Earnings Call Transcript - TX Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Ternium First 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. I would now like to hand the conference over to your speaker today, Sebastián Martí. Thank you. Please go ahead, sir.

Sebastián Martí, Investor Relations and Compliance Director

Thank you. Good morning. Thank you for your participation in our conference call today. My name is Sebastián Martí. I'm Ternium's Investor Relations and Compliance Director. Yesterday, Ternium issued a press release containing its financial results for the first quarter 2020. This call is complementary to that presentation. Joining me today are Máximo Vedoya, Ternium's CEO; and Pablo Brizzio, the company's CFO, 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 two in today's webcast presentation. With that, I'll turn the call over to Mr. Vedoya.

Máximo Vedoya, CEO

Thank you, Sebastián. Good morning to everyone and welcome to our first quarter 2020 conference call. Thanks again for your interest in our company and taking time to be with us today, especially in this unprecedented circumstance. I hope all of you and your families are well and keeping safe. I would like to dedicate my initial remarks to share with you our view regarding how the COVID-19 outbreak is affecting the steel market and our company and what we are doing to mitigate these effects. After this, Pablo will make a brief review of our quarterly results before going into the Q&A session. Since last quarter's conference call, the rapid spread of COVID-19 throughout the America has suddenly changed the business environment and is affecting steel demand across the region. It is still uncertain what the impact of COVID-19 will be on the global economy, as the nature of this crisis is different from what we have seen in the past. Our number one priority during the outbreak is to safeguard the health and safety of our employees throughout our industrial system. All of our employees who can perform their tasks remotely are today working from home. For those employees that have to be on-site, we have been very fast to implement best practices to minimize contagion that comply with, or in many cases exceed, local authorities' directives. We are adopting strict social distancing policies and exhaustive contagious prevention measures, such as wearing face masks all the time, temperature checks and disinfection policies at all transportation, site admissions, working posts and cafeteria locations. All employees at higher risk of developing serious complications from the virus are today at home. We are actively monitoring suspicious cases and implementing quarantine not only for them but also for anyone that has been in close contact with them. We are carrying out extensive communication programs across our facilities regarding ways to work safely and to prevent contagions at work and at home. There is actually a long list of measures we are implementing to mitigate this risk at our facilities. And we keep analyzing new ones. The response has been incredible. We are very proud of how our people are dealing with this demanding situation. They are showing strength, solidarity and resilience and making big efforts to make sure everyone stays safe and healthy. The COVID-19 outbreak is affecting also all of our communities. We are helping to support and strengthen the infrastructure of key hospitals within our communities with donations of ventilators for intensive care and safety kits for all health professionals. We also built and are operating our field hospital for the community in Monterrey, Mexico with 100 beds, and an intensive care unit with 10 fully equipped places. Another thing to consider during this outbreak is the health of our value chain. We are working very closely with customers and suppliers to go through this difficult time together. Our robust custom integration, IT systems proved to be a valuable tool when mobility restrictions were imposed in many of our markets. We have always seen our company as part of a bigger system, and this has never been more evident than in situations like today. In this short period of time in which COVID-19 spread throughout the region, we have been actively implementing several measures to prepare the company for these uncertain times. On the production side, our diversified industrial base provides significant operational flexibility which enables us to integrate our facility across the Americas in different ways to reduce run rate with the lowest possible impact of production cost. We are also optimizing production and overhead costs and reducing general expenses and extraordinary maintenance works. On the working capital side, we were very fast to reduce purchase of raw materials, third-party steel and other materials and spare parts, minimizing inventory buildups. We have also been working with our supply chain to optimize our procurement activities to reduce working capital. And to preserve cash, we are slowing down or postponing several capital expenditure projects across our facilities. For example, we currently expect to delay the startup of our new hot-rolling mill in Pesquería unit in Mexico to April of 2021 and our new steel bar mill in Palmar de Varela unit in Colombia to the second half of 2020. In addition, considering the significant uncertainty around the effects of the recession on the industry and their impact on our company in the medium-term, Ternium's Board of Directors decided to withdraw the annual dividend proposal for fiscal year 2019 that they made in February. The regular payment of dividends is not something Ternium's Board takes lightly, as it demonstrates over more than 10 years of increasingly higher dividend payments. But the Board considered it prudent to withdraw its proposal until there is more certainty over the effects this unprecedented situation has on the company's business. Let me turn now to the current state of our markets and operations. In Mexico, we continue to operate our main production line. The spread of COVID-19 in the country impacted shipments beginning in late March. The automotive industry in Mexico is currently closed and is expected to gradually reopen during May. This industry value chain between Mexico and the U.S. is highly integrated and demand synchronizes productions on both sides of the border. So our reopening of operations is an important issue for both countries. Other industrial customers in Mexico, such as the goods and electronic motor industries, are operating by gradually scaling back production in anticipation of weakening end customer demands. The construction sector began showing weaker demand in April, as it was subject to strict operational restrictions, which will gradually begin to be lifted during May. In Brazil, our slab facility in Rio is operating at technical minimums due to weak global demand for slabs. In the Brazilian market, demand for slabs from local producers can also significantly decrease as steel consumption in the country is getting weaker. We are making up for this decrease in sales in the second quarter with sales slab shipments to other markets. All in all, we expect to ship approximately the same tonnage of slabs to third parties in the second quarter and balance the lower production rate with lower inter-company shipments to our facility in Mexico. In Argentina, the mandatory lockdown imposed by the authorities in late March has been very strict from the beginning. Ternium’s slab facility, our main plant there, is currently operating at technical minimums as it is considered a non-essential operation. The rest of the plants are not operating not only for non-essential sectors. The lockdown of operations in Argentina is beginning very slowly to loosen up. As a result of the very weak shipments in April, we expect a gradual volume increase over the rest of the second quarter. The COVID-19 outbreak is affecting economic activities and the operation of our facilities in all our markets, and the effect of the situation on our business will show in the second quarter of the year and beyond. But we can assure you, we are very quickly adapting our company to this new scenario and working very hard to minimize this effect as much as possible. This is the value we can act at these difficult times, as we have done in other market crises over the history of our company. With that, I let Pablo make a very quick comment about our performance in the first quarter, and then we go to the Q&A. Thank you. Please, Pablo, go ahead.

Pablo Brizzio, CFO

Thanks, Máximo. Good morning to all. Let me review Ternium performance following the webcast presentation starting on page three. Our results for the first quarter improved sequentially as expected. In this slide, you can see that Ternium EBITDA in the first quarter 2020 increased to $302 million and EBITDA margin also improved, which is 13% of net sales. EBITDA per ton was $101. Further in the presentation, we are going to review the drivers of this increase. We were actually expecting better performance in the quarter. Argentina and Colombia authorities imposed lockdowns from March 20 to mitigate the spread of COVID-19, preventing us from shipping products with the exception of those to essential sectors such as food, health and energy in both countries. Looking forward, considering the scenario raised discussed, we expect a sequential decrease in EBITDA with significantly lower shipments by more than a decrease in EBITDA per ton. As for net income in the first quarter of 2020, we reported a loss of $19 million or $0.06 per ADS. These results include a $189 million non-cash deferred tax loss due to a 20% depreciation of the Mexican peso against the US dollar. This deferred tax result is equivalent to a $0.96 loss per ADS, so adjusted net income per ADS to exclude this non-cash item, the result would have been net income of $0.19 per ADS in the third quarter. In the next page, we can analyze our shipment performance in each region. As you can see, in the first quarter of 2020, shipments in Mexico increased sequentially and on a year-over-year basis. During the first quarter, we were able to increase our participation in the commercial market despite a soft environment for construction activities. We are continuing to ramp up our new galvanized and painting facilities. Our market share also increased against imports, which continue to represent a significant share of flat steel consumption in the country. By the end of March, our industrial customers started to face a slowdown in demand. The situation worsened with increasing restrictions and declines in steel prices affecting our steel shipments in the country in the second quarter. In addition, we anticipate lower shipments to the construction sector in the second quarter 2020, and this sector is also subject to strict operating regulations due to COVID-19 outbreaks. In the southern region, shipments decreased sequentially in the first quarter and also on a year-over-year basis. The Argentina market remained weak during the first quarter, reflecting seasonally low demand levels and the effects of the lockdowns which affected just the later part of March and continued. Looking forward, our current expectations are to see a gradual volume increase over the rest of the second quarter as the lockdowns of operations in the country seem to be slowly beginning to relax. In the other market region, shipments increased sequentially, with the increased shipment volume mainly due to change in shipment from Ternium Brazil to third parties slab shipped to other Ternium facilities, mainly to Mexico. In the second quarter, shipments to the other markets are expected to decrease, mainly due to the impact of the lockdown in the Colombia market while slab shipments to third parties should remain stable. Turning to page five, we can see that steel shipments in the first quarter 2020 increased 3% sequentially and decreased 6% on a year-over-year basis, considering where we have raised capacity with steel shipments in the second quarter expected to sequentially decrease in all regions. Going now to steel prices. We see that prices decreased 2% in the first quarter of the year as expected, while in Mexico decreased slightly as a result of weaker industrial contract realized prices, reflecting the lag in prices fixed on these contracts, mostly offset by higher steel prices in the spot market compared to the fourth quarter last year. In the second quarter, we expect a decrease in revenue per ton in Mexico, with a downturn in spot prices that began in March being partially offset by the industrial contract realized price that should improve a little over the first quarter of the year. Finally, we can see that net sales in the first quarter 2020 increased slightly sequentially, reflecting the 3% increase in shipments, offset by a 2% decrease in revenue per ton. Let's turn now to page 6 to reveal EBITDA drivers and the net result in the first quarter of the year. The sequential increase in EBITDA was the result of higher EBITDA per ton, and to a lesser extent the increase in shipments. The improvement in EBITDA per ton was mainly due to lower costs of raw materials and energy, partially offset by slightly decreased revenue per ton, as already discussed. On the chart, we can see the positive effect of higher operating income and net financial results, which were more than offset by the already mentioned net cash impact of the $189 million deferred tax loss related to the 20% depreciation of the Mexican peso. Net financial results increased sequentially and reflected the foreign exchange gain of the significant depreciation of the Mexican peso already mentioned, and also a 20% depreciation of the Brazilian real against the U.S. dollar. Turning now to page 7, before going to the Q&A. We generated significant cash in the quarter. We can see cash from operations in the first quarter of the region is strong, $443 million, as we took serious measures to manage working capital in this new scenario, and the free cash flow after tax of $1.805 million in the first quarter. Capital expenditure was $258 million in the first quarter, in line with the previous quarter as our capital expenditure progressed without tension during that period. We will start to see a decrease in CapEx from the second quarter as we slow down or postpone CapEx across our facilities, as mentioned by Máximo. On the balance sheet side, in the first quarter, we continue to be in a strong financial position, as revenues and net debt continue decreasing in the first quarter of the year. As of March 31, 2020, we have net debt of $1.3 billion equivalent to 0.9 times last 12-month EBITDA and a cash position of $1 billion and manageable debt amortization schedule. Thank you very much for your time, and we are now ready to take your questions.

Operator, Operator

Yes, sir. Your first question comes from Timna Tanners with Bank of America.

Timna Tanners, Analyst

Oh, hey, good morning. This is Timna Tanners. I wanted to ask first if you could give us any thoughts on what conditions the Board might require to resume the dividends. So, as you point out, your cash flows were still strong in the first quarter. Is it a question of visibility and uncertainty, or is it a question of something else, if you have any thoughts on that?

Máximo Vedoya, CEO

Okay. Thank you, Timna. I mean, as I said in my remarks, we have been giving dividends for the last 10 years and increasing them year-over-year. I think there is nothing else that what I said, I mean, the uncertainty around what these effects of this virus or this recession we have in all our steel market is still uncertain. The Board considered it very prudent to withdraw the proposal until we see more clarity on the steel demands. We have always been a conservative company in our financial position, and this goes along with that. I don't know if Pablo, you want to add something else.

Pablo Brizzio, CFO

Yes. Clearly, I agree with what you said. We consider it very important to have a strong financial position. In fact, we have reinforced our cash position without changing net debt. As you can see, we have reduced net debt during the quarter. But in the meantime, we have taken some new debt facilities available to us to reinforce our cash position, just to be prepared for any scenario that could appear in the next couple of quarters. Clearly, we understand that the Board has stood up to take a prudent response in front of this uncertainty. And clearly, whenever there is uncertainty, those are the steps the Board would consider.

Timna Tanners, Analyst

Okay. Perfect. Thank you. And then the other question I wanted to ask is really to try to pin down a little bit more of your thoughts on volumes going forward. And to completely recognize that it's challenging and visibility is not great, as we were just talking about. But on the one hand, I wanted to ask about slabs from Brazil, you said that you could offset some of the weaker domestic market through export. But I'm just having a hard time understanding where the exports will go because so many countries with extra supply are talking about exports, and I wonder to whom they're shipping? And then on the same lines, in terms of the auto recovery in Mexico, how do we think about the timing there? Because there will certainly be some inventory to work down first. So, will the shipments start to materialize more in the third quarter or how do you think about that? Thanks.

Máximo Vedoya, CEO

Thank you, Timna. It's a wonderful question. And as you said, it's a big challenge to answer that today in these times. I would try to make an effort. I can answer very specifically on the volumes. In the second quarter, most likely our volumes will come down somewhere near 30% in the entire market of Ternium. That's the shipments we expect to decrease in the second quarter. From that onwards, today we see our visibility that they are going to start increasing somewhat. We don't see a V recovery as some economists are saying; it's more like a U. These increases are not going to be very steep. But I think that most of the countries where we operate are going to take measures in order to the steel industry to try to increase their shipments. Last, as I told you, our facility in Brazil has two blast furnaces. It was operating at the rate of 138,000 tonnes a day. Today it is operating at a minimum of around 9,000 tonnes a day. What we were doing in the first quarter was shipping more to the local customers, and in the second quarter, we are going to ship almost the same to the U.S. and to some customers in Europe and we are going to reduce the shipment to our facility in Mexico. In the third quarter, we will probably change that and we are going to ship more to our facility in Mexico, but that is something that we have to see in the future. And we are going to reduce shipments probably to the U.S. and Europe. So that is the change. In the auto recovery, most of the automobile companies in Mexico are going to start producing between today and the 15th or 20th of May. It's true that their recovery is going to take time for our shipments. But remember, our shipments to the automobile industry are around 15% in Mexico, 15% to 20%. So, we are going to see some sudden increase in the second quarter, especially in June. But you're right that the increase will be more in the third quarter compared to the shipments in April that were almost zero. Also, the stock in the changing in Mexico is a little bit lower than the one in the U.S. Some of our companies work with just-in-time inventory. So, there is not a huge stock in the value chain in Mexico. So that's another positive thing that could happen in June. I hope I answered all your questions.

Timna Tanners, Analyst

Yes. Very helpful. Thank you and stay healthy.

Máximo Vedoya, CEO

You too.

Operator, Operator

Your next question is from Carlos with Morgan Stanley.

Carlos De Alba, Analyst

Thank you very much. I hope everyone is doing well. So, just going back to the dividend topic, since the shareholders meeting was postponed. I want to understand if there is a possibility that the board decides to bring it back at a later date in 2020, given that your shareholders meeting was deferred, and it may still take place this year? Or is this a dividend that is gone completely for the year? I understand that it is a board decision, but maybe you can provide some color. And then my second question has to do with volumes in Argentina. Clearly, the first quarter saw the lowest or weakest volumes in history that we have in our model, at least even worse than that in the first quarter of 2009. How bad was April? And how much worse can it get in Argentina? And then finally, if I can squeeze out their question on the CapEx. How do you see the CapEx this year based on the postponements that you were mentioning earlier? Thank you.

Máximo Vedoya, CEO

Okay, thank you, Carlos. I will start with the last one and go up from there. CapEx, if you remember in the last conference call, CapEx was estimated for 2020 at $850 million, and for 2021, we said it would be around $550 million. What we are seeing today, the plans we're making today is for 2022 to be between $550 million and $600 million. So it's a decrease between $250 million and $300 million and for 2021 to be around $600 million. We expect to finish the steel cost reduction in Pesquería with this CapEx and postponing some of the things that we're doing in 2020 to 2021. So overall, we are expecting a decrease not only in this year but in both the next two years with the CapEx. The second thing is volumes in Argentina, clearly volumes in Argentina in the first quarter were very bad, and the second quarter is going to be slower. Remember Argentina made a very hard lockdown. So only one of our plants was operating and most of the construction industry was closed. Our volumes in April are going to be very low, but they are going to increase in May and June. We hope by the third quarter to be kind of the same as in the first quarter. So yes, Argentina is taking an impact in the way they are managing this pandemic. But again, Argentina, the measures we are taking are making sure that the company is not burning cash or anything like that. So, we are very optimistic that the company will go through this in a very healthy way. And the third one was dividend; Pablo, why don’t you answer that?

Pablo Brizzio, CFO

Yes. Okay. Carlos, as you know, every year the profitability side of the year relies on the shareholders' meeting. But clearly the Board of Directors has the proposal in mind, and we cannot say that no change can happen close to the end of the year. If there is a change, this will happen. It's difficult to see the scenario at the moment in the short term, since we pay dividends around this period of time, every year, between April and May. The most conservative way to answer your question is that at the end of the year since the situation changes, entering into the end of the year, most likely the reset of the dividend will come in the following one. But we cannot rule out the possibility of it.

Carlos De Alba, Analyst

Thank you very much. Good luck.

Sebastián Martí, Investor Relations and Compliance Director

Thank you, Carlos.

Pablo Brizzio, CFO

Thank you.

Operator, Operator

We distribute dividends annually around this time, typically between April and May. The safest response to your question is that by the end of the year, since circumstances may change, it is likely that the adjustment to the dividend will occur in the following year, although we cannot completely discount other possibilities. Thank you very much, Carlos. Good luck. Thank you, Carlos. Thank you.

Thiago Ojea, Analyst

Hi, good morning, everyone. This is Thiago Ojea, Goldman Sachs. I'm just curious if you can provide any type of expectations on the situation in Argentina and the measures of opening for the lockdown. And if you believe that the activity in CSA, if you can really ramp the volumes to the external market given that no other regions in the world are also suffering a lower demand for steel, what would be perhaps the minimum level that you think would be profitable in terms of volumes to operate CSA. Thank you.

Máximo Vedoya, CEO

Thank you, Thiago. I couldn't hear your first question, but I'm going to answer the second one. As you said, Ternium Brazil is now operating, as I said, at around 9,000 tons a day. That's a decrease of around 38% from what we were operating in the first quarter. With that in mind, all the shipments in the second quarter have already been secured, and we are shipping the orders in the second quarter. We think we can continue operating at that level in the third quarter, because we need those slabs for our own Mexican operation. If we don't have any place to place the slabs, because steel prices remain weak in the third quarter, most of those slabs are coming from our Mexican operations. So I don't see any problem. I don't see any problems today in operating our Ternium Brazil operation at that level. I hope at least I answered the second part of the question, Thiago.

Thiago Ojea, Analyst

Sure. The first question was similar but related to the Argentina operations. We saw a big drop in the first quarter. I imagine that the drop remains in the second quarter would be even worse. What would be a reasonable level operation that you could be profitable in Argentina and if you have a better outlook for the third and fourth quarters?

Máximo Vedoya, CEO

Yes. Argentina, as I said, the lockdown in Argentina was profound, it was very strict. Only one of our plants was operating and most of the construction industry was closed. Again, our plant is there operating at a technical minimum. With that in mind, in the first quarter we were profitable in Argentina. So, I don't see any problems in the third and fourth quarter to continue at this level of the minimum in the blast furnace. Again, we do not expect to have inventory in the second quarter, although there is a decrease in the shipment. We are reducing the production of our blast furnace. We also expect that the lockdown is gradually improving, and we will start to grow in the third quarter. I mean, we have very low volumes in Argentina, and I don't think that the volumes can remain this low. I'm confident that Argentina could sustain production minimums for the second quarter and in the third quarter, we will start increasing our shipments. I hope I have answered the question.

Thiago Ojea, Analyst

Yes, you did. Thank you.

Operator, Operator

Our next question is from Thiago Lofiego from BBI.

Thiago Lofiego, Analyst

I guess they have a problem with Thiago, right; it's Thiago Lofiego from BBI. Hi, guys. Thank you. So, most of my questions were answered. So just two remaining ones here. One is about the costs associated with the measures you're taking because of COVID-19. So, do you have an estimate of those costs? And just a second one, going back to the volume questions that were already asked, just to get a little bit more clarity. You mentioned an average 30% drop in the second quarter. Can you give us a little bit more detail? I mean, is Argentina going to be even more than a 30% drop in the second quarter offset by Mexico and Brazil? Or is it pretty much even across all of the units there?

Máximo Vedoya, CEO

Okay. Thank you very much, Thiago. I'm going to answer first for the second one. As I said in answering Timna's question, it's really a challenge to predict volumes. The drop I mention around 30% is what we expect today. This can change upwards or downwards, although we only have two months to go because the uncertainty is still big. But I think the drop will be a little higher in Argentina; or it is going to be a little higher in Argentina. For third parties, the drop is going to be almost zero in Brazil. Remember, we have the same volume of slabs for third parties in Brazil in the first quarter as in the second quarter. So it's going to be around that for Mexico. That is what we are expecting today. Pablo, can you answer the first question of Thiago?

Pablo Brizzio, CFO

Yes, it's very difficult to put a number on that, but I think the best way to answer your question is what we said in our press release, in our opening remarks, that we are seeing small reactions or trying to sustain the level of the company’s margin. This clearly is coming from the measures we are taking in order to reduce costs, reduce working capital, and adjust our facility to the new level of sales that we are having. Therefore, sustaining or trying to sustain as much as we can the level of EBITDA margin that the company will resolve. Overall, we cannot see a huge impact on that cost, as of today.

Thiago Lofiego, Analyst

Yes. That will actually mean more on the specific expenses associated to COVID-19. So, like, sending people to work at home or postponing the project. So, what is the cost of just basically postponing the project? Do you have some specific cost associated to that? But that I understand, the lower fixed cost solution issues, et cetera, but it's more on the specific costs or expenses associated to COVID-19.

Pablo Brizzio, CFO

Yes. We are not seeing a huge increase in the cost of that. I mean, the project for example, the CapEx and the project we are postponing, we don't see an increase in the CapEx there once we resume operations. In fact, to be honest, we are seeing some reduction in the total amount. We are going to invest in cost in the fiscal year because we are seeing ways and renegotiations of some contracts that we are seeing some savings there. So, overall we cannot see a huge impact on that cost.

Thiago Lofiego, Analyst

No, that's clear. Thank you, guys.

Pablo Brizzio, CFO

You're welcome.

Operator, Operator

We don't anticipate an increase in capital expenditures once we resume operations, and in fact, we are actually seeing a reduction in the total amount. We plan to invest in costs this fiscal year because we've identified opportunities for savings through renegotiations of some contracts. Overall, we don't expect a significant impact on those costs.

Alex Hacking, Analyst

Good morning. And thanks for getting my name correct. I was excited to see, what do you calling. Just following up, you mentioned a small reduction in EBITDA per ton in the second quarter. I guess could you describe a little bit more like your cost structure in the second quarter, because obviously, we're going to see low volume. We're going to see lower prices. And maybe some of the levels that are allowing you to, I guess moderate what you're expecting on EBITDA per ton declines. Thank you very much.

Pablo Brizzio, CFO

Okay. Alex, let me take this one. Clearly, what we are seeing is different things. You're right that we see a new volume and you're also right that we will see pricing, but we also expect to experience some reductions in raw material costs. More significantly, we are expecting to adapt our facilities to produce at the level that we really need to supply our customers. Specifically, for example, in the case of Brazil, where we expect to ship basically the same level of volumes to third parties, we are reducing the shipments to our own facilities in Mexico just to adapt the production level to real needs. This is clearly another way for us to reduce the cost of maintaining inventory levels. Same thing in Argentina, where we were able to reduce the level of output of our blast furnace to the needs of our facility. Beyond that, we are working very thoroughly, as we always do, to reduce the costs of any contracts that we can have or roof overhead costs in our system. So, we are working on many different fronts. The only cost that is not reducing in line with the other is the iron ore, but besides that we are making a lot of effort in the rest of our facilities to adjust to the current situation. This is the best way we have to cope with reductions in prices and sustaining as much as we can the level of EBITDA margin.

Alex Hacking, Analyst

Thanks, Pablo, and then just a follow-up. I mean, so you would view the cost savings and the EBITDA per ton generation in 2Q as sustainable in those market conditions. So it's not just a one-off effect of inventory revaluation or something like that. Ternium could sustainably operate at these lower volumes and lower prices, obviously, we expect some kind of rebound, but Ternium sustainably operate at those levels, you know, for a longer period of time. Do you understand my question? Does that make sense?

Pablo Brizzio, CFO

Yes, that makes sense, Alex. Clearly, we are looking to adapt our operations as we said, the situation that we have in Mexico is one in which we can moderate the reduction because the level of imports would reduce first than the local producer. We can operate at a reduced level. We are seeing some smaller lease trends, more recovery in the uncertain market. In the case of Brazil, we can switch because we have contributed to that, and it involves a reduction of sales to third parties to move volumes to our own facilities in Mexico. Clearly, Mexico, where we have our main market, if there is a revert of the auto sector that was already discussed and all reopening should occur in the medium term. After the second quarter, we should see better levels of volume. In any case, clearly, we have adapted our facility to produce and to be relatively profitable at the current level of demand. Clearly, the level of profitability is below our target level. But we believe that if there is a recovery in volume, we could return to these specific levels.

Alex Hacking, Analyst

Okay, thanks. And then just one follow up, if I may. Any estimate for working capital for the rest of the year? Thank you.

Pablo Brizzio, CFO

Yes, working capital, as Máximo already mentioned, to run the numbers, we are expecting to have $600 million this year or next year. As you know, we already mentioned that we invested in the first quarter $250 million. Over the rest of the year, it's a difference to around $600 million. So, we have reduced the level of CapEx, and this clearly represents the number.

Alex Hacking, Analyst

Sorry. It was just about working capital, not CapEx.

Pablo Brizzio, CFO

Sorry, sorry. There was some noise in the line, so I thought it was CapEx. Yes, working capital, clearly, we continue working on reducing working capital. When you have a significant reduction in volume, it's difficult to adapt very quickly to have a reduction in working capital at the same level needed for the production level. We were able to have a positive working capital reduction during the first quarter. We believe we will continue to make an effort to do that, so it should be a positive number during the second quarter.

Alex Hacking, Analyst

Thanks, Pablo. Take care.

Pablo Brizzio, CFO

You too. Thank you.

Operator, Operator

At this time, there are no further questions. I would now like to turn the call back over to the CEO for closing remarks.

Máximo Vedoya, CEO

Okay. Thank you all again for your interest in our conference call. Please contact us if you need any further support or comments. In the meantime, take care and stay safe all of you. Hope to see you or hear from you all in our next conference call. Thank you very much and goodbye.

Operator, Operator

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