Ternium SA (TX) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ternium Fourth Quarter 2019 Results Conference Call.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Sebastián Martí, Director of Investor Relations.

Thank you.

Please go ahead.

Good morning.

Thank you for your time and participation in our conference call.

My name is Sebastián Martí.

I'm Ternium's Investor Relations and Compliance Director.

Yesterday, Ternium issued a press release containing its financial results for 2019.

This call is complementary to that presentation.

Joining me today are Máximo Vedoya, Ternium's CEO; and Pablo Brizzio, Ternium'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'd 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 all for joining us today.

As we always do, I'll briefly go through some prepared remarks, and then Pablo will review the quarterly result.

At the end, we'll have a Q&A session.

Let me begin with performance.

2019 was a challenging year for the steel industry.

Steel consumption in the Americas decreased, and steel prices went down during most of the year.

Under these difficult circumstances, we were able to report an EBITDA of $1.5 billion on shipments of 12.5 million tons and an EBITDA margin of 15%, again, among the highest in the region.

This performance led to earnings per ADA (sic) [earnings per ADS] of $2.87.

Even though we double CapEx in 2019, reaching a peak of $1.1 billion, we were able to generate free cash flow of $595 million and to reduce net debt to $1.5 billion or a net debt-to-EBITDA ratio of only 1.

Considering the strength of our balance sheet, the performance in the year and our current expansion program in Mexico and Colombia, the Board of Directors proposed an annual dividend of $1.20 per ADS.

This is equivalent to a dividend yield of 6% at the current stock price and to a payout ratio of 42%.

As anticipated in our last call, results recorded in the fourth quarter showed a rather low margin, in part as a result of unusual development in the steel market over last -- over the year, especially in the last quarter.

I'll ask Pablo to expand on this during his presentation, but I expect the fourth quarter to be the lowest point and the trend to change from the first quarter onwards.

Turning now what -- to what is happening in the steel markets in the America, although this is not clear yet.

Let me review Mexico.

The steel market in Mexico was weak last year.

Steel apparent consumption went down 6%, mainly due to a decrease in the commercial market as a result of a very weak construction activity.

There was also a decline in investment by our industrial customers in Mexico after several years of continued growth of their production capacity driven by the high level of uncertainty related to the trade issues I have just mentioned.

Our shipments in the country decreased by 4% last year, reflecting this lower demand -- steel demand environment.

Nevertheless, we were able to increase our market share in Mexico, so our shipments decreased less than the reduction of steel consumption.

Looking forward, I believe there are conditions for a slightly better steel market sentiment in Mexico.

Public construction is beginning to show signs of activity, although slow, as Mexico's government has proved to be very cautious with government spending.

On the macro side, the Mexican peso has recently appreciate, and interest rates are declining.

And no doubt that one of the most important developments in the year has been the ratification of the USMCA agreement by the U.S. and the Mexican government after several years of intense negotiations.

We are now very close to the enact of this new trade agreement.

This is a very positive development for the steel industry in North America region, its whole value chains and, I think, particularly for Ternium.

Rules of origin for steel have been strengthened, and this means that value chains from other regions will have an incentive to invest or relocate capacity to the USMCA countries.

This agreement will bring -- will certainly bring a reduction in trade uncertainties, which should widely foster investment and economic activity in Mexico in the years to come.

Turning to Argentina.

In 2019, shipments in the Southern region decreased 16% compared to 2018.

In this market, the economy has been weakening over the past few years as a result of public finance imbalances and their consequent effects on inflation, interest rate and local currency value.

We reacted to this difficult environment, and over the last couple of years, we have been adjusting the operational setting of our industrial facility in the country for efficient production at continuously lower levels of demand so we can sustain our profitable operation.

Looking forward, the performance of Argentina steel market will be very dependent on the country's macroeconomic situation.

We believe steel shipments in Argentina, which are already at a very low level, could remain relatively stable in 2020 subject to the Argentina government being able to achieve a successful restructuring of the public debt as a first necessary step to normalize the public finance.

Let me now give you a quick review of the performance of our slab facility in Brazil.

After a very profitable year in 2018, there was a significant increase of iron ore prices in 2019 together with record levels of pellet premium due to the effect of the world's iron ore supply of Vale's dam collapse and the subsequent closure of iron ore capacity.

This difficult situation coupled with a decrease of slab prices to multiyear lows put pressure on the profitability of our facility.

Consequently, during the second half of last year, we adjusted Brazilian mill production level to achieve an overall lower production cost, minimizing the use of iron ore pellet and purchased coke as well as putting in place other cut -- cost-cutting initiatives.

Steel market conditions have improved since then, with an increase in seaborne slab prices and a decrease in iron ore and coking coal costs to a more reasonable level.

In this better context, we are bringing production back to its normal level.

This is an example of how we can move to adapt our operations wherein steel consumption change so we can protect profitability in difficult times and maximize it when things improve.

Another point is that the Brazilian economy is turning, and steel consumption is improving there.

This is positive for Ternium as local companies in Brazil will increase slab purchases from our facilities there.

Okay.

Let me wrap up my remarks with some final comments.

In 2019, we were able to show industry level margins in a difficult market environment.

In 2020, I expect to see our margins gradually improving in the quarters to come with a reversion of the downtrend -- downward trend we had seen during 2019.

At the same time, we will continue growing our business with the completion of our expansion projects.

In the second half of last year, we started the new painting line in Mexico.

And in December, we started the new galvanized line also there.

For this year, in April, we'll have the start-up of the new rebar mill in Colombia and, by the end of the year, the commissioning of the new hot rolling mill at the Pesqueria facility.

The new hot rolling mill will enable a significant integration of our facility in Brazil and will consolidate a world-class production system with the latest technology to maximize efficiency and productivity.

This line was set up to start in December of this year, but we are working hard to get it ready a couple of months earlier than our initial estimation.

We cannot wait to take advantage of all the opportunities for improvement of our product range and related services that these new facilities will provide.

Okay.

I'll stop here.

So, Pablo, please take over to comment over the performance in

(technical difficulty)

Thanks, Máximo.

Good morning to all, and let me review our performance together with the webcast presentation in Page 3.

You can see there in 2019, we reported EBITDA of $1.5 billion on shipments of 12.5 million tons.

Shipments were somewhat low, reflecting weak demand conditions in Argentina and, to a lesser degree, in Mexico.

EBITDA margin in the bottom left chart decreased to 15% within a more sustainable level after a turn in the year in 2018.

Let's now review in the next page our results in the last 2019 and some first-in, first-out effect of higher cost inventories.

The fourth quarter of this last year should be the lowest point as it had, among other things, a seasonally low volume in Mexico and low production rate in Brazil; a low realized steel price level in Mexico that did not reflect yet the recovery in prices in November due to the contract price lag; a cost per ton that did not decrease yet, as I mentioned, as a result of the first-in, first-out accounting of purchasing slabs; together with a particular margin squeeze in Brazil that is now fading out, as Máximo explained; and finally, some negative impact related to inflation adjustment in Argentina.

So we now expect EBITDA to increase sequentially in the first quarter of 2020, with higher shipments and some recovery in steel margins mainly as a result of slightly lower costs.

We expect it to further recover in the second quarter of this year.

As for net income in the fourth quarter, we reported $90 million or $0.36 per ADS.

When compared to the third quarter, earning per ADS decreased $0.13, reflecting a lower operating income partially offset by lower effective tax rates that we will discuss later on.

On Page 5, we can review our shipment's performance in each region.

As you can see, in the fourth quarter, shipments in Mexico decreased sequentially and increased slightly versus the same quarter in the previous year.

After the seasonally weak fourth quarter, we anticipate an increase in shipments in the first quarter of 2020 with stable industrial market and demand and some help from restocking after a very low level of inventories.

In the other market region, we can see that shipment decreased 4%.

The main driver behind this decrease was 65,000 tons decrease in slab sales to third parties, as we have already expected, partially offset by higher finished steel shipments.

As Máximo mentioned, Ternium Brazil facilities bring the slab production back to its normal level after the decrease in the end of 2019, supported by improved margins for the production of steel slabs.

In the Southern region, shipments decreased 4% sequentially in the fourth quarter and also decreased 4% compared to the same period in the previous year, but steel demand in the Argentine market remains low.

Looking forward to the seasonally low first quarter, shipments in Argentina are expected to decrease to levels similar to those recorded in the same period of 2019.

Turning to Page 6. We can see that total steel shipment decreased 5% sequentially in the fourth quarter and 2% on a year-over-year basis.

Looking forward and considering what we have already discussed, we expect the steel shipments in the first quarter to sequentially increase.

Going now to steel prices.

We can see the average realized price continue decreasing in the fourth quarter of the year, as expected, driven by a weak pricing environment in North America in the second half of 2019.

Although steel prices revert from the lows as of October this last year, in the first quarter of 2020, we should not be fully reflecting yet in our revenue per ton in Mexico as high realized price on the spot market will be offset by the lag effect of lower contract prices.

Finally, we can see in the lower left-hand side chart that net sales decreased sequentially 8%, reflecting the 5% decrease in shipments together with a 3% decrease in revenue per ton already discussed.

Let's turn now to Page 7 to review in more details the driver of EBITDA and net results in the fourth quarter of the year.

Regarding EBITDA, which are so -- the upper chart shows that main changes were the decrease in EBITDA per ton, mostly as a result of lower revenue per ton and, to a lesser extent, the decrease in shipments and higher SG&A.

On the second chart, we can see that the lower operating income was partially offset by a lower effective tax rate and better results from Usiminas.

The effective tax rate in the fourth quarter included a noncash positive effect on deferred taxes due to the appreciation of the Mexican peso against the U.S. dollar.

The opposite happened in the previous quarter, and the Mexican peso depreciated.

Before going to the last slide of the presentation, I would like to comment about the change in the functional currency of our subsidiary in Argentina.

From January 1, 2020, Ternium Argentina will use the U.S. dollar as its functional currency instead of the local currency as it used to do until then.

This is a prospective change, so it does not affect the previously issued number until December 31, 2019.

The change in functional currency of Ternium Argentina will significantly reduce the volatility of the company's earnings that was due to the foreign exchange movements and the application of inflation adjustments.

Let's now turn to Page 8 to finish our presentation.

We can see free cash flow in 2019 reached $595 million with capital expenditure reaching a strong $1.1 billion as our expected program progressed as planned.

Capital expenditures should remain high during 2020 to a level approximately of $800 million, and we still have ahead of fast the completion by year-end of the new hot rolling mill in our Pesqueria unit in Mexico.

As Máximo mentioned, Ternium's net debt continued decreasing in 2019.

It went down by $282 million to $1.5 billion at the end of December.

And the $1.20 per ADS dividend proposed for the year is equivalent to a free cash flow yield of 15%.

So thanks very much for your time.

And now we are ready to take any questions you may have.

Please, operator, let's proceed with the Q&A session.

(Operator Instructions) Our first question is from Thiago Lofiego with Bradesco BBI.

Máximo, I have 2 questions.

The first one, more medium to long term, thinking about the company's strategy.

So you do, guys -- you guys have -- do have organic growth on the pipeline, but we also know that there may be some M&A opportunities, especially in Mexico.

So could you comment on capital allocation and how the company expect to spend money in the coming years, thinking about the different regions and different opportunities that you guys see?

Or in other words, do you see more room for further organic expansions in the next 5 years?

Or do you think that we might see some M&A down the road?

The second question is on Mexico.

What is your expectation regarding when construction activity infrastructure begins to rebound?

So did you see that as more of a 2021 story at this point?

Or could we see a more consistent rebound already unwinding in 2020?

And also, do you see as a concern the new capacities coming onstream?

I know we've discussed this in the past, but just to get an update on your view about the new capacities coming onstream in the Mexican market vis-à-vis demand growth.

Thiago, thank you very much.

Let me start by the second question about the construction activity in Mexico.

As you know -- I mean the trend of the construction in Mexico has 2 sides.

For the last several years, I think at least 4 or 5 years, infrastructure, which is -- was led by the government, decreased every year, I think, for the last 4 or 5 years but was compensated and even was a little bit higher by construction by the private sector.

But this changed last year.

So the private sector now decreased also.

So both main drivers of construction were bad in 2019.

I think there are 2 sides.

I think 2020 is going to be a little bit better than 2019.

But I think that we, in 2021, will be a little bit better, and we will see the trend by then.

Investment of the government has started to improve, but then this is going to take some time.

There are some projects -- I mean, in Mexico, every time the government change, there is a stop in all the infrastructure projects.

It happened in 2012, and it happened in 2019 with the change of the government.

But I think that this is getting a little bit.

It's not going to be huge, but it's going to be a change in trend.

Regarding the investment in the private sector, the stoppage was a lot in the industry.

I mean most of the investment coming to this industry were relocated in Mexico stopped because of the NAFTA and the renegotiation, and this is going to start changing.

It's going to take a while, but some of that effect, we are also going to see this year.

So overall, it's not going to be a huge improve, but there's going to be an improve.

And I think in 2021, as you said, this improve is going to be stronger -- even stronger.

Regarding the capacity in Mexico, which was your third question, I don't see a problem -- I mean Mexico imports almost 8 million tons of steel, and we are putting capacity -- we -- of that -- we import almost 1 million of that.

We are increasing capacity a little bit less than 4 million tons.

So -- and there's another project, I don't know when it's going to be completed, of 2 million tons.

So we have the capacity to fight all those imports, which I think will have a very competitive structure of cost to fight that import and to supply all the customers that today we cannot and that there are customers that need to be supplied by a USMCA country after the sign of the USMCA treatment (sic) [treaty].

So I think we are in a perfect situation to put -- it's the perfect timing to put this capacity on the market in Mexico.

So I'm not very much concerned of the increase of capacity.

Of course, we have to fight for the customers, but I think that we have a very good cost structure, a very great commercial team, and we know all the customers.

So I think they are eager to accept us and that we supply that volume to them.

Again, we don't have capacity today to do it.

And with this, we are going to have the capacity to do it.

So I think, again, it's a very, very good timing, and the signing of the USMCA was perfect for us because it's going to start in July or August depending on when Canada sign in.

And so we are going to be just in the moment to start supplying these customers that would -- that are going to need North American steel.

Now to the first part of the questions and the long-term strategy.

We discussed it along -- sometimes in some of the calls.

We were focused -- we are focused today in finishing this investment, $1.1 billion of CapEx this year, and as Pablo said, $800 million of CapEx next year, is a record high for Ternium in all the history.

So we were much focused on that.

What are the next step for Ternium?

Clearly, there are going to be some organic growth.

We have projects that we are analyzing in Mexico, in Colombia, in Brazil also.

Again, Brazil is a country that is going to grow, and we have a very solid industrial base in Brazil.

So -- but those are coming after the completion and the start-up of all our projects.

M&A.

M&A, we are always looking for acquisitions.

I mean -- and if those acquisitions are in the Americas, we are going to look for them.

So that could be a possibility.

But we don't have anything today that I can say we are going to do that acquisition or that other.

But -- and regarding acquisitions, it's also important that I added that.

Although the market is looking better in 2020, there are currently a lot of uncertainties in the market.

So we need to be extremely cautious when we analyze any M&A acquisitions, and we are going to be extremely cautious when analyzing an M&A acquisition.

I hope this answer everything you asked, Thiago.

I don't know if I forgot something.

It did.

Just a very quick follow-up, Máximo.

You mentioned potential future investments in Mexico, Colombia, Brazil.

So when we think about Brazil, are we thinking about potential new -- like new rolling facilities tied to CSA Ternium Brazil there?

Or would that be like the rationale, to sell into the Brazilian market?

No, no.

I think that -- no.

Brazil has rolling capacity in excess.

As you know, we are an investor in Usiminas, and Usiminas has a rolling capacity very near our plant in Ternium Brazil.

The Cubatao plant is very, very near.

And so one of the growth opportunities is to supply more slabs to the Cubatao facility, which has an excess capacity -- I mean which has a capacity that is not using.

And I think those are the growing opportunities that we should analyze in Brazil.

Our next question is from Alex Hacking from Citi.

I just have one question, which is around the new facility in Colombia.

How are you thinking about EBITDA per ton through the cycles for that facility or, I guess, kind of a range of EBITDA per ton?

I'm not particularly familiar with Colombia rebar market, so I'm not sure how margin structures there operate.

And I guess, actually, let me ask one more.

You mentioned you're potentially pulling Pesqueria forward by a couple of months.

So congratulations on that.

Any indication about how much volume you would expect to ship from that facility at the end of this year?

And any indication about what utilization rate you would kind of be targeting by the end of 2021?

Would you be looking to be at 100% utilization rate by the end of the year?

Or would it be a more gradual ramp-up?

Thank you, Alex.

I'll answer the second question, and I'll leave the difficult one to Pablo, the first one.

Pesqueria is going to start -- I mean the timing -- the official timing is still December, so not much production from that -- from the hot strip mill this year, but we are very confident that we can start that late in October.

These are going to be only 2 months for this year.

And remember, these are -- it's a $1.1 billion investment, so it has a long start-up.

So not much.

And the first 2 months, they are dedicated to making the test for all the different products that this hot strip mill has to do, so all the running tests for the different products, and that takes a lot of time for the commissioning of the hot strip mill.

But by the end of 2021, we expect to be 100%.

That's for sure.

That's a long curve of stock.

But by the end of 2021 -- I think it's a little bit earlier.

It should be by October or September, should be by 100%.

Okay.

Thanks, Máx, for sending the question to me.

So, Alex, the Columbia facility basically is in line with our approach that we have like CSA at the moment of acquisition, which is increasing the participation in the value chain of the production of steel.

Up to now, we have excess capacity in Colombia in the long product market, and we were limited with the local production that we have, and we were importing some products to supply the market.

So what we are doing with this facility is not only expand the market reach that we can have and substitute imports as we did in all the markets where we are but also take advantage of further increasing the margin that we can strike out of our production because we will be moving from finished product to bill it as an input for the production of our facilities.

So this clearly should improve the margins of the Colombian operation and moving the margin of the Colombian operation closer to the average margin of Ternium as a whole.

So clearly, that utilization that we want to follow, that's the target of this investment.

And again, though the volume in comparison to Ternium, Ternium is -- last year produced and sold 12.2 million tons here.

We are thinking of an expansion and talking of an expansion of around 0.5 million ton, not a minor one, but this will contribute to sustain and to get the markets of Ternium in the range that we always want to be, which is between 15% and 20%.

And clearly, this type of expansion or these type of projects are putting Ternium in a better position to sustain this level of profitability.

Our next question is from Rodolfo Angele with JPMorgan.

My -- I just have one question.

I would like to hear your thoughts on working capital.

It was one of the reasons why the cash flow was strong last year.

So I just wanted to hear from you what is a sustainable level, if there should be a hike in the first quarter.

Or any thoughts on working capital?

Okay.

Let me take this question, Rodolfo.

Clearly, as you mentioned, a key contributor to the free cash flow generation was the reduction in working capital.

And there are 2 sides of this reduction in working capital.

The first one was a real volume reduction in working capital.

As we always mention, and I think Máximo made it very clear at the beginning of the year, one of the targets of the company was to be more efficient in utilization of working capital.

And the second one, which is clear, and of course, is the price of the raw materials and the finished product that we have in our inventories.

The negative side of that is it reduced our EBITDA.

The positive side of that is that it reduced the value of our inventories.

Clearly, the second part will not be present there anymore because we are not expecting to see the big fluctuation of prices that we saw during last year.

So the -- we will continue to work in efficiencies in the management of our inventories.

But also, we need to take into consideration that we are expanding production during this year, 2020.

We have one facility that will be fully utilized by the end of the year, which is a Colombian one, but we will start working with the Mexican facility in Pesqueria, which is a significant one, and will require some level of inventory.

So all in all, the initial expectation is that should not fluctuate that much, the level of inventories, and probably will not be a contributor to the generation of free cash flow during 2020.

Your next question is from Thiago Ojea with Goldman Sachs.

My first question is regarding the long-term strategy around Ternium.

For years, Ternium was very successful in being short on its slabs and have an excess capacity on rolling.

Then after the CSA acquisition, it became the opposite.

You were long on the slabs.

And now with the new Pesqueria mill, you were slightly short again.

How do we -- should we think in 10-year view, this -- would you still invest -- you mentioned that you're going to invest in new projects.

Would it still be more towards like rolling capacity?

And specifically on the Pesqueria and new mill, after this is online, how should we consider costs going forward?

How the structure and cost will shift in Mexico?

Thank you very much, Thiago.

I'll answer the first one and then, as usual, the difficult one for Pablo.

No.

Sure.

I mean we -- as we always said, we want the -- we like the flexibility.

And before our acquisition of the plant in Rio de Janeiro, the decent -- the CSA plant, we said we have the 3 -- we have the natural gas reduction for one side.

We have blast furnace -- for 1/3, the natural gas; 1/3 is -- was blast furnace; and then 1/3 or a little bit more, we were short on slabs, and we buy slabs from the market.

And that was -- give -- gave us a lot of flexibility.

With the increase of the complexity of the Mexican market and the complexity of the product, being so short on slabs, let me put it this way, being so short of slabs started to develop some problems because we couldn't have the capacity of developing the steel for the needs of our more sophisticated customers.

So I think the acquisition of CSA, which brought us long on slabs, was a -- was very good for the timing and, of course, for the price we pay.

It was much smaller, the investment than if we have to build that capacity; and second, give us the ability to work with our sophisticated customers in the development of all the steels that we are doing today.

Now that we are investing in the hot strip mill, this is going to be even better because we are going to be able to produce the full range of all the products, of the most sophisticated steels that are produced around the world and give us the facility to work in the development of the customers with that.

But we are going to be short of slabs of at least 2 million to 3 million tons, which, for us, is quite a comfortable level.

So if you have to think of what we are going to do forward or what we are thinking, I said, we like this arrangement.

And if we grew -- we are going to grow given space that we do have to buy slabs in the market and remain a little bit flexible, especially for the downturn of a market that could happen sometimes.

Okay.

Let me take the second question.

Clearly, the Pesqueria project has different effects.

We understand all of them are positive in respect to the margins of the company.

The first one is the one that Máximo mentioned, which is we will be able to substitute or produce in our own facilities the high-end products that up to now we are not able to produce.

So this is improving the margin of our own production.

The second one is substituting of imports that we are doing of some products that then will be produced in the new facility in Pesqueria, and this is not a minor amount.

Even Máximo, during the opening remarks, mentioned this is close to 1 million tons.

So there, we'll be gaining the margin of -- instead of providing the finished product, producing that product and gaining the transformation part of the product.

And of course, the third portion is that we will increase our product offering because we will be having a higher level of production, and the total level of shipments in the Mexican market should increase quite a lot.

So putting all the 3 things together, clearly, there should be an increase in margins in our operation in Mexico.

Clearly, you would like to have a number to that, but the only thing I can say is that this is, again, in the same line of improving the margins of the company and sustaining the profitability level within the range that we consider that Ternium should have, which is between the famous 15% to 20%.

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

So the first question is on Brazil.

You mentioned, Máximo, that you expect the company -- Ternium Brazil to go back to higher levels of production.

Is this around 1.2 million tons or higher on a quarterly basis?

And then just to clarify, if you could clarify the comments on Brazil's potential investment.

I understood that the company is not interested in adding rolling capacity to CSA.

So does that mean that the company could potentially expand only the slab production?

Or do you want to do something with Usiminas in Cubatao?

If you could clarify, that would be great.

And then still on the capital allocation and investment plans.

Do you -- how do you see the expansions in Mexico going forward?

Do you expect that after this current cycle is completed and is fully ramped up, Ternium Mexico would add more downstream or perhaps it is time to also add upstream capacity in the country?

And then final question on dividends.

The company or the Board decided to maintain the dividend payment of $1.2 per ADS after -- this is the first year in several where the company doesn't increase dividends.

You could argue that the company has a space or had a space to pay more.

Certainly, the balance sheet remains strong even though net debt-to-EBITDA increased a little bit, but -- quarter-on-quarter.

And you are arguably past the current peak of the ongoing cycle, CapEx cycle.

So if you could maybe put it in context, what was the rationale, do you think, that the Board had when they decided to keep the dividend flat?

Okay.

Thank you, Carlos.

Long question.

So I'll try to not forget anything, but please interrupt me if I do.

I'll start with Brazil.

As you know, Brazil produced -- and I'm going to talk about yearly basis because of the -- how the Brazilian mill has to go into the realigning of the [convertibles].

Talking about quarters, 1 quarter can change with another because it has these realigning, so it's very difficult to talk quarter-to-quarter.

So I put the production in years.

2018 was 4.6 million tons.

2019, we produced 4.4 million tons.

What we expect to produce again in 2020 is 4.7 million, which was what we did expect in 2019.

Remember, we did -- we're going to increase the production.

And that by 2021, 2022, we are expecting to reach near the 5 million, which is very hard, but that's our goal.

But in 2019, we're expecting to produce 4.7 million, and we produced 4.4 million because of this downtrend of the market.

So 2020, our new estimation is 4.7 million.

I hope with this, I answered the question, but we are at full capacity in our Brazilian operation.

And regarding the investment in Brazil, let me be clear because I don't want to mislead you.

We have nothing concrete yet.

I mean what we have is that we have an investment in Usiminas.

We are one of the main shareholders of Usiminas, and Usiminas is doing better, and Brazil is growing.

So that's a very good -- it's very good for us.

We have a huge facility, one of the most modern facilities for slab production in Brazil.

And I think that this growth of the market -- or this improvement in Brazil, in the Brazilian economy, we are going to take advantage of that.

And so we want a presence in Brazil.

But we don't have any concretes of what are the next steps in the Brazilian operation.

We are analyzing different projects.

Some of them are based on reduction of costs -- huge reduction of costs like ones that we made in Mexico.

But again, they are very initial step of analyzing the different alternatives of the different views of the Brazilian market.

So don't expect anything in our balance sheet in 2020 about Brazil.

Then you ask about the investment in Mexico, upstream or downstream.

I mean, I think the Mexican market has still a great opportunity for us.

I mean there's still growth -- opportunity for growth and the opportunity for growth in both upstream and downstream.

I think that we are looking for some downstream future investments.

Again, I don't think that, in 2020, we're going to start any of those, but we are looking.

And then in the upstream, I mean, the USMCA when it is approved, it's very good because the rule of origins are much stronger, and it benefits us a lot.

But for some part of the market, the terminal -- how you say it in English -- the automobile manufacturers, in 7 years from the time it's signed, the rule of origin has to change, and it has to be melted and poured for only that part of the market.

And so today, we -- I mean, in 7 years, we are going to accomplish part of that with our facility in Guerrero but not all.

So thinking about an expansion upstream is also a logical situation for us.

But again, we are not going to see anything of that in 2020.

We're going to think of that through this year.

But yes, it's one of the projects we are analyzing in a very small scale only to provide that melted and poured to these automotive customers in 7 years.

So we have a lot of time to analyze and see what our best option is.

And the last one was the dividend that you said.

Carlos, I don't think I answered the first 3, didn't?

Yes, you did.

Yes.

So the dividend.

And this is a question that usually Pablo answers, but I'm not going to let Pablo Brizzio answer it now.

Okay.

No.

I mean, I think the dividend yield or the dividend ratio that we are paying is higher.

I do acknowledge that we have a discussion if we had to increase it or not.

But I think that the numbers -- I mean having a dividend yield of 6%, I think it's one of the highest in the industry, no doubt about, or a payout ratio of 42% is also, I think, a payout ratio very high.

So I know we don't have a dividend yield -- dividend policy.

But with this, we want to sign out that we are continue committed to paying dividends every year.

I think with the decrease of the margins of EBITDA this year, and I understand next year will be probably better, but I think with this decrease, maintaining the dividend is a very good sign for all our investors, and we are continue committed with that.

I hope I answered your question with that.

Our final question is from Caio Ribeiro with Credit Suisse.

So my first question is regarding the outlook that you mentioned for first quarter '20 and second quarter '20.

You mentioned that you expect EBITDA to increase sequentially mainly as a function of stronger shipments and slightly lower cost.

But I wanted to see what you're expecting in terms of prices, right?

There had been a recent pickup in HRC prices in the U.S. even though that seems to have somewhat reversed lately.

But I was just wondering if you expect to be able to somewhat reflect that recent increase in the U.S. and your prices in Mexico as well.

And then secondly, I just wanted to see if you could provide a little bit more details on the SG&A increase that you had in this quarter on a sequential basis and on a yearly basis as well.

Just if you could explain what was the main driver for that.

Thank you, Caio.

I start with the first one, outlook, and you mentioned prices.

There are 3 different prices.

Prices in -- I mean in our first quarter, you're going to be reflecting the increase in prices in slabs, the sales of slabs from our Brazilian operation.

And the low prices in the U.S. are increasing, as you said.

Not the full effect is going to be seeing in the shipments of Mexico because, remember, in Mexico, we have, I'd say, half and half.

But half our shipments are industrial customers.

They're a little bit more.

And usually, those are contract-based prices on a quarterly basis.

So the prices of those customers are probably going to decrease from the fourth quarter to the first quarter.

But the customers of the spot basis, the other 50%, are going to increase in the first quarter.

So the net effect would be highly -- a little bit better but not much better.

In the second quarter, the contract-based prices are going to be higher.

So you're going to see the full effect in the second quarter of this increase.

Volumes, though, are going to be higher in Mexico.

That's for sure.

I mean, as I said, Mexico, fourth quarter -- and the whole year was not a very good year for apparent consumption of steel consumption in Mexico.

But in the first quarter, we are seeing an increase in our customers' orders, and we expect to continue that way in the second quarter.

So volumes are going to increase.

And prices, not that much in the first quarter, but we are going to take advantage in the second quarter.

I think -- I don't know if I answer -- do you have the second part?

I have the second part.

Caio, thanks for your question because it's important for us to clarify this point.

In fact, we did not have an increase in normal G&A.

We have specific or particular issues that reflected the number is higher than the previous quarter.

And the 2 of them are -- the first one is the increase of an asset tax in Argentina.

Up to last year, this -- or before the entrance of the new government, this asset tax was 0.25%, and the new government passed a law increasing this -- or doubling this tax to 0.5%.

So $4 million of that increase is related to that.

So we needed to register so this will not be registered as an item in the following quarter.

And the second one, you know that we have a contract that we acquired together with the acquisition of CSA, now Ternium Brasil, to supply slabs to the Calvert facility of metal in the U.S. Since it was a long-term contract, we needed to account it for in our purchase price allocation.

So after that, we need to amortize this contract by the volume that we shipped.

Since we have higher volume in the fourth quarter in comparison to the third quarter, the amortization level was higher, and this is the other effect that show a higher SG&A, right?

The real SG&A -- or the expenditure, SG&A, basically were in line in both quarters.

We will now turn our call over to our Chief Executive Officer for closing marks.

Okay.

Thank you all very much for being part of our conference call today.

Please give us a call for any questions or comments or anything.

And if not, we'll see you next conference call.

Thank you very much.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.