Grupo Argos S.A. (GRUPOARGOS) Earnings Call Transcript & Summary

Good morning to all. I want to thank you for your company today. This conference will be dedicated to present the financial results of Grupo Argos at the end of the second quarter 2023. With us, we have Jorge Mario Velasquez , CEO of Grupo Argos; Alejandro Piedrahita, Vice President of Strategy and Corporate Finance for Grupo Argos; Rafael Jose Olivella, Chief Corporate Affairs Officer of Grupo Argos; and María Clara Aristizábal, Manager of the Real Estate business at Grupo Argos; Pablo Arroyave, CEO -- sorry, CFO for Odinsa and [indiscernible]. On our website, we have available all the information for the quarter together with the presentation we will follow during the call. To download it, you can enter the menu, financial information, the report sections. We are also transmitting this conference via Twitter. Please go to the Slide 3 of the presentation to begin the meeting. Would like to give the floor to Jorge Mario Velasquez , CEO of Grupo Argos.

Good morning to all. We thank you for being with us today. At this meeting to share with you the good results that we've had during the second quarter of this 2023. I would indicate that very similar to the trend that we have had since the beginning of the year. First quarter was -- had very positive results and second quarter continues along that -- those same lines. However, before expanding on these results, we would like to mention the progress is being made in the transaction to transfer our investment in Grupo Argos Food business in exchange for shares of Grupo Sura and Grupo Argos, which was announced on June 16 past. Grupo Argos has been going forward with realizing that transaction. Right now, the company has obtained the corresponding corporate authorizations from its corporation including authorizations related to conflicts of interest from the shareholders' meeting and the approval to proceed with this transaction from its Board of Directors. The transaction has different steps and several of those steps require government authorizations in Colombia and in other countries around the region. We're working very hard because we are committed to moving forward as quickly as possible with this operation in Grupo Argos. Also in the framework of this transaction, S&P Global indicated the performance of this operation would have no impact on the financial indications of Grupo Argos and maintain the highest credit ratings. At the end of the second quarter Grupo Argos has a cash position of close to COP 684 billion, which allows it to meet all these obligations of this transaction and maintain a very sound liquidity position. In the sense, Grupo Argos AAA rating was maintained the highest granted by that entity which is evidence of the organization -- of the organizations' structural soundness in the context of the transaction that we announced to you before. Moving on to the consolidated financial results for the company. The second quarter Grupo Argos managed to maintain a positive trend with double-digit growth rates in its main consolidated figures. Our revenue at end of the quarter at 12.1 trillion, growing 15%. EBITDA closed at COP 3.1 trillion, growing 19%. Net income closed at above COP 1.02 billion, growing 42%. Net income to the controlling entity ended at COP 718 billion, growing 84% of this is. In spite of considerable growth in financial expenditures compared to the first semester of 2022. On our separate and financial statements as well as in the consolidated statements, we had very positive results. This is the result of highlight of -- highlighted results in all our investments as well as the revenue perceived from the sale of Grupo Argos share in Opain after conclusion of the airport vertical with Macquarie. Accumulated revenue for the year was COP 984 billion, EBITDA was COP 763 billion, and net income was COP 704 billion. And all of these figures more than double what we saw in the same period the previous year. This income is achieved in just the first half of the year, it equals over COP 800 per share and is proof of Grupo Argos' capacity to generate value for its shareholders. I would now like to invite you to move to Slide 6. where we will see detailed results for all our businesses. I'm going to start with the Cement business. I suppose announced to the market at the beginning of this year during the quarter, Cementos Argos made a successful progress with a series of initiatives to transfer value to its shareholders. We highlight that the shareholder meeting held on June 22, approved an extraordinary dividend that will allow Cementos Argos dividend to its shareholders this year, the COP 445 billion, that's 15% higher than 2022. On the other hand, thinking about diversifying revenue sources for the company in a region with a lot of growth potential as in Central America and the Caribbean during the quarter. Cementos Argos reached an agreement to evaluate potential structures that will allow it to supply aggregates throughout the Caribbean Basin, including the United States from Costa Rica. Additionally, the company began a project to expand its cement producing capacity by 25% in Dominican Republic and we expect that this will be completed in the remainder of 2023. We should also highlight that in a context of high interest rates, the company's net debt-to-EBITDA ratio has be maintained below 3x, which is proof of the financial soundness of the company. Also 31% of the company's current indebtedness is tied to ESG indicators which ratifies the company's commitment to the idea of achieving profitable growth, considering wellbeing of all its stakeholders. Moving on to results for the quarter, thanks to good operational dynamics. There is still double-digit growth in all its lines. Revenue was COP 3.3 trillion, growing 17% year-on-year. EBITDA close to COP 662 billion or 30% year-on-year. In operational terms in the quarter, cement volumes were 4 million tons, while the Concrete business registered volumes of 1.8 million cubic meters. These are slightly lower figures of those reported last year. But in the midst of a commercial strategy that focuses on the highest -- the most profitable segments for the company maintaining price leadership and expanding margins as a priority for the organization. Results are particularly favorable in the United States region which concentrates over half of the company's revenue and EBITDA currently, where in the course of the year, revenue has grown 50% and EBITDA grown 42%, leveraged by a positive dynamic in the commercial and infrastructure segments in that country as well as very good pricing dynamics for cement in this sector. Likewise, we can highlight the behavior of exports from Colombia, which continue growing in tons of cement exported 14% compared to the first semester, first half of 2022. It should be remembered that with its plants in the Colombia and Caribbean like the Cartagena plant, [indiscernible] plant, both of which have bulk ports. Our cement business has a great capacity to export and connect to the largest growing geographies in the Americas. Now let's look at the energy business. In the face of an El Nino phenomenon, Celsia is prepared in all its businesses to face the climate situation. It has a balanced portfolio that will allow it to manage the impact of this phenomenon and also has generation plans that in have an optimum technical conditions to be able to deal with these climate conditions. Celsia also has guaranteed fuel contracts for the operation of its thermal plants. All of the above is added to its current contracting policy that will allow the company to be capable to assume the consequences that may arise in the market because of this phenomenon. Over 94% of the energy contracted by Celsia is assured under this mode. On the other hand, during the third quarter of the year, we expect that the sale of some of Celsia's assets in Central America will be concluded, which will allow the company to strengthen its liquidity position and reduce its net debt by close to COP 1.6 trillion. With the sale of these assets, Celsia will have the resources and financial flexibility to continue deploying its strategy focused on renewable energy especially solar and wind energy in its different geographies. And it will look for opportunities to strengthen its asset management portfolio, transmission and distribution assets and energy efficiency in other countries in the region. Operating results, you can see on Slide 9. So consolidated revenue of close to COP 1.6 trillion during the second quarter, growing 31% year-on-year and EBITDA that ended the quarter close to COP 481 billion, growing 7%. And if we add to this, the EBITDA that was generated by our platforms, with the expansion of Caoba, C2 Energy, Laurel and the commissioning of the Tesorito plant will be more and more relevant. The EBITDA with the platforms year-to-date closed at COP 1.2 trillion, growing 70% compared to the first quarter of 2022. Tesorito is a [indiscernible] project is a particular highlight, which with thermal generation will be key to provide reliability to the system during the El Nino situation. And year-to-date, this already registered COP 210 billion in revenue and an EBITDA of COP 58 billion. Energy generated for the period close of 1,318 megawatts. However, a reduction compared to the previous quarters, which is explained mainly by a decrease in hydro generation in the framework of operations to be prepared for our potential El Nino phenomenon. Now let's look at roadway and airport concessions business on Slide 10. In the last quarter, Odinsa and Macquarie Asset Management announced its entry to operation of a new platform that will manage airport assets for a value of COP 1.3 trillion. This new partnership between Odinsa and Macquarie confirms the confidence of this global investor and the organization's managements capacity and it's trust in Colombia as an investment destination. Odinsa will manage the platform, that include the airport concessions of El Dorado in Colombia and Mariscal Sucre in Ecuador considered two of the best airports in South America according to Skytrax. The platform may develop new projects and opportunities in the Americas and will continue promoting private initiatives, including the new Cartagena Airport, a project called El Dorado Max and Campo de Vuelo or Flight Field in at El Dorado. Although this transaction prepares Odinsa for powerful growth in the long term. Here, it is worth remembering that with the creation of verticals with Macquarie, the company no longer consolidates most of its assets and this makes its contribution to P&L significantly lower to facilitate and understand the valuation of Odinsa and its platforms through our website. We would invite you to see the new investor kit that we have prepared for this business. It should also be highlight that our Conexión Centro, Centro Connection Private Initiative that improves connectivity within the coffee growing region by completing the dual carriageway -- roadway system submitted to the ANI, the technical study, the financial model and other documents that will allow this project to continue moving forward with its feasibility stage. Let's move on now to the company's operational results. This quarter, average daily traffic on the roadway platform decreased slightly due to decrease of traffic mainly along Autopistas del Café product of the situation with the El Alambrado bridge which collapsed, which we have already mentioned before. In turn the airport traffic continues to improve, passengers mobilized by the airport platform reached 10.8 million last quarter, 6% year-on-year growth. We highlight the good dynamics of Quiport traffic, which allow the airport to recover pre-pandemic traffic levels and which is translated into year-on-year growth of above 25%. And Real Estate returns business. Gross cash revenue was COP 111 billion, growing 31% year-on-year. And EBITDA for the quarter was COP 59 billion, growing 94% year-on-year. After adjusting for divestments, gross cash revenue and EBITDA grew 12% and 31%, respectively. In terms of the same assets for the first semester for the first half of the year, net operating revenue and EBITDA grew 20% and 24%. In total, 43,000 square meters in contracts were renewed and 22,000 square meters in new contracts were entered during the second quarter 2023. At the end of the period, the fund ended with occupation of the non-hotel portfolio of 96%, a decrease of 49 basis points compared to the same period of 2022 and 85 basis points compared to the previous quarter but with very, very healthy levels of occupation. The sector with our greatest revenue growth compared to the second quarter of 2022 was a hotel business which ends with an average occupation of 58% and our medium rate of COP 283,000. RevPAR, or revenue per available room resulting was COP 165,000, which is growth of 6% compared to the previous year that's because specifically [indiscernible] is with highlighting good sales behavior, which surpassed our expectations and generating an increase in variable rates of 34% compared to the same period the previous year. Regarding the real estate business, accumulation in the month of June, the business obtained cash flow revenue of COP 111 billion and EBITDA of COP 49 billion, 14% increase compared to the same period the previous year. This year, most of the deals will be signed in the last month of the year. And so EBITDA is stable in the P&L compared to the previous quarter. Cash flow revenue for the quarter were [ $50 billion ], 12% less than the previous year, but 20% higher if we compare volumes year-to-date. During the quarter, we saw a fall in housing sales throughout the country. This is due to the changes in the way the subsidies are assigned, delays in delivery of subsidies and increasing costs in labor and construction materials. We continue to seek opportunities, optimizing our urban development plans and carry forward and comply with all our commitments to our customers. Despite this market situation, we continue to see a great appetite for our -- for the products we offer. We recently had a call where we received proposals from our clients and that are -- we're 6x what we were offering and will allow us to exceed our original plans for this year. Now let's look at the slide on Slide 17 to look on the consolidated results. Revenue was COP 6.4 trillion during the quarter, which is an increase of 8% compared to the same period 2022. Higher sales levels was translated into growth in EBITDA, which closed the period at COP 1.5 trillion with 12% year-on-year growth. Net income controlling entity for the period ended at COP 313 billion, 36% higher for the same quarter of the previous year. On Slide 18, we can see the variation on the contribution per business to consolidated revenue and EBITDA. On these charts, we can see our improved contributions from the cement and energy business. Thanks to the good operating performance as well as a significantly higher contribution from the concessions business due to nonrecurring revenue related to the conclusion of the airport vertical with Macquarie, which we mentioned earlier. Now let's look at the slide on -- Slide 20 to analyze the evolution of consolidated indebtedness. Grupo Argos consolidated net debt closed at COP 12.1 trillion, 3% more the same period the previous year. Despite a debt that does not increase essentially because of increasing interest rates, net financial expenses increased 58% compared to the second quarter of 2022. Separated results. We can see them on Slide 21. Separation results, so to the consolidated results show positive results. Revenue for the quarter ended COP 55 billion (sic) [ COP 555 million], EBITDA in the quarter at [ COP 409 million ] and net income of COP 357 million, all more than tripling the results for the same quarter of the previous year. Thanks to the cash position with which we end the quarter, Grupo Argos separated net debt, which you can see on Slide 24, ended the quarter at COP 950 billion, a reduction of 8% compared to the same quarter in the previous year. Grupo Argos' cost of debt continues to give way ending the quarter to 10.5% at the end of this quarter, 150 basis points less than the closure, in 2022. Seeing the trends in the CPI, we hope that this will be maintained, which would represent an important relief for the organization's financial expenses, which have significantly increased because of these indexes that have been mentioned before. Additionally, during this quarter, the company has continued to implement its buyback program, measures which we seek to affirm our trust in the business plan and the strategy that is being executed by Grupo Argos and its company. Since the beginning of the buyback program, the company has bought back over 1.2 million ordinary shares and over 245,000 preferential shares. Sustainability, besides excellent financial results Grupo Argos continues moving forward milestones in its mission to always be thinking about sustainable development, together with all its stakeholders between 2018 and 2022. Grupo Empresarial Argos invested over COP 200 billion in works for taxes projects that have benefited over 240,000 people throughout the entire country. On the other hand, the Cauca River, Center for Forest Research and conservation or CIRCA in Spanish, opened its stores on July 21, intending to offer and alternatives to propagate plant material, provide education and research on tropical forests and other ecosystems associated with the middle basin of the Cauca river. This research center required an investment of over COP 2.1 billion and has a capacity to produce 500,000 seedlings a year of major species from the tropical forest in the Southeast of Antioquia, where only 22% of the original plant coverage still remains. Construction of CIRCA was possible, thanks to coordination of efforts and whilst between Odinsa, Grupo Argos Foundation, Comfama, Julio C. Hernández Foundation intends to have a positive impact on water basins in the organization's area of influence. To close this presentation, I would like to highlight 5 fundamental points of this quarter. First, the operational dynamic of all our businesses is very positive and its contributions to consolidated results, continue growing by dual digits -- by double digits. At the end of the quarter, Grupo Argos has a very healthy cash position that gives the organization financial flexibility to perform and implement its strategic plan. Third, the conclusion of the airport vertical business is the realization of that strategic plan, which will additionally leverage future growth. Fourth, during the period, our framework agreement was signed for exchanging shares in the Grupo Nutresa for business. And regarding this, S&P Global indicated, this has no impact on Grupo Argos' financial indicators, and it maintained the highest credit rating for the organization. And fifth, the company is still focused on decreasing its indebtedness. And in future months, its net indebtedness will decrease by close to COP 1.6 trillion with the divestment of certain insistent assets of Celsia to Central America. Finally, our guidance for rest of the year is maintained according to the figures communicated at the beginning of the year. We hope to end the year with consolidated revenue of COP 22 trillion and an EBITDA of over of 5.2 trillion. Now I'd like to give the floor to Juan Esteban to continue with our conversation and any questions you may have. Thank you very much.

[Operator Instructions] Okay. We have the first question from [ Sebastian Luparia ].

I understand that the subsidiaries Cementos Argos is going to leave MSCI. You have been carrying out a buyback. How much more space do you have to buy?

I would like to give the floor to Alejandro Piedrahita.

Thank you very much for your question. In fact, Grupo Argos in the past has been pressing on the secondary market. We have announced something they were public. And this -- the space we have now is very small, very reduced, and we would have to, if we wanted to carry out larger buyback, we would have to use our takeover mechanism. And from the point of view, Cementos Argos, they also announced the possibility to purchasing using certain mechanisms or structures that are still being reviewed depending on the market conditions at a given time. That would be the answer that we would give as we have been given in the past as regards to buyback of Cementos Argos and also mechanisms that Grupo Argos can use in the future.

[indiscernible] asks us the following. What can you tell us about the issue of Decree 0050 on the freezing of toll rates. How have negotiations with the government move forward?

I'd like to give the floor to Pablo Arroyave of Odinsa.

With regarding Decree 0050, we'd like to remind you it was a decree that was enacted by the government in January to not increase toll rates in Colombia. In the case of Odinsa under the private capital fund, we have 4 concessions in Colombia that decree only affected 2 of those 4 concessions. Because Túnel de Oriente which is departmental concessions, we did increase total of rates. And in the case of Autopistas del Café, the decree came out after the increase was complication under the contract and the National Infrastructure Agency agreed to maintain the increase that has been applied. So -- these are clearly affected our Pacifico and Malla vial del Meta. Pacifico also -- already considered reduced collections. So Pacifico, those have been done even before this decree because of the contractual development of the concession, it was already submitted to the ANI. Quarterly records to collect the difference of in the collection that should have been received by the contract versus what should have been collected. So Pacifico's already had a mitigation indication vision, we've already used it. Pacifico already submitted 5 of these records to the ANI and fourth before to be paid and the fifth one is already being paid without any kind of objection. The case of Malla vial del Meta, which is a private investment whose income depends exclusively on the on the tolls collected. And this has effectively affected that contract and in the complementary agreement that was entered to in 2020. It contemplated a reduction of scope in the event certain rates that increased so forth. The administration is doing to date is talking and negotiating with the ANI to define whether this is the only mitigation mechanism or whether there would be a space for other mitigation measures, which are currently under discussion. It maybe use some cash that is now in the trust because of all the historical collections after the renegotiation of that contract. And so -- we're only -- really being affected in Malla vial del Meta and we are currently in negotiations with the ANI to compensate that mitigation. And on the other 3 concessions, either there was no effect or there was other already mitigation. And I'd like to give a macro comment. The country has a discussion because of the something that the Ministry of Treasury mentioned to review this freezing of rates, to be able to guarantee the stability of the concession system. So we need to celebrate those signs that are looking at reestablishing the normal regime for increasing toll rates.

We have the following question from [indiscernible]

Could you give us details on portfolio performance?

Yes, we can share that there was first observation, as you will see on the figures that Alejandro will share with you. There's considerable reduction in the investments from the equity method from the investment that Grupo Argos and Grupo Sura. As Grupo Sura will explain in extensive detail, this has to do with a definition of reclassification of certain investments that Grupo Sura has particularly that was -- has in Grupo Nutresa intending to prepare the structure of its balance sheet to carry out the project of shares -- for shares in Grupo Nutresa. This effect of reclassification simultaneously produces via periods of contingency accounts of a deferred tax which has been moved to the results statement on this. This quarter at its extraordinary charge on Grupo Sura , but Grupo Sura prepared to carry out the share swap under the agreement with JGDB and IHC. I'd like to give the floor to Alejandro, so he can give you the details of the variation between [indiscernible]

Effectively, as you mentioned, if you look at our revenue in Grupo Argos of June '22 versus June '23, from doing business and with the composition of the portfolio, portfolio in COP 58 billion compared to last year. However, when you look at that portfolio, how it's divided is that -- basically that portfolio has 2 main components. The first one is certain dividends that we received [ COP 43 billion against COP 61 billion ]. And the other one, which is the equity method from Sura. It goes from COP 260 million to COP 184 million. So effectively, that difference between these periods generated a drop of close to COP 31 billion, and that means that the delta is a negative delta. That negative deltas what I was mentioning, which Grupo Sura will talk about in detail is due mainly to a reclassification that gives rise to deferred taxes, important deferred taxes, which we will talk about our debt. And as you know, this has accounting effects, not cash flow effects, but they do affect the operational income of Grupo Sura, which under the equity method affects us and it means that we have a reduction of COP 31 million.

We have [indiscernible] is asking the following.

The Grupo Argos buyback program as you mentioned, you said you bought back 1.2 million shares in five months which is low and would not meet the goal from here to 3 years. What is the implementation plan?

Yes, we continue buying the maximum amount allowed under the mechanism that we're using today, which has a limitation of 25%. In that sense volumes will continue growing and the level of buyback that we look forward will also increase. The decision of the Board of Directors is to continue using a personal screen method -- with the [indiscernible] that was possible. And as the market is revitalized and volumes increase, that we will continue to see growth in that demand. The operation, as you mentioned, was suspended for some months. And then restarted recently by -- with authorization from the shareholder meeting, after having proceed with all the issues related to the takeover bids. And I trust that as the market becomes revitalized the volumes will continue to be positive. We will continue to use this mechanism with great commitment. And as we evaluate its performance together with the Board, we will carry out the necessary actions to be able to fulfill our commitment.

Daniel Guardiola is asking the following.

Could you share with us what are your expectations of dividend received for 2023, considering the conclusion of the transaction with Gilinski, greater leveraging of Grupo Sura, and therefore, it's lower payment capacity and the nonexistence of extraordinary contributions from Odinsa, Opain.

Okay Alejandro, you have the floor.

Basically in 2023, we have projected around COP 1 trillion in dividends received. I'm going to a little bit more detail because our revenue for 2023 shows our strong cash flow position. We have estimated additional revenue of COP 248 billion from the real estate that we just received an important inflow from our divestment participation in the -- so from an operating point of view, we are revenue close to COP 1.6 trillion. When you look at the dividend we pay is administrative expenses and taxes, we are close to COP 817 billion. Other buybacks give us an operational cash flow of [ COP 750 billion ], if we look at amortization, et cetera. I will go into all that detail, but in cash flow, what we have stipulated to end 2023 in available cash flow is close to COP 1 trillion in cash. What does this mean? This allows us to have flexibility regarding obligations that could arise given purchasing the share swap [indiscernible] due to the purchase, [indiscernible] which we presented in detail, not just S&P that maintained our AAA rating, but also Fitch looking at cash flow in 2023 with a projection out to 2025, which is what they look at. Our cash flow and our flexibility would be sufficient in any given situation. So regarding your second question regarding the [indiscernible] is that we have the sufficient financial flexibility in the event that we have any variation in the dividends received from certain businesses, which are part of the work that we showed them, which is part of the analysis that the risk rating agencies did which was being looked at, those scenarios, the fluctuations that Grupo Argos could have due to lower revenue from dividends. And what this shows is that due to this excess cash position we have, we have great possibility, great flexibility towards the future. Same line [indiscernible] to follow up on this [indiscernible] if some more information on dividends for next year. From the point of view of the provisions that we're doing in the analysis and in our model [ Daniel ] product of moving into that private equity front model. We do not have stipulated revenue dividends from Odinsa from the airport. And from each of the businesses, what we usually do in the exercise is we do is regarding the dividends received from previous periods. And as we look at the results of the companies, we adjust these to date, with the figures that you see for Cementos and Celsia. What we're seeing is that we would maintain from -- within our model, we would have dividends that are going to be growing alongside inflation and from the other businesses. In our own case, we have -- in the case of Nutresa, we will not receive dividends, and we would as a result of the Sura, that we could have additional compensation. But -- we also run in areas where we might have a reduction in the case of example, Grupo Sura that would still allow us to maintain our dividend payments by Grupo Argos, which is mainly what we were explaining and showing to the risk rating agencies, which was what meant that they maintained our AAA rating.