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Ternium SA (NYSE:TX)
Q3 2020 Earnings Call
Nov 4, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Ternium Third Quarter 2020 Results. [Operator Instructions]

I would now like to hand the conference over to Sebastian Marti. Thank you. Please go ahead.

Sebastian Marti -- Investor Relations and Compliance Director

Good morning, and thank you for joining us today. My name is Sebastian Marti and I'm Ternium's Investor Relations and Compliance Director. Ternium released yesterday financial results for the third quarter and first nine months of 2020. This call is complementary to that presentation. Joining me today are Ternium's Chief Executive Officer, Maximo Vedoya and the Company's Chief Financial Officer, Pablo Brizzio, who will discuss Ternium's business environment and performance. At the conclusion of our prepared remarks, there will be a Q&A session.

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. Good morning, and thank you very much for your participation. And we really appreciate your time and your interest in our company. And I think especially today, when I think some other things are happening, which keep us a little bit busy or our mind there. Since our last conference call, there have been significant advances toward a more normal environment in the steel industry. Steel demand increased as lockdowns and restrictions to operate for different industries were relaxed in the third quarter in all our markets. We continue to operate our facilities under strict sanitary protocols.

As discussed in previous calls and in recent scenario, which have been able to increase operating rate to close to full capacity. In situations like this in which Ternium can demonstrate its operational flexibility. During the second quarter, at the worst of the pandemic-related restrictions reduced Ternium's crude steel production by almost 30% compared to the first quarter. Then, in the third quarter, we took production back up to an even higher level than that of the first quarter of the year.

I'm proud of how quickly our people was able to react to these big changes in the market environment. Steel prices in North American market has also been helping as they were -- as they recover strongly from a very low base back three months ago when we had our last conference call. The higher shipment made possible by Ternium's operational excellence, together with improvements in the pricing scenario enabled us to report third quarter results that were significantly better than what we anticipated in our last conference call. Shipments increased 16% to 2.8 million tons, not yet back to pandemic levels -- to pre-pandemic levels but on our way there.

EBITDA was $353 million with a margin of 17% or $124 per ton, also a significant increase with expectations of more to come in the fourth quarter of the year. Free cash flow remained at a very high level as they did in the previous quarter with $389 million in this quarter, driving another decrease of net debt, we'll reach just $562 million at the end of September. During the third quarter, we were able to restart our main capex projects, including the new hot-rolling mill in Mexico of which we continue to expect a commissioning by mid-next year.

We also resumed the final commissioning of a greenfield rebar facility in Colombia. In this regard, I am very glad to announce that in Monday, two days ago, we produced the first bar out of these new facilities. The new mill will enable us to substitute imports of reinforcing bars in Colombia with total capacity equivalent to approximately a third of the market. With this facility, we will be the only producer of rebar in the north of the country. With new capacity, we will also contributed to an increase in competitiveness with a lower cost of production than our existing facility and we will also be able to broaden our product offering, integrating these new capacity with our existing facilities in the country.

Let me now make a quick description of the situations in our main market. In Mexico, we recovered in the third quarter a little over half of the volume we lost in the second quarter. We now expect shipments to return to pre-pandemic levels in the fourth quarter. We are seeing a continued recovery of shipments to the automobile, household, appliances and HVAC industries driven by solid end-user demand in the U.S. market. We also expect shipments to the construction market to sequentially improve with steady demand from small construction and various government infrastructure projects like the new airport in Mexico City and the new refineries.

In Argentina, following record low shipments in the second quarter of the year, volumes recover in the third quarter of 2020 to levels similar to those seen in the same quarter two years ago. Although the Argentina government successfully restructured a step, uncertainty in Argentina continues to be high. The country continues to have macroeconomic challenges that it will need to overcome with reforms and time. If there are no negative news at the macro level, we could have an additional yet sequential shipment increase in the fourth quarter as the steel end markets continue to advance purchases.

In Brazil, the steel market environment improved significantly over the last month and this has supported increased slab orders level in the domestic market. The auto industry did recover nicely in Brazil and the performance of the country's GDP in 2020 is going to be less affected by the pandemic among the Latin-American economies. Our slab facility in Rio is currently working at full capacity and we expect it to maintain in the fourth quarter of the year, the high level of integration with our mills in the region its had in the third quarter. Prices of slabs in the global market has also improved over the last three months and this is driven a recovery to more normalized margin levels in these facilities.

All right. I keep it short this time, so we have more time for Q&A section and the review of the quarter. Summarizing, the profitability of the company is improving and we have positive expectations for our performance in the fourth quarter of the year. Needless to say, although shipment levels in all our markets are currently strong, uncertainty persists about the future cost of the COVID-19 pandemic and the measures government around the world could take to contain it. As we have seen in Europe, it is evident that the pandemic is not over, so we will continue to take a cautious stand. We also continue working hard to help our communities endure the effects of the pandemic with all the initiatives I detailed on our previous calls. I am particularly proud of how the field hospital we built and operate in Monterrey is supporting the health of those in need in the local community.

Looking ahead into next year, we are very much looking forward to the commissioning of our new hot-rolling mill in Mexico. I believe this will be a game changer for Ternium, not only from a growth perspective, but also from a competitiveness point of view always with the goal of sustaining our high profitability levels related to our competitors. I am also very positive about the future of the key market in the U.S. and CA regions. With our expansion projects in the last stage of development, I believe Ternium with unique position to take advantage of the U.S. and CA's main benefits. All right, we are ready now to review in more detail the third quarter results.

Please, Pablo, go ahead.

Pablo Brizzio -- Chief Financial Officer

Thanks, Maximo, and good morning to everybody. Let's review Ternium's result for the third quarter of this year. As Maximo mentioned, you will see that our performance improved significantly in the third quarter. Over the last couple of quarter, we work hard on sustaining Ternium's profitability as well as on strengthening our balance sheet to cope with the difficult environment in our markets related to the COVID-19 pandemic.

Let's see some of the results of these efforts, starting on Page 3 on the webcast presentation with the company's quarterly EBITDA and net results. We have a significant EBITDA recovery with $353 million in the third quarter. There was a sequential EBITDA margin expansion of 400 basis points or $33 per ton. We will discuss this in more detail in the next slide.

Net income in the period was $173 million or $0.74 per ADS. The results compare to net income of $44 million in the second quarter. There we are, sorry. So I was saying that the result of net income of the third quarter compares to a net income of $44 million to the second quarter. Sorry about that, we are [Technical Issues] There we are. So and clearly, the second quarter was weak because of the consequences of the pandemic of COVID, so let's look forward to the fourth quarter with the expectation for a sequential increase in shipment and higher margins should result in a strong set of numbers.

Turning now to Page 4. Let's review in more detail the degree of the recovery in the shipments, one of the positive surprises in this third quarter. And so in the upper left hand side chart, in Mexico, shipments increased 23% on the sequential basis in the third quarter. They were down by 11% if you compare to the last year. In the fourth quarter we expect shipments in Mexico to continue to recover reaching pre-pandemic level.

In the southern region shipments in the third quarter revived from a very weak second quarter as shown in the lower left hand side chart, and were up year-over-year by 9%. If current market dynamic continue, we should see a further volume expansion in the fourth quarter. In the other market region, finished steel shipments increased sequentially and on a year-over-year basis in the third quarter as you can see in blue in the upper right-hand side chart.

As for slab shipments to third parties, in the same chart in grey, they decreased both in sequential and year-over-year comparisons. During the third quarter, we were able to further integrate Ternium S.A. facility in Brazil, with the company's industrial systems up to a level that resulted in a reduction in the volumes of slab shipped to third parties. In the fourth quarter, we expect a similar volume slab shipped to third parties.

Turning to the next page, you can see in the upper left hand side chart the result of this development. We consolidated the shipments of 2.85 million tons in the third quarter, up 16% sequentially. In the fourth quarter, we expect consolidated shipments to increase sequentially based on higher volume in our key markets as already discussed. Turning now to revenues, our realized price increased 5% in the third quarter, as we see in the upper right-hand side chart.

This is mainly explained by a sequential increase in the value of our sales mix as the prices in the North America market experienced a very strong revamp since our last conference call. We were expecting this to happen, but not in the magnitude it actually did. This improvement is prevailing steel prices, was mostly offset by weaker industrial contract realized prices as a result of the lag price reset. This strong pricing background will drive an increase in revenue pre ton in this region in the fourth quarter of the year.

Let's turn now to Page 6 to review the main sequential changes in EBITDA and net results in this quarter. The rebound in the EBITDA reflected the recovery in shipments and improved profitability. EBITDA margin increased sequentially, mainly reflected -- reflecting an increase in revenue per ton, partially offset by a slight increase in operating cost per ton. The higher operating income led to sequential improvement in net result, as you can see in the bottom chart. In addition, we saw a better result from equity in earnings of Usiminas and higher income tax.

Turning now to Page 7, let's review the main changes in the first nine month of the year on a year-over-year basis. The change in EBITDA shown in the chart reflecting the year-over-year decrease in shipments and EBITDA per ton. EBITDA per ton was negatively affected by lower steel prices, partially offset by lower purchase slab for materials, energy and labor cost per ton.

As for the year-over-year changes in net income in the bottom chart, in addition to the increase in operating income, you can see the effect of the net financial result of the significant fluctuation of the Mexican peso, the Argentine peso and the Brazilian real versus the U.S. dollar during this period. We also had an year-over-year higher income tax, the main reason behind this was a non-cash deferred tax loss in the nine months of the year in comparison -- in connection, sorry, with the Mexican peso 16% depreciation in the period.

Now to finish and before opening up the call to your questions, let's review on Page 8 Ternium's free cash flow, capital expenditure and net financial debt. You can see in the slide, a strong set of numbers. With the measures taken in the last two quarters, Ternium has achieved a strong financial position with ample liquidity and net cash provided by operations activity reach $1.4 billion in the first nine months of this year, including a $628 million working capital release and capital expenditure decreased significantly to $440 million in the period.

On that we have taken the consideration of everything that we have just mentioned with less net debt, down to $562 million as of the end of September equivalent to 0.5 times net debt to last 12-months EBITDA. With the redemption of our investment plan, we expect capital expenditure increase sequentially in the fourth quarter.

Okay, these were our prepared remarks. We are now ready to take your questions. Once again, thank you very much for your time and attention. Please, operator, proceed with the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jonathan Brandt with HSBC. Your line is open.

Jonathan Brandt -- HSBC -- Analyst

Hi, good morning, gentlemen. Congratulations on the results. Maximo, I first wanted to ask you about steel prices, both how quickly we should see the steel prices that happened in the third quarter in the U.S., how much of that should be captured in the fourth quarter and how much of it will roll into for the first quarter? And just sort of what is your outlook on North America's steel prices, today, given sort of everything that's happening and the uncertainty, etc.

And then my second question, I guess, maybe to Pablo is just if you look at your leverage to 0.5 times, it's sort of at the lower end of the historical range. So could you kind of walk us through what your uses of cash will be particularly as it certainly seems like profitability and free cash flow continue to increase as we go into the fourth quarter. What is the outlook for capex, what is the outlook for dividends, what are some of the other uses of cash or should we expect leverage to remain at this sort of level? Thank you.

Maximo Vedoya -- Chief Executive Officer

Thank you, Jon, for the questions. Let me start with the steel prices. I think there are two part of the questions. Steel prices, clearly, if you see our results we took advantage a little bit of the increase in the prices and of course we are going to take a little bit more advantage in the fourth quarter and I guess in the first quarter. Remember, Ternium -- part of our sales are contract price and spot prices and so during the fourth quarter and probably during the first quarter, we are going to see an increase in prices from shipments from Ternium depending on the mix, probably is going to be increase.

What is the outlook, I mean when we have had our last conference call, I remember I was telling you that while prices in the U.S. were very low, and it was incredible that local prices in China for the first time in, I think, 10 years were below the local price -- were above, sorry, the local prices in the U.S. So that -- we haven't seen that for the last 10 years. And so we expected prices to go up. It went up a little bit more quickly than what we thought. And I think that this level of prices should remain I mean, this environment should continue over the next couple of quarters.

Demand is good in the U.S., in Mexico, in this region. I think that our customers -- our consumers in construction is very solid. Industrial manufacture is also increasing and so I think that from the demand side, I think that it's strong. The increase in the offer -- the utilization rate is only at 70% and the lead times are quite glum in the U.S.. So I think that if the U.S. producers continue with this rationality, I think we are going to have several quarters with this price environment, we are expecting that. I think that answer the first question. The second question, I ask Pablo to start and then I'm going to comment on a more longer view in that question, Jon.

Pablo Brizzio -- Chief Financial Officer

Okay. Yes, Maximo, I think that we can take these questions in two different ways. The first one is the short answer to it, as Jonathan was asking. Clearly the fourth quarter will be a little different of what we saw during the last two quarters where we had reduced capex and increase on the working capital that we release together with very strong numbers coming out of -- from the operation of the company. So that's clearly very positive.

In the fourth quarter, we will continue to have cash flow from operations on the strong level but clearly we will have, first of all, an increase in our capex from the third quarter to the fourth. We are expecting more than double to the level of capex in the fourth quarter, we are expecting to reach the level that we originally said of around $600 million of capex for the year. As Maximo mentioned, we are restarting fully the plan that we have and clearly also is very difficult to continue releasing working capital with the new level of production that we had, the new level of sales and of course the new level of pricing that not only increase the value of our inventories, but also increase the value of our receivables.

So clearly, will be a quarter with a very strong cash flow from operations but with a reduction in the level of free cash flow because of both things, the reduction in -- or sorry the increase in capex and the increase in working capital. All in all, no matter what we will continue to keep having a reduced number of net debt that I think this lead to probably an answer in the long run -- in the longer run, so I think that Maximo can take now this answer and expand on the view, on the -- basically, the capital allocation of the company.

Maximo Vedoya -- Chief Executive Officer

Yeah. Thank you, Pablo, and again thank you, Jon. Yeah, I mean I think we answered of the cash usage. Clearly, as Pablo said, we are generating good cash flow and what are the -- our thoughts of the future? I think that three years ago, we started a very aggressive or a very important investment program for us. This program started with the acquisition of CSA in Brazil, which allow us to produce -- at our state-of-the-art facility and allow us to produce a whole new range of steel, which we're not able to produce that before.

Then continue and months later of the acquisition with the launch of our investment programs -- program in there in the greenfield facility in Mexico. The galvanized painting, the hot-dip mill, which -- those were capex programs very strong and mission of that was that we don't want to change substantially, we are changing already. The wait and you watch, going to new markets, much more sophisticate, much more value-added products.

We are about six, seven, eight months of finishing that investment program. And so, we are now looking that -- and we continue to see that they are good opportunities to turn into continue growing of using that cash. I think we can mention three, one is Mexico, we are very optimistic of Mexico or the NAFTA region or the North American region, I think that their part of construction field has to increase. I think all the deals that we have made within U.S. and CA, all these trade wars, regardless of who won in the U.S., it's going to continue. And -- because it's good for the people and I think that our power consumption is going to increase and we are very well positioned to take advantage of that. So there is going to be probably expansions in the Mexican -- in our Mexican facility.

The second thing is the melted-and-poured in the automotive industry in North America. As you know, we are part compliance of that but we are not fully compliant. So we have time, seven years, so we are trying to see what is our best option. We don't have to decide it today but we are going to be compliant. And the third is of course, how we maintain our conservative balance sheet but we also give dividends to our shareholders. That's the thing that we should continue doing and we want to do. And that I think is -- our track record shows that we also grow by taking advantage of different opportunities and I think that in this market, there is going to be -- I really do believe there's going to be opportunities in our region for Ternium to grow. So I think these -- I hope, Jon, I'm sorry, I was long but to answer the full question I believe.

Jonathan Brandt -- HSBC -- Analyst

No, no, that's great. Thank you. Just a follow-up, I mean, if -- do you see the potential for further M&A as a path forward for growth?

Maximo Vedoya -- Chief Executive Officer

Yes, I see. I mean, we don't have any particularly now, we don't see anything but as you know, when opportunities arrives we generally take advantage of that.

Jonathan Brandt -- HSBC -- Analyst

Great. Thanks, Maximo. Thanks, Pablo.

Pablo Brizzio -- Chief Financial Officer

You're welcome.

Operator

Our next question is from Thiago Lofiego with Bradesco BBI. Your line is open.

Thiago Lofiego -- Bradesco BBI -- Analyst

Thank you. Good morning, gentlemen. Maximo, how sustainable do you think the volume increase in Argentina is and what is your best outlook for 2021 at this point? And then, the second question, I'll take a risk here and I'll do the question here, what is your view on the impact of the election scenario of the -- on U.S. steel market, on the North American steel market? Do you think that might...

Maximo Vedoya -- Chief Executive Officer

Thiago, you're asking me -- yeah. Sorry.

Thiago Lofiego -- Bradesco BBI -- Analyst

Go ahead, go ahead.

Maximo Vedoya -- Chief Executive Officer

No, you're asking me to be a magician. Thiago, it's hard.

Thiago Lofiego -- Bradesco BBI -- Analyst

It's always good to hear...

Maximo Vedoya -- Chief Executive Officer

But I...

Thiago Lofiego -- Bradesco BBI -- Analyst

Your view.

Maximo Vedoya -- Chief Executive Officer

Expect...

Thiago Lofiego -- Bradesco BBI -- Analyst

But just to make my question here more specific, do you think if Biden wins, do you see the government gradually withdrawing from Section 232, do you see any changes in the recent U.S. and CA? So what do you think could happen in a Biden scenario? Thank you.

Maximo Vedoya -- Chief Executive Officer

Perfect. Thiago, first, let me talk about Argentina. I mean, it's very difficult today to try to make any projections of the demand in Argentina. As I said before, its not a macro economic problem, fourth quarter is very -- it's going to be good. But there are some other challenges in Argentina. I mean the -- this -- what is happening with exchange rate, Argentina clearly needs some reforms and need time to do some -- those reforms. And so, I think we are going to see a very volatile scenario in Argentina. It's going to continue to be high and not in any capability you're saying what is going to happen in 2021 today. So again, we are very cautious on what is our stance on how we operate in Argentina. We continue to be flexible in our operations there and I'm trying to -- we are increasing our production but on a flexible way.

And elections in the U.S....

Thiago Lofiego -- Bradesco BBI -- Analyst

Maximo...

Maximo Vedoya -- Chief Executive Officer

And what will happen...

Thiago Lofiego -- Bradesco BBI -- Analyst

I'm sorry to interrupt you but...

Maximo Vedoya -- Chief Executive Officer

Yeah.

Thiago Lofiego -- Bradesco BBI -- Analyst

Still on the Argentina...

Maximo Vedoya -- Chief Executive Officer

Yeah, yeah.

Thiago Lofiego -- Bradesco BBI -- Analyst

Answer here, what are the factors that you think are more -- will be more resilient in a worst-case scenario in Argentina if like the outlook there doesn't improve, actually if it gets worse, what are the factors that you would say, here we see more resiliency and here we think we're going to see more of a downside potential?

Maximo Vedoya -- Chief Executive Officer

I mean, and I'm not saying this is going to happen, so don't quote me but I mean, probably, I mean the one way out of this is going to be a devaluation somehow. I mean when you have these difference of exchange that could be an outcome. What happened usually in a devaluation is that most of the market decrease but then some of the export industrial manufacture continue to increase these and construction start to pick up also.

So for our market, we are going to probably see a downturn if it happen -- if this happened, but there are markets that will and will continue to recover. But again, the government is making a point of trying to solve the situation and so, that's why I said that, that is going to be a very volatile environment for the next couple of quarters probably.

Thiago Lofiego -- Bradesco BBI -- Analyst

Got it.

Maximo Vedoya -- Chief Executive Officer

Election in the U.S., what happens If Biden wins? To be honest, I don't see a lot of changes regarding the manufacturing if Biden wins. I mean I don't see -- I don't think he's going to change a lot of 232. Probably, he's going to I mean negotiate or be a little bit more flexible with some countries, which shouldn't have been in the 232, probably, in the first place but I don't -- I mean, the thing of this U.S. -- this regional approach where manufacture starts to come back to the region to the U.S., to Mexico, to Canada, these restoring things, it's in the mind of Donald Trump, clearly of the actual President but it's also on the mind of the Democrats.

So I don't think there is going to be a lot of changes, I think on the contrary both candidates are going to try to make stronger in manufacturing in their region. Biden -- if you ask me, what are the things Biden, he's going to do a little bit more than the actual, probably is in environmental issues, which for us or for Ternium should be a very good thing regarding our footprint, our environmental footprint and how we are doing a lot of things. But that's the only change I see, really. I don't think -- I don't know if I answered a little bit of your question.

Thiago Lofiego -- Bradesco BBI -- Analyst

No, you did. You did, Maximo. Thank you. Thank you for both answers there.

Pablo Brizzio -- Chief Financial Officer

Yeah.

Maximo Vedoya -- Chief Executive Officer

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

Thiago Ojea -- Goldman Sachs -- Analyst

Hi, thanks and good morning, good afternoon, everyone. I think my first question, I would like you to go back to the U.S. prices, Maximo, if you allow me. We saw really a sharp recovery on price in the past few weeks. I think my first question is, I understand that there was a lag compared to the Chinese price, which was unseen before but do you think business is sustainable or these are just like short-term pickup and should accommodate in our lower price level. How should we think about U.S. steel price going forward? I think this is my first question.

And in my second question, still relating to the U.S. market, we saw in the past few years a lot of announcement of new investment including a few, I wouldn't say North America, including a few in Mexico. How do you see now the new investments coming through in the next couple of years since that some of them are on hold. What is the competitive landscape in our view for the next two, three years in North America? Thank you.

Maximo Vedoya -- Chief Executive Officer

Thank you, Thiago. I mean U.S. pricing as I said, I mean clearly the prices are decreasing in the last couple of weeks or in the last two months to be honest. And --in what are steeper increases what we thought but we did see this coming and prices going up. And again, I think that demand is picking up in all our countries. I mean, China demand is going to grow by 8% in the next -- in this year. China in the last four months was a net importer. I mean usually China is a net exporter for the last 10 years of steel. In the last four months, it import more steel than the export.

If Europe is picking up depends on what is going to happen with the new research of COVID but it's picking up. And Latin America you saw Brazil. Brazil is clearly huge increase in demand. So I think that for the next several quarters I don't see an environment where prices going down in the U.S.. And it will depend again on the rationality of the U.S. production -- producers regarding the capacity utilization to be honest. But if this continues today, I think that the prices should remain in healthy level for the next quarters. And again that's my opinion. Thiago, I don't know if I answered the first question there?

Thiago Ojea -- Goldman Sachs -- Analyst

No. You did, you did. So I think now what I am curious to know, given the current capacity utilization and the new products announcements, how do you think the competitive landscape will evolve in the next few years?

Maximo Vedoya -- Chief Executive Officer

Yeah, so to think on these investments, they are doing -- clearly, there is new capacity coming on board in the next couple of years in Mexico and in the U.S. and this is a concern clearly but I mean, two of three things. First of all, our power consumption is going to grow. I mean, I think part of that new capacity is going to go to this increase in our power consumption. I mean, if you see the consumption in Mexico or the consumption in the U.S., it's less than two -- in both countries, in Mexico, I think its 150 kilograms per capita. In the U.S. it's a little bit more 240 to 260, depends on how you limit the numbers.

This is -- I mean if you see China it's more than 600. If you see Korea, it's 900. If you see Japan, with all the decrease in manufacturing, it's more than 400. So this majority has to bring back some of that consumption to the region. That's for sure. So consumption is going to grow. The second thing is that, we are going to find imports. I mean there's a huge amount of imports in Mexico and so part of this new capacity is going to change or to replace these imports. The third thing is, some of this capacity for sure is going to compete to other U.S. producers. And there are some of the U.S. producers that are not as competitive as -- and older capacity, which is higher costs.

And so I am not seeing a huge increase in that sense. And the fourth, of course, is we are working to be more competitive than the others in the region and that's our focus today. I mean we are doing -- but our facilities, as you've seen the numbers, are clearly one of the most competitive in the region. And so we are very able to take advantage of this increase in construction. But again to compete with the new capacity that is arousing.

Thiago Ojea -- Goldman Sachs -- Analyst

It's clear, Maximo.

Maximo Vedoya -- Chief Executive Officer

I hope I answered your question, Thiago.

Thiago Ojea -- Goldman Sachs -- Analyst

Yeah, I would just ask, what is the size of additional capacity that you consider credible to come online in the next couple of years, both in Mexico and U.S. Do you have any figure that you work on your projection?

Maximo Vedoya -- Chief Executive Officer

No, I didn't understand. Thiago, I'm sorry. The line is cutting and I don't -- I didn't understand very well the question.

Thiago Ojea -- Goldman Sachs -- Analyst

Sorry, my question is on this new capacity that is coming online, what can you consider that really do go through -- like really you will be able to build, you have a total amount of 1 million tonnes of capex, with that, for sure will be added in Mexico and in U.S.?

Maximo Vedoya -- Chief Executive Officer

For sure. I mean the new capacity in Mexico in our new hot strip mill. And it's not steel consumption but the new hot strip mill of ArcelorMittal, also is coming online. And in the region, I think in the new SDI in Texas is clearly, they are abusing it. I don't know the timing exactly but they are building. There is no -- the new facility of the Big River and the new plant place of Nucor, all those are things that in the next two, three years are going to be producing at full capacity, probably.

Thiago Ojea -- Goldman Sachs -- Analyst

That cleared much more. Thank you a lot.

Operator

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

Carlos De Alba -- Morgan Stanley -- Analyst

Hi, thank you very much. Good morning, everyone, or afternoon, I guess closely. So just maybe Maximo or Pablo, could you please comment a little bit more on the first quarter outlook. I mean you mentioned, Maximo, that prices in Mexico will probably continue to increase at least, do realized prices or revenue per ton will likely continue to increase in the first quarter. Just on the lag of the contracts but could you elaborate a little bit more on what are you seeing in Argentina operation in the fourth quarter and into the first quarter? And maybe, anything that you can add in terms of volumes and perhaps, cost. And then, I also have a second question.

Pablo Brizzio -- Chief Financial Officer

Okay. Hi, Carlos, how are you? Let me take this question. Let me make a caveat first before answering your question. Clearly, as Maximo explained during the initial remarks, we need to see how the pandemic evolves and if there is a second wave in the region. Clearly, things can change but if we do not take into -- that into consideration, we need to take other things into consideration. First one is the seasonality of volumes in the different markets where we are clearly in the Southern region, the first quarter is a seasonally low first quarter. In Mexico, this is more at the end of the year, so the first quarter tends to be a relatively good one. So we continue to see the coming quarter with a positive outlook. We are not going to see 100% of the price increase that we are seeing even right now reflected in the numbers of the fourth quarter.

So there will be some price increase yet, do we see any price staying at the level of Maximo -- as Maximo view is, we will see also that reflect in the first quarter of the year. So we believe that the outcome or the outlook that we are going to, for the fourth quarter is something that could be sustained with the -- with a transaction that we said in relationship to volumes in Argentina will be sustained enter into next year. The second caveat that we need to make is also the one-time Maximo mentioned, which is the situation in Argentina could make changes in the outlook for volume, but all in all, clearly with a volatility of these projections, we should have a rational quarter in line and what we are expecting for the fourth quarter of the year.

Carlos De Alba -- Morgan Stanley -- Analyst

And Pablo, sorry, thank you for that. Just wondering if you're seeing that price there...

Maximo Vedoya -- Chief Executive Officer

So I think the third caveat, Carlos, amid pandemic. I mean, clearly, I mean, I said, it's not over. And so, I don't know if some governments are going to come back to recession, I think they won't. They learned that it's not very useful and it make a lot of harm to the economy. So I think a possibility because cases are picking up in some of our countries and it [Technical Issues]

Carlos De Alba -- Morgan Stanley -- Analyst

Sorry, hello?

Pablo Brizzio -- Chief Financial Officer

That is alright. We have some problem with the line of Maximo but go ahead, Carlos.

Carlos De Alba -- Morgan Stanley -- Analyst

Yeah. No, just on prices, Pablo. Maybe -- how do you see prices in Argentina?

Pablo Brizzio -- Chief Financial Officer

We are...

Carlos De Alba -- Morgan Stanley -- Analyst

Yeah.

Pablo Brizzio -- Chief Financial Officer

Continue to see price in Argentina follow international price with -- as usual with less volatility as international prices. So we don't see much changes in prices in the region. Of course, if there is some changes in the foreign exchange rate, this will impact us, as usually happens in the short run but we will be able to sustain a pricing level as currently we are seeing in our markets.

Carlos De Alba -- Morgan Stanley -- Analyst

All right. And then my second question is on 2021 capex, if there is any ballpark number or range that you can provide. And then, you could maybe talk a little bit more about the timing of the restart of the hot roll line in Mexico, which you said next year but you can -- you could refine a little bit more the timing of that and how much production do you expect to have -- incremental I guess, production you expect to have from that whole coil line next year? And is there any other updates on project, that will be great.

Maximo Vedoya -- Chief Executive Officer

Yes, Carlos, I am back again. Capex, the -- I mean, 2021, it's going to be around also $600 million. It's quite the same number as 2021 -- as 2020. So we are seeing that number as capex. Hot-strip mill in Pesqueria, I mean we are -- I mean, the date for starting the hot-strip mill is July but that's the first coil, July of next year. Remember those -- these equipments are very big and difficult, so there is a long ramp-up period. So I think that the effect of the hot-strip mill, we're going to start seeing by the end of the year.

Carlos De Alba -- Morgan Stanley -- Analyst

All right, excellent. Well, thank you very much and good luck with everything and particularly with the ramp up of that new material. Thank you.

Maximo Vedoya -- Chief Executive Officer

Thank you, Carlos.

Operator

Next question is from Gabriel Galvao with Credit Suisse. Your line is open.

Gabriel Galvao -- Credit Suisse -- Analyst

Hello, everyone. Thank you for taking my questions. So my first question would be regarding Brazil, so we have been witnessing several price hikes in the domestic market and you also mentioned that your plan is to shift part of your third-party sales from the export to the domestic market. So maybe you could provide us some color on how is the relative profitability between exports and domestic sales in Brazil? So my second question would be actually a follow-up on the dividends. So if I remember correctly, you said that dividends for 2020 would remain suspended since you usually only pay dividends once a year, so is this the case here? Thank you.

Maximo Vedoya -- Chief Executive Officer

Yeah. Thank you, Gabriel. Brazil -- I'll start with Brazil. Brazil, I mean what is happening in Brazil is that, the Mexican consumption is increasing and as you remember we have the Ternium facility to make slabs. So we are not in the final market but as the manufacturing production in Brazil increases, some of -- Usiminas, CSN, other companies are asking us to sell slabs to them because they are ramping up production of the hot-strip mills and the cold-rolled on the galvanized lines. What is impressive on Brazil, I think that the number of the manufacture index, the BMI, what we read yesterday and it was high, I mean was record high, so it's increasing. It's not a lot of change in the profitability, we do have some advantage of freight and other things selling to the domestic market but it's not a lot of change in profitability between one, our export market and the domestic market.

And the thing...

Pablo Brizzio -- Chief Financial Officer

The second part of the question....

Maximo Vedoya -- Chief Executive Officer

Yeah.

Pablo Brizzio -- Chief Financial Officer

Let me clarify one point before entering into the second answer. What -- you mentioned that we -- what we said is that there is a reduction in sales to third parties in order to sell this or to send this product to our own operation facilities. Within the third parties, we include the local sales in Brazil. So clearly what Maximo was saying is right that we have increase -- we saw an increase in demand for local -- the local demand but the change from the second to the third quarter was due to reduction of sales or what we report in our financial statement as sales to third parties and an increase of transfers to our old industrial facilities both in Mexico and Argentina. So that's a big change that you saw in the numbers.

Gabriel Galvao -- Credit Suisse -- Analyst

Yeah.

Pablo Brizzio -- Chief Financial Officer

All in all, the production of Mexico or Brazil was higher but this is clear and you should note that we switch from third parties to local market, those are not increased but the switch was from total third parties to internal transfer. So with that verification and Maximo...

Maximo Vedoya -- Chief Executive Officer

Yeah, and...

Pablo Brizzio -- Chief Financial Officer

Please go ahead.

Maximo Vedoya -- Chief Executive Officer

And I thought the question was of the fourth quarter when we -- when I did say that we were going to change from other parties to the local. So depends on -- so my part of the answer was of the fourth quarter, Gabriel. I thought you were asking that.

Gabriel Galvao -- Credit Suisse -- Analyst

Actually I was asking about the perspectives for the first -- the fourth quarter because of this price hike and the relative profitability, but of course this clarification also helps a lot.

Maximo Vedoya -- Chief Executive Officer

Yeah, and to make clear from what we sell to the third party, in the third quarter, the number is going to be similar in the fourth quarter with the only difference that we are going to ship more to Brazil than to other parties. That's going to be a difference because of this increase in demand in Brazil. But the number of third parties completely, including Brazil, is going to be the same.

Dividends, well, you know that the Board -- in April, we make the decision or the Board make the decision to skip dividends payments due to the pandemic and what we were thinking or what we were seeing in that time. I think it was -- I still consider it was the right decision considering information we have available in April, I think it was right decision but it is clear not that the market is recovering much more quickly than what we expected. The Board will propose the yearly dividend payment in February, we do dividends every year, so we are not changing that. But I strongly believe that that Board dividend proposal will take into consideration the skipped dividend payments in 2020 when we -- when the Board makes their recommendations for the dividend in 2021.

Gabriel Galvao -- Credit Suisse -- Analyst

All right. That is very clear. Thank you.

Operator

Our next question is from Rodolfo Angele with J.P. Morgan. Your line is open.

Rodolfo De Angele -- J.P. Morgan -- Analyst

Hi, everyone. There is a lot of things we were already discussed so I will have just one question. There are few moments in Ternium's history that changed the company to another level. And we can, kind of, if we go back the acquisition of IMSA, I think was the first one, CSA was another one and I think, Pesqueria could be also one of those moments. We have been getting a lot of questions from investors who are looking at Ternium and they want to try to understand the impact of the new where all the profitability of the company. So my question to you is, can you comment on the range of additional EBITDA per ton that Pesqueria when its fully ramped up will bring to your operation. Just a range, ball park figures, what you expect to see the impact there. That's all from me guys, thank you very much.

Maximo Vedoya -- Chief Executive Officer

Pablo?

Pablo Brizzio -- Chief Financial Officer

Okay, I will start with the answer and then if you want let's complete on the answer. So Rodolfo, the -- your question is very clear and what we do with every investment that we perform is to try to increase the profitability of the company or the EBITDA generation of the company. Clearly, what we have today, we have an EBITDA margin of 16.5% and projecting an increase on profitability in the coming quarter is everything that we do is to sustain this level of profitability.

In the case of Pesqueria facility, as you put it clearly, one other point very important for Ternium and for future of Ternium and is comparable to the one that you said, and Maximo mentioned this in the initial remarks, comparable to the acquisition of CSA. There are different components of profitability in the case of the Pesqueria facility. The first one is substitution of fee imports that we are doing. So we will substitute with production in the new facility, imports of hot-rolled that we are doing today.

Second, we will stop utilizing the one facility that we use, which is one of the more sophisticated one, so we will close that down. In fact we have already done that. And so, we will have a new facility, a state-of-the-art facility that will provide a better performance and third, clearly we will increase the product base. So all in all, we are expecting to have more than 2 million tons of net product to sell into the market and they are -- we are -- the number of EBITDA is coming.

We will always say exactly the same, our main target and our goal is to sustain the profitability of this company above the 15% EBITDA margin. Clearly, to reach as high as we can but the range, traditionally, has been for us between 15% to 20%. We have some quarter with higher levels than that but they are the ones which we have to work. And everything that we do is to sustain that, so that is my initial comment. Maximo, I don't know if you want to add something to that.

Maximo Vedoya -- Chief Executive Officer

No, I think its very clear. I mean, I think Pesqueria -- everybody is hearing?

Pablo Brizzio -- Chief Financial Officer

Yes, yes. We are, Maximo.

Maximo Vedoya -- Chief Executive Officer

Okay, sorry....

Sebastian Marti -- Investor Relations and Compliance Director

There might be some problems with the webcast, but the ones with the...

Maximo Vedoya -- Chief Executive Officer

There are breaking signs here. No, but Rodolfo, I think that what Pablo is saying is true and you are saying is true. Pesqueria together with the acquisition with CSA, remember this is a combo. It again change for Ternium in the sense that it's a facility that is going to add 4 million to 4.5 million tons and of very high value-added products and a completely new range of customers that we can serve. So again our intention with this is to increase our profitability as Pablo said.

Rodolfo De Angele -- J.P. Morgan -- Analyst

Okay, I know -- let me just say this, I know you're already at the 15% of mark today, so what I am trying to do is when investors come to us and say OK, these guys have invested, what's the additional -- where is the impact of that, right? So one thing the 16% is a very shy answer. If we were to think about the project alone, what is Pesqueria bringing in? That's -- now, that can be a ball park figure, a range, is it $20 per ton? I don't know if you can comment on this but I just wanted to insist because as I said this is very important and I see what the market is having the secretly in quantifying it and sorry for insisting but this is my last question.

Pablo Brizzio -- Chief Financial Officer

No, that's fine Rodolfo, and we need to go through it but what we are trying to say is, it's extremely difficult to put a number exactly to that because it is also dependent on the price of the product, its also dependent on different things, that is very difficult to say. Now we will increase profitability by 2% because among other things, we are having a mix of product that includes of course, new painting product, new galvanized product but also includes hot-rolled products. So the prices are different in this one, so if you want to go through, which will be the EBITDA generated by this facility, well that's a different question.

Sustaining prices at what we see today, we are saying here more than 2 million tons with the profitability of EBITDA per ton over $120, $130, you are reaching to a number of more than $250 million of EBITDA per year. So this year, let me correct the number that you said, this quarter we had a 16.5% EBITDA margin. So, I am targeting a higher number for the following quarter. So it's very difficult for us to say that we this investment, we will be able to move to a higher margin than 20%, which is something that you could be expecting for.

But all in all, we are -- the expectation for us are huge in these new facility because we will unveil lot of opportunity for not only in the level of free cash flow generation, in the level of EBITDA generation and sustaining margin and trying to increase them but also of all the things that Maximo explained before. So first of all, it's a key investment for Ternium, clearly will increase the level of EBITDA generation until we will -- at least we'll sustain, but clearly, we believe that at some point will increase the profitability of Ternium. It's very difficult to put a number to that taking into consideration the numbers that we are showing. But clearly, as you mentioned, and as Maximo mentioned also, this is a game changer for Ternium and the result will be there.

Sorry, not to give you exact number but that is a view that we have with this investment.

Rodolfo De Angele -- J.P. Morgan -- Analyst

Okay, thank you very much, guys. Thank you.

Operator

Our next question is from Alex Hacking with Citi. Your line is open.

Alex Hacking -- Citi -- Analyst

Yeah, thanks. I guess, just a quick one for Pablo. So if I look at the Siderar financial statements, the implied EBITDA per ton was back over $200, during the quarter. I guess, is that a sustainable level there, my current utilization rates and current prices or was there something weird going on with the accounting whereby there was sort of a one-off boost in what that look like. Thanks.

Pablo Brizzio -- Chief Financial Officer

Hi, Alex. How are you? Yeah. There were some things in relationship to Argentina, remember that we have still inflation in Argentina, we have devaluation in the country. So when you have this aspect, it tends to increase a little bit the total number of the company.

Of course, if we are continue to see exactly this environment, then though that impact of that is increased just because the portion of the cost that is denominated in peso, which is around 35% of the total cost, clearly, those attempts as you calculate devaluation tends to be reduced. So you have a better margin on that respect. So you have these things when you have utilization of the inventory that you have before evaluating that as the prevailing exchange rate at the moment or the end of the quarter.

So there are some of this, also clearly, the performance of Ternium Argentina was very, very good. But these things tends to accommodate and to go to more normalized levels. But clearly, the performance on the margins of the Ternium Argentina are high.

Alex Hacking -- Citi -- Analyst

Okay, thanks. And then, just one quick one. In your answer to Rodolfo just now, you talked about some like value-added processing for the Pesqueria product. I guess I didn't realize that you had excess kind of paints gal capacity sitting around that you could be utilizing, is there a way you can -- I was kind of assuming that you were going to be selling it all as hot-rolled, is there a way you can quantify how much kind of excess for additional value-added capacity that you have there? Thanks.

Pablo Brizzio -- Chief Financial Officer

Yes. And, of course, this -- Maximo, please go ahead.

Maximo Vedoya -- Chief Executive Officer

No, no, no. Go -- you go ahead, Pablo.

Pablo Brizzio -- Chief Financial Officer

Okay. No, no, what I was trying to mention is that the total investment in Pesqueria was not only the hot-rolling mill but also the new galvanized line and the new painting line that they are already up and running and they are working almost at full capacity. So it's not that we have spare capacity there or just waiting for the new facility to be up and running. So we have that capacity and we have these -- this was part of the initial capex that enter into at the last of last year -- at the end of last year or beginning of this year. So after the ramp-up period, we are utilizing our facilities. It's not that we have -- they are available capacity waiting for this to be up and running.

Alex Hacking -- Citi -- Analyst

Okay, I got it. I misunderstood. So the new capacity is effectively just going to be hot-rolled capacity, right, with obviously...

Maximo Vedoya -- Chief Executive Officer

Yeah.

Alex Hacking -- Citi -- Analyst

Future potential to add -- value-add. Okay...

Maximo Vedoya -- Chief Executive Officer

Yeah.

Alex Hacking -- Citi -- Analyst

Thank you.

Maximo Vedoya -- Chief Executive Officer

But, Alex, I think it's -- I mean the new capacity is hot-rolled. I remember the galvanized line started six months ago to produce and the painting in December. So they are still in running. But one thing that the hot-rolled new capacity gives us is new substrate for these lines also. So that gives us the opportunity to make other products and more efficiently in many cases, in the current lines and other products that we are not able to do because we don't have the substrate. So it's going to be a change in the mix and probably we will have some increases in time in our current run -- the current rate of -- at how much we are running this galvanized and painting lines.

Alex Hacking -- Citi -- Analyst

Thank you.

Operator

Ladies and gentlemen, this concludes the Q&A period. I'll now turn the call back over to Maximo for any closing remarks.

Maximo Vedoya -- Chief Executive Officer

Thank you. Okay, I hope this call has been informative and has helped all of you have a better understanding of our company. Thank you very much for participating today, I know it's a challenge today to be hearing to us but thank you very much and I hope you have a nice day. Contact us if you have any other questions or comments and please stay safe. Bye.

Operator

[Operator Closing Remarks]

Duration: 0 minutes

Call participants:

Sebastian Marti -- Investor Relations and Compliance Director

Maximo Vedoya -- Chief Executive Officer

Pablo Brizzio -- Chief Financial Officer

Jonathan Brandt -- HSBC -- Analyst

Thiago Lofiego -- Bradesco BBI -- Analyst

Thiago Ojea -- Goldman Sachs -- Analyst

Carlos De Alba -- Morgan Stanley -- Analyst

Gabriel Galvao -- Credit Suisse -- Analyst

Rodolfo De Angele -- J.P. Morgan -- Analyst

Alex Hacking -- Citi -- Analyst

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