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

Good morning, ladies and gentlemen, and welcome to the Traxion Third Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Aby Lijtszain, Executive President and Co-Founder of Traxion. Sir, the floor is yours.

Thank you. Good morning. Welcome again. As you see, Traxion continues delivering good news despite adverse global macroeconomic conditions. Today, I want to briefly discuss three matters: nearshoring, revenues and margins. Nearshoring is a reality and will continue to penetrate in the next few years. Traxion is directly related to such trend, of around 50% of revenues come from it. Half is from final goods exported to states and the other half is from warehouse management, personal mobility and raw material transportation. Thus, we expect a consistent and progressive increase of demand from such expansion. Our commercial force is in the front line, capturing the most profitable opportunities. In order to properly benefit from nearshoring, Traxion has several attributes, a strong 4PL logistics platform, a comprehensive footprint in cross-border operations, specialized and efficient cargo solutions and the leading position in personnel mobility within industrial parks. Moving on, Traxion had a very good quarter in terms of revenue. They came ahead of our expectations. It was the first quarter, which we broke the MXN 5 billion mark in revenue and represents the highest quarterly figure of our history. Most relevant is that growth came high in the 3 divisions with logistics and technology posting the highest. It was a 29% increase, but even more important with virtually no CapEx. This is precisely how we want to continue to develop this division. Our traditional business segment also posted impressive growth rates with 27% and 18.5% in mobility of cargo and personnel, respectively. We continue to see a temporary impact in fuel, our most significant operating cost, which has increased more than 50%. However, the impact in margin has been just approximately 150 basis points and level at around 17.5%, which we think is very healthy given the circumstances. We will recover such compression in the short-term since we believe that the fuel cost pass-through will be fully implemented by year-end. For 2022, we expect our full year revenue to grow higher than we expected. However, the impact in fuel cost is going to compress our year-end margins. In consequence, we expect to reach a very similar EBITDA figure to what we released in our guidance in February. We are convinced that we have managed the situation very well. Once again, the resiliency of our business model has proven effectively. We are excited with the growth brought by nearshoring and feel sure that the company will capitalize on coming opportunities as it has always done efficiently and profitably. With this, I end my remarks. Please, Rodolfo, go ahead.

Thank you, Aby, and thanks, everyone, for joining us today. Our commercial strategy continues to bear fruit, and there is a sizable level of demand of our 3 segments. That has resulted in a healthy double-digit growth at the top line. Right now, the most interesting growth opportunities we observe for the short and midterms come from the nearshoring trend, which has already driven a portion of our revenues. We have been started in several new operations with clients, mainly in the northern region of the country, whose business is directly related to such nearshoring. The Logistics and Technology segment continues to post the greatest growth, which is mainly driven by the commercial success of Traxporta, increased operation efficiencies in the 3PL logistics and the launch of our pharma vertical. In terms of mobility of cargo, revenue growth has been driven by an increase in special cargo services such as refrigerated, in which Traxion continues to build a very respectable reputation, especially from the Bajio region to the border, and by increases in the price due to the growth in fuel cost pass-through. Both things have pushed revenue per kilometer almost 18%. Moving on to mobility of people. This quarter, Traxion started operations with new clients totaling more than 400 buses. We also began artificial intelligence trials to seek improved operating efficiencies and increase our value-added services to both clients and users. Finally, I would like to talk about the fuel pass-through. As you know, we are in close contact with our clients, and we have achieved an important advance of pass-through in our contracts, which we expect to start kicking into revenues the next quarter. However, we do not expect a full impact of such pass-throughs until the first quarter of 2023. Having said that, I end my remarks, and I will hand it over to Wolf, please?

Thanks, Rodolfo, and hello, everyone. I want to start by highlighting that this quarter, we are operating on a fully normalized basis compared to the same period of last year, where we still operate with higher demand from the last month of the pandemic. Growth in revenues was truly outstanding. Perhaps the most relevant aspect is that the 3 business divisions post high increases. Our level of service, strong relations with clients and broad portfolio of supply chain solutions are indeed driving such expansion. We have managed to achieve a much better cost and expense control to partially offset the fuel increase that has been affecting our P&L since the beginning of this year. Moving on, in terms of leverage, there is an increase of more than MXN 2.7 billion in total debt, mainly driven by M&A activity and organic growth. However, our leverage ratio is still in a very comfortable area and well within our strategic focus. We continue to make improvements in our overall debt profit, and we have a significant portion of our debt expiring in more than 3 years. All of that coupled with rising interest rates, drove our comprehensive financial results to be MXN 110 million higher than in the same period of last year. Despite of that, our cost of debt remains very efficient, thanks to our overall debt profit. As you can see, we have made significant investments this quarter, both organic and inorganic. It will not fully contribute this year to EBITDA or to profitability. However, we expect such investments to fully kick in as we move into 2023. In terms of cash flow, there is an increase of more than 40% in net operating cash flow, mainly due to improvements in working capital cycle. Finally, our CapEx program is running as planned, and we expect to continue with such progress for the remainder of 2022. Thanks for your attention. I will hand over to Tonio. Please, Tonio.

Thank you. Hello, everyone. I just want to discuss some other highlights. First, revenue increase is the result of an intensive and successful commercial strategy that pushed growth to be higher than that of recent quarters, which translates into significant advances, both in service penetration and market share. Our 3 segments reported very strong revenue increases, which is especially relevant given the global macro landscape. Margins in our traditional business lines are improving compared to the second quarter of this year, and we are starting to observe the effect of fuel pass-throughs. Fuel costs continues to be the main reason affecting margins. However, as Aby mentioned, we think that a 150 basis point difference in margin compared with what we forecasted is not that material given the circumstances, and Traxion is posting among the highest margins in the industry. Many of our peers have had much worse effect in such items. EBITDA came in at MXN 934 million, which is also the highest EBITDA figure in our history and was mainly affected by fuel costs. And due to that, posted a growth of just 3.5% compared to the same period of last year. In terms of inorganic growth, as you saw, we closed the Medistik deal. So Traxion is in the Pharma Logistics business since this quarter. We are confident that our commercial synergies are going to continue to materialize as we seek for more opportunities to multiply revenue of such division. We also closed the V MODAL acquisition, through which Traxion complemented its service portfolio with rail services. Most important is that both companies operate with a 100% asset-light focus, in line with our inorganic growth strategy. Shifting gears, our ESG program continues to report significant advances. Traxion started trials of electric last-mile vehicles for Redpack. This is a natural step for emissions reduction. And with such trials, we will start analyzing several metrics for further implementation. Furthermore, the company released its diversity and inclusion policy and its corporate governance menu. Please go into our website to access both documents. Well, thanks for your attention. With this, I wrap up my remarks, and we'll now open the floor for Q&A.

[Operator Instructions] Your first question is coming from Juan Ponce from Bradesco.

My first one is on the agreement with clients, the pass-through cost pressures. Can you remind us what percent have already agreed as of 3Q '22? And also on that front, have clients been receptive? Have you seen any pushback in certain pockets of the market? That would be my first question.

Juan, this is Rodolfo. Right now, we are around 65% of pass-through to all our clients. Of course, it's not easy. As you said, there's always a pushback, but I think the market is aware that the necessity of the increase is because of the fuel and because of all the needs in the logistics sector. So we have been doing good. It has been tough, but we are now at 65%.

And just a follow-up on this. You mentioned that you should be finished by year-end. Did I hear that correctly?

Yes. That's our program. We're trying to finish up in the next quarter all the pass-through.

Okay. And my last question, you mentioned several opportunities in the Northern region related to nearshoring. Can you please elaborate on what you are seeing on the ground? And what level of growth rates should we expect in your overall business from nearshoring?

Juan, this is Tonio. We have been seeing a lot of new opportunities from clients arriving from the U.S. or China. Companies are operating from those countries that are coming to open plants in Mexico. We've seen a lot of opportunities, mainly right now as of today, mainly in the personal transportation business. But of course, as other industrial parks get developed, we expect that we are going to capture some of the manufacturing and logistics derived from such openings. We know that there are some 90 industrial parks under construction in the northern part of Mexico right now.

Your next question is coming from Luis Yance from Compass.

Congrats on the fact that it looks like margins have finally stabilized. So I guess a couple of questions. I guess on margins, let me start with the, I guess, the Logistics and Technology that we saw some compression both sequentially as well as year-over-year. And you mentioned on your press release that it was due to pre-operating expenses on the pharma vertical. Just wondering how much of that gets reversed in the short-term, meaning in the fourth quarter? And should we expect those margins to kind of go back to low double digits? And as we move forward, once you integrate all this, especially the Medistik one that have significantly higher margins, where can we expect margins of this division to grow in, let's say, 2022? That would be my first question.

Luis, this is Tonio again. As we have discussed -- well, actually, yes, the pre-operating costs have diminished margins in the Logistics and Technology division this quarter. Of course, it's a moving target because as you know, many business lines are under development here: Traxporta, we have the last-mile solutions division, we have the 4PL. This includes the pharma vertical, of course. So such diversity of business lines carry different margins. But over the long run, you should expect and we should expect the Logistics and Technology division to be around 10%. But of course, as I said, it's a moving target. We expect that as Medistik kicks further into revenues and into margin, it could lift the margins somewhat for that big division.

Great. And then another question also on the margin side. You mentioned roughly 150 basis points has been taken from the margins due to the fuel price increase, but it seems to be just a matter of time once you get all the pass-throughs completed and reflected on the numbers. The stability in margins that we saw sequentially, and actually, it was more impressive if I take away the compression of logistics, actually, cargo and personnel had a very nice improvement sequentially in terms of margins. Just wondering if that's related to perhaps seasonality or something else or is that actually related to the fact that, as Rodolfo mentioned, 55% of the contracts already were negotiated and you started to see some benefit or out of the 150 basis points, all the benefits should we think that they start in the fourth quarter?

In cargo, it is mainly pricing, the difference you see. And in mobility of personnel, it's a mixture of both pricing and organic growth.

Okay. So it seems like you're still not seeing those benefits. So all those 150 basis points -- 150, I'm sorry, should start coming in the fourth quarter, right?

Yes. We expect those improved contracts, so to speak, to start kicking in, in the fourth quarter and in the first quarter of next year.

Okay. Great. And then on the capital allocation side, now that both acquisitions have been closed. Just wondering when they were announced, those assets were generating roughly MXN 260 million, right, MXN 220 million from Medistik and maybe roughly 40 from V MODAL. Is that a reasonable assumption to think MXN 260 million for the next 12 months? Or given the synergies that you're probably already achieving or looking to achieve, the visibility you have now, the businesses inside you guys, is MXN 260 million probably the floor and perhaps we should think about something, I don't know, closer into the MXN 300 million, MXN 400 million for the next year or so? Or how should we think about that and the progression of synergies on those 2 newly acquired businesses?

Luis, we expect at least double of EBITDA from acquisitions next year.

That's quite a bit. Excellent. And then my last question, I guess, going back to the nearshoring thing, it's interesting you guys mentioned, if I heard you correctly, 50% of your revenues are somehow related to nearshoring. Could you spend or elaborate a little bit more on that? Where is it coming from? And perhaps -- I remember you used to have, I don't know, 10%, 15% of your business was cross-border. Is that still the number? Where do you see that [ going ], et cetera? So if you could give us more detail on your exposure to nearshore would be great.

Of course, Luis. Well, as you know, it's 50% -- we estimate that 50% of our revenues are related to nearshoring. We estimate that half of that, around 25% of revenues are final goods exported to the U.S. The other half is divided into personal mobility in industrial parks in the north, some raw material transportation and also logistics.

Excellent. And I'm guessing, as this develops, because we're seeing clear signs that the nearshoring is a reality, you feel well positioned in the northern part, perhaps given that this is a new trend that we weren't thinking that much about a year or 2 years ago. Is it possible to think that you guys perhaps do some more acquisitions related to this, so you can have a bigger footprint in the north to take advantage of this? Or how do you guys think about the evolution of your exposure to nearshoring in the next couple of years?

Of course, right now, what we are doing is the commercial muscle, Luis, is on the front line in the field. We are seeking for opportunities. We are capitalizing on many of them. We are being very successful. Actually, nearshoring, we have seen a lot of investment pouring in for the past 2, 3 years. So what we expect is as industrial parks continue to develop and companies start -- continue to establish themselves into Mexico, we expect the growth in cross-border in manufacturing. We expect also, as you can imagine and as you said, organic and inorganic. If we encounter opportunities to strengthen our cross-border capabilities or our logistics capabilities to serve companies on a door-to-door service to the United States, that those would be attractive opportunities for inorganic growth.

Could you remind us how much is cross-border right now, roughly speaking?

The cross-border business is around 20% of our revenues.

Your next question is coming from Alex Demichelis from Nau Securities.