Grupo Carso SAB de CV

BMV:GCARSOA1

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, everyone, and welcome to the conference call to discuss the first quarter 2020 results of Grupo Carso. Before we begin, I would like to remind you that this call is being recorded, and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially.

Hosting this conference today, we have Mr. Arturo Spínola, CFO of Condumex and Carso Infraestructura y Construcción and Ms. Angelica Piña of Investor Relations. I will now turn the call over to Ms. Angelica Piña. Please go ahead.

[Angélica Garnica, executive]

Thank you. Good morning, everyone. Consolidated sales of Grupo Carso grew 5.2%, totaling MXN 24 billion. Carso Infraestructura y Construcción was the main driver, posting a 26.2% increase, due to more pipeline installations for telecom and gas in Mexico and LatAm, higher drilling works on geothermal and oil wells and higher revenue from the construction of the oil platforms for Pemex.

Grupo Condumex increased 4.3% from higher volumes of harnesses, automotive and telecom cables and higher prices in dollar terms. Carso Energy recorded additional revenues from the incorporation of the 2 hydroelectric plants in Panama since February. However, the sales of Grupo Sanborns decreased 1.4%, mainly impacted by the stay-at-home period, where consumption shifted to essential items in the last 2 weeks of March.

Consolidated operating income and EBITDA went down 15% and 8.6%, respectively, due to lower profitability in most of the divisions, mainly Grupo Sanborns, and the recording of extraordinary income and dividends from associated companies in 2019.

Controlling net income increased 23.3%, benefited by exchange rate fluctuations during the quarter. In the breakdown by division, the total sales of Grupo Sanborns were MXN 11.3 billion, decreasing 1.4%. Promotora Musical improved 13.5% its total sales, while Sears, Sanborns and other formats decreased 4.6%, 4.4% and 10.8%, respectively.

In January and February, sales boosted by clearance sales and positive calendar effects. However, less traffic at the stores caused sales in Sears financials to fall double-digit in March.

Operating income and EBITDA fell 28.8% and 23.5%, respectively. The gross margin reduced due to higher sales of technology in all the formats, while operating expenses were controlled, comprising less administration, promotion and advertising expenses as well as credit card reserves for nonperforming loans.

To address the health emergency, due to the COVID-19 virus, all Sears and Saks Fifth Avenue stores are temporarily closed. 96 Sanborns and 22 Sanborns are also closed, and the rest remain open, providing essential products and services, such as the takeaway option for prepared food and beverages. Most iShop stores and all [ back ] stores are open, all operating under the protocols established by the health authorities.

Regarding the industrial division, Grupo Condumex reported sales of MXN 8.2 billion, increasing 4.3%. The telecom sector posted higher revenues, higher volumes for fiber optic and coaxial cables. The automotive sector recovered volumes of harnesses and automotive cable after the GM strike, and sales were benefited with higher prices in U.S. dollars.

In construction, the installation of turnkey projects and cables for the mining industry improved. Operating income decreased 4.6% from lower margins in some product lines. EBITDA increased 3.8%, reaching MXN 1.1 billion. Net income reached MXN 1.1 billion, mainly due to the increase in the foreign exchange rate in the period from MXN 19.2 to MXN 20.6 per dollar as an average.

Carso Infraestructura y Construcción posted MXN 5.2 billion in revenues, increasing 26.2%, and was the main driver of the increase in consolidated sales due to the following reasons: more telecom projects in Mexico and LatAm and gas projects; the construction of 2 highways in Mexico and 2 in Panama in the infrastructure division; the oil platform for Pemex and higher volumes in directional drilling of geothermal wells and cementing of oil wells in the manufacturing and services for the oil and chemical industry division.

The operating income and EBITDA in Carso Infraestructura reduced 11.5% and 3.4%, due to the extraordinary income recognized in certain highway projects in the infrastructure sector in 2019, an additional hiring of contractors to face the volume growth in pipeline installations, which caused more costs and expenses.

The backlog reached MXN 34.6 billion compared to MXN 23.5 billion a year ago. The mix of projects currently in place are the Las Varas, Vallarta and Mitla-Tehuantepec highways, the beach corridors in Panama, diverse real estate projects, telecom installation services, the construction of the Samalayuca-Sásabe gas pipeline, the Maloob E and Maloob I oil platforms, and diverse services and equipment for the well drilling industry.

Lastly, the sales of Carso Energy totaled MXN 131 million, where additional revenues came from the 2 hydroelectric plants in Panama. The quarterly operating income reduced due to less production and commercialization of oil in Colombia, and additional expenses to conclude the gas pipeline in Chihuahua.

EBITDA improved from a loss of MXN 200,000 to a MXN 14 million profit. The Waha-Presidio and Waha-San Elizario gas pipelines, where we have a 51% participation, received rents from gas transportation. However, the revenues are not reflected in consolidated sales.

In the face of the health emergency caused by COVID-19, where prevention and mitigation measures involved temporarily closing nonessential activities, Grupo Carso's strategies for the second quarter in all divisions include: the implementation of additional measures to reduce and contain general expenses, strict inventory controls, sales of merchandise and services through digital channels and operation of distribution centers and manufacturing facilities under the protocols established by the health authority.

In the case of the retail division, all the remodeling and construction projects of new stores have stopped indefinitely. And at Carso Infraestructura y Construcción, some of the civil construction projects were suspended.

With this, I finish my general comments to proceed to the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Miguel Ulloa with BBVA.

[Miguel Ulloa Suárez, analyst]

The first one would be regarding your expectations heading the second quarter. Could you give us a brief outlook of what you're expecting for the second quarter? And how big is going to be the impact from the COVID-19 crisis?

[Angélica Garnica, executive]

Hello, Miguel. Well, about Grupo Sanborns, we just have the estimate for the month of April. Obviously, we depend on the decision of the authorities to the date of opening again of the stores. But we estimate like a 10% impact in sales, I mean, less in all the formats. Because, in this quarter, what happened is the first month of the year were very positive, 4%, an 8% increase in Sears. But then the other 2 second weeks of the month, caused the sales in Sears to decrease 25% and in Promotora Musical, like 16%. So we have estimated just like a 10% fall in sales for the month of -- well, not a 10%, I mean, 10% of the sales of the year would be for the closing of the stores in April.

[Arturo García, executive]

Good morning, Miguel. This is Arturo Spínola.

Regarding the Construction division, maybe the one to which we don't expect an important impact in the second quarter. That is because, as you know, the telecommunications and the oil services, we are maintaining in accordance with the decree of the government. And you can see there the pipeline installations and the manufacturing and services for the oil industry. That is more or less 80% of the sales of Carso Infraestructura y Construcción.

And recently, we was informed that we can continue with the high growth, Las Varas and Mitla. Then, we know in the case of Carso Infraestructura, we only are stopped the site construction projects. I mean, buildings, commercial center, et cetera, but that impact more or less 15% of the sales of Carso Infraestructura. Maybe, if we are going to have a little impact because of the installations in the residences, it can go down because of the contingency, but the rest of the projects of Carso Infraestructura, maybe we are not feel an important impact in this second quarter.

In the case of the industrial area, we are going to have an impact -- an important impact in the case of the automotive sector, because, as you know, all the manufacturing automotive plants are closed, at least in this April month and maybe the most of the May. Then, we are weighing 80% decrease in April, and maybe 50% decrease in May, then we are expecting that in June, we are going to have a -- not a normal month, but are continuous production. We expect to continue with the automotive production on June, but maybe not with the same level that the industry used to have at the beginning of the year.

In the case of the cables area, we are maintaining more or less 75% of the lines working. Just the construction line is stopped, because the telecommunication cables, we are continuing providing to our customers in order with the decree. Then the main impact is going to be in the case of the automotive sector, but we are going -- maybe if you consider that the automotive sector is around 30% of the industrial area, I mean, from Condumex, maybe the total impact could be around 30%, including the cable and the automotive sector in case the earnings. But we are taking care of our costs, inventories as -- and trying to suspend the not necessary expenses and CapEx.

In the case of energy, we don't expect an important impact. We are maintaining the construction of the Samalayuca-Sásabe pipeline. We hope to end in the second semester of this year. And we are -- we can continue the construction.

The hydroelectrics in Panama are working. Then the problem maybe would be to defer certain investments in the oil -- in the geothermical and oil projects, and that is because of the close of certain governmental offices that stopped certain process. That is the outlook that we expect for the second quarter for the different divisions of the group.

[Miguel Ulloa Suárez, analyst]

That's very useful. And just a quick second one, if I may, is regarding the FX extraordinary gains that you recorded in the quarter. Is this cash flow? Or is just mark-to-market? Or how does it work? Could you provide some color on that, please?

[Arturo García, executive]

The main impact was in the energy sector because of the Samalayuca-Sásabe project. And there is no flow, Miguel, that is an application of certain financial rules. I mean, we consider that the Samalayuca-Sásabe project is a U.S. dollar currency registration project, then the devaluation of Mexican peso caused a benefit. But it's just a booking benefit. I mean, there is no flow.

We have, on the case of the automotive sector, a benefit because of the accounts, let's say, by those are 100% in dollars. In that case, it's going to be slow, in the case of energy, that we are talking about around MXN 600 million benefit is just a booking benefit.

[Operator]

[Operator Instructions] The next question is from Alejandro Azar with GBM.

[Alejandro Azar Wabi, analyst]

Just a quick follow-up on Condumex, to understand a little bit about the business. So you mentioned you are drived out of operations, right, for during April? And you're starting to ramp up on June. Did you have -- how much inventories -- how many inventories do you have if things -- if the OEMs start production on May?

[Arturo García, executive]

Okay. It's important to say that the automotive sector are working with the government in order to support the ramp up of the manufactured companies in the U.S., and that could be that the beginning of the production was not on June but on May.

On the other hand, we used to have around 30 days inventory, because, as you know, the cable, that is our main raw material, is produced by us. Then -- and the copper inventory is around 15, 21 days, because we received the copper every week.

On the other hand, we are negotiating with our suppliers, more tend to pay the raw material. But before, we are talking about 1 month of the main materials in the different plants, because, as Angelica said at the beginning, we were incrementing the production in the first quarter, and then it goes down. Because of that, our inventory was decreasing. Fortunately, we got to stop certain purchase order, and we are trying to maintain the minimum level just to be ready when our customers inform us that they are going to begin the production again.

[Alejandro Azar Wabi, analyst]

Okay. Excellent. And also...

[Arturo García, executive]

That is in the automotive sector.

[Alejandro Azar Wabi, analyst]

Excellent. Another one, if I may, and this is on Ideal hydroelectrics. Would you care to explain a bit how the business works? And I mean, I understand that you signed a tariff with your client or the government. How does the current levels of oil impact? Does it benefit? Does it -- it seems as an impact on the level of your tariff? Or in terms of opportunity cost, regarding other energy power? Can you give us color on that, please?

[Arturo García, executive]

Yes. At the beginning, we don't have expectation about the impact because of the oil price in the hydroelectric. We have different contracts with customers and with the Panama government, short-term contract. But we don't have yet an impact or advice for our customers in order to change any condition of the supply contract.

And in the oil, the diesel, is not an important cost for us in that hydroelectric. The main cost is the amortization of the investment. Then, I don't have the detailed information, but maybe if you want, we can have a call with the energy manager in order to give you more detail about the operation of the hydroelectrics in Panama?

[Alejandro Azar Wabi, analyst]

Definitely, that would be very helpful, Arturo.

[Operator]

The next question is from Alejandro Chavelas with Crédit Suisse.

[Alejandro Chavelas, analyst]

Just two questions. The first one on Condumex. I don't think I got it right from the question that Alejandro Azar asked. So you have 7 days of inventory, if I'm not mistaken, right, of final product? Or is that raw materials?

[Arturo García, executive]

No, don't have just 7 days. We have around 1 month of the main raw materials. I mean, the raw material with a higher turnover. But the other kind of raw materials, I mean, the components that we call -- I mean, the -- I don't know how to say that. The component is the part that you put in the cable in order to connect the harness in the vehicle. In certain cases, we have 3 months, 2 months, it all depends in the terms of ship, because we receive some components from the U.S., others from Mexico, but we have some suppliers, for example, in China, that we have had certain problems at the beginning of the pandemia. Of that, it seems that the Chinese suppliers are beginning with the production in normal time. But the main inventory is around 1 month, and the rest, 2 or 3 months of inventory.

If you see, in terms of money, we sell around MXN 800 million per month. In the case of the automotive sector and the inventory, the raw material inventory is around MXN 1,500 million, more or less.

[Alejandro Chavelas, analyst]

And final product inventory, do you hold some of that? Or is it really not a consideration of holding final product inventory?

[Angélica Garnica, executive]

Can you repeat the...

[Arturo García, executive]

Can you repeat please the question, because I didn't understand. The sound is not too good.

[Alejandro Chavelas, analyst]

Yes. I mean, finished product inventory. How much in months [ of inventory do you have ]?

[Arturo García, executive]

Finished products, it's just around 1 week, I mean, 7 days. Because in the case of the automotive sector, we are supplying every day. Not in this month, obviously, but normally, we work in a just-in-time process with our customers. Our plants are near the customers because we -- in certain operations like GM in Silao plant, we have shipments every 1 hour, more or less. I mean, the -- almost every harness that we finish, we send to the customers. Then the main inventory is in raw materials, not in finished goods.

[Alejandro Chavelas, analyst]

Right. Understood. And the second one, on the energy business, on the Mexican pipelines, do you think there is or have the offtakers approached you regarding perhaps decreasing [indiscernible]? Or is there a discussion with this particular [indiscernible] on this? Or is the [indiscernible] on that front?

[Arturo García, executive]

Sorry, it seems that there was a mix of voices. I didn't understand.

[Angélica Garnica, executive]

We just heard until the offtakers, but what did you say at the end?

[Alejandro Chavelas, analyst]

Just a discussion [ how often ] with the offtakers regarding [ deferring payments ] of the pipelines.

[Arturo García, executive]

You mean in the case of the Waha pipelines or the Mexican pipeline?

[Alejandro Chavelas, analyst]

[ For both ].

[Arturo García, executive]

Okay, because in Mexico pipeline, we don't have offtakers right now. We -- our only customer is CFE. In the case of the Waha-Presidio and Waha-San Elizario pipeline, we did -- we have not received yet any changed requirements. We are supplying normally. It's important to say that 95%, 96% of our incomes in Waha-Presidio and Waha-San Elizario is from CFE. The offtakers is just 10 or 12 different offtakers, both with lower volumes. And until now, we have not informed about the change in the requirement of service.

[Operator]

There are no further questions at this time. I will turn the call back over to Ms. Piña for any closing remarks.

[Angélica Garnica, executive]

Thank you, everyone, for being here in the call. If you need additional information, you can connect at 11:00 to the Grupo Sanborns conference or send us an e-mail. Good day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.