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

Greetings. Welcome to Traxion First Quarter 2023 Earnings Conference Call.[Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Executive President, Aby Lijtszain. You may begin.

Thank you for joining. Welcome. As you can see, Traxion delivered a strong set of operating and financial results. And once again, quarterly revenues and EBITDA posted record high figures in the company's history. There are several details worth mentioning this period. As always, Rodolfo, Wolf, Antonio will elaborate more in a moment, but I want to share with you some thoughts. First, we are seeing increased activity in the most dynamic markets of the north of the country driven by the Nisin Quent, Tijuana, Juarez and the Monterrey Saltillo, Novolaredo corridor are where the most expansion opportunities are emerging. As you know, we have a tremendous presence in sort geographies and plan to continue to expand our operating capabilities to better serve our cross-border clients and those foreign companies seeking proximity to final consumer markets. Traxion has a large logistic footprint and an extensive cargo portfolio to render seller made solutions between Mexico and the U.S. Likewise, the company has the absolute largest and most modern people mobility platform to serve factories and industrial parks. In this segment, we're also finding greater commercial activity, and we are very close to complete our growth plan for 2023, which involves a large portion of our CapEx. Moving on. Fuel costs have normalized. This item increased 14%, which is significantly lower than the growth of the revenues. The path to is effectively reflected this quarter and the margins of our traditional business segments reveal that. Consolidated EBITDA margin came in at 17.7%, which was mainly driven by the higher contribution of the Logistics and Technology division, which posted almost 50% growth. Finally, Traxion made significant advances in ESG terms. Tonio will give you more details in a moment. What is important to highlight that we continue to strengthen our sustainability strategy according to our leadership commitment. We think that our quant ESG framework is one of the most robust in Latin America. And our ratings and standards are proof of such advanced guidelines. We are very excited about the commercial opportunity we see ahead. Thanks for your attention. I will now hand over to Rodolfo.

Thank you. Welcome, everyone. As Aby just mentioned, there are significant operating advances that I want to discuss. First, Traxporta, our digital Tibo market place continues to penetrate and gain market throughout different avenues. This quarter, such application posted more than 82% growth in revenues compared to the same period of last year. Second, we continue developing our pharma and intermodal verticals. In this line, I just want to highlight that we currently operate the absolute best pharmaceutical warehouses in Latin America, and we will leverage such capacities to keep expanding such business. There is a great scarcity value in the pharma supply chain. In Traxion is a natural player to properly explore such businesses. Third, our cover operations advance ahead of expectations. Cross-border activity increased mainly by volume derived from nearshoring. We had an expansion of approximately 8 retitrated trailers, which are mainly French products expectations to the U.S. We like this business very much basically because of its resilient nature and U.S. dollar exposure. Traxion continues to build up a strong reputation in the Bajio region in this service and to grow its market share and penetration into North America. Moving on to the Personal Mobility segment. We continue to absorb great demand for our service in the most important economical regions. This quarter, we started operation with new clients and increased capacity with existing ones, totaling more than 200 new buses. Traxion continues exploring new markets where personal mobility is still a challenge, and we believe that our solutions have an enormous value added for our clients. Finally, our 3PL Logistics division posted a healthy expansion due to a strong commercial activity and the incorporation of pharma businesses. All that increased our warehousing area in more than 142,000 square meters, an impressive 23.3% growth. As we always say, technology is the most significant competitive advantage and represents the highest barrier of entry in our sector. This is precisely what will continue to enable Traxion to keep seizing opportunities that arise from ushering trend. As you see, it was again a very busy quarter on the commercial and operating areas. Well, with this, I end my remarks. Wolf, please go ahead.

Thanks, Rodolfo. Hello, everyone, and welcome. There are many interesting details worth mentioning for this quarter. First, there is a healthy double-digit growth in our 3 business segments that was driven by both price and volume as the fuel impact of the full pass-through keep in this quarter and the Logistics & Technology division posted an almost 50% growth in revenue. This year, we expect additional growth coming in the following quarters. Traxion has made significant investments that have not yet shown their full potential and contribution to the top line. Let us also bear in mind that usually the first quarry is often in terms of activity. So there is an expectation of increased volumes with higher prices in 2023. Moving on, I want to discuss the recent refinancing we obtained. It is a MXN 6 billion credit facility. The plan was to refinance and repay the outstanding line at the end of March and to strengthen the company's leverage strategy according to our commitment to optimize overall financial profile. The spread of this activity is 50 basis points lower on average compared to the previous credit. As always, we see the best alternatives in terms of both costs and maturity. Moreover, there is an increase in comprehensive financial results that was mainly driven by a growth of approximately MXN 3 billion in gross debt compared to the same period of last year and the hike of interest rates that basically doubled the company's interest expense. However, our leverage ratio remains in the same level as in the past quarter, and we expect to lower it progressively throughout 2023. In terms of CapEx, our program was according to plan and with no surprises. A large portion of such investment is to grow organically our personal mobility fleet. This business continues to present us with very profitable opportunities as industrial activity expands, partly driven by the new sorting trends, especially in the northern markets. Finally, there is a very good piece of news. In February, we opened our first 3PL facility in Del Rio, Texas that we're managing for an e-commerce client. This represents a great milestone as we start operating logistics in the United States. As you see, there were several good news this quarter. This year started with strong activity in line with our guidance expectations. With this, I end my remarks. Thanks for your attention, and I will hand over to Tonio.

Thank you, Wolf. I just want to briefly highlight some of our important financial annuity matters. First, fuel costs have normalized. We successfully conducted the base to our clients, and we are now observing a margin inflection point in our traditional business lines. Our asset-light division is running efficiently as expected, and overall growth was more driven by price rather than volume, reflecting increased fares, both are very business. Third, operating cash flow decreased MXN 205 million was mainly driven by 2 things: first, the increase in preoperating income and expenses required to start new business, mainly in terms of working capital; and second, a higher interest expense compared to the same period of last year. Earlier in the quarter, we announced that we will cancel up to 35 million shares that Traxion has in the repurchase fund, which is approximately 6.4% of shares outstanding. Management will propose the matter during the next shareholders meeting later this week in order to proceed with such installation. This initiated is indeed very good news as well and reinforces our commitment of long-term value creation. Furthermore, net income can be lower than expected and was mainly due to a mixture of higher interest and preoperating cost and expenses for new business that are not contributing yet to the bottom line. However, we expect this effect to be temporary as such business start contributing to the top line. Moving on, Traxion made significant advantage in terms of EFG. We expanded orientational program to the states of Mexico on well, and we plan to certify more than 3,500 high school graduates there. We will continue such expansion to another set states by the end of this year. Moreover, Traxion was recognized as the company with the best corporate sustainability strategy in 2023 by Global Banking and Finance Review -- these are indeed very important achievements that play the company in a higher level in terms of EFG and in line with our leadership commitment was a very successful quarter in every front. Rachel made significant progress in total strategy, and we are very excited about VSC coming this year. With this, I wrap up management remarks, and we'll open the floor to Q&A. Thank you.

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

I believe in the -- you mentioned in the last conference call of potential upside on EBITDA margins this year due to a greater contribution of the technology and logistics divisions. Given we were then relative to what you are or what you're seeing on the ground today, could you say you are more optimistic or conservative about the second half of 2023.

Juan, this is Tonio. Thanks for your question. Remember that -- we always said that the logistical technology margin on a normalized basis on a long-term basis as well is on the 10% neighborhood. So this quarter, it was below because mainly of preoperating expenses and costs that required that were required to start new operations. We don't expect that to be on a long-term basis, but we do expect some more pre-operating costs in this segment, not on the same proportion, but we also expect the margin of this segment to be more on the 10% neighborhood.

The next question today is coming from Alex Demichelis from Nau Securities.

A couple of questions. The first one is just to follow up on the model of logistics and technology. So please walk us through how we received this evolution from the 7% that we saw in the quarter to the 10% neighborhood that you're talking about. And then within that, could you please explain how the medicines are working because when you acquire or Medistik, that business has much higher margins. So Traxion [indiscernible] comes together the third question. And then the second question is, could you please indicate that how you see the working capital evolution through the rest of the year because obviously the [indiscernible].

This is Wolf. In terms of the logistics margins, first, if we talk about the Pharma division, as you already mentioned, with Medistik, that's correct, about talking about the margin. But we already started new clients and new contracts over the same division in terms of the pharma vertical. So that is why it's taking us more preoperating expenses in this particular quarter. So this is why the margin is below in this niche. So we are expecting to have like a mature contract in the next quarters. So in that terms, we can raise the 10% area, as Tonio just mentioned. And in terms of the second question with the working capital, also this quarter, it's very normal for us to have that difference, mainly. We have 2 different things where we started in the net income. And the second thing is also because usually, we have a lot of contracts that we have to renew in this first quarter in the year. So we take a little bit more time to recover also the collect accounts. So this is mainly what was the impact. In terms of the working capital, we expect to be very normal as the previous quarters in the next 3 quarters of the year.

That's great. And given that you mentioned you started the operations on the logistics side in the U.S., could you please give some kind of player can you see that side of the business evolving in terms of growth, in terms of margins, what's the opportunity for you to be...

Alex, this is Rodolfo. So yes, we're really proud that we just began our first operation cross-border in Laredo in the warehousing business. We began in 1st of March. And we see a lot of potential of growing this business, of course, in the cross-border section of U.S. and Mexico, but also in a little inside more in the U.S. The margins we are seeing around that is the same as the logistics segment, around 10%, 12%, 10% to 12% is the margins we're seeing. But we've seen a lot of potential, and we're looking forward to expanding that business there.

The next question is coming from [indiscernible] from Comcast Group.

Can you hear me?

Yes, we can hear you, [indiscernible].

Okay. So my question is just a little follow-up on the logistics fund, and the margin is on had a compression due to the preoperating expenses. And once we start to see a more stabilized growth we should expect more to 10%. But what are you seeing in terms of when will be more stabilized? And maybe in the next 2 quarters.

We expect to normalize a little bit more in the next quarter. So it will be in a softer way, but we'll have to reach around 10% in the next maybe 1 or 2 quarters. So it will depend. Remember that we grow this segment by almost 50%. So it takes us a little bit more operating in this particular quarter. But as we can mature that contract, we are expecting maybe in the next quarter or maybe one more to be around the 10%. Thank you.

The next question is coming from [indiscernible] from Citi.

I have 2 questions on my side. First one is, what are you seeing in terms of upside when it comes to return on equity or return on invested capital over the next 5 years versus today. So do you see any room for expansion here? And what is the level more or less that you expect to reach in the mid- to long term? And have you heard any concerns from cargo customers regarding government proposals to weaken concession contracts and make you here for -- make it easier for the government to extrapolate property. Any color on that would be appreciated.

In terms of the return, the previous year 2022, it was quite hard because of the fuel cost impact to the company. So -- and we invest a high amount in the previous year. So in terms of what we're looking forward, we -- all the investments that the company made are willing to have more than 20% IRR or ROIC -- so the incremental ROIC or all the financial metrics that we're looking for should be going forward and better for the next future. So if we're looking for the near term, we should -- we should see like better margins also in the net income, and that will be in a better return in terms of capital.

[indiscernible] And talking about the government, I mean, we feel very confident and comfortable with Mexico and for investment in Mexico. We have grown here for many years, and we are planning to continue growing. And we haven't heard any news that change our vision for Mexico.

The next question is coming from Martín Lara from Miranda Global Research.

Congratulations for these results. I just have one question. Do you expect an additional margin improvement in reality of cargo and mobility of personnel this year.

Yes, as [indiscernible] just mentioned also before, we are almost getting the same margin that we have before the impact of the previous year. So yes, we should expect something better than we're looking in the first quarter. Remember that it's also the softening during the year the first one. So we should be in the better margins also in the next quarters of the year.

Your next question is coming from Douglas Turnbull from Invesco.

I just wanted to double check on kind of looking at the Medistik integration correctly because I think you said historically, it did something like GBP 600 million revenue in a year at about a 30% plus EBITDA margin, which would be a run rate of about GBP 45 million of EBITDA per quarter. And yet, if I look at the EBITDA and the logistics and technology year-over-year, relating grew by, I think, GBP 18 million. So I'm just trying to raise, am I looking at that correctly? Does that mean something else has gone backwards? Or have we significantly diluted the margin in that in the short term by adding new contracts? I guess I would have expected it to increase more given that wasn't in the base...

I'm sorry, Douglas as maybe I couldn't understand well the question, if you can repeat please.

Sure. I think historically, we said that the Medistik business did a revenue of about GBP 600 million in a year at about a 30% of say, EBITDA margin, which would assume that it would add about GBP 45 million of EBITDA per quarter. Given that isn't in the base for the first quarter of '22, I would have expected a bigger jump in the EBITDA number once we've included that in the base for the first quarter of '23. So I wonder if I'm not looking at that correctly or whether it was the fact that margin declined elsewhere? Or did adding new contracts in test in the short term, diminish the margin? Or why does the EBITDA in Logistics and Technology not increase more with Medistik being included in the run rate?

Thanks, Douglas. Yes, we are starting new operations with big contracts in this particular segment. So this is why the preoperating expenses that we have to have in this particular quarter are impacting the segment and in terms of margins and also. So this is why you're not looking that far in terms of the margins about Medistik. But if you see that particular business and you were saying MXN 600 million in rent terms of revenues per year. If you make it for this quarter, it's almost less than 10% of the revenues of the total division. So this is why the impact of the preoperatings are higher than the revenues in terms of just Medistik. But you will see better margins when we can mature and we have less preoperating in the next 3 quarters of this year for this particular division.

[Operator Instructions] And we do have another question coming from Fernanda Recchia from BTG.

Two questions on my side. The first one is actually a follow-up regarding the logistics new logistics operations that you are opening in the U.S. If you maybe could provide us some information regarding the size asset of this operation, if you already have contracts signed with clients. And you also commented about a lot of potential, but is this coming from organic or inorganic moves that you are expecting? And also, my second question is kind of related to this, but if you could provide us an update of your M&A pipeline, where you're seeing of target, we could have any news still this year?

This is Rodolfo. So regarding the warehousing business in the U.S., we began this with the business we already had with e-commerce, especially Amazon, bringing all the importations , all the imports that they do from the U.S. to Mexico. So we are not doing also the warehousing there and we know the fulfillment in the U.S. to do the cross-border in Mexico. So that's the beginning of this business. And yes, the pipeline for saying all the opportunities we see, it's mainly from Mexican crimes that are multinational companies that also need this type of service or services in the U.S. They have been competing us to help us do the service in. So that's what we are seeing opportunities there -- and regarding the second question, talking of M&A, we should expect to close our first M&A or you soon...

Thank you. There are no further questions in queue at this time. I would now like to turn the floor back to Aby Lijtszain for closing remarks.

The new showing is blowing the winds in our favor. We have very strong top rate in the north part of Mexico with more than 1,000 industrial clients and with the logistics and mobility solutions for them, Traxion is very well positioned to capture this big opportunity. I see a great future for this company. Thank you for joining.

Thank you. 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.