Earnings Call: Q1 2018

Apr 25, 2018

Good morning and welcome to this Grupo Rotoblast First 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. I will now turn the call over to your host, Ms. Ophelia Lopez Aranda, Grupo Rotopas, Head of Investor Relations. Please go ahead. Thank you, Shannon. Good morning, everyone, and thank you all for joining us today. We issued our earnings press release yesterday after market closed. 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. 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 now joined by Mr. Carlos Rojas, ROADOBLAS 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, Ophelia. Thank you all for joining us today. We started 2018 with a robust water solution portfolio and much less exposure to government sales. As we reported yesterday, we registered a record in both sales and EBITDA and was the 5th consecutive quarter of double digit sales growth. Despite the fact of political uncertainty, it has decreased consumer confidence in many of our Latin American markets. Our resilience is evident and I believe speaks to success of both our key acquisitions and our portfolio of reconfiguration strategies, which have enabled us to continue advance towards our Water as a Service and water solution business model and the leverage that strengths of our brands. Solutions and platforms. We will continue then to leverage our customer centricity, focus to pursue further growth. I would like to highlight the innovation and growth taking place in our Mexican operation, where the growing demand for integrated and water flow solutions helped us achieve double digit growth in sales as well. Likewise, in recent years, our operation in countries such as Argentina and the United States have become significant drivers for growth with great potential for the coming future. Moreover, through the efforts of our innovation and development centers, we brought to market 12 new products during the last year, which complements our solution portfolio to keep up with double digit growth rates. Furthermore, we have reached this quarter 22,600 points of sales in the Americas and more than 8,350 points of water treatment and purification service throughout Mexico. This is a 20% increase from last quarter in water treatment and purification points, consolidating us as the market leader and the fastest growing platform in the Americas. We also reaffirm our commitment to sustainability in all of our operations. As you know, last year, we issued the 1st sustainability bond in Latin America, of which we have already allocated over 90% to drinking water solutions, wastewater treatment and water recycling. These investments were just reviewed probably by Sustainability Analytics, a leading provider of ESG and corporate governance research and rating to investors. We have also completed our 1st greenhouse gas emission inventory, following the guidelines of greenhouse gas protocol in order to better account for our environmental footprint. You will find more information about these and other sustainability efforts we are undertaking in our 3rd annual integrated report. The report will be available on our website on April 13, and I think you will find it both comprehensive and interesting. Thank you for listening. I would now like to turn over the call to Mario, who will guide you through the quarterly financial results. I look forward to your questions. Thank you, Carlos. Good morning and thank you for joining us. I will now discuss some of the financial highlights of the Q1. As Carlos already mentioned, sales grew 10% year over year this quarter, partly driven by increased sales of individual and integrated solutions in the United States and Mexico, respectively. As he also pointed out, this is the 5th consecutive quarter of double digit growth, and we registered a quarterly record of both sales and EBITDA, partly due to the ability of the company to change government sales exposure from 42% to 4%, therefore creating a more resilient business model for the future. It is also worth pointing out that as detailed in our press release, in this quarter, we are reporting an adjusted EBITDA, which is calculated as EBITDA plus extraordinary nonrecurring acquisition expenses amounting to ARS 11,000,000. These expenses are related to the recent purchase of the U. S. E commerce platform that reported this quarter. Including this effect, quarterly EBITDA grew 28% year over year. Furthermore, the consolidated gross and EBITDA margins grew 110 basis points and 240 basis points respectively, due to greater fixed cost absorption in our larger volume operations, a better price mix and a disciplined expense control strategy. Net income margin decreased by 50 basis points with slightly higher net income tax, income tax and the Argentinian peso depreciation that affected our EBITDA generation for the quarter. In terms of our geographic breakdown, sales in Mexico grew 11% during the Q1, accounting for 63% of our total sales and mainly driven by an increased demand for integrated and water flow solutions. For their part, our operations in Argentina, which as you may recall are now being reported separately on account of their importance to the company grew significantly as well. Sales increased 37% and EBITDA 39% in local currency. In fact, it should be noted that if not for the depreciation of the Argentinian peso, which offset this growth, we would have registered an additional five percentage points in both cold sales, EBITDA and net profit. As to the other contract category, we continue to seek new venues for Grille and implementing a diverse set of strategies to increase profitability, while continuing to monitor closely the macroeconomic and political trends that currently impact some of those markets. Nevertheless, it is important to point out that EBITDA margins grew in both Mexico and the other countries category because of the enhanced price management strategies and disciplined cost and expense control through the zero budget approach that the company keeps on doing. With regards to our product mix, sales of individual solutions in the Q1 accounted for 90% of total sales and grew 9% year over year, boosted by an increasing demand in Mexico and the United States. Integrated solutions, on the other hand, accounted for 10% of total sales and registered a 19% increase on sales year over year, 2x the speed of growth of individual solutions. It is worth noting that integrated solution results include safe from water purifying fountains and the EBITDA contribution of wastewater treatment at recycling plants. Balance sheet remains strong with a net debt to EBITDA ratio of 0.5x, well positioned for future growth. These results confirm that we have successfully integrated our 3 largest and most recent acquisitions, truly leveraging their strengths, and more importantly that we continue to consolidate our business strategies of water as a service and water solutions, significantly expanding our reach and strengthening our solutions portfolio. And we have done so while reaffirming our commitment to customer centricity and to ESG principles, working continuously on the different components of our EMG evaluation. Finally, after the Q1 and with greater visibility for the year, we feel confident that water scarcity and sanitation dynamics will guarantee double digit growth in sales, EBITDA and net company for the company. We will 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. We'll go ahead and take our first caller, Guillermo Diego with Santander. Sure. Can you give us your outlook in terms of margin for the year? Well, we haven't gave any guidance on margins for the year, but we feel confident that the levels reached in the Q1 will repeat over the rest of the year. Okay. The levels of the margin achieved in the Q1 or the expansion that we saw in the Q1? The margins achieved in the Q1. Great. Thanks. Thank you, Diego. Regarding the same as Guillermo regarding margins, so I guess that's covered. And we have how much of the CapEx during 1Q 'eighteen was allocated to Citesa? And 2, regarding Integrated Solutions, considering that government exposure is decreasing and water treatment business should increase, which level of EBITDA margin we should expect in 20 Good morning. Thanks for your question. Regarding how much CapEx was allocated to Citeza, that was a third of the total CapEx for the quarter, which accounts for almost MXN 25,000,000. And that is mainly focused to put some water treatment plants in place as part of the agreements that we've been completing over this quarter. 2nd, regarding the margins on Integrated Solutions, I think you will see an improvement throughout the year because on one side, as mentioned in our press release, we have less operating losses in the integrated solutions coming from Brazil, given that now the operation is in very small size close to breakeven. And we will now you've seen for the future, it's water treatment and recycling tanks margins on top of water purifying fountains. Diane, do you have something on the line? We have no further questions on the webcast. No further questions at this time. I'm sorry, we did have one just queue up. We have Javier Arunaga with GBM. Hello, good morning. I was just wondering what will be your sales mix between individual and integrated solutions for 2018? Thank you. In the Q1, we reported 90% individual solutions and 10% integrated solution. I think by the Q4, you will be seeing a mix of 85.15. And so annually, it will be probably about 87.13. That's what we are estimating for 2018. And thank you very much, Javier, for your questions. Thank you, Mario. There are no further questions over the phone. Thank you, Shannon. 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, ladies and gentlemen. That does conclude today's conference. We thank you for your participation. You may now disconnect.