Grupo Traxión, S.A.B. de C.V.

Greetings. Welcome to the TRACSEAN Second Quarter 2021 Earnings Call Results. At this time, all participants are in a listening 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. Please note this conference is being recorded. I will now turn the conference over to your host, Abby LeJane, Executive President and Co-Founder. You may begin.

Thank you. Welcome to Tracción's call. I am very proud again to deliver a very strong financial and operating outcome. Tracción moves forward according to plan. It's important to have in mind that the company has consistently delivered remarkable results, even with the pandemic. 2020 was a record high period for us. This year, as challenging as it has been, we continue to improve our past growth, which I believe is especially relevant given the macro landscape. The first half of 2021 looks very good. Revenues have grown 27% compared to the first half of 2020, while operating income and EBITDA have expanded 30% and 19%. respectively. Margin is over 20%, which is consistent with our long-term goal, mainly due to seasonality and to our logistic business, which carries a lower margin than traditional business lines. But perhaps the most important financial figure is the very impressive expansion of almost 57% in net income during the first six months. Moving on, our logistics and technology division continue to expand as we record significant progress. It is important to highlight that during the first six months of the year, this segment has grown almost 55% compared to the first half of 2020. In terms of our traditional business lines, there is an increase in consolidated kilometer volume, mainly driven by the evolution of our organic growth plan. In addition, we continue to improve the company's incremental ROIC as traction asset-light approach gains more relevance in our business. Moreover, in terms of sustainability, we released our integrated report of 2020 with all the proper information and development achieving ESG. You will notice a great progress. We are working to obtain two ISO certifications in terms of anti-bribery and compliance management. We'll keep you posted on the evolution of the process. Finally, Traction is very well positioned to capture the expansion of e-commerce. Since we do not see any kind of slowdown related to this channel, Quite contrary, we expected to continue to penetrate. With this, I conclude my remarks and will hand over to Rodolfo. Please, Rodolfo, go ahead.

Thank you, Avi. Good morning, everyone. Thanks for your attendance. One of the most relevant highlights this quarter is the expansion of more than 144,000 square meters in 3PL logistic warehousing. As a result of a strong commercial activity, with both new and existing clients. There are still many opportunities in this business, and we are very well positioned to capture them. Our commercial muscle is probably one of the strongest, and we carry much better margins than our competition. On a special note, we started operations of warehousing in the auto industry with two clients. Moving on to the last mile solutions, we achieved several developments as well. First, we continue to grow as we increase our package handling volume by 23%. We expanded our national footprint by more than 8% and started a cross-border operation in Tijuana-San Diego border for e-commerce clients. Furthermore, we kick off our first internally developed cross-doc solution for e-commerce, which will enhance significantly these processes. In terms of cargo, you can see a healthy expansion, both in revenues and kilometers, which was mainly driven by organic growth in our dedicated fleet format for specialized services. We have enhanced our presence in the cross-border market and managed to generate more kilometer volume in this service. Tracción continued its fleet expansion and renewal program as budgeted. and initiate an implementation of a newly developed transportation management system through Traxporta app to optimize, control, and better manage our fleet, which will further enhance our productivity and continue to ensure our high-quality services. Finally, as you can see, our personal transportation fleet show an expansion compared to the same period of last year as a result of our organic road plans as we continue to see very attractive opportunities in this segment. It is important to mention that we continue to run this segment with over-demand, mainly due to social distancing measures implemented with industrial clients. In that matter, we're currently mapping out a potential reduction in such over-demand and the eventually reopening of schools. Well, with this, I wrap my remarks. 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.

Thanks, Rodolfo. Hello, everyone. Tracción delivers great financial metrics this quarter. Before getting into discussion, it is very important that you bear in mind that the results of the second quarter of last year reflected several benefits and savings in items such as rental facilities, salary cuts at top management level, negotiation with suppliers, and other support we got from other parties, given the uncertainty that the contingency brought. This quarter, we no longer enjoy such benefits and savings, mainly because things have stabilized considerably compared to what they were at the first months of the pandemic. Some of our figures, including EBITDA margin, reflected so. Getting into business, as Avi mentioned, The most important financial metric is the growth of both net income and earnings per share, which post an increase of 60.9% and 62.2% respectively. Furthermore, all our financial figures show robust growth ratios from top to bottom line and continue operating with a very solid balance sheet, a comfortable cash position and a strong capital structure. Speaking of the first half of the year, As you can see, we continue with a double-digit growth progress. The six-month figures look good in financial terms. Revenues, operating income, and EBITDA grew 27%, 30%, and 90% respectively. We have further achieved a very efficient working capital cycle and improved our debt profit. There are a couple of details regarding costs that I want to discuss. The first is that we recorded an important increase in the cost of fuel. which was basically caused by two phenomena. First, the kilometer volume, both in cargo and especially in personal mobility, increased significantly, which drove our fuel requirements accordingly. And the second is a general increase in fuel prices of more than 11%. In addition, there was a disruption in fuel imports that temporarily affected the supply and pricing of such elements. We expect to reflect the pass-through of such increases to our clients within the next period. as we have done in the past when we experienced such price spikes and we further expect the situation to normalize as we move forward in the third quarter. The second detail is that the maintenance cost increased more than 80% and was mainly due to a deferral of maintenance programs in the second quarter of last year. And that has been progressively normalizing and also to the maintenance we have to do to the units we rent to third parties to cope with over demand. In absolute terms, This cost is very similar than the one of the previous quarters. Shifting gears, in terms of debt, our net debt to EBITDA ratio was 1.54 times in the second quarter, compared to 1.8 times in the same period 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 4 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 continue to be in a privileged position in financial terms. Finally, in terms of CAPEX, we exercised roughly 537 million pesos this quarter, which includes expansion and renovation across the company. We are on schedule with our capital deployment plan for 2021 and expect to continue over the next quarters as per our guidance. Having said that, I'll hand over to Tonio who will discuss other financial details. Please, Tonio.

Thanks, Wolf. Hello, everyone. I will now discuss the most important financial figures in more detail. Wolf and Ari already mentioned the most relevant item to point out, which is a very impressive growth of 60.9% in net income. In terms of top line, consolidated revenues grew 28.8% compared to the same period of last year, to reach more than 4.2 billion pesos, which is in line with our growth plan. Revenues were mainly driven by expansion and increased operating volume in each of our three business segments. Moving on, operating income grew 15.6%. Growth in this line was partially offset by an increase in costs, mainly driven by fuel and maintenance, which Wolf already discussed. Moreover, even though the above effect also affected EBITDA, margin was 20.1%, which is in line with our long-term goal. In terms of costs, despite the unusual increase in fuel and maintenance costs, the rest of them follow virtually the same trend as in previous quarter. It is noteworthy that the cost of facilities, services, and supplies increased 24.1%, which is a much more normalized figure compared to previous quarter. It is precise in this line where we record the outsourcing of third party fleets and logistics services, which by the way, continued expanding. Shifting gears, comprehensive financial result recorded an expense of 138 million pesos. mainly driven by a lower interest expense and a loss in foreign exchange. We continue to improve our cost of financing, as you see, through our constant efforts to seek for the most efficient sources. There is yet another very significant aspect to highlight. Tracción reported high growth in both top and bottom line of 28.8% and 60.9% respectively, while total assets grew only 3.1% compared to the former periods. This is proof that our asset-light approach is evolving successfully. On the other hand, total debt decreased 208 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 19.1% on a year-over-year basis. Well, thanks for your attention. With this, I wrap up my remarks, and I will now open the floor to Q&A.

At this time, we will be conducting a question and answer session. If you'd 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'd like to remove your question from the queue. For participation using speaker equipment, you may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Pablo.

Monterey's with Barclays please proceed with your question hi good morning thanks for taking my question the first one is on the personal transportation business line it has been growing quite significantly over the last few quarters how sustainable is this growth rate and what are you expecting going forward my second question is on the average revenue per kilometer it has been flat Can we expect an improvement soon, or shall we just assume a flat performance going forward? Thank you.

Hello, Pablo. This is Rodolfo. How are you doing? So the personal transportation business, we see it continue growing through the next quarters. Of course, we had a big problem growth really fast because of the social distancing that the industry had had in the last year. But other than that, the business, we see it growing as usual for the past years.

Okay. And on the average kilometer question.

Pablo, could you please repeat the second question?

Yes, we saw this quarter that the average revenue per kilometer has been flat. Can we expect an improvement of that item soon or not?

I think if we're speaking about the average per kilometer in the personal size, we're waiting to see maybe the similar figures. In the cargo side, if you remember, we have some exposure also to the FX. So in this quarter, as you can see, or in the full 2021, we'll be aligned to 20 pesos per dollar. So we're not expecting, unless we have something different, something similar in the average per kilometer also. So maybe we'll be a little bit flat, and we're waiting to put in place more things that could get some efficiencies for the company in the cost side.

Okay, thank you very much.

Our next question is from Alex Demichelis, who is a private investor. Please proceed with your question.

Good morning, gentlemen. Alexandra Demichelis from Now Securities. A couple of questions, if I may. The first one is, I think, Wolf, you were saying that you haven't been able to pass through the cost increases on fuel, and maintenance costs have been higher this quarter. So should we expect those to be kind of passed through in the second half of the year and then we should see higher margins in the second half of the year? That's the first question. And then the second question is maybe for Rodolfo. I think you were mentioning about your commercial initiatives and increasing in square meters of warehousing. So how should we think about where you think you can be in terms of square meters of warehousing by the end of the year? And how do you see the fleet between now and the end of the year?

Hi, Alejandro. How are you? In terms of fuel and maintenance costs, if we try to look for the previous quarter, you will see that they are very aligned, the figures between the first quarter and the second quarter. it was a little bit difficult to compare with the second quarter of the last year. Remember that we were in the middle of the contingency. So if we try to look back just for the previous quarters, you will see that the figures are very aligned more in the maintenance side. And in the fuel cost, yes, there will be some disruptions in the previous quarter, in the second quarter, which affect temporary supply and also the prices. And we're expecting to make the pass through to our clients in this in this next future, in this period. So yes, we're expecting a bit high margin for the next quarters as the seasonality of the business is very common. So yes, we're expecting to make the pass-through in this month. Thank you.

Hello, Alejandro. This is Rodolfo. So regarding your question about the square meter of warehousing This business, it has a long period of incubation for the business side, so for the new business. So we are expecting to grow. Right now, we're around 600,000 square meter. We're maybe trying to grow for this year around five more percent in square meters. But we are having a big commercial push here. there's a big opportunity for us to keep growing in this segment. And regarding the fleet size, yeah, we expect to have a small grow in the passenger, but it will be average what we had on this semester.

Okay, that's great. Thank you.

Thank you. And our next question is from Martin Lara with Naranda Global Research. Please proceed with your question.

Good morning. Congratulations for the strong results. I have one question. Do you think that the personal mobility business will continue to be the main growth driver during the rest of the year?

Hi, Martin. This is Javi. Yes, we expect the personal mobility will continue to be a very strong growth driver, but also the e-commerce business that we are serving too. So those are the two main drivers of growth from the company.

Okay, thank you very much.

You're welcome.

And just as a reminder, if you have any questions, you may press star one on your telephone keypad. Our next question is from Sensen Nerdia with SUNY. Please proceed with your question.

Hi, good morning. Thank you for taking my questions. I have two of them. The first one is regarding on debt. You mentioned at the beginning of the call that you are expecting to reduce your debt. So in that regard, Could you give us a little bit of color about in what amount are you planning to reduce your debt? It's going to be for the following months, maybe, in the earnings relief. You mentioned that you have 9% of the total debt due to the next 12 months. So maybe more color about that. And could you give us an update about FRAXI? Is that something that you're planning to explore ahead? Or maybe it's going to be like only a pilot and then see how the market considering. Thank you.

Hi, Jason. How are you? This is Wolf. Regarding about the debt, we're expecting to be something around 6 billion pesos. We're around 6 billion, 6.5 billion pesos. So it should be something around that range. And if you see that the numbers and the expecting of the guidance of 2021 for the company, if we remain similar in terms of debt or something a little bit less than we have until today with the investment that we have planned, Obviously, the ratio will go down. So, we expect to maintain something around 1.5 times level in terms of net debt, EBITDA. So, will be something around that, between 6 and 6.5 billion pesos. Remember that we still continue to grow the company. So, that will be at the leverage in terms of ratio.

Okay. This is Rodolfo. So regarding the Traxy question, we're now already putting the app to work on some operations, and it's working really good for us, and we think it's a good opportunity for business in the future. So we're really optimistic that we can do good things there, and we're now putting it to test in some of our operations and small operations.

Okay, great. Thank you so much.

Okay.

And again, as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad. Doing so will ensure you will be joining the Q&A queue. And it looks like we have reached the end of the Q&A session. Therefore, I will now turn the call back over to Abby Lejeune for closing remarks.

Thank you. Traction has delivered very good results consistently. This period was not the exception. We continue to move forward with a strong positive trend. There are very interesting opportunities in our market that might boost the company's growth, and Traction is very well positioned to capitalize on them. We are optimistic with what we see moving forward. Thank you. Have an excellent week.

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