Grupo Traxión, S.A.B. de C.V.

good morning ladies and gentlemen and welcome to the traxion first quarter 2022 earnings call at this time all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation it is now my pleasure to turn the floor over to your host executive president abby leesting sir the floor is yours welcome everyone good morning this quarter taxion

has turned one year of reporting its logistics and technology segment independently. As you can see, its performance has been excellent and the future looks very promising. Most important is that our digital platform, Traxporta, and Tracción Logistics grew more than 86% compared to the same period of the last year. This is precisely where we see the most expansion and growth in the future. Our asset-light approach has proven to be successful. The company's quarterly results are positive, despite the disruption in fuel costs, which we are working to pass through clients. Bear in mind that this increase in fuel prices was very fast and sudden. It happened in the middle of the quarter, and the pass-through process is underway. This is something we have done successfully many times in the past, It's a normal part of the business. Moving on to our results, we continue to see strong demand in our quiz segments. As you saw, there were many interesting developments in the quarter. Our CAPEX plan is moving on as planned and according to our expectations. On that line, please be advised that due To the disruption in delivery of new units, we anticipated our capex needs since last year, which will turn into a competitive advantage as we will be able to address demand in a more efficient manner than our competitors. As usual, in a moment Rodolfo, Wolf and Toño will provide more color on operating and financial metrics. On the M&A front, in March we announced that Traction executed an agreement to acquire Medistic, a leading company that provides specialized 4PL solutions in healthcare, mainly medicines and medical accessories. With these acquisitions, we entered the pharma vertical through an asset-light approach and within a resilient industry. The most significant synergies we expect to realize are on the commercial front. there are many interesting opportunities to be exploited, together with other relevant operational and financial efficiencies as well. The transaction is subject to regulatory approvals, which Traction expects to obtain in the following months. Moreover, in terms of ESG, I am very pleased to share that since General Traction reports ESG figures and metrics in Bloomberg for everyone to review. We continue to work very hard for our foundation to enhance many social, educational, and mobility programs throughout the country. With this, I end my remarks. Please, Rodolfo, go ahead. Thank you, Avi.

Good morning, everyone. I'm going to start with some highlights in our logistic and technology segment. As Avi just mentioned, our digital platform grew more than 86%. but there are other significant aspects to discuss as well. In terms of last-mile solutions, we increased more than 10% of our daily handling volumes. Our state-of-the-art business model allows us to render a high-quality delivery process in terms of collections, evidence, and real-time visibility. We further increased by 9,000 users our digital app for last-mile services, with a very high retention rate, about 76%. while we continue to bring up-to-date our technology platform. This quarter, we started operating a distribution facility in Mexico City, which will increase our overall output by 30%. Moving on, in terms of 3PL, we increased more than 77,000 square meters of warehouse area, mainly due to new business and expansion with existing clients compared to the first quarter of 2021. On a special note, we started conducting inventories using drones, which will allow us to become even more efficient. Accuracy is guaranteed. No human contact needed. And information gets locked and compared in real time. growth in revenues has softened by increase in fuel costs. Additionally, our refrigerated operations grew 36% compared to the same quarter of last year. We have built a very strong position in the Bahia region for this kind of service, mainly to the border, where we have strengthened by 176% our transfer fleet in order to be more effective in border crossing. Finally, in terms of mobility of personnel, we kick off operations with 70 clients, totaling more than 500 new units, as a result of our effective commercial strategy. We have further implemented more technology to trace better routes and save approximately 400,000 kilometers per month, and the use of boots to improve some processes. In that line, we launched LeapGo, an app whose target is to significantly improve our users' experience. As you can see, technology is now our backbone, and our quarter was a very busy one. I am very pleased with what we have achieved in operational terms. With this, I conclude my remarks and would hand it over to Wolf. Please, Wolf.

Thanks, Rodo, and good morning, everyone. I would like to discuss some financial metrics. First, the company was able to maintain its net income levels. On this line, The main impacts were the fuel costs, obviously, and changes in comprehensive financial results. Here are two items to discuss. The first is the increase in interest expense, which was driven by the growth in overall debt due to organic growth and by the change in interest rates that affected the variable rate portion of our debt. The second has to do with an FX impact, which was caused by the position on US dollars that the Treasury maintains and a difference between billing and collecting of revenues denominated in US dollars as well. All that was partially offset by an efficiency in general expenses, which represents a 14.4% decrease compared to the same period of 2021. In terms of balance sheet, Tracción continues to operate with a very comfortable cash position and an adequate debt maturity profile that continues to be efficient and in line with our plan. We currently have more than 5 billion pesos in available facilities, of which 1.5 billion are committed. Speaking of leverage, our ratio went to 1.71 times net debt to EBITDA, mainly driven by CAPEX needs. It is very important to mention that such investments were conducted at the end of the quarter and contributed with virtually no revenue in the period. We continue to see strong demand and the CAPEX program is running as planned. Despite delays in delivery of new units and because of the strategic planning we did in 2021, we are now in a much better competitive position as we have taken delivery of new Eclipse to start operations promptly with clients. Finally, there is a 16.7% growth in net operating cash flow, mainly driven by a healthy improvement in our working capital cycle which is even more remarkable given the steady expansion of the company's operations. Thanks again for your attention. I will now hand over to Tonio. Please, Tonio.

Thank you, Wolf. Hello, everyone. As you probably noticed, we have been experiencing an increase in fuel prices for the past few quarters. Historically, fuel prices in Mexico have always gone up. The last southern hike was in January of 2018, and before that, there was another one in 2017. and that's only recent history. Having said that, please bear in mind that passing through such increases to our clients is an ongoing and standard practice within Tracción and the industry. It is also how our contracts are organized. After the price increase of 2018, we were able to conduct the pass-through within two quarters. Please be advised of two things. First, even though prices have gone up progressively for the past months, there was a very sudden and steep increase toward the last days of February, which was virtually two months into the quarter. And second, that such pass-through is underway. It is not a matter of if, it's a matter of when. And management expects to complete it in the following months. We also expect this sudden increase to be temporary. However, we are working under the assumption that it's going to prevail. Shifting gears, and despite the issue with fuel, We believe that the growth in revenues, expense control, and overall quarterly metrics are truly outstanding given the complicated situation that the world is going through. Revenues showed a very strong expansion mainly driven by three actions. First, an intensive and successful commercial activity mainly in the logistics and technology segment. Second, a very strong demand in the mobility of personal business. And third, an effective shift in cargo towards more specialized services, such as refrigerators and petrochemicals. Finally, the company is running according to its budget for 2022. Its CapEx plan is on schedule, and its commercial and operating platforms are positioned to continue to capture growth opportunities. Well, thanks for your attention. With this, I open the floor to Q&A.

Certainly. 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 do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions. Your first question is coming from Louis Yance from Compass. Your line is live.

Hi, Tonio, Avi, Wolf, Rodolfo. Thanks for taking the questions, and I hope you guys are doing well. A couple of questions on my side. I got the first one on cost, and I appreciate, Tonio, the color around the pass-through and the fact that, as you said, it's a matter of when, not if. But just wondering if you could quantify or give us a rough estimate in terms of, you know, how much of the 140 basis point margin compression we saw, it's related to this lag between increases in fuel prices and, I guess, the pass-through to clients. And whether, you know, in terms of the timing, I guess we can assume most of it, you said a quarter to two, most of it will be fully reflected in the third quarter. So it's fair to assume that assuming costs of state where they are today, we should see sequential improvements in margins related to this. But just wondering if you could quantify, you know, how much of that has to do with it. That'll be my first question.

Thanks Luis, Tonio here. Thanks for your question. Yeah, I mean, the bulk of the 140 basis points contraction in margin is from the increase on fuel cost. And now regarding that and considering that April is coming to an end shortly and that volatility in prices prevailed on the month of April, we think that the most recovery you would see or you should see in margin, if any, is going to be on the third quarter. We are working very hard to do the pass-through, but but we expect that.

Okay, great, great. Thanks for the caller. And then the second question goes to your guidance. Initially, you were calling for revenue growth of around 13% and margins in the 19% range. When I look at your results in the first quarter, you seem to be pretty much in line with that. But just wondering, given the first quarter results, the outlook for the remaining in the year, the encouraging signs that the fuel price increases will be passed through. Just wondering if that changes your view on the guidance and what would be the main assumptions to get to those numbers?

We don't have any change or any comment on guidance as of yet. The thing is that if you remember in February when we released the guidance, we were conservative because there was a lot of volatility. Volatility prevails as of today, so we don't have any new information or any new development to do any change. We feel confident with what we see in terms of demand, in terms of operating metrics, and if we are successful with the pass-through, which we think we are going to be, we don't think that the guidance should change at all.

Great. That's good to hear. And my last question on your recent acquisition of Medistick, can you give us an update in terms of the timing to close that transaction? And perhaps now that you've had a bit more time to look into the assets, a bit of a range on potential synergies that you can achieve in the first year, you know, based on the numbers you gave, kind of like an EBITDA of 220 million on an analyzed basis. And what would be the drivers of those synergies?

Hi Luis, this is Javi. So we expect to close the transaction maybe between three to four months. We're still in the regulatory process to get the authorization. And I mean, we continue to see strong opportunities mainly in the commercial part. We're already working on them. We have seen and made some successful transactions commercial effort to help the company growth that we are seeing with good eyes. So, I mean, I'm happy with the acquisition and seeing a lot of opportunities mainly in commercial side. The company is a very well managed business, so we're gonna feel some synergies in financial and operating, but the majority of that is coming from Great.

Thanks a lot, Avi and Antonio, for the answers.

Thank you. Your next question is coming from Alex Demiculus from Neo Securities. Your line is live.

Yeah, good morning, gentlemen. Thank you very much for taking my questions. First one, a follow-up from what Luis asked. So in terms of how you see the evolution of the year, should we assume that the first quarter should be the low point for 2022 because you're indicating the pass-through on fuel should happen in the next couple of quarters? Then the logistics expansion, I think you're saying that that came very late in the quarter, so second quarter should benefit from that. So how we should think about the shape of the year then?

Hi, Alex. This is Tonio. Thanks for your question.

Yeah, I mean, if you remember, in terms of seasonality, the first quarter usually is the softest of the year. So in operational and commercial terms, we think that this was the softest of this year, and things should improve in those terms.

Okay, that's great. And then a couple more. So last time we had results. I think, Avi, you were indicating that there were a number of potential M&A transactions to go ahead. Now you announced Medistick. So how are you thinking about the inorganic potential for the company?

Yeah, so we're working on some other opportunities that are coming mainly in the logistics and technology division. We see these opportunities smaller in terms of the amount of money that we are paying for them, but we see them as strategic. So they will allow us to offer more service to our clients or to grow that business line. So it's on the – I mean, we're still working, and we expect to have some new news soon.

Okay. That's great. And as a very quick follow-up, the tax for the quarter seems very low. So how we should think about devolution of taxation for the rest of the year and going forward?

Hi, Alejandro. This is Wolf. How are you? Thanks for the question. In terms of taxes, if you see also from the history of the company, it's also like a very stable line in the previous year. So it will have a few hikes or it could have different numbers throughout the quarters, but at the end of the year, usually it's a very similar number. So I think during the quarters, it will depend on the performance, obviously, of the company, but we should expect something similar in the previous years.

That's great.

Thank you. Mainly because of the deferral taxes, what makes the main changes.

That's great. Thanks.

Thank you. Thank you. Your next question is coming from Stephen Trent from Citi. Your line is live.

Good morning, gentlemen, and thanks very much for taking my questions. I had one or two for you. The first off you mentioned, you know, interest rates and fuel and what have you. So how are you thinking on a high level about offsetting your risk in terms of fuel and foreign currency? Are you thinking to hedge anything, you know, on the balance sheet, for example? And then the second question, if you could just refresh my memory on the cargo versus logistics segment versus personnel. What's the average length of your contracts? Maybe one or two years in cargo, maybe shorter on logistics. Thanks very much.

Hi, Stephen. How are you? In terms of hedging or swapping, in terms of FX or fuel prices, we don't hedge any of these. It's not part of the business. This was, I think, kind of a different order in terms of the loss that we had in the FX. A part of it is also virtually just because the portion that we had in our treasury in US dollar. So if we saw the last, I don't know, maybe two years, we will find after the first hike of the COVID season that the FX was very stable in terms of the US dollar against the Mexican peso. So we usually have more revenues that cost in terms of FX dollars. So we have like a natural hedge, so we don't hedge anything besides that. And in terms of the fuel, we also don't make any different hedge. Like the regular hedge that we use, it's our contract. So the way we did in the past, it's using our contracts and our relations with our clients to make the path through them when it goes up or when it goes down. So that will be the first question.

Yeah, and talking about the contracts, the term of the contracts, in general, they are multi-annual contracts in the three business lines. And it's important to know that the renewal rate from the company, from the clients, it's more than 95%. So it's very difficult for Traction to lose a client. I mean, we're used to have relations, very long-term relations with them, more than 10, 20 years, with the most important clients from the company.

okay that's very helpful i really appreciate the color guys thank you thank you thank you thank you your next question is coming from martin laura from miranda global research your line is live hey good morning and thank you for the call i have two questions the first one is does the guidance for the year include domestic acquisition And the second one is, do you believe that technological applications will be the main driver for the rest of the year in the logistics and technology segment? Or there should be an acceleration in last mile and logistics services revenues?

Hi, Martin. Tonio here. Our guidance, the guidance that we released in February only considers organic growth.

OK.

Yeah, and in the logistics and technology vision, we see that the main driver for this year will be the technological applications, because the growth that we're observing is really high. The other business lines are growing. Sorry?

Yes, sorry. Go ahead.

Yeah, the other business lines are growing on a healthy or very growth rate, but the technological applications has grown, I mean, really fast.

Okay, thank you very much. Thank you.

Your next question is coming from Manuel Parra from Barclays. Your line is live.

Good morning, everyone. Thank you for taking my question. Could you give us some color on how do you see overall demand? I mean, when consumers experience high inflation, many companies try to pass over higher costs, just like you are. So I'm trying to understand if a weaker consumer cannot compound negatively impact the demand for these services.

So we're observing a strong demand.

There is a lot of cargo that is moving in the country. We're seeing that the clients are hiring a lot of personal transportation services. So we're very happy and confident from that part. And that's very helpful also to increase the prices and to pass through the diesel cost and cost of inflation.

Okay, so do you don't expect some pushback from your clients that you try to make that possible?

I mean, it's a process. I mean, we have clauses in the contract, but we need to speak with all clients. I mean, the good thing here is that it's from all the industry and from all the country. So at the end, what we have observed in the past is that these processes are successful. I mean, it's part of the business. So the clients will want to negotiate the inflation because we are also observing high inflation. But at the end, our contracts are strong and the relations with them are strong too. So we are confident that we can do the pass-through processing to the clients.

Okay. Thank you.

Thank you. Your next question is coming from Edzen Marqua from Summit Capital. Your line is live.

Hi. Good morning. Thank you for taking my question. I have only one, which is related to the inorganic growth that you might expect for the following quarters. I know that maybe it's too early to understand the possible transactions in the commercial part of the business that you want to accept. But regarding on financing these transactions, what are your expectations or your milestones in order to achieve this possible M&A that you are in the process of doing that?

Thank you. Hi, Edson. Could you repeat the question? You were not, we didn't hear you very clear.

Okay, yeah, the question is related to the organic road that Abby was talking a little bit. So the question is, how are you going to finance this M&A?

Hi, Tom. How are you? As I just mentioned before, we have different credit facilities right now. In terms of credit availabilities, we have more than 5 billion pesos today. So it will be a mix between equity that we have in our cash position and also the debt that we can pull to our balance sheet. So, we have more than that, and it's not too relevant, even though the price of the acquisition is them, and also, as I just mentioned, it could be with the other one. So, our ratio is, remember, below 2, and it's around 1.7 times . So, we have a lot of room, even though over there.

Okay. Really clear. Thank you.

You're welcome. Thank you. Your next question is coming from Luis Yance from Compass. Your line is live.

Hi, guys. I'm back. Just a follow-up on the cost side. And I guess more related now on the labor cost, right? Because we've seen many companies with cost pressures, not only on the input cost or all materials and whatnot, but also on the labor side. You know, when I look at your labor cost, they had a, a sharp increase in the first quarter of almost 40%. So just wondering if you could give us some color in terms of how much of that it's kind of related to the new businesses that actually you're, you're, you're putting together that perhaps do not contribute yet to revenues, but you have the increases and therefore, you know, going forward, we will see a much better cost absorption from that. Or if there is also some pressures you're seeing from unitary costs in terms of Salary increases with the minimum wages. And I guess related to that, as you go into negotiations with your customers for the contracts specifically, you know, for the increasing fuel prices, just wondering if you factored this in also into the equation, you know, the pressures beyond fuel prices. And therefore, you know, the contract that you're aiming to achieve also will cover you from those pressures.

Hi, Luis Toño here. Thanks again. Yeah, I mean, the bulk of what you see in the increase of labor costs comes from the logistics and technology segment. The thing is that if you take a look at the growth of the segment, we need to strengthen the labor side, the equation. And then, as you said, that strengthening is not necessarily generating revenues right now because you need to prepare ahead of new business. And then if you take a look at past quarters, the past three quarters, you are going to see that the cost in absolute terms has been pretty steady. And that's consistent with the strategy of growing the logistics and technology segment as a percentage of revenues. And then in terms of labor in contracts, As we said, this is from the bulk of what you see is from logistics and technology. But when we do dedicated contracts in both in personal mobility or in cargo, labor is already blended in when it's a long-term contract. And labor has the annual increases blended in on that equation as well. So that's pretty much covered.

Okay, so if I understand correctly, You know, if we were to see, you know, salary increases, I don't know, in the 10% range or so, that also goes automatically to a certain extent on the contracts as well, right? So if you see big increases, you'll kind of cover the risk, right? That's right. Excellent. And my last question, I know you mentioned on CapEx that – you're on schedule for what you were planning to spend this year, I guess the 3 billion pesos for the year. Just wondering how do you see the potential impact, one, from an economy that is slowing down clearly, but perhaps the businesses that are driving your growth are less correlated to the economy and therefore you might just keep growing despite of that slowdown? And two, we know that a lot of companies have suffered from supply chain issues around the world. We've seen CapEx plans being delayed mainly for that. Just wonder if that's the case for you or you kind of anticipated that and have been ordering equipment in advance so your plans can be executed as planned.

Hi, Luis. Luis Javier again. So the majority of the capex for growth in the company is in the mobility of people, business line in the company. And it's important to remember that we sign long-term contracts with the clients. And that's where our bosses are assigned. So if we grow, we grow with contracts. And we're seeing the opportunities. We see the market here is strong. And so we're on timing in the CAPEX, but also in growth as we planned. And talking about the CAPEX in general, but also in cargo, we put the orders last year in advance, so we could cover the budget and the plan for the CAPEX for this year. And I think in general this was, or this is a competitive advantage because the short in, in chips in the world. It's still there. So our competitors, I mean, they don't have the equipment to really serve their clients very, I mean, as quick as we are doing right now.

Great. Thanks, Avi.

Thank you. Your next question is coming from Menin Agwan from Arrowhead. Your line is live.

Good morning, everyone. Congratulations on a successful quarter. My question is actually related to the Medistick acquisition and its impact on the revenue and EBITDA guidance. You already answered that you're not revising your guidance, but what will be the impact of Medistick's 35% EBITDA margin on your profitability?

Hi, how are you? This is Wolf. And just as we just mentioned, our guidance does not include the MESISTIC acquisition. So yes, this company, if you saw the numbers that we published in the previous month, you will find that it has a higher margin. So as I just mentioned, there's a very higher margin business line that we want to enter in. So this will affect, but remember that with the numbers that we gave, this will not move a lot when we integrate this company at the beginning. I think that will be moving maybe our margins after we can make all the synergies in the commercial side when we acquire this company and integrate in the company and put in place the synergies in the commercial side.

Okay, thank you.

You're welcome.

Thank you. That concludes our Q&A session. I will now hand the conference back to Abby Leischting for closing remarks. Please go ahead.

Thanks again for your attention. Given the formality of the business, the first quarter is usually the softest of the year. Having said that, we continue to see a very solid market in Mexico. Such activity will allow Traccion to generate interesting growth. There are other strategic opportunities we plan to capture, and we are ready to capitalize on them. Traccion is a strong company which has grown year over year, improving its profitability and generating sustainable long-term value. Please be advised that we'll host our Traccion Day in the following months. More details will arrive shortly. Have an excellent rest of the 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.