Grupo Traxión, S.A.B. de C.V. (TRAXIONA) Earnings Call Transcript & Summary

Greetings, and welcome to the Traxión Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Aby Lijtszain, Executive President and Founder. Thank you. You may begin.

Thank you, operator, and welcome, everyone. 2019 was a complex year in macro terms; however, Traxión achieved a growth of 29% in revenues and 42% in EBITDA through considerable efforts. Yesterday, we released our guidance for 2020. I will discuss the strategic approach of such figures and then will hand over to Rodolfo, Wolf, Antonio, so they can talk about financial and operating results with more detail. The plan this year is to grow 8% in both revenues and EBITDA, with a CapEx of at least MXN 1.2 billion. This will enable Traxión to generate cash to size more strategic investments in the future, delever the balance sheet gradually and optimize the profitability of our current installed capacity. In 2020, we'll continue to run the company with a robust operating leverage and boost our resources through the development of disruptive platforms based on innovation and technology. Moreover, we plan to improve significantly our debt profile and maintain healthy leverage levels and strong balance sheet in accordance with the current macro landscape. In terms of business, there are still attractive opportunities in all segments. In cargo, there is an enormous market to gain share from by providing a high-quality service and integrated mobility solutions. We have a flexible and modern fleet and a broad and diversified client base that enable us to size opportunities in different regions and sectors. In logistics, we see a profitable business with an asset-light approach, great growth potential and further diversification ahead. In the passenger segment, we continue to see strong demand and expansion opportunities with many clients. And we plan to enhance even more our operations through technological improvements. Finally, in 2019, we made significant developments in terms of sustainability. We designed and adopted our ESG strategy. We generated relevant policies, and aligned our objectives with those of our stakeholders. This resulted in Traxión being recognized with a Special Sustainability Award from one of the most respective publications in our sector. With this, I conclude my remarks. Now I will hand over the call to Rodolfo. Rodolfo, please.

Thank you, Aby. I want to discuss some of the key aspects I consider relevant for 2019 results. First, in personnel segment, there were several milestones that contribute to the great performance of the business line. Traxión implemented a series of new technologies to improve operating controls and achieve forward greater digitalization. Two examples are digital quotation system and our user-oriented app. These developments are helping us to improve the efficiency of our business and to be much closer to our clients. Also, we started operating 100 buses powered by natural gas. This requires significant efforts beyond the financial investments. We have to source the buses abroad, develop adequate infrastructure and fit the units for service. We are very proud to say that we achieved an even greater operating leverage since we were able to increase our profitability, thanks to our continuous effort of client optimization in a large scale, throughout which we were able to capture growth with virtually the same operational infrastructure. Second, in the cargo and logistics segment, we were able to increase our productivity throughout a more efficient fleet management and strong commercial team and our continued effort in route and price optimization. In this segment, we have flexible fleet, a diverse client base and a broad geographic footprint that help us seize opportunities much better than any competition in our country. We continue implementing initiatives to expand the useful life of our fleet and equipment, which optimizes the use of CapEx by directing resources towards the most profitable opportunities. 2019 was a great year. I'm very proud of all the coworkers that help us deliver such good results. With this, I conclude my remarks. Please, Wolf, go ahead.

Thank you, Rodolfo, and thanks, everyone. Welcome. I just want to highlight 3 elements of our results that I consider especially relevant. First, the company grew its net operating cash flow, almost 98% and 91% in the year and the quarter to reach MXN 2.1 billion and MXN 933 million, respectively. This was mainly due to an upgrade in working capital. Our team conducted a tremendous effort to achieve an improvement of approximately MXN 400 million in the receivable cycle implying around 20% of efficiency in 2019. The second element is that our set of financial and operating figures is in line with our guidance and expectations. There were no surprises there. The most relevant thing to consider are quarterly revenues of cargo and logistics. As you can see, revenues were literally unchanged compared to the fourth quarter of 2018. Well, this was mainly due to a seasonality effect. A portion of the revenue that typically is sold in the fourth quarter was sold in the third as a result of clients preparing ahead of the holiday season. This effect was expected. And this is one of the reasons why we upgraded our guidance last quarter with this estimate and also why you saw an increased activity and revenues in cargo in the third quarter of 2019. The third and last aspect I want to highlight is net income. You see that our net income in the year grew only by 2%. Well, the bottom line was impacted basically by the comprehensive financial results, which derived from a growth in average debt of almost 27%, which represents more than MXN 1.1 billion and from the impact of interest rate fluctuations in our hedges. Furthermore, we are perfectly conscious that there are areas of improvement in the debt profile arena, and we are taking the necessary steps to tackle them adequately this year. Shifting gears, I want to elaborate more on the detail and rationale of our guidance for 2020. As Aby mentioned, we chose to grow at moderate rate using the same strategic approach, generating cash and delevering the balance sheet. We'll boost our profitability and strengthen the bottom line. With that in mind, please be advised that our growth plan for 2020 is 100% organic. This growth plan does not consider or depends on any M&A transaction. In terms of CapEx, around 60% of the MXN 1.2 billion we plan to deploy is to grow and capitalize the best and most opportunities, while 40% will be to maintain our modern fleet. Thank you for your attention. I will now hand over to Antonio, who will discuss financial results in more detail.

Thank you, Wolf. I will review other financial and operating details before opening the floor to Q&A. I'll try to be brief. As Wolf already said, Traxión delivered in 2019. Consolidated revenues in the year grew mainly by 2 fronts: First, in the personnel and student transportation segment, all the business that we started in 2018 contributed fully in 2019. That, plus all the new operations started in the year, contributed to a healthy growth in revenues of 28.2%, with this segment contributing with 41.3% to consolidated revenue. Second, in cargo logistics, the operations of Bisonte acquired in October of 2018, contributed fully through the year. Moreover, Traxión continued to be more productive by diverse fleet management and client optimization. Furthermore, we expanded more than 51,000 square meters in logistics space. Finally, this segment grew 30% in revenues and contributed with 58.7% to the consolidated figure. Shifting gears, the most relevant aspects I want to discuss here are cost and expenses. In 2019, costs grew 31.4%, mainly due to increases in fuel prices that surpassed the company's projections and most important an increase in cost of depreciation and amortization. In this line, it is worth mentioning that Traxión grew its overall fleet by more than 19%. This growth was comprised by an average of 722 new passenger buses, the addition of more than 550 trucks of Bisonte and Roncalli, plus all its trading equipment together with the organic expansion of the cargo fleet. All that resulted in a significant increase in depreciation. Excluding such impact, all the other operating costs grew in line with revenues, even though the company incurred in several pre-operating costs derived from normal expansions of operations. Moving on to expenses. There was a growth of 20.1% compared to 2018, which is well below that of consolidated revenues. Most relevant, there is a 140 basis point compression in expenses as a percentage of revenues in 2019. This was mainly driven by improved efficiencies at a corporate level and the full operation of the shared services center. This basically means that we continue to grow the company with an effective operating leverage. In terms of the fourth quarter, Wolf already discussed what happened to revenues of the cargo segment. But I want to highlight something I consider relevant. The fourth quarter is fully comparable to that of 2018 in terms of cargo fleet, which again considers the addition of units from Bisonte and Roncalli. If you look at that, you will notice that average fleet increased only 4.2%, while kilometer volume grew 9.3%, which is more than double the growth of average units. This means that we keep being more productive in terms of fleet utilization. However, revenue per kilometer did show a slight decrease, mainly driven by the seasonality effect that Wolf just mentioned. On the CapEx arena, Traxión invested more than MXN 1.7 billion, mainly in organic growth of fleet and equipment. Moving on to the balance sheet. Perhaps the most important element to discuss here is leverage. The average debt during the year increased more than 27% compared to that of 2018, while total debt at the end of the year recorded a growth of 18.7%. However, net debt-to-EBITDA ratio at the end of 2019 was 2.05x, which is almost 6% less than the average of the first 3 quarters of the year and certainly lower than the same ratio at the end of 2018, which recorded 2.19x. Well, thanks for your attention. With this, I conclude my remarks. I will now open the floor to Q&A.

[Operator Instructions] Our first question comes from the line of [ Emma Anderson ] with Miranda.

I was wondering if you could give us some more detail on the decline in net profit over the quarter. And secondly, if you could give more detail on what happened with the cargo and logistics revenue over the quarter, please?

Thank you, [ Emma ]. This is Antonio. Thanks for your questions. In terms of the net income of the fourth quarter, there were 3 things that impacted basically the figure. The first was the financial cost. There was an increase in interest expense and an impact on hedges from interest rate movements. The second was an increase in depreciation costs. And the third, there is a cost of facility services and utilities that increased, and that increase was derived from natural expansion of operations and some pre-operating expenses. And to your second question, the cargo revenues in the fourth quarter were impacted mainly by a seasonal effect. There was a portion of the kilometer volume that was sold in the third quarter instead of the fourth. Usually, clients prepare ahead of the holiday season, the high sales season. And this year, they prepared even more ahead, and they recorded the sales in the third quarter. If you remember, we discussed this during our previous call, and that lead, obviously, to a better result in the third quarter. Thank you.

Our next question comes from the line of Martín Lara with Miranda.

Congratulations for the strong results and the solid guidance for this year. I have 1 question. Could you please give us your expectations for the 2 business segments also for this year?

As already Antonio and I mentioned at the pitch before, the expectation still remain almost the same of 2019 in both sectors. We're trying also to make some improvements in the company to make a better also effort or more efforts to continue growing -- just not growing, also to maintain our margin with our profitability expectations. So we are, so far, looking for the same profitability of 2019.

Okay. But what is the growth that we should anticipate in each segment?

We are not anticipating -- Martín, this is Antonio. We are not anticipating any material growth in cargo in terms of revenue. We are anticipating more profitability, more fleet utilization and more cash flow generation. And in terms of personnel transportation, it's hard to tell right now the exact figure that we plan for growth. But it's going to be around the guidance figure, around probably in the low teens. And that's because we are planning to expand -- be more selective on our expansion opportunities.

Okay, perfect. And I have another question. What can we expect in terms of acquisitions?