Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Ternium SA  (NYSE:TX)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ternium Fourth Quarter 2018 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. (Operator Instructions) Thank you. Sebastian Marti, you may begin your conference.

Sebastian Marti -- Investor Relations Director

Thank you, good morning, and thank you all 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 Fourth Quarter and Full Year 2018. This call is complementary to that presentation. Joining me today is Mr. Maximo Vedoya, Ternium's CEO; and Mr. Pablo Brizzio, 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 2 in today's webcast presentation.

With that, I'll turn the call over to Mr. Vedoya.

Maximo Vedoya -- Chief Executive Officer

Thank you, Sebastian, and good morning to everyone. It is very nice to have the opportunity today to share with you our thoughts regarding Ternium's performance. As we always do, I'll go through some prepared remarks, then Pablo will make a brief analysis of the latest quarterly numbers, and finally, we'll have a Q&A session.

All right. We had an outstanding result in 2018. We reported an EBITDA of $2.7 billion. This was the highest EBITDA in Ternium's history, with a 40% year-over-year increase. We had shipments of 13 million tons in the year, and this is the first Full Year with Ternium Brazil as part of our production system. There in Ternium Brasil, we achieved a steel production record of 4.6 million tons last year. EBITDA margins was 24%, the highest we had cut in the last decade. This strong performance led to earnings per ADS of $7.67 and also to a free cash flow of $1.2 billion, which translated into a $1 billion decrease in net debt during the last 12 months, taking our net net debt to EBITDA ratio to just 0.6 times. The Board of Directors proposed to raise the annual dividend to $1.20 per ADS equivalent to an approximately 4% dividend yield. This proposal took under consideration the current strength of our balance sheet as well as our ongoing investment program, which will require growing capital expenditures in 2019 and 2020.

As Pablo will show you afterwards, we have been gradually increasing our dividend payments over the last years and our intention is to continue doing so in the years to come.

Let's turn now to what is happening in the steel market. Our expectations are, for a global steel demand in 2019, to grow moderately. In Mexico, our main steel market, we believe sale to industrial customers will continue to do relatively well in 2019, with the Mexican manufacturing industry supported by growth expectations in the US economy.

On the other hand, the construction market will probably continue to be weak in the country as a result of low public and private investments. Relevant issues to follow in this market in 2019 will be the expected ratification of the new NAFTA, the USMCA, which is achieved during the year, would be a positive step to reduce trade uncertainty. The eventual agreement on section 232 steel tariffs among the current NAFTA partners, which should help to normalize steel trade flows in the region, and the commitment of the new Mexican administration to fight unfair trade and prevent redirection of export to the Mexican market as a result of higher trade barriers elsewhere.

Global overcapacity, continue to be a risk to fair trade. China's increases in production while having a weakening economy activity, which is dependent on government stimulus measures. It is important for governments in Latin America to be aware of the situation and to take measures to prevent the damage, it would cost to local industry.

Turning now to Argentina, the economy has been under a very restricted monetary policy in 2018, with an aim at taming inflation. Economic activity in the country weakened significantly during the second half of 2018, and in the first quarter of 2019, we will continue showing low level of shipments, taking into consideration that on top of these, this is a seasonally slow quarter in Argentina.

Further on, we expect a gradual recovery starting in the second quarter of 2019. The driver of this recovery would be a significantly better agribusiness performance based on improved yield in 2018 and a Recoson (ph) area, higher growth levels in the Brazilian economy, Argentina's main destination of exports of manufactured goods, and a gradual decrease in interest rate. In Brazil, Vale's event, created a challenge situation effecting Iron Ore prices, for the time being we don't see any significant problems to ensure supply of iron ore to our facility in Rio. In that facility, we will continue to work this year to increase even more its capacity utilization. Finally, we believe Usiminas is very well positioned to take advantage of the positive prospect of the Brazilian steel market in 2019.

So in a nutshell, we have a great 2018, and we look forward to continue growing our business in 2019. Margin in this year are not going to be as high as they were in 2018 as we are converting to a more sustainable long-term level, you can count on us, driving to maintain our margin leadership in the Americas, working hard to maximize efficiency at our facility and reduce production costs.

The ongoing investment project in Mexico, will certainly help on this front enabling a much high integration with our facility in Brazil and consolidating our world-class production system with the latest technology to maximize efficiency and productivity.

Okay, with these, Pablo, please take over to comment about our performance in the fourth quarter.

Pablo Brizzio -- Chief Financial Officer

Thanks, Maximo. Good morning to everybody, and thank you again for participating in our conference call. Let's review our performance in 2018, starting in Page 3 of the webcast presentation.

Maximo anticipated, our performance in the year was exceptional, with record EBITDA of $2.7 billion and EBITDA margin of 24%. As you can see in the upper right chart, our EBITDA in 2018, increased significantly compared to EBITDA in 2017, and is also significantly higher than EBITDA in any other reported period in the last decade.

In the upper left chart, shipment grew 1.4 million tons year-over-year in 2018, reaching a record 13 million tons. This increase was mainly related to the full consolidation of Ternium Brasil slab shipments to third parties, as in 2017, we consolidated only four month, from September to December.

Looking at Ternium's EBITDA margin on the lower left side and EBITDA per ton on the lower right side, we reported a margin of $208 per ton in 2018 or 24% of net sales, will have (ph) the margin range reported in the last years, which was between $110 and $170 per ton. As Maximo commented, margins in 2019 will be lower than in 2018 converting to a more sustainable long-term level.

Please turn now to Page 4 to review the main drivers of the year-over-year improvement in EBITDA. As you can see in the upper chart, the significant year-over-year increase in EBITDA is a result of a full year EBITDA per ton and higher shipments, reflecting strong price environment in the North American steel market and a full consolidation of Ternium Brasil.

Ternium Brasil enables us to integrate our operation, at the same time was able to take advantage of strong slab market in 2018.

Net income in the year reached $1.7 billion, significantly higher than any other year since we listed Ternium shares. The lower chart shows net income increased mainly due to higher operating income with some additional help for improved results from our participation in Usiminas and the lower effective tax rate due to a revaluation of assets for tax purposes in Argentina, that have a positive effect in deferred taxes.

Please turn now to Page 5. In this page, we are showing the evolution of free cash flow, capital expenditure, net debt, and dividend payment. Free cash flow in the year, reached a very strong $1.2 billion. Capital expenditures were $520 million in the year, higher than in 2017, mainly due to the full consolidation of Ternium Brasil and the investment projects under way, being carried out mainly at the Pesqueria facility and also in Colombia.

Looking forward into 2019, we expect to continue to showing strength in cash flow generation, although below the levels achieved during 2018, in line with lower EBITDA expectation and higher capital expenditure due to the development of our new hot rolling mill in Pesqueria.

Finally, Ternium's net debt decreased to $1.7 billion at the end of December to close to 40% decrease in net debt reflecting the strong free cash flow in the year, less the dividend paid, and represented a comfortable level of 0.6 times EBITDA at the end of December. On the lower corner, you can see how Ternium's dividend payment has been increasing pretty consistently over the year and the current proposal of $1.2 is equivalent to around 4% dividend yield. The dividend should be payable at the beginning of May after shareholders' meeting approval.

Coming now to the fourth quarter of 2018, we will now review in the next page, Page 6, our shipments performance. Total steel shipments went down 180 thousand tons sequentially or around 6% decrease. In Mexico, on the upper right chart, shipments remained relatively stable in the fourth quarter of the year. The quarter is normally the seasonally lowest in the year. So we expect shipments in Mexico, we saw some increase in the first quarter of this year. In other markets, in the lower right chart, you can see a sequential decrease in the fourth quarter 2018 mainly as a result of lower slab shipments from Ternium Brasil to third parties as anticipated. Thus, less volumes were shipped instead to Ternium Mexico, however, eliminated in the process of consolidation of the fourth quarter. We expect this to revert in the first quarter of 2019 with higher shipments of slabs to third parties and lower inter-company sales.

Turning finally to the Southern Region, the sequential decrease in shipments as shown in the lower left chart mainly reflect depressed economic activity and destocking process in the value chain in Argentina. The first quarter of the year is the seasonally lowest in Argentina. So shipments will continue to be weak in this market, and we expect them to begin a recovery in the second quarter as Maximo mentioned.

So in the next page, you can see the effect in Ternium sales of the 6% decrease of the shipments, together with a 6% decrease in revenue per ton that was mainly related to a lower realized price in the Mexican market as well as in the slab sales. We anticipate revenue per ton to continue decrease in Mexico in the first quarter of 2019, as a result of the usual reset of contract prices and some weakness in the spot market. The participation of each market in our net sales breakdown remains relatively stable with around half of the shipments being made in Mexico, 17% in the Southern Region, and a third in other markets.

On Page 8, we have a closer look to quarterly EBITDA. EBITDA margin was a healthy 19% in the fourth quarter, or around $170 per ton. This was a decrease compared to the very high margin we had in the third quarter, and we will go into that further on. Net income was $435 million, which is equivalent to $1.79 per ADS. Please turn now to Page 9 to review Fourth Quarter EBITDA and Net Income.

In the first chart, we can see the components of the sequential EBITDA decrease. The major component was a decrease in the margin with some additional decrease related to lower steel shipments and lower sales of electricity in Mexico as electricity sales price decrease seasonally in the winter.

Revenue per ton went down mainly as a result of lower realized price in the Mexican market and in the slab sales as we just discussed. The higher cost was mostly related to higher raw material, slab energy, and labor costs.

The effects of inflation accounting in Argentina was one of the reason for this increase in cost. Specially, the combination of high inflation with currency revaluation in the fourth quarter, something we're not expecting to happen. Also expected slab cost increase in the quarter, mainly as a result of first-in first-out accounting. In the first quarter of this year, we expect EBITDA to decrease slightly compared to the fourth quarter as a result of a lower margin partially offset by higher shipments. EBITDA per ton should sequentially decrease mainly due to lower revenue per ton in Mexico and a higher participation of slabs in the sales mix, as we are going to sell more slabs to third parties and less slabs inter-company. On the other hand cost per ton should remain relatively stable.

In the second chart in this slide, you can see that the sequential decrease in net income was mostly a result of lower operating income, this was partially offset by better financial results, better results from our participation in Usiminas, and a lower effective tax rate.

There were significant sequential gains in net financial expenses, mostly related to currency fluctuations in Argentina and Mexico that were partially offset by lower gains related to inflation accounting over the net monetary position, of course, in Argentina. There were also slight decrease in interest expenses mainly reflecting a lower net indebteness and average interest rate.

Okay, thank you very much for your attention. So we are now ready to take your questions. Please operator proceed with the Q&A session.

Questions and Answers:

Operator

(Operator Instructions)

Your first question comes from Marcos Assumpcao with Itau. Your line is open.

Daniel Sasson -- Itau -- Analyst

Hi, everyone. Good morning. It's actually Daniel Sasson from Itau. Thanks for the questions.

My first question is on the ratification of the new NAFTA agreement. I know that you mentioned that you, through, for reduce uncertainties in terms of trade, but if you could comment a bit on the impact you expect on US and Mexico prices and also maybe on costs, if we consider that the minimum wages of workers in the steel making industry in Mexico might increase and the potential impacts of that for margins? That would be my first question. And my second question regarding Argentina, we would likely see margin pressure in the short term considering the sharp depreciation in the peso since May last year, but what do you expect looking ahead, the FX seems to be more stable now. And also, what do you expect in terms of your normalized EBITDA per ton in 2019 considering that 2018 was a very, very strong, a very solid year in terms of your EBITDA per ton? Those would be my questions. Thank you.

Maximo Vedoya -- Chief Executive Officer

Thank you, Marcos. I'll start with the first one, and Pablo will lead the second one.

The new NAFTA agreement and what are the effects on prices? I mean, the effect will be of what will happen with 232. I mean, today the 232 against Mexico and Canada is still in place. The assumption, we all have and the Mexican government also have, was that once we reach an agreement, 232 was going to be eliminated between Mexico and Canada, that didn't happen. But we do know that to sign NAFTA, 232 has to be solved. I don't know if the solution is going to be eliminate the 232 between the countries or to put quotas between the countries. I mean, Mexico is going to have a quota in the US and the US is going to have a quote on Mexico. I think those were other two possibilities, I mean to eliminate completely or have a system of quotas. I don't see others solution for the 232. Both solutions, I think are good to stabilize prices, especially in Mexico. Remember that the US prices has a huge increase with 232, and Mexico started lagging, prices in Mexico started lagging behind the US prices, mainly because Mexico was also affected by the 232. I know today prices in the US are decreasing, prices in Mexico were also decreasing, although not at the range in the US, but to solve the 232 and to have certainty between the trade between US and Mexico steel, would eliminate, I think, this uncertainty there is, and so will benefit whatever the solutions is, whatever the two solutions are, will benefit Mexico. Are your there still?

Daniel Sasson -- Itau -- Analyst

Yes. Perfect. That was very clear.

Maximo Vedoya -- Chief Executive Officer

Sorry.

Daniel Sasson -- Itau -- Analyst

Do you expect any tax on your cost front coming from the new agreements that you have?

Maximo Vedoya -- Chief Executive Officer

No, remember the new agreement specified a cost of $16 per hour in workers only in some part of the automotive industry, not on steel, and although our salaries are much higher than the minimal wage. I mean, we don't expect to have any increase due to NAFTA.

Daniel Sasson -- Itau -- Analyst

Perfect. That was very clear. Thank you.

Pablo Brizzio -- Chief Financial Officer

Okay. Marcos, let me try to answer your second question, which is not easy to do, because as you know the inflation accounting that we need to have in Argentina is putting, especially in the first year of accounting for that, some distortions in the numbers. And also take into consideration that during the fourth quarter, as I mentioned during the initial remarks, we have something what you can consider a little weird (ph) which is we have an important level of inflation, which was 12%, but then we have also significant level of revaluation of the currency of 9%. So these things together works, if you want, against the numbers of the company and that was one of the reason why the total EBITDA of the company was below expectations.

The total impact of these in the cost of Ternium through Argentina was quite significant. So of course we cannot come or go through numbers without inflation accounting, but during the fourth quarter, if we had not inflation accounting, probably our EBITDA would have been even $50 million higher than what we have reported.

Going in, entering into 2019, clearly things should start to normalize because as Maximo mentioned, we are expecting to see some gradual recovery of shipments in Argentina and the economy in Argentina. So we are not expecting between in the currency value level, so this should start to normalize. As a whole, the EBITDA margin that we're seeing for the future is, as we already discussed, within the range that we always think is a normal level for a company as Ternium, which is between 15% to 20%, and of course, as happened in the last 3 or 4 years, always trying to be very close to the upper side of this range. So that's what we think should be the numbers coming in during this year.

Operator

Your next question comes from Caio Ribeiro with Credit Suisse. Your line is open.

Caio Ribeiro -- Credit Suisse -- Analyst

Yes. Good morning everyone. So, my first question is related to domestic demand in Mexico, and I know that you have been talking about the possibility of the new administration boosting infrastructure spending, which could drive demand for the commercial market up, which has been lagging for some time. So, I just wanted to get some view if whether there have been any new developments on this front and whether you can also provide some guidance for where you see steel demand growth in Mexico in 2019?

And then secondly, regarding steel prices in the US, there have been some recent price hike announcements for flat steel by some of the major players in the last few weeks in the last month as well, but overall market prices, they have remained relatively flat, and relatively unresponsive to these hikes. So, I just wanted to get some color from you, on what direction you expect the flat steel prices in the US to move toward in the next few months? And whether you already seen a bottom or whether you expect the weaker momentum that we're seeing to continue? Those are my two questions. Thanks.

Maximo Vedoya -- Chief Executive Officer

Thank you Caio for your questions. Let me start with the Mexican question, which is clearly a difficult question, because the government is starting, and steel demand will depend on how the new government or the new administration proceed. We are still positive regarding Mexico and our business there. The newer administration just only took office 2-month-and-a-half ago and I think there is a normal process of getting used to the changes. There have been some actions by the present administration that have created some uncertainty in the markets, and I know that. But I think that there are some things that are moving in the right direction. Spending is increasing and it's increasing first in Pemex. I mean, there is more activity going on in Pemex and more drilling going on, more pipelines being built. So you see that the new administration is trying to improve the performance of Pemex. What is the operative performance of Pemex, and we are seeing that in some of our customers and that's the first step, I think, for more infrastructure spending that is much needed in Mexico. To be honest, we don't see that infrastructure yet, and we didn't expect to see it yet. These are things that normally take several months before a new administration comes in. The last administration, that we changed from the PAN party to the PRI party, it was almost one year of almost zero investment. But, I think here, what we are seeing in Pemex, is a good sign that things are going to move in that direction.

The other thing is that the government is very vocal, and if you see the conference that president, Lopez Obrador, did on Monday, you will see that he is very vocal about developing the industrial sector in Mexico. I think the new president, understands the importance of the industry and development of the whole supply chains in the industry. So I think that we are also positive on what is going on, on that front. Again, these are not things that you're going to see in the near future. We don't expect a big increase in consumption in 2019. But, we think that this is a right direction for improving in the Mexican consumption in the following years. So again, we are quite positive regarding Mexico and our business there.

Regarding prices in the U.S., you are right, I mean the prices, if you follow the CRU, came down to 735 metric tons. It increased a little bit this year in the last weeks. I think that regarding to your question, I think, the U.S., they have reached a bottom. I think, although imports are high, 232 is there, and cost, especially in iron ore is increasing for some of the companies. You also see an increase in the slab prices in the market in the last 2 weeks. So I think costs for some of the mills that they're exporting to the U.S. is getting higher, and I think, the U.S. with the 232 still in the market, I think we'll be able to increase, a little bit the prices, and we are seeing the bottom of the price cycle.

Caio Ribeiro -- Credit Suisse -- Analyst

Perfect. That's very clear. If I may just have a quick follow up here. If you are right that the bottom in prices in the U.S. has really arrived, given that 3- to 4-month lag effect until your contract prices in Mexico reflect this rebound or this bottom, could we start to see a rebound in the net revenue per ton in Mexico, starting in second quarter perhaps?

Maximo Vedoya -- Chief Executive Officer

Yes. I think it does, it is still very early, but I think that in the second or third quarter, we will see a rebound

Caio Ribeiro -- Credit Suisse -- Analyst

Perfect. That's very clear. Thank you.

Operator

Your next question comes from Carlos De Alba with Morgan Stanley. Your line is open.

Carlos De Alba -- Morgan Stanley -- Analyst

Yes. Good morning, everyone. So first question if I may, is on the capacity utilization expected for Brasil, and total capacity, capacity utilization in Ternium Brasil this year on the back of your comments Maximo? And also how much volumes you expect to ship internally to Ternium Mexico this year? As you mentioned in the first quarter, there is going to be sort of a reversal of what we saw in the fourth quarter with more temporary shipments out of Ternium Brasil, but in the year, you can give us at least a range of the volumes to be internally sold, that'll be very useful?

And then my second question is regarding electricity, your electricity sales in Mexico. Could you comment, remind us whether those sales are done at spot prices or you have a contract, and if these are contract, is there any link to the CFE rates or how do you determine this, the rates that you charge on these energy sales? Thank you.

Maximo Vedoya -- Chief Executive Officer

Okay. Thank you very much, Carlos. Let me start with the Brasil question. Brasil produced in 2017, if you remember the full-year 4.4 million tons. That was a record for the Brasil facility. This year 2018, we got another record of 4.6 million tons. Our target for the Brasil is to produce 5 million tonnes, which was ultimately the last capacity that the plant was built, and we think we're going to reach that in the next couple of years. There are some bottlenecks that we are starting to see, and we are planning to invest. Some of them are already going on. So I think that the maximum capacity or the maximum production will be this 5 million tons, but we are very confident that in the couple of years, in the next couple of years, we're going to get there. What are the volumes to Mexico? And this is not a very simple question to answer because it's changing every month. I mean, our idea knowing that the contract we have from transfers(ph), the sales to the domestic market, sales to other customers, is to ship to Mexico 1,000 tons every month. So that's 1.2 million tons. And to buy from other suppliers, the 2 million or 2.5 million tons, we need, the other 2.5 million tons we need in Mexico. That's our plan, but we are always making choices, if we have better opportunities -- there are months that we're only going to ship 50,000 tons, and if we don't have better opportunities, we are going to ship 150,000 tons. And you can see that that there are different months. So we're always making the -- the account of where is best to supply that production of slabs. But, the plan is 1.2.

Electricity sales, I mean, we are selling to the MEM, which is the Mexican electrical market or the Mercado Electrico Mayorista (ph) in Spanish, but it's, CFE has the rates, and then the system buys energy dependent on how the system produce the energy. So it buys from the best cost available, and if production or consumption increases, it starts to buy from the left (ph) competitive source. So it is a spot price, although the price is set by the market. What happened in Monterrey? Monterrey is an electricity hub that sells energy in the winter, but consumes more than what it produces in the summer.

And that was the thing that we know when we started the plant there. So the sales are going to be at a higher prices in the summer, but lower prices in the winter, and that's what you see usually in the last two years, in the winter months, in the three winter months, I mean, November, December, January, you have a lower energy take, the prices are lower and then prices start increasing and they get to peak in July September, depends on the heat that goes on in that summer month.

Carlos De Alba -- Morgan Stanley -- Analyst

Understood. Very clear. Thank you very much Maximo.

Operator

Your next question comes from Thiago Ojea with Goldman Sachs. Your line is open.

Thiago Ojea -- Goldman Sachs -- Analyst

Hi, thanks. Good morning, everyone. My first question is regarding the new expansions. If you can provide a little bit more information, how Pesqueria, the hot rolling mill is evolving? If the target date remains by the end of 2020, the galvanizing line in mid 2019, and also the rebar mill in Colombia, if I'm not wrong should be up by first quarter of this year.

And also regarding the situation in Argentina, can you provide a little bit more color in terms of demand how these different sectors are responding to the situation? And if you're seeing more imports into Argentina of steel? Thank you.

Maximo Vedoya -- Chief Executive Officer

Thank you, Thiago. The first, the expansion projects. The hot strip mill will start December 2020, we don't have any, we are on track to that. So we don't have any development that's says other things. The painting line will start probably in April of 2019. The plant for the galvanizing line is late June, early July. Although there are a couple of things that we are trying to accelerate to get to that time. And the Colombian project was December 2019. And so far, we are also on track to get that time. As you know, all those timings are very, I mean, they're targets very hard, very, I mean, we put hard targets to reach, but so far, we think that most of them we are going to reach.

Argentina, we'll be on it. We are not seeing any imports or any imports of the material we produce. I mean, the problem is not imports, the problem is that the decrease in consumption in Argentina due to all the things I told you early. I mean, the interest rate going to more than 70%, now in 44%, that created a huge impact in the domestic market. So a lot of people, not only decreased consumption, but inventories went down a lot because of the capital cost of inventories with these interest rates. So I think, the problem is more that than seeing imports or other things.

Thiago Ojea -- Goldman Sachs -- Analyst

Okay, great. If I can follow-up in terms of the CapEx of these projects, the expansion of projects. What have been spent? And how much is left? If you also can provide a total CapEx guidance for 2019 would be helpful. Thank you.

Maximo Vedoya -- Chief Executive Officer

Yes. The CapEx for 2019 will be $850 million. So, we are increasing from $550 million almost to $850 million, and 2020, which is a long-term, but will be around $1 billion. So most of the CapEx of the hot strip mill that you remember was $1.1 billion, will come in 2019 and 2020.

Thiago Ojea -- Goldman Sachs -- Analyst

Okay. Thank you, Maximo.

Maximo Vedoya -- Chief Executive Officer

You're welcome, Thiago.

Operator

Next question comes from Thiago Lofiego with Bradesco BBI. Your line is open.

Thiago Lofiego -- Bradesco BBI -- Analyst

Thank you. I have two questions, the first one regarding the fact that the Mexican government decided not to renew the 15% safeguards on steel imports from certain countries. Does this impact your view on the markets, does this impact your view on the plan to expand in Mexico? Now we saw AMSA for example, we count and (ph) expansion projects, would just like to get your views there.

The second question, how do you see the Mexican auto industry growth in the coming years considering there are some import restrictions into the U.S. Do you think this might prevent further capacity growth in Mexico for automakers and consequently that would eventually impact your expansion plans, longer term?

Maximo Vedoya -- Chief Executive Officer

Thank you. Thiago. The first one, the Mexican government, the 15% safeguards that we have, remember these safeguards was only, it was very limited, the impact it has, to be honest. It was only for countries that Mexico has not had trade agreements, and Mexico has trade agreements with more than 50 countries. So import from Europe or Japan or the U.S. were free. And some of the industries, they have special tariffs, so they don't pay this one, but nevertheless, for us it, I think for all the steel market and you mentioned AMSA's reaction. For all the market, for all the steel industries in Mexico, it was kind of a surprise, because it goes in a different way of what the government was saying. I think the government is reanalyzing that decision, and I think, if -- there is a possibility that they change this, and I think there is a big possibility that that they will change the decision.

Auto industry. The automobile industry produced 3.9 million units in 2018. Almost the same as 2017. This is a huge number. When we make projection of the auto industry in the several years, we don't expect a huge growth. I mean, we said that the automobile industry will grow in 2020, 2021 to 4.2-4.4. This is not a huge increase. And mainly this comes by the fact that there is already an agreement between Mexico and the U.S. regarding automobile exports if there is a 232.

If you remember, when they signed the NAFTA agreement, there was a side letter, where you put a quota on the automobiles export from Mexico to U.S. of 2.6 million units. Today, the exports to the U.S. are around 1.8. So there is still an increase in the exports over there, but the increase is not very high, and so we always projected that the industry is going to grow, but it's going to grow only a little bit. And we're taking about 10%. So in our projection, we only have that number. I don't know if that's clear or not, Thiago.

Thiago Lofiego -- Bradesco BBI -- Analyst

Yes. No, that's clear Maximo. Just to followup here. You mentioned, just to make this clear. The quota might be 2.6 million units and now Mexico is exporting 1.8, is that what you mentioned?

Maximo Vedoya -- Chief Executive Officer

Yes, It's the number, the quota is 2.6, I mean that's, that's signed, I mean, what's public I think, at least, I read it in the newspaper. So it's a public information that they signed the side letter. There is also a side letter for auto parts. The side letter for auto parts is in billion dollars, I think, the number is $100 billion, and today the export is around $60 billion. So there is also increase in auto parts. If the 232 is coming, if the U.S. put a 232, which I don't know if that's, I mean, there has been a lot of rumors, and what we understand that the DOC, the Department of Commerce, just sent President Trump a memo regarding the 232 about autos, but we don't know what it says.

Thiago Lofiego -- Bradesco BBI -- Analyst

Great. Maximo if I may, just one very last question. You mentioned in the beginning of the call, that EBITDA per ton has normalized to normal levels. Right? And how comfortable are you, that $170 per ton roughly could be sustained, normalized to be the per ton (inaudible) for Ternium in a longer term.

Pablo Brizzio -- Chief Financial Officer

Hi Thiago, this is Pablo. As you know, we prefer to discuss EBITDA margins, at EBITDA per ton, because, as we often discussed, the pricing environment plays a huge role over there. What we say is that, yes we understand that the numbers would go to what we consider a normalized long-term level of between to 20%. Trying to sustain the margins in the upper side as we have done in the past years. Of course 2018 was an extraordinary year where we have a 24% EBITDA margin, and the fourth quarter, which we have already discussed (ph) little over 19% EBITDA margin. So that's the expectation, that's the framework where we work, and there is where we want to be or to continue to be present in numbers to the market.

Thiago Lofiego -- Bradesco BBI -- Analyst

Okay. Thank you, Pablo.

Operator

Your next question comes from Alfonso Salazar with Scotiabank. Your line is open.

Alfonso Salazar -- Scotiabank -- Analyst

Thank you, and good morning, Maximo and Pablo. I have two questions. The first one, there was in the local press some news regarding that your plants in Mexico could be affected by the railway blockade in the state of Michoacan. So I was wondering if you can provide some, what was the situation there? If you, we should consider any impact in Q1 because of the blockades. The second question is regarding the negotiations with the communities in the mining operations. And if you can provide some comments on your plans for the mining division, and because of what is happening in the iron ore market. Is it possible, would it make sense to increase capacity. What are your thoughts there. Thank you.

Maximo Vedoya -- Chief Executive Officer

Yes, we have some effects on the Michoacan blocks, as you know, we bring two things from railways from Michoacan, we buy slabs from Lazaro Cardenas from Mittal to our facility. That was the main blocks, but also the things that we bring from Colima, from the Pena Colorada or our own mining facility in Colima were also affected, although for less time. So we have a minor effect. We were going to have a minor effect, but it's a little bit increase in cost. We have to ship to, we have to change instead of shipping by train, we ship by vessel, and so that's a little bit of more cost. But today, as I said, the roads, or the trains are already free, and we're moving further without any effect.

Regarding mining, I mean, we don't have any development in mining. I think that we are discussing with the community, a new agreement, because we have to expand our mines in Aquila. But we are on track on that, we don't expect any problems from that. And an investment, to be honest, if you remember, long time ago, we have some plans of new investments in mining. Today, we are not seeing that in the near, near future, but as always, we are analyzing. If you remember well, we have two big mines one is the Aquila mine and the other one is Pena Colorada, and we opened a third mine near our pellet plant, but it's a marginal mine, where we have a lot of reserves. In the past that was a project we analyzed, today we are not seeing it, but if things change, we can revisit that.

Alfonso Salazar -- Scotiabank -- Analyst

Okay. Very clear. Thank you very much.

Operator

Your last question comes from Rodolfo Angele with JP Morgan. Your line is open.

Rodolfo De Angele -- JP Morgan -- Analyst

Hi. Good morning, everyone. Can you comment a little bit more on the raw material situation in Brasil.

Maximo Vedoya -- Chief Executive Officer

Yes, Rodolfo, the raw material, well, I mean, as you know, Vale had an accident or an event that, that decrease production in some of the regions they have, what the effect today, I mean, Vale changed quite a lot, what was the effect. First, they said that they were, they are going to close 40 million tonnes, then they had to close another 30 million tons because of different judge order or we don't understand very well. But now they are saying that that reduction was quite less. The main effect that everybody is suffering is a price increase in the slab prices. Today, as you know, the Brasilian facility has an exclusive contract with Vale for the supply of iron ore to our facility, and as of today Vale has continued to make deliveries under the contract. And for the time being, we don't see any significant problem to ensure the supply of iron ore to that facility. Of course the price will have an effect in our Ternium Brasil facility because the price increase from down 70, it went to 95, I think one or two days, and now it's around 88, so that's an increase in the cost. But as I said before, we are also seeing an increase in slab prices that we are not going to get immediately, but we are going to get once we start closing slabs for April and May.

Rodolfo De Angele -- JP Morgan -- Analyst

And if I may, just as a follow-up, was, did you use some material relevant amount of pellets in the operation (ph).

Maximo Vedoya -- Chief Executive Officer

Yes. From the 7.3 million tons of iron ore that we buy for the Ternium Brasil facility, we purchase between 2.5 million tons and 3 million tons of pellets. That's roughly what we are doing today. But as I said Vale is supplying the pellet for us.

Rodolfo De Angele -- JP Morgan -- Analyst

Okay. Thank you.

Maximo Vedoya -- Chief Executive Officer

You're welcome.

Operator

And at this time, I will turn the call over to CEO for closing remarks.

Maximo Vedoya -- Chief Executive Officer

Alright. Thank you very much for being part of our conference call today. As usually, please give us a call, if you need any further support to have a better understanding of our company. Thank you very much and goodbye.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 53 minutes

Call participants:

Sebastian Marti -- Investor Relations Director

Maximo Vedoya -- Chief Executive Officer

Pablo Brizzio -- Chief Financial Officer

Daniel Sasson -- Itau -- Analyst

Caio Ribeiro -- Credit Suisse -- Analyst

Carlos De Alba -- Morgan Stanley -- Analyst

Thiago Ojea -- Goldman Sachs -- Analyst

Thiago Lofiego -- Bradesco BBI -- Analyst

Alfonso Salazar -- Scotiabank -- Analyst

Rodolfo De Angele -- JP Morgan -- Analyst

More TX analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.