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

Greetings, and welcome to the Traxión Second Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Aby Lijtszain, Executive President of Traxión. Thank you. You may begin.

Thank you. Welcome again, everyone, to our earnings call. I hope that you and your families are okay, and I'm deeply sorry for how the contingency has evolved and hope that we return to normal soon. Despite the negative landscape, Traxión delivered solid results. Perhaps the most relevant aspect to highlight is that net income grew more than 100% compared to the same period of last year. This very positive outcome was mainly driven by our resilient business model and the capability of the company to react during the contingency. Rodolfo, Wolf, Antonio will take you through the most important details of the quarter that drove these excellent results. We continue to keep a close control on cost and expenses. That resulted in significant savings that boosted margins and net income. We managed to achieve a very effective asset utilization despite of the global landscape. Regardless of the downturn of some industries, we're able to allocate our fleet towards different sectors of the economy that were demanding our services and take advantage of our competitive position. This was possible because of the strength of our commercial muscle, the diversity of our service portfolio, the excellent relationship with clients and the flexibility of our fleet. We managed to provide expanded capacity to some existing customers and even to pay new clients. This is proof that we have one of the strongest commercial forces in the sector. When I founded Traxión, I designed our resilient business model based on diversification, discipline and innovation. I'm proud to say that this was precisely what helped us to weather the storm of the second quarter. Since we became public, we have talked extensively about the strength of our business model. Now we are seeing the benefits. Having said this, I just wanted to confirm our guidance for the year and reinforce our commitment to continue operating efficiently and profitability. In terms of innovation and disruptive technology, I'm very proud to share with you that this quarter, we launched 2 applications. The first is called Traxi, a mobility application for people commuting through which users find predetermined routes and the sign-up for rides. This way, they go safe, comfortable and on time. It was launched early and we intended and support medical staff to commute safely and totality free of charge. The second is Traxporta, a digital platform through which we connect clients that require cargo services with precertified trade operators. With this application, Traxión promotes an asset-light model based entirely in technology and know-how. Finally, as many of you already know, we released our first integrated report in June. We disclosed both financial and nonfinancial information. 2 years ago, Traxión started a long consistent journey to integrate sustainability into the business. Our institutional approach, client orientation and operating excellence as a result of many decades of accumulated experience and leadership in each of our business units. As well as of our commitment with people, the environment and the development of Mexico in general. I will now hand over the call to Rodolfo. Please go ahead.

Thank you, Aby. Before talking about second quarter highlights, I would like to talk a little bit about the industry and our company. Regarding the pandemic situation that the world is facing, we are very proud to be part of an industry that has and will continue to have an important role in the recovery of the economy. This business has high barriers of entry and requires a deep know-how to be successful. Our business requires scale, innovation, state-of-the-art technology and extensive safety protocols. Every day, our fleet moves people throughout 1,000 of kilometers under the highest quality standards, operating with the utmost efficiency and close monitoring. By being successful in these areas, we have been able to build a strong and profitable business, integrated by prosper companies that have been running for several decades. Traxión has an extensive and diverse client base that has been assembled throughout the years and years of hard work and operating excellence. It is precisely our sturdy platform that has enabled Traxión to seize opportunities and continue running under adverse circumstances, such as those of the second quarter and the COVID-19 pandemic. Having said that, let me walk you throughout some relevant aspects of the second quarter. Even though our kilometer volume decreased more than 19%, revenues grew 6.8%. Most importantly, the negative effect of the pandemic did not pass-through the bottom line. Wolf will give you more details over the financials shortly. We managed to achieve these outstanding results by being disciplined, innovative and diversified. We were extremely active in commercial terms. Our sales force stay in close contact with both existing and new clients. And we were able to gain new business and expand the capacity of some of our current accounts. On the operational side, we started the quarter with some uncertainty. As of the period above, we were able to set up operational platform in a good, steady rhythm. For example, in cargo, the auto industry was completely shut down. And we have to shift our fleet to other sectors such as retail, consumer and food. We rebalanced our fleet in record time, and we proved that our commercial team is the best in the industry. Our logistics segment show a significant increase in operations. Deliveries grew as the e-commerce channel gained momentum. And the last-mile and warehousing business grew following the new consumption trends in this contingency. In terms of personnel and student transportation, even though schools and industry shutdowns, because of the importance of social distancing, several existing and new clients expanded their fleet to try and offer their fast, the safest way to get to work by avoiding public transportation. Traxión was able to use the idle fleet to provide expanded capacity to both existing and new clients, mainly throughout its strong commercial muscle, operating excellence long-lasting client relationships and state-of-the-art technology platform. By mid-June, our operations started to normalize. It was a very complex quarter. It was a great test for the company, but especially for our management team. And I am very proud to say that we have proven that we do have the best transportation and logistics team in Mexico. With this, I finish my remarks. I will ask Wolf to guide you through other financial information. Thank you.

Thank you, Rodolfo, and thanks, everyone, for joining. I will walk you through the most relevant financial aspects of the quarter as well as some of the actions we took during this very challenging period. As you may assume, we continue implementing the measures we carried out during the first quarter in order to ensure the business continuity. Probably, some of the most important things to bear in mind this quarter, besides the operational results are that the company did not burn any cash and that we took some actions to improve our debt profit. Moreover, our revenues grew while our cash flow from operating activities increased a healthy 27.8% and net income spiked more than 100%. We achieved these results under a strict financial discipline. The company adopted a defensive stance to face the situation, and we managed to improve profitability by implementing a strict cost and expense policy that resulted in savings in both fixed and variable portions including fuel, payroll, maintenance, corporate overhead and nonessential items. All of that led to an increase in operating income and EBITDA growth, together with a margin expansion of 180 basis points and ultimately, in a very significant increase in net income. Tonio will discuss details in a moment. In terms of working capital, we saw a lightly increase in receivables, mainly due to expansion with both existing and new clients, which is a natural effect when we start new businesses. Despite of that, there was no significant impact in the working capital cycle, which is especially relevant given the current landscape. As you can see, both total debt and cash remain virtually unchanged compared to the first quarter of this year. Furthermore, despite an increase of almost MXN 1 billion in total debt compared with the second quarter of 2019, our cost debt decreased approximately 15% in terms of effective interest rate. Additionally, the company delevered the balance sheet during this period. Traxión ended the second quarter at 1.79x net debt-to-EBITDA, which is well below almost 2.2x 1 year ago. Speaking more about leverage, perhaps the most relevant aspects to consider are the actions we took to improve our debt profit. First, we negotiate principal amortization deferrals for the next 12 months, totaling approximately MXN 320 million, which will improve significantly our cash flow for such period. Second, we achieved a reduction of approximately 200 basis points on a MXN 485 million facility. And finally, we converted approximately MXN 148 million of short-term to long-term debt. As you can see, we were very active on the financial front as well. With this, I conclude my remarks. I will now hand over to Tonio, so he can discuss our figures in more detail. Thank you.

Thank you, Wolf. Hello, everyone. Welcome. I hope you and your families are safe and healthy. As you already saw, Traxión acted promptly and took the right actions to face this unprecedented situation. I will now walk you through some financial details before opening the floor to Q&A. Despite all the negative effects that this contingency brought, Traxión delivered a 6.8% growth in revenues. I will explain the drivers of such expansion. First, in cargo, we experienced a shift on demand among sectors. We were able to provide increased capacity since the auto industry reduced its volume significantly. This fleet rebalancing brought a decrease in kilometers driven of 13.9% and was partially offset by an expansion of cargo-related logistics. The result was a growth of 10% just in cargo revenues. Second, there was a significant increase in logistics services such as forwarding, last-mile and less-than-truckload, mainly driven by a growth of e-commerce activity. As a result of the improved business in cargo and logistics, our 3PL warehouse space grew 6.7%, together with an increase of 19.4% in revenue per square meter. Finally, in the personnel and student transportation segment, there was a decrease of 10.6% in revenues that was driven by a reduction in operating activity at the beginning of the quarter, mainly due to schools shutting down, some corporate supporting home office and industrial clients closing plants, especially in the auto industry. This resulted in a drop of 22.6% in kilometer volume. However, some clients that did not stop operating requested increased capacity due to social distancing rules and their aversion to their staffs exposure to public transportation as well as strict sanitary measures that Traxión implemented in this service. Moreover, through the second half of the quarter, our operations started to show more stability as some of sectors of the economy resumed activities. Shifting gears. In terms of costs, the change we recorded in fuel stems from the decrease in overall kilometer volume and to a lesser extent, from a drop of approximately 11.8% in fuel prices compared to the second quarter of 2019. This drop in kilometers also drove down the fleet maintenance cost. Now the cost of facilities, utilities and supplies increased 63%. This is mainly due to third-party services contracted in logistics business on behalf of some clients and is consistent with what we experienced in the first quarter of this year. Likewise, and due to the increase in less-than-truckload and last-mile activities, there were additional costs incurred mainly on customs and expanded capacities. Such costs are to be recorded in this line, resulting in a higher figure, both in absolute terms and as a percentage of revenues compared to other quarters. Moving on to the bottom line and as a result of all the measures we took in terms of cost and expenses, consolidated operating income grew 54.6%. Moreover, EBITDA totaled MXN 748 million, which represents a growth of 15.9% and a margin expansion of 180 basis points to reach 22.8%. This is proof of our resilient business model and efforts to maintain profitability. Now comprehensive financial result improved, mainly driven by a better cost of debt, interest income from our cash position, and the foreign exchange effect related to U.S. dollar-denominated billing of services. Finally, net income reached MXN 151 million, which represents a very impressive growth of 112.5% compared to the same period of last year. This drove net cash flow from operating activities to reach MXN 593 million, a 27.8% growth. Well, with this, I wrap up my observations. Thanks for your attention. I'll now open the floor to Q&A.

[Operator Instructions] Our first question comes from the line of Luis Yance with Compass Group.

Congratulations on such an outstanding quarter. Two questions on my side on the cargo business. I mean, you mentioned the courier and packaging business had a pretty outstanding growth during the quarter. A lot of it related to e-commerce. I just want to get a better understanding, how much of that business is actually e-commerce oriented and how sustainable the kind of growth we saw -- the 125% year-over-year growth we saw is sustainable going into the second quarter and the second half? That will be my first question. Then the second question, also on the cargo. You mentioned you moved capacity from sectors such as autos, into other sectors, perhaps such as retail, but as the auto sector is coming back over the past couple of weeks, and it looks like the retail sector remains strong. How do you balance that demand? Are you going to shift back some of that capacity to the autos? Or actually, you're adding capacity into that? Are you using third-party capacity as an option to have some flexibility? If you can comment on that, that will be great.

Luis, I'm Rodolfo. Regarding your first question about e-commerce -- about the packaging business. Yes, almost 80% that we grow -- of the growth of this month was e-commerce related. And what we saw is that it's a new trend in the market, it's happening. And of course, e-commerce was growing each year consistently, but this had a boost. So we think -- and with the clients we have, I think that the volume will maintain in the future. And regarding your second question about the auto industry and balancing of the cargo segment. We -- what we have done is, we choose the best clients over the -- over our business base or our client base, and always, we help with our customers and everybody to have the best way to achieve their goals. So the big issue here is when the auto industry comes back, depending on the sectors that we have each one of the company, they go back to do the service to those companies. For example, in June, you know the auto industry came back in a lot of places in Mexico. So the fleet that we have in other sectors went back to service those clients. So we do the balancing of the fleet continuously, and we have done that for the past years, and we can continue to do it in the future.

Great. And a follow-up, if I may. And that's just trying to reconcile the kilometers driven being down so much, but revenues going up. And I was wondering if you could share what percentage of your business or your revenues right now are under a fixed revenues that you get no matter whether you provide the service or not? And what are you seeing in that fixed portion of your business in terms of clients looking to renegotiate perhaps the schools that didn't open, they had to pay you. But now it looks like this situation is going to continue longer than expected. Are some of those revenues a little bit of risk? Or you've already renegotiated that and that's already reflected in the results?

Luis, this is Aby. So we have around 50% of our contracts negotiated with fixed revenues. And the good thing is that the -- all the capacity that is available because of the schools, it's relocated to industries, temporarily for the social distancing. So when the situation normalize, we think that the social distance will not need anymore, and we'll take those buses back to the schools.

Our next question comes from the line of Pablo Monsivais with Barclays.

It's kind of a follow-up question. And I would like to have a little bit more detail also on the cost side. But how do you see your numbers, your 22% EBITDA margin as a sustainable level going forward in a post-COVID world? You just mentioned that how revenues should trend after COVID, but also how cost? And what are your thoughts on probably margins going forward?

Pablo, I'm Rodolfo. So we have worked a lot in our cost efficiencies. Of course, our revenues were stable because of the logistics sector, and that sector is a little less margin than the other and then the cargo and the passenger. But what we did in this trimester, and we will continue doing in the future, is to work really hard to lower our cost. And that way, we can maintain the margins that we have delivered in Traxión in the future.

And kind of a related question is, okay, you will work hard to keep your cost down. But then let's fear that in 2020, demand continue to be strong. How do you manage your CapEx, for instance, and your -- and the profitability of your asset base? Should we expect then to see a ramp-up in CapEx because this year, CapEx has been a very small amount?

Pablo, this is Wolf. As we spoke in the last quarter, we are very cautious with every investment that we're planning in this moment. I think we have to be like that for a few more months at least. So we are analyzing all the opportunities that the company has. But for now, we're not expecting to have like a higher investment for the year yet. So we're still -- continue analyzing all the opportunities and be very -- be careful with all the investments that we can deliver for the next quarters.

Our next question comes from the line of Marcos Barreto with Citi.

First, can you give us a sense as to what portion of your flow was related to e-commerce versus other segments?

Marcos, I'm Rodolfo. The e-commerce, it's around 10% of our revenues overall, right now. We're working really hard to grow that percentage.

Okay. And how has COVID-19 impacted the competition landscape for you guys?