Ternium - Earnings Call - Q3 2018
October 31, 2018
Transcript
Speaker 0
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 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. 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'm Ternium's Investor Relations Director. Ternium issued a press release yesterday detailing its results for the third quarter twenty eighteen. This call is complementary to that presentation. Joining me today is Mr.
Maximo Vedoya, Ternium's CEO and Mr. Paulo Brizio, Ternium's CFO, who will discuss Ternium's business environment and performance in the third quarter twenty eighteen. 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. Beloja.
Speaker 2
Thank you, Sebastian. Good morning and thanks all for participating in this call. As usually, I will make some brief comments about our performance or the current state of our main markets. And then I'll ask Pablo to review our results in the third quarter of the year. Later, we'll go into a Q and A session.
Well, as you read, we reported a record EBITDA level in this third quarter. In the 2018, Ternium's EBITDA reached $2,100,000,000 a 50% increase compared to the same period last year. So far in 2018, we cut 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 show in the first nine months of the year translated into earnings per ADA of $5.79 On the other hand, even after the acquisition of CSA in September, Ternium's balance sheet is as ever. Free cash flow generation has been strong so far in 2018 reaching $847,000,000 in the first nine months of the year, taking net debt just to 2,100,000,000 as of the September.
This is just 0.8 times last twelve months EBITDA. Going to the develop of our main markets, since our last call, Mexico, The U. S. And Canada successfully renegotiated 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 in than from the original NAFTA agreement, make 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 and we can expand in the Q and A session. But 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. So 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 Pesqueria facility in Mexico five years ago.
Then last year we acquired the state of the art slab mill in Brazil. And a couple of months a year ago, we announced the investment program to further expand the capacity of the Texqueria 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, but I think there are still some issues of trade that are not yet solved, mainly the application of the Section two thirty two 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 makes no sense to maintain Section two thirty two tariff for Mexico and Canada.
And 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 still to The U. S, but 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.
So any tariff of quota imposed to Mexico should be mirrored by the Mexican government and 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 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 2019, which in Argentina this first quarter is a seasonally weak quarter. After this, we have better prospects for the country with the election and settled 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 EIS 29 to the financial reporting of our Argentine subsidiaries.
This has several effects in the accounting mechanism from the third quarter twenty eighteen 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 Pesqueria facility and Colombia are advancing on plant. The new galvanizing and pre painting lines in Pesqueria should be up and running during the first half of next year.
So with all these, 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. Thanks, Maximo. Good morning and thank you all for participating in our call. As Maximo 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 with record EBITDA level of
Speaker 3
$832,000,000 higher than 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 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 differ 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 $523,000,000 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 shipment 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 what Jorge has 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 the steel shipments. Part of this decline will be related to lower slab shipments to third parties and consequently higher internal slab consumption. Industrial market in Mexico continues showing steady demand, while commercial market usually driven by construction activity remained weak. In Argentina, as Maximo anticipated, financial market volatility and high interest rates continue to have a negative impact in industrial sectors production rates and construction activity. These events together with the destocking 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 slightly 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 worst steel market as well as lower purchase of third party steel in 2018 due to integration of Ternium Brazil. On top of that, shipments increased 1,800,000 tons year over year mainly due to the consolidation of Ternium Brazil slab sales to third parties. Let's now review the increase in net income in the first nine months. There was $386,000,000 year over year increase in net income on a 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 a slight increase in interest expenses, mainly reflecting higher net indebtedness following the acquisition of Ternium Brazil in September 2017. To better understand these effects 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 the third new Argentine subsidiary used the Argentine peso as their function 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 Maximo commented, free cash flow in the first nine months reached a very strong $847,000,000 Capital expenditures were $345,000,000 in the period, higher than in the same period of last year, mainly due to the consolidation of Ternium Brazil and the works being carried out in the Pesqueria facility.
Looking forward into the fourth quarter, we expect to continue growing 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 Pesqueria. Finally, the Pernius net debt decreased to $2,100,000,000 at the September, reflecting the strong free cash flow in the period less the dividend paid and represents a comfortable level of 0.8 times EBITDA. So thank you very much for your attention. These were all my prepared remarks.
So please let's start the Q and A. Operator, please let's proceed with it. Thank you.
Speaker 0
Your first question comes from Leonardo Correa with BTG Tactual. Your line is open.
Speaker 4
Yes, good morning everyone. First of all, 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 reports, there's clearly the domestic environment is quite challenging for steel operations. We've been seeing a dramatic currency move. Typically when we observe past price throughs, right, in these environments, we know that the pass through is quite incomplete. So I just wanted to get a sense of how profitability in Argentina should evolve going forward. And if you guys can comment on the outlook for volumes in 2019.
I know that it could be a bit premature, but 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? And 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 provide a bit more of 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.
Speaker 2
Thank you, Leonardo. We start with Argentina, your first question. And there are several questions that you made about that. Of course, I mean, today is in a very difficult position and we all know what is going on, but it has been going on for the last two quarters. So regarding first price, today prices in Argentina of steel are stabilized and they are in line with the Brazilian prices.
Of course, are not as high as The U. S, but they are in line with the Brazilians. So we don't expect many changes in the short term regarding that. Regarding volume, the world still just released how the volumes in Argentina are going to change and we pretty much are the same that we are seeing. 2018 will be between 67% down, but we are seeing an increase compared to 2018 in 2019.
This increase is of 2%, but it's a change in the current situation. In my initial remarks, I said that the Argentina situation was problematic. But I think also I mentioned that there were several things that are supporting an increase in demand beginning in the 1839, sorry. Commercial balance is reversing for the first time in many months. Last month, finally, there was a positive commercial balance and that probably will continue.
The peso has stabilized. The tourist is increasing, the energy flows are reversing, which also helps in commercial balance. And agriculture business should be much higher than last year. So I think that the last thing that should happen is that interest rates start going down. And when that happened, I think as I said, the volumes will start going up.
Of course, it's 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. So I think again 2019 will be a little bit better. Regarding CSA, Pablo? Yes, okay.
Or ex CSA.
Speaker 3
Ex CSA, yes. Starting in Brazil now. Hi, Leonardo, how are you? So 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.
So 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 in the coming quarter where we are expecting to see some production in shipments to third party and increase in shipments to our own facilities to be reflected there. Margins that we are generating and unfortunately, we are not disclosing specific number 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. And I guess that you remember what was mentioned by Maximo and Marci Lociara in our Investor Day. And also, we have specifically in this quarter the devaluation of the currency that helps in order to reduce the real input cost. So all in all, the margins in Brazil are very good and the fluctuation that you see in sales is basically related to that.
Speaker 4
Perfect. Thank you. Would it be possible to provide just the operating rates from CSA, Pablo?
Speaker 3
Yes. We will be as you know, we set the target at the beginning of the year. And clearly, at the end of the year, we will be commenting on the operating performance of Assiti. Clearly, we will be doing that.
Speaker 4
Okay. Thank you very much, Pablo and Maximo.
Speaker 2
Thank you. Your
Speaker 0
next question comes from Thiago Lofiego with Brad Asco, BBI. Your line is open.
Speaker 5
Thank you, gentlemen. Two questions on my side. The 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?
And within that question, what's your outlook for Mexican steel demand growth for 2019? Second question, what could be the potential increase in slot capacity in CSA? Can you give us an update on that? Thank you.
Speaker 2
Thank you, Thiago. Let me start with the Mexican environment. And yes, the news or the new news of the cancellation of the new airport. I mean, on the short term, we don't have any business with the new airport. So we don't have any direct impact at Cernium because of this cancellation or not.
But clearly, the cancellation is not a good news. I mean, 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. I mean, 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. So I think that was one of the positives. The decision of canceling the airport, clearly not a very good decision from a business perspective. I think it's a setback. But to be fair, Mr.
Lopez Obrador has been very vocal about his opposition to this infrastructure project for the last eight years. So although we didn't expect, it was something that could happen. If this is going to have a setback in our plans, so what we think of the Mexican growth for next year, not yet. I think on the contrary, I think this government, it's very outspoken in increasing infrastructure. As you know, and 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 compensate by the increase in the private investment. Last quarter, both of them decreased also. So that's what you've seen in our shipments in Mexico. But I think that this government wants to change that. So 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. So I think we have to wait to see what will happen with a 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.
Think with that,
Speaker 5
Thank you, Maximo.
Speaker 2
Actually, you can other one
Speaker 5
On Mexican steel demand growth for 2019 actually.
Speaker 2
The Mexican steel growth, we're still which are the only official numbers just released and they said it is 1.2% the growth for 2019. I think that's correct. But remember that Mexico has a lot of imports. So for us, I mean, are expecting to gain market share against imports. So the consumption is growing, it's not growing by a lot, but it is growing and 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. When we took was 4.3, I think the annual rate, if I don't remember. But and the expectation is to reach 5,000,000 tons in 2020. That's our expectation. And of course, we'll continue analyzing as we do in all our assets if that could increase a little bit more.
Speaker 4
Just to make it clear, Marcelo,
Speaker 5
the increase to 5,000,000 tons that's when you go to your nominal capacity, right? Installed capacity of five Exactly. Million But are you envisaging any potential capacity expansions at CSA?
Speaker 2
No. Today, are not seeing that. What we are looking at is what are the bottlenecking where we can have marginal increases, but not a huge expansion.
Speaker 5
Okay. Thank you, Massimo. Very clear.
Speaker 0
Your next question comes from Carlos Valba with Morgan Stanley. Your line is open.
Speaker 6
Thank you very much everyone and good morning. I would like to understand how do you see the evolution of EBITDA per ton in Ternium, Argentina or the Southern region given the accounting effects that you have given that the functional currency in the country is local? And what can we expect a contraction in EBITDA per ton I think is what we will see. But if you can quantify, give us a little bit of more color as to what you are seeing that will be really useful. And then you've given the weak relatively weak shipments in Mexico in
Speaker 2
the third quarter, Can you
Speaker 6
tell us what 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. So any color there would also be useful. Thank you.
Speaker 2
Thank you, Carlos. I'll take the second one first, if you don't mind. And then I think Pablo is much better expert in accounting than myself to explain the first one. Shipment in Mexico, I mean, expect today to be rather flat in the fourth quarter. The fourth quarter in the commercial market usually it's a slow quarter, but it's better in the industrial market.
And we don't see any changes from the third quarter in our order book. So we expect something similarly in the next quarter. I don't know if that answered the question Carlos
Speaker 3
or Yes.
Speaker 6
That's good, yes. Good color.
Speaker 3
So Pablo? Yes, okay. Hi Carlos. I understand that the issue of inflation accounting is causing some doubts on the number, but 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 numbers, which was back in 02/2002. So 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. So 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. But going exactly or directly to your question, we are not seeing 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 that what we saw up to now.
Speaker 6
Pablo, these margins we see well, yes, sorry, EBITDA margin doesn't really matter if it is in But
Speaker 0
pesos or in
Speaker 6
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 and L given that the currency has devalued in the last nine months and you have been purchasing raw material and put them in your inventory in pesos. So when do you expect to see and then 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? And how big of an impact do you expect that we will see?
Speaker 3
No, 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 currency accounting currency in Argentina, clearly, the value in dollar terms after the devaluation of the currency of our inventories is lower. So the cost of the following quarter saw a decrease. We are expecting this to continue in the fourth quarter and should start to normalize beginning of next year, most probably entering to the year or entering to the second quarter.
But all in all, we expect to continue to see good levels of margins coming out of Argentina.
Speaker 6
All right. Thank you very much.
Speaker 7
You're welcome. Thank you.
Speaker 0
Your next question comes from Rafael Cuno with Credit Suisse. Your line is open.
Speaker 8
Good morning, everyone, and thank you for the questions. So 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?
And how do you see it behaving going forward given the developments in NAFTA and protectionism scenario on a global scale? And 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? And what lines of products do you see as more like overstocked than others? If you could give us a color on that that will be very helpful.
Thank you very much.
Speaker 2
Thank you, Rafael. Prices in both Mexico and The U. S. Trending 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 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 calls, we were talking about the gap between The U. S. And Mexico, because after the 02/30 in history the prices were much more related and they were kind of similar. Today, is a gap between both prices because of the February. What will happen?
We don't see I mean, I think current prices in Mexico are in a sustainable levels. I think that a positive outcome if the February is solved between The U. S. And Mexico, this could be a good news or would be a good news. But again, that depends if the two thirty two is solved somehow.
If not, I think we are going to continue with the gap we had this quarter and the following quarter will continue with the same gap.
Speaker 3
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 a destocking 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. And then we started to see reduction on demand.
So 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 is not 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 shipments. So for us, it's something that is normal when we have this type of situation. So you are seeing a reduction in demand because of the reduction in growth in the actual economy or the recession that we are seeing for these quarters. And the second one is the adjustment of our customers' inventories to the new reality. So in these cases, usually it takes a couple of quarters for them to do that.
And we are expecting to see a normalization of these again beginning of next year.
Speaker 8
Very clear. Thank you very much.
Speaker 3
You're welcome.
Speaker 0
Your next question comes from Markus Zumko with ITAU. Your line is open.
Speaker 7
Hi, good morning everyone. Congrats on the strong results. First question is on the outlook for the gap between HRC and the lab prices. And how do you think that could impact your EBITDA 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 that number is still 20% below today of what was one year ago. And if we could just a last one on the new naphtha, you could if you believe that if
Speaker 2
you still have the
Speaker 7
same views on auto production growth in Mexico following the new agreement? That's it.
Speaker 2
Thank you, Marcos. I'll start with the last one because
Speaker 3
you like the
Speaker 2
I like the The new NAFTA. I mean, think yes, Mexican automobile production this year will end up around 4,000,000 units. And I think that with the new NAFTA, there's going 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.
And number two, the rule of origins or the rules to make what a car is NAFTA has changed. So I think that in the long term, there's going to be an increase in the consumption of steel because of this. I don't know if everybody knows, but the old NAFTA said that a car in order to be Mexican sorry, in order to be NAFTA of NAFTA origin has to have 62.5% of local content. But that local content was calculated in a very particular way and still for example and many other products were not taken into account, I mean in that calculation. You can have steel from, I don't know, 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. And the third one is that part of the production has to be made in places where workers and $16 an hour or more. So all these three things, I think put together a situation where more cars and more local content has to come from NAFTA.
So I think that, yes, there's no yet I mean, there's not yet any publication of what is going to be this 4,000,000 units in a couple of years, but I think it's going to be a little bit higher. I know with that I answered that question. Is. Thank you. Second one, prices in Argentina, I mean 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.
And Pablo, why don't you explain it very detail?
Speaker 3
Yes. You should not compare what you saw in the last conference call or in the last quarter results because that number were not adjusted. And as I mentioned at the beginning, by applying the new rules, we need to adjust every number to basically as of September year. So 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.
So 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 31. So you will see probably a further increase on that side. But I think that the important thing is what Maximo said, which was that when he was answering another question, which was that the prices in Argentina are reflected in international prices and are at the level of what we see in Brazil as steel prices.
Speaker 2
And Marcos, the first question regarding slab prices, I think well, the prices have decreased a little bit over the last couple of months. But what will happen in the future? I think there are two three things. One in the negative side is The U. S.
Is producing a little bit more steel, although I don't think that that effect it's going to be very high. But 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 disruption in slabs production in several facilities that produce slabs in Russia and in Brazil. So I think that it's going to more than compensate what happened in what is happening in The U. S.
So I don't expect prices to be much different than what they are today.
Speaker 7
Okay, Massimo. Just a follow-up here. Why you're seeing the disruptions in slab productions in Russia and Brazil? Actually my question was more on the gap between HRC and slab prices. How do you see that evolving going forward?
Speaker 2
No, the disruption comes from some industry that has to make huge or long maintenance in blast furnace and in the continued casting. So that's the issue. The gap you're referring to the gap in between The U. S. And the slab prices
Speaker 7
or would say global prices. The differences between prices were very high mainly in The U. S. And that impacted also Mexican prices. And then 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?
Speaker 2
No, I understand. But one I mean, overall, we are integrated, remember, because although we are buying slabs, we are also selling almost the same amount of slabs. So it's not going to affect us very much that margin or that gap for Foternium's mean Foternium's results. The gap today, it's clearly and against the cultural prices are decreasing a little bit. But I don't see major changes again in this gap today.
There are things again, I think that the prices in the markets are going to continue are set to continue in this space. And slab prices although have come down a little bit, I don't see that they are going to come down much more.
Speaker 7
Perfect. I got it. Thank you very much.
Speaker 0
Your next question comes from Alfonso Salazar Your line is open.
Speaker 9
Thank you. I have a couple of questions here. The first one is regarding NAFTA, the new NAFTA. You mentioned about these three new provisions. And 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 third question. The second one is if you can give us an overview of demand and profitability in other markets.
I'm thinking about Colombia in the coming years. And the third question, if you can give us or remind us what is the CapEx estimates as you expand in the coming years? Thank you.
Speaker 2
Perfect, Cavencio. 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. And 15%, at least 15% of that can come from things that are already paying more than sixteen hours, for example, research and development other things. So it's hard, but we have been talking to several people or several of our customers and it seems that they are going to make it to this 40%. And so 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, I mean, is doing much better to be honest. If you see if you saw the Usiminas numbers that came out a couple of weeks ago, I mean, market is increasing, volume are increasing. Again, we're still is predicting the steel consumption in Brazil, sorry, it's going to increase almost by 6% next year. So I think the elections at least bring some confidence to the market, at least for what we are seeing in the market. So I think that Brazil is going to bring us good news.
Colombia has I mean, 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. But I think that the new government with the new government things should start to improve in the beginning of next year. And Argentina and Mexico, main product main markets I think we discuss it extensively.
CapEx, CapEx would be around $800,000,000 next year. This year will be a little bit less than $500,000,000 next year $800,000,000 and 2020 will be probably around $1,000,000,000 because that will be the peak of our Pesqueria new Pesqueria investment. 2021 will probably come back to normal of $550,000,000 Very good. Thank you.
Speaker 0
Your last question comes from Tina Tanners with Bank of America. Your line is open.
Speaker 10
Yes. Hey, good morning and thank you. Wanted to ask I'll just ask two. 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 10,000,000 plus tons over the next several years, China is consuming fewer tons.
And just wondering a little bit more about why you think that Mexico can be more self sufficient? And then second question is just in light of the really strong results this last quarter and a rising 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.
Speaker 2
Thank you, Dima. I think the first question and I think there's a couple of things. I mean, China is not decreasing consumption. On the contrary, China is increasing consumption And supposedly and 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 produced in any way.
So it's very difficult to compare numbers. But I think China will continue with some restriction with some environmental restriction and consumption is increasing. And if China will continue with this trying to put more investments as they are I mean, it seems that they are doing that. Consumption will continue strong in China. I mean, in Mexico, there are almost in flat products only 8,000,000 imports.
And so I think that Mexico is a little bit more a place more competitive to produce steel than The U. S. And that's why we think that we are much capable of getting that share than and competing with The U. S. I mean, there is a logistic much near.
I mean, customers are very near our facilities. And so we don't see a disadvantage. I don't know if this is answering the question, but I'm very confident that we will be able to gain share of imports with this new facility.
Speaker 3
Okay. I think let me take the second question, which is not an easy one to answer.
Speaker 0
Because
Speaker 3
clearly, we are running at EBITDA margins, which is how we look to see these numbers. And the consequence of that is the EBITDA per ton at very high levels. Clearly, that's the case. This has been case for the last, I would say, couple of years. Remember that we always said that we expect to run our facility at our company at a level of above 15% to 20% EBITDA margin.
Clearly, have been over passing that level in the last couple of years, especially in this year. The integration of CSA now Ternium Brazil 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. But even as we see and we have been describing, Maximo 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 has said that we are 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. So and also, as you know, 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. And one question that was answered by Maximo and he's 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. So 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, but we understand that we will be able to sustain at healthy level of EBITDA margins. Hope to answer your Sure. Question,
Speaker 7
Thank you.
Speaker 3
You're welcome.
Speaker 0
There are no further questions queued up at this time. I'll turn the call back over to our CEO for closing remarks.
Speaker 2
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.
Speaker 0
This concludes today's conference call. You may now disconnect.