Earnings Call: Q4 2018

Feb 15, 2019

Good morning, and welcome to Grupo Rotopas' 4th Quarter 2018 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 uncertainties 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, Brudolfos' Chairman and Chief Executive Officer and Mr. Mario Romero, Chief Financial Officer. I will now turn the call over to Mr. Carlos Rojas. Thank you, operator. Thank you all for joining us today. As you know, yesterday, we reported double digit growth in sales and EBITDA year over year in both the 4th quarter and 2018 as a whole. All of our country operations grew except for Brazil, where as you know, we are reducing government sales and transitioning our focus on products mixed towards to premium segments. And this growth was driven by our acquisitions, increased demand for our products such as storage and flow solutions and our water as a service platform. In fact, in 2018 alone, we added over 4,700 certification points and over 1800 water fountains exceeding our expectations. The fact that we grew across the board is very significant for a number of reasons. First of all, as we have discussed in previous calls, some of our Latin America operations experienced significant political, fiscal and economical uncertainty during these past few months as well as, for example, the case in Argentina, where hyper inflation continued to have a significant impact in our overall results. And yet, not only we did manage to grow in the environment, but we did so while consolidating a mortgage supply portfolio of products and services, maintaining and expanding our market share. In this context, it is worth noting that the reopening of our sustainable plant, Aqua, 17x2x for ARS 1,000,000 was oversubscribed several times, paving the way for greater capital investments in our service platform. It is significant as well that our recent acquisition not only contribute to our sales growth, but they also provide us with synergies, technology and institutional knowledge that we can leverage as we move forward from that eventually will enable us to fully reliable water market position in the region. Finally, it is significant that as we grow, we also continue to develop strong E and C culture, pushing forward initiatives in sustainable finance, but also strengthening our corporate governance and promoting access to water to better products and services. We are convinced that this is the only way forward for companies such as our own and thankfully, as we talked about in our previous calls, we are being recognized for it. We continue to be included in the Total Sustainability MENA Pacific Alliance Index, which tracks best in class companies that outperform their peers in sustainability. However, we continue to improve in the corporate sustainability assessment produced by MOBECO SAM, the leading sustainability evaluation team. We continue to consolidate the robust and diversified portfolio, both organically and inorganically. And we do so with the aim of providing even more innovative solutions for a market that is growing and evolving constantly and which we have deep and well established leadership position. And we will continue to integrate our acquisition according to the strategy, grow our business and create value for our own stakeholders and communities. Thank you for listening. I would now like to turn over the call to Mario, who will guide you through the quarterly and key results and look forward to your questions. Thank you, Carlos. Good morning, everyone. Thank you for joining us today. I will now go over some of the financial highlights of the 4th quarter and the year. Sales grew 26% year over year this quarter, an 18% yield. With a major contribution from IPS in Argentina and the e commerce platform in the United States. EBITDA grew 57% year over year in the Q4 and 25% in 2018. Furthermore, increased profitability margins, obtaining greater efficiencies in our operations by means of a better pricing, lower raw material costs and a constant expense discipline and cost control initiatives such as 0 based touch peak. As for our geographic breakdown, sales in Mexico grew 8% year over year in the Q4, accounting for 54% of our total sales. Our operations in Argentina grew 45% in local currency, excluding the recent acquisition of IPS, even though this growth was offset in Mexican pesos due to the Argentine peso depreciation, reducing the goods growth by 4 percentage points. And our country's category, which includes our operations in the United States, Brazil, Peru and Central America grew 4% year over year. Regarding our annual results, sales in Mexico grew 6.5% in 2018, boosted by greater sales of water clove products and purification services, evidencing our leadership position in the market and the success of our diversification strategy. The order tariff grew 29% in 2018, driven by the growth of our operations in the United States and Central America. Sales in Argentina grew 55%, driven by the successful integration of IPS and improved price mix in our organic operations. However, as well as the case for the 4th quarter, the inflation rate had a positive effect on our journey growth, but it was offset by the depreciation of the Argentinean peso. To give you more color on the integration of IPS, this provides a powerful export platform in South America. It also contributes significant growth in volume and sales. In fact, the volume of exports from Argentina grew 42% in 2018, offsetting the slowdown driven by the depreciation of the Argentina peso. Despite of this adjustment in the purchase price, the acquisition continues to grow in sales and volume and the export platform market leadership and new product development will accelerate into 2018. This slide is good to point out that the intrinsic value of the company is great and immediate synergies are still pending to happen. Likewise, the integration of the e commerce platform in the United States is already boosting the growth of our organic operation in that country. Regarding our product mix, sales of individual solutions or products in the Q4 accounted for 92% of total sales and grew 32% year over year in the quarter and 21% for the year as a total, boosted by the integration of IPL, the growth of our organic businesses and the operations in the United States. For both part, integrated solutions or services accounted for 7% of total sales and we registered a 24% decrease year over year in the Q4, which is mostly attributable to a decrease in sales of cell sustaining solutions that are mainly associated to the growing channel, such as rural rainwater harvesting, the outdoor composting bathroom and the Premier Orchard Agriculture Irrigation System. Sales of services were down 5% for the year, mostly due to the 3rd quarter results. Nevertheless, we continue to the expansion and strengthening of our well accessories platform. For example, it's good to point out that our well purification platform now serving 49 cities in Mexico in line with our projections and plans. As for the water treatment plants and the reason behind the reopening of the sustainable bond And after undertaking our learning curve throughout 2018, we're observing good traction in 2018 and we think that we'll continue in 2019. During this time, we added new clients and booked 87 new coherent units throughout 2018, while continuing to exponentially deliver pipeline on the client base. It should be noted, however, that our net income was affected by 3 factors: 1st, higher interest payments amounting to a net of ARS192,000,000 due to a positive net debt position. 2nd, the monetary position was in Argentina amounting ARS 64,000,000 and third, taxes amounting to ARS 23,000,000. Normalized net income without considering the Argentine effect for monetary loss in taxes would have been MXN 265,000,000. We are maintaining effect eroding more than 100 basis points from our net margin. The fact that our acquisitions contribute significantly to our results combined with organic growth of our businesses and the positive outlook for our well as a service platform. This affects and reaffirms our positive long term outlook and evaluates our current growth strategy. As Carlos said, we remain committed to customer centricity and ENG principles, while maintaining a strong balance sheet and a positive debt outlook. We are also confident that we will keep net debt below 2 times EBITDA in line with our current 1.5 times EBITDA leverage. And we'll move the balance to final capital expenses for our water and service platform. Going forward, we are expecting we will achieve for this year sales growth greater than 10% and by the EBITDA margin will stand above 16%. I would like to have the opportunity to answer any questions you may have. We will begin with the participants in the conference call followed by our website users. Thank And at this time, we will go to a question from Jose Escobar of Activer. Hi, Carlos and Mario. Congrats on the results. I have one question, but before the question, I just want to be sure that the Brazilian sales declined in Brazilian real due to the strategy of focusing in higher profitable products. And the question would be, we have seen positive results in the e commerce platform in the U. S. Market. I was wondering when we are going to see this level of implementation, but in Mexico? Thanks Jose for joining the conference call today. As for the Vascey question, if you remember back in 2017, we have to initiate some of the rainwater harvesting programs and we consolidate we execute on it. That was not the case for 2018, particularly in the second half. So that is why you see a slowdown in Brazil. If you look at the retail water tank business in Brazil, That is growing and we're just managing in a small scale. As for the e commerce platform, as we explained previously in the market, the U. S, which is the most developed market, we are understanding the space. We are understanding what will be their capitalization into the other countries where we operate. And we've been starting to do some pilot testing in some countries in South America. We believe as e commerce becomes a greater distribution channel that's happened in the U. S, being ahead of the curve will help us in being the leader in Mexico. Thank you very much. We have a question on the webcast from Liliana de Leon from DBM. Could you please share with us more details regarding the growth of water treatment plants during 2018 and going forward? Thank you, Eugenio, for joining us today. And as we present during the webcast. But what we're seeing is as time passes by and we understand better the market and we've been educating as well the clients, better traction on the amount of interest and value to implants in the marketplace. As you can see, the pipeline in 2017 was we started the year with 25. We booked and executed 15. In 2018, the pipeline was 124. We booked 87, some of them are still in construction and will start to reflect on revenue and EBITDA recording throughout 2019. But the important thing here is in 2018, we are beginning the year with a pipeline of 417, which is 3.5 times last year and it's like 15 times 2 years ago. And where you can see moving from only having 6 clients in 2017, moving to 16 clients in 2019, We believe that the business that we have shared with you and the long term goal of achieving 5,000 water treatment plants is feasible and we are confident that those results will be achieved. Have another question from GBM, Guilena de Leon. Regarding 2019, you are expecting a growth in all the regions above 10% or some countries should be above, below the target? I would say, Lelina, that most of the countries will grow above that target rate. At this point, we are not giving those details, but we feel confident that at least that number will be achieved, I'll say. Let's see. I just hope. We have another question from Gerani Mukobian from Eximibe. We see an upward trend for the majority of the main raw materials. I understand that you make significant hedges for the raw material price. Could you please share us with more information about this? Hello, Geronimo. A couple of things. The hedge that the company does is for the FX exposure in the U. S. Dollars and we do hedge our cost, but only the FX exposure, not the raw material exposure. As for the raw materials future outlook, we are seeing more installed capacity in the petrochemical side and more supply than demand. So we see a 2019 stable environment regarding raw material costs. And the last question from Rodrigo, Rodobusco, I think it's pretty much the same as the other one about Titeza. But hello, thank you for the call. Could you give us an update on Titeza openings for 2018 2019? Well, I guess the 2018 is already reported here, 2019, but we're just trying to sign out is that the amount of Ireland that there is out there and obviously how many we're going to be looking depends on how good we are on executing that. I think our track record speaks well about our commercial and technological capabilities. We have about 50% heat ratio in 20172018. So I think that will help out to make your enormous for 2019. Jenny, could you please open the line again for questions just to see we have one on the phone? And as a reminder, it is At this point, there are no other questions in the queue. Thank you very much all for joining us today. See you soon again. Talk to you soon again in the next report. Thank you. Yes. 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. And again, ladies and gentlemen, that does conclude today's call. We would like to thank everyone for your participation. You may now disconnect.