Grupo Carso, S.A.B. de C.V. (GCARSOA1) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this webinar to disclose the results of the second quarter 2022 (sic) [ 2023 ] of Grupo Carso. Before we begin, I would like to remind you that this event is being recorded and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Hosting this conference today, we have Mr. Arturo Spinola, Chief Executive Officer of Grupo Carso; and Angelica Pina of Investor Relations. I will be reading the speech before we proceed to the Q&A session. Thank you for your interest and your participation in this webinar. I will take you briefly through the second quarter's financial results, and then we will take your questions. Consolidated sales for Grupo Carso improved 7.2% totaling MXN 48 billion. Carso Infraestructura y Construcción posted a 21.5% increase due to the progress in [indiscernible] and gas pipeline construction, infrastructure projects and higher trading activities. Grupo Sanborns sales went up 11.7% supported by seasonal promotional activities at the department stores. On the other side of the mix, Carso Energy and Elementia decreased sales 15%, 14.5% and 11.2%, respectively, due to the impact in revenues related to ForEx valuations. Consolidated operating income increased 28.5% from MXN 4.8 billion to MXN 6.2 billion with a higher gross margin. Lower costs reduced to 260 basis points even though administrative, selling and other expenses went up. By division, the main profitability came from Grupo Sanborns, Carso Infraestructura and Elementia, reflecting a better product and project mix. Condumex and Carso Energy reduced its operating income 16.1% and 13.4%, respectively. EBITDA totaled MXN 7.6 billion, higher than MXN 6.1 billion a year ago. The consolidated controlling net income posted a slight increase of 0.8%, reflecting mainly the improvement in operating results. Explaining the performance by division, the total sales of Grupo Sanborns reached MXN 16.3 billion, increasing 11.7%. The Father's Day and Mother's Day promotions supported this dynamism as well as the Hot Sale, which lasted 9 days and resulted in double-digit growth in our main retail formats. Operating income of Grupo Sanborns totaled MXN 1.4 billion compared to MXN 1 billion a year ago. This was due to a 150 basis points increase in the retail gross margin from 27.4% to 28% of sales, compensating the increase in operating expenses. EBITDA improved 25.2% and net income reached MXN 932 million compared to MXN 839 million in the second quarter of the previous year. Regarding stores, 1 Sanborns and 1 DACS store were opened during the period. Grupo Condumex decreased 15% its net sales, totaling MXN 11.3 billion versus MXN 13.3 billion in the same quarter of last year. The industrial sector posted higher volumes in harnesses, automotive and energy payables. However, reductions came primarily from the lower volumes of fiberoptic, copper and coaxial cable. These lower performances with volumes were combined with a reduction in the ForEx rate of 11.9%, where the strength of the peso impacted revenues in U.S. dollars. Carso Infraestructura y Construcción delivered an additional MXN 2 billion in revenues, increasing 21.5% at reaching MXN 11.6 billion. The divisions that have the best performance were Manufacturing and Services for the Oil and Chemical Industry where land drilling increased from [indiscernible] directional drilling and repair of oil wells. Pipeline installations, which grew due to telecom projects. Civil construction of hospitals in 3 different cities are starting with construction and thus the infrastructure is showing important volumes in the different projects of this division. The operating income and EBITDA in Carso Infraestructura y Construcción improved 11.2% and 13.1%, respectively. Controlling net income increased reaching MXN 716 million, driven by the sound operating results. The projects currently in place are the Las Varas-Vallarta and Mitla-Tehuantepec highways, telecom installation services, equipment for the petrochemical industry, drilling of deep wells for Pemex, various services and equipment for the oil industry, the construction of hospitals and the Escárcega-Calkiní Section 2 of the Maya Tren. The backlog totaled MXN 31 billion compared to MXN 49.7 billion a year ago. Regarding Elementia, the sales increased 11.2% from MXN 9.3 billion in the second quarter of 2022 to MXN 8.2 billion in this quarter. This increase was due to lower demand in Construsistemas USA and the Metals segments. Elementia's operating income and EBITDA increased 20.9% and 14.1%, respectively, reflecting cost efficiencies in cement and lower distribution expenses in Construsistemas that improved profitability. Controlling net income in Elementia fell 30.5% to MXN 180 million. It is important to remember that since the second quarter of last year, Elementia Materiales and Fortaleza Materiales have been consolidating its numbers with Grupo Carso S.A.B. The sales of Carso Energy dropped 14.5% totaling MXN 902 million. This was attributable to exchange rate effects while volumes improved in the different businesses in the division such as the 2 hydroelectric plants in Panama, the natural gas transportation services through the pipelines of Waha-Presidio and Waha-San Elizario in Texas USA, where we have a 51% participation, and the Samalayuca-Sásabe pipeline. So we have 100% participation. The operating income and EBITDA of Carso Energy went down 13.4%, and 13.2%, respectively. Net income increased 86%. Lastly, in this subsidiary, the construction of the compression station for the Samalayuca-Sásabe gas pipeline will be completed in this period, which will significantly increase the capacity in the following quarters depending on the [ demand ]. With this, I finish my general comments to proceed to the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Alejandro Azar from GBM.

[Foreign Language]. A couple of questions on my end. The first one is on CICSA. You've been having a strong set of results in the past 12, 18 months in line with strong project pipeline, but your backlog is decelerating fast. What do you see in the upcoming quarters or in the coming 12, 18 months for CICSA? My worry is that your EBITDA has almost more than doubled in the past 12 months. How do you see that trend on the size of the business in CICSA? That would be my first question. And the second one, if you could elaborate more on what are you guys doing in Elementia that is proving successful in terms of margins? And where do you see the size of that business in the next 12 to 18 months. And the third and last one is on the compressor station on Carso Energy. You mentioned the start of the commissioning. And how are we going to see the ramp-up in the EBITDA in the sales of that new compressor in Carso Energy? Those would be my 3 questions.

With regard to the CICSA backlog, [indiscernible] experience, it's important to say that really the final backlog of [indiscernible]. Usually we don't include the installation sector backlog because we have no [indiscernible] contract. And this side of the installation sector, for example, just note this year Carso [indiscernible]. I mean it is almost 50% of CICSA and most of that sales are not part of the backlog. The backlog usually is including the infrastructure sector, the oil and chemicals sector, et cetera. Then in [indiscernible] the backlog is increasing but our sales are not increasing, we hope to globally even with [indiscernible] around MXN 35,000 million. And there is [indiscernible] strong sector is going to be almost [indiscernible] because we are finishing our present projects in Maya Tren and the Mitla-Tehuantepec highway, and we will see in the short-term new projects [indiscernible] projects. But in the rest of the sectors, there may be installation and Manufacturing and Services for the Oil and Chemical industry, we are getting new projects. Now we are participating for bids, for the platforms and other equipment. We have around MXN 12,000 million in the Civil Construction sector. You should remember that Civil Construction sector [indiscernible] last 2 years because of the pandemic, but now we are increasing our [indiscernible]. We don't want to get in the same [indiscernible]. We can maintain the present level because of the newer business. And we are increasing our participation in installation sector. And if we [indiscernible] pipeline that CFP is potential, this sector is going to construct that pipeline, then we are not worried about the increase in the backlogs in CICSA. It seems that there is also [indiscernible] in Elementia. In Elementia segment the division is growing [indiscernible] is increasing. There is [indiscernible] in this period increased 20% [indiscernible] because in the U.S.A., the construction sector is decreasing, and it seems that the increase in the rates [indiscernible] but what we are doing is [indiscernible] factories in the [indiscernible] U.S.A. and increasing our [indiscernible] in the South America in which we are a good [indiscernible]. Then as you remember that we committed that the main CapEx for [indiscernible] Carso is in Elementia mainly because we are increasing our capacity and improving our process in order to offer better prices and better products. It is going to be a [indiscernible] because the net market is decreasing in our sector model, we are trying to offer better products in order to recover the market share. And in the case of the metals that we are decreasing more than 20% in this period, mainly it's important to remember that the copper price is around 21% lower than the same period in the last year. The COMEX is decreasing and the exchange rate is decreasing. The [indiscernible] decrease around [indiscernible] is more than 20%, around 28% in metals, that [indiscernible] is a macroeconomic effect because in [indiscernible] in the metals division, we saw copper [indiscernible] the copper price is impacting important way in our performance.

The compressor station.

And finally regarding the compressor station, it will be finished in September -- almost of September both including the [indiscernible] and the liberation of the process in the last quarter must be ready to use. Then we have announced already we signed that capacity and at the end of the year we can see the first results of the [indiscernible] pipeline.

Arturo, if I may, a quick one and an easy one. The returns on your gas pipelines, your IRR, the ones that you calculate before you enter the projects, could you mention those?

The increase of capacity is more than 20% if you see as [indiscernible]. But if you see as EBITDA, it must be more than 85%.

But that's -- okay. So that's -- I mean the Samalayuca ones, the Waha ones, the return that you get by investing [indiscernible] 20%?