Grupo Mexico SAB de CV

BMV:GMEXICOB

Earnings Call Analysis

Grupo México Q1 2024: Strong Growth Across Divisions

Grupo México reported a mixed performance for Q1 2024. Revenue reached $3.8 billion, a slight 1.6% decline year-over-year but an 11% recovery from the previous quarter. The Mining Division saw a 6% year-over-year increase in copper production, reaching 268,000 tons. While sales in the mining sector were down 7.4% due to lower commodity prices, the division's EBITDA was $1.47 billion. The Transportation Division experienced a 16.1% rise in sales, driven by exchange rate revaluation, with net income up 25.7%. The company maintains a strong balance sheet with $6.7 billion in cash and approved a MXN 1 per share dividend.

Overview of Performance

Grupo México has demonstrated solid performance across its divisions in the first quarter of 2024. Despite a slight 1.6% decrease in revenue compared to the first quarter of 2023, there was a notable recovery of over 11% sequentially. The quarter's EBITDA totaled close to $2 billion, reflecting a 6.6% decrease year-over-year but a substantial 27% growth from the previous quarter .

Mining Division Achievements

The Mining Division saw significant improvements. Copper production increased by approximately 6% year-over-year, reaching nearly 268,000 tons. This improvement was driven by an 18.7% production increase in Peruvian operations and contributions from the Buenavista Zinc concentrator. Despite a 7.4% decline in sales to $2.82 billion, primarily due to reduced copper, molybdenum, and zinc prices, the division mitigated this with higher sales volumes of copper and molybdenum .

Financial Metrics and Cost Controls

Grupo México maintained disciplined cost controls, with net cash costs for copper at $1.28 per pound, a 10.6% improvement from the fourth quarter of 2023. This improvement was credited to reduced operating costs and increased production. The company's cash position also ended the quarter robustly at $6.7 billion, marking a 1.5% increase from the previous quarter .

Transportation Division Highlights

The Transportation Division showcased strong growth with sales rising by 16.1% to $885 million, driven by favorable exchange rates. EBITDA for this division was $397 million, up by 8.6% year-over-year. However, this division faced a 310 basis point contraction in EBITDA margin, landing at 44.9%, though it saw a solid 21.8% improvement on a quarterly basis. Net income in this division increased by 25.7% year-over-year to $142 million .

Copper Market Outlook

The company provided insights into the current state of the copper market. Despite a decrease in average LME copper prices by 5.4% compared to the previous year, Grupo México expects copper supply to decrease by about 1% this year due to revisions in global production outlook. The company is optimistic, expecting robust demand driven by a resilient U.S. economy and growth from decarbonization technologies and AI. These trends support sustained attractive copper prices .

Infrastructure Division Initiatives

Key initiatives include expanding the Infrastructure Division's presence through the opening of a new office in Peru, strategically positioned to tap into new markets. Infrastructure projects saw an increase in daily traffic on toll roads and a formidable 96.5% occupation rate in drilling rigs. The division’s financial health was highlighted by sales totaling $190 million, marking a 22% year-over-year increase .

Upcoming Projects and Investments

Grupo México is dedicated to significant CapEx investments in 2024, including $491 million allocated for maintenance, growth, efficiency, and special projects. Key projects in the pipeline include the completion of the Buenavista Zinc concentrator, expected to yield significant copper and zinc production, and the Tía María project, projected to produce 120,000 tons of copper cathode annually using environmentally responsible methods .

Guidance and Strategic Decisions

The Board approved a dividend of MXN 1 per share, translating to a 4% dividend yield. Production guidance for Southern Copper was updated to 948,000 tons for the year, a slight increase from previous expectations. This adjustment reflects better execution plans and additional contributions from new projects like Buenavista Zinc and Pilares .

Earnings Call Transcript 2024-Q1

[Operator]

And good afternoon, and thank you for holding. Welcome to Grupo México's First Quarter Earnings Conference Call. With us, this afternoon, are all of Grupo México's top executives, who will discuss the financial performance of the company during the first quarter of 2024 results, giving you a summary of the latest news and addressing any questions you may have at the end of the call.

Before we begin, I would like to remind you that information discussed on today's call may include forward-looking statements regarding the company's results and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to place undue reliance on these forward-looking statements. Grupo México undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

All results are expressed in full U.S. GAAP. [Operator Instructions] A copy of the slides that the company will be reviewing today is available on their website at grupomexico.com. At this moment, I would like to remind everyone that your lines must be in listen-only mode until the question-and-answer session. Now it's my pleasure to hand the call over to Ms. Marlene Finny.

[Marlene de la Torre, executive]

Good afternoon, everyone, and thank you for joining us today for Grupo México's First Quarter Earnings Conference Call. Joining me here today are the [indiscernible] division. As usual, during our call, we will be following a presentation that can be downloaded from our website or follow -- or followed by joining the webcast as well. Today's program can be found on Slide #3.

So I will start with Grupo México ESG highlights, followed by the quarter's score card and financial highlights. Then Mr. Leonardo Contreras, who will provide detailed information regarding our mining decisions, starting with our view for the copper market, followed by the division's main highlights and project updates. After that, Isaac Franklin will go through the financial results mainly events and metrics of our Transportation Division. And lastly, but not least, Mr. Francisco Zinser will comment on our infrastructure division results and relevancy values. And at the end, as usual, the line will be open for any questions you might have and we will be answering that.

I want to start by highlighting that our 3 divisions showcased good results during the quarter. Within our Mining Division, as a result of the Mining Division, materializing Buenavista Zinc, first volumes, and improving copper production quarter-over-quarter. In our Transportation & Infrastructure Division showed double-digit growth in the first -- in their financial results quarter-over-quarter as well during this first quarter 2024. With that being said, let's move on to our main ESG highlights. That is Slide #5.

I'll briefly mention some achievements, but you can also dive deeper into our ESG metrics and achievements on our recently [indiscernible], ESG annual report, that is in our [indiscernible] and you can download and have all the information. It is important to mention that we have been included in the S&P Global Sustainability Yearbook for the third time in a row as we are ranked among the top 15% best-rated companies in sustainability in the metals and mining sector.

On climate action, we received clean energy certificate from one of our energy suppliers in Peru during the first quarter of 2024 as we increased our renewable energy consumption to 36% in 2023. This is always reflecting our 2027 target, which was to ensure that 25% of our -- at least in [indiscernible] electricity supply, who are derived for renewable purchase, we have already achieved our 2027 target this year.

We'll continue with our scorecard on Slide #6, which shows significant recovery versus the fourth quarter of 2023. Revenue in the first quarter of the year reached $3.8 billion. This is a 1.6% decrease versus the first quarter of '23, but a strong recovery of more than 11% on a quarterly basis. Along these lines, EBITDA totaled close to $2 billion. This is 6.6% lower than the same quarter of last year, but more than 27% higher than the last quarter of 2023. Our copper production reached almost 268,000 tons of copper for this quarter.

This is roughly a 6% increase when compared to the last year's first quarter and 1.5% above the fourth quarter of 2023. So we continue to grow out our production. Our net cash cost totaled $1.28 per pound, which is 29% above the first quarter of 2023. Nonetheless, we saw a $0.15 reduction in cash costs, translating into a more than 10.6% improvement when compared to the fourth quarter of last year.

It's important to always have in mind that we continue to have the best cash cost in the copper industry world-wide. Mr. Leonardo Contreras will get into more details for the mining division in a few minutes. Additionally, the Board approved a MXN 1 per share dividend during this quarter, which translates into a roughly 4% dividend yield. On slide -- moving on to Slide #7, you can find our usual summary of financial highlights in case you need it at any point during the call.

And moving on to Slide #8. We show that Grupo México maintained a solid balance sheet with low leverage and a net debt-to-EBITDA ratio of 0.3x. As you might already know, our main -- our debt in mainly issued in dollars, representing 75% of the [indiscernible] debt, while the rest is denominated in Mexican pesos and 95% of our total debt was issued with a fixed rate. On this slide, you can also see the dividend paid from 2022 to 2024 and the [indiscernible] dividend yield, including the MXN 1 dividend approved for this quarter, which will be paid on May 3 before -- [indiscernible] we continue to have a comfortable debt maturity as you can see on slide next, Slide #9, with no payment of over $1 billion until 2035. Our cash position ended the quarter at $6.7 billion, an increase of 1.5% versus last quarter.

Now I will let Mr. Leonardo comment on our Mining Division performance.

[Leonardo Contreras Lerdo de Tejada, executive]

Thank you, Marlene. Good afternoon, everyone, and thank you again for joining us today. I will start with our view of the current copper market, shown on Slide 11. The LME copper price decreased 5.4% on a yearly basis from an average of $4.05 per pound to $3.83 seen in the first quarter of 2024. After several producers announced reductions in copper production, that concerns about potential deficit, displaced market optimism. We now estimate that the copper supply will drop by about 1% this year, shifting our last quarter's view of a slight market surplus for 2024.

In addition to the significant downward revisions to global outlook of copper production for 2024, we are currently seeing strong market demand in the back of our resilient U.S. economy and new demand from decarbonization technologies and artificial intelligence. We believe these new factors will play a significant role in supporting the long-term copper demand, thus sustaining attractive copper prices.

Now let's continue with the Mining Division's financial highlights on Slide 12. Our copper production totaled just short of 268,000 tons, an increase of almost 6% year-over-year and 1.4% quarter-over-quarter, mainly driven by an 18.7% increase in production in the Peruvian operations and the 2,158 tons of copper produced by our Buenavista Zinc concentrator.

Moving on to our financial results on the same slide. Our sales ended the quarter in $2.82 billion, 7.4% lower than the first quarter of 2023 due to a decrease in copper, moly and zinc prices, which we were able to partially offset with higher copper and molybdenum sales volumes. Our EBITDA stood at $1.47 billion, 11.5% lower than the first quarter of 2023 and 33% higher on a quarterly basis. Our EBITDA margin ended the period at 52.2%.

As for our net cash costs, which ended the period at $1.28, a $0.15 improvement, which translates into a 10.6% improvement, mainly due to an operating cost improvement alongside higher production and higher byproduct credits. Now regarding CapEx, we invested $236 million during the first quarter of the year.

I would like to continue talking about our project updates on Slide 13 and 14, focusing first in our short-term projects. In our Buenavista Zinc concentrator located in Sonora, we have already invested $383 million out of the $439 million capital budget. The concentrator already started operations during the first quarter of 2024. We expect to produce more of 54,500 tons of zinc and almost 12,000 tons of copper in 2024 and an average of 90,000 tons of zinc and 20,000 tons of copper per year during the next 5 years.

Our Tía María project with an estimated $1.4 billion capital budget, we'll use SX/EW technology to produce 120,000 tons of copper cathode per year, operating with the highest international environmental standards. We expect to start the construction phase in the near future as we consider essential to move forward with this project to stimulate a sustainable growth cycle given the current economic situation in Peru.

Now let's continue with our long-term projects in the next slide. In Los Chancas, our project in Apurimac, Peru, we continue to engage in coordinated efforts with the Peruvian authorities to eradicate illegal mining activity. Once this process is completed, we will restart the environmental impact assessment, initiate the hydrological and technical studies and start the diamond drilling campaign for 40,000 meters with other additional information on the characterization of the deposit.

Lastly, commenting on our Michiquillay projects. By the end of the first quarter of the year, we had drilled 80,000 meters out of 110,000 plan and obtained almost 28,000 core samples for chemical analysis. The diamond drilling is underway, and we will provide data for cross-section interpretation, geological modeling and resource evaluation.

Now on Slide 15, you can see a summary of all our upcoming projects and the production and CapEx profile, which will lead us to reach us closer to 2 million tons of copper production per year. We are all very excited about this robust pipeline of projects, coming in line, at such a crucial moment for the copper market worldwide. If you happen to have any follow-up questions, we will have [indiscernible] during the Q&A. Now I will let Pak comment on our transportation release.

[Isaac Franklin Unkind, executive]

Thank you, Leonardo, and good afternoon, everyone. Thanks, again, for joining us. Continuing with the Transportation Division on Slide 17, I would like to talk about our financial highlights for the first quarter of the year. Our sales reached $885 million, a 16.1% increase versus first quarter 2023, mainly driven by the revaluation of the exchange rate. Our EBITDA for the quarter totaled $397 million during the quarter, 8.6% above the first quarter of 2023. The EBITDA margin showed a 310 basis point contraction, ending the period at 44.9%. However, on a quarterly basis, our EBITDA increased a solid 21.8%.

As for our net income, we totaled $142 million during the quarter, 25.7% higher than 2023 and 30.7% higher quarter-over-quarter. Volumes increased 5.9% in net tons kilometer, while carloads came in over 10.4% higher than the same quarter of last year.

Now let's continue with the main variation of our revenue on Slide 18. In relative terms, this quarter's subperformance was the intermodal segment, which saw an increase of 16% as we saw higher cross-border volumes, coupled with domestic market share gains. With single-digit growth, we have bulked with 4% growth due to several factors, such as a significant increase in grain shuttle train imports, market share gains in resins imports and chlorine freight, partially offset by a slow start in refined product imports.

Lastly, we have merchandise showing a 1% drop where the automotive volume increased due to better multilevel fleet and new inventory releases was offset by the decrease in industrial, cement and metals, which were impacted by lower domestic beer and finished products. The revaluation of de Mexican peso and lower scrap volumes, respectively.

Moving to Slide 19 to our operating metrics. Firstly, I would like to mention that during the first quarter of '24, we adopted several operating practices in line with the North American Railway standard that will generate improvements in service to serve chain supply in Mexico and the U.S. Average train speed is in line with the first quarter of '23 at 38 kilometers per hour. Dwell time has shown an increase of 17%, mainly due to bottlenecks caused by the aftermath of the migration prices, which resulted in a 6% decrease in car velocity for the quarter.

Crews have registered an increase of 6%, in line with our volume growth. Average train length has decreased by 12% and gross tons per train shows a decrease of 8% for the quarter. During this year, we will continue to focus all our efforts on improving productivity levels and preserving efficiency in all our processes with the purpose of increasing competitiveness in our service.

On Slide 20, you can see our expected CapEx for 2024. As we have commented before, GMXT's Board approved a plan to invest close to $491 million during the year for maintenance, growth, efficiency and special projects. We continue to work intensively on the quality of our track where we invest the most part of CapEx and OpEx. In line with this, almost 62% of the yearly CapEx will be invested in maintenance, including new rail & ties, locomotive overhauls, bridges and servicing through which we also gain efficiency, speed and viability for our service.

Also, we are investing $51 million growth CapEx, including the Pesqueria branch sliding enlargements and the balance Sunbeam Double Track along with sales and marketing projects, which will allow us to deliver the expected growth. Other important special project with $92 million budget allocation that will allow us to continue gaining market share includes the Monterrey and Celaya bypass, the “El Mexicano” tunnel rehabilitation and a safety program.

Lastly, $44.3 million will be invested in our efficiency programs, including truck equipment and enhancing our digital operating system, along with the construction and reconfiguration of yards. This concludes our general overview of the Transportation Division. I will now let Francisco Zinser comment on the Infrastructure Division.

[Francisco Gonzalez, executive]

Thank you very much, Isaac, and good afternoon, everyone. First of all, I want to state that we continue to make progress towards our strategic objectives and growth within all of our business units. Now I will go through the financial highlights of the Infrastructure Division, showcased in Slide #22.

An increase in daily quotas across the 6 drilling rigs, reduced pass-through gas expenses in the energy sector, capacity increase in our Toll Roads, along with better production in construction and the successful integration of our real estate operations, allowed us to continue with the good results with sales totaling $190 million, a 22% increase versus the same period of last year and a 4.5% increase on a quarterly basis.

Our EBITDA netted $89 million, a slight decrease of less than 1% quarter-over-quarter but almost a 5% increase year-over-year, with EBITDA margin standing at 47%. Lastly, net income totaled $10 million. To close the Infrastructure Division highlights, I would like to go through some of our most relevant events, depicted on Slide #23, and noteworthy operational efficiency, 2024. Alongside consistent profitability improvements, allowed Perforadora Mexico to achieve a strong 96.5% occupation rate.

This previously mentioned adjusted daily quotas allowed this business unit to reach $58 million in net sales and $30 million in EBITDA, a 16% and 10% increase, respectively, when compared to the same period of last year. In our Toll Road business unit, increased daily traffic, which was over 3% higher than the previous year, led to a considerable revenue rise. This has played a pivotal role in enhancing the unit's overall profitability with cumulative sales of $18 million and a $12 million EBITDA, surpassing last year's performance.

With the objective of expanding our presence with the new and existing clients of our Engineering business unit, we opened an office in Peru, considered to be a strategic hub to reach new markets. This office began operations during the first quarter of the year and represents the beginning of our expansion strategy to establish a foothold in a region with great potential for infrastructure development and innovation.

Lastly, our real estate business unit continues to be a key contributor to our growth with revenues for the quarter reaching $19 million and an EBITDA of $12 million, a 14% and 30% increase respectively, when compared to the same period of last year. These results were achievable as a result of strong rents and fees, coupled with the enhanced occupancy, which totaled almost 95%. Notably, these figures reflect a 100% incremental for the division, compared to 2023, following the consolidation of real estate data commencing on April 19 of last year.

With this, I conclude a review of the main highlights of the Infrastructure Division. Now I will let Marlene give her closing remarks.

[Marlene de la Torre, executive]

Thank you so much, Francisco, and thank you so much to Leonardo, Isaac and everybody here on your comments on Grupo México. And thank you, everyone, again, for your time and attention. With that impact, we will open the lines for the Q&A session.

[Operator]

[Operator Instructions] One moment for our first question, please. And it comes from Carlos De Alba with Morgan Stanley.

[Carlos de Alba, analyst]

So first question, if I may, Marlene, has to do with the dividend at Grupo México as the concerning shareholder of Southern Copper receiving in shares of Southern Copper instead of cash. Is this something that aligns with the preference of Grupo México, and if not, was there any conversation between the 2 companies and [indiscernible] express the fact that it would receive -- would like to receive cash instead of shares. Maybe you could -- we heard what Southern Copper said, but we would like to hear from the perspective of the controlling shareholder and how do you see this topic? And then I have another question for Francisco, if I can, please.

[Marlene de la Torre, executive]

Sure, Carlos. Well, just the decision of the Southern Copper dividend in share that was -- this is something that the Board -- the Southern Copper Board decide, that was the decision made, and I would comment on this before. And we have a very comfortable position -- of cash position in Grupo México. So in reality, also a decision from the Board of Grupo México dividend [indiscernible] -- it's also a decision that was made last week, and we feel comfortable with the cash position that we have, giving that away and will continue to consolidate the track record we have been constructing for many, many years now in our dividend -- acquired dividend -- not really our strategy is something that the Board decided because of different reasons. But we will see.

[Carlos de Alba, analyst]

Francisco, we have heard that potentially Grupo México is one of the companies interested in Terrafina process. So I wanted to hear from you what -- if there's any comments from the company -- any color that you can share with us? Definitely, the Infrastructure Division has been expanding the acquisition of [indiscernible] last year. And as you mentioned, expanding now into Peru. So any color would be helpful.

[Francisco Gonzalez, executive]

Yes. Thank you, Carlos. What we can say is that we are continuously looking for different opportunities for the Infrastructure division to grow. As you know, and you rightly pointed out last year, we started our first acquisition in the real estate industry, a commercial platform. We also like industrial real estate, and we are continuously looking for different avenues of growth. That's what we can say for the moment.

[Operator]

[Operator Instructions] I'm not showing any further questions in the queue. I will turn it back to management for any final comments.

One moment for our next question and is from the line of Alfonso Salazar with Scotiabank.

[Alfonso Salazar, analyst]

Marlene, the question that I have is more regarding the strategy of Grupo México and what could happen with the shares of Southern Copper, increasing shares that Grupo will receive? Is the plan to increase the position? Is the plan to maintain the position? Anything that you can give us regarding that, considering the big rally that Southern Copper shares have, just wondering if this could be a good opportunity for Grupo México to monetize a fraction of the position there or any other comment that you may have.

The second is, as a controlling shareholder -- controlling group of Southern Copper, do you think this is something that could continue or that Grupo will be willing to continue, meaning more stock dividends instead of cash dividends ahead, basically because of the position -- the cash position that Grupo already has in hand? So those are the 2 questions that I have.

[Marlene de la Torre, executive]

Alfonso, thank you for your question. I think the decision of the Southern Copper stock dividend was mainly decided based on Southern Copper's decision in need. So as a controlling shareholder, it doesn't change our view. I don't -- I think the decision is to maintain the position. It doesn't -- not really a decision made on Grupo México's need, it's more a decision based on Southern Copper as a listed company's need. So I would say we will have reviews, but we are not expecting to do any [indiscernible] changes in the Grupo México position in Southern Copper. So I would say to maintain a position because this is not part of the strategy in Grupo México -- based on Grupo México's need.

As you were mentioning, yes, we have a strong cash position. So that's why we can give dividends and continue to grow our CapEx needs, in addition to that, continue to give dividend. Hopefully, this will continue to be the case. We are generating a strong free cash flow from all of our divisions in the operations. And so that is very controlling for Grupo México. And we -- obviously, as you know, this is something that we do on quarterly basis, so it depends on our cash needs, on our cash generation, CapEx needs and that's how we decide the dividend.

So I don't think -- I cannot tell you anything if this is something that we will continue and it's [indiscernible]. But this was decided this time because of what I have already explained earlier today, we feel, with a very strong position to continue with our track record of Grupo México level because of the cash that we have and the cash generation that we're having from the divisions.

[Operator]

One moment for our next question, please. Okay. It comes from the line of Camilla Barder with Bradesco.

[Camilla Barder, analyst]

Just a quick question on my side. I would just like you to explain a little -- if you could explain a little bit more the reason why you updated your guidance upward for Southern Copper. And also, if you could share your outlook for production for the upcoming years, '25 onwards, it will be great. Thank you.

[Unknown Executive]

Is that for Southern Copper?

[Camilla Barder, analyst]

Yes.

[Unknown Executive]

Our guidance for production is as follows: for this year, 948.8,000 tons; for 2025, 920,000 tons; 2026, 920,000 tons; 2027, 1 million tons; 2028, 1,000,020 tons -- 20,000 (sic) [ 1,020,000 ].

[Camilla Barder, analyst]

Okay. And the reason why you updated your guidance upwards. It was 936,000 previously, now it's 948,000, right? 949,000.

[Unknown Executive]

Yes. It was a little bit lower than what we reported today. Basically, we are relatively prudent in how are we upgrading our forecast. But in this case, we feel confident that we will be able to reach the 948,000 tons that I mentioned before. And one of the reasons for that is that we will -- we are seeing a much better plan execution now than before. So we're having that. We have the positive contribution of additional copper coming from the Buenavista Zinc and the Pilares projects. So that's why we are expecting a much better forecast for the year than what we initially planned.

[Operator]

[Operator Instructions] One moment for our next question, it comes from Sophia Martin with GBM.

[Sofía Martin, analyst]

Regarding the guidance that you just shared on Southern Copper, I was just wondering why would there be lower copper production in 2025 and 2026 than there is in 2024.

[Unknown Executive]

It's mainly due to -- mainly due to lower ore grades at the Peruvian operations. We're working and hopefully, this will not be the case, but that's our current plans.

[Sofía Martin, analyst]

Okay. And could you just share your guidance on Asarco, please.

[Leonardo Contreras Lerdo de Tejada, executive]

Yes, the guidance for Asarco would be around 120,000 tons for next year.

[Operator]

All right. And thank you so much, everyone, for participating in the Q&A. I see no further questions, I'll pass it back to Marlene Finny for final comments.

[Marlene de la Torre, executive]

Thank you so much again for your time and your attention, and thank you, [indiscernible].

[Operator]

Thank you, everyone, for participating in today's conference. You may no disconnect.