Ternium - Earnings Call - Q1 2018
April 26, 2018
Transcript
Speaker 0
Ladies and gentlemen, good morning, and welcome to Ternium First Quarter twenty eighteen Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the conference over to Mr.
Sebastian Marti. Please go ahead, sir.
Speaker 1
Good morning, and thank you for joining us today. My name is Sebastian Marti, and I am Ternium's Investor Relations Director. Ternium issued a press release yesterday detailing its results for the first quarter twenty eighteen. This call is complementary to that presentation. Joining me today is Mr.
Maximo Obedoya, Ternium's CEO and Mr. Paulo Britschio, Ternium's Chief Financial Officer, who will discuss Ternium's business environment and performance in the first quarter twenty eighteen.
Speaker 2
At the
Speaker 1
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. Veloce.
Speaker 2
Thank you, Sebastian. Good morning to everyone, and thank you very much for participating in today's call. I would like to begin with some brief comments about our main markets, then Pablo Bricio will describe our performance in the first quarter of the year and at the end we'll have a Q and A session. Let me start by sharing a brief highlight of our results. We had a strong set of numbers in the first quarter driven by higher shipments in Mexico and higher prices in all our markets.
Revenues reached $3,000,000,000 on shipments of 3,500,000 tons. EBITDA was $665,000,000 increasing 32% compared to the fourth quarter. Net debt to EBITDA ratio, which continued to trend down, was at 1.2 times at the March, a very strong financial position. And as we anticipated in yesterday's press release, we are expecting a better performance in the second quarter. Going to the state of the markets in The Americas.
In The U. S, a strong end use demand, fairly high capacity utilization and relatively balanced inventory are supporting a healthy environment for the steel industry. Also steel prices have increased significantly during the last month. The introduction of Section two thirty two certainly contribute to this increase. And it is true that there is still some uncertainty regarding the final reach of Section two thirty two.
Many countries are in the process of negotiating exceptions. In the case of Canada and Mexico, these exceptions will probably link to the NAFTA renegotiation. Other countries like Brazil, Argentina, Europe and Japan are discussing their exceptions with the U. S. Government.
My view today is that they will have some sort of exemptions and probably this will come in a way as the exception that the Korea government negotiate with some sort of quota. Also other countries are analyzing the need of their own trade measures to avoid any collateral effects from unfair trade steel that could develop as a result of the application of the two thirty two in The U. S. Europe is an example of this. In the same way, the Mexican government is analyzing the renewal of the safeguard against steel imports that expired a few days ago.
And clearly the outcome of these trade related issues will likely influence future steel prices performance in these markets. But regardless of what the final outcome is, I believe that the issue of unfair trade is today on the table of most of the countries in the world and that is a very good news for the steel industry. Let's go now to Mexico. In Mexico, the industrial market remains strong with manufacturing in general having a good performance. The commercial market more related to construction is a weak point.
Realized prices will continue increasing in the second quarter in Mexico as contract sales with industrial customer reset under a stronger pricing scenario. Cost should also increase in Mexico in the second quarter, but to a lesser extent than realized prices, mainly as a result of higher price slab flowing through inventories as it takes some time for Ternium's cost of sales to reflect the rise in slab prices during the first quarter of the year. Regarding our investment program, the expansion project at Pesqueria facility are advancing at plant. The new coating lines will enable us to grow our participation in value added market mostly displacing imports and should be ready by mid-twenty nineteen. On the other hand, the hot rolling mill will allow us a far greater level of integration with our Brazilian facility after its completion by the 2020.
Going to Argentina, we have a strong performance also in the first quarter. This was related in part to the depreciation of the local currency that helped in the cost side as Ternium Argentina uses the Argentine peso as a functional currency. Demand and pricing will continue doing well during the second quarter, although cost per ton should increase as the effect of the currency depreciation we saw in the first quarter should decrease. At the same time, a significant drop in Argentina will affect the agribusiness and consequentially impact Argentine's GDP this year. But the good news is that GDP will be positive for the second year in a row and probably the same will happen next year.
The sustainable growth we expect in Argentina in the following years is something that has not happened for a while in that country. Finally, going to Brazil, Ternium Brazil continues in a very good path from a production point of view. We are gradually increasing the integration between Brazil and Mexico and profitability at the Ternium Brazil is also improving as seaborne slab prices are higher now than they were at the beginning of the year and prices of raw material have been drifting slightly lower lately. All right, I stop here and ask Pablo to go ahead with his comments about the first quarter and then we'll have more time for the Q and A session. Pablo?
Speaker 3
Thank you, Maximo. Good morning and thank you to all for participating in our conference call. Let's review our performance in the first quarter of this year. Please, if you can turn to Page three on today's webcast presentation. As Maximo mentioned, our performance continues to be strong in the first quarter of the year with EBITDA of $665,000,000 significantly higher than EBITDA in the fourth quarter last year.
Looking at earnings EBITDA per ton on the lower left side and EBITDA margin on the higher right side, we reported a margin of $189 per ton in the first quarter or 22% of net sales, reflecting higher prices in all turning markets and slightly decrease in operating costs.
Speaker 2
As for net income, in
Speaker 3
the 2018, we reported $422,000,000 equivalent to earnings per ADS of $1.87 a $0.95 sequential increase mainly due to higher operating income and a lower effective tax rate. In the following page, we can see that in the first quarter, Ternium's net sales in Mexico increased 16% sequentially due to a 10% increase in shipments to a new record of 1,800,000 tons and to a 6% increase in revenue per ton. As Maximo mentioned, we anticipate for the second quarter healthy level of the steel shipments and an increase in revenue per ton. Let's go now to Page five to review the performance of the Southern Region. As anticipated, steel shipments remain at strong level in the first quarter of the year despite the seasonal weakness of the first quarters in Argentina.
And steel revenue per ton increased 3%. We expect a slight increase in shipments in the second quarter and somewhat higher revenue per ton. In the next page, number six, we can see that other market shipments decreased slightly as a result of lower slab shipments to third parties compensated by a higher level of integrations among our facilities. For the same reason, in the second quarter, we expect slab shipments to third parties to decrease further. Revenue per ton increased 7% reflecting higher slab prices.
In the next page, we see the combined effects of these developments on our consolidated net sales. We have shipped a total number of 3,500,000 tons, consolidated sales grew 7% and revenue per ton 6%. If you can turn now to Page eight, so we can see the drivers of the first quarter EBITDA. As already discussed, steel prices increased in all turning markets, steel cost per ton slightly decreased and steel shipments increased in Mexico, partially offset by a decrease in other markets. The decrease you see in the other column is mainly related to the €43,000,000 non recurring gain related to our sales of electricity in Mexico that were reported in the fourth quarter.
We expect sequentially higher EBITDA in the second quarter of the year with higher EBITDA margin as higher prices in Mexico will be only partially offset by higher cost per ton. Let's now review net income on Page nine. There was a $224,000,000 sequential increase in net income in the first quarter, mainly due to higher operating income and a lower effective tax rate, partially offset by higher net financial expenses, mostly related to foreign exchange result. The 8% depreciation of the Mexican peso in the fourth quarter twenty seventeen and the 8% appreciation of the currency in the 2018 produced significant sequential fluctuations in the effective tax rate during changes on deferred taxes as well as in foreign exchange result on a net short local currency position in Telmius Mexican subsidiary. On Page 10, we can see the free cash flow in the first quarter, which reached $90,000,000 in the period.
We continue carrying on a moderate capital expenditure program in the first quarter. On the other hand, working capital increased $266,000,000 in the period. As you can see in the box on the same page, in the first quarter, the value of our inventories was again affected by higher steel prices as well as raw materials. Physical inventories decreased by $45,000,000 reflecting a destocking of our operations in Mexico. But the value of our remaining steel inventories grew by $99,000,000 Stocks and prices of raw material grew by $104,000,000 In addition, trade receivables and payables increased a net of $108,000,000 in the context of higher steel prices and higher shipments in Mexico.
We will continue working on optimizing working capital across Ternium, but it is important to mention that expected increase in revenue per ton will continue to impact our numbers. Moving now to Page 11, you can see an evolution of Ternium cash flow from operations, free cash flow, capital expenditure and net debt over the last four quarters. Free cash flow improved in the first quarter of the year. We expect free cash flow to remain at relatively healthy level in 2019, although capital expenditure should start to accelerate as we advance the new project in our industrial center in Presqueria. We anticipate capital expenditure of around $650,000,000 for 2018.
Finally, Ternium's net debt stood at $2,600,000,000 at the March, representing a comfortable level of 1.2 times EBITDA. Okay. Thank you very much for your attention. We are now ready to answer your questions. Please, operator, proceed with the Q and A session.
Speaker 0
Your first question today comes from the line of Thiago Lofigo with Bradesio BBI. Please go ahead.
Speaker 4
Thank you, gentlemen. Congratulations on the very strong results. I have two questions. The first one on the energy sales line. So what's the recurrence of that line in Mexico and Brazil?
And also if you could provide us with more data in terms of megawatts sold and or prices of energy, realized prices of energy in each of these regions so that we can better estimate that line? And then the second question is regarding Mexican steel prices steel pricing dynamics, specifically regarding Chernium. What's the breakdown of your clients' mix in terms of industrial, construction, distribution and whatever other types of clients? What's the big breakdown? And how should we think about contract and price dynamics for each of those segments going forward, not only in the second quarter, but just structurally thinking about how we should think about those dynamics?
Speaker 2
Thank you, Thiago. I'm going to start by the last part of the question, the Mexican steel prices dynamic. Our customers or our sectors are divided in two. One is the commercial that is most the construction or things related to construction and the other one in our industrial customers. And this is industrial today is more likely 55% of our mix construction, which is a little bit weak in Mexico and there you have distributors and tubular makers, it's around 45%.
Both prices are linked to prices or follow prices in The U. S. So follow the CRU paralysis sometimes with a little bit of lag, but usually they follow the CRU price that The U. S. Had.
In the case of industrial, most of those are linked in contract to some of those prices. So that is the mix that we have. Mhmm. In the case of energy, Pablo, please. Sorry?
Speaker 4
If I if I may just it's still it's still under the pricing side. So how should we think about the in terms of the contracts? I mean, the construction clients, do they have the same type of contracts like the industrials have?
Speaker 2
No. Because
Speaker 4
And I I understand. Yeah.
Speaker 2
No. Construction customers are more on a month to month basis, and so they they increase faster. That's true. And they don't have a contract that links, for example, the last three months or the last six months of the CRU, which the industrial customers, some of them have.
Speaker 4
And then so the final part of my question still related to prices is do we can we do we do you guys see upside on pricing, especially considering that U. S. Steel prices are trading at a abnormal premium for Mexican prices? I mean, can we see continued price recovery in Mexico? I know you mentioned for the second quarter, that's true.
But going into the second half, do think that can be true as well?
Speaker 2
Well, in the second quarter, for sure, because contracts are going to be higher in the second quarter because we take the last quarter. So the first quarter prices were regarding the 2017. So in the second quarter and probably in the third quarter will be higher than in the first quarter. Of course, then we'll see what happened in The U. S.
Prices and how that develops.
Speaker 3
Hi, Thiago. Going to your question in relationship to energy, you're right, there is a certain fluctuation in the sales of energy and this is more related to the climate situation in the Mexican environment. The prices of energy during winter decrease in comparison during the summer month. That's why you can see that there was a reduction in the income on the sale of energy to the grid and to the system during the first quarter of the year where we have the month, the cooler months of the year in comparison to what happened in especially the beginning of last quarter. So we are expecting to see when we move into the summer in Mexico, somewhat a higher level of sales in relationship to this energy.
So there is where you can see the fluctuation on the energy sales in other sales in our net income.
Speaker 4
Yes. But Pablo, can you provide us data in terms of like megawatts so that we can project that line? Because I mean, it's quite a relevant revenue line.
Speaker 3
Well, yes. In fact, the facility in Mexico is close to 900 megawatts. We have access to around 78% of that energy of which we consume close to half of that and the rest is sold to the grid or third parties.
Speaker 4
And in Brazil?
Speaker 3
In Brazil, it's a little different. The facility is smaller than the one we utilize a higher level. So we consume depending on demand around 60% or 70% of the total production and the rest is sold to the market.
Speaker 0
And your next question today comes from the line of Rodolfo Angeli with JPMorgan. Please go ahead. Dalfo Angeli with JPMorgan, your line is open. Your next question will come from the line of Carlos Vialda with Morgan Stanley. Please go ahead.
Speaker 5
Yes. Hello. Good morning, everyone. I was looking at the balance sheet and clearly this is one of the highlights of Ternium, very robust relative to the industry. So the question is with the outlook very strongly a very strong outlook for the remainder of the year And even with the current expansion projects, the reality is that probably your leverage continues to decline.
What are you going to do with that cash? Is it possible to pay a higher dividend, a special dividend? The dividend yield when you looked at other peers is not necessarily low, but around two point something percent after the stock has increased, probably has room to increase. And also if you pay a dividend that will boost your return on equity figure. So why not doing that?
And if you are not prepared to pay a special dividend, what are the most likely uses of cash as we move forward?
Speaker 3
Carlos, this is Pablo. If you allow me, I will take this question. First of all, the guidance that giving is just for next quarter. It's not that we are giving a guidance for the rest of the year. So with that clarification, let me go directly to your question.
In part, you answered yourself because the dividend that we are paying is not small. In fact, you are mentioning 2.4%, which is the number after increase, but at the moment of paying the dividend was more than 4%, so among the highest in the sector. And we are entering to a process now of increasing our capital expenditure. As I mentioned, we will invest around $650,000,000 and we invested only $100,000,000 during the quarter, during the first quarter. So during the remainder of the year, we will increase that.
That's the first part. And then you know that we already mentioned that entering into next year, we will reach the peak of our CapEx or our investment in relationship to the two facilities that we're building in Mexico, that should be around $1,000,000,000 So putting this together, plus the dividend payment, of course, we understand that we will have room to further reduce our debt, which is something that we consider appropriate in the situation where we are. And we are not expecting something, of course, that we cannot decide, which is a special dividend, but we have been very consistent on increasing our dividend payment as much as we can year after year. If you look in the history of dividend payment from Ternium in the last five years, we have increased more than 65% the total dividend paid this year in comparison to five years ago. So we you know that we price having a solid financial position.
We have that, but we think that we can still work there to be prepared for the next step, which is the CapEx that is coming in the rest of this year and in the coming one.
Speaker 5
All right. Thanks, Pablo. And just on that, maybe you or Maximo, does management and or the company have a preference between investing or acquiring assets in the market or buying more of the stakes in Ternium Argentina that it or other businesses that the company doesn't currently own?
Speaker 2
Well, we don't have a preference right now. Ternium Argentina, we don't have it today as as a possibility. If it is arise, we are going to analyze it, but it's not something that we are seeing today. As you know, the ANZs that have 26% of the participation first has to be willing to sell that and they are not today. So we are not having that in our portfolio or in our view today.
And the second is we are building a new facility in Pesqueria that in total when you took the you take the hot rolled mill, the galvanized line and the painting line, it's in total EUR 1,400,000,000.0. So that's the second step. And then we don't have any preference in continue growing. We have some projects analyzing also in Argentina. For example, we are analyzing a galvanized line in Argentina, which we haven't made any decision yet, but it's a project that we are seeing very carefully because if the demand continue growing, it's something that we are going to need.
So we have several different projects analyzing, but without any decision yet.
Speaker 5
All right. Understood. And then just on the Horro line in Mexico, what is the incremental EBITDA per ton that you think the company could generate by further integrating or by integrating turning Brazil production or slabs from turning Brazil into the new core line in Mexico?
Speaker 3
Carlos, thanks, Rafael, for the question, which is a very difficult one to answer because if you remember some conference calls ago when we entered into the facility in Brazil, Ternium Brazil now, we anticipated a reduction in margins because of the reduced margin in relationship to selling slab against the value added product that we have been having. In this case, what you saw that at the very beginning, this happened, but later on, we were able to increase the margins to higher levels than before. So what I'm trying to say that it is dependent a lot on the price environment and that the but clearly, the level of integration will help the margins in turn. The answer I will try to give to you, which is something that you have heard before, is that we always work with a target of having margins above 50% or within the range of 1520%. And everything we do is to sustain that.
And as you can see, in the last years, we have been on the upper side or even surpassing this range. So this is the goal that we have, sustaining, improving, increasing and by doing this investment, not only gaining market share, but also sustaining and improving our profitability. Hope to answer your question with that.
Speaker 5
Right. Thank you very much.
Speaker 2
Thank you, Carlos.
Speaker 0
Your next question comes from the line of Markus Hasenkow with ITAU. Please go ahead.
Speaker 6
Hi, good morning everyone. Congratulations on the strong results. Results keep improving. And my question is what is the management doing to reduce the valuation gap with peers? Second question is also if you could comment a bit about the spread between HRC and Slabs.
You have been playing this spread for many, many years, you did it very well recently with the acquisition of CSA. Last question just on CSA, if I can. If you if you see any possibility of debottlenecking the plant anytime soon. Thank you. Bye bye.
Speaker 2
Well, I start from the last to the first, if you mind, Markus. The debottlenecking in CSA, last year we produced 4,500,000 tons in CSA. Our goal is to reach 5,000,000 at least 5,000,000 tons. We are not going to reach that this year, but we have already defined certain small investment for some debottlenecking that we have. And I think that in a couple of years, we are going to reach the 5,000,000 tons.
I mean, this year it's going to produce a little bit more of the five the 4.5 and in 2019, I hope we will be very near our goal. As I said, these are different small investments, but quite a few for some debottlenecking that we have been finding during these six months that we have been running CSA. Hot rolled coil and slabs, I mean, the difference continue to be high, which I mean, we believe is going to be sustained for a while until in the North American market. This also depends of course in how the two thirty two ends up. I mean, if there's a lot of exclusions, if SLAPs is excluded completely from two thirty two or there is exclusions by product or by company, which are all things that are being discussed right now.
I think with the slabs, the good news also but for CSA is that slab prices also is increasing, but raw material prices are not increasing. So the difference between our raw material and slab is today very comfortable for us. And we expect to continue that way at least in the second quarter. Then the valuation gap, Pablo?
Speaker 3
Okay. Yes, Marcos, Pablo speaking here. You know that we well, we have discussed this in the past. We know that we have this gap. We understand the issue.
We want to work in line of using it. There are some things that we can do. There are some others that we would like to do, but are not feasible at the moment. You looking through your report and other reports, you all agree that there is a difference there, that probably there is no big certification for that. And it will keep performing as we are, and this is reflected in the price of our share, we should be gaining some reduction into that.
We have discussed, especially during our last Investor Day, what things we believe that can help the company to reduce the gap that, as you can imagine, we believe that in the past, we have some certification, not that much right now, but probably it's not the moment to go deeper into that because of things that we cannot done exactly right now. What we are always trying to do is to perform as much as better as we can, reduce our cost, enhance our production, enhance our volume and show the results that we are showing. All the other things, we are very well aware of them and you know that the company is willing to reduce our gap as much as we can.
Speaker 6
Okay. Thank you very much.
Speaker 3
You're welcome.
Speaker 0
Your next question comes from the line of Thiago Ojea with Citibank. Please go ahead.
Speaker 7
Thanks. Good morning, everyone. I have one question specific on Argentina. What do you expect for parenting consumption to grow this year in Argentina? And what is the current level of import penetration?
And if you see any risk going forward from imports in Argentina given the higher steel prices at the moment? And just want to follow-up on the market's point on the valuation gap to peers, is listing is kind of considering you'd be listed in any major index somehow? Would this be one of the possibilities? Thank you.
Speaker 2
Thank you, Thiago. I'll start with the first one. Consumption in Argentina will continue growing this year. The growth that we are expecting is around nine percent this year. That's our number.
I think it's a very good number. But regarding imports, we don't see any threat today for higher imports in Argentina. As you know, our custom base, we have a very long relationship with our customers. We have a very intense service value proposition to our customers in Argentina. We are with going very, very down the value change.
So I don't see that risk. Nevertheless, we are talking with all the governments as a steel industry because unfair trade can happen anytime and it's important that we all be prepared. As I talked in my first remarks, I think that the good news about these things that are happening with all these Section two thirty two, the save wards and everything is that all the governments in the region are very, very aware of what unfair trade can do to a country's economy or to a country's industry. And they are waiting and see how to react if this happens. So I think that's a very, very good news.
Speaker 3
Okay. Thiago, Paolo here. Going back to the question on the listing, you know that in any shopping list or any wish list in order to reduce our gap, a listing in another market could be one way to overcome that. We all have also discussed this thoroughly in the past. We don't have plans to do this right now, something like that.
We continue analyzing the opportunities. If we find a way to that in the future is something that we clearly consider because we understand talking to you and to our investors and analysts that this could be one way of doing that because of having a reference market or having a higher floating on our stock. So you know that we are considering all alternatives, nothing to announce in the moment, only saying that we know that, we consider that and if we have a chance and a reason to do that, clearly something that the company can consider.
Speaker 0
And your next question comes from the line of Andreas Bokenhauser with UBS.
Speaker 8
Please go ahead. Thank you very much. Just a follow-up question on Section two thirty two. Obviously, there's a lot of there was a lack of clarity on it overall, and we don't know about extension and so on yet. But generally speaking, how do you think about it?
I mean do you see it as an opportunity for Ternium in that if there are extensions on Mexico and The U. S. Given that where The U. S. Steel price is sitting right now over imports, you could have some upside there?
Or do you start to worry about imports coming in from Europe? I know some of the European producers are now talking about reallocating steel from North America into Central And South America that they can't get into The U. S. Any longer and that could be an important risk. How do you think about it?
Is this a risk or an opportunity at this point in time? Thank you.
Speaker 2
Thank you, Andres. I think overall, the February is an opportunity for Ternium. I mean, we don't have a lot of as we discussed in the last conference call, we don't have a lot of export to The U. S. Our Mexican export to The U.
S. Are quite small. Nevertheless, I think Mexico is going to be excluded. So that's a good thing and we can increase a little bit, but it's not in our plans yet to do that. And our big export to The U.
S. Are slabs from Brazil and those slabs I think are going to be excluded. The U. S. Has no capacity to produce more slabs and or the amount of slabs they needed.
And so Brazil it's going to be excluded or it's going to have a quota that more than satisfies our sales to The U. S. In slabs. The only risk, I don't think it's from European, I think it's more from Asian countries that could send more material to Mexico or to Argentina. I think that risk something that happens, but I think it's a risk that is manageable.
As I said, Mexico is on the path, I think, for renewal of the sale bag we have against the import of steel. I think that they have to increase the amount of products that they have. So I think that the governments, if that happens, they are going to react. But I don't see that that could happen a lot. I mean, it's going to be for short periods and people have to react to a different production capabilities.
Speaker 8
That makes a lot of sense. Maybe one follow-up question. So you mentioned, so Mexico could get exempted. If Mexico is exempted, and I know you said you don't export a lot to The US, but theoretically speaking, you know, what kind of price could you get, you know, your benchmark HRC flat steel into The US at if there is no tariff on Mexico? And do you have a sense of what price level you're selling in The U.
S. Versus where domestic prices are at the moment?
Speaker 2
No. Today, both prices are more or less similar. I mean, if The US theoretically, and this is very theoretically, The US, the section two thirty two is very, very restrictive, well, the future, U. S. Prices are going to be a little bit higher than Mexico, but you have a freight difference.
So shouldn't be a lot of difference.
Speaker 8
Got it. Thank you very much. I appreciate it.
Speaker 2
Thank you, Andres.
Speaker 0
Your next question comes from the line of Renan Criscio with Credit Suisse. Please go ahead.
Speaker 9
Hi, good morning everyone. Thanks for the question. My first question is on Argentina. You mentioned that there is a like the potential drop in Argentina potentially impacting economy and eventually impacting steel sales. So can you just remind us what's your exposure to like agricultural machinery or any other related sectors that could be impacted by such a draw?
And second one is on the Slab integration. You mentioned that this quarter you had a slight increase in the level of Slab integration. And that's all. My question is whether this is like a recurring strategy or if that was a factor for this quarter. And if you can elaborate a bit more on the economics of this lab integration and also how much further you can go with this integration?
Speaker 2
Thank you very much for the question. Regarding the problem of Argentina, what we mentioned is a general problem of Argentina. It's not going to affect a lot to us. I mean, the consumption with this problem that we're seeing is going to increase the 9% that I said. The main issue is we were expecting a little bit higher in last conference call, the growth in the GDP of Argentina.
And today, our expectation is that GDP because of these doubts that is happening in Argentina, it's going to be 2.5%. So it's a little bit of a decrease of what we were expecting before and mainly because of this problem. Slab integration, our own view, we are not seeing more slab integration today than what we did with CSA. Remember, are going to have in two years a new hot stream mill. The hot stream mill is going to be almost 4,000,000 tons.
So we are going to continue with the strategy of producing slabs for a facility in Brazil, but also we are going to buy slabs from the market. And we probably will be buying the same amount that we were buying before CSA. So we are continue with the strategy of having several sources of production, I mean, slabs, iron ore and buying slabs.
Speaker 6
Okay. That's good. Thank you.
Speaker 0
And your next question today comes from the line of Jon Brandt with HSBC. Please go ahead.
Speaker 10
Hi, good morning, gentlemen. I just wanted to a quick follow-up on the valuation gap and the things that you're doing to close that. Is there do you have a timing in mind? Or is this sort of an open ended, multiyear process that you're looking at? And then secondly, and I missed the first part of the call, so apologies if you already went through this.
I'm wondering if you can comment on NAFTA. Supposedly, we're getting closer to a revised agreement. I'm wondering if this has impacted your customers, if you've seen any change in consumption or behavior or anything relevant that you could discuss. Okay,
Speaker 3
John. Let me take first the question on the valuation gap. First of all, as we always said, let me remind that this gap has been reducing during the last years because of different issues. We know different things that we can do, but clearly, cannot promise or we cannot say that this can be solved in Q1 because as we have discussed during Carlos' question and in relationship to the listing of our company in our market, that's nothing that you can do from one day to another. So you have to have reasons to do that.
You have to have the opportunity to do that. And as Maximo mentioned also during one of the questions in relationship to the acquisition of the shares of Argentina, well, we don't have the opportunity to do that at the moment. But taking that as a possibility, we understand that this could also help in that regard. So as I said before, we are well aware of the issue. We have been working very hard in order to review that.
I think that we have reduced or the company have reduced that gap in the last years, and we will continue working on that front. But of course, we cannot promise that this will be solved in a certain period of time.
Speaker 2
Okay. Regarding NAFTA, John, as you said, I mean, they have been talking all this week, all last week regarding the renegotiation of NAFTA. I always said that I was confident that and I'm still thinking that they are going to reach an agreement. It's a good thing for the three countries. But of course, never know.
I think they are closer today. I mean, in the following weeks that we had some news and there's a good chance that the news is a good one. If we have regarding your specific question, have we had any impact in our customers? We didn't see any impact in the last year in the industrial customers. I mean, customers and you can see it from our shipments in Mexico continue with a very healthy environment.
They continue to produce very well all different sectors, automotive, white goods, electronics, everything continue in a good pace. So we haven't seen any particularly affection or any particularly slowdown of those customers regarding NAFTA. What we have seen is a reduction in construction, but that it's more because of infrastructure than because of NAFTA. I mean, you see last year and a half, infrastructure spending decreased in Mexico and private contraction increased. And that made that construction have been without growth for at least a year or a little bit more of a year.
But it's more related to infrastructure spending than NAFTA.
Speaker 6
Great. Thank you very much.
Speaker 0
And at this time, I would now like to turn the conference back over to our CEO for closing remarks.
Speaker 2
Okay. Thank you very much for being part of our conference today. As always, please feel free to contact us if you have any doubts or comment. Thank you very much.
Speaker 0
Thank you to everyone for attending today. This will conclude today's call and you may now disconnect.