Grupo Traxión, S.A.B. de C.V.

Greetings and welcome to the Traction Third 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 the 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, Mr. Abbey Lipson, Executive President for Traction. Thank you, sir. You may begin.

Thank you. Welcome again to Tracción's earnings call. I hope you and your families are safe and healthy. As usual, I will comment on some relevant aspects of the quarter before handing over to Rodolfo Wolf Antonio, who will discuss operating and financial figures in detail. I am very excited to share with you that once again, Tracción delivers solid financial and operating results despite the adverse environment that the contingency has caused. We posted record high financial figures. Tracción continues to conduct business profitably and efficiently. The company generates cash, has taken advantage of opportunities, and serves its clients This is the result of very hard work and how the company is designed. Surely, the most important highlight this quarter is that Traccion placed a 2.5 billion pesos bond with a seven-year maturity and a fixed rate of 8.98%. The deal was oversubscribed, which I take as an additional vote of trust in Traccion. especially given the current macro landscape. With this issuance, Traction replaced outstanding credit facilities, extended the overall maturity profile, will improve cash flows, and will optimize financing costs. After three years of being a publicly traded company, we have achieved this very important milestone that take us to the next level in terms of financing sources. Moving on to the operational side, as you can see, logistics has become a fundamental element of our business, especially those services related to e-commerce. Tracción has almost crippled both revenues related to this channel and daily handling volume compared to the same period of last year. Obviously, the contingency boosted such increase. But please bear in mind that e-commerce activity in Mexico was severely under-penetrated before COVID, and that people were forced to try it during the contingency. In general, people have discovered that e-commerce not only works, but is more convenient and efficient for many things. How do you say that we believe? that a great portion of this increased volume will remain as a trend once we go back to normal. Years back, we saw that growth of e-commerce was imminent. Of course, not driven by COVID, but by natural market forces. Anyway, Traction reacted promptly and planned accordingly. and has taken a portion of such growth that today represents more than 10% of total revenues. Shifting gears to other business lines, we have a stable quarter in terms of cargo operations. We still move our fleet among sectors, but with much more stability compared to when the contingency started. Our personal transportation segment grew. driven by requests for increased capacity that started on the second quarter and continue through the third quarter, driven by social distancing rules. Traction has faced over demand in this business and has been satisfied by temporarily using the fee that normally is dedicated to schools and by outsourcing buses with regional competitors that have spur capacity. Speaking about schools, please be advised that the contracts we have with these clients are still valid, and we have granted some discounts in the interest of strong commercial relationships. When schools return to their normal activity, they will let us know in advance so that we balance our fleet and they can resume their service in a timely manner. With this, I conclude my remarks, and I will hand over to Rodolfo. Please, Rodolfo, go ahead.

Thank you, Abby. Good morning, everyone. Thanks for your attendance. I will now discuss the most important operating highlights in this quarter. As Abby mentioned, logistic operation now represents a relevant portion of our business. Now contributing almost three times what they did on the same period of 2019. Traction increased by more than 66% its domestic last mile capacity. not considering the cross-border e-commerce business that we have developed, which has grown considerably as well. We invested more than 60 million pesos to improve our IT systems. We created RedTrax, an app that allows better tracking, improves internal processes, and provides much more accurate real-time information. It is important to consider that traction works extensively in 2019 to build a robust logistic platform that was launched at the beginning of 2020, which positioned the company in a privileged spot to capture the increasing logistic operating volume that the pandemic brought. Moving on, in terms of innovation, I'm very proud to share with you that Traxy, our people mobility app, launched in July, has now more than 5,000 downloads. and operates 10 daily routes with six different timetables, both in Mexico City and Guadalajara. In this service, we develop an app that monitors and controls riding capacity by using QR codes. In the personnel and student transportation segment, we have conducted an extensive commercial effort, which resulted in a solid growth in new clients and existing ones. Especially during this third quarter, we started operation with 90 new clients that required 130 additional units. Moreover, during September, we operated more than 6,000 units in this segment. This was possible mainly by outsourcing fleet of third parties with spare capacity. All this drove a growth of 15.7% in kilometer volume in this service. So as you can see, we are gaining clients despite the pandemic situation. Shifting to our cargo business, it remains stable during this quarter. We had an increase in our cross-border business related to auto industry and obtained a license for fuel transportation, a service that we have developed organically and was kicked off during this third quarter. In terms of expansion, we gain a five-year contract that will require 49 new cargo trucks for 2021. We also will be adding refrigerated trailers to our fleet to face the growth of this service. Finally, we achieved a 2.3% fuel saving as a result of synergies in new technologies. On the social and environment front, Traction joined a breast cancer prevention and support program together with a computer recycling campaign to assist child cancer groups. We also obtained the Clean Transportation Certification for the sixth year in a row and renewed several quality assurances programs.

Having said this, I will now hand it over to Wolf. Please, Wolf. Thanks, Rodolfo. Hello, everyone.

I just want to walk you through the actions we took on the financial front this quarter, especially details of both leverage and capex. As you know, we were successful in placing a 2.5 billion peso on secure seven-year bond with a fixed rate of 8.98%. With this bond issuance, Traccion gained significant benefits in terms of overall debt profit. This is also part of our plan to continue improving our cost of financing. If we take a look at our debt profit previous to the placement, Traction had an average maturity of around two years, and today that maturity profile improved significantly after the transaction. Our average maturity is currently of approximately four years. In addition to that, our net debt to EBITDA ratio decreased from 1.8 times pre-bond to around 1.7 times after the placement, and has further decreased compared to the third quarter of last year when the ratio was 2.16 times. Traccion has a much stronger balance, broader financing sources, and a very solid cash position, which results in a great financial situation among a very complex macro environment, which places us in a particularly comfortable competitive position. Moving on to details of CAPEX, as you see, we reactivated a portion of our CAPEX plan by deploying 171 million pesos during the third quarter. More than 70% of that was spent in the personal transportation segment, mainly to grow and satisfy requests from both new and existing clients. Moreover, as you know, we defer a large portion of the regional CAPEX figure of 1.2 billion pesos for the year. Even though we have exercised some CAPEX during the year, by deploying capital to fund business opportunities, we have encountered and we are running well below 50% of the regional pre-COVID CAPEX figure. The company also has been very active commercially and has been able to seize attractive opportunities during the contingency. Finally, I just want to highlight that Tracción continued generating cash during the quarter and kept executing a strict cost and expense savings program. Having said that, I will hand over to Tonio, who will discuss financial figures in much more detail. Please, Tonio.

Thank you, Wolf. Hello, everyone. Welcome. As you already saw, Tracción continued with a positive trend over the third quarter and ended with another record high result. I will now walk you through some financial details before opening the floor to Q&A. Tracción delivered a very strong growth in consolidated revenues of 20.4% to reach 3,774 million pesos, which is by far the highest revenue figure in the history of the company. This was driven by a considerable growth in operating activity of logistics channels and by increased demand in the personal transportation service, which resulted in an expansion of 15.7% in kilometer volume in this segment. Moving on, operating income increased 28.9%, significantly higher than growth of revenues, and was mainly driven by strict cost and expense controls implemented back when the contingency started. General expenses grew only 2.5% and showed an efficiency of 280 basis points as a percentage of revenues compared to the same period of 2019. In terms of costs, there was a decrease of 9.1% in average fuel prices compared to the third quarter of 2019, which drove down our overall costs by 15% in fuel. The other operating costs behaved with efficiencies versus growth of revenues. But perhaps the most important item to talk about is the cost of facilities, services, and supplies, which increased 66%, and is where we record the outsourcing of third-party fleets and logistics services, which continued expanding over the third quarter, as we already discussed. Moving on to comprehensive financial results, the field was somewhat altered by $36 million in refinancing fees, which is a one-off this time. Most relevant here is that interest expense decreased 66 million pesos, mainly driven by a lower cost of financing. Furthermore, net income reached 191 million pesos in the period, which is a very impressive growth of 37.7% compared to the same part of last year. But there is something very relevant to highlight. In the first nine months of 2020, net income is 472 million pesos, which is not only 60.7% higher and the same period of 2019, but also is 21 million pesos more than total net income generated by Traction last year, and we still have one quarter to go. All that, together with a strict working capital management, grow operating cash flows to grow 47.4% in the quarter and 39.3% in the first nine months of the year, which is a very healthy figure considering the complex macro landscape and uncertainty we are currently undergoing. Well, thanks for your attention. With this, I wrap up my observations and open the floor to Q&A.

Thank you. We will now be conducting a question and answer session. If you would 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 star keys. One moment, please, while we pull for your questions. Our first question comes from the line of Pablo Manizales with Barclays. Please proceed with your question.

Hi. Good morning. Thanks for taking my question. I have actually two questions here. The first one is that you mentioned that e-commerce was 4% of your revenues last year, and right now they represent 10% of your revenues. How do you see this segment evolving in the next two or three years? Do you think that it can reach 20%, 15% or 10% is the rate that it will remain? That's the first one. And my second question is on the EBITDA margin. 22%, I think it's a very good result. But do you expect any additional increase going forward or is this already a steady state profitability level? Thank you.

Hi, Pablo. How are you? This is Rodolfo. Yes, we had a very good year of growing revenues in e-commerce. Now they represent around 10% of the total revenues of Taxium. And for sure we see this percentage and, of course, the revenue growing in the future years. This is a segment that we are taking a very good look at and pushing our business through through that segment. I think we're going to have a very good growth in that part of the business.

I think as long as the market conditions prevail, we think that the company should be able to continue posting margins above 20%. However, logistics service post also lower margins. So if such services gain relevance, as we already mentioned, to the last quarters, we think that the consolidated margins could move a little bit.

Okay. And you said in your earnings results that, yes, logistics has a lower margin, but also lower capex. So probably on the return to equity or return on assets, how do you see your performance evolving?

I think speaking about the both segments, at some point they compete for the... for all that the company needs to deploy in the investment. So we look for the same profitability in many of our segments. So it should be the same anyway. As you mentioned, it will be less capex in the logistics side.

Yes. So the revenues from logistics are, as you mentioned, more profitable because the capex is much less.

Okay. Perfect. Thank you.

Thank you. Our next question comes from the line of Ruben Lopez with Santander Bank. Please proceed with your question.

Hi. Good morning. Can you hear me? Yes. Perfect. Thanks for the call. Congratulations on the results. The first question is a follow-up on the margins. I mean, of course, logistics has a lower margin, but can you share with us what could be a margin for logistics and what would be the margin for cargo? And I don't know if you can also share with us the ROIs I see for each of them.

Yes. How are you? Speaking about what we expect on the margins in both segments, if you speak about cargo, We're still looking for cargo, something around the 20%. And if we look for logistics, there are many things in the logistics side, but it could be something around 9% and 12% margin EBITDA. So that could, at some point, as I mentioned before, that could kick a little bit the margins for the company, but It doesn't have to keep the ROIC. And speaking about the ROIC, the company is looking always for any investment to have at least 40% of ROIC. I don't know if you hear me well.

Well, it's important to notice that the traditional transportation business, as cargo or passenger transportation, It's a little bit above 20%. Logistics is under 20%, but the average of the company will be around 20%. We don't expect to be below 20%.

Okay, perfect. Thank you. And the second one is on the technology side. Can you give us any update on Traxy, Traxporta, and Traxion Logistics? I don't know if downloads or active users, anything that you could share with us that could show the development or, yeah, the performance of these tools?

Yes, hi. How are you, Ruben? This is Ruben. Yes, on the Traxy side, we have... around 5,000 downloads by now, and we are operating around 10 routes, 10 times in six routes, 10 timetables in six routes around that. It's working really well. We have a lot of confidence in this part of the business. The transport part of the section, we are improving every day. We think we have a very good Foreseeing of this business. We were checking a lot of options to Infiltrate the market and I think we're going to do it very good in the first quarter of next year. I think that the IP part of our technology interaction are Very good projects that we are pushing every day and we have a we're very confident that they will make a good difference interaction in the new future

Perfect. Thank you so much.

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

Hi. Good morning. Congratulations for the very strong results. I have two questions. The first one is why are you keeping the same guidance after two record quarters? Isn't Italy a bit conservative? And the second one is what can we expect going forward with respect to labor costs and also in terms of facility services and utilities expenses?

Hi, Martin. How are you? I think we have a record-breaking quarter. There are still several factors to reconsider before the year ends that could pose an additional challenge. For example, like elections in the U.S., the new COVID outbreaks in Europe, et cetera. So we try to be a little bit conservative for this. And I think we're still having great news that the company expects to achieve and maybe to exceed the original guidance in this particular year.

Okay. Freddy?

Hi, how are you, Martin? And regarding the labor and the facilities, what we expect in the future is that the labor is around 13, 14% of total percentage of the cost, and I think the facilities are around 20 or 25%. So, I think we expect that to maintain this trend to the future, and we will work in retaining this cost and making that grow.

Okay, perfect. Thank you very much.

Thank you. Our next question comes from the line of Andressa Verotto with UBS. Please proceed with your question.

Hi. Thank you for the opportunity and congratulations on the results. I have two questions on my side. The first one is regarding the cost reduction on the passenger transportation segment. We've been seeing margin expansion in the segment. So I just wanted to know if this is recurring and what can we expect going forward. And my second question would be on the cargo transportation. We are seeing that the segment has been driven more by the logistics and e-commerce services. while the cargo transportation increases only about 1% in the quarter. So, I just wanted to get a sense on how it's being affected by the COVID pandemic, how it's been responding, and what are your expectations? Thank you.

Hi, Andresa. Good morning. This is Tonio. Could you please repeat the first question? We didn't hear you clearly.

Sorry, the first question is regarding the margin extension in the passenger transportation segment. If we can expect the cost reduction and efficiencies to be recurring.

Okay, yeah, you can expect that. We've been doing improvements in terms of both costs and expenses. We've been operating with some leverage as well in terms of in operating terms. And you can expect those margins to continue to be there.

Can you repeat your second question, please?

The second question is regarding the cargo transportation segment specifically, how it's been reacting during the pandemic and what are your expectations for recovery?

Hi. How are you, Andresa? This is Rodolfo. Well, the cargo transportation segment has been not with very highlights in the quarter. It has maintained really good. Of course, we're expecting to wait until the future comes. Of course, there's some things that COVID is growing in Europe. You know that there's elections in the U.S. So we still have some doubts on how this business will proceed. maintaining the future, but for now, it has been really equal, really stable in Mexico.

Thank you. Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from the line of Marcus Beato with Citi. Please proceed with your question.

Hey, everyone. Thank you for the call and for taking my question. I just have the one. Have you taken any cost-cutting measures during the pandemic that you think will fix even after this passage? Thank you.

Hi, Marcos. This is Tonio.

We expect, once we go back to normal, we expect a portion of these savings, especially in expenses, to be sustainable beyond COVID. That is as long as market conditions prevail and with similar conditions, but we are not going to be sure until we start going back to normal, until we see that we are actually going back to normal. We are not going to be sure. We know that there are some things that are sustainable for sure, but there are others that are very uncertain.

Okay. Thank you very much.

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

Hello, Rodolfo, Wolf, and Antonio. Thank you very much for the question, and congratulations for the strong results. My first question is regarding the SG&A line specifically. I mean, it was obviously a positive, so I was just wondering if you could provide more color on whether that was more related to layoffs or maybe temporary labor contract suspensions or online sales on the selling expenses side. That's the first question. And my other question is on the kilometers driven growth in the Pax transportation segment. I just wanted to ask if you still have the same effect that you had last quarter of same clients asking for more buses due to the necessity of maintaining social distancing. Or is that growth coming from other sources as of now? That's it. Thank you very much.

Hi, Jorge. How are you? Speaking about the expense side, it's mainly because of what we don't have to exercise this year, mainly like travel expenses and some other things that the company could renegotiate with the providers. so we can have better conditions in this particular year. So this is why Tonya was saying that mainly most of these savings could remain for after COVID season, and some of them maybe could go to normally or back to normally at some point. So we continue with the same personnel or the same capacity in personnel that we had before, and we didn't have nobody to hire from the company.

On quite the contrary, we have been hiring more talent in order to pay growth properly. Okay, Jorge. And regarding this, Rodolfo, regarding the transportation segment, the bus transportation segment, the personnel, we're still having the demand of extra buses, and we see it for the next quarter also. at least for the next few months regarding the social distancing. As you know, here in Mexico, we still haven't had very good results in the COVID, so a lot of manufacturers still are nervous, so they're still hiring extra buses for their people.

Very clear. Thank you very much, and have a great day.

It's important to note too that when the contingent is over, Those extra bosses that we are hiring, they are going to go work to the schools.

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. Lipsane for any closing remarks.

Thank you. This year has been extremely complex. Several sectors of the economy have declined significantly over the past eight months. Despite the pandemic and its adverse effects, Traction has grown, gained new clients, expanded operations within existing ones, has also made money, and remained profitable. We kept 100% of our staff and even hired additional talent to meet our growth needs appropriately. The company has posted record high figures during the pandemic with a strong balance and a comfortable cash position. This is the result of the business model we have created together with our strong and experienced management team. Thank you again. Have an excellent week.

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