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

Good morning, everyone, and welcome to the Traxión First Quarter 2024 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Aby Lijtszain, Executive President of Traxión. Sir, the floor is yours.

Thank you. Welcome again. As you can see, we posted another very good set of operating and financial results. The year looks good with great momentum and strong demand, especially in the asset-light division and the People Mobility business. Traxión is off to a good start. However, as you know from the past, the first quarter of the year is always the mildest when seasonality is much more visible. In addition, there were several investments made in the quarter that require upfront expenses, which have not matured and there is a ramp-up period for them to display their benefits. Moving on. If you look at the figures, they look similar to the same period of the last year, but with important efficiencies regarding operating margin and net income. As usual, Rodolfo, Wolf, Antonio will talk about several metrics in more detail, but I just want to highlight several strategic aspects. First, please note that the Logistics and Technology division posted almost 29% growth in top line. That means that the asset-light business now represents more than 36% of total consolidated revenues and is fast approaching to the same level as the People Mobility segment. All of that is in line with our long-term plan to become asset lighter, while we continue to leverage our operating and commercial position to boost storage expansion. This segment should represent more than 50% of top line within the next few years. As we have discussed many times, these logistics services are underpenerated in Mexico, and we are developing such penetrations with a strong commercial effort and scalable IT platforms. Moreover, Traxporta continued to grow progressively and we expect another year of higher growth rates for this marketplace that has proven to be a sales success. In terms of people mobility, we continue to see expansion driven by current and new clients. With strong demand, especially in the Northern regions, which have been the low hanging fruit location for industries seeking nearshoring. As you can see, we have more than 1,245 additional buses in average compared to the same period of 2023, and the plan is to start operating a similar amount of units in 2024. The company is performing well within its plan for 2024. The market is there. The opportunities are much more tangible and Traxión advanced with a very efficient and profitable approach to capitalize opportunities in the 3 business divisions. We believe that the initial trend will continue to advance and penetrate with strong momentum over the following years, and we are prepared to face such growth as we have been doing for the past 3 years. Thanks for your attention. I will now hand over to the others. Please, Rodolfo, go ahead.

Thank you, Aby. Welcome, everyone. I will now discuss some operating details worth mentioning. First of all, we continue to become increasingly more efficient in cargo, especially on a per unit basis. Even though the top line has remained flat, mainly due to the exchange rate that has an effect on the U.S. dollar-denominated services. Both operating income and EBITDA continued to grow with healthy margin expansions that have been sustainable over the most recent quarters. Moreover, the spread between the increase of revenues compared to cost per kilometer is now even wider with less kilometer volume and a marginal growth in fleet, which has to do with the reconfiguration program of our trucking operations. In addition, we have been implementing several state-of-the-art track features that have increased efficiencies in our operations at the border and have enhanced the security on many routes. Second, this quarter, you were able to see the growth we experienced in the people mobility fleet with more than 1,200 new buses on average in operation during the quarter. Demand levels keep coming strong, mostly from new clients starting operations and current clients expanding all of that being driven by nearshoring. Traxión carries on expanding organically in this segment with great momentum. The sheer size of our infrastructure together with our high-quality services are attributes that place Traxión in a very special niche where the company is one of the very few players is not the only one capable of serving large clients with extensive and complex mobility needs. Our premium services include value-added features such as root design and planning well in advance of our client needs, which grow more complex as the nearshoring evolves. And industrial parks are developed farther away from urban areas. Finally, in the Logistics division, we continued to expand and grow. As you know, many of these services are very underpenetrated in Mexico. Traxión has been moving forward with a very strong commercial effort to both gain market share and develop further markets for these services. As a result, our 3PL division continues to expand both areas and revenue per square meter. The intermodal services keep spending and Traxporta has been passing high-growth rates. Many thanks for your attention. With this, I end my remarks, and will hand it over to Wolf. Please?

Thanks, Rodolfo. Hello, everyone. There are many financial highlights to discuss. First, it is worth mentioning, as Aby said, that the first quarter exhibited the most seasonality within the year as it tends to be the softest. Despite that, we're starting to see the effects on the investments that we made in 2023, which was a high-growth year for Traxión. Having said that, total revenue grew 15.5% on a consolidated basis, in line with the company's expectations and plans. Moving down, operating income grew 21.8%, mainly due to an 80-basis point efficiency in costs as a percentage of revenues. In this line, it is important to highlight that the labor cost posted a much more normalized growth compared to the last 4 quarters. General expenses posted an increase higher than that of revenue but has behaved in line with the past quarters, having represented between 13% and 14% of total revenues historically, which is due to pre-operating expenses needed to sustain the level of growth. In terms of comprehensive financial results, you can observe a marginal increase in interest expense, which is explained by a small change in net debt. This was offset by some FX effects that resulted in a small efficiency in the overall financial results. Operating cash flow posted a healthy increase of MXN 571 million, driven by working capital improvement and recorded more than MXN 1 billion. Perhaps one of the most important figures, it is net income that were more than 92% to reach MXN 139 million, mainly driven by operating income. The CapEx plan evolves favorably also. We're about to complete the deployment of the proceeds of last summer equity follow-on. At first, we said that we are going to be able to invest such resources within 12 to 18 months, but we were able to do so in less than a year. Finally, in the leverage line, we continued to operate with a prudent debt utilization under a disciplined approach and a strong solid balance sheet. Once again, thanks for your attention. I will now hand over to Tonio.

Thank you, Wolf. Hello, everyone. I'll be brief. I just want to highlight some ESG and other relevant matters. As Wolf said, the CapEx plan evolves according to plan. Please bear in mind that we plan to deploy approximately 80% of the CapEx for organic growth in the People Mobility division, while 15% will be allocated to renew our cargo fleet, which as of today has an average age of less than 3.2 years. The remaining CapEx around 5% will be used to upgrade technological platforms and our 3PL infrastructure, together with some ESG-related matters. On this line, we are very proud to share that during the first quarter of this year, we started trials with the very first 100 electric 0 emissions bus in Mexico. This 45-seat unit has a range of 210 kilometers, a 3-stage advanced braking mechanism, comfortable interiors, and the high-impact body work to transport people safely. With this, Traxión is once again the first and the pioneer in the industry. The company further reinforces its commitment with the environment and with the reduction of emissions as it has done with its trucking fleet with consistent emissions reduction over the past years. We are the absolute leader in the industry, and our commitment is to lead also on ESG matters across the board. Our 4-pillar strategy has so far proven to be effective. And we believe that we have one of the most robust ESG strategies in place among companies in LatAm. With this, I end my remarks. Thanks again for your attention. I will now open the floor to Q&A.

[Operator Instructions] Your first question is coming from Fernanda Recchia from BTG Pactual.

I have 2 from our side. The first, it seems that there is a mismatch between your CapEx and cash flow generated. Would you mind walking us through the CapEx cycle specifically, if you could comment how long does it take for you to start generating cash from the CapEx you deploy on the zero. And my second question is regarding oil volatility. We perceive a great oil volatility at the beginning of this year. We know that you have an automatic pass-through calls of up to 7%. So could you comment at what threshold of oil price increase you feel comfortable without triggering individual contract negotiation with your clients.

Fernanda, this is Tonio. Thanks for your question. Regarding the mismatch between the CapEx and the cash flow generation, there's always a lag between the time when the CapEx is exercised and the time when it actually starts generating revenue and cash flows. Depending on the timing, it could take up to 2 quarters to be seen, sometimes less than that. For example, if we do -- if we exercise a certain portion of CapEx on the last 2 weeks of the quarter, you are going to be able to see that on cash flows perhaps 2 quarters from that. That's a lag between the -- it's up to 2 quarters, the lag between the actual exercise of CapEx and when it matures and starts generating today -- contributing to the cash flow.

Fernanda, this is Wolf. And in terms of the oil prices, I will say that as of now in Mexico, we are still in a similar range of price. So we're not feeling any impact yet, obviously, in the company. And I would say with this level also in the FX rate with the Mexican peso and the U.S. dollar, I will say something below the USD 95 which shouldn't be maybe feeling any other impacts in the fuel time.

And Fernanda, it's important to mention that we have in all our transportation contracts, the pass-through clause for diesel increase in case it's necessary. So as we have done many times in the past, if we see -- if we see an increase in the price, we can reflect that to our clients.

Perfect. And just a follow-up, if I may. So the follow-on proceeds that you used to purchase new trucks is rightfully reflected in Q1 numbers? Or it should be fully reflected in Q2 considering this time of up to 2 quarters for you to start receiving revenues.

We'll start seeing in the next 2 quarters, mainly Fernanda, obviously, all the investments that we made in the past 2 quarters. Talking about the last quarter of 2023 on the first earnings.

Your next question is coming from [ Bernardo Martica ] from Santander.

First, you stated in the financial report that the revenues for the cargo segment were negatively impacted by FX. I was wondering if you could give a bit more color on the segment, excluding effect, maybe what you expect from it to continue growing going forward? Or will it be the strategy. Again I have a follow-up question after that.

Bernardo, this is Tonio. Thanks for your question. Yes, if you take a look at the base of revenues in cargo, a portion of that -- some of the services that are cross-border related are denominated in U.S. dollars. So if you compare the exchange rate from this quarter to the past you're going to see that it is lower and that had an impact. However, as we -- as you have been seeing for the past 2 years, we are not growing the cargo fleet. We are expecting cargo revenues to grow in the low teens, high single digits because the organic growth of such segment, it is being captured by Traxporta with the digital app and it's being operated by third-party fleets. So however, what we want to do moving forward in cargo is not growing the fleet. If you see the fleet has not grown in 3 years, basically. But all the metrics have improved, you see -- in the past 3 years, revenue per kilometer has increased basically 50% with the same fleet. And that's what we want to do. We want to continue to be more efficient on a per unit basis in our cargo fleet while Traxporta continues to capture the organic growth of such division.

Perfect. That is super clear. And I have another question, if that's okay. It's on guidance. In terms of top line, first, you grew slightly below guidance and almost flat. Are you still comfortable with the 18% growth for the full year? And in terms of EBITDA margin, the first quarter was already in line with guidance. And since we saw significant capital deployment last year, do you see any upside potential in EBITDA margin for the second half of the year as these investments start to mature? Or should we just expect the 18%.

Yes, Bernardo, the effect that you see, typically, the first quarter of the year is the softest in terms of seasonality. That's why you see a lower margin and a little softer figures. But if you compare to 2023, you are going to see that it happened the same last year. And you can expect something very similar to what you saw in 2023 in terms of margin revenues so that we are very confident that we're going to achieve the guidance with no problem.

Your next question is coming from Alejandro Demichelis from Jefferies.

Yes. Well, you mentioned the situation on the cash flow and the CapEx and so on. How should we think about free cash flow for the rest of the funding that additional CapEx that you're talking about? That's the first question. And then the second question is on the cargo business. And clearly, the first quarter tends to be seasonally weaker and it has been impacted a little bit by the FX. But when we look at the revenues, when we look at the kilometers driven in the cargo division, they all seem to be kind of down quarter-on-quarter with margins also a little bit down. So can you give us a bit more of an indication of how you're seeing that cargo divisions.

Thanks, Alejandro. I'll answer the second one. This is Tonio. If you see, yes, you are right. The kilometer volume is decreasing. However, revenue per kilometer is increasing and the cost is decreasing. So the spread between revenue per kilometer and cost per kilometer is widening. And that is because we are operating less kilometers bought with more profitable routes, shorter, more profitable routes related mainly to cross-border and other specialized [ circuits. ]

Alejandro, in terms of your first question, I will say, remember that, Tonio just mentioned that as we deploy the CapEx in the company, we will see the cash flow coming in the next period, let's say, 1 or 2 quarters that we can mature the business after we can start the operations. So the cash flows will come in the next quarters after we made the investments in the company. So you should see in the next quarters, the cash flow will go up even though the investments will continue more in line with what we just saw in the guidance that we give you to the market.

So for the full year, can we expect cash flow negative, neutral, positive, how we should think about that.

We think that we're going to be close to neutral. Remember, obviously, again, one more time that we're making the investments and the fully benefit of the investments will come after. So if you measure in the same time, but we will wait a few more periods. We will see the mature of that, and that will make the positive cash flow compared with the investment that we made.

Your next question is coming from Jay Singh from Citi. Your next question is coming from [ Anna Sours ] from Miranda Global Research.

Congratulations for the strong quarterly results. I have several questions. How do you see the performance of the mobility of cargo business during the next few quarters? Then how do you see the fleet growth during the rest of the year? And finally, where do you see your leverage at the end of the year taking into account the significant investments that you are making?

Anna, this is Tonio again. Thanks for your question. We are looking at a net debt-to-EBITDA ratio between 2.3x and 2.5x. Remember that we have a self-imposed limit of 2.5x, so we cannot go over that. But we feel comfortable around 2.3x. That's where we were exactly 1 year ago. We are below that today. So we think we're comfortable with what we are looking. Remember that Traxión has always been very prudent with leverage utilization. And can you repeat the second question, please?

Yes. How do you see the fleet growth during the rest of the year.

Yes. Well, remember that this is a seasonal business. So what you can expect, if you take a look at what happened in 2023, you can expect something very similar in terms of growth margin behavior over the next few quarters. So that's -- I would say that is a very good example to look at 2023. In People Mobility -- sorry Anna, in People Mobility, we are planning to grow a shade over 1,000 units.

Your next question is coming from Pablo Ricalde from Santander.

My question is related to the Logistics and Technology segment. You mentioned about the 3 subsegments you have there about how they are growing. But I don't know if you can share profitability. How [ suburb ] in those 3 segments in the logistics and technology. That is my question.

Pablo, could you please repeat it? We didn't catch well the question.

Yes. My question is related to profitability in the subsegments, in the logistics and technology. You said service-related technology is growing and maybe a little bit color of how are like 1 of those 3 subsegments is growing in terms of EBITDA. I don't know if that's clear.

Pablo, this is Wolf. Yes, I would say, as you can see, we are right now in terms of margin, something around 7%. As Tonio mentioned, we will see that margins will improve for the next quarters as also the seasonality comes for the business and also our investments will mature also in the new contract that we have in that also division. So we will be growing up the margins close to the 9%, I think, for the next -- maybe for the second semester of this year.

But if we talk about like service related less mile, how are like margins separate between like service and last mile, which has like by higher margins and which has like lower margins.

Yes. So I will say mainly the 3PL services are something more close to the 20%. The Traxporta business is right now something more around the 4%. Remember that this is the one that is growing at the most. And the other one, the last mile right now, remember that -- how the market is -- it's doing it like for the past, I don't know, maybe 2 to 3 quarters. So we are maybe right now something more close to marginal -- in terms of margins or more close to the -- to zero margins, and we're expecting to improve that even though in the next 2 quarters. So the company is working hard mainly in this segment. So this is why we can expect the margins going up for the next quarters.

Your next question is coming from Daniel Rojas from Bank of America.

I wanted to go back briefly to the cash flow. If we look at this quarter, you had investment of MXN 164 million. It was down from last year's same period of over MXN 500 million. I just was hoping to get some idea, can you give us some color on the working capital. Was there anything specific for the quarter that made a change. What should we expect going forward? Anything that you can give us would be grateful.

Daniel, in terms of the cash flow, I will say, obviously, the investment that we made will come in the next quarter. So that will help, obviously, in the cash flow generation of the company. So if we can expect for the next quarters will be something similar. And mainly the cash flow that we're investing will be more in the growing the Logistics and Technology segment.

Okay. And if I may have a follow-up. You mentioned on the call that you see an additional 1,000 buses, but you also talked a lot about the ESG opportunity on the electric buses. What penetration should we expect for electricity buses with your new fleet, should it be marginal? Should we see this expanding? And what's the impact on the unit economics of the business?

Thank you, Daniel. Yes, we started trials with an electric bus. Obviously, as you know, we have always per headed efforts with the OEMs to be more efficient and be more environment friendly. Today, we don't see a great infrastructure in Mexico to start a large operation of electric process. However, we're starting trials with this. We have several last mile units that are powered -- electrically powered. Those are obviously on the trials as well. But please keep in mind that we are always improving and testing when they -- and when the infrastructure and the technology is here, we are -- for sure, we want to take measure. But right now, we are on a trial stage.

Okay. Okay. Fair. When you have a better idea of what the unit economics for the users, it would be great if you could share it with us.

We are going to communicate whenever we have everything.

Your next question is coming from Jay Singh from Citi.

It's Jay dialing in from Stephen Trent, Citi. The first thing I wanted to ask is, what sort of overall savings per unit do you expect as we switch from diesel to electric vehicles. And assuming diesel stays flat, what do you see is the cost difference.

Jay, look, the thing is that we just started trials with electric -- with 1 electric bus. It's a spare heating effort we're doing in order to analyze and gauge the market and the industry. However, we don't see yet the technology or the infrastructure -- the proper infrastructure technology in Mexico to start a large operation of electric buses. We are just dipping our toes in the water and testing. But when we have the information and when we have the results of the trial or the analysis, we're going to communicate properly to the market. When our intention is to eventually start operating electric versus diesel. But right now, at this moment, it's just a trial -- we are not on a trial stage.

Okay. Thanks for clarifying that. My next question is how much earnings visibility do you have to the Traxporta segment this year?

Can you repeat the question, Jay?

Sure. So I want to ask how much visibility do you have into earnings for the Traxporta segment this year?

Jay, we expect Traxporta to basically grow around 100% compared to 2023. It is hard to tell in terms of earnings, how much it's going to make because it is in a very high-growth stage, very steep growth curve. So it's a hard thing to know at the first quarter, how much it's going to make. But we're planning to grow very aggressively as the past 3 years.

It's important to note that we are growing on a profitable way. I mean, for sure, it's not mature and the margins are not where they are going to be when the business will be mature, but we have been doing around 4% EBITDA. So we are planning to be around that number also.

Your next question is coming from Federico Galassi from TRG.

I have 2 questions from -- in the mobility side. If you can tell us in FX neutral because I understand there is an effect of the -- the defect initially, depreciation of Mexican peso. But if you can tell us, again, FX neutral, how was the sales revenue year-over-year? And the second one, again, related for the FX, the increase in margins at EBITDA level has to be with this appreciation of the currency? Or do you have similar margin, if you want in both -- in the contracts in both currencies.

Very good. Let's see if we understand correctly the question, but the percentage of our revenues in the company is around 20%. So yes, 20% on dollars. So of course, we have benefits when it goes up, but also when the exchange rate is as it is right now. So we don't see any hard effects on our revenues right now. And I think the market is doing really good in Mexico, and we see really profitable for the future.

Maybe the question just to clarify is, your contracts in dollars or all your revenues that come in from dollar growth in the quarter and in the contracts in pesos too to have a round number of how it's growing in the both currencies, this is positive, I understand. If you see again in dollars by dollars and in pesos and taking out the effect of the currency appreciation.

Fed, this is Tonio. It is hard to tell at this time to tell you how much of those U.S. dollar-denominated contracts are growing. But let me get back to you on that one. And yes, I mean, if you -- if the exchange rate continues to appreciate, the peso continues to weaken as in the past 2 weeks, there could be a small benefit in our revenue base and also in the bottom line.

Your next question is coming from Julia Orsi from JPMorgan.

So can you please provide us more detail on the M&A pipeline and what we should expect in terms of size of the potential deals. So on the last call, you mentioned something between $20 million and $70 million. Is this still the case?

We are still evaluating on different targets. The targets are going to be for sure in the Logistics and Technology division. And we're planning to choose or to do a very good target that we think is going to be very accretive and strategic for the company. And let's say, we are still in the same range that we mentioned in the follow-on. So we're looking targets between let's say, $20 million to $30 million till $70 million or $80 million. So we're going to be in that -- within that range.

[Operator Instructions] Thank you. That concludes our Q&A session. I will now hand the conference back to Aby Lijtszain for closing remarks. Please go ahead.

2024 started at the full speed. Please be advised that the CapEx cycle has a lag between the time when the investment is exercised and the moment when such investment actually starts generating cash flows. Let's assure that Traxión continued to be very selective with its investments. And that the CapEx is exercised with rates above 20% of both ROIC and IRR. Traxión is a leading insurance facilitator in Mexico and is positioned to continue to capture profitable opportunities. We are ready for another year of growth, expansion, and value creation. Have an excellent weekend.

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