Ladies and gentlemen, thank you for standing by, and welcome to the Ternium First Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. 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 two 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 these 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.
It is still uncertain what the impact of COVID-19 will be on the global economy, as the nature of this crisis is different from what we have seen in the past. Our number one 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 tasks remotely are today working from home. For those employees that have to be on site, we have been very fast to implement best practices to minimize contagions that 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 posts, and cafeteria locations. All employees at higher 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. The response has been incredible. We are very proud of how our people are dealing with this demanding situation. They 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 equipped places.
Another thing to consider during this outbreak is the health of our value chains. We are working very closely with customers and suppliers to go through this difficult time together. Our robust custom 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 never been more evident than in the situations 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 enables us to integrate our facilities across the Americas in different ways, to reduce run rates with the lowest possible impact on production cost.
We are also optimizing production and overhead cost, and reducing general expenses and extraordinary maintenance works. On the working capital side, we work 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. To preserve cash, we are slowing down or postponing several capital expenditure projects across our facilities.
For example, we currently expect to delay the startup of our new hot-rolling mill Pesquería unit in Mexico to April 2021, and our new steel bar mill in Palmar de Varela unit in Colombia to the second half of 2020. 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 demonstrate over more than 10 years of increasingly higher dividend payments. The Board considered it prudent to withdraw its proposal until there is a more certainty over the effect 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. The spread of COVID-19 in the country impacted shipments beginning in late March. The automotive industry in Mexico is currently closed and is expected to gradually reopen during May. This industry value chain between Mexico and the U.S. is highly integrated and demands synchronized productions both sides of the border. A reopening of operations is an important issue for both countries. Other industrial customers in Mexico, such as 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 could 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, since steel consumption in the country is getting weaker. 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 party 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 late March by the authorities has been very strict from the beginning. The San Nicolas facility, our main plant there, is currently operating at technical minimums as it considers a non-interruptible 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. 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. The effect of this situation in our business will show in the second quarter of the year and beyond. We can rest assured, 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 the value we can add at these difficult times, as we have done in other market crises over the history of our company.
With that, I 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 Ternium's performance following the webcast presentation, starting on page three. 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 a 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 ADS. These results include a $189 million non-cash deferred tax loss due to a 20% depreciation of the Mexican peso against the U.S. dollar. This deferred tax result is equivalent to a $0.96 loss per ADS. Adjusting net income per ADS to exclude these non-cash items, the result would have been net income per ADS of $0.19 in the first quarter. In the next page four, 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.
We are continually 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 restrictions and declining steel prices, are affecting our steel shipments 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 is also 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 this day. Looking forward, our current expectations, as Máximo mentioned, is to see a gradual volume increase over the rest of the second quarter as the lockdowns of operations in the country seems to be slowly beginning to be relaxed. In the other market regions, shipments increased sequentially. Changes in shipment volume were mainly due to changes in slab shipments from Ternium Brasil unit to third parties, as slab ships to other Ternium facilities, mainly to Mexico, are netted out in the consolidation of Ternium financial statements.
Looking forward, steel shipments in the other markets in the second quarter are expected to decrease, mainly due to the impact of the lockdown in the Colombian market, as slab shipments to third parties should remain stable. Turning to page five, 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 realized 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 realized price, reflecting the lagged price reset 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. We can see that net sales in the first quarter 2020 increased slightly sequentially, reflecting the 3% increase in shipments offset by a 2% decrease in revenue per ton. Let's turn now to page six to review in more detail 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 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 to reflect the foreign exchange gain of the significant depreciation of the Mexican peso already mentioned, also a 20% depreciation of the Brazilian real against the U.S. dollar. Coming now to page seven, before going to the Q&A, we generated significant cash in the quarter.
We can see from cash from operations in the first quarter of the year reaching 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 expenditures program progressed without changes during the period. We will start to see a decrease 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 decreasing in the first quarter of the year.
As of March 31st, 2020, we had net debt of $1.3 billion, equivalent to 0.9 times 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.
Yes, sir. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from TimnaTanners with the Bank of America.
Oh, hey, good morning. 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 dividends. As you point out, your cash flows were still strong in the first quarter. Is it a question of visibility and certainty, or is it a question of something else, if you have any thoughts on that?
Okay, thank you, Timna. As I said in my remarks, we have been giving dividends for the last 10 years and increasing them year-over-year. I think in this, there's nothing else than what I said. The uncertainty around what this effect, this virus or this recession will have in all our steel markets is still uncertainty. The board consider very prudent to withdraw the proposal until we see more clarity on the steel demands. We have always been a very, let's put it, conservative company in our financial position. This goes with this. I don't know if, Pablo, you want to add something else to this?
Yes. No, I clearly agree with what you said. We consider it very important to have a strong financial position. In fact, we have reinforced our cash position without changing net debt. As you can see, we have reduced net debt during the quarter. In the meantime, we have taken some new debt from facilities available to us to reinforce our cash position, just to be prepared to any scenario that could appear in the next two quarters. Clearly, the board understood that this is the prudent way to take in front of this uncertainty. Clearly, whenever this uncertainty is over, the board of directors would reconsider the following steps.
Okay, perfect. Thank you. 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. Completely recognize that it's challenging and visibility is not great, as we were just talking about. 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. 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.
Do shipments start to materialize more in the third quarter, or how do you think about that? Thanks.
Thank you, Timna. It's a wonderful question. As you said, it's a big.
Yes
It's a challenge to answer that today in these times. I will 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 somewhat near 30% in the whole markets of Ternium. 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 an U. These increases are not going to be very steep. 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 two 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 steel customers. In the second quarter, we are going to ship almost the same to the U.S. and to some customers in Europe. We are going to reduce the shipments to our facility in Mexico. In the third quarter, we will probably change that, and we're going to ship more to our facility in Mexico. 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. That is the change.
The auto recovery, most of the auto companies in Mexico are going to start producing between today, some of them, and the 15th or 20th of May. It's true that the recovery, it's going to take time for our shipments. Remember, our shipments to the automobile industry are around 15% in Mexico, 15%-20%. We are going to see some increase in May and especially in June. You're right that the increase will be more in the third quarter compared to the shipments in April that were almost zero. 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. There is not a huge stock in all the value change in Mexico. That's another, I think, positive thing that could happen in June.
I hope with this, I answer all the questions.
Yes, very helpful. Thank you, and stay healthy. Thanks.
You too.
Your next question is from Carlos with Morgan Stanley.
Yeah, thank you very much, and hope everyone is doing well. 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-
Carlos? Carlos?
Yes. Hello? Can you hear me?
Yeah. We lost you for a minute.
All right. Sorry. 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? Is this a dividend that is forgone completely for the year? I understand that this is a board decision, but maybe you can provide some color. 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, quote unquote, can it get in Argentina? 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? Thank you.
Okay. Thank you, Carlos. 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, $850. For 2021, we said it would be around $550 million. What we are seeing today, the plans we're making today, is for 2020 to be between $550 - $600 million. It's a decrease between $250 - $300 million. In 2021, to be around $600 million.
We expect to finish the hot strip mill in Pesquería with this CapEx, and postponing some of the things that we were doing in 2020- 2021. Overall, we are expecting a decrease not only in this year, but on both the two 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 very hard lockdown. Only one of our plants were operating, and most of the construction industry was closed. There were no construction permitted. Our volumes in April are going to be very low, but they are going to increase in May and June. We hope by the third quarter will be kind of the same as in the first quarter. Yes, Argentina is taking an impact on the way they are managing this pandemic. Again, Argentina, the measures we are taking in Argentina are making that the company is not burning cash or anything like that. We are very optimist that the company will go through this in a very healthy way. The third one was dividends. Pablo, why don't you answer that?
Yeah. Okay. Carlos, as you know, at the very end, the power to decide the dividends relies on the shareholders' meeting. Clearly, the board of directors has a say on the proposal, and clearly we cannot say that no change can happen at close to the end of the year. If there is a change, this will happen. It's difficult to see this scenario at the moment since, traditionally, Ternium pays dividends once a year, and we pay dividend around this period of time every year. Between April and May every year. The most conservative way to answer your question is that at the very end, since if situation change entering into the end of the year, most probably the reset of the dividend will come on the following one.
We cannot say that this is not a possibility, because at the very end, the shareholders' meeting, and the board could propose something closer to the end of the year. A low probability in our view at the moment that this could happen, but we cannot reject that.
All right. Thank you very much. Good luck. Thank you, Carlos.
Thank you.
If you would like to ask a question, please press star one on your telephone keypad. Your next question is from Thiago. Thiago Ojea, your line is open.
Hi. Good morning, everyone. This is Thiago 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. If you believe that the activity 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 steel. What would be perhaps the minimum level that you think that would be profitable in terms of volumes to operate CSA? Thank you.
Thank you, Thiago. I couldn't hear the first question, but I'm going to answer the second one, then I ask you to repeat the first one because it was a noise in the line. I'm sorry about that. 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 secure, and we are shipping the orders in the second quarter. We don't have any problem with the second quarter. We think we can continue operating at that level in the third quarter because we are going to need those slabs from our own Mexican operation.
If we don't have any place to place the slabs because the demand is still weak in the third quarter, most of those slabs are coming for our Mexican operation. 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 Argentine operations. We saw a big drop in the first quarter. I imagine that the drop in demand in the second quarter will be even worse. What would be a reasonable level operation that it could be profitable in Argentina, and if you have a better outlook for the third and fourth quarters?
Yes. Argentina, as I said, the lockdown in Argentina was profound. It was very hard, let's put it. I don't know if that's the word, but it was very hard. So we did only operate the San Nicolas plant, which is the one that has the blast furnace. Again, the blast furnace there is operating also off a technical minimum. 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, we are not expecting to build up inventory in the second quarter, although the decrease in the shipment, 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. You have very low volumes in Argentina, and I don't think that the volumes can remain this low. I'm confident again that 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.
Yes, you did. Thank you.
Your next question is from Thiago Lofiego , from Bradesco BBI.
Hi. I guess they have a problem with Thiago, right? It's Thiago Lofiego with Bradesco BBI. Hi, guys. Thank you. Most of my questions were answered. Just, actually, two remaining ones here. One is about the costs associated with the measures you're taking because of the COVID-19. Do you have an estimate of those costs? 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? Is Argentina going to be even more than 30% drop in the second quarter, offset by Mexico and Brazil? Is it pretty much even across 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, it's really challenging to predict volumes. The drop I mentioned, around 30%, is what we expect today. This can change upwards or downwards, although we only have two months to go, because the uncertainty is still big. 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 zero in Brazil. Remember, we have the same volume of slabs for third party in Brazil in the first quarter as in the second quarter. It's going to be around that for Mexico. That's what we are expecting today. 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, Máximo Vedoya. Clearly, also Colombia will probably see a reduction in volume.
You're right.
that will be compensated by the ones that we mentioned in Brazil. Going to your first question, Thiago, clearly it's very difficult to put a number to that. 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 or 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 costs, reduce working capital, and adjust our facility to the new level of sales that we are having. The way to reflect that is precisely there. Sustaining or trying to sustain as much as we can the level of the EBITDA margin that the company will resolve.
Clearly, this is the best way we have to sustain profitability in our company. As you know, the company is always looking for ways to reduce our costs, and clearly and especially in situation like this one. Though it's difficult to put a number to that, the effort the company is doing is very strong, and the reflection will be in a small reduction of our EBITDA margin.
Pablo, I actually meant more on the specific expenses associated to COVID-19. Like, sending people to work at home or postponing the project. 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. It's more on the specific costs or expenses associated to COVID-19.
Yeah, Thiago Lofiego. We are not seeing a huge increase in the cost of that. 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 cold-rolling mill in Pesquería, because we are seeing ways and renegotiations of some contracts that we are seeing some savings there. In overall, we cannot see a huge impact on that cost as of today. 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. Apart from that, we are seeing only reduction in our costs. I hope with that we are more clear, Thiago.
No, that's clear. Thank you, guys.
You're welcome.
Again, if you would like to ask a question, please press star then the number 1 on your telephone keypad at this time. Your next question is from Alexander Hacking with Citi.
Good morning, and thanks for getting my name correct. I was excited to see what they were going to call me. Not Thiago. 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 your cost structure in the second quarter? 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 declines. Thank you very much.
Okay, Alex, are you all 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. It's also true that we are expecting to see some reductions in raw material costs. More significantly than that, is that we are expecting to adapt our facilities to produce at the level that we really need to supply our customers.
Specifically, for example, in the case of Brazil, where we are expecting to ship basically the same level of volumes to third parties, we are reducing the shipments to our own facilities in Mexico just to adapt the production level to the real needs of the facility and not to increase our inventory. This is clearly another way for us to reduce the cost of sustaining a 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 can have, or the overhead cost in our system. 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 overall over time. 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 a reduction, and we are making a lot of effort in the rest of our facility to adjust to the new current situation. This is the best way we have to cope with the reduction in prices and sustain as much as we can the level of EBITDA margin.
Thanks, Pablo. Just to follow up, you would view the cost savings and the EBITDA per ton generation in 2Q as sustainable in those market conditions. It's not just a one-off effect of inventory revaluation or something like that. Ternium could sustainably operate at these lower volumes and lower prices. Obviously, we expect some kind of rebound, Ternium could sustainably operate at those levels for a longer period of time. Do you understand my question? Does that make sense?
Yeah, that makes sense, Alex, 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 all will reduce first than the local producer. Though we can operate at a reduced level, we're seeing already, as was already mentioned during the call, some small 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.
Clearly in Mexico, where we have our main market, if there is a restart of the auto sector, as was already discussed, and reopening should see in the medium term after this second quarter a better level of volume. In any case, clearly, we have adapted 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 if there is a recovery in volumes, Ternium could go back to these specific levels.
Great. Thanks. Then just one follow-up, if I may. Any estimate for working capital for the rest of the year? Thank you.
Yes. Working capital, when Máximo already mentioned that all in all, just to put rounding numbers, we are expecting to have $600 million this year and next year. As you know, we already mentioned that we invested during the first quarter $250 million. The rest of the year is the difference to around $600 million. We have reduced the level of CapEx, and this is clearly a number. I think that was your question, Alex.
Sorry, I was asking about working capital, not CapEx.
Sorry. There was some noise in the line, I understood it was CapEx. Working capital, we will continue working in reduce the level of our working capital. As you know, when you have a significant reduction in volume, it's difficult to adapt very fast to have a reduction in working capital to be at the same level needed for the production level. We were able to have a positive working capital reduction during the first quarter. We believe that we will continue, at least during the second quarter, to make an effort to do that. It should be also a positive number during the second quarter.
Thanks, Pablo. Take care.
You too. Thank you.
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. In the meantime, take care and stay safe, all of you, and hope to see you or hear from you all 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.