Grupo Carso SAB de CV

BMV:GCARSOA1

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, everyone, and welcome to the conference call to discuss the results of the second quarter 2020 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, Gary. Good morning, everyone, and thank you for your interest and your participation in this conference call. I will take you briefly through the second quarter financial results, and then we will take your questions.

Consolidated sales of Grupo Carso decreased 39%, totaling MXN 14.7 billion. Carso Infraestructura y Construcción posted a 37% increase due to higher revenues from the construction of oil platforms for Pemex, higher drilling work on geothermal and oil wells and pipeline installations for telecom and gas in Mexico and LatAm.

Carso Energy also increased, recording additional MXN 261 million in revenues from the incorporation of the 2 hydroelectric plants in Panama. However, due to the COVID-19 virus, Grupo Sanborns and Grupo Condumex decreased their sales 66.1% and 31.3%, respectively, mainly impacted by the stay-at-home period from April to July, with traffic reductions in retail stores and production stoppages in the automotive industry.

Consolidated operating results and EBITDA went down 88.3% and 64.3%, respectively, due to lower profitability, mainly in Grupo Sanborns, and to a lesser extent, in Grupo Condumex. The controlling net result was a loss of MXN 49 million, explained by the lower operations mentioned before as well as lower results recorded in associated companies.

In the breakdown by division, the total sales of Grupo Sanborns were MXN 4 billion, decreasing 61 -- 66.1%. Sears, Sanborns, Promotora Musical and other formats decreased 70.2%, 75.7%, 49.1% and 48.1%, respectively. These results reflected the temporary closure of the 100% of the brick-and-mortar stores of Sears, Saks Fifth Avenue, Sanborns Cafe and 60% of the Sanborns stores, while the iShops and Dax stores mostly remained open, operating on the protocols established by the health authority.

Customer service continued through digital channels, where online sales grew 4.9x. The Retail gross margin increased from higher credit revenues, while operating expenses were controlled, comprising less expansion, energy, rent, advertising and other expenses. However, lower sales costs, operating results and EBITDA to be losses of MXN 1.1 billion and MXN 1.6 billion, respectively.

Regarding the Industrial division, Grupo Condumex reported sales of MXN 5.4 billion, decreasing 31.3%. This was due to the COVID-19 virus affecting the automotive industry with production stoppages from the OEMs, and therefore, causing lower customer orders in harnesses and automotive cables.

The suspension of the construction sector also affected the sales of construction cables and the installation of turnkey projects. The operating results and EBITDA of the Industrial division decreased 53.6% and 46.3%, respectively. The net income fell from MXN 758 million to MXN 84 million, mainly driven by the automotive sector reduction mentioned.

Carso Infraestructura y Construcción posted MXN 6.2 billion in revenues, increasing 37% due to the following reasons: the progress in the construction of the Maloob-E and Maloob-I oil platforms and higher directional drilling of geothermal wells and cementing of oil wells in the manufacturing and services for the oil and chemical industry divisions; more telecom projects in Mexico and LatAm; and the final stages of the construction of gas projects; and the construction of 2 highways in Mexico and 2 in Panama in the Infrastructure division.

The operating income and EBITDA in Carso Infraestructura rose 118.2% and 98.4%, respectively, due to the mix of projects. The backlog reached MXN 42.7 billion compared to MXN 21 billion a year ago. The 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 oil platforms, diverse service and equipment for the well drilling industry and most recently, the platform and track for section 2 of the Mayan train from Escárcega to Calkiní in Campeche.

Lastly, the sales of Carso Energy totaled MXN 277 million, where additional revenues came from the 2 hydroelectric plants in Panama. The quarterly operating income improved from MXN 1 million to MXN 60 million, and the EBITDA improved from MXN 2 million to MXN 169 million a year ago. 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.

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

[Operator]

[Operator Instructions] Our first question is from [ Vidal Levan ] with BlackRock.

[Unknown Analyst]

Can you please comment a little bit on the net debt level and also with the decrease in the EBITDA? We saw an important increase in the leverage ratio up to 2.3x. When do you expect to see the peak of this level? And if you can comment a little bit about the future expectations of the different divisions, mainly the commercial part of the business.

[Arturo García, executive]

Regarding the -- our leverage, as you know, the increase of that is because of the acquisition of the 2 thermoelectrical plants in Panama that includes a $400 million loan, both as well as that loan and the other that we have for the pipeline in Samalayuca-Sásabe is long-term loans.

Then, we are going to maintain that leverage and I mean between 2 or 2.5x, but most of that is long-term financing. Then, we don't see a problem because our -- regarding our liquidity.

And I don't -- the other question about the commercial situation, could you repeat, please?

[Unknown Analyst]

Yes. It's regarding your expectations of the potential recovery, if you can comment on the different areas, particularly on the commercial side of the business.

[Arturo García, executive]

Yes, we think we are going to recover the expected level at the end of the year, but we don't think to the 100% of that we have before the COVID, but we are expecting maybe 80% of the level that we used to have before the COVID for October, November. That is our expectation, but all depends of the Semaforo and other restrictions because, as you know, depending on the region, I mean the states, have different restrictions. For example, the hours that we can open, the days that we can open, et cetera. But in our best expectation, maybe 80% of our capacity for the end of the year. That is more or less our expectation.

[Angélica Garnica, executive]

And regarding the Retail division, it's going to be a slow recovery. We are expecting not to return to 2019 levels, but a little bit less from that, and normalizing expenses in 29.7% of sales or 30% of sales. What is positive in the Retail division is that we are controlling the credit portfolio with our NPLS, making the provisions -- calculating the provisions according to IFRS 9 monthly.

And for example, credit, we expect it to normalize until the next year. Also, the new reality for us with the digital channel is challenging. However, we have been facing a lot of demand. And it was positive for us because in the new reality, our conversion rate is 3.5x, and the number of visits increase in Sears, in Sanborns and in Claro Shops, like 190% in Sears, 100% in Sanborns, in Claro Shops, 230%. So we are going to keep pushing the innovations for digital channels.

For example, the novelty store that we have, marketplace -- the supermarket -- a section of supermarket in Claro Shop, a section of Miniso in Claro Shop. We are now launching the apps for Sears and Sanborns. And also, we have some chat bots to help the -- not only the service, but the sales and it's a chat bot that you can connect with WhatsApp. If you now visit the Claro Shop or the Sears website, you will see this chat box and it's a real novelty, so I think that will also help us to regain gradually the sales in the second quarter of 2020.

[Operator]

The next question comes from Alejandro Azar with GBM.

[Alejandro Azar Wabi, analyst]

The first is a follow-up on [ Vidal's ] on Sanborns. Is there -- and I know this number is pretty difficult, but is there any way you can share with us if there's an estimate on how much expenses for the new normal will be due to sanitary measures, et cetera, in Sanborns?

[Angélica Garnica, executive]

Well, I think -- well, as I was commenting before, the percentage of expenses, operating expenses, in relation to sales, we expect to again be in 30%, 29.7%, 29.4% as in the previous year. We don't have a lot of expenses. We were having a lot of savings in energy, in advertisement and other expenses. So we save like MXN 1 billion in overhead. So we are expecting the next following quarters to maybe save only MXN 500 million per quarter. So I think that's what we are expecting. And keep controlling the expenses, but without affecting the service and the image of all the stores.

[Arturo García, executive]

Generally, we are overcompensating the expenses for the COVID with other savings as electricity, marketing, et cetera. But we think no more than 1% of the sales is counting the materials and sanitization, et cetera, because of the COVID. That is not an important problem. In this case, it's more -- the highest problem is the market, the possibility to recover the level of sales. But the cost is not very important, Alejandro.

[Alejandro Azar Wabi, analyst]

Perfect. If I may, can I move to Condumex? Could you give us some color on how much the ramp-up or the capacity utilization looked from April and May to June? And if you are seeing some delays in the ramp-up of new contracts in the automotive segment, does your clients are kicking back new projects until next year or until the end of this year?

[Arturo García, executive]

Fortunately, Alejandro, the automotive industry, specifically our customers that produce mainly cars for the U.S.A., are returning very quickly to the same capacity that -- before of the quarantine.

I can say that June, for example, and July, are almost 90%, 95% of the level that we used to have in January or February. And our expectation is close the year no much more than 5% lower than the previous year. I mean we are seeing an important recovery for the next month.

There's no platform stoppage. Most of our customers are working at 100% capacity -- I mean not 100% capacity, but in accordance with the budget previous to the quarantine, it seems that the car sales in the U.S. are in good level. And now we are working 3 or 4 shifts in the most of our plants, I mean in the harness plants. And we are confident that maybe for this year, 5%, 7% lower than the previous year are going to be our sales.

[Alejandro Azar Wabi, analyst]

That's for the whole Condumex or just the automotive segment? And in USD or Mexican peso?

[Arturo García, executive]

Now -- what -- when I say 5%, 6%, 7% lower than previous year is the whole Condumex.

[Alejandro Azar Wabi, analyst]

Okay. Excellent. That was in peso terms, right?

[Arturo García, executive]

Yes. Because maybe that is important. Other fact that is helping out in this figure is the exchange rate, because 100% of the automotive sector sales and around 35% of the cable sales are in U.S. dollars. Then the exchange rate is helping us in these figures.

[Alejandro Azar Wabi, analyst]

Okay. Excellent. And one more, if I may, on CICSA, Arturo. I understand that the Samalayuca-Sásabe construction has ended. Is there any more CapEx to be deployed on this gas pipeline? And when can we see revenue and EBITDA coming from it during the next quarters?

[Arturo García, executive]

We expect to close the Carso Infraestructura y Construcción this year around 10% higher than the previous year. That is our expectation.

As you say, Samalayuca-Sásabe pipeline is almost finished. I mean maybe in the next 2 weeks, we are finishing the pipeline. But we are beginning the Maya train. We are with the project of platforms. Maybe we are not trying to close with the same gross margin that we had in this quarter, because we have an important effect due to claims that we recover in this semester. But maybe we are going to close around 11% of marginal contribution for this year in more or less 10% in sales higher than the previous year. That is our expectation. And we continue with looking for new bids in Mexico and out of Mexico. That is our expectation in Carso Infraestructura.

[Alejandro Azar Wabi, analyst]

One more, if I may. Sorry, this is the last one. Could you -- do you have a breakdown of which projects are in Mexico, for example, of 100% of sales in CICSA, how much is outside of Mexico?

[Arturo García, executive]

Now outside of Mexico, we have just the highways in Panama. That is, we have -- and in this moment, the 2 projects that we have in Panama are stopping because of the COVID. And we are waiting for a signal from the government in order to continue the projects, the both of them in Panama.

And I mean with a contract, we have just that project in Panama and the rest of our backlog is in Mexico. Well, I'm -- please don't forget that we have different companies out of Mexico to attend the installations to -- for América Móvil. And for example, in the case of Brazil, Colombia, Peru, we are recovering the level. We are already working, and we expect to maintain the level that we used to have the previous year. But our infrastructure projects is just the 2 highways that we have in Panama that now are stopped. Maybe the most important of our backlog is in Mexico due to the train, the Las Varas, Mitla, the platform for Pemex, et cetera.

[Operator]

The next question is from Miguel Ulloa with BBVA.

[Miguel Ulloa Suárez, analyst]

The question would be regarding the backlog. Could you provide us with an idea of how much will be due this year? And how much will be due next year?

[Arturo García, executive]

Miguel, the backlog that we have is for 2 or 3 years, all depends on different situation, I mean permits, engineering, et cetera. But in this year, we are talking about more than [ MXN 40 billion ]. For this year, maybe we are going to take around [ MXN 10 billion ]. And the rest for the next 2 years. I mean we have a backlog from 200 -- sorry, 2021 and 2022. Maybe for the end of 2022, we are finishing the most of the projects that we have now. That is more or less the timing of these projects.

[Miguel Ulloa Suárez, analyst]

That's helpful. And also, if I may, regarding the pipeline of Samalayuca. Do you have an estimate of the income flows for this year?

[Arturo García, executive]

Yes. If we finish the test, because -- we are finishing the construction in this week, next week, more or less, but we have to make test. Then maybe the test is -- took around 2 or 3 weeks more. Maybe in September, we are going to start to invoicing to the CFE. And maybe we are talking about $6 million, $8 million per month of revenue for this project. And in this year, maybe we are going to book sales 4 months, 3 months, all depends of the test and the expectation of CFE. But more or less, we are talking about $24 million, $34 million in this year.

[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 connecting to this call. If you need additional information, you can reach us. Have a nice weekend.

[Operator]

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