Edited Transcript of AGUA.MX earnings conference call or presentation 23-Apr-20 3:00pm GMT

From an operational standpoint, we successfully implemented our business continuity plan, transitioning the majority of our employees to remote working schemes. We implemented strict hygiene and safety standards and protocols in accordance with the World Health Organization guidelines for the remainder of who work in manufacturing facilities.

The health and wellbeing of our employees is of the utmost priority for us, as is that of our customers and our communities. It’s fortunate that as a multinational company with diverse product lines, we already have very robust and useful remote working and collaboration tech tools, which have significantly eased the current transition.

We will remain attentive to the mitigation measures adopted across the region. And when necessary, we will continue to adjust our operations work. And of course, we will keep you updated on the development as we have been doing for the past weeks.

As Mario will discuss in further detail, we expect that the current reduction in economic activity will have an impact on some of our product lines. But as I also mentioned, we will continue to provide much-needed water solutions to help our clients cope with the current situation, particularly through our water-as-a-service platform, and our strength in e-commerce and telemarketing platform in the United States.

Finally, we reactivated the Water for Affected Areas Program (sic) [Water Program for Affected Areas] or PAZA, which we developed in the aftermath of the 2017 earthquake in Mexico. And we have redirected it to address the need of the health system and vulnerable communities in the context of the pandemic.

We have already donated in Mexico, Argentina and Peru, over 500 storage solutions, and over 1,000 washing — hand-washing stations in public spaces as well as purification systems for hospitals, free of maintenance and operation costs for the year. In the case of Mexico, through bebbia — through the bebbia platform.

Moreover, we will continue to work with NGOs and government institutions to identify new opportunities to bring more and better water to those in need. We have been and remain fully committed to creating value for our shareholders and to the wellbeing of our employees, our clients and our communities.

The current situation demands that each of us did a part for the sake of all of us. We’ll be safe — sorry, on behalf of our company, I reaffirm our vow to continually do everything in our power to help our community consciously overcome this crisis.

Thank you for your time and attention. I will now turn over the call to Mario so that he can go over the quarterly results in more detail. I look forward to your questions.

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Mario Antonio Romero Orozco, Grupo Rotoplas S.A.B. de C.V. – CFO, VP of Administration & Finance and Director [3]

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Thank you, Charlie. Good morning, everybody. Thank you, again, for joining us today. I do hope you are all safe and that we will be able to return to our regular schedule soon.

I will now go over some of the key aspects of our first quarter results. Sales in Mexico grew 10% during the first quarter due to increased demand for both products and our water-as-a-service platform, which grew by 12%, driven by an increase in sales of water fountains; treatment plants; and most importantly of bebbia, our drinking water platform, which grew 55% during the quarter and doubled its sales after the adoption of mitigation measures in Mexico in the second half of March, a good example of the need and importance to access water during the current pandemic.

We successfully executed our pricing strategy for our products ahead of our competitors. And our new price/mix helped us offset the reduction in demand that follow the mobility restrictions during the last 2 weeks of March. Our plants and distribution centers are deemed essential, and therefore, continue to operate with a strict safety protocols and reduced staffing.

Sales in Argentina fell by 19% in Mexican pesos due to the challenging macroeconomic conditions, the continued depreciation of the Argentinian currency and a reduction in demand, which was not compensated by an improved price/mix. Our plants in Argentina operated intermittently since March 20, in line with government measures.

We are currently prioritizing deliveries to the health system and the need for sold storage solutions on the preferential price to affected municipalities. We expect to participate in the installation of hand-washing public stations.

In Central America, sales increased by 19%. This was due, in large measure, to the changes we have enacted in our commercial teams and policies, better addressing the specific characteristics of each market and in line with Flow initiatives for the region. Our manufacturing and distribution operations have been effective in varying degrees by the different measures adopted in the second half of March to combat the pandemic.

Peru began a total lockdown after March 16, following positive trends in both January and February. We have reduced our production in Brazil to adjust for the contraction in demand and are currently analyzing the prospects of services projects pipeline, which seems to exceed positive trends.

Finally, the demand for water solutions increased in the United States. The social distancing increased the demand for residential solutions, and agri-industrial activities continue. This is resulting in a 23% sales growth. Our e-commerce platform saw increased activity.

Most of our suppliers continue operating, and we have secured the availability of delivery services through various logistic companies. We will be monitoring the situation closely and adjust as necessary in all of the countries where we operate.

It is important to note at this point that government sales, as a percentage of total revenue, remained well under our 10% target, amounting to 6.7% during the first quarter, an increase compared to last quarter due to a program that provides sanitation systems to areas with no sewerage and drinking water fountains contracts for schools.

In terms of our portfolio mix. Sales of products during the quarter accounted for 93% of total sales and grew 1.5% compared to the first quarter of 2019. Services, on the other hand, grew 12.2% year-over-year, testing to the growing strength of our water-as-a-service platform.

In particularly, bebbia, our drinking water platform, reached more than 27,000 purification points in 118 municipalities in Mexico by the end of March.

In addition to this record sales for bebbia, we registered a strong performance from our school water fountain business, and continued to realize a steady income from treatment plants. We added [7] new clients to the portfolio during the quarter.

From the top. Quarterly sales net grew 2.2% year-over-year, which shows the resilience of our business model in the context of volatile environments. EBITDA and the EBITDA margin registered a minimum traction, 0.2% and 40 basis points, respectively.

Gross margin increased more than 100 basis points as a result of the efficiencies brought by Flow and reduced raw material costs. Net profits from continued operations increased as a result of the strategic divestment of underperforming assets last year and the unwinding of favorable hedging positions, as Charlie already mentioned.

Specifically, we closed an interest swap related (technical difficulty) outstanding AGUA 17-X that we prepared in February, and given the depreciation of the Mexican pesos and our strong position in U.S. dollar, a U.S. dollar-Mexican peso forward contract. The increase in net profit also caused a hike in our tax burden.

If we take out the gains of the hedging instrument, net profit will have amounted to approximately MXN 193 million, which is 105% increase compared to first quarter 2019. As Charlie pointed out, the strengthening of the balance sheet through the prepayment and reopening of the sustainable bond program, the optimization of working capital, the discipline in capital allocation and some product improvements increased our cash and cash equivalent holdings by 82%.

And we brought down our net debt-to-EBITDA ratio to 0.4x, well below our 2x ratio policy, and all is denominated in Mexican pesos, due in 2027. Also, CapEx remains at a very sustainable rate of 4% as a percentage of revenues. 34% of the total CapEx were allocated for water treatment and recycling plants.

We are continuing to work tirelessly to create value for our shareholders for our transformational effort Flow. Our strong balance sheet is a result of that, process, as are the disciplined efficiencies we have brought about in capital allocation and our operations, including the optimization of our working capital.

In fact, the preliminary results of Flow have afforded us a degree of financial flexibility, which should help us ensure that we address the challenges associated with the pandemic, promptly and efficiently.

To this end, we have established a Cash Flow Control Tower, which convenes weekly to perform a detailed analysis and follow-up of our liquidity, income, expenses and our terms with both clients and suppliers, among other subjects.

This is not only strengthening the capital allocation discipline we have already established but greatly increase our ability to address any issues that may arise in the coming weeks and months.

I would also like to point out that we continue to advance towards our goal of having a return on invested capital below our cost of capital by the end of the year. In fact, by increasing our ROIC and decreasing our weighted average cost of capital during the first quarter, we registered the lowest spread within the 2 in the past 15 quarters by spread now, it’s only 241 basis points.

Also, as we pointed out, Flow aims to create value for upholding the highest ESG standard. To that end, this quarter, we brought about 4 key initiatives and processes. The first one was to define our company’s value proposal for each of our stakeholders in the context of climate change dynamics. Through this exercise, we decided to focus in 3 main aspects: one, promoting access to water for the base of the pyramid, i.e. the most vulnerable populations; two, reducing waste and resource concession, what is often referred to as circular economy; and three, potentialize our water service platform to increase the access to quality water in all of our communities.

Additionally, we undertook a gender quality diagnostic that will inform our efforts in this regard as well our diversity offers down the line. We also updated and eliminated our code of ethics and professional conduct. And we have reactivated our PAZA effort, which is now focused on bringing relief in the context of the pandemic on the remaining PAZA C-19.

Finally, we will hold our General Shareholders’ Meeting tomorrow, Friday, April 24. The main proposal that will be considered can be summarized as follows: a, the approval of a capital reimbursement through capital reduction in the amount of MXN 0.40 through exchange of shares of the company and MXN 0.40 in cash; b, the ratification of the 15 members of the Board of Directors, including its 8 independent members, the ratification of the current committee composition and the compensation of the members of the Board and its committees; and c, the approval of the total sum allocated to the share repurchase program for the fiscal year 2020, in line with our shareholders’ value-creation strategy, which may amount up to the net — total net profits, including retained earnings as of the end of 2019.

We expect that the economic downturn associated with the pandemic will have an impact across all of our major markets. However, it must be reiterated that we have a very strong balance sheet, and we would use the flexibility to afford us to ensure that we are in a position to continue serving our clients and strengthening our water-as-a-service platform through the pandemic and its aftermath.

So in terms of guidance for 2020. Given the volatility in the different markets we are experiencing where we operate, we rather prefer to remove it and focus more in balance sheet management and cash flow generation. We believe that as a water company, our products and services play a key role in the current crisis, and we will be closely analyzing its impact on our client base and our project pipeline.

However, we are confident that our business model will continue to prove its resilience as it has done in the past, when we faced with complex political and economic environment. Thank you.

As usual, we will now answer any questions you may have. Please, operator, proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. Rojas, there appears to be no questions from the phone lines at this time. And Mr. Rojas, there appears to be no questions from the audience at this time.

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Carlos Rojas Mota Velasco, Grupo Rotoplas S.A.B. de C.V. – Co-Founder, Chairman & CEO [2]

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Should we proceed with the questions on the webcast?

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Mariana Fernandez, Grupo Rotoplas S.A.B. de C.V. – IR Manager [3]

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Sure. Do you want me to read it? We have the first question from Liliana de Leon from GBM. Could you please give us a preliminary estimate about volumes growth in 2020, considering the imminent economic deceleration?

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Carlos Rojas Mota Velasco, Grupo Rotoplas S.A.B. de C.V. – Co-Founder, Chairman & CEO [4]

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And can you also read the third question?

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Mariana Fernandez, Grupo Rotoplas S.A.B. de C.V. – IR Manager [5]

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We have another question from [Antonio Rodriguez from Profuturo]. What was the estimated growth in the revenue for 2020 before COVID-19? And what is the estimated growth in revenue for 2020, considering such pandemic situation?

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Carlos Rojas Mota Velasco, Grupo Rotoplas S.A.B. de C.V. – Co-Founder, Chairman & CEO [6]

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So regarding 2020 volume sales. I’ll allow for Mario to complement but we do continue to see strong demand for our solutions. Not all the markets are being — markets where it’s been possible for those who want our solutions to be able to acquire our solutions. For instance, in the case of Peru, the country was completely shut down, including our stores. And there were no sales for some of the days of March.

So while demand continues to be strong because the need for access to water and water of good quality continues to be there. In some of the cases, it’s not possible to access the solutions as a consequence of what different markets are regulating.

So in terms of our forecast for 2020, I will allow for Mario to complement the answer.

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Mario Antonio Romero Orozco, Grupo Rotoplas S.A.B. de C.V. – CFO, VP of Administration & Finance and Director [7]

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Yes. Thank you, Charlie. As explained during the conference call, we prefer rather to renew the guidance we gave for 2020, given all the volatility and uncertainties. It’s a week-by-week, new development we are facing. As explained during the conference, we experienced lockdowns in Peru, in Guatemala, Honduras, Nicaragua. So it’s hard to manage any expectations given all that volatility.

I will tie that up to the question from [Antonio from Profuturo]. Before COVID-19, the guidance we gave for the market was sales about 10% and EBITDA margin above 18%. Net debt-to-EBITDA below 2x, and ROIC equals above WACC. I would say that, as I’ve mentioned, we’re going to be more focused in balance sheet management and cash flow generation rather than P&L. And the reason I’m saying P&L is because what we explained before. There’s a lot of volatility there.

It’s not a supply issue that we’re having. It’s more the demand from the consumer. So with mobility restrictions and lockdowns, anything can happen. So we are committed to have ROIC equal or above WACC. And we are committing to manage very tightly cash flow generation and the balance sheet.

Just to give you an idea, [Antonio] and Liliana, we lost during March, about 10% of the quarterly sales from the different lockdowns and interruptions to the different countries where we operate.

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Mariana Fernandez, Grupo Rotoplas S.A.B. de C.V. – IR Manager [8]

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We have another question from [David Simon]. Can you please provide more details on bebbia? For example, are agents able to enter households to install and service as normal?

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Carlos Rojas Mota Velasco, Grupo Rotoplas S.A.B. de C.V. – Co-Founder, Chairman & CEO [9]

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So as mentioned, we have, as a top priority, making sure our talent and our customers are safe. And so we have implemented, in accordance to World Health Organization guidelines, both on standards and protocols.

And so we have continued to operate where countries or markets allowed to do as we have been considered an essential industry for this COVID situation. So we have been able to access, in terms of bebbia, customers’ homes and continue to install the water-as-a-service solution in terms of drinking water.

It has been very successful. Demand has been very high. There are, obviously, concerns by customers, but we do explain what is our protocol in terms of sanitation. They are confident with our service. They allow us to enter their homes, and they are very happy with the alternative of just having us visit them once as opposed to the alternative of having to access bottled water in a more recurring manner. So bebbia continues to see a surge in demand, which is very, very interesting.

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Mario Antonio Romero Orozco, Grupo Rotoplas S.A.B. de C.V. – CFO, VP of Administration & Finance and Director [10]

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Do you want to go with the question 5, Mariana?

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Mariana Fernandez, Grupo Rotoplas S.A.B. de C.V. – IR Manager [11]

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Sure. We have another question from Mauricio Alvarado from Citibanamex. Thank you for the presentation. Can you please expand on expectations on operating performance during the next month? Any particular concerns?

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Mario Antonio Romero Orozco, Grupo Rotoplas S.A.B. de C.V. – CFO, VP of Administration & Finance and Director [12]

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As I’ve mentioned, we are going to be fully — well, first of all, thanks for joining the call, Mauricio, and thanks for the question. As mentioned, we are going to be fully focused on balance sheet and cash flow management.

Our concerns are more related — well, first of all, we want to make sure all of our employees are safe and healthy. That’s our main concern right now. And second, as explained throughout the call, all the lockdown and mobility restrictions are causing affectations in demand. So that will be the concern.

On the other hand, and as you know, being in the water industry where water is crucial to this COVID-19 crisis, we are seeing constant demand for some of our products and services.

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Mariana Fernandez, Grupo Rotoplas S.A.B. de C.V. – IR Manager [13]

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The next question is from [Rodrigo Salazar]. What can we see going forward in terms of marketing expenses for the service segment?

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Mario Antonio Romero Orozco, Grupo Rotoplas S.A.B. de C.V. – CFO, VP of Administration & Finance and Director [14]

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Thanks, [Rodrigo], for joining us, and thanks for the great question. We are seeing a big, big opportunity in bebbia and ACUANTIA, which is the drinking water platform and the e-commerce. So we are really doubling down in our marketing and commercial efforts through this crisis.

It might sound interesting, but I think our products are — our business models are pretty much designed to what’s happening right now. So we are doubling down our efforts, the water-as-a-service platform and the e-commerce platform.

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Mariana Fernandez, Grupo Rotoplas S.A.B. de C.V. – IR Manager [15]

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We have another question from Jos Cebeira, Actinver. Hello, Charlie and Mario, congrats in the results and the significant improvement in the ROIC. I have just one quick question, an [easy] relationship with the Flow strategy.

The company has been able to deliver positive results despite the challenging environment as a result of the COVID-19 restrictions in some countries. But my question is regarding if this Flow strategy suggest, though, is doing something different in the current situation with COVID-19 against the previous scenario?

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Carlos Rojas Mota Velasco, Grupo Rotoplas S.A.B. de C.V. – Co-Founder, Chairman & CEO [16]

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Thank you very much for joining the call and for your question. I’ll answer first and then allow for Mario to complement. It’s funny how timely Flow happens to be for Rotoplas. It’s a transformation that really helped us be in such a great shape, facing this very complex and difficult situation.

And the reason we were doing it was because we knew the world was going to change. We didn’t know what was going to happen as a consequence of COVID. But we did know that the world needed a different approach to water and a different approach to doing businesses to — and so what we see that COVID is really just accelerating these trends that we knew it had to happen, which is leveraging more digital capabilities, strengthening innovation practices.

The sustainability just becomes more relevant on what is in the long term, but it’s obviously the way to go, being customer-centric. So all of the initiatives we have designed were in alignment of what the world is going to need, post-COVID, on this transformation of the world.

Because the world will change and the world will change in a more accelerated way, but it did change in the direction where it should have changed in the past. And so our purpose of generating well-being for customers, for society and for the environment, it’s in great alignment with the transformation we will see with COVID.

So obviously, in terms of timing, some initiatives might change their timing. But in general, on just having — being passionate about servicing customer needs with the customer at the center of our strategy, in a way where they have just a much better experience and where we service them in a much better way, end-to-end. It’s just in super good alignment with the transformation we’re seeing with COVID.

Mario, would you like to complement?

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Mario Antonio Romero Orozco, Grupo Rotoplas S.A.B. de C.V. – CFO, VP of Administration & Finance and Director [17]

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I think you have said it all. Just — I think I will only add that we started this transformation process more than 9 months ago. So the company, it’s in a very good shape to navigate through these challenging times.

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Carlos Rojas Mota Velasco, Grupo Rotoplas S.A.B. de C.V. – Co-Founder, Chairman & CEO [18]

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Mariana, thank you.

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Mariana Fernandez, Grupo Rotoplas S.A.B. de C.V. – IR Manager [19]

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Well, thank you very much, everybody. We hope you will join us again next quarter. Until then, we’ll be sure to keep you updated of any relevant news as they happen.

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Operator [20]

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And that does conclude today’s conference. We thank you for your participation. You may now disconnect.