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Edited Transcript of TRAXIONA.MX earnings conference call or presentation 25-Jul-19 3:00pm GMT

Q2 2019 Grupo Traxion SAB de CV Earnings Call

Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Traxion SAB de CV earnings conference call or presentation Thursday, July 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aby Lijtszain Chernizky

Grupo Traxión, S.A.B. de C.V. - Executive President & Director

* Antonio Tejedo

Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations

* Rodolfo Mercado Franco

Grupo Traxión, S.A.B. de C.V. - CEO & Director

* Wolf Silverstein

Grupo Traxión, S.A.B. de C.V. - VP of Finance

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Conference Call Participants

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* Alberto Valerio

UBS Investment Bank, Research Division - Associate Director & LatAm Transportation Equity Research Associate

* Marcos Barreto Guerrero

Citigroup Inc, Research Division - Research Analyst

* Martín Lara

Miranda Global Research - CEO & Founding Partner

* Rafael León de la Vega

Actinver Casa de Bolsa, S.A. de C.V., Research Division - Junior Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Traxión Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Aby Lijtszain. Thank you. You may begin.

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Aby Lijtszain Chernizky, Grupo Traxión, S.A.B. de C.V. - Executive President & Director [2]

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Thank you, operator, and thank you all for joining us. Welcome to our second quarter earnings call. Once again, I'm very pleased to present you another quarter of strong financial and operating results. Traxión is running through a positive track with remarkable commercial activity. We are right on the spot where we're planning to be. Traxión continues delivering outstanding growth regardless of the Mexican economic environment. There is something very relevant that is worth discussing. Beyond quarterly results, if you compare the first 6 months of this year with the same period of 2018, we see a growth of 44% in revenues with an increase of roughly 36% in expenses.

These results in an increase of more than 71% in EBITDA with a margin expansion of 330 basis points. Usually, the [tail] half of the year is less dynamic in terms of activity, but this year, as you can see, we showed excellent results. Moreover, logistics is gaining more relevance with our integrated mobility platform. Traxión has been consistently increasing its 3PL logistics warehouse space. And more clients are relating that outsourcing logistics is more efficient. While spotting so much attractive potential opportunities that could be leveraged by our innovative technological approach, we'll keep you posted as we move forward with this development.

Moving on, in financial terms. Our consolidated revenues of the second quarter grew more than 37%, while EBITDA increased more than 50%, a very efficient expansion, with the margin reaching 21%. This is indeed, a remarkable result. Traxión is growing and making money, which is a key to create value and our long-term goal. Finally, please be advised that this quarter we released our Annual Sustainability Report for 2018, where we would present our sustainability strategy. Please visit our web page to download the interactive version.

Having said that, I will now hand over the call to Rodolfo Mercado, our CEO, who will further discuss our extraordinary results in more detail. Please Rodolfo, go ahead.

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Rodolfo Mercado Franco, Grupo Traxión, S.A.B. de C.V. - CEO & Director [3]

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Thank you, Aby. Good morning, everyone. Thanks for joining. As Aby already mentioned, we had a very strong quarter in both operating and financial terms.

Once again, Traxión delivered outstanding results with revenue growth, both segments, and bottom line improvement. In cargo and logistics, revenue grow 41.6%, mainly driven by an increase of 45% in kilometer volume, 19% increase in revenues in logistic services and the contribution of Bisonte.

Moreover, in the cargo operations, the most relevant improvements are: an increase of 23.9% in EBITDA per unit, a 10.8% growth in EBITDA per kilometer and an increase of 4.3% in revenue per kilometer. We continue to be more productive in the cargo operations as total kilometer volumes for the quarter grew almost 1.5x the growth of fleet. We are now one of the largest 3PL logistic operators in Mexico with almost 427,000 square meters of warehouse space.

This is an important milestone since Traxión has already expanded its logistic warehousing capacity by more than 130,000 square meters since its IPO. As Aby already told us, this business continues to gain relevance within our platform. And we're taking actions to become a more important player in this arena.

Moving on to personnel and student transportation. Revenues grew 31.4%, mainly driven by expansion of current contracts and by our solid commercial structure throughout which Traxión was able to gain new clients. Most notably, EBITDA per unit increased 16.6% and EBITDA per kilometer increased 15.2%. Additional to this, both fleet and kilometer volume increased compared to the second quarter of last year, and revenues per kilometer grew 7.2%. We keep experiencing strong commercial activity in this segment.

On the operational side, the company ended the second quarter with a fleet of 8,087 power units. This represents a growth of 21.9% and is mainly driven by organic growth in the passenger fleet and by the integration of Bisonte. Total kilometers driven reached a 140.3 million, which represent a growth of more than 32% compared to the same period of last year.

We continue focus on enhancing both operations and profitability in the cargo segment, rather than growing the fleet. This is mainly achieved by improving our client base and our effort to updating our power units among subsidiaries, throughout which we basically renew the oldest trucks, balancing the fleet throughout the company. This has resulted in a significant reduction in overall age and has optimized our efficiency performance. As you can see, we continue to work hard. Our platform is unique. We have several competitive advantages, and our management team is committed to continue delivering results.

With this, I conclude my remarks. Now I will ask Wolf Silverstein, our CFO to walk you throughout the financial results. Thank you, again, for joining. Please, Wolf, go ahead.

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Wolf Silverstein, Grupo Traxión, S.A.B. de C.V. - VP of Finance [4]

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Thank you, Rodolfo. Good morning, everyone, and thanks for joining. I will now walk you through the most relevant financial figures in more detail.

We already discussed the drivers of growth in revenues. So I will talk about what happened below that line. Total cost reached MXN 2.2 billion, an increase of 43.6%. Fuel, our most representative operating cost, grew 49.7%, mainly driven by the increasing kilometer volume and by a hike in fuel prices of 13.8% compared to the second quarter of last year.

Labor, a very relevant cost as well, increased 21.1%, which is significantly lower than the growth of revenues and shows an improvement as a percentage as well. This efficiency is mainly achieved by the integration of subsidiaries and through the shared services center.

Depreciation and amortization recorded an increase, mainly due to a considerable organic growth of the fleet and to incorporation of the companies acquired during 2018. As you saw, we decided to change the name of other costs for facilities, utilities and supplies, which is where most of these costs were classified. In these lines, we include operating costs, such as leases of terminals, yards, depots, offices also communications, maneuvers, points of sale, utilities and supplies. These costs are directly related to the operation of the company, and most of them grow with the business. The cost of facilities, utilities and supplies increased 34.6%, which is in line with the growth of consolidated revenues.

Shifting gears, general expenses recorded MXN 577 million, an increase of 38.2%, which includes MXN 40 million of restructuring expenses. If we exclude such expenses, this line increased 28.7% and represented 17.5% of revenues, a very significant progress in terms of efficiency. All that resulted in an EBITDA of MXN 646 million, which represents a growth of 50.8% compared to the second quarter of last year. Most notably, the margin reached 21%, which represents an expansion of 190 basis points compared to the second quarter of last year.

Moving on, the comprehensive financial result recorded an expense of MXN 166 million, entirely driven by interest expense, which has more than doubled since the second quarter of last year, as our debt was MXN 5.7 billion. Nonetheless, our net debt-to-EBITDA ratio stands below 2.2x. Bottom line, net income was MXN 71 million compared to MXN 250 million of the same period of 2018.

Please, bear in mind that in the second quarter of 2018, the company recorded a foreign exchange gain of MXN 91 million from the U.S. dollar position held in treasury at that time, which together with a significantly lower interest expense in that same period explained the gap in net income between quarters.

Operating cash flow totaled MXN 464 million, which is relevant. What is even more impressive when we look at the accumulated figure that shows more than 238% growth compared to the first semester of last year. This is basically due to the net income, higher depreciation and better working capital management. In terms of CapEx, the company exercised MXN 687 million, which was mainly for our fleet expansion in both segments. All these investments are in line with our growth plans and guidance for 2019. Thanks, again, for joining us today.

With this, I conclude my remarks and open the floor to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question here is from Martín Lara from Miranda Global Research.

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Martín Lara, Miranda Global Research - CEO & Founding Partner [2]

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Congratulations for a very strong results. I have 2 questions. The first one is could you please explain the gap in net income between quarters. And the second one is that we notice the external results of the passenger segment. So I understand that the growth is 100% organic. Could you please elaborate more on what was the driver behind that growth?

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Antonio Tejedo, Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations [3]

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Martín, this is Antonio. Thanks for your questions. I'll answer the question about the gap on net income between quarters. The first -- if you see accumulated net income for the first 6 months, you're going to see that it grew 52.6% compared to the first semester of last year. That -- this growth is higher than that of accumulated revenues. So I think that the performance has been extraordinary as well in net income. But to answer your question. There are 4 main reasons that explain the gap in net income. The first one is that if you remember last year, we held a position in U.S. dollars within our treasury in order to hedge the CapEx needs for the year in that currency. That position generated an FX gain of MXN 91 million on the second quarter of 2018. And that phenomenon was not repeated this quarter, so it was a one-off. The second is that we had -- this quarter, we had nonrecurring expenses due to restructuring of MXN 40 million that were not -- in the second quarter of last year, we didn't have any nonrecurring expense. So those are the main 2 drivers. There are a couple of reasons as well, we know that, which is that we recorded a higher depreciation due to the integration of companies acquired and the extraordinary organic growth. And lastly, our leverage is increased, and we have a higher interest expense as well.

Moving on to your second question. As you said, we had an extraordinary result in the passenger segment. I think that the most relevant thing to consider is that the growth here is 100% organic. Also, these impressive figures were driven by several factors. Among them is strong commercial activity; a more efficient and accurate pricing process of contracts; continuous fleet profitability improvement; the operating leverage that has been a hallmark in the company for the past 5 quarters; and obviously, economies of scale. So all those factors drove these extraordinary results in the passenger segment.

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Operator [4]

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Our next question here is from Marcos Barreto from Citi.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [5]

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Congrats on the results. I have 2 questions. The first one is could you give any color on how Traxión businesses should react to a potentially slower economic growth. But -- should we expect contracted volumes to be locked in in addition to potential market share gains from smaller competitors? And my second question is, is it still fair to say that the company is still leaning away from big M&A?

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Antonio Tejedo, Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations [6]

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Marcos, thanks for your questions. As usual, very accurate questions in the questions. We are seeing that we are going to achieve our results for the year. We don't foresee any gain of market share from smaller competitors or regional competitors. We have -- fortunately, we have regional and national leadership on our segments. In -- for example, in the passenger segment, we are leaders by far. We are one of the few companies that have -- that or -- the very few companies that can fulfill large contracts to large clients. So that's a huge competitive advantage. And on the cargo side, as you saw, we not only increased the kilometer volume. What I mean is that kilometer volume increased more relative to the increase of the fleet. And not only that, we were able to not only increase those kilometers but also to sell them more expensive, more than 4% more expensive. So that -- what that tells you is that our clients are sensitive to quality, not to price. And quality is one of the features that a large company and a serious company can achieve. So we don't face any competition from others -- more companies in the cargo segment.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [7]

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Okay. Should we expect any reaction from the potential -- this lower economic growth?

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Antonio Tejedo, Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations [8]

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We have not seen yet any slowdown in the business, even though there are some indications of the macro landscape. But we -- on this -- on a street level, at a client level, at a supplier level, we have not seen any slowdown.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [9]

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Okay. And still no M&A, right?

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Antonio Tejedo, Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations [10]

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Yes, not M&A for the growth on 2019. Obviously, as you know, and as we have discussed, M&A is a continuous analysis that we want to conduct among the company. We -- every day, opportunities arrive at your table, and we analyze them early. But M&A is not part of the growth plans of 2019.

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Operator [11]

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Your next question here is from Alberto Valerio from UBS.

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Alberto Valerio, UBS Investment Bank, Research Division - Associate Director & LatAm Transportation Equity Research Associate [12]

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I have 2 on my side. First one, I'd like to know the impact of IFRS 16 in the EBITDA for this quarter. If I'm not mistaken, that's one was around MXN 40 million. And the second one, we note that the company report a drop on EBIT year-over-year on this quarter, despite the strong EBITDA expansion. My question is do the new contracts have lower margins in the beginning? Or after ramp-up, they should -- after the ramp-up, this should increase? Or the contracts being flowed now have lower returns than the present one?

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Antonio Tejedo, Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations [13]

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Thank you, Alberto. I will answer the second one first. We have not seen any contraction in contract margin. On the contrary, you see our average revenue per kilometer increase in both segments. The reason behind lower EBIT compared to the second quarter of 2018 is mainly due to the depreciation costs and to an increase in fuel prices that -- remember that we deliver the pass-through to clients every month. We do -- that's a continuous thing that we do on the company, but there's a lack in the pass-through. That's the main reason -- those are the main reasons that affected the EBIT. Also bear in mind that we had a MXN 40 million of nonrecurring expenses.

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Alberto Valerio, UBS Investment Bank, Research Division - Associate Director & LatAm Transportation Equity Research Associate [14]

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Okay. So should you have seen some improvement for following quarters?

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Antonio Tejedo, Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations [15]

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Yes.

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Alberto Valerio, UBS Investment Bank, Research Division - Associate Director & LatAm Transportation Equity Research Associate [16]

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Perfect. And about the IFRS 16, if you can give me some color on the impact on the EBITDA for this quarter?

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Antonio Tejedo, Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations [17]

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The impact in this quarter with the use of IFRS 16 was mainly in depreciation. Approximately MXN 50 -- MXN 52 million of depreciation and amortization. That were the main impact.

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Operator [18]

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(Operator Instructions) The next question here is from Rafael León from Actinver.

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Rafael León de la Vega, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Junior Analyst [19]

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I just have one. Bearing in mind the strong results during the quarter, I was wondering if are you planning to adjust the guidance for the rest of the year.

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Antonio Tejedo, Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations [20]

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Thanks, Rafael. Well, right now, we continue -- we have had a very strong semester as you saw. The first 6 months of the year have been very strong. We tried not to be very optimistic given the current macro landscape. If we continue to have strong results, we may revise our guidance next quarter.

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Operator [21]

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This concludes the question-and-answer session. I would like to turn the floor back over to management for any closing comments.

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Antonio Tejedo, Grupo Traxión, S.A.B. de C.V. - VP of Investors Relations [22]

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As you can see, we have a very good quarter again, while harvesting the benefits of the profitable investment we conducted last year, while we continue citing new opportunities for organic growth. This has assured that we will continue working hard and delivering. Have an excellent week.

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Operator [23]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you, again, for your participation.