Grupo Carso SAB de CV

BMV:GCARSOA1

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, everyone, and welcome to the Conference Call to discuss the results of the third quarter 2021 of Grupo Carso. Before we begin, I would like to remind you that the 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 today's conference, we have Mr. Arturo Spinola, 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, Tom. Good morning, everyone. 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. Consolidated sales of Grupo Carso improved 21.9% totaling MXN 30.1 billion. Grupo Sanborns posted a 29.9% increase compared to last year when all department stores and most restaurants were closed from July 1 to August 17, 2020. Condumex stood out by growing 18.3% related to higher cable volumes in the domestic and export markets, combined with higher sales prices in copper. Carso Energy also increased, recording additional MXN [ 780 ] million, sorry, in revenues from gas transportation services from the Samalayuca-Sásabe gas pipeline. Carso Infraestructura y Construcción decreased it's revenue 0.9% due to the completion of the construction of oil platforms and the gas pipeline.

Consolidated operating income decreased from MXN 3.3 billion to MXN 3.1 billion since an extraordinary item of MXN 1.1 billion was recorded last year corresponding to the reassessment of the benefit of the employee plan in the Retail division. Excluding this onetime item, operating income increased 47.1% due to improvement of 110 and 80 basis points in the gross margin and reduction of operating expenses in relation to sales, respectively.

The profitability of Grupo Sanborns decreased 64.3% due to the same extraordinary items, and Condumex [indiscernible] fix decreased 3.4% and 18.7%, respectively. On the other hand, Carso Energy's operating income improved remarkably from MXN 64 million to MXN 735 million due to the beginning of the reception of rents from gas transportation.

Excluding the extraordinary item mentioned, consolidated EBITDA was up 34.4% with an EBITDA margin that increased from 12.3% to 13.6%. The consolidated controlling net income totaled MXN 2.6 billion, reducing from MXN 2.7 billion last year. Excluding the extraordinary items mentioned before, net income increased 65%, reflecting mainly the improved operating results and lower financial expenses due to ForEx positive valuations in this quarter.

Explaining the performance by division, the total sales of Grupo Sanborns were MXN 11.9 billion, increasing 29.9%. These results reflected better mobility from reduction of lockdown measures from July to September this year where Mexico City and the state of Mexico remained between orange and yellow in the epidemiological traffic light, thanks to the continuous progress in vaccination and the reduction of confirmed cases of virus transmission in the population.

There was higher traffic at the stores, therefore, total sales this year grew 44.1%; Sanborns, 45.4%; and MixUp/iShop 6.6% in the quarter. The drivers of sales were big-ticket items, technology, electronics, white line and a gradual recovery was observed in higher-margin categories such as prepared food and fashion.

The retail gross profit increased 34.2% and the gross margin improved from 33% to 34.1%. The operating income total MXN [ 387 ] million compared to a loss of MXN 81 million last year, excluding the extraordinary income. EBITDA improved 135.4% and net income totaled MXN 319 million compared to a loss of MXN 192 million in the third quarter of 2020, excluding the extraordinary income.

Regarding the Industrial division, Grupo Condumex posted an 18.3% improvement totaling MXN [indiscernible] billion. This was due to higher demand in the domestic and export market in cable, combined with higher prices of copper. The Telecom division showed dynamism in copper, fiber optic and coaxial cable, while the Construction division had better sales of energy and power cables regarding volume recovery in most of our plants.

However, the automotive sector, due to the lack of components, decreased auto part sales since there were work and production stoppages at different times during the quarter in our main customers. This effect was additional to a decrease recorded in the exchange rate from MXN 22.2 to MXN 20 per dollar. The operating income and EBITDA of the Industrial division went down 3.4% and 3.3%, respectively, with lower sales in auto parts as well as increases in raw materials, logistics and labor expenses.

Controlling net income increased from MXN 1 billion last year to MXN 1.1 billion this year, driven by effects of foreign variation. Carso Infraestructura y Construcción posted MXN 6.5 billion in revenue, remaining stable with a minus 0.9% variation. The divisions that improved sales were manufacturing and services for the oil and chemical industry with a 9.1% increase from more land drilling contracts for repairing oil wells and the fabrication of equipment for the oil industry. Offsetting the conclusion of the construction of the Maloob-E and Maloob-I oil platforms and remain infrastructure units.

Infrastructure, which increased 53.3% in revenues, including the progress in the construction of the second section of the Mayan train and higher production in Mitla-Tehuantepec highway.

These divisions offset reductions coming mainly from pipeline installations, which fell 10.1% from the completion of work in gas pipelines and from the Civil construction and Housing divisions, which reduced 46.4% and 52.8% in sales, respectively, as work is at a high point of execution last year and now in the final phase.

The operating income and EBITDA in Carso Infraestructura y Construcción decreased 18.7% and 15%, respectively, on lower profitability due to the conclusion of projects and the mix of sales. Controlling net income decreased 12.9%. The projects currently in place are Las Varas-Vallarta and Mitla-Tehuantepec Highways, telecom installation services, equipment for the petrochemical industry and daily services and equipment for the oil industry and the Escárcega section 2 of the Mayan train. The backlog totaled MXN 34.1 billion compared to MXN 45.9 billion a year ago.

Lastly, the sales of Carso Energy totaled MXN 986 million, where additional revenues of MXN [ 718 ] million came from the Samalayuca-Sásabe pipeline being able to provide gas transportation services to the CFE in February of this year when the previous year did not have revenue. The quarterly operating income and EBITDA improved from MXN 64 million and MXN 167.8 million to MXN 735 million and MXN 828 million, respectively.

The Waha-Presidio and Waha-San Elizario gas pipelines in Texas, U.S., 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] And the first question comes from Miguel Ulloa with BBVA.

[Miguel Ulloa Suárez, analyst]

That would be the first one regarding -- you could provide some color on the operating outlook and EBITDA margins that you are expecting for each division in the coming months for 2022, please?

[Arturo García, executive]

Miguel, this is Arturo Spinola. Regarding the operating profit, is that...

[Miguel Ulloa Suárez, analyst]

No, the operating outlook, what do you expecting regarding the sales and revenues and the...

[Arturo García, executive]

Okay. In the industrial sector, we are having some problems because of the lack of the microcomponents. But even with that, we are increasing, as Angélica said. I mean even in the auto part sector, we are increasing in this year 10%, and we expect to close the year with a 2-digit increase regarding 2020. Then our problem in this sector is the margin. The debate of that situation, we are having a higher cost in the logistics and compensating with cost in labor, I mean, productivity because the customers have not -- advising with enough time to the stoppage that they are having, and we are having progress with that.

But we expect, in the second half of 2022, the industry is going to be normalized and we expect to commence that with new platforms that we are now distributing. And we expect to maintain the same level as the last year, I mean, in order to gross margin and increasing the next year around 7%, 8% regarding this year.

And in the cable market, we are not having problems. The copper prices are helping us to compensate certain industries. As the construction sector, that is not increasing as we want both -- in that sector, the sales are increasing in around 40% regarding the last year, and we are expecting to maintain this level for the next year.

Then in the industrial sector, we have good expectations. We are in a good shape, and we expect to recover the margin that we are losing in the automotive sector when the industry get the normal level that as you know, we don't think this year.

Regarding Carso Infraestructura y Construcción, we have a good level -- even when we finished the Samalayuca pipeline the last year, we are now compensating with equipment for the petrochemical industry. We have a lot of -- a good backlog in that sector. And as you know, recently, we won a new bid regarding an oil well. And in that sense, at least, we have backlog for the next 3 years.

And on the other hand, in the infrastructure project, we continue with the Maya train, the 2 important highways. I mean Mitla-Tehuantepec and Las Varas-Vallarta. And that project, at least, is a backlog for this year and the next 3 years. And we are continuing to participate in other bids that the government opened. We are going to participate in the next years, in the next months in a business for Pemex to construction of a platform, important platforms. I mean we are talking about 3 platforms from more than [ 130 in meters ]. And if we win at least 1 of that, we are increasing at least MXN [ 40 billion ] our backlog.

Then Carso Infraestructura y Construcción, I think it's even in a good shape. And we can maintain this level at least for the next 2 or 3 years. And we're expecting the new opportunities in the near future.

Regarding Carso Energy, Carso Energy, as you know, begin with the services CFE in the Samalayuca-Sásabe pipeline that, in that case, we are consolidating in our numbers. And that level is the -- and with Ideal Panama, I mean the electric plant in Panama, the levels that you are -- that we are showing now, we are maintained because we are supported in long-term contracts. Then we expect to maintain that level for the next year. Both with an opportunity, we decided to invest in a compression plant for the pipeline.

I mean we are investing around $80 million. And at least, we are increasing the capacity around 50%. Then we are increased with a lower cost, the capacity of the pipeline. And it's a little difficult to say how much our incomes are growing with that, but I think at least $15 million, $20 million per year in the first year. But all depends on the market and other facts, but we have a good expectation with that CapEx in the energy sector. I don't know, Angélica, if you can talk about the retail sector.

[Angélica Garnica, executive]

Well, regarding the retail sector, as we mentioned, CR grew 44% in this quarter; Sanborns, 45% and MixUp financial 6.6% in total sales. The improvement is going to come from the gross margin because now the Mix is more towards computers, TV screens, mattresses, refrigerators and in white lines, tablets. And less in higher-margin categories of fashion, shoes, perfumes because fashion has been recovering slowly.

So we hope in the fourth quarter, we estimate that this trend will continue. I mean, the recovery, the trend goes so far increasing even compared with 2019. I think all the formats have reached from 60% to 85% of completion compared to 2019, and this is very positive. And this will help recover the operating and EBITDA margins forward as we see more dynamism in prepared food, in restaurants, in fashion for the -- starting in the next quarter. I mean if we consider that last year, we have opened only 73% of the CR stores in very important states of [indiscernible] for example. So we are expecting a recovery in the -- starting in the following quarter as the gross margin recovers and the operating margin as a consequence.

[Miguel Ulloa Suárez, analyst]

That's very helpful. A second one would be, if I may, regarding CapEx for next year and probably 2023, what kind of CapEx should we expect for Carso in general.

[Arturo García, executive]

Miguel, the most important CapEx is the compression station that I said in Carso Energy, that is around $80 million. I'm not sure that we are finished with that in the [ media ], but the most of that $80 million are going to be invested in the next year.

In the case of Grupo Condumex and Carso Infraestructura y Construcción, we are expecting around -- amount $20 million and $30 million more. That is more in order to maintain the level of the machinery and to increase a little the capacity in the automotive sector. That is not intensive in CapEx, but we are investing around $20 million or $30 million. The Carso Infraestructura y Construcción is not projecting an important CapEx just to purchase and maintain certain machinery, maybe around $20 million -- sorry, $10 million, not more than that. And I don't know, Angélica, in case of Grupo samples, do you have the CapEx delivery?

[Angélica Garnica, executive]

Well, I mean, the CapEx would be like MXN 500 million, just like the same as this year.

[Operator]

The next question comes from Alejandro Azar with GBM.

[Alejandro Azar Wabi, analyst]

Angélica, Arturo, just 2 quick questions. One is a follow-up from Miguel. On the compressor, Arturo, for Carso Energy, I guess, we should be expecting income to increase by somewhere between 2023. That's the first one. And the second one is regarding the Line [ 12 ] of the subway, regarding the collaboration and repair agreement that you just -- you recently announced. Is there an estimate as to how this will impact the operation? I guess my question is, if it's a project that will only incur in expenses? And if you could give us some color, if you could. Those 2 are my questions.

[Arturo García, executive]

Okay. Regarding your last point, Alejandro, actually, the total cost of that rehabilitation is for us. I mean, we are not going to have any income above that. It's just cost for our company. And as we said, that is not material. I mean it was material for Grupo Carso, if you see the numbers of the group. We don't have now definitive amount because the project is made by the government and the group that they integrated. As soon as we have the engineering project completed, we can define the number, both in a previous level that we estimate -- we think it's not more than 1% of our sales. That is more or less that our auditors defined in a materiality for Carso Group.

In this case, for our [ auto ] materials is around MXN [ 800 ] million, and we have -- the cost is not going to be more than that, but we don't have yet definitive amount, Alejandro. Please consider that amount just an estimation because we don't have the definitive project from the government. Because they are going to define the approach of the rehabilitation.

[Alejandro Azar Wabi, analyst]

Excellent, Arturo. So just not more than 1% of Grupo Carso sales, right? We can take that.

[Arturo García, executive]

That's it. That's it.

[Alejandro Azar Wabi, analyst]

Okay. Perfect. And regarding the compressor station?

[Arturo García, executive]

The compression station, we are going to invest around $80 million. Maybe more than 1 year investment. I think we are going to begin next year. And maybe for the 2023, we are going to begin with the new income from -- with that investment. And as I said, we expect at least to increase 50% the capacity. And that is around $4 million, $5 million per month. But it is not a fact that we are going to get more customers for that capacity. But at least, we expect to increase $1 million, $1.5 million per month and increase in the next year. We don't have yet the definitive business plan for that, but we are sure that it's going to be a better business than actual pipeline because the cost is lower than the pipeline total cost. Then we are having good expectations with that. I don't know if you have another point about that.

[Alejandro Azar Wabi, analyst]

No, not on this Arturo. But if I may ask another question, you were awarded some contracts with Pemex for around $200 million for turnkey projects and onshore drilling. Are those $200 million already in your -- in the backlog that you announced this quarter, I mean those $34 billion, $35 billion backlog in CICSA.

[Arturo García, executive]

Yes, that is included in the backlog.

[Operator]

[Operator Instructions] The next question comes from Vidal Lavin with BlackRock.

[Vidal Lavin, analyst]

Could you please comment a little bit more about the uses of cash that you are going to have in the future? If you can give us the total amount of CapEx for 2022, it will be helpful. Or also if you can comment a little bit on how much do you plan to buy back shares, pay dividends? And also, we have seen an increase in capital -- in working capital requirements. So it could be helpful if you can give us expectations of the future uses of cash.

[Arturo García, executive]

You mean regarding the CapEx?

[Vidal Lavin, analyst]

Yes, not only CapEx for 2022, if you can give us the total amount for 2022, but also the additional uses of cash that you plan to have maybe buying back shares, paying dividends and also related to working capital, where we have seen some deterioration.

[Arturo García, executive]

Actually, the working capital requirements actually were expenses now. I mean because of the copper price increase and our accounts receivable increase, regarding that, we invest around MXN 2,000 million in working capital in the recent months. But we are not seeing the future more working capital requirement. Maybe we are going to continue with our dividend policy. As you know, we have a pending one for December. I mean around MXN 1,000 million for December. And as was in the last 3 or 4 years, we expect to increase a little for the next year, I mean around MXN 0.96, MXN 0.98 per share. That is an estimation. Then that is the CapEx and the dividend are the main drivers that we can talk about that. Working capital, we don't expect to need to increase the requirements because the copper prices being with decreasing. And as you know, our projects are not investing projects, are construction projects. And we received down payments and mostly payment from our customers. Then that is the most important. [indiscernible].

[Vidal Lavin, analyst]

Maybe just regarding the buyback shares. We have seen that you had increased the buyback around MXN 1 billion, if you plan to continue with that?

[Arturo García, executive]

Yes. Our plan is to continue with that. As you have seen the price, the share price, we are maintaining in a good level. And we think this policy to purchase our shares are having with a good result for the value of that. Then I cannot say, if we are continuing with the policy for more time, but at least for the rest of the year, we have to continue with this policy that is our idea, and we think the value of the shares having a good level than of that.

[Operator]

This concludes our question-and-answer session as there are no further questions at this time. I will now turn the call over to Ms. Piña for any closing remarks.

[Angélica Garnica, executive]

Thank you very much for your time and for connecting to this conference call. We look forward to speaking with you again.

[Operator]

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