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

Greetings. Welcome to the Traxion 3Q '23 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Aby Lijtszain, Executive President at Traxion. You may begin.

Good morning, everyone. Welcome, again. I'm very pleased to share with you the outcome of another successful quarter full of good news and positive results. There are many things to discuss in the financial, operating and ESG fronts that will be explained in more detail by Rodolfo, Wolf, Antonio. But as usual, I want to take advantage to point out some relevant matters. We observed that demand was significantly higher than our estimates. That's why we decided to move forward with an equity follow-on on August 10, which is another relevant milestone in the company's equity story. We raised MXN 2.7 billion that we plan to deploy it mainly to finance the organic growth for our people mobility segment, which continue to present us with profitable expansion opportunities because of the near shoring. We also plan to use a portion of the proceeds to fund further M&A activity mainly in the logistics and technology division to boost our exposure to measuring as we believe that we are the leading facilitator in Mexico for such trend. Traxion is one of the very few Mexican companies that have top the equity markets in the past few years, which translates into a strong vote of confidence from our investors. We believe that our business model is strong and our growth prospects are compelling. This financial strength is one of our most significant competitive advantage and is among the highest barriers of entry in the sector. Together, with our modern technology and extensive operating infrastructure, especially in the most desirable location for near shoring. In terms of P&L, Traxion posted a record high figures. Revenue grew 18.9%, almost reaching MXN 6.4 billion, while EBITDA increased 25.7% and pass again the MXN 1 billion mark. Moreover, net income grew more than 60%. Moving on to the operating side of the business. All our key metrics show self improvements. We continue to become more efficient in cargo, maintaining the revenue level with less trucks, focusing on cross-border and specialized services. One interesting fact is that our fleet has not grown significantly since 2019 but over the last 3 years, we have added increased cargo capacity with Traxporta. We now operate more than 3,200 third-party cross through this half. With that, we have more than doubled the cargo capacity of Traxion without incurring an expansion CapEx of the fleet. Thanks for your attention. With this, I end my remarks and I will hand over to Rodolfo, Wolf, Antonio for a deeper dive into the figures. Please Rodolfo.

Thank you, Aby. Hello, everyone. Thanks for your attention. There are several operating matters to discuss today. First, in the mobility of people segment, our fleet keeps growing together with our revenues per kilometer as we become more efficient in terms of costs. Demand level keeps coming in strong, mainly driven by new clients starting operation incurring clients expanding their existing ones. All of that is being driven by near shoring. Both operating profit and EBITDA came in higher than the revenues of the segment, which is indeed very good news. EBITDA margin posted a healthy 25.7% in line with our expectations and with the level of growth of the division, which includes pre-operating costs and expenses to properly start new operations. We continue to leverage through our commercial muscle, operating capabilities and IT platform to grow on the most profitable opportunities in this market. We continue expanding organically in this segment with great momentum, a strong balance sheet and a very favorable levels of demand. The sheer size of our infrastructure together with our high-quality service are attributes to place traction in a very special niche where the company is able to serve large clients with extensive complex mobility needs. Moving on in the Logistics and Technology segment. We have exceeded 800,000 square meters of 3PL warehousing space under management, which represents a 33.7% growth compared to the same period of last year. This was mainly driven by organic growth of our regular business together with strong expansions of the Pharma division. We plan to continue to grow this line by enhancing our commercial position as these services carry on penetrating in Mexico. Finally, in terms of mobility of cargo, we advance with our renovation and fleet management program. Additional to that, the average fleet decreased more than 140 units this quarter. Kilometer volume decreased 10.5% as well. However, revenues show a marginal increase. Despite of that and in line with the reorganization strategy, both operating income and EBITDA came in 99.3% and 28.7%, respectively higher in the second quarter of last year, mainly driven by a growth of 12.5% in revenue per kilometer. This was achieved by expanded activity in specialized cargo operations, which typically carry better economics with reduced distances, which basically means that we are becoming progressively more efficient on a per unit basis. All of that resulted in an EBITDA margin of 21.9%, well within our long-term targets. We're expected to keep operating this segment with such efficiency. Indeed, this was another busy quarter. We are excited about the prospects for the next year. Thank you for your attention. With this, I end my remarks. Please, Wolf, go ahead.

Thank you, Rodolfo, and good morning. I want to disclose some relevant financial metrics in more detail. First, CapEx. We have been supporting much more demand than what we anticipated at the beginning of the year. Due to that and after the follow-on offering, we are now able to capitalize on more opportunities and we plan to invest around MXN 3.5 billion of CapEx, which is approximately MXN 1.3 billion more than what we budgeted initially for 2023. It is of paramount important to observe that the benefit of such additional CapEx where we see over the next quarters, given the timing of the investments and the moment when they mature and start contributing to the topline. The plan is to continue to grow stronger with disciplined approach as we have done for the past. Our leverage level is now below 2x, a very healthy ratio where we feel comfortable despite accelerated growth plans for the future. We have been deploying the proceeds of the equity offering in a timely fashion and the plan is to use approximately 50% this year and the remainder throughout 2024. Second, net income came much higher than in the past few quarters and shows a more normalized level. This is mainly due to a great operating income, driven by increased operations across the company and efficiencies despite a higher interest expense environment. Third, margins. It is very important to highlight the margin recovery, both on a consolidated and per segment basis, mainly driven by cost efficiencies. Consolidated margin expands 100 basis points compared to the same period of last year. Most relevant is a 476 basis point expansion in the mobility of cargo sector to reach 21.9%, a much normalized level compared to 2022 and was driven by increased efficiency in fleet management and resulted in a healthy expansion in revenue per kilometer and a much better cost management. Thanks for your attention. With this, I wrap up my remarks. Please Daniel go ahead.

Thanks, Wolf. I want to highlight some details of the follow-on offerings and the good news is brought our story, then talk about some other milestones in terms of ESG. There are several good news surrounding our recent equity offering. First, the float increased significantly. It grew from 38% to 63%. Second, liquidity has improved quite substantially. During the first 2 months after the deal, it has basically doubled as a result of more shares outstanding and much less shares in term hands due to the secondary component. The process was executed in record time, taking advantage of favorable market conditions. Moreover, demand came in strong, especially from investors from the U.S., Europe and Brazil, while several new local accounts participated. More than 77% of the men was from foreign investors as a result of an extensive marketing effort. Today, Traxion's investor base is broader and much more diverse. We are very pleased about the feedback we received. There is genuine interest about how our business strategy connects with the near shoring trend and the whole ecosystem it is creating in Mexico. Shifting gears, there are several important matters on the ESG front. We recently released our integrated report, which includes among other things, an updated materiality analysis, the results of our verified Scope 1 and 2 carbon footprint. And for the first time, an estimate of our Scope 3 emissions. We have responded to 2 very relevant evaluations. The corporate sustainability assessment from Standard and Poors and the Carbon Disclosure Project, whose results and answers will be released towards the end of this year. Finally, we move on with implementation of pilot trials to increase the number of women in operating positions within our workforce. Thanks for your attention. With this, I wrap up my remarks, and we'll open the floor to Q&A.

[Operator Instructions] Your first question for today is coming from Pablo Ricalde at Santander.

I have 2 questions. The first one is on your guidance. I don't know if you can elaborate more on your top line growth expectations for the rest of the year and maybe talk a little bit more on the margins? And the second question is related on cash deployment. I don't know if you can provide an update on your follow on proceeds cash deployment.

Pablo, I'm going to try to answer your 2 questions in one answer. In terms of topline, we expect it to grow at least 20% in 2023. Margins should be around 18%, as we have always said. We advanced with the cash deployment of the follow-on process, and we expect the benefits of such investments to be seen in the first month of 2024. We have already successfully deployed around 50% of the proceeds -- I mean -- sorry, what I mean is that we expect to deploy successfully around 50% of the proceeds of the follow-on within this year and the remainder in 2024.

Next question comes from Guilherme Mendes with JPMorgan.

I have 2 questions. The first is regarding M&A, part of the proceeds over the follow-on should be targeting a new acquisitions. So if you can comment on how new negotiations have been evolving, what kind of sectors are you looking to? And what kind of ticket size should we expect for upcoming transactions and the second question is regarding Traxporta, you mentioned about doubling revenues on a year-over-year basis this quarter once again and congrats. The question is can you provide more details on what kind of contracts have been signing. So this is a contract to companies that you've already been serving or new clients at kind of the ticket size of those contracts. So if you can provide more details on how this growth has been evolving.

The business that we are looking is for the cross-border logistics. So we are planning to add a custom agency broker in the border with Mexico in the state, so we can offer our clients the full service. The ticket size I mean we are still negotiating. So I will look for a ticket size, maybe it could be between $50 million to $70 million.

This is Rodolfo. So regarding your Traxporta question, yes, as you said, we have been growing year-to-year basis, doubling the size of the company. The contract and the new business we have there is both sides we are getting more business from our clients that we already had in the cargo section. And also, we have been getting new clients, new customers that need this transportation services. So we expect for this business is to keep growing in the future. We have been receiving a lot of good feedbacks from our clients and we're showing good prospecting of growth in 2024.

Your next question for today is from Fernanda Recchia with BTG.

I have 2 as well. First, on Logistics & Technology segment. We noted a slight miss on the EBITDA margin, mainly related to the one-off expenses. So maybe if you could clarify how much was the amount related to one-off and how would we margins at this impact would be helpful for us to have a sense of normalized EBITDA margin in this segment? And second, just a follow-up on the cash deployment related to the follow-on. Could you give us some visibility if you have already negotiated the contracts that you deploy this year the CapEx? And if so, what are the IRR that you are seeing in this new contract?

This is Wolf. Regarding your first question in terms of the EBITDA margins in the Logistics and Technology side. I will answer, mainly the one-off that we had will be something around 1% of the margin in that division. So if we don't have that one, just to give you an idea, if you compare the score that we have in this quarter compared to the previous one, it's almost 9% growth in terms of square meters. So the one-off were something around 1% of the margin in that division.

So for the growth of the mobility of people segment, so we have already signed the long-term contracts with new clients to tell -- to deploy the CapEx at [indiscernible], which means 50% of the resources of the follow-on. And these resources are signed to get us a return -- I mean an IRR of around 20% and ROIC also over 20%.

Your next question is coming from Martín Lara with Miranda.

Congratulations for the results. I have one question. Could you please provide us with an updated guidance on the CapEx level for this year?

Martin, just -- I just mentioned a little bit earlier. So just to be -- on that number, instead of MXN 2.2 billion for this year, we are expecting something around MXN 3.5 billion, including, obviously, the results of the following that we already mentioned.