Grupo Rotoplas S A B

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. Good morning.

Hello everyone and thank you for joining us today. Before I walk you through the quarter, I want to take a step back. Almost five decades ago, Rotoplas began with a simple purpose, to improve people's lives through better access to water. That purpose is the reason we exist today, and it is the lens through which we make every decision. In a demanding environment, returning to those roots, being a company that creates real, This was another quarter of steady sequential progress, with a levered top-line growth, double-digit EBITDA expansion, margin improvement, and a meaningful reduction in leverage, all while continuing to invest in the business that will shape the Rotoplas Andrés will walk you through the numbers in detail, but the message is simple. The recovery we have been building is taking hold, and it is broadening across our geographies. We are not yet where we want to be, but we are moving in the right direction. We achieved these results despite currency volatility and higher raw material costs. That speaks to something more structural, our ability to execute. Pricing discipline, innovation, cost management, and capital allocation are becoming competitive advantages that allow us to perform even in challenging environments. We strengthened our financial position, leverage came down to 2.3 times, cash generation remained strong, and we refinanced our sustainability bond, extending our maturity profile and giving us greater flexibility to invest for the long term. This is a solid foundation we have been patiently building. Let me now share with you how we advanced on our four strategic priorities this quarter. Our first priority is profitable growth and core expansion. During the quarter, we continued to grow while maintaining disciplined pricing across our portfolio, protecting margins despite higher resin and freight costs. In Mexico, category-level demand was mixed, but our commercial execution more than compensated. The progress we made reflects the strength of the capabilities we have been building over the past several years. At the same time, we continue strengthening our portfolio across the entire water cycle by embedding technology into the products that made us market leaders. When we think about water, we think about how we can continue improving every step of the cycle of our customers. Today, our storage solutions incorporate smart level sensors, our smart pump improves water pressure and performance inside the home, and Bedia completes its cycle through water purification. Together, these innovations allow us to better serve our customers while continuing to build on the businesses that have defined Rotoplas since the beginning. Robots like the Vertical Tank and Smart Pump are still in the early stages of adoption, but we're encouraged by the progress we're seeing. They are already improving our commercial needs, expanding the markets we can serve, and helping us reach new customers. For example, our new Vertical Tank is compact enough to fit inside a residential elevator. A small detail, but it's opening up multifamily and urban apartment buildings as new use cases For a product category that used to be limited to houses with space for a rooftop tank. Our smart pump is also creating new opportunities to offer more integrated water solutions inside the home. For us, innovation is about continuing to improve the products our customers already trust and making them even more valuable over time. But a better product only creates value when people really understand its benefits. and know how to install it. So we stepped up the work around adoption, sharing our products more actively, including a smart pump demonstration on social media, which I'd like to share with you now.

Hola, buenas tardes, me llamo José Manuel Alcántara, soy instalador y hoy nos enfrentamos al tema de cambiar este hidroneumático. Se decidió actualizarlo a esta nueva bomba de la marca Rotoplas. Miren la diferencia de tamaño. Andrés Pliego Rivero Borell, Mariana Fernandez, José Luis Mantecón García, Mauricio Romero

And just as importantly, we're investing in the people who are bringing our solutions into the home. We're expanding training for our sales force and for the plumbers who install our products and reinforcing our plumber loyalty program, making our products easier to choose. Andrés Pliego Rivero Borell Andrés will walk you through each market in more detail, but together these results reinforce our confidence that we're building a more balanced and resilient company. Our second priority is water innovation and market disruption. Data continued its expansion, with record subscriber additions and continued improvement in genetic economics. Having completed our platform migration, we're now well positioned to accelerate growth. This is exactly the kind of recurring, resilient, and higher value business we set out to build, and it continues to validate our long-term strategy. Our third priority is technology and talent. We continue strengthening our digital capabilities through better data infrastructure and AI-enabled tools that improve customer experience and commercial execution. At the same time, we continue investing in specialized capabilities across analytics, automation, AI, and commerce. Technology combined with the right talent is what will allow us to scale more efficiently in the years ahead. Our fourth priority is sustainable impact and operational efficiency. Sustainability remains inseparable from our business. It is and has always been part of our DNA. This quarter, our teams across the region continued moving that commitment forward. We celebrated Sustainability Week with more than 300 employees participating across the organization. We were once again recognized as a CDP supplier engagement leader for the second consecutive year. And we continued strengthening our transparency by reporting our contributions to the UN Sustainable Development Goals. In Peru, our operation is earned Our operation earned its sustainable management distinction for the ninth consecutive year, while joining the country's national carbon footprint program for the first time. What makes me most proud is not the recognition itself, but what it represents. It reflects the commitment of our people to create a positive impact on water, our communities, and the environment. Together, these four priorities reflect how Rotoplas continues to evolve. We are strengthening the business while remaining true to the purpose that has guided us for more than four decades. To close, I'd like to return to where I began. Behind every number we discuss today are real people, families, schools, and communities gaining better access to water. That's what gives meaning to the work we do every day. Almost 50 years ago, Rotoplas was founded with a simple purpose, to improve people's lives through better access to water. Today, that purpose remains exactly the same. What continues to evolve is how we fulfill it. Through innovation, technology, stronger execution, and above all, the commitment of our people, we're building a company that is better prepared for the future while staying true to who we are. We're encouraged by the progress we're making, and we remain confident in the opportunities ahead. Thank you for joining us today, and I will turn the call over to Andrés.

Thank you, and good morning, everyone. As Charlie walks through our four strategic priorities, I'll focus on our two financial ones, sustaining our EBITDA margin expansion and strengthening free cash flow. This quarter we made progress on both, and you'll see it in the numbers. Net sales reached 3 billion pesos, a 3.4% increase year over year, with products up 3.2% and services up 4.7%. Growth was broad-based. Mexico, the U.S., and our other countries all grew, more than offsetting the ongoing pressure in Argentina. Gross profit closed at 1.3 billion pesos, With a 42% margin, at 70 basis point expansion year over year. This reflects agile pricing management and cost discipline, which allowed cost of sales to grow below the sales of rates. Operating expenses grew 5%, reflecting continued investment in our digital platforms. Even so, gross margin expansion more than offset that, An operating income reached 217 million pesos, a 4.8% increase versus last year. EBITDA closed at 409 million pesos, with a margin of 13.4%, a 90 basis points expansion, and an 11% increase year over year. At the net income line, we reported a loss of 201 million pesos, compared to a profit of 42 million pesos a year ago. I want you to walk... Andrés Pliego Rivero Borell The more normal part of our financing costs. The majority of the remainder, around 164 million, relates specifically to Argentina. The combined effect of IAS 29 Cyberinflation Accounting, which requires us to restate monetary assets and liabilities to current purchasing power each period, together with the peso movement. This can create meaningful swings from one quarter to the next. In the first quarter, this effect moved in our favor, and this quarter it reversed. On taxes, we recorded 84 million, which also weighted our net income for the quarter. This reflects the deep recognition of certain deferred tax assets in Argentina. So while the headline net income numbers look weak, I want to be clear. These are largely non-cash accounting-driven items type Argentina, and they don't reflect the underlying strength of our operations, which, as I mentioned, continue to improve this quarter. In Mexico, sales grew 4% and EBITDA grew 15%, with a margin of 21%, 200 basis above last year. Growth was broad-based across categories. We saw a gradual volume recovery across all three categories, particularly water heaters, On a seasonal winter demand. Evita remained negative, but the margin improved meaningfully versus last year, reflecting a better cost absorption and a more disciplined pricing. In the United States, sales grew 2% in pesos and 15% in dollars, driven by the continued mixed shift towards B2B channels, industrial construction, HVAC, and septic. and the ramp-up of our two new branches, Pompano and Phoenix. EBITDA margin reached 8%. This is our fifth consecutive quarter of positive EBITDA in the U.S. The structural turnaround we've discussed for several quarters continues to hold. Peru, Central America and Brazil together grew 24%, with a solid performance across every country. Peru delivered strong volumes on extended summer season, a boost for storage, though it slightly softened demand for water heaters.

Central America continued strong commercial momentum.

And Brazil, while still a small business for us, kept steady building out its water treatment platform. EBITDA in this segment declined, but that's almost entirely explained by a one-time impact of 74 million pesos Titled Resolved Client Dispute in Brazil's Water Treatment Business. Excluding that item, EBITDA in the country would have been positive, and margin would improve both for the quarter and year-to-date. Products grew 3% with EBITDA up 22% and margin expansion of 280 basis points, up 18%. Supported by cost efficiencies in Mexico, solid performance in the U.S., Peru, and Central America, and an improvement in Argentina. Services grew almost 5%, driven mainly by Iberia, which surpassed 193,000 active subscribers and continues to strengthen its unit economics. Growth was softer than usual, mainly due to the timing of our contract signings in RSA in Mexico. Service Civita was negative 92 million pesos versus the negative 41 million a year ago. But as I mentioned, most of that swing is on the one-time litigation impact in Brazil. Excluding it, the Service Civita margin would have been around negative 6%, an improvement versus negative 14% a year ago. The underlying trend keeps improving and the path towards services breaking even remains intact as VEVIA and RSA continue to scale. This quarter we took a concrete step on our capital structure. As we told you last quarter, the Board and shareholders approved a senior credit facility to refinance our sustainable bond. We've now executed on that. We prepaid the AWA 17-2x bond and close a new 7-year loan with Bancomext, priced at a 28-day TA plus 195 basis points. We also focus on protecting that structure from interest rate volatility. This month, we hedged 50% of the notional through a 4-year interest rate swap, fixing our rate at 7.5% through June 2030. The remaining 50% stays floating. That gives us current length cost of debt of 8.96, with more greater visibility and protection against future rate movements. This extended maturity profile gives us more financial flexibility and locks in the rate certainty for half of the balance, giving us a stronger financial foundation to keep funding the growth priorities Charlie mentioned. Like Bevia, RSA, our digital platforms, without adding any refinancing risk. Cash and cash equivalents close at 1.2 billion pesos, 64% above a year ago. I want to highlight that these figures come after returning 82 million pesos to the shareholders during the period, equivalent to 17 cents per share in cash. Our cash conversion cycle also improves. A direct result of the working capital discipline we've sustained over the past several quarters. On the debt side, our current structure is straightforward. The new 4 billion pesos Plancomex facility we just discussed, plus 431 million pesos in short-term working capital lines in Mexico. Net financial debt flows at 3.2 billion pesos, down 16% year-over-year. Net de tributa improved to 2.3 times from 3.2 times a year ago, continuing the deleveraging path we described last quarter, when the ratio stood at 2.6 times. We're getting closer to where we want to be, though there's still work ahead. CapEx for the first half totaled 194 million pesos, or 3.4% of sales, 8% below last year. Reflecting the same selective, return-oriented approach we've discussed before. As usual, most of it concentrated in Mexico and went to the expansion of Devian. Overall, this quarter, where the operating trends we care most about right now kept moving in the right direction. We will keep prioritizing three things going forward. Margin discipline, e-leveraging, and executing on the services path to break-even. Thank you. We are ready to take your questions.

Thank you both. I'll be reading the first question that comes from Regina Carrillo from PBM. Good morning. Congratulations on the results. Given a strong cash flow generation in the first half of the year, what are the main drivers needed for free cash flow generation to continue in the second half?

Thank you, Regina. Thanks for the question. We will continue with a strong focus on generating cash. I mean, it starts with operating results, so we will continue to focus on EBITDA expansion, and a lot also comes from working capital discipline. So the expectation is to continue through that path. Continue investing, continuing the CAPEX program that we have. CAPEX should be in line with what has been for the past quarters, between 3% and 4% of the total revenues. So with CAPEX-disciplined approach, working capital discipline and EBITDA focus, we think we can continue to generate free cash flow in the coming months.

Thank you Andrés. So the second question is from Regina from GBM again and Orlando Alcantara from BTG because both have similar questions. How do you guys are assessing el Super Niño phenomena after affecting southern versus northern Mexico? Can we expect if droughts increase similar product accelerations such as in 2021 and 2022?

Hey, thank you very much for joining Orlando and Regina. I think just another factor that brings tremendous volatility. It has been the standard for us, the book environment. And I think what's important is that we have the capacity to respond with agility. It will bring for certain scarcity of water in some areas. In some other areas it will bring storms. And yeah, I understand you're asking about Mexico, but it Also has a different impact in the U.S. It has a different impact in Peru. I think between the U.S. and Peru, geographically, all the way as far north as the U.S. and as far south as Peru, that's where we see the main impacts. Our solutions will likely be needed for different situations. In terms of the water scarcity, whether it will bring, you know, demand similar to 21 and 22, I don't necessarily see that because dams in Mexico are at high levels, which were really replenished by the rains we had last year, and this year has been a good year as well. But And one more thing is that we do anticipate more storms than usual. I mean, like devastating storms. So we're also preparing to see how we can support those areas of likely disaster in our different markets. Again, I cannot tell whether the net effect is going to be increased demand or not. We do know it's going to bring tremendous volatility and what's going to be required is capacity to respond with agility. So we will be preparing for that. Thank you.

Thank you, Charlie. The next question comes again from Orlando Alcantara from BTG. Can you give us more sensibility on gross margin for the next half of the year? How do you guys have been negotiating with your suppliers and have firms been settled for raw materials for the next 12 months?

Thank you, Orlando. As we mentioned in our remarks, one of the things that we've been working on is pricing agility. And Charlie was mentioning with El Nino Effect, and we've been working on that given the resin price volatility as well. As you know, I mean, oil has been very volatile, hence resin prices have been volatile as well. So, I guess that the main action that we're implementing or that we have been implementing is pricing agility. On top of that, we've been very disciplined with our cost management. And so, I mean, we do expect movements and volatility, but We don't see big impacts in our gross margin as for today. I don't know if Charlie wants to add something.

No.

Perfect. Thank you. So the next question and comment comes from Michael Beckel from Denon. Good morning and congrats on the continued path and strengthening of core businesses. Mr. Vici is leaving the U.S. operations, who seemingly was instrumental to the U.S. turnaround. Please explain what measures you take to make sure the profitable operations there continue and grow. What capabilities will you be seeking with the internal candidates to succeed Mr. Vici?

Thanks for joining, Micaela, and thanks for your question. Joe Vici, he's a great leader, great talent. We're very proud to have had him in the company. He was very instrumental for transforming the business. We had a very good recuperation of profitability. But not only that, we had tremendous transformation also in terms of work environment, developing strategy, and developing talent. And it was a very fluid transition from Joe Vesey to Rebecca Kapp-Mertens, who's now our leader in the U.S. Rebecca has been in the company for four years. She knows the business very well. She is a tremendous leader. We're very proud to have her as part of our leadership team, and we're confident she will continue to deliver profitability and growth in the business. So I'd like to congratulate Rebecca and wish Joe the best going forward.

Thank you, Charlie. Until now we have no further questions, but if you want to share another question, you can click on the question button on your screen. We'll give you one more minute, and if we don't get any more questions, then we can already close the webinar. Thank you. Thank you. We're not getting any more questions, but if you want to make some closing remarks, Andrés or Charlie, and then we'll close the conference call.

Well, maybe the closing remark is macroenvironment is volatile, challenging, We are very happy to see how new businesses, new services, new products are contributing in a very positive way with tremendous adoption from customers. So we really appreciate you participating in this call and your continued support of our purpose to serve people with water solutions and with positive environmental impact. Thank you, guys.

Thank you. So we'll meet again next quarter, and thank you for joining, and you may now disconnect.