Grupo Rotoplas SAB de CV
BMV:AGUA
Earnings Call Analysis
Q4-2023 Analysis
Grupo Rotoplas SAB de CV
The company faced a challenging year due to an adverse macroeconomic climate and a strong Mexican peso, but it also showcased resilient financials with solid strategic execution. Net sales rose by 8%, hitting MXN 3.4 billion, marking a significant triumph as the third-best historical performance.
In an effort to balance growth with profitability, the company employed pricing strategies that helped increase EBITDA margin by 2 points, even as annual sales fell by 5%. High operational and financial expenses, accentuated by exchange rate effects, influenced net income negatively.
Mexico's emerging businesses, like bebbia, RSA, and riego, are catching momentum with the product division on the rise, hitting a record EBITDA margin. While sales in Argentina increased mainly through pricing, the U.S. faced sales drops due to extraordinary weather, among other factors. Central America witnessed sales growth in local currency, despite currency headwinds, while Peru tackled economic challenges with reduced consumer activity and investment.
With product sales comprising 95% of total sales, the service sector grew considerably, pushed by water treatment plants and bebbia. The firm's financial stability has been supported by a robust balance sheet, evident in a net debt-to-EBITDA ratio of 1.6x. Cash conversion cycles improved through strategic management, although cash reserves dipped due largely to capital expenditures and FX strategies.
Capital expenditures were fine-tuned to close the year at 5% of sales, with significant investment in Mexico's water treatment and a commendable return on invested capital of 14.9%. In terms of shareholder returns, the Board proposed a cash capital reimbursement, planning a distribution of $0.50 per outstanding share.
The company's sustainability efforts were noted with 5 out of 6 policy goals achieved and the receipt of significant awards. They made strides in environmental initiatives, improving their carbon footprint and moving closer to a circular economy. Their governance continued to place emphasis on ethical practices, risk management, and diversity inclusions with visible progress indicated by improved ratings from a B to an A- in the CDP questionnaire for climate change actions.
The company sets its sight on a promising 2024 with a growth expectancy of 10% or more, targeting an EBITDA margin between 18% and 19%, maintaining a net debt-to-EBITDA ratio below 2x, and aiming for a return on invested capital to cost of capital spread of at least 200 basis points.
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Good morning, and welcome to Grupo Rotoplas Results Conference Call. Please note that today's call is being recorded. [Operator Instructions] 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 Aboumrad, Chief Executive Officer; and Mr. Mario Romero, Chief Financial Officer. I will now turn the call over to Mr. Carlos Rojas.
Hello, everyone. '23 was the year that challenged us all on many fronts. We faced an adverse macroeconomic and climate environment marked by the strength of the Mexican peso and a series of traumatic events that tested our resilience and adaptability. However, it was also a year where the strength of our strategy, the solidity of our operations and our firm commitment to innovation and sustainability became more evident. This quarter, our net sales saw an increase of 8%, reaching MXN 3.4 billion. This figure is a record for our fourth quarter and our third best performance historically, trailing only behind the 2 quarters of 2022 during the peak of the chart in Mexico. This growth speaks a lot about the resilience of the business model and our capacity navigating market complexities. Talking about our financial guidance. During 2023, we focused our efforts on the variables that were within our control, which includes promoting operational variables that -- operational excellence, maintaining brand leadership and growing our new businesses. Thanks to this approach, by year-end sales saw a smaller decline than anticipated reducing by 5%. This was fueled by a recovery in product sales and sustained growth in our service platform. Our EBITDA increased to a record high reaching a margin of 17.5%. Our leverage stayed below 2x. And lastly, though our ROIC was slightly below our revised 2023 guidance, it showcased a healthy increase from the previous year, maintaining a robust position well above the cost of capital. Talking about our ESG initiatives in progress, as you can see in this slide during the year, we met most of our easy targets. We've diligently evaluated our tier 1 suppliers and significantly improved our global net promoter score to 76. We have made progress in reducing CO2 intensity of continuing to -- our commitment to be a net zero company by 2050. We also enhanced water purification directly impacting the quality of life of many families. Our commitment to diversity continues with a goal to reach 30% female participation in our workforce by 2025. And though this year, we stayed behind our goal, we continue to build a more inclusive and diverse workforce. I'm also very proud to tell you that yesterday, we were recognized again as a top ESG performer in the S&P Global Sustainability Yearbook. Our common narrative evolves with strategic alliances, technological advancements and programmatic M&A. Our collaboration with Google Cloud and SAP marks our commitment to a future where operations are driven by intelligent and innovation -- intelligence and innovation. This initiative not only improves our internal processes, but also raises the quality of the solutions we offer to our clients. Also, the initiation of our programmatic M&A strategy with the acquisition of HiTech irrigation of Mexico amplifies our strategic approach to grow, enhancing our capabilities and market presence. This fundamental pillars that will support our growth and consolidation in the market. Now before I handover the call to Mario, allow me to introduce my AI generated voice. It will discuss a matter of great significance and urgency with you. Thank you for the introduction, Charlie. I'd like to discuss the current water situation in Mexico. Mexico City, 1 of Latin America's largest metropolises is currently facing a severe water crisis as the capacity of the Cutzamala system has dropped to less than 40% according to Conagua. The system struggles stem from a combination of factors, including years of insufficient rainfall attributed to climate change, rapid and disorganized urban growth and aging infrastructure. This marks the most stressed state the system has ever experienced in its history, and it's very important that everyone adopts water conservation habits, especially given the approaching dry months and the recent trend of dryer seasons. The crisis has raised concerns about day 0, a moment when water reserves may become insufficient to meet the needs of the population of the region. There are predictions that this day could occur as early as June this year if the reserves of the Cutzamala system do not replenish during the rainy season, with only 8 of the country's 210 main dams at full capacity and the rest averaging 51%, the gravity of the situation is undeniable. This critical water stress situation demands immediate and strategic responses. Rotoplas has risen to this challenge, offering not just immediate solutions but also demonstrating a long-term vision for sustainable water management. Our decentralized solutions have proven indispensable reaffirming our commitment as an ally in tackling this urgent water crisis. In 2023, through the A Fluir initiative, we delivered rainwater harvesting systems, offering benefits to individuals in both rural and urban areas. Additionally, reacting to the destruction caused by Hurricane Otis in Guerrero during October, our passive program was reactivated, providing essential support through monetary and in-kind donations. This initiative was instrumental in assisting partners, distributors and customers by addressing their immediate needs and facilitating home reconstruction efforts, which included complementary repairs of damaged water tanks. Collectively, these programs made a significant impact, benefiting over 290,000 individuals and thereby reinforcing our role as a committed partner in addressing the water needs of the population. Back to you, Charlie.
I want to close by expressing my deep gratitude for your continued support. Looking forward to 2024, it represents itself as a great -- as one of great opportunities and challenges. We are committed to advancing our fundamental initiatives and to providing solutions that support the population in adapting and mitigating the effects of climate change. We are convinced that with our strategic vision and capacity for innovation, we will not only overcome current challenges but also lead the way towards a more sustainable and resilient future in water management for the benefit of present and future generations. Now I will turn the call over to Mario to provide you with a more detailed perspective of our financial results.
Thank you, Charlie, and thank you all for being here. As Charlie previously highlighted, this quarter marked a return to positive sales growth with notable increases in services as well as improved market dynamics in our product sales. The targeted approach to focus our efforts on the 3 fronts under our control, allow us to achieve a balanced annual outcome. We've encountered our share of challenges but have consistently aimed to create value for our stakeholders in 3 key areas: profit; people; and planet. Looking back over the past year, it is clear with journey through a mix of trips and challenges. Kicking up with our significant accomplishments, we not only upheld our plan and leadership, but also witnessed double-digit growth in our services sector, coupled with a 2 percentage point increase in our EBITDA margin compared to 2022. Alongside this, we achieved record customer satisfaction levels and rolled out our new storage technology in 6 of our 8 Mexican factories. Also, our initiation of programmatic M&A activities through an asset acquisition aim at propelling our irrigation solutions for what stands out as a strategic move. Moreover, we enhanced our cash conversion cycle and sustain healthy leverage ratios, underlining our financial prudence. On the food side, the journey wasn't without its hurdles. The aftermath of 2022 droughts set a high benchmark, complicated year-over-year comparisons. The super peso phenomenon put challenges for our consolidated sales in international markets with exchange rate fluctuations and hedging activities impacting our financial performance and our cash position. We also have to adapt to competitive pricing dynamics as raw material costs fell. Macroeconomic and political developments in Argentina, Peru and Central America, along with climatic adversities such as the U.S. wet season in El Nino in Peru, further tested our results. Now just to Charlie introduce you to his AI-generated voice. Let me hand the call over to [ AI ] to discuss the P&L and country-specific results. Thank you, Mario. Looking into the details of the P&L, starting with the top line. Fourth quarter sales grew by 8%, benefiting from the growth in services and the recovery in product sales, especially in Argentina and in Mexico. The water shortages in the Valley of Mexico, along with our Blue Offers campaign, helped us record the best storage sales for December in the last 7 years in Mexico. Our strategy this last quarter was to balance annual growth with profitability, promoting demand through pricing strategies while safeguarding our EBITDA margin for the year. Consequently, while annual sales fell by 5%, we managed to achieve a 2-point increase in our margin. As mentioned, net income was impacted by higher operational and financial expenses due to the exchange rate effects. Now let's dive into our regional performance. Starting with Mexico, we are seeing strong traction in emerging businesses such as bebbia, RSA and riego. Additionally, the product division is beginning to show a recovery in demand. Mexico has recorded a historic high EBITDA margin. Sales in Argentina have grown in volume, but primarily through pricing. We continue to focus on maintaining profitability, improving plant productivity and increasing market share. In the U.S., the decrease in sales was influenced by several factors. The unusual wet season in states like California and Texas, which account for 1/3 of the country's total sales. A normalization in the demand for storage solutions following years of pandemic and an agricultural boom in states such as California, Oklahoma and Michigan saw slower-than-expected development in the septic business due to the wet season and delays in obtaining licenses and permits per county for primary water treatment solutions. Turning our attention to performance in Central America, Brazil and Peru, the drop in sales is associated with the following: In Central America, sales grew by 10% in local currency over the year. However, the impact of the super peso adversely affected the consolidated sales. In Peru, economic challenges continue as demonstrated by a decrease in government spending, consumer activity and private investments. Our sales of water heaters in the region encountered hurdles mainly due to a milder winter brought on by the El Nino phenomenon. The wastewater treatment plant business in Brazil is still in development, which shows good prospects. I will hand the microphone back to Mario for him to continue with the call. Thank you, AI. Hope my pronunciation is as good as, as he is. Regarding our portfolio mix, product sales accounted for 95% of total sales during the quarter and the full year. Services displayed 32% growth in the quarter and 43% over the year, largely backed by bebbia and our water treatment plants. Our focus remains on reducing the division's [indiscernible] EBITDA impact while optimizing our product service mix. Now examining our financial stance. Our financial stability is secured by a robust balance sheet, providing a solid foundation for driving growth and profitability. We maintain our net debt-to-EBITDA ratio at 1.6x, comfortably below our established threshold of 2x leverage. To provide further context, this figure includes a short-term U.S. denominated loan from the U.S. amounting to $1 million. In addition to the proceeds from our sustainable bond AGUA 17-2x, which totaled MXN 4 billion. Notable achievement has been the refinement of our cash conversion cycle, principally through strategic inventory and supplier management. We successfully shortened this cycle, underscoring our commitment to efficient working capital management. The reevaluation of the balance sheet in Argentina also contributed positively in the fourth quarter. However, it is crucial to acknowledge that our cash reserves have decreased primarily due to capital expenditures, dividend distributions and the impacts of our FX hedging strategies. Now moving forward to our discipline in capital allocation. During the quarter, we increased our CapEx to close the year at 5% of our sales, representing an 8% decrease compared to the previous year. The majority of our 2023 CapEx has been strategically allocated towards enhancing our corporate business with a special focus on Mexico. This deliberate investment not only strengthens our foundation offerings, but also positions us well to capitalize on emerging growth opportunities. During the quarter, significant investments were made in water treatment and recycling plants in Mexico, totaling $122 million accounting for 2% of our total CapEx for the year. Our return on invested capital increased by 80 basis points to 14.9%, significantly above our cost of capital. Now I would like to highlight some noteworthy actions in the framework of our sustainability strategy. As Charlie mentioned, we achieved 5 out of our 6 policy goals this year. In addition, we've been honored with 5 significant awards and recognitions across Mexico, Argentina and Peru, which I believe is a testament to our team's hard work and dedication. In the area of environmental sustainability, our efforts have been focused on reducing CO2 equivalent emissions and adopting a circular economy in our processes, notably through the use of recycled resins and revitalization of waste. These initiatives not only contribute to our plant's health but also drive us towards a more sustainable and cost-efficient operational need. This Tuesday, we received the results of the CDP questioner, and our performance in the climate change dimension has improved from a B to A minus. This advancement elevate us to a leadership level, surpassing the industry average as well as the averages for North America and globally. On governance, we maintain our dedication to an ethical culture and anticorruption. We have enhanced our risk management strategies and reinforce our sustainability committee. Moreover, the creation of our diversity and inclusion committee marks a significant step forward in ensuring our governance structures reflect our values and commitment to all stakeholders. In the social or people dimension, we are actively engaged in voluntary activities such as cleaning water bodies and building bathrooms would directly contribute to improving the quality of life in the communities we operate in. Our efforts to create a more inclusive and respectful environment for our gender LGBTIQ+ and people with disability subcommittees have been particularly rewarded, fostering a culture of respect within our organization. Now before discussing our guidance, I would like to emphasize that in yesterday's Board meeting, a decision was made to propose to the shareholders meeting, a cash capital reimbursement for the company's shareholders. This will be facilitated through the reduction of the capital stock with a distribution of $0.50 for each outstanding share. Finally, looking ahead to 2024 and considering the variables we currently have visibility on, we are setting our expectations for growth of 10% or more, an EBITDA margin range between 18% and 19%. And net debt-to-EBITDA ratio below 2x and a spread between ROIC and the cost of capital of our lease at least 200 basis points. We deeply value your trust and support as we continue to navigate this environment. I now open the floor for our Q&A session. Thank you for joining us this morning.
[Operator Instructions] So the first question is, because there's 2 of them, come from Carlos Alcaraz from Appalachia Research. And as they might be related, I'm going to read them together. Good morning, Carlos and Mario, first of all, congratulations on the record results for the quarter. The first question is about the G&A expenses. Could you give us more color on the factors that drove this growth? And the second question is related to operating margins. During the year -- during this year, will you continue with the strategy of increasing prices? Or will you be looking to increase sales volume for greater cost absorption and maintain a growing trend in the margins?
You and me, Charlie.
Excuse me. Mario, do you want to first talk about the G&A?
Sure. Thanks, Carlos, for joining this morning, and thanks for your questions. Well surrounding SG&A makes -- basically, they were driven by commercial and marketing efforts to maintain brand leadership in the product division just to share with all the community, we increased our market share in all countries and in all segments of products. So that's a great achievement. Obviously, we put a lot of emphasis on the marketing efforts. In addition, as we show in the numbers, the growth in services is gaining a lot of momentum. So additional effort in marketing have been put towards there. So that's the one part that explain SG&A expense. The second part is the IT digital strategy that we've been putting in place. We've been sharing with you guys around GCP or Google Cloud Platform with SAP Rise. Part of those efforts of digitizing the company account as an increase in SG&A. Obviously, the company will benefit from those to increase in SG&a going forward, but that's mainly what drives SG&A for the quarter and the year.
And then regarding your question about operating margin going forward, we do not see what we did saw on the previous year, we would not see going forward that the raw material to all decrease in the same way that it happened. So we do see more likelihood of an increase in prices. And we do see a tremendous opportunity in growing volumes of sales of our products. And so with that, the operating margin is going to be benefited. A driver for the revenues in the product sales is definitely the water scarcity we're experiencing in many of our markets. It's unlike any other moment we've ever seen, at least in the past decade. It's a very critical situation. And fortunately, we think our solutions will be part of the solution to that situation. And that should be reflected in revenues. Anything regarding operating margin, Mario?
Well, just touching on the prices. We expect to increase prices throughout the year relative to the inflation. So that, as you know, we operate in 14 different countries. So prices will be increased differently according to local needs.
Next question is from Carmen Barroso from Miranda Partners. Congrats on the results. My question is regarding services growth. How do you anticipate sustaining this trajectory going forward?
I think what Mario mentioned in terms of building platforms, building digital and technological capabilities is key here. We've seen the design of the business model and our unique value proposition is 1 that aligns very well with the needs in the market and the needs in environment. And so we are seeing very positive reaction from our customers in wanting to solutions, which are not all. It is very important that we have the capability. So we've been working very much the capabilities that we'll be able to sustain accelerated growth rates. And this has been a big investment that we've been making, it continues to grow the investment. And so it explains a little bit of those expenses that we have in 2023, but it is the pillars that enable us to be able to serve on a much bigger and bigger customer base. When we're growing at these rates and when we look at the number of customers we have, the new customers we're expecting for the next year is so much larger than the new customers from the previous year. And so it is very important that we focus on this digital capabilities, on service capabilities and processes. Mario, anything else that you like to complement?
Well, just probably it can be worth just to remember, Carmen, which by the way, thanks for being on this morning. The services business, our market is 10 times larger than the product segment. So it's a new markets blue ocean opportunities there. And the company is building those markets and trying to be the leader in those markets. So I think the market by itself represents an opportunity. And as Charlie was mentioning, I think Rotoplas is building the capabilities and skills to access those markets and create value for all the shareholders.
Question is from Martin Lara, Miranda Global Research. Congratulations for the strong results, and thank you for the call. And the question is, could you please explain the reduction in working capital needs and specifically, in inventory levels and accounts receivable in the last quarter? And what can we expect going forward?
I'll let Mario take this economical job.
Well, I think it's a great result. This morning, we were having our town hall meeting with all the company and we were congratulating all the teams that make this possible. So we're very happy with the result. And sometimes is when you ask people to achieve better, sometimes the results above expectations, and I think this is the case. Going forward, we are being more conservative, I think, 14% as a percentage of sales, I think it's on the very aggressive side. Historically, the company has been hovering around 18%, 19%. So now that we know that the teams can achieve 14%. I think a good new [indiscernible] is going to be somewhere around 16% to 17% of revenue. So we've been conservative. Obviously, we're seeing some benefits of digitizing more of our processes to achieve this kind of working capital management. But please don't be aggressive on your financial model, and let's play it on the 17% as a percentage of sales.
Just a quick complement. We saw pressured demand last year. And so we became very disciplined. And like I mentioned, we have a team that executes in a way that makes this company very resilient. So I think it was -- we have shown how [indiscernible] can be. But also, as mentioned, the water stress in some of our markets is very high, and we expect higher demand. And so obviously, we'll [indiscernible] that potential demand. And so that will drive those inventory levels to where it was sustained.
Next question is from Regina Carrillo, GBM. Congratulations on the results. And I have 2 questions. The first one. Could you tell us more about the Ofertas Azules strategy that you implemented this quarter? And the second one, given the current water scarcity situation in Mexico, with further strength in water supply expected for the coming months, what will be your business strategy here? And will you be working on any specific programs with the government or institutions to mitigate it?
So thank you very much for your question, Regina. The Ofertas Azules promotion happened before there was this shortage. I would say before the shortage of water that had been happening before, but before the operating companies started to restrain the supply of water. And we had a commitment of growing our market share. We saw a good opportunity to grow market share, and that was the nature of this strategy. And like Mario mentioned, we did grow market share in products in all of our markets, and so that generated a very good result. Also, we -- regarding your second question, would you like to mention anything regarding Ofertas Azules, Mario?
No, no, no, I think you just got it right.
Great. And so regarding what we see in Mexico going forward in terms of the situation and the potential demand, we don't see an opportunity where Mexico, in particular, particularly in Mexico City, the whole metropolis, the largest metropolis in the continent. We see it with a very painful situation where water supply will be limited very much. And our solutions are tremendously important for these situations. So we do expect higher demand and we will prepare for this developing our manufacturing capability and our inventories so that we can serve this opportunity like we've done in the past in other markets, like in 2022, there was a big situation in Monterrey. So Rotoplas is incredibly nimble in these solutions, and we are able to increase capabilities very quickly and to prepare for the situations. We would love to collaborate with the government in promoting a practice of lower consumption of water. It is important that we, as a population, a society, we reduce our consumption of quarter. It's a very key component to navigating the situation. Then there is obviously a very, very important opportunity of capturing rainwater and using that rainwater so that when there is rain, we are allowed for the system to replenish both on the groundwater and the dam system and also of treating and reducing water. So it's already required that big buildings and industrial buildings treat and reduce water. So it's important that we make traction with water treatment model to facilitate this happening. All of these customers usually don't have the expertise to do something as sophisticated in the water industry, such as treating to the level of reuse and then doing the actual reuse. And so this is where Rotoplas is a big opportunity to be a partner for these users and supplying them with the right technology to implement -- the right implementation capabilities and the right operation and maintenance capabilities for this to be sustainable. Mario, anything else?
Well, let me just complement on another issue around what are we seeing in Mexico.
And also irrigation, Mario, I forgot about that one.
Yes. And from those 20 reforms at the current President of Mexico said on Monday, there's 1 around water. And more than getting into the debate on the content, I think he highlights what I think is going to be the strategy going forward. And what we capture from that idea is that they're going to be protecting or the water consumption for individuals and less water available for industries and the agriculture. So that, we believe, is going to create a lot of different opportunities for our water treatment and recycling business and as well for rieggo business going forward. So that's what we see in Mexico. In Brazil, as you know, 3 years ago, a new legislation passed on and they are forcing to all industries and private industrial consumption needs to be done by private. So we're seeing a lot of that happening also in Brazil. So all in all, we are seeing a lot of focus from different governments and authorities on how we manage and treat water. And I think that eventually will translate into business for Rotoplas.
Now we have Felipe Barragan at BTG Pactual with 2 questions. I'm going to read them separately. So starting with the first one. What is the status on the programmatic M&A? And when can we expect the first acquisition to be made?
Okay. Well, the status on programmatic M&A, well first of all programmatic M&A, it's a process by itself. So it's something that it's running every day in the company. We have a small team of people working around building this capability, sourcing deals, looking for different alternatives of growth on the 3 strategic venues that we highlighted the last quarter. Just to remember, our focus on rieggo on water treatment and recycling in Mexico and Brazil, and in bebbia. Regarding the first acquisition was the HiTech acquisition we announced a couple of months ago. And there are a couple of news coming in the coming weeks. And we expect to be announcing more of those small deals to enhance our strategy and growth going forward. And well, sorry, Felipe. Thanks for joining us this morning. I didn't say hello. Mario, do you want to complement anything programmatic M&A.
No, no.
Going to Felipe's second question. Could you touch on the pricing strategy use in Argentina this quarter? Specifically, was there anything achieved this quarter versus the previous quarters? And what can we expect for the rest of the year?
Basically Argentina running at -- as we all know, inflation next year was 211%. You cannot lose a single day of not increasing prices. So the discipline we have in Argentina is that we increased prices every single month are pretty much in line on what are the inflation expectations. So that is what we've done. We did it last quarter. We did it on the third, second or first quarter. So that's the pricing strategy in Argentina. Going into 2024, we're going to be following the same strategy. We are expecting an inflation somewhere around 100%. So the team is increasing anywhere from 8% to 9% their prices on a monthly basis.
I want to go to the next one, Mariana, please.
The next one comes from Rodrigo Salazar from AM Advisors. Congratulations on the results. I have several questions, so I'll be reading the first one. The water situation in Mexico is worrying. How much of the growth of 2024 is driven by this dynamics in Mexico?
Well, there's obviously a part of the growth that we projected as consequent to this situation. Now it's a situation that is not extremely consistent, but the trend is always that there's -- that we're getting into a more and more critical situation on water stress. And so it has been the case also for the previous years. When we look at volumes, while volumes continue to grow and recently continue to grow our solutions is because the water situation worsens year-by-year as a trend. How much will it happen this year? It really depends on the policies, the operational practices of the water companies, which is well out of our control. But we do see that there's going to be a higher demand from it. Anything else, Mario, that you'd like to comment toward on this. And by the way, thank you very much for joining.
No.
Now we have what drove the improvement in services EBITDA? It seems you are putting a lot of CapEx to water treatment plants. When we could start to see this benefit in these new investments?
Would you care to explain, Mario?
Yes. Well, one of the reasons we're seeing improvement in services in EBITDA is obviously the scale as the business unit gets larger, such as bebbia, rieggo and so on. The absorption of fixed cost is much better. So that's an improvement of services. The second one is that we are considering to -- we found a way to capitalize on the equipment that we installed in bebbia. And that also is improving the EBITDA because now we can account for those purification units into the balance sheet, and we can depreciate in a 4-year period. So those 2 are the main reasons behind the improvement in services in EBITDA. And the benefit, I think, as those businesses keep on growing at a higher rate as we showcased, I think you'll see those benefits in the coming years.
Another question from Rodrigo. It seems margins in products in Mexico saw a strong decrease. Was this driven by the discounts given? Or is there something else to explain?
There was -- you mentioned the decrease in prices, right? There was -- sorry, there were the discounts, but also there were decrease in prices that happen halfway through the year. So that did impact margins. Now we don't see that going forward, as we mentioned and we do see that between growth in volumes and being able to raise prices according to inflation, margins will recuperate in products. Mario, anything else that you'd like to comment?
No. It's very straightforward, what you mentioned Charlie. I think you skipped question #3, Mariana. Well, the exchange rate for our guidance...
Can you mention the question for everyone's benefit, please?
Yes. Do you want me to read it? It's what exchange rate in Argentina, are you using for your guidance? And if you use average exchange rate in the fourth quarter?
Well, to the first question on the third question is we started at 800, and we are doing a monthly devaluation according to what the government in Argentina has announced. So we're starting off at 800 for January and so on all the way throughout December. They say that it's going to be running at 8% per month. So pretty much that's how we did our budget for 2024. And then on the fourth quarter, yes, we used average exchange rate, which is how we compute our numbers according to accounting rules.
And now moving to the last question, on Rodrigo side, what could we expect for CapEx investments in 2024? And where will it be allocated?
What we're going to be -- in terms of CapEx, you should expect a range from 3% to 4% in CapEx for 2024 as a percentage of sales, mainly they're going to be allocated to -- we're going to be doing the [indiscernible] as we mentioned in the call, there are still 2 factories missing out with the new technology. Also, we're going to be kicking out the technology in Peru, the new technology for water tanks. So I would say that's to protect the core. The other part will be maintenance CapEx to the business running, and the rest will be on water treatment, dam and recycling plants. So that's more or less where CapEx is going to be allocated in 2024.
Our next question is from Emilio Antor from GBM. With this continued growth in services for the fifth consecutive quarter, have your expectations of EBITDA breakeven change?
None less [indiscernible]. We're trailing pretty close to our plan. And during the very accelerated growth in bebbia, has a very big investment in acquiring our customers. And so as we see an opportunity to continue to introduce this novel solution with this novel approach of subscription to our markets, we will continue to invest in that customer acquisition. So it has to get still much larger and growth rates need to reduce a little bit for EBITDA to see big changes. Now we are seeing that the unit economics of these businesses are generating value. And so we feel very comfortable with investing or having these losses in EBITDA in services as we have clarity that the unit economics for these customers are profitable. And so just the investment, which is reflected as expenses that affect EBITDA generating losses, is something that is of benefit for the growth of the company in a profitable way going forward in the new business model. Mario, anything else that you to like to comment?
Just to complement. Yesterday, precisely at the Board meeting, we were discussing around bebbia. The business unit manager confirmed that he expects that by 2026, breakeven in bebbia will be achieved. Rieggo and water treatment recycling where we're expecting to have a positive EBITDA in 2024. And water treatment and recycling when you put together or combine Brazil and Mexico, that's going to happen in 2025. So they have not changed -- but I think we are just validating the milestones that we disclosed to the market a couple of quarters ago.
Martin Lara from Miranda Global Research is asking that the 2024 ROIC guidance seems conservative compared to the figure that you reported in 2023. Could you please elaborate on this?
Well, I think there's a lot of macro elements that can move the cost of capital throughout the year, and that's mainly tied to what central banks will do with interest rates. So we're being conservative in that spread. And on the ROIC guidance as well, until we don't have more clarity on what are the banks -- the central bank is doing throughout the year. So that's one thing. And the other thing is, as you all know, Argentina, with the massive devaluation in December, the market is reshaping, the market in Argentina is reshaping by itself. So those 2 things are the reason why we prefer to be conservative on the spread on the ROIC.
We have 1 last question. It's from David Siemens of Sydney. Does capitalizing the bebbia units explain all of the increase in the D&A? If you are now capitalizing purification units rather than expensing upfront, does that allow you to reduce the bebbia ASP to drive passive growth?
Do you want to first talk about the D&A, Mario?
Sure. To your question is, yes, that is all the -- most of the increase of the D&A comes from that capitalization in the services segment. And I will say that...
Some of it was to water treatment plants, no, as you mentioned?
Yes. And the remainder was on water treatment plants.
Then regarding the -- how this impacts the growth model. I do think it impacts it in terms of how we perceive the business slightly on where we may feel a little bit more aggressive on trying to grow the business. But this is very recent. And so I still wouldn't be comfortable in giving you a more detail on impact in the growth model. We do still have a very high customer acquisition cost as we're still in the early stages of that option. And so educating the consumers on this model is very, very expensive. Thank you for your question, David, and thanks for joining. But if you would please also follow up on this later on, a few quarters from now, where we can maybe share a little bit more details on the impact it has on our model.
Thank you. So that was the last question. And -- Mario, would you like to answer something else?
No.
Okay. Perfect. So let us share a poll. Ready. So if you have 1 more minute, we will really appreciate if you could answer 3 questions in a poll about the AI voices and the presentation. Thank you very much.
Do we know the results? Or are we going to show the next meeting.
Next meeting. So we will just wait like 10 more seconds and then we can close the webinar.
Well, well, we leave those of 10 seconds, let me just finish with probably David Siemens question on ASP. I think just an overall conclusion on this is I think the capitalizing the cost of purification units rather than expensing them upfront can provide Rotoplas with more flexibility in its financial reporting and potentially allow for a strategy that includes reducing bebbia ASP to drive faster growth. However, we should be careful and carefully manage this that we align all these new criterias with the company's overall financial health. And as you know, we're very conservative on that. So we'll keep the market and investors informed of all the changes. So we -- as you know, we want to achieve long-term sustainability. And I think that's the upper most and important objective for the company and bebbia by itself.
Thank you, Mario, and thank you, everyone, for joining.
Thank you. See you next quarter.
Thank you. Have a great rest of the week.