quickly than what we thought. And I think that this level of prices should remain -- I mean, this environment should continue over the next couple of quarters. Demand is good in the U.S., in Mexico, in this region. I think our customers are -- consumer construction is very solid. Industrial manufacturing is also increasing. And so I think that from the demand side, I think that it's strong.

The increase in the -- utilization rate is only at 70%, and the lead times are quite long in the U.S.So I think that if the U.S. producers continue with this rationality, I think we are going to have several quarters with this price environment. We are expecting that. I think that answered the first question.

The second question, I'd ask Pablo to start, and then I'm going to comment on a more longer view in that question, Jon.

Okay. Yes, Máximo, I think that we can take these questions in 2 different ways. The first one is a short answer to it, as Jonathan was asking. Clearly, the fourth quarter will be a little different from what we saw during the last 2 quarters where we had reduced CapEx and an increase on the working capital that we released together with very strong numbers coming out of -- from the operation of the company. So that's clearly very positive.

In the fourth quarter, we will continue to have cash flow from operations on a strong level. But clearly, we will have, first of all, an increase in our CapEx from the third quarter to the fourth. We are expecting more than that to -- the level of CapEx in the fourth quarter, we are expecting to reach the level that we originally said of around $600 million of CapEx for the year.

As Máximo mentioned, we are restarting fully the plans that we have. And clearly also, it's very difficult to continue releasing working capital with the new level of production that we have, the new level of sales and of course, the new level of pricing that not only increased the value of our inventories but also increased the value of our receivables. So clearly, it will be a quarter with a very strong cash flow from operations, but with a reduction in the level of free cash flow because of both things, the reduction in -- or sorry, the increase in CapEx and the increase in working capital.

All in all, no matter what, we will continue to keep having a reduced number of net debt. But I think this leads to probably an answer in the long run -- in the longer run. So I think that Máximo can take now this answer and expand on the view on, basically, the capital allocation of the company.

Yes. Thank you, Pablo, and again, thank you, Jon. Yes. I mean, I think the answer of the cash usage, clearly, as Pablo said, we are generating good cash flow.

And what are our thoughts of the future? I think that 3 years ago, we started a very aggressive or a very important investment program for us. This program started with the acquisition of CSA in Brazil, which allowed us to produce -- gave us a state-of-the-art facility and allowed us to produce a whole new range of steel which we're not able to produce that before; then continue, a month later of the acquisition, with the launch of our investment program in the greenfield facilities in Mexico, the galvanized, the painting, the hot-strip mill, which -- those were, CapEx programs, very strong. And the vision of that was that we were going to change substantially or we are changing already the way Ternium was going to new markets, much more sophisticated, much more value-added products.

We are about 6, 7, 8 months of finishing that investment program. And so we are now looking that -- and we continue to see that there are good opportunities to Ternium to continue growing or using that cash. I think we can mention 3.

One is Mexico. We are very optimistic of Mexico -- or the NAFTA region or the North American region.

I think that the apparent consumption of steel has to increase. I think all the things that were made with the USMCA, all these trade wars, regardless of who won in the U.S., it's going to continue and -- because it's good for the people. And I think that apparent consumption is going to increase, and we are very well positioned to take advantages of that. So there's going to be probably expansions in the Mexican -- in our Mexican facility.

The second thing is the melted and poured in the automotive industry in North America. As you know, we are part compliant of that, but we are not fully compliant. So we have time, 7 years. So we have time to see what is our best option. We don't have to decide it today, but we are going to be compliant.

And the third is, of course, how -- we maintain our conservative balance sheet, but we also give dividends to our shareholders. That's the thing that we should continue doing and we want to do.

And last, I think, is our track record shows that we also grow by taking advantage of different opportunities. And I think that in this market, there's going to be -- I do believe there's going to be opportunities in our region for Ternium to grow. So I think this, I hope -- Jon, I'm sorry, it was too long, but to answer the full question of over here.

No, no, that was great. Just to follow up, I mean, would you see the potential for further M&A as a path for growth?

Yes. Yes, I see. I mean we don't have any particularly now, we don't see anything. But as you know, when opportunities arrive, we generally take advantage of that.

Our next question is from Thiago Lofiego with Bradesco BBI.

Máximo, how sustainable do you think the volume increase in Argentina is? And what is your best outlook for 2021 at this point?

And then the second question, I'll take a risk here and I'll do the question here, what is your view on the impact of the election scenario on the U.S. to market -- on the North American steel market? Do you think that Biden...

Thiago, you're asking me -- sorry.

Go ahead, go ahead, go ahead.

No. You are asking me to be a magician, not a CEO.

It's always good to hear your view. But just to make my question here more specific. Do you think -- if Biden wins, do you see the government gradually withdrawing from Section 232? Do you see any changes in the recent USMCA? So what do you think could happen in a Biden scenario?

Perfect. First, let me talk about Argentina. I mean it's very difficult today to try to make any projections of the demand in Argentina. As I said before, if there's not a macroeconomic problem, fourth quarter is very -- it's going to be good. But there's a lot of challenges in Argentina. I mean the -- what is happening with the exchange rate. Argentina clearly needs some reforms and need time to do those reforms.

And so I think we are going to see a very volatile scenario in Argentina. It's going to continue to be high. And I'm not in any capability of saying what is going to happen into 2021 today. So again, we are very cautious on what is our stance on how we operate in Argentina. We continue to be flexible in our operations there and try to -- we are increasing our production but on a flexible way.

Elections in the U.S., what will happen...

Máximo, if I could -- I'm sorry to interrupt you, but still on the Argentina answer here. What are the factors that you think are more -- will be more resilient in a worst-case scenario in Argentina? If like the outlook there doesn't improve, actually if it gets worse, what are the factors that we would say, "Here, we see more resiliency. And here, we think we're going to see more of a downside potential?"

I mean -- and I'm not saying this is going to happen, so don't quote me. But I mean probably, I mean, the one way out of this is going to be a devaluation somehow. I mean when you have these difference of exchange, that could be an outcome. What happens usually in a devaluation is that most of the market decrease, but then some of the export -- industrial manufacturing continue -- increases and construction starts to pick up also.

So for our market, we are going to probably see a downturn if it happens -- if this happens, but there are markets that then will continue to recover. But again, the government is making a point of trying to solve the situation. And so that's why I said that, that is going to be a very volatile environment for the next couple of quarters probably.

Election in the U.S., what happens if Biden wins, to be honest, I don't see a lot of changes regarding manufacturing if Biden wins. I mean I don't think it's going to change a lot of 232. Probably, he's going to, I mean, negotiate or be a little bit more flexible with some countries, which should have been in the 232 probably in the first place. But I don't -- I mean the -- think of this U.S. -- this regional approach where a manufacturer has to come back to the region, to the U.S., to Mexico to Canada, this reshoring thing, it's in the mind of Donald Trump really, the actual president. But it's also on the mind of the Democrats. So I don't think there's going to be a lot of changes.

I think on the contrary, both candidates are going to try to make stronger manufacturing in the region. Biden -- if you ask me, one of the things Biden is going to do a little bit more than the actual probably is in the environmental issues, which for us, for Ternium should be a very good thing regarding our footprint, our environmental footprint and how we are doing a lot of things. But that's the only change that I see really.

I don't think -- I don't know if I answered a little bit your question.

No, you did, Máximo.

Our next question is from Thiago Ojea with Goldman Sachs.

I think my first question -- I would like to go back to the U.S. price, if Máximo will allow me. We saw really a sharp recovery on price in the past few weeks. I think my first question is I understand that there was a lag compared to the Chinese price, which was unseen before. But do you think this is sustainable or this is just short-term pickup and should accommodate in a lower price level? How should we think about U.S. price going forward? I think this is my first question.

And my second question is still related to the U.S. market. We saw, in the past few years, a lot of announcements of new investments, including a few -- I wouldn't say North America, including a few in Mexico. How do you see now these new investments coming through in the next couple of years? It seems that some of them are on hold. What is the competitive landscape in your view for the next 2, 3 years in North America?

Thank you, Thiago. I mean U.S. prices, as I said, I mean, clearly, the prices has increased in the last couple of weeks or in the last 2 months, to be honest. And it was a steeper increase than what we thought, but we did see this coming, and -- prices going up.

And again, I think that demand is picking up in all our countries. I mean china demand is going to grow by 8% in the next -- in this year. China, in the last 4 months, was a net importer. I mean usually, China is a net exporter, for the last 10 years, of steel. In the last 4 months, it imported more steel than they export. Europe is picking up. Depends on what is going to happen with the new -- resurgence of COVID, but it's picking up. And then in America, you saw Brazil. Brazil is clearly a huge increase in demand.

So I think for the next several quarters, I don't see an environment where price is going down in the U.S. And it will depend, again, on the rationality of the U.S. producers regarding the capacity utilization, to be honest. But if this continues today, I think that prices should remain in a healthy level for the next quarters.

Again, that's my opinion. Thiago, I don't know if I answered the first question you had.

No, you did, you did. So I think now what I'm curious -- given the current capacity utilization and the new projects announced, how do you think the competitive landscape will evolve in the next few years?

Yes. So the second is the investments that we are doing. Clearly, there is new capacity coming onboard in the next couple of years in Mexico and in the U.S., and this is a concern clearly. But I mean -- 2 or 3 things.

First of all, apparent consumption is going to grow. I mean, I think part of that new capacity is going to go to this increase in apparent consumption. I mean if you see the consumption in Mexico or the consumption in the U.S., it's less than 2 -- in both countries -- in Mexico, I think it's 150 kilograms per inhabitant. In the U.S., it's a little bit of 240, 260. It depends on how you make the numbers.

This is -- I mean if you see China, it's more than 600. If you see Korea, it's 900. If you see Japan, with all these equipment manufacturing, it's more than 400. So this reshoring has to bring back some of that consumption to the region. That's for sure. So consumption is going to grow.

The second thing is that we are going to fight imports. I mean there's a huge amount of imports in Mexico. And so part of this new capacity is going to change or to replace this imports.

The third thing is some of this capacity, for sure, is going to compete to other U.S. producers. And there are some of the U.S. producers that are not as competitive as older capacity with higher cost. And so I am not seeing a huge increase in that sense.

And the fourth, of course, is we are working to be more competitive than the others in the region, and that's our focus today. I mean we are doing -- in fact, our facilities, as you see in the numbers, are clearly one of the most competitive in the region. And so we are very able to take advantage of this increase in consumption, but again, to compete with the new capacity that is arousing.

It's clear, Máximo. Just...

What was your third question, Thiago?

Yes. I would just ask, what is the size of additional capacity that you consider credible to come online in the next couple of years, both in Mexico and U.S.? Do you have any figure that you work on your projection?

Look, no, I didn't understand -- Thiago, I'm sorry. The line is cutting, and I didn't understand very well the question.

Sorry. My question is on this new capacity that is coming online, what can you consider that really will go through, like really will be built? Do you have a total X amount of million tons of capacity that, for sure, will be added in Mexico and in U.S.?

No, for sure. I mean the new capacity in Mexico is our new hot-strip mill. And it's not steel consumption, but the new hot-strip mill of ArcelorMittal also is coming online. And in the region, I think, a new SPI plant in Texas, clearly, they are building it. I don't know the timing exactly, but they are building. There's no -- the new facility of Big River and the new plant in place of Nucor, all those are things that in the next 2, 3 years, are going to be producing at full capacity probably.

Our next question is from Carlos De Alba with Morgan Stanley.

So just maybe, Máximo or Pablo, could you please comment a little bit more on the first quarter outlook. I mean you mentioned Máximo that prices in Mexico will probably continue to increase -- at least your realized prices or revenue per ton will likely continue to increase in the first quarter just on the lag of the contracts. But could you elaborate a little bit more on what are you seeing in Argentinian prices in the fourth quarter and into the first quarter? And maybe anything that you can add in terms of volumes and perhaps cost. And then I will have a second question.

Okay. Carlos, let me take this question. Let me make a caveat first before answering your question. Clearly, as Máximo explained during the initial remarks, we need to see how the pandemic evolves. And if there is a second wave in the region, clearly, things can change. But if we do not take that into consideration, we need to take other things into consideration.

First one is the seasonality of volumes in the different markets. We are -- clearly, in the Southern Region, the first quarter is seasonally low, worst quarter. In Mexico, this is more at the end of the year. So the first quarter tends to be a relatively good one. So we continue to see the coming quarters with a positive outlook.

We are not going to see 100% of the price increase that we are seeing even right now reflected in the numbers of the fourth quarter. So there will be some price increase. Yet to be seen is price staying at the level as Máximo's view is. We will see also that reflected in the first quarter of the year. So we believe that the outcome -- or the outlook that we are going to -- for the fourth quarter is something that could be sustained with some reduction, as we said, in relationship to volumes in Argentina, will be sustained entering to next year.

The second caveat that we need to make is also the one that Máximo mentioned, which is the situation in Argentina could make changes in the outlook for volumes. But all in all, clearly, with the volatility of these projections, we should have a reasonable quarter in line with what we are expecting for the fourth quarter of the year.

Pablo, sorry, just on Argentina price...

So I put a third caveat, Carlos, and it's pandemic. I mean -- clearly, I mean, as I said, it's not over. And so I don't know if some governments are going to come back to restrictions. I think they won't. They have -- they learned that it's not very useful, and it makes a lot of harm to the economy. But it's a possibility because cases are picking up in some of our countries and...

(technical difficulty)

Sorry. Hello?

It's all right. We have some problem with the line of Máximo. But go ahead, Carlos.

Yes. No. Just on prices, Pablo, maybe how do you see prices in Argentina?

We continue to see price in Argentina following international price with -- as usual, with less volatility at international prices. So we don't see much changes in prices in the region. Of course, if there is some changes in the foreign exchange rate, this will be impact, as usually happens, in the short run, but we will be able to sustain pricing level as, currently, we are seeing in our markets.

All right. And then my second question is on 2021 CapEx. If there is any ballpark number or range that you can provide.

And then if you could maybe talk a little bit more about the timing of the restart of the hot-rolled line in Mexico, which you said next year, but if you could refine a little more the timing of that. And how much production do you expect to have -- incremental, I guess, production you expect to have from that hot-rolled line next year? And if there are any other updates on projects, that would be great.

Yes, Carlos. I'm back again. CapEx, I mean, 2021, it's going to be around also $600 million. It's quite the same number as 2021 -- 2020, so we are seeing that number as CapEx.

Hot-strip mill in Pesqueria, I mean, we are -- I mean the date for starting the hot-strip mill is July, but that's the first coil, July of next year. Remember, these equipments are very big and difficult, so there's a long ramp-up period. So I think that the effect of the hot-strip mill, you're going to start seeing by the end of the year.

Good luck with everything and particularly with the ramp-up of that mill next year.

Next question is from Gabriel Galvão with Credit Suisse.

So my first question would be regarding Brazil. So we have been witnessing several price hikes in the domestic market, and you also mentioned that your plan is to shift part of your third-party sales from the export to the domestic market. So maybe you could provide us some color on how is the relative profitability between exports and domestic sales in Brazil?

So my second question would be actually a follow-up on the dividend. So if I remember correctly, you said the dividends for 2020 would remain suspended since you usually only pay dividends once a year. So is this the case here?

Yes. Thank you, Gabriel. Brazil -- I start with Brazil. Brazil -- I mean what is happening in Brazil is that the domestic consumption is increasing. As you remember, we have -- the Ternium's facility makes slabs, so we are not in the final market. But as the manufacturing production in Brazil increases, some of our -- Usiminas, CSN, other companies are asking us to sell slabs to them because they are ramping up production of the hot-strip mills and the cold rolled and the galvanized lines.

What is impressive on Brazil, I think the number of the manufacturing index -- the PMI was released yesterday, and it was a high -- I mean was a record high. So it's increasing. It's not a lot of change in the profitability. We do have some advantage of freight and other things selling to the domestic market, but it's not a lot of change in profitability between one -- our export market and the domestic market.

The second part of...

Let me clarify one point before turning to the second answer. You mentioned that we -- what we said is that there is a reduction in sales to third party in order to sell this -- or to send this product to our own operational facilities. Within the third parties, we include the local sales in Brazil.

So clearly, what Máximo was saying is right. We have increased -- we saw an increase in demand for local demand. But the change from the second to the third quarter was due to reduction of sales of what we report in our financial statement as sales to third parties and an increase of transfers to our own industrial facilities, both in Mexico and Argentina. So that's the big change that you saw in the numbers.

Yes.

All in all, the total -- or Mexico -- or Brazil was higher. But this is the challenge -- it's not that we switched from third parties to local markets. Local market increased, but the switch goes from total third parties to internal transfer. So with that clarification, Máximo please go ahead.

Yes. And I thought the question was of the fourth quarter, when we -- I did say that we are going to change from other parties to the local. So it depends on -- so my part of the answer was of the fourth quarter, Gabriel. I thought you were asking that.

Actually, I was asking about the perspectives for the first -- the fourth quarter because of this price hike and relative gross profitability. But of course, this clarification also helps a lot.

Yes. And to make clear, from what we sell to the third parties in the third quarter, the number is going to be similar in the fourth quarter with the only difference that we are going to ship more to Brazil than to other parties. That's going to be a difference because of this increase in demand in Brazil. But the number of third parties completely, including Brazil, is going to be the same.

Dividends, well, you know that the Board -- in April, we made the decision of -- or the Board made the decision to skip dividend payments due to the pandemic and what we were thinking or what we were seeing in that time. I think it was -- I still consider it was the right decision. Considering the information we have available in April, I think it was, the decision.

But it's clear now that the market is recovering much more quickly than what we expected. The Board will propose the annual dividend payment in February. We do dividends every year, so we are not changing that. But I strongly believe that the Board dividend proposal will take into consideration the skipped dividend payment in 2020 when we -- when the Board make their recommendations for the dividend in 2021.

Our next question is from Rodolfo Angele with JPMorgan.

There's a lot of things that were already discussed, so I'll have just one question. There are a few moments in Ternium's history that changed the company to another level. And we can kind of -- if we go back, the acquisition of IMSA I think was the first one. CSA was another one. And I think Pesqueria could be also one of those moments.

We've been getting a lot of questions from investors who are looking at Ternium. And they want to try to understand the impact of the new mill to the overall profitability of the company. So my question to you is can you comment on a range of additional EBITDA per ton that Pesqueria, when it's fully ramped up, will bring to your operations? Just a range, ballpark figures. What do you expect to see the impact there?

Pablo?

Okay. I will start with the answer, and then if you want, let's complete on the answer. So Rodolfo, the -- your question is very clear. And what we do with every investment that we perform is to try to increase the profitability of the company or the EBITDA generation of the company.

Clearly, what we have today with an EBITDA margin of 16.5% and projecting an increase on profitability in the coming quarter is -- everything that we do is to sustain this level of profitability. In the case of Pesqueria facility, as you put it, clearly, one other point, very important for Ternium -- or for the future of Ternium and is comparable to the one that you said -- and Maximo mentioned this in the initial remarks, comparable to the acquisition of CSA.

There are different components of profitability in the case of the Pesqueria facility. The first one is substitution of imports that we are doing. So we will substitute with production in the new facility imports of hot rolls that we are doing today.

Second, we will stop utilizing one of -- one facility that we were using which was not the most sophisticated one. So we will close that down. In fact, we have already done that. And so we will have a new facility, state-of-the-art facility that will provide a better performance.

And third, clearly, we will increase the product base. So all in all, we are expecting to have a little more than 2 million tons of net products to sell into the market. And there is where the number of EBITDA is coming.

We will always stay exactly the same. Our main target and our goal is to sustain the profitability of this company above the 15% EBITDA margin. Clearly, to reach as high as we can, but the range traditionally has been for us between 15% to 20%. We have some quarters with higher levels than that. But there is where we want to work. And everything that we do is to sustain that.

So that's my -- my initial comment. Máximo, I don't know if you want to add something to that.

No, I think it's very clear. I mean, I think Pesqueria...

You want to stay on the center.

Everybody is hearing?

Yes. Yes, we are. We are, Máximo.

Okay. Sorry.

There might be some problems with the webcast, but the ones with the...

Okay. Making signs here. No, but Rodolfo, I think that what Pablo is saying is true and you are saying is true. Pesqueria, together with the acquisition with CSA, remember, this is a combo. It's a game changer for Ternium in the sense that it's a facility that's going to add 4 million, 4.5 million tons and -- of very high value-added products and a completely new range of customers that we can serve. So again, our intention with this is to increase our profitability, as Pablo said.

Okay. I know -- let me just sink teeth]. I know you're already at the 15% mark today. Or -- so what I'm trying to do is -- when investors come to us and say, "Okay, these guys have invested. What's the additional -- where is the impact of that, right?" So maintaining the 15% is a very shy answer.

If we were to think about the project alone, what is Pesqueria bringing? That's -- it can be a ballpark figure, a range. Is it $20 per ton?

And I don't know if you can comment on this, but I just wanted to insist because, as I said, I think this is very important, and I feel like the market is having difficulty in quantifying it. And sorry for insisting, but that's my last part.

No, that's fine, Rodolfo, and we need to go through it. But what we are trying to say is it's extremely difficult to put a number exactly to that because it's also dependent on the price of the product. It's also dependent on different things.

That is very difficult to say now, "We will increase profitability by 2%," because among other things, we are having a mix of product that includes, of course, new painting products, new galvanized product but also includes hot-rolled products. So the prices are different in this one.

So if you want to go through which will be the EBITDA generated by this facility, well, that's a different question. Sustaining prices at what we see today, we are saying here more than 2 million tons with the profitability of EBITDA per ton over $120, $130. You are reaching to a number of more than $250 million of EBITDA per year.

So this year, let me correct the number that you said. This quarter, we had a 16.5% EBITDA margin so -- and targeting a higher number for the following quarter. So it's very difficult for us to say that with this investment, we will be able to move to a higher margin than 20%, which is something that you could be expecting for.

But all in all, we are -- the expectations for us are huge in this new facility because we'll unveil a lot of opportunities for Ternium, not only in the level of free cash flow generation and the level of EBITDA generation and sustaining margins and trying to increase them, but also of all the things that Máximo explained before. So first of all, it's a key investment for Ternium. Clearly, we'll increase the level of EBITDA generation. And clearly, we'll -- at least we'll sustain, but clearly, we believe that, at some point, we'll increase the profitability of Ternium.

But it's very difficult to put a number to that, taking into consideration the numbers that we are showing. But clearly, as you mentioned and as Máximo mentioned also, this is a game changer for Ternium and the results will be there. Sorry not to give you exact number, but that is the view that we have with this investment.

Our next question is from Alex Hacking with Citi.

I guess just a quick one for Pablo. So if I look at Siderar financial statements, the implied EBITDA per ton there was back over USD 200 during the quarter. I guess is that a sustainable level there at current utilization rates and current prices? Or was there something weird going on with the accounting whereby there was sort of a one-off boost in what that looked like?

Alex, yes, there were some things in relationship to Argentina. Remember that we have still inflation in Argentina. We have devaluation in the country. So when you have this aspect, it tends to increase a little bit the total number of the company. If -- of course, if we are continuing to see exactly the same environment, the dollar impact of that is increased just because of the portion of the cost that is denominated in peso, which is around 35% of the total cost. Clearly, in dollar terms, as you have a devaluation, it tends to be reduced, so you have a better margin on that respect.

So you have these things when you have utilization of the inventory that you have before valuating that at the prevailing exchange rate at the moment or the end of the quarter. So there are some of this. Also, clearly, the performance of Ternium Argentina was very, very good. But these things tend to accommodate and to go to more normalized levels. But clearly, the performance and the margins of Ternium Argentina are high.

Okay. And then just one quick one. In your answer to Rodolfo just now, you talked about some like value-added processing for the Pesqueria product. I guess I didn't realize that you had excess kind of paints, galv capacity sitting around that you could be utilizing.

Is there a way you can -- I was sort of assuming that you were going to be selling it all as hot rolled. Is there a way you can quantify how much kind of excess or additional value-added capacity that you have there?

Yes. Of course, this is -- Máximo, please go ahead.

No, no, no. You go ahead, Pablo.

Okay. No, no, what I was trying to mention is that the total investment in Pesqueria was not only the core rolling mill, but also the new galvanized line and the new painting line. That -- they are already up and running, and they are working almost at full capacity. So it's not that we have spare capacity there or just waiting for the new facility to be up and running.

So we have that capacity. And we have this -- this was part of the initial CapEx that entered into the last of last year -- at the end of last year or beginning of this year. So after the ramp-up period, we are utilizing those facilities. It's not that we have there available capacity waiting for this to be up and running.

Okay. I got it. I misunderstood. So the new capacity is effectively just going to be hot-rolled capacity, right, with, obviously, future potential to add value-add?

Yes. But Alex, I think it's -- I mean the new capacity is controlled. And remember, the galvanized line started 6 months ago to produce and the painting in December. So they are still running up.

But one thing that the hot-rolled new capacity gives us is new substrate for these lines also. So that give us the opportunity to make other products more efficiently, in many cases, in the current lines and other products that we are not able to do because we don't have the substrate. So it's going to be a change in the mix, and probably, we will have some increases in time in our current run -- the current rate of -- how much we are running these galvanized and painting lines.

Ladies and gentlemen, this concludes the Q&A period. I'll now turn the call back over to Máximo for any closing remarks.

Thank you. Okay. I hope this call has been informative and has helped all of you have a better understanding of our company. Thank you very much for participating today.

I know it's a challenging day to be hearing from us, but thank you very much. I hope you have a nice day. Contact us if you have any other questions or comments, and please stay safe. Bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.