Grupo Rotoplas S.A.B. de C.V. (AGUA) Earnings Call Transcript & Summary

Good morning, and welcome to Grupo Rotoplas conference call. Please note that today's call is being recorded. [Operator Instructions] 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 Aboumrad , Chief Executive Officer; and Mr. Mario Romero, Chief Financial Officer. I will now turn the call over to Mr. Carlos Rojas.

Good morning, everybody, and thank you for joining us today. We really appreciate the opportunity to share and discuss with you our latest results and our perspectives. At Rotoplas, we have been relentless in our pursuit of excellence and the results we are sharing with you today are a testament to our unwavering commitment to growth, profitability and responsible stewardship. I am proud to report that 2022 was a better year for Rotoplas. With our performing growth, and continued improvement in profitability we managed to pause both record sales and EBITDA. Driven by an increase in... for the centralized water solutions as well as disciplined cost and expense management. We continue to strengthen our core business in order to invest in new growth avenues, which are solutions that support climate change mitigation efforts. We have recorded a sequential improvement in margins, all while navigating a challenging economic and political landscape in some of our markets and thanks to our commitment to best ESG principles and practices. As you can see in this slide, we have focused all of our efforts on meeting the guidance we have given to the market since the beginning of -- during the past years, we have made strategic decisions to cope with the COVID pandemic, the disruption of supply chains, increased cost of commodities and shipping, and our efforts have resulted in a significant increase in year-over-year sales. Our ROIC has exceeded the cost of capital, which was one of the key objectives of our transformation program and our leverage remains below 2x. This year, we were able to meet 100% of the market guidance. We exceeded our net sales growth target by 200 basis points, noting not only the strength of our core business, but also a recovery during the fourth quarter in services. We recorded an EBITDA margin of 15.5%, maintained leverage at 1.7x. Finally, ROIC was 140 basis points above the cost of table, 40 basis points above the guidance for 2022. I am also excited to announce that we have fulfilled our ESG annual goals in the profit, people and blended spheres. We have made significant progress in each area. Our focus on being a sustainable company extends beyond our own operations, and we're pushing others to do the same. For example, we're evaluating our suppliers using ESG criteria. We are committed to becoming a carbon-neutral company by 2020, and we have been taking steps to reduce our scope 1 and scope 2 emissions. Additionally, we're also working hard to create more diverse and inclusive workforce. Our goal for -- of reaching 10% participation of women in our workforce is an important step towards this center. And we're making good progress in this area. Mario will discuss in further detail our annual ESG results and what we are expecting for 2023. Going back to the financial goals, as you know, at Rotoplas, we have our site set high. Our 2025 goals are ambitious and include doubling the 2020 year during net sales, reaching an EBITDA margin of 20% or more, keeping a debt-to-EBITDA ratio of less than 2 times. -- and ensuring we create value for our own investors with a double-digit return on return on investment above our cost of capital. In fact, our growth was even greater than expected at this point, taking us even closer to our goal. We have recorded a 22% CAGR in the last 2 years. If we continue at this growth rate, we could reach our sales target a year earlier than initial. Just as important as these results, however, and perhaps even more important is how we achieved them. As we have discussed in previous calls throughout the past 3 years, we have addressed significant challenges, including the COVID pandemic, severe disruptions in supply chains and in certain economic environments. And even as we continue to address these challenges, -- we have remained focused on pursuing new opportunities that have shown remarkable potential. We have been able to continue building the next stage of our company, the road cost of the future. A key component in this process has been the discipline and agility brought about by our transformation program globe. By prioritizing initiatives with the greatest value creation potential, we have been able to continue to delivering innovative water solutions that meet the needs of our customers anticipate future water consumption trends and brings us closer to smarter, more sustainable water management. In the context of increasing water car cilia and changing consumer habits, our aim continues to be to fulfill the current and future needs of our clients and our societies. Another crucial component has been the continuing strength of our core business in which we continue to innovate while increasing our market leadership through flexible and responsive commercial strategies as well as allocated capital in a disciplined and strategic manner to ensure us to enable us to ensure an adequate supply of raw materials and undertake the modernization of our production process. These strategies were made possible by the consistent improvement in our margins and our overall financial strength. Despite the unpredictable economic and political climate were ready to capitalize on new opportunities. We remain flexible, agile and committed to making the most of the opportunities that come our way. Finally, at Rotoplas, we recognize that the water industry is uniquely important and that our role as a leader in the centralized water solutions carries with it the responsibility to uphold the highest standards of environmental, social and governance practices. That is why I would like to share that our most recent CDP climate change questionary results place us near the top Asian of environmental reporting amongst the top of talk to the companies in our region, attesting to our commitment to hold our reserves accountable in our environmental impact. In addition, for the sixth consecutive year and since its creation, our Romanian Dow Jones MinaPacific Alliance in example. This index is comprised of 68 sustainable dealers out of which 35% are Mexico. In conclusion, I am happy with our results in 2022 and I am confident in our ability to continue delivering value to our investors and our stakeholders. I look forward to your questions, and thank you very much for your continued support to Rotoplas. And with that, I will turn the call over to Mario for a closer look at the numbers.

Thank you, Charlie, and thank you all for joining us today. Along with Charlie, I am also proud to report that we fulfill our guidance and achieve outstanding results despite the challenging and ever-evolving market conditions across the regions where we operate. Our commitment to excellence and innovation has propelled us to the forefront of the water industry, a sector that is becoming increasingly vital as the world faces an unprecedented water crisis. Our team's agility and discipline have enabled us to deliver record results, solidifying our position with our growth and profitability goals for 2025 Permal insight and our unwavering focus on ESG objectives, broad base preferred for even greater achievements in the coming years. Before talking about 2023 financial guidance, let's go through our latest results. Sales increased 12% in the fourth quarter and 17% for the whole year, amounting to MXN 12.8 billion. This is a new historic high for Rotoplas. -- and it is a clear demonstration of the strength of our core businesses, driven by the growth in product sales. The growth was a combined by a consistent improvement in our margins, both year-over-year and compared to the previous quarter. As we've discussed in previous calls, we implemented an agile pricing strategy that combined with the unparalleled strength of our brands and our supply chain management has allowed us not only to increase our market share, but to do so in a way that improves our margins. In the fourth quarter, our gross margin increased by 560 basis points. And for the year, we saw a margin increase of 450 basis points. Our quarterly operating profit grew 38% and 49% during the year. EBITDA increased by 8% during the quarter and 12% over the year, totaling MXN 550 million in the fourth quarter and a record-breaking MXN 1.9 billion over the last 12 months. It is important to note that the EBITDA margin improved relative to the previous quarter, although it decreased annually due to the expenses associated with the development of our new businesses. Although these expenses had a temporary impact of MXN 60 million in the fourth quarter and MXN 288 million over the year. We are steadfast in our belief that these investments will pay off in the long term as these new businesses will become significant growth avenues for our company. Finally, our quarterly net profits increased 4x year-to-year, whereas the net profit for the full year was up 2.4x amounting to MXN 756 million, another historical record for the company. Now moving forward to our geographic breakdown. Let's start with Mexico. Mexico, we saw a 15% growth in quarterly sales and a 30% growth in 2022, driven by robust demand for our storage and water flow solutions as well as the continued success of Veria. The strength in product sales led to double-digit increases in EBITDA and expansion in the EBITDA margin during the quarter and the year despite accounting for inflation and the negative EBITDA of the service platform. In Argentina, quarterly sales grew 11%, even as demand decreased and the construction industry slowed down during the last quarter. Sales grew 41% during the year, driven by an improved commercial planning process and agile pricing strategy responsive to an inflationary environment. Sales in the United States increased by 3% in the quarter and 8% for the year due to rising volume and prices. Demand during the fourth quarter was impacted by the winter season and current economic conditions. The e-commerce platform and the development static solutions business continued to grow. However, associated with expense negative effect the EBITDA margin. As for other countries, sales in Central America and Peru have decreased as a result of a more economic contraction and the resulting reduction in demand. Aquanta Brazil's pipeline continues to expand, and we continue to develop new water treatment erecting plants. Now moving on to our solutions portfolio breakdown. Product sales grew 11% during the quarter and 18% during the year with double-digit growth across all the categories of products, storage, water flow and treatment. This compensated from a lack of board of services sales during the first 9 months of the year, although it should be noted that Veria, our drinking water platform continues growing at an accelerated pace and offset the other businesses within the service platform during the last quarter. In terms of our portfolio mix, sales of products represented 96% of total sales during the quarter. Then moving to some balance sheet items. Our cash and debt position. We maintain a strong balance sheet, which as we have discussed in previous calls, provides a solid financial platform to both pursue growth and profitability. Our net debt-to-EBITDA ratio is 1.7x, below our 2x leverage policy. It is worth noting that our debt position only considers a sustainable bond 17-2X, which net MXN 4 billion, has a maturity date of view in 2027 and was issued at a fixed rate of 8.65% per year. As Charlie pointed out, our supply chain remains closely monitored to secure the raw materials needed to meet product demand the global supply chain stability. This effort has led to a rising cash conversion cycle and working capital as we remain dedicated to optimizing and stabilizing them. As for CapEx, this one amounted to 5% of total sales for the year, 28% higher than in 2021. Most of these capital expenditures are being directed and upgrading our core product business, increasing the sustainability of our manufacturing operations and strengthening the leadership position of our brands while increasing their profitability, all of which enable us to continue moving forward with the development of our new businesses as we have mentioned. We will continue to be disciplined and agile with our capital allocation and spending -- ensuring that we prioritize the key growth drivers. As for the key metric, Royce, this one exceeded our guidance, reaching 14.1% as of December 2022. This was 140 basis points above our cost of capital, bolstering our focus on long-term sustainable value creation and keeping up with the cost outlined in the 2025 sustainable growth. Now I would like to discuss more on the impact we have with our sustainability strategy. We achieved outstanding results in our ESG initiatives this year. As Charlie mentioned, our targets were all met and some even exceeded. And we expect to make further gains dollars 2025 goals this year. As you can see in the chart, 20% of direct providers were evaluated, and we expect to about 45% in 2023. The NPS score was 72.4 points above the original goal, and it will rise to at least 73 this year. We reached 148 carbon emissions intensity under the 0.50 goal and expect to bring it down to 0.45 by year's end. There were 404,000 cubic meters of water purified using our solution, 90,000 more than the anogold, and we anticipate purified more than 600,000 cubic meters of water during 2023. The accumulated amount of people impacted with access to sanitation reached 553,000, 10,000 more than the goal for the past year. This year, we expect to add more than 200,000 people to reach close to 800,000 on a cumulative basis since 2021. We closed 2022 with a 24% of women in our workforce, and we will increase it to 27% by next December. Also, we were recognized for our efforts and named the sustainable innovation leading company in the governance category by HSBC sustainable innovation leading companies award. And finally, as part of our sustainability strategies people pillar, we launched an initiative to promote individual wellness for our employees. This initiative, which included healthcare and series of lectures and workshops on diversity and inclusion have nearly 1,400 participants. These efforts are a testament to our commitment to creating a positive work environment and promoting the health and well-being of our employees. Before opening the floor for questions, then I would like to close with this year's guidance. In light of our results, our 2023 guidance is as follows: sales growth will be equal or greater than 15%. The EBITDA margin will come between 16% and 17%. Net debt-to-EBITDA ratio will be kept below 2x, and we are targeting a return on invested capital 150 basis points above our cost of capital. With this, I will thank you very much for your time and attention. We will now answer any questions you may have.

[Operator Instructions] Next question comes from Carlos Alcaraz, Pineda Apalache Analysis. Congratulations for the remarkable results. Carlos has 3 questions, and I will read them separately. The first one is related to CapEx. What percentage of your revenues do you expect to spend during 2023?

So Carlos, thank you for joining the call. My the precise percentage, it's going to be reducing from without considering waste water drills, but we're targeting to have a -- well, first Carlos for joining this morning. We're targeting to have a gross margin above 40%. And then to your CapEx question, CapEx will come below 5% as a percentage of sales.

Carlos second question is related to gross margin. If commodity prices remain stable, what gross margin do you expect to reach by the end of 2023...

You already answered that one. So but I answered both...

And then Carlos last question is related to the increase observed during the last years in the intensity of natural phenomena in Central and North America. Carlos is asking if Rotoplas has any plans to earn in new markets, mainly in the product segment.

Not necessarily, Carlos, we would like to focus more on growing our business in North America, particularly in the United States. There are other potential markets that might be interesting, but we believe that as the strategy focusing on that market, which increases the size of the market that we service and increases the stability for our business. That would be the strategy that we'd like to focus most on.

The second question is from Carmen Barroso, Miranda Partners. Congrats on the results. Her question is, do you expect a positive impact from a sharing in your business this year?

Carmen, thank you very much for joining us. Thanks for the message. We do expect a positive impact in ensuring if it does happen, and hopefully, it will happen in a big way from Mexico. We're very hopeful for that. With this happening, lots of new facilities will be built that will require water solutions, particularly in the guidance of wastewater drilling plants. On the infrastructure that we have in the country has not anticipated this kind of growth and this kind of service is needed. And so we expect that for this to be feasible, these industries would have to become proactive in solving for water solutions. So they all need to harvest rainwater, they'll need to treat water, they will need to use that water. And so this would generate impact for Rotoplas. The level of impact in 2023, we would not be clear on it as we are not clear on the pace at which new facilities would be developed. But we would have the engineering capabilities and the field services and project management capabilities to be able to execute in a way that grows this business for Rotoplas a relevant way.

Just probably just to complement, sorry, Carmen. In our plan for 2023, we are not considering any additional revenues because of nearshore.

[ Philippe Varadan from BTG Pactual ] has a couple of questions. I want to read the first one. We saw sales growth in this quarter in the other countries segments. The commentary makes it seem that Brazil was the main contributor to year-over-year growth. Am I reading this properly? -- where are the slowdowns in Peru and Central America, primarily on volumes with continued increases in pricing for this region?

[ Philippe ], thanks for joining us this morning Yes. Well, let me explain in different parts. Yes, but we started to see some fractions on the revenue side. And the reason is -- as you know, we are developing the water premetal refactoring business there. You start with installation and it takes some time to start recording the revenues. So now you started to see that coming from the CEO, and that obviously will accelerate in the months to come. And then in the other side, Peru, with all the let's say social and political turmoil that they have lived in the last 4 months or so, it has had some impact on the economic side, some road closures, some store closures as well. So it's been tricky to operate breast in Peru in the last quarter. So we saw a slowdown in volumes because of this reason. Things are starting to normalize, but yes, this situation impacted Peru. And then Central America, the best country in my country. Some of them are just paying the aftercare situation. So there is some volume slowdown in Central America. So all in all, you have the right reading. The explanations behind them is just the way I just explained to you.

The other question from [ Philippe ]. I recall a 5% CapEx of sales moving forward from our way. Will we continue to see further CapEx on the e-commerce platform for the U.S.? And when do you think we can see an inflection point for the U.S. EBITDA to go into positive territory?

Thanks for the question, [ Philippe ]. We do expect to continue investing in the U.S. platform, the e-commerce platform. We imagine will be the nature of that business going forward. It's a place where CapEx is always required as technology evolves, and it's something that continues to happen on time. Investments will maybe reduce a little bit in that part of the business in that part of the e-commerce. But we will continue to invest in the U.S. cities and a market that we want to focus on our growth on. Regarding the change of EBITDA into positive territory, -- we've been managing this business in a way where we have it very close to breakeven. And the reason for that is while the e-commerce business does generate a profitable business, we are continuing to invest in developing the business in other areas such as acetic opportunity that we have discussed in the past. It is a very big opportunity that requires investment to develop. And so hopefully, we'll start to have better results in 2024 in terms of EBITDA, but we should see high growth in the revenues of this business in 2023. Mario, anything else that you'd like to add?

Yes. And then just on the EBITDA side, we are targeting to be breakeven or slightly above breakeven in 2023 time.

Can you read the next question.

Sure. It's Maria Milana, Global Research. Do you expect an acceleration in the U.S. and Argentina's results in the second half of the year?

That's I think it's what we are very early on in the year to see what are going to be the dynamics between the first half and the second half. What we have in our plan is a slight recession in the U.S. going into the third quarter of 2023. So that's what we have incorporated in our plan. And then in Argentina, it's an electoral year. We expect some volatility in the FX market affecting inflation, which we believe is going to come out close to 100%. So we have incorporated that to variables in term of plan. But right now, trying to guess what's going to happen in the second half. We don't have the view on that part of the year.

Nothing to add. Mariana, would you like to read the next one.