Ternium - Earnings Call - Q2 2019
July 31, 2019
Transcript
Speaker 0
Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to Ternium Second Quarter twenty nineteen 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. Mr. Sebastian Marti, you may begin your conference.
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 second quarter and first half twenty nineteen. This call is complementary to that presentation. Joining me today are Mr.
Maximo Vedoya, Ternium's CEO and Mr. Paulo Grittio, Ternium's CFO, who will discuss Ternium's business environment and performance. 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
Speaker 2
the call over to Mr. Redoce. Thank you, Sebastian. Good morning, everyone, and thank you very much for your participation and your interest in our company. As we always do, I'll make a brief description about the drivers of our results and the latest developments in our market.
And then Pablo will go through the webcast presentation regarding the results in the second quarter and we will close the call with a Q and A session. In the 2019, we reported a good set of results. We've had an increasing shipments in Argentina, the first after six consecutive quarters of volume decline in this market and we also had higher sales of slabs to third party while shipments in Mexico remained stable. We managed to finance in the quarter a significant increase of CapEx with our own cash generation as net debt increased slightly in the period when we paid our annual dividend and the balance of twenty eighteen income taxes, which was high after an exceptional year in Mexico. Interesting to note is that our net debt in the first half of the year remains stable after these quite high requirements of cash.
Our investment projects are development as expected time and budget wise. The new painting line at the Pesqueria facility in Mexico has already produced its first coiled and the next one to enter into operation should be the new galvanized line at the same site towards the September. Meanwhile, we continue the construction of the new hot rolling mill and the works of a new steel bar and coil mill in Colombia. Now let's go through the latest development in Mexico. Since our last call, there has been a couple of good news.
First, Mexico's Congress approved the USMCA, a further step towards the new NAFTA. To replace the current NAFTA, the USMCA has now to be approved by the Congress of Canada and The US. Another positive development has been the exception The U. S. Granted to Mexico and Canada from Section two thirty two tariffs.
This is a very good news as it helps normalize trade flows among Mexico and The U. S. And lift an unfair distortion trade in these markets. Now going specifically about the main markets in Mexico, the construction markets continue to show a weak performance as private non residential activities and government infrastructure projects are not showing an improvement yet. The industrial market is stable mostly supported by good exporting activity.
On the other hand, after a period of destocking, service centers and steel distributors in the country has relatively low inventory levels. Steel prices in The U. S. Market continued to decrease during the second quarter. They have recently bottomed out and began to rise and we believe there could be further room for recovery.
The significant year over year decrease in steel prices in this market is putting some pressure on our margins in Mexico. In spite of recent rebounds in the market price, realized prices in Mexico will continue decreasing in the third quarter of the year as a result of a lag reset on contract price. This should be partially offset by the rising price in the commercial market driven by the recent steel prices rebound. Overall, even though we are working in a challenging environment in Mexico, we anticipate a gradual recovery in shipments. We should take volumes in the 2019 to higher levels than what we've shown in the second half of last year.
In addition, a further recovery in steel prices should help on margins towards the end of the year. In Brazil, we successfully continue improving production facility utilization during the first half of the year, but the slab market situation has turned difficult year to date. During the last quarter seaborne slab market prices decreased. In addition, realized prices of contract slab sales in The U. S.
Are also affected by the downturn in The U. S. Price environment as we just discussed. As a result, we should see lower prices on sales of slabs in the third quarter. This situation and the significant increase in iron ore prices created a tough slab market with significant pressure on margins.
As a result, we are currently reconfiguring the mill utilization and renegotiating certain supply contracts to achieve a lower cost of production. In the third quarter, slab shipments to third party are going to decrease considerably mainly due to higher internal sales, but also due to a slightly lower production level as I had just mentioned. Turning now to Argentina, after an unusual long period of destocking in the value chain related to a softening steel market and a very high interest rate in the economy, shipments began to recover in the second quarter and we believe this will continue doing so in the third one. The automotive industry in the country remain subdued. On the other hand, current bright spot in Argentina are the agribusiness sector with a record harvest in this season and the energy industry with the shale oil and gas reserve development of Vaca Muerta.
Concluding, we expect the developments with prices and cost I just described in our different markets and particularly with our slab operation in Brazil will take Tonian steel margin in the third quarter twenty nineteen to a level below historical long term trade. We believe the steel market is currently going through a transition period and that a combination of steel price recovery, our efforts to adapt to a more challenging environment and the eventual normalization of the iron ore market should support a margin recovery as a result. Okay, I'll let Pablo go ahead with his comments about the results in the quarter. Pablo?
Speaker 3
Thanks, Maximo. Good morning to everybody and thank you again for participating in our conference call. Let's review our performance in the second quarter of this year, starting on Page three of our webcast presentation. As you can see in the first chart, in the second quarter, we reported EBITDA of $410,000,000 lower sequentially and roughly in line with our expectation for the quarter back in April. Considering steel prices in North America resumed a downturn during the second quarter after having stabilized for a while during the first quarter of the year.
As you can see in the slide, Ternium's EBITDA margin in the second quarter decreased to $123 per ton or 15% of net income. As for net income, in the second quarter, we reported $2.00 $6,000,000 or $0.92 per ADS. When compared to the first quarter, earnings per ADS decreased $0.19 mainly reflecting the decrease in operating income, partially offset by other results that we will analyze with more details in the following slides. Let's now review in the next page our achievements performance in each quarter and in the regions. As you can see in the first chart, shipments in Mexico in the 2019 were similar to those record in the first one, but decreased year over year mainly as a result of a soft commercial market in Mexico during this year as well as strong base of comparison achievements in the first half of last year were boosted by a share price in steel prices back then.
Looking forward, we expect slight increase in shipments in the third quarter of this year. In the air market region, in the upper right hand chart, shipments increased 5% in the second quarter, mainly due to a record strong level of slab shipments to third parties. The slab shipment increased 70,000 tons on a sequential basis and 290,000 tons year over year. Looking forward to the third quarter and the second half of the year, steel shipment excuse me, slab shipments to third parties are expected to decrease with lower shipments to The U. S.
Market and higher internal shipments to our own operations in Mexico. In the Southern Region, shipments increased 15% sequentially, reflecting some positive developments in the Argentine market, including a lower improvement in steel demand and the end of the destocking process in the value chain. Looking forward to the third quarter, shipments in addition are expected to continue recovering as Maximo mentioned. Turning to Page five, you can see in the first chart that the combination of this development resulted in consolidated steel shipments in the second quarter increased 4% sequentially and that remained relatively stable year over year. Looking forward and considering what we have just discussed, we expect steel shipments in the third quarter to sequentially decrease mainly to the lower slab shipments to the third parties, partially offset by slightly higher shipments as mentioned in the Mexican and in the Argentine market.
Going now to realized steel prices, in the upper right hand chart, you can see that our realized price continue decreasing in the second quarter of the year, a downtrend that has been going on during the last three quarters, mostly driven by the significant decline in steel prices in The U. S. Market since mid last year as well as flat prices. The steel price downturn in North America recently reached a bottom with several announcement of price increases being made by the main U. S.
Needs. Despite these positive developments, realized price in Mexico in the third quarter will continue to decrease as more than half of our sales to industrial customers are made under contracts that have a lag of about three or four months to reach the changes in prevailing market prices. This should be partially offset by the higher prices in the commercial market. Now the lower left hand side chart shows that net sales increased sequentially just a little. As the 4% increase in shipments volume was partially offset by the 3% decrease in consolidated revenue per ton.
Let's turn now to Page six to review in more details the drivers of EBITDA and net results in the second quarter. Regarding EBITDA, the main change was a decrease in EBITDA per ton, mainly related to softening prices that we just saw. This was partially offset by higher shipments. In the third quarter, we expect to report a lower EBITDA level, mainly as a result of the steel margin that will decrease below long term trends as well as lower shipments of slabs that we have just described. The main drivers of the expected decrease in EBITDA will be significantly lower shipments of slabs to third parties together with a lower margin on these sales.
Our realized slab prices will decrease while iron ore prices remain persistently high. In addition, the expected decline in realized price in Mexico, as I've mentioned, will put further pressure on margins in the third quarter of the year. On the second chart, we can see the main factor behind the decrease in second quarter's net income. The decrease in operating income was partially offset by a slight improvement in financial results and a lower effective tax rate due mainly to the application of inflation adjustment for tax purposes in Argentina. On Page seven, you can see the drivers of the first half year over year changes in EBITDA and net results.
The decrease in EBITDA in the 2019 was mostly related to a decrease in EBITDA per ton. And the decrease in net income was mainly due to the lower operating income partially offset by better financial results and a lower effective tax rate. Let's turn now to Page eight. This is the last page in the presentation, where you can see the performance of free cash flow, capital expenditure, net debt and dividend. Free cash flow in the 2019 reached $264,000,000 In this period, the decrease in working capital contributed to $2.00 $3,000,000 and capital expenditure was strong $485,000,000 Of course, as expected, and shall remain high in the second half of the year with a target of between 900,000,000 to $1,000,000,000 for the full 2019.
After dividend payment during the 2019 of €233,000,000 to shareholders and $300,000,000 to non controlling interest, Ternium net debt remained at $1,700,000,000 at the June versus the December 2018. This is equivalent to a comfortable level of 0.8 times last twelve months EBITDA. On the lower right corner, you can see how Ternium's dividend payment to shareholders has been increasing consistently over the years, while the latest dividend, which was paid in May 14 at $1.2 representing today a dividend yield of around 5%. Now focusing in the second quarter, I would like to say that Ternium operating generation was a significant amount of cash. Although the mentioned increase in CapEx coupled with two specific items, I will explain further on, took free cash flow to around zero in the quarter.
One of the specific effects that impacted the free cash flow in the quarter was tax payments. Usually, the second quarter of the year is when the balance of the previous year income tax has to be paid. In 2019, the cash effect of the payment of the balance of 2018 income tax was higher than in previous year, reflecting the very good result our Mexican subsidiaries have in 2018. Another item that impacted free cash flow in the second quarter was the payment of profit sharing in Mexico as required by Mexican laws. Again, we had a very good result in 2018.
The profit share payment in the second quarter twenty eighteen was high. None of these items, the tax and the profit sharing payment, should happen in the third quarter of the year. CapEx on the other side will remain high. All right. Thank you very much for your attention.
We are now ready to take your questions. Please, operator, proceed with the Q and A session.
Speaker 0
Your first question comes from the line of Caio Ribeiro from Credit Suisse. Your line is open.
Speaker 4
Yes, good morning all and thank you for the opportunity. So my first question is regarding steel prices in The U. S. And consequently in Mexico. Over the past month, there has been a few rounds of price hikes announced for flat steel in The U.
S. So I wanted to get your opinion on whether you think these are clear signals that prices could be bottoming out and whether you expect to start seeing this benefiting fourth quarter results already? And then secondly, on the cost and expenses front for the steel business, I just wanted to see if you could talk a little bit more specifically about what drove the increase in these figures for the quarter, particularly in SG and A line. Any more color you can provide and how you see this evolving going forward would be very helpful. Thank you.
Speaker 2
Thank you very much and good morning, Caio. I'll take the first one and then you're right about the cost expenses and Pablo will explain it very detail because it was very it was things of the second quarter. Yes, we are seeing the increase and as I said in the remarks, I think these increases are real and we are already pushing prices up in Mexico. So I don't remember when we talked last conference call, most of the decrease in prices in The US was because the competition or the production among US producers, imports in The US and a little bit in Mexico are coming down. And the decreasing prices in The U.
S. Was not because of imports coming, but because of more production coming from The U. S. And the competition between U. S.
Producers. I think that this has changed. There has been a couple of announcements where the production utilization has come a little bit down in The U. S. And this is driving prices up.
Consumption is good in both markets. So I think that prices are going to go further up and this will be reflected in our fourth quarters. Regarding the second one, I left Pablo. Hi, Caio. How are you?
Speaker 3
So you're right. There was an important increase in G and A during the second quarter in comparison to the first, and then me explain the reasons why and how are we looking at this number for the coming quarter. The first important difference between the two quarters is the amortization on intangible assets in relationship to contracts of slab sales that we acquire when we bought the assets in Brazil. And that depends on the amount of sales of slabs to The U. S.
Market. As we mentioned during the presentation, the second quarter reflected an important amount of tonnage of slabs to The U. S. Market. So the difference in amortization from one quarter to another is $5,000,000 So $5,000,000 of that increase is related to this amortization.
Clearly, as we also mentioned and Maximo was very pleased on, the reduction of slabs to third party will reduce this number for the third quarter. So this is one item. The second one is also related to this level of shipment to third parties, specifically slabs, which is logistic cost that increased significantly in the second quarter in relationship to sales of slabs, sales to our product to different markets and some increase in the logistic cost in Mexico. The third item is in relationship to some specific taxes that we have to pay. There are one which is an asset tax in Argentina that due to the latest tax reform in Argentina, the company has not to pay during the last two years, but this nonpayment is over, so we will have to pay this year and it came here in this line this quarter.
There are some other specific taxes that were raised in Brazil in relationship to the state of Rio De Janeiro and the new taxes in Argentina on exports. So we have a lot of specific issues affecting this number during this quarter that we are expecting to reduce significantly in the coming quarter.
Speaker 4
Perfect. That's very clear. Thank you.
Speaker 3
You're welcome. Your
Speaker 0
next question comes from the line of Thiago Lofiego from Bradesco BBI. Your line is open.
Speaker 5
Thank you. I have two questions. The first one about the volume recovery you mentioned for both regions in the second half. What are the drivers behind that view? And what are the risks to that view as well?
So in other words, what presents us from seeing a flattish second half versus the first half? The second question is regarding margins. You mentioned that third quarter margins are going be below historical long term trend. When you say that, what kind of margin level are you assuming for this historical long term? And considering all the variables, should we assume that the third quarter is going to be the bottom and an inflection point in terms of margin?
Speaker 2
Thank you, Thiago. Volumes in the second half, I mean, we are seeing increases in Argentina compared to these quarters because the recovery in Argentina is continued in the market of Argentina. We expect the third quarter volumes to be, think at least 10% higher of the volumes of the second quarter. If you remember the first quarter was kind of the bottom in Argentina and this quarter we increased 14% and next one probably 10%. In Mexico, you remember the second half of last year saw the decline in consumption in Mexico.
The first half of this year is a little it's higher than the 2018 and we are expecting at least the second half of this year to be the same as the 2019. So it's increased regarding what we saw last year in that second half. Regarding margins, as you know, have guided that the EBITDA margins range between 15% to 20% as our target in the long term. In the third quarter, we are going to reflect the current imbalance situations in the market. So it will be a little bit below that margin.
The situation should revert from the relationship between the steel prices and the input costs rebalance. If you ask me, we think that third quarter is the bottom. Yes, it is for us probably the bottom as we are seeing now an increase in the prices and to be honest, iron ore prices should come further down in the fourth quarter.
Speaker 5
That's great. If I may, just back on the volume question, you mentioned third quarter in Argentina should be around 10% higher versus second quarter, right? Exactly. What's the consolidated outlook for the second half in Argentina? Maybe not sure if we are too far, but if you could mention maybe what's your outlook for 2020, that would be interesting for us to understand as well.
Speaker 2
That's a great question, Thiago. Think Argentina has a lot to do with what will happen in the elections, to be honest. I mean, are seeing a recovery in the market. People are consuming more. There are some business as I said, they are going great.
Vaca Muerta development is amazing. Agribusiness is doing very good. But the rest of the market construction and industry as a general, I think what will happen in the election will define a little bit where the market goes in the fourth quarter and where the market goes in 2020.
Speaker 5
Okay. That's clear. Thank you.
Speaker 2
Your
Speaker 0
next question comes from the line of Rodolfo Angeli from JPMorgan. Your line is open.
Speaker 6
Hi. Good morning, everyone. Can you just elaborate a little bit more on the effects of the problems with Vale accident and how that affected your iron ore costs? And how, you know, if Brucutu coming back can eventually improve the situation on the cost side for you at SIFE?
Speaker 2
Well, the the situation of Vale and the situation of iron ore in general because we have first the problem with Vale in January, then we have the climate problem in Rio Tinto and Australia in March. And then we have the decline of the stock in China's port that started a decline in April and ended up in the July. I think all these three effects has an impact in the increase of iron ore that went from 60 something to almost 120 that is today. So that clearly has an effect directly in the cost of production in the Brazilian unit. I mean, main issue of the cost has been the increase in prices.
There has not been much more increases yet in cost because of the Vale accident, but mainly because of the increasing prices and that's the effect. As I said, the production is coming slowly back to the production before these three events. I mean, in China recently has increased a little bit and Rio Tinto I think it's producing again the same volumes as it's going to produce the same volumes as it produced in the 2018. And Vale has said that they are going to increase or they are increasing the northern production and they are increasing Burukutum this quarter. So I think prices are going to stabilize and decrease in the near future.
Speaker 6
Okay. Thanks. And if I may, a second question here. On the supply of slabs into The U. S, we discussed in earlier calls about the story of quotas into The U.
S. Can you just discuss a little bit how things are going and how that fits into your idea of selling less slab volumes in the second half of the year, please? Thank you.
Speaker 2
Yes, Rodolfo. That's a good question. Quarter in The U. S. Is going to be fulfilled.
I think it's already fulfilled for the third quarter. And in the fourth quarter, it's going to be a very small amount of slabs that can enter. So our slab shipments to The US will decrease in second half of the year and we are going to return the shipments probably in November. Those shipments will enter The U. S.
In December and January.
Speaker 6
Okay. Thank you very much.
Speaker 0
Your next question comes from the line of Fruan Tavares from Citi. Your line is open.
Speaker 7
Hi. Thank you. Good morning, everyone. Just my first question, just to actually follow-up on the long term margin or your view of normalized margins. Is there any assumption in that 15% to 20% EBITDA margin that you mentioned about what the long term iron ore price is?
And then second, maybe if you can give us an update on just capacity growth in your projects in Mexico? And maybe how do you see the pipeline of new capacity growth versus demand over the next few years given that we've seen announcements out of The U. S. For some more capacity there that could potentially enter Mexico as well. So just your view on supply demand essentially over the medium term.
Thank you.
Speaker 2
Yes. Hello. Good morning, Juan. Iron ore or long term pricing long term margin with what prices of iron ore we said. I mean, the iron ore prices we are seeing in the long term are the same that the analysts are putting that are around $70 for the YOVEX.
Nevertheless, it depends on the difference between steel prices and iron ore. What happened today is that there was a decrease in prices of slabs and a huge increase in prices of iron ore that created an imbalance that was not it's not usually the case. And and if you see also there is a big, rebalance or imbalance between scrap prices and Elnor. I mean, scrap prices decrease and iron ore increase. That hasn't happened, I think, for the last three or four years where the difference is so low between scrap and iron ore.
This has two ways of correcting and both are happening. Iron ore prices will have to decrease and steel prices are increasing. So I think that's what is going to happen. Regarding capacity growth, I mean, as you know, and The US also has a big part of imports, a significant part of the markets are covered by imports. And I think what our increased capacity is doing is we are going to supply that import.
I mean, we are going substitute a big part of that import and import tariffs. We are not seeing our capacity or increased capacity to increase our sales to The U. S. You know that The U. S.
And Mexico has made an agreement regarding February where there's going to be a balance between what we export and what The US exports. So our capacity is going to attack all that imports are going to the market. And as you know, the consumption in Mexico, the consumption per capita in Mexico is still very low compared to The U. S. Or compared to a lot of countries.
And so we expect that consumption in Mexico is going to increase, demand is going to increase and that's how we are seeing the increase of our capacity.
Speaker 7
All right, great. Thank you very much.
Speaker 2
You're welcome, Juan.
Speaker 0
Your next question comes from the line of Carlos De Alba from Morgan Stanley. Your line is open.
Speaker 8
Yes, good morning, gentlemen. Could you give us perhaps an update on the progress of your different projects in Mexico? I expected the galvanized and painting line to be already running, But if you can confirm that and give us any update as how the prices are doing in terms of budget and timing, that'd be great.
Speaker 2
Good morning, Carlos. With pleasure. I mean, projects in Mexico are doing very well. As you recall, Painting Line is already I mean, we said that it was going to start the trials in July. It produced the first coil a couple of days ago.
So I think, in August, it's gonna start producing commercial quality and start selling, of course, in a very in in in not a very big volume, but it's it's running okay. Galvanized line is gonna start at the September. That was the plan, the original plan, and we are seeing no delay on that. Both of them are going with the the budget we we set. The hot spring mill is gonna start the December 1, the first coil, the 12/01/2020.
Again, this project is going on time and on budget. Although we think that a little bit, of course, we are going to be able to cut a little bit of cost, although we are not, I mean, saying yet the amount is not huge, but we are seeing some savings in in in in what we said of the $1,100,000,000 investment in that hot stream mill.
Speaker 8
Perfect. And any other or any initiatives on on cost that you can mention that would help hopefully make the third quarter the bottom in terms of profitability?
Speaker 2
Well, the the the main thing that we are doing are in Brazil. I mean, in Brazil, as as we are reducing our marginal I mean, you know that that when you you charge the blast furnace, you have different qualities and different type of products. We are reducing the more expensive ones in the third quarter, which is a 25 more expensive to produce than our average cost. So we are going to reduce 10% of production in Brazil with the higher costs, with the marginal cost. That was one.
And of course, we are seeing in Brazil a delay in some of the maintenance stoppage that we had, although because of the decrease. So in the third quarter and fourth quarter mainly, we are going to have a little bit less cost there in Brazil.
Speaker 1
Thank you very much.
Speaker 0
Your next question comes from the line of Thiago Urea from Goldman Sachs. Your line is open.
Speaker 9
Hi, good morning. Thanks for the questions. So my first question is related to steel prices. If you can speak more broadly, what's your view about the steel prices in China? And specifically in U.
S, there are concerns about the removal of Section two thirty two that this could further repress steel prices. I know that in short term, you are hiking prices. But thinking long term, what do you think about global steel prices and impact of the removal of Section two thirty two?
Speaker 2
Hello, Thiago. I don't see any sign of removing the two thirty two for quite a long time. I mean, I am not seeing that. Again, I'm not a specialist in U. S.
Politics and maybe that is a question for The U. S. Producers. But they are not seeing any sign of removing the two thirty two. So I think two thirty two will stay a couple of years more.
I don't have a concern about that. What is true that China prices are stable, but again, Chinese production has been with two thirty two, but also with all the dumping and subsidy cases, I mean, China is finding harder and harder to export the excess capacity. Exports in China have been declining for the last three or four years and I expect that tendency to continue.
Speaker 9
Okay. And if I may, a second question. I'm not sure if you want more, maybe Pablo. Regarding the capital allocation, we had a negative free cash flow for this quarter. If you can reconfirm your CapEx guidance for this year and dividend levels for this year and probably know if you see any difference from the capital allocation that you had in the last year would be good.
Speaker 3
Yes, Thiago. Let me mention first that we are sustaining our level of CapEx for the year, the same guidance that we gave last year or the end of the year with a level of, let's say, an average level of nine fifty million dollars which is what we mentioned at the very beginning, is continuing to be the target for the year. As Maximo mentioned, we are trying to reduce expenditures in order to produce a number, but we will maintain this level of CapEx. We are not changing our views on the dividend payment, what we have just paid. As we mentioned, we paid May 14, so a couple of months ago, and the tendency for the company should be exactly the same.
I already mentioned during the opening remarks that we have some specific issues during this quarter that reviews the total level of free cash flow generation. But clearly, the level of cash flow generation was very important internally during the first quarter. Basically, the company generated free cash flow of around $270,000,000 which basically was exactly what we invested during the quarter. Even taking into consideration the two items that I mentioned that impacted the second quarter cash flow generation, which was an extraordinary high level of taxes paid during the second quarter and the profit share in Mexico. So clearly, the level of cash flow generation in Mexico was excuse me, in turn was very high.
And as Maximo mentioned also at very beginning of his opening remarks, we were able to sustain the same level of net debt from December 2018 up to June 2019, basically exactly the same numbers of $9,000,000 difference in a semester where we have dividend payment, a CapEx of $485,000,000 The taxes extra taxes that we need to pay and the profit sharing. So the company continues to generate a very positive level of cash flow. But clearly, we also said that the main driver of the usage of the cash flow for this year will be the CapEx and the dividend payments. And we are going through this as we enter into the second quarter and move into the third and the fourth quarter. So no changes in the capital allocation and expectations that we have for the full year 2019.
Speaker 9
Okay. Just a follow-up, Pablo. Can you provide the guidance for next year in CapEx? And given what you just said, would we expect maybe the peak on leverage to be on the third quarter of this year, given that probably EBITDA will be slower?
Speaker 2
Well, the next year 2020 will be around 800,000,000 to $900,000,000 And then in 2021, it's going to be back to normal of around 500,000,000 to $550,000,000 of CapEx. The top will be between third quarter, fourth quarter and first quarter of next year. I mean, that's when the biggest amount of CapEx for the hot stream mill is coming on board. So it's going to be this following two or three quarters.
Speaker 9
Okay. Perfect. Thanks, Maximo. Thanks, Pablo.
Speaker 1
You're welcome.
Speaker 0
Your next question comes from the line of Gustavo Allivato from Santander. Your line is open.
Speaker 10
Hi, guys. Good morning. I have two questions. The first one is regarding volume outlook for 2020. So you mentioned for Argentina, you depend on the elections.
How about for Mexico? Can you give us some color what can we expect for 2020 there? And the second question is regarding China Brazil. You mentioned in the release that you expect a lower shipments, like shipments to third party. So it just relates to lower exports to United States or lower sales in Brazil as well?
And if I may, a third question is, can you give us some color what's the margin of tariff in Brazil with iron ore price around $115 $120 I remember when you guys acquired the facility, the tire demand was around $60 per ton. So I it'd be very helpful if you could provide some color on this front. Thank you.
Speaker 2
Thank you, Gustavo. I'll start the the the two first one and and let Pablo explain the third one. 20 volumes in Mexico, I think of course that will depend on the economy of Mexico. I mean, you all have the news that Mexico economy in 2019 will grow almost nothing or very little, but we are expecting that 2020 will change a little bit in the sense that the construction business, the commercial business is going to start improving after several quarters of decreasing. First because of government expenditures or infrastructure projects and second today because the private sector is also not investing in construction in Mexico.
But 2020 should change and we are not seeing any change in the industrial consumption that mainly is driven by U. S. Economy. So we should see or we are seeing today, we are expecting today higher volumes in 2020. Brazil third parties are mainly sales to The U.
S. Although sales in Brazil are also a little bit lower or will be a little bit lower in the third quarter.
Speaker 3
And let me take your third question which was also linked to the Brazilian unit. You're right that we mentioned that our target was to generate $60 per ton margin in our Brazilian operation. We were able to overpass this during the first year due to very specific issues like a very good level of pricing. Now what we are going through, as Maximo explained in detail, we are going to an imbalance that will put pressure on these margins during specifically during this coming quarter. But clearly, are still working with this level of margins for the generation of our Brazilian unit in the medium and long term.
So we have not changed. Clearly, the imbalance, Maximo mentioned, happens once a while. I understand that the last time that happened was three or four years ago, and we have a reduced margin too. But then we recovered and we moved back to our normal level of margin. So we are continuing working with the same numbers for the
Speaker 2
coming year and the following one. Okay.
Speaker 10
But is it possible to give us some color what's the current margin of the facility in Brazil?
Speaker 3
Well, it's very difficult to tell you exactly a number. We have moved below this level during this quarter. The third quarter will be we understand the most impacted one below that number. Clearly, because we will be showing a reduction in prices and increasing cost, but we are expecting to see a recovery from that levels through the fourth quarter and the beginning of next year. So clearly, the margin, I will have stated that in our opening remarks, the lowest level will be during the third quarter, the upcoming quarter, and then slowly coming back to more normal levels.
Speaker 8
Okay. Very clear. Thank you.
Speaker 2
You're welcome.
Speaker 0
Your next question comes from the line of Andreas Boch from UBS. Your line is open.
Speaker 11
Yes. Hi, there. Just two quick questions from me. Just two follow ups. Number one, on the slab side of things.
Obviously, we've seen you increase your slab volumes in recent quarters, and you're mentioning that's going to slow down due to the Brazilian quota into The U. S. Do you have a sense of what's happening to the slabs that you are selling into The U. S. Right now?
Mostly, are they building up as inventories in The U. S? Or are rerollers effectively transitioning these slabs into finished steel? And that's the first question. The second question, with HRC prices in The U.
S. Now just being short of $600 per short ton, what effectively would be your net received price if you were to export from Mexico effectively on an FOB basis? I guess the other way of asking that question is what's your general transportation and other cost to be competitive in The U. S? Those are my two questions.
Thank you very much.
Speaker 2
Thank you, Andreas. What is happening with the slabs in The U. S? I think they are both. I mean, there are more stock.
I mean, people have built rerollers has built a little bit of stock because of the fulfillment of the quotas because they were expecting this. And I think that they are going to reduce a little bit production in the third and fourth quarter. I mean, I don't think they have slabs. The amount of slabs required to reroll at the same level that we're rerolling in the first half of the year. But to be honest, that's my view on the market.
It has not to be necessarily the truth, but it's what we are observing. The second question, I mean, we are very close to the border and we usually ship by by train. So our logistic costs are not very, very high. Depends on where we go. But but you are talking about depends on, again, where you go between $30 a tonne metric tonne to $50 a metric tonne.
I mean, they're not big, huge costs.
Speaker 11
Okay. That's very clear. Maybe a follow-up on that. I mean, would that basically mean that if you were to sell into The U. S.
Right now at $600 per short ton, would that be economical for you to do so now that the 25% tariffs has effectively been removed?
Speaker 2
No. For sure, it's economical for us to sell at those prices in The U. S. The question is if we are going to sell and if we are going to increase, probably we are selling something, but we are not going to increase our sales to The U. S.
Much higher than we are doing now.
Speaker 11
Okay. That's very clear. Thank you very much.
Speaker 2
You're welcome.
Speaker 0
Your next question comes from the line of Antonio Eluany from Bank of America. Your line is open.
Speaker 2
We are not hearing you, Antonio. I think there's somebody speaking.
Speaker 0
Antonio, we cannot hear you.
Speaker 9
Hello? Can you hear me?
Speaker 2
Yes. Now, yes.
Speaker 9
Hi, Massimo and Carlos. Sorry for that. Just a follow-up on the slab questions that you're talking about. How would you compare the production cost on slabs in Brazil and the price that you're currently seeing in in the market? And if would be possible now then you have the facility in Brazil for you to change your slab balance within the the 30?
Thank you.
Speaker 2
Well, that's Antonio, thank you very much. That's exactly what we are doing. I mean, are shipping more to Ternium, Mexico and we are not shipping to third parties mainly because of what happened with The US quota. So we are changing the balance for the third quarter. So you are not going to see shipments to third parties, but we are going to ship much more to Mexico.
In the third quarter, as I said before, we are going to reduce a little bit production because of these marginal costs when you produce with pellet. But that reduction is lower compared to the volume you're going to see that the third parties we don't ship to third parties. I mean, volume to third parties is going to decrease around 300,000 yes, 300,000 tons and production is gonna decrease much lower than that. Thank you.
Speaker 0
There are no further questions at this time. I will turn the call back over to the CEO for closing remarks.
Speaker 2
All right. Thank you very much to all of you for participating in our conference. As usually, please contact us if you have any additional requests for comments or information. And again, thank you very much. Bye bye.
Speaker 0
This concludes today's conference call. You may now disconnect.