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

Greetings. Welcome to the Traxion First Quarter 2021 Earnings Call Results. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Aby Lijtszain. Thank you, you may begin.

Thank you. Welcome again to Traxión call. I hope you and your families remain safe and healthy. I am very proud again to deliver very strong financial and operating results for the period. As you can see, we continue with a positive trend, especially in our logistics and technology business and in the personal mobility segment. Mobility of cargo grew as well, so we transfer such growth to our tech-driven platform, Traxporta, through which we can grow with no need to invest in 6 assets. There are 2 very relevant milestones to discuss this quarter. The first is that we spread out our logistics and technology business lines from cargo to report our third division, the logistics and technology segment. These business lines are supported by technology and have an asset-light approach, which will enable Traxion to grow the top line without having to conduct heavy CapEx, while both bottom line and profitability improve. As you have been observing, logistics and technology business have gained relevance in our P&L, and we expect these lines to continue to develop, gain penetration and grow in Mexico. Traxion has been very well positioned to capture such expansion. And we believe that this tech-driven business will continue to expand within the company over the long term. We are well positioned as well to continue to capture the expansion of e-commerce, and we expect to continue gaining new clients as we move forward with our plan. As I have been saying for some time, our technological innovation has been our strongest competitive advantage. And it's precisely such innovation what made us achieve this very solid growth through the pandemic. Shifting gears, the second milestone is that we execute our new syndicated credit facility for MXN 3.5 billion, which enabled us to refinance and prepare our former line. Wolf will elaborate more over this matter. 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. Perhaps the centerpiece of this quarter are the results of the newly reported logistics and technology division. This segment recorded quarterly revenues roughly about MXN 1 billion, with a margin of 9.5%, in line with our estimates and communication to the market. The progress of this segment was mainly driven by an increase in last-mile activity, 3PL volumes and a relevant contribution of MXN 128 million from our technology-based platforms, which, combined, show a growth of 160% in revenues. In terms of warehouse area, there was an expansion of more than 107,000 square meters compared to the first quarter of 2020, which is indeed an impressive improvement. In terms of last-mile services, we handled more than 3 million pieces in this quarter. With a level service above 95%, which is especially relevant since this is the highest volume Traxión has ever operated. In 3PL warehousing, we started operation with 3 new clients and continue implementing the latest technology for warehouse management. Now talking about personnel transportation. We started operations with 25 new clients over this quarter, which involved 100 new units and 150 units that we're already operating with other clients. Here, we also are in the process of implementing a route management system, which we expect to save us approximately 100,000 kilometers per month. In the cargo segment, everything is running steady. We're maintaining revenues throughout higher volume in kilometers. We haven't kept our high-quality service and levels of specialization, which place us among the first choices to our clients. Since the contingency started, we have seen how consumption patterns have changed. And we have been very active to remain competitive. Finally, in terms of human resources, we conducted training on personnel communication and technology utilization to our last-mile staff. And offer leadership workshops to a mid-management level. As you can see, we continue to be very busy in commercial and operating terms. Thank you for your attention. I will now hand it over to Wolf. Please go ahead.

Thanks, Rodolfo. Hello, everyone. I just want to walk you through the actions we took on the financial front this quarter, especially regarding debt. As you see, Traxión continued operating with a very solid balance sheet, a comfortable cash position and a strong capital structure. The company still stands within its best financial situation and has broader financing sources despite the macro uncertainty that prevails. We kept running the company with efficiencies in cost and expenses that drove cash flow improvements, which is far more relevant, enhancing its expenses by 150 basis points as a percentage of revenues. As Aby mentioned, during the first quarter, we executed a new MXN 3.5 billion syndicated credit facility, and we used a portion to prepare and refinance our former lines. As a result, more than 62% of our maturities are due in 5 years compared to 44% at the end of 2020, thus providing traction with enough flexibility in terms of long-term financial planning and it's part of our continuous effort to improve our debt profile. Moreover, our net debt-to-EBITDA ratio was below 1.5x in the first quarter compared to 1.93x in the first quarter of last year, which basically means that we continue to grow and expand our business while reducing the overall leverage level of the company. One detail worth mentioning is that Traxión has more than MXN 3 billion of available credit facilities. Some of them are committed and are either working capital lines or long-term loans. As you can notice, we're in a privileged position in financial terms. Finally, in terms of CapEx, we exercised roughly MXN 389 million, which includes expansion and renovations across the company. We plan to continue deploying capital over the next quarters as per our guidance. Having said that, I will hand over to Tonio, who will discuss other financial details. Please, Tonio.

Thanks, Wolf. Hello, everyone. I will now discuss the most important financial figures in more detail. Perhaps the most relevant item to point out is a very impressive growth of 52.1% in net income to reach MXN 197 million. In terms of top line, consolidated revenues grew 25.4% compared to the same period of last year to reach almost MXN 4 billion, and which is more than double of what Traxión reported 3 years back on the first quarter of 2018. It is indeed a very relevant expansion. Revenues were mainly driven by 3 elements: first, the increased activity in the last-mile business, which continued the trend of the past quarters. Second, by the contribution of MXN 128 million of the technology-driven logistics services, which were virtually nonexistent during the same period of last year. And third, by a very healthy growth of 18.3% in the personal transportation segment, which continues to run with a significant over demand given social distancing rules. Moving on, operating income grew 48.6%, which is almost 2x the growth of revenues, mainly driven by strict cost and expense controls implemented a year ago when the contingency started. Specifically, expenses grew 15.8%, which is remarkably less than that of revenue and showing a 150 basis point reduction as a percentage of total revenues compared to the same period of 2020. In terms of costs, all of them followed virtually the same trend as in previous quarters, but there are a couple of details worth mentioning. The first is the cost of fleet maintenance, which increased 52.1%, mainly driven by maintenance of third-party buses that were outsourced to cope with over demand in the personnel transportation segment. And second is the cost of facilities, services and supplies, which increased 53.3%. It is here where we record the outsourcing of third-party fleets and logistic services, which continued expanding. Finally, fuel prices continued to decrease approximately 7% on average during the quarter, and it had a positive impact on our cost. Shifting gears, comprehensive financial result recorded an expense of MXN 150 million. The main difference versus last year is that there was a foreign exchange gain of MXN 57 million in the first quarter of 2020, but most relevant is the decrease of interest expense in this quarter. There is yet another significant aspect to highlight. Traxión reported healthy growth in top and bottom line of 25.4% and 52.1%, respectively, while total assets only grew 5.9% compared to the first quarter of 2020. On the other hand, total debt decreased MXN 226 million versus the same period last year, and the company kept a very comfortable cash position. Finally, it is worth mentioning that operating cash flows grew 15.1% on a year-over-year basis. Well, thanks for your attention. With this, I wrap up my observations, I will now open the floor to Q&A.

[Operator Instructions] Our first question is from Stephen Trent of Citi. I'm sorry. The first question is from Alex Demichelis of Nau Securities.

A couple of questions, please. The first one is about the very strong growth that we have seen in the first quarter, and how you see that during the course of the year. Because, obviously, the second quarter of last year was weak because of the lockdown. So trying to square how the strong growth kind of goes with a 10% revenue guidance that you have. That's the first question. And then the second question is, maybe you can give us some kind of indication of how you're seeing the logistics and technology business in terms of growth and margins going forward?

Alex, thanks for your questions. As you know, we gave a 10% guidance at the beginning of the year. We don't -- we think that we should remain prudent on that matter because we still see that there's uncertainty at a macro level. Growth -- on the other hand, growth in logistics and technology has been strong. It has followed the trend of the past quarters, of the COVID, if you will, quarters. So we think that this kind of growth, especially those -- the volumes on last-mile and logistics are here to stay and are sustainable over the long run. We think that there's still a lot of penetration and development for this kind of services in our country. And we think that we are very well positioned to capture a nice portion of such growth.

Okay. And can you give us some indication of, say, during the month of April that -- given that you have very little visibility, how the business has been performing in terms of growth and margins then?

Yes. As you can see, margins, for example, if you see the cargo, the mobility of cargo segment right now, it's 22%, 22-ish in terms of margin. It's higher than historically because we took out logistics, which typically have lower margins. What we see this year is, weak -- it's going to depend on how the logistics and technology business evolves, obviously, but we see margins stable over 20%.

Our next question is from Stephen Trent of Citi.

Just 2 quick ones for you. One, when we think about the way you split the divisions and the technological focus, are there things or acquisitions, maybe not of companies, but acquisitions of technology that Traxión might consider such as artificial intelligence for the logistics division? And the second question, any high-level comments what you might be pursuing on ESG with respect to lower pollution? I know that's been -- I know circular and stuff like that in Mexico City. It's been a big deal. So curious to hear what you're doing on that front.

Stephen, this is Aby. So yes, I mean, we have a special team here in Traxión but is technological innovation that we're looking constantly the most advanced systems that we can find to add to our business. So yes, we are also beginning to see things in artificial technology. And talking about ESG, I'm going to pass to Antonio to answer the question.

Steve, this is Tonio. In terms of ESG, as you can see, right now, this is the first time we disclosed anything in terms of ESG in our quarterly report. We -- obviously, the most relevant thing for us right now is fuel consumption, emissions, and that's why we disclosed these metrics. These metrics you are going to be able to follow them on a quarterly basis. We are going to start adding more metrics as we have them ready, not only in terms of emissions, but in terms of other initiatives. And well, that's -- basically, that's the reason that you only see fuel consumption and emissions disclosed on the report.

Our next question is from Rogério Araújo of UBS.

Congratulation on the strong numbers this quarter. So a couple here on my side. The first one, in Traxións Day, you mentioned that the asset-light businesses had about $25 million to $30 million revenue a few years ago, was moving to $100 million in '19, $150 million in 2020, and if I'm not mistaken, the expectation was $200 million in 2021, $200 million. So is the asset-light businesses that you mentioned in Traxión Day, is this related to these new logistics and technology business line that we started to report? So it's apples-to-apples? And is this expectations of revenue continue to make sense? That's my first one.

Yes, so we expect this division to be more than $200 million this year. And yes, you were talking about the whole division of logistics and technology. And, yes.

Okay. And a follow-up here, if you say in the report that 17% of Traxión's revenue is derived from e-commerce. So what does enter here? It's only last-mile or there are other segments as well? So maybe warehousing on e-commerce?

Yes. The main thing is last-mile, but also logistics service for e-commerce. So we are giving tailored-made solutions for the big clients for e-commerce. So we have other services to this -- to the last-mile -- to the e-commerce service. As for example, imports of goods from United States to Mexico or transportation or warehouse management for them. But it's related to e-commerce because we offer the complete solution for the e-commerce companies.

Okay. Very clear. My second question is on the passenger transportation business. You had quite high margins, almost 27%. And I would like to know what is the net impact on the segments considering, first, the new contracts with companies due to COVID-19 that are likely going to be canceled or going to be ended when the market normalizes? And at the same time, the school transportation impact on your business? So what is the net impact on the margins? I'm trying to figure out here what's going to be the normalized EBITDA margin for the passenger transportation business when the market normalizes, when you lose part of those new contracts, but also get the schools again?

I think, the difficulty we have right now it remains the same volume or similar volume that we had in the past quarters. And I think that will be an operational challenge also for the company when this come back at some point. And as we think -- nothing we have expected or really planned different. So we will definitely stop -- outsource some part of our -- portion of that we rent third-party units. And all of that gives us also the opportunity to capture different clients with the regular business line. So at this point, I think it's going to be a matter of fleet relevance and also clients. So we are expecting to be as usual, and we are expecting also to maintain the same levels of the margins that we're seeing right now with also -- above the 25% in that business. If you see the previous quarters, you will find something between 25% and almost 29%.

Our next question is from Pablo Monsivais of Barclays.

I have 2 quick ones. The first 1 is if you can give us some guidance towards the long-term margins on your -- of your logistics and tech segment? So we expect, in the long-term, to see single-digit EBITDA margin. And my second question is, if you have an estimate on the ROIC, or the ROIC, for the logistics and tech business?

This is Wolf. I think we mentioned before, maybe on Traxión Day, the EBITDA margin that we expect in the logistics and technology division will be around 10%. It's a mix of the different kind of services that I already mentioned. And we're expecting in the long run to be something around that number. In terms of the ROIC that we expect also in this division, they are higher. I think it's hard to say any number in specific. But as you know, and as we mentioned before, we usually expect more than 14% in the regular business. And in this segment, because we don't have any real investment or high investment, the ROIC that we expect, it's much more higher than that number.

So to give you an idea because we see project by project. So we have projects, they have 50%, projets that have 80%. So it's much more higher rate.

Okay. Perfect. So despite your margins are 9%, 10%, you still have a very high ROIC?

Yes.

Our next question is from MartÃn Lara of Miranda.

Congratulations for very strong results. I have 1 question. What can we expect in the Traxporta platform and in the traditional cargo business during the rest of the year?

Yes. So we expect to grow a lot to Traxporta. We're like turning the growth from the transportation, the cargo transportation segment to Traxporta, and we're going to see a more conservative growth in the traditional cargo business. So we're going to grow only on a very specialized projects that will need specialized equipment and has big barriers of entry in the traditional cargo. And the rest of the growth in that business were going to send it to Traxporta because we don't have to invest to growth. So that's why we are pulling the growth through Traxporta.

Our next question is from [ Edson Murria ] of Summit Capital.

I have one. I was wondering if you can give us more detail about the performance of Traxi. And if you have a guidance or maybe what are your expectation of road on that specific part of your business?

Yes. So we put on hold Traxi during COVID time because we thought it was not the best season to launch it. We're going to continue once we see it normalize, but we are still working in the platform, and we see that it's going to bring huge advantages for the clients and for new clients. So we're happy with this platform. So it will be something similar around transportable in the personal transportation business, just waiting for the correct moment to launch it.

Okay. On a follow-up on this. Is this going to happen in 2021? Or it's more likely to be 2022?

Yes. Yes, it's going to happen on this year. We're just waiting to normalize the situation.

Our next question is from Gordon Lee of BTG Pactual.

Quick question on the outsourcing law. I was wondering whether you could provide us any insight in terms of the contracts that you have with your fleet, whether there's any impact from that outsourcing law that would be material to margins or to the way that the contracts are established?

Gordon, this is Rodolfo. We don't see any hit on that matter. All the outsource we do, it's on the third-party with the full transportation equipment. So we don't outsource people. That is the law that is coming out in Mexico. So we don't see anything damaging margins or anything in Traxión. And also, we don't use any outsourcing company personnel.

And do you think that's something that might affect your competitors? Or are they set up the same way as you?

There could be some competitors that they use their outsourcing, for sure. But we hire directly our employees so we won't have any impact.

[Operator Instructions] Our next question is from Rafael Buerba of Santander Asset Management.

I have a question actually on -- a follow-up on logistics. Revenues and EBITDA expanded, well, more than doubled and -- but your last-mile fleet only grew by 21%. So just to understand, if you could comment further on how much of the logistics businesses is asset-light versus asset-driven? Or did you have spare capacity in last-mile fleet? How will we continue seeing the growth in that division? Would be together with further CapEx or is it mostly technology that doesn't require that much CapEx? So understand a little bit more about the business, what's the typical service that you provide to clients and what are the typical customers that you have? So to understand a little bit more on the potential logistics and especially in e-commerce?

This is Aby. So it's a -- we operate also an asset-light business model because as we saw, this business grew from $30 million that gross revenues in 2019 to $90 million on 2020, so it multiplied by 3x. And we only did a CapEx of $5 million on 2020, and the majority of this investment was in systems. So what we are doing is we're outsourcing the service regionally to make the last-mile delivery. So that is way we could grow without doing CapEx. And I mean, that's -- yes, I think that's the answer I mean, for your question, or I'm missing something, Rafael?

So we should continue -- we could continue seeing a high-growth pace without requiring additional CapEx because, as you're saying, it's mostly asset-light? And what typical -- besides the last-mile delivery that you provide for clients, what type of technology are you offering? What's the typical service?

Yes. So that's where we're going to continue seeing. The business is growing without making CapEx investments. And we offer the service. We make tailor-made solution for our clients in the whole logistic chain. So we offer -- we can import the products from different parts of the world, make the cross permit, then do the transportation from the borders or the ports to the warehouses, the main warehouses. Then from these warehouses to small warehouses around Mexico or 2 different stores and then the last-mile business. So we do the whole solution for our clients. So they can hire everything or just a part of the service. So for example, we have -- some clients have, let's say, Amazon, we work with them with the importation service. So we import, I think, the majority of the goods that Amazon sells in Mexico. And then we do also a part of the last-mile for them, but they do the warehouse management. But we have other -- many clients, Chinese companies that we do the whole service for them. And we work with also Samsung Product21, Red Bull in the last-mile business and many more clients. While growing in this division every month, we will bring new clients to our client base. So that's what we do. And we are focusing to work with the large clients in Mexico for now on our B2B strategy.

Our final question is from [ George Lauren Cao ] of Morgan Stanley.

Congratulations on the results. It's just a quick reconciliation on the revenue exposure. You mentioned that you currently have 17% of net revenues related to e-commerce. And what we see here is that the logistics and technology segment represents around 27% of the consolidated top line right now. So my question is, can we say that the remainder 10% is mostly related to B2B transportation activity? Is that a fair statement?

Yes. The rest of the 10% that you're saying, of course, represents in transportation and also the warehousing we do through companies in Mexico. So that's the main to -- other income lines that we have on the technology and logistics division.

We have reached the end of the question-and-answer session. I will now turn the call back over to Aby Lijtszain for closing remarks.

Thank you. I just want to share with you some final thoughts. As you see, Traxión posted significant growth rates in a number of metrics, both financial and operational. There is a great expansion potential to the logistics and technology segment. I believe that Traxión faces a great growth opportunity, and it's very well positioned to take advantage of it. We expect this segment to become a very important portion of our business over the long run. Traxión management remain fully committed to keep working and focus on delivering. Thank you again for your attendance and have an excellent week.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.