Grupo Traxión, S.A.B. de C.V.

Greetings. Welcome to the Traction First Quarter 2021 Earnings Call Results. At this time, all participants are in a listen-only mode. The 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. Please note this conference is being recorded. I will now turn the conference over to your host, Avi Lisjain. Thank you. You may begin.

Thank you. Welcome again to Traction. I hope you and your families remain safe and healthy. I am very proud again to deliver very strong financial and operating results for the period. As you can see, we continue with a positive trend, especially in our logistics and technology business and in the personal mobility segment. Mobility of cargo grew as well, but we transfer such growth to our tech-driven platform, Traxporta. through which we can grow with no need to invest in six assets. There are two very relevant milestones to discuss this quarter. The first is that we spread out our logistics and technology business lines from cargo to report a third division, the logistics and technology segment. These business lines are supported by technology and have an asset-light approach. which will enable Traccion to grow the top line without having to conduct heavy capex, while both bottom line and profitability improve. As you have been observing, logistics and technology business have gained relevance in our P&L, and we expect these lines to continue to develop, gain penetration, and grow in Mexico. have been very well positioned to capture such expansion. And we believe that this tech driven business will continue to expand within the company over the long term. We are well positioned as well to continue to capture the expansion of e-commerce. And we expect to continue getting new clients as we move forward with our plan. As I have been saying for some time, our technological innovation has been our strongest competitive advantage. And it's precisely such innovation what made us achieve this very solid growth through the pandemic. Shifting gears, the second milestone is that we execute a new syndicate credit facility for 3.5 billion pesos, which enable us to refinance and prepare our former line. Wolf will elaborate more over this matter. With this, I conclude my remarks and I will hand over to Rodolfo Tito, go ahead.

Thank you, Avi. Good morning, everyone. Thanks for your attendance. Perhaps the centerpiece of this quarter are the results of the newly reported Logistics and Technology Division. This segment recorded quarterly revenues roughly about $1 billion, with a margin of 9.5%, in line with our estimates and communication to the market. The progress of this segment was mainly driven by an increase in last mile activity, 3PL volumes, and a relevant contribution of $128 million from our technology-based platforms, which combined show a growth of 160% in revenues. In terms of warehouse area, there was an expansion of more than 107,000 square meters compared to the first quarter of 2020, which is indeed an impressive improvement. In terms of last mile services, we handled more than 3 million pieces in this quarter with a level service above 95%, which is especially relevant since this is the highest volume structure has ever operated. In 3PL warehousing, we started operation with three new clients and continue implementing the latest technology for warehouse management. Now talking about personnel transportation, We started operations with 25 new clients over this quarter, which involved 100 new units and 150 units that were already operating with other clients. Here, we also are in the process of implementing a route management system, which we expect to save us approximately 100,000 kilometers per month. In the cargo segment, everything is running steady. We're maintaining revenues throughout higher volume in kilometers. We haven't kept our high quality service and levels of specialization, which plays us among the first choices to our clients. Since the contingency started, we have seen how consumption patterns have changed, and we have been very active to remain competitive. Finally, in terms of human resources, We conducted training on personnel communication and technology utilization to our last-mile staff and offered leadership workshops to a mid-management level. As you can see, we continue to be very busy in commercial and operating terms. Thank you for your attention. I will now hand it over to Wolf. Please go ahead.

Thanks, Rodolfo. Hello, everyone. I just want to walk you through the actions we took on the financial front this quarter. especially regarding debt. As you see, Tractone continued operating with a very solid balance sheet, a comfortable cash position, and a strong capital structure. The company still stands within its best financial situation and has broader financing sources, despite the macro uncertainty that prevails. We kept running the company with efficiencies in cost and expenses that drove cash flow improvements which is paramount relevance, enhancing its expenses by 150 basis points as a percentage of revenues. As Abby mentioned, during the first quarter, we executed a new 3.5 billion pesos syndicated grade facility, and we used the portion to prepay and refinance our former lines. As a result, more than 62% of our maturities are due beyond five years, compared to 44% at the end of 2020. Thus, providing traction with enough flexibility in terms of long-term financial planning, and it's part of our continuous effort to improve our debt profile. Moreover, our net debt to EBITDA ratio was below 1.5 times in the first quarter, compared to 1.93 times in the first quarter of last year, which basically means that we continue to grow and expand our business while reducing the overall leverage level of the company. One detail worth mentioning is that Tracción has more than 3 billion pesos of available credit facilities. Some of them are committed and are either working capital lines or long-term loans. As you can notice, we're in a privileged position in financial terms. Finally, in terms of capex, we exercise roughly 389 million pesos, which includes expansion and renovations across the company. We plan to continue deploying capital over the next quarter as per our guidance. Having said that, I will hand over to Tonio who will discuss other financial details. Please, Tonio.

Thanks, Walt. Hello, everyone. I will now discuss the most important financial figures in more detail. Perhaps the most relevant item to point out is the very impressive growth of 52.1% in net income to reach 197 million pesos. In terms of top line, consolidated revenues grew 25.4% compared to the same period of last year, to reach almost 4 billion pesos, and which is more than double of what Tracción reported three years back on the first quarter of 2018. It is indeed a very relevant expansion. Revenues were mainly driven by three elements. First, the increased activity in the last mile business, which continued the trend of the past quarters. Second, by the contribution of 128 million pesos of the technology-driven logistics services, which were virtually nonexistent during the same period of last year. And third, by a very healthy growth of 18.3% in the personal transportation segment, which continues to run with a significant over-demand given social distancing rules. Moving on, operating income grew 48.6%. which is almost two times the growth of revenues, mainly driven by strict cost and expense controls implemented a year ago when the contingency started. Specifically, expenses grew 15.8%, which is remarkably less than that of revenues, and showing a 150 basis point reduction as a percentage of total revenues compared to the same period of 2020. In terms of costs, all of them followed virtually the same trend as in previous quarters. But there are a couple of details worth mentioning. The first is the cost of fleet maintenance, which increased 52.1%, mainly driven by maintenance of third-party buses that were outsourced to cope with over-demand in the personal transportation segment. And second is the cost of facilities, services, and supplies, which increased 53.3%. It is here where we record the outsourcing of third-party fleets and logistics services, which continues expanding. Finally, fuel prices continue to decrease approximately 7% on average during the quarter, and it's got a positive impact on our cost. Shifting gears, comprehensive financial results recorded an expense of 150 million pesos. The main difference versus last year is that there was a foreign exchange gain of 57 million pesos in the first quarter of 2020. But most relevant is the decrease of interest expense in this quarter. There is yet another significant aspect to highlight. Fraccion reported healthy growths in top and bottom line of 25.4 and 52.1% respectively, while total assets only grew 5.9% compared to the first quarter of 2020. On the other hand, Total debt increased 226 million pesos versus the same period of last year, and the company kept a very comfortable cash position. Finally, it is worth mentioning that operating cash flows grew 15.1% on a year-over-year basis. Well, thanks for your attention. With this, I wrap up my observations. I will now open the floor to Q&A.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. One moment, please, while we poll for questions. Our first question is from Steven Trent of Citi. Please state your question. I'm sorry. The first question is from Alex Demichelis of Now Securities. Please state your question.

Good morning, guys. Thank you very much for taking my question. A couple of questions, please. The first one is about the very strong growth that we have seen in the first quarter and how you see that during the course of the year. Because obviously the second quarter of last year was weak because of the lockdown. So trying to square how the strong growth kind of goes with the 10% revenue guidance that you have. That's the first question. And then the second question is maybe you can... give us some kind of indication of how you're seeing the logistics and technology business in terms of growth and margins going forward.

Hi, Alex, thanks for your questions. As you know, we gave a 10% guidance at the beginning of the year. We think that we should remain prudent on that matter because we still see that there's uncertainty on a macro level. On the other hand, growth in logistics and technology has been strong. It has followed the trend of the past quarters, of the COVID, if you will, quarters. So we think that this kind of growth, especially the volumes on last mile and logistics, are here to stay and are sustainable over the long run. We think that there's still a lot of penetration and development for this kind of services in our country, and we think that we are very well positioned to capture a nice portion of such growth.

Okay. And can you give us some indication of, say, during the month of April, that, you know, given that you have very little visibility, how the business has been performing in terms of growth and margins then?

Yeah, as you can see, margins, for example, if you see the cargo, the mobility of cargo segment right now, it's 22, 22-ish in terms of margin. it's higher than historically because we took out logistics, which typically have lower margins. What we see this year is it's going to depend on how the logistics and technology business evolves, obviously, but we see margins stable over 20%.

Okay, thank you.

Our next question is from Steven Trent of Citi. Please state your question.

Hi. Good morning, everybody, and thanks for taking my question. Just two quick ones for you. You know, one, when we think about the way you split the divisions and the technological focus, are there things or acquisitions maybe not of companies but acquisitions of technology that Traction might consider, such as artificial intelligence for the logistics division? And the second question, any high-level comments, what you might be pursuing on ESG with respect to lower pollution? I know that's been discussed. I know Circula and stuff like that in Mexico City, it's been a big deal, so curious to hear what you're doing on that front.

Hi, Steven. This is Javi. Good morning, Javi. How are you? So we have a special team here in Tracción that is technological innovation that are looking constantly the most advanced systems that we can find to add to our business. So, yes, we are also beginning to see things in artificial technology. And talking about ESG, I'm going to pass to Antonio to answer the question. Hi, Steve. This is Antonio. How are you?

Oh, great. Thanks very much. Hi. Thank you. In terms of ESG, as you can see right now, this is the first time we disclose anything in terms of ESG in our quality report. We, obviously, the most relevant thing for us right now is fuel consumption, emissions, and that's why we disclosed these metrics. These metrics, you are going to be able to follow them on a quality basis. We are going to start adding more metrics as we have them ready. not only in terms of emissions, but in terms of other initiatives. And, well, that's basically the reason that you only see fuel consumption and emissions disclosed on the report.

Okay, I appreciate it. Thanks very much, guys.

Our next question is from Rogero Araujo of UBS. Please state your question.

Thank you. Hi, guys. Thanks for the opportunity. Congratulations on these strong numbers this quarter. So a couple here on my side. The first one, in Traction Day, you mentioned that the asset-light businesses had about $25 to $30 million revenue a few years ago. was moving to $100 million in 2019, $150 million in 2020. And if I'm not mistaken, the expectation was $200 million in 2021, $200 million. So is the asset-light businesses that you mentioned in Traction Day, is this related to this new logistics and technology business line that you started to report? So it's apples to apples, and if these expectations of revenue continue to make sense, that's my first one. Thank you.

Hi, Rogelio. Yeah, so we expect this division to be more than $200 million this year. And, yes, we're talking about the whole division of logistics and technology. And, yes.

Okay, thanks, Abby. And a follow-up here. You say in the report that 17% of Teston's revenue is derived from e-commerce. So what does enter here? It's only last mile, or there are other segments as well? So maybe warehousing on e-commerce?

Yeah, the main thing is last mile, but also logistics service for e-commerce. So we are giving tailor-made solutions for the big clients for e-commerce. So we add other services to the e-commerce service as, for example, imports of goods from the United States to Mexico or transportation or warehouse management for them. But it's related to e-commerce because we offer the complete solution for the e-commerce companies.

Okay, very clear. Thanks, Abby. My second question is on the passenger transportation business. You had quite high margins, almost 27%. And I would like to know what is the net impact on the segments considering first the new contracts with companies due to COVID-19 that are likely going to be canceled or going to be ended when the market normalizes. and at the same time, the school transportation impact on their business. So what is the net impact on the margins? I'm trying to figure out here what's gonna be the normalized EBITDA margin for the passenger transportation business when the market normalizes, when you lose part of those new contracts, but also get the schools again. Thank you.

Hi, Rodrigo. How are you? I think the facility that we have right now, it remains the same volume or similar volume that we had in the past quarters. And I think that will be an operational challenge also for the companies when this can come back at some point. And as we think, nothing we have expected or really planned different. So we will definitely stop outsourcing some part of our portion of what we rent third-party units, and all of that gives us also the opportunity to capture different clients with the regular business line. So at this point, I think it's going to be a matter of this relevance and also clients. So we're expecting to be as usual, and we're expecting also to maintain the same levels of the margins that you're seeing right now in the also above the 25% in that business. If you see the previous scores, you will find something between 25% and almost 29%.

Okay, very clear. Thanks a lot. Congratulations again.

Thank you. Thank you.

Our next question is from Pablo Monsivez of Barclays. Please state your question.

Hi. Good morning, guys. Thanks for taking my question. I have two quick ones. The first one is if you can give us some guidance towards the long-term margins of your logistics and tech segment. So we expect on the long term to see single-digit EBITDA margin. And my second question is if you have an estimate on the ROIC or the ROIS for the logistics and tech business. Thank you.

Hi, Pablo. How are you? This is Wolf. As I think we mentioned before, maybe in day, the evidence margins that we expect in the logistics and technology division will be around 10%. It's a mix of the different kind of services that I already mentioned, and we expect in the long run to be something around that number. In terms of the RIC that we expect also in this division, they are higher. I think it's hard to say any number in specific, but as you know and we mentioned before, we usually expect more than 14% in the regular business, and in this segment because we don't have any real investment or high investment, the ROIC that we expect is much more higher than that number.

So to give you an idea, because we see by project, we have projects that have 50%, other projects can have 80%, so it's much more higher ROIC.

Okay, perfect. So despite that your margins are nine ten percent you still have a very high uh ryc yes thank you thank you our next question is from martin lara of miranda please state your question good morning guys and congratulations for a very strong result

I have one question. What can we expect in the Traxporta platform and in the traditional cargo business during the rest of the year?

So we expect to grow a lot to Traxporta. We are like sending the growth from the cargo transportation segment to Traxporta. And we're going to see more conservative growth in the traditional cargo business. So we're going to grow only on very specialized projects that will need specialized equipment and have big barriers of entry in the traditional cargo. And the rest of the growth in that business, we're going to send it to Traxporta because we don't have to invest to grow. So that's why we are pulling the growth through transport.

Okay, great. Thank you very much.

Our next question is from Edson Moraya of Summa Capital. Please state your question.

Hi, good morning. Thank you for taking my question. I have one question. I was wondering if you can give us more detail about the performance of Traxy and if you have a guidance or maybe what are your expectations of roads on that specific part of your business?

Thank you. Yes. Hi, Edson. So we put on hold Traxy during COVID times. because we thought it was not the best season to launch it. We're gonna continue once we see it normalized, but we are still working in the platform and we see that it's gonna bring huge advantages for the clients and for new clients. So we're happy with this platform. So it will be something similar and transportable in the personal transportation business. just waiting for the correct moment to launch it.

Okay. I'll follow up on this. Is this going to happen in 2021, or is it more likely to be 2022?

Yeah, it's going to happen this year. We're just waiting to normalize the situation.

Okay, thank you, and congrats for the strong results.

Thank you.

Our next question is from Gordon Lee of BTG Pactual. Please state your question.

Hi, good morning. Thanks very much for the call. Quick question on the outsourcing law. I was wondering whether you could provide us Any insight in terms of the contracts that you have with your fleet, whether there's any impact from that outsourcing law that would be material to margins or to the way that the contracts are established? Thank you.

Hi, how are you? Gordon, this is Rodolfo. We don't see any heat on that matter. All the outsourced, we do it on the third party with a full transportation equipment. So we don't outsource people. That is the law that is coming out in Mexico.

So we don't see anything damaging margins or anything. And also we don't use any outsourcing companies.

And do you think that's something that might affect your competitors, though, or are they set up the same way as you?

There could be some competitors that use the outsourcing figure, for sure. But we hire directly our employees, so we won't have any impact.

Perfect. That's great to hear. Thank you.

You're welcome.

As a reminder, 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 two 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. One moment, please, while we poll for additional questions. Our next question is from Rafael Buerba of Santander Asset Management. Please state your question.

Good morning, Abby, Wolf, and Antonio. Thank you for the call and for the additional information on the new line of business. I have a question, actually, on a follow-up on logistics. Revenues in Evita expanded, well, more than doubled, but your last mile fleet only grew by 21%. So just to understand, if you could comment further on how much of the logistics business is is asset light versus asset driven, or did you have spur capacity in last mile fleet? How will we continue seeing the growth that division would be together with further CapEx, or is it mostly technology that doesn't require that much CapEx? So understand a little bit more about the business, what the typical service that you provide to clients, and what are the typical requirements customers that you have, so to understand a little bit more on the potential of logistics and especially in e-commerce. Thank you.

Hi, Rafa. This is Javi. So we set also an asset-type business model because as we saw, this business grew from 30 million that got revenues in 2019 to 90 million on 2020, so it multiplies by three times. And we only did a capex of $5 million on 2020, and the majority of this investment was in systems. So what we are doing is we are outsourcing the service regionally to make the last mile delivery. So that's a way we could grow without doing capex. And I mean, that's a, yeah, I think that's the answer. I mean, for your question. Or I'm missing something, Rafa?

So we should continue, we could continue seeing a high growth pace without requiring additional capex because, as you're saying, it's mostly asset-light. And what... Besides the mass delivery that you provide for clients, what type of technology are you offering? What's the typical service?

Yes, so that's where we're going to continue seeing the business growing without making capex investment. And we offer the service. We make tailor-made solutions for our clients in the whole logistic chain. So we can import the product from different parts of the world, make the cross permits, then do the transportation from the borders or the ports to the main warehouses, then from these warehouses to small warehouses around Mexico or to different stores, and then the last mile business. So we do the whole solution for our clients so they can hire everything or just a part of the services. So, for example, we have some clients as, let's say, Amazon. We work with them with the importation service. So we import, I think, the majority of the goods that Amazon sells in Mexico. And then we do also part of the last mile for them, but they do the warehouse management. But we have other... many clients of Chinese companies that we do the whole series for them. And we work with also Samsung, Forever 21, Liverpool in the last month business and many more clients. While growing in this division, every month we bring new clients to our client base. So that's what we do. And we're focusing to work with the large clients in Mexico. So for now on our B2B strategy.

Okay, very, very useful. Thank you and congratulations for the results. Thank you.

Our final question is from George Lauren Cow of Morgan Stanley. Please state your question.

Good morning, guys. Thank you for taking my question and congratulations on the results. It's just a quick reconciliation on the revenue exposure. You mentioned that you currently have 17% of net revenues related to e-commerce. And what we see here is that the logistics and technology segment represents around 27% of the consolidated top line right now. So my question is, can we say that the remainder 10% is mostly related to B2B transportation activity. Is that a fair statement? Thank you very much.

Hi, how are you? Yeah, the rest of the 10% that you're saying, of course, represents in transportation and also the warehousing we do to companies in Mexico. So that's the main two other income factors. lines that we have on the technology and logistic division.

Great. Very clear. Thank you.

We have reached the end of the question and answer session. I will now turn the call back over to Abhi Lisjain for closing remarks.

Thank you. I just want to share with you some final thoughts. As you see, Traction posted significant growth rates in a number of metrics, both financial and operational. There is a great expansion potential to the logistics and technology segment. I believe that Traction faces a great growth opportunity and is very well positioned to take advantage of it. We expect this segment to become a very important portion of our business over the long run. Traction management remains fully committed to keep working and focus on delivering. Thank you again for your attendance and have an excellent week.

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