Economic Outlook
During 2016, significant factors had an impact on the global financial environment, including the volatility at the financial markets and the referendum in the United Kingdom to decide on the convenience of leaving the European Union. Likewise, the strengthening of the value of the U.S. dollar against other currencies and the Mexican peso, because of the presidential elections in that country, was part of the events that characterized the year.
In the year, the U.S. economy expanded 1.6% mainly driven by a 5.77% growth in durable goods consumption. Nonetheless, private investment decreased 1.55%. Similarly, the benchmark interest rate in the United States increased by 25 basis points, which was mainly due to the high level of employment and inflation rate in comparison with the Federal Reserve target. As a result, the country’s monetary policy was adjusted.
In Mexico, the country’s Gross Domestic Product (GDP) grew by 2.3%, a marginally lower rate than that registered in 2015. Furthermore, formal employment expanded 4.10%. In particular, the tertiary sector of the economy offset the zero growth observed in the secondary sector, which was a result of both lower oil production and the moderate growth that the manufacturing industry showed. Regarding the behavior of domestic consumption in Mexico, the indicator was positively driven by a greater historical flow of remittances to the country, lower interest rates and the presence of higher, real salaries and wages. The inflation rate stood at 3.4%, driven mainly by a higher price of electric energy and fuels, as well as by the devaluation of the Mexican peso against other currencies towards the end of the year.
The Mexican currency suffered a devaluation of 18% during the year, registering a high volatility derived from the uncertainty produced by the presidential election in the United States of America, with potential impact on the North American Free Trade Agreement. This situation contributed favorably to a significant reduction of the trade deficit of our country in the last months of 2016. Additionally, Banco de México modified the monetary policy by raising the benchmark interest rate five times along the year, from 3.25% to 5.75%.
The surplus in Banco de México’s monetary reserves, as well as the convenience of monetizing public assets, jointly with the country’s solid export industry, tourism, the domestic sector and other competitive advantages, allowed Mexico to strengthen in the face of new international challenges. Similarly, economic growth in the United States is expected to increase the demand for goods and employment in Mexico, positively affecting the growth rate of the domestic economy.
Grupo Carso
In 2016, Grupo Carso recorded positive financial performance and achieved a solid improvement in its profitability levels, through which it overcame the macroeconomic challenges in the year. We expanded our businesses, consolidated strategies, improved our operations, and diversified the Group’s businesses and products. This allowed us to capitalize on new business opportunities in the sectors and markets in which the Group participates and lay the foundations for future growth.
Despite exchange rate volatility, as well as changes in consumer preferences, along with pressures in the competitive arena, we grew and consolidated our business initiatives at Grupo Sanborns in the year. In this regard, sales expanded 7.2% due to the good performance of all formats. We opened 17 new Sears, Sanborns and iShop stores, with which we operated 442 units at the end of the year, equivalent to 1,186,000 square meters of commercial area. Similarly, we continued to develop proprietary brands and our domestic suppliers, and carried out image change and remodeling works where we have 50% of the Sears stores renovated.
The global environment evolves towards online commerce. In this regard, we continued to strengthen logistics and operations of our online trade capabilities, mainly at ClaroShop.com. These tasks are intended to deliver a better service to our customers in all channels.
We acquired a significant portion of the shares held by Sears United States at Sears Operadora México S.A. de C.V. Under the terms of the transaction, which took place in the year, Grupo Sanborns now holds an equity interest of 99% in that operation.
We strengthened the competitive position and leveraged the portfolio of recognized brands of cables, as well as the operating efficiency of Grupo Condumex, whose sales increased 7.8% as a result of a higher volume of cables for the construction and telecommunications markets. We expanded the customer base and consolidated our commercial alliances with distributors that participate in the sector. The automotive business showed strong performance through business diversification and cost reduction initiatives, and the growth of the automotive industry in Mexico.
Because of our performance and the quality of our products, we obtained various awards from our main clients. In this regard, General Motors awarded us the “GM Supplier Quality Excellence Award” and “2015 GM Certificate of Excellence Silver”, thus recognizing our high level of quality and performance. For its part, we obtained from Daimler the “2015 Master of Quality Daimler Buses” recognition, while Valeo granted us the “Valeo BEST Project Management 2016” award. In addition, the Apaseo and Cordaflex plants obtained the “2015 Pinnacle Award” from our partner Delphi, in recognition of our commitment to quality, value and cost performance.
The industrial division is focused on improving product mix. In this regard, we have carried out divestitures in secondary businesses. These actions led to a 26.5% increase of EBITDA in Grupo Condumex during the year, with the division accounting for the largest increase in terms of profitability within the Group.
Sales at Carso Infrastructure and Construction (CICSA) expanded 12.2%, reflecting a greater contribution from various markets, such as pipeline installation and infrastructure. Both allowed offsetting the lower level of sales registered at the oil, civil construction and housing sectors.
Important projects were completed during the year. These included the final phase of the Wastewater Treatment Plant of Atotonilco, the Southern Guadalajara bypass road and El Caminero elevated bypass road in Mexico City.
At CICSA, we have adapted to the complex macroeconomic dynamics, as well as those of the industry. Despite lower government spending, we have worked to diversify our businesses. As a result, we have established strategic alliances and associations with other companies. This modality has allowed us to participate recently in the construction of the Runway 3 and the Terminal building of the new airport of Mexico City. Particularly, our alliance with FCC (FCC Americas) will allow us to participate in construction projects in the Americas.
Regarding the Carso Energy division, sales increased 3.2%, which is mainly a result of income from rentals of the Jack-Up “Independencia I”. Similarly, we concluded the construction of the Waha - Presidio gas pipeline, which provides gas transportation service to the Federal Electricity Commission (Comisión Federal de Electricidad) in Mexico. The Waha - San Elizario gas pipeline, located in the state of Texas, in the United States of America, and the Samalayuca - Sásabe gas pipeline, located in the states of Chihuahua and Sonora in Mexico, are still under construction. Our energy division will continue to seek opportunities to engage in business related to the oil, natural gas and alternate energy markets.
The aforementioned events allowed us to shape the performance of our four divisions, as well as to increase Grupo Carso’s net sales by 7.9% in the year, totaling Ps. 95,188 million. In addition, the Group’s operating income expanded 32.9%, explained by the extraordinary item generated by the purchase of Sears Operadora México shares. Similarly, EBITDA increased by 16.0% as a result of better operating and financial results. Consequently, Grupo Carso’s net income grew 53.7%, while net earnings per share stood at Ps. 4.20, in comparison with Ps. 2.72 achieved in the previous year.
Grupo Carso’s financial position remains solid. In this regard, total assets increased 16.3% to Ps. 109,556 million, while consolidated stockholders’ equity rose 12.2% to Ps. 71,580 million. Total liabilities totaled Ps. 37,976 million.
Currently, Grupo Carso maintains a corporate structure and financial viability that allow it to execute future projects. In this respect, the net cash flow generated by operating activities was Ps. 6,578 million. Moreover, the Group’s total indebtedness increased 58.1% to Ps. 11,721 million, as a result of the bridge loan contracted to finance the construction of the Samalayuca - Sásabe gas pipeline. Particularly, Grupo Carso paid in cash an ordinary dividend of Ps. 0.88 pesos per share, from the balance of the Net Tax Profit Account, which took place between May and October 2016. Finally, the Group made investments in fixed assets for Ps. 7,949 million during the period.
With regard to sustainability, the Carlos Slim Foundation executed programs in various fields, thus demonstrating the high sense of social responsibility that it maintains under a scope of efficiency and opportunity. In this regard, the foundation participated in education, employment, health, nutrition, social justice, and culture, as well as human development, natural disasters, economic development, and environmental protection and conservation. The foundation’s actions contributed to improving the quality of life of the population, thus promoting the formation of human capital, as well as generating opportunities for the integral development of people and communities.
On behalf of the Board of Directors, I would like to thank our shareholders, customers and suppliers for the trust they have placed in us. Likewise, I thank all our teams, urging them to continue showing the motivation required for Grupo Carso to achieve the goals it has set, to continue to improve its performance year by year, and to contribute to the development of Mexico.
Sincerely,
Mr. Carlos Slim Domit
Chairman of the Board
