2020 Annual Report
Letter from the Chairman of the Board of Directors to the Shareholders of Grupo Carso
Economic Outlook
2020 was a year marked by a worldwide crisis, caused by the COVID-19 pandemic, which at this time has already surpassed 100 million confirmed cases throughout the world and several million deaths. The travel restrictions imposed in order to mitigate the propagation of the virus, along with a lack of knowledge in regard to an effective treatment gave rise to temporary shutdowns in a large part of the world’s economy, especially during the first half of the year, causing a drop of 8.93% in the GDP of the world during the second quarter and 3.50% for all of the year, even with the activation of unprecedented monetary stimulus programs.
The United States economy shrank by 3.50%, caused mainly by a drop of 7.31% in the aggregate demand of the services sector, as well as by a drop of 5.27% in fixed gross investments. As a result, the Federal Reserve lowered the reference rate two times, to end the year at a range of 0.00% and 0.25%. Additionally, stimulus payments in the amount of around 3.5 billion dollars were distributed during 2020, raising the public debt as a percentage of GDP from 108.68% to 131.18%.
In Mexico, GDP fell by 8.46%, with secondary activities showing the greatest impact (-10.20%), the hardest hit being construction and manufacturing, with drops of 17.42% and 10.34%, respectively. Tertiary activities, which represent 64.05% of economic activity, fell 7.85%, affected mainly by commerce, which diminished by 9.67% and by tourism.
The Mexican peso underwent a devaluation of 5.22%, closing at $19.91 against the dollar, showing a high volatility during the initiation of the pandemic and reaching a maximum exchange rate of $25.36. Its recovery took place during the end of the year because of the current-account surplus, which reached 26,571 MDD, representing 2.41% of the GDP and because of the difference in interest rates between Mexico and the United States. Banxico lowered the benchmark interest rate on seven occasions during 2020, to close at 4.25%, down from 7.25% the previous year.
Inflation in Mexico closed at 3.15%; the underlying component increased by 3.80%, offset by the smaller rise of core inflation of 1.18%, which benefited from the fall of petroleum prices – mainly gasoline –, which fell by 8.90% during the year.
The trade balance had a historic surplus of $34,476 MDD, compared to $5,409 MDD for the previous year. The oil balance had a deficit of $13,995 MDD, $7,370 MDD less than in 2019, while the non-petroleum balance increased its surplus by $21,698 MDD, to close at $48,471 MDD. In exports, manufacturing, which has the greatest weight, fell by 8.92%, while importations fell in all categories, especially in consumer goods, which fell by 26.20%, while capital goods fell by 16.87%. The latter is explained by the decrease of investments in the country.
The public balance had a deficit of 674,160 MDP (2.90% of the GDP) compared to the previous year’s deficit of 393,608 MDP (1.60% of the GDP). This increase was due to lower revenue (-4.10% real), impacted mainly by the drop in oil prices, which fell by 38.70% in real terms, and which were not compensated by the drop of 4.90% in real expenses.
Grupo Carso
In 2020 consolidated sales totaled $94,684 million pesos, decreasing by 7.6% during the year. The operating income and the EBITDA were $8,916 and $11,206 million pesos, decreasing by 22.2% and 22.6%, respectively. These results reflect the closure of operations to contain the spread of the virus and mainly affected the stores of the commercial division.
In Grupo Sanborns, sales fell by 25.7% due to the temporary closure of 48.1% of the units of all the formats at the beginning of 2020, including all the Sears, Saks Fifth Avenue, Sanborns Café and 62.7% of the Sanborns stores, brought about by the health emergency of the COVID-19 pandemic. This is the reason the strategic focus of this Division was directed towards online business, offering all products and services of the physical stores through the internet. Its e-commerce reached a maximum penetration of 85.7% in some of its formats during the third quarter and stabilized at 8.0% of consolidated sales towards the end of the year, which was a growth of 400% with respect to the previous year. Initiatives were carried out throughout the supply chain to increase the marketplace providers for ClaroShop as well as for Sears and Sanborns, improve customer services and promotions, and to reduce delivery times. Due to the prevailing uncertainty of those times, investments in the commercial segment were put on hold, and the payment of dividends was not scheduled for the year. A strict control over operating expenses was instituted, endeavoring not to affect either the quality of our products or our service standards. The inventories were optimized, and we managed to maintain our financial balance and our commitments with our employees and customers.
Grupo Condumex increased its sales by 3.7% in 2020, mainly due to a favorable effect in the average exchange rate, combined with a significant recovery in the sale of telecommunications cables in the national and exportation markets as well as in the sale of harnesses and cables for the automotive industry after the closures caused by the pandemic. In 2020 we were awarded the “Supplier Quality Excellence Award” by GM for our commitment to quality and services in our operations in Apaseo, Jaral de Berrios and San Felipe. We also continued to promote innovation through our Carso Research and Development Center (CIDEC), providing leading-edge processes and products on a worldwide scale, such as the flat aluminum battery cable, with 48 Volt automotive connectivity, for which we own the Industrial Design Rights in Mexico. High voltage automotive cables by Condumex have been developed and approved in Europe, where they show a clear tendency towards growth because of the increase in the use of electric vehicles. The process in the lines to produce FTTH cable connections has been redesigned, raising their production by 70%, from 170,000 to 289,000 units per month.
Carso Infraestructura y Construcción achieved a growth of 25.6% in sales and 34.7% in EBITDA. This was due mainly to the progress in the construction of the two offshore platforms Maloob E and Maloob I for Pemex in the Bay of Campeche and three offshore infrastructure platforms, as well as to a greater volume of contracts for land drilling and for the reworking of oil wells. In the year we satisfactorily completed the construction of the Samalayuca-Sásabe gas pipeline, which was begun in 2015, and which has been available since the beginning of 2021 for the transmission of natural gas from Texas for use by the CFE power plants located in Chihuahua and Sonora, as well as for the North and Northeast part of the country. As for infrastructure projects, we have continued the development of various national highways, and the FONATUR has awarded us – through an international public bidding process – the contract for the supply of materials and construction of the Escarcega-Calkini section of the Tren Maya platform and railroad. This Project represents an opportunity to promote the social, cultural, and economic development of the Yucatan Peninsula through a comprehensive and sustainable project that will create jobs and the possibility of an improvement in the living conditions of the people living in Southeastern Mexico.
In Carso Energy, revenue from the two gas pipelines in Texas in which we have a 51% share continued to grow, maintaining their availability in conformance with the contractual requirements. The most significant events of the year were: i) The acquisition of two hydroelectric plants in Panama from Promotora del Desarrollo de America Latina, S.A. de C.V. (IDEAL), as part of the strategy for growth in the energy sector, and ii) the completion of the construction of the Samalayuca-Sásabe gas pipeline, which has been available for the transmission of natural gas for the CFE since February of 2021. On another note, regarding hydrocarbons in Mexico, the planning and permits procedures were continued for the exploration of blocks 12 and 13, which will begin early in 2021. About clean energy, particularly in geothermal, we have continued with the necessary procedures to obtain the concession.
The financial situation of Grupo Carso continues to be solid. The net cash flow from operations was $10,723 million pesos, and the 12-months net debt to EBITDA ratio was 0.87 times. The amount of the resources utilized for investment in fixed assets grew by 25.6%, for a total of $4,629 million pesos. Due to the uncertainty caused by the pandemic, the payment of dividends was not scheduled and the GCARSO Series A-1 share fell by 4.9%, from $69.8 to $66.4 pesos as of December 31, with a high trading and forming a part of the IPC/S&P Index of the Mexican Stock Exchange.
At the start of the pandemic the Carlos Slim Foundation took urgent measures, and despite the uncertainty and lack of knowledge regarding the behavior and scope of this new virus, the necessary actions were quickly identified and implemented, such as:
• Donation of equipment and reagents for PCR, Antigen and Serology tests, as well as ventilators and medications.
• Provision of protective equipment to health personnel, such as N95 masks, gloves, medical caps and gowns.
• We provided food for the health personnel in 35 hospitals.
• In order to expedite access to the vaccine, we carried out the necessary agreements, accepting the risk involved in the transfer of AstraZeneca technology to ensure the production of at least 150 million doses in and for Latin America in the mAbxience Laboratories of Argentina and Liomont in Mexico.
• We supported the expansion of capacity of several hospitals, as for example the Temporary COVID-19 Unit of Mexico City, which has changed the life and destiny of thousands of persons and their families. This Unit was forced to continuously expand its capacity in accordance with the circumstances, to finally become, with its 607 beds, an important facility in the treatment of COVID-19 in Mexico City. It has an exceptional group of people who have treated more than 8,000 patients and will continue to operate as long as necessary.
• We established the Monitor system, that has been a valuable adjunct in the prevention of contagion and in the provision of timely medical treatment for all our collaborators, thus decreasing the cases of serious illness and death.
In the name of the Board of Directors, I wish to express my appreciation to all our shareholders, clients and providers for the confidence they have shown in us. To all our collaborators, besides my appreciation, I want to call upon them to continue forward with us, so that together we may overcome these difficult times and make it possible for Grupo Carso to meet its goals and continue its contribution to the development of the country.
Sincerely,
Mr. Carlos Slim Domit
Chairman of the Board of Directors
