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Edited Transcript of GCARSOA1.MX earnings conference call or presentation 26-Jul-19 3:00pm GMT

Q2 2019 Grupo Carso SAB de CV Earnings Call

Mexico Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Carso SAB de CV earnings conference call or presentation Friday, July 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angélica Piña Garnica

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

* Arturo Spínola García

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

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Conference Call Participants

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* 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 second quarter 2019 results of Grupo Carso.

Before we begin, I would like to remind you that this call 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 Spínola, CFO of Condumex and Carso Infraestructura y Construcción; and Miss Angélica Piña of Investor Relations.

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

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

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

Consolidated sales of Grupo Carso grew 3.8%, totaling MXN 24.2 billion. CICSA was the main drivers for sales, posting an 18.3% decrease due to more pipeline installations for telecom, the ongoing construction of roads and high drilling work on geothermal wells.

Grupo Sanborns increased 1.5% in sales, and Carso Energy remained stable. Operating income and EBITDA decreased 12.3% and 8%, respectively, due to lower gross margins and higher expenses. Controlling net income fell 26.6% with higher financial cost driven by exchange rates fluctuations during the quarter. By division, the total sales of Grupo Sanborns were MXN 12 billion, growing 1.5%, due mainly to the performance of recently-opened stores.

In the second quarter of the year, there were less aggressive promotions in the clearance sales at the department stores. The same-store sales of Sears, Sanborns and Promotora Musical were negative 2.6%, 1.3% and 1.8%, respectively. The gross margin remained stable, but operating expenses increased 5% with higher energy rates and salaries as well as higher operating expenses and recruitment from new stores. Operating income and EBITDA decreased 10.1% and 5.7%, respectively.

On July 15 and 19, Grupo Sanborns announced having achieved a 33.2 stake -- a 33.2% stake in the capital of the Mexican company Miniso BF Holding, which has an important investment plan for the following 3 years in Mexico where it's expansion will generate around 1,670 direct jobs.

Grupo Condumex reported sales of MXN 7.9 billion, decreasing 2%. This included higher volumes in the telecom sector in copper, fiber optics and coaxial cable. However, they did not compensate a lower demand for construction cables and delays in the start-up of some automotive platforms.

Operating income and EBITDA fell 19.6% and 14.4%, respectively. Lower profitability came from auto parts, which recorded higher labor and raw material cost as well as lower volumes in certain cables as well as peso appreciation that impacted sales.

On the Infrastructure and Construction division, CICSA posted MXN 4.5 billion in revenues, increasing 18.3%. This can be explained by the following reasons; Pipeline Installation improved 32.9% in revenue due to an increase in telecom projects; the infrastructure sector improved 43.1% due to the construction of highway projects in Mexico and Panama; and manufacturing and services for the oil and chemical industry recorded higher direction on drilling and drilling works in geothermal wells. The mix of projects this quarter did not compensate higher profitability lines in the second quarter of 2019, coupled with the recognition of claims in process. Therefore, operating income and EBITDA in CICSA went down 21.5% and 16%, respectively.

The backlog reached MXN 19 million compared to MXN 12.4 million a year ago. The mix of projects currently in place are the conclusion of works in detail, the Las Varas-Vallarta Highway, the beach corridors in Panama, diverse real estate projects, telecom installation services and the construction of the Samalayuca-Sásabe gas pipeline as well as diverse services for the well-drilling industry.

Lastly, sales of Carso Energy totaled MXN 16 million related to the production and commercialization of oil in Colombia. The quarterly operating income and EBITDA were MXN 1 million and MXN 131,000, respectively, both decreasing from MXN 6 million and MXN 9 million last year. The Waha-Presidio and Waha-San Elizario gas pipelines, where we have a 51% participation, received rents from gas transportation. However, the revenues are not reflected in consolidated sales.

The Samalayuca-Sásabe gas pipeline in Chihuahua continued its construction. Regarding this last pipeline, on June 26, the Comisión Federal de Electricidad, CFE, sent Carso Gasoducto Norte a request for the initiation of arbitration, demanding the nullity of certain clauses of the contracts for the provision of natural gas transportation service. We are currently in talks with the CFE on certain contract terms.

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) Our first question comes from Alejandro Azar with 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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I have several questions, beginning with if you can give us an approximate, I don't know if this was public information, about the investment in Miniso. And the other one is related to your Gasoducto. If it is – it is still fair to say that you're going to start receiving income in the first quarter of 2020?

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Angélica Piña Garnica, Grupo Carso, S.A.B. de C.V. - Head of IR [3]

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This is Angélica. Regarding the Miniso transaction, it was -- it's an investment around MXN 1 million. And that's mainly what we have been saying. It doesn't consolidate. We're just going to reflect it in the minority participation. And well, Miniso, it's a company that sells and buys products and items for the domestic use, commercial, an industry of Chinese origin, and that's why we're participating with their growth.

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [4]

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Okay. And regarding the Gasoducto?

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer [5]

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Yes. Regarding the Gasoducto, we have expectations to finish it in the first 3 months out of the midyear, mainly April, I believe, or May. But that depends -- that we solve 2 or 3 pending matters with the Director of the [VR] in order to finish the constructions. Now we are continue -- we have received some support from the government in order to fund (inaudible) profit to (inaudible). And we are confident about -- to finish in May 3, maybe second quarter of the next year.

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [6]

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Just remind us for a second, Arturo, are you currently receiving income from the CFE given that you haven't finished as planned?

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer [7]

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Yes. We are receiving part of the raise of the contract in order to the problems as force majeure that we have. Now there is a legal resource from the CFE in order to sustain, but until now, we are proceeding with the anticipated range. It's important to say that there are not fees (foreign language). It's just anticipated payments in accordance with the advance in 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 [8]

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And those revenues -- because we're are not seeing an increase in Carso Energy, where do I see those revenues? In the holding or...

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer [9]

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We are considering as a down payment. I mean we are not considering them as revenue because as you know, we cannot recognize revenue until the pipeline is ready.

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [10]

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Okay. And then another one on CICSA. You mentioned infrastructure price growing, and the growth rate, it appears to be between 40% and 50%. Could you break down which country is growing and which not? And I mean Mexico and Panama because you mentioned those countries.

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer [11]

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Well, the main increase in the infrastructure sector is in Panama where we have 2 projects by around $900 million with FCC. That's our consortium. We have 50% of the projects, and we begin today with first one. And -- because in Mexico, we have got a project in Las Varas-Vallarta, and we are finishing the tunnel in Oriente. Then in infrastructure, the main growth is in Panama. (inaudible)

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [12]

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Yes. Would it be fair to say that Mexico is not growing? I'm just trying to see the performance is in line with the growth of the sector.

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer [13]

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Yes, yes. In Mexico, in the infrastructure and construction sector, we are not viewing good expectations this year. Maybe for the next. But if we are seeing good expectations in the oil sector, I mean, the platforms, drilling wells, et cetera, complicating the plan of Pemex.

Maybe the construction sector is going to be a little -- in Mexico, it's going to be a little bit lower than the previous years, but we are confident with the oil and gas services sector for CICSA.

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Operator [14]

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(Operator Instructions) The 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 [15]

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The first one would be regarding short-term expectations for each division. What kind of revenue growth and EBITDA margin should we look in the second half of the year? What you are expecting on this regard?

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer [16]

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Regarding the expectation of the -- in each sector. In the case of the industrial sector, we think we are going to grow just 1 or 2 points because as you know in this sector, the exchange rate is important for us because in the case of the automotive sector, all the -- 100% of the sales are in dollars. Then as the exchange rate is almost in the same level than the previous years, both our cost have impact for the inflation, for the salaries, et cetera. We are seeing a little difficult to increase our margin in the short term. It's good for the company, the exchange rate, but for this sector, it's not very good.

Then in the case of cables, the construction sector is an important sector for us. But in this first semester, the construction cables are decreasing around 13%, 14%, and that kind of cable has a good margin. Then we are seeing a little difficulty in increasing the margin. But as we are trying to control certain expenses, maybe 1 or 2 points from now, we can increase our margin in the industrial sector around Condumex.

In the case of CICSA, maybe if Pemex continues with the plan, as we reach some bids we have good expectations. First is the Panama projects are beginning. I mean, the 2 projects that we mentioned. And in Mexico, the oil and service -- oil and gas services, we are participating in 2 platforms bids. Maybe Pemex is going to contract drilling wells. Then we are focused on both jobs for the final EBITDA, maybe the next quarter is going to be in the same level than the second quarter.

In the case of Carso Energy, as you know, the only consolidated revenue that we have is in Columbia. We have lowered expectations in Columbia, but our good expectations are in Mexico. But we are beginning with the exploration phase, but the revenue for that sector is going to be to the final of the next year. (inaudible)

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Angélica Piña Garnica, Grupo Carso, S.A.B. de C.V. - Head of IR [17]

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Juan Miguel -- and regarding the reason we mentioned, I think we will keep the margins stable. We are just improving in expenses to control mainly the reserve for nonperforming loans and other expenses, just keeping the margins just like now and maybe improving them with credit. And with more sales of fashion, just as happened in this quarter that we sold more fashion. It was a decrease mainly in the lines of big ticket, where we had a high comparison base because of the -- of last year with electronics. So improving the participation of the mix of sales with fashion and restaurant.

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [18]

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Okay. That was helpful. And the second one, just a quick follow-up on CICSA, and it's regarding the expenses of contracts that you are currently renegotiating. Could you give us an idea of how much these expenses are or how much extra income does this represent? And when are you expecting to get the income back?

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer [19]

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I will now (inaudible) copper? Or what kind of projects are you talking about?

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [20]

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Right. Mainly that. Yes, mainly their programs.

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Arturo Spínola García, Grupo Carso, S.A.B. de C.V. - Treasurer [21]

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Okay. As you know, Carso participates as part of the of the construction and as a supplier of the construction. In the case of the -- our participation as a supplier, we are waiting for finishing the negotiation with Grupo de Portuario with good expectation because the most important part that we participate as a supplier was the construction of the (inaudible). As you know, that kind of umbrellas, inverted umbrellas maybe (inaudible). We had an important claim about that. The consortium has accepted around 80% of the claim, but all depends that the construction finish the (foreign language) with Grupo de Portuario. We had good expectation, and it could be -- now we can note about the amount, what it's going to be. And maybe can increase 1 or 2 points over the next quarter margin of CICSA because it's an important number for me in the case of the -- of this field that we claim to the consortium.

And in the case of the consortium, as you know, we don't consolidate the result. We have just 14% participation in the construction. Our expectation is not to recognize any loss, and you recuperate 100% of the expenses, the direct and indirect expenses. And we have expectation to finish soon the negotiation with Grupo de Portuario. It seems that they want to finish these negotiations as soon as possible. That obviously is the most important claim that we have now.

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Operator [22]

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There are no further questions at this time. I will turn the call back over to Ms. Piña for any closing remarks.

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Angélica Piña Garnica, Grupo Carso, S.A.B. de C.V. - Head of IR [23]

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Thank you again, everyone, for your participation in this conference call. We look forward to speaking with you again. Have a nice weekend.

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Operator [24]

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