© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen thank you for standing by and welcome to the Ternium Fourth Quarter 2019 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. [Operator Instructions]
I would now like to hand the conference over to your speaker today Sebastián Martí, Director of Investor Relations. Thank you. Please go ahead.
Good morning. Thank you for your time and participation in our conference call. 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 2019. This call is complementary to that presentation.
Joining me today are Máximo Vedoya, Ternium's CEO; and Pablo Brizzio, Ternium'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'd 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.
Thank you, Sebastián. Good morning and thank you all for joining us today. As we always do I'll briefly go through some prepared remarks and then Pablo will review the quarterly result. At the end, we'll have a Q&A session.
Let me begin with performance. 2019 was a challenging year for the steel industry. Steel consumption in the Americas decreased and steel prices went down during most of the year. Under these difficult circumstances, we were able to report an EBITDA of $1.] billion on shipments of 12.5 million tons and an EBITDA margin of 15% again among the highest in the region. This performance led to earnings per ADS of $2.87.
Even though we double CapEx in 2019, reaching a peak of $1.1 billion we were able to generate free cash flow of $595 million and to reduce net debt to $1.5 billion or a net debt-to-EBITDA ratio of only 1.
Considering the strength of our balance sheet the performance in the year and our current expansion program in Mexico and Colombia, the Board of Directors proposed an annual dividend of $1.20 per ADS. This is equivalent to a dividend yield of 6% at the current stock price and to a payout ratio of 42%.
As anticipated in our last call results recorded in the fourth quarter showed a rather low margin in part as a result of an usual development in the steel market over that over the year especially in the last quarter. I'll ask Pablo to expand on this during his presentation but I expect the fourth quarter to be the lowest point and the train to change from the first quarter onwards.
Turning now what -- to what is happening in the steel markets in the America. In the last couple of year, we were -- we have significantly uncertainty coming from Section 232 tariffs, the renegotiation of NAFTA, and the trade war between the United States and China. This together with strong fluctuations in inventory levels in North America during 2019 brought a great deal of volatility to steel prices.
We believe steel prices should move in a narrower range in 2020 as uncertainty caused by global region trade negotiations appears to have moderated. In addition our current consumption in the Americas is expected to increase in Brazil and Columbia and to a lesser extend in the U.S. and in Mexico.
Something to also consider for the performance of our steel market in 2010 is the coronavirus outbreak. For the time being, we are not seeing any significant impact on our steel value change in the region. If the epidemic is contained and declines over the next few months, there could be no major effect on steel market in the America, although this is not clear yet.
Let me review Mexico. The steel market in Mexico was weak last year. Steel apparent consumption went down 6%, mainly due to a decrease in the commercial market as a result of a very weak construction activity. There was also a decline in investment by our industrial customers in Mexico, after several years of continued growth of their production capacity, driven by the high level of uncertainty related to the trade issues, I have just mentioned.
Our shipments in the country decreased by 4% last year, reflecting this lower demand – steel demand environment. Nevertheless, we were able to increase our market share in Mexico, so our shipments decreased less than the reduction of the steel consumption.
Looking forward, I believe there are conditions for a slightly better steel market sentiment in Mexico. Public construction is beginning to show signs of activity although slow as Mexico's government has proved to be very cautious with government spending.
On the macro side, the Mexican peso has recently appreciate and interest rates are declining. And no doubt that one of the most important developments in the year has been the ratification of the USMCA agreement by the U.S. and the Mexican government after several years of intense negotiations.
We are now very close to the winner of this new trade agreement. This is a very positive development for the steel industry in North America region. It's wholly value chains, and I think particularly for Ternium. Rules of origin for steel have been strengthened and this means that value change from other regions will have an incentive to invest or relocate capacity to the USMCA countries. This agreement will bring – will certainly bring a reduction in trade uncertainties, which should readily foster investment and economic activity in Mexico in the years to come.
Turning to Argentina. In 2019, shipments in the Southern region decreased 16% compared to 2018. In this market, the economy has been weakening over the past few years, as a result of public finance imbalances and their consequent affection on inflation interest rate and local currency value. We reacted to this difficult environment. And over the last couple of years, we have been adjusting the operational setting of our industrial facility in the country for efficient production at continuously lower levels of demand, so we can sustain our profitable operation.
Looking forward, the performance of Argentina steel market will be very dependent on the country's macroeconomic situation. We believe steel shipments in Argentina, which are already at a very low level could remain relatively stable in 2020 subject to the Argentina government being able to achieve a successful restructuring of the public debt as a first necessary step to normalize the public finance.
Let me now give you a quick review of the performance of our slab facility in Brazil. After a very profitable year in 2018, there was a significant increase of iron ore prices in 2019 together with record levels of pellet premium, due to the effect of the world's iron ore supply of Vale’s dam collapse and the subsequent closure of iron ore capacity. This difficult situation coupled with a decrease of slab prices to multiyear lows put pressure on the profitability of our facility.
Consequently, during the second half of last year, we adjust the Brazilian mill production level to achieve an overall lower production cost minimizing the use of iron ore pellet and purchased coke, as well as putting in place other cut – cost-cutting initiatives.
Steel market conditions have improved since then with an increase in seaborne slab prices and a decrease in iron ore and coking coal costs to a more reasonable level. In this better context, we are bringing production back to its normal level. This is an example of how we can move to adapt our operations where sequence has been change, so we can protect profitability in difficult times and maximize it when things improve.
Another point is that the Brazilian economy is turning and steel consumption is improving there. This is positive for Ternium as local companies in Brazil will increase slab purchases from our facilities there.
Okay. Let me wrap up my remarks with some final comments. In 2019, we were able to show industry level margins in a difficult market environment. In 2020, I expect to see our margins gradually improving in the quarters to come with a reversion of the downtrend -- downward trend we had seen during 2019.
At the same time, we will continue growing our business with the completion of our expansion projects. In the second half of last year, we started the new painting line in Mexico. And in December, we started a new galvanized line also there. For this year in April, we'll have the start-up of the new rebar mill in Colombia and by the end of the year, the commissioning of the new hot rolling mill at the Pesqueria facility. The new controlling mill will enable a significant integration of our facility in Brazil and will consolidate a world-class production system with the latest technology to maximize efficiency and productivity. This line was set up to start in December of this year, but we are working hard to get it ready a couple of months earlier than our initial estimation. We cannot wait to take advantage of all the opportunities for improvement of our product range and related services that these new facilities will provide.
Okay. I'll stop here. So Pablo please take over to comment over the performance in…
Thanks, Máximo. Good morning to all and let me review our performance together with the webcast presentation in page 3. You can see there in 2019, we reported EBITDA of $1.5 billion on shipments of 12.5 million tons. Shipments were somewhat low reflecting weak demand conditions in Argentina and to a lesser degree in Mexico. EBITDA margin in the bottom left chart decreased to 15% within a more sustainable level after returning the year in 2018.
Let's now review in the next page our results in the last reported period. Starting with EBITDA was $263 million in the fourth quarter and EBITDA margin decreased to 12% of net sales, or $90 per ton. A low figure that reflected the low prevailing pricing environment in North America during the second half of 2019 and some first-in first-out effect of higher cost inventories.
The fourth quarter of the last year should be the lowest point as it has among other things, a seasonally low volume in Mexico and low production rate in Brazil. A low realized steel price level in Mexico that did not reflect yet the recovery in prices in November is due to the contract price lag.
A cost per ton that did not decrease yet as I mentioned as a result of the first-in first-out accounting of purchasing slot together with a particular margin squeeze in Brazil that is now fading out as Máximo explained. And finally some negative impact related to inflation adjustment in Argentina.
So we now expect EBITDA to increase sequentially in the first quarter of 2020 with higher shipments and some recovery in steel margins, mainly as a result of slightly lower costs. We expect it to further recover in the second quarter of this year.
As for net income in the fourth quarter, we reported $90 million or $0.36 per ADS. When compared to the third quarter, earning per ADS decreased $0.13, reflecting a lower operating income partially offset by lower effective tax rates that we will discuss later on.
On page 5, we can review our shipment's performance in each region. As you can see in the fourth quarter, shipments in Mexico decreased sequentially and increased slightly versus the same quarter in the previous year. After the seasonally weak fourth quarter, we anticipate an increase in shipments in the first quarter of 2020 with stable industrial market and demand and some help from restocking after a very low level of inventories.
In the other market region, we can see that shipment decreased 4%. The main driver behind this decrease was 65,000 tons decrease in slab sales to third parties, as we have already expected, partially offset by higher finished steel shipments. As Máximo mentioned, Ternium Brazil facilities bring slab production back to its normal level after the decrease in the end of 2019, supported by improved margins for the production of steel slabs.
In the Southern region, shipments decreased 4% sequentially in the fourth quarter and also decreased 4% compared to the same period in the previous year. Steel demand in the Argentine market remains low. Looking forward to the seasonally low first quarter shipments in Argentina are expected to decrease to levels similar to those recorded in the same period of 2019.
Turning to page 6. We can see that total steel shipment decreased 5% sequentially in the fourth quarter and 2% on a year-over-year basis. Looking forward and considering what we have already discussed, we expect the steel shipments in the first quarter to sequentially increase.
Going now to steel prices. We can see the average realized price continue decreasing in the fourth quarter of the year as expected driven by a weak pricing environment in North America in the second half of 2019. Although, the steel prices reversed from the loss as of October this last year, in the first quarter of 2020, we should not be fully reflecting yet in our revenue per ton in Mexico as higher realized price on the spot market will be offset by the lag effect of lower contract prices.
Finally, we can see in the lower left-hand side chart that net sales decreased sequentially 8%, reflecting the 5% decrease in shipments together with a 3% decrease in revenue per ton already discussed.
Let's turn now to page 7 to review in more details the driver of EBITDA and net results in the fourth quarter of the year. Regarding EBITDA, as we had showed, the upper potential that main changes were the decrease in EBITDA per ton mostly as a result of a lower revenue per ton and to a lesser extent the decrease in shipments and higher SG&A.
On the second chart, we can see that the lower operating income was partially offset by a lower effective tax rate and better results from Usiminas. The effective tax rate in the fourth quarter included a non-cash positive effect on deferred taxes due to the appreciation of the Mexican peso against the U.S. dollar. The opposite has happened in the previous quarter and the Mexican peso depreciated.
Before going to the last slide of the presentation, I would like to comment about the change in the functional currency of our subsidiary in Argentina. From January 1, 2020 Ternium Argentina will use the U.S. dollar as its functional currency instead of the local currency as it used to do until then. This is a prospective change, so it does not affect the previously issued number until December 31, 2019. The change in functional currency of Ternium Argentina will significantly reduced the volatility of the company's earnings that was due to the foreign exchange movements and the application of inflation adjustments.
Let's now turn to page 8 to finish our presentation. We can see free cash flow in 2019 reached $595 million with capital expenditure reaching a strong $1.1 billion as our expected program -- progress as planned. Capital expenditures should remain high during 2020 to a level approximately of $800 million and we still have ahead of faster completion by year-end of the new hot rolling mill in our Pesqueria unit in Mexico.
As Máximo mentioned, Ternium's net debt continued decreasing in 2019. It went down by $282 million to $1.5 billion at the end of December. And the $1.20 per ADS dividend proposed for the year is equivalent to a free cash flow yield of 15%.
So thanks very much for your time. And now we are ready to take any questions you may have. Please, operator, let's proceed with the Q&A session.
At this time, we would like to take any questions you may have for us today. [Operator Instructions] Our first question is from Thiago Lofiego with Bradesco BBI. Your line is open.
Hi. Thank you. Good morning, everyone. Máximo, I have two questions. The first one, more medium to long term, thinking about the company's strategy. So you do -- you guys have -- do have organic growth on the pipeline, but we also know that there may be some M&A opportunities, especially in Mexico.
So could you comment on capital allocation and how the company expect to spend money in the coming years, thinking about the different regions and different opportunities that you guys see? Or in other words, do you see more room for further organic expansions in the next five years? Or do you think that we might see some M&A down the road?
The second question is on Mexico. What is your expectation regarding when construction activity infrastructure begins to rebound? So did you see that as more of a 2021 story at this point? Or could we see a more consistent rebound already unwinding in 2020? And also, do you see as a concern the new capacity is coming on stream? I know we've discussed this in the past, but just to get an update on your view about the new capacities coming on stream in the Mexican market vis-à-vis demand growth. Thank you.
Thiago, thank you very much. Let me start by the second question about the construction activity in Mexico. As you know, I mean the trend of the construction in Mexico has two sides. For the last several years, I think, at least four or five years, infrastructure, which is -- was led by the government, decreased every year, I think, for the last four or five years, but was compensated and even was a little bit higher by construction by the private sector.
But this changed last year. So the private sector now decreased also. So, both main drivers of construction were bad in 2019. I think, there are two sides. I think, 2020 is going to be a little bit better than 2019. But, I think, that we in 2021 will be a little bit better and we will see the trend by then.
Investment of the government has started to improve, but then this is going to take some time. There are some projects -- I mean, in Mexico, every time the government change there is a stop in all the infrastructure projects. It happens in 2012 and it happened in 2019, with the change of the government. But I think that this is getting a little bit. It's not going to be huge, but it's going to be a change in trend.
Regarding the investment and the private sector, the stoppage was a lot in the industry. I mean, most of the investment coming to this industry were relocated in Mexico, stopped because of the NAFTA renegotiation and this is going to start changing. It's going to take a while, but some of that effect we are also going to see this year. So, overall, it's not going to be a huge improve, but there is going to be an improve. And I think in 2021, as you said, this improve is going to be stronger -- even stronger.
Regarding the capacity in Mexico, which was your third question, I don't see a problem I mean, Mexico imports almost 8 million tons of steel and we are putting a capacity -- we import almost 1 million of that. We are increasing capacity a little bit less than 4 million tons. And there's another project, I don't know when it's going to be completed, of 2 million tons.
So we have the capacity to fight all those imports, which, I think, will have a very competitive structure of cost to fight that import and to supply all the customers that today we cannot and that they're customers that need to be supplied by a USMCA country after the sign of the USMCA treatment.
So I think we are in a perfect situation to put -- there is a timing to put this capacity on the market in Mexico. So I'm not very much concerned of the increase of capacity. Of course we have to fight for the customers, but I think that we have a very good cost structure, very great commercial team and we know all the customers. So I think they are eager to accept us and that we supply that volume to them.
Again we don't have capacity today to do it. And with this we are going to have the capacity to do it. So I think again it's a very, very good timing and the signing of the USMCA was perfect for us because it's going to start in July or August depending on when Canada sign in. And so we are going to be just in the moment to start supplying these customers that would -- that are going to need North American steel.
Now to the first part of the questions and the long-term strategy, we discussed it along -- sometimes in some of the calls, we were focused -- we are focused today in finishing this investment $1.1 billion of CapEx this year and as Pablo said, $800 million of CapEx next year is a record high for Ternium in all the history.
So we were much focused on that. What are the next step for Ternium? Clearly there are going to be some organic growth. We have projects that we are analyzing in Mexico, in Colombia, in Brazil also. Again Brazil is a country that is going to grow and we have a very solid industrial base in Brazil. So -- but those are coming after the completion and the start-up of all our projects.
M&A. M&A, we are always looking for acquisitions. I mean -- and if those acquisitions are in the Americas we are going to look for them. So that could be a possibility. But we don't have anything today that I can say we are going to do that acquisition or that other.
But -- and regarding acquisitions, it's also important that I added that although the market is looking better in 2020 there are currently a lot of uncertainties in the market. So we need to be extremely cautious when we analyze any M&A acquisitions and we are going to be extremely cautious when analyzing an M&A acquisition. I hope this answer everything you asked Thiago. I don't know if I forgot something.
It did. Just a very quick follow-up Máximo. You mentioned potential future investments in Mexico, Colombia and Brazil. So when we think about Brazil are we thinking about potential new -- like new rolling facilities tied to CSA Ternium Brazil there? Or would that be like the rationale to sell into the…
No, no. I think that -- no. Brazil has rolling capacity in excess. As you know we are an investor in Usiminas and Usiminas has a rolling capacity very near our plant in Ternium Brazil. The Cubatao plant is very, very near. And so one of the growth opportunities is to supply more slabs to the Cubatao facility which has an excess capacity -- I mean with a capacity that is not using. And I think those are the growing opportunities that we should analyze in Brazil.
Okay, that’s clear. Thanks Máximo.
Our next question is from Alex Hacking from Citi. Your line is open.
Thanks for the question. I just have one question which is around the new facility in Colombia. How are you thinking about EBITDA per ton through the cycles for that facility or I guess kind of a range of EBITDA per ton? I'm not particularly familiar with Colombia rebar market, so I'm not sure how margin structures there operate. And I guess actually let me ask one more. You mentioned, you're potentially pulling Pesqueria forward by a couple of months. So congratulations on that. Any indication about how much volume you would expect to ship from that facility at the end of this year? And any indication about what utilization rate you would kind of be targeting by the end of 2021? Would you be looking to be at 100% utilization rate by the end of the year or to be a more gradual ramp-up? Thank you very much.
Thank you, Alex. I'll answer the second question and I'll leave the difficult one to Pablo, the first one. Pesqueria is going to start – I mean, the timing – the official timing is still December, so not much production from that – from the hot mill this year but we are very confident that we can start late in October. These are going to be only two months for this year.
And remember, these are – it's a $1.1 billion investment, so it has a long start-up. So not much. And the first two months, they are dedicated to making the test for all the different products that this hot strip mill has to do, so all the running tests for the different products and that takes a lot of time for the commissioning of the hot strip mill. But by the end of 2021, we expect to be 100%. That's for sure. There's a long curve of task. But by the end of 2021, I think it's a little bit earlier, it should be by October or September, should be by 100%.
Okay. Thanks Máx for the question. So Alex, the Columbia facility basically is in line with our projects that we have like CSA at the moment of acquisition, which is increasing the participation in the value chain of the production of steel. Up to now, we have excess capacity in Colombia, in the long product market and we were limited with the local production that we have. And we were importing some products to supply the market.
So what we are doing with this facility is not only expand the market reach that we can have and substitute imports as we live in all the markets where we are but also take advantage of further increasing the margin that we can strike out of our production because we will be moving from finished product to bill it as an input for the production of our facilities. So this clearly should improve the margins of the Colombian operation and moving the margin of the Colombian operation closer to the average margin of Ternium as a whole.
So clearly that relation that we want to follow, that's the target of this investment. And again, though the volume in comparison to Ternium, Ternium is – last year produced and sold 12.2 million tons here. We are thinking of an expansion of around 0.5 million ton not a minor one, but this will contribute to sustain and to get the markets of Ternium in the range that we always want to be, which is between 15% and 20%. And clearly this type of expansion or these type of projects are putting Ternium in a better position to sustain this level of profitability.
Perfect. Very helpful. Thanks Pablo and also Máximo.
You are welcome.
You are welcome.
Our next question is from Rodolfo De Angele with JPMorgan. Your line is open.
Hey, good morning, everyone. I just have one question. I would like to hear your thoughts on working capital was one of the reasons why the cash flow was strong last year. So I just wanted to hear from you what is a sustainable level, if there should be a hike in the first quarter or any thoughts on working capital? Thanks, guys.
Okay. Let me take this question Rodolfo. Clearly, as you mentioned, a key contributor to the free cash flow generation was the reduction in working capital. And there are two sides of this reduction in working capital. The first one was a real volume reduction in working capital. As we always mention and I think Máximo made it very clear at the beginning of the year, one of the targets of the company was to be more efficient in utilization of working capital. And the second one, which is clear and of course is the price of the raw materials and the finished product that we have in our inventories.
The negative side of that is to reduce our EBITDA. The positive side of that is that reduce the value of our inventories. Clearly, the second part will not be present there anymore, because we are not expecting to see the big fluctuation of prices that we saw during last year. So the – we will continue to work in efficiencies in the management of our inventories. But also we need to take into consideration that we are expanding production during this year 2020. We have one facility will be fully utilized by the end of the year which is a Colombian one, but we will start working with the Mexican facility in Pesqueria, which is a significant one and will require some level of inventory. So all-in-all, the initial expectation is that should not fluctuate that much the level of inventories and probably will not be a contributor to the generation of free cash flow during 2020.
Okay. Thanks, Pablo.
You're welcome.
Your next question is from Thiago Ojea with Goldman Sachs. Your line is open.
Hi. Good morning. Thanks for the questions. My first question is regarding the long-term strategy on Ternium. For years Ternium was versus excellent being short on its slabs and have an excess capacity on rolling. Then after the CSA acquisition it became the opposite. You were long on the slabs. And now with the new Pesqueria mill you were slightly short again. How do we should be think in 10-year view this – would you still invest – you mentioned that you're going to invest in new projects? Would still be more towards like rolling capacity? And specifically, on the Pesqueria Nuevo new mill after this is on line how should we consider costs going forward? How the structure and cost would shift in Mexico? Thank you.
Thank you very much, Thiago. I'll answer the first one and then as usual the difficult one for Pablo. No. Sure. I mean, we – as we always said, we want the – we like the flexibility. And before our acquisition of the plant in Rio de Janeiro the decent – the CSA plant, we said we have the three – we have the natural gas reduction from one side. We have blast furnace for on-third the natural gas, one-third was blast furnace and then one-third or a little bit more we were short on slabs and we buy slabs from the market. And that was – give – gave us a lot of flexibility. With the increase of the complexity of the Mexican market and the complexity of the product being so short on slabs, let me put it this way, being so short of slabs started to develop some problems, because we couldn't have the capacity of developing the steel for the needs of our more sophisticated customers.
So I think the acquisition of CSA, which brought us long on slabs was a – was very good for the timing, and of course for the price we pay. It was much smaller the investment that we have to build that capacity; and second, give us the ability to work with our sophisticated customers in the development of all the steels that we are doing today.
Now that we are investing in the hot strip mill, this is going to be even better, because we are going to be able to produce the full range of all the products – of the most litigated steels that are produced around the world and give us the facility to work in the development of the customers with that, but we are going to be short of slabs of at least two million to three million tons, which for us is quite a comfortable level. So if you have to think of what we are going to do forward, or what we are thinking, I said we like this arrangement and we grew -- we are going to grew given space that we do have to buy slabs in the market and remain a little bit flexible especially for the downturn of a market that could happen sometimes.
Okay. Let me take the second question. Clearly, the Pesqueria project has different effects. We understand all of them are positive in respect to the margins of the company. The first one is the one that Máximo mentioned, which is we will be able to substitute or produce in our own facilities, the high-end products that up to now we are not able to produce. So this is improving the margin of our own production.
The second one is substituting of imports that we are doing of some products that then will be produced in the new facility in Pesqueria and this is not a minor amount. Even Máximo during the opening remarks mentioned that this is close to one million tons. So there we'll be gaining the margin of -- instead of providing the finished product, producing that product and gaining the transformation part of the product.
And, of course, the third portion is that we will increase our product offering because we will be having higher level of production and the total level of shipments in the Mexican market should increase quite a lot. So putting all the three things together, clearly there should be an increase in margins in our operation in Mexico.
Clearly you would like to have a number to that, but the only thing I can say is that this is again in the same line of improving the margins of the company and sustaining the profitability level within the range that we consider that Ternium should have, which is between the famous 15% to 20%.
Thank you.
You're welcome.
Our next question is from Carlos De Alba with Morgan Stanley. Your line is open.
Yeah. Good morning, everyone. So the first question is on Brazil. You mentioned Máximo that you expect the company to -- Ternium Brazil to go back to higher levels of production, is this around 1.2 million tons or higher on a quarterly basis?
And then just to clarify, if you could clarify the comments on Brazil's potential investment. I understood that the company is not interested in adding rolling capacity to CSA. So does that mean that the company could potentially expand only the slab production? Or do you want to do something with Usiminas in Cubatão? If you could clarify that would be great?
And then still on the capital allocation investment plans. Do you -- how do you see the expansions in Mexico going forward? Do you expect that after this current cycle is completed and is fully ramped up, Ternium Mexico would add more downstream or perhaps it is time to also add upstream capacity in the country?
And then final question on dividends. The company or the Board decided to maintain the dividend payment of $1.2 per ADS after -- this is the first year in several where the company doesn't increase dividends. You could argue that the company has a space or had a space to pay more. Certainly balance sheet remains strong even though net debt-to-EBITDA increased a little bit but -- quarter-on-quarter. And you are arguably past the current peak of the ongoing cycle, CapEx cycle. So if you could maybe put it in context what was the rationale, do you think that the Board -- it had when they decided to keep the dividend flat?
Okay. Thank you, Carlos. Long question. So I'll try to not forget anything, but please interrupt me if I do. I start with Brazil. As you know Brazil produced -- and I'm going to talk about yearly basis and I'm going to talk about yearly basis because of the -- how the Brazilian mill has to go into the relining of the convertibles talking about quarters, one quarter can change with another because it has this relining.
So, it's very difficult to talk quarter-to-quarter. So, I put the production in years. 2018 was 4.6 million tons. 2019 we produced 4.4 million tons. What we expect to produce again in 2020 is 4.7 million which was what we did expect in 2019.
Remember we did -- we're going to increase the production. And that by 2021, 2022, we are expecting to reach near the five million which is very hard, but that's our goal. But in 2019 we're expecting to produce 4.7 million and we produced 4.4 million because of this downtrend of the market. So, 2020 our new estimation is 4.7 million. I hope with this I answered the question, but we are at full capacity in our Brazilian operation.
Thank you.
And regarding the investment in Brazil, let me be clear because I don't want to mislead you. We have nothing concrete yet. I mean what we have is that we have an investment in Usiminas. We are one of the main shareholders of Usiminas and Usiminas is doing better and Brazil is growing. So, that's a very good it's very good for us.
We have a huge facility one of the most modern facility for slab production in Brazil. And I think that this growth of the market of this improvement in Brazil in the Brazilian economy we are going to take advantage of that. And so we want a presence in Brazil. But we don't have any concrete of what are the next steps in the Brazilian operation. We are analyzing different projects.
Some of them are based on reduction of costs -- huge reduction of costs like ones that we made in Mexico. But again they are very initial step of analyzing the different alternatives the different views of the Brazilian market. So, don't expect anything in our balance sheet in 2020 about Brazil.
Then you ask about the investment in Mexico upstream or downstream. I mean I think the Mexican market has still a great opportunity for us. I mean there's still growth -- opportunity for growth. And the opportunity for growth in both upstream and downstream.
I think that we are looking for some downstream future investments. Again I don't think that in 2020, we're going to start any of those but we are looking. And then in the upstream I mean you know the USMCA when it is approved it's very good because the rule of origins are much stronger and it benefits us a lot.
But for some part of the market the terminal how you said in English the automobile manufacturers in seven years from the time it's signed the rule of origin has to change and it has to be melted and poured for only that part of the market. And so today we -- I mean in seven years we are going to accomplish part of that with our facility in Rio de Janeiro, but not all.
So, thinking about an expansion upstream is also a logical situation for us. But again we are not going to see anything of that in 2020. We're going to think of that through this year. But yes, it's one of the projects we are analyzing in a very small scale only to provide that melted and poured to these automated customers in seven years. So, we have a lot of time to analyze and see what our best option is.
And the last one was the dividend that you said. Carlos I don't think I answered the first three, didn't?
You did. Yes.
So, the dividend. And this is a question that usually Pablo answers, but I'm not going to let Pablo Brizzio answer that. So I mean, I think the dividend yield or the dividend ratio that we are paying is higher. I do acknowledge that we have a discussion, if we had to increase it or not.
I think that the numbers -- I mean having a dividend yield of 6% I think it's one of the highest in the industry, no doubt about or a payout ratio of 42% is also I think a payout ratio very high. So I know we don't have a dividend yield -- dividend policy. But with this we want to sign out that we are continue committed to paying dividends every year.
I think with the decrease of the margins of EBITDA this year and I understand next year will be probably better. But I think with this decrease maintaining the dividend is a very good sign for all our investors and we are continue committed with that.
Thank you very much.
I hope I answered your question with that.
Yes you did. Thank you very much.
Our final question is from Caio Ribeiro with Credit Suisse. Your line is open.
Yes. Good morning and thank you for the opportunity. So my first question is regarding the outlook that you mentioned for first quarter '20 and second quarter '20. You mentioned that you expect EBITDA to increase sequentially mainly as a function of stronger shipments and slightly lower cost.
But I wanted to see what you're expecting in terms of prices, right? There had been a recent pickup in HRC prices in the U.S. even though that seems to have somewhat reversed lately. But I was just wondering if you expect to be able to somewhat reflect that recent increase in the U.S. and your prices in Mexico as well?
And then secondly I just wanted to see if you could provide a little bit more details on the SG&A increase that you had in this quarter on a sequential basis and on a yearly basis as well. Just if you could explain what was the main driver for that? Thank you.
Thank you, Caio. I start with the first one; outlook, and you mentioned prices. There are 3 different prices. Prices in -- I mean in our first quarter you're going to be reflecting the increase in prices in slabs, the sales of slabs from our Brazilian operation.
And the log prices in the U.S. are increasing as you said. Not the full effect is going to be seeing in the shipments of Mexico because remember in Mexico we have, I say half-and-half but half our shipments are industrial customers they're a little bit more. And usually those are contract-based prices on a quarterly basis.
So the prices of those customers are probably going to decrease from the fourth quarter to the first quarter. But the customers of the spot basis the other 50% are going to increase in the first quarter. So the net prices would be highly -- a little bit better but not much better. In the second quarter the contract-based prices are going to be higher. So you're going to see the full effect in the second quarter of this increase.
Volumes though are going to be higher in Mexico. That's for sure. I mean as I said Mexico fourth quarter -- and the whole year was not a very good year for apparent consumption -- of steel consumption in Mexico. But in the first quarter, we are seeing an increase in our customers' orders and we expect to continue that way in the second quarter. So volumes are going to increase and prices not that much in the first quarter but we are going to take advantage in the second quarter. I think – I don't know if I answer – do you have the second part?
I have the second part. Caio the same for your question because it's important for us to clarify this point. In fact, we did not have an increase in normal G&A. We have specific or particular issues that reflected a number is higher than the previous quarter. And the two of them are – the first one is the increase of an asset tax in Argentina.
Up to last year this or before the interest of the new government, this asset tax was 0.25% and the new government passed a law increasing this or doubling this tax to 0.5%. So $4 million of that increase is related to that. So we needed to register. So this will not be register as an item in the following quarter.
And the second one, you know that we have a contract that we acquired together with the acquisition of CSA now Ternium Brazil to supply slabs to the Calvert facility of little in the U.S. Since it was a long-term contract, we needed to account it for in our purchase price allocation. So after that we need to amortize this contract by the volume that we shipped.
Since we have higher volume in the fourth quarter in comparison to the third quarter, the amortization level was higher and this is the other affect that show a higher G&A, right. The real G&A or the expenditure and G&A basically were in line in both quarters.
I see. That’s very clear. Thank you.
You are very welcome.
We will now turn our call over to our Chief Executive Officer for closing remarks.
Okay. Thank you all very much for being part of our conference call today. Please give us a call for any questions or comments or anything. And if not, we'll see you next conference call. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.