Grupo Rotoplas SAB de CV

BMV:AGUA

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, and welcome to Grupo Rotoplas Conference Call. Please note that today's call is being recorded [Operator Instructions]. Today's discussion contains forward-looking statements. These statements are based on the environment as we currently see it, and as such, there may be certain risk and uncertainty associated with such statements. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, further events or otherwise. Please allow me to remind you that the company issued its earnings press release yesterday after market close.

It can be found in the Investors section of its website. Also, the presentation for the call and the webcast link are in the Investors section.

Today's call will be hosted by Mr. Carlos Rojas Aboumrad, Chief Executive Officer; and Mr. Mario Romero, Chief Financial Officer. I will now turn the call over to Mr. Carlos Rojas.

[Carlos Rojas Aboumrad, executive]

Hello, everybody. Thank you for joining us today. As always, I am glad to have the opportunity to discuss with you our latest efforts and results. As we talked about in our last call, 2020 was an extraordinary challenge. As it turns out, it was also an extraordinary opportunity to adapt and continue holding, fulfilling our ultimate purpose to bring more and better water to our clients and communities. We achieved our growth and value creation goals for 2020 and continued with this trend during the first quarter. But most importantly, we also strengthened our ability to address the changing needs of our societies, taking advantage of global trends that continue to change the way we use and, perhaps, more importantly, that we would protect our scarce water resource.

What we know changes -- sorry, what do these changes look like, specifically in the context of COVID-19 pandemic? We have counted more than 50% of the time in this report, and an increase in the water bill as a result of staying at home. Second, people in Mexico, Central America and the United States are investing in improvements to their homes, creating a great opportunity for solutions such as ours that can help reduce water consumption.

Third finding is even more interesting. We found that the population is more concerned and conscious about water shortages, water pollution and about true quality of water supply. And finally, and perhaps most importantly, we have discovered that having access to drinking water became a top concern during the pandemic, trailing only behind health, unemployment and the performance of the economy. It is clear that having access to premium and tenable water supply is now a top priority for our societies and our customers.

These findings are not surprising. Across our markets and throughout the world, the demand for water continues to grow unabated. This causes water stress, which happens where demand exceeds the supply and, combined with drought, another national phenomena, it is driving society's interest for smarter and more sustainable water solutions. The pandemic has been, in a way, a catalyst, an accelerant for changes that were already taking place. Some companies have adjusted to these changes by adopting better sustainability practices, but we need to go further. Not only have we deepen our commitment to ESG principles and practices and continue to reduce our own footprint, but we are helping our clients and communities to improve their access to water and efficiency with which they use it.

We help families, companies, industries and farmers to reduce the environmental impact. We have adapted and thrived by addressing new consumer habits and global macro trends, but also crucially by adopting a more conscious approach, giving equal priority to people, the planet and profitability.

We have been able to do so to our Flow transformational program, which is now a key component of our organizational structure. As some of you may recall, we started from 2019 identifying new avenues for growth and is signing the process that would help us achieve our value creation goals. In 2020, the program enabled us to reach these goals and elevate across all areas of our company, contributing very significantly to our growth and EBITDA, enabling to launch over 23 new solutions and increasing our returns on invested capital above our cost of capital. This year, Flow is already at the core of the way we operate. As reflected in our 5-year plan, driving goals to continually reexamine our strategies and operations. As such, it is also that the core of the comprehensive strategy we are implementing, which merges the corporate and sustainability components to create value, drive sustainable growth and give priority to our organizational health.

Our organizational culture is embodied in the Rotoplas way, which we have updated, so it is aligned to the evolution of the company.

At the center of our day-to-day operations, we have a very good purpose, improving the quality of life through water solutions in a sustainable fashion, and we do so by focusing on the development of our people, being passionate about our clients, catalyze innovation, seeking performance multipliers as well as learning, operating and evolving in a natural fashion. It is who we are, the culture we have built, and it is our path forward.

About Flows' evolution, we're happy that this path continues to bring about a very positive results. We grew this quarter 26%, thanks to our ability to address the new water needs I mentioned earlier. And 17% of sales are linked to Flow initiatives. During the quarter, we launched 6 new solutions across the region. In Mexico, we introduced flexible hoses and new water culture, water softeners and electric showers, electric showers. We're also putting the market new solutions in Argentina and Peru as well as new models of pain in Peru. We have allocated MXN 59 million of CapEx to Flow-related projects during the quarter and we managed to fully execute more than 40 initiatives. Also, the cash conversion cycle was optimized by 34 days.

I am I'm also very glad to share with you that as part of our 5-year sustainable growth plan, we continue to improve our ROIC, which reached 14.8%. And our teams are fully committed to this transformation, and we will continue to lead our efforts to continuous improvement. During the period, more than 750 people were directly involved in the transformation program. It's important to note that we have, and we will continue to maintain our focus on the health and safety of our team. Through their efforts and the loyalty of our customers, we are well on our way to achieve our goals for this year.

Now before turning the call over to Mario, I would like to invite you to read our annual report, which will be published on April 30 in our website. The report is a key part of our transparency efforts, and we've elaborated and verified using high standards and frameworks. This year, apart from GRI, we have aligned to SASB and TCFD recommendations. It is also a great way to better understand how our company is doing. It starts to help secure a better future for all of us. Thank you again for your time. I will now let Mario guide you through our quarterly results. We will answer any questions you may have afterwards.

[Mario Antonio Romero Orozco, executive]

Thank you, Charlie, and good morning, everyone. Thank you for joining us today. As you have heard, we registered a very strong first quarter, growing by over 26% due to increased demand for our products, which was brought about by water stress, droughts and the new consumption habits that Charlie was explaining. We grew by double digits in all our markets, except for Mexico, where we registered an 8% growth in sales due to the contraction in demand for certain services, which I will discuss in further detail in a moment.

As a matter of fact, our net sales and EBITDA are a first quarter record. And even if we account the impact of the pandemic at the end of the first quarter of 2020, sales will have increased close to 20% and EBITDA around 24%.

That is, we registered record growth even after considering the typical nature of March of last year. About COVID, and our operation status, we remain vigilant, and we continue to comply with the strictest safety and hygiene protocols to protect the health of our personnel in our facilities and while working in the field, including periodic testing and regular workplace sanitation measures. Our administrative staff continues to work remotely.

In terms of our financials, we registered strong demand for our solutions accounting for more than MXN 2.4 billion in revenue. Our gross margin decreased due to pressure in raw material prices, partly as a result of the extreme weather conditions in the United States in February and the increasing demand as the global economy starts to catch up. However, we retain ample liquidity, are achieving consistent economies of scales and have built a network of local and global suppliers and increased our inventory to ensure an adequate supply. And while this has increased our working capital, it also ensures us against future disruptions.

In the same vein, we continue to add new personnel to maintain productivity, by complying with all sanitation standards and guidelines. Our operating margin decreased during the quarter due to the expenses associated to the Flow program, which amounted to MXN 75 million and accounting of MXN 6 million related to the implementation of health and safety measures during the quarter. Nevertheless, it is worth highlighting that our expenses grew at a much slower pace than our sales, evidencing that increasing efficiency we have achieved through Flow and execution discipline it entails. Our adjusted EBITDA, after accounting for onetime expenses, grew 31%. While our net profit contracted year-over-year, it is important to mention that this can be attributed to the fact that in the first quarter of 2020, we recognized a onetime gain when we closed our FX coverage position at a significant profit. Excluding this factor, net profit will have increased 66% year-over-year. We believe our overall results showcases how our company has evolved and adapted to the new reality of our societies, addressing our customer needs as they also evolve and adapt to their circumstances across our markets. We are willing and able to leverage our unique corporate culture, the Rotoplas way, to ensure that we are allies of our clients and communities as they navigate the changing environment. And execution discipline and innovation generated by Flow allow us to just to that.

Now as to our geographic breakdown, sales in Mexico grew 8% during the quarter due to the strong demand for our storage and water flow products, including the new ones that we are added to our portfolio as a result of Flow. The growth in sales of our products compensated for the contraction in the sales of services.

Net quarterly sales in Argentina grew 76%, driven by double-digit growth across all 3 categories: storage, water flow and improvement as well as a growing share of the export business, which grew more than 100% and now accounts for more than 5% of total sales. The adjusted EBITDA margin also increased to reach 14.5% as a result of the regularization of operation and an increase in sales volumes.

Starting this quarter, we will disaggregate our results in the United States, reflecting its increasing importance. Sales in the United States grew 29%, amounting to MXN 256 million, which represents 11% of total Group's revenue. This growth was driven by the increased consumer confidence resulting from vaccination rollout, by higher demand of water for agriculture in California, and by the migration of our communities, which require further investments in water solutions due to less public infrastructure.

Despite the disruption caused by the polices for 1 week in February in the southern region of the U.S., we increased the number of procuring and new clients, while also expanding the availability of solutions in our digital platforms, which were updated last year. This updated, combined with our improvements in delivery logistics, and the evolution of our 8 physical stores to service centers has improved the customer experience and catalyze growth.

The adjusted EBITDA for the U.S. amounted to MXN 19 million. The 7.5% EBITDA margin as a result of both increased volumes and the average of sales ticket. In contrast with the negative EBITDA we recorded in the first quarter of 2020 because of the investments we made to optimize our business. Sales in Central America increased by double digits during the quarter, partly driven by the reopening of the retail sector and the reactivation of homebuilding in the region. We opened a new plant in Managua, Nicaragua, at the end of March. This new plant will supply Costa Rica, Panama and Nicaragua, and will enable us to increase market share and improve our logistics in those countries.

Sales in Peru also increased by double digits, driven by the increased demand for our solutions, including the ones introduced during the previous quarters as well as increasing consumer spendings due to the fact that the government allow the withdrawal of retirement funds as a pandemic relief measure. Finally, we continue to focus on strengthening the presence of our wireless service platform in Brazil, including our sales teams. We have 4 water treatment recycling plants now in operation as of the end of March.

As for the mix, product sales grew 30%, driven by the trends we have described and by the initiatives undertaken within the Flow framework. As Charlie mentioned, during the quarter, we introduced new solutions, and we continue to increase our sales force efficiency and our participation in online sales, which have become a key component of the new market landscape. The strong growth of product sales compensated for the contraction in sales of services, which fell 20% due to 2 factors: one, and most important, ongoing school closures in Mexico, which affected the water fountains business; and two, the delay in contract signings for new terminal recycling plants resulting from the uncertainty that industries and commercial are still facing.

We remain, however, in a leadership position in both markets and are fully prepared for the eventual recovery. Navia, nonetheless, continues to grow solidly, increasing close to 2.5x in numbers of points of purification during the quarter. In terms of our portfolio mix, sales of products during the quarter accounted for 95% of total sales and services for 5%. Our government sales as a percentage of total sales amounted to less than 4% in the quarter, well below our 10% goal.

Talking about our cash position. We optimized our cash conversion cycle by 34 days. And we continue reviewing our terms with the related parties with the weekly Cash Control Tower. Our net debt-to-EBITDA ratio is 0.8x and well below our 2x ratio policy, and a level that we believe is more than adequate to sustain an accelerated growth rate as economic recovery continues across our markets. It is worth noting that our debt position consists the sustainable bond, which, as we have discussed in the previous quarter, net MXN 4 billion. It also considers a bridge loan in Argentina pesos for working capital and a loan in soles, which was rented by the Peruvian government as a measure to reactivate the economy.

During 2020, capital allocation was part of our focus. And on this quarter, on 2021, CapEx amounted for only 3% of our total sales, amounting to MXN 71 million.

I would like to note that as some of you may remember, we have a specialized committee to enhance control and accountability across our businesses. The capital allocation committee ensures not only that every project fulfills our criteria in terms of internal rates of return and net present value, but more importantly, that is aligned with our comprehensive strategy, including ESG parameters and criteria. Furthermore, as the committee keeps tracks of the resource allocation and the preliminary results of each project on a quarterly basis, it is possible to adjust in an agile manner.

Talking about ROIC. Now this was very, very good in the quarter, which stands at 14.8%, a 440 basis points year-over-year expansion. We remain committed to generating value by continuing to pursue initiatives and actions within the Flow program, including greater discipline in capital allocation, increased production efficiency in our manufacturing processes and maintain a strict expenditure discipline across all of our operations. Now moving into ESG. Charlie has already discussed the key aspects of our most recent ESG initiatives. But I would like to reiterate the invitation to check out our ESG KPI dashboard, which is available on our website as well as the annual report that we will publish in the coming days. During the first 3 months of the year, we have concluded the materiality assessment under the methodology proposed by the global reporting initiative and the Sustainability Accounting Standards report in order to have an approach that contemplates all stakeholders and also focus on financial risks. With the results of that materiality analysis, we are updating our sustainability strategy that is aligned with the 2021, 2025 business program.

As you may recall, our 5-year plan for sustainable growth has the goal of doubling sales and increasing profitability by placing the people, the planet and profit on equal touring. We believe this makes Rotoplas a 3-factor story, a growth and value investment, but also, crucially, a key player in helping to reduce environmental footprint of our customers and community and address water stress and supply disruptions.

We create value for our investors, while upholding the best ESG standards and practices and becoming an ally for those who work towards the common good. Sustainability is at the core of our purpose and our DNA.

Finally, let me finish up with the heads up around 2021. We anticipate raw materials and energy cost pressures going into the second quarter and third quarter as the global economy shifts into growth mode. However, given our growth in revenue and strong leading brands, we continue to expect net sales to increase more than 10% and adjusted EBITDA equal to 19% and to keep the net debt to adjusted EBITDA ratio below 2x. We also expect to continue creating value as we maintain our return on investment capital well above our cost of capital. Thank you very much for your time. Now we will move to the Q&A that you may have thank you.

[Mariana Fernandez, executive]

Thank you, Mario and Charlie. We will start with the first question. Across pandemic, are you expecting a slowdown in sales growth as we are seeing with other pandemic winners, Netflix or Amazon?

[Carlos Rojas Aboumrad, executive]

Our case, I think it's a little bit different. There's a tremendous market in terms of size that is yet to adopt new solutions, this new approach of the centralized solutions for servicing customer water needs. So I think that we still have a long way ahead of us in terms of market transformation from traditional solutions to decentralized solutions. And so no, I don't think it will be the case for us. I think the case for us will be rapid growth as adoption of our solutions continue to happen now going from innovators and early adopters to early majority.

[Mariana Fernandez, executive]

Thank you, Charlie. The next question. Could you please share guidance in terms of free cash flow generation for 2021?

[Carlos Rojas Aboumrad, executive]

Mario?

[Mario Antonio Romero Orozco, executive]

Good morning, and thanks for joining us this morning on the webcast. Well, as you might see, in the first quarter, we saw free cash flow reduction. This is a 2-story question. One, the growth of 26% really required more capital as we increase our accounts receivables and inventory levels. But on top of that, due to the growth mode that now we are all seeing in the different components of the world economy. We are seeing shortages in some of the raw materials. So what the company has done to secure raw materials is anticipating payments to vendors and securing more inventory than usual. That, I think, is going to be prevailing in the second quarter and third quarter.

And then as the supply chain is stabilized, we think that, that will come back to more normal levels in the fourth quarter. Having said that, the company's growth will demand more working capital, which is our main focus. And those pressures coming from shortages will pressure our free cash flow generation in the second and third quarter. As for year-end, we are anticipated to create a free cash flow. We are now in the ballpark anywhere from 5% to 8% of revenue as free cash flow generation. But that depends largely on how this shift to economic growth turns out.

You may probably saw in the news a couple of days ago how fast is China growing GDP wise, 18-plus percent. Some of our Board members are expecting second and third quarters in the U.S. be a high-growth economy. So that is changing a little bit how we are facing working capital. And so far, management has decided to favor growth and market share and not -- despite investing more in working capital.

And finally, the strong balance sheet that we have helped us navigate this situation in an ample way. Thanks for the question. It's a very interesting and complex question right now.

[Mariana Fernandez, executive]

Thank you, Mario. Moving to the next question. Thomas Pinto Basto is asking, can you provide some color around the Flow-related MXN 75 million expense? What did it comprise? And could you confirm that Flow-related expenses are done?

[Carlos Rojas Aboumrad, executive]

I'll let in a second, Mario, answering in a little bit more detail about on Flow, for now, will continue to generate the expenses. Some of the expenses might be fees and fees are success based. And so that will continue to happen as initiatives materialize. Other initiatives require other kinds of expenses. And we will continue to pursue growth paths outflow, which will possibly have onetime expenses. This year, we'll be focusing very much on digitization and advanced analytics. We'll be focusing also in accelerated growth businesses, also strengthening on our capabilities in natural innovation. And also development of talent. So just regarding this MXN 75 million, Mario, and going forward, anything else we can share?

[Mario Antonio Romero Orozco, executive]

Yes, we indicated the market, I think it was 2 quarters ago or 3 quarters ago that we were anticipating to have these slow expenses until the fourth quarter of 2021. So that's something that we disclosed previously to the market, and that will be showing as a separate item, so for clarity and transparency for all of our communities.

[Mariana Fernandez, executive]

Thank you. Moving to the next question. Mariana Cruz from BTG is asking. A follow-up question on the working capital cycle. If you are seeing further improvements in the coming years? Or are you already working under the most efficient structure? Thank you.

[Carlos Rojas Aboumrad, executive]

Thank you, Mariana. Just very quickly. We have a few businesses that have a better conversion cycle. Such as retail. And as they grow, they might improve the conversion cycle for the business in average. On the other hand, we did invest heavily in inventories to be able to navigate this complicated supply days as Mario was explaining before. And so I think there's opportunity for further improvement in the conversion -- in the cash conversion cycle. I wouldn't be able to tell you how much we will improve this cash conversion cycle, but the trend should be to continue to lowering that cash conversion cycle. There might be other effects from other businesses that have a little bit longer cash conversion cycle such as services in which we invest in equipment. So it might be an effect of a result in the speed at which these different businesses grow at. Mario?

[Mario Antonio Romero Orozco, executive]

I think you just said, and I think the second and third quarter, in terms of inventory and accounts payable, I think those KPIs are not going to be our main focus. We have other focus on growth and using our financial strength to gain market share or launch new products. And I think it's better than losing market share. Quick data in all of the market shares in different segments that the company participates in the first quarter, in all of them, we gained market share. So I think that strategy is paying off. That is why I said, in the fourth quarter -- once the supply chains tend to normalize, I think then we will be going back to optimize the cash conversion cycle. So we will need to be elevate patients going into second and third quarter because of what we mentioned.

[Mariana Fernandez, executive]

Perfect. And we have another question from Rodrigo Salazar. Congratulations on the results. I have 2 questions. Sadly, there are some crucial conditions in the water availability in Mexico, and I believe some other countries have the same conditions. How can Rotoplas can take advantage of these? And what are the products that get the highest benefit of this situation?

Secondly, we have seen polypropylene and polyethylene prices rise drastically recently. How big can be the impact on that front? And what are you expecting here?

[Carlos Rojas Aboumrad, executive]

So let me answer your first question, Rodrigo. Thank you for your question. It is unfortunate that we're casing these scarcity situations. It's not something that we like to see in general for the world, but it is of opportunity for Rotoplas. So we look to service these opportunities with solutions that provide availability of water and quantity of water. As scarcity grows, not only is there less available water, but water tends to be of lower quality. So solutions such as storage or rainwater harvesting, which are tremendous solutions to serve the lack of availability of water, our solutions are going to continue to see tremendous growth. It is a great challenge to service this growing demand in today's supply days. But what it has developed tremendous capabilities in the supply chain on where I can tell you. This may be part of the reason we're gaining market shares in businesses where we might already have very high levels of market shares. Because our practices to source and anticipate the demand are very, very ahead of anyone else doing this.

In terms of what our availability as well, water treatment and reuse is a great opportunity. When the suffering from lack of water for being a business for your main operational activities such as manufacturing or, let's say, a hotel and servicing your customers, you start looking for the alternatives to decentralized services, which is taking matters into your own hands, treating your own water, being sustainable and making sure you have more availability of water. So also a great opportunity for water treatment at sites. Hopefully, as soon as business starts getting back online, we start improving our book.

And then the last one is just on water purification for homes. People want to have home purification filtering on, people want to have better quality of water, and they won't see on a diminishing quality as scarcity grows. And so people will want to do something different in terms of filtration and purification. And Mario, will you care to answer the second one in terms of prices?

[Mario Antonio Romero Orozco, executive]

Sure. And just let me just complement on what you just mentioned, Charlie. Charlie, at the beginning of the webcast, he was mentioning about the findings on these extensive market research that we did that took us more than 6 months to complete it. And when you see the top 5 priorities of what people in the Americas are saying, one, is the access to drinking water. But there are other 2 that are connected to water, which is health as the #1 issue. And the other one is about environment and pollution. So taking apart the economy, which affected a lot of people, there are 3 components that reinforce themselves, water, health and environment consciousness. So I think that's going to play a big role going forward. And some of our services and products have tremendous upside on that.

To your second question, Rodrigo, yes, we are facing increasing raw materials for the reasons explained. As a company, one of the good things is that we have leading brands. And having a leading brand can help you manage that the market price is better. So what we are doing is, we are constantly reviewing our cost and our pricing in the markets so we can be agile on not losing or eroding our gross margin. So what we're going to be doing in the second or third quarter, where we are feeling out that pressure, we're going to be very focused on pricing in all of our countries and market segments to offset the increase in raw materials. And thank you for being today, Rodrigo, I didn't say hello and good morning.

[Mariana Fernandez, executive]

Thank you, Mario. We have another question from Bernd. Do you see the service revenues bouncing back after the pandemic has ended? And what is your future expectations, 2022 and beyond for this business? And could you please shed some light on the bebbia business?

[Carlos Rojas Aboumrad, executive]

Thank you very much for your question, Brent, and thanks for joining us. We do see services bouncing back up after the pandemic. Bebbia has been performing phenomenally in attracting new customers. It is a very new service. So the base is very small. And growth to revenues from bebbia do not impact enough the services business, yet it is a business that's growing exponentially. So as soon as it gains some critical mass, the impact for the business will begin to be relevant.

In terms of schools, hopefully, once they come back, there is more traction there, but we are really focusing on sites and finding a way to start closing deals with all of these customers who will be suffering from water scarcity and from stricter regulations. So we do see great opportunity for us going forward, and we are strategically focusing on this business and allocating resources to this business. So I -- we believe revenues will bounce back in general for services.

Regarding -- let me answer your third question first or next, and then we'll go to your second question. But bebbia, okay, I guess, I already mentioned that bebbia grew very strongly last quarter, continues to grow exponentially. In general, Net Promoter Score is very high. And so we do believe that this is the way people want to move forward in terms of how they want to drink water, where they are being more sustainable, being of more -- providing more on tranquility to people in terms of availability of clean water and the quality of water. And Net Promoter scores are very, very high for bebbia. So we do see this business continuing to grow in a very accelerated manner.

In regards to our future expectations, we did share guidance for 2025, on -- Mario if you can please share on what is that guidance?

[Mario Antonio Romero Orozco, executive]

Sure. We expect to double the sales using 2020 as a base year and to have the ROIC in the neighborhood of 20%. And obviously, the net debt-to-EBITDA ratio to be below 2x. Those are like the 3 main components for the 2025 guidance.

[Carlos Rojas Aboumrad, executive]

And maybe are getting close to 20% as well with the margins. I don't know if you would like to comment. Mario, put anything else?

[Mario Antonio Romero Orozco, executive]

No, I think really I don't have any complementary add to do.

[Mariana Fernandez, executive]

Perfect. We have another question from Liliana De Leon. How much of the product growth comes from new launches?

[Carlos Rojas Aboumrad, executive]

So what I can share with you is something I mentioned at the beginning of my statement, which is that about 17% of sales are related to new initiatives from Flow. There have been very relevant growth. And this MXN 440 million in additional sales that was being signaled is greatly due to Flow. And in general, there's a lot of new products being launched this year. We did already a big number on the first quarter. And there is even new products such as the dual tank, which are not only on just better products than our traditional ones, but they are -- and not only substituting traditional products, but also gaining new market share, gaining a lot of traction.

Anything that you'd like to complete, Mario?

[Mario Antonio Romero Orozco, executive]

I would say that probably what we were just discussing yesterday in the Board, where we're going to be launching more products this year than in the last 10 years. So part of the transformation is not only about efficiencies, but this also speaks about growth. And the biggest component of growth is going to be coming from new products or services in the coming years.

[Mariana Fernandez, executive]

We have another question from Rodrigo Salazar. One more question, if I may. In the M&A front, are you still interested in the U.S.? And have you seen clear any opportunities?

[Carlos Rojas Aboumrad, executive]

We're most definitely -- we're most definitely interested in the U.S. In general, organically and inorganically, we're very interested strategically to grow in the U.S. as the U.S. is such a big market and offers a great opportunity for diversification for Rotoplas. And I'll let Mario complement on the M&A strategy.

[Mario Antonio Romero Orozco, executive]

Yes, it is a market of our interest. We are seeing very interesting dynamics in the U.S. and tailwinds as well. We -- by the end of last year, we do an in-depth analysis of the segments of our interest, and we are reviewing opportunities to maybe growth inorganically. On top of that, recently, we -- as part of that start, we find out that there's a growing concern around tap water in the U.S. So that creates more opportunities to the businesses such as bebbia. So in a nutshell, yes, we are very interested in the U.S. to continue growing organically with our current set of products and services that we have, but also, if the right opportunity is presented to do it inorganically, we will consider it very thoroughly.

[Mariana Fernandez, executive]

Thank you, both. Fortnon Fonske is asking, what is the impact from the recently approved outsourcing deal and operating expenses?

[Carlos Rojas Aboumrad, executive]

Go ahead, Mario.

[Mario Antonio Romero Orozco, executive]

Fortnon, and thanks for joining us. I assume that you're referring to the Mexico outsourcing deal. Well, the effect is 0 because Rotoplas done the outsourcing. So that's about it. Thank you.

[Mariana Fernandez, executive]

The next question is from Thomas Lindastle. Can you provide us some more color on U.S. margin fightback? I believe the current margin in the U.S. is below group. Do they have a time line for -- time line for when it reach or exceed group level?

[Carlos Rojas Aboumrad, executive]

In general, retail margins tend to be a little bit lower. And so for e-commerce, I think margins will continue to improve, but they won't necessarily be reaching Grupo's margins in terms of retail. But in that business, we are adding additional services so that we better service our customers and provide a better user experience. So they will improve to the levels of group margins as we introduce these new offers to the U.S. business. We are doing it on first with septics. There's tremendous opportunity and traction with septics, and we're very excited about that. And so maybe we can give you a little bit more color in the near future.

[Mariana Fernandez, executive]

Thank you, Charlie. The next question, you mentioned in the info splash that Rieggo increased its pipeline. But when are you thinking that Rieggo projects are going to be relevant in terms of sales, 3% to 5% of consolidated figures?

[Carlos Rojas Aboumrad, executive]

It's a very new business for us. It has great opportunity. And not only the opportunity for demand very strong, but Rotoplas has tremendous capability in servicing these customers from the capability of field services and our knowledge around the water and our brand that we've developed over the years. So we do expect to be very successful here. On the other hand, Rotoplas, just our core business is growing at such accelerated rate that it takes time to grow at faster speed in volume of amount of dollars as in relative terms. So I think it will take a little bit of time. I don't know, Mario, if you'd like to share any particular numbers, but while it's been a very successful business, and we're seeing all of our hypothesis being validated, fortunately, the rest of the businesses are also very good and growing very rapidly.

[Mario Antonio Romero Orozco, executive]

Yes. And then I think just -- there's a couple of items that sustains what Charlie mentioned. Water management in the ag business is crucial. And second, the food security component, not only for Mexico, but also for the U.S., it's also key. So if you put water management plus food security, it's a very promising business, where, just by the pipeline growth we are seeing, it might come at a positive surprise for the company.

[Mariana Fernandez, executive]

We have another question. It's also about bebbia. Is it correct that bebbia growth rate decelerated significantly in the quarter? Is this just base effect? Or is there something notable in the KPIs that caused you to take your foot off the pedal?

[Carlos Rojas Aboumrad, executive]

That's not correct. The growth rate continues to accelerate even, and we have allocated significant resources to bebbia, and we continue to do so. So we're far from taking the foot off the pedal and it's quite the opposite. And we're very excited about that business in terms of its performance and where it's going. Maybe I misunderstood part of the question. Mario, is there anything you'd like to add?

[Mario Antonio Romero Orozco, executive]

No, probably we did explain ourselves well. And I'm sorry for that. What the -- we grew 2.3x quarter-over-quarter. So the growth is being exponential. And sorry about our confusing explanation.

[Mariana Fernandez, executive]

Okay. I think the last question is from Mariana Cruz. A follow-up question on the M&A front. Are you looking for opportunities in new products in water solutions, new regions? Or do you want to maintain your portfolio as it is today and only maybe to expand the business in the same regions you have presence today?

[Carlos Rojas Aboumrad, executive]

Thank very much for the question, Mariana, and thanks for joining. In general, we want to focus in the immediate future in the American continent in terms of regions. We participate in most of the continent. There's just the few countries we don't participate yet and that might be interesting, such as Colombia, but we are placing our focus and our resource allocation to the U.S. and North America mainly. In terms of how much we want to deviate from what we do, we're very clear that we just -- we do want to focus exclusively on water solutions, mainly the decentralized water solution approach. And we do want to make sure that there are synergies with our capabilities, whether they may be brand or operational capabilities such as field services or manufacturing or regional operational capabilities, such as our participation in the countries we already participating. Anything you would like to add, Mario?

[Mario Antonio Romero Orozco, executive]

Yes, and I think that might bring a little bit color on your comments. When we started the transformation, one of the things that we analyzed was to understand better what are the markets where we participate adjusted by our portfolio. And we find out that we participate in a market worth around $50 billion annually. So if you take Rotoplas, let's say, $500 million in sales. So we only have 1% of that market. And it's a market, it's growing probably around 5%, 6% annually. So really, we have a lot to do in the countries where we are and with the products and services that we are offering. So that really was a hard moment for us to confirm that we need to maintain focus and discipline into the region and with the portfolio that we have.

Obviously, we will be complementing with additional products or services. But at the end, I think the potential is out there. And we're in a good position to take a good part of it.

[Carlos Rojas Aboumrad, executive]

Thank you, Mario.

[Mariana Fernandez, executive]

Thank you, both. We are running out of time. We have some other questions, but we will make sure that we will answer them after the webcast. So thank you for your time. Any comment or suggestion, please feel free to reach out. We will be more than happy to hear from you. Have a nice day and see you next quarter.

[Carlos Rojas Aboumrad, executive]

Thank you.

[Mario Antonio Romero Orozco, executive]

Thank you very much. Thanks for joining. We look you in 3 months.