Grupo Traxión, S.A.B. de C.V.

Greetings and welcome to the Traction's first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Abby Lichtenstein, Chief Executive Officer. Thank you. You may begin.

Thank you. Welcome, everyone, and many thanks for joining us today. I hope you and your families are well and healthy. I am very sorry about what is happening in the world. I really hope that this situation normalizes quickly. In spite of this sad situation, Traction delivers solid and positive quarterly results. It is important to highlight that our revenues show a healthy growth of 12%. while keeping a strict control in cost and expenses. Moreover, the company continues to be more efficient in asset utilization and operations. It was in there a very favorable period. Rodolfo Wolf Antonio will discuss those metrics in a moment. We face the COVID-19 contingency with a solid financial position, a strong balance sheet, and a cash on hand. Our business is essential to the economy. and we plan to continue operating. 100% of our debt is in pesos, and currently below two times net debt to EBITDA. On the other hand, approximately 10% of our revenues are denominated in dollars, and all our costs and expenses are in pesos. We have been rearranging our revenue base in our two business lines. In the passenger segment, schools shut down, and many corporate supported home office. Nonetheless, the structure of contract in this business contribute to minimize the impact of the situation because they consider a fixed revenue base. Under such circumstances, these clients know that they have full availability and the service secure when they decide to resume activities. Moreover, there are other corporate and industrial clients that have not stopped and ask us to increase the fleet capacity because they need their employees to continue commuting while keeping social distance during the ride. Now, in the cargo and logistics segment, we started seeing a decline in the auto industry and in the export circuits. However, our diversity and flexibility enabled us to quickly move into other sectors, such as retail and basic consumer goods, and allow us to shift our fleet capacity toward other regions. With these actions, we regain a good portion of our kilometer volume. In the logistics front, we continue ahead with our plans to develop an asset-light business, and we have made significant progress. We expect to have more details for you shortly. All of that was possible thanks to a unique operating platform. Traction has a diverse client base, a flexible fleet, broad geographic footprint, prominent brands, modern systems, a tremendous commercial muscle, and a seasoned management team. This is our most important competitive advantage. This is what enabled us to build a solid and resilient business. In financial terms, we decided to grow all the available credit facilities to reinforce our cash position. We'll give you more details in a moment. Finally, we have worked very hard to deliver these positive quarterly results. We speak to our clients every other day in order to know about their needs. We are in close contact with our suppliers and we are conducting great efforts to manage the operational shift in an efficient way. We are keeping our people safe and healthy. We operate on strict sanitary measures. and our personnel has received constant training and information about all relevant matters of the contingency. I am convinced that Tracción will end up in a better position than competitors when the cycle normalizes. With this, I conclude my remarks and I hand over the call to Rodolfo. Please.

Thank you, Avi. Hello, everyone. I hope you are well. Setting aside the effects of COVID-19 pandemic and Mexico economic situation, Fraccion delivers impressive figures once again. And there are very important milestones worth mentioning during this first quarter. I will focus my comments on these achievements. Our fleet grew 2.9% with a kilometer volume increase of 4.6%, which is proof that the company continues running with a strong operating leverage. In the cargo segment, We boosted our specialized services. Refrigerated freight grew more than 65%, while the auto-loading tank service increased more than 85% compared to the first quarter of 2019. Within this business line, we now added tanker trailers to start the fuel transportation service, which we expect it to be a great opportunity in the near future. As Abby mentioned, we increased our asset utilization by 2.9%. We have continued growing our kilometer volume while reducing our fleet compared to the same period of last year by being more efficient on its allocation. Moreover, in terms of productivity, we reduce our driver turnover almost 20%, which is meaningful given to the high ratios of the industry. We achieve this by encouraging a deeper sense of belonging among our staff through our initiatives developed by our own human capital department. This represents a major milestone for our company, and it's a trade we are excited to promote. In terms of logistics, there are many elements to discuss this quarter, but what is probably the most relevant is that we converted more than 40,000 square meters of warehouse we had with temporary clients to permanent contracts with three-year continues. Furthermore, we received the awards of Mars and Kellogg as the best supplier and supplier with perfect deliveries. Traction increased its profit in logistics by more than 38% this quarter on a per square meter basis by achieving efficiencies in both pre-operating and ongoing cost. Moreover, throughout a last mile platform, Traction multiplied four times its e-commerce volume compared to the first quarter of 2019. Shifting to the personnel and student transportation segment, there are several financial and operating highlights to discuss. First, revenues increased by 16.3% in the first quarter, and it's important to highlight that this was mainly driven by fleet optimizations, since our fleet only grew 4.1% in the same period. EBITDA grew 17.1%, with a margin of 23%. Second, in the operating side, Revenues per kilometer grew 10.9%, while the cost per kilometer increased by only 7.6%, mainly due to a cost optimization program implemented by management in the last month of 2019 that has delivered really good results. As you can see, it was a very interesting quarter full of great news. And even though the recent contingency is causing global economic and social stress We have a great management team, and we are focusing on seeking all the opportunities in our industry. Having said this, I will hand it over to Wolf. Thank you.

Thanks, Rodolfo. Thank you, everyone, for joining. It was indeed a challenging quarter, and it has been a challenging month as well. Now, I will walk you through some details of the company's leverage, working capital cycle, and also the actions we are taking on the financial front to face the contingency in the most effective way possible. Given the COVID-19 outbreak, we decided to take measures to continue to have a strong balance. As you already know, we drew approximately 1.1 billion pesos of additional credit facilities that are now available in our cash. Besides this, the company still have additional credit lines. We'd rather have the cash on hand to face this contingency properly capitalized. As you can see, during the first quarter, we exercised 121 million pesos of CAPEX, almost entirely for renovations of the cargo fleet, and that we're planning in late 2019. We're currently evaluating the essential CAPEX needs for the next months. We will keep you posted on any updates. Moreover, we have cut all non-essential expenses and investments until we get a better view of what to expect. We are being extremely disciplined with cash utilization. Now, Moving on to our debt maturity, if you remember, last quarter we had around 26% of our debt due to expire in the next 12 months. Well, be advised that approximately 40% are short-term, renewable working capital facilities, while the remaining 60% is a portion of our long-term borrowings, including the syndicated loan. In that line, we are currently evaluating options to refinance the amortizations coming due. We expect to reach favorable agreements with our lenders with no constraints for the company. In terms of working capital, we also expect to start experiencing some changes in the working capital cycle. Given the contingency, we are planning to minimize whatever impact could appear. We are being assertive and conducting great efforts to optimize our working capital. In terms of suppliers, we speak to them any other day to gain insights about their capacity with no changes so far. All of them continue to have the capabilities to deliver. On the sideline, we are speaking with our potential suppliers to have options in case we need them. Moreover, I want to discuss the impact of the recent oil volatility. The average fuel price in the first quarter increased marginally, only 0.4% compared to the same period of 2019. However, the international oil prices began to fall dramatically at the very end of March, Having said that, we're expecting to have a positive effect shortly. Thank you for your attention. I will now hand over to Tonio so he can discuss in more detail the good results we post yesterday.

Thank you, Wolf. Hello, everyone. Thanks for joining. I hope you and your families are healthy. I will be brief with my remarks. I just want to highlight the most important financial elements of the quarterly results and then open the floor to Q&A. Perhaps one of the most relevant aspects to mention is that operating income grows 200 basis points higher than revenues, reaching a 14.3% increase compared to the first quarter of 2019. This is indeed proof, again, that the synergies and efficiencies achieved in the cost and expense structure are sustainable over the long run. Furthermore, yet other important element to discuss is that cash flows from operating activities grew 48.5% to reach 478 million pesos, which was mainly driven by the growth of net income and by a better working capital management. EBITDA margin maintained a level of over 20%, which is where we always want it to be and where we feel comfortable, especially as the logistics business is taking off and gaining relevance in the company's P&L. Moving on to costs, the most relevant change is in the facilities, services, and supply line, which rose 38%. This is mainly due to third-party services contracted in the logistics business to serve some clients with which the company started working in the later part of 2019. The nature of such services requires that Tracción utilizes assets of third parties to operate properly. Because of that, such costs needed to be recorded in this line, resulting in a higher cost, both in absolute terms and as a percentage of revenues compared to other quarters. This also brought a positive effect in the cost of fuel, in those third-party services, as I already mentioned, include a portion of fuel. Moreover, and most important, fuel cost reflects an efficiency in terms of kilometer volume versus fuel consumption, which is also very good news. Finally, in another item, comprehensive financial results show the reduction in expense to reach 102 million pesos, which was mainly driven by a foreign exchange gain of 60 million stemming from the U.S. dollar denominated revenue that results from the importation side of the business. Well, thank you for joining. I'll open now the frauds Q&A.

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Ruggiero Arujo with UBS. Please proceed with your question.

Yeah. Hi, everyone. Thanks so much for the opportunity. I hope everyone is healthy and well. So I have a few questions here. The first one is regarding the COVID-19 crisis. Do you have any expectations on revenue reduction in this second quarter of this year and maybe EBITDA reduction as well with that situation? And my second point is regarding potential cash burn. So is Traction burning cash at this moment with the current operations? And if the answer is yes, how much – cash burn you're having each month if the situation remains like this. So I can do my other question later. Thank you so much.

Hi, Rogerio. This is Tonio. Regarding your first question, we do expect some changes in the revenue mix in the second quarter. However, it's too early to tell how much we can expect about the results of the company for such water. But let me tell you something. What we do expect is once the contingency starts receding, we are gonna be one of the sectors that's gonna get back on business faster.

All right? And I would like to add that we don't expect very big impact because in the cargo side, all our trucks are working right now. In the personal transportation, we have some that are not working or protected with a fixed revenue contract. So the reduce of the revenues, it's not very big. And the second... Rogério, can you repeat your second question?

Sorry.

Yeah, no, sure. It's regarding cash burn. So this situation, is it leading to a cash burn in the month, you know, operationally? Or so, as you mentioned, there is not a huge impact on the revenue front. As I understand, this is valid for both the passenger transportation and also the cargo transportation business. Is that correct? And so my other question was regarding cash burn. Is Tracion burning cash with the current operations? And if yes, by how much? So this is only important to check the, you know, how many months of operation would the current cash position last. would hold in this situation before Traction has to make additional debt or so on. Thank you.

Hi, Rogerio. How are you? This is Wolf. Just to answer the second question, we're not burning any cash right now. We still have the same cash position that we ended with the first quarter. So as Avi already mentioned, we're still working almost fully in the cargo side and also working almost the same as I've already mentioned in the passenger segment. So we're not taking any additional cash from the company to make all the operations in a regular basis.

Okay, sounds good. It's very clear. Thank you. So my last question is regarding your assets, so both the buses and the trucks. Do you expect after this crisis the demand to for used vehicles to drop, or it's too early to say at this moment? Thank you.

Yeah. For now, our view is that we don't expect the demand is dropping. So we expect when the contingency is over, we're going back to work on a fully basis.

OK. Very clear. Thanks so much, everyone, and have

Our next question comes from the line of Pablo Monastiveas with Barclays. Please proceed with your question.

Hello. Thank you, everyone. I have a quick question from my side. Can you please shed more light on how were you able to accommodate sign demand within your cargo and logistics businesses? Also, any color on how personal transportation segments should look like in the coming months? And my second question would be, how are your collections with clients performing so far? We saw an increase in your accounts receivable, so wanted to have more insight if this is more of a seasonal impact or if because some clients are deferring something. Thank you.

Okay. The first question, thanks to the way the business is built that we are very diversified. we could move the trucks from one segment to the other one because we already have the clients in the consumer segment. So when the automotive went down in demand, we could very quickly move to consumer to work with retail. So it was a It was something really quick that we could do and allow us to maintain our volume of kilometers. So we didn't got an important impact in the cargo side of the business. And talking about the second question about collectibles, we're still collecting the same way as we did it before. We don't have any troubles right now with collectibles.

And just one follow-up, and probably this is also kind of a similar question to Rogero's. What is your view and your guidance? I mean, the EBITDA and CAPEX guidance wasn't touched, if I understood correctly, this quarter. I know that you're supposed to give more insight of that going forward, but how are you feeling about this? I mean, most likely EBITDA and CAPEX should go down, but what are you factoring in right now?

Thank you. Hi, Pablo. This is Toño. Thanks for your question. Regarding the guidance, we don't have enough elements right now as of today. We don't have enough elements to either remove or revise the guidance. Obviously, as you said, in case the situation changes, we're going to communicate immediately. The first quarter, we have no relevant impact as we have been rebalancing our operating base. We need to see how further measures from both the U.S. and Mexico are evolving in order to evaluate properly what's going on with the guidance.

Okay. Thank you very much.

Our next question comes from the line of Marcos Barreto with Citi. Please receive with your question.

Hi, everyone. Thanks for taking my questions and hope you're all okay. My first two questions are on the personal transport segments. The first one is, what is the average tenure of the contract? Is it one, two years? And the second question is, what happens to a personal transport client that has signed a contract but might now require someplace to work from home because of COVID?

Thank you. Okay, we're going to answer the first question. The average tenure is 2.5 years. And the second question, we didn't get it. Can you repeat it, please?

Pardon me? Can you repeat that, please? Marcos, could you repeat the second question? We weren't able to hear you. Yes.

What happens with personal transport clients that already signed a contract? But they now require employees to work from home, so they're not going to use what they ask for.

Hello. How are you? I'm in . The major clients we have in the personal transportation are workers that are working in the companies, not employees in offices. The home office only applies for the corporate business we have. It's a really small part of the personnel transportation business. Mainly the big transportation of passengers we do is for workers that go to their plants to make things.

Okay, thank you very much. And my last question is, would you provide more color on how you have adjusted your carbon logistics segment to capitalize on higher domestic last mile delivery?

Yeah. The cargo domestic, we have switched to our business in cargo from international transportation to domestic, but it has helped us also with the last mile. The last mile business we have, we do both B2B business and B2C. So the B2B business is getting a little slower, but the B2C business is getting much, much demand, much more demand than we get to usual. So we're still seeing the balance in the forthcoming weeks, but we think we will have a good balance in both B2B and B2C business in the last mile.

Okay, thank you very much.

Our next question comes from the line of Jorge Lorencao with Morgan Stanley. Please receive your question.

Good morning, everyone. Thank you for the question. My question is a little bit of a follow-up on Roger's question. It would be to help us think about EBITDA margins for the year. So I just wanted to know if you could provide, you know, what is the breakdown between fixed and variable costs for each segment and also what amount of cost you think you can cut. And also still leave the margin side. I think, you know, within the COVID outbreak scenario, we could see further revenue mix shift to the cargo and logistics side, which was already the company's plan from our standpoint. And I think that that could imply some additional pressure on margins. So just wanted to check if, you know, That's a reasonable reasoning line, and if you can estimate maybe very roughly what could be the additional mix shift and consequently the impact in margins coming from that. Thank you very much.

Hi, Jorge. How are you? This is Wolf again. Just trying to answer you as part of the question. First, as Rodolfo already mentioned, all the shifting things in the revenue side, we're still trying to make all the mix that we need to make like stabilized revenues for the company. In the cost side, we have some same measures with the revenues line. We're trying to cut any costs that are not essential for our operations right now. We're trying to maintain at some point the margins that the company has already for this year and also for 2019. So we're trying to work very hard on that side also. It's just not the fixed cost that we are working on. It's also what the new revenues that we can collect in this period. So we're trying to work in both the revenues and cost side. I hope or we hope that we can manage this situation for this quarter also.

Understood. Thank you very much.

Thank you.

Our next question comes from the line of Louis Yance with Compass. Please proceed with your question.

Thank you. Hi, guys. Congrats on the results, and I hope you guys are staying safe. A couple of questions on my side. And the first one is a follow-up on the previous question. I know it's kind of hard to forecast to get some guidance even for the second quarter, but what can you share? Could you share a little bit what you've seen so far in April in terms of revenue growth and EV debt growth so we can get a sense of, you know, how bad things are shaping up in the second quarter? That'll be my first question. And then the second one on the cost side, You mentioned some of the initiatives you've been making. Could you talk a little bit more about, you know, on the salary side, whether you're planning to, you know, reduce your workforce or at this point you're keeping it the same or whether you can lower salaries in that front? And also on the fuel side, you mentioned that you only saw a minor decrease in the first quarter. I was wondering how is that looking for the second quarter? Have you started to see a catch-up on domestic fuel prices that could benefit? Thank you.

Yes, Luis. I mean, right now, things could change day by day. But right now, we don't expect a big impact in revenues. So I mean, we don't expect to have something material. But the important thing is, as we are cutting expenses, the impact in our in the EBITDA we see that it will reduce less than the revenues and talking about the salary the salaries were on the way to implement some measures to also reduce costs. I mean, as a complete plan for the company. Because we are reducing costs in the 360 degrees.

Yes, we're trying to... We have a big plan to reduce costs, fixed costs. We do have some issues to reduce costs. And some of them... we're still seen to maybe reduce some salaries, but we think it's still too early to tell, and we're still seeing good things maybe in May. Some of our clients come back to work. So we do have a strong plan of reducing costs. That includes, of course, some salary costs if we have to do them. But we're still seeing what is the effect in May of this contingency.

Great. And how about fuel costs? Are you seeing a bigger decline now in this quarter?

Yes. With the oil prices in the world, we have seen the same oil cuts and diesel prices go down in our country. So we are getting good benefits around that issue too.

Hi, this is Antonio. Just complementing what Rodolfo said, the price of fuel has two main elements to consider. On one side, there's the oil price, which has been falling dramatically, and there's the change rate, which has partially offset the effect so far. So we need to take those considerations first. And another thing is that the oil prices started falling at the very end of March. So in the first quarter, you don't see any change. Actually, the price the average price from one quarter to the other, in terms of comparing 2019 with 2020, it was marginally changed. It showed no significant change.

And just to complement that for your question, Luis, for this quarter, maybe we expect to have a benefit on that. As you can see in April, maybe the benefit will be more than March. Approximately, it could be between 2% and 5%. So we're expecting better prices for the fuel in the next month.

Okay, great. Thank you. Let me ask you another question, more on the balance sheet, perhaps more the wolf, I guess. Juan, in terms of capex, I know you mentioned that you're looking to reduce some non-essential capex, etc., but I was wondering if you could give us bit of a range of what we should expect to see in terms of CapEx for this year, given that you may have some commitments that you still have to honor just to get a sense, you know, how much you can reduce relative to your initial guidance. And also on the cash balances, you mentioned you took part of your lines of credit, but you still have some available. How much more do you have available in case you need it? And for the short-term debt, when do you expect to sort of close the negotiations and push the debt that is coming to this year?

Thanks, Luis. For the first question, so far we have decided to defer approximately 60%. That will be around 700 million pesos of the CapEx for this year. So we are expecting to exercise the remaining 40%. during the second quarter, maybe a part of that in the third quarter, but mainly in the second quarter. And answering the second question, all the deadlines that we have right now, it's around 10% in additional debt of the full debt that the company has in the balance. So it will be around another 700 million pesos. So we can use the deadlines in any moment. And we're trying to negotiate, as I already mentioned, I hope we can do something maybe in the late of the second quarter to have a better notice of that, I think, also.

Okay, great. Thank you, guys, and stay healthy. Thank you.

Our next question comes from the line of Martin Lara with Miranda Global. Please proceed with your question.

No, I don't have any more questions. Thank you very much.

There are no other questions in the queue at this time. I'd like to hand the call back to management for closing remarks.

Thanks. Our way to manage the business and the policies we have adopted over time have enabled Fraction to go under this situation in the best possible way. I founded this company over two basic principles. The first is diversification, which has allowed us to build a solid and resilient business. And the second is prudent use of debt. I know that the sweet spot for leverage in this industry is below 2.5 times net debt to EBITDA, while currently under 2 times. Our business is an essential part of the Mexican economy. So please be sure that Tracción will keep operating right now with efficiency and excellence. Be close to clients and continue to be prepared to face adverse conditions. We advise that we remain committed to transparency and communication with the market. Feel free to reach out in case you have any questions. Please stay home and be safe. Have an excellent day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.