Earnings Call: Q2 2018

Jul 24, 2018

Quarterly report

Good morning, and welcome to the Grupo Vodafone Second 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. I will now turn the call over to your host, Ms. Ophelia Lopez Aranda, Grupo Rotaplas' Head of Investor Relations. Please go ahead, Ms. Lopez Aranda. Thank you, Jamie. Good morning, everyone. Thank you for joining us today. As you know, we issued our earnings press release yesterday after market close. It can be found in the Investors section of our website. We have also provided slides to supplement our discussion, which can also be found in the Investors section of our website. Please allow me to remind you that today's discussion contains forward looking statements. These statements are based on the environment as we currently see it, and as such, there might 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. We are joined today by Mr. Carlos Rojas, Rotoblast's Chairman and Chief Executive Officer and Mr. Mario Romero, our Chief Financial Officer. We'll begin our call with our remarks, and I will then open the floor to your questions. I would now like to turn the call over to Mr. Carlos Rojas. Mr. Rojas, please go ahead. Thank you, Ofelia. Thank you all for joining us today. As we reported yesterday, we faced a challenging environment this quarter, but came out ahead. As a company with a large and growing presence in Latin America, buying a significant amount of raw materials in U. S. Dollars, we had to address several issues: significant political uncertainty, growing economic growth, natural disasters and big covenants, including the sharp depreciation of the Argentinian peso against both the U. S. Dollar and the Mexican peso. Despite these factors, however, we registered double digit growth in EBITDA and record quarterly sales. We maintain a strong balance sheet and we continue to acquire new businesses in strategic markets, while pushing organic growth and operating efficiencies, as is laid out in our long term growth strategy. In this respect, I would like to highlight the acquisition of IPS, an Argentina leading water flow solution provider, which ideally complements our product performance in the region. It was an assertive acquisitions, and we will be incorporating these results in the Q3. It is also worth noting that the e commerce platform we acquired in the United States last year made a significant contribution to our growth in this quarter, as I did our as did our Water Flow Solutions product line in Mexico. And I would like to point out that we have reached over 9,700 predications and water treatment services in Mexico, which affects to the growth and success of our water as a service strategy. I believe that our performance in such a challenging environment is validation of our geographical and product diversification and most importantly of our core competitive strengths. It is also very significant that we have achieved this growth while maintaining our positive credit outlook and improving our Bloomberg ESG score, which demonstrates our commitment to sustainability, accountability and a positive social impact. This performance demonstrates the strength of our business across our main markets as well as our ability to successfully integrate our acquisitions. As Mexico and other Latin America economies improve, our company should benefit. Going forward, we expect that some of the negative factors that were at play this quarter will end with the receipt. In Mexico, for example, we're anticipating a more formal macroeconomic environment following the successful conclusion of the electoral process and the new administration's commitment to fiscal prudency and continuing of an independent monetary policy. This should help boost the consumer confidence and contribute to more stable currencies. Thank you for listening. I would now like to turn over the call to Mario, who will guide you through the quarterly finance results and I look forward for your questions. Thank you, Carlos. Good morning and thank you for joining us. I will now discuss some of the financial highlights of the Q2. As Carlos mentioned, sales grew 9.8% year over year this quarter with a major contribution from the e commerce platform in the United States and the growth in demand for Waterflow Solutions in Mexico. EBITDA increased by 14% over the same period, thanks to good operational leverage synergies within the company. In fact, our cash conversion ratio continues to grow stronger as a result of greater fixed cost and expense absorption due to our growing sales and a more efficient management of our working capital. Nonetheless, during the quarter and in the 1st semester, our net margins and profit were affected by FX losses and higher net interest expense due to a net debt position and a weak currency in Argentina. As Carlos pointed out, we faced a rather challenging environment this quarter in Latin America due to political uncertainty, natural disasters, slow economic growth and the sharp depreciation of the Argentinian peso, in addition to our weak currencies against the U. S. Dollar. Moreover, there were significant interest rate increases that affected consumer spending. Nonetheless, we were able to navigate successfully this difficult environment due to a disciplined cost and expense controls through the serial based budget approach that the company has implemented to counter up these volatility. In terms of our geographic breakdown, sales in Mexico grew 3.9% during the Q2, accounting for 65% of our total sales and mainly driven by an increased demand for water flow solutions from the retail segment. Our operations in Argentina grew significantly as well, 23% in local currency, while the depreciation of the Argentine peso continued to offset this growth when reported in Mexican pesos. In fact, if not for the depreciation of the Argentinian peso, our total consolidated sales could have increased by 15% instead of almost 10% reported. As to the other countries category, we continue to see new opportunities for growth and profitability, introducing new products and services with the appropriate pricing strategies, by closely monitoring the political economic issues that have affected many of those countries. With regards to our product mix, sales of individual solutions in the 2nd quarter accounted for 88% of total sales and grew 14% year over year, boosted by an increase in demand in Mexico and the United States. Integrated Solutions on the other hand accounted for 12% of total sales and registered a drop of 14%, which is mostly attributable to the decreasing government channel sales in Brazil, which is in line with our long term strategy of deemphasizing the public sector channel for the country. It is also worth noting that a larger contribution of the water as a service platform has improved the quality of our EBITDA margins. These results confirm that we continue to execute successfully into our strategy, grew integration results from our acquisitions, while pursuing organic growth through our businesses, strategies of water as a services and water products. And we have done so while reaffirming our commitment to customer centricity and to ESG principles, while maintaining a strong balance sheet and a positive debt outlook. Going forward, we feel confident that we will maintain double digit growth in revenues and risk adjusted EBITDA for the remainder of the year. Keep the government channel sales below 10% and preserve net debt to EBITDA ratio below 2 times. Finally, please take note that starting July 2, we will start to consolidate the financial, environmental and social results from IPS, which is our latest water flow acquisition in Argentina. The figures in data will appear under the segment Individual Solutions for Argentina. I would now like to open the floor for your questions. We will begin with the participants in the conference call followed by our website users. Please proceed, Jenny. Thank you. And we'll hear at this time from Eric Nacogdoc of Merrill Lynch. Hello, Carlos, Mario and Ophelia. Thank you. Could you please give us further details regarding the 77% increase on depreciation year over year? And also with the high volatility in Argentina and your increased exposure to the market, are you seeing any kind of hedge strategy to reduce the FX impacts you've had? Hi, Eric, and thanks for attending the conference. Regarding your first question, as explained in the press release, we have invested in solar renewable energy through to all our factories in Mexico. And you have the chance under Mexican tax law to do an accelerated depreciation on those assets. So that is part of the explanation of why depreciation has increased. On top of that and not significantly, we also make some sales of some assets in Brazil, machinery assets that were not longer in use. So those two effects explain why depreciation increased quarter over quarter and when compared to Q2 of 2017. Regarding the Argentinian market, we have explored different hedging alternatives because of the high inflationary environment and the high interest rates. Today taking a hedge is quite expensive. So we have decided to focus more on management or managing the appropriate pricing strategies and to play well on the inflationary environment, so we can counter off the volatility effect in Argentina. Eric, this is Carlos. Especially with the environment that Argentina is living, it's our belief that strengthening our portfolio will be helping us a natural hedge. Understood. Thank you. And we'll go to our next question from Liana de Leon of GBM. Hi, good morning. Thank you. Just a quick follow-up. Could you please repeat the main drivers behind the D and A increase? I think that I may answer. Yes, sure, again, two things. 1, we invested in solar energy panels for our rooftop of the factories. And you can do an accelerated depreciation under Mexican tax law. So that's one thing that increased the depreciation. And second, we sell some machinery assets in Brazil, which also account into the depreciation. Those are the 2 main components. Right, perfect. And my second question, could you please give us more color in Ipaz integration? I mean, with concerning the current volatility and effects, what we could expect in terms of revenues or EBITDA for the whole year or maybe for the next year? I think the appropriate way to answer that question is that when we did the press release regarding the acquisition, we indicate what were the multiples that the company was acquired for. And I think it's fair to say that those multiples were used with an FX exchange rate of 27.5 to 1. So we are setting the starting point at that rate. Going further, what we're going to be paying a close attention is to pricing, which is key not to lose the pass through effect from the FX to inflation. And therefore, we are seeking to preserve growth into Mexican peso terms. So those are the 2 other data points that I can give to you at this point. Great, perfect. At this time, we do have a question from Santiago and it looks like he removed himself at this point. But as a reminder then, it is star 1 if you do have a question that is star 1 for any questions on the phone line. We'll pause another moment. And we do have a question from Rodrigo Verduzco of GBM. Hi, thank you for the call. My question is regarding the expense control. That was one of the highlights for us and we want to congratulate you on that. But could you give us some of your strategy for the expense control and the SG and A's we see without depreciation, managed to drop it 12% year over year. So could you please give us any color on the cost management or expense management strategy you're implementing? Thanks, Rodrigo, for attending the call and for making such a good question. Back in 2014, the Rotoplast started to implement the serial based budget approach, which basically what we do is every year we started with a clean sheet and make people budget their expenses as it was a new company. So they have to review everything they have in place. So one is that done every month. We review internally what are the deviations, what savings can be obtained. And we have a group of 16 people across the company overseeing daily what expenses can be controlled and which ones can be reduced. So in that way, what we're trying to achieve is, as you mentioned, a very disciplined approach to SG and A control and on the other hand to increase sales. So the mix creates good operational leverage that we expect to continue on the coming future. Perfect. Thank you very much. Congratulations on that again. And we do have a follow-up question from Lilliana de Leon of GBM. Yes. Hi. Thank you. Just a quick follow-up regarding CapEx. We saw a 90% increase in the year. It's hard to assume that it's related with integrated solution, particularly CPESIS plants? Could you please repeat the question? I think we lost you at the beginning. Yes. We saw increasing CapEx for Mexican operation. I mean, it's fair to assume that it's allocated in Cipeza's plant? About 70% of that increase is the solar panels I explained before on the depreciation. And the reminder is on new plants that are being currently built in Citeza that will start generating cash flow in the second half of the year. Okay, perfect. That's very clear. And there are no other questions in the phone queue at this time. On the webcast, we have also Liana's question, but I think you have asked for the same question on the line. I don't know if you have any follow ups, Lily. There is no one else in the queue at the moment. Perfect. Well, thank you everyone and 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 so that does conclude this call. We would like to thank everyone for your participation. And you may now disconnect.