Earnings Call: Q2 2021

Jul 28, 2021

Good afternoon. Thank you for holding, and welcome to Grupo Mexico Second Quarter 2021 Earnings Conference Call. Muchas this afternoon are all of UCO Mexico's top executives who will discuss the Q2 2021 financial performance of the company giving you a summary of the latest news and address any questions you might have at the end of the call. Before we begin, I would now I would like to remind you that information on today's conference may include forward looking statements regarding the Company's results and prospects, which are subject to risks and uncertainties. Actual results may differ materially and the company is cautioned not to place undue reliance on these forward looking statements. Grupo Mexico undertakes no obligation to publicly update or revise any forward looking statements whether as a result of new information, future events or otherwise. All results are expressed in full U. S. GAAP. The presentation may be followed through our webcast. But if you wish to ask a question during the Q and A session, You'll need to do so via the phone by pressing star 1. A copy of the slides that the company will be reviewing Today is available on the website at glucomexico.com. At this moment, I would like to remind everyone that your lines are in a listen only mode until the question and answer session. We will now begin with Ms. Marlene Fenney. Hi, good morning, everybody, and thank you for joining us today for Grupo Mexico's 2nd quarter earnings conference call. We appreciate your time for being here with us. Here with me are all the top executives from our division, Mr. Itzhak, Mr. Javier Hectorino, Mr. Oscar Gonzalez, Sorry. For today's call, we will explore a presentation that can be downloaded from our website or by accepting the webcast. I would like to start today's call by sending my best wishes to you all and hoping everybody On today's call, we will be following the program detail on Slide number 3 of the presentation. I will start with Rupo Mexico's main highlights, Commenting on the industry's economic environment, the division's financials and its highlights, followed by Mr. Zach Franklin, We will dive deep into the financial results and main events of our transportation division. Finally, Mr. Francisco Pinter will comment on the relevant events that occurred during the quarter in our Infrastructure division. At the end, the line will be open for the questions I wanted to start the call by highlighting that Grupo Mexico's capital investments exceeded $22,000,000,000 over the last decade, a program that has allowed us to increase copper and mortar production by 64 Regarding copper and 47% regarding moly, respectively, along with the fact with a very The environment for metal prices during the year have allowed us to achieve excellent results for the quarter. This Let's jump right into our main ESG achievements on Slide number 5. We recently released our annual ESG report, which is aligned to DRI, CASB and CCFD, showcasing our commitment to transparency. You can all go to our website and you can find there our ESG report. In the report, you'll find relevant information about our strategy, efforts and results regarding ESG. I'll go through some examples right now, I invite you all to download the report from our website for more details that you might have or questions that you might have. During 2020, we invested 3.8 percent of our net income in community and philanthropy projects, supporting the UN Sustainable Development Goals. We also managed to adapt We are able to reduce Injuries raised by 44% in the Mining division, 30% in the Transportation division and 25% in our Infrastructure division. Our gas emissions during 2020 were reduced by 8% versus 2019, while volume and sales remain stable and roughly 20% of our consumed electricity was provided from renewable Our share that will be improved once our financial wind farm kicks in. We have settled the goal to reach 25 of our consumed electricity In the next slide, Slide number 6, Our scorecard for the quarter showed a challenging result as we achieved accumulated sales netting BRL 7,350,000,000, an increase of over 51% versus the Q1 of 2020, driven by higher metal Our EBITDA totaled BRL 4,560,000,000 during the 1st 6 months of 2021, an increase of Over 113% versus the same period of our last year, selling our EBITDA margin at 62%, Our cumulated operating income netted $3,780,000,000 an increase of Approval cash dividend of MXN1.75 per share, A 17% increase versus the last quarter, reinforcing our strong dividend program, which translates into a 7.4 I think we're among the highest dividend yield from a Mexican So this is really a good news. Aligned with our estimates, copper production for the first 6 months of the year totaled 541,000 tons, a 3.1% decrease versus the I would like to highlight our achievement improvement in cash cost of $6,900,000 versus the same period of last Moving forward to Slide 7. There in Slide 7, you can find a summary of our Financials, which is better for you to have in hand in case you need it as during the presentation and reflects what we just mentioned. Then going to Slide 8, Vicencir de Lobo Mexico maintains a solid balance sheet with low leverage and a net debt to EBITDA ratio of 0.5 percent. As you might already know, our debt is mainly issued in U. S. Dollars, representing 81% of the total debt, while the remainder is denominated in Mexican pesos. On the slide, you can also see the dividend And implied dividend yield from 2019 to 2021, including the now 1.75 dividend cash For the quarter approved by our Board. As you can see, we have a solid track record and these dividends have been increasing as we increase our And this will continue to be the case while we generate these levels of cash flow going forward. Into Slide 9 and then going to our debt maturity We have a comfortable maturity schedule with no significant payments until 2,035, a cash flow generation of around 18 $100,000,000 during the quarter, we saw $5,600,000,000 before. We also saw a 17% reduction of net debt versus Thank you, Marlen. Good afternoon, everyone, and thank you again for joining us today. My best wishes for you and your families. Let me start with the Mining Division's operating and financial highlights on the Slide 11. As Marlene previously mentioned, we saw an expected reduction in copper production, a reduction of 5.5% versus the Q2 of 2020, totaling 269,837 tons. This decline was due to lower oil grades in our Peruvian and Mexican operations as far as OpEx Great things help mitigating this effect. Besides the decline in production, higher coppers and micronut prices boosted our Sales during the quarter, ending in the period in $3,200,000,000 and over $6,000,000,000 for the 1st 6 months, a 71.1% increase when compared to the same period of last year A 63.98% increase versus 2.2% in a commodity basis. Casper remained at $0.06 personal position of cost leaders Thank you, Mr. Worriede. I'll continue the downward trend of our net cash costs, this time Supported by higher byproduct trends. Higher metal prices and our cost efficiency focus led us achieving An outstanding $152,500,000 increase in EDI when compared to the same period of last year And setting our EDDI margin for the quarter at 63.7 The Mining Division CapEx for the quarter was $428,000,000 and a total of 4 $7,000,000 for the 1st 6 months of the year as we continue to invest in our projects. I would like to continue talking about our projects and the progress in Slide number 12. In Pilares, The construction of the world for mining trucks between the Pilares pit and the primary crushing plants in Macallas This already completed with 47% of the investment in order to be closed by the end On our Buena Vista team project, which is expected to be operational by 2023, The basic engineering is complete and we have a 94% completion rate in the Eastern engineering plan. Finally, the results in the leaching past contain that there are suitable copper recovery in Ezbiras, We will continue to develop the Mexico area. On Slide 13, You can see all our upcoming projects and their impact to production as we continue our journey to reach 2,000,000 tons of copper produced per year. I would like to stop here to dive a bit First on our Chikigay project in Penang. The Chikigay, which is expected to be operational by 20 28, We produced 225,000 tons of copper per year, along with by products of moly, Well and Silvers are a competitive cash cost. Back in 2018, the contract for the acquisition of the project Along this payment, we have had important progress in conversations with communities in The environmental impact story has been addressed. Both, we expect it to be approved soon. All these considered, the company It's a good standpoint to initiate the exploration program of the project. Before concluding the mining revision highlights, I would like to Share with you a couple of quick remarks on the foreign copper market. The LNG copper price increased from Mona Veracio $2.42 per pound in the Q3 of 2020 to $4.40 seen during the Q2 2021, an 8.8 As of today, we are seeing prices at about $4.30 just above the year to date price of 4 point Particularly given the number of days of consumption in Chile. And on sustainability regarding future production from Copper market in helium houses are expecting a market deficit of about 250,000 tons this year Due to a recovery in demand, we should grow between 2% to 3.5%. I would like to personally reinforce here our future growth in the communities where we operate and our collaborators. Now I will let Isaac Franklin comment on our Transportation Division. Thank you. Thank you, Javier, and good morning, everyone. Thanks again for joining Continuing with the Transportation division on Slide 15, I would like to talk about our financial highlights for the Q2 of the First, I'm proud to announce that both segments showed positive variation in revenue, carloads and tonne kilometer. Our sales, which totaled $644,000,000 during 21 and a 35.9 percent increase versus the Q2 2020. This quarterly increase was mainly driven by the Automotive Metals, Intermodal, Minerals and Energy segments. On a cumulative basis, sales are up 14.6% versus 2020. Following the growth trend, our volume and carload increased 17% 24%, respectively, versus the same period of last year, 9.4% and 10.6% on a cumulative basis. This quarter's surge was led by our agricultural segment, Which increased $770,000,000 net tons given there. Along these lines, our EBITDA totaled $290,000,000 A 52.3% increase versus Q2 2020 and resulted in an EBITDA margin expansion of over 4.90 basis points, While our net income, which totaled $102,000,000 increased 113.4%. As we move forward to Slide 16, you can see our main highlights for the quarter, which results in Mexican pesos. Volume has returned to pre COVID levels In all our business units leading to record revenue, EBITDA and net income. Revenue saw an increase 17% versus the same quarter last year, driven by market share volume gain and our EBITDA increased 31.3 percent, netting ARS5875 million. Last top of list, our Board approved a cash dividend of 0 point 3 $5 per share. Continuing with the main variation of our revenue on Slide 17, as I previously mentioned, all of our segments saw revenue growth during the quarter, With the Automotive segment with our top performance showing a 2 21% increase due to last year's plant shutdowns I'm partially offset by the worldwide microchip shortage. Following the Automotive segment, we have Metals and Intermodal segments with 39% and 20 percent increased, respectively. Both segments mostly driven by market share gains and a recovery in consumption levels. Along this top performance, we also saw high Revenue growth in the Minerals, Energy, Cement and Industrial segment, where market share gains an economic recovery propelled the double digit growth. With medium revenue growth, we saw the agricultural and chemical segment. On Slide 18, we show our operating metrics of the 2nd quarter since 2019. We can see that most of our indicators are overall progressing then, thanks to our efforts to optimize our service master Our average train speed was above of 36 kilometers per hour, a 6.3% decrease versus Q2 2020. We also have a setback in dwell time, mainly due to weather conditions in Mexico. As a result, these complications in a decrease in car velocity of 74%. Having said that, we have great results on train length. Average Gross tons per train saw an increase of 6.1%. As for cruise trucks, we suffered an increase Over 11.3% from the same quarter of last year, but we continue to have relevant 6.6% improvement when compared to the same quarter of 2019. Our investment plan for 2021 shows on Slide 19 shows a revised total of $373,000,000 of which $246,000,000 will be allocated for maintenance, including New rates and types, locomotive overhauls and rail maintenance, dollars 72,000,000 will be allocated to growth projects, improving our capacity to seize opportunity markets we serve and $54,000,000 for the efficiency programs, including LNG locomotive conversion and tripoptimizer rates. This concludes our general overview of the Transportation Division. I would now like Francisco Cesar comment on the Infrastructure Division. Thank you very much, Isaac, and good morning, everyone. I will start by going through the financial highlights of the Infrastructure Division shown on Slide 21. Year to date revenues totaled $272,000,000 a 3.6% increase Compared to 2020 despite the complicated and ongoing circumstances caused by the pandemic. It's important to mention that the Energy business unit was the main driver of this increase, demonstrating the capacity of its business model. Our EBITDA totaled $58,000,000 for the quarter and $117,000,000 on a cumulative basis, which translates into an 8.6% decrease versus the Q2 of 2020 and an 18% reduction when comparing the 1st semesters of 2020 and The EBITDA margin for the quarter was 46.4 percent and our net income totaled $815,000 during the quarter, Showing net positive results for the Q2 in a row. As we continue on Slide 22, I'll go through the most relevant events of the division And a brief project update. In our Energy business unit, sales totaled $66,000,000 an increase of 20.6% when compared to the same quarter of last year. This increase was mainly driven by an increase in the price of the gas molecule. Our highway business unit saw a 13% recovery in daily traffic when compared to the same period of last year. It was due to the easing of mobility restrictions that were imposed last year because of the pandemic. As a result of this, 2nd quarter 2021 sales totaled $10,000,000 while EBITDA net $6,500,000 an increase of 73 And 74.2 percent, respectively, year over year. The Highway division ended the quarter with an EBITDA margin of almost 64%. In our Drilling business unit, we finished with an efficiency of 99.3 percent, dollars 72,000,000 in revenues and $31,500,000 in EBITDA, a decrease versus last year of 26% 35%, respectively, mainly driven by tariff reduction from Pemex across all platforms in the industry. As for our construction business unit, We reached $30,000,000 in revenues and $8,000,000 in EBITDA, decreasing 14% and 26% respectively versus last year, As the execution of projects has been moved forward, but backlog remains robust and we expect a second A strong second half for 2021. Finally, the division's project main updates are: 1st, in our Genesias wind farm Located in Agogolione, we reached a 99% completion rate with all 42 turbines already commissioned and generating test power. We are planning to go live during this Q3 of 2021. Additionally, the consortium led by Grupo Mexico Infrastructure Sura and Naciona, in charge of the executive project of the Section 5 South of the Maya Train and the construction of itself, which runs between Playa del Carmen and Tulum, has concluded the preliminary topography studies and reached a 58% completion rate on the geotechnical studies. Construction already began late in June, 105 days ahead of schedule with the placement and foundations of footings Before closing, I would like to thank everybody again for your Our first question comes from the line of Carlos de Alba with Morgan Stanley. Your line is open. Yes. Hello. Good morning, everyone. The first question, as always, if you could maybe share the Cash cost before byproducts of Afaco for the quarter and your expectation for the year, that will be appreciated. And the second question has to do with any potential implications that you'll see or may see on your Fuel distribution business from the recent changes or proposed changes in the fuel import legislation or policy in Mexico. Thank you. Thank you, Carlos. Thank you for your question. Regarding Accelco, The before by product, the net cash flow, it was on the for the 1st semester or second quarter, Rodon? 2nd quarter, please. For the second quarter, it was EUR 2 And then after that product, dollars 1,92,000,000 The idea and then if you if someone you want to It will continue being very profitable and trying to reduce our cash cost as we move Hi, Carlos. This is Francisco. Regarding your second question about the fuel storage terminal, we've been closely monitoring the recent events That has been happening in Mexico and evaluating if there is an impact to our projects. We continue to advance In engineering and in the different stages that we planned, but we are, of course, very Looking to these signals to see if there is any Modification that we need to make. We still believe that the country needs these fuels And this infrastructure is very much needed across different states in Mexico, but we also, of course, have to be Very under to how these changes could impact us. So that's what we have to say so far. Thank you, Francisco. And then if I may, Francisco, just a follow-up. So if The circumstances change and the business model as you currently have it is no longer viable. What would be the option there? It would be to sell it to Pemex, the business to Pemex? Or what are the options? We have been very prudent in our capital expenditures so far, spending only the money that we need Until we have all the relevant permits and approvals. So we that's something that we will need to evaluate. I mean, Valero, which is our main partner, as you know, This is the main importer of fuels in Mexico, and we have a very strong logistics with the Infrastructure and Transportation division. So we believe that we have a lot of Value to add, but of course, we need to be ready to see what are the rules and how we play them. But it's important to say that Our exposure so far to the business unit has been limited by our prudency in capital expenditures. All right. Thank you very much. You're welcome. Thank you. Our next question comes from Isabella Vascon Celeste with Bradesco BBI. Your line is open. Thank you. Good morning. So I have a couple of questions on basically how you're thinking about capital allocation ahead. Should we see higher dividends or even buybacks in the near future? And also specifically on growth for the I know it's been very healthy. So are analyzing further growth or even M and A. No, we have a digital division in Germany and I don't know if we are not comfortable So we've seen, as we mentioned before, in the Project and Mining division. We also keep an eye open to any And with recent copper prices, I think we have we're Well covered on that. Transportation division as well is accountable for their own growth. Recently, we did an emission in Mexican pesos, it's So as well and the Infrastructure division as well with project finance, in certain projects or whatever makes more sense depending on the different business units. So that's how we In terms of capitalization, we feel very comfortable with this levels of debt. We know we're generating more cash flow. And that's why you can see our increase in the dividend and dividend yield as well. We always keep an eye open and See their buybacks when if it makes sense. So that's something that we have on our table constantly and looking at it constantly. But for now, we Just to start increasing the dividend, so you the shareholders can have the value of this Great point forward for them. I don't know if that answers your questions. And then I will let Mr. Ystad And if you have any further any questions regarding capital allocation, please let me know. I don't know if I was clear enough. Thank you, Marien. And I think it was very clear. Okay. Thank you, Marvin. On the transportation side, we see a very, very strong market for the second half. We besides the recovery from the pandemic and the growth in Volumes that we are seeing and we're doing is a very high conversion from truck to rail. So that's why we expect Very strong market for the second half and so on. Thank you. And our next question comes from Alfonso Salazar with Scotiabank. Your line is open. Thank you. I have two questions. The first one is related to the mining division. Many years ago, you have A project to increase capacity at the rain mine in Azarco. I don't know if this is something that You are considering why I am so again with the high copper prices we see or any expansion at the Farco that could be implemented? And the second is also related to that. If there is a plan B for expansion of the Mine division, in case that for any reason The products that you have in the pipeline take longer to or there are some delays or cannot be If possible to complete them, what is the plan B for expansion of the mining division? Are you thinking about M and A? Are you considering other jurisdictions going to some other places? I remember that you had some exploration in Chile. But anything that you can Tell us about growth beyond the projects that you have. It would be very helpful. Thank you. A couple of alternatives, as you may know, on the mining side, take certain time. We have conducted And I think regarding the planned diesel growth in mining divisions, I would like We still have projects in line coming in, as Buenavista, Cesar Pilar, And then as you can see, we have a long medium term project as well, the La Contequilada and La Contequilada. So we still have a lot of We have some pipeline. I think we're one of the companies that has or if not the company that has the strongest pipeline in terms of projects. We also You know that we always keep an eye and we look at M and A opportunities, if it makes sense, if that fits with our current So that's something that I started many years ago, and we continue to do that and to look into opportunities. But we still have a very strong Thank you, Alfonso. First of all, I would like to refer to El Arco. El Arco is one of the world Copper deposits, and we are working right now in the Story of environmental impact caesare, we finished the baseline. We are also finishing the stories for Interconnecting We almost finished with the acquisition of land for the port and also The second project that is quite important for us is in Spain, with Ardenancollas. In Ardenancollas, we are We're still waiting for the final license for construction. And we hope to We get it by the in the second half of the year. We have good projects, By example, in Ecuador, we have spent almost $50,000,000 in exploration for covering Authentic corporate deposit. We are also working continue working in Chile from Exploration projects in the northern part that we started few years ago, and we are almost ready to In Argentina, we have some projects for copper, but mostly for gold and silver in the Rio Negro This is mainly the projects. Of course, in Peru, we continue with some exploration projects as well as in Mexico. That's all. Thank you for that, Javier. And I have another question now regarding the Grupo Mexico Transporter. In the conference call, you mentioned that security expenses were declining, That's good to hear. At the same time, in the press, we read about that So organized squam are fighting for controlling the manzanillo port. So just want to know if you have any problems or this has been affecting operations somehow No. We are as we mentioned in the conference, our Security has improved due to our own strategies and the support from the federal government from the Marine, the Serena and the local state and local colleagues, we haven't seen anything affecting our traffic For the as you can see, our intermodal segment has been growing, and the manganese is one of the main drivers. So we're We're confident that we don't think that we've been doing, we can continue to grow as we expect. Thank you for that, Giacobbe. And the final one regarding the changes in customs, the control of customs, Is that something that you can mention about how things are is there any impact on the operations, anything How that is impacting the fact that now it's controlled by Sarena and Secretariat Marina? The thing is, well, as you know, we have to wait on the new customs agency is set up That's the more focus on deeper revisions and all that, but That's really at some point, it might affect you in the very beginning, but the backlog It's there and we'll be moving forward. So we really don't expect much change Regarding the traffic and everything. Fair enough. Thank you very much for the answers. Thank you. Our next question comes from Gene Brandy with BBVA. Your line is open. Hi, there. Thanks for taking my question. Just a quick one for Isaac, Mehdi. Hi, Isaac. Just to know if you're just mentioning the guidance in terms of growth in volume this year between 5% to 7%. If you can update First on the savings, you were in the PFR, you were estimating between MXN 2,100,000,000 to MXN 2,600,000,000. Just to know where you stand now and if the number remains the same. Thanks. Well, the guidance and the outlook, as we mentioned in our conference, is still About the growing 10% in volume and we're expecting between 6% and 8% 6% and 18% in revenue. And regarding the which was the second question? Savings. The savings on the PSR, we will continue our programs. As we mentioned, Our train length increased 10.3% from the Q2 last year. Our gross ton per train increased 6.1%. So we're moving forward Towards that, we're expecting to keep growing and putting more fuel efficiency. Regarding the fuel efficiency, also our trip optimizer is now working on all the locomotives. So we're having Yes. And then our LNG Conversion. So that will increase our well, decrease our cost And improve our efficiency. Perfect. Thank you, Jack. Thank you. And this concludes our Q and A portion. I'd like to hand the conference back over to Ms. Marlene Fanning for closing comments. Thank you Thank you so much. Thank you for your questions. In case you need and you have any further questions or keep in touch, please let us know. And thank you for joining us and your time. Have a good day. Ladies and gentlemen, thank you for your participation. You may now disconnect. Everyone have a wonderful day.