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

Good day, ladies and gentlemen, and welcome to the TRAXION Second Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Aby Lijtszain. Sir, the floor is yours.

Thanks. Good morning, everyone. Welcome again. This quarter, TRAXION posted a mixed set of results. However, there are very good news given the global macro landscape, inflation and supply chain disruptions. Revenues are in line with our expectations and posted double-digit figures, mainly driven by the performance of our logistics and technology segment, which reported a growth of more than 21% in revenues and an improved margin. This outstanding growth was mainly due to a success of Traxporta app and the Traxion Logistics platform, which combined recorded a revenue growth of more than 61% in the quarter. We continue to see strong demand in our traditional business lines with very attractive organic growth opportunities boosted by the nearshore effect. Moving down to the bottom line, you will see that the main difficulty was the increase in fuel costs. As you know, we have experienced a lot of volatility in oil prices lately. Such fluctuations have caused a disruption in product availability, which resulted in price increases. As we said in our last call, we are working very hard to pass such prices increase to our clients. Given the order increase and current volatility, the pass-through process is taking a few months as expected. Nonetheless, we are confident that we will be implementing higher pricing measures in the following quarters. As I said before, it's not a matter of if, it's a matter of when. If you take a closer look at our results, aside of cost pressures, there are many other indicators that are in line with our business plan. We are controlling very well those aspects of the business. Moving on, the company is cash flow positive. Net operating cash flow grew and CapEx plans was according to our goals. On the ESG front, we made significant progress this quarter. We continue to bolster our strategy and believe that we have one of the strongest ESG platform in the sector. Tonio will discuss with more detail. With this, I end my remarks. Rodolfo, go ahead.

Thank you. Good morning, everyone. Welcome. As Aby just mentioned, we continue to advance very well with our commercial plan. We see growing demand in our 3 segments and healthy expansion rates at the top line with double-digit figures. The most important growth was in the logistics and technology segment, which reported significant advances on its 3 business lines. Our apps and digital platforms continue to gain market share and grow above competition throughout both ship volumes and increasing client base, which translated into higher revenues of 61.7% compared to the same period of 2021. Last mile solution show a healthy revenue increase despite the seasonality of the quarter. We rebalanced our last mile fleet and implemented improvements in our packaging handling processes to optimize trends in times. We continue to report consistently service levels above 95%. On the 3PL side, we continue to gain clients throughout an aggressive commercial activity, which has proven successful and which will be reflected in our coming quarters. We are also starting to see revenues from our new business that started at the beginning of the year. Moreover, we keep becoming more efficient operationally, and we have continued to receive very good feedback from our clients. Moving on, the mobility of cargo segment increased its volume in specialized services, especially refrigerated, which has become a sizable portion of our cross-border activity. As a result, revenues per kilometer increased 10.4%, which also reflects some increases in price that we have been starting to apply. Our cargo operations are moving as planned. Finally, the mobility of people segment showed progress on its organic growth activity. This quarter, we started operation with 49 clients for a total of 290 new units. We implemented several new technologies for artificial intelligence programs and other administrative enhancements that are great value-added services for our clients. It has been a very busy semester for this segment. Thanks for your attention. I will now hand it over to Wolf. Have a good day.

Thank you, Rodo. Hello, everyone. I want to discuss specific financial metrics. As you see, the main impact to our net income together with fuel cost was in the comprehensive financial result. Interest rates increased, which impact the variable portion of our debt. However, and despite such expansion, our cost of debt is very efficient. We have managed to seek and find better debt facilities. Moreover, our overall debt level increased due to a natural growth of business. Then there is a lower foreign exchange benefit compared to the second quarter of last year and an effect on the financial instruments that we use to hedge a variable portion of our debt. Moving on, on the expenses. We posted a 350-basis-point efficiency as a percentage of revenue and a 10% decrease in absolute terms. Some of these measures are temporary, but management is seeking ways for some other measures to become long term and contribute to further efficiency in the future. On the cash flow side, we're very prudent with the working capital cycle, which enhanced operating cash flows by more than 33%. If we look to the balance sheet, we continue to operate with a comfortable cash position and adequate leverage levels. TRAXION has more than MXN 4 billion of available credit facilities that will support our growth plans, both organically and inorganically. Finally, we continue to see strong demand and the CapEx program is running as planned. Despite delays in deliveries of new units and because of the strategic planning we did in 2021, we are now in a much better competitive position as we have taken delivery of fleet to start new operations. Thanks again for your attention. I will now hand over to Tonio, Please, Tonio.

Thank you. Hello, everyone. I just want to discuss some highlights in more detail. Revenue showed a very strong expansion mainly driven by 3 actions. First, an intensive and successful commercial activity, mainly in the logistics and technology segment, especially in digital platforms, which continue to gain market share and grow well above competition. Second, a very strong demand in the mobility of people business, which drove organic growth and which keeps presenting us with very attractive and profitable opportunities. And third, an effective shift in cargo to more specialized services such as refrigerated and petrochemicals with more profitable economics, which boosted sales and revenue per kilometer in this quarter. Please bear in mind that in the second quarter of last year, we run the people mobility segment with a significant over demand. And this quarter, we operated under normal demand conditions. So the growth in this segment is truly outstanding when compared to the same period of 2021. Preoperating costs have impacted the labor line, together with the natural growth of the business. We are preparing our platform to operate the pharma vertical, and we need to bolster our capabilities to properly serve our clients. Moving on, TRAXION continues to advance and make significant progress on the ESG front. There are 2 very important milestones this quarter. The first is that in June, our EcoVadis assessment was published. The company was awarded silver medal for its performance and TRAXION is within the top 25 percentile. EcoVadis analyzes the sustainability metrics of suppliers of more than 90,000 companies worldwide based on 4 main elements: environmental, ethics, labor practices and sustainable procurement. The second milestone is that TRAXION was added to the S&P Total Mexico ESG Index, which places the company among the most prestigious in terms of ESG efforts. The new composition of such index includes 30 companies with a goal to boost the exposure of such good rated corporations to international markets. TRAXION is one of just 4 companies of its sector that are part of the index. Well, thanks for your attention. With this, I wrap up my observations. I will now open the floor to Q&A.

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

This is Luis Yance from Compass. Congrats, again, for the accelerated top line growth. I think it's great to see companies like yours doing that in this environment. And I guess my question is on the missing part, which would be the margins, right? So I understand and you mentioned it, Aby, that you're in the process of passing on those increases to clients. So I was wondering if you could give us a sense in terms of, I don't know, what percentage of your contracts or your sales have been already successfully adjusted and we are going to see the benefit and perhaps the remaining portion, whether we'll see it, all of it in the fourth quarter or something that's passed on to it. So if you can give us a sense on the timing, that would be great. And I guess a related question to that is, are you still comfortable thinking that the 19% EBITDA margins that you had a guidance still achievable this year? Or given what we've seen so far in the first half, perhaps if you could give us kind of like a more likely range? And I guess my last question on the margin side would be, we've seen a little bit more pressure on cargo margins relative to personnel, if you can explain why that is, would be great.

Luis, this is Tonio. Thanks for your questions. Well, I guess that the main issue here with fuel prices is that we touch based with 100% of our clients in the second quarter, and we have achieved a 40% pass-through rate on the quarter that has not been fully reflected on such quarter. We expect those pass-throughs to start to kick in revenues and higher prices in the second -- in the third and fourth quarters. Then in your second question, regarding the 19% margin, uncertainty prevails. So for us, it's too early to reassess the margin. However, higher revenues with temporary margin pressures are a strong possibility. But nonetheless, we still not have enough elements to revise our estimates.

Luis, this is Wolf. And regarding your last question about the margins in the cargo side, this is mainly because of the kilometer volume that we had usually on top line of the business. If you see the mobility of people in comparison with the cargo side, the cargo side we usually have more kilometers volume per unit. So this is why the fuel cost, it's more deeper in this side until we have the price increase in the rates to the market. So this is why this impact is a little bit deeper in this side.

Great. And then my last question, if I may, on M&A. Could you give us an update on Medistik in terms of the timing of closing the transaction and I guess, the likely contribution of EBITDA this year once it's closed, but more importantly, next year based on what you're seeing so far? And I was wondering with the uncertainty that prevails right now, what can we expect from you on the M&A space for the rest of the year? Are you going to take a bit of a more cautious view there? And also related to CapEx, I guess, whether the MXN 3 billion you're still looking to spend and/or perhaps take a bit of a pause there?

Luis, yes, regarding the M&A side, we just announced the previous quarter, we're looking to close the deal in this third quarter. So by the time that we can close it, obviously, we will add it to our platform, to our numbers. After that, I mean, in terms of investment that we have planned in this year until now, we have been experiencing a strong demand, as Aby just mentioned. So because of the new sharing cross brand and all of the activity that we are still looking, and we are having in the company, we think we can execute our CapEx program for this year and mainly because we have a profitable opportunities in our long-term contracts. So this is why we want to keep it that way.

Your next question is coming from Alex Demichelis.

Alejandro Demichelis from Nau Securities. Just as a follow-up from what Luis asked. Could you please tell us how you see margins -- EBITDA margins, I mean, for the second half of the year? If you could give us kind of a bit of a range on how you see those kind of numbers? And then the second question is given the increasing in interest rates and the higher interest costs that you're seeing, could you see a situation where you prioritize a debt reduction over lower growth over the coming quarters?

Alex, thanks for your question. We are seeing temporary margin pressures right now given the higher cost of fuel. However, we are not sure of our assessment as of today in terms of margin. There could be a temporary -- as you have seen a temporary impact of 200 basis points, but that could be temporary.

Sorry, just to clarify. So that the second half of the year should be looking similar to what we have seen so far in the second quarter? Or are you thinking you could improve from there?

There could be room for improvement. But unfortunately, as of today, we are not sure. If you see the margins on the first half of the year, they are not so far from the 19% that we guided in February. So that's why we don't want to assess anything or say something that we are not sure as of today.

Alex, this is Wolf. Regarding to your second question, in terms of paying maybe debt, I think our main growth, as you can also see, and what we're talking to the market also, we're looking more in the asset light based business. So I think if you look also to the previous years, where we were delivering the leverage of the company at some point, in this particular year, we look for different opportunities with the profitability that we are looking for. So we're expecting a lower CapEx maybe in the next future. But for now, we'll keep the guidance that we made in the previous months. But for sure, maybe in the next future, we were looking more to grow the company in the asset light based business.

Your next question for today is coming from Martin Lara.

This is Martin Lara from Miranda Global Research. I have 2 questions. The first one is where do you see the average revenue per kilometer in mobility of cargo and mobility of personnel in the next few quarters? And the second one is where do you see the growth of the last mile fleet and the warehousing space in the logistics and technology business also during the rest of the year?

Martin, this is Tonio. I'll answer the second one first. Regarding the last mile fleet, we don't see the last mile fleet growing. Actually, if you take a look at our previous quarters, you're going to see that such fleet has not grown much. What we are doing is we are in a process of somewhat rebalancing it. And then regarding the 3PL space, when we IPO-ed the company in 2017, we said that we plan to grow at a rate of 50,000 square meters per year. But now as you see, we have a very strong commercial strategy, we're gaining market share in such a business. We are planning to grow as well, of course, more than 50,000 square meters per year. It is hard to tell because we are becoming more efficient not only in area but also in space. We are taking advantage of the volume of the building, not only the area. So it is hard to tell, but you can expect between 50,000 and 70,000 square meters per year, if nothing else happens.

Martin, this is Rodolfo. So regarding your question about the revenue per kilometer in the mobility of cargo, we're expecting around MXN24.5 per kilometer in the second semester of 2022. We're pushing the increase of prices. So we expect to be around that number.

That's for mobility of cargo, right?

Yes.

Okay. And in mobility of personnel?

In the modernity of personnel, we are thinking around MXN 18.5, MXN 19 per kilometer.

Your next question is coming from Filipe Nielsen.

It's Filipe Nielsen from Citibank speaking. So I have 2 questions on my side. One is regarding test and stalling cargo and all the stuff, those parts. So have you experienced any higher than normal rates in that in your business? And have this led to any reduction or discontinuation of services in some regions? That's the first one. And the second question is regarding tariffs. As you mentioned, you touched this with 100% of clients and some of the contracts are still to be included into results. But looking into demand, like have you seen any elasticity in terms of increasing demand -- increasing tariffs, sorry, playing in reducing demand going forward?

Yes. This is Rodolfo. So regarding the stalling cargo in our country, we haven't seen any increase in this area. We have a very good processes that we control the -- monitor away from all the cargo sector. Of course, there are some issues in our country, but this is not a main concern for us. We handle it really good. And regarding the volume and the increase in tariffs from the -- of you're saying of the rest of the clients, we see the volume really good. We haven't seen any slowing of the volume. We have -- I think, even though we have been asked for a lot of clients to increase our volume, this has helped us make the push for the increase of prices. But of course, the pass-through of the fuel, it takes some time. So we know how to do it. We have been doing it for a lot of years, but we expect to fulfill this in the near future, but we haven't seen any slowing of the volume in Mexico.

Your next question for today is coming from [ Rodrigo Salazar ].

Just 2 questions for me to ask. Could you explain why there are increases in labor costs? Were that high? And also, if you could explain the increase in leases you had this quarter?

[ Rodrigo ], this is Tonio. Could you please repeat the second question?

Yes. The second is about the leases that it seems to be much higher sequentially and year-over-year. So there is a special reason or something you can explain there?

Sorry, did you say leases? Are you referring to leases?

Leases, yes.

[ Rodrigo ], this is Wolf. Your first question about the labor cost, it's mainly because of the new operations that we're planning to put in place between the third quarter and also the last part of the year. So this is mainly the main impact in this side. And while we're growing also for this year. And regarding your second question about the leases increase, this is mainly also because of the new operations. We acquired also more units to operate this year and also the warehousing plant that we're planning to put in operations for the third quarter. This is what it's making like the hike here in the leases also. So this is part of the combination in the growing of the business.

We do have a follow-up question coming from Luis Yance.

Just a follow-up question on what you said, Tonio, about the fuel price increase as you mentioned that you've achieved for around 40% of the contract, you already got the pass-through done. It's just a matter of time until we see it in financials. So hopefully, we'll get to see some of that in the third quarter. But I was wondering about the other 60%. Is it fair to assume that most of it you will get into an agreement this quarter and therefore, fourth quarter is when we should start seeing the full benefit of all those price increases, assuming oil prices obviously stay constant or some of that will remain in perhaps fourth quarter some sort of improvement and then first quarter is when we will see -- next year when we will see kind of that the full benefit of your contracts? That would be my first question.

Luis, thanks. Yes, indeed, we've been working with this 40% of contracts. You should start seeing those pass-throughs in the third quarter. And regarding the 60% remainder, obviously, the ball is rolling with clients. And you should see progressively increases in pass-throughs on a month-by-month basis. We expect, obviously, we are working very hard and very fast as we can to make those pass-throughs be reflected at least between now and December.

Excellent. And another follow-up on the logistics side, I mean, if you could -- if you guys could give us a sense of the growth you guys are expecting in every segment within logistics because we saw a big growth on the tech applications, a little bit less so on the last mile. So just to get a sense on the growth you're expecting on all 3, 3PL, last mile and tech app. How much of -- roughly speaking, how much of your sales within that segment represent each? And perhaps touch base a little bit more on the last mile, if I were -- it's growing a little bit less. I mean, we're seeing some companies in the U.S. suggesting e-commerce might be slowing down a bit -- still growing, but slowing down a bit. Just wondering if you guys are hearing the same thing here in Mexico or given the low penetration, we might diverge in terms of trends versus what we might be seeing in the U.S.?

Luis, speaking about how can be like the behavior of each niche in the logistics division, remember that the digital apps, there are maybe put in place like 1.5 years ago. And besides that, this logistics division is growing very fast. If we're talking about mainly how can they be in the future, we expect for this year maybe that the last mile could be around 40% of our revenues. In terms of the 3PL could be something around 30% and also the remainder percent will be between the digital apps. So this you can see how this is growing. It was 0 2 years ago. And right now, it could be 30% about this division in terms of revenue. So it's -- we're trying to grow as fast as we can also, and we have a lot of market to capture also in this division. So this is how are we looking for this line of the business. And as you can see, you should see also double-digit growth continue growing in this full division in terms of the logistics side.

Luis, and regarding your question about the last mile and e-commerce. We still see in Mexico a lot of opportunities, and this segment is growing good. Not as fast, the rate of growth is not as fast of 2020 and 2021 as we know those years grow really, really hard. So we still see a lot of opportunities. We've seen a lot of growth, but not as high rates as it grew in the last 2 years.

[Operator Instructions] There are no questions in queue. I would like to turn the floor back over to Aby for any closing comments.

Thank you. We continue to see strong demand in our 3 segments, and we'll keep capitalizing on them. The market present us, especially those that arise from nearshoring 10 and from closed order activities, we have a leadership position. TRAXION continues to be the industry benchmark and to operate with a strong balance and cash position that will enable the company to move forward. As always, we'll keep you posted on the progress of the company. Thanks very much for your attention today. Have an excellent week.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.