Grupo Traxión, S.A.B. de C.V.

Good day, ladies and gentlemen, and welcome to the TRAXION 4Q21 and 2021 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Abhi Litzen. Sir, the floor is yours.

Good morning. Welcome again. I'm very pleased to speak to you after another outstanding year. TRAXION, has maintained its leadership position in the logistics and mobility industry. The company posted record high figures in net income and revenues and has broken its own records. But most important is that we continue to grow after two of the most complex years in recent history. The COVID contingency and the semiconductor scarcity limited our growth. but Traccion achieved the goal nonetheless, mainly due to a better than expected outcome of our asset-light division. During 2021, Traccion started reporting its logistics and technology segment separately, and it performed beyond its forecast. This division generated revenues of more than $220 million in 2021, which was beyond of our initial expectations. And such contribution now represents more than 27% of total consolidated revenues, well ahead from the original outlook. Moreover, just the growth of revenues from this segment represented basically half of the income growth of the whole company. We're very excited about what we see moving forward in this division. It is worth mentioning as well that Traccion has evolved quite favorably in terms of ESG. If you look at our report, you will find some interesting achievements that place us on a vintage point in such matters. We're one of the few Latin American companies to be included in the Dow Jones Sustainability Mila Pacific Index. Shifting gears, We just released our guidance for 2022, which considers a growth of approximately 13% in revenues and a margin around 19% figure. This margin level is mainly due to a higher contribution of the asset-light division that typically carries margins around 10%. To achieve such growth, we are considering a capex of approximately 3 billion pesos during the year. For 2022, we prefer to continue to be conservative and prudent, especially given recent events in Eastern Europe. Uncertainty prevails and we must act accordingly. Please be advised that this guidance considers only organic growth. Now, in terms of M&A, as we have been mentioning, we are resuming our activity and have some things lined up in the pipeline. mainly for the logistics and technology division, which we expect to announce in the coming months. As you see, we plan to privilege the expansion of our asset-light business lines while continue to take care of our traditional segments, which will allow us to develop our logistic interests. In 2022, Traction will keep moving ahead with profitable steps. Thanks for your attention. I will now hand over to Rodolfo.

Thanks, Javi. Hello, everyone. Welcome again. I just want to share with you some interesting facts, mainly on the operating front. As Javi just said, this was a very good year for our logistics segment. In terms of 3PL, we exceeded the goal both in new clients and revenues. Traction expanded his warehouse footprint by more than 50,000 square meters, and became significantly more efficient in space utilization and overflow management. During the fourth quarter, the company introduced an app for both clients and staff members so that they can have real-time information about their merchandise and processes throughout an accurate and reliable tool. We will continue to approach this business as the sector gains more penetration. Traction has a very strong commercial force in place and is very active on client targeting. Moving on, our last mile solution business continued to grow, mainly due to increase in e-commerce activity. In this division, Traction grew more than 42% its handling capacity and started a series of new initiatives to provide 100% product visibility. We further enhance our website to improve customer experience and show them a new image. Last mile solutions represent a great portion of our logistic and technology division. And we expect a healthy growth rate in 2022, as many logistics services continue to gain penetration in Mexico. And we capitalize on such opportunities. Moreover, and speaking about traditional business lines, we've made significant progress on the personal mobility segment. We finished 2021 with a very strong commercial momentum that paved the way for growth in 2022. We started operation with several clients totaling 300 new buses. We also kick off trails to automate some administrative processes. With this, we are one step ahead of competition in our client needs. Finally, in terms of mobility cargo, the company became more efficient. We focused more on more profitable services, such as refrigerated and petrochemicals, which typically carry better prices and margins. If you see in 2021, income of the division grew 11.5%, while kilometers volume increased 8.5%. And revenues per kilometer expanded 4.2%. This means that we generated more kilometers and we are able to sell them at a better price with a marginal increase in cost. As you can see, we had a very busy quarter and a very fruitful year. With this, I wrap my remarks. Please, Wolf, go ahead.

Thanks, Rodolfo. Hi, everyone, and thanks for joining. I will now discuss some financial metrics. Tracción posed record high revenues and net income in 2021. The company ended the year once again with a solid balance sheet, an adequate capital structure, healthy leverage levels, and a comfortable cash position. Roughly, half of revenue growth was driven by the logistics and technology segment. However, our traditional business lines posed very strong revenues as well. Moving on to the bottom line, there are two things I would like to point out. The first is the cost of fuel, which as you can see grew unusually more than revenues in both periods. This is mainly due to the increase in prices in the second half of the year that will continue to be passed through clients during 2022. The second is that there is an efficiency of 296 basis points as a percentage of revenues in general expenses. This is one aspect we have always highlighted. Our efficiencies and synergies plan is sustainable over the long term, and has allowed us to strengthen our corporate, operating, and commercial structures in such a way that we can continue to be more and more efficient as the company grows. Furthermore, Traction continues to post impressive growth rates while progressively decreasing leverage levels. Total debt increased only 4.8% compared to 2020, which is significantly lower than other financial metrics such as revenue, operating cash flows, EBITDA, and even net income. Moreover, and most important, our interest expense decreased in absolute terms, which is very good news. Finally, in terms of CAPEX, TRAXION reached its goal by investing roughly 2 billion pesos, which were allocated to finance organic road opportunities, mainly in the personal mobility segment, renew cargo fleet, acquire new trailing equipment, and make some upgrades in our tech platforms. In this line, and following Avi's remarks on our guidance, it is important to mention that our capex for 2022 will probably be subject to different timeframes compared to other years. This is mainly due to the disruption on global supply chains that could change the timing and effect of such investments. Nonetheless, our plan is to keep both our investment schedule and amount as planned. With this, I end my remarks. Thank you. And I will hand over to Tonio. Please, Tonio.

Thank you, Wolf. Hello, everyone. First, I want to point out the comparability between quarters. Let's bear in mind that the fourth quarter of 2020 carried a different demand dynamic, mainly due to the COVID contingency, which caused a shift in our operating structure. During 2021, particularly in the second half of the year, both demand and operations started to normalize progressively. Having said that, we achieved our goal, but with a different mix. Revenues are up both in the quarter and the year, and expense control has been truly outstanding. Net income posted a record high figure for the year. However, net income in the quarter came softer than that of the same period of 2020. This was mainly due to the kickoff of some logistic businesses that triggered higher income taxes. But there is nothing unusual in terms of top line. Moving on, if you look at margins in the cargo segment, you're going to see some compression. This has to do precisely with what I mentioned earlier about comparability between quarters. But actually, the margin recorded in the quarter is higher than those of the past three quarters of 2021. So it's good news. Moreover, I want to highlight the performance of the personal mobility segment. I think that the margin posted for 2021 is truly phenomenal. This segment continues to present us with strong growth opportunities, and we plan to keep expanding by selecting only the most profitable ones. Shifting gears, on the ESG arena, we made significant progress in 2021. We have discussed in previous calls all the milestones achieved during the year, but I want to point out a couple of achievements in the fourth quarter. First, our results of the carbon disclosure project were published in December. Such result placed us in the conscience category, which is the same level of the regional average of North America and above the transportation sector globally. This is a very important achievement. And second, also in December, and together with 29 other companies, Traction is now part of the first generation of the climate ambition accelerator of the United Nations Global Compact. The target of such initiative is to establish clear goals of greenhouse gas emissions. Please refer to the links provided in the earnings release for further information. Well, with this, I end my remarks and will open the floor to Q&A. Operator, please.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Alejandro de Michelis. Please announce your affiliation, then pose your question.

Good afternoon, gentlemen. Alejandro de Michelis from Now Securities. Congratulations on the results. A few questions, if I may, please. Avi, you mentioned you already have something lined up on the M&A. Could you please tell us a bit more how you are thinking about that? What are the parameters? How big should we expect this to be? Would that kind of affect your leverage, your kind of buybacks? That's probably the first question. I will then come back for more.

Hi, Alejandro. Yes, so as we have been mentioning, we are more active in the M&A arena to grow the logistics and technology division. So we are looking for companies that will be strategical acquisitions that can allow us to enter into or to offer a new service to the market or to enter into a new region. So those acquisitions will give us this opportunity. Traction has a policy to be leveraged always below 2.5 times net debt to EBITDA. So the company will remain achieving that policy And so we see this as an opportunity so we can grow our asset-light business more rapidly. Okay.

And the buybacks, you would still expect to conduct those?

I mean, we expect to continue to be active in the program. Mainly, we see I mean, that is a good opportunity to continue with the buyback program because of the price that we're looking that is in the market. So we're going to be active also in the buyback. Okay, that's very clear. Thank you.

And then on a separate question, more on the guidance and the margins and so on. First, we have seen the Logistics and Technology Division having a bit of kind of shift in margins in the fourth quarter How should we expect that to evolve into 2022? And let's say, how we should think about that 19% margin that you're kind of discussing now. Is that kind of like a minimum margin you think you can achieve? Is that something you see as challenging?

Hi, Alejandro. How are you? This is Walt. About the guidance that we gave you, talking about the margins, as you can see, gaining more relevance in the logistic and technology division in our revenues. Usually, we can expect something more around 10% in this kind of division. So, when it gains more relevance, it will push down a little bit the margins. It doesn't mean that the The ROIC or the returns that we're expecting in the company goes down. It's just the opposite, but the margins will be a little bit down, as you can see. Instead of the 20, it could be around the 19%. That's the main thing about the margin.

Okay. But in the fourth quarter, the logistics and technology division did 7%, yeah? So is that something temporary then?

We think it will improve more in this 2022. So, yes, instead of expecting something around the 7%, it's also the seasonality of the business. We were expecting something more higher, close to the 10%, maybe a little bit higher than that. But, again, it's still less than the 20% that is usually in the traditional business. So we will be more in the composition of the revenues in the company. That's great. Thank you.

Thank you. Your next question is coming from . Please announce your affiliation, then pose your question. Hi.

Thank you for taking my question. I come from Compass Group. I only have one question. is that I would like to understand a little bit more what is the main reason for these emerging compressions over the quarter that we've seen, and are we maybe having some difficulties passing the cost increases, or is it more of a mixed change on the different editions?

Thank you. Hi, Lucila. This is Tonio. Thanks for your question. The main reason you see a margin compression in the fourth quarter, there are two main reasons here. The first one is that the logistics and technology division gain more relevance, and as Walter already said, margins of those services are more near to the 10% area. And the second reason is that we, with the COVID, 19 contingency, we realized that we could operate the company with a linear structure. So we started to do some downsizing of the team, and that generated some one-off expenses that went right off the results of the quarter. But that's the main reason. It's a one-off of expenses.

Perfect.

Thank you.

Your next question for today is coming from Martin Lara. Please announce your affiliations and pose your question.

Good morning. Thank you for your call. I have various questions. The first one is how do you see the sales performance in each division in 2022? The second one is what is the EBITDA margin that we should expect in mobility of cargo and mobility of personnel? And the third one is your capex will increase by more than 50% according to the guidance you provided. What are the main projects and where do you see your leverage by the end of 2022?

Hi, Martin. Thanks for your question. This is Tonio. Your first question about sales performance in 2022, you can expect the logistics and technology division to grow above 20%. Then you can expect the mobility of people, personal division, to grow between 10 and 15%. And then you can expect the cargo segment to grow on a single-digit ratio. And this is mainly because we are going to privilege some operations of cargo. We're going to pass them through the digital app. And then we're going to become more profitable in terms of refrigerated cargo and petrochemical transportation, those specialized services that typically carry better margins and prices.

How are you?

This is Wolf. Just trying to answer the second and the third question about the EBITDA margins. If you look of the full year in 2021, you will see that cargo was around 22%, something around, so the low 20s. If you see the personal segment was the the middle 20s will be higher 25 to 27 and the logistics will will be something around the the eight percent something around so in terms of 2022 uh we're expecting to to continue in in such as margins as i just mentioned maybe the logistics side could grow a little bit more and we are consolidating the other business with the growth in terms of the third question if i try to answer the capex one There will be three different things. We saw some opportunities, again, in the personal segment, so mainly part of the investment that we're trying to continue in this 2022 will be through that division. The other part will be to renew fleet in the cargo side and also to penetrate some niches that we, in the specialized niches that we're looking in the cargo side, and also some resources for the technological side that it's a little bit less in terms of the capex that we're planning to invest this year. The other thing that it's important to mention is in this particular year, in terms of the automotive logistic chain and all the supply that we know in the global markets, it's affecting all of this industry. Even though we are expecting to invest this amount, maybe it's not going to give us the regular seasonality that we had in the previous years because of this, but that will be the only thing that could maybe have the full effect of our investment more for the 2023.

Okay, thank you very much.

Your next question is coming from Guy Thornwell. Please announce your affiliation, then pose your question.

Hi, it's Guy Thornwell from PyFunds. I had two questions. One is really a follow-up on the cargo side. From what you just said, it sounds like there are some less profitable contracts that you might sort of give up this year or not try to renew. Is that right? And what sort of sales impact might that have? And then secondly, on fuel costs. So in Q4, looking at the relevant segments, I think it increased by sort of 300 basis points as a percent of sales. You say you're passing that on, but how much You know, is there a delay here? Have you done any hedging of that? Can you pass it all on sort of over the year? Or, you know, obviously oil prices are going through the roof again. So what's the sort of impact we might see there?

Thanks.

Hi, Guy. What we're doing in cargo is we're continuing growing, but we're growing through our app. The name is Traxporta. So what we do here is we connect the clients with medium and small transportation companies in Mexico, and we charge a percentage for doing that. This percentage is around 15% to 20%. So we are growing the cargo business, what we're doing throughout the asset division, and it's much more profitable because we don't need to invest in the capex to get the business and to make money. So that's why we are growing through that business. And we see that as a huge opportunity for Traxion to grow in the segment on the asset division. And talking about the diesel cost, we have a pass-through clause in the contract. So we don't expect that the raise in the price of diesel will affect notoriously the company because we have these clauses and we have done this since we found the company every year that the prices of diesel increase.

okay but it's still it's still increased as a potential sales that's just the mechanical effect of it and so the other you'd expect the other line to decrease if the overall sales went up because you charge more for fuel you know they should i i'm just not seeing that in q4 that you're passing it through correct hi guys as abby just mentioned we don't hedge in like in the markets the fuel things we

like the natural hedge for us, it's like the closing our contract. And in terms of the pass-through, we usually take, it will depend, but one to two quarters, it will depend on the impact. Sometimes it's faster, but if it's a deep impact, it will take more or less one quarter, maybe four months, something like that. But it's a thing that we have to go to all the clients and and someone some of them apply like like the fields are charged like it's an automatic thing and in other ones we just try to negotiate and it takes us like a quarter to to get there so that that will be like the delay that we can expect on the on the fuel impact yeah okay i got it thank you you're welcome

Once again, if there are any questions or comments, please press star 1. There are no further questions in queue. I would like to turn the floor back to Avi for any closing comments.

Traditional business is from maintaining its leadership position, and shows healthy growth. Our logistics and technology division will continue to show very attractive growth rates boosted by e-commerce, and we expect to give good news this year. I hope to see all of you in the traction day. We'll be in touch shortly with details. Thanks again for your attention, and have an excellent day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.