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

Good day, and welcome to the Traxion Second Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the call over to your host, Aby Lijtszain. The floor is yours.

Good morning, everyone. This period, Traxion posted again record high figures of revenue and EBITDA, both are the highest in the company's history and were driven by strong demand related mainly to nearshoring. We continue to grow with revenues up more than 23%, in line with our expectations. Most important is that net income almost doubled to reach MXN 222 million this period, which is more than 98% growth compared to the same quarter of last year. The company has been expanding at high rates, but the timing between the CapEx and actual revenue creates a lag. The reason is simple. First, we need to invest resources and incur pre-operating costs and expenses to have new operations up and running. Then we have to wait for some time for those investments to mature and start generating revenue, which in most cases, is not for the full year, but the full investment is already done with just a portion of the return reflected. That is precisely what has not allowed us yet to properly see the returns we seek, which are typically above 20%. Having established that, we have found some efficiencies that will benefit EBITDA even more, and we are currently working on them. Such operating improvements and changes will allow us to run the company better. The first changes are on the last-mile division. There has been a price disruption in the B2C parcel market for approximately 18 months with no immediate signs of normalization, so we decided to reduce a portion of such operations. We are shifting our capacity and attention to the more profitable B2B business, taking care of large e-commerce players that require extensive and complex last-mile solutions and where we have a leadership position. We believe that we will see the benefits of these changes by the fourth quarter of this year, so good news on this side. Rodolfo will explain this in more detail in a moment. Moreover, as you saw in our earnings release, we are confirming our top line and EBITDA guidance for 2024, but we will reduce the CapEx figure in approximately MXN 600 million for the year. Our expansion plans are not affected by such CapEx reduction. We are taking a more strategic approach by raising prices and implementing the efficiencies I just mentioned. With this, we privilege cash flow, strengthen the balance sheet, and improve our profitability metrics, while maintaining our debt level always below 2.5x, as we have always done. Tonio will give more color on this matter in a moment. In summary, we will achieve our growth plans with less CapEx. We are implementing changes to tackle opportunities more efficiently. We expect such benefits to come fast and be tangible by the fourth quarter of this year. Finally, we expect to deploy resources according to our investment plan during the second half of 2024. However, for the foreseeable future, we have enough cash and leverage capacity to fund our growth plans with no need to tap the equity markets. Thanks for your attention. With this, I end my comments and will hand over to Rodolfo, please.

Thanks, Aby. Hello, everyone. I'm going to share with you more insights regarding the reorganization across the company, more specifically, the actions we're taking within Redpack, the last-mile division. We are basically reducing a very significant portion of the parcel services, which is a B2C business, mainly due to adverse price conditions that have prevailed for more than 18 months and with no signs of normalization in the foreseeable future. We will continue running the most strategic and profitable portion of such business. This restructuring includes the shift of resources to the B2B part of the last-mile operations and reduction of head count. This is one of the reasons why the margin of the Logistics and Technology division have been pressured in the last quarters. We expect to start seeing the benefits of this action within the fourth quarter of this year. As you already saw, there is an impact of approximately MXN 25 million of restructuring expenses this quarter. However, you will see the benefits really fast and sustainable over the long run. We have a more competitive position in the B2B segment as our clients require tailored and complex last-mile solutions. As I mentioned at the beginning, we have found many areas of improvement where we will be able to extract efficiencies and improvement across Traxion that, in the end, will translate in additional value creation. As these restructuring advances and the reorganization across the company takes shape, there will be additional onetime expenses in the third quarter that will be applied not only to the last-mile, but in other areas as well. You can expect more news regarding this reorganization in the next quarter. Thanks for your attention. I will now hand it over to Wolf for a deeper dive on financials.

Thank you, Rodolfo. Good morning, everyone, and welcome. I will now discuss some more financial and operating highlights. As we planned, the Logistics and Technology division is now the largest contributor to consolidated revenues with almost 37% this quarter and over 40% growth compared to the same period of last year, in line with our expectations. The margin in this division came in at 7.2%, mainly driven by the adjustments in the B2C service that Rodolfo just described. Moving on, I want to discuss 2 details in the cargo division that I think are relevant to mention. First, we reshuffled a portion of our fleet to make some operating adjustments with some specific lines in this quarter. Such reshuffling resulted in a certain volume of empty kilometers, which translates in additional costs and expenses without revenues. Second, as you know, there were severe storms that affected the northeast region of the country that caused the border at Nuevo Laredo to close several days and delay the operations in the Monterrey area, which caused temporary disruptions. On the other hand, revenue per kilometer in this segment continued to expand, posting an 8.5% growth with a healthy efficiency in terms of costs. Furthermore, in the people mobility segment, we observed an increase in average fleet of approximately 1,000 units compared to the second quarter of last year, in line with our expectations and plans. It is important to mention that we have kicked off operations in new cities that require proper infrastructure, which translates into additional pre-operating costs and expenses and costs that EBITDA margin in this division to compress in this quarter with no long-term effects. Having said that, we believe we will be able to recover somewhat fast, that will be by the next quarter. Shifting gears, I think that the most relevant figure to highlight is net income, which grew more than 98% compared to the same period of 2023. This was mainly driven by growth in revenue, economies of scale, together with a more favorable comprehensive financial result. Finally, in terms of debt, our interest expense has shown a significantly lower growth compared to the increase in revenues this quarter, which shows a prudent debt utilization approach. Traxion ended the quarter at 2.16x net debt to EBITDA, considering that we have already invested a portion of the CapEx plan, and the complete financial benefits are not visible yet. Thanks again for your attention. Now, Tonio will give you more color on guidance and CapEx. Please, Tonio.

Thank you, Wolf. I will now discuss the guidance update in more detail. As Aby said at the beginning and as you saw in the earnings release, management made the decision to reduce the CapEx figure for 2024. This effort will have no effect in both top line and EBITDA guidance figures, which is a growth of approximately 19% this year, which will be mainly driven by some efficiencies, together with a larger contribution of the logistics business. With this CapEx reduction, the company will privilege cash flow generation, while it strengthens its balance sheet and improves profitability ratios. Moreover, management expects to be close to cash flow neutral for 2024. The revised CapEx figure for 2024 is of MXN 3.6 billion, which is approximately MXN 600 million less than what we originally budgeted for the year. This CapEx scale-down is especially relevant as the revised figure will represent approximately 12.2% of total expected revenues for 2024 compared to 13.8% in 2023. So in the end, the CapEx to revenue ratio will be lower this year. In this line, we expect the CapEx to revenue ratio to continue to be lower in following years, which we believe is good news for return metrics and cash flows. One detail worth mentioning is all the organic CapEx that the company executes is done at returns over 20%. We have shown many of you how our basic economics per unit work. Specifically, for the people mobility division, we always estimate an internal rate of return above 21% right off the bat, and returns on invested capital are around the same figures and grow every year as contracts mature. We have indeed a very profitable operation and an attractive return profile that we expect to be much more visible as this CapEx reduction and company-wide reorganization advance. We are taking advantage that the demand for our services has brought to become more profitable by raising prices and achieving other operating efficiencies. Finally, please be advised that management plans to continue to execute both organic and inorganic growth and expansion plans of Traxion by using the cash flows that the business naturally generates, together with the additional leverage capacity that we have. As Aby said at the beginning, and I repeat, currently, the company is not in the need to tap the equity markets to fund growth. With this, I end management remarks, and we'll open the floor to Q&A.

[Operator Instructions] Your first question is coming from Luis Yance with Santander.

Congrats on the results. A couple of questions from my side. Happy to see that you're looking forward to a more balanced approach between cash flow generation and CapEx. Under that revised CapEx plans going forward, how should we think about your top line growth? Because as you decelerate CapEx, I would assume growth going forward, not this year, but perhaps starting next year, will start coming down a bit. But I just wonder if you're able to keep this kind of 12% of sales as CapEx, how should we think about growth? Is it kind of still in the double-digit zone? That will be my first question.

Luis, this is Wolf. Regarding your first question, yes, we will continue -- we're seeing a strong demand in our services in the company. So even though with this reduction in the CapEx for this 2024, we will continue to see double-digit growth in terms of revenue of the company.

That's great. And just a clarification, Wolf. When you guys say that you're planning to be cash flow neutral, does that mean your cash flow generation will cover not only CapEx needs, but also working capital needs and interest expenses? Or it's just on the CapEx side, the neutrality of cash flow that you're talking about?

For this particular year, Luis, it will be in terms of the CapEx and working capital. Remember that we are work in progress in terms of the efficiencies. So considering this and when we have this benefit in a full year basis, we consider that, that will be in a positive free cash flow of the company, including the CapEx, working capital and even though the financial expenses.

Great. That's good to hear. And shifting towards margins, I know there were a lot of moving items that impacted margins. It seems to me that most of them are temporary in nature. You described in great detail the impact on the last-mile. Just wondering if you could talk a little bit about the impact on margins on the personnel and cargo. When do we expect to -- when should we start seeing kind of the improvement? Is it also kind of more back-end loaded towards the fourth quarter? Or actually, third quarter, we should see an improvement relative to the second quarter, and then fourth quarter, a bigger improvement, given that, I guess, some of the weather issues are gone, perhaps the reshuffling of the fleet, some of that still gone, and I guess, as time goes by, in the new cities, on the personnel side, you start gaining some scale? So just trying to understand the evolution of the margins from where we are right now until the end of the year.

So, in terms of the margins, we'll expect, by different things, that the margins go up starting in the next quarter, let's say, the third quarter of this year, mainly due to different things. The first one will be the continued revenue growth. The second will be the efficiencies that we are working in the last-mile division in the B2C services, as we already mentioned in the report. The other one will be the adjustments in the operating and administrative structures that we're also putting in place in this particular third quarter that you will see in the next report, and obviously, the seasonality of the business. So all of this will be the mix that grow up the margins, including the more profitable way in the second half of the year.

Great. And my last question is, if you could give us an update on M&A opportunities that you're seeing in the market? Or are you taking a pause in that front as well?

Luis, so we'll continue reviewing different opportunities, and we're going to do an M&A only if it's very good and very attractive for the company, but we are still active on that.

Your next question is coming from Fernanda Recchia with BTG.

The first one, just a bit of a deeper dive on margins. Could you explain the margin difference between the B2C last-mile and the B2B? Given that you are reducing exposure to the B2C last-mile, how should we think about the normalized level of EBITDA margin in the Logistics and Technology segment? That's my first one.

Fernanda, this is Wolf again. Talking about the margins in the last-mile services, I will say, and I think I mentioned in the previous quarter also, we were close to 0 in terms of margins because we have some negative margins considering the B2C service. So with these efficiencies that we are putting in place for the next periods in the company, we should expect that the margins will be in the high-single digits for this particular service, completing the specific plans that we will take and keeping the company in the B2C services, plus the reshuffling fleet in that part for the B2B business in the dedicated and specific services that we can make in solutions for our clients.

And just to be clear here, do you expect to reach this high-single digit already in Q4 or just starting next year?

We are expecting to have something similar to that number by the end of this year, so let's say, in the fourth quarter of this year.

Perfect. That's very clear. And my second one is regarding the competitive landscape. I think Aby mentioned that one of the drivers that you use to increase margins is increased pricing. So if you could please comment on how have you been perceiving your competition, if your competitors have been following your price increase, that will be very helpful.

Fernanda, this is Aby. So we are on the process, and the process has been successful. So I can say that it's an initiative that is taking place mainly in the second half of the year.

Your next question is coming from Pablo Ricalde with Santander.

I don't know if you can provide more details on the reorganization of the last-mile division. We know you registered around MXN 25 million negative impact this quarter. But how much more you have to register on the negative side? And how much benefit should we expect from this?

Pablo, this is Wolf again. Obviously, about these efficiencies that we are [ recurring ] in the company, we estimate that in the next quarter, it will be something around the MXN 200 million. And this is because, again, we are making different efficiencies throughout the company, not just in the last-mile services. So, talking about this, I think the most important thing to mention is that these efficiencies, together with other efficiencies that are taking place at this time, should save at least approximately MXN 700 million per year. That's our estimation. So this will permeate all the way to the bottom line in the company and enhancing the company's returns. So nonetheless, management continues evaluating additional areas of improvement. This will help and boost the work of the company very fast.

Your next question is coming from Alejandro Demichelis with Jefferies.

Couple of questions. First one is a follow-up a little bit from the previous question. So, Wolf, when you mentioned those MXN 700 million of benefits, the first question is, when do you expect those things to start happening? And it is just coming from the last-mile division? Or are you assuming that there are some other efficiencies in other divisions of the company?

So we will see these benefits starting in the fourth quarter of this year. We're planning to finalize this first phase of the company in terms of efficiencies by the end of the third quarter. And besides that, the positive impact we will see in the fourth quarter of this year. We're currently analyzing and [ thinking place ] of different efficiencies, not just in the last-mile services, also in the -- in all the, let's say, overhead in the company and other areas that we can achieve different efficiencies. So this will be the impact that we are expecting right now, and the company will keep looking for more efficiency, even though in the near future.