Grupo Traxión, S.A.B. de C.V.

Good morning. Welcome to the Traxian Third Quarter 2021 Earnings Call Results. At this time, all participants are in a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Avi Litson, Vice President and Co-Founder. Sir, the floor is yours.

Good morning. Welcome again. Let me start by saying that this strong set of results especially relevant because traction continued to post notable growth rates over those of last year, which was a particularly challenging period, but very beneficial for us, mainly due to an excessive demand of several of our services, which has been normalizing. Despite of that, during this year, we have shown an attractive growth. There are several highlights in all fronts, financial, operational, ESG, and commercial. Our numbers speak by themselves, especially the accumulated results over the first nine months of the year. Rodolfo Wolf Antonio will provide you with more color and details, but I just want to share with you some thoughts. The company delivered record high figures in revenue, EBITDA, and net income. but perhaps the most important number to bear in mind is that accumulated net income for the nine months ended in September is more than 52% higher than the same period of 2020. Moreover, traction continues to leverage the balance despite the growth, while running at a 1.56 times net debt to EBITDA. There is something worse mentioning in terms of depth. Two of our rating agencies have increased their rating on Tracción, which is great news since such ratings confirm the strength of our business model and balance. In operating terms, our logistics and technology segment continues to expand in line with our objectives. Our logistics services that serves the e-commerce channel develop and penetrate. And we believe that there is still a tremendous opportunity for us. In this line, I want to let you know that we want to maximize the growth of this division, which we like a lot because it's asset-light nature. So far, we have been able to tackle opportunities and to generate organic growth. but we're also open to engage in M&A activity in this segment in order to achieve higher goals. Tracción has become a relevant participant in the last-mile solution business and a key player on the supply chain. There has been a paradigm shift on consumption patterns that is here to stay, and Tracción has been very well-positioned to continue to capture such opportunities. Now I handle the call to Rodolfo. Please, Rodolfo, go ahead.

Thank you, Avi. Good morning, everyone. Welcome. There are two special operational highlights this quarter. First is that we continue to improve our profitability in the 3PL business, since we carry on better margins than the competition. And second is that there is a very positive balance in the last mile operations. with significant improvements in the efficiency side. There is one element I would like to mention before we enter into further discussion. As all of you are aware, there is a global shortage of microchips that has affected several industries, especially the auto sector. This situation has not been beneficial for Traction because we have been experiencing delays in deliveries of trucks and buses, which has had an impact in renewal and expansion plans. We're working out with our fleet suppliers and managing our demands well into advance in order to sort out this situation favorably and with no further delays for 2022. Moving on, in terms of last mile solution, Traction has increased more than 35% of his handling volume and has accomplished a 98% rate on on-time deliveries. This was achieved mainly by carrying out technology improvements, and extended training programs, which have resulted in increase of level of service and client satisfaction. Perhaps one of the most relevant operational highlights this quarter is the expansion of more than 146,000 square meters 3PL logistic warehousing because of our strong commercial activity. Several existing clients have requested expansion in their capacity, while we continue to gain new accounts. We have complied with all certifications and audit for our clients. and recently obtained a best practice certification because of our inclusive organizational culture. On the personal transportation segment, we experienced some operational adjustments due to a more normalized success in demand generated by the contingency and the schools reopening. In mid-July, we started shifting fleets and preparing units, which resulted in a pre-operating cost and expenses which have, at the moment, were not offset by revenues from schools. since operations and billing process started in September. Because of that, we believe that there is no full comparability between quarters in this specific segment. Finally, in terms of mobility of cargo, there was a growth of more than 74% in refrigerated cargo operations and a good improvement in margins also. We continue to see market opportunities Since we entered this business three years ago, Traction has built a very strong competitive position, especially in the cross-border markets to and from the United States. Well, with this, I wrap up my remarks. As you can see, it was a very busy quarter. Thank you for your attention. I will now hand it over to Wolf. Please go ahead.

Thanks, Rodolfo. Hello, everyone. Once again, Traction delivers favorable financial metrics this quarter. Most important is that revenues, EBITDA, and net income post record high figures, and the company continues to operate with a very solid balance sheet, a comfortable cash position, and a strong capital structure. Moving into results, it is worth taking a closer look at accumulated figures. Revenues, EBITDA, and net income have so far recorded growth of 22.5%, 14.3%, and 52% respectively. while net operating cash flows have improved by 150 million pesos. These are truly remarkable figures, especially as we approach the end of 2021, and the comparability between quarters is not that accurate as we run the company with a temporary over demand during the third quarter of last year. One of the main highlights is that the general expenses recorded at 226 basis point efficiency as a percentage of revenues. This was driven by a strict control, economies of scale, and by our synergies program that has proven to be successful and sustainable over the long term. There are a couple of details regarding cost that I want to discuss. First, fuel cost, which is explained by three reasons. One, there was a general increase in prices of 11.5% compared to the same period of 2020. Two, there was a growing kilometer volume of our cargo operations, and three, pre-operating expenses due to fleet rebalancing and reopening of schools. Then, there is the cost of facilities, services, and utilities, which also grew more than revenues, and it is mainly due to the increase in logistic operations that we outsource with third parties. If you notice, this cost as a percentage of revenues has been normalizing over the past few quarters. Shifting gears, in terms of debt, Traction has been significantly improving its cost of financing, reflecting the favorable conditions under which the company handles facilities and managed refinancing. Net debt to EBITDA ratio was 1.56 times in the third quarter compared to almost 1.69 in the same period of last year, which basically means that we continue to grow and expand our business while reducing the overall leverage of the company. In general, There is no significant change in our total debt over 2021. As you can see, we continue to be in a privileged financial position. Finally, in terms of CAPEX, we exercised roughly 396 million pesos this quarter, which mainly includes expansion and renovations across our traditional business lines. We have invested roughly 1.3 billion pesos so far and are on schedule with our capital deployment plan of 2021. Having said that, I will hand over to Tonio who will discuss financial and other details. Please, Tonio.

Thanks, Wolf. I will now provide more color on the quarterly figures. Revenues are up more than 14% and the company's expense control has been truly outstanding. The result is an impressive growth of 45% in net income while posting other record high metrics. Now, there are two relevant matters to discuss. The first is that the logistics and technology segment continues to expand and now represents roughly 27% of total revenue. And the second is the growth of the personal mobility segment, which may seem a little soft, but it is not. It's far from that. The main thing to bear in mind here is that in the same period of 2020, we ran this business with an unusual over-demand, which we knew was not going to be sustainable. In this quarter, though, this situation has normalized as many clients reduced their increased capacities and schools reopened. This posed a huge operational shift that we had very well mapped out and was expected eventually, but nonetheless caused us to incur in preoperational costs and expenses that dampened the results of the segment. If you take a look at the accumulated figures, you are going to see a very healthy performance in the segment during the year. Moving on to sustainability, we have been very active on the ESG arena. On the environmental front, we are very proud to share that in July, Tracción completed the Carbon Disclosure Project Questionnaire, which is the largest environmental and climate change information system in the world, and one of the most trusted platforms. Through this, and together with other 30 companies in Mexico, Tracción is now part of the first generation of the Climate Ambition Accelerator of the United Nations Global Compact. This program will enable us to gain knowledge and skills about greenhouse emissions reduction according to global warming targets and scenarios. Moreover, the company supported the transportation of hundreds of volunteers who helped refurbishing a forest in the state of Mexico, and to build emergency housing for people in low-income communities where heavy rain caused flooding. Also, Tracción handled the shipping and delivery of several tons of food for victims of hurricanes and rain in the states of Jalisco and Veracruz. The company also obtained international standards ISO 37001 for anti-bribery practices and ISO 1900 for compliance management in terms of money laundering and fiscal prevention, creating a much more robust management system to prevent, detect, and deal with such situations and encouraging a better compliance practice. As you can see, we have been very busy on the sustainability arena as well. And with this, I wrap up my observations. Thanks for your attention, and I will now open the floor to Q&A.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Your first question is coming from Louis Yance. Your line is live.

Thank you. Hi, guys. Congratulations on such a great quarter. Two questions on my side. The first one is on the personnel. And I understand all the changes you've mentioned. You're going back to kind of normal. The extra demand is being taken away and school's kind of coming back. And the operational inefficiencies that you mentioned you had throughout the quarter. But despite that, you know, your margins are still quite robust. I mean, to me, yes, I understand the comparison. It's not fair versus last year, but you know, 29% margins is still pretty good. So just wondering, you know, when I look back to, I don't know, 2018, 2019, kind of more normal years, let's say, your margins were 22 to 24%. So just wondering as things continue to normalize, what's the new normalized level of margins that we should think about once we remove all this one-offs, extra demand, and once you remove also the the operational inefficiencies. So that'll be my first question on personal. And then the second question, if you could talk a little bit about the fuel price increases that we're seeing throughout the country and the kind of lag that you may have or not between that and passing that on to customers and whether we should think of fuel as a potential risk to margins. Thank you.

Hi, Luis. How are you? Good morning. This is Wolf. About the margins in the personal division, as you can see, not just for the previous year, also for 2021, we're looking for similar margins, so we're expecting to continue about the same levels. We're not seeing something different about that, so I think even if all the situation would normalize about the temporary over-demand, we can continue with the same margins around the same levels. and speaking about the the fuel or the oil prices i think uh have been able also to make the the pasture for the clients even it could take a little bit longer if it's if it's continue with the same trend but but again as you know this is something that all the market it's very common to to receive like all of these uh matters as a as a pasture to the clients and and again i think all the offer and all the demand, it's getting maybe some normal by the end of the year. And we hope that we can manage this the same way that we're doing or the same way we did in the past.

Thanks, Wolf. And just a follow-up, I guess, on the logistics and technology division. I mean, all this amazing growth that you're seeing, as we think about the drivers of it, How much do you think is just market growth that you're capturing? How much you're actually gaining market share? And if you're gaining market share, which I think is the case, what are you doing different versus competitors such that your clients come to you, hey, I want to spend. Hey, I want to do this thing with you or not. What's been driving that better market share gain versus some of your peers in the industry?

Hi, Luis. This is Javi. So I believe we are growing because of two things, market growth and also gain share of market. We have the two components. And I believe we are gaining market because we design tailor-made solution for our clients where we understand what they need and we create special solutions and we become very competitive for them, not only in price but also in quality of the service. So remember, we have a big infrastructure in Mexico. So we can offer solutions that are very competitive. So I guess that's why we're gaining new clients every month.

Great. Thanks a lot, Avi and Wolf. And congrats again on the good quarter.

Thank you, Luis.

Your next question is coming from Pablo Monsvenz. Your line is live.

Hello, guys.

Thanks for taking my question. Just kind of a follow-up on the personal transportation business. Schools are back and you're dealing with issues in the location of your units, but how we should think about this business line because You mentioned in the past that there was a structural shift in how you transported, for example, workers in a factory and that client now is demanding two buses instead of one in the past because of social distancing. And now you have schools back. So should we expect a much higher level of demand structurally for the next years? If so, I don't know if you have any idea by how much. That's my first question. My second question is a follow-up on the microchip shortages. I understand that your replacement policy has been affected and you're not receiving new trucks, but how are you guys working with that? I mean, are you charging to clients a bit more because of that particular truck is just harder to replace? Or how are you dealing with this and thinking that perhaps the situation will go for 2022? How do you think it will affect your overall financial metrics?

Thank you.

Hi, how are you, Pablo? This is Rodolfo. So regarding the personal transportation business, We have been seeing through the year a normalization of this service. So it didn't went from zero to 100 in one month. So it has been normalizing through the year. Now that schools are back, we prepare since June and July for this change. And we're seeing that now all the clients are working normally or trying to work normally. And we've seen this through December, maybe we go to normal transportation business as we had before the COVID issue, right? So I think we see that that will happen in these months. And regarding the microchips question that you asked, the delays that we have been having from our suppliers, it has been for some months. So we really don't have a big effect on our cost. We can continue doing the service with the buses that we have. We have had a little delays on our growth because we were planning to grow a little earlier this year, but we have managed to have that business run through, especially with logistics. So other than that, I think... we were trying really hard to work with our suppliers so we can have not big delays on next year so we can have buses and trucks on time.

If this situation extends for 2022, will you kind of translate this into higher prices for clients or no?

Well, we know that this will transfer to 2022. Now it's a That's a thing that everybody's saying. So we know on 2022, we will have some delays. But the good thing now is that we know what will happen in 2022. We're preparing for that. And we're making our numbers and making our statistics for next year accordingly to the dates that we know we're going to receive the bus. So I don't think this will affect exactly a price increase to our clients. You know, there's a shortage of transportation in the industry that maybe will help the price increase, but not exactly the renovation of trucks and buses. Okay, thank you.

Your next question is coming from Martin Lara. Your line is live. Thank you for...

technology segments going forward hello hello Martin I think your line is cutting you cannot hear the question sorry can you hear me yes perfect okay

and logistics and technology segments going forward? And do you believe that they should stay at these levels or they should improve a little bit even economies of scale? And the second one is what can we expect in terms of sales growth in the mobility of personnel going forward?

Can you repeat the first question, please?

Margins. It is cargo and logistics and technology.

Hi, Martin. This is Javi. So usually the margins in logistics in all the world at around 10%. But I mean, our business is growing very fast. So I believe that once it gets more stable, the growth, the margins can go up, but we're planning to continue growing for the next year. So I think it's a good way to project the margin on the level that they are right now because of our higher growth. And talking about what we expect to grow in the mobility of people, we expect to go back to normal, so the way it was before COVID. So now, I mean, we have a big pipeline and we're seeing growth in the business. So that's what we expect to go the way it was before COVID.

Okay. Thank you very much. You're welcome.

Your next question is coming from Steven Trent. Your line is live.

Good morning, gentlemen, and thanks very much for taking my question. Kind of two quick ones for me. You know, the first, when we look back at Traction's, you know, the run-up to the IPO and just after the IPO, you were doing acquisitions and you moved away from that. But when we think about moving forward, you know, is it conceivable that Traction's investments could maybe include uh more investments in technologies rather than uh buying other companies and the second question would just love to get you know your high level thoughts on what you're seeing uh in the competition on the trucking side thank you hi steven this is javi so we see a

a big opportunity in logistics and technology. And we like that business because we are growing a lot. And we're growing a lot without investing money, talking about the organic growth. So we want to grow that division in the company. So now we are more active and more open to make an acquisition or some acquisitions in this business line. we believe that that will be a good opportunity for traction. So we have done that in the past and we're successful. All the cases that we did on acquisition, they were successful and the companies grew, expanded margins, and we could do the integration of them very well. So now we're open to do some in the logistic and technology business. And talking about crocking, I mean, we see that the market is healthy. We see a growth. Traction has a lot of competitive advantage compared to the competition in Mexico. So we see an opportunity also to grow there. But we are growing, we are choosing our growth there more specialized businesses with high barriers of entry. So for example, refrigerators or transportation of all derivatives. So products that are not easy to move. And we like also the revenues in dollars. And the normal growth for that division we're putting to Transporta on our app that we have. So we do it through logistics and we use third parties to grow. So we're gonna seek in the division a growth on the specialized services and through Traxporta, through third parties and charging us. I want to remember you that we charge a commission between 15 to 20% for the third party companies that we introduce to the clients. And that's a business for transport. So we're planning to grow that business through there.

Okay. Thanks very much for that. You're welcome.

As a reminder, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone now. Your next question is coming from Edson Maguia. Your line is live.

Hi, good morning, and thank you for taking my questions. I have two of them. Because you mentioned that because of supply chain shortage around the world, you may have difficulties to renovate your fleet. So, however, could you give us a little bit more detail about the CAPEX specifically in wheat divisions? extend that capex and the second one is regarding on could you give us a little bit an update of fraxi um regarding um you plan on organic growth thank you hi edson this is tony good morning thanks for your question um

In terms of capex, we have like a rule of thumb because you know that the policy of the company is to keep the cargo trucks for some years and then we change them. So the rule of thumb is around three to 3.5% of total revenues of the company is the renovation capex for the year. I don't know if I answered your question correctly.

With the vision, for example, Specifically, let's say technology or mobility, personal mobility, in what percentage the fleet renovation will be, despite of the fact that supply chain shortage may be difficult to renovate, let's say, the whole fleet or part of the fleet as you plan it at the beginning of 2021?

Okay, so we invested, in this quarter, we invested six million pesos in technology. The bulk of the CAPEX is for renovation of the cargo fleet and for expansions in the personal mobility fleet.

Okay, okay, really great. Thank you, Daniel. And regarding infraction,

Yeah, so TRAXI, it's developing. We're beginning to offer logistic services, so something similar than Traxportabot for personal transportation. It was on hold during COVID. but now it's reactivating, and we see, I mean, already the company, the Traxy, as a platform, is profitable, and it's growing, and we're very happy with that because we see that we're going to have a lot of growth in that app.

Okay, really good. Thank you so much.

Your next question is coming from Louis Yance.

your line is live hi guys I'm back just a quick question on ESG and I appreciate all the efforts you guys have been doing in in that front one of the things that you know we typically miss from companies is two things one is you know disclosing the data historically in the progress and you've done terrific there so congrats there but then the other part is typically to have a target in terms of those measures. And that's something that, I mean, as I look at your report, you still seem to be missing. Is that work in progress in terms of, I don't know, fuel consumption intensity or the scope emissions intensity that you published? You're moving in the right direction, but do you have any medium to long-term targets that you're ready to disclose at some point? And I guess a related question there, and your business is clearly you know, diesel consumption is big, just wondering what are your plans to electrify your fleet down the road so you make even further progress there? Thanks.

Thanks, Luis. Of course, we are working on that. We are going to disclose eventually our targets in the short term. And related to electrifying the fleet, We are not there yet. We think that, of course, when the technology is available in Mexico and when things are ready to move. But right now, at this time, we don't think is the right moment.

Great.

Thanks. Terrific. Thanks, Antonio.

There are no further questions from the lines at this time. I would now like to turn the floor back to Abby Litson for closing remarks.

Traction continues advancing and posting healthy growth rates in all of its divisions. Our asset-light business keeps expanding fast and taking advantage of opportunities as the e-commerce channel penetrates and Traction will strengthen even more its competitive position in such markets. I am seeing interesting opportunities out there and excited about what I see moving forward. Thanks again for your attention and have an excellent week.

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