Grupo Rotoplas SAB de CV

BMV:AGUA

Earnings Call Transcript 2021-Q4

[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 risks and uncertainties 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]

Good morning. Thank you for being here with us today to talk about our latest quarter and our broader 2021 results. Our team has been working hard towards building the Rotoplas of the future, with a clear focus on achieving our 5-year growth plan, which we are aiming to double the size of the company in terms of revenue as of 2025. We have been cementing our leadership position, helping our customers to make the best use of water, and creating value through grow operational efficiency and social responsibility. Even though we faced significant challenges in 2021, I'm happy to report that we overcame them and met our growth, and increased market share targets, while continuing to create value for our investors. The fourth quarter was the third consecutive period with over MXN 2.8 billion in sales. On a yearly basis, we registered double-digit growth, exceeding our 17% growth expectations, and increasing our market share across the region, consolidating our leadership in the Americas. Most importantly, we have achieved this accelerated growth base by adjusting our strategy in a natural fashion. We adapted to the changes in the way societies use water, as well as to global supply chain constraints that led to raw material scarcity and cost increases, and this has been, to be sure, a significant challenge. Sales of services were affected by school closures and the sluggish demand for treatment and recycling plants, even as bebbia continues to grow at an accelerated pace. In addition, our gross margin decreased due to increased cost in raw materials and logistics. However, we were able to address these issues through the increased efficiencies that we have developed through Flow and our pricing strategy. We are already seeing a solid sequential margins recovery. The leadership of our brands allowed us to post double-digit growth in every country during the year. I would like to highlight the growth in the United States, where we have now launched ACUANTIA, our one-stop shop to provide end-to-end solutions to a broader customer segment, including water storage and water treatment solutions. By developing synergies between our e-commerce platform and the septic solutions business, while establishing alliances with new distributors and improving the user experience, ACUANTIA will enable us to reach more customers and to increase our presence in the American market, where we are observing a growing demand for the centralized water solutions. Flow has been a key enabler for adapting our strategy and operations without losing our medium and long-term focus. The coordination, alignment, as well as the improved organizational culture have allowed us to thrive in a particularly volatile year. We have reaped the benefits from initiatives launched since the transformational program started in 2019, contributing to this year's growth and operational efficiency. Accordingly, we achieved 98% of our annual EBITDA target in absolute terms, and we reached our return on invested capital objective, keeping us in the path of generating sustainable value for our shareholders. During 2021, our priority, besides our team members' health and well-being, was to maintain continuity of operations. The company achieved a factory efficiency of 99.53%, and the timely delivery of 100% of our orders to more than 90,000 distributors and direct consumers. As Mario will discuss in further detail. This required a significant effort from our team as well as the strategic use of our working capital. But our commitment to our clients is paramount and should be noted. It was a crucial factor in strengthening our market leadership position. Likewise, we were able to continuously adjust our pricing strategy to compensate for the cost we absorbed during the first semester and for the inflationary scenarios in some of our markets. This is the sort of strategic agility that combined with increased efficiency has enabled us to continue to thrive, while still investing to ensure our future growth. In 2021, we invested in the first phase of the technological upgrade of the manufacturing plants in Mexico, as well as in the first stage of the next generation water storage solutions, which will require less raw materials and less energy to produce, making them much more sustainable. In addition, we increased our production capacity in different countries and invested in the digitalization of businesses such as bebbia and ACUANTIA. As we have discussed before, we believe the demand for smarter decentralized water solutions for homes, industries and agriculture, will only continue to increase, and we are in a unique position to capture this market. During the year, we continued with a rapid pace of innovation. We launched 13 new products in 2021, which totals to more than 25 new solutions in the beginning of the transformation, while also introducing new sales channels to make sure our solutions reach everyone who needs them. Also in November, we acquired a minority stake in Banyan Water, a U.S.-based tech company that uses data analytics to help customers save water and get relevant metrics about their water consumption. This is an important step for us since it will be a cornerstone to continue to develop new digital solutions to power Rotoplas' next generation of products and services. Going forward, we will continue to focus on digitalization, user experience and sustainability. The adoption for sustainable practices in our own operations is relevant, but most importantly, helping our clients to reduce their environmental impact, and help the population to be more resilient to climate change is our leading -- is leading our purpose. In our recent AGUA Day, this past December, we reaffirmed our financial targets. We outlined -- and we outlined specific goals in terms of ESG. 2 of the major targets are being a net-zero emissions company by 2040, and we will increase the percentage of women in our workforce from the current 23% to 30% by 2025. The progress achieved last year under the sustainability strategy helped us to improve our SAM rating by 10%. We also improved our MSCI rating from BB to BBB. Additionally, we included -- we were included for the first time in the S&P Global Sustainability Yearbook, attesting to the success of our efforts. Finally, I would like to share, our annual organizational health survey showed happier and more committed employees. This fills us with great enthusiasm to continue giving our teams the necessary motivation to accomplish our mission. Well, this is our sustainable growth story. It has been a challenging and rewarding year, and we look forward to this -- to its next chapter. In 2022, our storage solutions will continue to evolve towards greater sustainability, while ensuring their top quality and value. We will also push for an accelerated growth in services and group EBITDA. All-in-all, our story is a story of sustainability and profitability, as well as one of rising to the challenges of rapidly changing the environment and making the most of the opportunities that are created. Thank you for being part of this story. I will now turn the call to Mario, and I look forward to your questions.

[Mario Antonio Romero Orozco, executive]

Thank you, Charlie, and good morning, everyone. Thanks for joining us this morning. It is very satisfactory to report that we reached our goals for the year and that our strategy has paid off. As we talked about in our previous calls, we were able to gain market share, adjust our pricing strategy, and sequentially improve our margins and while ensuring the satisfaction of our customers, and honoring our commitment to our communities. As Charlie said, we continue the path of a sustainable growth story. So let's get started with the financial highlights of the quarter and for the full year. This was the third consecutive quarter with sales over MXN 2.8 billion, and with a double-digit growth rate. Our solutions continue to prove successful in addressing the changing needs of our customers. Also, we registered double-digit growth across our 3 product categories: water storage, water flow and water improvement, most of our products growth derived from increases in volume. This is an important point, because we had explained before, we decided to gain market share during the first semester by temporarily absorbing costs, and to adjust our pricing strategy to increase margins during the second half. We think the strategy was successful as we were able to price in inflationary environments and introduce new solutions to the market. As a fact, out of our 30% annual product sales growth rate, 18% corresponds to volume increases and 12% to price increases. In addition, new products accounted to 2.6% of total revenue. In short, we were able to sell more products, introduce new ones, and produce suitable prices across all of our geographic markets. Increased agility and coordination in our operations brought about by Flow has been a complete gamechanger. Despite increased volatility and unstable supply chains, we managed to secure raw materials and meet the growing demand. This entailed significant effort and a strategic use of our working capital, and was no small feat, given that we have over 90,000 direct distributors and clients. We have strived to strengthen our sales channels and improve our user experience by -- among other things, ensuring that they find what they need when they need it. As an aside, it is worth noting that this is the last quarter we will adjust our results for the expenses associated with the transformation Flow, as the program has become our operational standard. In the end, we estimate that our strategy of gaining market share and the pursuing increased profitability granted us as 1.8x repetitive base that costs absorbed, which is about MXN 1.5 per share. At year-end, we increased our net profits by 7%, excluding the effect of the early closing of our hedge coverage position in 2020. On a brief note about COVID and our operational status. This quarter we carried an operating without interruption. We continue to comply with the strictest safety and hygiene protocols in our manufacturing facilities and in the field. Furthermore, all of our administrative staff continues to work remotely, which has led to significant innovation in our growth processes. As to our financials, net sales increased 14% in the quarter and 26% annually, reflecting our increased market share, the launch of new solutions and our pricing strategy. When compared to 2019, the growth is 33% for the quarter and 35% on an annual basis. In a nutshell, growth is robust, Flow is paying off and water imbalances and changes in consumption habits brought about by the pandemic, has boosted sales in a sustainable way. Product sales grew 18% during the quarter and 30% during the year. The strength of product sales continued to compensate for the effects of the pandemic and water-as-a-service sales. Our pricing strategy allows to revert the decline of our gross margin, which grew by 450 basis points this quarter compared to the third quarter. However, there was still a 220 basis points contraction versus the fourth quarter of 2020, as increases in raw materials and logistics were not totally offset. The adjustment in prices also contributed to a 5.4 percentage points increase in the EBITDA margin compared to the previous quarter, reaching 18%. Quarterly net profits increased 55% year-over-year due to the recovery of operating result and the reduction in financial expenses. On an annual basis, we estimate that the volatility in raw materials and the logistic prices impacted our EBITDA by about MXN 393 million. Nevertheless, we achieved 98% of the annual EBITDA target in absolute terms. Now, moving to our geographic breakdown, let's start with Mexico. Sales in Mexico grew 4% during the quarter and 14% in the year due to the strong demand for our storage, water flow and improvement solutions, including the new products we have introduced in the previous months. As I mentioned, our pricing strategy during the second half drove a sequential recovery of margins. Despite this, EBITDA margin showed a 500 basis points contraction year-over-year due to the raw materials and freights price volatility and the pandemic challenges faced in the water-as-a-service segment. As Charlie mentioned, we remain focused on investing in the optimization of our manufacturing technology in the country to ensure the sustainability of our operations, and bring about the next generation of water tanks. Sales in Argentina grew 37% during the quarter and 57% annually, driven by record volumes in water flow and water heating solutions, as well as the disciplined pricing strategy. The sales strategy taking advantage of the cross-selling capacity between brands, has boosted our sales team efficiency. Our operations in the country grew at an accelerated pace with improved operating profitability. Sales in the United States grew 42% quarterly and 32% during the year. The launch of ACUANTIA has greatly strengthened our operations and our reach, as we continue to expand our points of sales through alliances with hardware stores as well as improve our users' experience, leading to a significant increase in our website conversion rate. As I mentioned in our last call, we were able to use our purchasing power to acquire inventory before our supply increase the prices, and readjust prices in an agile fashion, hence increasing our margins. About the countries that are included in the others segment. Sales in Central America grew by double-digits during the quarter and the year, gaining market share and maintaining leadership within the region. Sales in Peru decreased in Mexican pesos during the fourth quarter due to the depreciation of the Peruvian sol. But registered double-digit growth during the year, driven by the strengthening and expansion of sales channels and the business diversification to water flow and the water heater segment. Finally, we continue to focus on strengthening our presence of water-as-a-service platform in Brazil. And our pipeline goal looks very attractive, with a high potential conversion rate. The recent water treatment and sanitation regulatory reform, which increases the role of the private sector, should greatly increase private investment in water treatment, and significantly expand our -- the market size. Now, in terms of our portfolio mix, sales of products were 96% of total sales during the quarter and the year, growing 18% quarterly and 30% annually. On the other hand, sales of services decreased 38% in the quarter and 20% in the year. This contraction is mostly attributable to the fact that school closures affected the drinking water fountain business, and we have been experiencing a very slow recovery in the water treatment and recycling plant business. Bebbia, our drinking water-as-a-service, continues to grow at double-digit rates and continues to gain subscribers. In the meantime, Rieggo recorded sales related to its first projects. Moving forward to our balance sheet and cash position. We optimized our cash conversion cycle by 7 days, and we continue reviewing our terms with all parties through a weekly Cash Control Tower meeting, to improve this relevant ratio. Our net debt-to-EBITDA ratio closed at 1.3x, even as we continue to take advantage of the opportunities that are rising. It is worth noting that our debt position considers a sustainable bond AGUA 17, which, as we discussed in the previous quarters, amounts to MXN 4 billion, and has a maturity date in 2027, and was issued at an 8.65% fixed rate. During the year, the loans in Argentina and Peru were fully prepaid. About capital allocation, CapEx was 4.7% of total sales, amounting to MXN 550 million. This is in line with our 5-year plan guidance. It's worth noting that increasing CapEx is directed towards improving our innovation and customer outreach. It's worth highlighting that the investment in Mexican new technology is to ensure the sustainability of our water storage product segment, by improving performance to the end customer, while using our energy and raw materials consumption. Our CapEx also includes investments in the digitalization of our customer user experience and improvement in our internal processes. As I already mentioned, we leveraged our cash position to ensure that we have taken advantage and adequate levels of working capital to sustain our growth, and guaranteed availability of raw materials in the context of price volatility. This was a significant strategy investment that enabled us to maintain the 100% order fill rate to our distributors and clients alike. In the next slide, we can observe Rotoplas economic value creation. ROIC reached 14.5% as of December, 235 basis points higher than our cost of capital, in line with our 2021 guidance and our sustainable value creation strategy for 2025. As Charlie mentioned, we achieved this result by pursuing a range of initiatives and actions within the full framework, and we will continue to pursue new opportunities and efficiencies to ensure we create value for all of our investors. There is a fact in our return on invested capital that this has increased 63% since the beginning of Flow in August 2019. Now moving into ESG. And as Charlie has already reiterated some of the major commitments we have made in the context of our sustainable strategy. On this slide, you can see some of the KPIs among the profit, people and planet dimensions on our short and medium-term targets. For example, we will keep a close eye on our clients' satisfaction, the percentage of suppliers evaluated with ESG criteria, our greenhouse gas emissions intensity, and the impact of our purification solutions. It's also worth noting, some ESG actions and results during the year, in addition to the improvement in the SAM and MSCI ratings that we have already discussed, and which can be summarized as follows. We released our first Annual Report aligned with the TCFD recommendation, and we complete for the second consecutive year, the CDP questionnaire. We participated in the United Nations Global Compact Accelerator, with a special focus on gender equity and climate change. Finally, it is worth noting that we allocated MXN 22 million in social investments in Mexico, Argentina, Peru and Central America, directly benefiting more than 15,000 people. As we have said in the past, we are committing to achieving a sustainable growth story, creating value for all of our stakeholders, while improving the life of our customers and communities, and helping them to make the most efficient use of increasingly scarce water resources. 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. Now, let me show you a brief video around ESG. [Presentation]

[Mario Antonio Romero Orozco, executive]

Well, thank you, and I hope you enjoy kind of this data and images which speaks about what the company does. Well, now moving into the guidance for 2022. We continue to bet of our internal drivers and the growing demand for its modern decentralized water solutions. We expect sales growth greater or equal to 15%, and EBITDA margin range between 16.5% to 17.5%, and the return on investment capital of 200 basis points greater our cost of capital, all these while keeping our leverage below or equal to 2x. This year we will continue to invest in creating disruptive capacities to continue to grow in the company's sort of move for the future. Before we move to your questions, I would like to express our appreciation for the confidence that investors have shown in our stock. We registered an 11.2% annual return in 2021, or an increase of 19.7% considered the capital reimbursements of dividends, which was a great management effort to deliver such value creation above the company's common practice. Finally, BTG Pactual started covering the story with a buy recommendation and a target price of MXN 39, therefore, bringing the consensus target price to MXN 43.55. Well, that's all for me now. Thank you very much for your time and attention. Now we look forward to your questions.

[Mariana Fernandez, executive]

[Operator Instructions] Our first question comes from Michel Gálvez. Could you give us more color over year cash burn? We noticed higher inventories which required higher working capital needs.

[Carlos Rojas Aboumrad, executive]

Mario, please go ahead.

[Mario Antonio Romero Orozco, executive]

Well, as we mentioned, last year was a lot of disruptions around supply chains. The company operates in 14 countries. We serve more than 90,000 distributors and clients. And our primary goal was to secure raw materials to maintain our manufacturing facilities and fuel services operating. And we achieved with this strategy 99.53% of operating efficiency, and we delivered 100% of all the orders received our clients. So that, obviously, increased our inventories close to MXN 800 million for the period. That was a conscious move of leveraging our financial strength and favoring of market share gain. And we believe that was an interesting move, which end up in increasing market share in all of our markets and segments that we bid in, and that inventory thing will be a temporary situation, which we'll be reverting in 2022.

[Mariana Fernandez, executive]

We have 2 other questions from Michel Gálvez from Principal Financial Group. I'll read the first one, which would be the expected CapEx for 2022?

[Carlos Rojas Aboumrad, executive]

Just a quick comment first on the CapEx, and then I'll let Mario get more into the details. But we had generated so many initiatives to evolve Rotoplas, and some of them -- since the beginning of the -- on transformation, which was at the end of 2019. Fortunately, we find ourselves with lots of content in growing the company organically. And so, CapEx will be higher than we have traditionally have had. And this is to first drive on the evolution and sustainability of our core businesses, primarily in the water storage segment, by evolving our manufacturing plants, and with these new capabilities evolving in a very relevant way, our water storage solutions. And we started with this last year. We validated on the first phase during last year in one of our plants, and we will continue to pursue this strategy very aggressively. Secondly, while we did have during the pandemic sluggish demand for water treatment plants in Mexico, particularly, we have seen much higher demand at the end of last year. We would hope that booking would have been higher last year, but it's really gaining traction in terms of closing new customers in the beginning of this year. And we do see high of investments for those water treatment plants in Mexico and in Brazil. There's additional product -- projects, sorry, which will require additional CapEx. Also, want to say, maintenance CapEx is not increasing in other terms. Mario, anything else that you'd like to contribute?

[Mario Antonio Romero Orozco, executive]

Well, it's probably -- it's going to be a high CapEx year. We're -- CapEx will come around 8% to 9% as a percentage of revenue, and the reason is, just what Charlie explained. We -- it's a big move towards investing in this new technology for water -- the next-generation water tanks. We are targeting an IRR higher than 20%. And we are very excited about this new technology, because really -- it's really a disruptive move into the marketplace. The product by itself offers a great -- greater benefits and then performance to our end users. And we believe that's kind of the things that the company should focus if we want to be sustainable going forward. Secondly, as part of this high CapEx year, we believe that traction coming from Brazil and Mexico in water treatment and recycling plants is going to be there. On Mexico it's going to be playing catch up for 2 years. The pandemic really hit commercial hotels and all those sectors which really refrained from doing new things. Brazil, as we mentioned briefly during the conversation, last year, there's a new law coming into place around water sanitation. That's going to bring a lot of opportunities in the next 10 years. So the company is really putting the money for all these big initiatives that the company has created. We're putting the money into those. And we're really -- we're very enthusiastic about the future that this will bring to the company.

[Mariana Fernandez, executive]

The third question from Michel Gálvez, which is your base case scenario over cost and raw materials and logistics? When are you expecting this would normalize in your base case? And are you working with further savings in cost and expenses?

[Carlos Rojas Aboumrad, executive]

Mario?

[Mario Antonio Romero Orozco, executive]

Well, yes. That's a very interesting question, Michel. First, 2021 was a crazy year. Freight containers from China to Mexico increased by more than 10x. Raw materials increased 75%, 1 month towards the other. So it was a very volatile environment where the company need to adjust and operate and find ways to deliver to our clients, but also to our shareholders and all the communities, and the stakeholders and alike. Going to 2022, we expect some volatility still happening in the first half, and we believe things are going to start to normalize in the second half. We've been seeing by the end of last quarter, some price drop in resin prices, and some normalization as well as in freights. Freights are not coming back to the levels we were used to. But now the company has set up the pricing in this new normal, so that's more or less what we're sensing. It's kind of one of the top priorities with the company monitoring this on a weekly basis, pricing one side and cost and logistics in the other. And as mentioned, I think it's going to be the name of the game until June. And then to your other question embedded in that one. Part of the transformation is all the time looking at new initiatives to bring about other cost reduction or expenses optimization. And there's still a lot of different initiatives in the company aimed towards that. One of the reasons around this big initiative of the year, new water tanks technology, speaks around energy and raw materials optimization.

[Mariana Fernandez, executive]

Our next question comes from Liliana De Leon, GBM. Congratulations for the results. I would like to know about the growth in the U.S. Could you give us more color on U.S. performance? How much of the sound top line comes from e-commerce and how much from septic tanks, which business is gaining more traction?

[Carlos Rojas Aboumrad, executive]

Liliana, thanks for joining and thanks for your question. First of all, I got to say that I'm very excited about the U.S. We're finding such great opportunities in this. Very resilient market with huge potential, such a deeper market than we're used to in Latin America. And we're finding these opportunities where Rotoplas' unique capabilities in delivering the centralized water solutions are really needed. And in terms of e-commerce, it's a business that's been growing very well. Most of the top line growth comes from the e-commerce business, and that is particularly because it's the one that's bigger, that's -- that we've been working on longer. And so, in terms of total amount of dollars in growth, the e-commerce represents the bigger growth. But in terms of speed of growth, septics is very new, but that one is growing at incredible rates. It's incredible to see in the U.S., such a developed country, solutions that are very old in terms of technology, and the way they're implemented, they have so many pain points for the customer, for the end user. And so, the opportunity for offering end-to-end solutions to these customers in such a big market -- I mean, 10 million comes on septics, it's a huge market. It's tremendous. Now septics does leverages on the e-commerce capabilities so that we can offer this one-stop-shop experience, which offers a much better customer experience in terms of solving for septic needs. And so, I got to say that, while the biggest dollar amount growth comes from e-commerce, the higher growth rate is coming from septics, and that one will eventually be much more relevant as it continues to get larger.

[Mariana Fernandez, executive]

Our next question comes from Mariana Cruz, BTG Pactual. In the call you mentioned the investments you made in the new technology to produce a new generation of water tanks. Could you give us more color on what this new technology implies?

[Carlos Rojas Aboumrad, executive]

It is a technology that allows us to have much higher control in the process. And with this, we can improve the specifications of the product, all the way from being able to use a wider spectrum of materials, including hopefully, much higher content of recycled materials, which will make the product much more sustainable. And also in the design of the product, we can produce a product that has a better shaped product which gives a much better resistance and better performance. In appearance, it also is a much better product. We have this in one of our markets in Central Mexico for quite some time now -- to close to a year, and we have seen tremendous reception from the customers. They do prefer it by a lot. And so we have seen these possibilities in improving profitability in this segment from the -- because of the preference of the customer for this kind of solution. In terms of the technology, it is a different manufacturing process, that's what I can say. And it's a technology that we have been co-developing with experts in that manufacturing process, which is a new manufacturing process, but one that has existed in the market for a while for other products. And so, I can say that it's a much more sophisticated manufacturing process. Mario, anything else that you think might be worth sharing in terms of…

[Mario Antonio Romero Orozco, executive]

No. I think with what we commented on the CapEx -- well, I will just probably add on to this. During 2021, we -- in one of the regions in Mexico, we did this investment, and we really run a pilot for 9 months to validate all the different data around customer acceptance, market share gain, pricing points and so on. So that was run in 2021. So we're going into 2022 to make this investment with a lot of data and confidence around why this is going to be very successful.

[Mariana Fernandez, executive]

The next question in line comes from Rodrigo Alonso from LatinFinance. What is the status of the M&A you plan to do in North America? And how will you finance the acquisitions, with cash flow or loans? And do you plan to issue an ESG bond in 2022?

[Carlos Rojas Aboumrad, executive]

Thank you for your question, Rodrigo. As we've mentioned before, we see great opportunity in the U.S., and we're pursuing that strategy aggressively. We're finding better and better ways to participate through M&A in the U.S. We have been making an effort to do so for multiple years now. The one we did in the last year is small in size, in terms of the value -- dollar investment, but it is a very high strategic relevance as the digitalization of water is really a big component in the future of water management. There's other opportunities that we see that we're pursuing. And we do think that we will find better windows to do more acquisitions. And in terms of the financing of these acquisitions, I think it would depend case-by-case depending on the target, and the particularities of each of those companies in terms of size and it's structure -- and profitability structure. Mario, anything else that you think we can share in terms of strategy for M&A in the U.S. and the financing?

[Mario Antonio Romero Orozco, executive]

No. I think you covered all the issues. As we mentioned on these previous calls, the U.S. is a market which, as Charlie mentioned, is presenting a lot of opportunities, and we're devoting the great part of our, let's say, inorganic thinking around the U.S. market.

[Carlos Rojas Aboumrad, executive]

And this question about plans to issue an ESG bond within '22, Mario?

[Mario Antonio Romero Orozco, executive]

Well, that -- no, we're not planning to issue any new debt.

[Mariana Fernandez, executive]

Next question is from Martin Lara from Miranda Research. And I have 2 questions. The first one, what was the contribution of the Flow program in 2022 in terms of sales and EBITDA? And the second one, could you please share with us your pricing strategy for this 2022?

[Carlos Rojas Aboumrad, executive]

Thank you, Martin. Mario, can you share more detail on that?

[Mario Antonio Romero Orozco, executive]

Thanks, Martin, for joining us this morning. Flow -- in terms of revenue, it accounted for about 8% of total revenue coming from the Flow initiatives, and in EBITDA, around 25%. I think it is important to tell you guys that Flow -- all the initiatives that are now running within the company, take time to mature. Most of them are going to be reaching maturity by 2025. So -- and that's what we're monitoring to capture all that while. The reason between why EBITDA component is higher than revenue. It's because there's a lot of initiatives around costs and expenses that not necessarily reflect in the revenue. To your second question around our pricing strategy, this year, our budget is going to be aligning prices towards expected inflation in 2022. That's -- if nothing, if volatility does not prevail and have a similar year to 2021. But today, we expect that.

[Carlos Rojas Aboumrad, executive]

And maybe just to add to that. Flow in terms of the focus of initiatives, we categorize them. At the beginning it was much more about increasing profitability, and it was a lot cost and expense reduction driven initiatives. We then saw a much more intensive stage last year in promoting the revenue line, and particularly more in products, and those initiatives are -- have been developed and have been executed in a very high percentage. Some of that will continue to be executed, and it's obviously part of Flow, this initiative with which we're evolving the water storage solutions, and that requires so much CapEx. But a lot of that is -- was developed in last year, and will continue to be executed to take a company-wide throughout this year and next year. And a lot of the initiatives that are now being -- we're being focused on, which have higher potentials, are these new businesses in services and in the U.S., which are mainly focused in Mexico, Brazil and the U.S. And we see, with this businesses much higher potential. We have been working on them for multiple years now. They're gaining not only more and more traction, but they're gaining enough size where we will start seeing impact in relative terms to the size of the company in the coming years. So we're very excited about that. And that will be the bigger trend going forward in terms of where we will be focusing our resources and initiatives.

[Mariana Fernandez, executive]

The next question comes from Rodrigo Salazar, AM Advisors. Could you expand on your margin guidance? It seems that margins will not recover as initially expected with the pricing strategy, and they, the margins, be lagging towards 2025 guidance. Are you expecting a strong rebound in 2023 with the new technology and more normalized cost pressures?

[Carlos Rojas Aboumrad, executive]

Mario?

[Mario Antonio Romero Orozco, executive]

Rodrigo, I think you're right in this part, but I will probably, in order to try to help you understand around margins, and what is happening -- to consider this. Products in 2021 reached 18%. And our products in 2022 is going to be improving those markets. We are thinking more around 19% coming out from products. Services, on the other hand, it's the one that is like dropping the margins. And the reason is, we are heavily investing, which remember, all the new machines of bebbia just goes into the expenses, and that drops the margins. So the margin drop is not coming from a low recovery on the product side, but because of the driving services. However, having said that, we believe that in the cycle towards 2025, we're going to be reaching our guidance of 20% or more. So it's a 2-part story. One is products, which the hiccup of 2021, because of the raw material price increases that we explained, but we are on track of reaching the target. The drive is coming from the services side, but that eventually we'll meet by 2025, towards our goal.

[Mariana Fernandez, executive]

We have another question from Liliana De Leon, GBM. Profitability is improved, but 2022 seems to be, again, a challenging year in terms of higher raw material prices. Which region or business line do you think would be the most resilient to keep observing price increases and in which ones you are cautious about?

[Carlos Rojas Aboumrad, executive]

Mario?

[Mario Antonio Romero Orozco, executive]

I would say that, we believe that raw material price peaks were reached between October-November last year. The price setup and margin structure going into 2022 is taking into account those price points from raw materials. What we've been seeing in December, January, February and started to see some color in March is that those prices are starting to drop. So -- because we set up the prices of our products and services using that, we believe that we should be able to achieve our targets with regards to margins.

[Mariana Fernandez, executive]

Moving to the next question. Alain Jaimes from Signum Research. I could see that you used CapEx to modernize several of your platforms. My question is, how much do you estimate that this amount of investment translates into income? That is, how much do you plan to grow with the investment made?

[Carlos Rojas Aboumrad, executive]

Alain, thanks for your questioning. I'll let Mario get into more details in a second. But let me just say that, a lot of the platforms we're building and evolving with this investment, have been towards the services and the new businesses platforms, which have great potential and where we see higher growth rates. Today, they don't really make an impact because of the proportions of the 2 businesses, the new businesses and the traditional products business. And I do see that they will continue to grow as -- in an accelerated manner. And if you take a look at what we're doing with ACUANTIA and with bebbia, it's very clear, the evolution of those platforms. We do have a guidance of doubling the business by 2025 in revenues. And, while we will continue to have growth -- virtual growth in products, a lot of the growth that we need to get to that doubling number is going to come from these new platforms. Mario, I'm not sure if there's any details that we can…

[Mario Antonio Romero Orozco, executive]

Yes. We would love to share with you -- and I think you posted a very interesting question. We cannot disclose the details, for example, on the new water tank. We already have a model built around it. We know how much more market share we're going to be achieving and how is that going to translate into better revenue. With those details given, which is a new technology, we have competitors, we rather prefer to [ result ].

[Mariana Fernandez, executive]

The last question is from Rodrigo Salazar, AM Advisors. We do expand on bebbia and the water plant business. What's the situation of water plants? It seems a lot of contracts are not being renewed and not new contracts are being signed. In bebbia, users are expanding positively, but this comes -- might be affecting short-term numbers. When do you expect this business to be profitable and that sales are being fully reflected? And the second part of the question or comment is, what do you believe is the customer pushback in bebbia? Or what has been the biggest challenge to attract more clients?

[Carlos Rojas Aboumrad, executive]

Let me complement, Mario, at the end, particularly with the last question about bebbia. Well, in terms of numbers, can you share first some details on that?

[Mario Antonio Romero Orozco, executive]

And I think that's a fair point that Rodrigo makes. Given these 2 years, the recent -- a lot of contracts were not renewed on the water treatment plants was due -- because there was a lot of uncertainty in our clients going forward. They didn't know they have to become smaller, larger and so on. So that's, we believe, it's temporary. The pipeline that we have built in the last 5 months is very promising. So we believe that, that's going to come back and recover its growth story. With regards to profitability, there's no specific profitability. If we stop growing bebbia, our profitability will be there, and all the services unit will be profitable. The reason is that -- remember that all the purifier that we installed in your home, that is recorded as an expense. So every addition of new clients -- we grew more than 80% of our client base in 2021. And with addition has a very high customer acquisition cost because we need to put together the machine to start creating the service. Share rates are below 10%, but that gives you a life span of more than 10 years for our clients. The business has proved very well, so if we stop that business today growing, we will be achieving 20% to 25% EBITDA on bebbia. But we don't want to stop. We want to increase exponentially the amount of families that use the bebbia service. Having said that -- and I think it's a fair question, we should give you -- and I think we will discuss this internally -- more color around how bebbia is behaving by itself apart from the rest of the water treatment and recycling plant. So you can have a better color of how that business looks, one, if it stops growing. But, today, we prefer to push the growth. And it's not because we're losing clients, it's because we are gaining a lot of new clients.

[Carlos Rojas Aboumrad, executive]

Two comments, well, one on treatment -- water treatment plants, and the other on bebbia. Regarding bebbia, we have been also working very much on developing the capabilities to service this kind of customers, which is in a business model that's so different to what we were used to with the product business. Much more digital. It's a service business, where we're servicing 1,000s of customers every month directly at their homes. And it did require lots of process development, technological platform development and additional new capabilities. But in terms of what we're seeing from customers, in terms of their satisfaction and their desirability of changing water consumption habits, going from the traditional solutions to this kind of water subscription solutions with purified water, it's tremendous. So we'll continue to invest very confidently that this will be one of water plants' main businesses in the future. In terms of water plants, one of the big things is that, the capabilities that we have acquired when we invested in water treatment through acquisition, was in solutions that were driven to these centers of high foot traffic such as hotels or stores, which during the dynamic, they all came to basically a halt. And so these kinds of projects came to a hold. And there was a lot of uncertainty on what was going to happen to these places -- cinemas, shopping centers, big stores, hotels. And we had been -- we have been developing other capabilities for other kinds of water treatment plants. I did mention this in the AGUA Day where you were able to join, and we developed capabilities to service the food and beverage industry, to service the mining industry, to service other industrial kinds of customers -- the automotive industry, the pulp and paper industry. And these industries -- in Brazil, we've been finding lots of success in terms of booking. And in Mexico, it's been following Brazil, and we're starting to see a lot more traction. And hopefully, we'll be able to share numbers around booking for water treatment plants, which is a leading indicator of what sales will look like and profitability. But we're very confident that it will start picking up in this year.

[Mariana Fernandez, executive]

Thank you, Charlie. Thank you, Mario. We are running out of time. Thank you all for joining us. If there…

[Mario Antonio Romero Orozco, executive]

Mariana, I think for the missing questions, we didn't have enough time, we should reach back and answer to them, please.

[Mariana Fernandez, executive]

Exactly. If you have any further questions, please make sure to include your name, and we will contact you after the call. Have a great day.

[Mario Antonio Romero Orozco, executive]

Thank you.

[Carlos Rojas Aboumrad, executive]

Thanks.

[Mario Antonio Romero Orozco, executive]

Have a great day. Bye-bye.