Earnings Call: Q3 2018

Oct 17, 2018

Quarterly report

Good day, and welcome to the Grupo RotoPlus Third Quarter 2018 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 there 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 closed. 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, RotoPlas' Chairman and Chief Executive Officer and Mr. Mario Romero, Chief Financial Officer. I will now turn the call over to Mr. Carlos Rojas. Please go ahead, sir. Good morning, everybody. Thank you and thank you all for joining us. As you know, yesterday we reported that we registered double digit growth in sales and EBITDA year over year in both in the Q3 and the 1st 9 months of the year. And the main drivers of this growth were the performance of our operation in the United States, integrations of the results from our recent acquisitions in Argentina IPS and the same increase of water as a service in Mexico. All in all, I believe that this is evidence of our ability to successfully integrate our acquisition and leverage the synergies they provide. And just as importantly, it highlights the potential of our integrated solutions businesses, which continue to gain a more prominent role in our operation. In fact, after a very successful trial run, we have begun to expand we have begun expansion of our drinking water platform, which compromised residential and commercial purification service several Mexican cities. We also registered significant growth in Central America and Peru, overcoming a challenging cross semester for our operations in those countries and further consolidation our position there. And even though the depreciation of Argentina peso had a significant impact in our old results, it is worth noting that our operation in Argentina grew faster than the advantages of the market opportunities that are arising in the country. Moreover, with the duration of IPS, accompanied with over 70 years of history, which has a healthy balance sheet and very competitive export platform that will greatly aid us in consolidating our presence in South America as a whole. We will continue to execute our strategy for the region, taking a long term view as we always have and feel confident that as the volatility recedes, our operation in Argentina will make an even greater contribution to our company growth. Moving forward, we will continue to emphasize innovation and sustainability. And in the same vein, we will continue to seek the opportunities for growth, both organic and through acquisitions. A few days ago, we reopened the second issuance of the sustainability bond, which has oversubscribed 3.8x and netted MXN 1,000,000,000. This fund will be a earmarked to the water as a service business in Mexico. And we continue to be included by John's Sustainability Index, Mila Pacific Alliance Sustainability Index, which attained to our superior performance in this area. Finally, it is worth noting that government shares well below 3% exceeding our goal in this respect. Thank you for listening. I would like to turn over the call to Mario, who will guide you through the quarterly results and look forward to your questions. Thank you, Carlos. Good morning, everyone. Thank you for joining us. I will now go over some of the financial highlights of the Q3. As Carlos mentioned, sales grew 27% year over year this quarter. With a major contribution from our recent acquisitions and the greater demand to our integrated solutions in Mexico enabled to increase by 11% over the same period. You should be noted that the depreciation of Argentina peso had a negative impact of 8% in both of us total sales. Furthermore, the weakness of some of the removiscurrences against the U. S. Dollar and the price of commodities increased by cost of raw materials, which had a negative effect on some of our margins, but were partially compensated by a better price mix and the cost efficiencies. This affects volatility in Argentina and higher net interest payments derived from a positive net debt position both have a significant impact on net income. As for our geographic breakdown, sales in Mexico grew 4% during the Q3, accounting for 54% of our total sales, down from 65% in the previous quarter. The area of Casa Catteri, which includes our operations in the United States, Brazil, Peru and Central America, almost 65% year over year. And as Carlos already mentioned, our operations in Argentina grew 39% organically in local currency, even though this growth was offset by a 41% depreciation of Argentine peso against the Mexican peso. Nevertheless, it is worth noting that we have not only maintained or expanded our market share across most of our market segments, elevating the strength of our brand and service. Regarding our product mix, sales of Enidio Solutions in the 2nd quarter accounted for 90% of total sales and grew 27.7% year over year, both by the integration of IPS and the growth of our operations in the United States. For the part of integrated solutions accounted for 10% of total sales and registered an 18% increase year over year, which is mostly attributable to sales of white water cleaning plants in Mexico. There was a reduction in the EBITDA of Integrated Solutions, mainly due to the expenses associated with the ramp up of the water as a service platform in Mexico, which is valued in excess of ARS 8,000,000 per quarter as more customers are being acquired. The fact that our acquisitions are nicely complementing the company's product and service portfolio combined with organic growth of our business, particularly the water as a service in Mexico, added that to the strength of our current growth strategy and reaffirms our positive long term outlook at a sustained double digit growth rate. Going forward, we feel confident that for 2018, we will achieve organic double digit growth for sales and EBITDA, and we will maintain a strong balance sheet with a positive debt outlook for future growth. Finally, I would like to make a brief aside to mention the ARS 111,000,000 increase in depreciation and ARS 43,000,000 for onetime M and A related expenses for the e commerce platform in the Q1 in the United States and the waterflip business in Argentina for the Q3 and MXN 29,000,000 for onetime accelerated depreciation due to solid panels installation in Mexico and machinery divestiture in Brazil. I hope this clarifies some doubts, which may have been clear in our past conference call. 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. Please proceed, Tricia. And our first question we'll hear from Eric Nigglewhort with Bank of America Merrill Lynch. Hi, thank you for the call. I just have one question. I would like to see if you can explain to us further the costs related to the drinking water platforms, please in Mexico? Hi, Lincoln. Thanks for your question. As some of you are aware, last year, Rocket Plus decided to launch an innovative service in Mexico of promoting people to hire the service of purifying water at the point of use. We started with a pilot test last year. It became very successful. And this year, we decided to ramp up and scale it to other cities. This business is breakeven at the gross margin level. As of the Q4, we have in excess of 7,200 clients. And obviously, all the digital marketing efforts and acquiring new businesses is creating additional expenses in excess of ARS 8,000,000 per quarter. So we believe that it will continue for at least the next two quarters while achieving 15,000 clients that is where they're keeping at the EBITDA level comes. Okay. Thank you very much. And then we have no further questions from the phone. We have a question from Elena Rehlian from GBM. Could you share with us comments regarding strategies to mitigate the FX effect in Argentina? Hello, Ligela. Thank you for your question. First of all, I have to tell you, I spent with my team a few days last week in Argentina to get acquainted with what is happening in the economy. And what we understand is that we will continue circling during this year with the economy. So this should start getting much better in the next year, especially in the second or third quarter. So during this period, 1st, we are taking care of those synergies we have found with our group in this company that we found a strong management team. And we found that we can improve significantly the productivity by the provincial use in Mexico. So it's our belief that this is a result that we are going to achieve in the very short term. And second, we found strong boots on their side in the commercial side that we will use to take the opportunity on the cross selling with our other products like water heaters and marine tanks. So we believe also this will be showing in the short term. And at the same time, we have been improving our export business to generate. So we have a company volume at full capacity. And when we're confident that this acquisition will be very good for the growth in the short run. Do you want to add something? It? Carlos has pretty explained, I think it's important to mention that 20% of the volume being produced in Argentina is now being exported to Africa. And that will compensate the downturn in the local market for the Q4 and Q1, where we believe it's going to be challenging in terms of the economic environment? We found that the macroeconomics in Argentina, we are expecting in the agriculture close some records in this scrap for this next year. Also, we are expecting a reactivation in the construction where people wants to invest their savings in construction. And also, they see possibly the economy with the Mercosur in Brazil. The connection is in favor of Bolsonaro again in the 28th October. So these 3 situations should bring a very fast recovery for Argentina in the next year. Thank you. Thank you. We have another question from Liliana de Leon from GBM. Do you have any update for the 2019 guidance in terms of sales and EBITDA growth? And the Avisa for 2019 or 2018? Yes. The way I'm going to answer it is, we're not going to give in this call guidance for 2019. But I can confirm what I did in my during the call is that we're going to post double digit growth organically. We believe that sales are going to be growing organically around 10% for the whole year and EBITDA around 20% for the whole year. We do have a couple more phone questions. Would you like to take those? All right. Take it, Tricia. We'll hear from Damian Fraser with Miranda Investor Relations. Hi, Carlos and Mario. I think you may have just partially answered this question, but the question I had was whether you believe that Rodent Palace has sufficient pricing power in Mexico and Argentina to offset the increase in raw material costs and recover the EBITDA margins that you had in the past or whether we should expect the existing margins to be the new normal? Well, Damon, and thanks for joining the call. As pricing power in Mexico, yes, we do and we have already increased prices. There's always a delay of 3 months to see it fully releasing to the market. So you will see that going to the Q4. As for Argentina, in the inflationary environment, the 3 business segments that we have, all of them are market leaders and we are increasing prices faster than inflation. So we are translating on Mexico all the raw materials increases and in Argentina the FX increases plus all the local cost increases, which are being adjusted with the rapid inflation. So in a nutshell, the answer is yes. And we are already working on that to deliver the results in the 4th quarter. Thank you very much. And we'll move on to Eric Nageljour with Bank of America Merrill Lynch. Eric, your line is open. Sorry, I had the mute on. A follow-up question. You're mentioning a 10% growth in top line and a 20% growth in EBITDA. That would imply margin a considerable margin expansion. Would that come from a decrease in costs in PET costs? Or would that come from just price increases? I would like to understand. Well, in the previous question, I was answering that you will have a better reflect of the price increases in the 4th quarter that will imply better margins on that side. And also on the raw material side, we are forecasting that they're going to be better prices than the previous three quarters. So both effects will help our margins going into the 4th quarter. Okay. Thank you. We have another question from Matthew Pigott from Jupiter Asset Management. Can we please have an update on the water of the treatment business? How have the trails gone? And when do you expect to recognize revenues from this business? Hi, Matthew, and thanks for joining the call. As of the Q3, we have moved from 510 water treatment recycling plants to 567 water treatment recycling plants. The target by year end is to close in 600, that represents a 17% growth rate year over year. However, as we finish construction on the well treatment and recycling plants, revenue is being recognized. So one we have 100 treatment plants in the pipeline, some of them are exacerbated and constructed, some of them are in the process and some of them are starting. So we will start to see some revenue recognition in the 4th quarter and the full effect going into 2019. That's for our water treatment and recycling. For the water as a service purification at the residential level, we closed, as mentioned, with 7,200 purification points and we are posting a 23% increase sequentially quarter over quarter. We're installing around 650 purification points of use on a monthly basis and that's picking up as we acquire more customer and we improved our operational capabilities. And finally, as for weather contents for schools, we are finishing up the installation of the 4,250 schools. Some of that revenue has already been recognized. Some still pending to be recognized. So in that business, all in all, there's some units being installed that revenue recognition will come over the next quarters. Thank you, Tricia. We have another question on the phone. There are no further questions. 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. And that will conclude today's call. We thank you for your participation.