Grupo Carso SAB de CV

BMV:GCARSOA1

Earnings Call Analysis

Grupo Carso Reports Solid Q2 2023 Growth

In the second quarter of 2023, Grupo Carso saw consolidated sales rise by 7.2% to MXN 48 billion, with Carso Infraestructura y Construcción leading the charge by a 21.5% increase, driven by various projects and higher trading activities. Grupo Sanborns enjoyed an 11.7% boost, backed by promotions. However, Carso Energy and Elementia faced sales declines by 15% and 11.2%, influenced by ForEx valuations. Despite mixed divisional performances, the group's operating income surged by 28.5% to MXN 6.2 billion, with an improved gross margin and despite increased administrative and selling expenses. EBITDA grew to MXN 7.6 billion. Net income saw a marginal uptick of 0.8%. Notably, Carso Energy plans to complete a compression station that will significantly enhance pipeline capacity, awaiting rising demand. The leadership noted an untroubled outlook on the backlog increase for CICSA and expressed confidence in their industrial sector and Elementia's growth despite market challenges.

Positive Revenue Growth and Operating Performance Highlight Grupo Carso's Second Quarter Results

During its second quarter, Grupo Carso experienced a noteworthy improvement in its financial performance. The consolidated sales saw a 7.2% jump, reaching MXN 48 billion, owing to significant contributions from various segments. Carso Infraestructura y Construcción led the way with a striking 21.5% surge in revenue, propelled by progression in gas pipeline construction, infrastructure developments, and trading activities. In the retail arena, Grupo Sanborns delivered an 11.7% increase in sales, buoyed by effective seasonal promotions.

Challenges Faced by Carso Energy and Elementia Amidst Currency Volatility

However, it wasn't all growth across the board. Carso Energy and Elementia, two of Grupo Carso's divisions, faced some headwinds with sales dipping by 15% and 11.2% respectively. Their performance was particularly impacted by foreign exchange valuation changes.

Rising Operating Income and Margins Signaling Improved Efficiency

Gratifyingly, the obstacles faced by some divisions were counterbalanced by an overall increase in operating income, which soared by 28.5%, reaching MXN 6.2 billion. This was accompanied by a higher gross margin and a reduction in costs, which proved the company's enhanced efficiency despite a climb in administrative and other expenses.

Grup Sanborns and Infrastructure Driving Profitability Amidst Varied Divisional Success

Grupo Sanborns proved to be a standout with its operating income rocketing from MXN 1 billion to MXN 1.4 billion, sparked by a solid retail gross margin increase. Elementia also posted gains in operating income and EBITDA, up by 20.9% and 14.1% respectively, thanks to cost-saving measures. In contrast, Condumex and Carso Energy saw a reduction in their operating income by 16.1% and 13.4% respectively.

Investments and Expansions Setting the Stage for Future Growth

Looking towards the future, Carso Infraestructura y Construcción celebrated increases in operating income and EBITDA, fueled by robust operational results and a series of projects like highway constructions and telecom services. Importantly, the division's backlog stands at MXN 31 billion, despite a reduction from the previous year's MXN 49.7 billion. Carso Energy is also gearing up for growth with the completion of a compression station which is expected to significantly boost capacity in the upcoming periods.

Earnings Call Transcript 2023-Q2

[Angélica Garnica, executive]

Good morning, everyone, and welcome to this webinar to disclose the results of the second quarter 2022 (sic) [ 2023 ] 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, we have Mr. Arturo Spinola, Chief Executive Officer of Grupo Carso; and Angelica Pina of Investor Relations. I will be reading the speech before we proceed to the Q&A session.

Thank you for your interest and your participation in this webinar. I will take you briefly through the second quarter's financial results, and then we will take your questions. Consolidated sales for Grupo Carso improved 7.2% totaling MXN 48 billion. Carso Infraestructura y Construcción posted a 21.5% increase due to the progress in [indiscernible] and gas pipeline construction, infrastructure projects and higher trading activities. Grupo Sanborns sales went up 11.7% supported by seasonal promotional activities at the department stores.

On the other side of the mix, Carso Energy and Elementia decreased sales 15%, 14.5% and 11.2%, respectively, due to the impact in revenues related to ForEx valuations. Consolidated operating income increased 28.5% from MXN 4.8 billion to MXN 6.2 billion with a higher gross margin. Lower costs reduced to 260 basis points even though administrative, selling and other expenses went up. By division, the main profitability came from Grupo Sanborns, Carso Infraestructura and Elementia, reflecting a better product and project mix.

Condumex and Carso Energy reduced its operating income 16.1% and 13.4%, respectively. EBITDA totaled MXN 7.6 billion, higher than MXN 6.1 billion a year ago. The consolidated controlling net income posted a slight increase of 0.8%, reflecting mainly the improvement in operating results.

Explaining the performance by division, the total sales of Grupo Sanborns reached MXN 16.3 billion, increasing 11.7%. The Father's Day and Mother's Day promotions supported this dynamism as well as the Hot Sale, which lasted 9 days and resulted in double-digit growth in our main retail formats.

Operating income of Grupo Sanborns totaled MXN 1.4 billion compared to MXN 1 billion a year ago. This was due to a 150 basis points increase in the retail gross margin from 27.4% to 28% of sales, compensating the increase in operating expenses. EBITDA improved 25.2% and net income reached MXN 932 million compared to MXN 839 million in the second quarter of the previous year. Regarding stores, 1 Sanborns and 1 DACS store were opened during the period.

Grupo Condumex decreased 15% its net sales, totaling MXN 11.3 billion versus MXN 13.3 billion in the same quarter of last year. The industrial sector posted higher volumes in harnesses, automotive and energy payables. However, reductions came primarily from the lower volumes of fiberoptic, copper and coaxial cable. These lower performances with volumes were combined with a reduction in the ForEx rate of 11.9%, where the strength of the peso impacted revenues in U.S. dollars.

Carso Infraestructura y Construcción delivered an additional MXN 2 billion in revenues, increasing 21.5% at reaching MXN 11.6 billion. The divisions that have the best performance were Manufacturing and Services for the Oil and Chemical Industry where land drilling increased from [indiscernible] directional drilling and repair of oil wells. Pipeline installations, which grew due to telecom projects. Civil construction of hospitals in 3 different cities are starting with construction and thus the infrastructure is showing important volumes in the different projects of this division. The operating income and EBITDA in Carso Infraestructura y Construcción improved 11.2% and 13.1%, respectively.

Controlling net income increased reaching MXN 716 million, driven by the sound operating results. The projects currently in place are the Las Varas-Vallarta and Mitla-Tehuantepec highways, telecom installation services, equipment for the petrochemical industry, drilling of deep wells for Pemex, various services and equipment for the oil industry, the construction of hospitals and the Escárcega-Calkiní Section 2 of the Maya Tren. The backlog totaled MXN 31 billion compared to MXN 49.7 billion a year ago.

Regarding Elementia, the sales increased 11.2% from MXN 9.3 billion in the second quarter of 2022 to MXN 8.2 billion in this quarter. This increase was due to lower demand in Construsistemas USA and the Metals segments. Elementia's operating income and EBITDA increased 20.9% and 14.1%, respectively, reflecting cost efficiencies in cement and lower distribution expenses in Construsistemas that improved profitability.

Controlling net income in Elementia fell 30.5% to MXN 180 million. It is important to remember that since the second quarter of last year, Elementia Materiales and Fortaleza Materiales have been consolidating its numbers with Grupo Carso S.A.B.

The sales of Carso Energy dropped 14.5% totaling MXN 902 million. This was attributable to exchange rate effects while volumes improved in the different businesses in the division such as the 2 hydroelectric plants in Panama, the natural gas transportation services through the pipelines of Waha-Presidio and Waha-San Elizario in Texas USA, where we have a 51% participation, and the Samalayuca-Sásabe pipeline. So we have 100% participation. The operating income and EBITDA of Carso Energy went down 13.4%, and 13.2%, respectively. Net income increased 86%. Lastly, in this subsidiary, the construction of the compression station for the Samalayuca-Sásabe gas pipeline will be completed in this period, which will significantly increase the capacity in the following quarters depending on the [ demand ].

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

[Angélica Garnica, executive]

[Operator Instructions] Our first question comes from Alejandro Azar from GBM.

[Alejandro Azar Wabi, analyst]

[Foreign Language]. A couple of questions on my end. The first one is on CICSA. You've been having a strong set of results in the past 12, 18 months in line with strong project pipeline, but your backlog is decelerating fast. What do you see in the upcoming quarters or in the coming 12, 18 months for CICSA? My worry is that your EBITDA has almost more than doubled in the past 12 months. How do you see that trend on the size of the business in CICSA? That would be my first question.

And the second one, if you could elaborate more on what are you guys doing in Elementia that is proving successful in terms of margins? And where do you see the size of that business in the next 12 to 18 months. And the third and last one is on the compressor station on Carso Energy. You mentioned the start of the commissioning. And how are we going to see the ramp-up in the EBITDA in the sales of that new compressor in Carso Energy? Those would be my 3 questions.

[Arturo García, executive]

With regard to the CICSA backlog, [indiscernible] experience, it's important to say that really the final backlog of [indiscernible]. Usually we don't include the installation sector backlog because we have no [indiscernible] contract. And this side of the installation sector, for example, just note this year Carso [indiscernible]. I mean it is almost 50% of CICSA and most of that sales are not part of the backlog. The backlog usually is including the infrastructure sector, the oil and chemicals sector, et cetera.

Then in [indiscernible] the backlog is increasing but our sales are not increasing, we hope to globally even with [indiscernible] around MXN 35,000 million. And there is [indiscernible] strong sector is going to be almost [indiscernible] because we are finishing our present projects in Maya Tren and the Mitla-Tehuantepec highway, and we will see in the short-term new projects [indiscernible] projects.

But in the rest of the sectors, there may be installation and Manufacturing and Services for the Oil and Chemical industry, we are getting new projects. Now we are participating for bids, for the platforms and other equipment. We have around MXN 12,000 million in the Civil Construction sector. You should remember that Civil Construction sector [indiscernible] last 2 years because of the pandemic, but now we are increasing our [indiscernible].

We don't want to get in the same [indiscernible]. We can maintain the present level because of the newer business. And we are increasing our participation in installation sector. And if we [indiscernible] pipeline that CFP is potential, this sector is going to construct that pipeline, then we are not worried about the increase in the backlogs in CICSA.

It seems that there is also [indiscernible] in Elementia. In Elementia segment the division is growing [indiscernible] is increasing. There is [indiscernible] in this period increased 20% [indiscernible] because in the U.S.A., the construction sector is decreasing, and it seems that the increase in the rates [indiscernible] but what we are doing is [indiscernible] factories in the [indiscernible] U.S.A. and increasing our [indiscernible] in the South America in which we are a good [indiscernible].

Then as you remember that we committed that the main CapEx for [indiscernible] Carso is in Elementia mainly because we are increasing our capacity and improving our process in order to offer better prices and better products. It is going to be a [indiscernible] because the net market is decreasing in our sector model, we are trying to offer better products in order to recover the market share.

And in the case of the metals that we are decreasing more than 20% in this period, mainly it's important to remember that the copper price is around 21% lower than the same period in the last year. The COMEX is decreasing and the exchange rate is decreasing. The [indiscernible] decrease around [indiscernible] is more than 20%, around 28% in metals, that [indiscernible] is a macroeconomic effect because in [indiscernible] in the metals division, we saw copper [indiscernible] the copper price is impacting important way in our performance.

[Angélica Garnica, executive]

The compressor station.

[Arturo García, executive]

And finally regarding the compressor station, it will be finished in September -- almost of September both including the [indiscernible] and the liberation of the process in the last quarter must be ready to use. Then we have announced already we signed that capacity and at the end of the year we can see the first results of the [indiscernible] pipeline.

[Alejandro Azar Wabi, analyst]

Arturo, if I may, a quick one and an easy one. The returns on your gas pipelines, your IRR, the ones that you calculate before you enter the projects, could you mention those?

[Arturo García, executive]

The increase of capacity is more than 20% if you see as [indiscernible]. But if you see as EBITDA, it must be more than 85%.

[Alejandro Azar Wabi, analyst]

But that's -- okay. So that's -- I mean the Samalayuca ones, the Waha ones, the return that you get by investing [indiscernible] 20%?

[Arturo García, executive]

Yes, it is around 15%, 20%.

[Alejandro Azar Wabi, analyst]

15%, 20%. Okay.

[Angélica Garnica, executive]

Our next question comes from Miguel Ulloa.

[Miguel Ulloa Suárez, analyst]

The first one would be regarding the Industrial division. Could you provide some color on the telecom segment? And how long do you expect this acceleration to last in the top line going forward?

[Arturo García, executive]

If you know, Miguel, we will see this acceleration. This is most copper price and the exchange rate. As you know, the copper price is around MXN [indiscernible] and exchange rate more than 10% in the [indiscernible] others generally. But we are increasing our volumes in some sectors, in the automotive sector, in the construction sector. The one sector in which we are reducing our volumes is telecommunications. But on the other side [indiscernible] we are now doing projects to increase our capacity, for example, in high-load cables that you can use in the electrical cables. And in the power cables. I mean power for distribution lines, CFE and other utilities. Then when we will see the Mexican peso in a more logical exchange rate, then we will see an increase in our sales because if you see the operating profit as a percentage, we have maintained this because we are [indiscernible] strong our cost, our prices, et cetera. Our problem is the copper price, the exchange rate. And now we have new contracts signed in the automotive sector for energy. We have new purchase order for CFE for [indiscernible]. Then we are confident about the industrial sector even when [indiscernible] reaching our target but recovering from the last year. And if the exchange rate come to better level for the next quarters, we are going to see better numbers because as I said for just the automotive sector, we are increasing just 1%, even when the exchange rate reached 11%. Then we are investing. We have CapEx for this sector, and we are confident about that. Let's see what happens in the next quarters.

[Miguel Ulloa Suárez, analyst]

That's useful. And the second one, if I may, is regarding Sanborns. And recovering the profitability before pandemic levels is something that you foresee in the future? Or is something that it will take a couple of quarters more or probably 2024? How should we think about it?

[Angélica Garnica, executive]

Well, Grupo Sanborns this quarter posted a good growth. But this was supported by the promotions of Father's Day, Mother's Day and mostly in June the Hot Sale. These were 9 days of promotions, where we have in the consolidated basis more than 20% growth. So that was very good. We are taking like advantage of also our credit card. Our NPLs are controlled, like more than the market. And I think it was [indiscernible] happening in the first quarter a result of also using our credit card, it was more credit income and the performance of our department stores mainly, that has been helping in recovering margins, which we expect we can do that until the fourth quarter, so a recovery in margins and supported by the line of credit.

And also by the new formats such as DACS, which opened 1 store this quarter. And I think that's like the result, like more and more traffic at the stores, more use of the credit card. And that's why you see the recovery of the margins in this quarter, and that's what we expect for the -- also in the second semester of this year.

[Miguel Ulloa Suárez, analyst]

That's useful.

[Angélica Garnica, executive]

Another question, please raise your hand and we'll open your microphone. There are no more questions for the session. So we will end this webinar for the moment. You know we are open to receive your calls and your e-mails for any information additional you need. Thank you very much for participating, and have a nice day.