Annual Report for 2019
Letter from the President of the Council to Grupo
Carso Shareholders
Economic Panorama
In 2019 the world economic situation experienced a marked slow-down, attributable in part to the uncertainty surrounding the commercial tensions between the United States and China.
The United States economy grew by 2.3%, driven by consumer spending that increased by 3.7% and offset by a 1.8% gross decrease in corporate spending, as compared to a 5.1% increase in 2018. In view of this scenario, the Federal Reserve Board lowered the benchmark interest rate three times, to close the year at a range between 1.75% to 2.00%.
In Mexico, the Gross Domestic Product saw a drop of 0.1%, affected by a decrease of 4.9% in gross fixed capital formation, a cutback of 1.5% in government spending, and the slow-down in consumer spending, which grew by only 0.6% in 2019, whereas it increased by 2.3% in 2018.
The Mexican peso closed at $18.93 against the dollar in 2019, changing in value by 72 cents during the year, with a minimum of $18.75 during that period. The difference in interest rates between the risk-free bonds of Mexico and the United States and the acceptance of the TMEC (USMCA) trade agreement by the Chamber of Representatives in December contributed to this favorable appreciation of the peso.
Inflation in 2019 was 2.83% compared to 4.83% in the previous year. Non-core inflation increased by 0.59%, principally due to the slight increase of 0.2% in low octane gasoline, compared to the 15.4% increase of the previous year. Core inflation rose to 3.59%.
The trade balance showed a surplus of US$5.820 billion compared to a surplus of US$13.618 billion the previous year. The hydrocarbons trade balance reached a deficit of US$21.222 billion, US$1.938billion less than in 2018 and the non-hydrocarbons trade balance increased its surplus by US$17.500 billion, ending at US$27.042 billion. In exports, the manufacturing sector, which is the one with the greatest weight, grew by 3.4%, while all the import sectors decreased, highlighting the drop in capital goods of 8.9%, a drop explained by the decrease in capex investment in the country.
The Public Trade Balance showed a deficit of $398.356 billion pesos – equivalent to 1.6% of the Gross Domestic Product; the budgetary revenue had a real increase of 1.6% in respect to the previous year; budgetary expenditures decreased by 0.1% in real terms, due to the cut-back in expenditures. The primary trade balance had a surplus of 1.1% of the GDP. During the year, 121.227 billion pesos (0.5% of the GDP) of the Budgetary Income Stabilization Fund was used to offset the lower tax revenues collected because of the slowdown of the Mexican economy.
The beginning of 2020 has been severely impacted by the COVID-19 pandemic, which began in China and subsequently spread to the rest of the world. This has caused great uncertainty and nervousness in the financial markets and has put the brakes on the global economy, while raising the fears of a recession. Against this backdrop, the dollar’s value has grown considerably against all other currencies, and the price of petroleum has dropped to levels not seen in 18 years.
GRUPO CARSO
During 2019 the consolidated sales reached a total of $102.478 billion pesos, representing a growth of 6.0% for the year. The operating income and the EBITDA were $11.453 and $14.481 billion pesos, increasing 3.8% and 0.3%, respectively. These results include income from the revaluation of investment property, while in 2018 we recognized the depreciation of exploration investments in Colombian oil fields.
In Grupo Sanborns sales grew by 3.0%. We continued to focus on profitability per square meter, and no combined Sears-Sanborns stores were opened. We continued with our strategy of the optimization of space and a wide range of merchandise, obtaining good results especially with white lines and furniture, thanks to our analysis of demand. During the year, Sears began the implementation of a new technological application for the management of inventory, which will improve the logistics of the bricks and mortar stores as well as of online sales. Promotora Musical continued its expansion plans, opening 17 new iShop stores, with which we reached a total of 91 sales points throughout the country. This format ended the year with a very positive trend in sales, based partly on the introduction of new telephone models. The Group’s credit portfolio remained in a healthy condition, and we continued to remodel stores and to invest in the entire e-commerce and ClaroShop marketplace operation, from greater online sales promotions and forms of payment to information security, protection of data, and greater speed in deliveries. This year, additionally, we realized a strategic investment in 33.3% of the equity of Miniso Mexico, with the objective of diversifying into low-cost variety products, and thereby participate in the growth of this format.
Grupo Condumex increased its sales by 2.6% in 2019, mainly from the greater volume of telecommunications cables for the domestic market and for exportation. It also had good performance for other industrial and electrical products for various industries. The first three quarters of the year saw an increase in the sale of harnesses and cables for the automotive industry. However, this division was indirectly affected by the General Motors (GM) strike in the United States in the months of September and October, which affected production in Mexico and reduced our sales towards the end of the year. But even in the face of these reverses, GM awarded us the “Supplier Quality Excellence Award” for our commitment to quality and service in our operations in Apaseo, Jaral de Progreso and San Felipe. The last-named plant has won this award for the last six consecutive years. We also continued to support innovation through the Carso Research and Development Center (CIDEC), introducing leading edge processes and products on a worldwide scale, such as the “MinLed” cable, with luminescent properties based on LEDS, that functions by electromagnetic induction to guarantee its operational continuity, and in which we hold a patent in the principal countries with a mining industry.
Carso Infraestructura y Construcción attained a growth of 26.0% in sales and 21.1% in EBITDA. This was mainly due to the facilities for the telecommunications sector and to the progress in the construction of the gas pipeline in Chihuahua. In this year, we concluded the Oriente Emission Tunnel, the huge hydraulic deep-drainage system of the Valley of Mexico, the construction of which began in 2008 and that was inaugurated in 2019. We also began the construction of the Las Varas-Vallarta highway and diversified our activities towards other countries in conjunction with our partner, FCC, with projects such as the highway sections I and II in Panama. We carried out the drilling of geothermal wells for the Federal Electricity Commission (CFE), as well as the drilling of oil wells and other associated services for various clients, and we were awarded –in an open international bidding process – a contract for the construction of two offshore platforms for PEMEX in the Gulf of Mexico.
In Carso Energy, the two gas pipelines in Texas, USA in which we have an unconsolidated 51.0% share, continued to increase their income, operating and maintaining their availability in conformance with requirements. The most significant event in Carso Energy was the negotiation of the contractual terms for the Samalayuca - Sásabe gas pipeline with the CFE, which ended with favorable terms for both parties, allowing the Company to count upon a greater short-term liquidity for possible additional investments in the sector. The construction of the said pipeline was continued and we expect to see its completion in the second half of 2020. In the hydrocarbons operations in Colombia, sales decreased by 28.7%, due to the decreased production and sale of crude. In Mexico, however, the permitting and development plans for the exploration of blocks 12 and 13 were continued. In the clean energy sector, the time frame for geothermal concessions was expanded, and we continued with the development and business plan for those concessions. We also reached an agreement with Ideal for the acquisition of two Hydroelectric plants in Panama.
In several associated companies, such as Elementia; GMéxico Transportes; Trans-Pecos Pipeline LLC; Comanche Pipeline LLC and Inmuebles SROM, which are not consolidated, if the proportional sales and EBITDA of these companies were considered, $19.796 billion pesos in sales and $6.278 billion pesos in EBITDA would correspond to Carso.
The financial situation of Grupo Carso continues to be solid. The net cash flow from operations was $8.390 pesos billion and our 12 month net debt to EBITDA ratio was 0.19 times. The amount of resources utilized for investment in fixed assets was $3.683 billion pesos. In June and December of 2019, Grupo Carso paid a cash dividend of $0.94 pesos. The Series A-1 GCarso share remained at an almost constant price, changing by – 0.8% from $69.8 to $70.4 pesos to December 31, with a high market grade and forming a part of the Price & Quotations Index of the Mexican Stock Market.
In regard to sustainability, the Carlos Slim Foundation operates 96 programs and projects in 13 different areas, among them education; employment; health; sports; the environment, and culture, reaching millions of beneficiaries in Mexico and other Latin American countries.
Of particular importance to the Foundation is the “Mexico United” initiative, established for the purpose of addressing the damage caused by the September 2017 earthquakes. During that emergency, we and the companies of the Group and their volunteers responded immediately to the basic needs of thousands of people who had been affected, by distributing groceries, tents, blankets and sleeping pads, water purifiers and telecommunications. Ever since, we have continued with our construction and reconstruction efforts, with the resources obtained from the call for donations that we launched, in which for every peso received the Foundation contributed five more. We received a response from 217 thousand donors who placed their trust in us and contributed $412.4 million pesos, to which were added $2.0618 billion pesos by the Foundation. These resources have been used for the rebuilding of homes, for health and education infrastructure, for markets, and for the rescue of cultural patrimony. As we have mentioned, the actions taken and the application of these resources have been published, month by month and with total transparency in the Foundation’s website.
At the present time, to face the health emergency caused by the COVID-19 pandemic, Grupo Carso and the Carlos Slim Foundation are realizing support activities for all the population, to which the Foundation will allocate $1.000 billion pesos, contemplating three initiatives: Health, Remote Education, and Carso COVID-19 Protocol for the protection of employees and clients.
In the name of the Board of Directors, I thank the shareholders, clients and providers for the confidence they have placed in us. Besides thanking them, I invite all our collaborators to continue forward and to utilize these uncertain times as a time in which to get to know each other, our families and our work, overcoming this juncture together, and making it possible for Grupo Carso to achieve its goals and to continue its contribution to the development of the country.
Sincerely,
Lic. Carlos Slim Domit
President of the Board of Directors
