Grupo Carso SAB de CV

BMV:GCARSOA1

Earnings Call Analysis

Solid Consolidated Growth Amid Challenges

Grupo Carso reported consolidated sales of MXN 49 billion, marking an 8.3% increase compared to the previous quarter. This growth stems from favorable market conditions, including higher volumes and an 11% improvement in the exchange rate against the previous year's quarter. While Carso’s subsidiaries such as Condumex, Elementia, and Carso Energy significantly contributed to this growth, Grupo Sanborns experienced a modest decline in sales, down 1.5%.

Mixed Operating Income and Margins

Operating income for Grupo Carso reached MXN 5.3 billion, slightly down from MXN 5.6 billion in the preceding quarter, mainly due to increased costs in Grupo Sanborns and Samajal operations. The overall EBITDA for the quarter was MXN 7.2 billion, showcasing a small growth from MXN 7 billion a year ago, although their EBITDA margin took a hit, declining by 80 basis points to 14.7%.

Challenges Faced by Grupo Sanborns

Grupo Sanborns reported total sales of MXN 15.5 billion, with a significant reduction in operating income down to MXN 535 million compared to MXN 1.2 billion from last year. Contributing factors include heightened labor costs due to recent salary increases in Mexico and a reevaluation of credit policies affecting profitability. Conclusively, this division's EBITDA reduced by 39.2%, indicating operational challenges.

Strong Performance in Industrial Division

Grupo Condumex’s sales surged to MXN 13 billion from MXN 10.3 billion year-over-year, largely driven by higher sales of construction and automotive cables. Their operating income and EBITDA improved significantly, reaching MXN 1.4 billion and MXN 1.6 billion respectively, showcasing a robust return on investment in the industrial sector.

Strategic Insight into Backlog and Future Projects

Grupo Carso reported a backlog of MXN 21.6 billion, down 34.2% from MXN 32.8 billion a year prior. The decrease indicates ongoing restructuring and adjustment to previous contracts rather than new governmental projects. However, their strategy remains optimistic, as they aim to maintain involvement in public project biddings expected to open in the upcoming quarters.

Oil and Gas Operations - A Long-Term Vision

The Samajal operation reported MXN 430 million in revenues, reflecting the company's new oil exploration and exploitation in the Ichalkil and Pokoch fields. While current expenditure was noted with a loss of MXN 145 million due to startup activities, management anticipates reaching operational profitability within the next year with plans to produce 70,000-80,000 barrels per day as operations stabilize over the five-year investment horizon of around $1 billion.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, everyone. And welcome to this webinar to discuss the results of the third quarter 2024 of Grupo Carso. Before we begin, I would like to remind you that this event is being recorded, and the 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 Financial Officer of Grupo Carso; Garnia Angelica Pina of Investor Relations, who will take you briefly through the third quarter financial results, and then we will take your questions.

[Angélica Garnica, executive]

Consolidated sales of Grupo Carso totaled MXN 49 billion, growing 8.3% in the quarter. Grupo Condumex, Elementia, Fortaleza and Carso Energy increased its revenues related to positive impacts coming from higher volumes and the exchange rate, which went up 11% versus the same quarter of 2023, improving revenues from dollarized domestic sales, exports and sales operations.

On the other hand, it's important to mention at Samajal, the hydrocarbon operation started to consolidate in sales in this quarter, contributing with additional MXN 430 million. Carso Infraestructura y Construcción and Grupo Sanborns posted 1% and 1.5% reductions, respectively.

Consolidated operating income reached MXN 5.3 billion versus MXN 5.6 billion in the second quarter of 2023. This reflected a lower profitability from Grupo Sanborns and Samajal mainly, and to a lesser extent from Carso Energy related to additional costs and expenses.

EBITDA from July to September 2024 was MXN 7.2 billion over to MXN 7 billion a year ago. The EBITDA margin changed 80 basis points from 15.5% to 14.7% in relation to sales. The consolidated company net income grew 6.9% reaching MXN 3 billion, higher than MXN 2.8 billion last year for better financial results compensated for lower income from operations.

Explaining the performance by division, the total sales of Grupo Sanborns reached MXN 15.5 billion with a 1.5% reduction versus MXN 15.8 billion in the third quarter of 2023. Operating income in Grupo Sanborns totaled MXN 535 million compared to MXN 1.2 billion a year ago. This reduction in profitability was explained by higher costs and operating expenses. EBITDA was reduced 39.2% and net income reached MXN 407 million compared to MXN 458 million in the third quarter of the previous year.

The sales floor remained stable, ending with 448 stores due to the opening of one new Dax store, 1 iShop and the reopening of 3 stores located in Acapulco.

In the Industrial division, Grupo Condumex sales totaled MXN 13 billion versus MXN 10.3 billion in the same quarter of last year. This improvement in performance came primarily from higher sales of construction and automotive cables and harnesses, coupled with an 11% increase in the ForEx rate.

Regarding operating income and EBITDA, these items reached MXN 1.4 billion and MXN 1.6 billion, respectively, a higher profitability compared to MXN 1.1 and MXN 1.25 billion a year ago. [indiscernible] Carso Infraestructura y Construcción sales totaled MXN 10.7 billion. The divisions that have the best performance were manufacturing and services for the oil and chemical industry with additional works in fluids, drilling and oil well reparations onshore and civil construction, which improved due to the progress in construction of retail projects.

The performance, as mentioned before, offset lower volumes observed in infrastructure, where the Train Maya reached its final phase and is currently in administrative closure. And pipelines with lower telecom network installations were recorded. The operating income and EBITDA in CICSA improved 0.3% and 1.3%, respectively. Controlling net income went up 2.6%, totaling MXN 645 million.

The projects currently in place are 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 shopping centers, hospitals, apartment buildings and the conclusion of the Mitla-Tehuantepec highway.

The backlog totaled MXN 21.6 billion compared to the MXN 32.8 billion a year ago or a 34.2% reduction. The sales of Elementia, Fortaleza increased 13.7% from MXN 7.8 billion in the third quarter 2023 to MXN 8.9 billion in this quarter. This was related to higher volumes and the peso appreciation since most of this division's revenues are generated outside of Mexico, either from exports or commodity base, which reflected in the cost of [indiscernible] sales.

Elementia's profitability improved with operating income and EBITDA growing 29.2% and 23.8%, respectively, reflecting cost efficiencies within the supply chain. The sales of Carso Energy totaled MXN 910 million higher than MXN 878 million last year. This was attributable to exchange rate effects in revenues from natural gas transportation services through the pipelines of Waha-Presidio and Waha-San Elizario in Texas USA and the Samalayuca-Sasabe gas pipeline, as well as the revenues recorded in the hydroelectric plants in Panama.

The operating income and EBITDA of Carso Energy were MXN 694 million and MXN 796 million, respectively. The net result totaled MXN 329 million. Lastly, beginning this quarter, the oil operations to explore and exploit the Ichalkil and Pokoch fields in the Campeche coast are being recorded and consolidated within the Grupo Carso numbers, where MXN 430 million in revenues were recorded as Samajal.

Due to startup activities, the operating result was a loss of MXN 145 million. EBITDA totaled MXN 102 million versus a loss of MXN 50 million a year ago.

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

[Operator]

[Operator Instructions] Okay. We have Carlos Alcaraz.

[Carlos Alcaraz Pineda, analyst]

My first question is about Grupo Sanborns. Could you give us more color on the reduction in operating profit? And my second question is about the construction division. You mentioned backlog about -- I don't have -- if you -- yes, -- 21 -- but this backlog is related to the new government projects in Mexico or -- maybe -- and if so, do you release a date when your project will start?

[Arturo García, executive]

Thanks, Carlos, for the questions. Related to the Grupo Sanborns, one of the most important cost that has increased in this division is the labor cost, the personnel cost. As you know, the minimum salaries in Mexico was increased in the last year in an important level and that has an impact in our cost. As you know, Grupo Sanborns has around 47,000 people in its payroll and that has an impact. We are now working in productivity in the way to compensate that salary increase with a better performance of the people because that is a merit that maybe is to continue in the future years.

On the other hand, we are in the end of the process to change the credit models. The current business is very important for Grupo Sanborns. And as you know, we have some problems in the last year, and we are using our policies and the process related to the credit and has certain impact that we hope this is the final quarter in which we have impacts relating the credit.

Related to the construction question, no, the backlog that we are showing now is just with the business that we have now signed we are not considering nothing for this new government. In fact, the new government has a lot of projects that we can participate as trains, highways, et cetera, but not are -- even nothing in the table. Our idea is to participate in the each project that we can have the expertise to get the possibility.

But until now, there's nothing in the -- as a bid or something like that. We think that we are going to have information just for the first or second part of the next year. In this year, we are not seeing nothing new for us in the job, the private business. In that case, the construction civil business is increasing. The installation business is maintained at its level. The only business with the government that we are increasing now is with Pemex. Fortunately, we are recovering some account receivables from them. But the answer is the MXN 21,000 million that we are informing is just for projects already in process.

[Carlos Alcaraz Pineda, analyst]

Okay. And another follow-up question. What percentage of this backlog do you expect to start in the next year?

[Arturo García, executive]

It's important to say that, for example, in the case of installation, which our main customer is Pemex and America Movil Group. We have no long-term contracts signed. I mean we sell around MXN 10,000 million per year, but we have just contracts by 2,000. Then that backlog doesn't represent the total possibility of revenues for this division. In the case of the Mitla-Tehuantepec highway, we are waiting to finish this year. I mean for the next year, we are not having backlog for Infra division.

Our expectation is that, that backlog was around MXN 15,000 million, Carlos, is our expectation. And because we have just an opportunity what is in the case of Pemex because regarding platforms bids, but until now, we have no information, but we have good possibilities to increase our backlog in the Structures and Equipment division. But that is our expectation for the backlog for the sale and backlog.

[Operator]

Emilio, we will open your microphone, you can take your question.

[Unknown Analyst]

My question is regarding the -- your working capital during the quarter. We saw you had an increase in overdue receivables. Could you give us more color on the nature of this change? Was it related to the Pemex receivables you just mentioned? Or does it have to do with the credit strategy on Grupo Sanborns?

[Arturo García, executive]

Yes. We are going to reduce our accounts receivable, mainly in Carso infrastructura y Construccion. We recover accounts receivable from the government related with the Mitla-Tehuantepec highway, around MXN 5,000 million. And in the last quarter, we recovered around MXN 6,000 million from Pemex. As you know, Pemex and that highway is a very important business for us. Now we are calibrating our accounts receivable with them, but that was the main reason. We -- on the other hand, we are increasing our inventories in the retail division in preparation of the end year period. As you know, it is the most important quarter for the retail division. That is the comments about the working capital.

[Operator]

If someone else has another question, we will open your microphone, please proceed. Your microphone is open.

[Unknown Analyst]

The first one would be regarding Samajal. Could you provide some color of what are your expectations going forward? And what should we expect in terms of CapEx and income in coming quarters?

[Arturo García, executive]

Thank you, [ Miguel ]. Related to Samajal that our main operation in process now is Ichalkil and Pokoch -- we have -- the total investment could share around $1 billion in the next 5 years, and that can get around 70,000, 80,000 barrels per day. And -- but now we are analyzing the best way to perform that process. For example, now we have a drill blockage, and we are in process to recover. That means around 8000 million barrels per day -- 8,000 barrels per day. And our expectation is to get black numbers for the third or fourth quarter of the next year. That is our idea. It's a long-term project, but we have a good partner, and we are confident with the results of that. Approved reserves are important, and we are now reviewing as I said, the best way to accelerate that process in this company. That was named PetroBal [indiscernible]

[Unknown Analyst]

Okay. And a quick follow-up, if I may, would be regarding how many barrels are you expecting for next year?

[Arturo García, executive]

We are reviewing the numbers, but we think we can reach around 30,000 per day more or less million (sic) [ barrel ].

[Angélica Garnica, executive]

[Operator Instructions] If there are no additional questions we finish this -- [ Vidal Lavin ] your microphone is now open.

[Alejandro Lavin, analyst]

Hello, can you hear me? This is Alejandro Lavin from Santander.

[Angélica Garnica, executive]

Sorry, yes, okay.

[Alejandro Lavin, analyst]

Just a quick one and maybe more big picture question, looking into next year, especially and looking across all of your divisions. I mean, there has been a lot of talk about near-shoring in Mexico, right? And you certainly have several divisions that could be somehow related to this benefit if we -- all of us believe that this is a longer-term trend that is here to stay, which is at least in my view, this is going to happen. Maybe it's in a pause today, but it should keep going for Mexico in the next couple of years, right? So if you think about nearshoring within your business and within your group, what possibilities do you see in terms of potential projects or benefits that you as a group could benefit from nearshoring?

[Arturo García, executive]

Thank you, Alejandro. Actually, we are having now some benefits of the nearshoring. For example, in the Condumex division, the Industrial division, as you see, we increased our sales 26% in this quarter. Part of that is for the exchange rate, but part of that is for the increase of our sales, mainly in the case of the automotive industry and in the construction cables.

In the case of the construction cables, we are seeing an increase of the demand from the industrial parks or that kind of buildings. And in the case of the automotive sector, we are increasing because of the no plants in Mexico, more demand for the automotive industry. As you know, now the China's issue with the U.S. are helping us to increase our possibilities in Mexico. Now we are seeing in construction and in Automotive division, maybe we can come other benefit in infrastructure or something like that. But now we are seeing possibilities for our Industrial division and our Construction division. That is our cost in that -- regarding the nearshoring, Alejandro.

[Angélica Garnica, executive]

Any additional questions? Nothing? Okay. If there are no further questions, at this time, we thank you for participating in this conference call, and we look forward to speaking with you again. Have a great day.