Alfa SAB de CV

BMV:ALFAA

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, and welcome to ALFA Fourth Quarter 2018 Earnings Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

Now I would like to turn the conference over to Luis Ochoa, Vice President of Corporate Communications. Mr. Ochoa, you may now begin.

[Luis Ochoa, executive]

Thank you. Good afternoon, everyone, and welcome to ALFA's Fourth Quarter 2018 Earnings Conference Call. Additional details about our quarterly results can be found in our press release we released, 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.

Joining us today would be Álvaro Fernández, ALFA's President; and Eduardo Escalante, our CFO. Álvaro will discuss first key business highlights that advance ALFA's strategy and then Eduardo will discuss the financial results for the company. At the end of the call, we will take your -- all your questions.

Álvaro, you may begin.

[Álvaro Fernández Garza, executive]

Thank you. Good afternoon, everyone. I am pleased today to talk about the good year that ALFA had in 2018. As you all know, we're a global company, with 70% of our sales outside of Mexico. This provide us with many and diverse opportunities, including acquisitions and divestitures in different regions and countries.

In my presentation, I will discuss some of the key actions undertaken by the subsidiaries during the year. But first, a few words about the overall results. On a consolidated basis, 2018 EBITDA was $2.9 billion or $2.4 billion adjusting for extraordinary items, a record for ALFA.

Total revenue of $19-point billion (sic) [ $19,055 million ] was 13% higher than the prior year. Importantly, utilizing the proceeds from asset sales and cash from operations, we reduced total debt and our leverage ratio was improved.

Let's start with Alpek, which had an stand-up year both in terms of its financial performance and progress made on positioning the company for future growth. These included the sale of the 2 cogen facilities for $800 million.

On the acquisition front, last May, the company acquired PetroquímicaSuape and Citepe in Brazil, the only PTA-PET integrated site in South America, expanding Alpek's polyester capacity and footprint at a very favorable movement into industry cycle. Initial results from this operation have exceeded our expectations.

In addition, Alpek, along with its 2 joint venture partners, acquired M&G's plant under construction in Corpus Christi, Texas for $1.2 billion. Each partner invested $400 million with Alpek's contribution in Corpus of $266 million cash contribution, with the remaining $133 million structured as a recovery from the second lien on the assets. Alpek will also recover $67 million during the project's development. As we look to the current year, proceeds from the cogen sale will provide Alpek with the financial flexibility to further improve its balance sheet.

Moving next to Axtel, which was -- which has also been very busy divesting its lower-growing legacy businesses in order to focus on higher growth opportunities. Axtel began this divestiture process in 2017 with its tower sales to American Tower and in 2018 sold most of it's mass-market businesses to Televisa. With 80% of its FTTH business already sold, Axtel is confident it will sell the remaining portion, while it continues to look for opportunities to monetize other assets. Proceeds from the assets have been used to reduce debt. Looking ahead, Axtel will be focusing on providing telecom and IT services to the Enterprise and Government segments.

For Sigma and Nemak, in 2018, they concentrated in improving operating efficiencies and winning new business contracts to ensure future growth. Sigma's new state-of-the-art facility in Spain is delivering the expected efficiencies for improving it's been -- but the improvement is being offset by the underperformance of their fresh business and the cost increase in the U.S. We improved profitability, seeing that we concentrate on streamlining its production footprint.

As discussed last quarter, the company is already in the process of closing the one plant in the Netherlands, increasing existing plants efficiency and new product innovation will be the focus going forward. The auto industry is evolving and Nemak is well on its way to achieving its goal of $1 billion in new contracts for structural and electric vehicle components by 2022. With $200 million in new contract wins in this segment in 2018, the cumulative figure now stands at $600 million, including providence from BMW, Daimler and the Volkswagen Group.

Moving on to Newpek. I can tell you we will continue to seek the divestment of its assets in the U.S.

As we look to the current year, we expect our company to turn in solid performances reflecting current market conditions. Global economies are not expected to be strong, and commodity prices, in general, are not expected to be as favorable. Nevertheless, all the companies have been further improving operating efficiencies and win new business, better positioning them for long-term growth. For ALFA, we expect to remain prudent with our capital allocation plans and continue to focus on cash flow generation and debt reduction.

Eduardo will now take you through the financial review. Eduardo?

[Eduardo Alberto Castillo, executive]

Thank you, Álvaro. I will use this time to focus on financial highlights from the quarter and the year and discuss our 2019 guidance.

We are very pleased with the results, which are a testament to the diversity of our portfolio. We turned in another solid quarter, resulting in record EBITDA for the year. On a consolidated basis, total revenue was $4.7 billion in the quarter and $19.1 billion for the year, an increase of 9% and 13%, respectively.

Fourth quarter top line growth was driven by Alpek, while the good results for the year reflected higher revenue from all the companies, except Newpek. More favorable commodity prices, better pricing as well as contributions from acquisitions were the primary drivers of the top line.

Reported 4Q '18 consolidated EBITDA was up 56% year-on-year to a record $887 million. On a comparable basis, excluding extraordinary items for both periods, consolidated EBITDA for the quarter increased 8% as Alpek, Nemak and Axtel all reported higher EBITDA.

All the companies continue to make progress with their investment plans, and total CapEx and acquisitions for the quarter was $512 million and $1.5 billion for the year, excluding divestitures in Axtel and Newpek. The largest expenditure in 2018 was Alpek's acquisition of Suape and Citepe.

Our capital structure was a key focus in 2018, and we made good progress in reducing our debt and improving liquidity. We reported net debt to last 12 months EBITDA of 2.3x or 2.7x excluding extraordinary items compared to 3.1x in 4Q '17.

I will now move on to discussion of the -- of each one of the individual companies. Let's begin with Alpek. When looking at the year as a whole, Alpek benefited from more favorable oil and feedstock prices and significantly improved polyester margins when compared to the prior year. And reflecting the acquisitions of Suape and Citepe, Alpek delivered record volume, revenue and EBITDA.

In contrast with the first 3 quarters of the year, fourth quarter 2018 results reflect the temporary distortions in demand and margins caused by the sudden shift in oil and feedstock price trends. This, in turn, curtailed volume growth and created price volatility when compared to 3Q '18, although year-over-year and full year results remain very strong.

4Q '18 revenue was up 33%, benefiting from the inclusion of Suape and Citepe. Excluding the acquisitions, revenue was up 19% year-over-year. Reported 4Q '18 EBITDA of $369 million included several onetime items. Adjusting for these items, EBITDA was $181 million, a 45% increase over adjusted 4Q '17 EBITDA. At year-end, net debt-to-EBITDA was 1.7x, down from 3.3x at the close of 2017. Adjusting for the $220 million noncash gain on business combination of Suape and Citepe, the leverage ratio at the close of 2018 was 2.2x.

Moving next to Sigma. Volume and revenues were slightly up from 4Q '17. Similar to the past few quarters, Mexico turned in the best performance. By region, in local currency terms, revenue was up 8% in Mexico and 2% in Europe, while sales in the U.S. and Latam were similar to 4Q '17. Excluding extraordinary items, Sigma's EBITDA decreased 5%. In Europe, performance was mainly impacted by lower margins in the fresh meat business in Spain. Also contributing to the decrease was a weaker performance in the U.S. due to higher raw materials and freight costs. Latam countries are doing well, but are not large enough to offset the weaker performance in the larger markets. Reflecting a strong free cash flow generation, Sigma reduced net debt by 4%, further improving its net debt-to-EBITDA ratio and interest coverage.

For Nemak, total revenue in the quarter was down 1% due to lower volume. But for the full year, revenue increased 5%. Nemak sold 11.5 million equivalent units in 4Q '18, down 4% from 4Q '17. North America's volumes were unchanged, while Europe and rest of the world reported declines. In Europe, volume was impacted by customer production delays associated with new regional emission testing standards and lagging demand for diesel power vehicles. In the rest of the world, a good performance in Brazil was not enough to offset ongoing softness in China.

For the full year, volume was slightly positive driven by a stronger North America market for most of the year. EBITDA was up 3% over the same period of the prior year to $171 million, reflecting onetime effects associated with the customer settlement and certain reclassifications, which more than compensated for the impact of lower volumes and higher energy expenses. Similar to the other companies, Nemak was able to reduce net debt, reflecting a strong free cash flow.

Moving on to Axtel. To avoid any confusion, I would like to point out a key difference between how Axtel presented its financial results and how ALFA is doing it. Reflecting Axtel's expectation that it will divest the remaining fiber-to-the-home business and the complete phaseout of the legacy wireless business, the company has recorded all of the mass-market business as a discontinued operation. By contrast, as this is not material to ALFA, our financial results will include the business as a whole. In other words, for ALFA, the financial statements will be as they have been in the past and will not show any discontinued operations as a separate line item.

Even though revenue was soft in the Enterprise segment, it was not enough to offset the winding down of the legacy Wimax business and a decline in the Government segment as total revenue declined 8% in the quarter. Reported EBITDA was $206 million and includes a gain of $139 million from the sale of the mass-market business. When excluding this gain and the gain from the tower sales recorded in 4Q '17, EBITDA was up 16% year-over-year. Higher profitability was driven by a better performance in the Enterprise and Government segments. Axtel used the proceeds from asset sales to reduce bank debt, in turn reducing net debt-to-EBITDA ratio to 1.6x, and 2.4x adjusting for extraordinary items.

To end, Newpek. The company's results reflect the ongoing divestiture of its U.S. acreage. Overall, quarterly production was down 45% in U.S. and 6% in Mexico. In turn, Newpek reported revenue of $22 million in the quarter, 29% lower than the same period of the prior year, reflecting generally lower production. Based on expected cash flow of some of the assets, Newpek recorded an $88 million noncash impairment expense on some assets. EBITDA was $16 million in 4Q '18 compared to EBITDA of $3 million in 4Q '17. However, when adjusting for the sale of the Wilcox assets, EBITDA was negative $6 million in the quarter.

This ends my discussion about the company.

Now let me move on to 2019 guidance. After achieving a year of strong financial results, we remain confident in our ability to execute our long-term strategy, while focusing on key initiatives that are critical to continue our momentum into 2019. For 2019, our guidance is as follows: Sigma is estimating total revenues of $6.7 billion, 5% ahead of 2018 driven by higher volumes and average prices across all regions. EBITDA is projected at $735 million, an increase of 7% over 2018. CapEx is planned at $194 million.

Alpek. The company's outlook for 2019 is based on the lower average Brent oil price year-over-year, lower polypropylene margins and the normalization of PET margins, which saw a big spike in mid-2018. These result in total revenue of $7.2 billion and EBITDA of $918 million. This includes an estimated $200 million gain from the plant sale of the cogeneration power plants in 2Q '19. CapEx is projected at $310 million.

For Nemak, 2019 reflects lower volume due to its lower industry trends in North America and the continued adverse effects of the phasing of new emission testing and lower sales of diesel vehicles in Europe. The company is estimating revenues of $4.4 billion, 6% lower than 2018, while EBITDA is projected at $620 million. CapEx is also -- is estimated at $320 million. Based in part on its pipeline of its scheduled product launches over the next 12 to 18 months, Nemak sees good prospects for a recovery in consolidated volumes by 2020.

Axtel. Axtel expects revenues of $641 million and EBITDA of $270 million, in line with comparable 2018 EBITDA. CapEx is projected at $122 million, including, in this figure, approximately a $50 million CapEx reserve for the renewal of certain point-to-point spectrum frequencies.

Newpek. The company has been divesting its U.S. acreage, resulting in lower production and revenue. As a result, for 2019, Newpek is estimating revenue of $54 million and negative EBITDA of $3 million. CapEx is projected at $29 million, assuming limited drilling activity.

ALFA. On a consolidated basis, this leads to estimated total revenue of $19.1 billion in line with 2018. EBITDA is projected at $2.4 billion, unchanged from 2018 adjusted EBITDA. Consolidated CapEx is projected at $979 million. Lastly, the macroeconomic assumptions underlying our guidance were including -- were included in the guidance press release issued earlier today.

To summarize, we delivered solid results, both in the quarter and for the full year. Actions taken by the companies are positioning ALFA for future growth and further strengthening our balance sheet. We are well positioned to capitalize on opportunities to grow the company and add significant value to our shareholders over time.

This concludes our discussion. We will now take your questions. Please, Luis.

[Luis Ochoa, executive]

Yes. We would like to begin the Q&A session with questions on ALFA. Mr. Álvaro Fernández, ALFA's President; and Mr. Eduardo Escalante, CFO, will take questions on ALFA and on corporate matters.

Operator, please instruct participants to queue for questions on ALFA.

[Operator]

[Operator Instructions] We will take our first question from Vanessa Quiroga of Crédit Suisse.

[Vanessa Quiroga, analyst]

If I could ask about Axtel -- the plans for Axtel after the sales -- asset sale transaction that they did. Are there further plans to divest Axtel?

[Álvaro Fernández Garza, executive]

Vanessa, I mean, we -- as we have told you many, many times in the past, we are evaluating the strategic side of Axtel in ALFA. For the moment, I think we have plenty of opportunities to divest further nonstrategic assets. We have talked about a few things like we did the FTTX and perhaps some other things like the call center -- like the...

[Eduardo Alberto Castillo, executive]

Data centers.

[Álvaro Fernández Garza, executive]

Data centers. And there is -- the only things that we can divest, and we have little or no effect in EBITDA, but that the proceeds can be used to reduce debt and have a more solid company in that regard. But I think your question has more profound issues. And yes, as we have said before, well, any company from our portfolio is for sale, but we need to wait for a good buyer with a good, let's say, offer. And in that regards, we're not necessarily talking to anyone right now. But of course, we will be able and we will be ready to listen to possible options in that regards.

[Vanessa Quiroga, analyst]

Okay. Is there going to be a section for Newpek or should I ask now?

[Luis Ochoa, executive]

There's going to be a section for Newpek.

[Operator]

And we'll now take our next question from Rodolfo Ramos of Bradesco BBI.

[Rodolfo Ramos, analyst]

My question is in regards to the potential listing of Sigma and particularly as it relates to the announcement that was carried out by the current administration on the reduction of capital gain taxes from 30% to 10%. I was wondering how are you looking the time frame on the listing of Sigma and how does this potential change on tax legislation affect your decision?

[Álvaro Fernández Garza, executive]

Well, as we have said -- thank you for your question. As we have said before, we will like to have listed all companies. As you know, we have tried to -- we did try to list Sigma, and we didn't do it. But we would like to do it as soon as possible. And taking all considerations into account, we -- definitely, the fiscal side of it or the tax side of it, we're taking into account and -- but it's a combination of many, many things. So we need to see how the economy, especially the Mexican economy, is growing. So we -- how do we optimize our operations as we have some issues in the U.S. and Europe that we have mentioned them. And we will -- I mean, we will be ready to whenever that's, let's say, the best combination of different things are optimized. It's very difficult to give you an exact date now, but we could be ready as soon as the end of the year, if all the variables are there. If not, we could wait a few more months. So I'm sorry that we're not being too specific, but that is really the exact answer. We would like to do it, but we would like to wait for the variables to be there. I don't know if you want to...

[Eduardo Alberto Castillo, executive]

No.

[Operator]

We'll now take our next question from Luis Miranda of Santander.

[Luis Miranda, analyst]

Álvaro, I'm trying to take advantage of having you on the call. And Álvaro, from the ALFA Day until now, you discussed sort of you were expecting more questions on the political environment in Mexico. And I think that -- now that, with the couple of months that we have had with a new President in Mexico, your view on first the business environment, especially -- in Mexico, but also in the north? And also do you expect -- your view on consumer environment in general? That will be very helpful.

[Álvaro Fernández Garza, executive]

Thank you, Luis. To be honest, that's a very, very tough question. We have seen, let's say, best growth. I think you saw that and past figures were, let's say, not the best of January's figures that I show. And it's -- we are concerned that it's consumer being, let's say, more conservative, and we are a bit worried about that. And with regards to the political environment, yes, I mean, of course, we are concerned on many, many things going on, especially on the labor side. We'd like to see some improvements in PEMEX on the production of gas and oil. But obviously, derivatives like propylene for Indelpro in our case and many other variables. So yes, it is a concern. I think we need to wait a few more months to have a full -- more clarity on what's going to happen. And if things go better or worse from we're right now, we think that is not me saying, there's been a lot of concern with the downgrade of PEMEX and the [ consent of the conflict ] could be downloaded. In that regards, yes, we are concerned. We have many revenues and EBITDA related to Mexico. But we are very, let's say, ready for whatever happens here. Because as I said, initially, 70% of our EBITDA and sales are related outside of Mexico. So if we see some problems, we still have options to invest in other parts of the world. But if we see a solid economy and things improve, of course, we will have plenty of options to invest and develop here in Mexico.

[Luis Miranda, analyst]

Perfect. That was very, clear. Just if I may, a follow-up. Are you seeing more contact with the government and willingness to find alternatives, especially with regards to supply of polypropylene or gas?

[Álvaro Fernández Garza, executive]

Yes, I have talked to -- personally, I have talked to the Minister of Energy. And she was very open on -- and very willing to move forward with the -- how do you say, to have the refineries working better. She has said that it's been relatively tough to do that. We had the confirmation of PEMEX that they will have a lot more propylene available this month. However, they did have some problems again with one of the refineries, if I remember correctly, it was Madero. And the volume that they confirmed was not there. So answering your question, we see a lot more willingness to increase the production of different products, and we see that they are very, very interested in being helped. We have talked about -- a lot about the petrochemical site and how we can help and give them ideas. And they have been very open to listening. We do see, however, that they have a big, big problem. I mean, it's not, I would say, beyond willingness, it's -- but they were more open to perhaps doing investments together with the private sector. So I think it's too early, but so far, at least from our side, from ALFA, especially in particular with Alpek, we see positive attitudes for developing more and have more availability of different products from the refinery side.

[Operator]

We'll now take our next question from Mauricio Serna of UBS.

[Mauricio Serna Vega, analyst]

Just wanted to go over some details on the guidance. You're guiding for flat EBITDA year-over-year, but that would imply actually an 8% decline if you exclude the sales from -- the asset sales from the cogeneration asset sales from Alpek, if I'm not mistaken. So how should we think about in terms of free cash flow? Should we expect an increase overall? Anything related to working capital that could reinforce the free cash flow generation this year? And just following also on that, now that you've come back to your desired leverage ratios at 2.3x, how should we think about capital allocation in terms of new -- potentially new investments or maybe increasing the dividend payment of the company?

[Eduardo Alberto Castillo, executive]

Sure, Mauricio, thank you for your questions. Yes, the guidance that we provided of $2.4 billion consolidated EBITDA, as you mentioned, does include $200 million of gain from the cogen assets in Alpek. What each one of the companies and also at the consolidated level we're doing is we are adjusting many of the cash flow items to follow this level of EBITDA. In particular, we are -- we have significant efforts towards reducing our working capital investment. And we are also raising the hurdle that we have for approval of CapEx and investments in the company. Regarding dividends, we have discussed before, we do expect the dividend from Alpek. Last year was an exceptional year as Alpek faced the acquisition of the Brazilian assets and also the delay of the cogeneration plants. But we do expect Alpek to pay a dividend that at least partially should compensate for the nondividend payment of last year. Alpek will propose this amount, this is still on their analysis. And we'll propose this amount in their coming shareholders' assembly and will make it public at the appropriate time. The sale of the cogeneration assets that we expect for the second quarter will also help significantly for the debt levels that we have both in Alpek as well as in ALFA. So we do expect to continue or moving along the level 2 goal that we set up for ALFA.

[Operator]

We appear to have no further questions and I'll turn the call back to you.

[Luis Ochoa, executive]

Let's move on to questions on Sigma. Mr. Eugenio Caballero, Sigma CFO, will answer your questions. Operator, please ask people to place questions on Sigma.

[Operator]

[Operator Instructions] We'll take our first question from Alejandra Obregon of Morgan Stanley.

[Alejandra Obregon, analyst]

I was just wondering if you could guide us through the outlook for Sigma. Particularly, if you could talk about the profitability levels in each of the countries. If you could kind of provide will it be a normal or a fair margin assumption for each of the countries. And then my second question would be in Mexico, on the fourth quarter numbers. What's driving the margin contraction? If you could provide us some color there, that would be very helpful.

[Eugenio Sada, executive]

Okay. Thank you, Alejandra. Sure. So margins for next year, our expectations in terms of changing -- I'll focus more on the U.S. We don't think the margins that we've had in the U.S. for the second half of the year are sustainable. And we expect them to go back to the levels where we had them last year, which is slightly above the 14% EBITDA margins. For most of the rest, they should be similar. We still see some upside on margins for our European operations. As Álvaro discussed, we are in the process of closing one facility in Netherlands, and we're doing some additional restructuring in our operations over there that should give us some margin benefits going forward. For the Mexican and Latin America operations, we think their margins going forward should be fairly similar to the ones we've had this year. Related to the Mexican margin, with your second question for the fourth quarter of this year, most of the contraction has to do with what happened with FX at the end of the year. If you look at FX, it came up fairly quick, particularly on December and then it came back down. We don't expect those margins going forward, but that's the most relevant reason for the Mexican operation for the fourth quarter. If you look at yearly numbers for Mexico, the average is fairly good and it's consistent with our history. And with sustainable growth, particularly, in special terms -- the Mexican operation in special terms year-over-year for the full year were up 12%.

[Operator]

We'll take our next question from Luis Miranda of Santander.

[Luis Miranda, analyst]

Just follow-up questions in Mexico. If you could give us some color in terms of the consumer environment, if you are seeing any trade down at the end of the year or recently in January. And also what do you expect in terms of pricing in Mexico and internal inflation?

[Eugenio Sada, executive]

Okay. So in terms of trade down, we haven't seen anything very dramatic in the recent months. We did have some trade down throughout the year last year. But nothing too relevant to put margins at risk and nothing outside that for the last few months. In terms of pricing, I guess, we're going to have to be very close to what happens with FX. And we were getting ready to do something related to pricing at the end of the year, but then FX came down very quickly and so we stopped that -- those efforts. As you know, we've been dealing with volatility in the FX for Mexico for a while, and we're sort of used to operating in that environment. So in case that happens, again, going forward, we would expect to do some price increases when we need to. But other than that, looking at raw materials and where we're right now, there aren't any expectations for price increases in the Mexican operations with what we see right now. That obviously can change very quickly.

[Luis Miranda, analyst]

Very good. And just if I may follow up. Just in Europe, when you consider the fresh operations, do you expect improvements in profitability in Europe in the first half or this is going to take longer to improve?

[Eugenio Sada, executive]

Yes. So again, we do expect improvements, I'm not sure we're going to see them in the first half because of the restructuring efforts we're doing right now. So there might be some investments we do for those savings. I would expect, and also with the seasonality that we have in our European operations, we usually have better margins in the second half of the year compared to the first half of the year. And so with that in mind and also taking into account that the Netherlands facility is going to be finished closing somewhere around May or June, it's more likely that we see improvements on the second half than the first half.

[Operator]

And we'll take our next question from Vanessa Quiroga of Crédit Suisse.

[Vanessa Quiroga, analyst]

On the U.S. operations, please, I would like to hear more details on what you are seeing that is affecting margins, in general?

[Eugenio Sada, executive]

Thank you, Vanessa. So for the U.S. operations, we discussed this last quarter, we had some very high increases in raw materials and in some expenses also. We are taking action on pricing. It's taking a little bit longer than we initially thought. But we are already doing or did some price increases at the end of the fourth quarter. If you look at our margins for the U.S. for the fourth quarter, it's already slightly higher than what we had in the third quarter. But once you take that into the running rate for a full quarter, we do expect to have much improved operations on those margins for the remainder of 2019. But again, as I said, mostly raw material costs, particularly chicken throughout the year and some pork items for the second half of the year, which seems to be stable to better for '19. But regardless of what happens with raw materials, our pricing actions are already into effect, and we expect improved margins for '19.

[Vanessa Quiroga, analyst]

Okay, okay. And do you see demand defensive, stable?

[Eugenio Sada, executive]

Yes. I mean, relatively flat. I mean food growth in the U.S. retail sales are not that high and our categories aren't moving that much. But right now we're a lot more focused into getting our margins back to where they need to be more than anything else. And we do see enough growth opportunities in our operations in the U.S. going forward definitely.

[Operator]

We'll now take our next question from Diego Saenz of MetLife.

[Diego Saenz, analyst]

With the leverage trending down, I was wondering what level of net debt-to-EBITDA would you like to reach before looking for potential M&A transactions?

[Eugenio Sada, executive]

Yes, so our leverage was down. We did put a lot of effort into optimizing our free cash flow in the year as it is for the whole ALFA group. Right now, we are at 2.7. However, we want to have it below 2.5 as it is the policy for ALFA. We are always looking to M&A opportunities. Where we see enough value, we're willing to make those bets and take the leverage back down as fast as we can. As you know, Sigma has been very good at generating free cash flow and taking the leverage back down to where it needs to be so that we're comfortable. And so I wouldn't say that there's a particular number in terms of leverage where we'll be more aggressive or not in terms of M&A. I will tell you that the past 2 years or ever after we acquired Campofrío, we've been a lot more strict into what will look at and what we're willing to pay for in terms of M&A. But we are currently looking at a few companies as we've been for the last 2 years, and I think that's the thing going forward, always looking into making sure that we are investment-grade and that we are able to come back to the levels that we think are the ones we want to be in for the long-term, which, as I said, is below 2.5.

[Operator]

It appears there are no more questions at this time. So I'd like to turn the call back to you.

[Luis Ochoa, executive]

We will move forward and take questions on Newpek. Mr. Rodolfo Gamboa, Senior VP of Oil & Gas will take care of them.

[Operator]

[Operator Instructions] We'll take our first question from Vanessa Quiroga of Crédit Suisse.

[Vanessa Quiroga, analyst]

The question that I had on Newpek is regarding the Mexican operations. If you can give color on how the operations have done since the beginning of the new presidential administration. And how do you see the working environment since then?

[Rodolfo Gamboa, executive]

Yes, thank you, Vanessa. We are progressing with the projects that we already have on the existing fields, the both ships -- the 2 ships that we have in Veracruz, and the 2 blocks that we won in the last bid process in Tamaulipas. The process in Tamaulipas have been delayed from the initial expectation in early 2018, mainly due to regulatory processes, but we are pushing through and we're ready to start operations -- actually, we started operations this week and into next. And so from that standpoint, we're making progress. And we are very selectively looking at other opportunities on a one-by-one basis.

[Operator]

[Operator Instructions]

[Luis Ochoa, executive]

Okay. Now let's move and Alpek, Nemak and Axtel held their earnings conference calls earlier this morning and their respective CFOs are here with us if there are any additional questions. Operator, please instruct participants to queue for questions on Alpek, Nemak or Axtel.

[Operator]

[Operator Instructions] It appears that we have no questions at this time.

[Luis Ochoa, executive]

Okay. Well, then I want to thank you all for your interest in ALFA, and if you have additional questions, please feel free to reach out to us by phone or email. We will be pleased to assist you. Thank you very much.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.