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Edited Transcript of GCARSOA1.MX earnings conference call or presentation 21-Feb-20 4:00pm GMT

Q4 2019 Grupo Carso SAB de CV Earnings Call

Mexico Mar 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Grupo Carso SAB de CV earnings conference call or presentation Friday, February 21, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angelica Piña Garnica

Grupo Carso, S.A.B. de C.V. - Head of IR

* Antonio Gómez García

Grupo Carso, S.A.B. de C.V. - CEO

* Arturo Spínola García

Grupo Carso, S.A.B. de C.V. - Treasurer and CFO & Administration Director - Carso Infraestructura Construccion & Grupo Condumex

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Conference Call Participants

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* Alejandro Chavelas

Crédit Suisse AG, Research Division - Research Analyst

* Alejandro Azar Wabi

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Miguel Felipe Ulloa Suárez

BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the conference call to discuss the fourth quarter 2019 results of Grupo Carso.

Before we begin, I would like to remind you that this call 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, we have Mr. Antonio Gómez García, CEO of Grupo Carso; Mr. Arturo Spínola, CFO of Condumex and Carso Infraestructura y Construcción; and Ms. Angelica Piña of Investor Relations.

I will now turn the call over to Ms. Angelica Piña. Please go ahead.

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Angelica Piña Garnica, Grupo Carso, S.A.B. de C.V. - Head of IR [2]

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Thank you, Chad. Good morning, everyone, and thank you for your interest and your participation in this conference call. I will take you briefly through the fourth quarter financial results, and then we will take your questions.

Consolidated sales of Grupo Carso grew -- sorry about that. Consolidated sales of Grupo Carso grew 4.3%, totaling MXN 29.6 billion. Carso Infraestructura was the main driver of revenues, posting a 25.4 increase due to more pipeline installation for telecom and gas in Mexico and LatAm and higher drilling work on geothermal and oil wells.

Grupo Sanborns posted a 6.5% increase related to the launch of new technology models in iShop since October, and Carso Energy remains active with investments in pipeline, geothermal and oil projects. The sales of Grupo Condumex decreased 5.9% mainly due to the General Motors strike in the U.S., which affected the production of automotive harnesses, coupled with the Mexican peso appreciation.

Consolidated operating income went up 5.7%, due to appraisal of investment properties recorded as other income, while EBITDA decreased 6.2% on lower profitability in all divisions. Controlling net income fell 32.7% with higher financial costs driven by exchange rate fluctuations during the quarter.

In the breakdown by division, the total sales of Grupo Sanborns were MXN 17.7 billion, growing 6.5%. Promotora Musical improved 33.8% in total sales while Sears and Sanborns were stable, posting minus 0.1% and positive 0.6% variation, respectively.

The gross margin reduced due to higher sales of technology and year-end promotions. Both operating expenses were controlled, increase in sales, comprising energy rates, salaries, operating expenses and recruitment from new stores and the implementation of new IT logistics platform. For the same reasons, operating income and EBITDA decreased 9.1% and 6.7%, respectively.

Grupo Condumex reported sales of MXN 7.3 billion, decreasing 5.9%. And this included an appreciation of the Mexican peso, but were mainly affected by the General Motors strike in the U.S., which lasted 40 days since the end of September and permeated in the volume of the manufacturing plant.

The telecom sector posted higher volumes for fiber optic and coaxial cables. Operating income and EBITDA decreased 7.2% and 4.3%. Lower profitability came from the falling revenues and higher operating expenses in the distribution chain and also electricity.

On the Infrastructure and Construction division, Carso Infraestructura posted MXN 5.3 billion in revenue, increasing 25.4% due to the following reasons: more telecom projects in Mexico and LatAm and gas projects, the construction of 2 highways in Mexico and 2 in Panama in the Infrastructure division and higher volumes in directional drilling of geothermal wells and cementing of oil wells in the manufacturing and services for the oil and chemical industry division.

The operating income and EBITDA in Carso Infraestructura reduced 29.6% and 10.6%, due to the mix of projects with lower margins and the recording of possible effects of the conclusion of infrastructure projects. The backlog reached MXN 19.9 billion compared to MXN 21.3 billion a year ago. The mix of projects currently in place are the Las Varas-Vallarta and Mitla-Tehuantepec highways, the Beaches corridors in Panama, diverse real estate projects, telecom installation services, the construction of the Samalayuca-Sásabe gas pipeline, the Maloob E and Maloob I oil platforms and diverse services and equipment for the well drilling industry.

Lastly, the sales of Carso Energy totaled MXN 11 million. The quarterly operating and EBITDA results were losses of MXN 13 million and MXN 9 million, due to less production and commercialization of oil in Colombia and additional expenses to conclude the Samalayuca-Sásabe gas pipeline in Chihuahua, which continues its construction. The Waha-Presidio and Waha-San Elizario gas pipeline, where we have a 51% participation, received rents from gas transportation. However, the revenues are not reflected in consolidated sales.

The revenues and EBITDA for Grupo Carso coming from the Waha in the full year were MXN 1.4 billion and MXN 1.2 billion, respectively. The strategy of Carso Energy is to continue looking for opportunities to participate in energy businesses. Recently, we announced the acquisition of shares representing the capital stock of Ideal Panama, which has been operating since 2012, 2 hydroelectric plants with a combined capacity of 145 megawatts for an amount of $153 million with our own cash flow. This division currently is active in investments in progress in gas pipelines, oil projects and geothermal energy fleet -- field.

With this, I finish my general comments to proceed to the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question will come from Alejandro Azar with GM -- I'm sorry, GBM.

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [2]

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The first one is related to the GM strike. If you could tell us the impact of this during the quarter, and if you saw a recovery in these volumes from December and maybe on January.

And the second one is related to the conclusion of some projects in CICSA. Could you explain the impact also on profitability during the quarter in this segment?

And the third one, if you could provide us with some guidance on EBITDA growth or on CapEx for 2020 for each subsidiary.

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer and CFO & Administration Director - Carso Infraestructura Construccion & Grupo Condumex [3]

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The first question was...

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Antonio Gómez García, Grupo Carso, S.A.B. de C.V. - CEO [4]

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The GM strike.

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer and CFO & Administration Director - Carso Infraestructura Construccion & Grupo Condumex [5]

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Okay. Related to the GM strike, our impact was around MXN 400 million in the sales of the Harnesses division. We already recovered part of that in the -- in November, December, but the reality that maybe GM used to have enough inventory to support the strike, and we don't expect to recover the 100% of the sales lost because of the strike in GM. I mean, maybe of MXN 400 million that we lost, maybe we are going to recover around 30% considering the releases of year -- for this year.

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Antonio Gómez García, Grupo Carso, S.A.B. de C.V. - CEO [6]

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Yes. And this is mainly because when this strike arrives to GM, they have more inventories than usual.

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer and CFO & Administration Director - Carso Infraestructura Construccion & Grupo Condumex [7]

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And on the other hand, related to the infrastructure projects, (inaudible), and in the Oriente Emisor Tunnel (sic) [Emisor Oriente Tunnel] and we have some provisions before from the administration of the termination of the project. We have some -- not claims, but some costs, additional costs that we are reviewing lines with Conagua, with our customer, and we are not sure to recover that cost. We made some provisions related to the tail. But if the negotiation is positive for us, we are going to record the cancellation of the provision.

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Antonio Gómez García, Grupo Carso, S.A.B. de C.V. - CEO [8]

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And the other -- on the other hand, is the issue -- normally, when you finish a big project like those, you have to spend a lot of time to make the administration and legal closure of the project with the customer. So you have to invest money, people, costs, lawyers and everything to make the termination, and you don't have redeems on those days. Maybe it takes around 3 months to make the complete termination of the contract.

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [9]

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If I may, Arturo, on the first one related to the Harness business, would you share some comments regarding not forecast, but there's been a lot of noise regarding an increased investment in harness due to the electrification of the industry. Would you share your outlook in terms of if you see that this division should be the one that grows within Condumex the most?

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer and CFO & Administration Director - Carso Infraestructura Construccion & Grupo Condumex [10]

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Okay. We don't expect a negative impact because of that. Maybe we are going to increase our -- the content of our project because of that. I mean, now most of the cars are requiring more conduction of electricity inside the cars because of the gadgets, sensors, et cetera. And with electricity, I mean, hybrid and electrical cars, we are seeing more requirements of the harnesses. We don't see a negative environment for that. Maybe it's going to be positive for us. Actually, we have now the development from cables as aluminum cable that support the new necessities of the industry. Then good -- we don't see a negative impact. We think that it's going to -- adding the content of the harness in the cars, maybe we are going to be -- good for us.

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Operator [11]

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Our next question comes from Miguel Ulloa with BBVA.

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [12]

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The first one would be regarding the outlook for 2020 for each subsidiary. And what you're expecting for Condumex on chips, in particular.

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Angelica Piña Garnica, Grupo Carso, S.A.B. de C.V. - Head of IR [13]

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(foreign language)

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Antonio Gómez García, Grupo Carso, S.A.B. de C.V. - CEO [14]

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Okay. In the case of CICSA, we have a good perspective in the division that we used to construct and build telecommunication systems, fiber-to-the-home in Mexico and mainly in all our LatAm operations.

In public infrastructure, things are slowly, but they are starting to put some new projects in the market, and we will participate in those, which we think we have advantages because of the size of the company, the size of the project and so on like the Tren Maya and some plans for CSE, mainly. And we will continue constructing the 2 highways that we are right now working on, which are Mitla-Tehuantepec and Las Varas-Vallarta. So we think, in that case, in the public projects, the first quarter will be low, but it will increase at the -- in the second part of the year.

For Condumex, we are seeing good opportunities in telecommunications and electronic cables. Not also -- not only for the telecommunications companies, also for the automotive industry, we are developing some telecommunications cables for the prototype of many companies for the autonomous banking. And we are expecting a tough year in building wire in Mexico because the construction, new projects are not in place. And the cable is in the last part of the construction phase.

So we will continue working with the distribution center in order -- with our (inaudible) in order to put in place products and sizes and prices in accordance to what has happened today in Mexico. And we are seeing around 2%, 3% increase in those markets.

And we also are working very hard in development of new cables. We name them as hybrid cables, which are cables that brings together the electricity power and the telecommunications cables in just one cable. And that -- we think that will give us a very good opportunity in the market because that type of cables could reduce costs for the installations and utilities and telecommunications content.

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [15]

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Okay, that's helpful. But -- so in terms of profitability, should we expect a margin expansion? Or do you think it's going to be very difficult because of the negative impact of the slow start of the year?

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Antonio Gómez García, Grupo Carso, S.A.B. de C.V. - CEO [16]

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No, we are expecting more or less same margins last -- this year.

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [17]

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Okay. And that's without the provisions for the closing of the project, I guess?

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Antonio Gómez García, Grupo Carso, S.A.B. de C.V. - CEO [18]

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Yes, exactly.

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [19]

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And the final question would be regarding the pipeline project. When do you expect to finish the pipeline project ending? And how -- what kind of income should we be looking at in 2020?

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Antonio Gómez García, Grupo Carso, S.A.B. de C.V. - CEO [20]

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Well, the pipeline is in the very last phase of construction. We are -- if everything goes like today, we will finish the construction around June, and the pipeline could be in operation maybe on August, September this year. The revenues that we are waiting from -- for the construction are very low because we are in the last part of the construction, and that's it.

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Operator [21]

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(Operator Instructions) The next question comes from Alejandro Chavelas with Crédit Suisse.

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Alejandro Chavelas, Crédit Suisse AG, Research Division - Research Analyst [22]

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Just a quick one regarding the impact of USMCA on Condumex. We -- should we perhaps expect for the medium or long term for the new content requirements of North American content to be a driver for Condumex going forward? Or what are you seeing? Are you seeing OEMs, for example, Asian OEMs looking for new suppliers in electronics? Or would you expect production in line with the North American OEMs?

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer and CFO & Administration Director - Carso Infraestructura Construccion & Grupo Condumex [23]

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We don't expect an important impact of the Pemex as well -- now we have made a (inaudible) And then 96% of our products are now in compliance with the new requirements of the Pemex. I mean, the regional content and something like that. And the last 4% that we are not in -- accomplished with the Pemex, we are going to be ready for the next year.

Also on the other hand, it's important to say that most of the products that we made in the automotive sector are for the SUVs because -- and other kinds of big cars. I mean, we will make very low product for the sedan. That is the kind of cars that are reducing the exports for the U.S. The -- most of our products are maintaining the level, and we are ready to face the Pemex.

Our product is intensive in labor, and that is important for maintaining that kind of production in Mexico. And now that we are accomplished with Pemex, we don't see a problem. Okay. Actually, we see good opportunities. And we have a technological center with 300 engineers working in technology, software development, all for the OEM industry. And that give us enough information to maintain in the competitive way with the OEM company. Then with a new regulation of the new characteristic of the Pemex, we are confident, and we are -- we think we are ready to face the new Pemex and maybe increasing our participation in that market.

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Operator [24]

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Ladies and gentlemen, at this time, there are no further questions. I would like to turn the call back over to Ms. Piña for any closing remarks.

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Angelica Piña Garnica, Grupo Carso, S.A.B. de C.V. - Head of IR [25]

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Thank you, everyone, for connecting to this conference call. If you need more information, we will be available. Have a good weekend.

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Operator [26]

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Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.