Good morning, and welcome to Grupo Rotoplas second 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 for joining us today. Before we begin, I would like to thank our esteemed Executive Chairman, our renewed Board of Directors, and our committed team members for their trust and support as we begin this new stage in the life of our company. It is encouraging that our Board of Directors is now more diverse than ever, with more independent directors and even broader regional and functional expertise, and our first female board member. Our Board's leadership and our team's expertise are at the core of our company. As you know, as a CEO, I am committed to providing people with more and better water through constant evolution, embracing digital technology, permanent product and service innovation, and last but not least, promoting talent development amongst our people.
These four pillars will guide my tenure, and I hope that with your support and hard work, they will bring about more value creation. In many ways, I'm standing on the shoulders of giants, if you will, and I believe our quarterly results show this. Our business model and the strength of our brand have proven not only a bulwark against what continues to be challenging macroeconomic and political environment in some of our larger markets, but they also enable us to continue taking a proactive and innovative approach to increasing shareholder value. In spite of a reduction in sales volume, we have been able to continue diversifying our product portfolio to update our pricing strategy, to continue gaining market share in Argentina, and to increase our sales in Central America, which as you know, it is very competitive market.
More importantly, we continue to push forward with our vision for the company. We are strengthening our Water as a Service platform, adding new customers for our water treatment and recycling solutions, which it is worth noting, will have significant impact on our sales during the second semester as the billing cycle takes effect. We have doubled the presence of our drinking water platform, bebbia, throughout Mexico, and we expect to continue growing at this pace in the future. We are also continuing to focus on streamlining and optimizing our operations, as exemplified by divestment of our manufacturing assets in the United States, which will not only enable us to focus on growing our market-leading e-commerce platform in that country, but also boosted our return on investment and our balance sheet, as Mario will explain in further detail. We are and will remain firmly committed to maximizing value for our shareholders.
Finally, I would like to highlight two very significant events that took place in May. The first one is that Rotoplas was included in the S&P/BMV IPC Sustainable Index, which is designed to measure the performance of Mexico's leading companies in terms of economic, environmental, and social criteria, providing an objective benchmark for managing sustainability investments for portfolios. This is a welcome reward for our steadfast commitment to ESG principles and incentivizes us to go even further in the future, adapting to a rapidly evolving and ever more important ESG landscape. The second one is our outreach event, AGUA 2019, which proved to be a great way for our company to connect directly with our shareholders. I will now let Mario discuss the key financial aspects of our quarterly report. Thank you again for your attention, and I look forward to your questions.
Thank you, Charlie. On behalf of the Rotoplas team, thank you for your comments. Good morning, everybody. Thank you for joining us. I will now go over some of the key financial aspects of the second quarter and the first semester, including relevant accord from our latest Shareholders Meeting. Starting with the top line, net sales grew 1.8% year-over-year this quarter, mostly driven by the integration of IPS in Argentina and 4.1% for the semester, driven by the aforementioned integration and sales growth in Central America and Peru.
Gross profit increased 12.2% due to a better price mix and lower raw material costs. Operating profit grew 3% due to 380 basis points increase in the gross margin, which mitigated larger operating expenses in this quarter related to the integration of IPS, increased distribution costs due to our growth in Central America, and the updating of our e-commerce platform in the United States, which will enable it to maintain its leadership position in the coming months in this market. The operating margin improved by 10 basis points. Adjusted EBITDA, excluding one-time donations and acquisition-related expenses, decreased 5.8% year-over-year. However, the adjusted EBITDA margin grew 110 basis points in Mexico and 160 basis points in Argentina.
The adjusted EBITDA for the semester remains in line with that of the first semester of 2018. The adjusted EBITDA margin stood at 16.1% compared to 16.8% for the first six months of 2018, in line with our guidance for 2019. The margins contraction can be attributed to a contraction in sales volume that was partially offset by an improved price mix and lower raw material costs. Net profit during this quarter amounted to MXN 69 million. It was affected by increased interest payments amounting to MXN 65 million due to a large net debt position, an MXN 18 million loss on U.S.-Mexican peso hedge, and a monetary position loss related with hyperinflation and depreciation in Argentina of MXN 24 million. As for the semester, our interest payments amounted to MXN 134 million due to our net debt position increase.
We had a MXN 36 million loss on US/MX derivatives and a MXN 60 million loss in our monetary position in Argentina. In terms of our geographic breakdown, we registered a quarterly decrease of 9.9% in sales year-over-year, and a 6.9% reduction in the first semester in Mexico. Our adjusted EBITDA margin grew to 23.1% or 110 basis points year-over-year this quarter due to the continued reduction in material costs and better product mix. It seems that Mexico has entered a technical recession in the second quarter, there was a significant drop in government purchases, particularly those of water fountains. In fact, most of our income from that business is now derived from servicing previously installed water fountains.
Furthermore, as was already mentioned, the building time to market of new sales of treatment and recycling solutions will not impact our revenues until the second semester. Nevertheless, it is worth pointing out that we are optimistic about that business pipeline and have destined 34% of our CapEx to it as we prepare to start building. In Argentina, sales grew 77.2% this quarter after accounting for the contribution of sales from IPS, which grew due to a better price mix that offset a contraction in volume and increased the company's market share. We also registered a 72% organic sales growth in local currency, mostly driven by our pricing strategy, even though it was partially offset by the 48% depreciation of the Argentinian peso.
Sales during the first six months of the year increased 65.6% versus the first semester of 2018 as a result of our offering new mid- and lower-range products, particularly water heaters, which have proven successful in the context of a continuing economic downturn that has increased our market share. In fact, without the effect of the depreciation of the Argentinian peso, the group sales would have increased 11.4% during the quarter and 13.5% during the semester. Furthermore, we expect an improvement in the macroeconomic environment in Argentina during the second semester. The results of our other countries category were mostly affected by the reduction in government sales in Brazil. Sales continued to grow at double digits in Central America, driven by increased sales of storage solutions, and our sales of water heaters and storage solutions also grew in Peru as well.
It is also worth noting that we are very optimistic about the prospects of our newly updated e-commerce platform in the United States and our alliance with Tank Holding Corp., which acquired our manufacturing facilities in that country. We will continue looking for new partners to further enhance the platform's offering and ensure it remains as the market leader. Government sales remain below our previously established threshold, as it only represents 1.8% of total revenue for the quarter. Regarding our portfolio mix, sales of products in the second quarter accounted for 94% of total sales and grew 5.6% year-over-year, driven by the integration of IPS. Services accounted for 6% of total sales and registered a 49% decrease year-over-year, which is attributable to the decrease in government purchases in Mexico, and the effects of the time to market cycle that I have already mentioned.
Nevertheless, as we have mentioned in the past, we continue to see good traction in this business, growing our pipeline and booking new clients. Moreover, we are also exploring how to increase our post-sale reach, offering maintenance service and additional products, taking advantage of our distributor network, and the word of mouth of the professionals who install our solutions. Sales of products grew 8.2% during the semester, and integrated solutions or services decreased 42%. Our results this quarter, and for the first six months of the year, show that our capital allocation discipline continues to contribute significantly to our results, and that we continue to find new venues for organic growth and to expand our Water as a Service platform. As already mentioned, 34% of our CapEx was used to construct water treatment and recycling plants.
Moreover, our capital in Argentina is driving projects aimed at increasing the efficiency of our heating and water flow solutions. I would also like to reiterate that we are confident that we will keep net debt below 2x EBITDA, in line with our current 1.7x EBITDA leverage. We'll continue to use this balance to finance CapEx for our Water as a Service platform. In that vein, as Charlie already mentioned, the divestment of our manufacturing assets in the U.S., which net MXN 771 million, will contribute significantly to our cash holdings and will have a positive impact on our net debt position. Moreover, we expect our return on investment to increase due to our overall effort at streamlining and optimization, and most importantly, our capital allocation discipline, which not only encompasses our acquisition, but also our potential divestments.
In fact, we are currently exploring options in the regions in which we operate. I believe that our results reaffirm our positive long-term outlook and validates our current growth strategy, which is built on the strength of our brand, our distribution network, our cutting-edge technology, and product design and unwavering customer loyalty. We expect to continue to be able to take advantage of the rapidly increasing demand for water in the hemisphere, which by some estimates, is growing 2.5x Faster than the population. Long term, there will be even more significant growth opportunities in storage, water flow, treatment, recycling, heating, and purification. Our company will be the best position to take advantage of them, as it is in the present.
That is why, going forward, we will continue to focus on the customer to maintain a strong balance sheet and a positive debt outlook, as we have asserted in the previous quarters. Just as importantly, we will remain committed to ESG principles and best practices. We are part of the CEO Water Mandate, a network of CEOs of international companies committed to water under the Global Compact, the largest sustainability network in the world. We're also participating in the Clean Seas campaign with United Nations Environment. We have also launched a competition in alliance with Imagine H2O, the water-based startup accelerator from San Francisco, to implement a pilot project aimed at developing new solutions for water problems.
Likewise, we are honored by the fact that Institutional Investor placed us in the first place in ESG amongst capital good companies in Latin America, and that our integrated annual report continues to be recognized in the Vision Awards of the League of American Communications Professionals. With regard to the shareholder assembly, I think it is worth noting that it approved the appointment of three new independent directors, increasing our board's diversity and geographically and functional expertise, as we discussed on our last call. As Charlie mentioned earlier, the assembly also approved a proposed reimbursement of MXN 0.38 per share and the stock repurchase program for 2019 for the direct benefit of our shareholders. As Charlie already emphasized, we will continue to pursue new strategies to maximize value for shareholders.
Finally, as I have mentioned, during the first six months of the year, we faced economic slowdowns in Mexico and Argentina, and the Argentinian peso depreciation, which affected our results. We expect a better second half of the year due to the following factors. Increased revenue recognition for billing from water treatment and recycling plants. More comparable figures as the second semester of 2018 already includes the hyperinflation and currency depreciation in Argentina. Stable raw material cost at a lower price point than the ones from last year. A stronger cash position in our balance sheet due to the MXN 771 million sale that was realized in July 2019, which will improve our net debt position and reduce our interest payments. For the full year, we expect we will register single-digit sales growth and an EBITDA margin above 16%. Thank you for your time.
We will now answer any questions you have. As usual, we will begin with the participants in the conference call, followed by our website users.
Thank you. If you would like to ask a question over the phone, 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. Once again, everyone, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. As an additional reminder, that is star one to ask a question. We'll take our first question from Rodrigo Verduzco with GBM.
Hello, Charlie. Hello, Mario. Thank you for the call. My first question is regarding volumes, specifically in Mexico. We were wondering if you could give us a little more color in terms of the dynamics you're seeing going forward for consumption, both for the service platform and the products platform. Thank you very much.
Well, thank you very much for your question, Rodrigo, but regarding the service platform, the second quarter was our record quarter for bookings, in new contracts for wastewater treatment plants. Those wastewater treatment plants will be constructed in the next quarter. Towards the end of the year, we should see actual sales be generated from those projects. We also just finished constructing our largest wastewater treatment plant for a paper manufacturing company. That one just came online, and sales should be impacted also for that reason. Regarding products, the product side of the business, we see that buildings that were stopped in the construction process are beginning to start their construction process again, and that should help volumes in products for the second semester. Mario will also complement with additional points regarding government expenditure and others.
Thank you very much.
Well, as Charlie mentioned, we are seeing a better dynamic by government expenditures for the second half. We are also seeing some of the halted construction permits that paralyzed some cities in Mexico start to come back. We are more constructive on the second half because of the above-mentioned items in Mexico.
Perfect. Great. Very helpful. Thank you very much.
Just to finish up, being a little bit more specific, there are some rainwater harvesting programs also in Mexico for the second half, particularly in Mexico City. We believe that some of the water fountains for schools will be relaunched in the coming months.
Perfect. Sorry, a quick follow-up, if I may. Well, it's regarding the divestment. Congratulations on that. We think it's the right steps. We were wondering, going forward, are you expecting to see the divestments also, for example, in the rotomoldeo plants perhaps in Brazil? Do you have any color in which assets would you think would make sense to continue on this divestment route?
Yes. As I was explaining through the conference, we are very actively looking at all of our portfolio assets. We are taking quarterly meetings to review and to take action on underperforming assets. Also putting more money on good-performing assets. That is going forward, and there's more to see in the coming months.
These divestments are very strategic. Regarding the U.S. divestment, in the rotomolding manufacturing process, to have the scale that we needed to have better results, we had to go into businesses that were not water-related. We have decided, as always, that we will remain very focused on water solutions. That was one of the drivers for that divestment, as well as being able to negotiate with the acquiring company, which is the leading company in the U.S. for tanks, and particularly water tanks, a supply agreement that will help us develop our e-commerce business moving forward in the United States, which is an e-commerce business that currently focuses on water solutions, but related to storage, and will continue developing that portfolio into other water solutions.
Again, when we look at divestments, it's both underperforming assets, but also assets that are not as aligned to our strategy in the water space.
Okay, perfect. That's very clear. Finally, sorry about all the questions, could you give us a little more color in terms of the full-year guidance revision? In terms of the single-digit growth you're expecting, could you give us a little more color in terms of high single digit or a low single digit for the year?
Well, actually, it's none of the two. We're looking at mid-single digits. Obviously, as we have very weak results on the first half of the year. As we have mentioned, we're more constructive on the second half. That is why at the end, we're going to be hitting a mid-single digit growth.
Perfect. Thank you very much.
As a reminder to the phone audience, if you'd like to ask a question over the phone, please press star one. We'll take our next question from Jerónimo Cobián with Actinver.
Hello, everyone. I just want to clarify, I'm José Cebeira. The question is more about the guidance. Just to follow up, you say mid-single digit for 2019. My question is regarding about. We have seen a challenging environment during the first half of the year. This has also coupled with some delays in, I would say, water treatment plants and other kind of stuff. I want to know, what do you see for the coming years, talking about 2020 and for the coming years? The thing is we have an expectation for the things that are going better for the coming years. I would like to know if this expectation continue to be positive in terms of the business for Mexico. I see some bright spots in Argentina. I'm pretty happy about that, more about Mexico.
Just as you mentioned, Argentina is beginning to look better. Like I mentioned, we're very proud of our board members, our team and the board members. In our meeting yesterday, we were discussing Argentina's future in terms of macroeconomic terms. Yeah, we are more positive regarding Argentina, which will benefit us greatly as Argentina has become such a relevant market for Rotoplas. Regarding Mexico, we do know that the future is quite uncertain. Regardless of that economic performance in 2020 and moving forward, we do know that the need for water solutions because of scarcity or because of the intention of the general population to take care of water, is going to continue to increase. We, as a company, have been focusing very much on understanding our customers. It is our key top priority initiative.
With this, we will continue to innovate, as Rotoplas has always done. We're sure that we'll find ways to compensate for any potential economic downturn that the country will have. We know that there might be some missed timings, but we're very confident that in the long term, our innovation will always compensate because it's a space where these solutions will always be needed, and the demand for these solutions will continue to increase.
Perfect. Thank you very much.
If I can complement also Charles for 2019, going into 2020, we have a good visibility on signed contracts for treatment and recycling plants. As mentioned, we have a delay in billing, but we are now certain that second half will start that billing. Sequentially wise, that invoicing for water treatment plants is going to increase close to 40% second half to first half. When you add up all the components, a more constructive government expenditure clause, some new construction with the permits coming back, plus full visibility on treatment and recycling contracts on the bebbia platform growing at 2x, that is the four main drivers why we feel second half in Mexico will be better than the first half.
Great.
Thank you, Mario. Just a follow-up. I don't know if you have seen the news during the morning. There is Alfonso Ramírez from Morena party that mentioned that he is looking forward to implement a collect tax related to use of water. Do you see any opportunity to possible taxes?
We were not able to listen to your question clearly. You cut out there for a little bit. Would you please repeat it?
Yeah, no problem.
Can you-
During the morning, Alfonso Ramírez from Morena party here in Mexico mentioned that he's willing to implement a new tax for the use of water here in Mexico. Have you seen any possibility to get advantage or increase any kind of possible, I would say, business talking about water plant treatments?
Well, we were not aware of that, because we were on our quarterly meeting with all the team in all the countries. Just taking the question as it comes, I think they put a tax in the water. That means a price increase in water. If there's a price increase in water, there is a lot of opportunities for the company to capture. People will be more aware of recycling water, or to do rainwater harvesting. I think anything related to water price increase will benefit the company.
And again-
Right
This tax is most likely related to the stress that we will continue to see. The water availability stress that we'll continue to see in the future.
Great. Thank you.
Once again, as a reminder to the phone audience, that's star one to ask a question. It appears we have no further phone questions at this time.
Thank you, Orlando. We have a question on the webcast platform coming from Alain Jaime. Thanks for taking my question. Do you see a recovery in the Mexican construction sector in the short term? If not, what strategies do you have to reduce this effect?
Hi, Alain. Thanks for joining the call. As previously mentioned, with the other questions that aroused. Yes, we are seeing some reactivation in the construction sector in Mexico. On top of that, we have already been taking some cost-cutting actions in the company. If that doesn't revamps, the company will be prepared for a negative environment. We're seeing both things. If they converge, that will be very good for the company. If not, at least we're going to be very well prepared, with the management of our cost structures and expenses.
We have two questions from Mauricio Alvarado from Citibanamex. Can you please expand on the sales growth estimates for 2019 and 2020 year end, considering the relevance of Mexico within consolidated sales and the declining GDP trends in the country?
Thank you very much for your question, Mauricio. As we had mentioned, we do foresee a possible downturn in Mexico's economic performance. As also mentioned, such as this tax, there continues to be an increase in water stress, and we continue to see more demand for water solutions. It is important for the company to continue to invest in innovation so that we have the right solutions. The company is very agile there. We may have some misalignment in timings, but I'm sure that in the longer term, Rotoplas will continue to lead in water solutions, taking advantage, unfortunately, of this water stress situation. We see now, as mentioned, rainwater harvesting solutions being installed in northern areas such as Mexico City. We will continue to the second part of your question and please, could you read, Mariana?
Sure. Also, CapEx has been increasing in the last two years, which has also triggered total debt levels. How feasible would it be to keep debt EBITDA below 2.7x , considering compressed EBITDA, increasing CapEx needs, and that this ratio used to be below 2x in the last years?
Before Mario goes into the technical detail, which is, in short, it's quite feasible to keep it under that. As we mentioned, a big part of our CapEx investment, 34%, was dedicated to wastewater treatment plants and amplification plants. When we build it's after we've signed contracts with customers we consider to be of very high quality. The certainty of those plants generating revenues is very high. We're quite certain of the performance those capital investments will have in the future. Also, as we mentioned, the divestment of our manufacturing business in the U.S. will have a big impact in our balance sheet. Mario can give you a little bit more detail in the debt levels that we can foresee.
Thanks, Charlie. Mauricio, regarding the ratios you mentioned. Well, right now, the net debt to EBITDA is 1.7x . That is below 2x . After the transaction that we closed on July 19, debt level, it's above 1x . We expect pro forma to close by year-end below one turn of net debt to EBITDA. The balance sheet is pretty strong, and as Charlie mentioned, the strength of the balance will enable us to keep investing in innovation and to pursue the water treatment and recycling plants, to keep on building the bebbia purification business, and to keep on these long-term tests where water needs are growing much faster than population.
There are no more questions on the webcast. Orlando, could you please open the line for questions?
Absolutely. As a reminder to the phone audience, if you'd like to ask a question over the phone, please press star one at this time. Again, to ask a question over the phone, please press star one. It appears there are no further questions in the phone queue.
Okay. Well, thank you very much for your time and your interest. We hope you will join us again next quarter. Until then, we'll be sure to provide you with important updates.
This does conclude today's call. We thank you for your participation. You may now disconnect.