Ternium SA (TX) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Ternium First Quarter 2020 Results Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Sebastián Martí. Thank you. Please go ahead, sir.

Thank you. Good morning, and thank you for your participation in our conference call today. My name is Sebastián Martí, and I am Ternium's Investor Relations and Compliance Director. Yesterday, Ternium issued a press release containing its financial results for the first quarter 2020. This call is complementary to that presentation.

Joining me today are Máximo Vedoya, Ternium's CEO; and Pablo Brizzio, the company's CFO, 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 to everyone, and welcome to our first quarter 2020 conference call. Thanks again for your interest in our company and taking time to be with us today, especially in this unprecedented circumstances. I hope all of you and your families are well and keeping safe. I would like to dedicate my initial remarks to share with you our view regarding how the COVID-19 outbreak is affecting the steel market and our company and what we are doing to mitigate these effects. After this, Pablo will make a brief review of our quarterly results before going into the Q&A session.

Since last quarter's conference call, the rapid spread of COVID-19 throughout the Americas has suddenly changed the business environment and is affecting steel demand across the region. And it is still uncertain what the impact of COVID-19 will be on the global economy as the nature of these prices is different from what we have seen in the past. Our #1 priority during the outbreak is to safeguard the health and safety of our employees throughout our industrial system. All of our employees who can perform their task remotely are today working from home. For those employees that has to be on site, we have been very fast to implement best practices to minimize conditions that (sic) [do not] comply with or, in many cases, exceed local authorities' directives.

We are adopting strict social distancing policies and exhaustive contagion prevention measures as wearing face masks all the time, temperature checks and disinfection policies at all transportation, site admissions, working post and cafeteria locations. All employees at high risk of developing serious complications from the virus are today at home. We are making a very active monitoring of suspicious cases and implementing quarantine, not only for them, but also for anyone that was in close contact with them. We are carrying out extensive communication programs across our facilities regarding ways to work safely and to prevent contagions at work and at home. There is actually a long list of measures we are implementing to mitigate this risk at our facilities, and we keep analyzing new ones. And the response has been incredible. We are very proud of how our people are dealing with this demanding situation. We are showing strength, solidarity and resilience and making big efforts to make sure everyone stays safe and healthy.

The COVID-19 outbreak is affecting also all of our communities, and we are helping to support and strengthen the infrastructure of key hospitals within our communities with the donations of ventilator, equipment for intensive care and safety kits for all health professionals. We also built and we are operating a field hospital for the community in Monterrey, Mexico with 100 beds and an intensive care unit with 10 fully equipment places.

Another thing to consider during this outbreak is the health of our value chain. We are working very closely with customers and suppliers to go through this difficult time together. Our robust customer integration IT systems proved to be a valuable tool when mobility restrictions were imposed in many of our markets. We have always seen our company as a part of a bigger system, and this has been never been more evident than in the situation like today's.

In this short period of time in which COVID-19 spread throughout the region, we have been actively implementing several measures to prepare the company for these uncertain times. On the production side, our diversified industrial base provides significant operation flexibility, which enable us to integrate our facility across the Americas in different ways to reduce run rates with the lowest possible impact of production cost. We are also optimizing production and overhead cost and reducing general expenses and extraordinary maintenance works. On the working capital side, we were very fast to reduce purchase of raw material, third-party steels and other materials and spare parts, minimizing inventory buildups. We have also been working with our supply chain to optimize our procurement activities to reduce working capital. And to preserve cash, we are slowing down or postponed several capital expenditure projects across our facilities. For example, we currently expect to delay the startup of our new hot rolling mill in Pesquería unit in Mexico to April of 2021 and our new steel bar mill in Palmar de Barilla unit in Colombia to the second half of 2020.

In addition, considering the significant uncertainty around the effects of the recession on the industry and on their impact on our company in the medium term, Ternium's Board of Directors decided to withdraw the annual dividend proposal for fiscal year 2019 they had made in February. The regular payment of dividends is not something Ternium Board takes lightly as it demonstrates over more than 10 years of increasingly higher dividend payments. But the Board considered it prudent to withdraw its proposal until there is a more certainty of the effects this unprecedented situation will have on the company's business.

Let me turn now to the current state of our markets and operations. In Mexico, we continue to operate our main production line. But the spread of COVID-19 in the country impact shipments beginning in late March. The automotive industry in Mexico is currently closed and is expected to gradually reopen during May. This industry value chains between Mexico and the U.S. is highly integrated and demands synchronized productions both sides of the border, so our reopening of operations is an important issue for both countries. Other industrial customers in Mexico are the white goods and electronic motor industries are operating by gradually scaling back production in anticipation of weakening end customer demands. The construction sector began showing weaker demand in April as it was subject to strict operation restrictions, which will gradually begin to be lifted during May.

In Brazil, our slab facility in Rio is operating at technical minimums due to weak global demand for slabs. In the Brazilian market, demand for slabs from local steel producers has also significantly decreased as steel consumption in the country is getting weaker, and we are making up for this decrease in sales in the second quarter with higher slab shipments to other markets.

All in all, we currently expect to sequentially ship more or less the same tonnage of slabs to third parties in the second quarter and balance the lower production rate with lower intercompany shipments to our facility in Mexico.

In Argentina, the mandatory lockdown imposed in March -- in late March by the authorities has been very strict from the beginning. The San Nicolás facility, our main plant there, is currently operating at technical minimums as it considers a noninterruptible operation. The rest of the plants are not operating but only for shipments to essential sectors. The lockdown of operations in Argentina is beginning very slowly to loosen up. As a result, after very weak shipments in April, we expect a gradual volume increase over the rest of the second quarter.

All right. The COVID-19 outbreak is affecting economic activities and the operation of our facility in all our markets, and the effect of this situation in our business will show in the second quarter of the year and beyond. But we can rest assure, we are very quickly adapting our company to this new scenario and working very hard to minimize this effect as much as possible. This is a value we can add at these difficult times as we have done in other market crisis over the history of our company.

With that, I'll let Pablo make a very quick comment about our performance in the first quarter, and then we go to the Q&A. Thank you. Please, Pablo, go ahead.

Thanks, Máximo. Good morning to all. Let me review target performance following the webcast presentation starting on Page 3. Our results for the first quarter improved sequentially, as expected. In this slide, you can see that Ternium's EBITDA in the first quarter of 2020 increased to $302 million, and EBITDA margin also improved, reaching 13% of net sales. EBITDA per ton was $101. Further on in the presentation, we are going to review the drivers of this increase. We were actually expecting slightly better performance in the quarter. Argentina and Colombia authorities imposed lockdowns from March 20 to mitigate COVID-19 spread, preventing us from shipping products with the exception of sales to essential sectors such as food, health and energy in both countries. Looking forward, considering the scenario already discussed, we expect a sequential decrease in EBITDA with significantly lower shipments and a moderate decrease in EBITDA per ton.

As for net income in the first quarter of 2020, we reported a loss of $19 million or $0.06 per year. These results include a $189 million noncash deferred tax loss due to a 20% depreciation of the Mexican peso against the U.S. dollar. This deferred tax result is equivalent to $0.96 loss per ADS. So adjusted net income per ADS to exclude these noncash items, the result would have been net income per ADS of $0.19 in the first quarter.

In the next page, Page 4, we can analyze our shipment performance in each region. As you can see, in the first quarter of 2020, shipments in Mexico increased sequentially and on a year-over-year basis. Of note, during the first quarter, we were able to increase our participation in the commercial market despite a soft environment for construction activities. Our -- we are continuing ramping up our new galvanized and painting facilities in Pesquería. Our market share also increased against import, which anyway continued to represent a significant share of flat steel consumption in the country. By the end of March, our industrial customers started to face slowdown in demand. This situation, together with increasing mobility restriction and declining steel prices are affecting our steel shipment in the country in the second quarter. In addition, we anticipate lower shipments to the construction sector in the second quarter of 2020 as the sector results is subject to strict operating restrictions due to the COVID-19 outbreak.

Going to the Southern region, you can see that shipments decreased sequentially in the first quarter and also on a year-over-year basis. The Argentine steel market remained weak during the first quarter, reflecting seasonally low demand levels and the effect of the lockdowns, which affected just the last part of March and continue to these days.

Looking forward, our current expectations, as Máximo mentioned, is to see a gradual volume increase over the rest of the second quarter as the lockdown of operations in the country seems to be slowing -- slowly beginning to be relaxed. In the other market region, shipments increased sequentially. Changes in shipment volume were mainly due to change in slab shipment from Ternium Brasil unit to third parties, a slabs shipped to other Ternium facilities, mainly to Mexico, are netted out in the consolidation of Ternium financial statement. Looking forward, steel shipments in the other markets in the second quarter is expected to decrease mainly due to the impact of the lockdown in the Colombian market as slab shipments to third party should remain stable.

Turning to Page 5. We can see that steel shipments in the first quarter 2020 increased 3% sequentially and decreased 6% on a year-over-year basis. Considering what we have already discussed, we expect steel shipments in the second quarter to sequentially decrease in all regions.

Going now to steel prices, we see that average revised price decreased 2% in the first quarter of the year as expected. Revenue per ton in Mexico decreased slightly as a result of weaker industrial contract revised price, reflecting the lag price preset of this contract, mostly offset by higher steel prices in the spot market compared to the fourth quarter last year. In the second quarter, we expect a decrease in revenue per ton in Mexico with a downturn in spot price that began in March being partially offset by industrial contract realized price that should improve a little over the first quarter of the year.

Finally, we can see that net sales in the first quarter 2020 increased slightly sequentially, reflecting the 3% increase in shipment, offset by a 2% decrease in revenue per ton.

Let's turn now to Page 6 to review more details on the drivers of EBITDA and net results in the first quarter of the year. The sequential increase in EBITDA was a result of a higher EBITDA per ton and, to a lesser extent, the increase in shipments. The improvement in EBITDA per ton was mainly due to lower cost of raw material and energy, partially offset by a slight decrease in the revenue per ton as already discussed.

On the chart on the bottom, we can see the positive effect of higher operating income and net financial results, which were more than offset by the already mentioned net cash impact of the $189 million deferred tax loss related to the 20% depreciation of the Mexican peso. Net financial results increased sequentially, reflecting foreign exchange gain on the significant depreciation of the Mexican peso already mentioned and also a 20% depreciation of the Brazilian real against the U.S. dollar.

Turning now to Page 6 -- 7, sorry, before going to Q&A. We can generally -- generated significant cash in the quarter. We can see from -- cash from operations in the first quarter of the year reached a strong $443 million as we took several measures to manage working capital in this new scenario and a free cash flow after tax of $185 million in the first quarter. Capital expenditure was $258 million in the first quarter, in line with the previous quarters as our capital expenditure program progress without changing during the period. We will start to see an increase in CapEx from the second quarter as we slow down or postpone CapEx across our facility, as mentioned by Máximo.

On the balance sheet side, in the first quarter, we continue showing a strong financial position. Ternium's net debt continued to decrease in the first quarter of the year. As of March 31, 2020, we have net debt of $1.3 billion equivalent to 0.9x last 12 months EBITDA and a cash position of $1 billion and a manageable debt amortization schedule.

All right. Again, thank you very much for your time, and we are now ready to take your questions. Please operator, proceed with the Q&A session.

(Operator Instructions) Your first question comes from Tanners with Bank of America.

This is Timna Tanners. Wanted to ask, first, if you could give us any thoughts on what conditions the Board might require to resume the dividend. So as you point out, your cash flows were still strong in the first quarter. Is it a question of visibility uncertainty? Or is it a question of something else? If you have any thoughts on that.

Okay. Thank you, Timna. I mean, as I said in my remarks, I mean, we have been giving dividends for the last 10 years and increasing them year-over-year. I think in this, there is no anything else, there's nothing else but what I said. I mean, the uncertainty around what the effect this virus or this recession will have in all our steel markets is still uncertainty. And so the Board considered very prudent to withdraw the proposal until we see more clarity on the steel demand. We have always been a very, let's put it, conservative company in our financial position. And so this is -- goes with this. I don't know, Pablo, you want to add something else to this.

Yes. No, I clearly agree with what you said. We consider very important to have a strong financial position. In fact, we have reinforced our cash position without change in net debt. As you can see, we have reduced net debt during the quarter. But in the meantime, we have taken some new debt from facilities available to us to reinforce our cash position so as to be prepared to any scenario that could appear in the next couple of quarters.

Clearly, we understand that this -- the Board understood that this is the prudent way to take in front of this uncertainty. And clearly, whenever this uncertainty is over, the Board, I guess, will consider the following steps.

Okay, perfect. And then the other question I wanted to ask is really to try to pin down a little bit more of your thoughts on volumes going forward and completely recognize that it's challenging and visibility is not great as we were just talking about. But on the one hand, I wanted to ask about slabs from Brazil. You said that you could offset some of the weaker domestic market through export. But I'm just having a hard time understanding where the exports will go because so many countries with extra supply are talking about exports, and I wonder to whom they're shipping.

And then on the same lines, in terms of the auto recovery in Mexico, how do we think about the timing there? Because there'll certainly be some inventory to work down first. So do shipments start to materialize more in the third quarter? Or how do you think about that?

No. Thank you, Timna. It's a wonderful question. And as you said, it's a big -- it's a challenge to answer that today in these times, but I would try to make an effort.

The volumes, I can answer very specific on the volumes on the second quarter. Most likely, our volumes will come down near -- somewhere near 30% in the whole markets of Ternium. That's -- it's the shipments we are going to decrease in the second Q. From that onwards, today, we see a visibility that they're going to start increasing somehow in how the recovery is. We don't see a V recovery as some economies are saying. It's more like a U, so these increases are not going to be very, very steep. But I think that most of the countries where we operate are going to take measures in order to the steel industry try to increase their shipments.

Slabs. As I told you, our facility in Brazil has 2 blast furnace. It was operating at a rate of 13,800 tons a day. Today, it's operating at a minimum of around 9,000 tons a day. What we were doing in the first quarter is shipping more to the local slabs, to the local steel customers. And in the second quarter, we are going to ship almost the same to the U.S. and to some customers in Europe. And we are going to reduce the shipments to our facility in Mexico. In the third quarter, we will probably change that, and we are going to ship more to our facility in Mexico. But that is something that we have to see in the future, and we are going to reduce shipments probably to the U.S. and Europe. So that is the change.

And the auto recovery, I mean, most of the automobile industries, auto companies in Mexico are going to start producing between today, some of them and the 15 or 20 of May. It's true that the recovery, it's going to be -- it's going to take time for our shipments. But remember, our shipments to the automotive industry are around 15% in Mexico, 15%, 20%. So we are going to see some increase in the second Q., some increase, sorry, in May and especially in June. But you are right that the increase will be more in the third quarter compared to the shipments in April that were almost 0.

Also, the stock in the change in Mexico is a little bit lower than the one in the U.S. Some of our companies work with just-in-time inventory. So there's not a huge stock in all the value chains in Mexico. So that's another, I think, positive thing that could happen in June. I hope with this, I answer all the questions.

Your next question is from Carlos with Morgan Stanley.

I hope everyone is doing well. So just going back to the dividend topic. Since the shareholders' meeting was postponed, I want to understand if there is a possibility that the Board decides to bring back at a later (technical difficulty)

Carlos?

Carlos?

Yes. Hello. Can you hear me?

Yes, now, now. We lost you for a minute.

All right. Sorry. So the question is on dividends. Is there a possibility that the Board decides to reinstate the dividend at a later date in 2020 given that the shareholders' meeting was deferred and it may still take place this year? Or is this a dividend that is foregone completely for the year? I understand that this is a Board decision, but maybe you can provide some color.

And then my second question has to do with volumes in Argentina. Clearly, the first quarter saw the lowest or the weakest volumes in history that we have in our model, at least even worse than in the first quarter of 2009. How bad was April? And how much worse quarter-on-quarter can it get in Argentina?

And then finally, if I can squeeze a third question is on the CapEx. How do you see the CapEx this year based on the postponements that you were mentioning earlier?

Okay. Thank you, Carlos. I take -- I start with the last one and go up from there.

CapEx. If you remember in the last conference call, CapEx was, for 2020, $850 million, 8 50. And for 2021, we make -- we said it would be around $550 million. What we are seeing today, is the plans we are making today is for 2020 to be between $550 million and $600 million. So it's a decrease between $250 million and $300 million, and in 2021, to be around $600 million. We expect to finish the steel -- the hot streel mill in Pesquería with the CapEx, with this CapEx, and postponing some of the things that we were doing in 2020 to 2001. So overall, we are expecting a decrease not only in this year but on both the 2 years with the CapEx.

The second thing is volumes in Argentina. Clearly, volumes in Argentina in the first quarter were very bad. In the second quarter are going to be slower. Remember, Argentina make a lockdown -- a very hard lockdown. So only one of our plants were operating and most of the construction industry was closed. I mean, there were not construction permitted. So our volumes in April are going to be very low. And -- but they are going to increase in March -- in May and June, and we hope by the third quarter will be kind of the same as in the first quarter. So yes, Argentina is taking an impact on the way they are managing this pandemic. But again, Argentina, the measures we are taking in Argentina, and we are making that the company is not burning cash or anything like that. So we are very optimistic that the company will go through this in a very healthy way.

And the third one was dividend. Pablo, why don't you answer that?

Yes. Okay. Carlos, as you know, at the very end, the power to decide the dividend relies on the shareholders' meeting. But clearly, the Board of Directors are saying on the proposal and clearly, we cannot say that no change can happen. Close to the end of the year, if there is a change, this could happen. It's difficult to see the scenario at the moment since traditionally, Ternium pays dividend once a year, and we pay dividend around this period of time every year. So between April and May every year.

The most conservative way to answer your question is that, at the very end, since the situation changed entering into the end of the year, most probably the reset of the dividend will come on the following one, but we cannot say that this is not a possibility because at the very end, at the shareholders' meeting and the Board could propose something closer to the end of the year. This a low probability in our view at the moment that this could happen, but we cannot reject that.

Next question is from Chicago.

This is Thiago Ojea from Goldman Sachs. I'm just curious if you can provide any type of expectations on the steel sales in Argentina and the measures of opening for the lockdown. And if you believe that the facility in CSA, if you can really redirect the volumes to the external market, given that other regions in the world are also suffering a lower demand on its steel, what would be perhaps the minimum level that you think that would be profitable in terms of volumes to operate CSA.

Thank you, Thiago. I couldn't hear the first question, but I'm going to answer the second one. And then I ask you to repeat the first one because it was a noise in the line. I'm sorry about that. So CSA or Ternium Brasil. Ternium Brasil is now operating, as I said, to around 9,000 tons a day. That's a decrease of around 38% from what we were operating in the first Q. With that in mind, all the shipments in the second Q, we have already secured, and we are shipping the orders in the second quarter. We don't have any problem with the second quarter, and we think we can continue operating at that level in the third quarter because we are going to need those slabs for the Mexican -- from our own Mexican operation. So if we don't have any place to place the slabs because still the money is still weak in the third quarter, most of those slabs are coming for our Mexican operations. So I don't see any problem -- I don't see problems today in operating our Ternium Brasil operation at that level. I hope with this, I answered the second part of the question. Thiago.

Sure. The first question was a similar one but related to the Argentina operation. We saw a big drop in the first quarter. I imagine that the drop in May, in the second quarter, will be even worse. What will be the level of operation that it could still be profitable in Argentina? And if you had a better outlook for the third and fourth quarters.

Yes. Argentina, as I said, the lockdown in Argentina was profound. I mean was very hard, let's put it. I don't know the exact word but it was very hard. And so we did only operate the San Nicolás plant, which is the one that has a blast furnace. Again, the blast furnace there is operating also of a technical minimum. And with that, in the first quarter, as you see, we were profitable in Argentina. So I don't see any problems in the third and fourth quarter to continue at this level of the minimum in the blast furnace. Again, Argentina is not -- we are not expecting to build up inventory in the second quarter, although this -- the decrease in the shipments as again, we are reducing the production of our blast furnace. We also expect that the lockdown is kind of improving, to say something, and shipments will resume in May and June and will start to grow in the third quarter.

I mean, you have very low volumes in Argentina, and I don't think that the volumes can remain this low. So I'm confident, again, that Argentina could -- we can sustain the production at this minimum for the second quarter. And in the third quarter, we will start increasing our shipments. I hope with this, I answered the question.

Our next question is from Chicago from DBI.

I guess, they have a problem with Thiago, right? It's Thiago Lofiego from Bradesco BBI. So most of my questions were answered. So just actually 2 remaining ones here. One is about the costs associated with the measures you're taking because of the COVID-19. So do you have an estimate of those costs? And just a second one, going back to the volume questions that were already asked, just to get a little bit more clarity. You mentioned an average 30% drop in the second quarter. Can you give us a little bit more detail? I mean, is Argentina going to be even more than 30% drop in the second quarter, offset by Mexico and Brazil? Or is it pretty much even across the -- all of the units there?

Okay. Thank you very much, Thiago. I'm going to answer first the second one. As I said in answering Timna's question, I mean, it's really a challenge to predict volumes and so the drop I mentioned, around 30%, is what we expect today. This can change upwards or downwards, although we only have 2 months to go, because the uncertainty is still big. But I think the drop will be a little bit higher in Argentina or is going to be a little bit higher in Argentina. For third parties, the drop is going to be almost 0 in Brazil. Remember, we have the same volume of slabs for third party in Brazil in the first quarter as in the second quarter and so -- and it's going to be around that for Mexico. That's what we are expecting today. And I think with this, I answer the second question. Pablo, can you answer the first one of Thiago?

Yes, of course. Let me add to that answer Maximo. Clearly, also, Colombia will probably see a reduction in volume.

You're right.

That will be -- yes, will be compensated by the ones that we mentioned in Brazil.

But going to your first question, Thiago, clearly, it's very difficult to put a number to that, but I think that the best way to answer your question is what we said in our press release, in our opening remarks, which is though we are seeing a reduction in volumes, and Máximo mentioned the number, we are seeing small reduction of trying to sustain the level of the EBITDA margin of the company. This clearly is coming from the level of measure that we are taking in order to reduce cost, reduce working capital and adjust our facility to the new level of sales that we are having, and the way to reflect that is precisely there. Sustaining or trying to sustain as much as we can, the level of EBITDA margin that the company will be going. So clearly, this is the way -- the best way we have to sustain profitability in our company. As you know, the company is always working, looking for ways to reduce our cost and clearly and especially in a situation like this one.

So though, it's difficult to put a number to that, the effort the company is doing is very, very strong. And the reflection will be in a small reduction of our EBITDA margin.

Yes. Pablo, I actually meant more on the specific expenses associated to COVID-19, so like sending people to work at home or postponing the project. So what is the cost of just basically postponing the project? Do you have some specific costs associated to that?

I understand the lower fixed cost dilution issues and et cetera, but it's more on the specific costs or expenses associated to COVID-19.

Yes. Thiago, we are not seeing a huge -- an increase in the cost of that. I mean, the project, for example, the CapEx and the project we are postponing, we don't see any increase in the CapEx there once we resume operations. In fact, to be honest, we are seeing some reduction in the total amount we are going to invest in the hot strip mill in Pesquería because we are seeing ways and renegotiations of some contracts that we are seeing some savings there.

So in overall, we cannot see a huge impact on that cost as of today. I mean it's true that there are some people at their home, especially the vulnerable ones, the one that has preconditions that make their health more vulnerable. But apart from that, we are seeing only reduction in our costs. I hope with that and we are more clear, Thiago.

(Operator Instructions) Your next question is from Alex Hacking with Citi.

So just following up. You mentioned a small reduction in EBITDA per ton in the second quarter. I guess could you describe a little bit more like your cost structure in the second quarter? Because obviously, we're going to see lower volume. We're going to see lower prices. But maybe some of the levers that are allowing you to, I guess, moderate what you're expecting on EBITDA per ton decline.

Okay. Alex, you're right. Let me take this one. Clearly, what we are seeing is different things. You're right that we will see reduced volume. You're right that we will see reduced pricing, but it's also true that we are expecting to see some reductions in raw material costs, and more significantly than that is that we are seeing -- we are expecting to adapt our facilities to produce at a level that we really need to supply our customers.

Specifically, for example, in the case of Brazil, where we are expecting to see basically the same level of volumes to third parties and we are reducing the shipments to our own facilities in Mexico just to adapt the production level to the real need of the facility and not to increase our inventory. This is clearly another way for us to reduce the cost of sustaining the level of inventory. Same thing in Argentina, where we were able to reduce the level of output of our blast furnace to the current needs of our facility. Beyond that, we are working very hard as we always do, but now we need to do it in a shorter period of time. We are reducing the cost of any contract that we have or the overhead cost in our system. So we are working, as Máximo mentioned, with our suppliers, also to work together to go over this situation, trying to adjust and to reduce, if we can, the impact of this cost in our overall overtime. So we are working in many different fronts. Probably the only cost that is not reducing in line with the others is the iron ore. But besides that, we are seeing reduction, and we are making a lot of effort in the rest of our facility to adjust to a new current situation. This is the way - the best way we have to cope with the reduction in prices and sustaining, as much as we can, the level of EBITDA margin.

Just to follow up. I mean so you would view the cost savings and the EBITDA per ton generation in 2Q as sustainable in those market conditions? So it's not just a one-off effect of inventory revaluation or something like that? Like, can you sustainably operate at these lower volumes and lower prices? Obviously, we expect some kind of rebound. But can you sustainably operate at those levels for a longer period of time? Do you understand my question? Does that make sense?

Yes. That does make sense, Alex. But clearly, it's not what we're looking for. As we said, the reduction in volume, probably in our case, will be lower than in other companies. Clearly, the situation that we have in Mexico is one in which we can moderate the reduction because the level of imports that always reduce first than the local producers. But -- and we -- though we can operate at a reduced level, we are seeing already, as was already mentioned during the call, that some smaller -- less tons, more recovery, for example, in the Argentine market.

In the case of Brazil, we can switch because we have the flexibility to do that if there is a reduction of sales to third parties to move volumes to our own facilities in Mexico. And clearly, in Mexico, where we have our main market, if there is a restart of the auto sector, as was already discussed in all --and reopening should see in the medium term after the second quarter, a better level of volume.

In any case, clearly, we have adapt our facility to produce and to be relatively profitable at the current level of demand. Clearly, the level of profitability is below our target level, but we believe that there is a recovery in volumes, Ternium could go back to these specific levels.

And then just one follow-up, if I may. Any estimate for working capital for the rest of the year?

Yes, working capital, what Máximo already mentioned that all in all, it's just to put rounding numbers, we are expecting to have $600 million this year and next year. So as you know, we already mentioned that we invested, during the first, quarter $250 million over the rest of the year is the difference to around $600 million. So we have reduced the level of CapEx, and this is clearly the number. I think that was your question, Alex?

Sorry, I asked about working capital, not CapEx.

So sorry. So there was some noise in the line, so I thought it was CapEx.

So yes, working capital, clearly, we will continue working and reduce the level of our working capital. As you know, when you have significant reduction in volume, it's difficult to adjust very, very fast to have a reduction in working capital to be at the same level nearly for the production level. We were able to have positive working capital reduction during the first quarter. Clearly, we believe that we will continue, at least during the second quarter, to make an effort to do that. So it should be also a positive number during the second quarter.

At this time, there are no further questions. I would now like to turn the call back over to the CEO for closing remarks.

Okay. Thank you all again for the interest on our conference call. Please contact us if you need any further support or comments. And in the meantime, take care and stay safe, all of you, and hope to see you or hear from you all from -- in our next conference call. Thank you very much, and goodbye.

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