Earnings Call: Q3 2019

Oct 24, 2019

Good morning, and welcome to Grupo Rotoplast Third 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. 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 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 Roxas Abumrad, Chief Executive Officer and Mr. Mario Romero, Chief Financial Officer. I will now turn the call over to Mr. Carlos Rojas. Thank you very much. Good morning, everyone. Thank you for joining us today for our Q3 conference call. As some of you might recall, in our last call, I laid out the 4 pillars that guide my tenure as CEO. Constant evolution, embracing digital technology, permanent product and service innovation and promoting talent development in our team. Through these pillars, we continue to fulfill our company's mission for people to have more and better water, bringing useful and effective decentralized water solutions to our customers across the Americas, improving their well-being and providing them with a superior experience. And just as importantly, we continue to do so while upholding and expanding our commitment to sustainability, not only in our own operations, but in the communities where we do business. We aim to have a positive social impact and to do so while growing and creating value for our shareholders. And it pleases me to report that we continue to grow in spite of what most people would agree have been challenging economic and political environment in many Latin American countries, including some of our major markets. Our brand, our strategies make us resilient and adaptable, allowing us, for example, to grow and gain market share in the context of adverse macroeconomic conditions in Argentina, where we have managed to outpace inflation and grow 10% even after accounting for depreciation of the Argentine peso. Or as in the case of Mexico, where as anticipated in our last call, our water as a service platform had a very significant positive impact in our results due to the success of our water treatment and recycling solutions and the need to make our drinking water platform. In Central America, a competitive environment that entails significant logistical challenges and where our increased regional penetration led to double digit growth. Throughout 4 decades, Rotor Plus has grown and learned constantly facing new challenges and overcoming them, becoming more innovative, diversified and resilient in the processes we operate with. Nevertheless, it is now time to go further. And as I said that rotoplasm is committed to creating value for its shareholders and to do so, it must transform itself, evolve to ensure that it reaches its full potential as a public company to grow and increase profitability. In order to do so, I am excited to share with you that we have started a transformational program for the company, which we have named Flow. Flow has 2 major components. The first one is to optimize our production procurement and billing processes as well as our pricing strategies, while at the same time continuing to promote sales growth across our markets. The second one is to focus on the key innovation drivers for future growth, including enhancing our water as a service platform, vision through constant innovation and continued expansion and pursuing an optimal growth strategy. This is a major effort for the team and our company, but I'm confident that we will achieve the objectives we have set for Flow by the end of next year. While looking deeply into our operations, building on previous initiatives and introducing new ideas and perspectives with the participation of all areas in our company. Likewise, we mentioned in the last call, we continue looking for opportunities to streamline our operations and increase our return on invested capital above cost of capital within the next 18 months. Such is the case of the sale of our manufacturing assets in the United States, which will fuel the growth of our e commerce platform and increase our returns. As we look to the future, I am confident that Rotoplast will reach its full potential and that it will do so while continuing to adhere to the highest DSG standards, helping to preserve water as a future resource and engaging in collaborative innovation for the benefit of our societies. We will continue to do what we do best, permanently introducing new and better products and services, seeking new avenues for growth and delivering the best experience for our customers. I will now turn the call to Mario so that he can go over some of the financial highlights of our quarterly report. Thank you very much for listening, and I look forward to your questions. Thank you, Charlie. Good morning, everybody. Thank you for joining us. I will now go over some of the ESG and key financial aspects of the quarter and the 1st 9 months of the year. As for the ESG results, it is very encouraging that Rotaplas is included in the Dow Jones Sustainability Indices and the Sustainability Index created by S and P and the Mexican Stock Market for the 3rd consecutive year. These indices all include the best performer in ESG principles and best practices as evaluated by expert third parties. In the case of the S&P BNB sustainable IPC, only 30 companies are included. Likewise, it is very encouraging that our ESG score, as measured by Bloomberg, put us in the top 10 of Mexican companies. As such, our inclusion not only signals our commitment, sustainability to the investment community, which as you know is an increasingly important investment criteria for global investors. But it also evaluates our team's effort and pushes us to go even further. Now more than ever, it's imperative to create value in a sustainable way, and it has become our way. In terms of our geographic breakdown, quarterly sales in Mexico grew 5% year over year in spite of the economic slowdown with a major contribution from stellate related products and our water as a service platform. As we anticipated in our last call, water treatment plants, these contracts were won in previous quarters and which began operating in this period once construction was completed, increased sales by 22%. Furthermore, Bevia, our drinking water purification platform, reached more than 18,000 purification points and has doubled its size and its speed in the last 12 months. In Argentina, sales in the 3rd quarter continued to exceed a positive trend, growing 10% and increasing market share across all three businesses categories that we have in that country, which are water storage, water flow and water heater. Despite the macroeconomic tensions stemming from the primary selection, the fall of consumer confidence and the depreciation of the Argentina pesos in all categories, we increased our market share. As for the 1st 9 months, sales increased 38%, driven in part by the acquisition of the water as a flow business IPS. Organic growth in local currency was 71%, while the inflation rate was near 50%. It is worth noting that during this period, the Argentinian peso depreciated 41%, affecting the group's growth in Mexican pesos by 11 percentage points for the whole year. Sales continued to grow at double digits in Central America, driven by enhanced client relations efforts and a strategy of focusing on smaller cities, which lack sufficient water infrastructure, enabling us to increase our market share and reach. As you know, we face a challenging economic and political environment in Peru, including the reduction in government spending, which resulted in a quarterly decrease in sales in water flow and treatment categories. Finally, as Charlie already mentioned, we have great expectations for our upgraded e commerce operation in the U. S. Where we reached an agreement with the purchase of our manufacturing assets that ensures product sourcing, new product development and a nationwide presence. Finally, it is important to mention that government sales hit an all time low as they now only represent 1.4% and 1.6% of our sales during the quarter and the 1st 9 months respectively. This percentage is well lower than the internal guidance of maintaining our exposure below 10% of rotoplasm revenue. Regarding our portfolio mix, sales of products in the quarter accounted for 92% of total sales and grew 4% year over year due to a marketing strategy for mid branch and low end products, coupled with growing demand for storage products. This related to the scarcity of water resources in the regions where we operate. Services accounted for 8% of total sales in the 3rd quarter and registered an 8% increase year over year related to water treatment plant that entered into operation into this quarter. Now moving to the global results. Top line sales grew 4% year over year this quarter and 4% in the 1st 9 months, driven by the factor that Thiago already mentioned and an improved Vietnamese in the traditional channel and the water service in Mexico. Also commercial and optimization strategies to gain market share and increase sales in Argentina contributed to this result. The gross margin shows an expansion driven by lower resin costs, improved efficiency in the manufacturing plants, better sales mix and a strict expenditure discipline contributed to expansion of operating margin by 3.30 basis points. As a result, EBITDA grew by double digits even after adjusting for discontinued operations related to the sale of our manufacturing assets in the United States, which met $762,000,000 in cash, which strengthens our balance sheet. The adjusted EBITDA for the quarter increased 19% compared to the same period of 2018, and the margin grew 2 40 basis points to the amount of 19.4%. Year to date, the EBITDA margin stood at 17.2%, well above our guidance for 2019. Net profit for the 1st 9 months decreased due to an increased financial expenses and the annual hedge program, with net interest and derivative payments amounting to MXN 180,000,000. Likewise, hyperinflation in Argentina continued to cause monetary position and FX losses amounting to MXN 148,000,000. Dollars This continued operations were considered at a loss of MXN 146,000,000. This was due to the sale of manufacturing assets in the U. S. And the related acknowledgment of deferred taxes arising from losses in previous years. In terms of CapEx, we will maintain our capital allocation discipline and throughout our optimization strategies, we will find new venues for growth and to expand our water as a service platform as we continue to do with the water treatment plant and the strengthening of our e commerce platform. Capital investment made as of September 2019 accounted for 4% as a percentage of sales. Most resources were allocated to Mexico, particularly to water treatment and recycling plants, which will be translated into future revenue as invoicing takes place. As for cash flow generation, the company posted significant increase when compared to last year quarters. This cash flow generation gives us the confidence that we will keep net debt below 2x EBITDA and much in line with our current 1.1x net debt to EBITDA. It should be noted that this represents a significant decrease from the 1.5 leverage we had in December of last year. As previously pointed out, the objective of Fluoro is to create value above our cost of capital, And this result will be reported quarterly to the market. It is worth mentioning to explain that the drivers behind the search on ROIC is mostly explained by capital reduction in a losing business operation in the U. S. Good news is that a positive sheet in the trend should follow in the coming quarters. And finally, as I have mentioned during the 1st 9 months of the year, we continue to face economic headwinds in Mexico and Argentina and the Argentina peso depreciation, which is affecting our volumes and top line growth. However, going into the Q4, we expect positive effects coming from increasing revenue recognition from water treatment and recycling plants, stable raw material costs, which have already had a positive effect in the quarter margins and a stronger cash position in our balance sheet, which will help us improve further our net debt position. For the full year, I confirm our last call guidance on revenue with a mid single digit sales growth for the year and an increase in EBITDA margin guidance above 17%. Thank you for your time today. And as usual, we will now answer any questions you may have. Thank We'll now take a question from Jose Serbera with Actinver. Good morning, Charlie and Mario. Congrats on the results. I have two questions, if I may. The first one is regarding the Argentina operation. I was wondering if you can share with us the average increase in price in local currency, because to be honest, I'm not sure about my math behind the increase of 10% in revenues in Mexican peso by the sharp depreciation of the Argentina peso? And second, in Mexico, could you elaborate more about the outstanding margin expansion in Mexico, additional to the lower raw material prices? Thank you. Hello, Pepe. Thanks for joining us for the conference. As for your first question, the average price increase we have achieved in Argentina are above 60%. Some categories have more been on the 70%, others on the 60%. But all in all, price increases average price increase has been in the neighborhood of 60%. I think it's worth for your calculations to consider the cross FX between the Argentinean peso and the Mexican peso, so you can get a better proxy on how is that moving or flowing to peso revenue, Mexican peso revenue. Your second question, the increase in margins, as explained, we've been able to implement some manufacturing efficiencies in the factories, which has helped increase our gross margin on top of, as you mentioned, the raw material cost that now we are experiencing a more stable environment in regards of polyethylene and polypropylene prices. On top of that, as you know, we are very disciplined in putting a lot of focus into SG and A. So better gross margins, increasing revenues and a disciplined approach to SG and A is helping us achieve better margins. Perfect, Mario. Thank you very much and congrats in the results. Thank you, Pepe. We'll take the next question from Mauricio Santos with GBM. Hi, Charlie. Hi, Mario. Thanks for the call. Two questions. The first one is a follow-up on the margins in Mexico. Do you foresee are they sustainable going forward? Do you let's say, you're tracking at 25 0.4% year to date. This quarter was 27%. What will be wise to expect in the next 12 months? And the second question would be in regard to the water treatment plants. Let's say, I guess you are you're registering those sales from the service bracket. All those sales were healthy, what's happening with EBITDA in the service bracket? Thank you. Thanks for joining the conference. Would you be so kind to rephrase your second question because we didn't have it very clear? Okay. Yes. Well, the second question is basically your let's say the service bracket is growing by sales grew 8.3% throughout the quarter. However, I believe you have a contraction in EBITDA. And basically, if you could elaborate on why EBITDA is declining and it was my understanding that, let's say, sales in the service segment should owe higher margins. Yes. Thank you. No, it's not clear. When we're talking about the margins going forward, we've seen stable raw material prices in the coming quarters. So margins should behave around the levels that we reported on this quarter. As for the services part, as you know, we've been putting a lot of time and resources in growing the Bevia platform. Okay. Bevia now is accelerating its growth and penetration. More money is being put into commercial and marketing efforts. And that is dragging the overall performance of the services segment, as I said, for Sonoma. So that should be the case for the coming quarters as well because we are quite convinced that Albavia, it's very important path for future growth of the company. So these efforts will continue going forward. And additionally to that, Mauricio, in the wastewater treatment business, we are also pursuing a high growth in sales strategy where we have increased investments in sales and engineering departments. And we will see that we have been very strong in increasing the value of our portfolio. Also, we have been very successful in bringing online new wastewater treatment and purification plants in new industries and new customers and also in new sizes. They're all still centralized, but some have been challenges that we've overcome as they're new to the business, such as a paper mill or petrochemical industry that we're servicing or the hotel industry we're servicing, which opens tremendous opportunities for our business to participate in a much larger market. Okay. Just to put some numbers on what Charlie just explained, and we forgot to put that slide on the presentation is the pipeline last time we met grew to 166 trillion plants. The group grew to 100 and clients moved from 22 to 27. So we are increasing the client base. We are increasing the pipeline. And all that is translating into CapEx and new contracts that will eventually reflect in better revenue. Okay. Do you have any time frame for that pipeline to start flowing into the It happens on a multi basis because on a multi basis, we have some runoff of old contracts that some of them are starting to expire after 7 years, but new contracts are coming in. So you have new contracts coming into place, the runoff and what we track is what's the net effect and that is growing mark after We'll now go to Regina Carrillo with GBM. Hello, good morning. I have one question for you. We noticed an increase in working capital. Do you think you could give us a little more details about this change? Yes, Regina, and thanks for joining us. Well, the working capital, we improved our working capital from last quarter on 3 percentage points as revenue. And this is due mainly to a very strong effort on better management on accounts receivables and vendors payments. On top of that, we've been fine tuning our inventory management as well. So the 3 dimensions, inventory, accounts receivables and suppliers have a positive effect and that translated into a greater free cash flow generation. Going forward, we believe that achieving or maintaining a 24% of working capital as a total revenue should be maintained. Perfect. Thank you so much. And it appears there are no further questions at this time. I'd like to turn the conference back to the speakers for any additional or closing remarks. Thank you very much for joining us We'll turn the call to Mariana Ngo for final comments. Well, thank you very much, everybody. We hope you will join us again next quarter. Until then, we'll be sure to keep you updated of any relevant news as they happen. Thank you. Bye. This does conclude today's call. Thank you for your participation. You may now disconnect.