Consorcio ARA, S. A. B. de C. V. (ARA) Earnings Call Transcript & Summary

Hello, and welcome to today's first quarter 2025 results conference call and webcast. My name is Leslie, and I will be your event specialist today. [Operator Instructions] Please note that today's conference call and webcast are being recorded. [Operator Instructions] To follow the conference online, please visit https://consarra.transmision.com.mx. The word transmission is with 1 S only. It is now my pleasure to turn today's program over to Alicia Enriquez, Administrative and Financial Director. Please go ahead.

Thank you, Lis. Good morning, and a warm welcome to our conference call on the first quarter 2025 results of Consorcio ARA. This call will be also transmitted via webcast, accompanied by a slide show for visual support. With me on the call to discuss the results are Luis Felipe Ahumada Russek, Vice Chairman of the Board; Miguel Lozano, Chief Executive Officer; and Felipe Loera, Chief Financial Officer. I want to alert everyone that certain statements and comments made during the course of this call will be considered forward-looking statements as defined by the Securities Litigation Reform Act of 1995. Consorcio ARA believes that such statements are based on reasonable assumptions, but there are no assurances that current outcomes will not be substantially different from those discussed today. All forward statements are based on information available to the company on the date of this call. The company is under no obligation to publicly update or revise any forward-looking statements, as a result of new information that may become available in the future. As usual, at the end of our prepared remarks, there will be time for Q&A. We'll wait until then to open the queue for questions. Results for the first quarter of 2025 compared to the first quarter of 2024. We had a very good start to the year, which was reflected in solid results for the first quarter of 2025 with improvement in virtually every financial metric. Revenues totaled MXN 1.85 billion, a growth of almost 16% over the first quarter of last year, while net income came to MXN 179.5, up 25%. Housing revenues came to MXN 1.78 billion for the quarter, a 16.4% increase, and resulted from the sale of 1,442 homes, 6.7% more than in the first quarter of 2024. With this, average price of the homes sold this past quarter was MXN 1,235,700, which is 9.1% higher than the average price in the same period of last year. This increase is attributable mainly to the higher weight of middle income and residential homes in our revenue mix. Breaking down our revenues by segment. Affordable entry-level homes brought in MXN 551.5 million, 7.5% below in the first quarter of 2024, primarily due to the completion of our development that accounted for 32% of our revenues in that segment in the first quarter of 2024. Revenues in the middle income and residential segment performed very well in the first quarter of 2025, a significant double-digit year-over-year growth. Growth in the middle income segment, revenues totaled MXN 863.5 million, a 36.7% year-over-year growth and residential home sales came to MXN 366.9 million, a 20.9% increase. Revenues from other real estate projects in the first quarter of this year came to MXN 65.3 million, a growth of 4.8% compared to the same first quarter of 2024, supported by higher revenues from our Shopping Center division. The revenue mix for the first quarter of 2025, affordable entry-level homes accounted for 29.9%; middle income homes, 46.7%; and residential homes, 19.9%, while the remaining 3.5% came from other real estate projects. The first quarter of 2025, we titled homes worth MXN 176.2 million under the Build with Infonavit Loan or Line Three program. This will be recognized in our results of revenues in a maximum of 6 months, as the homes are delivered. Revenues from titled homes delivered under this program in the first quarter totaled MXN 326.2 million. Most of the homes titled under Line Three were in the affordable entry-level segment. In the first 3 months of the year, operating income totaled MXN 181.8 million, rose 11.8% over the same period of last year. Net income was MXN 179.5 million, a 25% increase and EBITDA was MXN 245.4 million, a growth of 4.3%. The 25% growth at the bottom line was due mainly to the increase in revenues as well as financial income and equity in joint ventures. The operating margin in the first quarter of 2025 was 9.8%, the net margin was 9.7% and the EBITDA margin was 13.3%. This is generating a March free cash flow to the firm was negative by MXN 59 million, mainly because of our investment in inventory, which is necessary to meet our 2025 target. Financial position as of March 31, 2025. As of March 31, 2025, cash and cash equivalents totaled MXN 2.15 billion, 8.2% lower than at the close of 2024 due mainly to the payment of principal and interest on the debt. Accounts receivable ended the first quarter of the year at MXN 673.7 million, 21% higher than December 31, 2024 due to increased volumes of homes titled in the last weeks of the quarter. Accounts receivable turnover was 1.1 months. Total inventories as of March 31, 2025, amounted to MXN 18.48 billion, a slightly 2% increase. On the same date, cost-bearing debt came to MXN 2.59 billion, a 3% decline from the close of 2024. Short-term maturities, meaning debt coming due in the next 15 months, made up 14.4% of cost-bearing debt, and long-term debt 85.6%. As of March 31, 2025, 65.2% of our cost-bearing debt was in the part of ARA 23X and ARA 21-2X note, 12.5% were unsecured bond loan with our [indiscernible] ARA, 13.5% were secured loans for our shopping centers and the remaining 8.8% was lease liabilities. Net debt as of last year was positive by MXN 447.7 million. Leverage ratios remained at optimal level. Cost-bearing debt to EBITDA was 2.47x, the net debt to EBITDA ratio was just 0.43x and the interest coverage ratio was 3.26x. And if we take these ratios of coverage of net interest, meaning interest expense less interest income, it will be 10.65x. On March 12, Fitch Ratings ratified its long-term national-scale rating of A+ for ARA with a stable outlook. At the same time, it reiterated its AA- rating of ARA 21-2X note. According to that agency, ARA's ratings recognize its strategy of maintaining a strong land bank, in addition to its focus on maintaining a solid financial profile with high cash balances and temporary investments and [Audio Gap] expectation that leverage will remain in line with the rating and the company's ability to generate positive free cash flow. This report can be viewed on our corporate website. How did industry perform? According to Mexico's National Institute of Statistics and Geography, and [ Informatics ], in the first 2 months of 2025, [indiscernible] activities, in general, driven by 0.4% compared to the previous year, construction industry growth was 0.5% and the [ business ] sector which includes housing and [indiscernible] grew by 9.5%. According to data from the unified houses registry, growth in the first quarter of the year [indiscernible] under [ 171.1 ] up 10.7% increase from the same period last year. At 28,500 paid for a [indiscernible]. [indiscernible] lending team generally appreciate, based on data from [indiscernible] granted 4,929 loans for the 2 states of [indiscernible] which is a growth of 2.3% compared to the same loans of 2024. This loans were [indiscernible] investment of MXN 9.49 million, up 5.9% growth in the same period. The average size of our new home loan in January of 2025 was MXN 734,000 and 8.5% increase compared to January of previous year. [indiscernible] record of 5 loans in January of this year, 13.8% less than same month of 2024 and we invested in these products MXN 900 million, 3.4% loss. The average size of our loan ramp in the first month of 2025 was MXN 994,000 which was 13.3% higher at the same period of last year. Our commercial bank home financing, in the month of January this year, 5,793 transactions were granted for the appreciation of new [indiscernible] home. At the same point, a 2% reduction compared to the same month of 2024 and investment in these products, MXN 13.96 billion, a 3.1% decrease. The average size of our loan granted in the first month of this year was MXN 2.41 million, 8% higher than in January 2024. In the first quarter of 2025, 66.1% of our revenues came from home finance by [indiscernible], 8.8% from [indiscernible] and the remaining 25.1% come from commercial bank and home [indiscernible] finance. Concluding with the good results, our Shopping Center division also delivered the strong numbers for the first 3 months of the year, with revenues up 6.9% to MXN 125.9 million and net operating income rising 3.5% to MXN 87.1 million. These results were a result to a shopping center that are 100% owned by ARA and are consolidated in our financial statements. Centro San Miguel, Plaza Centella, Centro San Buenaventura, Plaza Carey, uni and mini as well as 50% of Las Americas and Paseo Ventura according to our stake in those properties, which are entered under the equity. Total gross leasable area in our 6 shopping centers and uni and mini shopping centers [indiscernible] The frequency rate as of March 31, 2025 was 93.5%, a very competitive rate. [indiscernible] promotion passed in the annual general stakeholders meeting. [indiscernible] Consorcio ARA stakeholders met for their annual general extraordinary and ordinary meeting. Among the notice [indiscernible] resolutions passed were, Appointment of German Ahumada Alduncin as Chairman of the Board, and German Ahumada Russek as honorary Chairman. Shareholders also welcomed new Board members Luis Felipe Ahumada Rafferty and Claudio Nunez Sanchez de la Barquera, whose participation we are confident will be of great value to the company. We also extend our most sincere thanks to outgoing members, Pedro Alonso Angulo and Raul Robledo Tovi, who are resigning after more than 20 and 10 years of service, respectively. A dividend payment totaling MXN 200 million, equivalent to 29.1% of our 2024 net income. The dividend per share amounts to MXN 0.164218 per share, a yield of 5.13% based on the closing price of 2024, which was MXN 3.20. This dividend is paid out of the [indiscernible] retained earnings from fiscal years prior to 2014 discontinued account and net tax earnings account, which means it's not subject to tax withholding. You may recall that Consorcia ARA has a policy of selling dividend out [indiscernible] to shareholders equivalent to up to 50% of net income from the prior fiscal year, provided that the company has [ sufficient amount ] in the next fiscal earnings account and is generating positive free cash flow. Shareholders are also burdened to approve the cancelation of 4,731,327 shares acquired using the stock repurchase fund, representing 0.39% of our total capital stock. After that cancellation, our capital stock consisted of 1,217,894,226 shares. Conclusion. Although the global economic environment poses daunting challenges, with high volatility and uncertainty, we believe that Mexico's housing industry stands on solid ground. Its fundamentals, sustained housing demand and vigorous mortgage lending, remain firmly in place and should sustain the industry. Furthermore, as one of the strongest companies in the industry, we are deeply committed to supporting the government's valuable initiatives aimed at providing access to decent housing for families that have not yet had the opportunity to purchase a home. We are holding fast to the targets we set at the start of the year and are on the alert for any factor that might either support them or require a change of strategy. Thank you and we will now move on to questions and answers.

[Operator Instructions] The first question from the audio line is from Mr. Jorge Vargas from GBM.

Congratulations on the results. You invested significantly in inventory during the first quarter of the year, leading to a slightly negative free cash flow. Could you share your expectations for inventory turnover in the next quarters? And should we expect positive cash flows towards the second half of the year?

Well, regarding to the free cash flow generation, yes, at the end of the year, we expect to have a positive free cash flow generation, although we have to consider that in this year, we are going to open new projects, 11 considering new phases and 5 are new projects. So we need to continue investing in our inventories. And according to the dividend payment, we expect to pay the dividend during this second quarter soon as we have the exact date, we are going to deliver the notice to the Mexican Stock Exchange, Jorge.

Our next question is from Mr. Andres Aguirre from GBM.

Congrats on the results. We've seen a favorable shift towards middle income and residential segments. Is this trend expected to continue for the remainder of 2025? And additionally, we saw that during the quarter, you had a slight increase in SG&A. Can you talk about the drivers and if you expect this continue for the remainder of the year?

Andres, well, for this year, yes, we expect a greater participation of the middle income and residential segment because [indiscernible] but unfortunately, we have the completion of one of a very successful project in the entry affordable level. The good news is that we already have land, we are going to start -- well, this is a new opening for this year, and we expect to have revenues in the following year, not in this year. So yes, we expect a greater participation of the middle income and residential segment. And yes, Andres, we have more general expenses because as we know, the start of the year is a little slow. So we have to increase promotions and pricing in order [indiscernible] the homebuyer to the cycle. So yes, we have this increase. And also one thing that we have in this first quarter is that in order to be more efficient in terms of our operations, we downsized a commercial division along with the entire team. I mean director, managers, et cetera, so that require us to make severance payments in wages and in advertising and promotions, we saw the higher increases.

We have finished with the conference call questions from the audio lines, and we'll now continue with the webcast questions. [Operator Instructions]

Okay. Well, thank you, Leslie. The first question is from Michel [indiscernible]. I already mentioned that we expect to pay the dividend during this second quarter as soon as we have the exact date, we are going to deliver the numbers. And the second is from Carlos Alcaraz. My first question is about the operating margin for the quarter. Do you expect this to remain the same for the next quarter? And regarding the entry-level programs announced by the government, will you be looking to participate in these programs? Well, Carlos, already I mentioned that we have some extraordinary expenses because we reduced one commercial director so -- and also we have to invest more in advertising. For the following quarters, I would tell you that we expect to recover the operational margin. And yes, we are very happy that now doors are open. So we are exploring some options that has to work with the government. It's a very big goal that the government has, as you know, is more than to provide in the following 6 years to provide 1 million houses. So we are exploring and as soon as we find something with the government, we are going to disclosure to the market. We are very positive on that. Then Michel [indiscernible]. Well, the new members of the Board and the change of CEO, it could change the liquidity policy of the company or we expect to maintain the robust liquidity? No, Michel, I would tell you, well, Ahumada Alduncin, as you know, is son of German Ahumada Russek and also is very convinced that to have a healthy financial position is something mandatory in our housing sector. So no, no, don't worry. And I think that's it. Thank you very much for your interest in Consorcia ARA. Please Leslie, we can finish the call.

That was the last question. This concludes the question-and-answer session for today. Consorcio ARA would like to thank you for participating in today's conference call and webcast. You may now disconnect. conference is over. Thank you.