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

Good morning, and welcome to Grupo Rotoplas' [indiscernible] 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 statement, 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. Andrés Pliego Borell, Chief Financial Officer. I will now turn the call over to the speakers.

Good morning, everyone. Thank you for joining us. Let me start with what matters most about this quarter. We saw a meaningful improvement in our performance. Sales grew almost 10%, our fastest pace in several quarters. EBITDA grew 35% with a margin of 13.2%, 250 basis points above last year. Our net result was practically at breakeven, and leverage came down to 2.2x from 3.2x last -- a year ago. We did it in an environment that did not help raising cost stayed elevate consumer confidence was low and construction remained weak in Mexico and Argentina. These results did not come from a better market. They came from better decisions we have made over the past months and from how our teams executed them. There is a concept we have been discussing a lot inside the company. and the exit. A company that wants to last for decades has to do 2 things at once. It has to exploit what it already knows how to do, run the core better, faster and with fewer errors. And it has to explore why it does not know yet, place bets today that become tomorrow's growth. Neither is not alone. This quarter, we saw progress on both fronts. The core business operated more efficiently, while new products and services we have developed over the past few years started to contribute more meaningfully to our results. Let me walk you through what we saw across our 4 strategic priorities. All of our regions grew this quarter. In Mexico, sales grew close to 5% and EBITDA margin expanded 250 basis points to 8% in a market that remains with low customer confidence, lower construction and heavy rains. What made the difference was execution, tight expense control, sharper commercial discipline and the rollout of new strategic solutions beyond our traditional core portfolio, such as vertical tank rainwater harvesting systems. In Mexico and Central America, these new solutions already account for close to 8% on of Grupo sales. Resin costs did weigh on our gross margin, which contracted 60 basis points. We manage pricing with agility and our expense discipline more than offset that effect. The diversification we have been building is now showing up in the numbers. The United States grew double digits and boosted in sixth consecutive quarter of positive EBITDA, supported by a vertical focused commercial strategy and stronger demand in water storage and in industrial and chemical applications. In other countries, performance was solid, led by Peru and Central America. In Argentina, the operational improvements we have been implemented -- implementing were reflected in the quarter. despite very low demand, EBITDA was at breakeven, an improvement from the loss reported last year. This reflects the work we have done on pricing and efficiency rather than the recovery in the market. Water innovation and market disruption is where the work we have done over the last few years is most visible. Services grew 10% and EBITDA was positive 4 million compared to a loss of 63 million a year ago. Bea passed 208,000 active subscribers, adding more than 14,000 new subscribers in the quarter, with its unit economics improving. Our water treatment plant business grew in Mexico and Brazil. In Mexico stricter water regulation is also creating demand for compliant solutions. These are recurring higher value businesses. they are the explorer side of the company becoming real. We treat technology as operational capability, not as a board function, AI and digital tools are now part of the daily work in sales, service, planning and finance. And our teams are learning to use them in concrete tasks. At the same time, we're building the foundations for the next stage of growth. new ERB starting with a more integrated digital experience for our customers and stronger data and capabilities. These projects are processing -- are progressing, sorry, according to plan. For us, growth and impact go hand in hand. The more people we serve with water and sanitation solutions the greater the impact we can create and the greater the value we bring to the markets and communities where we operate. A recent example is Brotas -- our campaign has started in Gaza and Puebla, together with our ambassador, BosVandez. This is the first delivery we -- in this press delivery, we supported Masa an organization of indigenous women tapes, benefiting more than it families facing water vulnerability. Let me show you a short video. [Presentation]

It fills me with pride to show the video. And to see the great things we can achieve through our business. We continue to make progress against the targets we have set under our strategy. Across our environmental, social and water-related priorities. And the same discipline we apply to improving our operations also helps us use resources more responsibly and reduce our footprint. This progress is being recognized externally as well. This quarter, expansion ranked us among the 10 most responsible companies in Mexico, #9 out of 183 participants. In Peru, we were once again recognized as a water responsible company. In Argentina, we partnered with Habitat for Humanity to deliver sanitation kits to families. We launched the second edition of a [indiscernible] impact our development program for women in our team with 39 across 4 countries. . Behind these results, there is discipline in how we operate and how we allocate capital and in how we choose where to grow. That discipline brought leverage down to 2.2x net debt to EBITDA, a full term below a year ago, and it gives us the flexibility to keep investing in the business that will shape the Rotoplas over the coming years. Andrés will take you through the details. To close 2 things. First, we're not satisfied yet. The environment remains challenging, and there is still work ahead. Second, this quarter confirms that the strategy is working, a quarter that is more efficient, new businesses, new products that are contributing and a stronger balance sheet. Behind every number, there are families, schools and communities with better access to water. And that purpose keeps us focused on the long term. Thanks for your trust. I will now hand it over to Andrés, who will walk you through the financial results.

Thank you, Carlos, and good morning, everyone. I'll go through the results in more detail. focusing on what drove margin expansion and our cash generation. Net sales reached MXN 2.9 billion, up almost 10%, with both products and services growing around 10% and and growth in every region, led by other countries in the United States. Gross margin was 41%, 60 basis points below last year. Our pricing starting to remain agile. But given market conditions, it did not fully offset the increase in resin costs. Where we made the biggest difference was in expenses. Operating expenses grew less than 3% against almost 10% growth in sales. That operating leverage took operating income up 51% and EBITDA up 35% with a margin of 13%, 250 basis points above last year. This is our fifth consecutive quarter of year-over-year EBITDA improvement. Below the operating line, net financing costs fell to MXN 164 million from MXN 354 million a year ago, mainly due to lower foreign exchange effects in Argentina. Of the total, MXN 121 million corresponds to interest, commissions and leases and MXN 43 million to foreign exchange effects. Together with the higher operating income, these broaden our results close to breakeven. For the first 9 months, sales grew almost 5% to MXN 8.6 billion. Gross margin expanded 20 basis points supported by our pro strategy amenability costs. Operating income grew 20% and EBITDA grew 18% to MXN 1.1 billion, with a margin of 13%, 150 basis points above last year. The improvement came mainly from Mexico and the United States, while Argentina narrowed its losses. In Mexico, as Charlie mentioned, demand remains soft. And even so, sales grew almost 5%. A Growth was driven by our new strategic solutions and continued momentum in our services platform. EBITDA margin expanded 250 basis points to almost 18% reflecting operating leverage and services margin. Argentina sales grew 24% in local currency and 7% in Mexican pesos. This growth came from pricing and was below inflation. So sales decline in real terms. Volumes contracted this quarter, reversing the modest recovery we saw in the second quarter as construction activity remained weak. EBITDA was at breakeven compared to a loss in the third quarter of last year. That said, we remain cautious on Argentina. In the United States, sales grew 21% in pesos and around 31% in dollars, driven by our specific end markets with stronger demand for tanks and for industrial and chemical applications. EBITDA margin was around 3% versus around 5% a year ago, reflecting a supplier cost increase that we passed through only partially and entry pricing for new key accounts as we prioritize growth. Recovering margin will be a key focus for us next quarter. Even so, this is our sixth consecutive quarter of positive EBITDA in the United States. Peru, Central America and Brazil together grew 25%. In Peru, growth was supported by improving customer and investment segment. El Nino-related heat weighted on water heaters but boosted demand for storage. Central America continued growing at double digit across the region and Brazil kept building out its water treatment plan. EBITDA in this segment grew 19% with a margin of 19%, 100 basis points below last year, mainly due to the timing of projects in Brazil. Together, the United States and other countries now represent 27% of Group sales, up from 24% a year ago. Almost 10% with growth with growth across all regions. EBITDA grew 10% with a stable margin of 15%, , supported by better results in Mexico, Argentina and other countries. Year-to-date, product EBITDA grew 16% and the margin expanded 160 basis points to 16%. Services sales were up 10%, and driven mainly by via, which ended September with more than 208,000 active subscribers after a record 14,000 net additions in the quarter. Segment EBITDA was positive MXN 4 million, a 67 million improvement versus the third quarter of last year, reflecting Baba's continued progress in unit economics, which is helping absorb the cost of growth. For the first 9 months and excluding the onetime litigation impact in Brazil we discussed last quarter, services EBITDA would have been around negative MXN 37 million compared to negative MXN 117 million in the same period last year. The result has improved quarter after quarter this year, and we remain on track towards sustainable breakeven in services. Our capital structure remains simple after refinancing what completed last quarter. Total financial debt closed at MXN 4.4 billion, 5% lower than a year ago mainly the 7-year Banco Mex loan plus MXN 407 million in short-term working capital lines in Mexico. Net financial debt was MXN 3.3 billion, about 500 million less than a year ago. Net debt to EBITDA closed at 2.2x compared to 3.2x a year ago and 2.3x last quarter. The improvement came from higher EBITDA, higher cash balances and lower debt. We're moving in the right direction, and there is continued work to be done. We ended the quarter with MXN 1.1 billion in cash, about MXN 270 million more than a year ago. Operating cash flow for the first 9 months was MXN 1.2 billion, 17% higher than last year. CapEx totaled MXN 370 million under 4% of sales and within the 3% to 4% range we have discussed. Most of it went to services in Mexico, where we invested as contracts and customers are confirmed. Working capital absorbed cash this year mainly from higher inventory, which reflects resin purchase at higher prices and softer demand in Argentina, bringing inventory days down is a working capital priority for the fourth quarter. Our stronger cash position also allowed us to return value to shareholders. While we continue to deleverage yesterday, our Board of Directors approved the proposed a proposal for a capital reimbursement of 0.33 per share, equivalent to approximately MXN 160 million, which will be submitted for approval at an extraordinary general shareholders meeting together with the MXN 0.17 per share paid earlier this year, total cash distributions for 2026 would reach MXN 0.50 per share. Overall, this quarter overall -- sorry, overall, this was a quarter where trends we care most about, kept moving in the right ratio, margins, cash generation and leverage. Going forward, our priorities remain margin discipline, deleveraging and steady improvement in services. Thank you all. We're ready to take your questions.

Thank you. So we will read the first question that comes from Orlando Cantara from BTG Pactual. Thanks for the questions, and congrats on the results this quarter. I have several questions. The first one is by your estimate, Mexico product sales grew roughly in line with inflation, which implies volumes are close to flat. What is the share of price and volume in Mexico sales is low to mid-single-digit growth in Mexico, the new normal?

What happened recently in terms of water availability since 2024 and then 25% and then 26% is that we had much more rain making shortage, the situation of water shortage that's changed. I do not necessarily think that it's going to be sustained. So in terms of growth rate being the -- what we have today is a new normal, part of it is dependent on water availability. On the other hand, we do have, as I mentioned, what we call the strategic products, which are products beyond our core products, the traditional water tanks and the piping that we have, that cat grown incredibly well. And today, those products are 8%, just the Mexico new products are about 8% of all of Grupo's revenues. So we do expect to see more growth in products going forward, not necessarily because of more water shortages or more construction, that would definitely drive revenues for this business. But beyond that, we've been getting closer and closer to customers. We've been for years now developing our practice of launching new products that are very aligned to those customer needs. And our gold market keeps getting better and better. Digital capabilities allow us to move with more agility and connect better with customers. And we do expect continued growth in products as a result of that. Andres, anything else?

Nothing to add in.

Thank you. So the second one from Orlando is ROIC has been stuck in the mid- to high single digits for 5 years, below cost of capital, even after heavy investments which invested capital now flat? What EBIT level gets you back above cost of capital and by when. Also, services to lose money at the end at the EBITDA level, but take most of the CapEx at what number of baby subscribers does services earn its cost of capital? And would you slow CapEx once you get there?

Thank you, Orlando. Yes, we we're very focused on ROIC and getting back to cost of capital. The company has invested a lot in IT, in water treatment and in Berea for the last few years. So we're still carrying the investment in the balance sheet and the results are just starting to come together. So I guess we're finally seeing what Bebiis doing in our results and water treatment plants are doing in Brazil, for example, we have the positive effect this quarter. So yes, we we will start to see better PAT or better results, operating results in the services businesses and try to catch up with investment. The ROIC on products is a much healthier ROIC. So it's more of a growth story that is complicated to see through ROIC. But we'll continue to focus on bringing it up to where the cost of capital is. Charlie, anything else?

I think one of the this consider will rattle on has been a very good metric for Rotoplas where products was, by far, the largest part of the business and investments were lower on services. services continue to become a more relevant part of our business where investment is required. It's a different business model. So we'll be increased clarity in terms of the difference -- the difference -- the different financial metrics between products and services, but yes. ROIC, I don't think is necessarily the right metric to look at products -- sorry to look at services. For products, it will continue to be the main metric on how are we creating value, and it doesn't very well for product. On services, growth rate is very important as well as the unit economics and both continue to improve in very important ways. Unit economics for Baba continues to improve as 2 things happen. We learn more about the business, and we continue to improve our processes, our systems, on how we operate. And then the other thing that drives on unit economics is scale. And we're -- that scale is increasing by ruling centralized operating expenses. So yes, that's the only thing I would add.

Thank you both. So the third question from Orlando is U.S. sales grew about 31% in dollars, driven by water storage and industrial chemical demand. What is behind the storage demand? And is it structural or tied to specific projects?

It's a little of 2 things, necessarily specific projects. Part of it is structural, how we are operating in the U.S. is fundamentally different from those vertical -- from not vertical approach. And with that vertical approach, we're getting closer to the customer, where we are understanding better what the customer wants. And so we can better offer more complete solutions, which increases the average order value and it improves customer satisfaction. So from that perspective, structurally, it will -- it has improved and will continue to improve per that of our U.S. team. And something else that did contribute is, there was less specification. And just as an example, in the Colorado River Basin, there is much less water. And so yes, there is a part that is driven by water stress caused by climate events. That part is something that is the one hand. Anything else, Andreas.

No, nothing.

So I'll read one question from Pablo Mulas from GB congrats on the results. Actually, he has 3 questions related to services, and each 1 of them. So first one is how sustainable is positive services EBITDA from here? That would be the first one.