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

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

Good morning, everyone. Thank you for being with us today. Before we review this quarter's results, I would like to introduce [ Et Lanova ], our AI expert in the water industry who will discuss water situation in regions where we operate. [ Et Lanova ], the floor is yours.

Good morning, everyone. Thank you for joining us today. It is a pleasure to stand before you today to discuss the beginning of 2024, a year that has started with many challenges on various fronts, bringing with it opportunities to continue pursuing our mission. So before handing the call over to Charlie, I want to share some things with you. At Rotoplas, we are deeply connected to our environment, especially to the resource that defines our existence, water. The global water situation is reaching a critical point and the data is alarming. As you may know, Less than 1% of our planet's water is suitable for human consumption. Over the last half century, our freshwater resources have been halved. In Mexico, where our operations play a crucial role, there is acute water scarcity, especially in the northern and central regions exacerbated by overexploitation of aquifers and inadequate management that affects both urban and rural communities. In Argentina, we face an uneven water distribution, made worse by industrial pollution and agricultural challenges that intensify the already critical scarcity in arid zones. In the United States, we are confronted with century old infrastructure nearing the end of its life span, adding to the challenges of sustainable water management in the context of over demand and contamination. Additionally, the water crisis in Peru mainly arises from an uneven geographical distribution of water resources with plenty available in the Amazon, but scarce supplies in Coastal and Andean areas. This issue is worsened by pollution from mining activities and inadequate wastewater management in populated regions. In Central America, challenges include both water scarcity in some areas and access in others, further complicated by pollution due to poor waste management. Finally, Brazil faces regional water scarcity in the Northeast and widespread pollution concerns in urban areas despite its abundant resources in the Amazon. The fight against water scarcity is an urgency we cannot overlook. For every degree Celsius increase in global climate, there is a 20% decrease in the availability of renewable water. At least 69% of the impact of climate change is expressed through the water cycle, and we are already witnessing the effects of this phenomenon on our operations and communities. Given this, our mission is more important than ever, and we are committed not just to continuing but to intensifying our efforts to ensure a sustainable future. Thank you for your attention. Over to you, Charlie.

Thank you, [ Et Lanova ]. Now after discussing this pressing issue, let's dive into our quarterly performance. In the first quarter of 2024, we saw solid progress across various segments of our operations. Services sales increased significantly by 56%, driven by strategic expansion of our services platform, such as bebbia and a strong organic and inorganic growth in both [indiscernible]. In Mexico and Central America, our response to ongoing drought conditions led to performance improvement. By adjusting production in the supply chain, we were able to meet the increased demand for water management solutions, primarily in Central Mexico and parts of Guatemala and El Salvador. Our operational efficiency has remained strong despite various challenges. We achieved a record high gross margin and also record high EBITDA margin demonstrating the effectiveness of our business strategies. Net income returned to more normalized and healthy levels as it is no longer heavily affected by financial expenses related to exchange rate hedges as it was the case in 2023. Our ROIC was 14%, maintaining a strong position 290 basis points above the cost of capital, while our financial leverage fell well managed below 2x. However, the first quarter also presented some challenges. Our net sales decreased by 3% to MXN 2.7 billion, compared to the previous year. This decline is partially attributed to the exponential performance of the first quarter of 2023, which was a record quarter that benefited from drought conditions in Northeast Mexico and higher selling prices. Product sales were particularly impacted, decreasing by 6% due to weak demand and adverse currency fluctuations, mainly in Argentina, the U.S. and Peru. Additionally, in Mexico, this quarter's prices were approximately 8% lower than the first quarter of 2023. Focusing on Argentina, the macroeconomic environment has been tough. The substantial devaluation of the Argentine peso following the implementation of new government stabilization program in December, coupled with fiscal tightening has led to a recession affecting all sectors, particularly construction which saw a 32% decline year-over-year. The year-over-year devaluation of the Argentine peso relative to the Mexican peso has drastically altered the exchange rate by [ 382% ], intensifying the recession impact and leading to a significant drop in sales measured in Mexican pesos. Moving back to the bright topics of the quarter. Let's talk about our programmatic M&A strategy. We reinforced our commitment to sustainable growth by making programmatic M&A part of our core competencies which is expected to contribute an additional 4% to 5% growth in the coming years. Our recent acquisitions, including a majority stake in IrriVan and the operational treatment plant in Puebla are milestones that enhance our capacity to manage water efficiently through the cycle. These transactions are not to mirror expansions. There are strategic integrations that provide us with new capabilities and reinforce our existing competencies, especially in critical areas facing water scarcity. The purpose of this acquisition extends beyond growth, embed resilience and agility into our business model, enabling us to navigate market complexities with confidence. By leveraging the synergies, we reinforced our presence along the water cycle. Our investors should view these strategic moves, not as high as they can but as calculated to the steps, [indiscernible] Rotoplas' position and ensure our enduring strength and leadership in the water industry. We will continue to inform you of the progress within this strategy and the actions we take to continue with our commitment to a future where water scarcity is not a threat, but a challenge we are fully equipped to meet. Now before turning the call over to Mario, let me highlight our most significant progress in ESG matters during the quarter. Firstly, Rotoplas has conducted a high-level assessment of risks and opportunities related to climate change and water security. This proactive strategy is guiding us in developing detailed road maps to effectively tackle environmental challenges that affect both our business and the communities we serve. Furthermore, for the 14th consecutive year, Rotoplas has received the distinction of being a socially responsible company in Mexico. And lastly, we have engaged in various activities to promote an inclusive culture with our organization. As part of the commemoration of International Women's Day in March, we hosted a series of initiatives across all countries. This included the vocational webinars, the creation of both internal and external communication materials designed to celebrate and empower women within and beyond our corporate boundaries and a special broadcast on Rotoplas S.A.B, our internal communications platform. This platform uses an engaging and entertaining format to deliver key messages, fostering and sense -- fostering a sense of community and connection. These efforts reflect our dedication to fostering an inclusive environment that respects and values diversity in all its forms. Thank you again for your trust and support as we continue to build our vision for a sustainable and water secured future. Now I will turn the call over to Mario to provide you with a more detailed perspective of our financial results.

Thank you, Charlie, and good morning to everyone joining us today. As we reflect on the first quarter of 2024, we remain dedicated to our mission of delivering the centralized water solutions and enhancing access to water across our operating regions. Despite facing some headwinds as Charlie just mentioned, in terms of demand, FX impact and climatic conditions in certain markets, our strategic operational and financial initiatives continue to drive value for our stakeholders. Regarding our financial highlights, I'd like to delve deeper into 3 key areas: Gross margin, EBITDA margin and net income, as I will discuss our top line performance later on. Starting with the gross margin. Our pricing strategy, combined with a decrease in raw material prices and a boost in sales of Tinaco Plus+ has been instrumental. Tinaco Plus+ not only has lower average production cost but also benefits from high productivity levels at our facilities in Mexico. These factors contributed to achieving gross margin exceeding 50%. Moving on to operational expenses, which has so well constrained our operating profit, the most significant expenses were in Mexico due to increased freight costs associated with distributing Tinaco Plus+ to new regions within the country as well as expenditures on the utilization and e-commerce initiatives, including cybersecurity. Additionally, we incurred cost in marketing barrier. Despite these expenses, we managed to expand our EBITDA margin by 70 basis points. It is important to note that these are primarily strategic expenses, aimed at building capabilities for future revenue growth. Finally, as Charlie mentioned, our net income saw a substantial increase, reaching MXN 304 million, an eightfold increase compared to the first quarter of 2023. Recall that last year, we experienced an impact of nearly MXN 250 million due to devaluation effects of currency exchanges hedges. As an additional note, starting this year, we adjusted our accounting practice for hedges to record these effects directly in the cost of goods sold, enhancing alignment with operational realities. Transitioning to regional performance. In Mexico, net sales grew by 13%, driven by increases in both the product and service sectors. The growth in services was particularly fueled by the expansion of bebbia and both organic and inorganic growth with our ROIC and Rieggo operations. In the product segment, significant sales volumes in storage solutions, primarily [indiscernible] were a highlight. Regarding profitability, an increase in expenses contributed to a reduction in the EBITDA margin to 28%. Argentina faced a net sales decrease of 31% in Mexican pesos, but saw a significant rise of 231% in local currency due to the severe currency devaluation experienced last December. Despite market contraction, improvements in cost management resulted in a stronger EBITDA margin of 16%. In the United States, net sales fell by 20%, probably because of the lack of drought conditions in key states, affecting pricing and inventory management. The EBITDA margin remained negative due to lower sales impacted cost absorption. Other countries, including Peru, Central America and Brazil, saw a collective net sales decrease of 7%. Growth in Central America was offset by sales drops in Peru due to market contraction and in Brazil due to high construction expenses, leading to a reduced EBITDA margin of 16.3%. Regarding the performance of our product and services revenues, services now represent 8% of our total sales. Within the Services segment, bebbia has significantly expanded its reach now serving over 115,000 users, which reflects our successful penetration and growth in the consumer water solution market. Rieggo with its Programmatic M&A program has successfully installed innovative innovation solutions across more than 55,000 hectares, demonstrating the commitment to enhancing agricultural efficiency. And RSA has increased its scale and reach primarily in the hotel and industrial sectors. Moreover, our strategic acquisitions has bolstered our market presence, enabled us to venture into new sectors and foster synergies that propel our growth trajectory. Additionally, our services sector is seeing an improvement in EBITDA as it gains a scale and benefits from additive M&A transactions. Our financial stability is supported by a robust balance sheet with a net debt-to-EBITDA ratio of 1.7x, well below our 2x policy target, reflecting disciplined leverage management. Our total debt stands at MXN 4.1 billion, structured between short-term and long-term liabilities to optimize financial flexibility. Short-term debt is MXN 124 million, primarily for working capital to efficiently manage day-to-day operations. Long-term debt is MXN 4 billion, composed of the fixed rate sustainable bond. We have refined our cash conversion cycle by 56 days. Thanks to the effective working capital management, even with increases in inventory and accounts receivable due to product growth in Mexico and Central America. Additionally, our interest coverage ratio remains healthy consistently above 8x. In the quarter, we invested [ MXN 28 million ] in CapEx, which represented 3.7% of the quarter sales. The majority of this investment was directed towards updating our production processes for storage solutions in Mexico, including the new technology for the next generation of water tax. Additionally, in Mexico, CapEx allocations include MXN 22 million directed towards bebbia and MXN 14 million for RSA treatment plants. In Argentina, our investments were primarily focused on maintaining existing facilities and boosting productivity capacitive impacts. This strategic employment of resources highlights our dedication to upholding operational excellence and supporting our long-term sustainability objects. Moving into return on invested capital. For the quarter, it stood firm at 14%, maintaining a significant 290 basis points above our cost of capital. This performance is a testament to our effective capital management, aligning our investments with strategic priorities that yield substantial returns and fortify our long-term financial sustainability. Tomorrow, at our General Shareholders' Meeting, we will present several key proposals of which I would like to highlight the following. The cash capital reimbursement to shareholders through the reduction in share capital amounting to $0.50 per share. The ratification of current Board members and the appointment of new members, we aim to increase the independence of our Board to 53%, and improve gender diversity by raising female representation to 13%. This commitment enhances diversity across gender, age groups nationalities and perspective. Regina García-Cuéllar, an economist with a PhD from Harvard, recognized for her thesis on trade and the gender gap, has significantly enhanced profitability and market share at Izzi and redefined the customer experience at Citibanamex. She's also a noted advocate for education and gender equality, serving as a co-chair of the Mexico chapter of 5050 Women on Boards. Additionally, Marcos Westphalen brings over 17 years of experience in the digital industry, including significant roles at Google across Latin America, Europe and globally, currently leading the global customer -- Google customer solutions organization for Hispanic America. His expertise in digital business has been acknowledged with several leadership awards, and he's also a respected educator in the field. We are thrilled to welcome these 2 talented individuals. Their inclusion will broaden our Board expertise in customer experience, services businesses and technological innovation. Furthermore, we are very excited to announce that our 2023 annual reported integrated report will be available on our Investor Relations website tomorrow. We invite everyone to view this report and learn more about our ESG performance and initiatives. Finally, looking ahead, we remain cautiously optimistic about our performance for 2024. We are forecasting sales growth higher than 10% and aiming for an EBITDA margin between 18% and 19%. Our financial discipline will ensure that our net debt-to-EBITDA ratio stays below 2x, aligning with our long-term strategic goals. Finally, we expect to conclude the year with an ROIC that exceeds our cost of capital by at least 200 basis points, reinforcing our focus on value creation and efficient capital utilization. Thank you once again for your continued trust and support. We are committed to navigating these challenging times with resilience and strategic agility. I will now open the floor to any questions you may have. Thank you.

[Operator Instructions] Let's start with the first question. It's Sofia Martin from GBM. I have 2 particular questions. The first one, have your expectations of EBITDA breakeven changed? Given the continuous growth of the Services division, should we expect any guidance update? Maybe we can start with that and then I will read the second question.

Great. Thank you very much for joining, Sofia. The expectations do not change in terms of breakeven as we are moving very closely to the strategy that we have foreseen. So the strategy had included that aggressive growth in, for instance, bebbia. And -- so we do expect that the breakeven will happen by the date we had imagined. What's important though is to consider that while it consumes a lot of expenses, which affect the EBITDA level to grow. If we were not growing at this rate, this -- all of these businesses would be on breakeven or have a positive EBITDA. And so today, all losses are attributed to growth. Besides growth, we would be at breakeven or EBITDA positive in [indiscernible] services. Mario, would you like to add anything else?

No. Just probably that maybe we are still working to -- as we explained in the last quarter to breakeven by 2026, given an RSA, they're going to be already profitable this year.

The second question, given the current water scarcity situation in Mexico, do you have any update strategy? And will you be working on any specific programs with the government or institutions?

So I think there's tremendous opportunity to change behaviors on how we manage water as individuals, as companies in the private sector and as a country, considering also what -- how we manage water in the public sector. I think we have good ideas to contribute, we will try to promote more sustainable practices in terms of water management within this country and any other regions where we face water scarcity. I think it's very important to always remember that water is very local. And so it can't be generalized. It has to be approached in a very specific way to the market or to the specific geographical area to have the right approach, considering the conditions of that area. So for instance, in Mexico City and the Metropolitan area where we're having water scarcity today, there's so much rain, it would make sense that we make better use of that rain and to do it in a sustainable way, which means it gets captured and it gets treated to levels that can be used in more applications, such portable applications. And where that happens at a very local level, such as a particular building, a particular industrial facility or particularly home. And that water doesn't need to get pumped long distances, considering that where we have the benefit that is placed on right where it's likely to be needed if it had a right quality. And so our strategies do change. We do adjust to the situations. And hopefully, we can contribute in a positive way in the way we manage water as a country and on specific local approaches. Collaborating with the government, it's more around that. Collaborating in the government in terms of programs to sell solutions to the government, that's not an area we have focused on, and it's always a desire to contribute to the well-being of the markets that we participate in, but it's not a focus to [indiscernible] the government programs. Anything else, Mario?

Not on my side, Charlie.

Do you want to go to the next one, Mariana?

Sure. [ Andrea Montiel ], Investor Relations. First, there has been a significant increase in service sales, driven mainly by the expansion of bebbia and growth in [indiscernible]. Could you detail the key strategies you are implementing to sustain and enhance this growth? And do you expect services to continue this strong -- with this strong growth throughout the year?

Thank you very much for joining, Andrea. Thank you for your question. So well, when we're talking about the water stress, I think that the services approach is the one that best serves that water need. And there's 2 components that drive the growth in services. One is the solutions we're bringing to the market are very novel and they serve an existing need. And the second one is that need is growing as there's more water stress. So we have plenty of room to grow. These are markets that are much larger than our core business. So we expect this segment of services to continue to grow very aggressively, not only for the rest of the year but for future years. And with this, not only captive growth, but we serving critical applications will really make a difference in terms of how we serve this water scarcity situation. With these solutions, keep in mind that we're impacting the world in terms of the environment in a positive way with less -- with getting access to the amount of water needed and the quality needed with less energy consumption and with less use of onetime use plastics, for instance. And also, with these solutions, we serve it in a way where it's very -- where it makes a lot of sense for those who run out of water. It's economically attractive. And at the same time, it provides the water needed for all of the different applications to allow for the core activities of any of these centralized locations, in a home to be able to shower. In an office space, we'll be able to have water for toilets, in a manufacturing facility to have water for the manufacturing process. So it serves very critical core activities in all of these locations. And so we see tremendous potential there. Mario, would you like to...

I would just probably complement your -- what you said, Charlie, with the idea that we must remember that we've been investing for a while on developing these businesses within reporting EBITDA losses for a while because we believe that this is of helping different forms of people to solve their water needs. It is a path to the future. We believe that this water scarcity situation has accelerated this [indiscernible]. And now we're seeing how -- water treatment and recycling is becoming more important to people because some of them are facing long-term shortages that there is no way to solve it unless you have solution like water treatment and recycling. The same happens with Rieggo, for instance, there's a lot of farmers that before they used to have plentiful of water, now, they don't. So they need more technology to manage their crops. So that -- all that situations are starting to become relevant. So people is moving there. So I think now what is happening is, these strategies that we place together probably 3, 4, 5 years ago are starting to convert with the market needs that we anticipate and we believe that going forward, the water needs will only be incremental because of climate change, population growth and lack of infrastructure which if you go back 5, 6 years ago to our quarterly calls, we were anticipating that. So I will just add up to what you said, Charlie, this [Foreign Language], which I don't know how to say that in English, but it's a -- but we believe that's the case. And we believe Rotoplas is well prepared to take advantage of this opportunity.

Perfect. So now moving to Carlos Alcaraz's question, Apalache research. And he has 2 questions. I'm going to read the first one. And it's regarding the water treatment plant in Puebla, how much will this acquisition represent in annual sales?

Well, thank you very much for joining us this morning. For the full year, it's going to be in the neighborhood of 3%, and I just -- well, the number is strong, and that is not relevant, but it speaks to the strategy behind Programmatic M&A that is buying small assets and just [indiscernible] them into your platform. So that's -- thanks for the question. I think it's relevant because it highlights what's a Programmatic M&A about.

Going to the second question, considering the situation in Argentina, what do you consider to be the main drivers for the growth in sales reflected in the guidance?

Thanks for the question, Carlos-san. So for the short term, not Argentina. But hopefully, we're optimistic that Argentina will have an interesting turnaround as a country that will turn a new trend for a longer period of time. In Argentina, we played for a long time. And so we've experienced long cycles where there's tremendous benefit, and we hope that we're going into one of those. And that is rather than just being a cycle and what has been a downward trend that it will be a cycle in an upward trend that the trend will change. But in terms of what would offset that growth on Mexico, Mexico's unfortunate situation is one that will require tremendous focus on our side. It's challenging. And we see a lot of people suffering as a consequence of the water shortage. And we really are a very purpose-driven company. When we look at these opportunities, we don't see it as a pure financial business opportunity. Not at all. We see it as an opportunity to serve on our society in a positive way. And so we've been working tirelessly to be able to put together the capability to serve the needs that we foresee this market is not going to need it. It's not easy to have a leadership position where you have the biggest manufacturing capacity. And if that market grows, it's really on you to be able to have the additional capacity to serve it when we had the situation in Monterey. We had to triple our manufacturing capacity in Monterey in very short term. It is on one of our core trends to manufacture these solutions. And so we're very good at that, and we'll do that as a conviction to serve our markets. And I think we will have an increase in sales for that reason. Additionally, we do see continued growth in services in all of the main businesses in services, bebbia, ROIC and Rieggo. And we do see starting to have better dynamics in other markets, Central America, Peru and the U.S. that hopefully will end up also reflecting growth compared to this quarter in the future quarters. Not Central America because that was a particularly strong quarter, the past quarter was particularly strong, but to continue having that strength, but growth in the other markets. Mario?

Well, let me just connect that question because there's another question from Michael. Thanks for joining us this morning. And also another question from Felipe Barragan from BTG. Thanks Felipe, again, for joining us this morning. Well, both of them asked, okay, guys, you don't change your guidance, you need to grow for the next quarter at a rate of 14%. How is that going to be achieved? And I think that connects to what Charlie has answered. And I think the way Charlie frames it, I think we're convinced that a couple of things. One is Argentina was badly hit similar devaluation, huge demand contraction on first quarter. We believe that going into the second half of the year, the prices are going to be better because as we mentioned last call, we adjust on a monthly basis connected to inflation. And second, we're starting to see demand coming back on the second quarter. So we believe Argentina will -- it was affected in the first quarter, but we'll make it up in the remainder of the year. As you might recall, the U.S., we discussed last quarter that we were assessing how to approach better the septic business. We were adjusting parts of it, and we focus in the scope. Joe, which is the new CEO for the U.S. operation has been doing so and know that for the last 5 months. He believes that now that the U.S. will be better positioned to start regaining growth despite the climatic situation that explains part of the drop in the sales. And finally, services, as Charlie mentioned, they're very well positioned to keep a good traction on top of -- we believe that water scarcity in Mexico and Central America will not be solved overnight. So those are the elements that we consider within the management team to maintain our guidance on growth for the reminder of the year.

Thank you. So I'm going to read the Felipe Barragan's second question. We already touched on guidance on Argentina. So on the acquisitions done this quarter, any word or any update on how that's performed so far? And any way of quantifying that will be much appreciated.

Both acquisitions are probably new. We have seen them, one, delivering a couple of months of performance, the [indiscernible] month. We are in the process of integration. And so far, we have found what we felt, we will wait to find. We are very excited about these 2 companies that we acquired. We are sure that the growth that we have for both of them will deliver the expected results. And I think it's worth to mention that both were accretive to the [indiscernible].

And in terms of the growth, how much they contribute to the growth. The organic growth is the biggest growth we will have in services.

Perfect. With that, you just answered first question of [ Mauricio Buitrago ], so I'm going to read the second one. Do you think Mexico could continue showing those margins?

The margins we've had are extraordinary. And it's not -- I think it's super optimized. It's not on the levels that we can stabilize at. And so now, we don't necessarily see the same level of margins to be sustained. They will continue to be very high margins, and particularly considering the industry we play, I think we have the best practices that deliver the best margins. And we will continue to have that. But this is very, very high margins. Mario, anything?

Yes. I think at the end, what we are trying to balancing out is, as the guidance says, we are targeting at the group level for 18%, 19% EBITDA margin, and that's composed by different parts of the business. Mexico outperformed this quarter. Some other places underperformed, the mix is very good. We're above going forward. We believe -- again, we have someones who are better, someones who are not that better. But at the end, we feel that the company should be in the range of 18% to 19%. So I think that's the right way to approach it when conducting your analysis.

Thank you. So now we have another question from Michael [ Beregal ]. The valuation of financial instruments is now recorded as costs. What was the corresponding figure in Q1 of this year and that's the first question, and the other one is, and what was the first quarter of this year value of FX losses and inflationary effect in Argentina?

Well, thanks, Michael, for your question. I think it's very -- I was thinking when I was reading your question that next quarter, we might probably just show some reconciliations on a couple of items. One is the FX that I think it's worth to see where it belongs in this transition year. So last year, as you remember, we had MXN 252 million of FX cost at the financial level and this year, MXN 60 million, which was reported at the cost level. So in order to compare apples to apples, what you need to do is just put another MXN 252 million. And the cost, there's MXN 60 million for the first quarter, and then you can see the operating and EBITDA result. In terms of bebbia, which is another question that Mariana didn't mention, but I would like to -- I'll also clarify, first quarter last year, we don't have depreciation amortization for bebbia. So that's an MXN 8 million effect for the quarter. So in order to compare apples to apples, we have to add that to the EBITDA. So I think going forward, we will put probably just in this transition year, a reconciliation so it's going to be easier for you guys to compare those numbers. And as for the effect of Argentina, this quarter, we have a benefit of MXN 36 million due to the exchange rate and inflation effects when compared to the negative MXN 63 million from last year. Those 3 questions, which are really important for the performance of the quarter and when we compare for the first quarter were clarifying.

So we have a question from Emilio Antor, GBM. Last quarter, you talked about the digital strategy. Would you give us any update on its performance and its cost?

Thank you very much for your question, Emilio, and thanks for joining. It's difficult to talk to the benefit -- financial benefit of the digital investments because they really are an enabler, and they enable us to do the business with new capabilities to serve our customers in new ways. So these investments really generate the growth that we see in businesses such as the services businesses where we have tremendous growth. So it's difficult to do the attribution division that way. In terms of the expenses, the costs, Mario would never share our investment on technology, but I don't know if there's any color we can give.

I think well, the right way to frame it is as probably, we did a press release regarding the partnership with SAP and Google Cloud, that on one side, is bringing savings because we are consolidating all of our digital platforms into 2. So that has an IRR, and we have a business case as for that corporate strategy. And then if you want to look at what an additional unit of investment will bring -- digital investment will bring, we have different initiatives going throughout all the company and all of them has a specific business case with a [indiscernible]. We are very cautious about how much capital we invest in all the different initiatives that we have, including the digital ones. So it's hard to give you a number because there's too many things going on. But rest assured that all the business cases have a very good returns on the digital investments that we do.

Now I'm going to read Martin Lara's questions. He is from Miranda Global Research. And I'm going to read them both together. The first one, it's about the pricing strategy. And the second one is about the cash conversion cycle. The first one, could you please give us more details about the pricing strategy in Mexico? And the second one, as I said, is about the cash conversion cycle and what do we expect for the coming quarters in terms of cash?

A comment before I hand it over to Mario. Martin, thanks for joining, and for your question. Regarding the gross margin, we have worked very strongly on developing the innovation in our products to differentiate our products and our solutions and also in communicating that Rotoplas is a brand that offers on solutions that are long-lasting of high quality and that offer on value-added and so this gives us the opportunity to have a premium on the price. So that's one of the reasons we have high gross margins. In terms of going forward, as mentioned, we also need to make sure that we continue to have a good differentiation, the reasonable differentiation with our competition and that is also the right cost benefit ratio for our customers. And so that also keeps pressure on the margins. And I said, we do expect to have EBITDA margins, as Mario mentioned, around the 18% to 19% levels. Mario?

No, I think you just nailed it out perfectly, Charlie.

So I think that we are running out of time. So I want to read the last question. It's from Armando Rodriguez and it's, considering your expenses and the business growth you are foreseeing in the short term, should we expect some changes on your leverage in the following quarters?

The answer is yes. It was explained in the press release and throughout this morning. The company set up for higher revenues that were mainly affected by Argentina's underperformance, and the reorg we're conducting in the U.S. and all that we're focusing, we explained. So going forward, we expect that we should experience some leverage from our current expenses run rate, and that should reflect in a good performance for the company for the coming quarters as sales increases. Forgot to say that last part. I think we can take the last one, Mariana, if you want, we still have 2 minutes to go.

Perfect. One more question. This one is what specific measures are you considering implementing to address the challenges identified in the quarterly report and improve results in regions where we are experiencing significant decreases in sales and margins?

Okay. Thank you very much for your question. Yes, there's markets that don't perform as strongly as the stronger ones. And I think there's important opportunities in all of the markets that we participate in. One of the drivers for growth is focusing in those markets where the geographical locations were, the solutions for -- the need for our solutions are near the most, and even though, for instance, in Argentina, there's a contraction in construction. There's places where the need for solutions are critical. And so they see more resilience in terms of performance. And so focusing those specific areas helps to bring stability. In terms of growth, it's the new products and the new models that offer the opportunity to find growth regardless of the local economic dynamics of that particular market. And so this allows us to drive both revenues and increase margins in those markets. Mario, anything else that you'd like to add?

No. I think you said, and as we have explained throughout this morning, we have a very specific plan to propel growth in the U.S. Argentina, we expect a much better second half. Our services finally is starting to gain momentum. Mexico and Central America, I think the drought situation will be a good tailwind to have. And Peru, which has been affected from different economic and political situations there, we believe that those are not for the long term and that will eventually help that market came up. So we are very focused on making all the businesses and all the regions to have a good growth rate and we're committed to all of our stakeholders to deliver value at every single moment.

Thank you. So we are just in time, and thank you, everyone, for joining us.

Thank you, everyone. Have a great day. Bye-bye.