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

Hello, and welcome to today's second 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. During the presentation, we will have a question-and-answer session. To follow the conference online, please visit https://consorcioara.transmision.com.mx. The word transmission is with one S only. If you would like to view the presentation in a full-screen view, please click the full screen button in the upper left-hand corner of your screen. Press the same button to return to your original view. It is now my pleasure to turn today's program over to Alicia Enriquez, Administrative and Financial Director. Please go ahead.

Thank you, Leslie. Good morning, and a warm welcome to our conference call on the second 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 must 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-looking 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 second quarter of 2025 compared to the second quarter of 2024. Operating and financial results in the second quarter of 2025 continue the positive momentum we have seen over the past year. Revenues totaled MXN 2.07 billion, the highest level since the fourth quarter of 2019, alongside positive generation of free cash flow to the firm totaling MXN 218.1 million and came to MXN 129.8 million after interest payments. In the second quarter of 2025, housing revenues came to MXN 1.99 billion, a 10.6% growth compared to the same quarter of last year. These revenues corresponds to 1,613 titled homes, which results in an average price of MXN 1,235,800, a 3.3% increase over the average price reported for the second quarter of 2024. The revenue growth was propelled mainly by the affordable entry-level and middle income segments. In the former [indiscernible] category, sales in the second quarter of 2025 came to MXN 700.2 million, rising 13.6% over the same period of 2024. While in the latter, revenues totaled MXN 882.2 million, 13.3% higher. Residential category sales reached MXN 410.8 million, a growth of 1.1%. Looking at the revenues from homes delivered under the Build with Infonavit Loan or Line Three program between April and June, the total came to MXN 368.4 million. The vast majority of these homes were in the affordable entry-level segment. Revenues from other real estate projects, mainly from the sale of land and shopping center leases, totaled MXN 81.6 million and dropped 4.1% from the second quarter of 2024 primarily due to lower revenues from the sale of commercial land. Looking at the revenue mix in the second quarter of 2025, affordable entry-level homes contributed 33.8%, middle-income homes 42.5%, residential 19.8% and the other real estate projects 3.9%. In the second quarter of 2025, operating income came to MXN 197.2 million with a margin of 9.5%. Net income was MXN 172.0 million with a margin of 8.3% and EBITDA was MXN 288.2 million with a margin of 13.9%. Results for the first half of 2025 compared to the first half of 2024. In the first 6 months of 2025, total revenues, meaning the sum of housing revenues and revenues from other real estate projects came to MXN 3.92 billion, a solid 12.7% [ advance ] compared to the same period of last year. Housing revenues totaled MXN 3.78 billion, an increase of 13.3% and corresponding to the sale of 3,055 homes, with an average price of MXN 1,235,700, 6% higher. Breaking down our sales by housing segment. In January-June 2025, affordable entry-level homes totaled MXN 1.25 billion, a 3.2% growth compared to the same period of last year. Middle-income home sales totaled MXN 1.75 billion, 23.8% higher and residential home sales reached MXN 777.7 million, a 9.6% increase. Revenues from other real estate projects, mainly from the sale of land and from shopping center leases, totaled MXN 146.9 million and were basically stable in year-to-year terms. Looking at the sales mix for the first half of the year, affordable entry-level homes contributed 32%, middle-income homes 44.5% and residential 19.8%, while other real estate projects accounted for the remaining 3.7%. In the first 6 months of this year, operating income totaled MXN 379.2 million with a margin of 9.7%. Net income was MXN 351.5 million and a margin of 9% and EBITDA totaled MXN 542.1 million with a margin of 13.8%. Between January and June 2025, we generated positive free cash flow to the firm totaling MXN 159.0 million. Financial position as of June 30, 2025, cash and cash equivalents totaled MXN 2.19 billion, 6.3% lower than at the close of 2024 due primarily to the payment of debt. Accounts receivable ended the second quarter of the year at MXN 605.0 million, 8.7% higher than on December 31, 2024. Accounts receivable turnover was 29 days. Total inventories as of June 30, 2025, amounted to MXN 18.8 billion, a 3.8% increase over the close of the previous year. As of June 30, 2025, cost-bearing debt came to MXN 2.53 billion, a decline by 5.2% from the balance reported as of December 31, 2024, attributable primarily to the payment of straight unsecured loans. Short-term maturities, meaning debt coming due in the next 15 months, made up 13.8% of cost-bearing debt and long-term debt 86.2%. As of June 30, 2025, 66.8% of our cost-bearing debt was in the form of the ARA 21-2X and ARA 23X notes. 13.3% were simple unsecured loans for our shopping centers, 10.8% were simple unsecured bank loans with our real estate collateral and the remaining 9.1% were lease liabilities. Net debt at the close of the second quarter of this year was positive by MXN 343.9 million. Leverage ratios remain at optimum levels. Cost-bearing debt-to-EBITDA was 2.39x. The net debt-to-EBITDA ratio was just 0.32x and the interest coverage ratio was 3.32x. And if we base this ratio on coverage of net interest, meaning interest expense less interest income, it would be 10.73x. We are proud to share that on April 30, Standard & Poor's ratified ARA's credit rating mxAA minus with a stable outlook, the highest of any publicly traded housing company in Mexico. In its report, the agency said that it expects ARA to remain committed to its strategy of medium-term growth and compensation to shareholders along with its prudent financial policy regarding the use of debt while maintaining a robust liquidity position. This report can be viewed on our corporate website. Housing industry performance. According to Mexico's National Institute for Statistics and Geography, INEGI, as of May 2025, in annual terms, industrial activity in general declined 0.4% compared to the previous year. The construction industry as a whole slowed 1%, while the building subsector, which includes housing and industrial base, grew 3.3%. According to data from the Unified Housing Registry Group, in the first half of the year, 91,581 homes were registered, a 3.9% decrease compared to the same period of last year and 62,070 homes were produced, 2.7% higher than in the first half of 2024. Regarding mortgage lending between January and April 2025, which is the latest information available based on data from the Ministry of Agrarian, Territorial and Urban Development, or SEDATU, INFONAVIT granted 48,964 loans for the purchase of new homes and decreased by 5.7% compared to the same period last year. This loan represented an investment of MXN 38 billion, 8% higher. The average size of a new home loan between January and April 2025 was MXN 775,000, a 14.6% increase compared to the same period of the previous year. Fovissste PORI's [ park] granted 4,087 loans for new homes in the first 4 months of the year, down 19% from the second quarter of 2024. The investment in this totaled MXN 4.1 billion, 6.6% less. The average size of a new home loan granted between January and April 2025 was MXN 1.01 million, a 15.3% increase compared to the same period of the previous year. As for Commercial Bank home financing, in the first 4 months of 2025, 28,129 mortgages were granted for the acquisition of new and used homes, a 9.2% reduction compared to the same period of last year. And the investment in this totaled MXN 67.8 billion, 4% lower. The average size of loan granted between January and April 2025 was MXN 2.41 million, a 5.6% growth compared to the same period of the previous year. In the first half of 2025, 66.2% of our revenues came from homes financed by INFONAVIT, 10.1% from Fovissste and the remaining 23.7% from Commercial Bank and homes purchased without financing. Shopping centers. Mirroring the positive trend in the housing division performance, revenues in the shopping center division in the second quarter of 2025 totaled MXN 131.4 million, an 11.1% growth over the same period of 2024, while net operating income came to MXN 91.9 million, 7.3% higher. Revenues in the first half of the year rose to MXN 257.3 million, up 9% over the first half of last year and net operating income totaled MXN 179.0 million, a 5.4% year-to-year increase. The results correspond to shopping centers that are 100% owned by ARA and are consolidated into our financial statements, Centro San Miguel, Plaza Centella, Centro San Buenaventura and Plaza Carey, uni and mini centers, as well as 50% of Centro las Américas and Paseo Ventura, according to our stake in those properties, which are entered under the equity method. Total gross leasable area in our 6 shopping centers and in uni and mini shopping centers is 212,003 square meters. The occupancy rate as of June 30, 2025, was 94.3%, a very competitive level. Dividends. Consorcio ARA is known for its capacity to generate cash flow, which has allowed it to maintain a policy of dividend payment, which is commendable given the investment-intensive nature of our industry. In this regard, on July 3, the dividend declared in the April General Ordinary Shareholders Meeting was paid out, totaling MXN 200 million, equivalent to 29.1% of 2024 net earnings. The per share dividend was MXN 0.1642304144, a yield of 5.13% on the stock price at the close of 2024, which was MXN 3.20. This dividend was paid out from the net fiscal earnings account as of December 31, 2023, which means it was not subject to tax withholdings. Renewal of market maker contract. On July 2, we renewed our market maker service contract, which we signed in June 2019 with BTG Pactual. This contract will help continue supporting the market liquidity of ARA shares. Sustainability. Our sustainability commitment is fair and comprehensive. As a sign of this, we recently registered 3,687 homes for certification by EDGE, which stands for Excellence in Design for Greater Efficiency, located in the state of Mexico, Guanajuato, Guerrero, Nayarit, Nuevo León, Puebla and Quintana Roo. You may recall that EDGE certification requires a home to be designed in such a way that it saves a minimum of 20% of energy, 20% of water and 20% of energy embodied in materials compared to the local baseline. These homes add to the 5,864 homes already certified, which have shown savings well above the required minimum. We also invite you to consult our 2024 annual and sustainability report, which is available on our corporate website. In addition to discussing ARA's financial performance, the report covers our corporate governance, sustainability, ethics and transparency, the quality of our products and services, the ARA Foundation and our commitment to the environment. It should be noted that our report conforms to Global Reporting Initiatives 2021 guidelines and in accordance required. We also incorporate the Sustainability Accounting Standards Board, SASB, indicators provided by the IFRS Foundation applicable to the real estate and real estate services industry. Conclusion. Looking ahead to the second half of the year, we remain cautious given the volatility that has arisen in the markets and the macroeconomic effects that could affect demand in our industry. At the same time, we remain focused on our strengths and fundamental purpose to allow more families to have their own homes. We maintain the target we set at the beginning of the year, which is to achieve growth similar to that of the previous year. Thank you, and we will now move on to the question and answers.

[Operator Instructions] The first question from the audio lines is from Mr. Anton Mortenkotter from GBM.

Can you hear me there?

Not really, Anton, sorry.

Can you hear me there?

A little better.

Okay. Just one quick question, understanding on the plans that the current administration has with INFONAVIT, we've seen that there were many schemes that were being discussed with housing developers. I was just wondering how those conversations are going? Is there any clarity on what is going to happen and how is it going to play out?

Yes, Anton. Well, as we mentioned at the beginning of the year, we are very excited about the possibility of contributing to the government goals. And we have land reserve, very good business of land reserve, financial solidity, everything to make it happen. We have put forward some projects on the table, some proposals, but they are proposals. We haven't signed any contracts. But as soon as we sign something, we hope it will be soon, we are going to fix [indiscernible] about it. Thank you, Anton.

Our next question is from Mr. Jorge Vargas from GBM.

Just have two questions on my side. SG&A has grown at a double-digit pace during the last 2 quarters, pressuring EBITDA margins below the 14.5% historical average. Should we expect a recovery ahead? Or will these cost pressures persist? And then ARA generated strong free cash flow of MXN 200 million in the quarter, aided by better collections. Was this improvement mainly one-off? Or are there ongoing initiatives to structurally improve cash conversion going forward?

Thank you, Jorge. Those are very interesting questions. Well, talking about expenses, selling expenses increased the most. In an environment of uncertainty, we believe that some customers are postponing their home purchase. So just to help to accelerate their decision, we incurred higher selling expenses through promotions and more frequent advertising. Payroll expenses also increased. Well, honestly, in previous year, we have been holding back inflation-based salary adjustment, and we applied those increases this year. Additionally, and yesterday, we mentioned in the Board meeting in terms of accounting is an expense, but we are investing in strengthening our director team. Now we have a new commercial director and also other technical director because it is very important both position to get the strategy that the new President of the Board has settled. So yes, we know this quarter is an expense. Also, as you know, we have a new CFO. So it looks like an expense, but I'm pretty sure that it's a very good investment in order to improve our results and in order to get the strategy for the next coming 5 years. That is related with the expenses. And talking about generation free cash flow, well, we hope to have a better second half in terms of revenues. So margins will improve. It depends on that. And talking about the generation of free cash flow, we expect but it's going to be modest because we are planning to open new projects, mainly that are necessary to continue our operations in the -- for the following year. So yes, we expect that to have a positive free cash flow generation, but it would be modest. Thank you, Jorge.

Our next question is from Mr. Alex Baez-Sacasa from Neon Liberty Capital Management.

Just a quick question on your expectations for the second half of the year. What is your expectation for the average price? Is it to be flat or down substantially? Or what sort of direction should we be thinking about that?

Alex, thank you very much for your question. It would be MXN 1.2 million, MXN 1.3 million. So it will be an increase of 2%, 3% compared to the previous year.

We have finished with the conference call questions and continue with the webcast questions. [Operator Instructions]

Leslie, well, we have one question from Carlos Alcaraz from Apalache Research. She states, thank you very much for the call and for taking my questions. First, we noticed that general expenses increased by 2.1 points compared to revenue growth. What explains this increase? Also, what do you attribute the decline in the average price of residential housing too? Well, I think, Carlos, that I already explained the performance of our expenses. And regarding your second question, the price of our payment depends on the kind of projects that we have. So it doesn't mean that we have declined the prices of our products, no, in this second quarter. It is related to the kind of projects. You know the amenities, the size of the house, et cetera. So it depends more on the type of houses that we are selling. So there are no more questions in the webcast, Leslie. So I really thank you for your interest in Consorcio. Leslie?

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.

Thank you.