Grupo Rotoplas SAB de CV

BMV:AGUA

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, and welcome to Grupo Rotoplas' Fourth Quarter 2018 Results Conference Call. Please note that today's call is being recorded. [Operator Instructions]

The hosts will open the floor for questions later.

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 closed. 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, Rotoplas' Chairman and Chief Executive Officer; and Mr. Mario Romero, Chief Financial Officer.

I will now turn the call over to Mr. Carlos Rojas.

[Carlos Rojas Mota Velasco, executive]

Thank you, operator. Thank you all for joining us today. As you know, yesterday, we reported double-digit growth in sales and EBITDA year-over-year in both the fourth quarter and 2018 as a whole.

All of our country operations grew, except for Brazil, where as you know, we are reducing government sales and transitioning our focus on products mix dollars to premium segments. And this growth was driven by our acquisitions, increased demand of our products such as storage and flow solutions and our water-as-a-service platform. In fact, in 2018 alone, we added over 4,700 purification points, another 1,800 water fountains, exceeding our expectations. The fact that we grew across the board is very significant for a number of reasons.

First of all, when we had discussed in previous calls, some of our Latin America operations experienced significant political, fiscal and economic uncertainty during these past few months as was, for example, the case in Argentina, where hyperinflation continued to have a significant impact in our overall results. And yet, not only we did manage to grow in the environment, but we did so while consolidating a more diversified portfolio of products and services, maintaining and expanding our market share. In this context, it is worth noting that reopen of our Sustainable Bond of AGUA, 17/2x for MXN 1,000 million was oversubscribed several times, paving the way for greater capital investments in our service platform. It is significant as well that our recent acquisition not only contributed to our sales growth, but they also provide us with synergies, technology and institutional knowledge that we can leverage as we move toward. And that eventually will enable us to pull reliable water market operation in the region.

Finally, it is significant that as we grow, we also continue to develop a strong ESG culture, which should grow our initiatives in sustainable finance, but also strengthening our corporate governance and promoting access to water through better products and services. We are convinced that this is the only way forward for companies such as our own [indiscernible], as we talked about in our previous calls, we have been recognized for it. We continued to be included in the Dow Jones Sustainability MILA Pacific Alliance Index, which ranks best-in-class companies that outperform their peers in sustainability. Moreover, we continue to improve the Corporate Sustainability Assessment conducted by RobecoSAM, the leading sustainability evaluation firm.

We continue to consolidate the robust and diversified portfolio, both organical and inorganically, and we do so with the aim of providing even more innovative solutions for the market that is growing and evolving constantly in which we have deep and well-established leadership position. And we will continue to integrate our acquisition according to this strategy throughout our business and create value for our own stakeholders and communities. Thank you for listening. I would now like to turn over the call to Mario, who will guide you through the quarterly and year results and look forward to your questions.

[Mario Antonio Romero Orozco, executive]

Thank you, Carlos. Good morning, everyone. Thank you for joining us today. I will now go over some of the financial highlights of the fourth quarter and the year. Sales grew 26% year-over-year this quarter, an 18% yield, with the main contribution from IPS in Argentina and the e-commerce platform in the United States. EBITDA grew 57% year-over-year in the fourth quarter and 25% in 2018. Furthermore, we increased profitability margins, obtaining greater efficiencies in our operations by means of a better pricing, lower raw material costs and a constant expense discipline and cost-control initiatives such as zero-based budgeting. As for our geographic breakdown, sales in Mexico grew 8% year-over-year in the fourth quarter, accounting for 54% of our total sales. Our operations in Argentina grew 45% in local currency, excluding the recent acquisition of IPS, even though, this growth was offset in Mexican pesos due to the Argentina peso depreciation, reducing the goods growth by [ 4 full ] percentage points.

The Other Countries category, which includes our operations in the United States, Brazil, Peru and Central America, grew 4% year-over-year.

Regarding our annual results. Sales in Mexico grew 6.5% in 2018. This had greater sales of water flow products and purification services, evidencing our leadership position in the market and the success of our diversification strategy. The other sales grew 29% in 2018, driven by the growth of our operations in the United States and Central America. Sales in Argentina grew 55%, bringing the successful integration of IPS and improved price mix in our organic operations. However, as was the case for the fourth quarter, inflation rate had a positive effect on our yearly growth, but it was offset by the depreciation of the Argentinian peso.

To give more color on the integration of IPS. This provides a powerful export platform in South America, and it also contributes significant growth in volume and sales. In fact, the volume of exports from Argentina grew 32% in 2018, offsetting the slowdown driven by the depreciation of the Argentinian peso. Despite of this adjustment in the purchase price, the acquisition continues to grow in sales and volume. And exports platform marked the leadership and new product development will accelerate into 2018.

This slide is good to point out that the intrinsic value of the company is great, and the synergies are still pending to happen. Likewise, the integration of the e-commerce platform in the United States is already boosting the growth of our organic operation in that country.

Regarding our product mix. Sales of the individual solutions or products in the fourth quarter accounted for 93% of total sales and grew 22% year-over-year in the quarter and 21% for the year as a total, boosted by integration of IPS, the growth of our organic businesses and the operations in the United States.

For the other part, integrated solutions or services accounted for 7% of total sales and registered a 24% decrease year-over-year in the fourth quarter, which is mostly attributable to a decrease in sales of self-sustaining solutions that are mainly associated with the government channel such as more rainwater harvesting, the outdoor composting bathroom and the family orchard agricultural irrigation system. Sales of services were down 5% for the year, mostly due to the fourth quarter results. Nevertheless, we continued the expansion and strengthening of our water-as-a-service platform. For example, it's good to point out that our water purification platform is now serving 39 cities in Mexico, in line with our projections and plans. As for the water treatment plants and the reason behind the reopening of the Sustainable Bond and after undertaking our learning curve throughout 2018, we are serving good traction in 2018, and we think that it will continue in 2019. During this time, we are at new clients and booked 80% of new units throughout 2018, while continuing to exponentially grow the pipeline on the client base. It should be noted, however, that our net income was affected by 3 factors: first, higher interest payment amounting to a net of MXN 192 million due to a positive net debt position; second, the monetary position loss in Argentina amounting to MXN 64 million; and third, taxes amounting to MXN 23 million.

Normalized net income without considering the Argentinian effect or monetary loss and taxes, they have been MXN 465 million. The Argentinian effect eroded more than 100 basis points from our net margin.

The fact that our acquisitions contribute significantly to our results, combined with organic growth of our businesses and the positive outlook for our water-as-a-service platform, this helped us and reaffirms our particularly long-term outlook and evaluates our current deal strategy.

As Carlos said, we remain committed to customers intrinsically and energy principles, while maintaining a strong balance sheet and a positive debt outlook. We are also confident that we will keep net debt below 2x EBITDA, in line with our current 1.5x EBITDA leverage. And we'll use the balance to finance capital expenses for our water-as-a-service platform.

Going forward, we are expecting we will achieve for this year's sales growth greater than 10% and that the EBITDA margin will stand at about 16%. I would like to have opportunity to answer any questions you may have. [Operator Instructions]

[Operator]

[Operator Instructions] And at this time, we will go to a question from José Cebeira of Actinver.

[José Antonio Cebeira Gonzalez, analyst]

I have 4 questions. But before the question, I just want to be sure that the Brazilian sales decline in Brazilian real due to the strategy of focusing in higher profitable products. And the question would be, we have seen positive results in the e-commerce platform in the U.S. market. I was wondering when we are going to see this level of implementation in Mexico.

[Mario Antonio Romero Orozco, executive]

Thanks, José, for joining the conference call today. As for -- there are 3 questions. If you remember, back in 2017, we had to really shave some of the rainwater harvesting programs, and we complied with it and we executed on it. That's not the case for 2018, particularly in the second half. So that is why you see a slowdown in Brazil. If you look at the retail water tank business in Brazil, that is growing, and we're just managing them in small scale. As for the e-commerce platform, as we explained previously in market, the U.S., which is the most developed market, we are understanding its base. We are understanding what will be their capitalization into the other countries that we operate. And we will be starting to do some pilot test in some countries in South America. We believe as e-commerce becomes a greater distribution channel such as in the U.S., being ahead of the curve will help us in being the leader in Mexico.

[Operator]

[Operator Instructions]

[Ofelia Aranda Trewartha, executive]

We have a question on the webcast from Liliana de Leon from GBM. Could you please share with us more details regarding the growth of water treatment plants during 2018 and going forward?

[Mario Antonio Romero Orozco, executive]

Thank you, Liliana, for joining us today and as we present during the webcast. What we're seeing is as time passes by and we understand better the market and we've been educating as well the clients, better traction on the amount of interest in water treatment plants in the marketplace. As you can see, the pipeline in 2017 was -- we started the year with 125. We booked and executed 15. In 2018, the pipeline was 124. We booked 87. Some of them are still in construction and will start to reflect on revenue and EBITDA recording throughout 2019. But importantly, here is in 2018, we're beginning the year with a pipeline of 1,217, which is 2.5x last year and it's like 15x 2 years ago. And what you can see moving from only having 6 clients in 2017 moving to 60 clients in 2019, we believe that the business that we actually view and the long-term goal of achieving 5,000 water-treatment plants is feasible, and we are confident that these goals will be achieved.

[Ofelia Aranda Trewartha, executive]

We have another question from GBM, Liliana de Leon. Regarding 2019, you're expecting the growth in other regions above 10% or some countries should be above/below the target.

[Mario Antonio Romero Orozco, executive]

I would say, Liliana, that the -- most of the countries will grow above that target rate. At this point, we are not giving those details, but we feel confident that, that number will be achieved as a whole.

[Ofelia Aranda Trewartha, executive]

We have another question from Jeronimo Cobián from Actinver. Do we see an upward trend for the majority of the main raw materials? I understand that you made significant hedges for the raw material side. Could you please share more information about this?

[Mario Antonio Romero Orozco, executive]

A couple of things. The hedge that the company does is for the FX exposure in U.S. dollars. And we will hedge our costs, but only the FX exposure, not the raw material exposure. As for the raw materials future outlook, we are seeing more install capacity in the petrochemical side and more supply than the demand. So we see 2019 stable environment regarding raw material costs.

[Ofelia Aranda Trewartha, executive]

And the last question is from [ Rodrigo Verduzco ]. I think it's pretty much the same as the other one about Systesa. But hello, thank you for the call. Could you give us an update on Systesa opening for 2018 and '19?

[Mario Antonio Romero Orozco, executive]

Well, I guess, the 2018, the way we report, here in 2019, what we are just trying to sign out is that the amount of [indiscernible] that there is an outdoor. And obviously, how many we've been looking depends on how good we are on executing there. I think our track record speaks well about our commercial and technological capabilities. We're about 50% heat ratio in 2017 and 2018. So I think that will help out to make your -- the numbers for 2019.

[Ofelia Aranda Trewartha, executive]

Danni, could you please open the line again for questions just to see if we have one on the phone?

[Operator]

[Operator Instructions] At this point, there are no other questions in the queue.

[Carlos Rojas Mota Velasco, executive]

Thank you very much all for joining us today. So we'll soon again -- talk to you soon again on the next report. Thank you.

[Ofelia Aranda Trewartha, executive]

Yes, thank you very much for your time and your interest. We hope you will join us again next quarter. Until then, we'll be sure to provide you with important updates.

[Operator]

Again, ladies and gentlemen, that does conclude today's call. We would like to thank everyone for your participation. You may now disconnect.