Alfa S.A.B de C.VA (OTCPK:ALFFF) Q3 2018 Earnings Conference Call October 17, 2018 1:00 PM ET
Executives
Luis Ochoa – VP of Corporate Communications
Eduardo Escalante – CFO
José Carlos Pons – Alpek’s CFO
Alberto Sada – Nemak’s CFO
Adrian Santos – Axtel’s CFO
Raúl Millares – President of ALFA Energy
Analysts
Vanessa Quiroga – Credit Suisse
Eduardo Altamirano – HSBC
Abraham Fuentes – BlackRock
Eric McClure – Bank of America Merrill Lynch
Marcelo Inoue – Citi
Mauricio Serna – UBS
Luis Miranda – Santander
Operator
Good afternoon and welcome to ALFA Third Quarter 2018 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instruction given at that time. As a reminder, today’s conference is being recorded.
Now, I would like to turn the conference over to Mr. Luis Ochoa, Vice President of Corporate Communications. Mr. Ochoa, you may begin.
Luis Ochoa
Thank you. Good afternoon everyone and welcome to ALFA third quarter 2018 earnings conference call. Additional details about our quarterly results can be found in our press release, which was distributed yesterday afternoon and is available on our website in the Investor Relations section. As a reminder, during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. Therefore, actual results could vary from those mentioned in this conference call.
Before we begin, I would like to remind everyone that we will be hosting an Investor Day in New York on November 15th with presentations by ALFA’s Chairman, Armando Garza; President, Alvaro Fernandez as well as executives from each of ALFA subsidiaries. If you have not signed yet, maybe you sign up yet and would like to attend, please contact Ochoa Riel on the IR team.
Joining us today is Eduardo Escalante, our CFO, who will discuss the financial results for the Company. At the end of the call, we will take your questions. Eduardo, you may begin.
Eduardo Escalante
Thank you, Luis, and good afternoon everyone and thank you for joining our call today. ALFA had another very good quarter largely driven by the strong performance at Alpek and solid performances across the other companies. On a consolidated basis, total revenue was $4.95 billion, an increase of 16% reflecting higher revenue from Alpek and Nemak driven by improve volume and better pricing as well as contributions from acquisition. Foreign sales presented two thirds of the total.
With improved margins in many of our businesses, 3Q ’18 consolidated EBITDA was up 66% year-on-year to 666 million, the second highest ever, as our three largest companies reported better comparable results over 3Q ’17. On a comparable basis, excluding extraordinary item for the periods consolidated, EBITDA grew 28%. Majority net income was 72 million in 3Q ’18, up from a loss of 332 million in 3Q ’17. This year-on-year involvement is mainly explained by how higher operating results and the M&G-related impairment that impacted 3Q ’17.
Sequentially, majority net income decrease from 184 million as fiscal FX gain from the appreciation of the Mexican peso resulted in higher taxes during 3Q ’18. All of the companies continue to make progress with the investment, plans and total CapEx and acquisitions for the quarter was $198 million and $1 million for the nine month period. The largest expenditures year-to-date 435 million was Alpek acquisition of Suape and Citepe. The overall financial position of ALFA continues to improve with net debt-to-EBITDA of 2.7 times compared to 3.3 times in 3Q ’17.
Moving now onto a discussion of the individual companies. As a reminder, more detail financial information about the quarter for the individual companies was provided during the respected conference calls held year-to-date. I will now provide some of the key financial and operating highlights for the companies. Starting with Alpek, 2018 is still not a good year for Alpek and the Company was once again standout in the quarter. Alpek is benefited from an upswing in oil prices and significantly improved polyester margin when compared to the prior year. And coupled with acquisitions, Alpek delivered record EBITDA in 3Q ’18.
Reported revenue was up 48%, also benefiting from the inclusion Suape and Citepe, the two Brazilian companies acquired last quarter and up 32% on a comparable basis. The polyester business segment was the main driver in the quarter, supported by higher margin as well as contribution from acquisitions. This good performance came about despite disruptions from Hurricane Florence and a fire at the Altamira facility, which resulted in a temporary closure but was restarted early September. Both events were mitigated by Alpek leveraging its global integrated polyester platform.
Plastics & Chemicals also [indiscernible] performed, supported by better than expected polypropylene margin. Of note, Plastics & Chemicals volume was 4% higher than 3Q ’17 largely due to the EPS capacity expansion that was completed last year. The strong top line growth coupled with expanding global polyester margins throughout EBITDA off to a record 274 million compared to 3 million in 3Q ’17 and 229 million in 2Q ’18. EBITDA also benefited from favorable inventory gain of 33 million and a 9 million gain from an advanced insurance payment related to the fire at the Altamira plant.
By contrast, 3Q ’17 EBITDA was negatively impacted by cost associated with M&G financial discipline. Excluding special item in both years, EBITDA increased 117% year-on-year. In other company new, the final revolution from the U.S. Department of Commerce with respect to the antidumping case, it was positive. And now, awaits final decision from the International Trade Commission. Capital expenditures in the quarter excluding acquisitions amount to 300 million primarily for the ongoing construction of the 350 megawatt Altamira cogeneration power plant which was 98% complete by quarter end.
Moving next to Sigma. Results were generally in line with expectations driven by a solid performance in Mexico and Europe. The new plant in Spain is fully operation and delivering expected results. Raw material prices were mixed both by product and by region. Sigma’s average price in dollar terms decreased 1% year-over-year, impacted by the 6% peso devaluation against the dollar. In terms, total quarterly volume increased 1% while revenue was flat year-over-year. By region, revenue increased 7% in Mexico in peso. In Europe, revenues in euros increased 1% benefiting from acquisition.
Sales in the U.S. were down 1%. Reported EBITDA was similar both years results benefited from a 10 million gain due to asset revaluation associated with the acquisition of Caroli. Additionally, this quarter was also impacted by a 4 million provision charge for a plant closure in Europe. Excluding these items, EBITDA increased 3% in the quarter. This reflects solid performance for Mexico and Europe that was partially offset by lower profitability in the U.S., which was impacted by higher raw material and freight cost, associated with the new transportation regulation.
Going to Nemak. Overall, Nemak reported solid results with total volume on revenue, both increasing 5%, with performance value by region. Revenue in the quarter benefited mainly from higher volume. North America delivered the strongest performance of 11%, reflecting strong sales to the Detroit three automakers while rest of the world also affected by the lower sales in China and the depreciation of the Brazilian real. Lower detail sales together with production delayed among all the end cause by new initial peso standards are impacting Europe which saw a decline in volume.
Nemak continues to benefit from operating efficiency and a large portion of sales coming from higher value added product. EBITDA was up 5% over the same period last year to $160 million driven by higher volume and operating efficiency. Regarding the structural and electric vehicle component business, Nemak reached a peak volume levels for its first structural components programs in Slovakia, supplying more than 400,000 parts today for the Volkswagen Group and is currently bidding for new contract for approximately 1.2 billion.
Before moving on, let me make a few comments about the recent U.S., Mexico, Canada trade agreement as it pertains to the order industry. In our view, the new agreement is positive as it removes some of the uncertainty that has been another hang for the past year. This agreement stands to strengthen the regional auto parts industry as automakers will be required to produce a higher share of vehicle content in North America. Nemak already exceeds the regional value content threshold for major auto components, while the close on salaries which establishes a $16 per hour content apply for automakers, but does not apply directly to auto parts suppliers. In summary, Nemak needs the preconditions of the new agreement and we believe that it will present some opportunity for further integration in the region.
Moving on to Axtel. The Company continues to make progress exceeding this Mass Market business as well as growing core business segments. The third quarter results were driven by Managed Networks and IT services in the core Enterprise and Government segment. Largely due to the winding down of the legacy Wimax business, total revenue in dollar terms was down 4% in the quarter. However, total revenues were up 4% in the core Enterprise and Government segment. Axtel reported EBITDA was down 7% year-on-year in U.S. dollars when excluding gains from the tower sales recorded in 3Q ’17 EBITDA was up 8%.
Axtel’s productivity initiatives coupled with expense management, resulted in a 100 basis points improvement in the EBITDA margin in the quarter. Axtel continues to undertake financial transactions to mitigate risk and improve its financial position. A key transaction during the quarter was the refinancing of Bancomext [indiscernible] swapping $172 million into pesos, resulting in a 50-50 mix between pesos and U.S. dollars. Better terms and maturity of 10 years was also part of the refinancing. Axtel continues to evaluate the base financing options for the Company.
Newpek, with respect to production, Newpek had 555 production producing wells at the Eagle Ford Shale, down from 639 wells at the end of 3Q ’17 due to the successful sale of partial acreage to the Sundance Energy earlier in the year. Overall, quarterly production was down in the U.S. and flat in Mexico. In turn, Newpek reported revenue of $27 million in the quarter 30% higher than the same period of the prior year, reflecting higher prices which offset the decline in U.S. production. By contrast, the Company reported an EBITDA loss of 2 million compared to EBITDA of 1 million in the same period of the prior year due to higher expenses in Mexico. The Company continues to be planned to divest this acreage position in Eagle Ford. There is nothing further to report right now.
This ends my discussion about the individual company. To summarize, we are pleased with the results for the quarter and nine month period. We continue to see ALFA and our subsidiaries execute on a strong growth strategy. ALFA continues to grow the sales and EBITDA while making meaningful investments to ensure future growth and actions taken by our individual subsidiaries are further strengthening our balance sheet.
This concludes our discussions of third quarter results. We will now take your questions. Please, Luis.
Luis Ochoa
We would like to begin with the Q&A session with questions on ALFA. Mr. Eduardo Castillo, ALFA’s CFO will take questions on ALFA and our corporate matters. Operator, please instruct participants to queue for questions on ALFA.
Question-and-Answer Session
Operator
Yes sir. Thank you. [Operator Instructions] And we’ll now take a question from Vanessa Quiroga from Credit Suisse.
Vanessa Quiroga
The first question that I have was about as the process for the sale of Eagle Ford Shale acreage. If you can provide an update on that process and an estimated proceeds amounts? And the second question would be, what do you see for the future for ALFA in terms of the E&P business?
Eduardo Castillo
Thank you, Vanessa for your question. Let me pass the question to Raúl Millares, the President of ALFA Energy, who is here in the call today. He’s the most appropriate to answer your question?
Raúl Millares
Let me understand your question. You want to know of what we already sold or what we are planning to sell?
Vanessa Quiroga
What you’re planning to sale?
Raúl Millares
Okay. Well, at this point in time, I can tell you where we’re balancing in the process of negotiating and we have very close to with one potential buyer. It’s hard to tell you right now what’s going to be there the amount because as you know, our partner, Pioneer Natural Resources is a public company. And we have an agreement that we will not disclose any information regarding this transaction unless we both agree and until we finish, complete at least the signing of SPA, the share purchase agreement. So at this point in time, I can only tell you that we are very-very advanced, and I believe in the next week we should be ready to tell, commenting about this transaction.
Vanessa Quiroga
And then the second question was about the outlook for the oil business for ALFA in the future?
Eduardo Escalante
Okay. We’re actually making a very deep review of what is our situation, what is going to be our strategy in the future, asking now things have changed. We already mentioned in the past that we were in the process of divesting our investments, the oil and gas business outside Mexico and basically concentrating in Mexico. As you know, we have to lift two blocks that we gave in the previous round in the Mexico in the North part of Mexico, which we continue to advance in the process of starting up that close to field that we acquired, but it’s been a challenge to deal with the structures of Mexico, all the requirements that you have to fulfill, but that’s not new for overall this Mexico.
So, we are basically concentrating in Mexico and we just change in government where we are waiting to see what happen in the next government which around to see when they come and how they will come. So, we are basically following the same situation that it means the oil and gas business that we are concentrating in Mexico, but at the time being we are waiting to see what will happen with the new administration in Mexico.
Operator
We’ll now take our next question from Eduardo Altamirano from HSBC.
Eduardo Altamirano
Just have a question. This is a follow-up to Vanessa’s. With the new administration coming in, how are you seeing sort of the evaluations for the next update several years across all business lines? Do you see any challenges looking ahead? Or what are the opportunities as well that you see coming up as you work with let say kind of a new order in Mexico?
Eduardo Escalante
Well, actually, we all want to see our economy growing and more prosperity for citizens in Mexico. So, we will be working together with the new administration and the new government leadership at all levels in order to make sure that it happens. We are confident of the growth of the economy in Mexico in the coming years. That is as much as I can tell you. Again so far the times have been extremely positive in Mexico so that it gives us a confident.
Eduardo Altamirano
And then as well as in terms of let say, potential deleveraging that you’d seen within the next sort of six months. It seems that your subsidiaries’ cash flow pretty strong across the board. What sort of targets you have, let say for the first half of the 2019?
Eduardo Escalante
Sure. As we have discussed before, we will continue to focus on reducing debt and deleverage levels that we have. We see for the coming months in addition to a very good results that we are having in our companies in particular Alpek, we also see an opportunity for the rest of the year to reduce the investment that we have been work in networking capital. And also some of the different companies have a several potential monetization transactions, which we have already discussed with you.
In particular, the cogeneration sale in Alpek and the mass market business divestiture in Nextel, the plan, in particular in the later is to use the proceeds to reduce the debt levels of those companies. Overall, on a consolidated basis, the net leverage target that we have is to be below 2.5 times. Today, we are at 2.7 times, so that far away of the target.
Eduardo Altamirano
Sorry. And just to clarify. Is that target just kind of the steady state target or is that kind of just for the end of the year?
Eduardo Escalante
No, that is our steady state goal.
Eduardo Altamirano
Okay, excellent.
Eduardo Escalante
The level for the end of the year really depends again on the monetization projects that we have pursuing to that.
Operator
We’ll now take our next question from Abraham Fuentes from BlackRock.
Abraham Fuentes
I wonder if you can give us a little more details regarding Sigma operations about what can we expect in terms of margins for the next quarters and also in terms of saving?
Eduardo Escalante
Hi, Abraham, could we wait until, we are at the Sigma Q&A please and could you ask this question again at that moment?
Abraham Fuentes
Okay.
Eduardo Escalante
So, we can finish this next chapter on ALFA.
Operator
[Operator Instructions] We’ll now take our next question from Eric McClure from Bank of America Merrill Lynch.
Eric McClure
Just quick question regarding guidance and sorry, if you’re already addressed this. We saw in Alpek’s press release that they’re saying full year EBITDA could be 100 million higher than what you had guided in the previous quarter. We’ve been seen this pass-through directly to ALFA or will there be some change in the guidance?
Eduardo Escalante
Thank you, Eric for the question. Yes, the benefit of everybody, Alpek mentioned in its results release as well as in the call this morning. But it is likely that they will surpass their guidance for the year in an estimated amount of a $100 million. The original guidance, the new guidance for Alpek is 750 million. We also believe that the rest of our companies will be a meeting the respective guidance. They are going to be pretty much in line. However given that we are near the end of the year, we will not provide a new guidance on this occasion, but benefited — ALFA will benefit from the results of Alpek also in our bottom line. We will not provide a new guidance, but certainly, we will surpass the guidance we have for the consolidated company.
Operator
We’ll now take our next question from Vanessa Quiroga from Credit Suisse.
Vanessa Quiroga
Yes, sorry. This is still about ALFA, if it possible. I was wondering, if you think there is room to execute that share buyback program in given your current position in the balance sheet? Or would you and wait until you reach that 2 times leverage target?
Eduardo Escalante
Sure, Vanessa. Thank you for your question. For the time being, the focus is on reducing the debt and achieving the net leverage target, which, again, is 2.5 times. After we are able to restart label, we will certainly consider any number of programs among them shares buybacks. For the time being the plan is to reduce that.
Vanessa Quiroga
Okay. And just to be clear, all that leveraging efforts are being done by the subsidiaries, and the only transaction that could be at the ALFA’s level is the Newpek sale of the Eagle Ford Shale plant, right?
Eduardo Escalante
That is correct.
Vanessa Quiroga
Or is there anything else? Okay that’s great. Thanks. Thanks for those.
Eduardo Escalante
You’re welcome.
Operator
And there are no further questions at this time on ALFA. Mr. Ochoa, please proceed.
Luis Ochoa
Okay. So now let’s move on with questions on Alpek. Alpek held its earnings conference call earlier this morning. And Mr. José Carlos Pons, Alpek’s CFO is here with us, if there any additional questions. Operator, please instruct participants to queue for question on Alpek.
Operator
Yes, sir. Thank you. [Operator Instructions]
Luis Ochoa
Okay. Let’s continue with questions on Nemak. As in Alpek’s case, Nemak held its own earnings conference call earlier this morning with Mr. Alberto Sada, Nemak’s CFO is here with us, if there any additional questions. Please operator, instruct participants to queue for question on Nemak.
Operator
Yes sir. [Operator Instructions] And there are no questions for Nemak at this time.
Luis Ochoa
Okay. We will now take questions on Sigma. Mr. [indiscernible] Sigma’s CFO will answer your questions. Operator, please ask people to place questions on Sigma.
Operator
Yes, sir. Thank you. [Operator Instructions] We’ll take a, our first question is from Abraham Fuentes with BlackRock. And Mr. Fuentes your line is open. Please go ahead.
Abraham Fuentes
Sorry. I don’t know if you can give me a little more detail about the operations of U.S. And what can we expect in terms of sales and operating margin for the next quarters?
Unidentified Company Representative
Sure, Abraham, thank you for your question. So as you saw in those results, our U.S. margin was lower than normal for the quarter. And the biggest impact had to do with the increases in raw materials that we have all the summer for the U.S. We just for to give you a little bit more explanation on how that happens, we normally pricing summer discounts for summer months beforehand. And we were not expecting such high increases in a couple of raw materials particularly in park trends and pork dale. And so, we had an impact on margin for the quarter. That started to get better on through the end of the third quarter. And we expect margins to continue to improve after that to the more normal levels as the ones we had on previous periods.
Operator
We’ll now take a question from Marcelo Inoue from Citi.
Marcelo Inoue
I still have question regarding the U.S. I understand that the impact to earnings this quarter was mostly due to cost, but I wanted to hear from you, what are your views for next year in terms of pricing in the U.S.? It seems that overall meat prices remained roughly flattish quarter-on-quarter in the third quarter. But I wanted to understand, what could be the risks in terms of potential sort of supply demand imbalances next year with the recent extra taxations and trade issues? Thank you.
Unidentified Company Representative
Sure, Marcelo. So, raw materials were mixed, but as I said for pork trend and pork dales particularly, it was very-very high for the summer. It’s normal that the prices for these raw materials, both prices in general are higher in the summer, just not as high as they were this year. They already down at more normal levels. And our price has also changed in the U.S. since the end of the summer and starting in September. And so, we don’t expect any major impacts like the one we have in the third quarter on the remainder of the year or for that extent potentially next year.
In this year, we see pork ham prices which are more relevant to Europe and Mexico than the U.S., but also play a role in the U.S. They have been fairly from stable to positive, and they moved them around a little bit when the trade issues between Mexico and the U.S. started. As you probably know, Mexico is the relevant market for U.S. for pork hams. So when the Mexican government is post tariffs on U.S. support, prices in the state tended to go down. Now, on the turkey side, it’s been a little bit the other way around. Last year, turkey producers did not make a lot of money producing turkey. Margin on their side were very low.
So, supply — turkey supply came down this year. We’re already starting to see some information that tells us that next year there is going to be a lot more turkey supplier available. So we expect turkey prices to come down and that is particularly positive for our Mexican operation. And now what to expect going forward on pork which is relevant for us, so our largest raw material in the meat side is pork, there are some margin pressures for pork producers today, so there is a possibility that we have less supply particularly in the second half of next year.
Now, it’s — what’s good for us in terms of that increase is that it’s a plant increase and something we’re preferring for big pork ham, and we do not expect to have a major impact on those increases as long as they have been gradually as we are foreseeing today, and that assuming, we don’t have any type of crisis in terms of any sickness related to pork. There have been some instances of African swine fever in some parts of the world, nothing major yet. But if that were to expand in the coming weeks or month, that is something we will need to take into account as well.
Operator
We’ll now take our next question from Mauricio Serna from UBS.
Mauricio Serna
Just very quickly on Mexico, however, very strong quarter. Just want to understand, what was the reason why the Mexican margin expanded? And you think these levels are sustainable? And on the other hand, you talk a little bit more about LATAM and in U.S., on the long term, what levels of margins you expect to achieve in both these markets?
Eduardo Escalante
So, on Mexico, if you remember our operation in Mexico, we import a lot of raw material that is dollarized coming from the U.S. And so, if you look at FX at the end of June right before the elections, it was coming up pretty dramatically. And so we took the decision to increase prices at that time. And after June, after the elections came appears stability in the country and with that FX levels came down, but we had already raised prices. So, as we normally do we try to stay or sustain our pricing levels as much as possible when things like that happen.
We are monitoring that very closely so that we can give discounts or pricing depending on where our competitors are moving. But most of the time when this happens we’re able to capitalize a little bit on margins as it is the case for the third quarter. The performance was good as you mentioned for the quarter and big part for that reason in peso terms, the Mexican operation was up over the same quarter last year 16% in peso terms again.
For LATAM and the U.S. already talked a little bit about the reason why the margins as were lower than we normally have. And we would expect the U.S. margins to come back to the levels where we’ve had in the past. Last year’s margin for the U.S. were almost a 15% and that that is a number we’re still shooting for. Latin America margins are normally a little bit below. The U.S. and Mexico margins as you can imagine the scale in those countries is less than and so the margins are usually little below. There are opportunities for them to grow.
This quarter’s margin was close to 9% and it’s a relevant increasing what we have last year. We’ve seen positives in countries like the acquisition that we made last year is being paying off and we think it’s going to pay off even more. And that margin is still with some issues in countries like Nicaragua, and you’re probably aware with a lot of social economic instability that is costing us and margin still, less than last quarter, but there are still some impacts their related distribution issues and even sales in that country that we’re pairing with.
Mauricio Serna
Got it. So that means, I mean understand the U.S. number, but then what we should, how should we think about the LATAM region in the long run?
Eduardo Escalante
Yes. So as I said margin for this quarter is close to 9%, which is a significant increased to last year. And we think that’s a margin we can sustain. And to the medium to long-term there might be opportunities without margin to become double-digits. But we’re not committing to that on guidance yet.
Operator
We’ll now take our next question from Luis Miranda from Santander.
Luis Miranda
Just follow up to Mauricio on Mexico. I just want to understand like you said that the 7% growth that we saw in Mexico top line. Is most of its price or it was also a balance with volume? And if you could just give us some on the performance of the consumer in your categories post elections? If you see any material change or have you seen the stability that you mentioned across the categories? Basically that’s the talking points? Thank you.
Unidentified Company Representative
Sure Luis. Thank you for your questions. On the first part of your question, so most of the Mexico growth on top line, the 7% on peso terms has to do with pricing, as you know when we increase prices it’s always hard to grow. We did not have any relevant volume decreases for the period. But yes, so it’s pricing for the most part. In terms of consumer, consumer confidence increased a lot after the elections with a lot of stability. In terms of consumption, we saw 5% increased in food sales in nominal terms. So nothing too dramatic either way, it’s very similar to the numbers that we’ve been seeing before the elections. Hard to predict how this number is going to behave going forward. And so it’s, I would say, I would call it stability in consumption more than anything else.
Luis Miranda
Just in terms of the competition, has the competition follow on the price increases in some of the categories?
Unidentified Company Representative
Yes, for the most part, as you know, in a particularly in the packaged meats industry, we’re all exposed to in FX in a very similar way. So as it is the case, we are the first ones to move but everybody follow suit. And everybody increased, right now as FX came back we’re monitoring prices very closely so that we don’t have too much pricing per store even just to make sure that we keep and stay competitive.
Operator
We’ll now take your next question from Eduardo Altamirano from HSBC.
Eduardo Altamirano
Just for the long-term sort of sustainability standpoint, you expect the U.S. MCA having been pretty much undertaken the North American countries. Are you still looking at sort of sourcing raw materials from the outside the U.S., given the fact that, within this most recent iteration of risk that you saw potential duties between bilaterally between the U.S. and Mexico, that this could be material risk going forward. Just understand what your prospects are for the longer-term of the business?
Eduardo Escalante
Yes, Eduardo, thank you for your question. Ever since we started the hearing the news that there were some risks related to agreements between Mexico and the U.S., we developed a very detailed plan just in case something happened that it happened. And we’ve mapped out for every relevant raw material what’s the best source of that raw material and the next — and the second and third best net alternatives wherever they are. And what we’ve been doing since then is making sure that we take advantage even when opportunities arise related to those changes.
What happened recently when the Mexican government imposed this tariff on pork, we were very quick to react in buying pork in Canada, in Europe as well because, we were already ready for something like that. This continues plans we still have in place. And even though it seems NAFTA is coming along fine, and tariffs might disappear, we are planning on operating this plan. And what we found is that, every now and then we found opportunities when the second or third, third best alternative is more attractive than the first for a couple of weeks and we take advantage of that it’s happened in Brazil, it’s happen in Europe.
And that is something that we’ve plan on keep on operating as I was saying. For the most part, for some of these raw materials, it’s going to be hard for the Mexican operations to find a long-term best alternative compared to the states for logistic reasons and for geographical benefits that they have for the production of feed for pork and turkey, et cetera. But in case something we’re to happen as it happens this year, I would say that we’re very ready for those changes.
Operator
[Operator Instructions] We’ll now take a question from Vanessa Quiroga from Credit Suisse.
Vanessa Quiroga
My question is regarding Europe and plans that was closed during last quarter. I was wondering is there more of disclosures that we should expect? And if you see what could be that rate of risk for that operation in Europe and for you to reach that target EBITDA margin that you have double digit?
Unidentified Company Representative
Yes, certainly, Vanessa. So the plans that we announced has not been closed yet. We provisioned for the closures because we got authorization from the world council for that closure. We expect to close it by the end of the year beginning of next year. And we’re going to shift production from that facility or across into other facilities in the region. We still expect to have more activities like these going forward in the next 2 to 3 years that we discussed in the past. This is the first up to you. And the biggest risk I would say is always in Europe’s case where things like negotiations with or labor negotiations in general with the government with the local unions. It’s something that we’ve dealt in the past and we have so much experience in how to do these.
And we do not foresee any major issues with that. That is not something that we expect short term, because the best way of doing this these activities is slowly take advantage of normal attrition trying to relocate products. And something to maybe just specialized in price plans more than closing them. And so, it’s something that we’re going to do in very detailed and concise manner. And again, we announced the first and we think few more coming online. The fact that the new facility in Spain is working so well also helps us into potentially bringing more products into that facility and saving even more money to do that.
Vanessa Quiroga
And in terms of your target margins, do you feel very confident about reaching 12% margin?
Eduardo Escalante
So, what we’ve have as guidance for our long term guidance for European operation is 10%. And we still think that is achievable in the medium term. And that’s a combination of what I was just explaining in terms of optimizing the footprint and also improving our sales mix into more innovation related sales and potentially reducing our exposure to private label in Europe. And we still think that is achievable.
Vanessa Quiroga
Are you reducing exposure to what?
Eduardo Escalante
Private label sales in Europe.
Vanessa Quiroga
Private label, okay.
Eduardo Escalante
Shifting more sales from private label to branded products.
Operator
And there are no further questions for Sigma at this time. Mr. Ochoa, please proceed.
Luis Ochoa
We will now take questions on Axtel. For that purpose, Mr. Adrian Santos, Axtel’s CFO will answer on the half of Axtel.
Operator
[Operator Instructions]
Luis Ochoa
We will now move forward and take questions on Newpek. Mr. Raul Millares, Newpek’s CFO will take questions.
Operator
[Operator Instructions] There are no questions at this time.
Luis Ochoa
Well, I want to thank you all for your efforts in ALFA. Again, we look forward to seeing many of you at the ALFA Day in New York City on November 15th. If you have additional questions or want to register for the ALFA Day, please feel free to reach out to us by phone or email, we will pleased to assist you. Thank you very much.
Operator
And once again that does conclude today’s conference. We thank you all for your participation. You may now disconnect.
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