Grupo Industrial Saltillo SAB de CV

BMV:GISSAA

Earnings Call Transcript 2018-Q3

[Operator]

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

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

[Patricia Cruz, executive]

Good day, everyone, and welcome to Grupo Industrial Saltillo's Third Quarter 2018 Earnings Conference Call. This call is for investors and analysts only.

Joining us today from GISSA are Mr. José Manuel Arana, Chief Executive Officer; Mr. Jorge Mercado, Chief Financial Officer; and Mr. Saúl Castañeda, Head of Investor Relations. They will be presenting the company's performance as per the earnings release issued yesterday after the close. If you did not receive the release and would like a copy, please contact i-advize in New York at [phone], and we will e-mail you immediately, or go to GISSA's website www.gis.com.mx, under the Investor Relations section.

Let me remind you that forward-looking statements may be made during this conference call and are based on the information that is currently available. Please refer to the earnings release for a more detailed and full disclaimer.

Also, all figures discussed are in Mexican pesos unless stated otherwise.

I'll now turn the call over to Mr. José Manuel Arana, CEO of GISSA, to begin with the main highlights and a strategic overview. José Manuel, you may begin.

[José Manuel Arana Escobar, executive]

Thank you, Patty, and thank you all for your interest in GISSA. I'm pleased to be here with you today to share GISSA's financial and operating results for the third quarter of 2018. This quarter was a great -- had a great amount of activity, mainly with regards to the NAFTA renegotiations that now we call USMCA, which finally reached a turning point. We also have the results of the Mexican election process, which did not seem to affect our commercial and operation process.

Regarding the USMCA agreement, although the business exposure to NAFTA has been reduced, thanks to the globalization strategy we implemented in the past year, I'm pleased to say that the decisions made by all 3 countries greatly favor our operation in Draxton. We once again reaffirm Draxton's strong positioning and relevance of its operations under the scenario and its position as an attractive supply option in the industry providing current and potential customers with solutions to comply with regional content required in the new agreement.

Forward-looking to future changes in the automobile industry and the globalization of our operations, we felt the need to accelerate the transformation process of our products. As such, we implemented a technology strategy for Draxton, our Auto Parts segment. This change was in anticipation of the future changes that we envision taking place in the auto sector, ensuring profitability and capability to compete in an increasingly challenging marketplace.

We are currently investing $7 million each year in R&D at Draxton, which is a 1% of our yearly sales. This include investing in key areas such as smart plants, processes and technology, products, tools, and materials. Focusing on this type of initiative we believe will give us advantage in securing our position in the future to ensure continuous growth. This effort is so important for us that we could potentially double our investment to 2% of our sales in the coming years.

Overall, Mexican construction industry continues to grow and perform well as investment in the sector and interest of capital continues. The new government has indicated that its goals are to continue boosting the construction sector with a implementation of several subsidy programs for social housing that will strengthen the housing sector. We also expect to highly benefit from these initiatives in the near future, especially in Vitromex.

In the United States, they are increasing tariffs to tile imported from China going from 10% to 25% starting January 2019. This will accelerate Vitromex sales in USA. The economy as a whole has decelerated somewhat, so we do not expect some setbacks along the way. But we are also very positive in the various potential opportunities that lie for us.

For GISSA, Q4 of 2018 and 2019 will be about continuing with our strategic plan, executing greatly, mainly in Vitromex in a manner that is prudent for our shareholders. We are confident that the decisions we have made will bring us ever closer to our objectives.

Thank you for your attention. I now kindly ask Jorge to begin his discussion on GISSA's financial performance with greater detail.

[Jorge Armando Perez, executive]

Thank you, José Manuel, and a warm welcome to everybody.

Let me first start by describing a little bit about the change in trend that we saw in Q3 versus Q2. The second half of the year started with a tougher quarter that was brought on by higher energy and scrap costs almost in all regions. The energy cost accelerated quite rapidly across all our footprint. Good news is that we have partial pass-through. We're working to find a way to improve debt coverage or hedge.

Regarding scrap, we are in a better position, as a majority of our contracts are covered well above 90%, some of them with time lines. China has a lower coverage ratio around 40% and longer-life quarterly and annual adjustments due to the legacy contracts that we acquired from INFUN. We will seek to change Draxton conditions in these contracts worldwide.

Now compared to the previous quarter, the change in trend of energy and scrap, the lower summer seasonal sales in Europe and the market slowdown due to the diesel regulation change. Also in Europe, we saw lower sales of about MXN 40 million and caused a 300 basis point decline of gross margin contribution line.

In the third quarter, the company as a whole was able to deliver the best its cost performance in the last 6 quarters, if you exclude the capitalization of R&D expenses incurred in the third quarter of last year. We will continue to find cost opportunities to offset these external events. To a great extent, the quarter-to-quarter softness came from Draxton Europe and Asia, both the top line and margin impacts. We believe that part of this changing will be compensated in future quarters.

Now let me get into the third quarter comparison versus last year. As reported, EBITDA was 29% lower than the third quarter of last year reaching MXN 465 million. Much of this decrease came from the margin line. As you see, mainly driven by Vitromex and Draxton. As such, EBITDA margin reached 10% versus 15% in the same quarter of previous year. It is important to note that year-over-year comparability was increased by a onetime benefit of MXN 58 million in the third quarter related to capitalization of investments. Excluding this effect, EBITDA decrease would have been 22%.

Now let me get deeper into Draxton. In dollar terms, the revenues for Draxton increased 1% in the third quarter. EBITDA declined, however, 24%. Again, the higher cost trends for energy and raw materials drive all the variance. If you exclude the onetime capitalization volume and pricing effect energy and costs, thus leaving the scrap lag effect as the main driver of the variance versus the year.

Draxton Mexico saw revenue increases of 9% to reach $68 million mainly due to the pass-through of surcharges in the scrap metal and ferroalloys to sales prices as well as higher volumes in the Irapuato plant. EBITDA was down, however, 16% to $10 million, reflecting the absorption of higher scrap metal and ferroalloy cost with a time lag that we should be covering next quarter. Higher daily costs as well as additional expenses at San Luis Potosi plant related to the launching of new Auto Parts also had an impact.

Draxton Mexico has had a nonrecurring benefit of almost MXN 50 million, mainly related to R&D expense capitalization in the third quarter of last year.

Europe and Asia revenue declined 7% to $84 million in the third quarter of 2018 due to temporary lower sales volume in the diesel vehicle market caused by the new environmental regulations across Europe. The 32% EBITDA contraction to $12 million was significantly due to the higher energy costs and scrap metal prices, particularly in China, where scrap metal price increased 50% due to environmental regulations that caused the steel and foundry industries to compete for supply of this material. Scrap metal represented half of the region's EBITDA change in the quarter.

Draxton maintained revenue growth on accumulated basis and profitability levels well above industry average and key corporate players in the industry.

Now let me turn to Vitromex. In Vitromex, even with the poor economic results, as we have explained before, we have seen progress in the turnaround. The 4 drivers which we are working now are: Improving pricing in Mexico. Most of our pricing gap is driven by the Mexican market. As we have explained, it has become highly competitive due to the downturn of 4% of the market. The actions we are taking are reset our revenue management team to focus on price segment and channel strategies to increase price realization. Pricing in Mexico has increased month to month, and that's good news.

Simplifying our portfolio. We have reduced in the last quarter about 30% of SKUs, which have lower margin or contribution or lower volumes. This will simplify all our operations.

The second point which we are focusing is improving U.S. volume. The U.S. is a key market for us. This business has sold in the past up to 8 million square meters a year. Margin of contribution and customer scale are much higher than in Mexico. There's a huge opportunity here. The actions we are taking are: as we mentioned before, we have a full new sales team, which is helping regain and reactivate key customers, and we're already seeing that. We have the size capability to focus on the U.S. market to make sure we have the appropriate products for that market. And we have to gain our service level. Currently, our field rate is above 95%, coming from below 70% a few months back.

In addition, we're working on lowering our costs. We are consolidating operations in Mexico to improve the throughput and brought back targeting the manufacturing, R&D and sales operations team. Quality has improved significantly and unit costs excluding the lower volume absorption impact is also lower. And working on improving our working capital to make sure that we have the right inventory in place to serve our customers.

One of our key priorities for Vitromex is the U.S. turnaround execution. As such, our efforts remain focused on this goal, and we do not -- and we do expect a gradual strengthening, however, it will take time. We do not expect a reversal of the trend until the second quarter of next year.

Calorex. Calorex once again exceeded our expectations. The upbeat sentiment in the construction industry, particularly in the vertical construction significantly helped us gain market share and demonstrate brand reliability. This in addition to strict cost controls and continued operating efficiences led us to double the EBITDA levels during the quarter.

Calorex posted 70% revenue growth to MXN 627 million in the third quarter and double EBITDA to MXN 50 million. It's a solid performance attributable to the positive dynamic of the construction industry, a better price and mix and improved operating efficiency and cost controls. We remain optimistic for the top line trend in the short term and expect an expansion in U.S. market share for the medium term.

And now finally, let me go to Cinsa, the houseware sector. Market dynamics during the quarter remained strong. It pleases me to say once again that Cinsa continued to be the Mexican family's main supplier of choice within a highly competitive market. A good example of this is our great success in Walmart. We have doubled our sold-out increases despite having additional Chinese competitors in the picture. As a result, we posted double-digit top line growth during the quarter and 9-month period.

EBITDA and EBITDA margin for the third quarter were MXN 8 million and 2%, respectively, both of which were negatively impacted by a significant increase in raw materials, currency fluctuations during the quarter resulting in foreign expenses and better fixed cost expenses, partially offset by a better combination of price and product mix.

For year-end, we estimate a stable top line profitable growth versus 2017 and in the medium and long term, the houseware business aims for higher margins and higher market penetration in U.S.

Finally, regarding GISSA's debt position, this is in line, this line item reached $405 million comprised of 58% in dollars, 19% in euros and 25% in pesos -- 23% in pesos, sorry.

In line with the company's strategy of maintaining a solid flexible balance sheet, debt-to-EBITDA ratio was 2.9x. Net debt-to-EBITDA ratio was 2.5x and interest coverage was 5.1x, both in line with the covenants set by the financial institutions.

In terms of CapEx, the company has invested over MXN 500 million in the last month to increase capacity in food process and profitability, and we expect to reach MXN 800 million by year-end.

I appreciate your attention. This concludes my presentation. And at this point, I want to ask the operator to please proceed to the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] We do have a question from Luis Miranda of Santander Bank.

[Luis Miranda, analyst]

And just trying to understand this effort with regards to the research and development initiatives. And this 1% of sales, what is the trigger that you're expecting to materialize or what will be the triggers in order to jump from the 1% to 2% in R&D? And if this could happen, if this is, I would say a medium-term initiative, when will you evaluate this? And the second point is with regards to Vitromex. You mentioned the price increases and the initiatives in Mexico. I just want to understand is -- this is having -- or are you seeing an impact -- an additional impact in volumes or volumes are not been affected? And what kind of profitability could we expect for 2019 -- or improvement in volumes in 2019?

[José Manuel Arana Escobar, executive]

Yes, I'll take a stab at the first question related to R&D and engineering in Draxton. We have been working about a year in developing this new strategy of investment and the first thing with it was for the team internally and externally, and currently, we announced new organizational structure led by the global R&D leader José Manuel Corrales, located in Bilbao in one of our research centers. And we defined a set of products that we will focus on. And basically, what we are aiming is to codevelop products from the beginning of the development of the OEM and Tier 1s, so that we optimize the product, we increase strength, ensure quality and the most important is reducing waste and cost of production to be competitive. So these efforts will translate in higher sales, better profitability and ensure that we are also investing in the machining component of our business. We see that our mix of machined products will increase, for which we need further research and engineering as we're getting closer to the OEMs. I don't know if I answered the first question.

[Luis Miranda, analyst]

Yes. Yes, you did. Just one -- just a technical follow-up. So this jump from 1% to 2% it's more, could we say a [ 2010 ] initiative more than a 2019 initiative?

[José Manuel Arana Escobar, executive]

Yes. This is like a 3-year scale-up both in people, primarily it's people that will be allocated to our research center, and we will develop specialty teams for product families, and the second biggest investment is related to actual research with inside and outside universities, technicians, primarily of metals and alloys to increase resistance parts, primarily on iron. On the second question of Vitromex, you're right. I think that we do expect volume increase in Mexico, but the turnaround in terms of pesos that go all the way down to EBITDA will come from a better pricing and a combination of mix and portfolio rationalization, where we by eliminating lower profit products and increasing the volume of better profitability of products just by changing -- even if we sell the same volume, we expect a significant turnaround of about MXN 100 million. That is very impactful on our income statement, and that's one of the elements of what you saw. Our outlook for 2019, I cannot give you a specific number. All I can say is that we will go back to profitability, and we are going to set ourselves for 2020 to be close to our industry standards.

[Operator]

We'll take our next question from Alejandro Azar of GBM.

[Alejandro Azar Wabi, analyst]

Two questions, one on -- first on Vitromex. You mentioned industry standards. Would you clarify for Vitromex where those industry standards you're trying to achieve on 2020? And I just want to understand what is happening with the U.S. portfolio renewal process. How -- does it come from declining 50% in volumes? What is happening to the operations in the U.S.?

[José Manuel Arana Escobar, executive]

I'll give you a sense of what's happening in the U.S. in the last probably 24 to 36 months. Chinese products have been coming to the U.S. at very low prices. And to -- even though there is not a dumping on by the U.S., you can see that by increasing their duty from 10% to 25%, there is a significant damage to the local market, and that will -- just by itself will help us gain volume that the key customers were importing themselves from China. That's one of the element. The second element is, we need to focus on our design, so that we change about 20% of the product portfolio every year, so that every 5 years, we practically renovate our product line. We failed to pay attention to the renovation of portfolio. So the combination of the 2 are the main reasons of volume declines. For the 2020 industry standards, if you look at our long-term profitability, which is basically daltile, Interceramic and Lamosa, you're looking at EBITDAs from 12% to 16%, and we need to be by 2020 reaching those standards.

[Alejandro Azar Wabi, analyst]

Okay. And again, on Vitromex, you mentioned on -- I think it was Jorge's remarks that you're expecting a better economic trend in the second quarter of 2019. I just want to make sure you referred to the -- like economic conditions like GDP growth or are you taking into account that your -- given your new strategy, despite how the economic trend will come in the next few years, you are going to normalize these operations?

[Jorge Armando Perez, executive]

What I meant really is that even with the poor performance that we're seeing in the numbers, there's things that we are seeing that are making progress, which are basically -- the drivers that we have mentioned is pricing in Mexico and volume in the U.S. are the key drivers of the rise. So we are seeing pricing increases month to month in the key segments in the Mexican market. And we also see we're starting to pick up customers in the U.S. Both of those things are telling us that we -- as we brought projections that we should be seeing some of the devices in red starting to turn devices in black starting next quarter -- second quarter next year. That's sort of the -- what we are seeing. And this is within an economic environment which is stable. If the current environment change, would that have an impact, no. But given our economic environment, which is stable, the trend that we are seeing and our ability to get more price realization in Mexico and start to regain or reactivate customers in the U.S., and where we are seeing things will allow us to turn into the black by the second quarter of next year.

[José Manuel Arana Escobar, executive]

The main reason of why the speed of change in the tile business is not faster is because most of the industry carries around 70 to 90 days of inventory. So we need to change the landscape of the inventory to start executing the better margins as we turn this into black. We may see improvements from the results that we have currently, but not to the level to be positive in late Q2 of next year.

[Jorge Armando Perez, executive]

Let me just -- sorry, let me just add one thing. The importance of the key of the U.S. market works in 2 ways for us on the handle. One is helping the leverage of the company, operating leverage, because as I mentioned, this business, the U.S. market, at some point, Vitromex sold almost 8 million square meters of this, with loss more than 60% of that. So it helps on the leverage, but also the marginal contribution of the U.S. business is much higher than the Mexico business. So the U.S. market in which we are focusing a lot, the part regarding the team is very important. The ability to have a team on the ground, that is executing, that is able to open doors, again, is very important. And that is what is going to start turning around the economics of the business significantly. Mexico as -- the quarter grew and we grew in a tiny market, a market that has probably shrunk 4 percentage points, to be able to sustain that we have to invest in pricing, and we delivered because we needed to make sure that we kept the scale that we need to keep our cost at a competitive rate.

[Alejandro Azar Wabi, analyst]

And a final one on Vitromex. How are your capacity utilizations today? And how they compare to, let's say, 2017 on Vitromex?

[José Manuel Arana Escobar, executive]

Yes. Capacity may have -- we have 2 effects. As we are changing our inventory landscape, we are starting certain lines to provide maintenance to the kilns. So that we, when we turn them back on, they are more efficient and we can lower our cost. In -- we are around 70% -- 65% to 70% currently. But as we go back, what we are trying to do is to produce less volume than what demand is, so we can manage inventory and get back to the levels of inventory with the right mix of inventory. So what we will have at the end of the day, after probably a 12-month maintenance program in about 42 lines that we have, will be the result of an increased capacity of about 15%. So at the very end, which will be probably June of 2019, we will decrease cost because of the technology improvements and maintenance primarily on the kilns.

[Alejandro Azar Wabi, analyst]

Perfect. And one thing...

[Jorge Armando Perez, executive]

Around 80% to 80-plus percent of our capacity. Capacity will not be a constraint.

[Alejandro Azar Wabi, analyst]

Okay. And on the automotive sector, especially in Europe, you mentioned the regulatory environment. Because we've seen during the past year or 18 months that the diesel market share has declined severely. But you haven't had a volume decrease during those periods. So my question is, how is your exposure to the diesel engine market? And how can you explain what is happening in the region in terms of regulation?

[José Manuel Arana Escobar, executive]

Yes, we are not exposed in the diesel engine. Diesel engine uses primarily crankshafts that come from another process that we don't utilize and don't sell.

[Alejandro Azar Wabi, analyst]

No, but I mean, José Manuel, how your other products, your brake disc, your calipers and brackets exposed to vehicles on the diesel market?

[José Manuel Arana Escobar, executive]

Yes. The diesel market is having a small bubble and what you're seeing is big sales of diesel cars because OEMs want to get rid of their inventory. So what you're seeing is, September 1, we had a European regulation in place. So since June, July, August, September basically, what we've seen is that OEMs have increased their sales in diesel cars going through a lot of discount programs, which has impacted in the sales of gas -- gasoline cars. That is what is impacting us, primarily. What you will see in the future as we see more gas cars coming in versus diesel cars going down, we see this is an opportunity, as our crankshafts are more suitable for gas engines than for diesel engines. So we are already seeing a shift in the near future to gas engines that will primarily benefit our sales in the crankshaft. But yes, there was an impact in sales and also in the manufacturing of cars, because OEMs want to get rid of the diesel inventory. It will get back. It will get back to the normal production plans with the exception of one American OEM that is struggling in small cars.

[Alejandro Azar Wabi, analyst]

Do you happen to have a -- an inventory sales ratio in Europe?

[José Manuel Arana Escobar, executive]

Inventory sales ratio, you mean of cars or...

[Alejandro Azar Wabi, analyst]

In cars, yes, yes, yes. Because the question is more related to, given the sound demand we've seen during 2018 and the lower production levels, I don't know if inventories have come lower than 2 months of sales. So in the next 12 months, you're going to produce more to fill up those inventories?

[José Manuel Arana Escobar, executive]

I think that, that will hit us in Q1 of '19. Not right now.

[Alejandro Azar Wabi, analyst]

Okay.

[José Manuel Arana Escobar, executive]

And this is -- I would say this is not general. Currently, I see several vehicles from GM and SCA that is impacting positively our sales volume their -- because their vehicles are growing and gaining market share, but overall the industry will be better in Q1 of '19 as a total.

[Operator]

[Operator Instructions] We'll take our next question from Jose Vazquez of GBM.

[Jose Vazquez, analyst]

My question is regarding the impact of the energy cost increasing in the automotive sector -- the business line. Because we have seen automotive companies that have reported previously, and they didn't have such a great impact, although they mentioned something, but not as big as the one that you are posting in your results. Although my question is, why the difference between those sort of companies that are practically in the same industry than you guys? That will be the first one.

[Jorge Armando Perez, executive]

Well, my understanding is that the impact was also important. Some of our peers -- one of our peers that has a presence, stronger presence in NAFTA, was quite clear that it has somewhat energy cost impact in Mexico or in the NAFTA region. And also some of our peers in Europe did mention that. So I think that was an industry-wide impact. What might change for them is it's a couple of things. One, their ability to offsetting the short-term with productivity initiative some of that, and also if their contracts have indexation to energy. We in international have some indexation involved for energy and scrap metal and other materials. We will continue going forward to find ways to deliver, including the contracts or find hedging mechanisms to make sure we continue to cover costs. We think we're in a good position regarding other industries and other players. The ratio of coverage that we have in our costs is quite high. In -- for the Draxton contracts, scrap is well above 90% and - so what we have to work on is in the legacy contracts on the new contracts that we have to continue to align them to the Draxton sort of guidelines of what is being covered. The energy cost was quite significant. The energy increase was quite significant in Mexico. In Mexico what happened, and this is also in the press and is widely known, what the government or the energy institutions allowed is for the tariff, which is called tarifa media, to increase much faster than it had in the past, and this had a significant impact in Mexico. In Mexico, we have a coverage of around 40% of the energy. So we are going to be able to cover some of that. Some of that will continue to hit Draxton, Mexico in the next quarter. And we are working on other ways to offset that. But yes, I mean, the -- in the presentation, we tried to show the -- what's happening in energy across the geographies, across the footprints in which we operate, and all our competitors did suffer the same with some variances in terms of -- given that the month of August was summer, some of them have -- might have lower exposure to the increment during the month, but yes, it was basically a worldwide impact.

[José Manuel Arana Escobar, executive]

And it may change from industry to industry. In Europe, we have contracts that have a formula to index cost on a yearly basis. So we follow the increase and only after a year, we can reflect that cost to the customer. In some customers, it's on a quarterly basis, so we will gain that cost on the following quarters. But basically, our strategy is to incorporate in all of our new products, 100% of energy in 100% of product. That is our new goal.

[Jose Vazquez, analyst]

Okay. Also with this, I see that the greatest impact of the scrap price was in China. Could you put only on a perspective from the $2.5 million that impacted on this specific matter, how much is from China and how much is from the other regions, please.

[Jorge Armando Perez, executive]

Yes. Most of it is China. China, as you may recall, it's a business that we acquired a couple of years ago, and most of the contracts are INFUN legacy. The design of those contracts did not proceed the levels of coverage that we have in Draxton and in other geographies. So we have 3 large customers in China, which are not have -- do not have an indexation on that input. So we are working with the customers and we will find ways to hedge that back. And also, we are working on offsetting that through productivity in other parts of the company. But that's yardage, basically, China in regards to that $2.5 million.

[José Manuel Arana Escobar, executive]

Most of it is China.

[Jose Vazquez, analyst]

Okay. And just one quick last one. I'm seeing in the numbers from the JVs that you registered a 20% increase in volumes and a 12% increase in sales. But then you go to the margins, first on the EBIT level that you see that we have only a 10% margin, and then also a 2 percentage point also in the EBITDA margin from JVs. Is this explained only by the energy? Or there are other issues that highly impacted the results of the JVs?

[José Manuel Arana Escobar, executive]

On Evercast, primarily, we are launching a second line, and the second line is not working at 90% of capacity yet. Very soon in the next 6 months, we will reach our capacity. So we are hitting most of the fixed cost of the ramp, basically, and the other impact is also adjusting our pricing to be competitive to gain not only to be at 90-plus in the whole plant, but we are seriously looking at future growth as well, after 2020.

[Jose Vazquez, analyst]

Okay, so a quick sum up. It's the energy impact and then the ramp-up of the second line in Evercast, correct?

[José Manuel Arana Escobar, executive]

Yes. And pricing.

[Jorge Armando Perez, executive]

And pricing.

[Jose Vazquez, analyst]

Okay. And pricing.

[Jorge Armando Perez, executive]

For pricing. So at the end of the day, we do continue to see the profitability of our JVs and Draxton as a whole. As I mentioned above competition, we want to remain very competitive in costs, and we'll continue to drive that basically down.

[Jose Vazquez, analyst]

Okay. Perfect.

[José Manuel Arana Escobar, executive]

And the other JV, we had a ramp. Now that we are ramping up our BMW disc brake which is 5-metal brake, we have had basically a 24-month scrutiny that we are launching early January, and now we are turning that business to a positive EBITDA.

[Operator]

[Operator Instructions] We'll take our next phone question from Mauricio Santos of GBM.

[Mauricio Santos, analyst]

I have a follow-up on Vitromex. I understand that the level of demand has eased off and you suffered some deleveraging, operating deleveraging as a result of that. However, I would like to know if there were any one-offs in Vitromex throughout the quarter, because the decline in EBITDA is 3x the decline in sales. So I was just wondering if there was any one-off. Are you drying down inventories?

[Jorge Armando Perez, executive]

Mauricio, this is Jorge. Most of the result is driven by the volume deleverage that is driven also by the U.S. market. As such, there is some one-off related to the [indiscernible] as we normalize volume, those things won't happen again, and then also we have some -- we terminated a few people. So yes, there is some one-off, it's about MXN 15 million amounted to the 2 items that we have that I just mentioned in the quarter. And this is part of the process in which as we are -- expect to rationalize. We also have some -- a bit higher maintenance because what we are doing, we've taken advantage also of the situation in volume to increase our maintenance in some of the equipment. So we're going to be doing that through the last quarter too. So those would be things that on a regular basis you would not be seeing.

[Mauricio Santos, analyst]

And just on this area of, let's say, start to production, or I think it's like [indiscernible]. It's like you will try to produce -- shorten the production lead time, shorten inventories, but just I would like to understand how much more CapEx do you need to invest in Vitromex in order to be able to fully renovate the portfolio every 5 years? I agree that the CapEx is -- has already been invested, right?

[Jorge Armando Perez, executive]

Yes, let me see if I capture the question. I'm not clear. Okay, regarding CapEx, if you recall the -- at the start of the year, [ CIT ] called out for up to about MXN 2.3 billion in CapEx. We are going to be around 50% or less of that for all the companies. I would say Draxton has basically executed what they wanted to execute, and what we have been more careful is in Vitromex. And we are investing what is required for the business as the business continues to perform. As José Manuel mentioned, a lot of our maintenance in Vitromex is driven by 2 things. One is maintenance, because a few years back, some of the orders were shut down for long time and they have to be almost rebuilt in some cases. And the other one is to catch up in the technology front. Because some of the process is more on the packing side, and things like related to having longer runs need to have some investment, and we are going to be doing those gradually, as José Manuel mentioned. And hopefully by the mid of next year, we should be in good shape to be running all our lines around 80%. Now regarding investment for these products, that, really, there is some R&D on that. But there is not much CapEx that is required for that purpose.

[Mauricio Santos, analyst]

Okay. You basically...

[José Manuel Arana Escobar, executive]

I would say that we are currently being very careful on what we invest in CapEx. It's primarily aligned to the future demand and changes that are happening. We will invest this year, basically around our depreciation, and next year, will be the same. And with that, we think we can turn this around.

[Operator]

This does conclude our question-and-answer session. I'd be happy to return the call to Mr. Arana for any concluding remarks.

[José Manuel Arana Escobar, executive]

Guys, thank you very much for the call, once again for your continued interest in GISSA. Please don't hesitate to contact us if you have any further questions. You guys, have a great day.

[Operator]

This does conclude today's Grupo Industrial Saltillo's earnings conference call. You may now disconnect your lines. And everyone, have a great day.