Alpek SAB de CV

BMV:ALPEKA

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, everyone, and welcome to Alpek's Fourth Quarter 2019 Earnings Conference Call. With us this morning, we have Alpek: José Valdez, CEO; José Carlos Pons, CFO; and Alejandro Elizondo, IRO, who will discuss the company's performance and answer any questions that you might have.

As a reminder, today's conference is being recorded and will be available on the company's website at www.alpek.com.

I will now turn the call over to Mr. Elizondo. Please go ahead, sir.

[Alejandro Elizondo, executive]

Thank you, operator. Good morning, and welcome. We very much appreciate everyone's participation today.

This call will be divided into 2 parts. First, Mr. Valdez, our CEO; and Mr. Pons, our CFO, will provide a general overview of Alpek's 2019 performance and the outlook for 2020. Afterwards, we will have a Q&A session.

Before we get started, let me remind everyone that the information discussed in today's call may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to rely unduly on these forward-looking statements. Alpek undertakes no obligation to publicly update or revise any forward-looking statements whether a result of new information, future events or otherwise.

I will now turn the call over to Mr. Pepe Valdez.

[Jose de Jesus Valdez Simancas, executive]

Thank you, Alejandro. Good morning, everyone, and thank you for joining us today.

2019 was a great year for Alpek as we posted our second-highest EBITDA in history, stemming from a strong operating performance in both of our segments, culmination on the sale of our cogeneration assets and progress on multiple initiatives aligned with our long-term strategic plan.

The year was marked by a decrease in feedstock cost environment as paraxylene disconnected from its typical correlation to crude oil, with price falling to its lowest level since third quarter 2017. Propylene prices also declined in a similar fashion to levels not seen since fourth quarter 2016. This steady decline in feedstock prices generated both inventory losses and a negative raw material carryforward effect that weighed on our performance during the first 3 quarters. However, as paraxylene prices extended towards the end of the year, both inventory losses and raw material carryforward effects became minimal in fourth quarter results.

Polyester segment results for 2019 were favored by a strong sales volume, which was on par with record 2018 levels. Asian reference polyester margins were also above guidance but declining towards the end of the year and less favorable when compared to last year's extraordinary high levels.

Plastics & Chemicals segment performance was better than expected as the strong volume and margins in both polypropylene and EPS experienced mainly during the first half of the year more than offset underperformance of Caprolactam caused by low global reference margins.

Next, and turning our attention over to key developments, I'm very pleased with our team's accomplishment related to meeting the short-term strategic goals we set for Alpek in 2019 as well as carrying out actions well aligned with our long-term strategic growth plan.

In third quarter '19, we finished construction of the Altamira cogeneration power plant, and during fourth quarter '19 finalized its sale, along with the Cosoleacaque power plant, to ContourGlobal for a total amount of $801 million. The net proceeds from the sale were used to pay down debt as well as decree a dividend payment of $143 million, which was executed in January 2020.

Also, in fourth quarter '19, Alpek agreed to acquire 350,000-ton PET facility in Wilton, U.K. from Lotte Chemical Corporation and obtain all regulatory requirements needed to finalize the acquisition shortly thereafter. This purchase is our first outside of the Americas and is aligned with our long-term strategy as it improves the balance between our total PTA and PET capacities. Consequently, as of January 1, 2020, Alpek has taken over the site's operations.

Looking ahead, Alpek will continue focusing on the 3 key elements of its long-term strategy. Number one, fostering a circular economy for our products. We are convinced that PET will continue to be the material of choice for beverage packaging based on its value proposition as well as its environmental advantages. PET is lighter, stronger and cheaper than both aluminum and glass, in addition to being 100% recyclable. And already being gathered and recycled at high rates worldwide, it has carbon footprint that is 80% lower than glass or aluminum. We will focus on promoting these attributes, reaching a leadership position in the rPET market in the Americas through strategic M&A as well as forming partnerships to promote initiatives aimed at increasing recycle rates in the markets we serve.

Two, strengthening our core business. We will integrate new assets like our Wilton PET facility and Corpus Christi polymer JV. We will also implement initiatives aimed at improving our position in the cost curve mainly by leverage our proprietary IntegRex technology, thereby ensuring high profitability throughout different parts of the industry cycle.

Three, strategic growth. We will analyze both organic and M&A opportunities with a disciplined focus and opportunistic view. We are interested in projects that will allow us to backward integrate into key raw materials, improve the balance between our PTA and PET capacity as we complete this acquisition, develop and sell higher-value products for our existing markets, as well as opportunities where Alpek can leverage its core strengths to create value.

As announced earlier today, our 2020 guidance is based on relatively stable prices for crude oil, continuation of low feedstock prices, increased sales volume from both segments and improvements to operating costs, but reduction to margins in both Polyester and Plastics & Chemicals, in line with levels experienced at the end of 2019. Though the net results of the effect will be lower expected profitability versus record 2018 and '19 levels, we maintain an optimistic view as Alpek's position in the market continues to strengthen in spite of changes to margins, which provide us with opportunities to emerge stronger in future cycles.

As a final remark, the strong improvement to financial ratios obtained through the emission of a new 10-year bond and debt repayment through the year provides Alpek with a strong platform to face 2020 and execute on its long-term strategy.

At this point, I would like to turn the call over to José Carlos.

[José Pons, executive]

Thank you, Pepe. Alpek posted one of its strongest year ever in 2019 in terms of volume and EBITDA despite a declining feedstock price environment. Consolidated volume remained flat year-over-year at 4.4 million tons versus record level -- record 2018 levels. And sales totaled $6 billion, down 11% versus 2018 driven mainly by lower average prices.

When comparing 2019 and 2018 EBITDA, it is important to note that 2019 consolidated EBITDA includes a net gain of $128 million from 3 extraordinary items: first, a $188 million extraordinary gain related to the sale of Alpek's 2 cogeneration plants; second, a $68 million noncash inventory loss; and third, a $9 million net gain from others, such as the nonrecurring insurance payouts and legal fees and expenses.

In contrast, 2018 consolidated EBITDA included a net gain of $259 million as a $220 million noncash gain on business combination from the Suape/Citepe acquisition was partially offset by inventory gains and others.

Adjusting for extraordinary items, Alpek's comparable consolidated EBITDA was $722 million in 2019, down 10% versus $804 million in 2018 and above 2019 guidance levels.

Comparable 2019 Polyester EBITDA was $474 million as a result of strong volume, lower margins versus record levels in 2018.

Moreover, comparable 2019 Plastics & Chemicals EBITDA was $231 million, above guidance due to stronger-than-expected polypropylene and EPS margins during the first 3 quarters but down 16% versus 2018 due to even higher polypropylene margins at the time.

Moving down the P&L. 2019 profit related to the controlling interest was $342 million.

Regarding our balance sheet, net debt was $1.33 billion at the close of 2019, down by $502 million versus 2018 as the proceeds from the cogeneration plant sales were received.

Alpek finished the year with a net leverage ratio of 1.6x, a strong improvement versus 2.4x in 3Q '19 and 1.7x in 2018. Our interest coverage was 7.2x.

CapEx was $270 million in 2019. Most of these funds were used to finish the construction of the Altamira cogeneration power plant, acquire the Richmond rPET facility and perform minor asset replacements.

Finally, I would like to share more details on our view for 2020. Alpek estimates are based on a $59 per barrel average Brent price versus $64 per barrel average in 2019 and a current price close to $55. We used an average exchange rate of MXN 20 per U.S. dollar.

Overall, we expect sales to decrease 9% year-over-year as a strong 6% estimated volume growth would be offset by lower reference prices.

Consolidated 2020 EBITDA is estimated to be $547 million, including a $30 million noncash gain from a business combination effect from the acquisition of our Wilton, U.K., site. Adjusting for this extraordinary gain, 2020 comparable EBITDA is expected to be $517 million, $205 million lower than 2019. Increased sales volume and lower production costs mainly in the Polyester segment are not enough to offset reductions to industry reference margins, which negatively impact polyester, polypropylene and EPS results. Additionally, 2020 no longer includes income from cogeneration plant operation, which totaled $40 million in 2019.

Consolidated 2020 CapEx is estimated to be $277 million, considering both maintenance and strategic projects. We plan on investing $75 million towards increasing our rPET processing capacity via M&A and $44 million on improving rPET pelletization capabilities at our existing sites, among others.

Regarding dividends, we have already made a payment of $143 million in 2020 related to the cogeneration plant sale, which was agreed last year. We also plan on proposing a dividend payment at our upcoming shareholders' meeting. As in previous years, the figure will be disclosed at the event.

From a financial standpoint, Alpek begins the year with a very solid position and maintains its target leverage of 2.5x net debt-to-EBITDA.

This concludes my remarks. I would now like to open the call for questions.

[Operator]

[Operator Instructions] Our first question today comes from Joao Lorenzi of Bank of America.

[Joao Lorenzi, analyst]

So I have 2 actually. The first one, I would like to have your view, please, on the PET and the PP margins for the next year. I know you already put out your guidance, and there is some decrease in margins. But what exactly are you considering to get this margin decrease for the next year? Are they staying at the same level and you're just dragging for the future? Do you see this going down further in the first semester? What's your view on that?

And the second question is about Corpus Christi. I would please like to have a view on when exactly do you start now the plans to start producing? What's your new expectations? And when you think we should have a new CapEx guidance or something of that sort?

[Jose de Jesus Valdez Simancas, executive]

Let me address your first question regarding PET and polypropylene margins. But basically, I would say in terms of PET, I think we have seen a steady decline in margins starting mostly in August '19, in August last year. Margin has gone, depending on the reference that you use, let's say, from July last year to December this year, a little bit more than $100 per ton from $300-plus to roughly $200 per ton if you use the Asian reference price. So margin has come down very quickly and very severely over the last 6, 7 months.

Now it's very difficult to forecast the margins going forward because there are some factors that are difficult to predict. We do believe that part of the explanation for these margins coming down steeply in the second half of last year has to do in a way with the China-U.S. trade war, which we believe impacted directly and indirectly demand for PTA fibers, I mean, mostly PET fibers that China was exporting, as I say, directly or indirectly to the U.S. And that -- let's say that reduced demand create a little more supply, but there is also some impact from new capacity additions. So basically, again, this is the result -- the fall in margins is a result of more of an oversupply situation. Again, part of it might correct itself as the trade war is normalized. But another part will for sure stay with us as more capacity will be starting up in the next -- or has started over the last months.

Going forward, we are assuming that the PET margin -- PET integrated margin in China will be around $215 per ton, and the integrated PET margin in Asia will be around $255 per ton, okay? This is the assumption we had. As I mentioned, we reached the minimum level in December last year with the -- I mean, with the margin in China reaching around $180, the margin in Asia around $210. So we believe, at least for the time being, that seems to be the low point. Today, we have margins in China, I mean, they bounced back a little bit to $230 and in Asia close to $280. And the assumption we have for the budget again is $215 China versus $255 Asia based. So again, that is the assumption. We -- this assumption is higher than the margins were in December but a bit lower than the margins we have today. So again, that's -- we believe that this is a relatively conservative assumption for the budget. But as I say, too many variables right now, trade war. And now to a certain extent, we saw a rebound in margins that coincides with the beginning of the new year in China, which -- that normally happens, like activities in December and sometimes January are very slow, people are preparing to go into the new year celebrations. But -- so there is an impact of that. But also, to a certain extent, we do believe there may be some noise in the system as a result of the virus, of the coronavirus. So again, what we have today is a little bit higher than budget, but we're still cautious, and we'll wait and see, when this normalizes, where the margins stay. So this is with regards to PET.

With PP, we are also reducing our margins to take into account the start of a new polypropylene plant in the U.S. during the second quarter of this year. And so that's another assumption in the budget. We did reduce margins as well in that segment.

And if I may, I'd tell you that total margins -- total margin loss for the year in budget versus last year is going to be like $200 million. So most of the decrease in guidance versus last year has to do with this margin reduction.

I'm going to give you more information than what you asked because I think it's the right time to do it and perhaps will also help some questions of somebody else. So we have $200 million reduction in margins for 2020 versus 2019. And we also -- I have to remind we also have $40 million less EBITDA as a result of the sale of the cogeneration plant, okay? So we have a big $240 million negative impact in our results next year, which will be partially compensated with the improvement in cost and also with the slightly higher volumes in our businesses. So -- and that -- those, again, will be the main -- that will be the main explanation of the results for 2020.

Now you asked a second question regarding Corpus Christi. Corpus Christi, we -- remember I've been telling you since last year that we expected to have the investment costs finalized by the end of the first quarter, meaning March. I do believe that until March, perhaps April, we will be able to be more specific about the start and the CapEx of the project. So be patient. We don't want to rush into making any information that will not be validated later. So we're working in that. And again, I think perhaps with our conference next quarter, we'll be able to be a little bit more -- give you a little more clarity on your question.

[Operator]

The next question is from Alejandra Obregon of Morgan Stanley.

[Alejandra Obregon, analyst]

I have 2 actually in -- with regards to volumes. The first one, on your fourth quarter volumes in Plastics, if you could help us understand why we saw weaker volumes there. Is that still linked to Caprolactam entirely? Or is there anything else that we need to consider there?

And then on your 6% volume estimate for 2020, what is exactly that you're baking in? And if you could help us understand maybe in terms of different regions, businesses or anything that could help us better understand what that 6% volume is embedding.

[Alejandro Elizondo, executive]

You have to repeat the question. You obviously want to understand better the development on first -- on quarter-to-quarter -- fourth quarter volumes and full year 2020.

[Jose de Jesus Valdez Simancas, executive]

Okay. Relating to your first question, the fourth quarter volumes, I think the biggest impact is not really Caprolactam. I think the biggest impact has to do with seasonality in our volumes, the most important part being PET. Traditionally, if you look at our numbers, fourth quarter tends to be lower than -- it actually tends to be the lowest quarter of the year, not only lower than third and second quarter but also, in most times, lower than first quarter. So I didn't see any other impact additional to seasonality, PET. And in polypropylene, there is not really that seasonality as much, but the experience at the end of last quarter was a trend of feedstock prices, propylene coming down. We mentioned before that from an paraxylene perspective there was little change in fourth quarter. But from a propylene perspective, the prices continued to come down. And when that situation develops, again, a lot of our customers start to reduce inventories, waiting for the opportunity to buy the product at lower cost. So I think those will be the 2 main answers: seasonality on the PET side and inventory reduction on the polypropylene side and to a certain extent, also in the EPS business, okay?

And now with your second question. And again, you were also talking about volume increase. And what I can tell you, we do have volume increase in -- for next year. And partly, I would say most of it is a result of the acquisition of Lotte in the U.K., which will allow us to increase our PTA sales to this company, and a little bit -- let's say, a little bit of growth, very little bit of growth in PET, I mean, in the rest of the countries. And that would, I would say, explain the improvement. We are assuming like a 6% increase in volume for the budget. But again, I think if you look at this, the biggest factor, I would say, is PTA. The biggest improvement or change is in PTA volumes. PTA volumes are increasing, a little bit more exports and, of course, the supply to the new U.K. PET facility.

[Alejandra Obregon, analyst]

So in terms of polypropylene, we should expect volumes to continue on the weak note for 2020? Is that correct?

[Jose de Jesus Valdez Simancas, executive]

Yes. Well, in terms of polypropylene, our budget is almost identical to our 2019 results. So it's very similar. We're not really reducing the volume. We assume same volume but lower margin [indiscernible].

[Operator]

The next question is from Vanessa Quiroga of Crédit Suisse.

[Vanessa Quiroga, analyst]

My first question is regarding the contracts and negotiations in North America for your Polyester business. Have you received any pressure from customers seeing lower prices and spreads in Asia trying to lever that in the negotiations with you in North America? That's the first question.

And the second is if you perceive that additional capacity of polypropylene also in Asia has any effect on your North American market.

[Jose de Jesus Valdez Simancas, executive]

Okay. Let me answer the second question first, Vanessa. Look, yes, as I mentioned before, the Asian pressure in polypropylene has been coming down over the last 2, 3 years as a result of polypropylene prices in North America today being competitive with polypropylene -- I mean I'm sorry, not polypropylene, propylene prices in North America being competitive with propylene prices in Asia. At some point in time 2, 3 years ago, there was a big difference in propylene prices in favor of Asia, and that put pressure and in some cases was translated into exports from Asia into North America of polypropylene. Today, I don't think the pressure from Asia is the key driver or the key factor. Today, the key driver and the main factor for a reduction in margins has to do with the domestic competition. As there is more capacity in the market and not enough growth in demand, the oversupply becomes larger. And that, as you know, translates normally into lower margins. So that is really the situation for polypropylene.

In terms of -- yes. In terms of PET margins in North America, we did experience pressure from -- again, from the -- the fall in margins in Asia, that certainly put pressure and that forced us to reduce margins somewhat, certainly much more than we would have liked to. But yes, we have, again, included in the budget that reduction in margins for domestic or for North America, let's say, PET.

And as you might remember, our sales mostly of the Argentinian/Brazilian plants, those are almost -- how would I say, those are more directly linked to the Asian margins. In North America, we normally sign a contract that is not linked to Asian prices but is linked to a market situation or cost plus. In the case of South America, we are more linked to -- or the reference we use is either, in most cases, perhaps Asia or perhaps China. So in that part of the world, we do have to follow -- or we have the impact of the fall in margins in Asia.

[Vanessa Quiroga, analyst]

Okay. No. That's very clear. And could I also ask you -- taking this opportunity, ask you to comment on Alpek's strategy regarding recycled PET? On your remarks and on the press release, you mentioned that Alpek will continue investing. But exactly what is the strategy of the company regarding that business line?

[Jose de Jesus Valdez Simancas, executive]

Well, I mean, first of all, I will say that we are very eager to participate in that segment in the market. If you ask me, I would say that the future growth of PET in the markets we serve, meaning North America, South America, I think most of that growth is going to be -- is going to come from recycled PET. I don't think you're going to see a lot of growth in virgin PET. Our forecast is that virgin PET will remain quite flat in the years to come. And that will be my guess. But then we do see that recycled PET is going to grow and it's going to pretty much -- is going to be significant. So again, we do want to participate in this business, number one, because of its growth potential of the, let's say, synergies that, that business has with our existing business today, also as a result of customers demanding that. And more than anything, I have to say because we're fully convinced that participating in that market is the right thing to do. We've done a lot of work in trying to understand the future of PET under the attacks that we have been facing. And we are more and more convinced that, as we mentioned before, that PET is the best, let's say, the best option for beverage containers going forward. The problem we have or we have had in -- particularly in North America, I would say, is that we have not, I mean, we have not recycled enough volume, particularly U.S., I would say. Mexico is a success story. Mexico is a country where we're recycling already 65% of the bottles. In the U.S., it's much lower, like 30%. So again, we do believe that we do have to take care of that. We do have to increase recycle -- the volume of recycle. And again, when you consider PET virgin plus recycle, there is no question that, that provides, as we mentioned, the lowest carbon footprint of all the alternative materials.

We do have to work also -- so fundamentally, we believe we have a very strong program, virgin and recycled. But recycled certainly reduces even more the carbon footprint of PET. So that's why we have to do it. And at the same time, of course, you reduce what I believe now to be the biggest problem of PET, which is the disposal of the waste. I think we've been slow in reacting to that. But not only us, but the whole -- let's say, the whole value chain. But I think all of us are now addressing and taking that very seriously, and that's why it will be no surprise to you we are planning to grow recycling. Now as far as I know, most of our colleagues or our competitors and some of our customers as well are also looking at that. So that's very important. I don't think we can, let's say, keep our position in PET if we don't participate actively in that. And again, with that, hopefully we will be able to change the perception of the customers and convince them that PET is actually a great alternative from many perspectives: cost, weight or volume of material used, convenience and, again, carbon footprint being perhaps the biggest advantage. So we do have -- we are looking at different opportunities mostly in the places where we have the virgin PET because I think that's where you can get more synergies. And again, hopefully, if we do that, we will be able to also convince consumers and keep the PET market in its totality growing over the next years. So that, I would say, is the most important part. But that's perhaps the most important CapEx going forward for Alpek at this point in time.

[Operator]

The next question is from Gabriel Barra of UBS.

[Gabriel Barra, analyst]

I have basically 2 questions here. On -- the first one on CapEx. We have observed in the company release this morning that the company guidance, that decreased something close to 10% year-over-year, taking into account the company 2019 guidance. How -- despite the [ adequate ] maintenance investment in 2020, we should expect additional investment in Corpus Christi plant consummation and the acquisition of PET 2018 in U.K. Is it possible to give us more color on the CapEx breakdown in terms of maintenance CapEx and the other projects and M&As?

And the second on capital allocation. As you report, the leverage of the company has reached something close to 2x net debt-to-EBITDA if you now take into consideration cogen sale impact on EBITDA. So how could you see -- how can you see like the capital allocation strategy looking forward mainly in terms of acquisition, [ the line ] going forward?

[Alejandro Elizondo, executive]

Just one second.

[Jose de Jesus Valdez Simancas, executive]

Well, your first question in terms of breakdown of the CapEx, I would say the maintenance CapEx would be $65 million, $70 million, and the remaining CapEx will be -- I would say for -- again, for recycled PET or circular economy and Corpus Christi.

Now with regards to your question, the way I understood it is if we would become more aggressive in acquisitions as a result of the lower leverage of the company, I don't think that will change our behavior. I think we will look at opportunities, as always, and whatever makes strategic sense, we will invest in those. But I don't think we're going to be rushing into buying more things just because we have more money or less debt. Again, I don't think that's going to change our strategic -- or the way we approach our strategic initiatives.

[Gabriel Barra, analyst]

Okay. If I may, may you provide some color on company operation in Brazilian plant maybe in terms of how much the company top line and EBITDA is coming from Citepe/Suape.

[Jose de Jesus Valdez Simancas, executive]

Sorry, Gabriel. We don't understand you very well. So let me redo here. We'll see if...

[Gabriel Barra, analyst]

If I may, I have one more question here on Brazilian plant mainly in terms of how much the company top line is coming from Citepe/Suape operation. Could you please provide some color on this?

[José Pons, executive]

So Gabriel, just to make sure we understand your question properly, it's coming in a little bit unclear, it's -- you want to understand how much of our operations is coming in from Brazil, right? The PetroquímicaSuape and Citepe, is that right?

[Gabriel Barra, analyst]

Yes. In terms of EBITDA and top line. Yes.

[Jose de Jesus Valdez Simancas, executive]

How much of the operations or of the Capex?

[José Pons, executive]

Yes. Of the operation.

[Gabriel Barra, analyst]

Top line and EBITDA.

[Jose de Jesus Valdez Simancas, executive]

Yes. Okay. Look, Gabriel, we've never disclosed that sort of breakdown that you're asking. I will be able to tell you, though, that Brazil -- the results from the Brazil acquisition are pretty much in line with our expectations. So I think perhaps that will give you a good sense of what you're asking.

So again, the Brazil operation is doing well and as was expected. We, let's say, overperform in Brazil the last 2 years. We had better-than-expected results in '18 and '19. In 2020, I think we're going to be very much in line with what we have expected. And again, main reason for -- I mean, we were overperforming. Now we're going to be neutral as a result of, on the one hand, negative -- the reduction in margins in Asia, but the positive being the improvement in volumes and cost efficiencies that we have been able to capture.

[Operator]

The next question is from Gilberto Garcia of Barclays.

[Gilberto Garcia, analyst]

I have a couple of questions on your guidance. Specifically, is the volume growth that you're guiding for including the U.K. plant that you now have control over? And the large -- and the CapEx, does it -- did it include the amount you paid for the acquisition but -- and just to clarify, but not the amount you will invest on Corpus Christi?

[Jose de Jesus Valdez Simancas, executive]

No. We are including Corpus Christi in the CapEx calculation, which is delaying the CapEx a little bit because the -- assuming that the cost -- the investment cost estimate will be a little bit later than we originally estimate. So we are reducing that because we think we will start the construction a little bit later than originally planned.

And again, in terms of guidance, as I explained to you, the most important increase is PTA, out of which mostly goes to the U.K. And also, as you know, sometimes in North America we acquire PTA as well where sometimes we're short, and we are reducing a little bit our purchase to third parties of PTA in 2020 versus 2019.

[Gilberto Garcia, analyst]

Okay. And another question is in your guidance. You're assuming a higher oil price and the current spot price. So really there's a lot of volatility. So do you have a guidance in terms of the sensitivity of the oil price to your EBITDA?

[Jose de Jesus Valdez Simancas, executive]

You're right. Like, it looks like today the -- our assumption of crude oil is higher than the market. But you might remember that, Gilberto, 2 or 3 weeks ago, it was the other way around. I think the coronavirus has some -- the -- has put a little bit of pressure on that. And the price of crude oil last year was just what you referenced, $64, and we're assuming $59. If -- what we see today is $56, I guess, what the price today is. So yes, it -- normally when crude oil price was down, normally it impacts our results somewhat. I don't have the number with me. I would ask you to allow us to do some sensitivity. We'll do something and share them with you later. But it's not as it used to be, such a big -- it will not have such a big impact as it had before.

[Alejandro Elizondo, executive]

And Gilberto, if I could complement. That -- this is Alejandro. But Pepe already commented earlier, for example, you may have a lower crude price as of today, but the margins were also higher than what we were expecting in guidance as of today as well. So these are certain factors that offset sometimes each other. We can touch base later as well as to what we're seeing in sensitivity. But the guidance level is based on these assumptions, and then some variables may be positive while others may be negative and some of these things may average out as well.

[Jose de Jesus Valdez Simancas, executive]

And I will say something important as well. Normally, we forecast crude oil price, but also very important is to assume what the margin of naphtha is going to be over crude prices. And in this regard, I can tell you that last year we had very low naphtha prices -- naphtha margins to crude oil. So even if the crude oil price is a little bit lower than our budget, we're assuming a relatively low margin of naphtha to crude oil price than what we are seeing today. Today, we are seeing $70 per ton of margin. Last year, we experienced like $30-something, somewhere like $35, $38. So perhaps, again, this reduction in crude oil prices is -- will be compensated by the higher-margin naphtha versus crude. Every dollar -- approximately every dollar of crude oil prices would impact cost of paraxylene by like $7 per ton. And again, let's assume it's $56 versus $59. You're talking $3 of -- $3 per barrel x 7 is $21, but the margin of naphtha is $70 versus $40. So that more or less compensates the situation. So it's not, as of today, a great concern. But as I said, to give you more precise answer, let us get back to you. Alejandro will get back to you and try to answer your question in a more precise way.

[Alejandro Elizondo, executive]

Of course.

[Operator]

The next question is from Eduardo Altamirano of HSBC.

[Eduardo Altamirano, analyst]

I actually have 2 for you. The first one, Pepe, it's in response to the answer that you gave to Vanessa that you've seen pressures for increased collection and recycling of PET. Seeing that this is the increased effect, who do you think is going to bear the brunt of such collection efforts? Do you think it's going to be the end consumer, the bottling companies, the producers, combination of all 3? Have you quantified the potential impact to the margins on that collection or recycling process as well?

And the second part of the question is that I know you're not going to -- that you said that you're not giving any dividend guidance per se. But a quick back-of-the-envelope calculation leaves me targeting roughly a 0 free cash flow-to-equity this year. I'd want to understand if you're willing to dip into any sort of debt to pay out dividends going forward or what do you expect the -- what the levels are. Also, would you fall within your stated range within your corporate bylaws? Or would you go above or below that range just to keep in line with what's been done in previous years?

[Jose de Jesus Valdez Simancas, executive]

I think the issue about collection or the impact of -- I think very important to mention, part of the reason why the collection did not grow -- one thing -- more than collection, part of the reason why recycling probably did not grow as much over the last years has to do with the fact that our customers or some of our customers were not willing to pay for recycled PET a higher price than virgin price. So that made it very difficult to justify recycling projects. I think what you have now is -- I think, very clearly is the -- a little bit of change from that perspective, and I think the customers have become much more open to promote the recycling. And in some cases, the new formulas for prices of recycled have been negotiated. Before, as I say, it was normally related to virgin prices. Now what you see happening in the industry is the cost of recycled PET is going to be -- I mean the price of recycled PET is going to be more, let's say, with a cost-plus formula, which I think is fair. It gives more certainty to the recyclers, and I think that will promote more and more activity on that front. So again, this is going to be a new formula. As opposed to being related to virgin, it's going to be cost based or cost-plus. And then sometimes, it will be higher, sometimes it may be lower, and I guess the customers are willing to live with that. I don't think that you will see this impacting in any significant way the prices to the final consumers. And so that's regarding to the recycling.

In terms of dividend guidance, I think right now, of course, we are reviewing the number. We normally been paying sort of like, let's say, a fixed amount, but it certainly is not a policy that is written in stone -- on stone. It's something that changes at the end of the day depending on the cash flow. You'll remember when we acquired Brazil in 2018 we did not pay dividends that year, okay? So yes, we try to pay as a percentage of our income or net income. But again, this can be changed depending on the CapEx needs of the company. And when there -- I mean, so far, when there has been an important project, attractive project, normally we will give priority to that and have some flexibility on the payment of dividends. So right now, for the same reason, we are -- we have not yet determined the amount of dividends for this year. Again, depends on the investment on the Corpus Christi facility, depends on investment in other projects. But that will remain the answer. So we have been very predictable so far, with some exceptions, okay? So this year, as I mentioned, we already made an important payment. And the way we look at the payment of dividends, we -- in January, it was like the dividends will -- will be not paid in 2018, okay? So again, we will review the situation for 2020, I mean -- and we'll announce in the shareholders' meeting. We have not really defined yet the number.

[Operator]

The next question is from Liliana De Leon of GBM.

[Liliana de Leon Meza, analyst]

My question is related with the guidance in terms of volume. If we exclude the incorporation of U.K. asset, we should expect growth in organic volume?

[Alejandro Elizondo, executive]

Liliana, can you repeat the question? It didn't come across clearly.

[Liliana de Leon Meza, analyst]

Yes. Sure. Regarding the volume, the guidance on volume for this year, the volume is organic or it also includes the U.K. contribution? I mean what should be the volume in terms of organic excluding the contribution of U.K. from the other assets?

[Alejandro Elizondo, executive]

So just to make sure that we got it properly, you're asking with regards to our volume guidance, how much of that is organic versus how much of that is coming from acquisitions or M&A throughout the year, correct?

[Liliana de Leon Meza, analyst]

Exactly. Excluding the U.K. contribution from the level...

[Jose de Jesus Valdez Simancas, executive]

As I mentioned before, Liliana, we are going to -- most of the increase is going to be PTA, and an important chunk of that is going to U.K. And clearly, when we provide our volume or our guidance, this -- at the end, this is consolidated in there so we don't double count the volume. So the PTA, we are going to increase. It might reflect perhaps as PET, but then we don't double count. It's coming -- a lot of the growth is coming from this acquisition.

[Operator]

The next question is from Jean Bruny of BBVA.

[Jean Baptiste Bruny, analyst]

Can you hear me?

[Alejandro Elizondo, executive]

Yes.

[Jose de Jesus Valdez Simancas, executive]

Yes.

[Jean Baptiste Bruny, analyst]

Yes. All right. Yes. Just a quick one on M&G Altamira, if you can give us an update on the project.

[Alejandro Elizondo, executive]

Can you repeat the question, Jean?

[Jean Baptiste Bruny, analyst]

Yes. Just an update on the M&G Altamira?

[Jose de Jesus Valdez Simancas, executive]

Yes. Okay. I will let José Carlos answer that question.

[José Pons, executive]

Thank you, Pepe. Yes, the M&G Altamira process is going as we originally expected. All the creditors have been participating very actively in putting together all the documents that are needed to emerge -- so for the company to emerge from the concurso mercantil. We have seen a very good coordination. We almost are finished with all the requirements in terms of establishing the mechanisms to emerge from the concurso mercantil as well as establishing the bylaws of the company.

At this moment, it's difficult to precisely forecast when we're going to -- or when the company is going to emerge from the concurso mercantil, but I would say that it's around the end of the first quarter, beginning of the second quarter.

[Operator]

The next question is from Alejandro Chavelas of Crédit Suisse.

[Alejandro Chavelas, analyst]

Just 2 questions quickly. The first one is, I think you mentioned in your introduction that you were thinking about investing $75 million in rPET. I was wondering if that growth would come from organic investments. And how much would you expect that to add in terms of terms of tons of rPET capacity?

And the second question would be what assumption are you using in terms of propylene to polypropylene spreads in North America for your guidance.

[Jose de Jesus Valdez Simancas, executive]

[indiscernible]?

[Alejandro Elizondo, executive]

So just to confirm the question, Alejandro, the first question is related to CapEx for rPET, how much of that is going to be M&A versus organic projects. And then what will result from incremental capacity? And the second is our assumption on PP spreads, correct?

[Alejandro Chavelas, analyst]

Correct.

[Jose de Jesus Valdez Simancas, executive]

I think if I recall correctly, I think we mentioned in my presentation that...

[Alejandro Elizondo, executive]

It was in mine.

[José Pons, executive]

It was on mine. But [indiscernible].

[Jose de Jesus Valdez Simancas, executive]

I'm sorry. Why don't you answer that, Josè Carlos, because you mentioned that.

[José Pons, executive]

Yes. Thank you. Yes. What we disclosed was that we're going to spend -- or we're expecting to spend around $75 million of strategic inorganic initiatives for rPET and $44 million for organic projects. $44 million of organic projects are more related to operating the facilities that we have today, taking what we have today to be able to deliver better products to our customers. Those are projects that are already ongoing, and we expect them to conclude very soon. So probably by the third quarter, we will be able to ramp up some of that capacity.

$75 million of M&A, rPET is really a placeholder. It's not something that we are already committed by any form of investing. We're exploring opportunities, as Pepe indicated, but we will continue to update you in [indiscernible] interactions that we have. So at this moment, we're not in a final position to give you specifically because we are -- really it's more work in process.

[Jose de Jesus Valdez Simancas, executive]

Okay. Now with regards to your second question in terms of the spreads for polypropylene, we are assuming a $0.155 per pound spread between polypropylene and propylene -- polymer-grade propylene, PGP.

[Operator]

With no questions in the queue, I'd like to turn the conference back over to Mr. Elizondo for any additional or closing remarks.

[Alejandro Elizondo, executive]

I would just like to thank everyone for participating in today's call. Please feel free to contact us if you have any follow-up questions or comments.

[Operator]

Ladies and gentlemen, that does conclude today's conference. Thank you all for joining us.