Good morning, and welcome to Grupo Rotoplas' fourth quarter 2019 results conference call. Please note that today's call is being recorded, and all participants are currently in listen-only mode to prevent background noise. The host 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 close. It can be found in the investor section of its website.
Also, the presentation for the call and the webcast link are in the investor 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.
Good morning, everyone. Thank you for joining our fourth quarter conference call. I would like to start by sharing with you the latest developments in Flow, the transformational program I announced in our last conference call. As you may recall, Flow is a major effort by our team to realize the full potential of our company, creating value for our shareholders through optimal capital allocation and increased growth and profitability while continuing to uphold the highest ESG standards throughout our operations. Flow focuses not only on optimizing our operations and increasing our sales across our markets, but also on our key innovation drivers, including, most notably, our Water as a Service platform. It is, in short, a vision and roadmap for an optimal and sustainable growth strategy, helping us to fulfill our mission to bring more and better water to our customers throughout the Americas and improve profitability.
As I mentioned in our last call, we hope to achieve Flow's ROIC objective by the end of this year. However, it pleases me to report that we have recently reached two significant milestones. First, we increased our return on invested capital as of the fourth quarter by 250 basis points, 9.8% compared to 7.3% in the fourth quarter of 2018. This confirms that we are on track to ensure that we reach our goal of having a ROIC equal or above our cost of capital by the end of 2020. We are fully committed to creating value for our investors through optimal value creation strategies that allow us to take full advantage of present and future growth and innovation opportunities. We are also committed to a disciplined approach to capital allocation, to ensuring that there are no operations that detract from EBITDA, however minor.
In fact, as I already mentioned in our last call, last year, we undertook the divestment of our manufacturing assets in the U.S. to focus on the growth of our e-commerce platform in that country. We will continue to develop and strengthen this platform as well as our call center and our critical stores, as we're convinced that this multi-channel sales strategy will allow us to continue to increase our share of that very important market. Moreover, as we continue to look for further avenues for growth, we will increase our investment in two key components of our Water as a Service platform.
Bebbia, our drinking water platform, which doubled its sales and user base last year, and our water treatment plants business, which as Mario will describe in further detail, realized very significant gains as projects got underway during the second semester of 2019, and has a very attractive deal pipeline this year, featuring even larger projects and clients. We will undertake these investments maintaining a strong balance sheet and focusing, as I said before, on reaching our value creation goals. In this respect, it pleases me to announce we will reopen our pioneer sustainable bond, AGUA 17-2X, for the second time by the end of this month.
As you may recall, AGUA was the first sustainable bond in Latin America, and it has allowed us to make investments in line with the United Nations Sustainable Development Goals, as evaluated by the leading firms of analytics and achieving a number of awards and certifications. The reopening of the bond will help us strengthen our balance sheet while undertaking the projected expansion of our Water as a Service platform, benefiting our shareholders, our customers, and the communities that we serve. The second milestone related to Flow that I wanted to mention is the fact that we have shortened our cash conversion cycle by 14 days as of the end of 2019. We have been optimizing our working capital. We have done so by negotiating better terms with our clients and suppliers and increasing the efficiency of our inventory management.
This is a very significant development that attests to the work our team is doing to streamline and optimize our operations while continuing to provide a superior experience to our customers, and it signals the way ahead. As you are aware, we faced significant macroeconomic and political challenges in some of our major markets throughout 2019. Economic stagnation, hyperinflation, and decreased spending. However, our strategy has proved resilient, and we have been able to adjust to these conditions, as shown by the fact that our results for 2019 were in line with our expectations and the guidance we provided as we grew 4%, which is in large part due to growth of our services platform and localized efficiency and marketing efforts. Furthermore, our EBITDA margin was 17.5%, growing 70 basis points, and our net debt-to-EBITDA ratio was less than one time, exceeding our guidance on both counts.
I would like to make a quick recap of Flow, the transformational process that we announced the past quarter, which provides the framework for all of our team's efforts. As some of you may recall, the main objective of Flow is to ensure that we create value for our shareholders and bondholders in a sustainable way. Achieving a return on invested capital equal to or above our cost of capital before the end of this year, while continuing to pursue new opportunities for growth. Flow has three pillars. The first one is to increase the profitability of our current portfolio, optimizing our production, procurement, and billing processes, as well as our pricing strategies. The second pillar entails optimizing our capital allocation strategies, as well as improving the quality and execution of our growth initiatives, particularly those associated with our Water as a Service platform.
The strengthening of our e-commerce platform in the U.S., and our new cross-sale strategy. Finally, the third pillar is concerned with improving the organizational health of our company throughout change management, urgent project execution, and accountability, and a review of the organizational climate in order to identify potential areas for improvement. Flow has been a major effort for our team. We have looked deeply into our operations and continue to do so, all while bringing new ideas and perspectives from all levels of the company. However, we are already seeing its impact on our recent results, and we'll are confident that we'll reach the objectives we have set out for it. I am optimistic that as we look forward with the implementation of Flow and build on the strength of our team, our brand, and our products and services, we will achieve the goals we have set for 2020.
I am also confident that we will continue to create value and grow in a sustainable fashion, having a positive impact on our societies. I will now turn the call to Mario so that he can go over some of the financial highlights. Thank you again for listening, and I look forward to your questions.
Thank you, Charlie. Good morning, everyone. Thank you again for being with us today. I will now go over some of the key financial aspects of the fourth quarter and of 2019. Mexico experienced an economic deceleration and a steep fall in the construction sector during 2019. Nevertheless, due to the resilience of our business model and products and services, portfolio sales only decreased by 1% for the year. However, fourth quarter sales increased 5% year-to-year, with a major contribution from our Water as a Service platform, which grew 45%. It is worth noting that our treatment plant business grew double digits as we began to realize the income from the plants that were built in the previous quarters. As Charlie already mentioned, we have an attractive pipeline this year with even larger projects and different clients.
At year-end, we closed with 600 water treatment and recycling plants, and the value of the current portfolio is in excess of MXN 2.3 billion . As Charlie mentioned, we will reopen our sustainable bond, AGUA 17-2X, for the second time by the end of this month. We will issue MXN 1 billion in additional debt. Use of profits will be aligned with the sustainable framework, mainly for treatment, recycling, and purification of water. As we have diversified our clients base in the treatment plant business and also the industry reach, moving from one industry to 11, we have found different needs in greater scale projects that require higher initial investments. That is the case, for example, of mining companies, paper mill, or touristic developments in regions facing water scarcity. For those clients, we have also integrated water solutions, desalination plants, and rainwater harvesting systems.
We estimate that the maintenance and growth CapEx for business as usual operation should stand somewhere close to 2% of total sales. However, for the design, construction, financing, and operation of larger scale water treatment plants, the company will need additional resources. Now, moving from the treatment and recycling to the drinking water purification platform, these are the news. bebbia doubled its sales during 2019 and registered a significant increase in installed units. We added more than 10,000 units to move from close to 8,500 in 2018 to 18,000 by year-end. During the fourth quarter, we'll launch an aggressive digital marketing campaign that follows a multi-channel strategy implemented for the platform.
In a nutshell, in 2019, for the whole Water as a Service platform, Sytesa, bebbia, and water purification units, we increased by MXN 100 million our sales and marketing efforts by growing the sales force, training people, and develop marketing campaigns to penetrate the market much faster. Finally, as part of this strategy, we are expanding the outreach of Ojo de Agua to other cities in Mexico as we are starting to track water quality in new zip codes. In Argentina, we continue to observe a positive quarterly trend in sales in local currency as we continue to gain market share in the Flow and Water Treatment Segments. This growth was driven by our pricing strategy, which allows to outstep inflation, and to our product segmentation strategy, which has enabled us to penetrate different population segments.
Furthermore, the depreciation of the Argentinian peso strengthened our export platform, which contributed to the increase in sales. Now, export sales represented 7% of total sales and should represent more for the upcoming years. During the fourth quarter, we also introduced a cross-selling strategy that will enable to increase our per-client sales. As for the year, sales grew 22% in Mexican pesos in 2019. This shows our experience of more than 20 years of participating in such a country. In Central America, sales grew double digits in the year, mainly driven by the introduction of country-specific commercial policies, which has enabled us to expand and strengthen our client base across the region. It is worth noting Honduras' growth as a result of an increased demand in water storage solutions due to droughts. While sales in El Salvador grew as a result of our commercial approach to that country.
Sales increased in Peru as a result of an increased demand for water storage and the launching of the water flow category. Finally, our e-commerce platform in the United States grew by double digits during the fourth quarter, following our optimization effort there and the new digital strategy. It is important to note that at this point, government sales as a percentage of total Rotoplas revenue remain well below our 10% target and hitting an amount of only 2.5% for total year. In terms of our portfolio mix, sales of products during the quarter accounted for 90% of total sales and were in line with the fourth quarter of 2018. While yearly sales grew 5% in spite of the economic deceleration in Mexico that I mentioned before.
Services, on the other hand, grew 45% during the quarter, even though they decreased 3% in the year as a result of the dynamics of the water treatment plant business that we mentioned in previous calls. Starting at the top, all net sales grew 3% year-over-year and 4% for 2019, which shows the resilience of our strategy in the context of sluggish and volatile economic environments. As we have already mentioned, our Water as a Service platform contributed very significantly to this result, as well as our growth across our markets and our close optimization of our commercial and operational strategies. Our gross margin increased by 60 and 210 basis points in the fourth quarter and the year, driven by lower raw material costs and our optimization strategy. As a result, our operating margin increased by 220 basis points in the fourth quarter and 130 basis points during the year.
Moreover, our EBITDA margin grew 880 basis points in the quarter and 70 basis points in 2019. The adjusted EBITDA for the quarter increased 15% and 8% for the year. Net profits decreased as a result of increased financial expenditures related to net interest payments and the recognition of the hyperinflation and foreign exchanges losses in Argentina, as well as financial instruments related to the forex hedging that also affected the result. As for CapEx, we will maintain the capital allocation discipline mandate by our value creation strategy. Through optimization, we will continue to find new avenues for growth and to expand our Water as a Service platform.
Our capital investment stood at 4% of total revenue as for the end of 2019, which we believe is a very sustainable level for maintenance and business as usual growth. It should be emphasized that we have reduced our leverage to 0.8 times net debt-to-EBITDA as of December of 2019, down from one and half turns in December 2018. Furthermore, Fitch Ratings ratified our A A rating and S&P double A minus rating, given the fact that cash flow generation increased significantly in 2019. We are confident that we will keep net debt below two times EBITDA. The divestment from the manufacturing asset in the U.S. during July 2019 also strengthened our cash position and it's an example of the decisions we're going to be taking to improve the ROIC for the company.
As Charlie already mentioned, we are pleased to have increased our return on investment capital 34% to 9.8%, which was partly driven by our optimization of capital allocation in the United States, as well as better numerator results driven by revenue and margins growth. We expect that we will continue to report a positive trend in the following quarters while we work towards our goal of achieving a ROIC equal or above our cost of capital towards the end of 2020. In terms of ESG and climate change, being water solutions, ESG issues are one of our top priorities, and we are pleased to be part of the leading sustainability index and to have one of the top 10 ESG scores in Mexico, according to Bloomberg.
I would now like to share with you that as part of our efforts, we have undertaken an arduous process to identify and understand the risks and opportunities brought about climate change to our clients, our operations, our investors, our people, our suppliers, and to the communities in which we do business. As a result of this process, we have launched our climate change strategy, which aims to mitigate these risks and help our stakeholders to adapt and reduce their vulnerability. In line with this strategy, we carried out an analysis to identify how our current portfolio of products and services help our clients to increase their resilience to droughts, flooding, and/or lack of access to clean water, among other events.
We will continue to develop and execute different initiatives aligned to this strategy, as we truly believe that climate change is a big concern for our generations and also the generations to come. In regard to guidance, we expect an improvement in the macro and economic and political scenario that will help improve our performance during 2020. Having said that, we expect that net sales growth will be equal or above 10%. EBITDA margin will be equal or above 18%. Net debt-to-EBITDA ratio will be below two turns. Return on invested capital above or equal to our cost of capital. Thank you for your time today, and as usual, we will now open the line to answer any questions you may have.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Once again, that is star one to ask a question. We'll take our first question from Regina Carrillo with GBM.
Hi, good morning. Thank you for your time. We saw that you had a great year in 2019 regarding raw materials. I just want to know, what are you thinking for 2020?
Hi, Regina. Good morning. For 2020, we were expecting pretty much the same trend that we saw in raw materials for 2019. That's how we planned for the year. As far as we've been into the year, that's been the case. That's pretty much it.
Great, thank you. May I ask another question?
Sure.
After the U.S. sale, are you thinking about another divestment right now?
We are analyzing all the portfolio of products and services that the company has in all the different countries that we operate. Underperforming assets that do not comply with the minimum request of our cost of capital, we are analyzing alternatives to divest from those assets. The short answer is yes, and some of that will be happening in 2020.
Great. Thank you so much.
Our next question comes from José [Cepeda] with Actinver.
Hello, Charlie and Mario. Congrats on the results and on the rates improvement. My first question has already answered, but my second question is about the services business line. As you know, you report a significant increase in sales, but I just want to know how can we forecast this division for the coming five years? I believe that this division could increase, I don't know, between 15%-20%, but I just want to know how can I forecast this division for the company. Thank you. Hello?
Yes, José. Thanks for joining for the call. A good approach to model this service business unit is to do it by unit economics. As we've been telling to the market, we have equivalent water treatment plants, which, as you know, some of them are larger, some of them are smaller. There's an economic unit for that business. We expect to have a good increase on equivalent units. The reason is, as mentioned through the call, that larger water treatment and recycling plants are being needed by the market. That will represent that above 10% in unit economics should be achieved for the coming years. With the idea of reaching, in 10 years, as we have mentioned previous to the market, the number of 5,000 equivalent units, in that case. As for bebbia, which is the water drinking platform, that's the case. Same as unit economics.
We have reached 20,000. We believe that about a million users should be reached in 10 years as well. The way we think around that is, there's 32 million families in Mexico. From that 32 million families, by 2030, 1/3 of those are going to be the new generations, either millennials or Generation Z. From those, 10 million families or so, we believe that at least 1/3 of them will have the possibility of hiring such a service. From that, three million families, Rotoplas will at least want to have a third of them. That's more or less on how we're building our economic model around bebbia. Obviously, as years passes, that will be either confirmed or revised through time. For the water fountains for schools, really gaining some traction now. We have about 6,000 schools to be served.
There's a universe of 120,000 schools in Mexico, private and public. I think that business will grow probably single digit, but it's a good business to have, and we're making our best efforts to be in that marketplace as well.
Just to add to the water fountains in schools, there's two additional purposes for this business. One is the service of children in schools to fight obesity and diabetes. The second one is to start generating brand recognition on that market for the future.
Great. Thank you, Charlie and Mario. Congrats on the results again.
Thank you, José.
As a reminder, to ask a question, please press star one on your telephone keypad. Again, that's star one to ask a question. We'll move on to Mauricio Santos with GBM.
Hi, Carlos. Hi, Mario. Thanks for the call. I was just wondering, two questions. The first one is, you're guiding for two times net debt-to-EBITDA or below two times net debt-to-EBITDA. By this I mean, what are the CapEx plans for the year? The second question would regard, I believe that the new government is starting to raise water tariffs to residential areas. Is there any way to tap this opportunity? Thank you.
Hi, Mauricio. Good morning. The idea is to be below two turns of net debt-to-EBITDA.
Okay.
In terms of the question of the government, we are just seeing what are their projects and ideas. As always, we are always looking to help them in order if we can be a good partner to help access water or to clean water. The company's always there trying to do their best to cover that problem that people have. Nothing specific, just looking at the projects, and if we can be of any complement, we'll for sure will do our best effort to do that. As for CapEx requirements for 2020, maintenance CapEx will be below 2%.
Okay.
Which is just to sustain business as usual. Where our CapEx could be accelerated, it's in the Water as a Service platform due to larger water treatment and recycling projects that we are now managing in the pipeline and some other expansions and deals in the same space. That given the capital intensity, that can trigger the amount of CapEx for the year. That's the main reason why we are raising these additional MXN 1 billion in debt.
Okay. let's say you close the year with 0.8 times net debt-to-EBITDA. It will go up now, as long as you don't break the two turns tier, right?
Yeah, I think the important part to understand that is that every unit of additional debt will be adding up additional EBITDA.
Yeah. I understand.
Yeah.
This MXN 1 billion is going to be used for the water treatment business mostly. Well, I guess.
Yep.
Okay. Fair enough. Thank you, Mario. Thank you, Carlos. Congrats for the fourth quarter.
Thank you, Mauricio.
Thanks.
As a reminder, please press star one if you would like to ask a question. Once again, that's star one to ask a question. We currently have no more questions in the queue.
Okay. We will read the questions on the website. We have a question from Ricardo [Gordillo] from Falconi Consultoria. What's the strategy for the Brazilian market going forward?
For Brazil, we started in the business of wastewater treatment. We successfully signed multiple contracts with multiple customers. The first plant of wastewater treatment has come online. We see a terrific opportunity in wastewater treatment in Brazil as a strategic move for Rotoplas. We know that Brazil is one of the main markets in the American continent, where we will continue to do our best efforts with our product portfolio to service that market, promoting for everyone to have more and better water.
We have another question from Cristian Michel Juarez Arroyo from Santander Asset Management. In the long term, looking at your breakdown of revenues, what is the size of services and revenues versus products?
We are targeting to these services at least 20% of our total revenue in five years. We mention at least because we are finding some opportunity growth that can accelerate that and be more than that. That's the target the company has, and we hope we can do better than planned.
Those are all the questions in the website. Orlando, could you please open one more time the line for questions?
Absolutely. As a reminder to the phone audience, press star one on your telephone keypad to ask a question. That's star one on your telephone keypad if you would like to ask a question. We have no further questions in the queue at this time.
Thank you, Orlando. Thank you very much, everybody, for joining us. We hope you will join us again next quarter. Until then, we'll be sure to keep you updated, and of any relevant news as they happen. Thank you.
Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.