Good morning, and welcome to Grupo Rotoplas' first quarter 2019 results conference call. Please note that today's call is being recorded, and all participants are currently in a 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, 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 could be found in the investor 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, Rotoplas' Executive Chairman of the Board, and Mr. Mario Romero, Chief Financial Officer. I will now turn the call over to Mr. Carlos Rojas. Please go ahead.
Thank you all for joining us today. It's always a pleasure to be able to speak to you, but today is a particularly auspicious day to do so, as I have an important announcement to make about the future of our company. First, I would like to address a couple of key aspects of the company results for the current year. As is mentioned in the report, we continue to grow up in spite of changing, challenging macroeconomic environments in both Mexico and Argentina. IPS, our regional acquisition in Argentina, continues to grow, and our portfolio in that country is only built up by something new, another large amount of new solutions, for which there is a great demand in the current economic conditions. We also registered double-digit growth in Peru and Guatemala, El Salvador, Costa Rica, Honduras, and Ecuador, which are very competitive markets.
Furthermore, we continue to take advantage of our synergies between our e-commerce platform and our manufacturing operations in the United States, and it is due to this only that we have opened a new store in Oklahoma, further strengthening our retail presence in the United States and the total external market. The success in diversifying our market presence and our ability to leverage the strength of our acquisitions has enabled us to overcome the negative effects of the depreciation of the Chilean peso and the reduced growth of Coca-Cola in Mexico, which negatively impacted most of our results. We have strived to be an exceptional citizen company, innovative, and rapidly diversified company that achieves growth by producing the best solutions and drives the highest ESG standards. Furthermore, we continue to seek and find growth even in facing adverse economic conditions.
Our latest strategy reflects our deep thoughts and, at the same time, our intent to continue moving forward. To that end, this is the great time that I would like to announce the next stage in the company's evolution. As part of the Board of Directors yesterday, I will continue serving as Executive Chairman of Rotoplas and will be succeeded as CEO by Carlos Rojas Aboumrad, our Vice President of Sales and Retail. Carlos is currently a mechanical engineer and obtained an MBA from Babson College. He first joined Rotoplas in 2004 as part of our development professional program and has since been the leader for our innovation and sustainability efforts, working with our operations in Mexico, Brazil, and the U.S. Since 2013, he's been in charge of innovation and new business ventures. He's also a member of our Board of Directors.
I believe that Carlos, who has worked for the past years to create a lot of value for us, and I look forward to his new role as CEO. His skills and vision represent the best of our people, hard worker, and embody our vision for the future of this path. A testament of his commitment, I would now ask him to address the assembly before turning to Mario for a more in-depth discussion of our key results.
Thank you very much for your kind words, Mr. Chairman. I'm honored by your and the board of our largest company, and I'm humbled to assume this responsibility. Under your leadership, Rotoplas has experienced extraordinary growth and has greatly expanded its presence across America, building an ever-innovating product portfolio, and greatly diversifying its geographic reach. It has been my privilege to contribute to this effort and to have the opportunity to continue to do so as CEO. As you already mentioned, our strategies have proven sound, and we will continue to execute on them. We will continue to strengthen and diversify our portfolio. We will continue to provide innovative solutions to our growing and changing markets, conserving the leadership positions that we've done. Most importantly, we will continue to adhere to the highest ESG standards, not only continuing our growth, but also creating value for our stakeholders and our community.
Thank you for participating in this call. I look forward to your questions, and I hope you will be able to join us at our AWWA event, which will take place on May 6th at 5:30 P.M. in our headquarters in Mexico City. It would be a great opportunity to meet in person. In the meantime, I would like to turn over the call to Mario for a more interactive discussion of our quarterly results and other relevant news. Thank you.
Thank you, Carlos, and congratulations on the earnings. It is great news for the Rotoplas team. Good morning, everybody. Thank you again for joining us today. I would now give the floor to Mario Perez Caro. He will commence with the overview of the quarter's relevant news concerning our quarterly results before proceeding to the Q&A session that will take place in a moment.
Starting with the top line, sales grew 7% year-over-year this quarter, driven by the integration of the new acquisition in Argentina, as well as our growth in Peru and Central America. EBITDA grew 5% year-over-year due to an improvement in the gross margin and lower depreciation expenses. Furthermore, the manufacturing margins improved as a result of a reduced investment cycle, and the gross margin increased by 100 basis points.
The 46% depreciation growth in Peru reduced this overall growth by mainly 3 percentage points. Likewise, we paid interest payments amounting to MXN 69 million, and monetized precision loans of MXN 38 million in 2019 due to hyperinflation and depreciation of local currency. The loss resulting from the adjusted fair value at 2019 reduced net income by 30%. Hyperinflation in 2019 impacted net margins by 127 basis points. This payment resulted in an increase of MXN 2 million in operational expenses in 2019. MXN 18 million in legal expenses, which negatively impacted 2019 results. In consequence, we are planning to cap negative effects in 2020. Our geographic breakdown, sales in Mexico decreased 4% year-over-year in the first quarter as a result of lower sales and the reduced sales forces of our main customers, which had a negative impact on the demand for our products.
Most of the decrease was incurred in bottled drinking water contracts for stores and water dispensing. On the other hand, the drinking water purification plants for commercial and residential customers are stable in terms of revenue and have grown in number of units compared to the same quarter last year, reaching more than 10,000 pieces in June and MXN 53 in revenue. Our operations in 2019 reached record currency, 53%, driven by 40% growth in ITR and local sales of our lower range products. However, as already mentioned, this year there was an upset in MXN due to rising interest rates and depreciation. The results of our power purchase agreements brought express solutions to you due to water scarcity failures in the country and therefore the improvement of our solutions in Peru, particularly in Guatemala and Calera in Costa Rica, as a result of very targeted promotional plans.
Inventory costs also remained well below our internal limits as they only represented 1.8% of our sales. Regarding our product mix, sales of new solutions of products in the first quarter accounted for 30% of total sales, with year-over-year growth of 11% year-over-year, boosted by the advancement including the new Argentina, Central America, and Peru. As for tap, digital solutions accounted for only 6% of our total sales and registered a 33% decrease year-over-year. This probably indicates a slowdown in government spending in the public human sector, which lowers sales to the other side. Likewise, the development cycle of new water treatment plants translated into lower sales of existing solutions this quarter. It is walking along with our expectations in terms of the year.
Moreover, as we mentioned in previous calls, we continued the discussion in this group, growing our pipeline in between five new clear units which represent 30% impact year-on-year, quarter-on-quarter. As Carlos already pointed out, our acquisitions continue to contribute significantly to our results, and we continue to find new avenues for organic growth in the primary water supply segment. These are things our executive team can have and evaluate our current year-to-date. Going forward, we will remain committed to ESG principles and continue to focus on the topic. We will maintain clean balances and effective debt levels, as we have stated in the previous slide. We are also delighted that we are confident that we did not have the EBITDA in our 2021 outcome. We will continue to use the balance and capital expenses for water solutions.
For 2019, we are confident that we will achieve sales growth better than 10% and an EBITDA margin of about 15%. As for the new part of this, as you know, the general assembly, there are board directors. We have directors who represent three different generations, reflecting our customer base. These are baby boomers, Generation X, and millennial. We also have three additional directors joining the U.S. As a listed company of global reach like ours, it's only fitting that we continue to strengthen our board. Therefore, I would like to announce that we will be proposing three new independent board members to the shareholders assembly. Marina Diaz, Alberto Arizu, and Jerónimo Gerard. If approved by the Assembly, Ms. Diaz Ibarra will be the first female director of our company, and with her appointment, as well as those of Mr. Izzo and Ms. Leal.
Independent directors will continue to provide a unique view to all of the board committees. They will make up to 50% of our board members independent. Furthermore, the three directors will complement our board expertise with experience in IT and the wastewater management arena, among various fields. In addition to this appointment, we will also propose a MXN 0.38 dividend per share and a stock-repurchase program for 2019. It's worth noting that our enterprise value at the EV/EBITDA TTM was 9.1 times, which is about half of the average of comparable water and water-related companies around the world. Thank you for your time. We will now answer any questions in the chat. We will begin with the participants in the conference call, followed by our website visitors.
Operator, could you please open the line for questions?
Ladies and gentlemen, if you wish to ask a question over the phone, please press star 1 on your telephone keypad. Please ensure that the mute function is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Once again, it's star 1 on your telephone keypad to ask a question. We will pause for just a moment to allow everyone. Okay, we will now take our first question. It comes from Rodrigo Verdinzel from GBM.
Hello. Good morning. Thank you for the call. Congratulations on the results. I have 2 questions for you. The first one is regarding the integrated sales portfolio. We were wondering if you could give us more color on the situation you're seeing regards the security or the clarity in regards to regulations or political stability in terms of your demand growth for the water fountain services or other government-related services. The second question is regarding Sytesa. We were wondering if for 2019, where should we track the growth in terms of sorry, the build, operate, and transfer team or the maintenance team? Thank you very much.
Hi, Rodrigo, thanks for joining this conference. Regarding the first question, there are 2 components in price in the sales of services. The third one is the water fountains. First, do not require in the past years, we have.
I'm terribly sorry, I think the line is cutting. I couldn't quite hear that.
Can you hear? Can you hear me better?
Yes. Like that, sir. Thank you.
Okay. I was explaining.
I'm sorry. I'm terribly sorry to interrupt. The thing is that the line is cutting again. I lose connection, like when you start speaking. I don't know.
I will change the mic. Probably be better.
Thank you.
Okay. Going back. There are two components to the decrease in sales of the water space. One is
The water contracts are first. We were executing some contracts we had from the past. We were investing in sales. As you know, that problem was finished. Those sales will also last, and the rates of revenue will also come. That's one component. We are building new plants to become more complex. It's taking more time than we anticipated with new plants up and running. That's according to our plan. Our plan for 2019, the water treatment plan, is intact. Actually, we are seeing more traction to it. The only thing is that new clients are coming in with different processes that are similar and bigger and more sophisticated wastewater being developed. It is taking longer time for the company to start getting that revenue in the process. Those are the two. Sorry, had to change the microphone.
To complement Mario's response, I wanted to mention that in the wastewater treatment plant business, the synergies between Sytesa and Waterplan have proven to be very valuable to our customers, and the response has been tremendous. It is a business model that's very different from our traditional business model, and it does take longer for results to show up in the sales and EBITDA numbers. The response from customers and the acceptance of our offer has been very, very positive. Thank you. I hope, Rodrigo, these answers clarify your question. Rodrigo, can you hear us?
It seems that the participant has disconnected at this time. We will now move on to the next question. It comes from José Cebeira from Actinver. Please go ahead.
Hi, Carlos and Mario. Just two quick questions. During the first quarter, you faced more than a challenging environment in Mexico due to uncertainties in the economy and the delay in some payments. I just want to know that during April, have you seen any recovery, I mean, in Mexico? Do you expect stronger figures during the second half of the year? Second question, if I may, just regarding the IFRS 16, this effect. I just want to know if you can share with us a little bit more comparable figures. I mean, the amount of EBITDA without this IFRS 16 or the EBITDA margin. Thank you. Hello?
Ladies and gentlemen, please stand by as we're experiencing a temporary interruption in today's conference. Thank you for your patience, and please remain on the line. Please go ahead.
Hi, Carlos and Mario.
Yes. Can you hear us now, sir?
I have two questions. The first one is regarding Mexico. I know that during the first quarter you faced more of a challenging environment and some delays in the payment. I just want you to give more color about the performance in April, or if you think that the figures for the domestic operation are going to improve during the second half of the year. Second question is regarding the IFRS 16 effect. Could you give us a little bit more details about what should be the EBITDA without this effect?
Yes. First, José, thank you very much for joining the call. Regarding your second question, the company adopted IFRS 16 in January 2018. The EBITDA is the same. It already includes the effect of IFRS. The first point, as you mentioned, we are facing the challenging environment in the consumer side in Mexico. We are being more conservative in CAPEX in 2019. At the right point, very aggressive in CAPEX in Mexico. We are in a lot of a difficult capital As you see in the quarter report, the company, we remain comfortable with our in terms of revenue in EBITDA. Mexico is a lot of big challenge at the moment. Can you hear me, José?
I'm really sorry, but I can't understand what you have said. I believe that there are some huge problems in the mic. I'm really sorry, but I can't understand what you have said.
José, can you hear me now?
Yes. I can hear you.
We're going to try to reconnect you to another line. I'm going to try to answer again the questions with this mic, and so we can get them to you.
All right.
EBITDA is the same as the
Ladies and gentlemen, please stand by, as we're experiencing a temporary interruption in today's conference. Thank you for your patience, and please remain on the line. Please go ahead.
José, can you hear me now?
Yes. Loud and clear.
Thank you very much for your patience. We have a terrible problem with the mic.
No worries.
Now we're in better shape now. Regarding your two questions, I'm going to start with the IFRS. The EBITDA report is going to be the same because the company adopted IFRS 16 since January 2018, there's no changes there.
Okay.
With regards to Mexico, as we mentioned through our conference, we are seeing a more challenging environment going forward. Therefore, we are being more conservative in our capital expenditures, as well as starting to implement some cost-cutting initiatives across the company.
All right.
It's also worth to mention that we have some tailwind coming from lower resin prices. As you might know, new polyethylene capacity is coming to the market, and that is helping us in the cost of raw materials, which translate into an offset to the declining or more conservative revenues growth for Mexico.
Okay. Thank you very much.
Again, sorry for these technical inconvenience-
No worry.
We only have mic problem.
Okay. Don't worry. Thank you very much for the answer.
Thank you. Once again, as a reminder, ladies and gentlemen, it's star one if you wish to ask a question over the phone. There are no further questions over the phone at this time. I would like to hand it back over to the speakers
We have a couple of questions posted on the website. Mariana, you want to read them?
Sure. We have a question from Liliana De Leon from GBM. Could you please give us more detail on Sytesa's growth or profitability for the year?
Hi, Liliana. Thanks for joining us. With regards to Sytesa, as we explained before, the pipeline and the booked water treatment plant is going according to plan. Our plan for the year is intact in terms of our target of revenue and profitability. As explained before, we have experienced some delays on the beginning of invoicing the service, given that there are more complex water treatment plants being built, as well as a new set of clients that their processes are different to what we were used to. We expect to continue increasing the pipeline and the bookings for the remainder of the year, and invoicing should be resolved during the second quarter of this year.
We have another question from Liliana De Leon. How volume in Mexico are performing in April? The slowdown in Mexico is something that could make you more cautious regarding growth and profitability going forward?
Thanks again, Liliana, for this question. As explained to José, obviously the environment, as we all sensing, is being more challenging. I think the good part to it is that raw material prices are going down, and that is helping out the profitability of the company for 2019. We are very focused on executing well our plan and hope to have a good year in Mexico despite of the economic situation we are all facing.
We have no further questions on the website. Could you please open the line again, Christian, for questions?
Of course. There are no questions in the phone queue at this time. Once again, ladies and gentlemen, it's star one if you wish to ask a question over the phone. There are no further questions in the phone queue at this time.
Thank you, Christian. Well, thank you very much for your time, patience, 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 will conclude today's conference. Thank you all for your participation. You may now disconnect.