Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Ternium Third Quarter 2018 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Sebastián Martí, you may begin your conference.
Good morning. Thank you for joining us today. My name is Sebastián Martí, and I'm Ternium's Investor Relations Director. Ternium issued a press release yesterday detailing its results for the Third Quarter 2018. This call is complementary to that presentation. Joining me today is Mr. Máximo Vedoya, Ternium's CEO, and Mr. Pablo Brizzio, Ternium's CFO, who will discuss Ternium's business environment and performance in the Third Quarter 2018. At the conclusion of our prepared remarks, we will open up the call to your questions. 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. Thanks all for participating in this call. As usual, I will make some brief comments about our performance and the current state of our main market, and then I'll ask Pablo to review our results in the Third Quarter of the year. Later, we'll go into a Q&A session. Well, as you read, we reported a record EBITDA level, in this Third Quarter. In the first nine months of 2018, Ternium's EBITDA reached $2.1 billion, a 50% increase compared to the same period last year. So far in 2018, we've had a 25% EBITDA margin, equivalent to an EBITDA per ton of $215. We expect to report healthy EBITDA again in the Fourth Quarter of the year, although lower than the EBITDA levels we've just reported for the Third Quarter, mainly as a result of sequential decrease in EBITDA margins.
The very strong operating performance Ternium showed in the first nine months of the year translated into earnings per ADS of $5.79. On the other hand, even after the acquisition of CSA in September of last year, Ternium's balance sheet is as solid as ever. Free cash flow generation has been strong so far in 2018, reaching $847 million in the first nine months of the year, taking net debt just to $2.1 billion as of the end of September. This is just 0.8 times last 12 months EBITDA. Going into the development of our main markets, since our last call, Mexico, the U.S., and Canada successfully renegotiate NAFTA. Well, now it's renamed USMCA, but let me just refer to it as new NAFTA in this conference call. For us, this is a very positive development.
The new NAFTA changed some things from the original NAFTA agreement, made some things a little tougher, but in generally, we see this as a positive for the industry. This agreement also significantly reduced the uncertainty that was preventing many investment decisions from going ahead during the last year. I will not go into the details of this new agreement. I'm sure that you already have gone through it. We can expand in the Q&A session. I would like to point out that the introduction of several changes, particularly to the rule of origins, mainly in the auto industry, should ensure a much higher participation in the final product of regionally produced high-end steel. There were no rules on the original NAFTA related to the steel content in car.
These are very good news for us, for Ternium, as one of the main avenues of growth for our company over the last year has been the expansion and sophistication of our high-end steel production facilities, targeting the auto industry. We built our Pesquería facility in Mexico five years ago. Last year, we acquired a state-of-the-art slab mill in Brazil. A year ago, we announced the investment program to further expand the capacity of the Pesquería facility and to integrate it with our new slab mill. This growth path will bring Ternium to an unmatched competitive position as a provider of high-end steel products in the Mexican market. As I said, we are very pleased with the new NAFTA.
I think there are still some issues of trade that are not yet solved, mainly the application of the Section 232 from the U.S. to Mexico. When the U.S. imposed a 25% tariff to imports of steel from most countries in the world, Mexico and Canada were not exempted. Now that the three countries have reached an agreement on this new NAFTA, it make no sense to maintain Section 232 tariff for Mexico and Canada. This will probably change when the three countries formalize the agreement. What remains to be seen is how this is going to change, if Mexico and Canada are going to be exempted from the current tariff, or if there is going to be a quota system like the one negotiated between the U.S. and other countries like Brazil, South Korea, and Argentina.
Ternium doesn't export much steel to the U.S. Our position, and the position of all the Mexican steel industry, is that Mexico should be exempted. At the end, the U.S. export more steel to Mexico than the other way around. Any tariff or quota imposed to Mexico should be mirrored by the Mexican government. This would hurt more the U.S. than the Mexican steel producers. Let me now turn to Argentina. As we mentioned in our last call, the economic situation in Argentina changed significantly during the last couple of quarters, as international financial market lost confidence in the country and there were less favorable financing conditions for emerging markets in the world. Following a 30% depreciation of the Argentinian peso in the second quarter of 2018, the currency depreciate another 30% in the third quarter.
This prompt another increase of interest rate, taking them to an annual level of around 70%, which stabilize the local currency market at a cost of strongly affecting economic activity. Everything points out to slow shipments in Argentina in the fourth quarter, as well as in the first quarter of 2019, which in Argentina, this first quarter, is a seasonally weak quarter. After this, we have better prospects for the country. With the election uncertain in Brazil over, an ongoing process to stabilize the fiscal balance in Argentina, a recovery of the agribusiness activity, and a continued strength in the energy sector. Finally, in the third quarter, we began applying IAS 29 to the financial reporting of our Argentine subsidiaries. This has several effects in the accounting mechanism from the third quarter 2018 and on. Also, we have to re-express accordingly the first and second quarter of the year.
Pablo will expand on this later. Regarding Ternium's expansion project, the work at Pesquería facility and Colombia are advancing on plan. The new galvanizing and pre-painting lines in Pesquería should be up and running during the first half of next year. With all this, we are very excited with the changes Ternium is going through and the opportunities they will bring us to increase shareholder value. All right. Please, Pablo, go ahead with the comments about our performance in the third quarter, please.
Thanks, Máximo. Good morning, and thank you all for participating in our call. As Máximo said, let's review now the performance of the third quarter and the first nine months of the year. As already anticipated, our performance in the third quarter was exceptional. We record EBITDA level of $832 million, higher than the EBITDA in the second quarter, and significantly higher compared to the same quarter last year. Before we continue, let me remind you that starting in the third quarter, we have applied the International Accounting Standard 29 to the financial reporting of Ternium's Argentine subsidiary. This means that financial reporting of our subsidiary in Argentina has been adjusted to take into account the effect of inflation. Consequently, figures report for the first and the second quarter of the year has been re-expressed to reflect end of September constant value of the Argentine peso.
This is why you will find that figures reported in yesterday's press release for the first and the second quarter of the year differed from the original disclosed one. Going now to page three in the webcast presentation and looking at Ternium's EBITDA per ton on the lower left side and EBITDA margin on the higher right side, we reported a margin of $265 per ton in the third quarter, or 29% of net sales, as revenue per ton increased and operating cost per ton decreased. As for net income, in the second quarter, we reported $523 million, equivalent to earnings per ADS of $2.49. This means $0.93 sequential increase, due mainly to higher operating income and lower effective tax rate, partially offset by higher net financial expenses. We will now review, in the next page, our shipments performance.
In the third quarter, finished steel shipments decreased in Mexico and southern region, and remained relatively stable in other markets. The decrease in finished steel shipments was partially offset by higher shipments of slabs to third parties, mainly in the U.S. market. As you can see in the lower right chart, shipments of slabs to third parties fluctuated every quarter, and the balance of slabs production in Brazil is consumed internally. The combined effect of what we have just mentioned resulted in consolidated steel shipments decreasing 5%. Looking forward to the fourth quarter, which is seasonally weak period, we expect slight sequential reduction of steel shipments. Part of this decline will be related to lower slab shipments to third parties, and consequently, higher internal slab consumption. Industrial markets in Mexico continue showing steady demand, while commercial market, usually driven by construction activity, remain weak.
In Argentina, as Máximo anticipated, financial market volatility and high interest rates continue to have a negative impact in industrial sectors production rates and construction activity. This event, together with the restocking process in the value chain caused by high financial cost, will also affect the level of steel shipments in the country. Please turn now to page five to review the drivers of EBITDA and net results in the third quarter and the first nine months of the year. The upper chart depicts sequential changes in EBITDA and net income in the third quarter, and the lower chart show year-over-year changes in the first nine months of the year. Looking at improvements in the third quarter, the upper left chart, EBITDA per ton, increased sequentially, reflecting a good level of steel prices in the U.S. and Mexican market, as well as slightly lower consolidated cost per ton.
On the other hand, shipment decreased 5%, as already mentioned. In the fourth quarter, we expect to report strong EBITDA levels, although lower than record EBITDA we reported in the third quarter of the year, with lower EBITDA margin and slight reduction in steel shipments. We anticipate a sequential decrease in revenue per ton in Mexico, reflecting a decrease of steel prices over the last three months. We also expect cost per ton to rise at our Mexican subsidiary, as higher prices of previously purchased slabs gradually flow through the cost of sales. On the upper right chart, we can see the increase in the third quarter net income. The main drivers of the improvement were higher operating income and slightly lower effective tax rate, partially offset by higher net financial expenses.
The decrease in the effective tax rate was mostly related to the Mexican peso fluctuation against the U.S. dollar. The Mexican peso 8% depreciation in the second quarter and 6% appreciation in the third quarter produced significant non-cash sequential changes on deferred taxes. Let's review now the drivers of EBITDA improvement in the first nine months of the year on the lower left chart. On a year-over-year basis, EBITDA per ton increased with the help of an overall strong steel price environment in the world steel market, as well as lower purchase of third-party steel in 2018 during integration of Ternium Brasil. On top of that, shipments increased 1.8 million tons year-over-year, mainly due to the consolidation of Ternium Brasil slab sales to third parties. Let's now review the increase in net income in the first nine months.
There was a $386 million year-over-year increase in net income on strong operating income. This improvement was partially offset by higher net financial expenses, with effective tax rate remaining relatively stable. There were significant year-over-year increases in net financial expenses, mostly related to currency fluctuation in Argentina and other markets that were partially offset by gains related to inflation accounting over the net short monetary position. There was also slight increase in interest expenses, mainly reflecting higher net indebtedness following the acquisition of Ternium Brasil in September 2017. To better understand this effect on our financial results, which were mainly non-cash, let me remind you that the Argentine peso depreciated 55% against the U.S. dollar in the first nine months of the year, compared to the 8% depreciation in the prior year period, and that Ternium Argentine subsidiary use the Argentine peso as their functional currency.
Please turn now to page six. This is the last page in our presentation, where you can see the evolution of free cash flow, capital expenditure, and net debt. As Máximo commented, free cash flow in the first nine months reached a very strong $847 million. Capital expenditures were $345 million in the period, higher than in the same period of last year, mainly due to the consolidation of Ternium Brasil and the works being carried out in the Pesquería facility. Looking forward into the fourth quarter, we expect to continue showing a strength in cash flow generation in line with our strong EBITDA expectation. We expect capital expenditure to start picking up, specifically during 2019, due to the development of our new hot rolling mill in Pesquería.
Finally, Ternium net debt decreased to $2.1 billion at the end of September, reflecting the strong free cash flow in the period, less the dividend paid, and represents a comfortable level of 0.8 times EBITDA. Thank you very much for your attention. These were all my prepared remarks. Please, let's start the Q&A. Operator, please, let's proceed with it. Thank you.
Okay. Ladies and gentlemen, to ask a question, please press star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Leonardo Correa with BTG Pactual. Actually, your line is open.
Yes. Good morning, everyone. First of all, congratulations on the strong results to everyone. My first question is still regarding Argentina. I just wanted to explore some of the impacts, guys, going forward. Many parameter changes in Argentina. As you mentioned in the report, clearly the domestic environment is quite challenging for steel operations. We've been seeing a dramatic currency move. Typically, when we observe past price moves in these environments, we note that the pass-through is quite incomplete. I just wanted to get a sense of how profitability in Argentina should evolve going forward. If you guys can comment on the outlook for volumes in 2019.
I know that it could be a bit premature, just to help us to try to map out what type of scenario for Argentina, given that this has been a main concern for some investors over the past couple of quarters. The second point regarding CSA. Clearly the operational numbers coming from CSA have been quite strong. Looking at the volumes in other markets, they also surprised on the positive side. If possible, guys, can you provide a bit more clarity on the type of contribution on the profitability side and also on absolute EBITDA coming from CSA? Those would be my questions. Thank you very much.
Thank you, Leonardo. We start with Argentina, your first question, there are several questions that you made about that. Of course, Argentina, today is in a very difficult position, we all know what is going on, it has been going on for the last two quarters. Regarding first price, today prices in Argentina of steel are stabilized, they are in line with the Brazilian prices. Of course, they are not as high as the U.S., they are in line with the Brazilians. We don't expect many changes in the short term regarding that. Regarding volume, the World Steel just released how the volumes in Argentina are going to change, we pretty much are the same that we are seeing. 2018 will be between 6% and 7% down, we are seeing an increase compared to 2018 in 2019.
This increase is of 2%, it's a change in the current situation. In my initial remarks, I said that the Argentina situation was problematic, I think also I mentioned that there were several things that are supporting an increase in demand beginning in the second Q of 2018. 2019, sorry. Commercial balance is reversing for the first time in many months. Last month, finally, there was a positive commercial balance, that probably will continue. The peso has stabilized. The tourist is increasing. The energy flows are reversing, which also helps in the commercial balance. Agriculture business should be much higher than last year. I think that the last thing that should happen is that interest rates start going down. When that happens, I think, as I said, the volumes will start going up.
Of course, it is still very early to say that all this is going to happen 100%, but the volumes in this quarter and next quarter are already very small for our usual business. I think, again, 2019 will be a little bit better. Regarding CSA, Pablo?
Yeah. Okay.
Ex-CSA.
Ex-CSA, yes. Ternium Brasil now. Hi, Leonardo. How are you? I understand the concern that you have, and we have been trying to give you or give the market in advance the situation in Brazil, which will cause some volatility in the volumes because, as you know, what we'll be reporting is the sales of slabs to third parties.
Clearly, the slabs that we produce in Brazil and send to our operation are not reflected as sales. Depending on the total trade that we have with third-parties and the needs that we have internally, this is what is reflected in the number of sales that can fluctuate quarter-over-quarter and can make the total shipment that happened during this quarter and what we are predicting the coming quarter, where we are expecting to see some reduction in shipments to third-party and increase in shipment to our own facilities to be reflected there. The margins that we are generating, and unfortunately we are not disclosing specific numbers for our Brazilian operation, clearly has been better than initially expected because of the increase in volumes that we have achieved in our Brazilian operation and the reduction in cost that we were also able to achieve.
I guess that you remember what was mentioned by Máximo and Marcelo Chara in our investor day. Also we have, specifically in this quarter, the devaluation of the currency that helps in order to reduce the real input cost. All in all, the margins in Brazil are very good, and the fluctuation that you see in sales is basically related to that.
Perfect. Thank you. Would it be possible to provide just the operating rates from CSA, Pablo?
As you know, we set a target at the beginning of the year. Clearly at the end of the year, we will be commenting on the operating performance of CSA. Clearly, we will be doing that.
Okay. Thank you very much, Pablo and Maximo.
Thank you.
Your next question comes from Thiago Lofiego with Bradesco BBI. Your line is open.
Thank you, gentlemen. Two questions on my side. First one, just on the recent development regarding the Mexico City airport. Do you guys see any possible implications to Mexican steel demand given the more, at least apparent, uncertain environment for companies? Do you see a potential slowdown in infrastructure investments or any risks to your own growth plans in Mexico? Within that question, what's your outlook for Mexican steel demand growth for 2019? Second question, what could be the potential increase in slab capacity in CSA? Can you give us an update on that? Thank you.
Thank you, Thiago. Let me start with the Mexican environment and yes, the new news of the cancellation of the new airport. On the short term, we don't have any business with the new airport, so we don't have any direct impact at Ternium because of this cancellation or not. Clearly, the cancellation is not a good news. The new office or the new government, it's still not yet in office. After the election, I think they made some very positive things. It was really positive, the attitude and the things that they were doing. One of them was the participation in the NAFTA negotiations. It would not have been possible to close the deal without the direct involvement of the new administration. I think that was one of the positives. The decision of canceling the airport clearly is not a very good decision from a business perspective.
I think it's a setback. To be fair, Mr. López Obrador has been very vocal about his opposition to this infrastructure project for the last eight years. Although we didn't expect, it was something that could happen. If this is going to have a setback in our plans or what we think of the Mexican growth for next year, not yet. On the contrary, I think this government, it's very outspoken in increasing infrastructure. As you know, we have been talking about this for a lot of quarters. For the last two years, construction in Mexico, the commercial market in Mexico has been almost the same because there was a huge decrease in spending of the government infrastructure, which was compensated by the increase in the private investment. Last quarter, both of them decreased also. That's what you've seen in our shipments in Mexico.
I think that this government wants to change that. I don't think spending in infrastructure will decrease. On the contrary, I think it will increase. Private spending, on the other hand, it has to increase. I think, again, the closure of NAFTA is something very good. The airport is not something very good. I think we have to wait to see what will happen with the private one. Although I don't think it's going to be worse, I don't know if it's going to improve a lot because only of the NAFTA. I think with that, I
Thank you, Máximo. Actually, if you can give your view on the-
The other one was?
Relationship with the slab production in Mexico.
Mexican steel demand growth for 2019, actually.
The Mexican steel growth. World Steel, which are the only official numbers, just released. They said it is 1.2%, the growth for 2019. I think that's correct. Remember that Mexico has a lot of imports. For us, we are expecting to gain market share against imports. The consumption is growing. It's not growing by a lot, but it is growing. We have this upside of how able we are going to be to compete with these imports. The increase in slab production, today we are producing at a rate of roughly 4.7, a little bit more than 4.7. You know when we took was 4.3, I think, the annual rate, if I don't remember. The expectation is to reach 5 million tons in 2020. That's our expectation.
Of course, we'll continue analyzing as we do in all our assets, if that could increase a little bit more.
Just to make it clear, Máximo, the increase to 5 million tons, that's when you go to your nominal capacity, right? Installed capacity, 5 million tons.
Exactly.
Are you envisaging any potential capacity expansions at CSA?
No. Today we are not seeing that. What we are looking at is what are the bottlenecks where we can have marginal increases, but not a huge expansion.
Okay. Thank you, Máximo. Very clear.
Your next question comes from Carlos De Alba with Morgan Stanley. Your line is open.
Thank you very much, everyone. Good morning. I would like to understand how you see the evolution of EBITDA per ton in Ternium, Argentina, or the southern region, given the accounting effect that you have, given that the functional currency in the country is local. What can we expect, contraction in EBITDA per ton, I think is what we will see. If you can quantify, give us a little bit of more color as to what you are seeing, that would be really useful. Given the relatively weak shipments in Mexico in the third quarter, can you tell us how is your order book looking for the fourth quarter? Do you expect to see a recovery in volumes? I don't think that in the outlook that was provided on page three of the release, there is any comments on volumes in Mexico.
Any color there would also be useful. Thank you.
Thank you, Carlos. I'll take the second one first, if you don't mind, then I think Pablo is much better expert in accounting than myself to explain the first one. Shipment in Mexico, we expect today to be rather flat in the fourth quarter. You know the fourth quarter in the commercial market, usually it's a slow quarter, but it's better in the industrial market. We don't see any changes from the third quarter in our order book. We expect something similarly in the next quarter. I don't know if that answered the question, Carlos, or?
Yeah. That's good. Yeah. Good call.
All right. Pablo?
Yeah. Okay. Hi, Carlos. I understand that the issue of inflation accounting is causing some doubt on the number, the big impact of inflation accounting was we had up to now because we needed to adjust our numbers since the last time that we did adjust the number, which was back in 2002. There is where we have the big impact. From now on, the impact will be reduced, if you want, to the difference between the inflation rate and the exchange rate at the end of the quarter. What you will see, for example, if during the fourth quarter, on average number, you have the same devaluation as of inflation rate, there should be no impact because of that. Going exactly, or directly to your question, we have not seen that any of these adjustments will have a negative impact in the margins in Argentina.
In fact, the margins during the third quarter were reasonable margins, and we are expecting to see margins in the fourth quarter at the same or even a little higher levels than what we saw up to now.
Pablo these margins, when you see. Well, yeah. EBITDA margin doesn't really matter if it is.
Exactly
In pesos or in dollars. My question was more than the application of IAS 29, was on the fact that the impact of the rapid moves in devaluation in the inventory and the cost once it flows into the P&L, given that the currency has devalued in the last 9 months, and you have been purchasing raw material and put them in your inventory in pesos. When do you expect to see? Obviously, when it flows into the income statement, it has been providing a positive boost to EBITDA there. When do you expect to see a change in this trend? How big of an impact do you expect that we will see?
It's clear. Of course, probably the significant impact is not the inflation accounted by, but the devaluation, as you put it. Since we have peso as our accounting currency in Argentina, clearly the value in dollar terms after the devaluation of the currency of our inventories is lower. The cost of the following quarter show a decrease. We are expecting this to continue in the fourth quarter and should start to normalize beginning of next year, most probably entering into the year or entering into the second quarter. All in all, we are expecting to continue to see good levels of margins coming out of Argentina.
Right. Thank you very much.
You're welcome. Thank you.
Your next question comes from Rafael Cuno with Credit Suisse. Your line is open.
Good morning, everyone, thank you for the question. My question is still on the line of prices. More specifically, could you update us on where we stand on the gap between prices in Mexico and the U.S. currently? How do you see it behaving going forward, given the developments in NAFTA and a protectionism scenario on a global scale? Also, in your outlook section on the earnings release, you mentioned value chain destocking in Argentina. I was just wondering if you could expand on producers and clients stockpile levels throughout the chain in both the relevant markets in Mexico and also in Argentina. What lines of products do you see as more overstocked than others? If you could give us a color on that would be very helpful. Thank you very much.
Thank you, Rafael. Prices. Prices in both Mexico and the U.S. trended down during the past three months. I think that local Mexican price has been, I think, a little bit more affected as a result of the decrease in the commercial demand, connection with the weakness in the construction industry that we talked a little bit before. If you remember our last conference call, and the other one, I think the last two conference call, we were talking about the gap between the U.S. and Mexico, because after the two, three in history, the prices were much more related, and they were kind of similar. Today, there is a gap between both prices because of the 2-3-2. What will happen? I think current prices in Mexico are in a sustainable levels.
I think that a positive outcome, if the 2-3-2 is solved between the U.S. and Mexico, this could be a good news, or would be a good news. Again, that depends if the 2-3-2 is solved somehow. If not, I think we are going to continue with the gap we had this quarter, and the following quarter, we'll continue with the same gap.
Okay, Pablo? Okay, I'll take the second one, Rafael. Thank you. Clearly, when we see a situation like the one we saw in Argentina, we understand it's quite normal to see this stocking process because at the very end, the Argentine market was working at a level which was quite high as of the end or at the beginning of the second quarter. Then we started to see a reduction on demand. Our customers, clearly, that were working with inventory levels that were related to the volumes or the level of the volumes that you saw previously, clearly start to reduce this inventory because, of course, also because of the interest rates that we see in Argentina, it's a significant cost for them to maintain a level of inventory, which is higher than what they really need for the new level of shipment.
For us, it's something that is normal when we have this type of situation. You are seeing a reduction in demand because of the reduction in growth in the Argentine economy or the recession that we are seeing for these quarters. The second one is the adjustment of our customers' inventories to the new reality. In these cases, usually takes a couple of quarters for them to do that. We are expecting to see a normalization of this again beginning of next year.
Thank you very much.
You're welcome.
Your next question comes from Marcus Sinco with Itaú. Your line is open.
Hi, good morning, everyone. Congrats on the strong results. First question is on the outlook for the gap between HRC and slab prices. How do you think that could impact your EBIT per ton going forward? Second question on Argentina, just about prices. When do you expect to recover the prices that we were seeing one year ago? When we look at the southern region average revenue per ton, we see that number is still 20% below today of what was one year ago. Just a last one on the new NAFTA, if you still have the same views on auto production growth in Mexico following the new agreement. That's it.
Thank you, Marcus. I start with the last one because.
You like the other one.
I like the new NAFTA. I think, yes, Mexican automobile production this year will end up around 4 million units, and I think that with the new NAFTA, there is going to be an increase in that production. I think that there are going to be two effects. I think that more people, if they want to sell in NAFTA, are going to produce cars in the region, number one. Number two, the rule of origins or the rules to make what a car is NAFTA has changed. I think that in the long term, there is going to be an increase in the consumption of steel because of this. I do not know if everybody knows, but the old NAFTA said that a car, in order to be NAFTA, of NAFTA origin, has to have 62.5% of local content. That local content was calculated in a very particular way.
Steel, for example, and many other products were not taken into account in that calculation. You can have steel from China or Japan and produce a door in Mexico, and that door will be NAFTA origin. The new rules have three sets of standards in order for a car to be NAFTA. This first one is also the local content and goes from 62.5% to 75% in four years. The second one is that 70% of the steel and aluminum has to be coming from NAFTA. The third one is that part of the production has to be made in places where workers earn $16 an hour or more. All these three things, I think, put together a situation where more cars and more local content has to come from NAFTA.
I think that yes, there's not yet any publication of what is going to be these 4 million units in a couple of years, but I think it's going to be a little bit higher. I don't know if with that I answered that question. Yes.
It did. Thank you.
Second one, prices in Argentina. Pablo can explain it a little bit better, but the price you are seeing or the decrease you are seeing in prices is because of this inflation adjustment. Pablo, why don't you explain it very detailed?
You should not compare what you saw in the last conference call or in the last quarter results because that numbers were not adjusted. As I mentioned at the beginning, by applying the new rules, we need to adjust every number to basically as of September 30 this year. In order to see a comparison, you need to look at the numbers that we are publishing now in order to look at the comparison. Clearly, adjusting by inflation, what makes is for you to increase, in this case, the level of sales, and then you divide that number by the exchange rate that applied at the end of the quarter.
That's the number that you need to look, and just to make things a little bit more complicated, next quarter, in the fourth quarter, we will be adjusting again all numbers in order to reflect the reality as of December 31st. You will see probably a further increase on that side. I think that the important thing is what Máximo said, when he was answering another question, which was that the prices in Argentina are reflecting international prices and are at the level of what we see in Brazil as steel prices.
Marcos, the first question regarding slab prices, I think the prices have increased a little bit over the last couple of months. What will happen in the future? I think there are three things. One, in the negative side is the U.S. is producing a little bit more steel, although I don't think that effect is going to be very high. On the other side, raw materials are increasing, and that should put pressure on slab prices. The second one is that during 2019, there are going to be some disruption in slabs production in several facilities that produce slabs in Russia and in Brazil. I think that it's going to more than compensate what is happening in the U.S. I don't expect prices to be much different than what they are today.
Okay, Máximo. Just a follow-up here. Why you're seeing the disruptions in slab productions in Russia and Brazil?
Because the-
My question was more on the gap between HRC and slab prices. How do you see that evolving going forward?
The disruption comes from some industry that had to make huge or long maintenance in blast furnace and in the continuous casting. That's the issue. The gap, you're referring to the gap between the U.S. and the slab prices? Or where?
I would say global prices. The differences between HRC. HRC prices were very high, mainly in the U.S., and that impacted also Mexican prices. Slab prices. I think that for the part that you are non-integrated, that impacts your margins, and that's why I want to see a little bit of an overview from you on how do you see the difference between those prices.
I understand. Overall, we are integrated, remember, because although we are buying slabs, we are also selling almost the same amount of slabs. It's not going to affect us very much that margin or that gap for Ternium's results. The gap today, and against the hot roll prices, are decreasing a little bit. I don't see major changes, again, in this gap today. I think that the prices in the markets are set to continue in this pace. Slab prices, although have come down a little bit, I don't see that they are going to come down much more.
Perfect. I got it. Thank you very much.
Your next question comes from Alfonso Salazar with Scotiabank. Your line is open.
Thank you. I have a couple of questions here. The first one is regarding the new NAFTA. My concern is with the new introduced one, the labor value content provision, which specifies that 40% of the auto value content must come from manufacturing sites with wages of at least $16 an hour. Don't you think that that could make production going back to the U.S. or Canada, or at least slowing out the production in Mexico? That's my first question. The second one is if you can give us an overview of demand and profitability in other markets, and I'm thinking about Colombia, in the coming years. The third question, if you can remind us what is the CapEx estimates as you expand in the coming years. Thank you.
Perfect, Alfonso. Thank you very much. NAFTA. I think that the 40% rule of labor that are above or equal to $16 an hour, I think it's going to increase production. I think it's going to increase production in the U.S. also, but I think it's going to increase production in all the regions. Remember, the 40% has a way also of calculating how this 40% is done. 15%, at least 15% of that can come from things that are already paying more than 16 hours. For example, research and development and other things. It's hard, but we have been talking to several people or several of our customers. It seems that they're going to make it to this 40%. We are confident that they are going to stay in Mexico, in the country, and they probably will increase a little bit.
Other markets, I think Brazil is doing much better to be honest. If you saw the Usiminas numbers that came out a couple of weeks ago, the market is increasing, volume are increasing. We're still predicting that the steel consumption in Brazil, sorry, is going to increase to almost by 6% next year. I think the elections at least bring some confidence to the market, at least for what we are seeing in the market. I think that Brazil is going to bring us good news. Colombia is a market that is more focused on construction or commercial products. The last couple of quarters has not been very good for Colombia. Construction has decreased for almost seven quarters in a row in Colombia. I think that with the new government, things should start to improve in the beginning of next year.
Argentina and Mexico, our other main markets, I think we discussed it extensively. CapEx would be around $800 million next year. This year will be a little bit less than $500 million. Next year, $800 million. 2020 will be probably around $1 billion, because that will be the peak of our new Pesqueria investment. 2021 will probably come back to normal of $550 million.
Very good. Thank you.
Your last question comes from Timna Tanners with Bank of America. Your line is open.
Yeah. Hey, good morning, and thank you. Wanted to ask other stuff, too. I know there's a multiple question thing here, but I wanted to ask about a little bit more detail about why you're so convinced of taking share from imports into coming years with new supply, just in light of the fact that there's also new supply coming on in the U.S., about 10 million+ tons over the next several years. China's consuming fewer tons. Just wondering a little bit more about why you think that Mexico can be more self-sufficient. Second question is just, in light of the really strong results this last quarter and a rise in price environment and a reversal a bit in next quarter, how do we think about more normalized profitability per ton?
Do you think that we have out-earning in this quarter, under-earning in the next quarter, and then maybe more normal if prices stabilize, or am I missing something? Thanks a lot.
Thank you, Timna. I take the first question. I think there's a couple of things. China is not decreasing consumption. On the contrary, China is increasing consumption today.
Right.
Supposedly, this is, of course, supposedly, but is decreasing production. I mean, it's shutting down capacity, and there's a huge discussion because they have a lot of capacity that was not recognized but was producing anyway. It's very difficult to compare numbers. I think China will continue with some restriction, with some environmental restriction, and consumption is increasing. If China will continue with this, trying to put more investment as they are. It seems that they are doing that. Consumption will continue strong in China. In Mexico, there are almost, in flat products only, 8 million imports. I think that Mexico is a place more competitive to produce steel than the U.S. That's why we think that we are much capable of getting that share and competing with the U.S. There is a logistic much near.
Our customers are very near our facilities. We don't see a disadvantage. I don't know if this answering the question, I'm very confident that we will be able to gain share of imports with this new facility.
Okay, Timna, let me take the second question, which is not an easy one to answer.
Sorry.
Clearly, we are running at EBITDA margins, which is how we look to see at these numbers, and the consequence of that is the EBITDA per ton, at very high levels. Clearly, that's the case. This has been the case for the last, I would say, couple of years. Remember that we always said that we expect to run our company at a level of above 15% to up to a 20% EBITDA margin. Clearly, we have been overpassing that level in the last couple of years, especially in this year. The integration of CSA, now Ternium Brasil, is a key component of this increase in margins. Of course, helped also by the increase in prices that we saw in the North American market.
Even as we see and we have been describing, Máximo gave a lot of details on the gap that we are seeing, and it has been the case in the last quarter between the prices in Mexico and the prices in the U.S., signaling that, in fact, the prices in Mexico has been not that high or outperforming as we saw in the U.S. What we are seeing is that we already, in our outlook, have said that we're expecting to sustain a healthy level, not only of EBITDA as a number, but also EBITDA margin, clearly not at the levels that we saw during this quarter. Also, as you know, and we have been describing this for years, and especially in the last Investor Day, we will continue working as much as we can in order to control or reduce cost.
One question that was answered by Máximo, he is showing part of that, is not that we only are expecting to reduce cost, but increase the capacity utilization in our facility, especially the one in Brazil, to levels that will match the nominal capacity of that facility. All in all, we are expecting to continue to show very strong EBITDA margin and EBITDA per ton. Clearly, we cannot tell you that we will sustain the one that we have just showed. We understand that we will be able to sustain at healthy levels of EBITDA margins. Hope to answer your question, Timna.
Okay. Sure. Thank you.
You are welcome.
There are no further questions queued up at this time. I turn the call back over to Ternium CEO for closing remarks.
All right. Thank you everyone again for participating in our conference call. I hope you found the call useful. As always, feel free to contact us for any comments or additional questions, and we'll see you or talk with you in our next conference call in three months. Thank you very much.
This concludes today's conference call. You may now disconnect.