Good morning, and welcome to Grupo Rotoplas' 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. 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 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 Rojas Aboumrad, 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 third quarter conference call. As some of you might recall, in our last call, I laid out the four 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. 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.
It pleases me to report that we continue to grow in spite of what most people would agree have been challenging economic and political environments 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. 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 on our results due to the success of our water treatment and recycling solutions and 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 four decades, Rotoplas 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. As I said, Rotoplas 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 two 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. We are 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 Rotoplas will reach its full potential and that it will do so while continuing to adhere to the highest ESG 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 first nine months of the year. As for the ESG results, it is very encouraging that Rotoplas is included in the Dow Jones Sustainability Indices and the Sustainability Index created by S&P and the Mexican stock market for the third consecutive year. These indices only include the best performer in ESG principles and best practices as evaluated by expert third parties. In the case of the S&P/BMV IPC Sustainable, 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 to sustainability to the investment community, which, as you know, is an increasingly important investment criteria for global investors. It also validates our team's effort and pushes us to go even further. Now more than ever, it is 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 storage-related products and our water-as-a-service platform. As we anticipated in our last call, water treatment plants, whose contracts were won in previous quarters and which began operating in this period once construction was completed, increased sales by 22%. Furthermore, bebbia, 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 third quarter continued to exhibit a positive trend, growing 10% and increasing market share across all three business categories that we have in that country, which are water storage, water flow, and water heating. Despite the macroeconomic tensions stemming from the primary election, the fall of consumer confidence, and the depreciation of the Argentinian pesos, in all categories, we increased our market share. As for the first nine 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 first nine months, respectively.
This percentage is way lower than the internal guidance of maintaining our exposure below 10% of Rotoplas 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-range 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 third quarter and registered an 8% increase year-over-year related to water treatment plants that entered into operation into this quarter. Now moving to the global results. Topline sales grew 4% year-over-year this quarter and 4% in the first nine months, driven by the factors that Charlie already mentioned, and an increased dynamism in the traditional channel and the water-as-a-service in Mexico.
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 contribute to the expansion of operating margin by 330 basis points. EBITDA grew by double digits, even after adjusting for discontinued operations related to the sale of our manufacturing assets in the U.S., which net MXN 762 million 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 240 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 first nine months decreased due to increased financial expenses and the annual hedge program, with net interest and derivative payments amounting to MXN 180 million. Likewise, hyperinflation in Argentina continued to cause monetary position and FX losses amounting to MXN 148 million. Discontinued operations were considered at a loss of MXN 146 million. This was due to the sale of manufacturing assets in the U.S. and the related acknowledgement 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 plants 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 a significant increase when compared to last year quarters. This cash flow generation gives us the confidence that we will keep net debt below 2 times EBITDA and much in line with our current 1.1 times 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 Flow is to create value above our cost of capital. 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 shift in the trend should follow in the coming quarters. Finally, as I have mentioned, during the first nine months of the year, we continue to face economic headwinds in Mexico and Argentina, and the Argentine peso depreciation, which is affecting our volumes and top-line growth. However, going into the fourth quarter, 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 you. If you'd 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, press star one to ask a question. We'll now take a question from Jose Sobera 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 MXN by the sharp depreciation of the Argentina peso. 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 50%. Some categories have more, only on the 70%, others on the 60%. All in all, average price increase has been in the neighborhood of 60%. I think it's worth for your calculations to consider the cross effects between the Argentinian peso and the Mexican peso, you can get a better proxy on how is that moving or flowing to Mexican peso revenue. To 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&A. Better gross margins, increasing revenues, and a disciplined approach to SG&A is helping us achieve better margins.
Perfect, Mario. Thank you very much, and congrats on the results.
Thank you, Pepe.
Once again, if you would like to ask a question, please press star one. 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? Let's say, you're tracking at 25.4% year to date. This quarter was 27%. What would be wise to expect in the next 12 months? The second question would be in regard to the water treatment plants. Let's say, I guess you're registering those sales in the service bracket. Although sales were healthy, what's happening with EBITDA and 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. Yeah. Well, the second question is basically, 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. Basically, if you could elaborate on why your EBITDA is declining, and it was my understanding that, let's say, the sales in the service segment should show higher margins.
Yeah, thank you. Now it's more clear. You want to jump on, Pepe? Well, when we're talking about the margins going forward.
We foresee stable raw material prices in the coming quarters. 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 bebbia platform.
Okay.
bebbia now is accelerating its growth and penetration. More money is being put into commercial and marketing efforts.
Okay.
That is driving the overall performance of the services segment as a per se. That should be the case for the coming quarters as well, because we are quite convinced that bebbia, it's a very important path for future growth of the company. These efforts will continue going forward.
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. 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. Also, in new sizes. They're all still centralized. Some have been challenges that we've overcome as they're new to the business, such as a paper mill or a 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.
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 treatment plants. The book grew to 100. Clients moved from 22 to 27. We are increasing the client base, we are increasing the pipeline. I know that it's translating into CapEx and new contracts that will eventually reflect in a better rhythm.
Okay. Do you have any timeframe for that pipeline to start flowing into the.
It happens on a monthly basis. On a monthly basis, we have some runoff of old contracts that some of them are starting to expire after seven years, but new contracts.
Okay
are coming in. We have new contracts coming into place, the runoff, and what we track is what the net effect, and that it's growing month after month.
Okay. Perfect.
Well, thank you.
Thank you.
Once again, it is star one to ask a question. We will 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, thanks for joining us. Well, the working capital, we improved our working capital from last quarter on three percentage points as revenue. 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. The three dimensions, inventory, accounts receivables, and suppliers, have a positive effect, and that translated into a greater free cash flow generation. Sorry. 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.
Once again, it is star one to ask a question. 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 now for final comments.
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. Goodbye.
This does conclude today's call. Thank you for your participation. You may now disconnect.