Grupo Carso SAB de CV

BMV:GCARSOA1

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, everyone, and welcome to the conference call to discuss the third quarter 2018 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. Angélica Piña of Investor Relations.

I will now turn the call over to Ms. Angélica Piña. Please go ahead.

[Angélica Garnica, executive]

Thank you. Good morning, everyone, and thank you for your interest and your participation in this conference call. I will take you briefly through the third quarter's financial results, and then we will take your questions.

During the third quarter of the year, consolidated sales of Grupo Carso grew 7.5%, totaling MXN 23.1 billion. Retail and Industrial were the main driver of these result, posting a 7.1% and 10.6% increase. Infraestructura y Construcción decreased 2.9%, and Carso Energy sales are not represented.

Operating income and EBITDA reduced 5.2% and 4.7%, respectively, with all the regions reducing profitability, mainly due to the sales and projects mix and higher costs. Controlling net income reduced 16.5% due to forex variations.

By division, the sales of Grupo Sanborns reached MXN 11.8 billion. Promotora Musical or iShop/MixUp stood out with higher same-store sales of 26%. Then Sanborns was 4.3% and Sears with 3.1%. A greater technology and electronics shares in the product mix affected the retail gross margin, which decreased 130 basis points to 39.5%.

There was a tighter control of OpEx in the quarter even when we recorded 3 operating expenses for the new Sanborns and Sears integrated store, higher energy rates and provisions on nonperforming loans on the credit portfolio.

Operating income and EBITDA decreased 6.2% and 3.4%, respectively. It is important to emphasize that the Chapter 11 declaration Sears U.S. does not affect the operations of Sears Operadora México S.A. de C.V., which has the rights of use for the Sears brand until 2026. We do not have merchandise assortment problem or shares, IT or management with them. Therefore, we will continue paying 1% of royalties for the use of the brand.

Grupo Condumex reported sales of MXN 7.8 billion, adding MXN 748 million more, which represented an increase of 10.6%. This included higher volumes in telecom cables, harnesses and building wire. Operating income and EBITDA decreased 7.5% and 8.4%, respectively, with margins reducing 220 to 250 basis points due to effects of the copper price as well as additional expenses from higher energy rates and tariff expenses in the automotive new platforms.

On the Infrastructure and Construction division, CICSA posted MXN 4 billion in revenues, decreasing 2.9%. Civil Construction improved its sales. However, we recorded lower revenues in the Pipeline Installation sector due to lesser activity in the construction of the Chihuahua gas pipeline where we expect to recover in the next months.

We also recorded lower revenues at Infrastructure and Construction due to the lack of tenders. The completion of major projects and the fact that the new construction projects, such as a terminal building and Runway 3 of the new international airport of Mexico City and the highway projects in Panama and Nicaragua do not consolidate, and therefore, are not reflected in sales. Currently, only the Emisor Oriente Tunnel is under construction.

For these reasons, operating income and EBITDA decreased 4.7% and 5.9%, respectively.

The backlog reached MXN 13.2 billion, and add MXN 22.3 billion more when considering projects in which CICSA has a participation with other companies to reach MXN 35.6 billion.

Lastly, sales for Carso Energy totaled MXN 20 million related to the production and commercialization of oil in Colombia. The quarterly operating income was a loss of MXN 4 million, while the EBITDA totaled MXN 176,000, both improving from losses of MXN 8 million and MXN 5 million last year.

These results reflect expenses related to the oil rounds for the Carso Oil and Gas won 2 contractual blocks for the exploration and production of hydrocarbons as well as the project costs of the exploration program in 2 geothermal fields. The Waha-Presidio and Waha-San Elizario gas pipelines, where we have a 51% stake, are already receiving sales from gas transportation, however, their revenues are not reflected in consolidated sales. The Samalayuca-Sásabe gas pipeline in Chihuahua continues its construction.

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

[Operator]

[Operator Instructions] Our first question comes from [ Abigail Arellano ] of BBVA.

[Unknown Analyst]

This question was for Arturo. I hope you help me with the following: I will like to know what was the mix of sales and EBITDA per segment in Condumex during this quarter?

[Angélica Garnica, executive]

For the question, you need the EBITDA per -- by sector?

[Unknown Analyst]

Yes. No, in Condumex, mix of sales and EBITDA. Also, I have some questions about if the airport gets canceled, and how it will be -- what has been the contribution of these operation in the EBITDA in this quarter?

[Angélica Garnica, executive]

Okay. Well, in Condumex, we divide our sectors in telecom, automotive and construction. So in the third quarter, operating income was 32.5% telecom, 42.2% automotive and 25.2% construction compared to the previous quarter of 2017 where telecom was 23.4%, automotive was 53.9% and construction 22.5%. That's the operating breakdown of the mix in Condumex.

[Unknown Analyst]

Okay. And about the airport. Can you give me any guidance, please?

[Arturo García, executive]

About the airport?

[Unknown Analyst]

Yes.

[Arturo García, executive]

Well, as you know, in Carso Infraestructura y Construcción, we are just a contractor. A part of our construction, which has 2 projects today. The -- one of the paths of the new airport and the -- mainly in the terminal building. We now are working as the contract is -- it's indicated, I mean, we are working every day and never it's happened. But we know that the new government can cancel the airport. For us, the contract is under the public construction law, we don't have a problem with the present revenues and the present incomes. The problem for us indicates, if the new airport was canceled, with the future revenues. I mean, we don't have financial compromises with financial institutions, et cetera, we just have a construction contract. I -- we hope that the new airport not be canceled, but our main preoccupation is around the future income for the company. And on the other hand, as Angélica committed, these incomes are not consolidated in our financial statements. You just see the mandatory participation. And we're just hoping that the airport not be canceled, but we don't expect a risk for our financial performance at Carso.

[Unknown Analyst]

So you are saying like, for example, the short-term perspective for CICSA is positive?

[Arturo García, executive]

Yes, for CICSA, we don't see an important problem. As you know, we just have the 14% of the construction for the terminal building and 25% for the path. Then we would like to continue with the contract, both if the airport is going to be changed for Santa Lucía or for other place. As the new President says, they are going to move the contract for the new project. Then we are just concentrating to accomplish our present obligations and then see what is going to happen after the construction. We don't see an important risk for CICSA about the airport.

[Unknown Analyst]

Okay. Also, can you -- could you help me -- what about your segment, any guidance on CapEx for 2019?

[Arturo García, executive]

The main of our CapEx around MXN 6 billion is for energy. I mean, the pipeline -- the Precitubo -- the pipeline from Samalayuca-Sásabe and the contractual blocks for the oil explorations camp. And on the other hand, about MXN 3 billion for Grupo Sanborns. It's MXN 2.5 billion, MXN 2.3 billion in Grupo Sanborns from new stores and the regulations. In Condumex, not more than MXN 0.5 billion just for maintenance and to replace some machinery. The main issue for CapEx is Carso Energy.

[Unknown Analyst]

Okay. And my last question will be, how should we expect 2018 per subsidiary?

[Arturo García, executive]

We expect to recover the margins at least 1 or 1.5 points in the case of Condumex because the -- unfortunately, the exchange rate is good for us. I mean, the devaluation is good for us. In this case, we expect to recover the margins in the automotive and telecommunication sector in Condumex. Since I'm going to maintain the same level because we expect to improve the margin of CICSA to next year. This year, I think we are going to maintain the percent margins. Carso Energy, as you know, now has just projects. We are going to improve the margins and the revenues maybe to the next year, at the final of the next year. And I don't know in the case of Grupo Sanborns. Angélica, if you can comment, please?

[Angélica Garnica, executive]

Well, Grupo Sanborns, the fourth quarter of 2017 was really affected by the earthquakes and also the distribution center at Sears. So we expect a recovery in this fourth quarter because we sell 30% of our annual sales in the fourth quarter. So we expect a recovery in same-store sales in all the 4 months to keep Promusa double digit somewhat around 4% and Sears also recovering to achieve a 4%. So I'm – [ performance ] for the year, around 4% to 5% and a recovery in the EBITDA margin of maybe 30 basis points for the consolidated fourth quarter.

[Operator]

[Operator Instructions] As we have no further questions at this time. I would like to turn the call back over to Ms. Piña for any closing remarks.

[Angélica Garnica, executive]

Well, thank you, everyone, again for connecting and hearing the conference. If you have more questions, please contact us by e-mail or by phone. Have a great day.

[Operator]

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