Good day, welcome to the Grupo Rotoplas 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 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, 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.
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 the third quarter and the first nine months of the year. The main drivers of this growth were the performance of our operation in the U.S., the integrations of the groups from our recent acquisitions in Argentina IPS, and the sale 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. 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 the very successful trial run, we have begun expansion of our drinking water platform, which comprises residential and commercial purification service in several Mexican cities. We also registered significant growth in Central America and Peru, overcoming a challenging first semester for our operations in those countries and further consolidation of our position there. Even though the depreciation of ARS had a significant impact in our fourth results, it is worth noting that our operation in Argentina grew faster than the industry average and gained market share, enabling us to take advantages of the market opportunities that are arising in the country. Moreover, with the acquisition of IPS, a company 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, feel confident that as the volatility recedes, our operation in Argentina will make an even greater contribution to the company growth. Moving forward, we will continue to emphasize innovation and sustainability. In the same vein, we will continue to seek new opportunities for growth, both organic and through acquisitions. A few days ago, we reopened the second issuance of the sustainability bond, which has oversubscribed 3.8 times, equaled MXN 1 billion. This fund will be earmarked to the water as a service business in Mexico. We continue to be included Dow Jones Sustainability Index and the Pacific Alliance Sustainability Index, which attest to our superior performance in this area. Finally, it is worth noting that government sales were 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. I 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 third quarter. As Carlos mentioned, sales grew 27% year-over-year this quarter, with a major contribution from our recent acquisitions and a greater demand for our integrated solutions in Mexico. EBITDA increased by 11% over the same period. It should be noted that the depreciation of Argentina peso had a negative impact of 8% in Rotoplas' total sales. Furthermore, the weakness of some of the various currencies against the US dollar and the price of commodities increased the 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 efficiency.
These effects, 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 third quarter, accounting for 54% of our total sales, down from 65% in the previous quarter. The other countries category, which includes our operations in the U.S., Brazil, Peru, and Central America, grew 65% year-over-year. As Carlos already mentioned, our operations in Argentina grew 39% organically in local currency, even though this growth was offset by the 31% depreciation of the ARS against the MXN. Nevertheless, it is worth noting that we have not only maintained but expanded our market share across most of our market segments, indicating the strength of our brand and service.
Regarding our product mix, sales of integrated solutions in the second quarter accounted for 90% of total sales and grew 27.7% year-over-year. This, by the integration of IPS and the growth of our operations in the U.S. 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 waste water treatment plants in Mexico. There was a reduction in 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 varying in excess of MXN 8 million 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 the organic growth of our business, particularly that of water as a service in Mexico, that attests to the strength of our current growth strategy and reaffirms our positive long-term outlook of a sustainable 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 MXN 111 million increase in depreciation and amortization component for the first nine months, corresponding to MXN 48 million for the company's growth, MXN 33 million for one-time M&A related expenses for the e-commerce platform in the first quarter in the U.S. and the waterless business in Argentina for the third quarter, and MXN 29 million for one-time accelerated depreciation due to solar panels installation in Mexico and machinery divestiture in Brazil. I hope this clarifies some doubts which may have been unclear 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, Michelle.
Thank you. If you would like to ask a question, please press star followed by the digit 1. 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, star one to ask a question, and we'll pause for just a moment. Our first question we'll hear from Eric Neguelouart 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, Eric, thanks for your question. As some of you are aware, last year, Rotoplas 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. This year we decided to ramp up and scale it to other cities. This business is being breakeven at the gross margin level. As of the third quarter, we have in excess of 7,200 clients. Although the lead and marketing efforts and acquiring new businesses is creating additional expenses in excess of MXN 8 million per quarter. We believe that it will continue for at least the next two quarters, although achieving 15,000 clients, that is where breakeven at the EBITDA level comes.
Okay. Thank you very much.
As a reminder, it's star one if you would like to ask a question. We have no further questions from the phone.
We have a question from Liliana De Leon from GBM. Could you share with us comments regarding strategies to mitigate the FX effect in Argentina?
Hello, Liliana. 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. What we understand is that we will continue suffering during this year with the economy, it should start getting much better in the next year, especially second and third quarter. During this period, first, we are taking care of those synergies we have found with our group in this company, that we found a strong management team. We found that we can improve significantly the productivity by the transferable use in Mexico. It's our belief that this is a result that we are going to achieve in the very short term. Second, we found a strong boost 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 water tanks.
We believe also this will be showing in the short term. At the same time, we have been improving our export that this is generate. We have a company running at a full capacity. One, we're confident that this acquisition will be very good for the group in the short run. Do you want to add something?
What Carlos Rojas has explained, I think it's important to mention that 20% of the volume being produced in Argentina is now being exported to Africa. That will compensate the downturn in the local market for the fourth quarter and first quarter, where we believe is going to be challenging in terms of the economic environment.
We found that in the macroeconomics in Argentina, they are expecting in the agriculture close some records in this crop for this next year. Also, we are expecting a reactivation in the construction, where people wants to invest their savings in construction. Also, they see positively the economy with the Mercosur in Brazil, that the election is in favor of Bolsonaro again in the 28th of October. These three 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?
Liliana, is this for 2019 or 2018? The way I'm going to answer it is, we're not going to give in this call guidance for 2019. I can confirm what I did 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?
Sure. Please do so.
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 Rotoplas 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.
Hi, Damian. Thanks for joining the call. Pricing power in Mexico, yes, we do. We have already increased prices. There's always a delay of three months to see it fully released into the market. You will see that going through the fourth quarter. For Argentina, in the inflationary environment, the three business segments that we have, all of them are market leaders. We are increasing our prices faster than inflation. We are translating, on Mexico, all the raw materials increases. In Argentina, the FX increases plus all the local cost increases, which are being adjusted to the rapid inflation. In a nutshell, the answer is yes. We are already working on that to deliver the results in the fourth quarter.
Thank you very much.
We'll move on to Eric Neguelouart 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, a 20% growth in EBITDA. That would imply a considerable margin expansion. Would that come from a decrease in PET costs, or would that come from just price increases? I would like to understand.
As in the first question I was answering, that we will have a better reflect of the price increases in the fourth quarter. That will imply better margins on that side. Also, on the raw material side, we are forecasting that there are going to be better prices than the previous three quarters. Both effects will help our margins going into the fourth quarter.
Okay, thank you.
We have another question from Matthew Biggs from Jupiter Asset Management. Can we please have an update on the water as a treatment business? How have the trials gone, and when do you expect to recognize revenues from this business?
Hi, Matthew, and thanks for joining the call. As of the third quarter, we have moved from 510 water treatment and recycling plants to 567 water treatment and recycling plants. The target by year-end is to close in 600. That represents a 17% growth rate year-over-year. As we finish construction on the water treatment and recycling plants, revenue is being recognized. We have 100 treatment plants in the pipeline. Some of them has already been constructed, some of them are in the process, and some of them are starting. We will start to see some revenue recognition in the fourth quarter and the full effect going into 2019. That's for water treatment and recycling.
For the water as a service purification at the residential level, we closed, as mentioned, with 7,200 purification plants, we are posting a 23% increase sequentially quarter-over-quarter. We're installing around 650 purification points of use on a monthly basis, that's picking up as we acquire more customer and we improve our operational capabilities. Finally, as for water fountains for schools, we are finishing up installation of the 4,250 schools. Some of that revenue has already been recognized. Some is still pending to be recognized. In that business, all in all, there's some units being installed that revenue recognition will come for the next quarters.
Thank you, Michelle. Do 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.
Thank you.
That will conclude today's call. We thank you for your participation.