Ladies and gentlemen, thank you for standing by, and welcome to Ternium Third Quarter 2020 Results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star and then one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to Sebastián Martí. Thank you. Please go ahead.
Good morning, and thank you for joining us today. My name is Sebastián Martí, and I'm Ternium's Investor Relations and Compliance Director. Ternium released its financial results for the third quarter and the first nine 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 two 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 this 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, at the worst of the pandemic-related restrictions, we reduced Ternium's crude steel production by almost 30% compared to the first quarter. 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 were able to react to these big changes in the market environment. Steel prices in North American markets have also been helping as they recover strongly from a very low base back three months ago when we had our last conference call. The higher shipment made possible by Ternium's operational excellence, together with improvements in the price scenario, enables us to report third- quarter results that were significantly better than what we anticipated in our last conference call.
Shipments increased 16% to 2.8 million tons, not yet back 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 it did in the previous quarter, with $389 million in this quarter, driving another decrease in net debt. Net debt will reach 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, for which we continue to expect 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 on Monday, two 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 a total capacity equivalent to approximately a third 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. 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 market. 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 refineries. 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 two 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 is no negative news at the macro level, we could have an additional sequential 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 month, and this has supported increased slab order levels in the domestic market. The auto industry is recovering 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 slab facility in 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 have also improved over the last three months, and this is driven by a recovery to more normalized margin levels in these facilities. All right. I keep it short this time so we have more time for the 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 course of the COVID-19 pandemic and the measures governments around the world could take to contain it. As we are seeing 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 built 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 competitiveness point of view, always with the goal of sustaining our high profitability levels relative to our 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 in a unique position to take advantage of the USMCA's many benefits. All right. I would very much like 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 have 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 three 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 detail in the next slide. Net income in the period was $173 million or $0.74 per ADS.
The results compared to the net income of $44 million in the second quarter. We are having some noise in the line. There we are. Sorry. I was saying that the result of the net income of the third quarter compares to a net income of $44 million in the second quarter. Sorry about that. We are having, again, some noise in the line. Yeah, we are. Clearly, the second quarter was weak because of the consequences of the COVID pandemic . Let's look forward to the fourth quarter. The expectation is for a sequential increase in shipments, and higher margins should result in a strong set of numbers. Turning now to page four, let's review in more detail the degree of the recovery in the shipments, one of the positive surprises in this third quarter.
As shown 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 to the last year. In the fourth quarter, we expect shipments in Mexico to continue recovering, reaching pre-pandemic levels. 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 market region, finished shipments increased sequentially and on a year-over-year basis in the 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 facility in Brazil with 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. We consolidated the shipments of 2.85 million tons in the third quarter, up 16% sequentially. In the fourth quarter, we expect consolidated steel 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 have 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 the lagged price reset. This strong pricing background will drive an increase in revenue per ton in this region in the fourth quarter of the year. Let's turn now to page six to review the main sequential changes in the EBITDA and net results in this quarter. The rebound in EBITDA reflected the recovery in shipments and improved profitability. EBITDA margin increased sequentially, mainly 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 seven, let's review the main changes in the first nine months of the year on a year-over-year basis. The change in EBITDA 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 costs 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 of the net financial result of the significant fluctuation of the Mexican peso, the Argentine peso, and the Brazilian real versus the US dollar during this period. We also had a year-over-year higher income tax. The main reason behind this was a non-cash deferred tax loss in the nine months of the year in connection 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 eight Ternium's free cash flow, capital expenditure, and net financial debt. You can see in the slide a strong set of numbers.
With the measures taken in the last two quarters, Ternium has achieved a strong financial position with ample liquidity, and net cash provided by operations activiti es reached $1.4 billion in the first nine 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 large net debt down to $562 million as of the end of September, equivalent to 0.5 x net debt to last 12 months EBITDA. With the resumption of our investment plan, we expect capital expenditure 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.
Certainly. Ladies and gentlemen, in order to ask a question, you do need to press star and then one on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jonathan Brandt with HSBC. Your line is open.
Hi. Good morning, gentlemen. Congratulations on the results. Máximo, I first wanted to ask you about steel prices. Both how quickly we should see the steel prices that happened in the third quarter in the U.S., how much of that should be captured in the fourth quarter, and how much of it will roll into the first quarter? Just sort of what is your outlook on North America's steel prices today, given sort of everything that's happening and the uncertainty, et cetera? My second question, I guess maybe to Pablo, is just if you look at your leverage to 0.5 x, it's sort of at the lower end of the historical range.
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.
Thank you, Jon, for the questions. Let me start with the steel prices. I think there are two parts to the questions. Steel prices, clearly, if you see our results, we took advantage of the increase in prices a little bit . Of course, we are going to take a little bit more advantage in the fourth quarter, and I guess in the first quarter. Remember, Ternium, part of our sales are contract prices and part are spot prices. During the fourth quarter and probably during the first quarter, we are going to see an increase in prices from shipments from Ternium, depending on the mix, but it's probably going to be an increase. What is the outlook?
When we had our last conference call, I remember I was telling you that 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 above the local prices in the U.S. 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 we thought. I think that this level of prices should remain. This environment should continue over the next couple of quarters. Demand is good in the U.S., in Mexico, and in this region. I think our customers are consuming. Construction is very solid. Industrial manufacturing is also increasing. I think that from the demand side, I think that it's strong.
The increasing in the offer, the utilization rate is only at 70%, and the lead times are quite long in the U.S. 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, or we are expecting that. I think that answered the first question. The second question, I ask Pablo to start, and then I'm going to comment on a longer view in that question, Jon.
Okay. Yes, Máximo. I think that we can take these questions in two different ways. The first one is the short answer to it, as Jonathan was asking. Clearly, the fourth quarter will be a little different from what we saw during the last two quarters, where we had a reduced CapEx and an increase in the working capital that we released, together with very strong numbers coming out from the operation of the company. That's clearly very positive. In the fourth quarter, we will continue to have cash flow from operations at a strong level. Clearly, we will have, first of all, an increase in our CapEx from the third quarter to the fourth. We are expecting more than 2x to the level of CapEx in the fourth quarter.
We are expecting to reach the level that we originally said, around $600 million of CapEx for the year. As Máximo mentioned, we are restarting fully the plans that we have. Clearly , 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 increases the value of our inventories, but also increases the value of our receivables.
Clearly 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 increase in CapEx and the increase in working capital. All in all, no matter that, we will continue to keep having a reduced amount of net debt. I think this leads to probably an answer in the long run. I think that Máximo can take this answer now and expand on the view on basically the capital allocation of the company.
Yeah. Thank you, Pablo, and again, thank you, Jon. Yeah, I think the answer to the cash uses, clearly, as Pablo said, we are generating good cash flow, and what are our thoughts on the future? I think that three years ago, we started a very aggressive or very important investment program for us. This program started with the acquisition of CSA in Brazil, which was a state-of-the-art facility and allowed us to produce a whole new range of steel, which we were not able to produce before.
Continue a month later of the acquisition with the launch of our investment program in the greenfield facility in Mexico, the galvanize, the painting, the hot rolling mill, which those were CapEx programs, very strong, and the vision over that was that we were going to change substantially, or we are changing already, the way Ternium was going to new market, much more sophisticated, much more value-added products. We are about six, seven, or eight months of finishing that investment program. We continue to see that there are good opportunities for Ternium to continue growing or using that cash. I think we can mention three. One is Mexico. We are very optimistic about Mexico, 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 US, are going to continue, because it's good for the people. I think that apparent consumption is going to increase; we are very well -positioned to take advantage of that. There's going to be probably expansions in our Mexican facility. The second thing is the melt and pour in the automotive industry in North America. As you know, we are partially compliant with that; we are not fully compliant. We have time. It's seven years. We have time to see what our best option is. We don't have to decide it today;, we are going to be compliant. The third is, of course, how we maintain our conservative balance sheet; we also give dividends to our shareholders.
That's the thing that we should continue doing, and we want to do. Last, I think our track record shows that we also grow by taking advantage of different opportunities. I think that in this market, I do believe there's going to be opportunities in our region for Ternium to grow. I think in all this, I hope, Jon, I'm sorry I was too long, but to answer your full question .
No, that was great. Thank you. Just to follow up, would you see the potential for further M&A as a path for growth?
Yes, I see. We don't have any now. We don't see anything. As you know, when opportunities arise, we generally take advantage of them.
Great. Thanks, Máximo. Thanks, Pablo.
You're welcome.
Our next question is from Thiago Lofiego with Bradesco BBI. Your line is open.
Thank you. Good morning, gentlemen. Máximo, how sustainable do you think the volume increase in Argentina is, and what is your best outlook for 2021 at this point? 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. steel market and the North American steel market? Do you think that Biden is-
Are you asking me? Sorry.
Go ahead.
No, you're asking me to be a magician, not a CEO.
It's always good to hear your view.
I try.
Just to make my question here more specific, do you think that if Biden wins, you see the government will gradually withdraw f rom Section 232? Do you see any changes in the recent USMCA? What do you think could happen in a Biden scenario? Thank you.
Perfect. Thiago, first, let me talk about Argentina. 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 in the fourth quarter, it's going to be good. There's a lot of challenges in Argentina. What is happening with the exchange rate, Argentina clearly needs some reforms and needs time to do those reforms. 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 in 2021 today. Again, we are very cautious about what our stance is on how we operate in Argentina. We continue to be flexible in our operations there, and we are increasing our production, but in a flexible way. Elections in the U.S., and what will happen.
Máximo, if I could, I'm sorry to interrupt you, but still on the Argentina answer here.
Yes.
What are the sectors that you think will be more resilient in a worst-case scenario in Argentina if the outlook there doesn't improve? Actually, if it gets worse, what are the sectors that you would say? Here we see more resiliency. Here, we think we're going to see more downside potential?
Look, I'm not saying this is going to happen, so don't quote me. Probably, one way out of this is going to be a devaluation somehow. When you have this difference of exchange, that could be an outcome. What usually happens in a devaluation is that most of the market decreases, but then some of the export industrial manufacturing increases, and construction starts to pick up also. For our market, we are probably going to see a downturn if this happens. There are markets where it would continue to recover. Again, the government is making a point of trying to solve the situation. That's why I said that it's going to be a very volatile environment for the next couple of quarters, probably.
Got it.
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 don't think he's going to change a lot of 232. Probably, he's going to negotiate or be a little bit more flexible with some countries that shouldn't have been in the 232, probably, in the first place. The thing about 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, clearly, of the actual president, but it's also on the mind of the Democrats. 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 the manufacturing in the area, 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 environmental footprint and how we are doing a lot of things. That's the only change I see, really. I don't know if I answered your question a little bit .
No, you did, Máximo. Thank you. Thank you for both answers there.
Yeah.
Our next question is from Thiago Ojea with Goldman Sachs. Your line is open.
Hi, thanks, good morning, good afternoon, everyone. I think my first question, I would like to go back to the U.S. prices, Máximo, if you allow me. We saw 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? This is just like a short-term pickup and should accommodate in a lower price level? How should we think about U.S. steel prices going forward? I think this is my first question.
My second question is still related to the U.S. steel market. We saw in the past few years a lot of announcements of new investments, including a few, I would say, in North America, including a few in Mexico. How do you see 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 two to three years in North America? Thank you.
Thank you, Thiago. U.S. prices, as I said, clearly the prices have increased in the last couple of weeks or in the last two months, to be honest. It was a steeper increase than what we thought, but we did see this coming and prices going up. Again, I think that demand is picking up in all our countries. China 's demand is going to grow by 8% this year. China in the last four months was a net importer. Usually, China has been a net exporter for the last 10 years of steel. In the last four months, it has imported more steel than they export. Europe is picking up. It depends on what is going to happen with on new resurgence of COVID, but it's picking up. Latin America, you saw Brazil. Brazil is clearly huge increase in demand.
I think that for the next several quarters, I don't see an environment where prices are going down in the U.S. It will depend, again, on the rationality of the U.S. producers regarding the capacity utilization, to be honest. If things continue as today, I think that prices should remain at a healthy level for the next quarters. Again, that's my opinion. Thiago, I don't know if I answered the first question or not.
No, you did. I think now what I'm curious about, given the current capacity utilization and the new product announcements, is how you think the competitive landscape will evolve in the next few years?
Yeah. The second is the investments that they are making. Clearly, there is new capacity coming on board in the next couple of years in Mexico and in the U.S. This is a concern, clearly, but two or three things. First of all, apparent consumption is going to grow. I think part of that new capacity is going to go to this increase in apparent consumption. If you see the consumption in Mexico or the consumption in the U.S., in both countries, in Mexico, I think it's 150 kg per in habitant. In the U.S., it's a little bit of 240, 260, depending on how you make the numbers. If you see China, it's more than 600. If you see Korea, it's 900. If you see Japan, with all the squeeze in manufacturing, it's more than 400.
This reshoring has to bring back some of that consumption to the region. That's for sure. Consumption is going to grow. The second thing is that we are going to fight imports. There's a huge amount of imports in Mexico, and part of this new capacity is going to change or to replace these imports. The third thing is, some of this capacity for sure is going to compete to other U.S. producers.
There are some of the U.S. producers that are not as competitive as older capacity, which is at a higher cost. I am not seeing a huge increase in that sense. The fourth, of course, is that we are working to be more competitive than the others in the region. That's our focus today. Our facilities, as you can see in the numbers, are clearly one of the most competitive in the region. We are very able to take advantage of this increase in consumption, but again, to compete with the new capacity that is arising.
It's clear, Máximo. Just one final question.
I hope I answered the question, Thiago.
Yeah. I would just ask, what is the size of the additional capacity that you consider credible to come online in the next couple of years, both in Mexico and the U.S.? Do you have any figures that you work on for your projection?
No, I didn't understand, Thiago. I'm sorry. The line is cutting, and I didn't understand the question very well .
Sorry. My question is, on this new capacity that is coming online, what Ternium considers that really will go through, like really will be built? Do you have a sort of X amount of million tons of capacity that for sure will be added in Mexico and in U.S.?
No, for sure. The new capacity in Mexico is our new hot strip mill. It's not steel consumption, but the new hot strip mill of ArcelorMittal is also coming online. In the region, I think the new SDI plant in Texas is clearly they are building it. I don't know the timing exactly, but they are building. There's the new facility of Big River and the new plant for plates of Nucor. All those are things that in the next two to three years are going to be producing at full capacity, probably.
That's clear, Máximo. Thank you a lot.
Our next question is from Carlos De Alba with Morgan Stanley. Your line is open.
Hi. Thank you very much. Good morning, everyone, or afternoon, I guess, closely. Máximo or Pablo, could you please comment a little bit more on the first quarter outlook? You mentioned, Máximo, that the prices in Mexico will probably continue to increase. At least you realize prices or revenue per ton will likely continue to increase in the first quarter, just due to the lag of the contracts. Could you elaborate a little bit more on what you are seeing in Argentine prices in the fourth quarter and into the first quarter? Maybe anything that you can add in terms of volumes and perhaps cost. I also have a second question.
Okay. Hi, Carlos, how are you? Let me take this question. Let me make a caveat first before answering your question. 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. If we do not take that into consideration, we need to take other things into consideration. The f irst one is the seasonality of volumes in the different markets where we are. In the southern region, the first quarter is the seasonally lowest quarter.
In Mexico, this is more at the end of the year; the first quarter tends to be a relatively good one. 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. There will be some price increase, yet to be seen if prices stay at the level Máximo views. We will also see that reflected in the first quarter of the year.
We believe that the outcome or the outlook that we are going to have for the fourth quarter is something that could be sustained with some reduction, as we said, in relation to volumes in Argentina, could be sustained entering into next year. The second caveat that we need to make is also the one that Máximo mentioned, which is that the situation in Argentina could make changes in the outlook for volume. 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. Thank you for that. Just on Argentina prices. Sorry.
No, I put a third caveat, Carlos. It's a pandemic. Clearly, as I said, it's not over. I don't know if some governments are going to come back to restrictions. I think they won't. They learned that it's not very useful. It does a lot of harm to the economy. It's a possibility because cases are picking up in some of our countries.
Sorry. Hello?
No, we have some problem with the line of Máximo, but go ahead, Carlos.
Yeah. No, just on prices, Pablo, how do you see prices in Argentina?
We are continuing to see prices in Argentina following international prices, as usual, with less volatility at international prices. We don't see many changes in prices in the region. Of course, if there is some changes in the foreign exchange rate, this could impact, as usually happens in the short run. We will be able to sustain the pricing level as we are currently seeing in our markets.
All right. My second question is on 2021 CapEx: if there is any ballpark number or range that you can provide. If you could maybe talk a little bit more about the timing of the restart of the hot roll line in Mexico, which you said next year, but you could refine a little bit more the timing of that and how much production do you expect to have, incremental, I guess, production you expect to have on that hot roll coil line next year. If there are any other updates on projects, that'd be great.
Yes, Carlos, I'm back again. CapEx, 2021, is going to be around $600 million. It's quite the same number as 2020. We are seeing that number as CapEx. Hot strip mill in Pesquería, the date for starting the hot strip mill is July, which is the first coil. July of next year. Remember, these equipments are very big and difficult, there's a long ramp-up period. I think that the effect of the hot strip mill, you're going to start seeing by the end of the year.
All right. Excellent. Well, thank you very much, and good luck with everything, and particularly with the ramp-up of that mill next year. Thank you.
Thank you, Carlos.
The next question is from Gabriel Galvão with Credit Suisse. Your line is open.
Hello, everyone. Thank you for taking my questions. My first question would be regarding Brazil. 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. Maybe you could provide us with some color on how is the relative profitability between exports and domestic sales in Brazil? My second question would be actually a follow-up on the dividends. If I remember correctly, you said that dividends for 2020 would remain suspended since you usually only pay dividends once a year. Is this the case here? Thank you.
Thank you, Gabriel. Brazil. I start with Brazil. What is happening in Brazil is that domestic consumption is increasing a lot. As you remember, we have the Ternium facility make slabs, so we are not in the final market. As the manufacturing production in Brazil increases, some of Usiminas, CSN, and other companies are asking us to sell slabs to them because they are ramping up production of the hot strip mills , the cold roll, and the galvanized lines.
What is impressive about Brazil, I think that the number of the manufacturing index, the PMI, was released yesterday, and it was a record high. It's increasing. It's not a lot of change in the profitability. We do have some advantage in terms of rate and other things selling to the domestic market; there's not a lot of change in profitability between our export market and the domestic market. The second part of the question.
Let me clarify one point before entering the second answer. You mentioned that what we said is that there is a reduction in sales to third parties in order to send this product to our own operation facilities. Within the third parties, we include the local sales in Brazil. Clearly, what Máximo was saying is right. The change from the second to the third quarter was due to a reduction of sales, or 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. That's the big change that you saw in the numbers. All in all, the total production of Mexico or Brazil was higher. This is the change, not that we switched from third parties to the local market. The l ocal market increased, but the switch was from total third parties to internal transfer. With that clarification, Máximo.
Yeah, I thought the question was in the fourth quarter when I did say that we were going to change from other parties to the local. My part of the answer was in the fourth quarter, Gabriel. I thought you were asking that.
Actually, I was asking about the perspectives for the fourth quarter because of this price hike and the relative profitability. Of course, this clarification also helps a lot.
Yeah. To make it clear, from what we sell to the third parties in the third quarter, the number is going to be similar in the fourth quarter. T he only difference is 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. The number of third parties , including Brazil, is going to be the same. Dividends. Well, you know that in April, we made the decision, or the board made the decision to skip dividend payments due to the pandemic and what we were thinking or what we were seeing at that time. I still consider it was the right decision, considering the information we have available in April. I think it was decided.
It's clear now that the market is recovering much more quickly than we expected. The board will propose the annual dividend payment in February. We do dividends every year, so we're not changing that. I strongly believe that the board dividend proposal will take into consideration the skipped dividend payment in 2020 when the board makes the recommendations for the dividend in 2021.
All right. That's very clear. Thank you.
Our next question is from Rodolfo Angele with JP Morgan. Your line is open.
Hi, everyone. 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, I think Pesquería could also be one of those moments. We've been getting a lot of questions from investors looking at Ternium. They want to try to understand the impact of the new mill in the overall profitability of the company. My question to you is, can you comment on a range of additional EBITDA per ton that Pesquería, 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? That's all from me, guys. Thank you very much.
Pablo?
I will start with the answer, and then, if you want, let's complete the answer. Rodolfo, your question is very clear. 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 in profitability in the coming quarter is that everything we do is to sustain this level of profitability. In the case of the Pesquería facility, as you put it, clearly one other point, very important for Ternium and for the future of Ternium, and is comparable to the one that you said, and Máximo mentioned this at the initial remarks, comparable to the acquisition of CSA. There are different components of profitability in the case of the Pesquería facility.
The first one is substitution of imports that we are doing. We will substitute with production in the new facility, imports of hot rolls that we are doing today. Second, we will stop utilizing one facility that we were using, which was not the most sophisticated one. We will close that down. In fact, we have already done that. We will have a new facility, a state-of-the-art facility that will provide a better performance. Third, clearly, we will increase the product base. All in all, we are expecting to have more than two million tons of net products to sell into the market, and there is where the number of EBITDA is coming. We will always say 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%-20%. We have some quarters with higher levels than that, but there is where we want to work. Everything that we do is to sustain that. That's my initial comment. Máximo, I don't know if you want to add something to that.
No, I think it's very clear. I think Everybody's hearing?
Yes, yes, we are, Máximo.
Yes.
Okay, sorry.
There might be some problems with the webcast, but the ones with the phone lines are okay.
Okay, because they are making signs here. Rodolfo, I think that what Pablo is saying is true, and what you are saying is true. Pesquería, together with the acquisition of 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 4.5 million tons of very high- value-added products and a completely new range of customers that we can serve. Again, our intention with this is to increase our profitability, as Pablo said.
Okay. Let me just insist. You're already at the 15% mark today. What I'm trying to do is, when investors come to us and say, "Okay, these guys have invested. Where is the impact of that?" Right? Maintaining the 15% is a very shy answer. If we were to think about the project alone, what is Pesquería bringing? It can be a ballpark figure, a range. Is it $20 per ton? 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. I'm sorry for insisting.
No, that's fine. That's fine, Rodolfo. We need to go through it. What we are trying to say is extremely difficult to put a number on exactly , because it's also dependent on the price of the product. It's also dependent on different things. That is very difficult to say, "No, we will increase profitability by 2%." Among other things, we are having a mix of products that includes, of course, new painting products, new galvanized products, but also includes hot- rolled products. The prices are different in this one. 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 a number of more than $250 million of EBITDA per year. This year, let me correct the number that you said. This quarter, we are at 16.5% EBITDA margin. Targeting a higher number for the following quarter. 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. All in all, 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, in the level of EBITDA generation, and sustaining margins and trying to increase them, but also of all the things that Máximo explained before. First of all, it's a key investment for Ternium.
Clearly, we'll increase the level of EBITDA generation, and clearly, at least we'll sustain, but clearly, we believe that at some point we'll increase the profitability of Ternium. It's very difficult to put a number to that, taking into consideration the numbers that we are showing. Clearly, as you mentioned, and Máximo mentioned also, this is a game- changer for Ternium, and the results will be there. Sorry not able to give you an exact number. That is the view that we have with this investment.
Okay. Thank you very much, guys. Thank you.
Our next question is from Alex Hacking with Citi. Your line is open.
Thanks. I guess just a quick one for Pablo. If I look at Siderar financial statements, the implied EBITDA per ton there was back over $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? Thanks.
Hi, Alex. How are you? Yeah, there were some things in relation to Argentina. Remember that we have still inflation in Argentina. We have devaluation in the country. When you have this aspect, tends to increase a little bit the total number of the company. Of course, if we are continue to see exactly the same environment, the U.S. dollar impact of that is increased, just because the portion of the cost that it is denominated in Argentine peso, which is around 35% of the total cost.
Clearly, in U.S. dollar terms, as you have a devaluation, it tends to be reduced, you have a better margin in that respect. You have these things, when you have utilization of the inventory that you have before evaluated at the prevailing exchange rate at the moment or the end of the quarter. There are some of these. Clearly, the performance of Ternium Argentina was very good. These things tend to accommodate and go to more normalized levels. Clearly , the performance and the margins of Ternium Argentina are high.
Okay, thanks. Then just one quick one. In your answer to Rodolfo just now, you talked about some value-added processing for the Pesquería product. I guess I didn't realize that you had excess kinds of paints, galv capacity sitting around that you could be utilizing. 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 excess or additional value-added capacity that you have there? Thanks.
Yes, of course. Máximo, please go ahead.
No, you go ahead, Pablo.
Okay. No, what I was trying to mention is that the total investment in Pesquería was not only the hot rolling mill, but also the new galvanized line and the new painting line, which are already up and running, and they are working almost at full capacity. It's not that we have spare capacity there or just waiting for the new facility to be up and running. We had that capacity, and this was part of the initial CapEx that we entered into at the end of last year or the beginning of this year. After the ramp-up period, we are utilizing those facilities. It's not that we have the available capacity waiting for this to be up and running.
Okay, I got it. I misunderstood. The new capacity is effectively just going to be hot roll capacity, right? With obvious future potential to add value . Okay. Thank you.
Yeah. Alex, I mean, the new capacity is hot roll. I remember the galvanized line started six months ago to produce, and the painting in December. They are still running up. One thing that the hot roll new capacity gives us is a new substrate for these lines also. Substrates 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 make because we don't have the substrate. It's going to be a change in the mix, and probably we will have some increases in time in the current rate of how much we are running these galvanized and painting lines.
Thank you.
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 to 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.