Grupo Industrial Saltillo SAB de CV

BMV:GISSAA

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Priscilla, and I will be your conference operator. At this time, would like to welcome everyone to the Grupo Industrial Saltillo's earnings conference call. [Operator Instructions] Thank you.

I will now turn the call over to Patricia Cruz with i-advize. Please go ahead.

[Patricia Cruz]

Good day, everyone, and welcome to Grupo Industrial Saltillo's First Quarter 2019 Earnings Conference Call. Joining us today is Chief Financial Officer, Jorge Mercado; Chief of Operations Officer, Jorge Rada; and Investor Relations Manager, Arturo Morales. Please be advised that this call is for investors and analysts only.

During this call, they will be discussing GISSA's performance as per the earnings release issued yesterday. If you did not receive the report, it is available at www.gis.com.mx in the Investor Relations section.

Let me remind you that forward-looking statements may be made during this conference call. These are based on information that are currently available and are subject to change due to a variety of factors. For more detail and a complete disclaimer, please refer to the earnings release. Also, all figures discussed are in Mexican pesos unless otherwise stated.

It is now my pleasure to introduce Jorge Mercado to begin with the main highlights of the quarter. Please go ahead, sir.

[Jorge Armando Perez, executive]

Thank you, Patricia, and thank you all for joining us for this conference.

Before getting into the numbers, I would like to just go over 3 very important organizational events that took place in the first quarter. The first, José Manuel Arana decided to retire from GIS after 5 years. During this time, he led the transformation of GIS from a regional player to a global company. As a result of this change, we welcome Manuel Rivera as our new CEO. Manuel's knowledge of the company, which he has acquired the past 4 years as a GIS board member, plus his vast experience in the global auto industry, make him the ideal person to take the company to the next level.

In addition, my colleague, Jorge Rada, has been named Chief Operating Officer of GIS. Jorge's one of the most global auto parts executives around. His leadership has been key to the success of the creation of Draxton. It pleases me to say that the transition process has been very smooth and will help solidify the foundations for GIS' growth.

Second, last month, we received a [indiscernible] from COFECE to go through with the sale of the -- sale agreement with Ariston Thermo regarding our water heating business unit Calorex. We expect to close the transaction in the coming days as planned. This transaction represents an important opportunity to simplify our portfolio and focus on our core businesses. We intend to use the profits on this sale for repayment of debt and other corporate uses.

Third and finally, another important change this quarter was the consolidation of Evercast into GIS numbers. This was possible due to the strengthening of the previous agreement, which now includes 10 additional years of supply and increase of 50% in our iron casting capacity. These 3 events are consistent with our view of the future for the company.

Now just let me go over very quickly over some of the macro business drivers that we achieved. We are expecting a complex economic environment, very important concerns about economic growth across the globe. We expect a challenging 2019 and 2020. Key vitals such as GDP, interest rates and inflation are going to be challenging for all our companies in all geographies.

Now let me move quickly into some of our key financials for the quarter. The first quarter of 2019 now consolidates Evercast figures into GIS and excludes Calorex. This being said, the [indiscernible] consolidated revenues decreased 6% year-over-year as sales from our [indiscernible] division, Draxton, were down by 10%. Vitromex and Cinsa presented no major challenges in terms of revenue versus last quarter.

Consolidated EBITDA declined 23% on a quarter-to-quarter basis, mainly explained by Draxton's performance, significant exchange rate headwinds and Vitromex. We will go in more detail in the following section.

Now -- let me now introduce to you Jorge Rada, so we can get right away to the -- to Draxton and understand a bit more about the details. Jorge, as I said, is our Chief Operating Officer and the Global Head of Draxton.

[Jorge Garza, executive]

Thank you, Jorge, and good morning to everyone.

Well, I will talk about Draxton and our joint ventures, which are mainly dedicated to the automotive industry in North America, Europe and China. The automotive industry in other regions is expected to present flat growth or slightly lower volumes in 2019 than 2018. In North America, the auto production is estimated to close slightly below 2018. And in Europe, the auto industry has experienced the effects of the WLTP, which created a bottleneck for the OEMs to recertify their vehicles on the new emission standard. And also, we are experiencing the overall economic situation.

As a result of this, 2019 has started at a slow pace. But we expect this trend to reverse in the second half of the year, and the total industry will close -- will be close to -- sorry, 2019 closer to 2018.

In China, the auto market is presenting very similar behavior. The first half of 2018 was very strong. However, the second half softened, very similar to Europe in which the first half was strong and the second half was very soft.

In 2019, the market started also low -- slow, but analysts expect that the market will start to recover over the next months and will finish close to the level of 2018 and retake its growth trend for the next year. This is about China.

Draxton's global sales were 10% below the previous year in the first quarter. The main reason for this is the effect in our volumes derived from the slower automotive market in Europe and Asia, the restructuring starting in Ford, which is an important customer to us, and in Mexico, the anticipated exit of a relatively old customer to us, which is Brembo. This was anticipated and expected and finished last year. So we compare previous year first quarter to present year first quarter. We are not seeing the Brembo volume there, that's why you can see a lower volume in Mexico.

The business was also impacted by higher energy costs, both in Mexico and Europe, and a less favorable exchange rate that represented more than half of the variation in Europe and Asia, which affected sales and EBITDA expressed when you express that in US dollars. We made strong efforts to control fixed costs and labor cost based on the lower volumes. And with the combination of all these effects, first quarter's EBITDA was $35 million, down from $42 million last year.

Operationally, all our plans have been able to improve their scorecard for the main KPIs operationally, and we are very well prepared to benefit from the expected recovery of the volumes in the second half of this year.

We continue our commercial efforts. And just in the first quarter in -- of this year, we have been nominated for projects for more than 30,000 tons globally. The transition from diesel to gasoline in Europe doesn't represent a threat for our volumes since we are much more oriented to products that go to the gasoline market or that are used in both options, diesel and gasoline. So this transition in the future eventually will not be a threat to Draxton volumes.

And additionally, Draxton continues to penetrate the electric vehicle market by getting orders for brake calipers and brackets, differential cases for transmissions and other components for electric motors such as starter carrier. We are in the process of launching some of these components in the second half of this year, both in Europe and China. So we can say at this moment that our portfolio, 65% of Draxton's product portfolio can be used on electric vehicles. And with this, we confirm our strategy that we are growing and following the trends of the automotive markets globally.

[Jorge Armando Perez, executive]

Thank you, Jorge.

Now let me turn to Vitromex. For the last 3 quarters, we have focused on improving Vitromex' performance. We have talked about a few key drivers that we need to improve on. First is U.S. volume. In the U.S. volume, we continued with our efforts to regain customers. The recurring process as shown in the U.S. market is going in the right direction, although slower than expected, and we're currently going through various certification process in order to reestablish supply relationships.

Key customers, U.S. customers that is, or potential customers, have already visited our facilities in Chihuahua to conduct manufacturing site reviews. These are highly-demanding and time-consuming process, but we're getting closer to starting a new business with these companies.

Second, what we gain in share while improving pricing in Mexico. Good news, we are achieving both this quarter. Volume is growing 3% versus last year, while net pricing grew 1.5% net of a negative mix. Overall, Mexico top line grew 4.5%. We are expecting to have a very competitive position in terms of growth rates within the industry.

Third, improving costs. We are making great progress in some of our plants as they are reaching higher utilization levels and extraordinary impacts within very competitive unitary costs. This is in an environment which electricity cost has increased 45% quarter -- in the quarter.

EBITDA margins, excluding onetimers and other extraordinary charges, almost broke even for the quarter. EBITDA was MXN 88 million lower than first quarter 2018, about which MXN 70 million were related to a turnaround strategy and balance -- the balance was the result of lowered volumes and the energy impacts that we just mentioned.

Now let me turn to Cinsa. This business unit continued to show positive trends in profitability. The quarter revenues were at the same levels in first quarter 2018 driven by the slowdown in [indiscernible] portfolio.

We grew EBITDA by 19% versus previous year driven by revenue management, strict discipline and fixed costs and efficiencies in the use of raw material.

Finally, let me talk about our leverage levels. We have been actively managing our working capital and cash flow as well as debt levels. We kept our leverage ratio relatively stable. Our net debt-to-EBITDA ratio is currently at 2.4x, considering we added Evercast to these calculations. Ratios will show a significant improvement once the transaction with Ariston is completed and we -- as we intend to repay debt with those resources.

We will continue to focus on increasing our customer base as fixed cost discipline, working capital management and CapEx as well as operational excellence to overcome this challenging environment.

Thank you very much for your attention. This concludes my remarks for today.

Operator, please begin the Q&A session.

[Operator]

[Operator Instructions] We will take our first question today from Alejandro Azar from GBM.

[Alejandro Azar Wabi, analyst]

First, I would like to begin with Draxton. If you can give us more color per region about the short term, if you can call it, guidance. Because you mentioned that in North America, for example, you're going to have new volumes coming online in -- by the end of 2019.

And then I'd like to know also, from the new contracts, which amount to 130,000 tons, how much of those come from North America? And when should we begin to see those ramping up?

[Jorge Garza, executive]

Good morning, Alejandro. Thank you for your question. Look, in this year, in North America, we experienced lower volume up to now, mainly based on the fact that volume from a customer that installed a plant in Mexico, and they took it for themselves. This was anticipated and expected, and we knew it. So this is not a surprise. When we -- this decision by this customer was made, we took the job to the work to refill this volume, okay? So we are already launching products that will be replacing this volume. And not only with gray iron, but with nodular iron, which, in this market, is down. The nodular iron or ductile iron is more complicated, and the prices are higher. And the margins are normally better for the company that produce ductile iron, okay? So we are increasing the volumes there, and you will start to see these volumes by the end of this year. And also 2020 is already going to be higher than 2019 and higher than 2018, okay? This is -- of course, we have obtained volumes for complex products in gray iron tool, like the volume BMW. BMW is going to be discs, and we're going to produce up to 900,000 discs for brakes in San Luis Potosi. And that -- we are already launching that product, and the launching curve is slowly at the beginning of this year, but then ramps up very fast. And we will be at the level of 900,000 discs by the end of this year. So this is going to be seen over the year. And then 2020, you will start to see better volumes.

The same situation is happening in Europe where the volumes have been very stable from the customers. However, the industry is passing through, as we said, the bottleneck of the WLTP and the situation in the economy of Europe. Everybody's expecting what -- I mean, the Brexit and all these other things are like stopping the demand. So there is a pent-up demand that we expect that will be decrease by the second half of this year. Analysts expect that the second half will recover. And by the end of the year, you will see a very similar volume in the automotive industry than 2018.

In our case, we won -- like last year, volumes from customers that we didn't have before, like [ MIN ] and [ MAN ]. It's a truck company, belongs to [ Port Buying Group ], and they get those volumes for special products that are heavy. And they are oriented to trucks with [ McKinney ]. This is going to be launched by the end of the year, and we are going to machine them in our machining facility in [ Lleida ]. [ Lleida ] is in Spanish, [ Lleida ] is in [ Catalan ], very close to our facility in Barcelona. And everything is going well on their course. I mean everything is on time. Quality is going very well. Customer is very satisfied. So with this, we expect that volumes in 2020, also in Europe, will be higher than volumes in 2019 and 2018, okay? And the pipeline is getting filled with new orders. So we really expect that the volumes, next year globally, will be about, let's say, more than 30,000 tons higher than this year. This is what we expect. This is -- you wanted a guidance, this is how our guidance for next year.

[Jorge Armando Perez, executive]

Alejandro, just let me complement a little bit what Jorge [indiscernible] said. The -- in Mexico, as Jorge mentioned, we lost -- it was planned, Brembo, which took away important a number of tons from our days from the Mexico operation. And it's about basically on gray iron. If you took away that single customer, Mexico would be showing growth -- significant growth. Brembo was a large customer, a customer that was doing over 30,000 tons. It was a process in which Brembo left in a period of about -- a bit more than a year. Thus, we have seen that lap in steel. As we go ahead in this year next quarter, that lapping is going to start to end. So you -- so the comparisons are going to start to look better because the Draxton Mexico have gained significant number of platforms that -- and are not seen right now just because one large customer left.

Overall, what I think is very important to understand is that Draxton have gained customers. The volume softness is the volume softness you will see in the industry with 2 differences: Draxton is increasing the number of customers; and the volatility related to things such as diesel or migration into hybrid or electric cars is less for GIS, for Draxton, than is for other of our competitors.

As Jorge said, we have been awarded contracts, which deliver a solid pipeline for the second half of the year and more into the fourth quarter for Europe and Asia. And we feel good about them that prospects for next year.

[Jorge Garza, executive]

I think it's very important to mention that important part of the growth of our volume in Mexico comes from brakes components. As you may see in the industry, you analyze the players who are here as Tier 1 systems suppliers for brakes. We have more customers, okay? And they are Tier 1 system suppliers for the OEMs. The production is being located in Mexico from other countries, and that is creating a higher demand for brakes components. That is why we added in the second line of Evercast, which was launched last year. And we already announced the growth of 50% of the capacity of Evercast, which is going to free up capacity in Draxton Mexico. And Evercast is going to be dedicated to one customer, which is our partner -- our JV partner, ZF. And that capacity that is going to free up in Mexico is already sold. So it means we are really growing. The bump that you see in Mexico is basically based on the exit of one customer in gray, and the volume that we are gaining to replace that are normally softer, which is a different type of iron, more complex. And also we have only -- gray iron, we have only in San Luis Potosi. And in San Luis, we have also ductile. And in [indiscernible], we have ductile. So next year, you will see the volumes already coming back to the normal growth path. And over the years, we expect the volumes to continue to grow because the few ones who are producing brakes systems are expecting to grow in Mexico.

[Alejandro Azar Wabi, analyst]

A follow-up question on the BMW contract. If I heard it right, you mentioned you were going to do the discs and machine also for the cast and the machine for the brake disc of BMW.

[Jorge Garza, executive]

That is correct. Actually, these discs are very special discs. As you can see, BMW is making premium cars, and the disc is composed of an iron disc and aluminum cap that is in the center of the disc. And this will make the disc lighter, okay? But the iron component is made in San Luis Potosi, in our plant in [indiscernible] San Luis Potosi. The cap in aluminum is imported from BMW themselves, and we are machining. We are riveting the cap on the disc, and we are also painting the disc. And we are going to deliver to companies that are going to assemble these in the front corner of the system, and they are going to deliver it to BMW. But the contract was negotiated with BMW directly. However, they don't buy the discs directly on the logistic -- on the supply chain. They ask you to deliver to other plants, like [indiscernible], like ZF. And they assemble the disc, and they deliver it to BMW. But the customer is BMW.

[Jorge Armando Perez, executive]

That's also -- is that -- the fact that this is the first time BMW allows this disc to be manufactured or assembled outside Germany, this is a very, very good signal about the quality and expertise of the Draxton teams.

[Alejandro Azar Wabi, analyst]

I was going to go there because if I recall correctly, your capacity for brake discs is pretty small in Mexico. Your strength comes in brakes and calipers. So how do you see in the medium-term to long-term eating market share in the brake disc segment, if you want to call it like that?

[Jorge Garza, executive]

Well, it depends on the market. We actually -- you're totally right that we are focusing more on brake calipers and brackets and also knuckles, and we do crankshaft and other kinds of stuff. But the disc is not the biggest portion of our portfolio, okay? However, if the discs are complex discs and include machining, we may consider to add capacity. At the moment, we are not negotiating with any customer additional volumes for an expansion on discs, for example. But we have some open capacities, San Luis Potosi, in plant #1. And we are talking to some other potential customers to make some discs there. But you are right, the capacity is not huge. And if there is a need from the market, we will consider it. But the focus more, you are totally right, is on other components.

[Alejandro Azar Wabi, analyst]

Perfect. And one more, if I may, on Vitromex. Can you give us more color on the nonrecurring items?

[Jorge Armando Perez, executive]

Yes, Alejandro. We -- as like we've mentioned, one of the -- our key strategy is to be able to improve in several fronts. One is the U.S. market. As such, we are making sure our manufacturing footprint allows us to be very cost-efficient in serving our markets better than we used to do in the past. Thus, we're having to make a lot of changes in terms of where we produce certain SKUs. And this process is about changing SKU from one facility to another. We're incurring costs such as obsolete inventories. We are having to shut down plants, even for as long as 4 weeks -- or ovens, not plants. Ovens, ovens, so we can be able to relaunch the new SKUs in different plants. So this is a -- when you do this, you're basically having to absorb all the fixed costs while you are shutting down the oven. So we are doing that, at this point, quite significantly.

Then the second thing that comes along that is that you start to address the cooling of the plants, and as such, we also -- some termination of certain number of people in certain plants and in certain support areas. So it's a long list of things that are -- that we're starting to accelerate, that we are going to be doing for, probably, for this quarter and next to make sure that we have the right configuration in our manufacturing footprint to compete very aggressively in the market in which we want to compete. This is aligned with the timings that we are seeing in terms of how the things are improving in Mexico and the process in the U.S., which, as I said, we are very excited because we had visits from customers that used to be very important customers for us in previous years.

Remember, Vitromex USA, at a peak, sold 8 million meters -- square meters of tiles. And last year, we sold below 4 million. We have clarity in which we -- where the volume went, which customers we lost, what is the potential of those customers, and we have a team that is fully focused on that, on regaining that volume because the brand is well-known. Vitromex has historically been a reliable customer which underwent problems a couple of years ago and now we have to go through the process of having our plans approved, having our selection of process chosen, and I would say that we have made a lot of progress. We have passed the plant inspections. Some of them are, I guess, right now, choosing the products. So we are seeing light at the end of the tunnel for this.

[Alejandro Azar Wabi, analyst]

A follow-up on my last question. So when you are decreasing your capacity in Vitromex from 52 million square meters, you are -- where do you plan to go? Do you plan to go to 35 million? Is there a number? Or...

[Jorge Armando Perez, executive]

No, no, Alejandro. I would say we are rightsizing it. But the capacity or the throughput of the plant is a function of several things such as what size of tiles are you going to be producing. So actually at the end of the day, even with all the changes we are going to be making, we're actually going to end up with a bit more capacity, but with a very different layout in where -- in terms of where it's going to be located and how the capacity is going to be the biggest, either between porcelanic or ceramic, or doing the larger sizes versus the lower sizes.

So if we are able -- and it's a complex process which is already happening to a different layout of SKUs. You can actually get more out of our current oven [ adjudication ] just because of the SKU is much better because we're also decreasing the number of formats. A format is a key bottleneck in terms of making -- having to make changes. If we have lower number of changes, we're going to have higher throughput because we're going to have less downtime.

In addition, we have been investing in digital printers, which allows us to have -- within one format, to be able to turn out a lot of different SKUs without having to have downtime, as we had in the past. So the process is a quite complex process. We have brought a lot of very good talent that is helping us go through this process. We also -- in reality, we also have some additional consulting and support costs associated with the process, which is what we are doing. We have brought -- or we send people from the outside. They are helping key players from, not only from Mexico, from other places, which we think is an investment and -- because we are seeing in the plants which are closer to where we wanted to happen, the quality is where we want it to be. It's 95% of [Foreign Language] the first, with very little scrap. So we are seeing in the plants that are closer to the -- our goals that we sort of we expected.

[Operator]

Our next question today comes from Héctor Maya with Santander.

[Héctor Maya, analyst]

First, I wanted to know if you could share with us a little bit more color regarding the cost environment and profitability in the Auto Parts division. And after that, I will have a follow-up.

[Jorge Garza, executive]

I cannot hear you very well. Can you repeat the question, please, because, I don't know, maybe the volume is too low?

[Héctor Maya, analyst]

Yes. So now can you hear me better?

[Jorge Garza, executive]

Slightly better.

[Héctor Maya, analyst]

My first question is if you could share with us some more color regarding the cost environment and profitability in the Auto Parts division.

[Jorge Armando Perez, executive]

Let me just repeat. You want to have a better understanding in terms of the volume and profitability of the Auto Parts?

[Héctor Maya, analyst]

The cost and profitability -- the cost environment.

[Jorge Armando Perez, executive]

The cost environment?

[Héctor Maya, analyst]

Yes, yes.

[Jorge Garza, executive]

Of the auto suppliers, the suppliers of the automotive industry?

[Jorge Armando Perez, executive]

I believe, Jorge, he's talking about our -- and please correct me if I'm wrong, Hector, about what is -- what are we seeing in terms of the cost of scrap, the cost of energy, labor, I guess. Is that accurate?

[Héctor Maya, analyst]

Yes, and then also on the environment of scraps.

[Jorge Armando Perez, executive]

And then, what? Sorry.

[Héctor Maya, analyst]

Yes, scraps also. Yes. Sorry, the line is not very good.

[Jorge Garza, executive]

Well, we definitely have different situations in different regions. As you can -- maybe you know, in the automotive industry, there are products, there are -- they have a formula for some raw materials and some inputs that we use to produce parts.

For example, in the casting industry, it is like a rule that raw material is indexed to -- I mean, the price that you sell is -- has an index, also linked to the price that you buy. So from that point of view, in the casting industry, we don't have that kind of risk. The only risk that you face in this kind of industry is that there is a time lag between the moment you buy and the moment you have the prices to sale, okay?

But eventually, if you see this in the long term, there is no -- there is like a natural hedge, and normally, you don't lose money there, you don't make money either. But sometimes when the prices are going up, you see some quarters in which you are, let's say, less profitable because you take a few months, maybe 1, 2 or 3 months, to reflect the prices to the customers.

On the other side, if the prices are going down, it takes also for you some time to reflect the lower prices to the customer. And in that period of time when the prices are going down, then you have like a temporarily higher profit, okay? So from that point of view, we don't see a risk on the raw materials.

On the labor, that's -- of course, different countries have different inflations. Normally, our customers, the OEMs and the Tier 1s, don't have provisions to give you price increases. But you know it from the beginning and, actually, you need to work on productivity to compensate and to offset those cost increases in labor. That's why we are always focusing on improving productivity -- labor productivity.

Inflation is very similar in Europe, in the different countries, except in Eastern Europe where labor costs are going higher than Western Europe. And we have plants in Brno, in Czech Republic, and in Poland. And the inflation there is higher than the inflation in Western Europe, like in Spain, in Italy where we also have plants.

In Mexico, maybe everybody is speculating a little bit about what is going to happen with the T-MEC. We don't know exactly what is going to happen. Of course, nobody knows, but we don't see that the labor cost will have a big impact in the short term. Prices and costs are always related to productivity. In order to be able to pay more to the people, we need to be more productive. Otherwise, the formula doesn't add up. I mean, it is a problem.

So we really -- we see -- we do see -- expect an increase of labor cost in Mexico, but we don't see that is going to be dramatic. Some people may expect after the rectification of the T-MEC.

I don't know if I answered the question or you would like to go further in some of the items.

[Héctor Maya, analyst]

No, that was very clear. And I have a second question also, if I may. Could you give us some more details about the restructuring in Vitromex, particularly in terms of the time line on how the process with Home Depot is going?

[Jorge Armando Perez, executive]

The -- well, we've been saying for the last couple of quarters the focus that we have for Vitromex. The analysis of what went -- what changed in Vitromex is not that difficult, to be honest. It's tough to implement, but in terms of where we want to go, it's not that difficult. The #1 issue that affects our profitability was the loss of key customers in the U.S. We lost more than 4 million square meters over a 2-year period, which have very high contribution margin. So our focus is to go after those customers that we lost. They have a name. We have contacts, and the process is going very well.

We -- as I said, the process to be able to regain a customer entails different phases. Some of these phases started last year and they included, basically, getting to the new people from our side and their side, then understanding their needs in terms of what they were seeing for design needs for the next year as well as price points. With that, we went back. We had a -- we built a design, specifically, design team for the U.S., and they came up with the proposals. That took a couple of months, that whole process.

And at the beginning of the year, we started to present those proposals. The prepared proposals were attractive. Then afterwards, the -- what customers such as, in particular, customers such as Home Depot and other companies do, their purchasing teams review that and then they send the purchasing teams and to think of [ things come down ] and they come to your plant and they review the processes, the quality, the protocols and everything. They've come over to our Chihuahua plant and also to our San José plant. And then, afterwards, they come and they tell you whether or not you have any observations. We have none. We have -- we were able to bag those.

And then from the original lineup of products that you sent to them, they just pick a number of SKUs that they want you to start. They might give you a specific number of stores in which you'll start. They'll say you're going to be, whatever, supplying, let's say, 500 stores or whatever. And then that process starts to ramp up as you prove that you are reliable again and the product has some tool. So we are in that process with several customers, with some -- we are closer to that. We said, last year, that we expected those things to -- that would take us all the way through Q2, to the end of the Q2, and we still think that. So we are consistent on that.

The second -- and that also -- to be able to do that, we have to go back to our manufacturing strategy, our manufacturing footprint, and make sure that we're able to deliver. As such, we are making some of the changes I was saying, which are costing some money in terms of people being shifted around or SKUs being shifted around. Some inventory will we have to be write down -- written down. In other cases, we have to build up inventory to be able to make sure that we're going to be delivering what these guys want and have no issues in terms of service. So we're trying to be very prudent and very conservative to make sure that we don't have an issuing service with this guy.

The other sort of big peak in which we had a gap was we lost a couple of points of share in the last couple of years in Mexico and we lost pricing. And in both of those things, we're doing well. As we mentioned, at the end of the year, we made changes to the leadership of the sales team in Mexico. We brought a guy that used to work with Vitromex that went -- had been in another GIS company, Hector Zertuche, and he is doing a tremendous job. And it's showing.

And we are also being able -- by being very actively managing our mix. Vitromex attempted to go into the large pieces through the porcelanic. The origin of Vitromex was more on the ceramic. So we are working more on having -- in getting to the large sort of tiles business but with our ceramic lineup, which has proved a good idea. And so Hector has been able to grow volume and to deliver net price [ validation ] in the first quarter. And we haven't had this for a while. So we are happy with that, too.

And the other piece, which is a large piece and it's a very time-consuming piece and it's a very resource-consuming piece, is that getting our plants where they should be. We also lack some investments in terms of our ability to integrate the process to have longer and larger rungs of tiles. And so we are investing against that, and that has some costs. We have a lot of talent that is helping our teams, making sure that we have the right capacity in terms of knowledge and skills and ability to deliver what we need to do.

So those are the things that we have been working on, and we continue to work on those things.

[Operator]

[Operator Instructions] We'll go next to Alejandro Chavelas from Actinver.

[Alejandro Chavelas, analyst]

Congratulations on the results. Just -- some of my questions have been answered. Regarding the auto segment margins, particularly NAFTA, I think we show a very sharp recovery in the quarter. I am guessing it's partially because of positive trends and short-term trends in commodities, which have shown -- they have shown positive metal there. Is that the case? Or is there anything else extraordinary in the NAFTA margins? Or is it just mix and better profitability?

[Jorge Garza, executive]

Did you get the question well, Jorge?

[Jorge Armando Perez, executive]

No, I didn't.

[Jorge Garza, executive]

I don't know why that we are not hearing the questions with the right volume.

[Alejandro Chavelas, analyst]

It doesn't matter, I'll ask again. Just to understand if there's anything extraordinary in the NAFTA margins in the first quarter of 2019 because we saw a very sharp recovery. So how is positive metal there?

[Jorge Garza, executive]

You're talking about the margins or you're talking about the prices?

[Alejandro Chavelas, analyst]

Yes, margins in NAFTA. Margins in NAFTA.

[Jorge Garza, executive]

That's compared to last year?

[Alejandro Chavelas, analyst]

No, more in a sequential basis. But yes, also year-over-year.

[Jorge Garza, executive]

They're not in our numbers. You're seeing -- you're talking about the industry?

[Alejandro Chavelas, analyst]

No, about Vitromex. I think you have a 14% margin in NAFTA. Is that correct?

[Jorge Armando Perez, executive]

No. Margin, 15%, no?

[Jorge Garza, executive]

Let me check the numbers here.

[Jorge Armando Perez, executive]

The EBIT margins are the same.

[Jorge Garza, executive]

EBIT margin for North America was actually 20%, 2018, and it went down to 15%.

[Alejandro Chavelas, analyst]

Okay, 13% EBIT margin in North America -- no, sorry, North America is 15% versus 20% last year.

[Jorge Garza, executive]

Yes, that's right. And actually, it went other way around. We had a one-timer of about $1 million due to some excess costs because of -- we have so many requests that we had to be shipping some parts over -- using planes. So that actually cost us a bit more. So it's actually the other way around.

[Alejandro Chavelas, analyst]

Maybe you were seeing the columns in opposite way. I mean, the first column is this year and the right-hand side column is last year. And I'm looking at what we published yesterday. And reduction...

[Jorge Armando Perez, executive]

The sequential improvement is in the 4Q '18. Okay.

[Jorge Garza, executive]

Oh, yes, oh, yes. You mean -- yes, versus the last quarter? Okay, okay.

[Alejandro Chavelas, analyst]

Yes.

[Jorge Garza, executive]

Last quarter -- normally, last quarters every year are not good quarters. Volumes are very low and normally, that's why in some cases, the industry -- the automotive industry presents numbers in seasonally adjusted annual rates because if you compare last quarter of one year with the first quarter of the second year or the following year, normally, you cannot compare them directly because, normally in wintertime, there is a Christmas holiday and OEMs stop and we sell less and then the numbers of December, normally, are very low, and that drags the whole quarter down. That's why we prefer to compare first quarter to first quarter, and that's a more, let's say, fair comparison.

[Operator]

And I'm showing that we have no further questions on the phone today; however, we do have questions via webcast.

[Patricia Cruz]

Thank you, Priscilla. And we have 3 questions coming from Mauricio Santos of GBM.

The first question is could you touch further on the North America deceleration at Draxton? The second one is have you written off obsolete products at Vitromex? And the third is that reflected in the EBITDA loss?

[Jorge Armando Perez, executive]

Let me take the first, the second and the third. Yes, we have wrote off some -- actually, we started to do that a little bit since last year. And we have a policy which has been applied across quarters since, even before I was here. So they continue to apply that policy in the same way, and we'll continue to do that. And those -- all those numbers are reflected. We incur in provisions and we serve, as our policy states, in terms of how long the inventory stays, and that's with Vitromex and all other of our products. Not only Vitromex, all our companies have a process in which we build up provisions according to the time they are in the inventories.

And if you want to take the first one [Foreign Language], the revenue...

[Jorge Garza, executive]

Yes, sure, yes. The North America deceleration on Draxton comes from transformation of our portfolio because we used to have a relatively big customer that decided to have their own plant in Mexico and there was a gradual exit of the volumes from that customer. And this year, we don't have that customer anymore and it is very difficult for a company like ours to make synchronization of exit and entering of new products.

Okay. So this year is the inflection point in which we don't have any more volumes from that customer and we are launching many products from other customers in North America. That is why you see a small reduction of volumes this year, but it doesn't mean that this is a fundamental situation that will prevail in the future. We are launching many products and, in year 2020, the volumes will be higher than this year and higher than last year, okay?

So this is just a temporary thing that we have to accept because there was no way to stop the production of one customer and to enter the production of many more customers in one day or in one month. That is why it's taking some time to validate the new products, to launch them. And you will see now in a couple of months that we will not be talking about that comparison with the previous customer because that customer left and it was expected. That was not a sudden or a surprise for us. And we went to the market, we got many new businesses from new customers, and that is why this year is the year in which we are launching many products, and you will see the volumes in 2020. But it doesn't have to do anything with lots of products. Actually, our customer is only one. We have many more customers and many more products.

[Operator]

And this does conclude our Q&A session for today. I'll turn the call back to Jorge Mercado for closing remarks.

[Jorge Armando Perez, executive]

Thank you once again for your continued interest in Grupo Industrial Saltillo. Please don't hesitate to contact either Arturo or myself if you have any further questions, and have a great weekend. Thank you very much.

[Jorge Garza, executive]

Thank you.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.