Grupo Rotoplas S A B

For 45 years, constant transformation has been at our core. From the first water tank rising on the rooftops of Mexico to lead several markets across the continent, we've set the pace for an entire industry. Our solutions have been part of countless moments of joy and everyday tranquility, always keeping our promise of sustainable growth. Driven by our love for water, we continuously redefine our relationship with this essential element, nurturing its care and keeping an eye on the future. Rotoplus is in the heart of countless lives, reflecting our passion for water in every innovation, in every solution. We create integrated value across the water cycle. understanding that our commitment extends far beyond bare profits. As we look forward, we embrace the challenges of the future as opportunities to keep flowing, to keep innovating, and to continue celebrating our role in your life. Today, tomorrow, and for generations to come, at Rotoplast, we are more and better water.

Good morning and welcome to Grupo Rotoplas' results conference call. Please note that today's call is being recorded and all participants are currently in listen-only mode to prevent background noise. The host will open the floor for questions later. 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 Abumrad, 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 Atlanova, our AI expert in the water industry, who will discuss the water situation in regions where we operate. Atlanova, 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 Rota Plus, 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 over-exploitation 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 lifespan, adding to the challenges of sustainable water management in a 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 excess 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, Adlanova. 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 BEVIA, and a strong organic and inorganic growth in both RSA and RIEG. 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 rate was 14% maintaining a strong position 290 basis points above the cost of capital, while our financial leverage fell well managed below two times. However, the first quarter also presented some challenges. Our net sales decreased by 3% to 2.7 billion pesos 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 US, and Peru. Additionally, in Mexico, these quarters 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 reinforce our commitment to sustainable growth which is expected to contribute an additional 4% to 5% growth in the coming years. Our recent acquisitions, including a majority stake in Irriban and the operational treatment plant in Puebla, are milestones that enhance our capacity to manage water efficiently through the cycle. These transactions are not mere 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 these acquisitions extends beyond growth. They embed resilience and agility into our business model, enabling us to navigate market complexities with confidence. By leveraging these synergies, we reinforce our presence along the water cycle. Our investors should view these strategic moves not as high-stake angles, but as calculated prudent steps that fortify Rotoplus' 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, RotoPlus has conducted a high level assessment of risk and opportunities related to climate change and water security. This proactive strategy is guiding us in developing detailed roadmaps to effectively tackle environmental challenges that affect both our business and the communities we serve. Furthermore, For the 14th consecutive year, Roto Plus 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 educational 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 Roto Plus TV, our internal communications platform. This platform uses an engaging and entertaining format to deliver key messages, 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-secure future. Now I will turn the call over to Manny 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 like to delve deeper into three 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 costs, but also benefits from high productivity levels at our facilities in Mexico. These factors contributed to achieving a gross margin exceeding 50%. Moving on to operational expenses, which has somehow 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 digitalization and e-commerce initiatives, including cybersecurity. Additionally, we incurred costs 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 304 million pesos, an eightfold increase compared to the first quarter of 2023. Recall that last year, we experienced an impact of nearly 250 million pesos due to the valuation 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 a 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 BEVIA and both organic and inorganic growth with our RSA and VEA operations. In the product segment, significant sales volumes in storage solutions 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 evident margin of 16%. In the United States, net sales fell by 20%, probably because of a lack of broad conditions in key states, affecting pricing and inventory management. The evident 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 never represent 8% of our total sales. But in the services segment, BEVIA has significantly expanded its reach, now serving over 115,000 users, which reflects our successful penetration and growth in the consumer water solution market. Riego, with its programmatic M&A program, has successfully installed innovative irrigation 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 propelled our growth trajectory. Additionally, our services sector is seeing an improvement in EBITDA as it gains a scale and benefits from active M&A transactions. Our financial stability is supported by a robust balance sheet with a net debt to EBITDA ratio of 1.7 times, well below our two times policy target, reflecting discipline leverage management. Our total debt is at 4.1 billion Mexican pesos, structured between short-term and long-term liabilities to optimize financial flexibility. Short-term debt is 124 million pesos, primarily for working capital to efficiently manage day-to-day operations. Long-term debt is 4 million pesos, composed of a 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 about eight times. In the quarter, we invested 28 million pesos 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 tanks. Additionally, in Mexico, CAPEX allocations include 22 million pesos directed towards BEVIA and 40 million pesos for RSA treatment plants. In Argentina, our investments were primarily focused on maintaining existing facilities and boosting production capacity in pipes. This strategic deployment of resources highlights our dedications 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. A cash capital reimbursement to shareholders through the reduction in share capital amounting to 50 cents 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 Garciacuella, an economist with a Ph.D. from Harvard, recognized for her thesis on trade and the gender gap, has significantly enhanced profitability and market share at EC and redefined the customer experience at Citibank MX. She's also a noted advocate for education and gender equality, serving as a co-chair of the Mexico chapter of 50-50 Women on Board. Additionally, Marcos Vesvalen brings over 70 years of experience in the digital industry, including significant roles at Google across Latin America, Europe, and globally, currently leading the Google Customer Solutions Organizations 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 two talented individuals. Their inclusion will broaden our board's expertise in customer experience, services businesses, and technological innovation. Furthermore, we are very excited to announce that our 2023 Annual Integrated Report will be available on our investor relationships 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 two times, 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.

Thank you. You can submit a question by pressing the Q&A button and please include your name and the company. Let's start with the first question. It's Sofia Martin from GBM. Hi, I have two particular questions. The first one, have your expectations of EBW given changed? Given the continuous growth of the services division, should we expect any guidance updates? 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 break-even as we are moving very closely to the strategy that we have foreseen. So the strategy had included that aggressive growth in, for instance, Bavia. So we do expect that the break-even will happen by the had imagined um what's important though is to consider that while it consumes a lot of expenses which affect the ebitda um at the ebitda level to grow if we were not growing at this rate this all of these businesses would be um break even or or would have a positive ebitda and so today all losses are attributed to growth. Besides growth, we would be at break-even or EBITDA positive in all services.

Thank you, Charlie.

Mario, would you care to add anything else?

No. Just probably just... That will be us. Maybe we are still working to, as we explained the last quarter, to break even by 2026. We have an RSA that are going to be already profitable this year.

Perfect. Thank you, guys. The second question, given the current water scarcity situation in Mexico, do you have any updates strategy and will you be working on any specific programs with the government or institutions? Thank you very much.

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 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 it can be used in more applications, such as portable applications, and where that happens at a very local level. such as a particular building, a particular industrial facility, or a particular home, and that that water doesn't need to get pumped long distances considering that we already have the benefit that is placed right where it's likely to be needed if it had the right quality. And so 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 as specific local approaches. In 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 in. And it's always a desire to contribute to the well-being of the markets that we participate in, but it's not the focus to sell to government programs. Anything else, Mario?

Not on my side, Charlie.

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

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

Thank you very much for joining, Andrea. And thank you for your question. So 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 two 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 have the growth, but be 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 getting access to the amount of water needed and the quality needed with less energy consumption and with less use of one-time use plastics, for instance. And also with these solutions, we serve it in a way where it's very, but 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 decentralized locations, in a home to be able to shower, in an office space to 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?

We'll just probably compliment what you say, Charlie, with the idea that we must remember that we've been investing for a while on developing these businesses. We've been reporting evita losses for a while. Because we believe that the thesis of helping different forms of people to solve their water needs is a path to the future. We believe that this water scarcity situation has accelerated this path. 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's no way to solve it unless you have a solution like water treatment and recycling. The same happens with Riego. For instance, there's a lot of farmers that before they used to have plenty full of water, No, they don't. So they need more technology to manage their crops. So 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 three four five years ago are starting to converge with with the uh with the market needs that we anticipate uh and and we and we believe that going forward the water needs will only be incremental uh because of climate change population growth and lack of infrastructure, which we go back five, six years ago to our quarterly calls, we were anticipating that. So I will just add up to what you said, Charlie, this coyuntura, which I don't know how to say that in English, but it's a... This situation. But we believe that's the case and... And we believe Rotoplast is well prepared to take advantage of this opportunity.

Perfect. So now moving to Carlos Alcara's question about larger research. Good morning. Thank you for taking my questions. And he has two 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 gonna be on the neighborhood of 3%. And I just, well, the number is relevant and it is not relevant, but it speaks to the strategy behind programmatic M&A. That is, you know, buying small assets and just bolt them in to your platform. So that's, thanks for the question. I think it's relevant because it highlights what's programmatic M&A about.

I think 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 your question, Carlos. So for the short term, not Argentina, but hopefully we're optimistic that Argentina will have an interesting turnaround as a country that will set a new trend for a longer period of time. In Argentina, we've played for a long time and so we've experienced long cycles where um so the the cycles were that there's um tremendous benefit and we hope that we're going into one of those and that is rather than on just being a cycle and what has been a downward trend that it will be um a cycle in an upward trend that the trend will change um but in terms of what would offset um that growth well 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 opportunity.

not at all. We see it as an opportunity to serve 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 these markets are going to need.

It's not easy to have a leadership position where you have the biggest manufacturing capacity and if that market grows, to have the additional capacity to serve it. When we had the situation in Monterrey, we had to triple our manufacturing capacity in Monterrey in very short term. It is one of our core strengths 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 then we will have an increase in sales for that reason. Additionally, we do see continued growth in services in all of the main businesses and services, Bevia, RSA, and Riego.

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. Good morning, Michael. Thanks for joining us this morning. And also another question from Felipe from BTG. Thanks, Felipe, again for joining us this morning. Well, both of them asked, Okay, guys, do not 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 just answered. And I think the way Charlie French said, I think we're convinced that a couple of things. One is... Argentina was badly hit December devaluation, huge demand.

Contraction on first quarter. We believe that. into the second half of the year, prices are going to be better.

As mentioned, 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 on 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 deceptive business. We were adjusting parts of it, and we're focusing the scope. Joe, which is the new CEO for the U.S. operation, has been doing so and that for the last nine months uh he believes that uh now that the us will be better positioned to start uh regaining uh 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 remainder of the year.

Thank you. I'm going to read Felipe Barragan's second question. We already touched on guidance in Argentina. So on the acquisitions done this quarter, any word or any update on how that has performed so far?

And any way of quantifying that will will be much appreciated. Thank you. I'm one delivering a couple of months of performance. We are in the process of integration. And so far, we have found what we felt best. we would like to be to point. We are very excited about

these two 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 training multiple of that one.

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. We just answered the first question of Mauricio Bidrago, so I'm going to ask the second one. Do you think Mexico could continue showing those margins?

No. The margins we've had are extraordinary.

And I think it's super optimized. It's not the levels that we can stabilize at. And so now we don't necessarily see the same level of margins to be sustained. There will continue to be very high margins, and particularly considering the industry we play in, 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 balance is, as the guidance says, we are targeting at the group level. level for an 18-19% of the 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 were above going forward. Again, you know, we have someone's doing better, someone's doing 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. Okay.

Thank you. So now we have another question from Michelle Birgel. 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 was thinking when I was reading your question, Next quarter, we might probably just show some reconciliations on a couple of items. One is the FX. I think it's worth to see it where it belongs. in this transition year. So last year, as you remember, we have 252 million pesos of FX cost at the financial level.

And this year is 60 million, which was