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

Good morning, everyone, and welcome to this webinar to discuss the results of the second quarter 2024 of Grupo Carso. Before we begin, I would like to remind you that this event is being recorded, and the 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 is Mr. Arturo Spinola, Chief Financial Officer of Grupo Carso; and me, Angélica Pina of Investor Relations, who will take you briefly through the second quarter's financial results, and then we will take your questions. Consolidated sales of Grupo Carso totaled MXN 48 billion, remaining stable year-over-year. Grupo Condumex and Elementia Fortaleza increased its revenues, while Grupo Sanborns and Carso Energy sales with impacts coming from the exchange rate, which suffered a 2.9% reduction versus the same quarter of 2023, affecting revenues from dollarized domestic sales, exports and sales from our foreign operations. Carso Infraestructura y Construcción posted a 7.7% reduction due to the conclusion of infrastructure projects. Consolidated operating income reached MXN 5.7 billion versus MXN 6.2 billion in the second quarter of 2023. This reflected the lower profitability for Grupo Sanborns, Carso Energy and Grupo Condumex related to the exchange rate mentioned before. EBITDA from April to June 2024 was MXN 7.4 billion compared to MXN 7.7 billion a year ago. The EBITDA margin changed 50 basis points from 15.9% to 15.4% in relation to sales. On the other side, the consolidated controlling net income reached MXN 4.6 billion higher than MXN 3.4 billion from last year, growing 34.5% or higher financial income compensated lower operating results on last year. Explaining the performance by division. The total sales of Grupo Sanborns reached MXN 15.9 billion with a 2.7% reduction versus MXN 16.4 billion in the second quarter of 2023. Operating income in Grupo Sanborns totaled MXN 897 million compared to MXN 1.4 billion a year ago. This reduction in profitability was explained by a 6% increase in operating expenses. EBITDA reduced 27.2% and net income reached MXN 649 million compared to MXN 1 billion in the second quarter of the previous year. The sales floor increased 0.3% ending with 445 stores due to the opening of one new Dax store and one iShop store. In the Industrial division, Grupo Condumex sales totaled MXN 12.1 billion versus MXN 11.3 billion in the same quarter of last year. This improvement in performance came primarily from higher sales of construction and automotive cables and harnesses, which compensated lower volumes in telecom cables, coupled with a 2.9% reduction in the ForEx rate while the strength of the peso impacted our revenues in dollars. Regarding operating income and EBITDA, these items reached MXN 1.2 billion and MXN 1.4 billion, respectively, compared to MXN 1.3 billion and MXN 1.5 billion last year. Carso Infraestructura y Construcción sales totaled MXN 10.8 billion. The divisions that had the best performance were manufacturing and services for the oil and chemical industry with additional works in fluids, drilling and oil well reparations and single construction, which improved due to the progress in the Star Médica Hospitals in different cities and other retail construction projects. The performance, as mentioned before, offset lower volumes observed in infrastructure, where the Mayan Train reached its final phase and is currently in administrative closure and pipelines where lower telecom network installations were recorded. The operating income and EBITDA in CICSA improved 0.9% and 3.7%, respectively. Controlling net income decreased 2.2% totaling MXN 701 million. The projects currently in place are telecom installation services, equipment for the petrochemical industry, drilling of deep wells for Pemex, various services and equipment for the oil industry, construction of hospitals, shopping centers and the conclusion of the Mitla-Tehuantepec highway. The backlog totaled MXN 27.8 billion compared to MXN 31.2 billion a year ago. The sales of Elementia Fortaleza increased 4.7% from MXN 8.3 billion in the second quarter of 2023 to MXN 8.7 billion in the second quarter of 2024. This was related to dynamism in the cement demand in the U.S. and Mexico, compensating sales in the Construsistemas segment, which suffered the effects of the peso appreciation since most of these additions revenues are generated outside of Mexico, either from exports or commodity based. Elementia's profitability improved, where operating income and EBITDA grew 24.1% and 18.0% respectively, reflecting cost efficiencies in the cement sector. The sales of Carso Energy totaled MXN 796 million lower than MXN 902 million from last year. This was attributable to the exchange rate effects in the revenues recorded in the hydroelectric plants in Panama and in the Samalayuca-Sásabe gas pipeline, while revenues from natural gas transportation services through the pipelines of Waha-Presidio and Waha-San Elizario in Texas, U.S. remains strong. The operating income and EBITDA of Carso Energy were MXN 617 million and MXN 709 million, respectively. The net result totaled MXN 283 million. In this subsidiary, the construction of the Centauro del Norte gas pipeline started. Having signed an investment agreement with the CFE for the construction of 416 kilometers to connect the Samalayuca-Sásabe gas pipeline in Baja, California. Lastly, 2 relevant events were released regarding the new hydrocarbons division of Grupo Carso, where the PetroBal Operaciones Upstream was formally acquired to explore and exploit the Ichalkil and Pokoch fields in the Campeche coast to work together with Fieldwood Energy and where we have already reported the assets in this quarter. Additionally, the relevant event of the Lakach field to provide gas infrastructure comprehensive services with banks maintaining ownership of the field and its reserves and estimated production in the next 2.5 years. With this, I finish my general comments to proceed to the Q&A session. Thank you.

[Operator Instructions] The first question comes from Carlos Alcaraz.

Congratulations on the results. I have two very specific questions. The first one is about PetroBal. Will the results be consolidated in Carso Energy? Or will there be a new division for this company? And regarding the good results in Condumex, do you expect this trend to continue? Or could it be affected by the U.S. election?

Regarding the results of PetroBal, we are designing a new division, the hydrocarbons division PetroBal [indiscernible] and the next investment in that sector is not going to be as the Carso Energy, moved to a new division in this quarter. I mean, we consider the result of PetroBal in June 2024. On the other hand, we have no expectation with the election in the U.S. for Condumex. The matter is what makes it the exchange rate. I think that the market has discounted the situation, the political situations, but we don't know what has been seen -- seen between Mr. Trump or Mrs. Kamala right now which seem to be the candidate but we don't -- we are not very confident with that. But as you know, almost 80% of our expedition is for LatAm, not for the U.S., then the exchange rate is our concern, not the [indiscernible] political situation in it.

Our next question comes from Alejandro Azar of GBM.

I have 4 questions. If you -- if I may, I can go each one by one or I can tell the 4 at once. I don't know how do you want me to proceed?

Please, one by one, Alejandro.

So the first one, Arturo is on Sanborns. This is the third quarter that we've seen a decline in operating income or an increase in expenses. Angélica, you mentioned that a 6% increase in operating expenses was what drove EBITDA down 30%. Could you guys be more specific in terms of what is happening with Sanborns because our guesstimate or our view is that there are credit losses in the business and all the growth that you guys saw in the past 2 years, it's not coming to fruition or you're not getting paid on your credit portfolio. Could you be -- or what is the margin that we should take for Sanborns because we're seeing margins close to 8%. That would be my first one.

Yes, Alejandro. We just finished implementation of a new software to control the credit portfolio of Grupo Sanborns. And even we found some problems, we have recognized that. I think the last [ charge ] about our credit problem as a result of the changes that we made in the political, in the Sanborns, et cetera. In this case in Claro Shop, we are impacted with some cancellation of credits because we think that this is the last quarter, which we will have to be impacts about the credit problem that we are resolving. And on the other hand, we have some impacts in the wages, salaries and personnel. As a result of the increase in the minimum salary, we have reviewed our salaries and will have some impact, but is -- I think we are going to come to the 9% margin at the end of the year because this problem with the credit situation has finished. That is our expectation. That is the situation there, Alejandro.

Okay. Arturo. And the next one is on Carso Energy. Is -- are we seeing 100% of the compressor station revenues in the second quarter?

We recorded the new tariff with CFE since June as a contract loan, will be done in May or in May 2 or 3 weeks, but in June, we are recognizing that 100% of the new tariff regarding the station.

Okay. So you think that with -- for a third quarter, and I understand that Panama Hydroelectrics are really volatile. But we should expect like EBITDA to at least stabilize in terms of growth or declines?

That is correct, Alejandro. That is correct. It is our expectation.

Okay. And the next two, Arturo, are on CICSA. The first one is, what is making the -- the business segment of manufacturing and services for the oil and gas industry increase 50%. And how are we going to see the new MXN 1.2 billion of services that you're going to do with Pemex? Are we going to see that here or in the new division with PetroBal?

No. In this quarter, specifically, we have some benefits for claims that we made in the past, and we take in this quarter of around MXN 800 million we are recognizing or if not for the rest of the year, is just onetime effect, but on the other hand, we are going to have more service in this division regarding PetroBal regarding [indiscernible] and regarding Lakach, but we are going to see that maybe for the next year.

And how should we account for that MXN 1.2 billion, Arturo? I mean the services contract with Pemex regarding the gas field. Is that the -- I don't know what to say because that was the investment that you were going to do. Should we think of an internal rate of return of 20%, 18% on that.

It's important to say that the owner of the assets of the investment is going to be Pemex, For [indiscernible] a service contract, okay? Then to do all the infrastructure that need Pemex, we are going to invest around $600 million more or less. The rest to reach the MXN 1.2 billion is OpEx, okay? And the infrastructure. I mean in 2.5 years, we are going to begin the recovery of our investment, okay? That is the...

Okay. So first -- so if I understand correctly, the next, let's say, 18 months to 24 months, we're going to see CapEx and OpEx on Grupo Carso side. And then you're going to start receiving revenues from 2 years and onwards.

That is the idea. I mean the -- at first [indiscernible] we are going to have an impairment that we are going to recognize a total account receivable, okay? Because it is not our asset. It is an asset to Pemex, not for us, okay? Then is a kind of account receivable among us and Pemex.

Okay, Arturo. And the last one is a bit tricky on my side. And I just want to understand on CICSA, the sales and backlog, and help me with this, if I'm not doing the math or understanding the operations correctly. The backlog during the last 18 months, and I mean the first quarter of 2023 to 2024, the second quarter, the backlog has come down from MXN 33 billion to MXN 27 billion. So it's practically flat. But during that span, you have generated MXN 65 billion in sales. So if I understand, you are, let's say, doing your backlog, but at the same time, getting new contracts that make your backlog state at the same level. So how should we understand this? I mean it seems that you are gaining contracts -- short-term contracts that you are able to monetize pretty rapidly.

Yes. For example, in the installation division, that means around 30% of [indiscernible]. We don't have long term contracts. We just have short-term contract and that division invoiced around MXN 40,000 million per year. Then you can see that the backlog [indiscernible] division is not as the same that happens in the infrastructure sector. Then on the other hand, it is very simple in the case of the drilling sector. We just finished our contract with Pemex, but we continue with different agreements to renew that contract. But we don't have a new contract, We are now negotiating the new contract. Then the backlog doesn't shows the total expectation of CICSA because just in the infrastructure division and the civil construction division will have long-term contracts. In the rest of the divisions, we have short-term contracts and we continually renovating with our customers. That is the situation.