Grupo Rotoplas S A B

Good morning, and welcome to Grupo Rota Plus's 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. Andres Pliego, Chief Financial Officer. I will now turn the call over to the speakers.

Good morning, everyone, and good afternoon to those joining us from other time zones. We greatly value your support and interest in Grupo Roto Plus. Today we'll reflect on the challenges and accomplishments of 2024 and share how we're positioning ourselves for the coming times. We have just closed a particularly challenging year, largely due to the recession in Argentina, which placed significant pressure on our top line and profitability. Although these headwinds tested our resilience, They also underscored the importance of continuing to invest strategically in the future of our company. As many of you know, we had two major projects underway, both of which demanded substantial capital and organizational commitment. The first was our project in Mexico focused on upgrading our manufacturing of storage solutions. The second was a broad technological revamp across the entire group, Together, these initiatives represent the culmination of a multi-year investment cycle designed to strengthen our foundation for the next phase of growth. Starting with the SMART project, we installed new machinery and equipment to modernize the production process of our legacy product, Latinaco. This upgrade enables a more efficient, faster, and cleaner manufacturing process, ultimately improving the quality of the product and the user experience across fabrication, logistics, sales, installation, and maintenance. Our second major initiative has several facets. At the group level, we migrated all our data to Google Cloud, unlocking advanced digital analytics and AI tools. On the commercial side, we introduced new data-driven and IoT functionalities, giving the end-user better insights into water consumption and quality. We also launched our B2B and B2B2C e-commerce platforms in Mexico, an entirely new channel for Rotoplus, allowing us to work more closely with distributors and end-users alike. Despite the difficulties encountered this year, we are very proud to achieve the highest Net Promoter Score in Grupo RotoPlus history. Through dedicated UX committees and active customer listening, we are continually refining our process and improving every interaction with our clients and consumers. Additionally, our Vegas service continues on a strong growth trajectory, adding subscribers at a healthy pace and receiving excellent feedback from the Vegas market. Now that these two major projects are operational, our immediate focus consists with what we share on our day, is to optimize expenses and investments over the coming quarters. Specifically, we are capitalizing on omni-channel and digital capabilities. We will leverage the Babya 3.0 platform and our new e-commerce channels to better serve existing customers and attract new ones. Reversing the decline in EBITDA, we're taking decisive steps to reduce expenses. In November, we undertook a difficult but necessary restructuring that reduced our overall headcount by 4%. This measure helps streamline operations and position us to be more agile and competitive. Focusing on free cash flow generation, we aim to boost operating profit through disciplined working capital management and strict capital expenditure control, thereby ensuring a stronger cash flow position to drive strategic initiatives. Looking ahead to 2025, we remain guided by our four strategic pillars. One, sustainable growth of our products. Two, ongoing development of services. Three, continued digitalization. And four, generating value for all our stakeholders. Every year brings its own challenges, and 2025 will likely be no exception, whether due to macroeconomic variables or political uncertainties in multiple geographies. However, we will continue to adapt and remain as agile as water itself, always seeking new ways to bring sustainable water solutions to millions of people. We have also made significant strides in our environmental, social and governance commitments, which have positively impacted our stakeholders. Through the upgrades in our manufacturing process for storage and our transition to renewable energy in Mexico, We have reduced Scope 1 and Scope 2 emissions by approximately 12% aligning our efforts with the objectives of the Paris Agreement. Additionally, we published our Sustainable Development Impact Disclosure report in collaboration with J.P. Morgan, becoming the first company in Latin America, and only the second worldwide, to disclose how our strategy aligns with the United Nations Sustainable Development Goals at this level of detail. We invite you to read this report, which is available in our investor relations website. In the realm of community social action, our Escuelas Conagua program stands out, conducted in partnership with the Coca-Cola Foundation, eight bottlers of the Mexican Coca-Cola industry, and Isla Urbana. The program successfully closed 2024 with the installation of 300 IoT-enabled rainwater harvesting systems in schools across Mexico. This initiative directly benefits students and teachers, improving their access to water and raising awareness about responsible water usage. Finally, before handing over to Andres, I want to express my gratitude to our employees, partners, distributors, and especially our shareholders for their trust and support throughout this challenging year. We remain committed to our vision of providing innovative and sustainable water solutions, and we look forward to seeing the opportunities ahead. Thank you again. Now I will turn the call over to Andres.

Thank you, Charlie, and good day to everyone. I'd like to begin by highlighting the most significant factors that shaped our quarterly and full-year performance. As you know, the challenging economic conditions in Argentina had the greatest impact on our overall results. If we exclude Argentina, our quarterly sales would have grown by 7.5% and our full-year sales by 7.8%. Unfortunately, lower sales in Argentina, combined with our planned investments in digital initiatives, affected our margins. ultimately limiting our full-year results and contributing to a 46% decline in net income for the year. As we mentioned during the AWA day, and as Charlie briefly recap, we have two main financial priorities I'd like to elaborate on. The first is reversing the EBITDA trend through cost and expense reduction. In this regard, we have already taken several measures, including a workforce restructuring that unfortunately led to the departure of some employees, reducing our headcount from 3,640 to 3,502, resulting in a severance payment of 54 million pesos in the quarter. Excluding this severance cost, our full-year EBITDA margin would have been 13.8%. Moreover, if we remove this cost from the fourth quarter expenses, we see an 8% reduction compared to the previous quarter, showing a sequential improvement. We will continue adjusting our costs and expenses according to market conditions in the countries where we operate. Our second priority is increasing free cash flow generation by optimizing working capital and exercising strict control over capital expenditures. We have drawn up plans to further reduce inventories, particularly in Argentina, and to continue improving our country's oil management in Mexico, leveraging technology to streamline our processes. Regarding CapEx, we're prioritizing maintenance investments that support our existing product lines. While discretionary spending requires monthly approval under more stringent criteria. In our services division, we have adopted a pay-as-you-grow strategy to ensure that the highest return projects receive investment firsts. We believe these actions will positively impact our return on invested capital going forward. Moving on to regional performance, Mexico posted a 10% annual increase in sales, In products, we saw a solid expansion in the first half of the year, followed by a slower pace in the second half, with the fourth quarter sales ending in line with the same period in 2023. Services, on the other hand, continued to post steady double-digit growth, giving the margins in Mexico contracted due to higher digital expense and softer product sales in the latter part of the year. In addition, the increased weight of services, where we have not yet reached profitability, further pressured EBITDA. In Argentina, net sales declined by 41%, reflecting the country's recessionary environment, which eroded both demand and pricing power. Conditions worsened each quarter, resulting in a negative EBITDA margin in the quarter. However, full-year EBITDA margins remained positive. Although several indicators such as slowing inflation, improving fiscal accounts, increased credit availability, and some positive consumption signals point to a potential recovery, we have yet to observe a rebound in the construction sector, which is typically one of the last segments to recover. We remain cautiously optimistic about Argentina in 2025, yet the timing of any meaningful improvement in demand remains uncertain. In the United States, net sales declined by 6% in 2024, largely because there were no drought conditions and the agricultural sector contracted, reducing demand for our tanks. Despite negative EBITDA, our cost control measures are helping to improve margins. Meanwhile, net sales in other countries grew by 12% for the year, with the strongest increase occurring in the fourth quarter, driven by growth in Peru, Central America, and Brazil. However, higher logistics and distribution costs, coupled with increased investments in our water treatment plant operations in Brazil, exerted pressure on margins in these regions. Regarding our segment performance, services now represent 8% of total revenue, supported by the continued success of Pellium, which recently surpassed 133,000 subscribers. Notably, Bevia Smart accounts for over 70% of new contracts, indicating that customers' values have more detailed information about their water usage. Other services, such as water treatment and irrigation, continue to expand their client base. The EBITDA margin in the services remains in negative territory, but is improving as we move forward. Meanwhile, as previously mentioned, our product segment has experienced a decline, primarily due to economic situation in Argentina, which has significantly impacted sales volume, pricing, and margins. Turning to our cash position, we ended the year with 732 million pesos in cash and cash equivalents. Our net debt to EBITDA ratio stands at 2.6 times. We view this as a temporary situation and expect it to return below 2 times. Today, financial debt amounts to 4.7 billion pesos, with 684 million pesos in short-term obligation, mostly tied to working capital, and 4 billion pesos in long-term from our fixed-rate sustainable bond. The blended cost of our debt is currently at 9%. With respect to capital allocation, our total capex equated to 5% of sales and 0% decreased compared to 2023, with 93% of these funds deployed in Mexico. The primary investments include new technology for manufacturing storage solutions, which aligns with our long-term commitment to sustainability, as well as 101 million pesos for the construction of our Ixtapaluca plant, 121 million pesos for veria, and 54 million for water treatment plants. Our return on invested capital stood at 7.8, which is 444 basis points below our cost of capital. If we exclude the severance payments, the ROIC increases to 8.3%. Moving forward, we intend to focus on improving NOPA to restore positive spread between ROIC and WAPI. thereby enhancing profitability and delivering lasting value to our shareholders. On ESG, and in addition to what Charlie mentioned about our overall performance in this area, I'd like to focus on specific goals. We successfully achieved five out of our six public ESG targets. The only shortfall was our gender goal. However, we did see an improvement in female representation, moving from 23.7 to 25.1% of our total workforce between 2023 and 2024. We remain committed to more inclusive hiring practices, as well as the retention and development of female talent throughout the organization. Looking ahead, we will continue working to generate a positive impact on both people and the planet. ensuring long-term viability of our business model. Thank you once again for your time and interest in our company. We remain committed to delivering strong results while keeping our long-term perspectives. We believe we're in the right industry as water will continue to grow in importance globally. Moving forward, we will concentrate on the levers within our control to enhance profitability and strengthen our operations. With that, we can now begin the Q&A session.