Ternium S.A. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Ternium Second Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Sebastián Martí. Thank you. Please go ahead.

Good morning, and thank you for joining us today. My name is Sebastián Martí, and I am Ternium's Investor Relations and Compliance Director. Ternium released yesterday's financial results for the second quarter and first half of 2020. This call is complementary to that presentation. Joining me today are Ternium’s Chief Executive Officer, Máximo 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 turn the call over to Mr. Vedoya.

Thank you, Sebastián. Good morning, and thank you very much for taking the time to join our call today. In my prepared remarks, I would like to review the effects of COVID-19 on our company during the second quarter, our actions to mitigate these effects and also the status and prospects of our main markets. After this, Pablo will comment on the results for the second quarter, and then we will have a Q&A session. The second quarter has been one of the most challenging quarters I can remember. Lockdowns or restrictions to operate were in effect in most of our markets during the quarter. Not without effort, we were able to adapt the company to this difficult market situation. In a very short period, we totally redesigned the way we operate our facilities in the current sanitary context with the aim of mitigating contagious risk to the extent possible, with the health and safety of our employees, customers, and suppliers as our main concern. In this regard, in addition to the sanitary measures I commented on our last quarter conference call, we continue to develop innovative tools to increase compliance with our protocols. Just as an example, during July, we implemented the use of an artificial intelligence system to verify compliance with sanitary protocols within our industrial facilities to help prevent the spread of COVID-19. More than 400 cameras at Ternium’s facilities in Mexico, Brazil, and Argentina are able to reinforce social distancing policies and the use of face masks through video analytics that utilize in-house developed algorithms. Yet, our efforts in favor of mitigating the effects of the COVID-19 pandemic are not stopping at our facilities’ gate. The field hospital we built in Monterrey, Mexico with 112 beds and a fully equipped intensive care unit has been very actively supporting the health needs of the local community in these difficult times. We also supplied 25 intensive care units to two hospitals in Rio de Janeiro, Brazil and 100 beds to a field hospital in Ensenada, Argentina, as well as intensive care equipment. Our aim was to help all of our communities in the region. To maximize the effectiveness of our help, we worked together with directors of key hospitals in each of Ternium’s locations to determine the specific needs in each case. All in all, with a $5.5 million dedicated fund, we were able to build a field hospital and donate beds, intensive care equipment, ventilators, and other medical equipment as well as safety kits for health professionals to 16 hospitals and health care facilities in four countries. Our global procurement platform had a key role in this effort as it was able to purchase the required equipment and have it delivered to each location. Additionally, to foster the sharing of knowledge of treatment of COVID-19, we created a network of medical professionals. 70 doctors from local communities in Mexico, Argentina, Brazil, and Colombia participate in the virtual meetings with their colleagues at Humanitas, an Italian network of hospitals. Through this platform, Humanitas’ experience of dealing with the COVID-19 outbreak in Italy is available at a public virtual campus. I’m very proud of all we have been able to do to support our communities in a short period. Many of our initiatives in this regard and in all the parts of our activity can be found in our new Sustainability Report, which was issued two weeks ago. The redesigned report intended to be an integral discussion of our progress towards achieving our objectives in a sustainable way. This is the first edition of our Sustainability Report to follow the Global Reporting Initiative, or GRI, reporting guidelines. We believe GRI guidelines enable us to deliver a higher level of transparency and data comparability. Additionally, we have committed ourselves to the UN Global Compact and to the advanced Sustainable Development Goals or SDGs. You will also be able to find more about our contribution to the UN SDGs in our latest Sustainability Report. Let’s turn to our operation now. These have been times of swift decision action. We usually say that our industrial system has significant operational flexibility. With steel demand dipping during the second quarter, we saw many steel companies in the region in need of making the costly decision of shutting down blast furnaces until demand recovers. In contrast, our blast furnaces in Brazil and Argentina were able to keep operating as they reduced production to technical minimums and increased shipments to other Ternium facilities in the region, which in turn adjusted their steel procurement and production lines. The cost competitiveness of our facilities and the capacity to roughly change the degree of integration among Ternium allow for these quick adaptations to changes in the market environment. In addition, with the aim of sustaining our margins, we worked hard on optimizing production and overhead costs and reducing general expenses and extraordinary maintenance works across our facility. As a result of all these factors, in a very difficult environment in the second quarter when shipments declined 18% sequentially, we were able to show a 13% EBITDA margin and EBITDA per ton of $91, just a slight decrease compared to our first quarter. Another aspect of our company on which we concentrate our efforts was the balance sheet and cash flows. Faced with significant uncertainty regarding the extent and duration of the effects of the pandemic on the global economy and in particular, in our markets, we took immediate action to increase liquidity and strengthen our financial position. We minimized inventory buildups, reduced purchases of raw materials, third-party steel, and other items. We worked with our supply chain to reduce working capital and postponed several capital expenditure projects across our facilities. The results of these actions yielded more than $300 million working capital released in the second quarter and a reduction of capital expenditure to less than half the level we had in the first quarter. Consequently, we had free cash flow of $393 million in the second quarter, taking net debt down to a little over $900 million at the end of June. This is equivalent to a net debt to last 12-month EBITDA ratio of only 0.8 times. For the time being, we will continue taking a conservative stance regarding the management of our balance sheet. While the effects of the pandemic seem to be abating in several parts of the globe, there is still no clarity regarding an end to its disruptions to the global economy and to our market. Let me now make a quick description of the status of our main markets. In our Mexican facilities, we are approaching normal rates of production. The easing of operational restrictions in the country is enabling a gradual return of activity in the auto industry as well as in other manufacturing industries, including household appliances and lighting. Coupled with an improvement in market share, this return to activity should support a recovery of shipments in Mexico during the third quarter. In the construction sector, after being mostly shut down during a good part of the second quarter, it is beginning to slowly come back, although it remains weak. In Brazil, we have significantly increased production in our slab facility from the minimum technical levels reached during the second quarter due to the reduction in steel demand. This increased production rate is supported by a higher level of integration with the company’s industrial system. Additionally, improvements in economic activity in Brazil are driving our current recovery in local steel industry’s slab demand, which had almost disappeared during the second quarter. In Argentina, following record-low shipments in the second quarter, we expect a sequential volume increase, mainly driven by higher activity levels in construction, the agribusiness sector, and the canning and white goods industries. Steel production in Argentina has also been able to return closer to normal levels as restrictions in many parts of the country are gradually being relaxed. In this context, the recent announcement of an agreement with international creditors for the restructuring of Argentina’s government debt is a positive development, but this was a necessary step for a macroeconomic program to be successful. Just a note of healthy caution before I finish. I am very proud of the achievements our management team and all of Ternium employees have made so far during this unusual time. Their commitment and results were admirable, and I would like to thank them for their hard work. However, we are not back to normal yet. While all of our markets in the Americas are showing signs of improvement and our expectations for demand and production rates in the third quarter are positive, uncertainty persists regarding a possible resurgence of COVID-19 and its effects on the economy. You can rest assured we will continue striving to make our company stronger and to mitigate the effects of the pandemic on the company and its stakeholders. Okay. These were the main points I wanted to touch on today before we review the second quarter results and answer your questions. Please, Pablo, go ahead.

Thanks, Máximo, and good morning to all. Let’s go through Ternium’s results for the second quarter and the first half of this year. Let’s start with the company quarterly EBITDA and net results on Page 3 of the webcast presentation. As you can see, Ternium EBITDA decreased sequentially in the second quarter to $224 million, as expected, due to lower shipments and slightly lower EBITDA per ton. Net income in the period was $44 million or $0.22 per ADS. The results compared to a net loss of $19 million in the first quarter, a period that included the effect of significant depreciation of the Mexican peso and the Brazilian real to the U.S. dollar as we will analyze in more detail in the following slides. As for EBITDA in the third quarter of 2020, we expect it to be in line with EBITDA in the second quarter, mainly reflecting higher steel shipments and lower steel prices in the North American market. Let’s now turn to Page 4 to see our steel shipments in the quarter. All of our markets show the effect of the COVID-19 pandemic on steel demand. In Mexico, shipments decreased 25% on a year-over-year basis and 29% on a sequential basis. We are expecting shipment recovery in the country in the third quarter, reflecting a return to activity coupled with improved market share. Shipments in the Southern Region decreased 32% year-over-year in the second quarter and 9% on a sequential basis. Our shipments in the first quarter were already weak, reflecting seasonal low activity. Looking forward in the third quarter, we expect sequential volume increase in the Southern Region and the gradual relaxation of restrictions, mainly in Argentina. In the Other Market region, we can see, on one hand, finished steel shipments in blue, decreasing year-over-year and sequentially in the second quarter. And on the other hand, slabs shipped to third parties, in gray, with slight sequential increase. The sequential increase in slab volumes in the second quarter reflects higher slab exports from Ternium's Brazilian facility to third parties, partially offset by lower volumes shipped to third parties in Brazil. Looking forward, we expect Ternium’s slab facility in Brazil to have a sequential high utilization rate in the third quarter, and to increase its integration with the company’s industrial system, reducing in turn the volume of slabs shipped to third parties. This development, as you can see in the next page, resulted in consolidated steel shipment of 2.44 million tons, decreasing 18% sequentially. Summarizing what we have discussed, we expect steel shipments to increase sequentially in the third quarter in our key markets with some offsetting from lower sales of slabs to third parties. Turning now to the upper right-hand side chart, we see that the average realized price decreased 6% in the second quarter. This reflected lower realized prices at Ternium’s main market. In Mexico, revenue per ton decreased in the second quarter, reflecting mainly lower steel prices in the spot market. On a sequential basis, we expect lower average realized prices in Mexico in the third quarter with weaker industrial contract realized price as a result of the lag price reset. Let’s review now with the following page the main sequential changes in EBITDA and net results in the second quarter of this year. EBITDA decreased as a result of lower shipments and EBITDA per ton. The decrease in EBITDA per ton was mainly due to lower revenue per ton, partially offset by lower operating cost per ton. Regarding changes in net results, on the bottom chart, the $19 million loss in the first quarter includes a significant effect in connection with the 20% depreciation of the Mexican peso and 23% depreciation of the Brazilian real against the U.S. dollar. This effect in the first quarter included a loss of $189 million on deferred tax results at Ternium’s Mexico subsidiary and a gain of $109 million in net results of foreign exchange on the consolidated basis. The foreign exchange fluctuation decreased significantly in the second quarter, making the size of these effects decrease as well in this period. Let me review now the main changes in the first half of 2020 on a year-over-year basis on Page 7. As shown in the chart on top, the year-over-year changes in EBITDA in the first half were the result of lower shipments and EBITDA per ton. The year-over-year decrease in EBITDA per ton in the first half reflects the mainly lower steel prices, partially offset by lower material, energy, maintenance, labor, and service costs. Finally, before we go to the Q&A, let’s review Ternium’s free cash flow, capital expenditure, and net financial debt on Page 8 of this presentation. After a strong set of numbers in the first quarter, we reported an even stronger set of second quarter 2020 numbers as Máximo anticipated. These numbers reflect the measures taken to adjust the company operations to the reduction in sales, and the decision to slow or postpone several projects across Ternium facilities enabled us to further strengthen our balance sheet. With free cash flow in the first half of 2020 at $578 million, we reduced net debt by 40% in the semester to $917 million at the end of June 2020, reaching the already mentioned number of 0.8 times of last 12 months EBITDA. All right. Once again, thanks very much for your time and attention. We are now ready to take your questions. Please, operator, proceed with the Q&A session. Thanks.

Your first question comes from Jens Spiess from Morgan Stanley.

Yes. Hello, thank you for taking my questions. I just wondered, how are you seeing the demand outlook for the different sectors in Mexico? Are there any particular sectors that you’re worried about that could take longer to recover or to return to pre-COVID levels? And second question would be about slabs from your Brazil operations. What’s the outlook for slab exports to the U.S.? Any sense of what the impact would have if the U.S. reduces input quota for slabs from Brazil? And also if you could give us a sense of the current profitability there compared to past quarters. Thank you.

Thank you, Jens. The first question about the Mexican demand and the different sectors. I think that demand in Mexico for the industrial sector is very good today. I mean, all the different sectors that produce cars, home appliances, lighting, and electrical motors are running at near full capacity or at capacity before the pandemic. And I think they will continue to do that. Unless there is some revival of the COVID pandemic, they are going to continue doing that. The sector that demand is lower is construction. Here, I would say that the private construction, which was one of the drivers for the last couple of years, started to go below that number before the pandemic. And of course, with the pandemic, most of the private construction stopped. What we are seeing is that infrastructure is starting to pick up. Infrastructure was very bad. If you remember, in the last several conference calls, infrastructure in Mexico was very bad. But today, it’s improving with some of these big projects from the government. So overall, industrial production is very good; construction is below what we expected, but with infrastructure improving and private construction not improving at all. I think that answers the first question, Jens. Second, slabs exports to the U.S. We are not seeing any changes yet in the quotas for slabs to the U.S. Nevertheless, I would say that with the prices or how the prices are today in the U.S., I think it’s more profitable to export slabs somewhere else than to the U.S. So we are not extremely worried about what will happen with the U.S. if there is a change in the slabs agreement between the governments of Brazil and the U.S. I know there has been some press articles about a proposal to change this agreement and put some quota or reduce the level of the quota. I don’t think that this is very reasonable because they have an agreement, and I don’t think they should change it. However, if that happens, there are not likely to be significant changes in our view for the third and fourth quarter because the price difference today is minimal.

Okay, that’s very helpful. Thank you.

Okay, thank you.

Your next question comes from Rodolfo Angele from J.P. Morgan.

Hi, good afternoon, everyone. Listen, it was a quarter that impressed us, given the very challenging business environment that the industry faced. And in the case of TX, in the case of Ternium, we were particularly impressed with the performance on the cost side. Volumes are down, and yet you were able to reduce costs. So I was just wondering if you could talk a little bit about how you got to that very interesting performance. And how much of that can we expect to remain into the coming quarters? Thanks. That’s all for me.

Thank you, Rodolfo, and thanks for your comments. We will try to continue along this path in the future. Of course, our aim, at all times, is to be able to reduce the run rate of our facility. If we have to reduce the run rates of our facility, we aim to do so with the lowest possible impact on production cost. We always analyze our fixed and semi-fixed costs in a variable way. We don’t always have 100% success, but that is our objective. In part, that was what we accomplished in this quarter. This is possible mainly because of our diversified industrial base, which provides operational flexibility, and we can integrate our facilities better depending on the market conditions. As you also know, we performed strict control and reduction of general expenses. We reduced our overhead cost in the quarter and nearly halved our contractors and third-party workers, replacing them with our own employees that were idle because those particular lines were not working. Also, we had a reduction of freight in the quarter as we shipped less. So I think all of those strategies contributed to these results. I don’t know if I answered the full question, but…

Yes, no, sure. We’ll probably have follow-ups. But we’ll do that with Sebastián after this. Thank you very much.

Thank you. You’re welcome.

Your next question comes from Caio Ribeiro from Credit Suisse.

Yes, hello gentlemen. So my first question is on prices in North America, by which you mentioned will be a headwind for second quarter results. I’m just wondering if you could talk a little bit more about what you believe are the main reasons that prices are under pressure right now, given that demand seems to be sequentially improving with automakers resuming activities, and other export-oriented industrial sectors as well. Is it the addition of the capacity in the U.S., all the expansion that are coming online that’s driving this pressure in your view? And when do you believe that we could see a rebound for prices there and consequently in Mexico as well? And then my second question, just on the potential impact of these potential infrastructure stimulus packages that are being discussed in the U.S. with numbers ranging from $700 billion to $1 trillion. I just wanted to see if you have any initial assessment on how you could benefit from that? And whether we could see a stimulus package for infrastructure announced in Mexico as well for the coming years, which could help prop up steel demand? Thank you.

Caio, thank you very much for your questions. I will try to answer the first one as it is a good question and the question that we all are having. I think that prices in North America are at a level that we haven’t seen in quite a while. Not the absolute number, but I think today or yesterday – I think it was today that the prices index of the CRU was released for this week. Prices in the U.S. are almost $30 below domestic prices in China. This has not happened in quite some time, probably around 2009. So clearly, prices in the U.S. are at a point that should change quite quickly. Why is this the case? It’s not a problem of import material as it was in the past; it’s mainly the competition between domestic steel mills and, of course, the problem that demand was very depressed. Some of the steel mills reduced capacity and some others did not, leading to a fight for market share that produced the reduction of prices. My expectation is that prices in the U.S. should improve soon because it doesn't make sense for these prices to be where they currently are. Regarding infrastructure in the U.S., it's going to improve demand around the North American market, but I don't see much impact for Ternium since we don't sell significantly to construction or infrastructure programs in the U.S. It will certainly boost prices and shipments for other companies in North America. Concerning Mexico, while infrastructure is much needed, I don’t expect a program as significant as the U.S. in the near future because the government is still very cautious with public finances. I don’t foresee them willing to spend much more than they currently are on their big projects.

No, no, that’s very clear. Thank you for that.

Yes. Infrastructure in the U.S., I mean, I think it’s the main issue for all steel demand. Clearly, it’s going to improve demand around the North American market. If you asked what’s the specific impact on Ternium, we have not yet had an impact or managed to put an impact from that. But clearly, it’s going to increase demand in the U.S. and will favor prices and shipments from all the companies in North America. In Mexico, although infrastructure is much needed, I don’t think we will have a program in the near future that is comparable to the U.S. I think it’s necessary, but the government is still very cautious regarding public financial numbers. So I am not very optimistic about a program like that being introduced in the near future.

Perfect, that’s very clear. Thank you very much for your answers.

Your next question comes from Timna Tanners from Bank of America.

Yes. Hey, thanks for all the great detail. I always enjoy your candid observations on the market. Wanted to just ask a little bit more about the guidance, if I could, because this sideways EBITDA move was a bit surprising. I understand the lag effects on pricing. But I guess, two questions around that. One is, is it just that the pricing is so much of a decline that it offsets all the positives elsewhere in terms of volume and what could surprise you? And then, just in line with the comments about market share battles and oversupply in the U.S. market, is it possible for the Mexican market to decouple from what’s happening in the U.S. or do you think they’re all inextricably intertwined? Thanks.

Thank you, Timna, and thank you for your initial comment. Yes, I mean, the main driver of our outlook is prices in North America. You’re right, volumes are increasing in all our markets, in Colombia, Mexico, Argentina, and even in Brazil slabs – although shipments of slabs, as Pablo said, total shipment from the slab facility are going to improve. However, third-parties are going to be lower. Unfortunately, prices remain very low. I expect that prices start to rebound quite quickly as I said. I think this current level of prices does not make sense. We have to be cautious with our outlook, not to predict huge increases because we don’t know if this will happen. Also, note that more than 50% of our sales in Mexico are locked in these contract-based quarters. Therefore, you are going to see the prices of the second quarter in the third quarter.

Yes. Okay, that’s really interesting. Thanks for that. I apologize if I missed it. I had some connection problems because of the storm here last night. But I was wondering if you commented on the dividend or your thoughts on that. If you wouldn’t mind repeating if you already talked about that.

No, we don’t comment or nobody asked yet about dividends, and it’s a great question. Thank you, Timna. Well, as you know, we suspended the dividends for this year. I believe with the information we have, I still believe that the Board decision to suspend dividend payment was the correct one. It still makes a lot of sense. Although, as I said in the beginning, I see the third quarter positive and the fourth quarter also positive, uncertainty persists over the spread of COVID-19 and its effects in our market that may lead to a rebound. So I think the decision was correct. Having said this, I have no doubt that Ternium will resume payments of dividends next year as we have done in the past, and again, if the situation permits, especially if the business situation continues to improve, as we are seeing today, I wouldn’t rule out that the Board could propose a dividend for at least a part of what we skipped this year.

So they could compensate for some of the lost dividends you’re saying as early as February, is that what you said?

Yes, Timna. Again, this is a decision that the Board makes, not mine, but I think that the Board could compensate, at least in part, the skipped dividend, given how things continue to go. Thank you.

Okay. Great, thank you very much.

Your next question comes from Jonathan Brandt from HSBC.

Hi, good morning, good afternoon gentlemen. Congratulations on a very strong quarter, given the circumstances. I guess, I wanted to ask you about free cash flow and balance sheet management. We’ve seen a pretty big reduction in working capital this quarter. So I’m just wondering, is that sort of a new sustainable level or should we expect, as volumes increase as you’re expecting in the second half, should we see a rebound in working capital levels? And then, I guess, sort of related to that, given that you’re free cash flow positive in a very difficult quarter, I would expect you to be free cash flow positive in the second half as well. Can you just sort of elaborate on your balance sheet management, and should we continue to see net debt continue to fall? Will the majority of free cash flow generation, at least until you sort of resume dividends, be put toward net debt reduction? Thank you.

Thank you, Jon, and thank you for your initial comment. Clearly, we had a very strong quarter regarding free cash flow, as you mentioned, and part of that was working capital. As shipments and activity start to improve, we will have to invest a little bit in working capital in this quarter and next quarter. So we are not going to have all that free cash flow, but in detail, I will ask Pablo to give you the specifics.

Yes. Okay, Máximo. Hi, Jon. Clearly, as Máximo was saying, it’s impossible to say or to believe that after a quarter where we have significant reduction in working capital due to the reduction in volumes, we can sustain or achieve a similar number in the following quarter. On the other hand, clearly, we will – as anticipated in our outlook, we are expecting to continue having positive EBITDA generation and consequently positive free cash flow generation. But we will try to sustain at least the level that we have for working capital. It’s very difficult for us to say that we can keep achieving similar reductions in working capital. So on a conservative note, we could say that working capital may even increase a little bit because of increased volumes that we have discussed during our presentation and Máximo's comments. So, probably, we need to invest some money there, but we will try to keep this number as low as we can. On the other side, we will generate positive free cash flow, as the CapEx plan for the following quarter will not return yet to the levels that we had during the first quarter; it will probably be in line with the level that we saw during the second quarter. So altogether, we could see a little positive news, still in the reduction of net debt during this third quarter, but not coming from further reduction in working capital.

Okay, thanks, Pablo. Thanks, Máximo.

You’re welcome.

You’re welcome.

Your next question comes from Fabian Graimann from Pictet Asset Management.

Thank you very much for taking my question. And you’ll no doubt agree with me that your stock today trades at a significant discount to fundamental value. Despite that, we really see no evidence of you trying to unlock that value. Be it via solid dividend policy linked to free cash flow, management buying back shares, a corporate structure simplification, or via other means, why is that?

Okay. Fabian, thanks for your question. Let me try, Máximo, do you want to tackle this one? First of all, sorry to disagree with your comment. We think that we did a lot to try to unlock this value if you want. Clearly, we understand that we have a discount against our peers and we can discuss over that. But we have been working quite a lot to simplify our corporate structure. We have had a history of increasing dividends. The only times we did not pay dividends were during preventing years where we have crises like the case of 2009 and this year. The company has been working very hard to sustain profitability levels. This is shown in the EBITDA margin that the company was able to sustain over the last 5 to 10 years. The reflection of that was the increase of the dividend payment in the last year, specifically during the same period where we nearly doubled the dividend payment from the company. Of course, we are exposed to different markets and the risk of being exposed to different markets may prevent the value of our company from being completely unlocked. There are some other reasons we can discuss on the level of floating of our company and other issues we have commented on in the past. But be sure that the company is always thinking about that; it is a goal we prioritize.

Sorry, just to clarify that. Does that mean we should expect an update on the listing issues as well as formulating a clear dividend policy potentially linked to free cash flow or earnings? Should we not be expecting that?

Well, we don’t have a written dividend policy, but we have a clear tendency regarding the way we pay dividends. If you look at what we have done during the last years, you will see how we pay dividends, even when we don’t have increasing results, we sustain the increased dividend payment. In respect to the issue of listing, it’s a very complex one and difficult to discuss during this call because there are certain restrictions to do that. But it’s also something we have in mind, and if there is a reasonable and feasible chance to act on it, we have been discussing and analyzing this for a very long time.

Fabian, what you have to take clear is that we are working on this effect. We know that the price is undervalued for us as well. We have been working to see what can be improved. As I said before, the dividend was not easy, but I think it was a right decision. If we can, we can compensate part of that next year. The bottom line is that we are working on this and will continue to do so.

Perfect. Could I just ask for an update on your project timelines and how this links together with CapEx for 2020 and 2021, please?

Yes, of course, Fabian. For 2020, we will have a final CapEx of around $600 million, and 2021 will probably be around that number too. These are lower numbers than what we had six months ago, but I think that they are the correct ones. Two projects: the Colombian project is almost finished. The problem we have in Colombia is that the technical people who have to make the commissioning from the vendors of the equipment cannot travel yet. I think they will be in Colombia in September. Therefore, I think the Colombian mill should start by the fourth quarter of 2020. Regarding the Pesqueria project, we are beginning to resume our construction. If you remember, by March, we had more than 4,000 people and we are developing plans to start today the hot strip mill by mid-2021. Why this delay? As I said before, the safety of the people is our paramount concern. To have more than 4,000 people currently, with the pandemic still high in the Monterrey area, I don’t think is very reasonable for us to carry on. Therefore, we are developing a plan to start the hot strip mill in mid-2021 and make plans not to have so many people working at the facility. Instead of a peak of 4,000 people, we are probably going to have a peak of 1,500 people, I think in November or December. But that’s the ultimate detail to plan in the next couple of weeks.

Fantastic, thank you.

You’re welcome.

And your next question comes from Isabella Vasconcelos from Bradesco BBI.

Hi, guys. Thiago Lofiego here. Thank you for the question. So, two questions on my end. The first one, Maximo, if you could comment on demand recovery in Argentina. You mentioned that utilization is almost back to normal levels there. But just want to understand what’s your base case in terms of shipments decline for this year on a percentage basis versus last year? And also, what do you think is reasonable to consider for 2021? Second question on the slab side, so the slab production Ternium Brazil, where is it right now and how are you seeing demand in the different markets? And also, if you could comment on where EBITDA per ton levels are at Ternium Brazil, especially considering the new FX level in the country? Thank you.

Thank you, Thiago. Demand recovery in Argentina is a good question. I don’t know if we have a solid answer for you. As you know, Argentina, although it has made some significant advances with the debt agreement, continues to face challenges in the near future. It needs reforms and time. It's difficult to see what is going to happen in Argentina in 2021. In the near future, shipments in the third quarter are expected to be comparable to those for the same period last year, given that recovery is underway. Remember, 2019 was not a great year either. We see stronger activity in certain sectors like the agro-business sector and construction is improving, especially private construction. If you see cement sales in Argentina, the smaller sales impacts are better than last year, but larger volumes are lower due to poor infrastructure. Thus, there are varying scenarios across these different sectors. Regarding slabs, the facility is running at nearly full capacity today for two reasons: one, demand in our own facilities is improving, leading us to ship more from Brazil; and two, demand is improving in other regions. Surprisingly, China is buying slabs, and Turkey is also buying slabs. We are shipping slabs from Brazil to China and to other markets. Also, as demand in Brazil improves, other steel producers in Brazil are needing a bit more slabs. Consequently, we are resuming shipments to them in September or October. Overall, slab demand is quite good right now, so we have increased the production rate in our slab facility in Brazil.

No, that’s all clear. Thank you, Máximo.

Thank you.

And that was our last question. At this time, I will turn the call back over to Ternium CEO for closing remarks.

Okay. Thank you very much again for your participation in our conference call today. Please contact us if you have any further questions or if you didn’t understand something. I hope to see you all or to hear from you all in the next conference call. Meanwhile, take care of yourself and stay safe. Thank you very much.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.