2021 Annual Report
Letter from the Chairman of the Board of Directors to the Shareholders of Grupo Carso
Economic Outlook
After a year of 2020 that was deeply affected by the COVID-19 pandemic, in which the GDP of the world experienced a drop of 3.1%, the year of 2021 began with a gradual recovery, thanks to the progress of vaccination programs that achieved a greater immunity, as well as to the discovery of better treatments for the disease, to all of which was added the distribution of unprecedented monetary stimulus payments. According to the IMF, the Gross Domestic Product of the world grew by 5.9% during 2021.
The United States economy grew by 5.7% in 2021, after having dropped by 3.5% the previous year, driven mainly by personal consumption and gross fixed investment, which increased by 7.9% and 7.8%, respectively, compensating for a greater commercial deficit and a lesser government expenditure.
In Mexico, the GDP grew by 5.0%, after having dropped by 8.4% in 2020, driven by the secondary activities, which grew by 6.8%, highlighted by a 9.0% recovery of the manufacturing industry and of the construction industry by 7.3%. Tertiary activities grew by 4.2%, with a strong commercial recovery of 10.7%, compensating for the 3.4% drop in financial services.
The Mexican peso closed at $20.53 against the dollar, for a depreciation of 3.1% and with a fluctuation of from 19.60 to 21.92 during the year. The difference in interest rates between Mexico and the United States became increasingly greater throughout the year. The Bank of Mexico raised the reference rate six times, bringing it from 4.25% in 2020 to 6.00% at the end of 2021, while the United States interest rate remained unchanged.
Inflation, driven by the commercial disputes with China, has pressured the Central Banks into raising the interest rate. In Mexico, inflation closed at 7.4% due to the increase in the prices of raw materials and oil on a worldwide level. The core component increased by 5.9% while the non-underlying component increased by 11.7%. In the United States, on the other hand, inflation increased to 7.04%.
In 2021 the commercial balance had a deficit of $11,491 MDD [million dollars], compared to a surplus of $34,013 MDD the previous year. The petroleum balance reached a deficit of $24,926 MDD, which is greater than in 2020 by $11,002 MDD, and the non-petroleum balance decreased its surplus by $34,503 MDD to end at $13,435. In exports, manufacturing rose by 16.7% and imports increased in every sector, with an increase of 34.9% in consumption goods. The worldwide shortage of semiconductors was the reason Mexico exported only 2.7 million vehicles in 2021, 0.94% greater than in 2020, but still 20.1% less than in 2019. The price of Mexican oil products rose from $35.8 USD per average barrel to $64.60 USD/barrel in 2021.
Public finances continued healthy, thanks to greater revenues from the economic recovery and the containment of expenditures by the government’s austerity policies. The public balance had a deficit of -757,790 million pesos MXN, similar to the equivalent of 2.9% of the GDP in 2020. The national debt as a percentage of the GDP diminished from 51.7% in 2020 to 50.1% in 2021.
The challenges have continued in 2022 with its first months complicated by the Russian invasion of Ukraine, which has caused an increase in the price of energy, food, and raw materials on a worldwide level, causing additional inflationary pressures and uncertainty in regard to world growth during the year.
Grupo Carso
In 2021 consolidated sales totaled $124,573 million pesos, increasing by 31.6% during the year. Operating profits and EBITDA were $12,857 and $15,724 million pesos, increasing by 44.2% and 40.3%, respectively. These results reflect the normalization of post-pandemic operations, mainly in the stores of the commercial division, as well as an important growth factor in the industrial division.
In Grupo Sanborns sales increased by 35.0% due to the recovery of demand after the temporary closure of the stores, undergoing a gradual normalization as a greater percentage of vaccination was attained, along with greater movement in the population. The principal activity in sales continued to be in the categories of electronics, technology and linens, while fashion and footwear began to improve, with the return to school, the return to work and to public events. The strategic focus in Sears continued to be the promotion of online business and to offer all the products and services in the physical stores by that means. E-Commerce increased by 3.5 times in respect to the previous year. Initiatives were carried out online to increase the number of providers in all the supply chain for ClaroShop as well as for Sears and Sanborns, the improvement of customer service, promotions, and the reduction of delivery time and expenses. The Sears App was launched, and the percentage of purchases picked up in the store – the “Click and Collect”service – was increased. Based on a careful analysis of the assignation of investments, the opening of all the stores – with the exception of iShop – was delayed; inventories were optimized, and a greater operational leverage was attained, with a strict control of expenditures, without affecting the quality of the products or the level of our services.
Grupo Condumex increased its sales by 34.4% in 2021 and EBITDA by 25.5%, mainly due to a favorable effect in the average exchange rate, combined with a significant recovery in the sale of telecommunication cables in the national and exportation markets, as well as in the sale of harnesses and cables for the automotive industry. In 2021 we received the “2020 Supplier Excellence Award” from GM in the operations in San Felipe, Silao, Ixtacuixtla, Jaral del Progreso, Jaral de Berrios and Apaseo, for our levels of commitment in regard to quality and service, as well as the SILVER Provider award in the replacement parts market. During the year we developed hybrid energy, communications and signal cables for radio communication systems, and cell phone telephony antennas for the new 5G service. We also developed connectorized optical cables as a solution for speeding up the deployment of telecommunications infrastructure for the FTTH service, and we increased the production capacity of optical connection cable. We obtained the approval of our automotive coaxial cables by GM and approval of our automotive communication protocol cables by VW, Daimler and GM, presenting the opportunity to do business with new clients. In addition to the foregoing, we increased our participation in the national market for energy cables for mines.
Carso Infraestructura y Construcción saw a growth of 3.8% in sales. This was due mainly to greater volumes in the repair of Wells and drilling services, as well as to the startup of new deep onshore drilling contracts with Pemex. Estructuras y Equipos increased the manufacture of equipment for the petrochemical industry, mainly in relation to the Dos Bocas project in Tabasco. In the installation of pipelines, there was a greater assignation of works for Telecom, and the Samalayuca-Sásabe gas pipeline was completed. As for infrastructure projects, we continued with the construction of the Mitla-Tehuantepec and the Varas-Vallarta freeway, and greater revenue was generated from the progress in the construction of the Escarcega-Calkini section of the Tren Maya platform and railway. Towards the end of the year, the cost of the rehabilitation of Line 12 of the STC Metro was recognized, in conformance with the collaboration agreement with the government of Mexico City, by which the operating profits of that Division experienced a significant decrease.
Carso Energy was already participating in the Group to a significant degree with a share of 51.0% in the two gas pipelines we have in Waha, Texas, in the United States, not consolidated with the startup of the Samalayuca-Sásabe pipeline, 100% owned by the Group, as well as with the acquisition of the two hydroelectric plants in Panama the previous year. This business segment contributed $2,994 million pesos, growing by 228% above 2020.
This increase in participation was owed primarily to the startup of the Samalayuca-Sásabe gas pipeline, which had been available since the beginning of the year for the transmission of natural gas from Texas for the Federal Electricity Commission, and which began to produce revenue at that time, as well as to the revenue from the two hydroelectric plants in Panama, acquired in 2020. We will soon increase the capacity of the aforementioned gas pipeline to a significant degree through the investment in a compression station. The two gas pipelines in Texas, in which we hold 51.0%, will continue to increase their revenue, operating and maintaining their availability in conformance with the contractual requirements. In regard to hydrocarbons in Mexico, the exploration and production phase for hydrocarbons in blocks 12 and 13 have continued. In regard to clean energy, specifically geothermal energy, we have continued with the procedures necessary in order to obtain the concession in two fields in which we have attained a significant advance in the exploration phase.
The financial situation of Grupo Carso continues to be solid. We have endeavored to maintain a financial balance as well as our commitments towards our employees and our customers. The net cash flow from our operations was $12,328 million pesos and the 12 month net debt to EBITDA ratio was 0.82 times. Due to the pandemic the investments in fixed assets decreased by 69.0%, to a total of $1,432 million pesos. The payment of a dividend in the amount of $0.93 pesos per share was adopted and the price of the GCARSO Series A-1 share remained constant at -0.3% from $66.4 to $66.2 pesos on December 31, with a high stock market price, and forming a part of the IPC/S&P index of the Mexican Stock Market.
In the name of the Board of Directors, I thank our shareholders, customers and providers for the confidence they have shown in us. Besides my appreciation I invite all our collaborators to continue forward with us, making it possible for Grupo Carso to meet its goals and continue to contribute to the development of our country.
Sincerely
Lic. Carlos Slim Domit
Chairman of the Board of Directors
