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

Good morning. Welcome to the Traxión Third Quarter 2021 Earnings Call Results. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Aby Lijtszain, Vice President and Co-Founder. Sir, the floor is yours.

Good morning. Welcome again. Let me start by saying that this strong set of results is especially relevant because Traxión continued to post notable growth rates over [ the course ] of last year, which was a particularly challenging period, but very beneficial for us, mainly due to an excess of demand of several of our services, which has been normalizing. Despite of that, during this year, we have shown an attractive growth. There are several highlights in all fronts: Financial, operational, ESG and commercial. Our numbers speak by themselves, especially the accumulated results over the first 9 months of the year. Rodolfo, Wolf and Antonio will provide you with more color and details, but I just want to share with you some thoughts. The company delivered record high figures in revenue, EBITDA and net income. But perhaps the most important number to bear in mind is that accumulated net income for the 9 months ended in September was more than 52% higher than the same period of 2020. Moreover, Traxión continues to deleverage the balance. Despite the growth, we are running at 1.56x net debt-to-EBITDA. It is something worth mentioning in terms of debt. Two of our rating agencies have increased their rating on Traxión, which is great news since such rating [ confirm ] the strength of our business model and balance. In operating terms, our logistics and technology segment continues to expand in line with our objective. Our logistics services that serves the e-commerce channel, develop and penetrate, and we believe that there is still a tremendous opportunity for us. In this line, I want to let you know that we want to maximize the growth of this division, which we like a lot because of it's asset-light nature. So far, we have been able to tackle the opportunities and to generate organic growth, but we're also open to engage in M&A activity in this segment in order to achieve higher goals. Traxión has become a relevant participant in the last-mile solution business and a key player on the supply chain. There has been a paradigm shift on consumption patterns that is here to stay, and Traxión has been very well positioned to continue to capture such opportunities. Now I hand the call to Rodolfo. Please Rodolfo, go ahead.

Thank you, Aby. Good morning, everyone. Welcome. There are two special operational highlights this quarter. First is that we continue to improve our profitability in the 3PL business, since we'll carry on better margins than the competition. And second is that there is a very positive balance in the last-mile operations with significant improvements in the efficiency side. There is one element I would like to mention before we enter into further discussion. As all of you are aware, there is a global shortage of microchips that has affected several industries, especially the auto sector. This situation has not been beneficial for Traxión because we have been experiencing delays in deliveries of trucks and buses, which has had an impact in renewal and expansion plans. We're working out with our feed suppliers in managing our demands were in to advance in order to sort out this situation favorably and with no further delays for 2022. Moving on, in terms of last-mile solution, Traxión has increased more than 35% of its handling volume and has accomplished a 98% rate on on-time deliveries. This was achieved mainly by carrying out technology improvements and extending training programs, which have resulted in increase of level of service and client satisfaction. Perhaps one of the most relevant operational highlights this quarter is the expansion of more than 146,000 square meters 3PL logistics warehousing because of our strong commercial activity. Several existing clients have requested expansion in their capacity, while we continue to gain new accounts. We have complied with all certifications and for our clients, and recently obtained a best practice certification because of our inclusive organizational culture. On the Personnel Transportation segment, we experienced some operational adjustments due to a more normalized excess in demand generated by the contingency and the schools' reopening. In mid-July, we started shifting fleet and preparing units, which resulted in a pre-operating cost in expenses, which have, at the moment, was not offset by revenues from schools since operations and billing process started in September. Because of that, we believe that there is a no full comparability between quarters in this specific segment. Finally, in terms of mobility of cargo, there was a growth of more than 74% in refrigerated cargo operations and a good improvement in margins also. We continue to see market opportunities. Since we entered this business 3 years ago, Traxión has built a very strong competitive position, especially in the cross-border markets to and from the United States. Well, with this, I wrap up my remarks. As you can see, it was a very busy quarter. Thank you for your attention. I will now hand it over to Wolf. Please go ahead.

Thanks, Rodolfo. Hello, everyone. Once again, Traxión delivered several financial metrics this quarter. Most important is that revenues, EBITDA and net income posted record high figures and the company continues to operate with a very solid balance sheet, a comfortable cash position and a strong capital structure. Moving into results. It is worth taking a closer look at accumulated figures. Revenues, EBITDA and net income have so far recorded growth of 22.5%, 14.3% and 52%, respectively, while net operating cash flows have improved by MXN [ 150 ] million. These are truly remarkable figures, especially as we approach the end of 2021 and the comparability between quarters is not that accurate as we run the company with a temporary over-demand during the third quarter of last year. One of the main highlights is that the general expenses recorded at 226 basis point efficiency as a percentage of revenues. This was driven by a strict control, economies of scale and by our synergies program that has proven to be successful and sustainable over the long term. There are a couple of details regarding costs that I want to discuss. First, fuel cost, which is explained by 3 reasons: One, there was a general increase in prices of 11.5% compared to the same period of 2020; two, there was a growth in kilometer volume of our cargo operations; and three, the operating expenses due to fleet rebalancing and reopening of schools. Then there is a cost of facility services and utilities, which also grew more than revenues, and it is mainly due to the increase in logistic operations that we outsource with third parties. If you notice, this cost as a percentage of revenues has been normalizing over the past few quarters. Shifting gears. In terms of debt, Traxión has been significantly improving its cost of financing, reflecting the favorable conditions under which the company handles facilities and manage refinancings. Net debt-to-EBITDA ratio was 1.56x in the third quarter compared to almost 1.69 in the same period of last year, which basically means that we continue to grow and expand our business while reducing the overall leverage of the company. In general, there is no significant change in our total debt over 2021. As you can see, we continue to be in a privileged financial position. Finally, in terms of CapEx, we exercised roughly MXN 396 million this quarter, which mainly includes expansion and renovations across our traditional business lines. We have invested roughly MXN 1.3 billion so far and are on schedule with our capital deployment plan of 2021. Having said that, I will hand over to Tonio, who will discuss financials and other details. Please, Tonio.

Thanks, Wolf. I will now provide more color on the quarterly figures. Revenues are up more than 14% and the company's expense control has been truly outstanding. The result is an impressive growth of 45% in net income while posting other record high metrics. Now, there are 2 relevant matters to discuss. The first is that the Logistics and Technology segment continues to expand and now represents roughly 27% of total revenue. And the second is the growth of the Personnel Mobility segment, which may seem a little soft, but it is not. It's far from that. The main thing to bear in mind here is that on the same period of 2020, we ran this business with an unusual over-demand, which we knew was not going to be sustainable. In this quarter, though, this situation has normalized as many clients reduced their increased capacities and schools reopened. This posed a huge operational shift that we have very well mapped out and was expected eventually. But nonetheless caused us to incurring preoperational costs and expenses that dampened the results of the segment. If you take a look at the accumulated figures, you are going to see a very healthy performance in the segment during the year. Moving on to sustainability, we have been very active on the ESG arena. On the environmental front, we are very proud to share that in July, Traxión completed the Carbon Disclosure Project questionnaire, which is the largest environmental and climate change information system in the world and one of the most trusted platforms. Through this and together with other 30 companies in Mexico, Traxión is now part of the first generation of the climate ambition accelerator of the United Nations Global Compact. This program will enable us to gain knowledge and skills about greenhouse emissions reduction according to global warming targets and scenarios. Moreover, the company supported the transportation of hundreds of volunteers who helped refurbishing a forest in the state of Mexico, and to build emergency housing for people in low-income communities where heavy rain caused flooding. Also, Traxión handle the shipping and delivery of several tons of food for big teams of hurricanes and rain in the states of Jalisco and Veracruz. The company also obtained international standards ISO 37001 for anti-bribery practices and ISO 19600 for compliance management in terms of money laundering and fiscal prevention, creating a much more robust management system to prevent, [ detect ] and deal with such situations and encouraging a better compliance practice. As you can see, we have been very busy on the sustainability arena as well. And with this, I wrap up my observations. Thanks for your attention, and I will now open the floor to Q&A.

[Operator Instructions] Your first question is coming from Luis Yance.

Congratulations on such a great quarter. Two questions on my side. The first one is on the personnel. And I understand all these changes you've mentioned, you're going back to kind of normal, the extra demand is being taken away and schools' kind of coming back, and the operational inefficiencies that you mentioned you had throughout the quarter. But despite that, your margins are still quite robust. I mean, to me, yes, I understand the comparison is not fair versus last year, but 29% margins is still pretty good. So just wondering, when I look back to, I don't know, 2018, 2019 kind of more normal years, let's say, your margins were 22% to 24%. So just wondering, as things continue to normalize, what's the new normalized level of margins that we should think about once we remove all these one-off extra demand and once you remove also the operational inefficiencies? So that will be my first question, on personnel. And then the second question, if you could talk a little bit about the fuel price increases that we're seeing throughout the country, and the kind of lag that you may have or not between that and passing that on to customers and whether we should think of fuel as a potential risk to margin.

Hi, Luis, this is Wolf. About the margins in the personnel division, as you can see, not just for the previous year, also for 2021, we're looking for similar margins. So we are expecting to continue about the same level. We're not seeing something different about that. So I think even if all the situation would normalize about the temporary over-demand, we can continue with same margins around the same levels. And speaking about the fuel or the oil prices, I think, having able also to make the pass-through for the clients, even it could take a little bit longer if it continue with the same trend. But again, as you know, this is something that all the market is very common to receive like all of these managed as a pass-through to the clients. And again, I think all the offer and all the demand, it's getting, maybe some normal by the end of the year. And we hope that we can manage this the same way that we're doing, or the same way we did in the past.

And then just a follow-up, I guess, on the logistics and technology division. I mean all this amazing growth that you're seeing, as we think about the drivers sort of, how much do you think is just market growth that you're capturing? How much you're actually gaining market share? And if you're gaining market share, which I think is the case, what are you doing different versus competitors such that your clients come to you, "Hey, I want to spend; Hey, I want to do this thing with you or not." Like what's been driving that the better market share gains versus some of your peers in the industry?

Luis, this is Aby. So I believe we are growing because of 2 things: The market growth and also gaining share of market. We have the 2 components. And I believe we are gaining market because we designed tailor-made solutions for our clients, where we understand what they need and we create special solutions, and we become very competitive for them, not only in the type but also in quality of the service. So remember, we have a big infrastructure in Mexico. So we can offer solutions that are very competitive. So I guess that's why we are gaining new clients every month.

Great. Thanks a lot, Aby and Wolf, and congrats again on the good quarter.

Thank you, Luis.

Your next question is coming from Pablo Monsivais.

Just kind of a follow-up on the personnel transportation business. Schools are back, and you're dealing with issues in the allocation of your units. But how we should think about this business line, because you mentioned in the past that there was a structural shift in how you transported, for example, workers in a factory. And that client now is demanding 2 buses instead of 1 in the past because of social distancing, and now you have schools back. So should we expect a much higher level of demand structurally for the next years? If so, I don't know if you have any, by how much? That's my first question. My second question is a follow-up on the microchip shortages. I understand that your replacement policy has been affected and you're not receiving new truck. But how are you guys working with that? I mean -- are you charging to clients a bit more because of that particular truck is just harder to replace? Or how are you dealing with this? And thinking that perhaps the situation will go for 2022. How do you think it will affect your overall financial metrics?

Pablo, this is Rodolfo. So regarding the personnel transportation business, we have been -- we haven't seen through the year a normalization of this service. So it didn't went from 0 to 100 in 1 month. So it has been normalizing through the year. Now that schools are back, we prepare since June and July for this change. And we're seeing that now all the clients are working normally. We're trying to work normally. And we've seen this through December, maybe we go to normal transportation business as we had before the COVID issue, right? So I think -- we see that, that will happen in these months. And regarding the microchip's question that you asked, the delays that we have been having for -- from our suppliers, it has been for some months. So we really don't have a big effect on our cost. We can continue doing the service with the buses that we have. We have been -- had a little delay on our growth because we were planning to grow a little earlier this year, but we have managed to see -- to have that business run through, especially with logistics. So other than that, I think we were trying really hard to work with our suppliers, so we can have a -- not big delays on next year, so we can have buses and trucks some time.

If this situation extends for 2022, will you kind of translate this into higher prices for clients, or no?

Well, we know that this will transfer to 2022. Now it's -- that's a thing that everybody is saying. So we know in 2022, we will have some delays. But the good thing now is that we know what will happen in 2022. We're preparing for that. And we're making our numbers and making our statistics for the next year accordingly to the dates that we know we're going to receive . So I don't think this will affect exactly a price increase to our clients, but there's a shortage of transportation in the industry that maybe will help the price increase, but not exactly the renovation of trucks and buses.

Your next question is coming from Martín Lara.

[Technical Difficulty] Technology segments going forward [Technical Difficulty]

Martin, I think your line is cutting. We cannot hear the question. Sorry.

Can you hear me?

Yes. Perfect.

[Technical Difficulty] and logistics and technology segments going forward. And do you believe that they should stay at these levels, or they should improve a little bit given economies of scale? And the second one is what can we expect in terms of sales growth in the mobility of personnel going forward?

Can you repeat the first question, please?

Margins, in and logistics and technology.

Hi, Martin, this is Aby. So usually, the margins in logistics in -- [ overall ], at around 10%. But I mean, our business is growing very fast. So I believe that once it gets more stable, the growth, the margins can go up, but we are planning to continue growing for the next years. So I think it's a good way to project the margin on the level that they are right now because of our higher growth. And talking about what do we expect to grow in the mobility of people, we expect to go back to normal, so the way it was before COVID. So now, I mean, we have a big pipeline and we are seeing growth in the business. So that's what we expect to go before COVID.

Your next question is coming from Stephen Trent.

Kind of 2 quick ones for me. The first, when we look back at Traxión's, the run-up to the IPO and just after the IPO, you were doing acquisitions and you moved away from that. But when we think about moving forward, is it conceivable that Traxión's investments could maybe include more investments in technologies rather than buying other companies? And the second question, would just love to get your high level thoughts on what you're seeing in the competition on the trucking side.

Stephen, this is Aby. So we see a big opportunity in logistics and technology, and we like that business because we are growing a lot and we're growing a lot without investing money, talking about the organic growth. So we want to grow that division in the company. So now we are more active and more open to make an acquisition, or some acquisitions in this business line. We believe that, that will be a good opportunity for Traxión. So we have done that in the past and were successful. All the cases that we did an acquisition, they were successful, and the companies grew, they expanded margins, and we could do integration of them very well. So now we're open to do some in the logistics and technology business. And talking about trucking, I mean, we see that the market is -- it's healthy. We see a growth. Traxión is very -- has a lot of competitive advantage comparing to the competition in Mexico. So we see an opportunity also to grow there. But we are growing -- we're choosing our growth there to more specialized businesses with high barriers of entries. So for example, refrigerated or transportation of all daily rates. So products that are not easy to move. And we like also the revenues in dollars. And the normal growth for that division, we're putting to Traxporta, on our app that we have. So we do it through logistics and we use third parties to grow. So we're going to seek in the division a growth on the specialized services and through Traxporta, through third parties. And charging as -- I want to remember you that we charge commission between 15% to 20% for the third-party companies that we enclose to the clients, and that's a business for Traxporta. So we are planning to grow that business through there.

[Operator Instructions] Your next question is coming from Edson .

I have 2 of them. The first one is regarding the CapEx. Because you mentioned that because of supply chain [ shortage ] around the world, you may be have difficulties to renovate your fleet. So however, could you give us a little bit more detail about the CapEx specifically in these divisions, can you expand that CapEx? And the second one is regarding -- could you give us a little bit update of Traxi, regarding your plan on organic growth?

This is Antonio, thanks for your question. In terms of CapEx, we have -- like a rule of thumb because you know that the policy of the company is to keep the cargo trucks for some years, and then we change them. So the rule of thumb is around 3% to 3.5% of total revenues of the company is the renovation CapEx for the year. I don't know if I answered your question correctly.

With [ divisions ], for example, specifically, let's say, technology or mobility, personnel mobility in mid percentage, the fleet renovation will be despite of the fact that supply chain shortage might be difficult to -- when we -- let's say, the whole fleet or part of the fleet as you planned it at the beginning of 2021.

Okay. So we invested -- in this quarter, we invested MXN 6 million in technology. The rest of the -- the bulk of the CapEx is for renovation of the cargo or fleet, and for expansions in the personnel mobility fleet.

Okay. Okay. Really great. And regarding on Traxi?

So Traxi is developing -- were beginning to offer like logistics services. So something similar than Traxporta, but for personnel transportation. It was on hold during COVID, but now it's reactivating. And we see -- I mean already the company's -- the Traxi as that platform is profitable and it's growing. And we're very happy with that because we see that we're going to have a lot of growth in that app.

Your next question is coming from Luis Yance.

Just a quick question on ESG, and I appreciate all the efforts you guys have been doing in that front. One of the things that we typically miss from companies is two things: One is disclosing the data historically and the progress, and you've done terrific there. So congrats there. But then the other part is typically to have a target in terms of those measures. And that's something that -- I mean, as I look at your report, you still seem to be missing. Is that work in progress in terms of, I don't know, fuel consumption intensity or the scope emissions intensity that you published, you're moving in the right direction. But do you have any medium to long-term targets that you're ready to disclose at some point? And I guess a related question there, and your business is clearly -- diesel consumption is big. Just wondering what are your plans to electrify your fleet down the road so you make even further progress there.

Thanks, Luis. Of course, we are working on that. We are going to disclose eventually our targets in the short term. And related to electrifying the fleet, we are not there yet. We think that, of course, when the technology is available in Mexico and when things are ready too, we're going to move. But right now, at this time, we don't think is the right moment.

There are no further questions from the lines at this time. I would now like to turn the floor back to Aby Lijtszain for closing remarks.

Traxión continues advancing and posting healthy growth rates in all of its divisions. Our asset-light business keeps expanding fast and taking advantage of opportunities as the e-commerce channel penetrates, and Traxión will strengthen even more its competitive position in such market. I am seeing interesting opportunities out there and excited about what I see moving forward. Thanks again for your attention and have an excellent week.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.