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

Greetings. Welcome to Traxión's Fourth Quarter 2020 Earnings Call Results. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Aby Lijtszain, our Executive President and Co-Founder. Thank you. You may begin.

Thank you. Welcome again to Traxión Earnings Call. I hope you and your families are safe and healthy. As usual, I will comment on some relevant aspects of the quarter before handing over to Rodolfo, Wolf, Antonio, who will discuss operating and financial figures in detail. For the third year in a row, Traxión posted impressive results. Despite the pandemic, the company achieved record high financial and operating figures. We faced a contingency with an extensive position and the results were positive. I am very proud to share with you that in October, Traxión joined the United Nations Global Compact. And there are very significant step towards ESG and the implementation of the best practices in terms of sustainability. It was a most challenging year, but also the best in our history. 2020 tested our business model resiliency, the execution capabilities of our management team and the flexibility of our commercial muscle. As you know, Traxión launched an asset-light division in 2020, focused to capture the growth of Logistics services. The company was very well positioned to capture the growth that came with a contingency as people were forced to use e-commerce. We basically tripled our exposure to logistics channels related to it. This boost in an electronic sales encouraged a faster development of the logistics infrastructure needed to support an appropriate penetration of e-commerce and Traxión took advantage of that. Moreover, through Traxión Logistics, our technology-driven platform, we became the supply chain manager of several clients, and our focus is to continue to be for many more of them in the near future. Moving on, Traxión surpassed its guidance figures, once again, over a very complex macro environment. The company reached MXN 14.3 billion in revenues, MXN 3 billion in EBITDA and MXN 661 million of net income. What I think is more relevant here is to compare these figures to those of 2017 when we became public. We basically doubled our revenues in 3 years, with an impressive growth in EBITDA of 140%, a 330-basis point expansion in margins and a 97% growth in net income. Additionally, operating cash flow grew 17.5x. These are truly remarkable figures, especially given current conditions. Shifting gears, our Cargo operations maintained a healthy level. We have to shift our fleet continuously among sectors and geographies to satisfy demand. Logistics recorded significant growth as well, mainly driven by e-commerce activity that boosted our last-mile business, which registered a growth of almost 300% in the fourth quarter. And by an expansion of 25%, which is more than 105,000 square meters of 3PL warehouse space, which resulted from increased demand. In these business lines, we are preparing an investment plan to reinforce our operating infrastructure, especially in the last-mile segment, which is the one showing more dynamic growth. In terms of Personnel Transportation, as you know, we started facing increased demand mainly due to social distancing measures. And we have to shift the fleet that is normally dedicated to schools to serve these clients. Such demand surpassed this capability, and we needed to outsource approximately 500 buses from other players. As of today, we continue to pace over demand. We are constantly in touch with our clients to know their expectations and improve their profitability of such fleet outsourcing. Finally, in terms of guidance and due to the global macro landscape, we are planning a growth of approximately 10% in both revenues and EBITDA and maintain our margins. We expect to deploy approximately MXN 2 billion of CapEx, mainly for fleet renovations, growth initiatives with both existing and new clients in the Personnel Transportation segment that got delayed by the contingency and by investments in technology to reinforce the asset-light division. With this, I conclude my remarks, and I will hand over to Rodolfo. Please, Rodolfo, go ahead.

Thank you, Aby. Good morning, everyone. Thanks for your attendance. I will now discuss the most important operating and commercial highlights of the quarter. In the Personnel Transportation segment, we started operating 250 new buses during the last 3 months. As a result of an active pipeline and some initiatives that were reactivated after being deferred at the beginning of the contingency. Moreover, our level of service is reported to be above 97% in this business, mainly through technologies implemented during the pandemic for a better control management. In the Cargo segment, we started freight operations of natural gas. It was a kickoff of the first stage of a multi-annual contract. We also continue to grow in the refrigerated service as well. Furthermore, we executed a joint venture with a multi-model logistics operator to strengthen our exposure in the intermodal service. In the Logistics arena, as you know, we basically tripled our exposure to e-commerce. Traxión with its last-mile subsidiary, Redpack, which was acquired in 2018, was very well positioned to seize opportunities and expansions, especially from e-commerce. In this segment, we expanded the fleet by 10% in this quarter to face increased demand. And we continued adding new clients, both domestic and foreign to our base. It is important to highlight that we consider that approximately 70% of revenues of Redpack are directly linked to e-commerce. We expanded our 3PL logistics space by more than 85,000 square meters to reach 525,000 in total. As a result of an aggressive commercial strategy that resulted in an increase of both existing and new clients. We further enhanced handling volumes in some of our operations and optimized spaces, which improves our margins. Shifting gears, Traxión Logistics, our logistics platform ended its first year of operation with better-than-expected results, which proves our value creation capabilities throughout this technology-driven logistics solution platform. Our asset-light approach toward Logistics services is starting to pay off. And we expect to continue to see positive outcomes from this business over the long run. As you all know, it wasn't a typical year. However, we achieved our goals with a different mix and through enormous effort of our team, with all our business lines showing improvements more operationally and financially. Having said this, I will now hand it over to Wolf. Please, Wolf, go ahead.

Thanks, Rodolfo. Hello, everyone. I just want to walk you through some financial highlights. Traxión surpassed its guidance for the year and to a different revenue mix than originally planned and most important, with 26% less CapEx than expected. This happened mainly due to some investment projects we had with both existing and new clients that were put on standby, given the pandemic. During the contingency, we implemented an aggressive expense control plan that resulted in economies of scale and efficiency in general expenses of 150 basis points as a percentage of revenues compared to 2019. In terms of cost, there are some changes in the cost structure compared to 2019 that were driven by the asset-light business line, which require outsourcing of fleet and services. In that regard, fuel costs decreased due to 2 main reasons. The first is the Traxión handled logistics-related cargo services to third parties, which brought down this cost. Moreover, there was a general decrease in process. And the second reason is the general price decrease compared to 2019. Furthermore, our facilities, services and supplies costs increased significantly for both the quarter and the year. This phenomenon started in the second quarter of 2020 and continued over the third and fourth quarters and is explained by the increase of third-party outsourcing of Logistics services in a series of business lines, cargo, last-mile, customs, less-than-truckload and 3PL. Moreover, as you know, we experienced over demand in our Personnel Transportation segment, which we converted with our personnel rented units from third party, with such rentals recorded in these lines. Moving on to operating cash flow. There are some variations both in the quarter and in the year, mainly on the working capital cycle that affected the operation cash flows. The main variations in the year are explained by 2 things. First, an increase in accounts receivable, driven by growth in the client base of Logistics services and new clients starting operations in the Personnel and Student Transportation. And second, in an increase in refundable taxes that also moved the cash flow figure. In terms of debt, Traxión decreased its leverage ratio to reach 1.6x net debt-to-EBITDA compared to 2.05x at the end of 2019. Total debt increased only MXN 773 million, while net debt decreased MXN 410 million, mainly driven by an enhanced cash position. Another important aspect to highlight in terms of debt is that with the run we issued in September, the company managed to improve significantly our debt maturity profile, including several other refinancing of the other facilities. Having said that, I'll hand over to Tonio, who will discuss financial details in much more detail. Please, Tonio.

Thank you, Wolf. Hello, everyone. Welcome. As you already saw, Traxión continued with a very dynamic trend over the fourth quarter and ended 2020 with a very positive outcome. I will now walk you through some financial details before opening the floor to Q&A. In 2020, Traxión delivered a very strong growth in consolidated revenues of 17.6% to reach MXN 14.3 billion in the year, which is by far the highest revenue figure in the history of the company. This growth was driven by a considerable expansion in the activity of logistics channels, especially those related to e-commerce and by increased demand in the Personnel Transportation service which posted a 19.4% growth in kilometer volume, mainly due to the over demand that started with the pandemic. Moving on, operating income increased 38.4%, which is more than double the growth of revenues and was mainly driven by strict cost and expense controls implemented back when the contingency started. Moreover, in terms of costs, Wolf already discussed the most relevant adjustments that changed the cost structure of the company as Logistics services gained more relevance in our P&L. But it is worth mentioning that labor costs increased mainly due to growth in Logistics business lines and to the expansions in the Personnel Transportation segment that required more headcount. Then there is fleet maintenance, which usually is consistent, but there were some preventive maintenance costs that were delayed by the contingency and needed to be carried out during the quarter. We also have to provide maintenance to a portion of the third-party units we have been outsourcing. However, on a year-on-year basis, fleet maintenance recorded a marginal increase of just 1.6%. Moving on to margin. On a yearly basis, Traxión was able to preserve its margin, which is good news given the complexity of 2020. Cargo and Logistics EBITDA posted an increase of 19.3% for a compression of 50 basis points in margin. This is due to the relevance of Logistics services in the P&L that carry lower margins by nature than those of regular Cargo. This is consistent with what we experienced over 2020. Finally, the Personnel and Student Transportation segment recorded an increase of 22.8% in EBITDA and an expansion of 260 basis points in margin compared to 2019. This is indeed a very impressive figure. Moving on to comprehensive financial result. Traxión recorded lower interest expense in the year, mainly driven by the bond issuance and the refinancing of some facilities that resulted in a better financing cost. But in the quarter, there is an impact on foreign exchange and the effect on the interest rate derivatives. Overall, there is no significant change in this item for 2020. Shifting gears, net income reached MXN 189 million in the quarter and MXN 661 million in the year, which represents very impressive growth and are very healthy figures considering the complex macro situation we are currently undergoing. Well, thanks for your attention. With this, I wrap up my remarks, I will now open the floor to Q&A.

[Operator Instructions] Our first question is from Alejandro Demichelis of Nau Securities.

Yes. The first question is, could you please provide some split on that MXN 2 billion CapEx number, specifically, how much goes into growth, how much goes into renewal of the fleet and so on?

Hi, Alejandro. How are you? This is Wolf. To explain a little bit more from the CapEx, we are projecting 40% of that number of the MXN 2 billion for renewal of the fleet. Part of that comes from the 2020 catch-up that we will make the reposition or the replacement that we need in that previous year. And the other 60%, it's basically from the growth that we are expecting in both segments, Cargo and also Personnel. And also for this year, we are expecting an important number also for the technology side. So we can also provide more volume also through e-commerce under 3PL warehousing.

Okay. That's clear. So if 60% of the CapEx goes into growth, then is that 10% revenue growth, a conservative estimate that you have there?

Sorry, can you repeat the question, Alejandro?

Yes. Sorry, the question is, if 60% of the CapEx goes into growth, isn't that a conservative number that you put for 10% revenue growth.

We are trying to -- just to know also the seasonality. We are planning to deploy this capital throughout the year. So we're not investing all in the first quarter. So that's maybe why you're seeing that number for 2021.

Okay. That's clear. And I just have one quick question to follow-up. Have you seen any disruption recently from the Texas situation in terms of cross-border or cargoes in some of your clients?

Yes. Hello. How are you, Alejandro? This is Rodolfo. We experienced a few days of interruption due to cross-border business, but it's back to normal right now. It was only due to weather, the few days, there was a little worse in that part of Texas and Mexico.

Our next question is from Martín Lara of Miranda Global Research.

Congratulations for the very strong results. I have 2 questions. The first one is how big do you think the e-commerce business can become in, let's say, 3 to 5 years? And the second one is, what can we expect in the last-mile and 3PL businesses just for this year?

Okay. Talking about e-commerce, we expect the important growth in Mexico because we have some figures that set up e-commerce now is around 6% of the total commerce of the country. Comparing to, for example, United States that it's above 20%. So Mexico has a lot to develop in that business. So we believe that the trend of growth for e-commerce in Mexico is going to continue for the next years.

Okay. And this year -- yes, sorry.

Go ahead. If you can repeat, please, the second question.