Grupo Carso SAB de CV

BMV:GCARSOA1

Earnings Call Transcript 2024-Q1

[Angélica Garnica, executive]

Good morning, everyone, and welcome to this webinar to discuss the results of the first quarter 2024 of Grupo Carso. Before we begin, I would like to remind you that this event 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 is Mr. Arturo Spinola, Chief Executive Officer of Grupo Carso; Angelica Pina of Investor Relations, who will take you briefly through the first quarter's financial results, and then we will take your questions.

Consolidated sales of Grupo Carso totaled MXN 46 billion. Grupo Sanborns reported a slight increase in sales considering a retail environment marked by higher inflation and lower activity. On the other side, the impact in the exchange rate, which suffered a 9% reduction versus the same quarter of 2023 affected revenues from dollarized domestic sales, exports and sales from our foreign operations.

Grupo Condumex, Elementia, Fortaleza and Carso Energy -- and Carso Energy. Carso Infrastructure and Construction posted a 7.5% reduction due to the conclusion of some construction projects.

Consolidated operating income reached MXN 5.5 billion versus MXN 6.1 million in the first quarter of 2023. This was mostly due to local costs affected by higher inflation -- by the higher inflation mentioned before, coupled with sales, including a stronger peso. By division, higher profitability came from Carso Infrastructure and Construction and Elementia Fortaleza with a 13.5% and 12% increase, respectively, while the rest of the divisions sold reductions. EBITDA from January to March 2024 was MXN 6.9 billion compared to MXN 7.5 billion a year ago. The EBITDA margin changed to 20 basis points from 15.4% to 15.2% in relation to sales.

The consolidated controlling net income reached MXN 3 billion lower than MXN 3.8 billion on last year, reflecting lower operating results. Explaining the performance by division, the total sales of Grupo Sanborns reached MXN 16.5 billion, almost stable versus MXN 16.4 billion in the first quarter of 2023 in an environment marked by a [indiscernible] when families have lower income after several year-end expenses.

This result was in line with a modest recovery of 0.05% reported in February and March in the private consumption in the domestic market, but still below last year.

Operating income in Grupo Sanborns totaled MXN 878 million compared to MXN 1.1 billion a year ago. This reduction in profitability was explained by an 11.6% increase in operating expenses, which reflected a rebound in inflation from 4.4% to 4.42% annual rate in March. EBITDA reduced 16.1% and net income reached MXN 718 million compared to MXN 950 million in the first quarter of the previous year. The sales floor increased 0.4% ending with 446 stores due to the opening of 3 new DAX stores and 1 iShop.

In the Industrial division, Grupo Condumex, its sales totaled MXN 10.8 billion versus MXN 12.5 billion in the same quarter of last year. This lower performance came primarily from a 9% reduction in the ForEx rate, where the strength of the peso impacted our revenues in dollars. Lower volumes in telecom cables were observed, compensated with new projects for harnesses and automotive cables.

Regarding operating income and EBITDA, these items reached MXN 1.2 billion and MXN 1.3 billion, respectively, compared to MXN 1.6 billion and MXN 1.8 billion previous. Carso Infrastructure and Construction, its sales totaled MXN 10.1 billion. The divisions that had the best performance were civil construction which improved due to the progress in the Star Medica Hospitals in different cities and other retail projects such as [indiscernible] Shopping Center and manufacturing of services for the oil and chemical industry with additional drilling and oil well [indiscernible], while also including the construction of oil platforms like [indiscernible]. The performances mentioned, offset lower volumes of serving pipelines in the telecom network installations and infrastructure, where the Mayan Train reached its final phase.

The operating income and EBITDA [indiscernible] improved 13.5% and 13.2%, respectively. Controlling net income decreased 15.1% totaling MXN 740 million. The projects currently in place are telecom installation services, equipment for the petrochemical industry, drilling of big wells for Pemex, various services and equipment for the oil industry, the construction of hospitals, shopping centers and the conclusion of the [indiscernible] Section 2 of the Mayan train. The backlog totaled MXN 32.1 billion compared to MXN 33.4 billion a year ago.

The sales of Elementia Fortaleza decreased 5.2% from MXN 8.2 billion to MXN 7.8 billion in the first quarter of 2024. This was related to the peso appreciation since most of the division's revenues are generated outside of Mexico, either from exports or commodity based. The impact of the exchange rate affected metals and all operations of the Consumer System segment. However, Elementia's profitability improved, where operating income and EBITDA grew 12% and 7.3%, respectively, reflecting cost efficiencies in the segment and sector.

The sales of Carso Energy totaled MXN 689 million lower than MXN 822 million from last year. This was attributable to exchange rate effects in the revenue [indiscernible] Panama and the Samalayuca-Sásabe Gas Pipeline, while revenues from natural gas transportation services to the pipeline of [indiscernible] Texas USA remains strong. The operating income and EBITDA of Carso Energy were MXN 495 million and MXN 575 million, respectively. The net result totaled MXN 199 million.

In this subsidiary, the construction of the compression station for the Samalayuca-Sásabe pipeline was completed in December 2023 and is finishing commission tests to increase the transportation capacity in the following quarters, depending on the demand. Also in this subsidiary, the construction of the [indiscernible] pipeline started. Having signed an investment agreement with a CFE for the construction of 416 kilometers to connect the Samalayuca-Sásabe pipeline to Baja California.

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

[Angélica Garnica, executive]

[Operator Instructions] You have your microphone open now.

[Alejandro Azar Wabi, analyst]

Angélica, Arturo, can you hear me now?

[Arturo García, executive]

Yes, yes, Alejandro.

[Alejandro Azar Wabi, analyst]

Okay, great. I just wanted to understand a little bit on Grupo Sanborns, last quarter was really tough for you guys. This quarter seems on the same direction. What is happening on the cost side and also on the sales side because sales were flat versus the industry, which grew a little bit. So that would be my first question. And the second one is on Carso Energy. If you can provide a little bit more color, Arturo, on after the compressor station starts producing revenues. How should we see that division because this quarter surprised us on the downside really, really hard. So if you can also comment on how big is the impact from the hydroelectrics in Panama?

[Arturo García, executive]

Yes, Alejandro. First, regarding Grupo Sanborns, we have 2 main reasons for reviewing the cost. The first is the increases in wages and salaries because of the minimum salary increase, we have some impact because in certain categories, the wages increased and we have to adjust all the payroll. And on the other hand, we finished the review of the bad debt, and we increased our reserve in this quarter. I think we -- we are just about MXN 400 million, that was the final [indiscernible] that we have for the next quarters. We have no more adjustment about that situation of the bad debt.

[Alejandro Azar Wabi, analyst]

So the NPLs are increasing. Do you have the percentage of NPL from the credit portfolio?

[Arturo García, executive]

The NPLs are increasing but not so much. The real reason that we have a problem with our system that [indiscernible] for example, in the case of Sears, we have around [indiscernible] NPLs and [indiscernible] is higher, but we restricted our trade, but what's most about our network of our system. The NPLs are in market as Grupo Sanborns is 5%.

[Angélica Garnica, executive]

Yes. I think the ones that are like 2 digits is Claro Shop like around 13%. Sanborns is around 6% and Sears is 3.5%. So that is like the combination. However, considering the 5.2 million credit cards, 3.9 million cards are from Sears. Then we have 800,000 or around 900,000 cards for Sanborns and [indiscernible]. So let's say that 7% of our credit cards have double-digit NPLs, 16% have 1 digit, that is 5%. And then Sears, 75% of our credit cards have 3.5 NPLs. So in aggregate days, I mean, it went up, but we are controlling more the online granting of credit, which is the one that was like most affected in this change in the IT system for credit.

Our portfolio is around MXN 15 billion -- MXN 14.5 billion. And I mean, with this, we are still managing a sound great portfolio. We don't see any more changes in the NPLs in the following -- in the rest of the year. And basically, that would be the explanation.

[Alejandro Azar Wabi, analyst]

Super, and on the Carso Energy question?

[Arturo García, executive]

Yes, [indiscernible] Samalayuca-Sásabe pipeline, we just fixed the commissioning phase, and we are starting with the production of this site in this month -- even in this month. And that means Alejandro that we are going to increase our incomes in the pipeline since May invoices. That is around $3 million per month than the compression station. That was the direct impact, but we can increase $3 million with the other customer that we are looking for.

[Alejandro Azar Wabi, analyst]

Okay. And one more, if I may, Arturo, and this is just a clarification, our understanding about the new gas pipeline, I don't recall if the name is [indiscernible], the new one that you're going to build on that is going to be linked to Samalayuca-Sásabe. Was that -- is that a done deal? I mean you already have the go ahead from the CFE to do that? Or my thoughts were that you were in discussions with the authorities to see if that was going to be a true project or can you clarify that for me, please?

[Arturo García, executive]

I can say that the pipeline is now in process. We are dealing with the engineering phase. We will have a contract with the CFE. We are even designing some items about the road, for example, but, I can say that it's a fact. The pipelines on the first phase, we have 2 phases. As a whole, this kind of project has problem [indiscernible]. We just begin with the engineering phase and we have a good -- we don't see a problem with the CFE.

[Alejandro Azar Wabi, analyst]

Is there any way you could share some financials for us on that front? You mentioned 2 phases, but financing, size of it?

[Arturo García, executive]

Well, the PF for this pipeline was signed last week. We have the finance ready. We design, at least in process by the government.

[Angélica Garnica, executive]

Miguel. Please go ahead with your question.

[Miguel Ulloa Suárez, analyst]

Just a quick one regarding mix. Could you provide some color on what you're expecting for the following quarters considering the weakness in the telecom segment?

[Arturo García, executive]

Yes, we don't see -- we don't have [indiscernible] about the telecommunication companies because our related party changed its plans and we don't see an increase for the rest of the [indiscernible]. I think we are going through onetime the level in the installation sector [indiscernible] and in the cable company. We are looking for other markets. Now for example, we are selling cables and communications cables [indiscernible] we are increasing our presence in South America, for example, in Colombia and Brazil. And that is our view for the [indiscernible] and America [indiscernible] is not going to decrease a lot for the rest of the year. But we are looking for other markets in order to compensate. For example, the construction cables are increasing. We are getting new business for hybrid and electrical cars, et cetera. For the telecommunications system, we don't see an increase in our [indiscernible].

[Miguel Ulloa Suárez, analyst]

That's very useful. And a second one, if I may. Just regarding the backlog for [indiscernible] in coming months, do you -- do you have any projects that can -- that could represent an increase in the backlog or?

[Arturo García, executive]

We have some bids in the case of Pemex for the platforms and other services [indiscernible] was delayed. I don't know that they are going to get even in this year, but we are expecting [indiscernible] from Pemex. On the other hand, in infrastructure projects, we don't have a good expectation for this year. As you know the elections, the change of government, et cetera. We do see any important projects for this year, which we are expecting just for the 2025.

In the case of civil construction, we have a good backlog, and we can increase for the [indiscernible] because we are now negotiating other buildings, for example, more and more hospitals, and other commercial center. Important projects for [indiscernible] we are participating in the [indiscernible] the backlog is not consolidated for us because we have just 25% of our consortium with [indiscernible] construction companies and we have just beginning with that project. We have 3 blocks in that it was [indiscernible] we are close to beginning with engineering phase, et cetera, and we are not going to consolidate participations.

We have 25% [indiscernible] the noise project that we lost, but I don't see [indiscernible] infrastructure. We are expecting to reach sales more similar than 2022 than the 2023. I mean we have a little decrease, but even at the same level than 2022.

[Angélica Garnica, executive]

We have a question from Nicole.

[Unknown Analyst]

I just had a follow-up regarding the credit business in Grupo Carso. If I understood correctly, the extraordinary impact of the additional reserves was MXN 400 million?

[Arturo García, executive]

No, for this quarter?

[Unknown Analyst]

Yes.

[Arturo García, executive]

Almost's MXN 400 million for all of the quarter, and that is the last adjustment for this quarter.

[Unknown Analyst]

Okay. So this is in addition to the MXN 730 million that you had last quarter. So in total, it's been an impact.

[Arturo García, executive]

That's right. That's right.

[Unknown Analyst]

Okay. And I think last quarter, you also mentioned that it was like the last additional reserves. So just to understand where did this additional reserve accounts come from?

[Angélica Garnica, executive]

Well, it was just part of making the adjustment of this. I mean the sales increased 0.9%, and then the gross profit improved 3.4%, and this includes the credit income. So our credit business is sound. However, we have still some accounts mostly online that we have to adjust because some payments weren't like considering in the full period. That's why the operating income was 24.6%. This was because the expenses increased from MXN 4.3 billion to MXN 4.8 billion. So that was mainly the impact. And as Arturo said, I mean, it was MXN 505 million increase in expenses where MXN 300 million also from the increase in the reserves. But I mean that was just for the total that we are considering.

If you have another question, someone want to participate, you can raise your hand, and we will open your mic. Okay. For the moment, there are no additional questions. With this, we are concluding the conference. We thank you for participating, and we look forward to speaking with you again. Thank you, and have a good day.