Grupo Traxión, S.A.B. de C.V.

Greetings and welcome to the Traction Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Avi Lichtstein, Executive President of Traction. Thank you. You may begin.

Thank you. Welcome again, everyone, to our earnings call. I hope that you and your families are okay, and I'm deeply sorry for how the contingency has evolved and hope that we return to normal soon. Despite the negative landscape, Traction delivered solid results. Perhaps the most relevant aspect to highlight is that net income grew more than 100% compared to the same period of last year. This very positive outcome was mainly driven by our resilient business model and the capability of the company to react during the contingency. Rodolfo Wolf Antonio will take you through the most important details of the quarter that brought this excellent result. We continue to keep a close control on costs and expenses that resulted in significant savings that boosted margins and net income. we managed to achieve a very effective asset utilization despite of the global landscape. Regardless of the downturn of some industries, we were able to allocate our fleet toward different sectors of the economy that were demanding our services and take advantage of our competitive position. This was possible because of the strength of our commercial muscles, the diversity of our service portfolio, the excellent relationship with clients and the flexibility of our fleet. We managed to provide expanded capacity to some existing customers and even to create new clients. This is proof that we have one of the strongest commercial forces in the sector. When I founded Traccion, I designed a resilient business model based on diversification, discipline, and innovation. I'm proud to say that this was precisely what helped us to weather the storm of the second quarter. Since we became public, we have talked extensively about the strength of our business model. Now we are seeing the benefits. Having said this, I just wanted to confirm our guidance for the year and reinforce our commitment to continue operating efficiently and profitably. In terms of innovation and disruptive technology, I'm very proud to share with you that this quarter we launched two applications. The first is called Traxy, a mobility application for people commuting through which users find predetermined routes and they sign up for rides. This way they go safe, comfortable, and on time. It was launched early than we intended and support medical staff to commute safely and totally free of charge. The second is Traxporta, a digital platform through which we connect clients that require cargo services with pre-certified freight operators. With this application, Traxion promotes an asset-light model based entirely in technology and know-how. Finally, as many of you already know, we released our first integrated report in June. We disclosed both financial and non-financial information. Two years ago, Tracción started a long, consistent journey to integrate sustainability into the business. Our institutional approach, client orientation, and operating excellence are the result of many decades of accumulated experience and leadership in each of our business units, as well as of our commitment with people, the environment, and the development of Mexico in general. I will now hand over the call to Rodolfo. Please go ahead.

Thank you, Avi. Before talking about second quarter highlights, I would like to talk a little bit about the industry and our company. Regarding the pandemic situation that the world is facing, we are very proud to be part of an industry that has and will continue to have an important role in the recovery of the economy. This business has high barriers of entry, and requires a deep know-how to be successful. Our business requires scale, innovation, state-of-the-art technology, and extensive safety protocols. Every day, our fleet moves people throughout thousands of kilometers under the highest quality standard, operating with the utmost efficiency and close monitoring. By being successful in these areas, We have been able to build a strong and profitable business, integrated by prosper companies that have been running for several decades. Traccion has an extensive and diverse client base that has been assembled throughout years and years of hard work and operating excellence. It is precisely our Star B platform that has enabled Traccion to seize opportunity and continue running under adverse circumstances. such as those of the second quarter and the COVID-19 pandemic. Having said that, let me watch you throughout some relevant aspects of the second quarter. Even though our kilometer volume decreased more than 18%, our revenues grew 6.9%. Most importantly, the negative effect of the pandemic did not pass through the bottom line. Wolf would give you more details over the financial shortage. We managed to achieve these outstanding results by being disciplined, innovative, and diversified. We were extremely active in commercial terms. Our sales force stayed in close contact with both existing and new clients, and we were able to gain new business and expand the capacity of some of our current accounts. On the operational side, we started the quarter with some uncertainty. But as the period evolved, we were able to set up operational platforms in a good, steady rhythm. For example, in cargo, the auto industry was completely shut down, and we had to shift our fleet to other sectors such as retail, consumer, and food. We rebalanced our fleet in record time, and we proved that our commercial team is the best in the industry. Our logistics segments show a significant increase in operation. Deliveries grew as the e-commerce channel gained momentum, and the last mile in warehousing business grew following the new consumption trend in this contingency. In terms of personnel and student transportation, even though schools and industry shutdowns Because of the importance of social distancing, several existing and new clients expanded their fleet to try and offer their staff the safest way to get to work by avoiding public transportation. Tracción was able to use the idle fleet to provide expanded capacity to both existing and new clients, mainly throughout its strong commercial muscle, operating excellence, long-lasting client relationships, and state-of-the-art technology platform. By mid-June, operations started to normalize. It was a very complex quarter. It was a great test for the company, but especially for our management team. And I am very proud to say that we have proven that we do have the best transportation and logistics team in Mexico. With this, I finish my remarks. I will ask Wolf to guide you throughout our financial information. Thank you.

Thank you, Rodolfo, and thanks everyone for joining. I will walk you through the most relevant financial aspects of the quarter, as well as some of the actions we took during this very challenging period. As you may assume, we continue implementing the measures we carried out during the first quarter in order to ensure the business continuity. Probably, some of the most important things to bear in mind this quarter, besides the operational results, are that the company did not burn any cash, and that we took some actions to improve our debt profit. Moreover, our revenues grew, while our cash flow from operating activities increased a healthy 27.8%, and net income spiked more than 100%. We achieved these results under a strict financial discipline. The company adopted an offensive stance to face the situation, and we managed to improve profitability by implementing a strict cost and expense policy that resulted in savings in both fixed and variable portions, including fuel, payroll, maintenance, corporate overhead, and non-essential items. All of that led to an increase in operating income and EBITDA growth, together with a margin expansion of 180 basis points and ultimately in a very significant increase in net income. Antonio will discuss details in a moment. In terms of working capital, we saw a likely increase in receivables, mainly due to expansion with both existing and new clients, which is a natural effect when we start new business. Despite of that, there was no significant impact in the working capital cycle, which is especially relevant given the current landscape. As you can see, both total debt and cash remain virtually unchanged compared to the first quarter of this year. Furthermore, Despite an increase of almost 1 billion pesos in total debt compared with the second quarter of 2019, our cost debt decreased approximately 15% in terms of effective interest rate. Additionally, the company delivered the balance sheet during this period. Traction entered the second quarter at 1.79 times net debt to EBITDA, which is well below almost 2.2 times one year ago. Speaking more about leverage, perhaps the most relevant aspects to consider are the actions we took to improve our debt profit. First, we negotiate principal amortization deferrals for the next 12 months totaling approximately 320 million pesos, which will improve significantly our cash flow for such period. Second, we achieve a reduction of approximately 200 basis points on a 485 million pesos facility. And finally, we converted approximately 148 million pesos of short-term to long-term debt. As you can see, we were very active on the financial front as well. With this, I conclude my remarks. I will now hand over to Toño so he can discuss our figures in more detail. Thank you.

Thank you, Wolf. Hello, everyone. Welcome. I hope you and your families are safe and healthy. As you already saw, Tracción acted promptly and took the right actions to face this unprecedented situation. I will now walk you through some financial details before opening the floor to Q&A. Despite all the negative effects that this contingency brought, Traction delivered a 6.8% growth in revenues. I will explain the drivers of such expansion. First, in carbon we experienced a shift in demand among sectors. We were able to provide increased capacity since the auto industry reduced its volume significantly. This fleet rebalancing brought a decrease in kilometers driven of 13.9%. and was partially offset by an expansion of cargo-related logistics. The result was a growth of 10% just in cargo revenues. Second, there was a significant increase in logistics services, such as forwarding, blackmail, and lead and truckload, mainly driven by a growth of e-commerce activity. As a result of improved business in cargo and logistics, our 3PL warehouse space grew 6.7%, together with an increase of 19.4% in revenue per square meter. Finally, in the personal and student transportation segment, there was a decrease of 10.6% in revenues that was driven by a reduction in operating activity at the beginning of the quarter, mainly due to schools shutting down, some corporates supporting home office, and industrial clients closing plants, especially in the auto industry. This resulted in a drop of 42.6% in kilometer volume. However, some clients that did not stop operating requested increased capacity due to social distancing rules and their aversion to their staff's exposure to public transportation, as well as the strict sanitary measures that Tracción implemented in this area. Moreover, through the second half of the quarter, our operations started to show more stability as some sectors of the economy resumed activity. Shifting gears, in terms of costs, the change recorded in fuel stems from the decrease in overall kilometer volume and, to a lesser extent, from a drop of approximately 11.8% in fuel prices compared to the second quarter of 2019. This drop in kilometers also drove down the fleet maintenance costs. Now, the cost of facilities, utilities, and supplies increased 63%. This is mainly due to third-party services contracting in logistics business on behalf of some clients, and is consistent with what we experienced in the first quarter of this year. Likewise, and due to the increase in less than truckload and last mile activities, there were additional costs incurred mainly on customs and expanded capacity. Such costs are to be recorded in this line, resulting in a higher figure, both in absolute terms and as a percentage of revenues compared to other quarters. Moving on to the bottom line, and as a result of all the measures we took in terms of costs and expenses, consolidated operating income grew 54.6%. Moreover, EBITDA totaled 748 million pesos, which represents a growth of 15.9% and a margin expansion of 180 basis points to reach 22.8%. This is proof of our resilient business model and efforts to maintain profitability. Now, comprehensive financial results improved may be driven by a better cost of debt, interest income from our cash position, and the foreign exchange effect related to U.S. dollar denominated billing of services. Finally, net income reached 151 million pesos, which represents a very impressive growth of 112.5% compared to the same period of last year. This drove net cash flow from operating activities to reach 593 million pesos, a 27.8% growth. Well, with this I wrap up my observations. Thanks for your attention. I'll now open the floor to Q&A.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please 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'd 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 start key. Our first question comes from the line of Luis Yance with Compass Group. Please proceed with your question.

Thank you. Hi, guys, and thanks for taking my questions, and congratulations on such an outstanding quarter. Two questions on my side on the cargo business. I mean, you mentioned the courier and packaging business had a pretty outstanding growth during the quarter, a lot of it related to e-commerce. I just want to get a better understanding how much of that business is actually e-commerce-oriented, and how sustainable the kind of growth we saw, the 125% year-over-year growth we saw, is sustainable going into the second quarter, into the second half. That will be my first question. Then the second question, also on the cargo, you mentioned you moved capacity from sectors such as autos into other sectors, perhaps such as retail. But as the auto sector is coming back over the past couple of weeks, and it looks like the retail sector remains strong, how do you balance that demand? Are you going to shift back some of that capacity to the autos, or actually you're adding capacity into that? Are you using third-party capacity as an option to have some flexibility? If you can comment on that, that would be great. Thank you.

Hi, Luis, how are you? I'm Rodolfo. Regarding your first question about e-commerce or about the packaging business, yeah, almost 80% of the growth of this month was e-commerce related. And what we saw is that it's a new trend in the market. It's happening. And, of course, e-commerce was growing each year consistently, but this had a boost. So we think, and with the clients we have, I think that the volume will maintain in the future. And regarding your second question about the auto industry and the balancing of the cargo segment, what we have done is we choose the best clients over our business base or our client base. And always we help with our customers and everybody to have the best way to achieve their goals. So the big issue here is when the auto industry comes back, depending on the sectors that we have, each one of the companies, they go back to do the service to those companies. For example, in June, the auto industry came back in a lot of places in Mexico, so the fleet that we had in other sectors went back to service those clients. So we do the balancing of the fleet continuously, and we have done that for the past years, and we can continue to do it in the future.

Great. Thanks a lot. A follow-up, if I may, and That's just trying to reconcile the kilometers driven being down so much, but revenues going up. I was wondering if you could share what percentage of your business or your revenues right now are under fixed revenues that you get no matter whether you provide the service or not, and what are you seeing in that fixed portion of your business in terms of clients looking to renegotiate. Perhaps the schools that didn't open, they had to pay you, but now it looks like this situation is going to continue longer than expected. Are some of those revenues a little bit at risk, or you've already renegotiated that, and that's already reflected in the results?

Hi, Luis. This is Xavi. So we have around 50% of our contracts negotiated with PICS revenues. And the good thing is that all the capacity that is available because of the schools, it's relocated to industries temporarily for the social distancing. So when the situation normalizes, we think that the social distance will not need anymore and will take those buses back to the schools temporarily.

Great. Thanks a lot for the answers, and congratulations again on the quarter.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Pablo Montevalle with Barclay. Please proceed with your question.

Hi, guys. Thanks a lot for taking my question. It's kind of a follow-up question, and I would like to have a little bit more detail on also on the cost side. But how do you see your numbers, your 22% EBITDA margin at a sustainable level going forward in a post-COVID world. You just mentioned that how revenues should trend after COVID, but also how cost and what are your thoughts on probably margins going forward? Thank you.

So, how are you, Pablo? I'm Rodolfo. So, we have worked a lot in our cost efficiencies And, of course, our revenues were stable because of the logistics sector, and that sector is a little less margin than the cargo and the passenger. But what we did in this trimester, and we will continue to do in the future, is to work really hard to lower our cost, and that way we can maintain the margins that we we have the labor interaction in the future.

And kind of a related question is, okay, you will work hard to keep your costs down, but then let's figure that in 2020 demand continues to be strong. How do you manage your capex, for instance, and the profitability of your asset base? Should we expect then to see a ramp up in CapEx because this year CapEx has been a very small amount?

Hi, Pablo. How are you? This is Wolf. As we spoke in the last quarter, we are very cautious with every investment that we're planning in this moment. I think we have to be like that for a few more months at least. So we are analyzing all the opportunities that the company has But for now, we're not expecting to have, like, a higher investment for the year yet. So we're still continue analyzing all the opportunities and be very careful with all the investments that we can deliver for the next quarter.

Perfect. Thank you very much. Thank you.

Thank you. Our next question comes from the line of Marcos Porreto with Citi. Please proceed with your question.

Hi, everyone. Thank you for calling and for taking my questions. First, can you give us a sense as to what portion of your flow was related to e-commerce versus other segments?

Yeah. Hi, Marco. How are you? I'm Rodolfo. The e-commerce it's around 10% of our revenues overall. Right now, we're working really hard to grow that percentage.

Okay, thank you. And how has COVID-19 impacted the competition landscape for you guys?

I think Tracción has... very competitive advantage. It's a company that is very diversified. I mean, we have contracts that make our customers pay a fixed revenue. Also, we are diversified through different sectors and different services. Traction is a very, we have a very healthy balance sheet. So I don't believe there are many companies organized this way in the industry. So I believe Traction will be on a very good position comparing to the industry and to the competitors. And we're going to end this situation standing very strong and very competitive.

Okay, thank you all. Thank you. That's all from my part. Thank you, Marcos.

Thank you. Our next question comes from the line of Eduardo Miller with Miranda Global Research. Please proceed with your question.

Good morning, everyone. Congratulations for your very strong results. I only have two questions. The first one is, if you are keeping the same guidance for the year thinking to account such positive results, And the second one is, if you think that the EBITDA margins are sustainable going forward, especially if gasoline costs go up. Thank you very much.

Could you repeat the last question, please?

Sure. If you think that the EBITDA margins are sustainable going forward, especially if gasoline costs go up in the future.

Hi, Eduardo. How are you? Speaking about the levels of the margin, I think it's a little bit early to say, but again, we will continue to work, as Rodolfo was saying, looking for efficiencies and the revenue continues in the next future. So we're trying to keep it that way, and we expect to continue at least as the company was before COVID and during COVID margins.

And talking about the guidance, as we mentioned, we want to maintain the guidance.

Thank you very much. That's all. Thank you, Eduardo.

Thank you. Our next question comes from the line of George Lorenzau with Morgan Stanley. Please proceed with your question.

Good morning, everyone. Thanks for taking my question, and congratulations on the results. I have two questions from our side. The first question, is on the revenue post-crisis. I was just wondering if you are already expecting any potential permanent revenue shift between the business post-crisis versus before the outbreak. And if so, just wanted to know how do you see that shift potentially affecting margins and returns going forward? And the second question is on maintenance costs. How do you see the normalization on that line going forward? And we ask that mainly because there are decrees that face the mileage in the quarter since I know. Hi George, this is Tonio. We don't see, it's too early to tell you if there's going to be a permanent revenue shift. Of course, this quarter we experience a constant rebalancing of the revenue base. We think that as the situation normalizes in the short, mid-term, we don't know, but as the situation goes back to normal, we are going to start experiencing Some rebalancing back to what we were pre-COVID, but of course, as we mentioned, we think that some channels such as e-commerce are showing trends that could be permanent. We are not sure right now how it's going to end up, but we do expect and we are prepared for a possible rebalancing of the revenue mix.

Speaking about the maintenance cost, this cost is variable and it's very related to the kilometers volume. So in terms of the volume of these kilometers of the company has in the regular basis quarter, it's supposed to be very aligned with the history of the company in this variable cost. So it will depend on the kilometers volume that the company will have in the next future. Thank you very much. Thank you.

Thank you. Ladies and gentlemen, if you'd like to join the question queue, please press star 1 on your telephone keypad at this time. Our next question comes from the line of Luis Yance with Compass Group. Please proceed with your question.

Hi, guys. Two follow-ups from my side. One is, you know, going back to the guidance, you mentioned that you're keeping guidance intact. And if I remember correctly, that was or even that to grow 8% for the year. In the first half, you have grown already 14%. So that would imply, you know, kind of flattish second half year over year. Is that what you're kind of expecting or you want to be conservative given the lack of visibility or what's your thoughts about, you know, the second half of the year in terms of business activity? So that will be my first question. And then the second question, one for Wolf, I guess. And you mentioned that the increase in accounts receivable had to do a lot with new clients, but also allowance for doubtful accounts had a sharp increase. Are you seeing some clients struggling and perhaps delaying payments, or that's just still within the normal course of business of what you would expect at this point in time? Thank you.

Okay, Luis. So... We've seen traction doing very well this half of the year. Wanna be cautious talking about the numbers of traction despite of the situation, so we are remaining the guidance the way it was. Even thought we're getting very good numbers right now.

And Luis, speaking about your second question, and you were right, it's more like we want to be more conservative in this time. As you may assume, it's not a regular time, and we prefer to be very conservative and cautious also in this way. So it's not that we're seeing something unhealthy on our accounts receivable. It's more like we want to be more sure that nothing's going to hit our balance sheet.

Great. Thanks a lot, guys.

Thank you. Thank you, Luis.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Lichstein for any final comments.

Thanks. The way Traction was created has placed the company in a very fortunate position with growth and solid balance, which resulted in cash generation and profit this quarter. Despite all what is happening, Traction continues creating value and better serve clients. Traction Management remains fully committed to keep working and focus on delivering. If you have any questions or doubts, please contact us. Stay safe. Have an excellent week.

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